The Case for Investing in the Demographic Dividend
July 2024
As President-elect Prabowo Subianto prepares to assume office, one significant policy decision that could define his administration is increasing Indonesia's debt-to-GDP ratio. Prabowo's administration should feel and say that there is no better investment than prudently investing in Indonesia's future. This is what great countries do, and Indonesia is a great country.
Although traditionally cautious about public debt, Indonesia now has a compelling case to strategically raise this ratio under Prabowo's leadership. Such a move, if managed carefully, can be transformative, drive economic growth, address infrastructure deficiencies, and enhance the welfare of the country.
Increasing the debt-to-GDP ratio is a powerful lever for stimulating economic growth. By borrowing more, the government can invest in projects to boost productivity and expand the economy. This includes investments in infrastructure, education, and healthcare, which are essential for long-term sustainable development. While private investment plays a role, public funding is crucial to kick-start and sustain large-scale projects.
This country's infrastructure needs are immense. According to the World Bank, hundreds of billions of dollars in investment are needed to upgrade our infrastructure to meet current and future demands. Infrastructure development is a critical area where increased borrowing can yield significant returns, enhance connectivity, reduce transportation costs, and promote regional development. Better roads, ports and airports facilitate trade and attract foreign direct investment, thereby driving economic growth. The multiplier effect of such investments can be substantial, as they not only create jobs during the construction phase, but also improve economic efficiency in the long run.
Increased borrowing will bolster Indonesia's economic resilience. By investing in critical infrastructure, the country can reduce its vulnerability to external shocks. For instance, improved transportation networks facilitate more efficient disaster response and recovery, while a diversified economy performs better against global commodity price and economic fluctuations.
Strategic investments can also support Indonesia's transition to a more sustainable economic model. This includes funding for renewable energy projects, climate adaptation measures, and sustainable urban development. Such initiatives not only address environmental challenges, but also contribute to long-term economic stability and growth.
By increasing its debt-to-GDP ratio, the necessary resources can also be mobilized to expand the electricity grid to rural areas, which will improve living standards and economic opportunities for millions of Indonesians. Similarly, investing in high-speed internet infrastructure can drive the digital economy and support innovation.
Beyond physical infrastructure, investments in education and healthcare services are vital for Indonesia's long-term prosperity. A higher debt-to-GDP ratio will provide the government with the fiscal space needed for significant improvements in both. Improved education systems can equip the workforce with the high-value industry skills required in a rapidly changing global economy, and be prepared for the challenges of the 21st century. Increased spending on education will lead to a more skilled and adaptable workforce, capable of driving innovation and economic diversification. This is particularly important as the country seeks to move up the value chain and reduce its dependence on commodity exports. Better healthcare services will increase productivity by reducing the economic burden of disease and enhancing overall well-being. These investments not only have immediate benefits, but also ensure a more educated, healthier and productive workforce in the longer term, essential for maintaining economic competitiveness in a globalized world.
Soldiers march on their stomach. So do school children. A smaller investment by the government than in roads and bridges, but potentially providing much more bang for the Rupiah, is providing children in school with a free lunch. The idea is currently floating around the halls of decision makers, and it certainly has its merits. A free lunch at school ensures that children receive at least one nutritious meal per day, which can improve their overall health and development. Well-nourished children are more attentive, have better concentration, and perform better academically. Free meals can serve as an incentive for parents to send their children to school, thereby increasing attendance rates, and address food insecurity among low-income families. If raising the debt ratio means millions of children are fed at school, I’m all for it.
Critics of increasing the debt-to-GDP ratio often point to the risks associated with higher debt levels, such as fiscal instability and the potential for increased borrowing costs. However, these risks can be mitigated through careful fiscal management and strategic borrowing. Indonesia can manage its debt sustainably by focusing on long-term investments that generate economic returns. Borrowing for productive purposes, rather than for consumption, ensures that debt contributes to future growth. Additionally, the government should implement measures to improve tax collection and broaden the tax base, thereby increasing revenue to service the debt.
As President-elect Prabowo charts the course for his administration, increasing Indonesia's debt-to-GDP ratio stands out as a strategic move with the potential for substantial benefits. By borrowing more to invest in infrastructure, education, healthcare, and meals at school, Prabowo can stimulate economic growth, address critical development gaps, and ensure a more prosperous and resilient future for Indonesia.
by James Kallman - CEO of Moores Rowland Indonesia