Does the Indonesian Demographic Transition Favors Indonesian Future Economy?

Abstraksi

In 2045 Indonesia will commemorate its centennial Independence Day. There has been a lot of improvement in term of economic development and social welfare during this 100-year period. To provide guidance towards 100 years of Independence Day celebration, in 2017 Minister of National Development Planning/National Development Agency (Bappenas henceforth) presented the Indonesian Vision 2045 which emphasized on the development of Indonesian human resource, sustainable economic development, equal development across Indonesia, as well as national security and good governance. Further, the Indonesian Vision 2045 mentions that in 2045, Indonesia will join India, China, the USA, and Nigeria as the top 5 populous countries in the world. In line with the Indonesian Vision 2045, Indonesia Statistic (BPS) released the projection of Indonesia population up to 2100. From this population projection, Indonesia will experience a demographic bonus era, in which the dependency ratio will be relatively low and Indonesia labour market will grow significantly. The dependency ratio is simply a ratio between non-working age population to the working age population. Thus, Indonesia will gain demographic dividend in term of more labour force available in the market as well as less spending on education and health expenses for the non-working age population. Nevertheless, it is also projected that the demographic bonus will be ended in 2030. Therefore, it is very important to mitigate the risk of “getting old before being rich” phenomenon as many middle-income countries experienced. From the population projection, after decades of experiencing demographic bonus, Indonesia will evidence a transition in its population; population growth is relatively low, baby boomer generation getting older, plus life expectancy getting higher, and changing in the population pyramid’s shape. Starting from 2030 dependency ratio in Indonesia will increase gradually implying that non-working age population starting to dominate the structure. This demographic transition will become a new challenge for society and the government. Despite eminent and significant demographic transition which already takes place, there is less study on how this population changes will affect Indonesia economy in the future. Therefore, this study aims to construct a nexus between demographic transition and the Indonesian economy as well as the state budget using the 3P’s (productivity, proportion, and participation) approach. This approach is similar to the Australian Inter Generational Report (IGR), in which utilising a simple decomposition of income per capita. Similarly, our study constructs three distinct components of income per capita, namely productivity, participation rate, and proportion of the labour force. This study finds that productivity is the main engine of economic growth in both historical and future projection. Thus, it is assumed that productivity will be still a dominant factor in determining income per capita. As an implication of this assumption, this study assumes that the growth of productivity rate is constant over time. This study finds that to achieve the Indonesia 2045 Vision, the growth rate of productivity rate should 1.5 times higher than the average growth rate of productivity rate in the last decade. In the baseline scenario in which there is no improvement in productivity, this study finds that GDP per capita is only half of the Indonesia 2045 Vision. Thus, this study argues that productivity improvement is essential in order to achieve the Indonesia 2045 Vision’s objectives. Even though two other components of income per capita are relatively less dominant, we find that both participation rate and proportion of the labour force will have distinct properties. For example, before 2025, the participation rate will drag down the income per capita. The downward trend of participation rate is in line with the growth rate of the labour force which is smaller than the growth rate of the working age population. However, since 2026, there is a reversal of growth rate, in which the labour force will have a higher rate than working age. As a result, there will be a turning point for participation rate from negative contribution to income per capita into positive contribution. The proportion of labour force, on the other hand, has a contrasting path to the participation rate. Since 2029, when the participation rate will increase gradually, the proportion of labour force will decline. In turn, it will hamper the economic growth in the period of 2029 up to 2045. The government cannot do much policy on the last component which is the proportion of labour force since it is by nature will change in line to demographic transition. However, this study argues that the government could do more in term of boosting productivity and enhancing human capital development to improve the participation rate. From the policymakers point of view, the improvement on productivity as well as participation rate could be started by prioritizing the education and health sectors. These two sectors are the cornerstone of a more productive and efficient labour force. As this study extends the analysis into demand and supply sides of these two sectors, a significant implication for the policymaker is imminent. This study finds that due to demographic transition, flexible spending on education and health sectors should be implemented. At current policy, the government tend to allocate a fix proportion of state budget for education and health expenditure, as mandated by the law. This study argues that the government should also consider adjusting these mandatory expenditures to a more flexible scheme. Since 2026, the demand for education spending will decrease over time, as a proxy of slow down on the birth rate. A decade later, in 2036, spending on education from the government will exceed the demand. Conversely, demand for health spending will increase gradually as the eldest cohort will be more dominant. Up to 2045, health spending will be always less than demand. After 2045, in the next two years, the health spending finally will exceed the demand side.