The middle-income trap refers to a situation where a country that has escaped low-income status is experiencing stagnation and cannot reach high-income status.
The situation is not merely about economic statistics but a reality that hinders a country's development.
According to National Development Planning Minister Rachmat Pambudy, Indonesia's economic growth has remained stagnant at 5 percent in the last two decades.
Though stable, the growth rate is not enough to pull Indonesia out of the middle-income trap.
One of the main causes of the trap is the low productivity of the workforce. Many Indonesian workers, especially in the informal and agricultural sectors, still struggle in jobs with low wages and minimal productivity.
Statistics show that the agriculture sector absorbs almost 30 percent of the national workforce, even though it contributes just 12.7 percent to the gross domestic product (GDP).
In contrast, the industrial sector, which should ideally be the driving force of the economy, only absorbs around 14 percent of the workforce. The sector's contribution to the GDP declined to 19.7 percent in 2020.
Therefore, structural changes to move the workforce from traditional sectors to more productive sectors are an urgent agenda.
However, this productivity issue is also related to other things. The quality of the nation's human resources also needs to be improved significantly.
Indonesia's Human Capital Index is still at 0.54, far below neighboring countries like Singapore (0.88).
This means that a child born in Indonesia at the current time only has a 54 percent chance of reaching their full potential compared to a child born in a country with the best education and health services.
This data is in line with the results of the Program for International Student Assessment (PISA), which showed that the skills of Indonesian students in reading, mathematics, and science are still below the global average.
Three researchers from the Faculty of Administrative Sciences, Brawijaya University — Petrus Sepraldi Siregar, Widya Jamilah Mersi, and Shela Hajjaria Putri — studied the middle-income trap in 2021 and found that based on World Bank records, only 13 out of 101 countries in the world managed to escape it. Indonesia has been striving to get out of the middle-income trap since 1985.
According to the researchers, one of the reasons why Indonesia has not been able to escape the trap is the lack of optimization of existing resources, for example, in terms of developing micro, small, and medium enterprises (MSMEs).
Based on their research, it is believed that the solution for the optimization of MSMEs is increasing investment and capital infusion by the government.
Investment in education
Amid the current challenges, one valuable lesson can be derived from the experiences of other countries. South Korea, for example, was once in a similar situation as Indonesia in the 1960s. At that time, South Korea's per capita income was not much different from Indonesia's today.
However, the country chose a clear path: investing in education massively, encouraging innovation, and developing high-tech industries.
They relied not only on building physical infrastructure but also their human capital and innovation ecosystem. Now, South Korea is one of the most advanced countries in the world.
Indonesia has several policies to support such a transformation. In the 2025–2045 National Long-Term Development Plan, the government is targeting a structural transformation of the economy through the strengthening of innovation, science, and technology.
Green economy and digital transformation are two key strategies to increase competitiveness at the global level.
However, the policies will not be successful without paying closer attention to the distribution aspect of development.
Inequality between regions is still high: while Java dominates the national economy, Indonesia's eastern regions are often left far behind.
So what can be done? First, Indonesia needs to develop the creative economy and tourism sectors. These two have great potential for creating jobs, especially for the younger generation.
Given Indonesia's cultural wealth and natural beauty, tourism can serve as a driving force for inclusive new growth in the country as long as it is managed sustainably.
Likewise, the creative economy also has big potential as a space for innovation for many Indonesian youths.
Second, digital transformation must be a top priority. Currently, the digital economy is one of the sectors that are growing the fastest in the country.
However, not all regions have access to quality Internet services, let alone digital skills training.
In this regard, the government must be more serious about building digital infrastructure in underdeveloped areas and providing training programs that are relevant to the needs of the global market.
This is not merely about catching up, but creating a workforce that is ready to compete in the international market.
Third, investment in vocational education and training needs to be boosted. The country's education system must be oriented toward the needs of the labor market, not only on mastering theories.
Industry-based internship programs, cooperation with the private sector, and improvement of the quality of vocational education are concrete steps that must be taken without delay.
Indonesia's youths need more than just academic degrees: they need adequate skills and experience to fill various job positions.
However, improvements in regulations and bureaucratic reforms are not enough. Attracting foreign and domestic investment is one of the keys to pushing economic growth.
To this end, clear, transparent, and simple regulations must be implemented. There should be no room for overlapping regulations and slow bureaucracy.
In this regard, Vietnam's experience in attracting global investment through policy reforms can provide an inspiration.
Lastly, green economy implementation must be an integral part of the national development strategy.
In addressing climate change, Indonesia has a great opportunity to lead by adopting renewable energy, sustainable forest management, and developing green economy projects.
In addition to contributing to climate change mitigation, this step can also open new jobs and investment opportunities.
Tackling the middle-income trap is not a short-term task. However, with a clear vision, the courage to take big steps, and the cooperation of all parties, Indonesia has all the potential to escape the trap.
If the nation can manage its human resources, utilize technology, and carry out reforms consistently, being a developed country will not only be wishful thinking.
This is a big task for everyone for the sake of a better life for the next generations.
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Translator: Hanni Sofia, Raka Adji
Editor: Arie Novarina
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