Jakarta. Indonesia must immediately pursue three major reforms — budget refocusing, tax reform, and deregulation — if it wants to sustain high economic growth and escape the middle-income trap, senior economist Raden Pardede warned on Thursday, cautioning that weakening manufacturing signals a deeper structural problem in the economy.
Speaking at the SMBC Indonesia Economic Forum 2026 in Jakarta, Raden said Indonesia once recorded economic growth of nearly 10% in the 1980s, supported by a manufacturing sector that expanded 22% and contributed more than 24% to gross domestic product.
More than three decades later, manufacturing’s share has fallen to around 19% of GDP, while agriculture has become the largest source of job creation, a trend he described as a warning sign for the economy.
“We once reached 25-26% of GDP, while agriculture was 13.1%. What is interesting now is that job creation is coming more from agriculture, not manufacturing,” Raden said.
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He argued that Indonesia’s economic transformation should naturally move from agriculture to manufacturing and eventually services, rather than reversing course.
“If the number of farmers keeps increasing, in my view that reflects impoverishment in a country. This is our challenge. If we let this continue, it is not sustainable,” he said.
Raden said Indonesia still has an opportunity to break free from the middle-income trap, but the country must significantly raise per capita income from around $5,000 to above $14,000 through sustained high economic growth.
To achieve that, he outlined three major priorities: budget refocusing, tax reform, and deregulation.
On budget refocusing, Raden highlighted the government’s flagship Free Nutritious Meals program (MBG) saying the initiative has generated positive spillover effects across industries, particularly food and beverage manufacturing, agriculture, and livestock.
He added that the program has also encouraged investment in kitchen facilities and created jobs, though he stressed that spending efficiency remains critical.
“The state budget allocation is reportedly reaching Rp 335 trillion. This is the single largest item in government spending. The impact is positive,” Raden said.
“Of course, our hope is that it is implemented efficiently and effectively. There should be no irregularities, such as overpriced items like socks,” he added.
Raden was more skeptical about the government’s Village Cooperatives program, or locally called Koperasi Desa Merah Putih, saying its top-down structure still needs to prove its effectiveness.
According to him, successful cooperative models in countries such as Australia and New Zealand were built from the bottom up, unlike Indonesia’s current approach, which relies heavily on state-backed entities and financing from state-owned banks.
“In my view, this remains to be tested. I only want to remind the government that the impact of KDMP may not yet be optimal,” he said.
Raden also called for deeper tax reform, recalling how Indonesia restructured its tax system during the 1982-1983 crisis to reduce dependence on oil revenue.
He linked the issue to Indonesia’s domestic processing strategy, warning that relying solely on natural resources without mastering technology would not deliver sustainable long-term gains.
“Even a resource-processing strategy based solely on natural resources, without mastering the technology, will eventually fail,” he said.
“We must do it efficiently and effectively. In the end, we have to master technology to control value-added creation and productivity,” he added.
On deregulation, Raden emphasized the importance of empowering the private sector to drive growth, warning that the economy cannot rely only on government spending and the sovereign wealth fund Danantara.
“If we rely only on one engine, the government and Danantara, then our growth will be limited,” he said.
“It depends on how active the private sector becomes, because that is a much larger engine,” he added.
Raden said Indonesia’s private sector is now far stronger than during the 1998 Asian financial crisis, but businesses continue to face challenges from regulatory uncertainty, weak competitiveness, and low productivity.
“My suggestion is why not make government spending function as a catalyst, given the fiscal constraints,” he said. “To become a catalyst, the answer is deregulation,” he added.
Raden concluded by saying Indonesia faces a difficult trade-off between maintaining stability and pursuing aggressive growth amid uncertain geopolitical conditions, but stressed that reforms can no longer be delayed.
“That was how we once achieved growth of 7.5%, 8%, even nearly 10%,” he said. “Can we repeat that success? I think we must try again.”
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