THE Central Statistics Agency (BPS) has yet to offi cially announce Indonesia’s economic growth for the third quarter of 2026. However, Coordinating Minister for Economic Affairs Airlangga Hartarto reported to President Prabowo Subianto on October 23, 2026, that growth had reached 5.45%. This news likely came as a welcome relief to the President, following a shocking news that struck the Indonesian capital market: on October 15, 2023, Morgan Stanley Capital International (MSCI) unexpectedly announced that Indonesia’s capital market was at risk of being downgraded to a “Standalone Market.”
Yet, the general public remains indifferent to GDP growth statistics that fail to reflect the reality of their daily lives. What people truly need are affordable basic necessi ties, job opportunities, and accessible, low-cost education and healthcare. It would be far better to see economic growth below 5% that is felt by all Indonesians than to chase a 6% growth rate that benefits only a wealthy few, while the average citizen is forced to dip into savings or take on debt just to cover their basic needs.
For the business sector, conditions on the ground are far less rosy than the statistics presented by the govern ment. Even when economic growth reached 5.29% in the second quarter of 2026, demand for credit remained slug gish. According to data from the Financial Services Authori ty (OJK) as of August 2026, bank lending to the micro, small, and medium enterprise (MSME) sector has grown sluggishly, at a rate of 2.32% year-on-year. The overall 13.26% growth in bank credit has been driven primarily by state-owned banks (Himbara) which are tasked with sup porting government programs to record a 26.26% increase in lending. In contrast, private banks, which are more re sponsive to market demand, saw their lending grow by only 1.35%.
A report by The New York Times (NYT) in mid-October entitled A Ticking Time Bomb: An Economic Crisis Looms in Indonesia suggests that Indonesia is ailing. The report notes a discrepancy between the statistics presented by the gov ernment and the actual conditions on the ground.
Indonesia is indeed a land of paradoxes. Even as the government claims success in achieving higher GDP growth, investors are heading for the exits. This is due to a range of concerns, including law enforcement, transparency, policy consistency, and the overall business climate. A case in point is the capital market, which faces a potential down grade by MSCI; the authority is perceived as failing to demonstrate consistent improvements regarding ownership transparency, trading integrity, and law enforcement.
The decision by MSCI prompted a chorus of criticism from executive and legislative officials, as well as former of ficeholders with some even alleging a foreign conspiracy. “MSCI is not a religious institution where essential truth re sides, and its officials are not prophets possessing sole, in fallible authority,” stated Said Abdullah, Chair of the House of Representatives (DPR) Budget Committee, in a written statement on October 18, 2026.
The reclassification of the Indonesian capital market by MSCI, dropping directly from “Emerging Market” to “Stan dalone Market,” bypassing the “Frontier Market” tier, is certainly not a sign of an impending economic apocalypse or an indication that Indonesia is destined to become a “failed state.” Nevertheless, such a designation would place Indonesia in the same category as countries like Bosnia and Herzegovina, Botswana, Ghana, Lebanon, Nigeria, Pal estine, Ukraine, Zimbabwe, Argentina, Jamaica, and Pana ma. Those nations have recorded relatively high scores on the Fragile States Index (FSI).
Meanwhile, some countries with high FSI scores have already effectively become failed states or have experi enced severe systemic collapse, such as Somalia, Haiti, Yemen, Syria, and Zimbabwe. Consider also the case of Sri Lanka, which eventually managed to recover after endur ing an exchange rate and foreign exchange crisis, a sover eign debt default, fuel shortages, and the collapse of its government. Such nations typically possess abundant natu ral resources, yet they are plagued by poor governance and high levels of corruption.
The “standalone market” status is more than just a la bel; it serves as an indicator of investor confidence in Indo nesia, specifically its capital market. The impact on market sentiment has been severe. It is far more potent than the “bold” rhetoric delivered in President Prabowo Subianto’s speeches. The Jakarta Composite Index (JCI) plummeted; on October 16, 2026, it plunged 11.57%, falling from 5,373.78 to 5,185.11. As of October 26, 2026 (the time of writing of this article), the JCI remains depressed at 5,373.09, marking a 38.58% decline from its position at the start of 2026 (8,748.13) and reaching its lowest point since November 2020.
Indonesia still has time to demonstrate that its capital market is trustworthy, transparent, liquid, and possesses integrity. Indonesian capital market authorities must be ca pable of enforcing market regulations, including having the courage to take action against conglomerates that maintain close political ties to the government. During an MSCI meeting with 100 investors, hosted by UBS Group on Octo ber 20, 2026, MSCI Managing Director Raman Aylur Subra manian emphasized that stock market reform is essential to root out “bad ac tors” or parties that undermine the governance of the stock market.
The problem is that these “bad ac tors” are not confined to the capital market; they are pervasive, found everywhere, including among govern ment officials and even within law en forcement agencies.
Therefore, MSCI’s decision should serve as a catalyst for improving the governance of Indonesia’s capital mar ket and correcting policy, rather than being dismissed through allegations of foreign conspiracies, geopolitical senti ment, or geoeconomic fragmentation. Alternatively, perhaps the administra tion of Prabowo Subianto is intention ally prepared for Indonesia to become a “Standalone Market,” driven by over confidence in the country’s large do mestic market, robust natural resourc es, strong consumer demand, and political stability.
A “Standalone Market” status ef fectively renders a market isolated; it implies limited accessibility and open ness to foreign investors, governance issues, a lack of structural and regula tory transparency, and diminished li quidity. This designation is typically assigned to capital markets that exhib it highly restricted access for foreign investors, severe liquidity constraints, high operational risks, or governance and regulatory concerns deemed seri ous by global investors.
A PRESCRIPTION FROM A NOBEL LAUREATE IN ECONOMICS TO PRE VENT INDONESIA FROM FALLING BEHIND?
In Jakarta, on October 12–13, 2026, Professor James A. Robinson, recipient of the 2024 Nobel Prize in Economics, delivered a lecture to a group of Indo nesian officials and business leaders. He appeared at the invitation of the Prasasti Center for Policy Studies, a think tank founded by Hashim Djojo hadikusumo, Burhanuddin Abdullah, Jimly Asshiddiqie, and Soedradjad Dji wandono. Prior to this, the economist and political scientist from the Univer sity of Chicago met with President Prabowo Subianto, who harbors an ambition to drive Indone sia’s economic growth to 8% by 2029.
According to Robinson, achieving high and sustainable economic growth requires an unwavering commitment to building institutions that foster a dy namic private sector. Reaching 8% eco nomic growth demands far more than simply increasing investment and gov ernment spending. “The state must build inclusive economic institutions, expand business opportunities, and ensure that growth is not enjoyed sole ly by groups with privileged access to power and economic resources,” says Robinson, who co-authored the 2012 book entitled Why Nations Fail with Daron Acemoglu.
He points to the successes of Chi na, Dubai, and South Korea as exam ples. The experiences of these nations demonstrate that a government cannot be hostile toward capitalists or the pri vate sector; instead, it must guide them through measurable targets, clear incentives, and a willingness to learn from failure. “In the political realm, it is evident that all these suc cess stories are built upon a founda tion of strong state institutions capable of implementing policy,” he explains.
According to Infobank Institute, in the 1960s, Indonesia, China, South Ko rea, and Singapore occupied a similar standing, all were impoverished na tions that had recently gained inde pendence after enduring the pain of brutal colonization by foreign powers. At that time, Indonesia was mired in political instability, where political agendas took precedence over eco nomic policy, ultimately leading to hy perinflation in 1965. That same year, Singapore faced a bleak future after be ing expelled from Malaysia. China, meanwhile, was deeply impoverished, constrained by the ideological, utopian paradigm of Mao Zedong. South Korea, still recovering from the devastation of the Korean War (1950–1953), was even poorer than Ghana or North Korea.
Subsequently, leaders emerged who successfully steered a transforma tion. In 1961, General Park Chung-hee took power in South Korea following a coup. While his leadership style was authoritarian, Park was intensely fo cused on economic development. He implemented a meritocratic system and fostered close, strategic relation ships between the government and ma jor local business enterprises, the pre cursors to the chaebol such as Samsung, Hyundai, and others—to drive growth in the industrial, manu facturing, and infrastructure sectors.
In 1965, Lee Kuan Yew had to lead Singapore, amidst tears, after his tiny nation was expelled from the Federa tion of Malaysia; at the time, the coun try had a GDP per capita of less than US$320 and was highly vulnerable to ethnic unrest. Lee managed to achieve a breakthrough through pragmatic pol icies: embracing globalization, prior itizing human capital and education, and implementing a meritocratic sys tem in which individuals were promot ed based on their performance.
In 1967, General Soeharto took the helm in Indonesia and succeeded in quelling the crisis by attracting signifi cant amounts of foreign investment. He subsequently achieved impressive growth, bolstered in particular by the windfall from the oil booms of 1973 and 1978. His “New Order” administra tion, which remained in power until 1998, focused on high economic growth and national stability.
In 1978, Deng Xiaoping assumed leadership, adopting an empirical and pragmatic approach by embracing free-market principles to drive the economy. He is famously quoted as saying, “It doesn’t matter if a cat is white or black, so long as it catches mice.” The reforms initiated by Deng were carried forward by his succes sors, such as Jiang Zemin, who helped transform China into a wealthy nation, and Zhu Rongji, known as the “slayer of corruption,” who helped establish China as a prime destination for inves tors.
During the 1970s, all four nations recorded similar rates of economic growth. The average annual growth rates were 7.21% for Indonesia, 7.39% for China, 9.20% for Singapore, and 10.62% for South Korea. In the 1980s, the average annual growth rates were 5.77% for Indonesia, 9.74% for China, 7.83% for Singapore, and 9.01% for South Korea; during this decade, Indo nesia’s economic growth began to lag behind the other three countries.
In the 1990s, Indonesia’s economic pace fell further be hind, largely due to the impact of the Asian financial crisis. The average annual growth rates were 4.31% for Indonesia, 10.06% for China, 7.22% for Singapore, and 7.28% for South Korea. When the Asian financial crisis struck in 1998, Indo nesia’s economy contracted by 13.13%, Singapore’s declined by 2.19%, and South Korea’s fell by 4.94%, while China’s economy continued to grow at a rate of 7.92%.
In the 2000s, Singapore and South Korea had already attained the status of developed nations, resulting in more moderate economic growth rates of 5.38% and 4.92% per annum, respectively. As an emerging economy, China accel erated, growing at 10.37% annually, while Indonesia’s econ omy grew at 5.11% per year.
In the 2010s, as China emerged as a new superpower, maintaining a growth rate of 7.66% per year, Indonesia re mained stagnant with an annual growth rate of 5.42%. This trend persisted from 2020 to 2025, a period marked by global uncertainty and geopolitical tension, during which Indonesia’s economy grew by an average of 3.69% annually, compared to 4.90% for China.
The question arises: why have Singapore, South Korea, and China succeeded in generating high, sustained econom ic growth, ultimately becoming developed nations, while In donesia has remained trapped with an average growth rate of 4.75% since the 1998 reform era?
The insights offered by James Robinson may provide an answer. Although China, South Korea, and Singapore can not serve as direct benchmarks for Indonesia, they do offer examples of how nations can achieve success. According to Robinson, Indonesia is more comparable to certain African nations that also rely on abundant natural resources. While Indonesia has fared better than some African countries (which have suffered from decline or civil war), it has none theless fallen behind India, Vietnam, and Malaysia. Robin son outlines seven lessons, primarily directed at national leaders: ranging from the necessity for clear motivation to the willingness to accept criticism and the realization that a leader should not seek to be universally liked. (See Box: Les sons from Successful Nations; The Examples of China and South Korea)
STRENGTHENING THE ECONOMIC ENGINE: INDUSTRI ALIZATION, ICOR, AND TFP
The growth target for 2027 has been set at 6%. It is a stepping stone toward achieving 8% growth by 2029. An economic growth target of 7%–8% is sufficient for Indonesia to address its primary economic challenges: poverty and unemployment.
Assuming an annual economic growth rate of 7%, Indo nesia will escape the middle-income trap by 2038. That number can be reached even sooner if growth hits 8% annu ally. Conversely, at 6% growth, Indonesia would not break free from the middle-income trap until 2041. If growth re mains at only 5%, Indonesia would still be stuck as a mid dle-income country by the time it reaches its “Golden Year” in 2045.
According to Infobank Institute, Indonesia’s economic engine currently lacks the capacity to generate 7% growth, as evidenced by three key indicators.
The first indicator is the manufacturing sector is strug gling under the weight of unresolved structural burdens, such as protracted licensing processes, high policy uncer tainty, and elevated logistics costs. Surveys by the World Bank and the Indonesian Employers Association (APINDO) indicate that logistics costs in Indonesia amount to 14.29% of GDP, a figure higher than those of India, Malaysia, or the Philippines.
The second indicator is that Indonesia faces high eco nomic costs, as reflected in its elevated Incremental Capi tal-Output Ratio (ICOR). In 2025, Indonesia’s ICOR reached over 6.24. It is significantly higher than the 3.7 average for ASEAN countries. A higher ICOR indicates greater econom ic inefficiency; specifically, generating 1% of economic growth in Indonesia requires an additional invest ment-to-GDP ratio of 6.24.
The third indicator is that there is a lack of inspiration and innovation, evidenced by low Total Factor Productivity (TFP). TFP serves as a driver of economic growth distinct from capital and labor, encompassing innovation, efficien cy, management capacity, and the utilization of technology. Indonesia’s economic growth has been driven primarily by the accumulation of capital and labor for 200 years.
In the post-crisis period, spanning 28 years from 2009 to 2025, Indonesia’s economy has grown at an average rate of only 4.57% per year. Economic growth exceeding 7% was achieved only during the New Order era, specifically in 1977, 1978, 1980, 1981, 1989, and 1990, and even then, it was driven primarily by capital and debt.
Currently, Indonesia’s Total Factor Productivity (TFP) hovers around 1%, a figure that has remained virtually stag nant since the Dutch colonial era. According to Solikin M. Juhro, Secretary-General of the Indonesian Economists As sociation (ISEI) and Deputy Governor of Bank Indonesia, the country has an opportunity to build momentum by lev eraging digitalization and the creative economy, supported by its rich social capital. “These can serve as new, innova tion-based sources of growth. If we want to reach the next level and achieve higher economic growth, we cannot rely solely on physical and human capital. Those are merely en dogenous factors. The key lies in boosting productivity, effi ciency, and innovation, alongside strengthening institu tions, such as improving regulations and the business climate,” he told Infobank in October.
Developed nations like Singapore, South Korea, and China have demonstrated that innovation emerges from strong institutions, inclusive economic frameworks, market protections, human capital development, and access to low-cost capital which encourage companies to actively pursue research and development. While Indonesia is for tunate to possess abundant natural resources, without in novation, it risks remaining trapped indefinitely as a mere supplier of raw materials. If economic growth continues to rely on labor and capital accumulation, including ev er-mounting debt, the 8% economic growth will be merely a dream.
Yet, the general public remains indifferent to GDP growth statistics that fail to reflect the reality of their daily lives. What people truly need are affordable basic necessi ties, job opportunities, and accessible, low-cost education and healthcare. It would be far better to see economic growth below 5% that is felt by all Indonesians than to chase a 6% growth rate that benefits only a wealthy few, while the average citizen is forced to dip into savings or take on debt just to cover their basic needs.