Can Indonesia educate itself out of middle-income status?

After successfully expanding their economies from low- to middle-income levels, many developing countries now face the risk of falling into the ‘middle-income trap’. The IMF defines this as ‘the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries’.

Indonesia is now stuck in the middle-income mud. The question is — how can Indonesia escape to attain high-income status in the foreseeable future?

One potential solution, offered by the World Bank in the case of Malaysia, is to produce highly skilled workers. Basically, an abundance of highly skilled workers allows countries to undergo a structural economic transformation to achieve a more diversified, sophisticated and nonstandard export basket of manufacturing goods, as well as to compete in a globalised services market. The structural transformation will then increase worker productivity and boost economic growth to the rate required to achieve high-income status.

But deep challenges face Indonesia’s education sector and limit its ability to produce sufficient numbers of highly skilled workers. Two particularly complex issues are the country’s low overall education quality and the low level of tertiary education enrolment.

Indonesia’s problem with low-quality education has been widely documented. By way of illustration, a 2013 study by Samer Al-Samarrai and Pedro Cerdan-Infantes states that Indonesia ranked 40th out of 45 countries participating in an international mathematics and science assessment. In that assessment, 72 per cent of Indonesian students performed at the low level, only 3 per cent achieved the high level and none the advanced level. More worryingly, there has been no noticeable improvement in performance on these metrics over the past decade, except in reading.

The same study finds that the problem of low quality is not caused by a lack of public investment. Indonesia is spending one-fifth of its total public budget on the education sector, trying to implement a plethora of reforms, including making the first nine years of education free, requiring teachers to undergo an assessment to gain certification, and designing a new core curriculum. All these reforms and increased investment have thus far failed to yield much return. Rather, the problem appears to be caused by weak governance, and in particular how policies are actually implemented on the ground.

In Indonesia, although the central government still provides significant funding and designs the core curriculum, the day-to-day management of primary and secondary education rests in local government hands. It is responsible for managing teachers (although most teachers are paid by the central government), appointing school principals, and maintaining and building education infrastructure. The huge variation in the capability of local government officials could play a role in stymieing success.

Improved governance of the education sector is needed. This requires an understanding of the governance context in which a particular policy or program succeeds, an analysis of whether such contexts can be replicated in a different locale, and significant capacity-building activities — which may also involve a higher investment in personnel — in local governments that have been identified as suffering from weak governance.

The issue of relatively low tertiary education enrollment will also be challenging to overcome. Currently, the average education attainment of the working-age population extends to around eight years of schooling, with only around a quarter of Indonesians enrolled in tertiary education. There is now evidence of a large and increasing excess demand in the labour market for tertiary-educated workers, which could be hampering the economy from growing to its full potential. Hence increasing tertiary enrolment is a necessary condition to sustaining economic growth and getting away from the middle-income trap.

Unfortunately, the majority of Indonesian households cannot afford to enrol their children in tertiary education. There are at least two policies that could address this issue.

The first is for government to heavily subsidise tertiary education, although there are numerous drawbacks to this option. The opportunity costs of a heavily subsidised tertiary education are very high. Moreover, the subsidy may not be large enough to entice the economically disadvantaged to enrol. Finally, since a tertiary education qualification carries large private returns, there is the argument that students should be required to make a private contribution.

The second policy option may be more viable: increasing participation through a student loan system, something that does not presently exist in Indonesia. Like similar systems elsewhere, the loan would only need to be repaid after the student graduates. A loan system is equitable, because it is available to every individual who wants to enrol in tertiary education. In addition, various studies have shown that a sustainable loan system requires less government funding than a heavy subsidy. Indonesia’s neighbouring countries are currently designing and experimenting with various types of loan systems, and Indonesia would be wise to follow suit.

With the labour market now demanding increasing numbers of highly skilled workers, education will be a fundamental issue to ensure that Indonesia frees itself from the middle-income trap, and is equipped to continue along a path of high growth. But without genuine improvements in education governance and an effective tertiary education loan system, it is hard to see how Indonesia will ever find itself in the high-income domain anytime soon.

Daniel Suryadarma is a Visiting Fellow at the Arndt-Corden Department of Economics, Crawford School of Public Policy, Australian National University. 
This article appeared in the most recent edition of the East Asia Forum Quarterly,‘Indonesia’s choices’.