MANILA, PHILIPPINES – Indonesia is projected to be the world’s 7th largest economy by 2030, but sustaining recent dramatic gains will require a transformation of its current growth model, with much more focus on high-end technologies, skills, and services, says a new Asian Development Bank (ADB) report.

“Building up knowledge-oriented sectors and processes is crucial for continued high growth and strengthening Indonesia’s position in ASEAN towards and beyond 2015,” said Bindu N. Lohani, Vice-President for Knowledge Management and Sustainable Development. “One area rich with potential is the creative industries sector and this should be a key part of the government’s strategy for building a stronger knowledge-based economy.”

Indonesia saw some of the highest growth rates in the world from 2001 to 2010 and it has a large and youthful workforce, says Innovative Asia: Advancing the Knowledge-Based Economy released today. However, the World Bank’s Knowledge Economy Index ranked Indonesia 107th out of 145 countries covered in 2012.

To propel the economy forward on a more knowledge-based path, policymakers need to upgrade infrastructure, reduce red tape for business, boost research and development spending, and improve the quality and relevance of tertiary education.

Creative industries like fashion, design, games and animation are areas where Indonesia, with its high number of tertiary students, should look to expand. Digital technology and global networking have made the creative industries sector one of the fastest-growing in the world. Its contribution to the Indonesian economy from 2002 to 2010 was 7.74% of its total GDP. A new Ministry of Tourism and Creative Economy formed in 2011 is expected to help Indonesia take a bigger chunk of the global creative pie.

Knowledge economies use information and communications technology (ICT), innovation and research, and higher education and specialized skills to create, disseminate, and apply knowledge for growth. Currently, developing Asia ranks well below the OECD average in the World Bank’s Knowledge Economy Index.

Advanced economies of Asia such as Japan; the Republic of Korea; Singapore; and Taipei,China have successfully shifted from agriculture to manufacturing to knowledge-based industries. Others, such as the People’s Republic of China and India, have built pockets of knowledge-based growth, but have not yet translated this into a broader economic model. Countries such as Bangladesh, Myanmar, and Lao PDR have yet to really embark upon knowledge-based growth.

Swift technological advances mean developing Asia is unburdened by older generations of technology, allowing it to quickly embrace new technologies. The International Telecommunication Union estimates that in 2013 there were nearly seven mobile subscribers for every fixed line in Asia. With the right policies and investments, Asia could therefore move to on-demand cloud-based services and wireless internet and mobile applications faster than more developed economies.

Actions to promote knowledge-based economies will differ by country. But they will require strong, coordinated government policies coupled with investment in ICT including universal, affordable and high-speed broadband connectivity, better education notably tertiary and skills-focused training, and a culture of research and innovation with strong intellectual property rights. Flexible capital and labor markets are also crucial.

This shift to knowledge-based growth is critical since the region’s comparative advantages in labor and capital-intensive manufacturing are fading. New technologies like robotics, and increasing stress on resources like energy and water, are emerging as threats to Asia’s competitive edge. A shift to innovation-based growth would help countries avoid the middle-income trap and also address rising income inequalities.

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