Indonesia is pushing for significant policy changes in order to avoid the 'middle-income trap'.

• The Finance Minister of Indonesia, Sri Mulyani Indrawati, has stated that despite Indonesia's annual GDP growth of 5%, which is higher than the global average of 2%, it is not sufficient for the country to make significant progress towards becoming a high-income nation.
• The new administration will take charge in October for a five-year term.
• The incoming president has pledged to continue the pursuit of making Indonesia a high-income economy.

The latest success story among Asia's emerging economies is Indonesia's rapid growth.

Indonesia's Finance Minister, Sri Mulyani Indrawati, has stated that the country's annual 5% GDP growth, which is higher than the global average of 2%, is insufficient for Indonesia to make significant progress towards becoming a high-income nation.

Indonesia's goal of becoming a skilled workforce on high wages and reducing poverty rates is part of its "Golden Vision 2045," a comprehensive plan to transform the country into a prosperous nation by its 100th anniversary.

To achieve our goal of becoming a high-income country with sustained growth through high productivity, we must prioritize investing in human capital, the finance minister stated in a recent interview on CNBC's "Squawk Box Asia."

The International Monetary Fund's August report on Indonesia highlighted the country's goal of increasing value added by transitioning from raw commodities, developing a skilled workforce for the digital age, and accelerating infrastructure development and institutional reform to promote balanced, green, and equitable growth.

Although a change in political power occurred in Indonesia earlier this year, the country's ambitions remain unchanged. Over 200 million voters in the world's most populous Muslim country participated in the February election, resulting in the end of President Joko Widodo's tenure and the election of former army general and Defense Minister Prabowo Subianto.

In October, the new administration will begin a five-year term, with President Subianto pledging to continue the effort to make Indonesia a high-income economy.

The outgoing president's economic reforms will facilitate the attainment of Indonesia's grand vision.

Gareth Leather, a senior economist at Capital Economics, stated that Joko Widodo implemented economic reforms, including simplifying the process of hiring and firing new workers and altering land use rights.

Although Indonesia has some issues with infrastructure and corruption, they are making progress, as stated by him.

To avoid the "middle-income trap," Indrawati believes that major policy reforms are necessary. She stated that Indonesia's government has allocated a significant portion of its fiscal budget towards education, health, and social safety net programs.

The finance minister and the IMF agree that achieving high-income status will require "broad and sustained structural" reforms, while also securing the economic stability that has already been built up.

The Lowy Institute, an Australian-based business think tank, published a report in July that highlighted the positive impact of the country's digitalization of social welfare programs and subsidized food and energy initiatives on poverty reduction. Specifically, the report noted that less than 10% of the country's 279 million residents were living below the international poverty line by 2023.

'Won't ever be the next China'

Economic engineering in Indonesia involves taxation and labor reforms to facilitate hiring and firing of workers.

"They're useful steps in the right direction," said Leather.

"In Indonesia, under the old system, if you wanted to terminate a worker, you were required to pay them up to 60 weeks of severance pay. This was significantly more than in any other country. If you're a manufacturing investor considering where to establish your business in Asia, the inflexibility of the labor force may deter you."

"Indonesia is expected to have a decent performance if it continues growing at 5-6% over the next decade, but it won't ever be the next China," said Leather.

Indrawati, meanwhile, remains cautious.

"Despite Covid and geopolitical fragmentation, a lot has been achieved, but a lot of work still needs to be done, said the minister."

Indonesia must remain politically non-aligned through its economic policy, even as war tensions escalate in Ukraine and Gaza, according to the finance minister.