In 1890, Russian prince Nicholas Alexandrovich, who would soon become Czar Nicholas II, took a trip across Asia. In February his cruise ships dropped anchor in the Bay of Batavia (modern day Jakarta Bay) on the island of Java. He spent several weeks touring the island, complaining about the heat, and hiking volcanoes. Little could the prince imagine that over a century later the island—and its neighbors—would be poised to leapfrog Russia as one of the largest economies in the world:
In 2026, Indonesia is expected to surpass Russia to become the world’s sixth largest economy (in PPP terms)—about two years earlier than if Putin’s invasion of Ukraine had never happened. (We reached that estimate by comparing the IMF’s growth projections pre- and post-invasion.)
This is not directly a sanctions story. Yes, financial sanctions and lack of access to advanced technology through export controls have significant negative long-run effects on the Russian economy. But Russia’s slide and Indonesia’s ascent are both driven in large part by the same thing: people. Russia is suffering from acute brain drain while Indonesia’s labor force is growing. In particular, Indonesia’s educated professional class is growing while Russia’s is shrinking. That contrast is what makes their soon-to-be swap on the list of the world’s largest economies notable. The world’s center of economic gravity is shifting.
In Russia, working citizens under the age of 35 now comprise less than 30 percent of the labor force, the lowest share since Russia started collecting that data twenty years ago. And here’s a statistic which should scare all Russian policymakers: from the start of the invasion to spring 2023, 86 percent of Russian emigrants are under the age of 45 and 80 percent are college educated. In the coming years, Russia’s labor supply will shrink as potential migrants view the country less favorably and as its living standards converge with other former Soviet republics, Moscow’s traditional source of migration. This, coupled with declining birth rates, means that by 2040 a declining workforce could reduce GDP growth by as much as 0.5 percent, according to projections like those by Bloomberg Economics.
Meanwhile Indonesia’s labor force is growing, its commodity exports are booming, and its new capital is under construction. There is a reason why Xi Jinping reportedly tried so hard to bring Indonesia into the BRICS expansion this week. He knows very well where the future is heading: it’s to China’s south, not its north.
While Russia’s workforce ages and its education levels decline, Indonesia’s continue to improve as new workers enter the labor force with strong educational backgrounds and important skills, albeit at a slower rate than the two decades prior to COVID. A growing and more prosperous labor force has also provided a strong foundation for increases in Indonesian private consumption. This is particularly important for China as it searches for new consumer markets to absorb its exports. Although Russia may be an important export market for Chinese producers for the moment, as it rushes to fill the gaps left as western companies pull out, its long-term growth prospects are stagnant at best and more likely negative. The opposite is true for Indonesia, which is still mostly on track to achieve its goal of becoming a High-Income Country by 2045.
Indonesia can see its brighter economic future ahead and its refusal so far to join the BRICS expansion speaks to its own growing confidence—and was one of the most significant and overlooked developments of last week.
The data shows that Russia will increasingly need benefactors like China to prop up its economy while rising powers like Indonesia will have many more friends eager to do business across the islands.
Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.
Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economics and trade.
This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email [email protected]
Image: The never-ending development in the big city of Jakarta.
Nomustang on September 2nd, 2023 at 16:32 UTC »
Very nice for Indonesia honestly.
Stuff like this is what makes me wonder why so many people still think Russia will be a major world power over the next few decades. They do have some inherent advantages particularly a long history in military equipment or jet engines and of course oil but those advantages are either already eroding or will erode in one way or another.
anarchist_person1 on September 2nd, 2023 at 11:59 UTC »
seeing developing countries actually develop is always nice. I hope Nigeria, Indonesia and various other high population countries manage to fully industrialize and economically develop and reach a higher standard of living like China has done, although ideally with a little less authoritarianism.
Capable-Yam4557 on September 2nd, 2023 at 11:36 UTC »
SS:
In 2026, Indonesia is expected to surpass Russia to become the world’s sixth largest economy (in PPP terms)—about two years earlier than if Putin’s invasion of Ukraine had never happened.
The article argues that the decline of Russia compared to the rise of Indonesia is largely driven by their population. Russia is old and declining, also suffering from the acute brain drain, while Indonesia has young and growing educated professional class.
Russian labor force under the age of 35 only comprise of less than 30%. It's even worse after the Invasion of Ukraine, 86% of Russian emigrants are under the age of 45 and 80% are college educated. Indonesia on the other hand, is young and growing. The rising private consumption alone could convince China to look South instead of North.
Indonesia can see its brighter economic future ahead and its refusal so far to join the BRICS expansion speaks to its own growing confidence. The data shows that Russia will increasingly need benefactors like China to prop up its economy while rising powers like Indonesia will have many more friends eager to do business across the islands.
Even though the size of the economy will soon be similar, Indonesia still has a long way ahead to rival Russia in term of global influence. Indonesia while rich in resources still doesn't have enough of them to influence the global price of commodities like Russia. Indonesia also doesn't have a sophisticaed industrial base yet like Russia.
But what people here might not know is Indonesia currently experiencing a wave of re-industrialization, caused by successful economic policy reforms, mainly in industrial downstreaming. New industrial complexes emerges all across the archipelago, but most of them will be in full production after 2027. So while Indonesia doesn't look impressive right now, things might change in a few years. It would be significant because by then the economic growth will be driven by domestic industry from upstream to downstream, not by foreign investments in the form of only assembling factories or by service sector which doesn't employ many people and causing youth unemployment.
If everything goes smoothly (which usually not, but we'll see), Russia with their antics would lose to young new players like Indonesia in global influence, sooner than expected. What is certain is the world is changing and the power is shifting all across the globe.