TFP is usually introduced as the residual “A” in the production function: output left unexplained by capital and labor. The conventional story is familiar. TFP rises when countries innovate, educate workers, improve infrastructure, strengthen institutions, and make markets more efficient. Figures 1–3 support this baseline. Figure 1 shows that countries with higher human capital tend to have higher measured TFP. Figure 2 shows a positive association between market efficiency and TFP, suggesting that productivity depends partly on whether resources can move toward better uses. Figure 3 adds the institutional layer: countries with stronger governance quality also tend to record higher TFP. These figures are correlations, not causal proof, but they point to a common idea in the productivity literature: TFP depends not only on what an economy has, but on whether its rules, markets, and institutions allow resources to be used well.

Indonesia’s own TFP path gives this debate a practical urgency. Figure 4 shows that Indonesia’s annual TFP growth has been volatile: large contractions during the Asian Financial Crisis and COVID-19, followed by recoveries, but not a smooth upward trend. In the FRED/Penn World Table series, Indonesia’s TFP index stood at 0.99552 in 2023, still below its 2019 level of 1.00802. This should not be read only as a pessimistic story. It suggests that Indonesia still has room to raise productivity if the right bottlenecks are addressed. The question is where future TFP gains might come from.

The missing link that is often overlooked is within the labor market. In Lagos’ (2006) model of TFP, productivity does not simply fall from the sky as an external technology shock. It emerges from labor-market frictions where jobs are created, destroyed, accepted, and rejected. Each worker-firm match has its own productivity. Some matches are productive enough to survive; others are not. The key mechanism is selection. The economy has a reservation productivity threshold: a cutoff that determines whether a match continues or disappears. If the cutoff is higher, fewer low-productivity matches survive, and average productivity among active jobs rises. If the cutoff is lower, more low-productivity matches remain, and measured TFP can be weaker.

This matters because it turns TFP from a purely technological concept into a labor-market outcome. Productivity depends not only on machines, skills, or infrastructure, but also on which jobs survive, which firms expand, and where workers end up. In this view, the labor market is not just a place where employment is counted. It is a sorting mechanism. It decides whether workers are matched with firms that can use their skills productively, or whether they remain in low-productivity work.

This mechanism is useful for thinking about Indonesia. In a dynamic economy, weak matches should eventually be replaced by better ones: workers leave less productive jobs, productive firms expand, and labor moves toward higher-value activities. But if workers are absorbed into informal, stagnant, or survival-based employment, that selection process may be weaker. The economy may still “employ” people, but not necessarily in jobs that raise average productivity. This is why informality may matter for TFP: not because informal workers are inherently unproductive, but because informality can limit the pathways through which workers move into firms that train, scale, and upgrade them.

Labor absorption therefore becomes central to the productivity debate. To see why, we need to look at Indonesia’s labor-market structure. Figure 5 shows that informality still dominates employment: BPS records informal workers at 59.11 percent of total employment in 2023. Figure 6 shows that this informality is unevenly distributed, especially high in agriculture and rural areas. This matters because informality is not merely a legal category. It often reflects smaller firms, weaker training, lower access to finance, limited worker protection, and fewer pathways into productivity-enhancing jobs. World Bank research similarly finds that informality in Indonesia remains elevated, concentrated in agriculture and low-skilled services, and associated with productivity, education, and wage gaps between formal and informal workers.

This changes the productivity story. Human capital does not automatically become TFP. A worker trained for modern manufacturing or digital services cannot raise productivity if the economy mostly absorbs labor into petty trade, low-productivity services, or survival self-employment. The issue is not simply that Indonesia needs “more skills.” It needs a labor market that converts skills into productive work. Recent World Bank data reinforces this concern: youth labor force participation remains low at 49.6 percent, youth unemployment is high at 17.3 percent, and real wages have stagnated especially in labor-abundant sectors such as construction and manufacturing.

A reasonable counterargument is that this overstates labor markets. Indonesia’s TFP problem may be more about weak innovation, infrastructure gaps, institutional quality, or limited firm capabilities. Better matching cannot substitute for technology adoption or investment. That objection is right, but incomplete. Technology does not diffuse by itself. Infrastructure does not allocate workers by itself. Education does not guarantee productive employment by itself. These inputs must pass through firms and labor markets. If productive firms cannot expand, if informal firms remain too small to train workers, if job information is weak, and if workers cannot move toward better opportunities, then productivity remains trapped.

This is why the policy implication should not be “formalize everything by decree.” The goal is to build pathways from informal and low-productivity work into better matches. That means improving labor-market information, linking vocational training to actual firm demand, helping small firms grow into formal employers, reducing barriers that prevent productive firms from expanding, and designing social protection that supports worker mobility rather than locking people into bad jobs.

Indonesia’s TFP debate already recognizes human capital, market efficiency, institutions, and allocative efficiency. The missing labor-market link is to ask where workers actually go. Productivity is not only created in schools, factories, or infrastructure projects. It is created when workers are matched with firms that can use their skills, train them, and scale their output.

Figures

Amartya Sen provides a framework that attempts to encompass prominent equality-preferring ideas. Sen (1979) advances the definition of equality by inserting capabilities and functioning theory, and argues that neither Utilitarianism nor Rawlsianism have yet sufficiently captured the potential discrimination endured by certain individuals. He attributes the impact of individual circumstances and needs on income distribution, defining its concept as basic capability equality (Sen 1979, p. 217).

Sen illustrates this by providing an example of the potential discrimination endured by disabled individuals. He argues that Utilitarianism and Rawlsianism would put them at a disadvantageous position, stating that they will begin life with a low initial level of total utility (Sen 1979, p. 217). He addresses the importance of a framework to capture “basic capabilities”, highlighting aspects such as the ability to move, nutritional needs, clothing, sheltering, and social participation as a baseline that needs to be acknowledged for every individual (Sen 1979, p. 218).

He views that Rawlsianism’s strict focus on primary goods will limit the understanding of equality by only emphasizing the obtainment of goods, rather than evaluating how these goods will affect the condition of human beings. He states that the concept of basic capability equality would extend the idea of Rawlsianism by shifting the focus from obtaining goods to understanding what these goods will do to the individuals (Sen 1979, p. 219). For Utilitarianism, he argues that such a perspective will only focus on how these goods affect the mental reaction of human beings rather than on individual capabilities. Thus, with Utilitarianism and Rawlsianism, allocating resources to such individuals is baseless due to the lack of a marginal utility argument (expensive), total utility argument (because he is contented), or primary goods deprivation (because he has goods others have) (Sen 1979, p. 218). With basic capabilities, however, the understanding would be more complete due to an agreement on a baseline on individual equality.

Sen extends his framework by integrating the concept of basic equality into the ends and means of development. He asserts that beyond the metric of growth, the primary objective and means of development should be oriented towards the enhancement of human freedom (Sen 1999, p. 53). He argues that the instrumental roles concerning economic facilities, political freedoms, social opportunities, transparency, and security should be arranged to enhance individual capabilities and promote individual self-sufficiency and autonomy (Sen 1999, p. 53). Consequently, Sen maintains the position that the state should act as a safeguard of such institutional arrangements, and believes that such an equitable structure requires a certain degree of equality between individuals.

Most notably, he identifies poverty as a hindrance towards achieving human freedom. He acknowledges poverty and inequality as a result of conditional variations and states, and that income and capability will also be strongly affected by factors over which a person has limited control over. Sen identifies aspects such as gender, social roles, innate disabilities, geographical factors, and endemic diseases as examples (Sen 1999, p. 88). He highlights that relative income deprivation can create an absolute capability deprivation (Sen 1999, p. 89). Thus, he believes that the paradigm of capability will increase our understanding of the causes of poverty, deprivation, and inequality (Sen 1999, p. 90).

Rather than identifying inequality as a final goal of institutional arrangements, he reframes its existence, along with other metrics such as growth, as a signal to be operationalized for the achievement of an absolute target: the enhancement of human freedom. He posits that economic inequality will inevitably impose a limitation towards it. Accordingly, not only does he provide a robust philosophical baseline that underlines the importance of tackling inequality, but he also accommodates other metrics, such as growth, as a factor of human freedom.

However, Sen himself admits that the capability and functioning theory is not fully defined. Particularly, he did not evaluate the problems regarding distribution and how it relates to capability theory (Robeyns and Byskov 2020). Thus, having to redefine what it means to be equal, the operationalization of his ideas is relatively limited.

Nevertheless, Sen’s idea lays the foundation to rethink of what it means to be equal. His approach not only addresses the limitations of Utilitarianism and Rawlsianism towards conceptualizing equality, but also anticipates the potential discrimination by equality-based approaches, a framework that acknowledges the intrinsic value of individual capabilities despite uneven extrinsic consequences.

Aigner, Greenspon, and Rodrik (2025) provided strong evidence for the case of such unevenness. They highlighted that between 2016 and 2021, the share of total publications in the top 10 economics journals has been dominated by Western countries. The USA accounted for more than half of the total share of publications, while advanced countries, including Western Europe, Canada, Japan, Australia, and New Zealand, cover most of the remainder. Developing countries, including nations in East Asia & Pacific, which have a noticeably larger global GDP share than the USA and those of advanced countries, contributed less than 5% share. This showcases that the global distribution of authorship in economic journals has been severely unequal.

They also found that the inequality is persistent. Since 1990, changes in the share of authorships have been only slight. The USA lost about 20% of its share, but most of the shares were then replaced by contributions from advanced countries. Other regions gained little significance in advancement, despite most of it experiencing significant growth in GDP contribution.

They found that a significant increase in the contribution of developing countries has been mainly attributed to lower-ranked journals. Again, the USA and the advanced countries remain dominant contributors to the top 100 economic journals. Thus, regardless of economic performance, hierarchy seems to persist in the field of economics.

This evidence underlines that some regions have greater influence in shaping the field than others. Representation is not just a matter of inclusion, but about power. If economics is a universal science, then power concentration is a structural problem. And with its universality contested, the question then is: “How universal is economics, and why?”

Maybe, the answer lies, in part, in how knowledge systems reproduce themselves. Hierarchies are often not purely meritocratic, they are also institutional. Prestige itself a byproduct of historical accumulation: trainings, networks, funds, and practices that reinforced visibility. The circumstances are not always intentional.

This matters because economics does not merely describe the world, it shapes it. When those assumptions are generated predominantly by scholars embedded in certain economies, they carry with them a particular reading of what economic problems look like and what solutions are available. The field’s knowledge is not neutral, it is positioned.

None of this is to say that economics has nothing universal to offer. Supply and demand, incentive structures, the logic of comparative advantage, these are not one-sided notions. But there is a difference between universal principles and universal assumptions.

The Aigner, Greenspon, and Rodrik findings should unsettle us not because some economists are wrong, but because an economics that is answerable to only one part of the world will eventually become answerable to no one. The problems of the twenty-first century will not be solved by inherited frameworks alone. They will require economists who carry different problems in their gut, different failures in their memory, different institutions in their baseline assumptions.

So: how universal is economics? In its ambitions, it aspires to be. In its current practice, it is not. The gap between the two is not merely an academic concern. Whose economy we study determines whose economy we understand. And whose economy we understand determines whose economy we build.

As food systems become more industrialized, cheap, calorie-dense, and low-nutrition foods have become widely available (Popkin & Ng, 2022). Processed snacks, sugary drinks, and foods high in fat and sodium are now easier and cheaper to produce than fresh, nutrient-rich alternatives like fruits, vegetables, and high-quality proteins. Calories are abundant. Nutrition isn’t.

This shift comes with serious consequences. Diet-related non-communicable diseases, such as cardiovascular disease, diabetes, and certain cancers, are now among the leading causes of death globally (GNR, 2021). These are not diseases of infection, but of lifestyle, shaped by a combination of behavior, environment, and long-term exposure to poor diets.

For low-income populations, these changes reshape everyday choices. Cheap, highly palatable foods rich in sugar, salt, and fat are now within easy reach. They are not only affordable, but also calorie-dense, which makes them especially attractive for individuals engaged in physically demanding work. When food needs to be both filling and inexpensive, these options become hard to resist.

This creates a difficult trade-off. The poor are no longer only at risk of not getting enough calories, but also of getting the wrong kind of calories. In many places, undernutrition and obesity now coexist within the same communities, even within the same households. This phenomenon is often referred to as the double burden of malnutrition. At one end, food insecurity and nutrient deficiencies remain serious concerns, reflected in persistent rates of stunting and wasting. On the other, rising obesity rates and diet-related diseases are becoming increasingly common among the same populations.

This pattern is not limited to developing countries. In many high-income economies, lower-income individuals are more likely to suffer from obesity and related health conditions than their wealthier counterparts (Salmasi & Celidoni, 2017). The question is why?

One way to understand this is through a simple constraint. When income is limited, people are often forced to choose between foods that are cheap and filling, and foods that are more nutritious but also more expensive (Martin, 2005). In many modern food environments, unhealthy foods tend to provide more calories per unit of cost than healthier options. At the same time, humans are naturally drawn to flavors associated with sugar, fat, and salt (Drewnowski & Specter, 2004). The result is a systematic bias in food choice. When budgets are tight, and preferences align with what is cheap and available, the outcome is not surprising. People consume more calories, but fewer nutrients.

There is also a longer-term dimension to this problem. Investing in healthy food is, in a sense, an investment in future health. But not everyone values the future in the same way. Individuals with higher expected income and more stable prospects have stronger incentives to maintain their health over time. For those facing economic uncertainty, the future may feel more distant or less certain, making immediate needs and gratification more pressing. In economic terms, differences in time preferences across the wealth gradient can shape dietary choices in unfortunate ways.

As Indonesia’s economy continues to grow, it is beginning to face this same dual challenge. Non-communicable diseases are already the leading cause of death in the country (Arifin et al., 2022), and obesity rates are rising across age groups (UNICEF, 2022). At the same time, evidence suggests that an obesogenic food environment, one that encourages excessive calorie consumption, is becoming more widespread.

Given these challenges, policies that focus on “feeding” the population risk missing the problem altogether. Indonesia’s Free Nutritious Meal Program (Makan Bergizi Gratis) offers one example of an intervention with this potential risk. A program that merely redistributes food without addressing the underlying food system risks further reinforcing the trajectory of rising obesity and non-communicable diseases.

The challenge, then, is not simply about feeding the poor, but about understanding the conditions under which they eat. As food becomes cheaper, more accessible, and more engineered for taste, the problem of nutrition becomes less about scarcity and more about incentives. Without addressing this shift, efforts to improve welfare risk solving the wrong problem, and as is often the case, the poorest will be the least equipped to deal with the consequences.

Since the seminal work of Sachs and Warner (1995), a large body of literature has argued that resource abundance often brings not prosperity, but a range of economic and political adversities. Resource-rich countries have been associated with slower growth, weaker competitiveness, lower human development, greater internal conflict, and more pervasive rent-seeking (see, for example, Sachs and Warner 1995; Auty 2001; Rosser 2006).1 What should have been a blessing has, in many cases, appeared closer to a curse.

Over time, these strong arguments have created a deeply pessimistic view towards resource-rich economies. But that pessimism has also sparked the literature to numerous debates. For instance, Brunnschweiler (2008) re-examined the claim and found a positive effect of natural resource abundance on economic growth. Brunnschweiler and Bulte (2009) pushed the debate further by showing that conflict may be a cause of resource dependence, rather than its consequence. James (2015), meanwhile, argued that much of the negativity surrounding the resource curse stems from a misleading tendency to treat resource abundance and resource dependence as if they were the same thing. More recently, Bruckner, Habib, and Lokanc (2023) revisit the debate and find no evidence that natural resource abundance is inherently detrimental to development. On the contrary, they show that natural resources can be associated with higher income, lower poverty, and stronger human development outcomes.

This mixed evidence has kept alive one of the central questions in development economics: are natural resources inherently a blessing, or do their effects depend on how they are governed? Countries such as Norway and Qatar are frequently invoked as examples of resource-rich economies that have managed, in different ways, to convert natural wealth into longer-term national strength. Their experience suggests that the problem may not lie in resources themselves, but in the economic and institutional conditions through which resource wealth is managed.

One of the most influential economic explanations for the resource curse is the Dutch disease.2 During a boom in the natural resource sector, resource-rich economies can experience a loss of competitiveness in other tradable sectors, particularly manufacturing. Rising export revenues place upward pressure on the domestic currency, making other exports less competitive, while labor and capital are drawn toward the booming resource sector. The result is a distorted economic structure and growing imbalance across sectors (Corden and Neary 1982; Reisinezhad 2020).

A related argument in the literature is that the deeper challenge lies less in abundance itself than in the instability that often accompanies it. As Cavalcanti, Mohaddes, and Raissi (2015) suggest, the challenge may stem more from volatility than from resource abundance. Resource revenues are inherently volatile, subject to boom-bust cycles, and are exhaustible. Under such conditions, much of the policy discussion has focused on how states can smooth these shocks, avoid procyclical spending, and preserve wealth over time.

It is in this context that some countries have established sovereign wealth funds (SWFs), or more specifically resource funds, as a response to the volatility of natural resource revenues.3 Financed from natural resource revenues, these funds are typically justified as instruments for stabilization, saving, and investment. Their purpose is to allocate excess resource revenues in ways that protect the economy from the fiscal and macroeconomic pressures associated with volatile commodity income. By reducing the tendency toward procyclical expenditure and helping governments manage windfalls more prudently, resource funds are often seen as one of the most practical institutional responses to the resource curse (Tsalik and Ebel 2003).

A considerable body of work has found that resource funds can generate positive effects, particularly when supported by credible institutions. Existing studies link them to reduced exchange-rate volatility, improved fiscal outcomes, stronger institutional quality, smoother public expenditure, and a greater capacity to dampen the adverse effects of commodity shocks on trade and growth (see, for example, Shabsigh and Ilahi 2007; Bagattini 2011; Tsani 2013; Sugawara 2014; Mohaddes and Raissi 2017; Affuso, Istiak, and Sharland 2022; Alsadiq and Gutiérrez 2023). One notable findings, Bagattini (2011), for example, finds that the mere presence of stabilization funds can improve fiscal outcomes, even where the economic rationale for establishing them appears weak, although their effectiveness depends heavily on institutional quality.

At the same time, resource funds are not without criticism. Their success depends not only on formal design, but on the broader political and institutional setting in which they operate. A fund may exist on paper, but if it is weakly governed, politically exposed, or unsupported by a meaningful revenue base, its capacity to stabilize and save may be far more limited than the optimistic view implies.

In this sense, a broad logic has emerged in the literature. Resource wealth can generate booms, but also volatility, fiscal instability, and competitiveness problems. Resource funds, especially when supported by strong institutions and sound management, are therefore often presented as one way to transform temporary windfalls into more stable and productive forms of wealth, and thereby mitigating the resource curse. Yet one part of the story remains underexplored: ownership.

The more interesting question may lie one step earlier. A resource-based sovereign wealth fund can only manage revenues that the state actually captures. This immediately raises a deeper issue: who owns the resources in the first place?

It is here that ownership becomes analytically central. Luong and Weinthal (2010), for instance, advances an alternative claim: the so-called resource curse is rooted neither in resource wealth nor in resource dependence itself, but in the ownership structure governing natural resources. Khanna (2017) reinforces this point by showing that state ownership and control over resources are associated with stronger growth outcomes than other ownership arrangements, though only where pre-existing institutional quality is sufficiently strong. More recently, Bruckner, Habib, and Lokanc (2023) identify state ownership as an important transmission channel through which natural resource abundance shapes economic development, particularly in countries that combine above-median state ownership with stronger policies and institutions.

At the same time, ownership should not be treated as a simple solution. Greater state control may allow governments to capture a larger share of resource rents, expand fiscal space, and channel those revenues into stabilization, saving, or long-run investment. But the risks are equally clear. Where institutions are weak, stronger state control can also create more room for patronage, political interference, inefficiency, and rent extraction. Private ownership, by contrast, may limit the state’s direct command over rents, but it can also bring capital, technology, and managerial discipline that state-led systems do not always guarantee. The point, then, is not that state ownership is inherently superior to private ownership, but that the developmental significance of ownership is conditional on the institutional environment in which it operates.

Seen from this angle, not all resource funds are institutionally equivalent. A fund in a country where the state directly controls a large share of extractive rents differs fundamentally from one in a country where the sector is largely privately dominated and public revenues depend mainly on taxation and royalties. The distinction is not merely legal. It shapes the scale, stability, and fiscal significance of the revenues that can ultimately be transferred into the fund. Before asking whether a sovereign wealth fund works, then, we should first ask whether the state has sufficient command over resource rents for the fund to matter in the first place.

If ownership matters for the resource curse, and resource funds matter for how resource-rich countries respond to it, then the interaction between the two may represent one of the most important institutional questions in resource governance. To this end, the nexus between ownership structure and resource funds remains relatively underexplored in the literature.

This broader discussion is also relevant for Indonesia. As a resource-rich country, Indonesia has experienced resource booms in the past, but their long-run management has often been uneven. Although Indonesia now has sovereign wealth vehicles such as INA and Danantara, it still lacks a resource fund specifically designed to stabilize and save commodity revenues. That absence matters. If resource wealth brings not only fiscal opportunity, but also volatility, exchange-rate pressures, and broader macroeconomic risks, then questions of ownership and institutional readiness become difficult to ignore. Should Indonesia consider establishing a resource-based sovereign wealth fund? Would its current ownership structure support meaningful rent capture? And is the country’s institutional quality strong enough for such a fund to work as intended? These are not easy questions, but they are precisely the kinds of questions that deserve more serious attention.

All in all, the resource curse literature has taught us to think carefully about volatility, institutions, and the governance of resource wealth. Sovereign wealth funds have rightly become part of that story. Yet before resource wealth can be stabilized, saved, or invested, it must first be claimed. Ownership, then, is not a peripheral concern. That is why ownership matters. And it is also why the more fundamental question remains: who owns the rents?

Acemoglu et al. (2004) solidified the claim of institutions as a long-term determinant of growth. Operationalizing the European settler’s mortality rates as an institutional proxy, they empirically supported the significant role of inclusive institutions in promoting sustainable economic growth (Acemoglu et al. 2001). They later provided empirical evidence for democracy as a foundation for growth, highlighting that democratization has increased long-run GDP per capita by 20 percentage points (Acemoglu et al. 2019).

Effectively, it showcases an integrated structure between institutions as a vehicle to initiate growth and democracy as its ideological foundation. It manifested in the form of a governance system, backed by theoretical rationale and empirical evidence.

The World Bank (2017) supported this premise. Classifying governance as “rules-based” and “deals-based” bargains, it asserts the importance of inclusivity to ensure prolonged economic development. The “rules-based” system, which emphasized accountability, equitable power distribution, and a less personalized form of governance, is claimed to be a more sustainable political and economic structure. Particularly, it advocates the predictability and adaptability of such a system to ensure effective transition and long-term consensus for the rules of governance.

Other scholars have taken alternative approaches to support the finality of democracy. Sen (2013) argued for the intrinsic value of democracy. He affirmed the role of political, economic, and social freedom as instruments of growth. Aligned with the idea of inclusive institutions and “rules-based bargains”, he stated the importance of transparency and protective security as necessary tools to sustain growth.

However, China, Rwanda, and Singapore raises questions about the generalization of democratic institutions as the sole mechanism for sustainable growth. These countries have distinct historical and sociological characteristics. Rwanda is a former Belgian colony. The colony categorized Hutu and Tutsi into distinct racial and hierarchical identities that resulted in a long-standing resentment between the two factions. The conflict culminated in 1994, when roughly 800,000 Tutsi were massacred by the ruling Hutu, driving most of them into exile in Uganda.

Paul Kagame, a Tutsi, led the Rwandan Patriotic Front (RPF), which ended the genocide during the same year. His military intervention is seen as a successful initiative to bring stability to the region. In 1998, Paul Kagame became the president of the RPF, and then became the national president in 2000. He has ruled since.

His governance is full of contradictions. Although he was successful in stabilizing Rwanda’s political and economic environment, the regime that followed is unambiguously authoritarian. Opposition is often suppressed and political opponents imprisoned. Already ruling for more than 20 years, his last election in 2024 still resulted in him winning 99% of the total votes (Kupemba 2024).

Despite such conditions, Rwanda’s economic performance excelled. From 1994 to 2024, Rwanda’s average GDP per capita growth reached a substantial value of 4.85%. With such an average, Rwanda has not only surpassed the economic performance of its neighbours, but also that of most countries in the world. Referenced from the World Development Indicator, the average GDP per capita growth from 1994 to 2024 has only reached 1.02% in Sub-Saharan Africa, -0.04% in Central Africa, 0.7% in Southern and Eastern Africa, and 1.8% in the world. Furthermore, control of corruption in Rwanda has been one of the best performing, showcasing a value of 0.67 in the World Bank’s Control of Corruption Estimate Index.

Figure 1 World’s GDP per capita growth (1994-2024)
Source: World Development Indicators (n.d.)

Figure 2 Rwanda GDP per Capita Growth (1994-2024)
Source: World Development Indicators (n.d.)

If Rwanda became a significant exception to a democratic form of governance, China and Singapore scaled it by multitudes. Both are considered economic miracles of the 20^th century. They have a centralized approach to political governance and experienced a sustained economic growth at an unprecedented level.

China has existed for millennia. It is one of the largest by region and the most populous in the 21st century. At one point in history, they dominated the global landscape. They had significant transformations over the years, experiencing multiple cultural and political revolutions. From the era of the Han dynasty, to the golden age of the Ming and Qing, to the period of modern communist China, they have endured. Thus, unlike Rwanda, they are a wounded giant attempting to restore its peak (Ho 2014).

Singapore tells a different story. It became independent after separating from Malaysia in 1965. In its entire history, it has been governed by a single party. For much of its time, power is also very much concentrated in the figure of Lee Kuan Yew, the founding father of Singapore and the longest serving prime minister from 1965 to 1990. But in 30 years, the country became one of the higher-performing economies in the world. Then in 2024, it had the 2nd highest per-capita GDP in the world in terms of purchasing power parity.

Their story highlights evidence against the necessity of democratic reforms as a basis for growth. Notably, all three share a common structure. Despite extractive political institutions, their economic institutions are inherently inclusive. Acemoglu & Robinson (2013) categorize this combination as unsustainable, yet, it held.

The limited success of autocratic political institutions does not necessarily disprove effectiveness of democracy: it disproves its generalizability. These cases raise enough evidence to highlight the conditionalities for democracy. That is, the institutional and cultural heterogeneity of countries should be taken into consideration when attempting reform.

Mansfield & Snyder (2005) strengthen this argument by highlighting the importance of sequencing in democratic reforms. Without strong political institutions and the rule of law, political participation and elections can backfire, resulting in unintended consequences. Zakaria (1997) further supported the argument by cautioning against the danger of constitutional liberalism with democracy, arguing that such misinterpretation often leads into ineffective prescriptions for development.

Cultural heterogeneity also becomes a distinct factor that influences this conditionality. Lipset (1959) argues that pre-requisites for democratic governance must first be fulfilled. He highlighted that aspects such as level of education, class structure, and wealth are determinants of whether democratic governance would succeed. Chua (2002) extends his to the Asian context, underscoring that the success of Singapore should also be attributed to the concept of ‘Asian democracy’. Thus, he firmly asserts the role of cultural factors towards forms of governance. While Xu (2011) argued that China, with its “regionally decentralized authoritarian” have been effective in promoting reforms given its unique political system, highlighting its adaptability while detaching itself from the idea of Western democracy.

Altogether, this empirical evidence converges into a single idea: the success of democratic reform itself is conditional. Thus, for the case of Rwanda, China, and Singapore, democratic reform should be viewed as a tool rather than an absolute destination. Evidently, China, Singapore, and Rwanda have simply followed a path shaped by its own constraints.

This iterative process was often ignited during a crisis, such as one shown during the Great Depression. In the worsening condition, policymakers were puzzled to find a reliable metric of its economic impacts. It was during this period that Simon Kuznets, a Russian-American economist and statistician, contributed to the creation and formalization of Gross National Product (GNP). It was defined as the total value of output by a nation’s population, regardless of location. His framework later provided the foundation for Gross Domestic Product (GDP), measured as the sum of consumption, government expenditure, investment, and net exports. Adopted as an international standard for economic performance, it has become the primary lens for economic measurement (Vanham 2021).

Yet, the establishment of GDP as an international metric did not come without challenges. Kuznets himself argued that using GDP as a measure of national welfare will overlook other aspects, including the quality of life, environmental degradation, and income inequality. Therefore, despite providing a foundation for GDP, he expressed a profound disagreement with simplifying the overall definition of economic performance as a measure of productive output (Vanham 2021).

This tension illustrates that a metric could be utilized with numerous interpretations. While GDP provides a consensus, Kuznets showcased that a singular definition of growth should be challenged. More importantly, disagreement regarding definitions should be taken as a corrective process to enhance our understanding of economic progress.

Such a sequence illustrates a recurring pattern that ideas, regardless of how well-formed, are constrained by what they can explain at a particular time. History acts as a record that keeps track of ideas and how they were exposed, revised, and advanced. Thus, with the reach contestation, our understanding of how capital, labour, growth, institutions, and technology will be shaped.

After the Great Depression, the idea that “supply creates its own demand”, known as Say’s Law, was rebutted . The world needed a new intellectual axiom, and at the end of the Great Depression, “The General Theory” by John Maynard Keynes, emerged. It argued that instead of wages, employment is decided by the aggregate demand for goods and services. Rebuking the classical theory, he asserts that government intervention is a necessary tool to help the economy reach full employment.

Building on the Keynesian framework, the Harrod-Domar model was one of the earliest to be introduced. It shows that economic growth is strictly a byproduct of the saving rate and the capital-to-output ratio (Boianovsky 2018). The idea became a landmark for capital fundamentalism, emphasizing capital formation as the main driver of economic growth. The model became enormously influential during the late 1940s to the mid-1950s, being one of the first models of the post-war growth theory.

Criticism emerged shortly after its birth. Comments were made highlighting fundamental problems with the model’s assumptions, defined as the knife-edge instability (Hagemann 2009). Particularly, the model assumes that the warranted rate of growth and the natural rate of growth are exogenously given without mechanisms to align them. This assumption produces an extensive period of rising or falling unemployment. In addition, fixed proportions of labour and capital add to the problem, leaving the model fundamentally unsustainable.

In 1956, the Solow-Swan model became a direct response to the Harrod-Domar model by asserting the roles of technological advancement and the substitutability of labour and capital as factors of production (Hagemann 2009). The model empirically proved the idea in 1957 through the “Solow residual”. It illustrates that a large portion of growth cannot be attributed to capital accumulation or population growth, implying the significance of total factor productivity towards income increase. The discovery effectively iterates the notion that capital accumulation is the determining factor of economic growth.

This sequence is not simply an empirical finding or a theoretical advancement, it was an acknowledgement. From a historical standpoint, it validated the claim that definitions of growth and its measurements are rarely final. More importantly, our understanding of growth will only continuously evolve.

The Solow-Swan began by scrutinizing the instability of its predecessors, only to create room for other sources of evaluation. It validated the limitation of capital as a factor of growth, but left the specification of total factor productivity for interpretation. Thus, theoretical evolutions will be limited by our understanding of current phenomena. Each solution will only expand the question, and not conclude it indefinitely.

After dominating growth theory for decades, the Solow-Swan model was eventually displaced by the Endogenous Growth Theory. The new theory improved upon the model, adding human capital and knowledge spillovers to the construct of total factor productivity (Lucas 1988; Romer 1994). Other perspectives, such as the Adaptive Efficiency Model, argues that growth is a byproduct of institutional adaptation, highlighting the conditionalities imposed by evolving institutions on economic growth (North 1994; Simpson et al. 2025).

Together, they define growth as a byproduct of several endogenous factors. They illustrate the limitations of past models as a predictive tool for growth. They did not replace the Solow-Swan model, but our understanding of growth has changed permanently since they emerged.

These models support the claim that defining growth should come as an evolutionary process. The statement that “the economy grows because of fast capital formation” is deceptive in its simplicity and only partially true. Growth is a phenomenon influenced by many factors, and attributing one factor without the other can only produce an incomplete understanding of its nature.

Acknowledging capital formation as a driver of growth is crucial. However, human capital, knowledge, and institutions determine how capital should be accumulated and will be deployed. The Solow-Swan model confirmed the idea that capital and labour can only explain a fraction of growth, and it has proved the limitation of capital accumulation as its primary explanatory factor.

The consequence of misalignment extends beyond theory. The Harrod-Domar model dominated post-war growth discussion, but its failure in creating a sustainable growth mechanism had severe consequences. It undermined alternative growth factors, and overemphasized its own importance and creates a disproportionate burden on developing countries, implying barriers of equitability (King & Levine 1994).

The same goes for the Solow-Swan. After being the primary reference for understanding growth, it failed specify total factor productivity at the empirical level. Without theoretical improvement, technological advancement could only be understood more broadly, significantly limiting understanding of growth factors, and thus, its policy implications.

The past dynamics of GDP and GNP also display a similar conflict. We agreed that growth is measured as an increase in productive output. But such a definition is not final. There will always be room to incorporate other definitions of growth, allowing alternative measurements to take place, and in effect, other models to emerge.

Therefore, the question of defining and measuring economic growth is not a question of empirical specification, but a clash of consensuses. GDP is a construct of economic growth, but not the entirety of it. The same way that capital formation is proven to be only a factor of growth, and not its whole.

Economic growth is not a problem awaiting a final solution, it is a moving object. The progression from Harrod-Domar to Solow to Endogenous Growth Theory is not a story of convergence but a record of succession, for each exposed the blind spots of its predecessor. Disagreement about definition and measurement is therefore not a weakness but a necessary mechanism by which the discipline advances. The right response to any consensus on growth is not to defend it, but to ask what it cannot see.

Comparisons between countries often focus on how the quality of goods and services in developing countries is worse than that in richer nations. Why do advanced countries seem to have better things than the rest of the world? We think it’s due to a simple “no-brainer” reason: some countries are just much richer than others. That is the simple yet best way to explain how the US has better infrastructures, or Japan with its public transport, or why Switzerland is so damn expensive.

We know that Indonesia’s living standards remain far behind those of advanced economies. But, examining how Indonesia have progressed over time compared to other nations should provide a clearer perspective on whether it’s growth trajectory has been typical, faster, or slower than expected.

Using GDP per capita, we can now see how Indonesia compares with the advanced countries. Figure 1 shows the 2024 GDP per capita of several advanced economies. The numbers range from the United States, one of the richest countries in the world with a GDP per capita of $84,534, to Japan, another wealthy nation with about $32,487 per person.

To make it concrete, imagine that the average person in the United States earns about $84,534 in a year, while the average Japanese earns around $32,487. Now compare that with Indonesia, where the average income per person is only about $4,925 per year.

Figure 1. GDP Per Capita Comparison of Indonesia to Advanced Countries

The gap is not marginal. The average American earns roughly seventeen times more than the average Indonesian. While even Japan, with lowest income level among other advanced economies in the figure, has an income per person about six times higher than Indonesia. The United States has more than twice the income per person of Japan. This highlights just how far Indonesia still has to go before reaching that category.

The difference in living standards then should therefore not come as a surprise. These income differences also translate into differences in the nation’s ability to provide public goods for its people. Governments in richer countries can collect far more tax revenue per citizen, allowing them to finance better infrastructure, public services, and social protection systems.

If we compare to countries that started from a similar income level and faced similar development challenges, Indonesia did not exactly win the race either. Figure 2 compares the growth of GDP per capita between Indonesia and several countries that had similar income levels in the past, including China, Vietnam, Peru, and Thailand. In 1985, Indonesia’s GDP per capita stood at around $511. At the time, this figure was actually higher than China ($295) and Vietnam ($238), though still below Peru ($767) and Thailand ($774). However, the trajectories of these countries over the following decades diverged quite significantly.

Figure 2. GDP per Capita Trends of Indonesia and Comparable Economies (1985–2024)

Thailand’s GDP per capita grew from around $774 in 1985 to more than $7,300 in 2024, and Peru increased from roughly $767 to over $8,400 during the same period. Meanwhile, China increased its GDP per capita from just under $300 in 1985 to more than $13,000 by 2024

Of course, Indonesia has also experienced significant growth as well. Its GDP per capita rose from around $511 in 1985 to approximately $4,925 in 2024. This represents nearly a tenfold increase over four decades. But, when placed alongside these comparable countries, Indonesia’s progress appears more stagnant.

Comparisons with countries from similar starting points suggest that Indonesia’s growth, while substantial, has been more moderate than that of some of its peers. Indonesia is progressing. We’re becoming richer, but in a rate slower than those who started poorer. This distinction matters. It should shift our perspective from asking “why is Indonesia poor”, into “what prevented Indonesia from growing at faster rate similar to China, Vietnam, Peru, and Thailand”. And it is a question that Indonesia has yet to answer.

Amid the expansion of higher education, the composition of unemployment by educational attainment has also shifted. Since the late 2000s, the proportion of university graduates among the unemployed has increased significantly, consistently reaching double digits in the 2010s and 2020s. In contrast, the share of senior secondary (SMU) graduates among the unemployed has changed only slightly over time, averaging around 28 % since 1986.

This pattern suggests a structural shift in the composition of unemployment within the Indonesian labour market. That is, the proportion of university graduates’ unemployment has risen relative to the total open unemployment pool. Such evidence signals an absorption failure in the labour market for university graduates, potentially highlighting a labour market mismatch during extensive higher education expansion initiatives.

This evidence presents a conundrum. Isn’t more quality education supposed to be good for the economy? Isn’t it supposed to increase the value of human capital, boost productivity, and thus create more jobs? Why does that not seem to be the case, especially when the Indonesian economy is growing?

First, we have to understand the proposed mechanism for which education could increase wage and employment outcome. Theoretically, Becker (1964) highlights that education is a form of capital investment. Just like how firm invests in machines, individual invests in skills. Both are expected to produce future returns. Becker models it with the following equation.

In the model, Y represents income after education, X represents income without additional education, while C represents the cost of education, and r illustrates its rate of return. The mechanism he proposed is that when people acquire education, they expect some sense of return. When they spend time and resources to obtain an education, including tuition, time spent studying, and foregone earnings, they expect future benefits. This increases the expectation of workers’ productivity by firms, resulting in higher wages and lower unemployment. Therefore, in an equilibrium, education should improve labour market outcomes.

Spence (1973) highlights the function of education as a signal of workers’ ability. Education may not primarily increase skills, but it may signal a worker’s ability to employers. Therefore, in an equilibrium, high-ability workers are predicted to have better education and wages based on observed signals taken by firms and hirers.

However, Indonesia presents a case where these models are not functioning properly. That is, Becker and Spence argued that education is supposed to produce a positive signal of workers’ ability and enhance labour market outcomes. Evidently, there seems to be a discrepancy of the proposed mechanism resulting in what seemed to be a labour market failure.

Such failures have been studied in extensive mismatch literature. Duncan and Hoffman (1981) argued that overeducation could happen when the education level increases more rapidly than the skill requirements for available jobs. In such cases, workers may obtain education levels that exceed the qualifications required by their jobs. This leads to a schooling surplus, where individuals are hired below their education level, resulting in an inefficient allocation of human capital.

Structurally, Pritchett (2001) highlights evidence that educational attainment in developing countries does not directly contribute to growth as predicted by foundational economic models. He argued that mismatches and institutional arrangements were sometimes unaccommodating of growth, resulting in counterproductive educational initiatives. In particular, he highlights the case where countries’ demand for growth for higher-skilled labour failed to meet the pace of their expansive educational initiatives. He also highlighted that their ability to transmit knowledge and skills effectively through educational programs also plays a role. This signals a potential case when rapid education expansion will not translate into employment opportunities.

A related structural explanation is presented by Dani Rodrik (2016), who argued that a misaligned transformation, illustrated by premature deindustrialization, will hinder growth for developing countries without a comparative advantage in manufacturing. He argued that manufacturing will produce an unconditional labour productivity convergence, meaning that it will produce growth quickly if they industrialized. He also showcased that manufacturing can absorb low-skilled workers more effectively, in contrast to non-industrialized and service sectors that require highly skilled labour. He illustrates the case of some African and Latin American countries that have been enduring the consequences of premature deindustrialization, showing signs of an increase in informality and petty services despite growing investment. These underline the central role of manufacturing in driving catch-up growth, and the danger of prematurely transitioning into a high-skilled sector.

For the demand side, Van De Werfhorst (2009) presents a case where education has evidently transformed into a positional good. He highlights that educational pursuits were also significantly driven by social-class pressure, underscoring the phenomenon of credential inflation amidst the loss of educational value. As a result, demand for education steadily rises even without rewarding job market consequences.

Altogether, these combinations may signal that Indonesia is experiencing structural challenges, facing a mechanism failure in the current labour market ecosystem. With a growing number of educated populations and a rising share of university graduates in unemployment composition, Indonesia’s labour market failed to absorb a significant number of the educated workforce. This raises an important policy question: What is the current strategy for Indonesia’s government for higher education expansion, and where will it take us?

Indonesia’s grand development strategy for education is embedded within a broad national development strategy, emphasizing structural transformation. The National Long-Term Plan (RPJPN 2025-2045) acknowledges the weaknesses of the current manufacturing climate, the signs of premature deindustrialization, and poor research and development capability. The document emphasized the importance of higher education initiatives to increase productivity, along with downstreaming as a strategic initiative for growth and development.

On paper, Indonesia’s long-term development plan presents a coherent framework for sustainable growth. However, its success is highly dependent on short-term implementations. And so far, the alignment between the short-term trajectory of labour market development and its long-term vision has been questionable at best.

Indonesians are enduring problems regarding labour mismatch, including overeducation and undereducation. As discussed, unemployment amongst university graduates having also been rising. This pattern is shows that there is a clear sign of labour market misalignment amidst HE expansion.

If we examine the composition of undergraduate students in 2025, most are enrolled in the degree that would presumably directly contribute to the service and non-manufacturing sectors. Primarily, enrolment are concentrated towards education, social, economics, and healthcare sectors.

Furthermore, if we take a look at the employment composition, the primary sector, being agriculture, forestry, and fishing, along with service sectors (retail, accommodation, and education), still dominate the employment share of the job market. More importantly, they are growing at a similar rate to the secondary sector, signalling labour market absorption failure in manufacturing industry. This highlights that the manufacturing sector failed to grow at a targeted rate despite evident policy prioritization.

In response to the current labour market situation, the government tend towards a more interventionist approach. Welfare programs such as Makan Bersama Gratis (MBG) signal massive boosts for the service sector, particularly the food and agricultural sectors. However, whether such an initiative will translate into a meaningful development consequence, especially in the middle of rising unemployment, remains an open question.

Another massive program, Koperasi Merah Putih, also became a source of scrutiny. With a promise to initiate a top-down institutional design for more than 80,000 rural cooperatives, the government also proclaimed it as a substantial program to help ease the problem of rising unemployment. Through loans channelled by Bank Himbara, the government presented Koperasi Merah Putih as a vehicle for rural development. However, being concentrated in the service sector, the prospect of Koperasi Merah Putih becoming a proper vehicle for substantial labour market development is still highly doubtful. Not to mention, with the current institutional design, one being a top-down initiative that contrasts the autonomous and bottom-up approach of cooperatives, a question of the government’s ability to monitor and incentivize “workers” is still debated. All of which are oriented towards primary and tertiary sectors.

Other programs, such as TKDN and Danantara, signal commitment to strengthening the national manufacturing industry. However, amidst criticism of protectionist tendencies, rising costs, and perceived inefficiency, its ability to generate employment opportunities and growth in the manufacturing sector would be highly dependent on technological adoption and utilisation. Yet, most of the current technology was obtained during the previous administration. Evidence also shows that despite prioritization for manufacturing, labour market absorption for the sector remains stagnant, signalling a transition barrier towards high-skilled jobs in the manufacturing sector for Indonesians.

This evidence provides a mixed perception of Indonesia’s development strategy. Tension arises due to the lack of coherence between the long-term plan and short-term execution. The government take notice of the importance of strengthening the Indonesian manufacturing sector for sustainable growth. But, the problem regarding labour market absorption for the educated remains, for which most do not gravitate towards manufacturing. As a result, growth of education will significantly outpace the demand for quality jobs, resulting in a labour market mismatch and rising unemployment for the educated.

All in all, while the higher education expansion initiative is a necessary investment to prepare for future growth, it is also imperative that industrial sequencing and short-term alignment are also oriented to reduce unemployment and increase the workforce’s productivity. Ultimately, an alignment between industrial and education policy would be a crucial determinant in addressing the long-run consequences of higher education expansion. Whether it proves to be a worthwhile investment or a wasted opportunity will depend on the evolution of these policies in the years ahead.

This is the moment of realization that macroeconomics is not just a list of slogans, but a discipline about mechanisms — about how outcomes are produced, and how those outcomes depend on institutions, expectations, constraints, and assumptions.

And even when the policy and its mechanism “works”, the bigger question we should be asking is: Inflation on what? Inflation for whom? or even better, who wins and who loses? The rich? The poor? People living paycheck to paycheck? People who barely even know what an interest rate is, but still feel its effects every month? These are not side questions. They go straight to the heart of how the economy works. This is where frontier macroeconomics begins.

Let’s take a step back and understand what do we really mean by macroeconomics. At its core, macroeconomics is a study of the performance of the national and global economies. Traditionally, the two headline questions were growth and cycles: why living standards rise in the long run, and why economies boom and slump in the short run.

But the modern version of macro doesn’t stop there. It asks: growth for whom? cycles for whom? That shift happened for a practical reason. When real economies went through episodes like jobless recoveries after the 2008 global financial crisis, decentralization reforms that shifted fiscal responsibilities, and the massive income shocks like the COVID-19 pandemic, it became harder to pretend that the “average household” is the whole economy. The distribution of income, wealth, and risk shapes how policies transmit through the economy — and ultimately, whether they work at all. Inequality has therefore become an increasingly central theme of modern macroeconomics.

Frontier macroeconomics starts with its bottom-up approach: microfoundations. Instead of treating the economy as a single machine moved by a few aggregate relationships, modern macro asks a more disciplined question: what decisions are households, firms, banks, and governments actually making, and how do those decisions add up to aggregate outcomes?

A useful place to begin is the Solow–Swan model1, the classic in growth theory. It is powerful, but deliberately simple. Many of its key drivers are treated as given — or, in economic terms, exogenous. In its standard form, the model starts with a production function in which aggregate output (Y) is produced using capital and labor.

The backbone of the model is capital accumulation: not all output is consumed today, and the portion that is saved is reinvested to build the capital stock for the future. This process is what drives growth over time. A simple way to think about it is “saving an egg today so you can have more chickens tomorrow.”

One of the most important elements in the Solow model is the saving rate. The model assumes households save a fixed fraction of income. That simplicity is useful, but it also leaves an important question unanswered: why do households save that amount in the first place?

Modern macroeconomics pushes directly on that gap. Instead of taking saving as given, microfoundations ask: how does saving emerge from household decisions? How do people choose between consuming today and saving for tomorrow? Since households do not simply spend everything at once, theorists model that trade-off explicitly through an intertemporal utility maximization problem. In other words, saving is no longer imposed from outside the model; it becomes the result of optimization.

These optimization behavior of not only households, but also firms, governments, and other agents marks the transition from older growth models to the broader architecture of modern macro. The diagram below gives a broad roadmap of how these models evolve and connect to the benchmark frameworks used in modern macroeconomics. What follows is a quick tour of some of the most important ones.

• Neoclassical Growth Model (NGM) / Ramsey-Cass-Koopmans234

  This is the classic micro-founded growth model. It explains how households choose consumption and saving over time, and how those choices shape capital accumulation and long-run growth. It is used as the foundational benchmark for modern dynamic macro models.

• Overlapping Generations (OLG) Models56

  People do not live forever. The OLG model introduces finite lives: people are born, work, save, retire, and die. It is designed to study how different generations interact. It is especially useful for analyzing pensions, aging populations, public debt, social security, and intergenerational redistribution.

• New Keynesian (NK) Model7

  Prices do not adjust flexibly. The New Keynesian model takes the dynamic structure of modern macro and adds sticky prices, nominal rigidities, and imperfect competition. Its main purpose is to explain why monetary policy has real effects in the short run. It is widely used to study inflation, interest rates, business cycles, and stabilization policy.

• Heterogeneous-Agent (HA) Model89

  The HA model drops the idea that everyone in the economy is basically the same. Instead, households differ in income, wealth, risk exposure, and constraints. These models are used to study how inequality, incomplete markets, and household-level shocks shape aggregate outcomes.

• Heterogeneous-Agent New Keynesian (HANK) Model10

  HANK combines heterogeneous households with a New Keynesian monetary framework. Its main contribution is showing that monetary policy does not affect all households in the same way. It is increasingly used as a modern benchmark for monetary policy analysis, especially in central banks, because it captures distributional effects and more realistic transmission channels.

• Search and Matching Models111213

  This models focus on labor market frictions. Workers do not instantly find jobs, and firms do not instantly find suitable workers. These models are used to explain unemployment, vacancies, wage bargaining, job creation, and labor market dynamics.

One application of the OLG models is the study of pension reform in Indonesia. Kudrna, Piggott, and Poonpolkul (2022)14 show that extending pensions can raise welfare, especially for older informal workers, but also creates long-run fiscal trade-offs as the population ages. This shows how policy affects different generations and fiscal sustainability over time.

In essence, frontier macroeconomics is not a rejection of traditional macroeconomics. It is when the old questions are taken more seriously. Growth still matters. Business cycles still matter. But modern macro asks those questions with sharper tools: by making behavior explicit, by taking frictions seriously, and by recognizing that households and firms are not all the same. The field has evolved from simple aggregate relationships towards models built upon optimization (why households choose to consume, save, or work), expectations (what do people believe about inflation, wages, or policy tomorrow), and constraints (how firms finance investments, how household borrow, and where markets fail).

This matters most when the economy is hit by shocks or policy changes. A tax reform does not affect capital owners and workers in the same way. An interest rate hike does not hit rich households, indebted households, and hand-to-mouth households equally. A recession is not just a fall in output; it is also a change in hiring, job finding, and household risk. Frontier macroeconomics matters because it gives us a way to study those mechanisms directly, rather than hiding them behind one “average” household.

That said, frontier macroeconomics still faces important critiques. Even sophisticated models depend heavily on assumptions, and microfoundations do not automatically make them true. Expectations may be modeled too neatly, data are often hard to identify cleanly, and policy conclusions can change depending on which frictions the model emphasizes. In light of this, frontier macro should not be seen as a one-fits-all framework. Rather, macroeconomic models are useful precisely because they help isolate specific mechanisms and clarify what drives economic outcomes in different contexts. As Dani Rodrik puts it in Economic Rules: “The correct answer to almost any question in economics is: It depends.”

References

Reformasi was expected to be a turning point for Indonesian democracy. Law Number 22 of 1999 on Regional Government and Law Number 25 of 1999 on Fiscal Balance between Central and Regional Governments became significant milestones, effectively laying the foundation for the independence of subnational governments in domestic political affairs. For a moment, the pillars of change seemed established, and the promise of a new Indonesia seemed to be within reach.

Twenty-seven years have passed since, yet the dream of a new Indonesia still feels long overdue. Stalled by institutional failures, the steady erosion of democratic principles, and overly concentrated power structures, Indonesia has failed to deliver on its promise of equitable development. And the very heart of it, decentralization, becomes a subject of paradoxical scrutiny.

The 2001 Decentralization, or “The Big Bang Decentralization”, was enacted to redistribute the political, fiscal, and administrative capacity to local agents. It was legally anchored on Law Number 22 of 1999 and Law Number 25 of 1999, effectively increasing the autonomy for municipalities and city-level governments. Although theoretically aligned with Oates’ (1972) framework, it is conditional on the existence of a robust and democratic local institution.

Evidently, the post-decentralization consequences of Reformasi have produced mixed socio-economic results. Several indicators have highlighted alarming economic conditions, as evidenced by a steady increase in the Gini Index. In addition, Freedom House’s score has also indicated a steady erosion of democratic quality in Indonesia, plateauing in the late 2000s.

Several pieces of evidence have also highlighted the nuanced results of the post-decentralization period. Although granted higher authority to obtain local revenues, changes in the proportion of locally sourced revenue (PAD) in respect to central transfer remain dormant for most local governments. Furthermore, the widening of corruption distribution by elected officials also signals institutional failure, producing a flawed check-and-balance procedure that was once thought to be superior in a decentralized system.

With the creation of a profound legal basis and an apparent shift towards the democratization of Indonesia’s political culture, we then ask: what went wrong? Have the institutional and social conditionalities for the Indonesian landscape yet been met for an effective decentralization? Are we moving too fast, too soon?

Historically, Indonesia is not the only one experiencing a disappointing turn. Numerous decentralizing nations, particularly in Asia and Latin America, also encountered mixed results. Using cases from the Philippines and Pakistan, Guess (2005) highlights that the implementation problem by supervisory institutions often determines the success of decentralization. He specifies aspects that include fiscal and political support, individual capacity of policymakers, modification of cultural constraints, and the strength of institutions as determining factors of regional decentralization’s effectiveness.

Malesky and Hutchinson (2016) emphasize that the deficiency in implementing decentralization is caused by the resistance of authoritarian elites, who fear losing control. Using examples from Cambodia, Myanmar, Thailand, and Vietnam, they highlighted that the ability to choose the local government as a training ground is highly dependent on the central government’s political will. Thus, authoritarian governments will attempt to restrict such educational initiatives.

The study from Faguet and Shami (2022) illustrates a contrasting comparison between two decentralizing nations, with Bolivia decentralizing under a democracy and Pakistan under an authoritarian regime. Both were differently designed and had different outcomes, highlighting the cultural and institutional conditionalities of decentralization.

In Bolivia, decentralization was initially enacted as a response to the decline of the MNR (Movimiento Nacionalista Revolucionario), providing an opportunity for the then-government to gain loyalty from Bolivia’s rural voters. In addition, decentralization also offers a response to the regional pressures that demanded a greater fiscal and political autonomy from La Paz. The Bolivian decentralization was enacted with several mechanisms, including the enforcement of ownership of infrastructure and responsibility for the provision of primary services by local governments, twenty percent transfer of national tax revenues to municipalities, allocation of funds to municipalities on a strict per capita basis, creation of Oversight Committees to enhance accountability by civic organizations, the creation of new municipalities, and expansion of existing municipalities. The result was immediate and significant, dramatically shifting resource allocation to the smaller municipalities. Bolivian subnational governments increased their responsiveness to local needs, and decentralization became a lasting national characteristic.

On the other hand, Pakistan’s decentralization was designed to increase the legitimacy of Musharraf’s leadership by initiating the creation of new local governments and extending some existing services. By overthrowing an elected government, Musharraf’s decentralization prioritized the exclusion of the existing political establishment. The proposed mechanism lacked the institutional enforcement necessary for an effective decentralization, resulting in an architectural system characterised by poor service responsibilities and reporting, along with an ambiguous procedure of fiscal flows. The decentralization gained little support from the Pakistani grass-roots and significant opposition from existing political parties. In effect, Musharraf’s decentralized system only lasted for 7 years before being abolished in 2008, along with his resignation.

For Indonesia, the mechanism of decentralization is built upon the pillars of political, administrative, and fiscal aspects, uniformly applied to all subnational regions. Firstly, decentralization forces a delegation of authority to local governments through local elections for subnational government heads and the Regional House of Representatives (DPRD) at the district level. Secondly, the authority on the provision of most local public services is transferred from central to subnational governments. Lastly, local governments gained increased authority for managing expenditures and are encouraged to collect local taxes through the mechanism of regionally owned revenue (PAD).

Prior to decentralization, Indonesian districts function under the strict control of the central government. Under the framework of Law No. 5 of 1974, regional governments were predominantly reliant on the central government. Mostly, revenue sources are obtained from the Subsidy Fund (SDO) and Instruction Funds (Dana Instruksi), with minimal revenue sharing from natural resources. Thus, the 1999 laws replaced the former model of dependency with an entirely new framework for self-governance and independence.

Apparently, the uniform approach to Indonesian decentralization, although equitable in spirit, has failed to consider the asymmetrical economic and social landscape of affected districts. With significant disparities in fiscal capacity, public infrastructure, and human resources quality, Indonesian decentralization rested on the conceptual axiom that greater autonomy, regardless of institutional readiness, would produce positive social and economic consequences for treated districts. An increasingly contested idea based on recent evidence.

By such a mechanism, Indonesian decentralization has yet to take into account the unique adaptability of regions. The implementation rests on the assumption that greater independence allows districts to exercise control over resources, that independence and autonomy should be an unambiguous strength and a driving factor for better economic growth. However, such an approach undermines the importance of addressing different constraints of regional government.

Between 1996 to 1999, Indonesian districts are structurally unequal in several foundational aspects. Using the dataset obtained from the World Bank’s Indonesia Dataset for Economic and Policy Research, it is shown that the socio-economic conditions vary significantly. The result indicated that aspects such as regional human development index (HDI), fiscal capacity, physical infrastructure, and government service delivery, differ severely.

It highlighted the widespread inequality in areas such as regional economic conditions, fiscal capacity, and service delivery. Furthermore, it is indicated that although the human development index is moderately unequal, subnational advancement in aspects of human capital, as measured by the percentage of net secondary school enrolment, varies significantly among districts.

Not to mention, other measurements also indicated severe variation in the quality of provision of basic needs, which include access to electricity and sanitation. Moreover, health service indicators, as illustrated by the percentage of child births attended by health workers, showed significant inequality. With such a condition, it highlights the disparities in the local government’s ability to provide basic services, indicating evidence of unequal service delivery.

Other regional economic indicators also showcased similar results. Proxied by percentages of roads already covered with asphalt, the physical infrastructure of Indonesian districts was severely unequal prior to decentralization. This aspect is especially important for the Indonesian development agenda, underlining the existence of a structural barrier for equitable subnational economic activities.

Some indicators showed more staggering results. The poverty gap indicated a coefficient variation of more than 0.9, highlighting the existence of extreme inequality among regions. Furthermore, fiscal independence, proxied by the PAD share over total revenue, exceptionally reached over a 1-point value of the coefficient variation. These aspects revealed a foundational discovery for Indonesian districts prior to decentralization, that institutional capacity varies extremely amongst regions. Thus, their adaptability towards the uniform “Big Bang Decentralization” is highly influenced by these extraordinarily different prerequisites.

Based on such evidence, the Indonesian decentralization sparked an important perspective, one that highlights the potential dilemma of undertaking a uniform approach to distributing power. Particularly, the Indonesian case highlights the need to anticipate structural constraints. That is, one that takes into account the institutional adaptability of affected regions.

A simultaneous, uniform, and significant increase in fiscal resources and the local government’s authority may result in unintended consequences if implemented in a landscape characterised by severe inter-regional inequalities. One unambiguous premise following the 2001 power distribution is that local governments uniformly gained abundant opportunities but were strained by an evidently unique self-imposed limitation. However, for the Indonesian case, increasing central transfers or electing local government officials do not seem to tackle these limitations. Thus, it reveals such structural constraints that are possibly unaddressed.

By instituting the 2001 decentralization reform, Indonesia has created a framework for equitable power distribution. But, behind the legal hardware, lie such deeper complexities. One that is intangible and only seemingly permanent.

Indonesia did not decentralize into a neutral landscape. Rather, it unfolded across regions with severe administrative, fiscal, and service inequality. Yet, even though power can be distributed simultaneously among regions, capacity differs in character.

It is not that the decentralization is wrong, but it has revealed a foundational principle amongst Indonesian regions. The success of autonomy and independence is conditional. It may expose the fragility of some and accelerate the opportunity of others.

The lesson is that institutional sequencing matters. Power can be transferred, but not the institutional ability that comes with it. When power moves faster than institutions, the promise of empowerment may strain and risk the benefits of the transformation it brings. Two decades later, decentralization remains a discussion, and with it, its paradoxical manifestation.

The idea of cooperative-based economics has long been debated in the Indonesian development agenda. Historically, ideas of cooperatives gained national momentum after Indonesia’s independence in 1945. Amongst many of its advocates, the first vice president of Indonesia, Mohammad Hatta, strongly believed in cooperatives as a suitable foundation of Indonesia’s economic progress. In his studies, such as “Cooperatives in Indonesia” and “Cooperatives and the People’s Economy”, he argued that cooperatives would be a fitting vehicle to foster rural development by providing small farmers more authority over their economic future.

However, cooperatives gradually became one of the sources of national divide in the 1960s. They were viewed as increasingly politicized and were often pressured to support certain parties. Thus, once viewed as an indispensable foundation to Indonesian economic development, cooperative ideas became increasingly contested.

The slowdown continued after the presidency of Soekarno. In an attempt to further curb left-wing political influence, Soeharto’s regime further dismantled cooperative ideas, resulting in a significant drop in the number of cooperatives from 1966 to 1967. Existing cooperatives were then replaced with Koperasi Unit Desa (KUD) and were often viewed as a top-down initiative to increase the central government’s presence in rural areas. Such an approach effectively differed from the core principle of 1945’s cooperatives by detaching itself from the pillars of autonomy and independence.

Cooperative ideas regained momentum in the post-1998 period due to numerous economic stimuli from the newly formed government. Consequently, the number of cooperatives increased dramatically from 1998 to 2001. Nevertheless, it is evident that many cooperatives in this period were mostly inactive and heavily dependent on the central government. Over the period of 2019 to 2024, the government stated that a substantial number of cooperatives, reaching 82.000 units, have been disbanded due to inactivity.

The beginning of Koperasi Merah Putih marks a new chapter for Indonesian cooperatives. In his statements, Prabowo firmly asserts the cooperative’s role as a tool to level the playing field for weaker economic agents. Particularly, he highlighted the significant role that cooperatives will play in increasing value chain efficiency and food sovereignty. Thus, with such an agenda, Prabowo effectively reintegrates the role of cooperatives into the Indonesian development blueprint, a renewed attempt to revive cooperative-based economic thinking.

Despite the second wind, staggering differences in principles between Koperasi Merah Putih and the cooperative idea from 1945 quickly became a source of scrutiny. Koperasi Merah Putih utilizes the Central State Budget as its main source of funding. Funding is also supported by the Village Fund, the Regional State Budget, and People’s Business Credit (KUR). Furthermore, Koperasi Merah Putih involved several state-owned enterprises, including Bank Rakyat Indonesia (BRI), Bank Mandiri, Bank Nasional Indonesia (BNI), Bank Syariah Indonesia (BSI), and the State Treasury Service Office (KPPN) to distribute state funding. The State Treasury Service Office also assumes additional responsibilities, including monitoring, evaluating, and digitalizing transactions.

This evidence highlights the centralized nature of Koperasi Merah Putih’s financing architecture, sharply contrasting the autonomy-based cooperative ideal of 1945. Not to mention, several human capital constraints emerged due to managerial, financial literacy, and monitoring issues amongst its members. In consequence, several human capital development programs were employed by enrolling cross-sectoral organizations.

Thus, with such contrast, many began to question the basis of Koperasi Merah Putih as a substantive development initiative, or whether it is a form of recycling flawed historical cooperative models under renewed political rhetoric. Rather than incentivizing the growth of cooperatives through a bottom-up policy mechanism, the government has chosen a sweeping, centralized program under a single national framework. This places considerable pressure on the state institutions to nurture, monitor, and ensure the effectiveness of Koperasi Merah Putih. Furthermore, this decision reveals the structural differences in the institutional approach taken by autonomous, community-driven cooperatives and the centralized model of cooperatives, while placing a substantially higher administrative burden on responsible ministries and SOEs.

Past studies have scrutinized the form of cooperatives and its conditionalities. Referencing cross-country comparison, Hans Hansmann, in his book “The Ownership of Enterprise,” underlines that in the early 1970s, cooperatives were able to acquire a substantial amount of market share amongst developed countries. Particularly in Europe, cooperatives have accounted for 45 percent of the total agricultural share in France, 48 percent in Germany, 60 percent in the Netherlands, 70 percent in Denmark, and 80 percent in Sweden. Evidently, cooperatives have been successful in incentivizing farmers to effectively negotiate, or to some extent, displace middlemen. By removing monopsonistic agents, cooperatives have also displayed an unambiguous improvement in social welfare. Additionally, Hans Hansmann underlines reasonings that include overcoming asymmetric information and risk bearing as a stimulus for the formation of cooperatives.

A foundational characteristic of cooperatives is a high degree of interest homogeneity amongst its members. This alignment allows collective decision-making without imposing a disproportionate burden on members based on shared decisions. Interest alignment is essential, as it reduces internal conflict and ensures members share similar incentives. In addition, capital is primarily raised from the cooperatives’ members, while external borrowing is utilized as a supplement to collective contributions.

Although external borrowing is acknowledged as an employable form of capital raising for cooperatives, Hansmann underscores in his study that the majority of equity capital in his observed cooperatives is raised from members. For a farmer-owned enterprise, liquidity constraints are evidently much less important than initially expected. In addition, he highlighted that most successful cooperatives have often carefully designed methods to raise capital, adhering to the principle of independence. Therefore, his findings suggests that accumulation of capital is not, and should not, be the most important barrier for effective cooperatives.

Another study by Uma Lele, titled “Co-operatives and the Poor: A Comparative Perspective,” also highlights several additional conditionalities for effective cooperatives. She argues that human capital qualities such as leadership, management capability, experience, and technical competence deserve greater emphasis in building functional cooperative institutions. Furthermore, she contends that external policies related to agricultural pricing, input distribution, technology, infrastructure, and regulatory frameworks must first be improved to ensure meaningful grassroots participation and reduce the dominance of rural political elites.

Ironically, the current institutional design of Koperasi Merah Putih risks repeating the same problem as past cooperative programs. Historically, a centralized intervention, whether in the form of a KUD or extensive subsidy, largely results in dysfunctional cooperatives. That is, an administratively present but functionally dormant institution.

When cooperatives emerged not from the genuine collective interest, but were dominated by a uniform national instruction, they tended to weaken leadership, cripple the internal cohesion, and lack a uniform incentive. Without a strong foundation for local ownership and internal capability, Koperasi Merah Putih will only be the government’s vehicle to channel credit, without adding much value to productivity and farmers’ autonomy. Thus, with such a scheme, the enormous financial and administrative burden in regard to human quality and institutional development will be placed on cross-sectoral organizations, which have shown a disappointing result in the past.

In response, greater emphasis should be placed on enacting incentivizing policies that allow cooperatives to grow organically. Rather than creating thousands of top-down institutions, the government should focus on increasing the attractiveness of cooperatives by removing the structural barriers that prevent them from functioning effectively. Regulatory improvements related to pricing, input distribution, technology, and infrastructure are essential to creating a supportive environment for cooperative activity. In addition, strengthening human capital through leadership training, managerial development, and technical capacity should be prioritized to stimulate genuine grassroots initiative and increase meaningful participation within cooperatives.

All in all, the success of Koperasi Merah Putih should not be measured by sheer numbers, but by whether it aligns itself with the institutional principles that enable cooperatives to flourish. If these lessons remain unaddressed, Koperasi Merah Putih risks becoming yet another well-intentioned program that fails to create substantial change. By prioritizing autonomy, improving regulatory conditions, and strengthening human capital, the government can not only encourage the development of effective cooperatives but also assess whether this initiative is a meaningful path toward rural empowerment. Whether Koperasi Merah Putih ultimately embodies this opportunity or risks becoming a well-intended backfire, remains an open question that the government must urgently confront.