The missing foundation of Prabowo’s economic vision

Indonesian President Prabowo Subianto’s administration has placed food security, energy self-sufficiency and military modernization at the center of Indonesia’s national development agenda.

Under the framework of Asta Cita, these strategic and defensive sectors are expected to serve as the primary stepping stones toward transforming Indonesia into a welfare state.

The underlying assumption is straightforward: physical sovereignty and sectoral stability will naturally generate a leap in economic prosperity. Yet a closer examination through the lens of public policy and political economy suggests that this assumption rests on shaky foundations.

History offers plenty of evidence that strong food security, energy resilience and military capabilities are not the primary engines of economic growth capable of lifting a country out of the middle-income trap.

Rather, they are typically the outcomes of a productive and prosperous economy, not the starting point. The true foundation of national advancement lies in broad-based prosperity generated through abundant employment opportunities and high-quality jobs.

When most of the labor force is absorbed into productive formal-sector employment, household welfare improves organically without excessive reliance on government assistance programs. More importantly, a growing formal workforce automatically expands the tax base, both horizontally and vertically.

A broad and healthy tax base strengthens the state’s fiscal capacity, enabling governments to fund agricultural research, accelerate energy transitions, and modernize defense capabilities without undermining macroeconomic stability.

Ignoring labor-market quality while concentrating primarily on defensive physical sectors risks trapping Indonesia in a vicious cycle of weakening purchasing power, a shrinking tax base and rising social expenditures that do little to improve long-term economic productivity.

Prabowo’s development paradigm therefore requires a fundamental rethinking. National prosperity does not emerge from physical security alone; labor productivity ultimately generates both wealth and resilience.

From America to Scandinavia

The United States’ experience during the post-World War II golden age through the mid-1970s shows how near-full employment can dramatically reduce inequality. During this period, gains in labor productivity moved largely in tandem with rising real wages for middle-class workers.

That dynamic changed sharply from the late 1970s onward as labor protections weakened and financial deregulation accelerated. Between 1980 and 2005, labor productivity increased by roughly 71%, yet median real wages grew by only about 14%.

In his landmark work Capital in the Twenty-First Century, Thomas Piketty argued that extreme inequality emerged because the return on capital consistently exceeded the overall rate of economic growth.

Matthew Rognlie later challenged this interpretation, suggesting that much of the increase in capital’s share stemmed from soaring housing values driven by urban land scarcity rather than limitless industrial capital accumulation.

Despite their differences, both perspectives point to the same conclusion: when labor markets fail to distribute the benefits of growth through fair wages, shared prosperity eventually deteriorates.

Japan offers another powerful example. Under Prime Minister Hayato Ikeda and his National Income Doubling Plan launched in 1960, surplus labor was gradually shifted from low-productivity agriculture into high-value manufacturing industries.

During Japan’s three decades of rapid economic expansion, stretching into the early 1990s, unemployment remained exceptionally low, generally hovering between 1% and 2%. It was this large-scale employment creation and continuous investment in human capital, not merely logistical or physical security, that propelled Japan into the ranks of the world’s leading economies.

The Scandinavian social democracies followed a similar path. Countries such as Denmark, Sweden, and Norway sustain generous welfare systems because broad tax bases and highly productive labor markets support them. Denmark, for example, maintains one of the world’s highest tax-to-GDP ratios, along with substantial personal income tax rates.

Why has such a model remained politically sustainable? The answer lies in the labor market. Because most working-age citizens are employed in formal jobs with decent wages, they possess both the ability to pay taxes and the confidence that they will receive reliable public services and social protections in return.

China’s economic transformation after 1978 further reinforces this lesson. Under Deng Xiaoping’s leadership, China gradually shifted labor from agriculture to export-oriented manufacturing.

Tens of millions of rural workers migrated to urban centers and found employment in newly established factories that became the engines of growth. China lifted hundreds of millions of people out of poverty not through large-scale consumption subsidies, but by integrating them into productive non-agricultural employment that generated sustained income growth.

The informality trap

When these international experiences are compared with Indonesia’s labor-market reality, a troubling structural imbalance is apparent. Indonesia’s economic growth has remained relatively stable at around five% annually, yet the quality of that growth has steadily deteriorated. Its capacity to generate employment has weakened significantly.

Today, every 1% increase in economic growth creates only about 110,000 new jobs. This inefficiency is compounded by Indonesia’s persistently high Incremental Capital Output Ratio (ICOR), which hovers around six. This figure suggests that investment remains expensive and inefficient at generating additional economic output.

The formal industrial sector’s inability to absorb new entrants into the labor force has pushed a large share of Indonesians into informal employment. According to national statistics, informal workers still account for nearly 60% of the workforce, equivalent to more than 84 million people.

The dominance of informality carries serious economic consequences. Workers face unstable incomes, limited legal protections and heightened vulnerability to economic shocks. The result is the risk of prolonged economic involution, where business activity expands in quantity, but productivity and living standards stagnate.

A major source of this problem lies in the quality of Indonesia’s human capital. Roughly half of the country’s workforce has only completed primary or lower-secondary education. These educational limitations significantly constrain competitiveness at a time when digital disruption and the green transition are reshaping labor markets worldwide.

Without sweeping reforms to vocational education and workforce training that genuinely align with industry needs, Indonesia’s much-celebrated demographic dividend could easily become a demographic burden characterized by widespread underemployment and declining productivity.

Limits of the state

A recurring misconception in development policy is the belief that the state can become the dominant provider of employment. In reality, the government’s fiscal and organizational capacity is inherently limited.

Indonesia’s entire public sector, including civil servants, employees of state-owned enterprises, and active military and police personnel, accounts for less than five percent of total employment. By contrast, the private sector, small and medium-sized enterprises, and the informal economy collectively absorb more than 95% of the labor force.

When governments attempt to expand their role too aggressively by weakening private-sector dynamism through excessive bureaucratic control, the likely outcome is a crowding-out effect that suppresses entrepreneurship and reduces the creation of high-quality formal jobs.

These limitations also invite closer scrutiny of large-scale populist initiatives such as the Prabowo administration’s Free Nutritious Meals program, which now consumes hundreds of trillions of rupiah in public spending.

The program has already generated constitutional controversy regarding budget allocations and continues to face operational challenges ranging from procurement inefficiencies and nutritional standardization to food safety concerns.

In other words, sustainable prosperity cannot be achieved solely through free meal programs, the establishment of thousands of village cooperatives or massive increases in defense spending.

Such initiatives may serve as temporary safety nets, but they should not evolve into universal programs that place excessive strain on public finances. Social assistance should be carefully targeted toward those experiencing extreme poverty and genuine vulnerability.

If Indonesia hopes to achieve its ambitious goal of 8% economic growth by 2029, development priorities must be reoriented toward strengthening the labor market. Resources currently devoted to broad-based populist spending should be redirected toward labor-intensive productive sectors.

Policymakers would be wise to reduce the country’s high ICOR through logistics and regulatory reforms while overhauling vocational education to ensure closer integration with industry demand.

Only by enabling more Indonesians to secure productive, high-quality formal employment can the country build a robust tax base, strengthen fiscal resilience and ultimately achieve the durable national prosperity and security that every welfare state aspires to.

Ronny P. Sasmita, Ph.D, is senior international affairs analyst at the Indonesia Strategic and Economic Action Institution, a Jakarta-based think tank.