Urbanization has the potential to be a major driver of prosperity and inclusiveness in Indonesia, but fully realizing this potential requires bold institutional reforms, according to a World Bank report launched today. Indonesian cities need improved management and more adequate financing. This translates into expanding options for financing infrastructure and basic services, improving coordination among different levels and sectors of government and within metropolitan areas, and building capacity in local governments to better plan and implement urban development.
Indonesia has urbanized as it has climbed the ladder of development. Since 1950, average GDP per capita has increased almost nine-fold. At the same time, the share of the population living in urban areas has increased from 12 to 56%. Indonesia’s prosperity gains are closely linked to the benefits from urban agglomeration and the transition to an economy based on services and industry.
“As people and firms cluster in cities, it becomes easier to match talent to jobs, exchange ideas and knowledge, share inputs, and access markets,” said Kurt Kunz, Swiss Ambassador to Indonesia. “Cities are engines of prosperity, and this is why Switzerland supports sustainable urban development in Indonesia,” he added.
Although urbanization has slowed from the breakneck pace of the 1980s and 1990s, Indonesian cities continue to grow in population at a rapid pace. Today, about 151 million people live in urban areas. By 2045, the centenary of Indonesia’s independence, around 220 million people, or over 70% of its population, will live in cities.
“Better economic opportunities in cities have helped lift millions of Indonesians out of poverty and millions more join the middle-class,” said Sameh Wahba, World Bank Global Director for Urban, Disaster Risk Management, Resilience and Land Global Practice.
The report notes that Indonesia has not benefitted as much from urbanization as other countries. Between 1996 and 2016, every percentage point increase in the share of Indonesia’s population living in urban areas was associated with a 1.4% increase in GDP per capita, compared to 2.7% for other developing countries in East Asia and the Pacific. Indonesian cities also face challenges to their livability due to traffic congestion, pollution, insufficient affordable housing, and continued deficits in access to basic services. Moreover, while urbanization has made an important contribution to the overall rise of living standards, the benefits have not been shared equally.
The report Time to ACT: Realizing Indonesia’s Urban Potential argues that Indonesia’s ability to fully realize the promise of urbanization will depend on better managing “congestion forces” that arise from the pressure of growing urban populations on infrastructure, basic services, land, housing, and the environment. The report proposes three basic policy principles:
· Augment the coverage and quality of basic services and infrastructure to reduce congestion, boost equality of opportunities, and reduce disparities in human capital outcomes.
· Connect people with jobs and basic services within cities, and connect urban areas of different sizes with each other, with surrounding rural areas, and with international markets.
· Target places and people left behind by the urbanization process to ensure that they share the prosperity benefits of urbanization and that urban areas are livable for everyone.
“No large country has ever reached high-income status without also becoming urbanized,” said Rodrigo A. Chaves, World Bank Country Director for Indonesia and Timor-Leste. “Because the urban environment is difficult and costly to change once built, delays in action will risk locking Indonesia further into a suboptimal trajectory of urban development. To succeed, Indonesia needs to act now.”
The report offers a novel way of classifying the different types of urban and rural places across the country. Drawing on a wide range of data sources, it takes stock of the extent to which urbanization in Indonesia has delivered on three key outcomes: prosperity, inclusiveness, and livability.
Work on the report was supported by the Swiss State Secretariat for Economic Affairs through the Indonesia Sustainable Urbanization Multi-Donor Trust Fund, and from the Australian government through the Local Solutions to Poverty and Partnership for Knowledge Based Poverty Reduction trust funds.