Smaller Indonesian cities are growing faster than Jakarta as they catch up with development, according to a report by the McKinsey Global Institute.
McKinsey said in the report embargoed for Saturday’s release that the economies in Indonesia’s small cities, which include urban areas with a population of 500,000 to 1 million, were growing at an average 6 percent annually. That is faster than Jakarta’s yearly 5.8 percent growth rate.
There are 20 areas in the small-city category, which is dominated by cities outside Java. Pekanbaru in Riau led the growth at 10.1 percent, followed by Balikpapan in East Kalimantan at 9.1 percent and Makassar in South Sulawesi at 8.6 percent, McKinsey said.
“Their output growth is driven by high growth in both their populations and productivity. Should this trend continue, the top performers in this league will become the next mid-size cities,” the report said.
Economic growth in mid-size cities such as Bogor, Depok, Bandung and Medan are on par with Jakarta. McKinsey said their production growth was mainly driven by productivity improvements, with population expansion estimated to contribute only one-seventh of their economic growth.
The report said urbanization in Indonesia was an increasingly dominant component of economic growth. The urbanization rate, or the share of the population living in cities, could reach 71 percent in 2030 from 53 percent today as an estimated 32 million people are expected to move from rural to urban areas in the next 20 years. By 2030, an additional 72 million people could live in urban areas, the report said.
Jakarta could become a megacity with population at 12.7 million by 2030. Population growth at 1.4 percent a year is 0.6 percentage points higher than the national rate of population growth.
“However, Jakarta’s economic prominence appears to have reached a plateau,” McKinsey said. “After years of rapid population and GDP growth, the GDP of Jakarta is not expected to expand much faster than national GDP between now and 2030, and we expect Jakarta’s share of national GDP to remain stable at 22 percent.”
But the pattern of Indonesia’s urbanization is shifting, McKinsey said. Other cities are growing at a faster average rate than Jakarta with the result that mid-size cities, those with between 1.5 million and 5 million inhabitants, could make up 29 percent of GDP by 2030, up from 21 percent today. The fastest economic growth is expected in big towns, defined as having fewer than 500,000 inhabitants.