Main findings
Macroeconomic policy challenges. Indonesia’s economy performed exceptionally well
over the decade following the Asian Crisis on the back of the prudent macroeconomic
framework and solid policy reforms of the time, and from which dividends continue to flow.
However, growth has moderated in recent years, reflecting weaker international demand
and slow investment growth due to lower commodity prices but also heightened regulatory
uncertainty and infrastructure bottlenecks. Indonesia is still in the catch-up phase of
growth, but the pace of reform has slowed in recent years, and some protectionist measures
have been adopted. Both internal and external factors will continue to challenge the
implementation of monetary policy. Ensuring continued increases in living standards for all
Indonesians will require maintaining macroeconomic stability, adopting a broad range of
structural reforms, and creating fiscal space to expand government expenditures in priority
areas such as education, health, poverty alleviation and infrastructure. The recent removal
of most fuel subsidies was a laudable step in this direction. However, low commodity
export prices and slower growth mean that further space will need to come from carefully
designed increases in tax revenues from current low levels. There is also room to improve
the efficiency and targeting of public spending at both central and sub-national levels.
Implementing policies for inclusive and sustainable growth. Indonesia has made
impressive inroads into poverty, aided by strong per capita income growth and increasingly
efficient and well-targeted poverty-reduction programmes. However, income inequality is
high and even rose in the past decade. The current mix of social programmes, including
cash transfers conditioned on school attendance and a subsidised rice programme, are not
well targeted, although encouraging headway is being made in developing a single registry
of vulnerable households. Transport congestion and logistics bottlenecks are preventing
better integration with global value chains and inhibiting growth more generally.
Investment in power generation and water treatment is also lagging. While PISA outcomes
are in line with Indonesia’s current stage of development, the education system still suffers
from serious quality and access problems.
Improving the regulatory framework and dealing with corruption