Golden Vision 2045: Structural Reforms to Achieve High-Income Status
Given Indonesia’s goal of becoming a high-income country by 2045, this paper seeks to provide guidance as to how best to achieve this objective. To this end, we identify “success countries” that have transitioned into high-income status and show that: (i) Indonesia lags in key structural areas, relative to the success countries’ initial conditions; (ii) further progress in these key areas supported the success countries’ convergence process, pointing to the important role of structural reforms. We also benchmark Indonesia’s granular structural gaps vis-à-vis its current upper-middle income and high-income peers, to help gauge structural reform priorities. Finally, we follow recent work (Budina et al., 2023), to assess the impact of structural reforms on real output, to help prioritize the possible agenda. Our results indicate that external sector regulation and economic openness, governance, business regulation and human development areas should be implemented in priority, as they would enhance inclusiveness and support a leveling up of living standards for the country as a whole. Moreover, these reforms have been shown to be complementary and likely to deliver stronger output effects when bundled together.
A. Achieving and Sustaining High Growth-International Experience
1. Indonesia aims to achieve high-income status by 2045. In 2019, President Joko Widodo reiterated its Golden Indonesia Vision, which set the goal for Indonesia to become an advanced, fair, and prosperous nation by 2045.1 This ambition was restated by President-elect Prabowo Subianto in his program for the 2024–29 Presidency. Indonesia is already among the largest twenty economies in the world, the largest member of the ASEAN group, and an upper-middle income country. Its structural strategy is meant to support these ultimate objectives and consists in enhancing the value-added following from Indonesia’s commodity production.2
Income Status
(Based on World Bank’s income classification)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources: World Bank, World Development Indicators; and IMF staff calculations.Average GNI Per-Capita
(In current US$, average by income group)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources: World Bank, World Development indicators; and IMF staff calculations.2. Breaking through the middle-income trap will require growing fast, for long. After a short stay in the upper middle-income (UMI) group pre-pandemic (in 2019), Indonesia re-transitioned from Lower Middle-Income (LMI) to becoming UMI (World Bank’s income classification) in 2022 (Figure 1 and 2). Assuming the global GNI per capita thresholds continue to move as in the last two decades, and assuming Indonesia stays at an annual population growth of 1 percent (as observed since 2000), reaching high-income status by 2045 will require an annual GNI growth rate of around 8 percent (in current US$); roughly equivalent to 5.5–6 percent real annual GDP growth (assuming annual inflation stays at its target, 2.5 percent), and be sustained over two decades. This would level up Indonesia’s GNI per capita level by 50 percent by 2045. While Indonesia has experienced very high growth episodes (e.g., in the 1970s’ and in 2000s’, Figure 3), its potential growth is currently estimated at around 5 percent; therefore, structural reforms are needed to support an upfront and durable increase of the potential and observed growth rates.
GNI Growth
(In percent, year-on-year)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources: World Bank, World Development Indicators; and IMF staff calculations.3. Available studies indicate Indonesia’s economic structure faces gaps relative to what would be needed to support higher and sustained growth rates. For example, Hausman’s predicted medium term growth for Indonesia based on its degree of Economic Complexity is estimated around 5.6 percent;3 which falls short of what would be required to become a high-income country by 2045, let alone considering uncertainties along the way-high growth rates need to be sustained for 20 years for Indonesia’ to transition to high income. Hausmann shows that Economic Complexity is tightly linked to income growth, explaining a large share of income variations across countries. Hausman’s Economic Complexity Index (ECI) suggests that Indonesia’s economy has gradually become less complex over the last decade, owing to a lack of export diversification. On the upside, Indonesia is slightly more complex than expected from its current income level; this means that it should grow rapidly towards the level of income that is compatible with its complexity degree.
4. In this paper, we seek to identify the determinants for high and sustained country growth episodes, to shed light on reform priorities to support Indonesia’s ambition. To this end, we search for key structural characteristics of AEs and EMEs that have achieved either (i) a sustained period of high growth (“Growth for Long”, Group 1) or (ii) quick convergence towards the high-income status, (Group 2).
First, we identify the countries with “growth for long” (GFL) episodes (Group 1). These success countries are defined as countries having had sustained high growth leading into reaching high-income status. More specifically, we look at growth trajectories by countries since 19624 to identify those cases that experienced at least 11 consecutive years of strong growth (defined as nominal annual GNI growth higher than 8 percent, the benchmark for Indonesia), and managed to become either an AE or a HI EME5 by 2022 or earlier.6 There are 11 such “success” countries for which the “growth for long” (GFL) strand lasted at least 11 years: almost all experienced a long stretch of strong growth starting in the 60s’ (see Box 1, Fig. 1 and 2).
Second, we look at “fast convergence” (FC) countries. We define Group 2 countries as those that transitioned from LMI to HI status since 1960, and durably remain HI in the latest WB classification.7 Only ten EMEs and AEs satisfy these criteria (see Box 1, Fig. 3), and all of them transitioned in less than 20 years; two of which are also in the “growth-for-long” group (defined above), namely Chile and Panama.
5. The success episodes provide insights for a blueprint to help achieve Indonesia’s vision. In the remainder of this paper, our 19 “success” stories are used as a comparator group to try to identify the characteristics or features that both provided a fertile ground at the start of these success trajectories, and accompanied them over time.
Success Countries
(see Annex A. for details)
Group 1 (or “growth-for-long”, GFL) success countries: EMEs and AEs that experienced a stretch of at least 11 years of strong growth starting as MI and now HI or AE.
Max Number of Consecutive Years with Strong GNI Growth
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources: World Bank, World Development Indicators; and IMF staff calculations.Group 1 Countries: GNI Per-Capita
(In current USS, Atlas method)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources; World Bank, World Development Indicators; and IMF staff calculationsGroup 2 (or “fast convergence”, FC) success countries: EMs and AEs having sustainably transitioned from LMI to HI over our time period.
Group 2 Countries: GNI Per-Capita
(In current USS, Atlas method)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Sources: World Bank, World Development Indicators; and IMF staff calculations.B. Where is Indonesia Starting from and What Roads Have Success Stories Followed?
6. This section identifies the potential gaps Indonesia would need to bridge to strengthen its chances to become a high-income economy in the next two decades. To this end, we look at Indonesia’s starting conditions, as it begins its course towards the high-income goal, comparing them to where the success countries stood at the start of their growth episodes. We also study the evolution of such key variables for the success countries through their income convergence path, to identify regularities that could help guide Indonesia’s reform agenda.
7. Our work draws on the literature to select potential drivers of sustainable and inclusive growth. Some recent papers look at the structural drivers of growth, or explain the evolution of other economic outcomes, such as Foreign Direct Investment (FDI) flows. We start from the economic features most often cited as structural determinants of growth, such as trade or economic openness, governance, business regulation and the labor and credit markets (see, for instance, Berg and Ostry, 2011, OECD, 2018(b), and Budina et al., 2023). We then extend this framework to other possible determinants, to get a more comprehensive picture of the structural features that have accompanied sustained growth episodes across the world. This provides us with a basis for our analysis, see variables in Table 1 (and Annex A for details):
First, human capital and labor productivity have been underlined as key aspects of strong and sustainable growth, including for Indonesia (see Salinas, 2021; OECD, 2018(a), 2021, and 2023; and WB, 2023(a), for the former; and Alekhina et al., 2020, Kang, 2021, Hausman, 2011, for the latter).
Second, determinants of the investment environment such as infrastructure and financial inclusion are also found to be key (Salinas, 2011; OECD 2018(a), Alekhina et al., 2020 and Kang, 2021, among others).
Third, additional aspects of development that must be examined as drivers of inclusive and sustainable growth; these include demographics (which is key for Indonesia, see, for example, OECD, 2021), as well as poverty and gender inequalities (Berg and Ostry, 2011, Alekhina et al. 2020, OECD, 2023, and WB, 2023(b) and (c)).
Finally, we also include the demand side structure of GDP in our analysis, to get a better understanding of how relying on various components supported growth in the success countries.
Indonesia: Structural Areas and Indicators
Indonesia: Structural Areas and Indicators
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Indonesia: Structural Areas and Indicators
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Initial Conditions: Where Does Indonesia Start?
8. The first step is to compare initial conditions. The paper looks at Indonesia’s economic and structural characteristics as of 2022 and compares them to the initial characteristics of the identified success countries in Groups 1 and 2. More specifically, the analysis includes indicators reflecting the GDP growth drivers (public and private consumption and investment, exports), governance (Worldwide Governance Indicators, WGI), human capital features (education and health), demographics, human development (HDI, poverty and gender inequality), and labor market and infrastructure. We also include Hausman’s indicators of economic complexity, as well as indicators of economic complexity and openness (Table 1).
GDP composition: Indonesia’s GDP is less reliant on external supply and demand than the comparators. Indonesia’s GDP is less reliant on imports than the success countries when they started their strong and sustained growth trajectory (21 vs. 50 percent of GDP); this is compensated by both lower domestic consumption (61 vs. 80 percent of GDP), and lower exports of services (2 vs. 11 percent of GDP).8
Exports and openness: Indonesia’s exported products are less economically complex than the success countries at their starting point, and its economy is less open. Hausman’s Economic Complexity Index (ECI) is based on the fact that the productive knowledge that a society uses is reflected in the variety and structure of its exports. This indicator accounts for both the diversity of a country’s exports and their ubiquity (with greater ubiquity measured through the number of exporters of the same products, and the types of products exported by these exporters). Indonesia had a relatively low ECI in 2022, compared to where the success countries started (-0.1 vs 0.7, on average); this is likely mostly explained by the low complexity of its products (Figure 4); notably, Indonesia does not stand out as having a less diversified economy than comparator countries-its Hirschman-Herfindahl export product concentration index is very close to the success countries’ initial conditions’ average. Finally, Indonesia’s economic openness is low compared to the comparator average at the start of the high growth trajectory; this is reflected in lower net FDI inflows as a share of GDP (1.6 vs. 4.9 percent of GDP), lower economic openness (proxied by the sum of exports and imports over GDP, 21.1 vs. 46.4 percent of GDP), higher tariff rate (simple mean on all products, 6.3 vs. 5.0 percent), and a lower external sector reform index (0.67 vs. 0.83), pointing to a lower degree of economic freedom in trade and external finance (the index describes the extent to which countries can freely exchange goods and services, as well as ideas, see Budina et al., 2023).
Governance: Indonesia fairs lower in terms of governance than the average growth success stories at their starting point. Based on the WGI indicators (D. Kaufmann, Natural Resource Governance Institute and Brookings Institution, and A. Kraay, World Bank), Indonesia is in the bottom quarter of the distribution for the indicators related to control of corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability. While these indicators are survey- and perception-based and should be therefore interpreted with caution, it is striking that all of them indicate similar results, which calls for stepping up governance and anti-corruption reforms, and government effectiveness to bring them in line with those observed at the start for the success cases.
Human capital: Indonesia’s indicators are below those in the success cases at the start of their growth trajectory, with demographics offering a window opportunity in the coming years.
Education. While not an outlier, Indonesia is in the second quartile (Q2) of the distribution, and below average for most relevant education outcome indicators, including school enrollment rate (100.6 percent vs. 103.1 percent),9 duration of compulsory education (9 vs. 9.2 years), and adult literacy rate (96 percent, vs. 97 percent). Indonesia also has a lower share of people aged 25 years or more that have completed at least primary education (82 percent, vs. almost 87 percent) than the average “success case” at the start of the growth episode.
Productive knowledge. While Hausman’s Economic Complexity Index (ECI) informs on the complexity of a country’s exports, it also embeds information on each economy’s productive capabilities, given that a country can produce a product only to the extent it has the requisite knowledge. In other words, the ECI can be seen as a measure of human capital. Under this lens, Indonesia is also below average, with an ECI of -0.1 (compared to 0.7 on average).
Human development and health. Indonesia’s life expectancy is lower than the mean of the comparator group, as is its health expenditure as a share of GDP. The Human Development Index is below the average of success countries at the start of their episodes, although it is still in the range considered as “high human development” under the UNDP classification. Indonesia fairs similarly on inequality (GINI coefficient) compared to other countries’ starting conditions.
Gender. Indonesia fairs below the success country average, based upon the UNDP’s Gender Inequality Index. Female labor participation ranks very high relative to the success countries.
Demographics. Indonesia has a lower age dependency ratio than average and a stronger demographic dividend (proxied by the share of the population aged 15–64 years).10 This provides a window of opportunity to strengthen health and education spending upfront, before dynamics change—with population starting to age, and the dependency ratio to increase. Results emphasize the importance of effectively and urgently investing in human capital to help strengthen Indonesia’s initial conditions to better support a sustained high growth episode.
Labor market: Indonesia has a strong participation rate, but lower labor productivity and more vulnerable employment than the success cases at the start. Indonesia has a low unemployment rate (as of 2022, 5.9 percent, vs. 8.2 on average for success countries at the start) and higher labor force participation than the comparators (67 vs. 58 percent). However, the International Labour Organization (ILOS)’s estimate of the share of vulnerable employment (over total employment)11 is higher (50 vs. 18 percent of total employment), and labor productivity weaker than that in the comparators—with low hours worked per employee (38 vs. 42 on average), and low output per worker12 —compared to initial settings for the success countries.
Infrastructure services/Utilities: Indonesia fairs well in terms of electricity and digital access but lower on access to water. Mobile subscriptions per 100 people are much higher than average starting conditions in the success countries (115 vs. 20 on average); this result must be nuanced since internet connectivity has risen significantly in the last two decades. Indonesia does not lag in terms of electricity access (99 vs. 97 percent) either, despite its complex geography. While data for comparator countries is scarce, access to drinking water is slightly lower in Indonesia than in comparator countries at the start of their strong growth trajectory (94 vs. 96 percent of the population).
Indonesia 2022 vs Comparator Countries’ Initial Conditions: GDP Composition
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Source: IMF staff calculations.Economic Complexity (Hausman, 2011)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Source: Atlas of Economic Complexity, Hausman (2011). The first (diversification) tree map displays a breakdown of exports from Indonesia in 2021, showing each product share of total exports (Services in red, agriculture in yellow, textiles in green, minerals in brown, metals in orange red, chemicals in pink, vehicles in purple, machinery in blue, electronics in light blue. The second (complexity) tree map shows the same exported products, with color denoting their level of complexity (from low complexity products (in brown, to high complexity product, in green).9. These findings provide initial guidance on areas where Indonesia could benefit from an upfront structural reform boost, to improve the grounds to achieve its objective within the settled—ambitious—timeframe. This analysis does not provide evidence of causality between the potential growth drivers at the starting point and the high GDP growth rates that followed in the success countries. That said, it is striking that Indonesia does have a gap to bridge, not only to reach its ambition in the next two decades, but to set initial conditions similar to those in countries that entered strong growth trajectories—which are likely to have supported the process. The exercise provides some initial evidence that improvements in key horizontal areas (education and human capital, including to enhance productivity and economic capabilities; economic openness, labor vulnerability and governance) should be part of the equation for Indonesia to succeed in durably lifting growth; the current demographics offer a window of opportunity to do so in the coming years.
Structural Variables Along the Strong Growth Trajectory
10. After focusing on initial conditions, this section looks at the evolution of the above-described structural features along the “growth for long” (GFL) and “fast convergence” (FC) episodes, for the “success” countries.13 We focus on the evolution of the variables of interest during the first 20 years of the success countries’ strong growth trajectories (corresponding to a different period in each case). We focus on the median value in every year of the trajectory and rebase all variables at 100 in the first year, to get a clear picture (not driven by outliers) of the structural variables that increase the most over the success countries’ strong growth trajectories.
11. The identified growth trajectories were overall accompanied by an opening of the economy, institutional strengthening, rising human capital and labor productivity, and poverty reduction. Of the WGI indicators, government effectiveness, control of corruption and rule of law indicators increased the most along the strong growth trajectories of the reference countries (Figure 5, chart 2).14 Regarding the composition of GDP, good exports and total imports saw a particularly significant increase during the growth episodes, likely reflecting the fact that strong growth was supported by an opening of the economy (chart 1). This is confirmed by the fact that economic openness, proxied by the sum of exports and imports over GDP (as well as trade barriers indicators) rose (resp. declined) along the strong growth trajectories (charts 8 and 9). Human capital indicators increased substantially during the growth episodes (education variables, chart 3; output per worker, chart 6, and ECI, whose median increases slowly, but steadily over time, chart 8). Finally, development variables also expanded along the strong growth trajectories, in particular health expenditure and life expectancy (chart 4), and there was an important reduction in poverty and gender inequality along the way (chart 5).
Structural Variables Along the Success Countries’ Strong Growth Trajectory
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Source: See Annex A for details on sources for all data series. Staff calculations.Note. Horizontal axis corresponds to the year along the growth trajectory, series show median of the success countries in each of these years, variables are rebased at 100 in the first year of the trajectory.C. A Granular Look into Current Structural Gaps
12. Taking advantage of the enhanced granularity in recent data, this section examines Indonesia’s structural gaps vis-à-vis current peers and OECD countries.15 We use the previous variables, and add new indicators that are only available more recently—such as the structural reform indicators used by Budina et al. (2023), on external sector regulation, business, credit and labor market, a Measure of Aggregate Trade Restrictions (MATR, see Estefania-Flores et al., 2022), the survey-based OECD Trade Facilitation Performance Index, financial inclusion variables from the Global Financial Inclusion Database, private credit data from the WB, and the WB’s Logistics Performance Index (and its infrastructure component). All variables are normalized (0 to 1) for the entire sample of AEs and EMs (with higher values denoting better outcomes), and we focus on gaps between Indonesia and each comparator’s group’s median (such that results are less likely biased by outliers). Gaps should not be interpreted in relation to a possible frontier in each area, but rather as gaps to be bridged to help resemble the typical country in each comparator group. Negative gaps indicate that Indonesia performs better than the comparator group’s median in a specific area. Many of the indicators are based on public perception and surveys, but still considered as they do allow to get a broader picture of the considered structural areas.
Granular Structural Characteristics, Gap to Comparator Groups
(Indonesia’s Gaps Relative to Peer Group Median, Positive Gap Indicates a Worse Outcome Relative to Comparator Group)
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Trade and Economic Openness
13. Indonesia is less open to trade than OECD comparators. While being close to other ASEAN-6 members in terms of economic openness, Indonesia has stronger trade barriers and weaker trade facilitation performance than OECD countries, which calls for efforts to improve the trade policy framework. As underlined earlier, Indonesia’s economic openness (proxied by the sum of exports and imports over GDP) is significantly lower than in G20 EMs and OECD countries, and even more so compared to other ASEAN-6. Additionally, and similarly to other ASEAN-6 countries (and G20 EMs), Indonesia stands out as having more trade restrictions and barriers to trade (in particular, non-tariff) than OECD countries. Indonesia’s non-tariff measures (NTMs) are high; they add up to an average tariff equivalent of 30 percent, more than in other countries in the region.16 Important efforts are also needed to improve logistics and trade facilitation to reduce—inter alia— the time, costs, and uncertainty of cross-border transactions, for example (see Figure 6, charts 1 and 3).
Economic Sophistication and Human Capital
14. While exports are as diversified as in comparator countries, Indonesia has the least sophisticated exports within ASEAN-6 countries, and has lower labor productivity and weaker human capital than comparator group medians. The economy is diversified (as per the HHI export product concentration index); however, Indonesia’s economic complexity has fallen over time, and Indonesia’s largest exports remain in low complexity products (agriculture and minerals, Fig. 7). This is in line with Indonesia’s lower labor productivity compared to G20 EMs and OECD members (see World Bank, 2023(b)). The low economic sophistication is likely linked to important gaps in human capital—reflected in much lower duration of compulsory education and the share of population having at least a Bachelor’s degree, especially relative to G20 and OECD EMs. This calls for deliberate actions to increase education funding, improve learning time (including catching up learning time lost during the pandemic, increasing access to early childhood education and broadening secondary education attendance) and the quality of learning (increasing teachers’ accountability and service delivery, for example) as Indonesia learning outcomes remain low compared to peers (see OECD, 2021, World Bank, 2021, 2023(a) and (c)).
Governance
15. Strengthening governance and anti-corruption efforts, while enhancing the legal system would support accountability and business certainty. Gaps are identified relative to peers in these areas. Indonesia, similar to ASEAN-6 and G20-EMs median countries (although outperforming the latter in some areas), lags the OECD median country significantly in each of the WDI governance areas-Government Effectiveness, Regulatory Quality, Voice and Accountability, Political Stability, Controlling Corruption and the Rule of Law.
Investment Environment
16. Efforts are needed to strengthen the quality of Indonesia’s infrastructure and logistics, its business environment and lay the ground for an infrastructure base capable of supporting stronger economic activity. Indonesia fairs relatively well on credit market and business regulation indices compared to peers (although it lags the OECD median in terms of business regulation liberalization). Indonesia’s infrastructure, however, has gaps relative to peers, as reflected by the access to drinking water, lower individual connectivity via cell phone subscription, and most importantly, to all comparator medians on the WB’s logistic performance index, in particular its infrastructure subindex (see Figure 6, chart 5). Looking more specifically, gaps are seen in all subcomponents compared to comparators, including infrastructure, customs, shipping, tracking and tracing, and timeliness. Transportation costs are particularly high (see Indonesia Investments, 2023) and contributed to headline inflation to a great extent in 2022/2023. Lower financial inclusion, reflected in the lower share of people indicating that they either store money in a financial account or have a bank account, and lower private credit to GDP than comparators, also contributes to a less conducive, and less attractive business environment (see World Bank, 2023(a), underlining that Indonesia has one of the largest unbanked populations in the world).
Human Development and Labor Market Vulnerability
17. Achieving inclusive growth will require to close human development gaps. This includes efforts to enhance heath, reduce labor vulnerability and informality, and gender gaps, so as to level up living conditions broadly, without dividing the population between those gaining from stronger growth and those left behind. Indonesia currently has a demographic advantage, with a favorable age dependency ratio that is still growing (see OECD, 2021). However, it does lag all comparators in terms of human development, in particular health and gender inequality outcomes, and stands out for its high informality and vulnerable employment rates. While inequality measured by the GINI index seems better than median ASEAN-6 and median G20-EM, this survey-based indicator is subject to underreporting and survey-access difficulties, and may mask income inequalities between regions, gender, formal/informal sectors and other subcategories of the population, and inequalities in terms of access to services (education, sanitation and health, for example, see Hill, 2021, World Bank, 2023(c), [and placeholder to cite WB work on labor and consumption inequality]). Promoting job quality and social protection to reduce vulnerable employment, reducing informality (which is widespread across regions, demographic categories and sectors, see Ma et al., 2023), by further increasing labor market flexibility (see gap on the Labor market regulation reform index that reflects hiring and firing regulations, and the degree of flexibility of wage determination, by Fraser), would help increase both productivity and the potential of the labor force.
D. Informing Indonesia’s Growth Plan
18. This section examines the impact of key structural reform variables on growth to inform Indonesia’s structural reform agenda. We employ the local projection method by Jordà (2005), following the methodology developed in Budina et al. (2023). We compute structural reform indicators by area (governance, external sector, business, credit market and labor market).17 We look at the potential gains in output growth from major structural reforms, defined as episodes for which an improvement in the relevant indicator is at least two standard deviations of the distribution (of annual changes in the relevant reform indicator across the whole sample of AEs and EMEs). To better tailor to Indonesia’s needs, we focus on AEs and EMs, and include one additional reform indicator that reflects reforms related to overall human development (based on the Human Development Index, that incorporates information on education/schooling, health outcomes, and GNI pc), to add an inclusiveness aspect to the analysis. Regressions are run over the period 1996–2022 (the period over which variables are available).
19. Key findings suggest that governance, external sector regulation, credit market regulation reforms, and reforms improving human development would all have a positive, significant effect on output. Local projection estimates help gauge the effect of reforms in various areas on real GDP.18 Except for labor market regulation and business regulation reforms, all structural reforms are found to have a positive, significant effect on real output, with governance and human development related reforms having an immediate impact, while external sector and credit market regulation reform have a more gradual impact over the years (see Figure 7). Labor market regulation reforms are not found to have a significant on employment (as for Budina et al., whose estimates focus on EMDEs). Business regulation reforms have a non-significant (and positive) effect on the whole sample, but this positive impact becomes significant after two years, conditional on being an EME country.19
EMs and AEs: Effects of Structural Reforms on Real Output, and Conditional on Being an EM
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Source: IMF staff estimates.Note: t=0 is the year of the shock. The lines show the effect on real output of a major economic reform in the years after the shock, with dotted lines showing 90 percent confidence intervals. Red lines show effects of reforms, conditional on being an EM, with dashed components of the red lines indicting statistical insignificance (at the 10 percent level).20. Results also suggest that packaging reforms yields better output outcomes. Looking at the effect of “first-generation” structural reforms (external sector regulation, governance, and business regulation reforms, to which we add the human development reform), packaged together, yields a positive and significant effect. More precisely, such a reform package (characterized by an increase of two standard deviations of the average of the underlying reform indices) could raise output levels by around 1.5–2 percent after two years. The effect is stronger and could raise up to around 3 percent after four years, conditional on implementing all reforms simultaneously (red line, Figure 8, left hand side chart). The effect of the reform package does not significantly depend on how much reforms the country has already achieved (below or above median of the reform package indicator). In other words, implementing such a package continues to have significant effects even for countries that have already made important reform progress in the past (see Figure 8, right hand side chart).
EMs and AMs: Effects of Packaged Reforms on Real Output
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Source: IMF staff estimates.Note: t=0 is the year of the shock. The lines show the effect on real output of a major economic reform in the years after the shock, with dotted lines showing 90 percent confidence intervals. LHS: Red line shows effects of reform package, conditional on implementing all four reforms simultaneously, with dashed components of the red lines indicating statistical insignificance (at the 10 percent level). RHS: Blue (resp. black) line shows effect of reform package for countries with below (resp. above) median reform package.21. These results help guide a possible sequencing of structural reforms in Indonesia (see Table 2). On the basis of the above, reforms on external sector regulation, governance, business regulation and human development-related reforms should be implemented in priority. Implementing this group of reforms in tandem would help ensure that any upcoming growth gains are broadly shared. These reforms are complementary and mutually reinforcing, with governance being foundational, business regulation efforts making it easier for firms to operate and expand, and external sector reforms supporting competitiveness. All reforms (except on business regulation) would have immediate, significant effects on real output. Because some of these reforms will require financing, they will need to be supported by upfront efforts to further expand the fiscal space in the short-term, particularly with domestic revenue mobilization. Reforms in other areas, such as credit market regulation reforms, are likely to deliver stronger output effects, once the first set of reforms has been implemented.20 While the comprehensive Job Creation Omnibus Law was enacted during the pandemic with the objective of improving the investment climate and generate new job opportunities, more is needed to finalize implementation regulations and streamline regulations further, improve business certainty, ease trade and logistics processes, level up learning outcomes, and enhance social protection. More broadly, laying the ground to support stronger activity and ensure the growth gains are evenly shared will be crucial to help reach Indonesia’s ambition.
Indonesia: A Roadmap for Structural Reforms
See 2024 FSAP Recommendations, Annexes VII and VIII, and Selected Issues Paper on Access to Finance by SMEs.
Indonesia: A Roadmap for Structural Reforms
| Short-term | Medium-term | |
|---|---|---|
| A. Fiscal Policy | 1. Increase domestic tax revenue to bolster fiscal space. This should also endure beyond the short-term. 2. Prioritize high-quality spending supportive of Indonesia’s development and closely monitor fiscal risks 3. Increase coverage and adequacy of the social safety net, improve targeting of subsidies. |
4. Better align retail fuel prices with international prices. 5. Enhance the strategic direction of MTFF, and its articulation with the annual budget and long-term plans; ensure the General Government accounts comprehensively reflects fiscal activities. 6. Strengthen SNG’s own-revenue sources and PFM, including current and investment spending execution and service delivery capacities |
| B. Inclusion and Development | 1. Boost size and quality of health spending and social protection, for a broadly shared growth. 2. Boost education spending, improve learning time and quality to reduce skill mismatch and increase productivity and knowledge capabilities/economic sophistication. |
3. Tackle gender inequality, to further increase the labor force and potential growth. |
| C. Governance | Strengthen governance and anti-corruption framework, improve legal system to support accountability and business certainty. | |
| D. Trade and Foreign Investment Policy | 1. Avoid intensifying restrictive trade policies (including in the IP context) and transition away from NTMs that distort trade and investment decisions and risk international spillovers. | 2. Foster openness in trade and FDI, and increase trade facilitation (e.g. to reduce time, cost and uncertainty of crossborder transactions) |
| E. Business climate | 1. Reduce regulatory uncertainty, bureaucracy costs and administrative hurdles. | |
| 2. Strengthen infrastructure and logistics | ||
| F. Credit Market 1/ | 1. Develop regulation to strengthen the development of credit scores; establish an oversight framework for the Credit Reporting Systems 2. Reforms to enhance capital market development (e.g., repo market, development of interest rate and forex derivatives). 3. Strengthen regulatory approach to alternative financing models (DFS) 4. Introduce a regulatory green taxonomy and update reporting requirements for firms and financial institutions |
5. Expand (direct) access to the fast payment system (BI-FAST) and build on the National Standard for Payment Open API (SNAP) to develop a comprehensive approach to open banking/finance 6. Foster the presence of institutional investors in the domestic market 7. Enhance financial literacy and reduce the digitalization gap across Indonesian provinces 8. Explore ways to scale and utilize the domestic banking system to mobilize climate finance. |
| G. Labor market | 1. Enhance the hiring and firing regulation, assess the extent to which wage determination encourages informality. | 2. Tackle labor informality and duality, while ensuring the protection of workers. |
See 2024 FSAP Recommendations, Annexes VII and VIII, and Selected Issues Paper on Access to Finance by SMEs.
Indonesia: A Roadmap for Structural Reforms
| Short-term | Medium-term | |
|---|---|---|
| A. Fiscal Policy | 1. Increase domestic tax revenue to bolster fiscal space. This should also endure beyond the short-term. 2. Prioritize high-quality spending supportive of Indonesia’s development and closely monitor fiscal risks 3. Increase coverage and adequacy of the social safety net, improve targeting of subsidies. |
4. Better align retail fuel prices with international prices. 5. Enhance the strategic direction of MTFF, and its articulation with the annual budget and long-term plans; ensure the General Government accounts comprehensively reflects fiscal activities. 6. Strengthen SNG’s own-revenue sources and PFM, including current and investment spending execution and service delivery capacities |
| B. Inclusion and Development | 1. Boost size and quality of health spending and social protection, for a broadly shared growth. 2. Boost education spending, improve learning time and quality to reduce skill mismatch and increase productivity and knowledge capabilities/economic sophistication. |
3. Tackle gender inequality, to further increase the labor force and potential growth. |
| C. Governance | Strengthen governance and anti-corruption framework, improve legal system to support accountability and business certainty. | |
| D. Trade and Foreign Investment Policy | 1. Avoid intensifying restrictive trade policies (including in the IP context) and transition away from NTMs that distort trade and investment decisions and risk international spillovers. | 2. Foster openness in trade and FDI, and increase trade facilitation (e.g. to reduce time, cost and uncertainty of crossborder transactions) |
| E. Business climate | 1. Reduce regulatory uncertainty, bureaucracy costs and administrative hurdles. | |
| 2. Strengthen infrastructure and logistics | ||
| F. Credit Market 1/ | 1. Develop regulation to strengthen the development of credit scores; establish an oversight framework for the Credit Reporting Systems 2. Reforms to enhance capital market development (e.g., repo market, development of interest rate and forex derivatives). 3. Strengthen regulatory approach to alternative financing models (DFS) 4. Introduce a regulatory green taxonomy and update reporting requirements for firms and financial institutions |
5. Expand (direct) access to the fast payment system (BI-FAST) and build on the National Standard for Payment Open API (SNAP) to develop a comprehensive approach to open banking/finance 6. Foster the presence of institutional investors in the domestic market 7. Enhance financial literacy and reduce the digitalization gap across Indonesian provinces 8. Explore ways to scale and utilize the domestic banking system to mobilize climate finance. |
| G. Labor market | 1. Enhance the hiring and firing regulation, assess the extent to which wage determination encourages informality. | 2. Tackle labor informality and duality, while ensuring the protection of workers. |
See 2024 FSAP Recommendations, Annexes VII and VIII, and Selected Issues Paper on Access to Finance by SMEs.
Annex I. Data and Results
A. Data Description
 |
|
B. Description of the “Success” Countries
List of the “Success” Countries and Characteristics of their Strong Growth Trajectory 1/
List of the “Success” Countries and Characteristics of their Strong Growth Trajectory 1/
 |
List of the “Success” Countries and Characteristics of their Strong Growth Trajectory 1/
|
C. Descriptive Analysis: Starting Conditions
The following box plots are showing Q1 to Q3 range (colored in blue), lower and upper adjacent values1 (vertical tick marks to the left and right of the interquartile box, respectively), and blue dots are for outside values (i.e. beyond one and a half interquartile range).
GDP Components, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
WGI Development Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Education Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Health and Demographics Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Human Development and Gender Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Labor Market Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Infrastructure, Credit and Business Regulation Indicators, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
External Sector Openness And Trade Structure, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
Trade Regulations and Barriers, Indonesia Vs. Success Countries
Citation: IMF Staff Country Reports 2024, 271; 10.5089/9798400284663.002.A001
D. Comparator Spider Charts: Country Groupings
| Country | ASEAN-6 | G20-EM | OECD country | Group 1 success country | Group 2 success country | IMF classification | WB income classification (as of 2022) |
|---|---|---|---|---|---|---|---|
| Argentina | × | EM | UM | ||||
| Australia | × | AE | H | ||||
| Austria | × | AE | H | ||||
| Belgium | × | × | AE | H | |||
| Brazil | × | EM | UM | ||||
| Canada | × | AE | H | ||||
| Chile | × | × | EM | H | |||
| China | × | EM | UM | ||||
| Colombia | × | EM | UM | ||||
| Costa Rica | × | EM | UM | ||||
| Croatia | × | EM | H | ||||
| Czech Republic | × | × | AE | H | |||
| Denmark | × | AE | H | ||||
| Estonia | × | × | AE | H | |||
| Finland | × | AE | H | ||||
| France | × | × | AE | H | |||
| Germany | × | AE | H | ||||
| Greece | × | AE | H | ||||
| Hungary | × | EM | H | ||||
| Iceland | × | AE | H | ||||
| India | × | EM | LM | ||||
| Indonesia | × | × | EM | UM | |||
| Ireland | × | AE | H | ||||
| Israel | × | AE | H | ||||
| Italy | × | × | AE | H | |||
| Japan | × | × | AE | H | |||
| Korea | × | × | AE | H | |||
| Latvia | × | × | AE | H | |||
| Lithuania | × | × | AE | H | |||
| Luxembourg | × | AE | H | ||||
| Malaysia | × | EM | UM | ||||
| Mexico | × | × | EM | UM | |||
| Netherlands | × | × | AE | H | |||
| New Zealand | × | AE | H | ||||
| Norway | × | × | AE | H | |||
| Panama | × | EM | H | ||||
| Philippines | × | EM | LM | ||||
| Poland | × | × | EM | H | |||
| Portugal | × | AE | H | ||||
| Romania | × | EM | H | ||||
| Russia | × | EM | UM | ||||
| Saudi Arabia | × | EM | H | ||||
| Singapore | × | × | AE | H | |||
| Slovak Republic | × | × | AE | H | |||
| Slovenia | × | AE | H | ||||
| South Africa | × | EM | UM | ||||
| Spain | × | AE | H | ||||
| Sweden | × | AE | H | ||||
| Switzerland | × | AE | H | ||||
| Thailand | × | EM | UM | ||||
| Trinidad and Tobago | × | EM | H | ||||
| Turkey | × | × | EM | UM | |||
| United Kingdom | × | AE | H | ||||
| United States | × | AE | H | ||||
| Vietnam | × | EM | LM |
| Country | ASEAN-6 | G20-EM | OECD country | Group 1 success country | Group 2 success country | IMF classification | WB income classification (as of 2022) |
|---|---|---|---|---|---|---|---|
| Argentina | × | EM | UM | ||||
| Australia | × | AE | H | ||||
| Austria | × | AE | H | ||||
| Belgium | × | × | AE | H | |||
| Brazil | × | EM | UM | ||||
| Canada | × | AE | H | ||||
| Chile | × | × | EM | H | |||
| China | × | EM | UM | ||||
| Colombia | × | EM | UM | ||||
| Costa Rica | × | EM | UM | ||||
| Croatia | × | EM | H | ||||
| Czech Republic | × | × | AE | H | |||
| Denmark | × | AE | H | ||||
| Estonia | × | × | AE | H | |||
| Finland | × | AE | H | ||||
| France | × | × | AE | H | |||
| Germany | × | AE | H | ||||
| Greece | × | AE | H | ||||
| Hungary | × | EM | H | ||||
| Iceland | × | AE | H | ||||
| India | × | EM | LM | ||||
| Indonesia | × | × | EM | UM | |||
| Ireland | × | AE | H | ||||
| Israel | × | AE | H | ||||
| Italy | × | × | AE | H | |||
| Japan | × | × | AE | H | |||
| Korea | × | × | AE | H | |||
| Latvia | × | × | AE | H | |||
| Lithuania | × | × | AE | H | |||
| Luxembourg | × | AE | H | ||||
| Malaysia | × | EM | UM | ||||
| Mexico | × | × | EM | UM | |||
| Netherlands | × | × | AE | H | |||
| New Zealand | × | AE | H | ||||
| Norway | × | × | AE | H | |||
| Panama | × | EM | H | ||||
| Philippines | × | EM | LM | ||||
| Poland | × | × | EM | H | |||
| Portugal | × | AE | H | ||||
| Romania | × | EM | H | ||||
| Russia | × | EM | UM | ||||
| Saudi Arabia | × | EM | H | ||||
| Singapore | × | × | AE | H | |||
| Slovak Republic | × | × | AE | H | |||
| Slovenia | × | AE | H | ||||
| South Africa | × | EM | UM | ||||
| Spain | × | AE | H | ||||
| Sweden | × | AE | H | ||||
| Switzerland | × | AE | H | ||||
| Thailand | × | EM | UM | ||||
| Trinidad and Tobago | × | EM | H | ||||
| Turkey | × | × | EM | UM | |||
| United Kingdom | × | AE | H | ||||
| United States | × | AE | H | ||||
| Vietnam | × | EM | LM |
References
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To support this ambition, Indonesia has inquired about joining the OECD in July 2023, and became the first country in Southeast Asia to start accession talks with the OECD in February 2024.
Indonesia is a global producer and exporter of coal, agriculture, including palm oil and fisheries, and mining related products including nickel.
The Economic Complexity concept is based on the country’s export structure, as it contains information on its knowledge/production capabilities. See Hausman (2011), and updated Atlas of Economic Complexity, online data.
This excludes low-income countries, as well as Venezuela (for which GNI per capita data is missing) and Syria (only country in our AE/EME sample that is still low-income in 2022). The panel is unbalanced, as GNI data is not available over the whole period for all countries.
EMEs and AEs are based on the IMF’s WEO classification, while HI countries are based on the WB’s GNI-based income classification.
This allows us to exclude countries that appear stuck in the middle-income trap.
This excludes three countries that went back to Upper Middle Income after their upgrade to High Income (Argentina, Mauritius, and Russia), and Guyana, which only transitioned to HI in 2022.
For these three GDP components, Indonesia lies at the bottom of the distribution, compared to where the comparator countries started their strong growth trajectory.
Gross primary school enrollment rate, which explains values higher than 100.
The country has also a lower life expectancy at birth (by 10 years, relative to the success countries at the start).
This vulnerable employment estimate by the ILO refers to the sum of (i) own-account workers (i.e., without employees) and (ii) contributing family workers (also known as unpaid family workers). The series is part of the “ILO modeled estimates database,” including nationally reported observations and imputation for missing data, primarily to capture regional and global trends with consistent country coverage, they are to be used with caution.
Output per worker, in GDP at constant international US dollars, at purchasing power parity, amounts to 26,000 for Indonesia in 2022, compared to around 38,000 on average for the comparator group at the start of their strong growth trajectory.
In this section, we exclude Panama and Trinidad and Tobago from the sample, as they are respectively a small state (exporting oil and gas) and financial center, and we do not want them to bias results (if outliers).
Note that for the success countries whose strong growth trajectory starts before 1996, we attribute the WGI scores of the year 1996 (first year in which WGI is available).
See Annex D for description of comparator groups.
WB and IBRD, 2022.
Reform indicators are constructed as averages of corresponding sub-variables, sourced from the Fraser Institute and WGI governance indicators, see Budina et al. (2023) for details.
Dependent variables are real GDP (at Purchasing Power Parity) or employment (for Labor market regulation). We control for lags of the dependent variable, past growth, expected growth, and past reforms (two lags each), country and year fixed effects, use OLS estimates, and generate impulse responses for the estimated coefficients of interest using the associated Driscoll-Kraay (1998) robust standard errors. See Budina et al (2023) for details.
For Budina et al., on EMDEs, this reform is found to have a positive and significant impact overall.
In this sample, credit market regulation reforms have a stronger effect on output for countries that are above-median in the package-reform, but the effect of labor market reforms remains broadly insignificant in the sample.
Lower (upper) adjacent value is the furthest observation which is within one and a half interquartile range of the lower (upper) end of the box.
