Jakarta harbour

Economic situation Making investment easier, developing local value chains

The dynamic economic development of the last ten years, with annual growth rates of about five to six per cent, has made Indonesia an attractive market. In 2020, however, the country’s gross domestic product dropped by 2.1 per cent as a result of the COVID-19 pandemic. Growth picked up again in 2021 to 3.7 and to 5.3 per cent in 2022.

The current recovery is an opportunity to restore pre-pandemic macroeconomic framework conditions and accelerate structural reforms. The International Monetary Fund (IMF) has predicted stable annual economic growth of approximately five per cent for the years between now and 2028.

An economy in transition

However, numerous challenges remain. Industrial competitiveness and the private sector’s willingness to invest are hindered by frequent state interventions, ubiquitous corruption, cumbersome bureaucracy and long-neglected infrastructure, as well as by the shortage of skilled workers and a generally poor level of educational attainment. As a result, the country is far from being able to generate enough jobs to keep pace with population growth. Youth unemployment, which was 13 per cent in 2022, is relatively high.

Indonesians display a great deal of individual initiative. The informal sector accounts for around fifty per cent of gross national income. However, the COVID-19 pandemic has hit small and micro enterprises very hard; millions of people have lost their jobs because of COVID restrictions or are facing an uncertain employment future.

Mother with her children in a train compartment, Jakarta, Indonesia

Mother with her children in a train compartment, Jakarta, Indonesia

Mother with her children in a train compartment, Jakarta, Indonesia

Development potential

Until now, the Indonesian economy has been heavily reliant on exporting fossil and mineral resources (including coal, gas, copper and nickel), and agricultural crops like palm oil and rubber, whereas the share contributed by the industrial sector has shrunk in the last few years and is mainly limited to cheap contract manufacturing.

The government has set itself the goal of bringing more foreign capital and expertise into the country, and developing value chains, which basically means achieving more profits domestically by processing products instead of selling raw materials.

Several packages of economic policy reforms have been launched with that aim in mind. The plans include multiplying the level of investment, creating incentives for start-ups, easing the requirements for work permits, lowering energy costs and making it easier to buy land. Regulations to restrict workers’ rights, for example with regard to things like minimum wages, social benefits and protection against dismissal, have met with sharp criticism from trade unions.

Regional and international cooperation

With the creation of the ASEAN Economic Community (AEC), the ten members of the Association of Southeast Asian Nations, including Indonesia, have affirmed their will to strengthen their regional cooperation. Indonesia is actively advocating the accession of its neighbouring country Timor-Leste to ASEAN. A roadmap for this process has been adopted recently. The accession would strengthen and expand the cooperation of the South-East Asian countries.

A Partnership and Cooperation Agreement envisaging close political, economic and cultural cooperation between the European Union and Indonesia has been in force since 2014. In 2016, negotiations for a Comprehensive Economic Partnership Agreement (CEPA) began.

As at: 18/10/2023