Title page
Contents
Executive summary 9
1. Key policy insights 14
Indonesia is confronting the most severe challenges since the 1997 crisis 14
Macroeconomic policy action has been stepped up in the face of the pandemic 20
Indonesia could gain more from globalisation 32
The fruits of growth should be shared 39
Regulatory barriers are high and State-owned enterprises ought to lead by example 43
A greener post-COVID-19 Indonesia? 49
Ambitious reforms are needed to sustain improvements in living standards 53
References 57
Annex 1.A. Evolution of budgetary allocations since 2019 62
2. Investing in competences and skills and reforming the labour market to create better jobs 63
Demographic transitions and skills 65
Improving education quality is crucial to boosting human capital 67
Labour market rigidities are holding back the potential of the economy 86
Policy recommendations 104
References 105
Table 1. The economy suffered a contraction 10
Table 1.1. Macroeconomic indicators and projections 19
Table 1.2. Events that could lead to major changes in the outlook 19
Table 1.3. Main economic stimulus measures in 2020 27
Table 1.4. Past recommendations related to raising revenue 31
Table 1.5. Past recommendations related to tourism 36
Table 1.6. Past recommendations regarding SOEs 46
Table 1.7. Structural reforms to close gaps can yield large long-term gains 54
Table 1.8. The fiscal cost of reforms is modest 54
Table 2.1. Labour market performance in G20 countries 89
Table 2.2. The share of workers paid below the minimum wage differs across provinces 94
Figure 1. A sudden stop to a growth story 10
Figure 2. Poverty is on the rise again 11
Figure 1.1. The pandemic interrupted a long spell of sustained growth 14
Figure 1.2. Income and productivity convergence started decelerating around 2014 15
Figure 1.3. Consumer price inflation is low 18
Figure 1.4. A number of macroeconomic vulnerabilities have resurfaced 20
Figure 1.5. The sovereign risk premium has decreased since March 2020 but remains high 21
Figure 1.6. Debt will rise in the aftermath of COVID-19, but remain sustainable 22
Figure 1.7. The financial sector is profitable and the authorities consider it well capitalised 23
Figure 1.8. Credit growth to the real sector has weakened from very high levels 24
Figure 1.9. Fiscal and current account deficits 26
Figure 1.10. Composition of budgeted public spending 28
Figure 1.11. Tax revenue is low by OECD and G20 standards 29
Figure 1.12. Composition of tax revenue 29
Figure 1.13. Export performance has been rather modest 33
Figure 1.14. Northeast Asia is Indonesia's main trading partner 34
Figure 1.15. Mobility restrictions are hitting tourism hard 35
Figure 1.16. Pervasive statutory restrictions discourage foreign direct investment 39
Figure 1.17. Poverty and income inequality remain high 41
Figure 1.18. Regional disparities are high with pockets of deep poverty in the poorest provinces 42
Figure 1.19. Indonesia has very strict regulations on product markets 44
Figure 1.20. Indonesia's regulatory barriers to competition are very high 44
Figure 1.21. Corruption is still perceived as high 48
Figure 1.22. The transition to a greener economy could be quicker 50
Figure 2.1. The OECD measure of human capital puts Indonesia in the middle of peer countries 64
Figure 2.2. Indonesia is enjoying a demographic dividend 65
Figure 2.3. The dependency ratio is currently low but set to increase significantly 66
Figure 2.4. More than 20% of Indonesian youth are inactive 67
Figure 2.5. There is ample room to improve the quality of schooling 68
Figure 2.6. Indicators of government spending on education 69
Figure 2.7. Public funds are tilted towards primary education 70
Figure 2.8. Spending per student is lower than in peer countries 71
Figure 2.9. Only half of the population has completed secondary education 71
Figure 2.10. Indonesia is close to the average of peer countries in participation in upper secondary education 72
Figure 2.11. Indonesians' performance in reading, mathematics and science is lagging 74
Figure 2.12. Indicators of spending per pupil vary substantially across provinces 76
Figure 2.13. Lower secondary education enrolment varies considerably across provinces 78
Figure 2.14. A quarter of Indonesian primary school pupils have had no early childhood education 80
Figure 2.15. Enrolment in tertiary education is close to the average for middle-income countries 81
Figure 2.16. Few Indonesians study abroad 84
Figure 2.17. A third of upper-secondary Indonesian schools lack access to computers 85
Figure 2.18. Informality is pervasive in Indonesia 88
Figure 2.19. The importance of informality varies across provinces but is high everywhere 90
Figure 2.20. The correlation between the minimum wage and provincial GDP per capita is weak 95
Figure 2.21. Access to internet is increasing rapidly but remains elusive for more than half of Indonesia's population 96
Figure 2.22. Labour regulations are restrictive 100
Figure 2.23. At similar educational attainment, women's employment rate is lower 101
Figure 2.24. Female labour force participation is picking up after decades of stagnation 102
Figure 2.25. Indonesian women have received less education than men 103
Boxes
Box 1.1. Indonesia's strategy to contain the spread of the COVID-19 virus 15
Box 1.2. Implementing effective financial literacy policies: the case of India 24
Box 1.3. Major tax reforms since 2019 30
Box 1.4. The omnibus laws 38
Box 1.5. Indonesia's government key goals and policy priorities 39
Box 1.6. Financing Indonesia's clean energy transition 50
Box 2.1. Distribution of responsibilities in education 77
Box 2.2. The importance of education policy implementation 79
Box 2.3. FDI in Viet Nam's education sector 83
Box 2.4. Labour reforms in the Omnibus Law on Job Creation 91
Box 2.5. Good jobs for all in a changing world of work: The OECD Jobs Strategy 99
Box 2.6. Indonesia's conditional cash transfer programme (Keluarga Harapan) 99
Annex Tables
Annex Table 1. Budget comparison, 2019-2021 (IDR trillions) 62