Foundations for Growth and Competitiveness 2026

Indonesia

Indonesia's economic convergence has stalled in recent years, largely reflecting slowing labour productivity growth. While robust investment has sustained rapid growth in the capital stock, growth in total factor productivity has been significantly lower than in emerging market peers. Unemployment has receded to pre-pandemic levels, but low female participation weighs on aggregate employment.

Reducing barriers to trade and foreign investment while expanding and deepening the network of bilateral and regional trade agreements would help boost global value chain integration and economic growth. Educational attainment and quality need to be enhanced while student skills need to become more closely aligned with labour market needs. Reducing regulatory red tape and levelling the playing field between state-owned enterprises and private businesses would boost investment and productivity.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Trade and investment: Deepen global value chain integration

Indonesia faces significant bottlenecks for trade and investment due to widespread regulatory barriers, including high restrictions on services trade and foreign direct investment. This is compounded by persistent non-tariff barriers, including numerous local-content requirements and indirect discriminatory impediments that favour domestic firms, hindering foreign firms and trade integration.

Recommendations

✓ Eliminate or reduce non-tariff barriers and licensing requirements on imports and exports.

✓ Accelerate negotiations and implementation of regional and bilateral trade agreements, explicitly including services chapters.

✓ Level the playing field for foreign firms by reducing discriminatory provisions in public procurement and product market regulation.

Education: Improve quality and alignment with market needs

Indonesia's education system faces significant gaps in quality, reflected by persistently low PISA scores, which is compounded by considerable disparities in educational attainment across regions and high out-of-pocket costs for secondary schooling. Mismatches between educational outputs and labour market demand hamper productivity and economic growth.

Recommendations

✓ Invest in teacher training and evaluation to enhance instructional quality.

✓ Reduce out-of-pocket costs for secondary education for low-income families through increased state funding.

✓ Expand and improve vocational training by involving local governments and businesses in defining needs.

Infrastructure: Expand and modernise transport and energy networks

Indonesia faces persistent infrastructure bottlenecks that constrain economic growth, especially outside Java. Gaps in electricity reliability, road connectivity, port capacity, and urban transport reduce logistics efficiency, inflate costs, and limit access to markets and services.

Recommendations

✓ Modernise the electricity grid and expand access by accelerating investment in transmission and renewable generation.

✓ Prioritise infrastructure investment outside Java, especially in transport corridors and secondary cities.

✓ Strengthen public-private partnerships (PPPs) by improving project selection, risk-sharing frameworks, and regulatory clarity.

Business environment: Reduce the administrative burden and reform SOEs

Bureaucratic complexity, inconsistent regulation, and SOE dominance in key sectors constrain private investment and productivity. The prevalence of state-owned enterprises (SOEs) creates significant market distortions and an unlevel playing field for private sector growth. SOEs often act as instruments of government policy, benefiting from subsidised interest rates, implicit state guarantees, and enjoying exemptions from certain antitrust laws.

Recommendations

✓ Expand and enforce the use of the one-stop-shop for business licencing (OSS-RBA).

✓ Develop a clear SOE ownership policy, distinguishing between commercial vs. strategic roles.

✓ Apply competitive neutrality principles and limit SOE privileges.

Digitalisation: Expand access and foster diffusion

Despite progress in digitalisation, Indonesia faces challenges related to low fixed broadband penetration and slow 5G rollout, particularly in rural areas. Adoption of digital tools by the broader business sector has been modest, while digital firms with intangible assets have difficulties accessing finance. Shortfalls in digital skills are widespread across the population, including among students, teachers, and government employees, which limits the effective use of digital technologies.

Recommendations

✓ Streamline permitting for broadband and 5G deployment, establish an independent telecommunications regulator, and reform spectrum allocation.

✓ Expand digital adoption programmes and strengthen venture capital and alternative financing for digital firms.

✓ Give digital competencies more prominence in school curricula and upgrade the digital skills of teachers.

Recent progress on structural reforms

Key structural reforms in recent years include the streamlining of business licensing and labour market frameworks as well as the gradual liberalisation of foreign direct investment across key sectors, including energy, telecommunications, and e-commerce. A recent tax reform has reduced corporate tax rates, expanded VAT coverage, and included provisions for carbon taxation to enhance fiscal sustainability and support climate objectives. However, reform implementation has encountered significant legal challenges and public opposition that has somewhat constrained the reform momentum.