Economic Openness: Indonesia Case Study

Our report highlights that Indonesia is a country with extraordinary potential. With an economy that is growing 5% per year, democratic rule and the fourth largest population in the world, there are many reasons to be optimistic about Indonesia’s future.

A report for the Global Index of Economic Openness programme by Stephen Brien and Daniel Herring

Published 9 Oct 2019

A comprehensive and in-depth report on economic openness in Indonesia.

The Legatum Institute’s mission is to create the pathways from poverty to prosperity, and our work is focused on understanding how prosperity is created. To that end, with the generous support of the Templeton World Charitable Foundation, we have published a Global Index of Economic Openness to rank countries’ ability to interact with, and benefit from, both domestic and international commerce.

This is one of multiple in-depth country reports, which analyse performance on the key characteristics of openness to trade, investment, ideas, competition, and talent.

 

Our report highlights that Indonesia is a country with extraordinary potential. It has the world’s fourth largest population and will become one of the largest economies in the world. With its economy growing around 5% per year, there are many reasons to be optimistic about Indonesia’s future.

Its banking system is strong, and businesses are improving access to finance. Its institutions are fragile but surprisingly robust for a new democracy. Elections are considered free and fair, and it is politically stable. While the government faces many policy challenges, fiscal and monetary policy has been effective and disciplined.

Despite these economic and political achievements, Indonesia still has a challenge to bridge the gap with some of its better performing peers. A legacy of economic nationalism has sought to protect and promote Indonesian industry at the expense of foreign companies, which can bring much needed capital, goods and expertise to the country.

Executive Summary

This report is part of a series of case studies examining the links between a nation’s Economic Openness and prosperity, informed by the insights generated by our Global Index of Economic Openness.

  • Market Access and Infrastructure, such that products and services can be easily produced and delivered to customers;
  • Investment Environment, such that domestic and foreign sources of finance are widely available;
  • Enterprise Conditions that ensure markets are contestable and free from burdensome regulation;
  • Governance that is underpinned by the rule of law, as well as government integrity and effectiveness.

Our analysis indicates a clear link between the extent to which a country’s economy exhibits these characteristics and its productive capacity. This link is supported by a long history of academic literature, and can also be seen in the economic histories of those countries that have achieved a high level of economic wellbeing.

This report explores this link in more detail for Indonesia, whose overall rank in the Global Index of Economic Openness is 68th.

Indonesia’s achievements have led to impressive growth rates – its stable political environment and reasonably robust democratic processes, as well as its active civil society and press continue to underpin greater economic openness, along with its strong banking system and sound fiscal policy.

However, as Indonesia enters the coming five years of President Widodo’s new term, it faces other policy challenges across a number of areas, not least that infrastructure is severely constrained due to a legacy of protectionist policies and burdensome regulations.

Confronting vested interests in government and the private sector, and committing to improve infrastructure, human capital, investment and reforming the bureaucracy are all critical elements that could significantly boost economic openness, leading to greater prosperity for all in Indonesia.

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Economic Openness: Indonesia Case Study:

A comprehensive and in-depth report on economic openness in Indonesia.

By Stephen Brien and Daniel Herring

Oct 2019

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