OECD Economic Surveys

INDONESIA

NOVEMBER 2024

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OECD Economic Surveys:
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Please cite this publication as:

OECD (2024), OECD Economic Surveys: Indonesia 2024, OECD Publishing, Paris, https://doi.org/10.1787/de87555a-en.

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OECD Economic Surveys

ISSN 0376-6438 (print)
ISSN 1609-7513 (online)

OECD Economic Surveys: Indonesia

ISSN 2072-5116 (print)
ISSN 2072-5108 (online)

Photo credits: Cover © kalilipatvideoart/Shutterstock.com. Executive summary © Indra_aldyla/Shutterstock.com.

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 3

Foreword

This Economic Survey was prepared by Andrea Goldstein and Charles Dennery, under the supervision of
Philip Hemmings. Research assistance was provided by Eun Jung Kim and editorial support by Michelle
Ortiz and Emily Derry.
This Survey is published under the responsibility of the Economic and Development Review Committee of
the OECD. The Committee discussed the draft Survey on 24 September 2024. The cut-off date for data
used in the Survey is 12 November 2024.
Information about this and previous Surveys and more information about how Surveys are prepared is
available at https://www.oecd.org/en/topics/economic-surveys.html.
On 20 February 2024, the OECD Council decided to open accession discussions with Indonesia. On
29 March 2024, the OECD Council adopted the Roadmap for the Accession Process of Indonesia
[C(2024)66/FINAL], setting out the terms, conditions and process for the accession of Indonesia.
In accordance with this Roadmap, OECD technical committees, composed of expert policy-makers from
each of the 38 OECD Members, will conduct an in-depth assessment of Indonesia’s legislation, policies
and practices against OECD legal instruments and OECD best policies and practices covering multiple
areas of government policy, including economic policy but also labour market and social policy, education,
and health.
The overarching objective of the OECD accession process is to promote Indonesia’s convergence with
OECD standards, best policies and best practices, resulting in better outcomes for OECD Members as
well as for Indonesia and its citizens. Throughout the accession process, the OECD will work closely with
Indonesia to support the adoption of long-lasting reforms for this purpose.
Publication of this document, and the analysis and recommendations contained therein, do not prejudge
in any way the results of the review of Indonesia by the Economic Development Review Committee as part
of its process of accession to the OECD.

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

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Table of contents

Foreword 3
Executive Summary 9
1 Deepening the macroeconomic foundations for inclusive growth 15
The economy remains strong 16
High interest rates have supported the Rupiah and reduced inflation 21
Raising more revenues and making spending more efficient is essential 25
Findings and recommendations 35
References 36

2 Accelerating growth and attaining socioeconomic convergence 38

Economic convergence has stalled 39
Productivity levels are modest and integration in global value chains is limited 41
Increasing employment rates and strengthening human capital 43
Policies to strengthen the business environment 47
Findings and recommendations 60
References 61

3 Making the digital transformation work for all 65

With the appropriate reforms, digitalisation can accelerate economic growth 66
Strengthening broadband connectivity 67
Facilitating digitalisation in the business sector 74
Seizing the potential of e-government 77
Ensuring education and training is geared to digitalisation 82
Helping households and workers handle digitalisation 83
Findings and recommendations 85
References 86

4 Pressing ahead with the green transition 92

Introduction 93
Past progress and future challenges in emission reduction 94
Getting the right mix of instruments for decarbonisation 98
Decarbonising electricity generation 103
Promoting smart manufacturing 107
Reducing emissions in the transport sector 108
Shifting to cleaner household energy use and making buildings more energy efficient 113
Reducing emissions and protecting ecosystems in land- and sea-use 114

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Preparing workers for the green economy 115

Adapting to a changing climate 116
Findings and recommendations 122
References 124

FIGURES
Figure 1. Growth has recovered 10
Figure 2. Economic convergence has stalled 11
Figure 3. The penetration of fibre remains low 12
Figure 4. Indonesia needs to further slow down and eventually reverse the increase in GHG emissions 13
Figure 1.1. Growth has recovered but economic activity remains below the pre-crisis trend 16
Figure 1.2. Indonesian exporters have benefited from high international demand for commodities 17
Figure 1.3. Inflation has normalised and unemployment is falling but informality has increased 18
Figure 1.4. Indonesia's balance of payment has been in surplus and reserves have increased 19
Figure 1.5. Surveys and high-frequency indicators point to robust domestic demand 20
Figure 1.6. BI has been successful at anchoring core inflation 22
Figure 1.7. Higher interest rates have supported the Rupiah 23
Figure 1.8. Credit and investment are dynamic, and asset prices are declining in real terms 23
Figure 1.9. Foreign ownership of government debt has fallen 24
Figure 1.10. Indonesia has returned its fiscal deficit to below 3% of GDP 26
Figure 1.11. Increased demand for public spending could put public finances under stress 27
Figure 1.12. The tax ratio remains low in Indonesia 29
Figure 2.1. In recent years GDP per capita has stopped catching-up with the OECD area 39
Figure 2.2. Poverty continues to trend downwards 40
Figure 2.3. Child malnutrition has steadily declined 40
Figure 2.4. Productivity performance has been weak 41
Figure 2.5. Participation in global value chains is low, and relatively few firms engage in foreign trade 42
Figure 2.6. The gender gap in labour force participation remains significant 44
Figure 2.7. Student performance in PISA tests is low and has declined in recent years 45
Figure 2.8. Despite progress, Indonesia’s PMR scores still indicate a relatively restrictive environment for business 48
Figure 2.9. Corruption is still perceived to be widespread 52
Figure 2.10. Non-tariff trade barriers are broadly low but include numerous local-content requirements 54
Figure 2.11. Regulatory restrictions are high on services trade and foreign direct investment 55
Figure 2.12. Research and development activity is relatively low 59
Figure 3.1. The mobile market is saturated but fixed broadband penetration is low 68
Figure 3.2. Broadband speed is low 69
Figure 3.3. The digital divide between urban and rural areas is deep 70
Figure 3.4. Estimated probability of having access to internet 71
Figure 3.5. Firms' adoption of digital technologies is modest 75
Figure 3.6. Access to finance is a significant problem for SMEs 76
Figure 3.7. There is scope to further develop e-government 78
Figure 3.8. As elsewhere, cybersecurity incidents are common 79
Figure 4.1. Indonesia needs to sustain GHG emission reductions to reach net zero 93
Figure 4.2. Emissions continue to increase steadily, except those relating to land use 95
Figure 4.3 Further decoupling is needed to achieve net zero emissions while raising living standards 96
Figure 4.4. The contribution of market-based instruments to total climate action is limited 99
Figure 4.5. Implicit fuel subsidies have become more significant in recent years 102
Figure 4.6. In Indonesia, energy-related emissions dominate total GHG emissions 103
Figure 4.7. Indonesia has a long way to go in decarbonising energy supply 104
Figure 4.8. There is ample room for reducing GHG emissions from road transport 108
Figure 4.9. The car fleet is smaller than in ASEAN peers 110
Figure 4.10. Electric vehicles diffusion is slow in Indonesia 110
Figure 4.11. Using cars less would reduce Indonesia’s high incidence of accidents and congestion 112
Figure 4.12. Investing more in rail would make train use more attractive 112
Figure 4.13. Climate change is a challenge for workers, but the green transition opens new opportunities 116
Figure 4.14. Floods are the most frequent climate-related events 118
Figure 4.15. Extreme weather and climate-related events damage the economy 118

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Figure 4.16. The agriculture sector relies heavily on freshwater, while water stress is relatively moderate 119
Figure 4.17. Indonesia’s insurance coverage for climate-related damage is higher than in peers 121

TABLES
Table 1. Steady growth is projected 10
Table 1.1. Growth will remain steady 21
Table 1.2. Events that could lead to major changes in the outlook 21
Table 1.3. Past OECD recommendations on monetary policy 25
Table 1.4. Past OECD recommendations on raising revenues 30
Table 1.5. Illustrative impact of structural tax reforms 31
Table 2.1. Past OECD recommendations on fighting informality and enhancing inclusion 44
Table 2.2. Past OECD recommendations on education and training 47
Table 2.3. Past OECD recommendations on State-Owned Enterprises and government intervention 48
Table 4.1. Main policy targets and measures for achieving the green economy transition 97
Table 4.2. Key green economy policy texts 98
Table 4.3. Comparing mitigation policy instruments 100
Table 4.4. Indonesia plans to expand the share of electricity generated from renewable sources 106
Table 4.5. Main initiatives in disaster risk management 117

BOXES
Box 1.1. Bank Indonesia’s inflation targeting setup 22
Box 1.2. Islamic finance in Indonesia 22
Box 1.3. Indonesia’s old-age pension systems 28
Box 1.4. Key factors for improving tax administration 32
Box 2.1. Reducing stunting 40
Box 2.2. Boosting tourism 43
Box 2.3. Primary and secondary education in Indonesia 46
Box 2.4. Recent regulatory reforms in Indonesia 49
Box 2.5. The Corruption Eradication Commission (KPK) 51
Box 2.6. Recent trade agreements completed or underway 52
Box 2.7. Supply and demand industrial policies in OECD and non-OECD countries 57
Box 3.1. Digitalisation strategies and policies 67
Box 3.2. What explains the divide in Internet access in Indonesia? 71
Box 3.3. Indonesia’s unicorns and venture capital eco-system 74
Box 3.4. Protecting personal data – the experience of Australia and Singapore 79
Box 3.5. Using digital IDs to access e-government: the experience of Estonia and Denmark 80
Box 4.1. Indonesia’s main policy plans and goals for the green economy transition 97
Box 4.2. Using a mix of policy instruments to cut GHG emissions at lowest cost 100
Box 4.3. Cutting energy subsidies while shielding the most vulnerable – the experience of 2013-2018 102
Box 4.4. The Just Energy Transition Partnership and the Energy Transition Mechanism 105
Box 4.5. Indonesia’s air quality challenges 108
Box 4.6. Cutting emissions from shipping without raising the cost of transporting people and goods 109
Box 4.7. Indonesia’s kerosene-to-LPG programme (2007-2012) 114

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Basic statistics of Indonesia, 2024

(Numbers in parentheses refer to the OECD average)¹
LAND, PEOPLE AND ELECTORAL CYCLE
Population (million) 277.5 Population density per km² 146.6 (39.2)
Under 15 (%) 24.9 (17.0) Life expectancy at birth (years, 2022) 68.3 (79.6)
Over 65 (%) 7.0 (18.3) Men (2022) 66.2 (77.0)
International migrant stock (% of 0.1 (13.9) Women (2022) 70.4 (82.4)
population, 2020)
Latest 5-year average growth (%) 0.8 (0.4)Latest general election February-2024
ECONOMY
Gross domestic product (GDP) Value added shares (%)
In current prices (billion USD) 1 371.6 Agriculture, forestry and fishing 13.1 (2.8)
In current prices (trillion IDR) 20 892. 3 Industry including construction 42.1 (27.2)
Latest 5-year average real growth (%) 3.4 (1.7) Services 44.8 (70.0)
Per capita (thousand USD PPP)² 15.6 (59.0)
GENERAL GOVERNMENT
Per cent of GDP
Expenditure 16.7 (43.9) Gross financial debt (2022) 45.3 (109.5)
Revenue 15.0 (39.0) Net financial debt (2022) 16.2 (66.9)
EXTERNAL ACCOUNTS
Exchange rate (IDR per USD) 15 232.29 Main exports (% of total merchandise exports, 2022)
PPP exchange rate (USA = 1) 4 821.59 Fuels 24.3
In per cent of GDP Metals 14.4
Exports of goods and services 21.7 (31.3) Vegetable 13.5
Imports of goods and services 19.6 (31.2) Main imports (% of total merchandise imports, 2022)
Current account balance -0.1 (-0.3) Machinery and electronics 24.4
Net international investment position (2020) -26.4 Fuels 18.9
Metals 10.2
LABOUR MARKET, SKILLS AND INNOVATION
Employment rate (aged 15 and over, %) 65.7 (58.0) Unemployment rate, Labour Force Survey (aged 5.3 (4.8)
15 and over)
Men 79.4 (65.5) Youth (aged 15-24, %) 13.1 (10.6)
Women 51.7 (50.8) Long-term unemployed (1 year and over, %) 1.1 (1.0)

Participation rate (aged 15 and over, %) 67.9 (60.9) Tertiary educational attainment (aged 25-64, %, 13.1 (41.0)
2022, OECD: 2023)
Mean weekly hours worked 38 (37.3) Gross domestic expenditure on R&D (% of GDP, 0.3 (2.9)
2020, OECD: 2021)
ENVIRONMENT
Total primary energy supply per capita (toe, 0.9 (3.8) CO2 emissions from fuel combustion per capita 2.4 (7.6)
2022, OECD: 2022) (tonnes, 2022, OECD: 2023)
Renewables (%, 2022, OECD: 2023) 22.8 (12.5)
Exposure to air pollution (more than 10 g/m³ of 98.5 (56.5)
PM 2.5, % of population, 2020)
SOCIETY
Income inequality (Gini coefficient, OECD: 0.361 (0.315) Education outcomes (PISA 2022 score)
latest available)
Poverty gap at USD 3.65 a day (2017 PPP, %) 3.6 Reading 359 (476)
Public and private spending (% of GDP) Mathematics 366 (472)
Health care (2021, OECD: 2022) 3.7 (9.2) Science 383 (485)
Education (public spending, % of GNI, 2021) 3.3 (4.4) Share of women in parliament (%) 21.6 (32.8)
1. The year refers to the latest calendar year (2023) unless otherwise indicated. Where the OECD aggregate is not provided in the source
database, a simple OECD average of latest available data is calculated where data exist for at least 80% of member countries.
2. OECD aggregate refers to weighted average.
Source: Calculations based on data extracted from databases of the following organisations: OECD, International Energy Agency, International
Labour Organisation, International Monetary Fund, United Nations, World Bank.

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

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Executive Summary
Key messages
• GDP growth has recovered but prudent monetary and fiscal policies are needed to retain
macroeconomic stability. In the longer run, fiscal revenues must increase to cover growing societal
needs and meet the challenges of climate change and population ageing.
• Faster growth is required to reach the government’s goal of advanced-economy status by mid-
century. Education, infrastructure and formal employment should be enhanced, while the
environment for business can improve further.
• Digital infrastructure needs are only partly met. Digital access and adoption among business fall short,
and related skills remain insufficient. Removing unnecessary regulations could spur the digital transition.
• Decarbonisation needs to be stepped up by further reducing coal-fired generation, expanding the
share of renewables in the energy mix, reinforcing market mechanisms, and investing in mass transport.

GDP growth has recovered and macroeconomic policies should remain prudent

Monetary and fiscal policies should remain prudent and data-dependent. GDP growth has rebounded from
the COVID-19 recession and inflation has declined markedly, but exposure to global uncertainty remains
high. Government spending and revenue are low in international comparison and future spending pressures
require an increase in tax revenues. The tax bases for VAT and income taxation should be broadened and
spending should be made more efficient.

Output increased by 5.0% in 2023 (Figure 1). by public spending on the new capital city, Nusantara,
Private consumption remains the main engine of but is projected to remain below the 3% limit. Bank
growth, while export volumes have benefited from Indonesia is expected to continue reducing the policy
buoyant global demand for commodities. International rate in late 2024 and in 2025. Renewed inflationary
tourism has largely recovered from the decline tensions and pressure on the Rupiah present downside
caused by the pandemic. Investment has remained risks which could slow down interest rate cuts.
dynamic, partly due to public infrastructure projects.
While fiscal balances are set to remain within
However, growth in recent years has been insufficient
target over the projection period, they will come
to bring convergence in income towards advanced
under strain over the longer term. Spending
economies; GDP per capita has remained around
pressures will grow due to the green transition and
one quarter of the OECD average since 2010.
increasing demand for public services by a more
Inflation has returned to target. Headline inflation affluent and older population. There is scope for
peaked at 6.0% in September 2022 amid surging food structural increases in revenues to cover greater
and energy prices. High interest rates and currency spending needs. Broadening the tax base, including
strengthening have tamed price growth. In October through fewer exemptions and stronger enforcement
2024, headline inflation was 1.7%, within the central is needed, as well as increasing enrolment in old-
bank’s 1.5% - 3.5% target band. Bank Indonesia’s age pension schemes. The planned rollout of the
policy rate was lowered to 6% in September 2024. “free nutritious meal” programme in schools should
be gradual and targeted on the poorest. Greater
GDP growth is projected to remain robust, at 5.1%
attention to the efficiency of spending is required,
in 2024 and 5.2% in 2025 (Table 1). Consumption
including through further reductions of energy
will remain strong and private investment is likely to
subsidies and cost monitoring for new spending.
pick up. The fiscal deficit will be widened somewhat

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Figure 1. Growth has recovered

Contribution to real GDP growth

% pts, %
8
Net exports
6
Gross capital formation
4

2 Government consumption

0 Private consumption

-2
Real GDP

-4
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Note: Provisional economic forecast for 2024 by OECD in November 2024.

Source: OECD Economic Outlook 116 (preliminary); and OECD calculations.
StatLink 2 https://stat.link/5tsqy1

Table 1. Steady growth is projected

Annual growth rates, %, unless specified
2022 2023 2024 2025
Gross domestic product 5.3 5.0 5.1 5.2
Private consumption 5.0 4.9 5.1 5.1
Gross fixed capital formation 3.9 4.4 4.8 6.8
Exports 16.2 1.3 5.5 5.1
Imports 15.0 -1.6 6.4 6.3
Headline CPI inflation 4.2 3.7 2.3 2.2
Current account balance (% of GDP) 1.0 -0.1 -0.4 -0.3
General government budget balance (% of GDP) -2.2 -1.5 -2.7 -2.5
Note: Provisional economic forecast for 2024 and 2025 by OECD in November 2024.
Source: OECD Economic Outlook 116 (preliminary); and OECD calculations.

Accelerating growth and attaining socioeconomic convergence

Real income per capita has more than doubled over the past quarter of century, and extreme poverty has
declined. However, over the past decade economic growth has not been sufficient to bring further economic
convergence in GDP per capita (Figure 2), reflecting slowing labour productivity growth. Indonesia has room
to benefit more from integration in global value chains. Education, skills, and participation in formal
employment should be enhanced, while the environment for business can improve further. Pro-active
industrial and trade policies should be targeted, monitored, and time-bound.

Unemployment has receded, but the labour employment rate, as well as informality, to make the
market remains fragile and informality is high. most of its workforce. Shifting the funding of
The unemployment rate has fallen from 7.1% in mid- maternity leave from employers to social insurance
2020, at the peak of the pandemic, to 4.9% in mid- would bolster formal employment among women.
2024, below the pre-pandemic prevailing range of 5–
Reaping the demographic dividends from a
5.5%. Indonesia should reduce the gender gap in the
young population requires quality education.

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Basic education is almost universal in Indonesia, strengthen skills training must be continued,
but the quality is often poor, with significant including through incentives for employers. In
variation across provinces, contributing to a primary and secondary education, harmonising
shortage of skilled workers. Campaigns to curricula and increasing funding is essential.

Figure 2. Economic convergence has stalled

GDP per capita relative to OECD
% of OECD average
35
Indonesia G20 emerging economies G20 emerging economies excluding China

30

25

20

15

10
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022
Note: Data are based on nominal GDP adjusted for purchasing power parity (PPP, current international dollar). G20 emerging economies
excluding Indonesia: Argentina, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and Türkiye.
Source: OECD (2024), OECD National Accounts Statistics (database); and World Bank (2024), World Development Indicators.
StatLink 2 https://stat.link/px8v5w

Further improving the business environment Greater efforts in combatting corruption and
would boost productivity and help achieve abuses of market power would also help foster
economic convergence. There is scope to lower a more competitive and productive business sector.
barriers to foreign investment and trade, better
The government aims to expand economic
enforce competitive neutrality, as well as rationalise
activity around raw material extraction, but this
and improve the governance of SOEs. Reducing
policy requires caution. Industrial policies to spur
non-tariff barriers to trade such as import and export
domestic downstream nickel processing have
licenses would broadly increase productivity and
attracted investors’ interest. However, there are
trade integration.
implementation risks, including overshoot in
processing capacity and fiscal impacts.

Reaping the benefits of digitalisation

Indonesia has further scope to harness digitalisation. Geographic, gender and age-related gaps in
individuals’ access to, and adoption of, the Internet and related tools need to be closed. Access and adoption
among business also lags developments in peer countries. Faster deployment of 5G technology and fixed
broadband is key. Digitalisation skills are still insufficient and STEM education must be broadened.

The digital sector represents a growing share individuals and firms in access to, and use of,
of the economy. Digitalisation is advancing and digital technologies. Faster broadband
digital-technology unicorn companies are deployment to overcome geographical,
emerging. However, disparities persist across education, gender, and income gaps in the

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12 

adoption of digital technologies is a major Much of Indonesia’s economy makes

challenge. relatively little use of digital tools. Enhancing
digitalisation across all business sectors,
Investing in high-speed broadband is crucial
including agriculture, would help spur productivity
(Figure 3). Improvements in Indonesia’s mobile
and growth. Access to finance is difficult for
and fixed communications systems are
digital firms that mostly have intangible assets
compromised by complicated procedures for
that are not accepted as collateral. Further
obtaining access to public infrastructure. In
promoting the digitalisation of the business
telecoms services, the absence of an
sector and SMEs is also needed. Removing
independent regulatory body is a concern.
regulations that weigh on digital firms (e.g. by
Aligning education and digitalisation is limiting e-commerce activities) would help.
essential. The latest PISA scores show that Easing access to government data for business
many students have relatively low educational purposes could open new opportunities and
attainment and insufficient skills to make full use generate additional benefits, provided digital
of digital technologies. The education system security is better guaranteed.
could also benefit from a greater use of digital
tools.

Figure 3. The penetration of fibre remains low

Number of fibre-based subscribers as a share of total households, September 2023

Note: The fibre penetration rate is the share of the number of subscribers for Fibre to the Home (FTTH) and Fibre to the Building (FTTB) in the
total households.
Source: FTTH Council Europe, FTTH/B Global Ranking 2024.
StatLink 2 https://stat.link/sv8h3b

Achieving the green transition

Indonesia is vulnerable to the impacts of global warming. In addition, the country’s goal of reaching net-zero
greenhouse gas (GHG) emissions by 2060 is challenging in the context of economic convergence.
Decarbonisation needs to be further stepped up, in particular by accelerating the decommissioning of coal-
fired power plants, expanding renewable energy generation, implementing carbon taxation, modernising the
electricity grid, and investing in mass urban transport and rail transport. Mainstreaming climate-change
adaptation requires strengthening institutional capacities, governance mechanisms, and planning and
programming frameworks, also with international support.

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Replacing fossil fuels so that GHG emissions Reducing the environmental impact of the
peak no later than 2030 and reach net zero by energy sector is a policy priority. Shifting to low-
2060 (Figure 4) requires considerable emitting energy sources such as solar, wind and
investments. The economic and human cost of geothermal requires considerable investment,
business-as-usual emission scenarios is large and including in the electricity transmission system. To
Indonesia has committed to ambitious targets for enhance private investment, it is important to
reducing GHG emissions. The cost of mitigation ensure that the state-owned vertically integrated
efforts will be concentrated over the next few years. energy company acts responsibly as the sole off-
The Just Energy Transition Partnership can make taker on the energy market.
Indonesia a model for ensuring a green transition.

Figure 4. Indonesia needs to further slow down and eventually reverse the increase in GHG emissions
GHG emissions: trends and targets, 2005-60

Mt CO2 eq
3 500
Total GHG emissions (Latest available data) Total GHG emissions (reported to UNFCCC)
3 000
BAU 2030
2 500
2030 target (CM1): -31.89%
2 000
2030 target (CM2): -43.20%
1 500

1 000

500

0
2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060
Net-zero target
(CM2)
Note: Business-as-usual (BAU) projections and countermeasures (unconditional and conditional mitigation scenarios, CM1 and CM2) from the
Enhanced Nationally Determined Contribution Report by Indonesia to the UNFCCC (2022).
Source: Laporan Inventarisasi Gas Rumah Kaca (GRK) Dan Monitoring, Pelaporan, Verifikasi (MPV) 2023, Volume 9, Januari 2024; and MoEF
(2022), Enhanced Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change (UNFCCC).
StatLink 2 https://stat.link/yjzb71

The transition to a more price-based energy change. Better land-use regulations, as well as
market needs to be accelerated. Regulatory wider insurance coverage, can help mitigate the
responsibilities should be transferred to an impact on businesses and people.
independent authority with sufficient powers and
Resolute action to protect forests and the
financial resources. The implementation of an
ocean must continue. The rate of deforestation is
appropriate carbon tax should be accelerated.
the lowest in 20 years. However, further efforts are
Transport is the second-largest source of GHG needed to protect peatlands and forests as part of
emissions. Efficient and extensive urban and inter- mitigation strategies and to help reduce the impact
city mass transport systems must be developed to of climate-related natural disasters.
lower emissions and cope with surging traffic.
Accelerating the replacement of traditional
combustion engine vehicles with zero- or low-
emission alternatives will be essential.
Indonesia also needs to step up its adaptation
policies. The risk and cost of more frequent
flooding and drought will increase with climate

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

14 

MAIN FINDINGS KEY RECOMMENDATIONS

Maintaining effective macroeconomic policies
Inflation has moderated, though inflationary risks persist. Maintain prudent, forward looking, data-dependent monetary policy,
making interest rate cuts conditional upon inflation developments.
Fiscal policy has been prudent over the past two decades and debt Avoid fiscal slippage, ensure the value for money of new spending
remains moderate. Yet, borrowing costs remain high and limited taxation commitments, and maintain the deficit to GDP ratio remains below the
revenues expose the country to debt rollover risks. mandated ceiling.
Public provision of key services can be expected to grow over time Ensure a medium-term fiscal strategy that takes steps to increase
reflecting increasing societal demand and rising investment needs as revenues as a share of GDP in order to fund spending priorities, notably
Indonesia’s economy develops further. in education, infrastructure and reducing informality.
Fiscal revenues are modest in international comparison, including Broaden the tax base, including by lowering the personal income tax
relative to other countries in the region. This limits space for counter- basic allowance (PTKP) and upper thresholds of the tax schedule.
cyclical actions as well as future social and green spending needs. Broaden the VAT base and lower the compulsory registration threshold.
Attaining long-run economic convergence
Employers must provide 3-months paid maternity leave, but compliance Shift the funding of maternity leave from employer to social insurance or
can be low, especially in small firms. This contributes to lower levels of general taxation; focus support on low-wage earners.
female labour force participation and formal employment.
School performance has fallen according to PISA indicators, and Further improve education, including by harmonising the secondary-school
Indonesia remains significantly below other OECD economies. Different curricula and ensuring consistency nationally, to provide a broader core
curricula apply to secular and religious schools with large heterogeneity. knowledge across all pupils.
The scope of SOEs and their share of GDP are higher than the OECD Develop a state ownership strategy that defines more clearly the sectors
average, as well as comparable emerging market economies. where government ownership remains relevant.
The autonomy of the Corruption Eradication Commission (KPK) has been Safeguard the independence, autonomy and authority of the KPK to
hindered by the 2019 reform, leading to perceptions of a lack of independence. ensure the effective prevention, detection and investigation of corruption.
Trade restrictions remain widespread (including the recently introduced Reduce the number of sectors where import and export quotas apply; do
Commodity Balance Mechanism) and hinder participation in global value chains. not expand the Commodity Balance Mechanism to other goods.
Proactive policies have been introduced to develop domestic downstream Ensure industrial policy addresses market failures and subject policy
activities. Some success has been achieved in developing nickel smelters and measures to cost-benefit analysis in relation to precisely defined targets
processing facilities, but implementation risks remain very significant.
Enhancing digitalisation
Nationwide deployment of 5G infrastructure is particularly costly given Subject digital infrastructure investments to granular cost-benefit analysis.
Indonesia’s archipelagic geography.
Rollout of high-speed internet infrastructure needs to be faster. Reduce barriers to broadband deployment through simplified procedures
The communication regulator has been suppressed. Direct and indirect for obtaining permits for infrastructure installation, including for access to
state participation in communication operators generates potential public infrastructure.
conflicts of interest and risks undermining competitive neutrality. Establish a fully independent and well-resourced communication regulator.
The business potential of digital transformation is not being fully exploited. Further boost public support to SMEs, in cooperation with the business sector,
Adoption of digital tools lags OECD countries, particularly among SMEs. through targeted programmes to facilitate the adoption of digital tools.
The foundation and specific skills for harnessing digitalisation are weak. Give digital competences more prominence in the school curriculum,
The pool of ICT professionals is small and the gender composition is biased. upgrade the digital skills of teachers and principals, and encourage girls’
participation in STEM education.
Confronting climate change and the green transition
The effective price of carbon is distorted by poorly targeted fuel subsidies. Gradually reduce energy subsidies (including on LPG) and compensate
Subsidies on liquid petroleum gas (LPG) are meant to only benefit vulnerable households through better targeted support.
targeted households, but many other households also receive them.
Coal-fired power plants generate over half of Indonesia’s electricity Accelerate early decommissioning of coal-fired power plants, conditional
supply. Support for transition away from coal includes funds from the on funds’ availability and energy security considerations.
international multi-donor Just Energy Transition Partnership (JETP).
There is scope to improve the structure of electricity supply. The State Transfer regulatory responsibilities to a new independent authority.
electricity company is the sole off-taker on the electricity market and Provide this body with appropriate technical capacity and financial
regulation makes renewable power prices unattractive. resources. Establish a robust, stable, substantial, and multi-year pipeline
of auctions for renewable-energy generation, with competitive and
transparent tariff-setting.
Mass urban and intercity transport systems are underdeveloped. High Increase investment in mass urban and intercity transport systems,
reliance on road transport, especially internal-combustion engine subjecting projects to rigorous cost-benefit analysis. Gradually dissuade
vehicles, contributes to greenhouse gas emissions, high levels of road car use, for example by introducing road pricing and congestion charges.
fatalities and traffic congestion, as well as poor urban air quality.
Negative impacts of climate change can be reduced by adapting public Incorporate climate resilience planning for the future climate into
infrastructure and reallocating activities away from more affected areas. infrastructure planning, procurement and spatial planning rules.
Indonesia’s coastal cities are particularly vulnerable to climate change.

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

  15

1 Deepening the macroeconomic

foundations for inclusive growth

Charles Dennery, OECD

GDP growth has rebounded after the pandemic, led by buoyant consumption
and strong export demand. High interest rates have produced a marked
decline in inflation after the global surge in 2022, yet monetary policy should
remain cautious and data-dependent. Fiscal policy should also remain
prudent and the deficit limit should be upheld. Government revenues are low
in international comparison and likely medium-term spending pressures will
require an increase in tax revenues. The tax base for VAT and income
taxation should be broadened and spending should be made more efficient.

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16 

The economy remains strong

Output growth has returned to pre-pandemic levels

Real GDP grew by 5.3% in 2022 and 5.0% in 2023, in line with the pre-pandemic average of 5% (Figure 1.1,
Panel A). Similar rates of growth are expected for 2024 and 2025 (see below). However, as in many other
countries, the level of economic activity has remained below the pre-pandemic trend (Panel B); the gap
currently stands at about eight percentage points. Private consumption has been buoyant since 2022, while
exports have been boosted by high international demand for commodities. Tourism (5% of GDP and 10% of
employment in 2019, before the pandemic) has partly recovered, although tourist arrivals and spending from
Asia (both ASEAN and non-ASEAN markets) remain well below pre-pandemic levels. After contracting
strongly in 2020, gross fixed capital formation rebounded in 2021 and has remained strong since.

Figure 1.1. Growth has recovered but economic activity remains below the pre-crisis trend
A. Contribution to real GDP growth B. Real GDP
% pts, % IDR, trillion Index 2018 = 100
10.0 16 000 160
Net exports Real GDP
Gross capital formation
Government consumption Real GDP: Trend
7.5 14 000 140
Private consumption Real GDP per capita (rhs)
Real GDP
5.0
12 000 120

2.5
10 000 100

0.0
8 000 80
-2.5
6 000 60
2017Q1
2017Q3
2018Q1
2018Q3
2019Q1
2019Q3
2020Q1
2020Q3
2021Q1
2021Q3
2022Q1
2022Q3
2023Q1
2023Q3
2024Q1
2024Q3
-5.0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

C. International tourist arrivals and spending D. Tourist arrivals by country of origin

Number, million
20 Number, million USD, billion20 6
International tourist arrivals 2023 2018
Inbound tourist spending 5
15 15
4

10 10 3

2
5 5
1

0 0 0
2017 2018 2019 2020 2021 2022 2023 ASEAN Asia Oceania Europe Americas Rest of
excl. ASEAN the world

Note: The trend line for real GDP (Panel B) is calculated based on pre-crisis data from 2013Q1 to 2019Q4. The population data from Q1 to Q3 2024 are
estimated. Inbound tourist arrivals refer to non-residents (foreign visitors and nationals permanently residing abroad) within Indonesia's economic territory.
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); OECD National Accounts Statistics (database);
Statistics Indonesia (BPS), Tourism Statistics (database); and World Tourism Organization.
StatLink 2 https://stat.link/d1v5lz

Rising global geopolitical tensions have had contrasting effects on Indonesia. Russia’s war of aggression
against Ukraine initially increased the price of energy, food and fertilisers, hitting purchasing power.
Meanwhile, surging prices for commodities such as coal, palm oil and metals have improved the terms of
trade. And, despite the slowdown in global trade growth (caused, inter alia, by lower global growth and trade

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

  17

tensions, notably between the United States and China), Indonesia has benefited from strong commodity
demand. Furthermore, modest trade ties with Europe (accounting for around 11% of exports and 5% of
imports) make the country less directly exposed to disruptions in the Red Sea than other Asian economies.
Exports surged in 2022 (Figure 1.2, Panel A). Lower international demand and commodity prices, combined
with stronger domestic demand, reduced net exports in 2023. Commodities continue to dominate the
composition of merchandise exports, but diversification efforts and down-streaming policies (Chapter 2) have
led to increased exports in processed metal and motor vehicles in recent years (Figure 1.2, Panel C).

Figure 1.2. Indonesian exporters have benefited from high international demand for commodities
A. Trade of goods and services B. Exports of goods by trading partner
% of GDP Index Jan 2022 = 100 China United States
30 200 % of
Exports of goods and services ASEAN & Oceania Rest of Asia
total
Imports of goods and services Europe Rest of the world
Commodity price (rhs) 100
26 160

80
22 120
60
18 80
40

14 40
20

10 0 0
2017Q4
2018Q2
2018Q4
2019Q2
2019Q4
2020Q2
2020Q4
2021Q2
2021Q4
2022Q2
2022Q4
2023Q2
2023Q4
2024Q2

2007

2009

2011

2013

2015

2017

2019

2021

2023
%
C. Exports of goods % D. Imports of goods
Plastics
100 100
Rubber
Other Other
80 Machinery & mechanical 80
appliance
Vehicles except railway

60 Electrical machinery & 60

equipment
Iron & steel
40 Palm oil 40

Petroleum gas
20 20
Crude petroleum

Refined petroleum
0 0
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023

Coal briquettes
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023

Note: In Panel A, the price indices for individual commodities (palm oil, coal, iron ore, gold, and nickel) are aggregated by using weights based
on the share of each commodity in total 2021 exports of these commodities.
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); Ministry of Energy and Mineral Resources of Indonesia;
and World Bank Commodity Markets Outlook; and OECD calculations based on UN Comtrade.
StatLink 2 https://stat.link/xj1rzq

Reflecting the war in Ukraine and the associated increase in global food and energy prices, headline
inflation rose from 2.2% in January 2022 to a peak of 6.0% in September 2022. The relative strength of
the Rupiah – as well as the presence of administered prices for fuel, electricity, and other commodities –
cushioned the effects of the crisis. The government’s decision to cut energy subsidies in September 2022
and partly replace them with cash transfers initially fed into higher headline inflation (for instance, gasoline
prices increased by about 30% following the cut in the subsidy). Higher interest rates (see below) and
close synergy between the central bank and the government helped tame price increases and headline

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18 

inflation fell to 2.3% in September 2023. Headline inflation rose to 3% in March 2024, largely due to the
effects of El Niño on the rice harvest season, before falling back; in October 2024, it reached 1.7%
(Figure 1.3, Panel A). Meanwhile, core inflation has stayed around 2% in recent quarters.

Figure 1.3. Inflation has normalised and unemployment is falling but informality has increased
A. Inflation B. Monthly net wage, by type of worker
Y-o-y % changes IDR, million
12 24 3.5
Headline Core Formal Casual Self-employed
10 20 3.0
Energy (rhs) Food (rhs)
8 16 2.5

6 12 2.0

4 8 1.5

2 4 1.0

0 0 0.5

-2 -4 0.0
Jan-2020

Jan-2021

Jan-2022

Jan-2023

Jan-2024
Apr-2020

Oct-2020

Apr-2021

Oct-2021

Apr-2022

Oct-2022

Apr-2023

Oct-2023

Apr-2024

Oct-2024
Jul-2020

Jul-2021

Jul-2022

Jul-2023

Jul-2024

2016

2017

2018

2019

2020

2021

2022

2023
C. Employment and unemployment D. Labour force participation rate (LFPR)
Million % % and share of informality
150 8 100 % 70
Employment LFPR, male LFPR, female
Informality (rhs), male Informality, female
Unemployment rate (rhs)
140 7 80 65

130 6 60 60

120 5 40 55

110 4 20 50

100 3 0 45
Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3 2018 2019 2020 2021 2022 2023
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Note: In Panel A, data are based on consumer price index with a base year of 2022 except for core, energy, and food inflation prior to January
2024 with a base year of 2018.
Source: CEIC; and Statistics Indonesia (BPS); and OECD (2024), OECD Economic Outlook: Statistics and Projections (database).
StatLink 2 https://stat.link/ztqfsl

While unemployment has declined to pre-pandemic levels, the labour market has not fully healed from
scarring effects. The unemployment rate has fallen from 7.1% in the third quarter of 2020, at the peak of
the pandemic, to 4.9% in mid-2024, just below the pre-pandemic range of 5–5.5% (Figure 1.3, Panel C).
The labour force participation rate recovered and was the same in 2023 as in 2019 (69.3%,
Figure 1.3, Panel D), with an additional 4.8 million workers being employed in mid-2024 (compared to a
year earlier). However, the share of formal wage-earners declined between 2019 and 2023 (with an
increase in the employment shares of both self-employed and informal workers). The increase in informal
work signals a deterioration in labour market conditions and seems very slow to unwind. Labour market
reforms carried out in 2020 and 2023, as well as other government initiatives, should eventually improve
labour market outcomes and job quality (Chapter 2). Nominal wage growth in the formal sector has picked
up (Figure 1.3, Panel B) but real wages have not recovered to pre-pandemic trend levels.

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  19

In recent years, the current account balance has often been negative, largely offset by positive net FDI
inflows. The balance of payment surplus increased to USD 6.3 billion in 2023 (0.5% of GDP) (Figure 1.4,
Panel A). The current account recorded a small deficit in 2023, after a USD 13.2 billion surplus (1% of
GDP) in 2022 (Figure 1.4, Panel B). The lower trade surplus was the result of lower commodity demand
and prices, along with the dynamism of domestic demand sustaining imports. The capital and financial
account turned positive in 2023, while FDI inflows have remained strong (notably in manufacturing). After
considerable outflows in 2022 caused by a lower risk appetite for emerging markets, Indonesia's portfolio
investments rebounded in 2023. Reserve assets increased from USD 137 billion at end-2022 to
USD 146 billion at end-2023 – on average over 2023, this represented 5.8 months of imports (Panel D).
Asset reserves declined to USD 139 billion in May 2024 as the central bank intervened to maintain the
stability of the Rupiah but have increased again, to USD 151 billion in October 2024.

Figure 1.4. Indonesia's balance of payment has been in surplus and reserves have increased
A. Balance of payment B. Current account
USD, billion USD, billion
80 80
Current account Direct investment Good Services
60 Portfolio Investment Other investment 60 Primary income Secondary
Balance of payment Current account
40 40

20 20

0 0

-20 -20

-40 -40

-60 -60
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
C. External debt D. Total reserves, 2023 or latest year
% of GDP % of GDP Number of months
200 50 10
IDN IND MYS Total reserves including gold
PHL THA VNM Total reserves in months of imports (rhs)
160 40 8

120 30 6

80 20 4

40 10 2

0 0 0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

IDN IND VNM PHL THA

Note: In Panel A, data on capital account is not shown in bars, while it is included on data for balance of payment. In Panels A and B, provisional
data for 2023. In Panel D, data for Viet Nam refer to 2022.
Source: Statistics Indonesia (BPS); IMF (2024), World Economic Outlook database, April; and World Bank (2024).
StatLink 2 https://stat.link/wm8hfo

Steady growth is projected but risks remain

Real GDP growth is projected to reach 5.1% in 2024 and 5.2% in 2025. Business and consumer confidence
remains strong and private investment is expected to gain momentum. High-frequency spending indicators
are generally less optimistic than survey measures. For example, new car and motorbike sales were lower

OECD ECONOMIC SURVEYS: INDONESIA 2024 © OECD 2024

20 

in the first three months of 2024 than in the corresponding months of 2022 and 2023 (Figure 1.5, Panel A).
However, expiration of a post-Covid subsidy on some vehicle purchases, along with higher interest rates,
likely explains this. Meanwhile, the purchasing-manager index (PMI) for manufacturing and the OECD’s
composite leading indicator point to more robust demand (Figure 1.5, Panel B). A resurgence of subsidies
in 2024, planned expansion of the free school lunch programme, and investment in the new capital city,
Nusantara, will make the fiscal stance more accommodative in 2024 and 2025. However, the deficit is
expected to remain within the 3% limit over this period. Along with lower interest rates starting in late 2024,
the fiscal stimulus will support domestic demand and output growth in 2024 and 2025. This fiscal position
is broadly adequate, given the negative but closing output gap, and moderate core inflation readings.

Figure 1.5. Surveys and high-frequency indicators point to robust domestic demand
A. Consumer confidence and retail sales B. Business confidence and PMI
Index 2019 = 100 Index 2019=100 Index 2019 = 100
104 140 104 70

102 120
102 60
100 100

100 50
98 80

96 60
98 40

94 Consumer confidence 40 Business confidence

Retail sales (rhs) 96 reference 30

92 20
Motor vehicle sales (rhs) Manufacturing PMI (rhs)
90 0 94 20
Jan-2019
May-2019
Sep-2019
Jan-2020
May-2020
Sep-2020
Jan-2021
May-2021

Jan-2022
May-2022
Sep-2022
Jan-2023
May-2023
Sep-2023
Jan-2024
May-2024
Sep-2024
Sep-2021

Jan-2019

Jan-2020

Jan-2021

Jan-2022

Jan-2023

Jan-2024
May-2019
Sep-2019

May-2020
Sep-2020

May-2021
Sep-2021

May-2022
Sep-2022

May-2023
Sep-2023

May-2024
Sep-2024
Note: In Panel B, PMI values below 50 indicate that a balance of firms reports a contraction in output.
Source: OECD (2024), OECD Main Economic indicators; CEIC and S&P Global.
StatLink 2 https://stat.link/1o9flx

The labour share has fallen, reflecting the partial adjustment of wages to higher GDP per worker. This is
expected to rebalance with real wages increasing more solidly over the projection horizon, while formal
employment continues to gradually recover. Together with a more neutral output gap in 2024 and 2025, this
will put some positive pressure on core and headline inflation, but annual headline inflation is expected to
hover around 2.3% in 2024 and 2025 (Table 1.1). The trade deficit is expected to widen somewhat in 2024
and 2025, due to lower export prices and weak external demand while import growth picks up.
External uncertainties and risks are particularly prominent (Table 1.2). The economy remains reliant on
international demand for raw materials and unprocessed commodities, notably from China, despite efforts
to diversify markets and products (Chapter 2). Weaker than projected growth in China would hit export
revenues and increase the trade deficit. Against this backdrop, fiscal and monetary policy settings should
remain prudent.

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  21

Table 1.1. Growth will remain steady

Annual percentage change, volume (2010 prices)
2020 2021 2022 2023 Projections
Current prices (IDR trillion) 2024 2025
Gross domestic product (GDP) 15 443.4 3.7 5.3 5.0 5.1 5.2
Private consumption 9 101.4 2.0 5.0 4.9 5.1 5.1
Government consumption 1 491.2 4.3 -4.5 2.9 7.5 0.1
Gross fixed capital formation 4 897.0 3.8 3.9 4.4 4.9 7.3
Final domestic demand 15 489.6 2.8 3.8 4.6 5.4 5.6
Stockbuilding1 -307.3 1.5 1.0 0.1 0.2 0.4
Total domestic demand 15 182.3 4.3 4.7 4.6 5.3 5.6
Exports of goods and services 2 676.5 18.0 16.2 1.3 5.6 5.3
Imports of goods and services 2 415.5 24.9 15.0 -1.6 6.4 6.5
Net exports1 261.0 -0.4 0.8 0.7 0.1 -0.0
Other indicators (growth rates, unless specified)
Potential GDP 4.3 4.5 4.6 4.3 4.2
Output gap2 -4.7 -4.0 -3.6 -2.9 -1.9
GDP deflator 6.0 9.6 1.5 0.9 2.3
Consumer price index 1.6 4.2 3.7 2.3 2.2
Current account balance3 0.3 1.0 -0.1 -0.4 -0.3
General government fiscal balance3 -4.4 -2.2 -1.5 -2.7 -2.5
Three-month money market rate, average 3.7 3.2 4.6 5.1 4.4
Ten-year government bond yield, average 6.4 7.0 6.6 6.2 6.0
Notes: 1. Contribution to changes in real GDP. 2. As a percentage of potential GDP. 3. As a percentage of GDP.
Source: OECD Economic Outlook 116 (preliminary) and OECD calculations (provisional OECD economic forecast in November 2024).

Table 1.2. Events that could lead to major changes in the outlook
Shock Possible impact Policy response options
New surge in food and energy prices. Higher cost of living, and fiscal cost of subsidies. Reform subsidies and make them more targeted.
Change in risk appetite for EMEs. Decline in investors’ appetite for risk could increase Maintain prudent lending with adequate coverage ratio;
interest rates and lead to currency outflows. keep an appropriate level of currency reserves.
Natural disasters. Indonesia is prone to natural disasters (extreme Incorporate climate into financial stress tests and land
weather, volcanic activity and earthquakes), which planning regulations; promote insurance coverage.
can entail large fiscal, economic and social costs.

High interest rates have supported the Rupiah and reduced inflation

After the pandemic, monetary policy has tightened

In response to the COVID-19 pandemic, Bank Indonesia (BI) decreased its main policy rate to a record-
low of 3.5% in February 2021, and loosened regulatory requirements for banks. BI also purchased
government bonds (SBN) in the primary market (see below). In the immediate aftermath of Russia’s war
against Ukraine and the global inflation surge, core inflation readings remained moderate in Indonesia. BI
initially refrained from increasing its policy rate, given anchored inflation expectations (Box 1.1) and the
continuing need to support the economy. With the surge in domestic inflation, and policy tightening in other
countries, BI eventually raised the policy rate from 3.5% to 5.75% between August 2022 and January 2023,
turning the real interest rate positive (Figure 1.7, Panel B). The relative strength of the Rupiah in 2022
helped cushion the impact of global energy prices on domestic inflation. The policy rate was further
increased in October 2023 and April 2024, then BI initiated a first rate cut in September 2024.

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22 

Box 1.1. Bank Indonesia’s inflation targeting setup

Since 2005, Bank Indonesia (BI) – which was granted operational independence in 1999 – has operated
in an inflation targeting regime, with a tolerance range of ±1 percentage points. Initially set at 6% in
2005, this inflation target was increased to 8% in 2006 before decreasing gradually; between 2020 and
2023, it was set at 3% and in 2024, reflecting decisions made in 2021, it was further reduced to 2.5%.
While headline inflation has occasionally overshot over the past two decades (in response to global
developments), BI has been successful at anchoring core inflation within the target range (Figure 1.6).

Figure 1.6. BI has been successful at anchoring core inflation

%
10
Inflation target band Headline inflation (y-on-y) Inflation target Core inflation (y-on-y)
8

0
2010Q1

2011Q1

2013Q1

2014Q1

2015Q1

2016Q1

2017Q1

2018Q1

2019Q1

2020Q1

2021Q1

2022Q1

2023Q1

2024Q1
2012Q1

Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); Bank Indonesia; and CEIC.
StatLink 2 https://stat.link/4fopur

The reserve requirement ratio for conventional banks was reduced from 6% to 3.5% (of total Rupiah
deposits) between 2019 and 2020 in response to the pandemic. It has since been raised to 9% in 2022
(Figure 1.7, Panel A) and has remained stable since. For shariah banks (Box 1.1) it now stands at 7.5%.
The macroprudential liquidity buffer has remained at 5% of banks’ assets (3.5% for shariah banks) since
October 2023, though this ratio is relaxed for loans to priority and green sectors. BI’s countercyclical capital
buffers currently remain set at 0%. As such, while high policy rates have helped stabilise the exchange
rate and inflation, BI has maintained looser liquidity policies, so as to partly shield domestic credit from
external developments.

Box 1.2. Islamic finance in Indonesia

Indonesia is the second-largest contributor to global Islamic banking assets and is home to the world’s
second-largest Muslim population. In compliance with the prohibition of interest rates and speculation in
Shariah law, Islamic finance uses real assets whose stream of income replaces the interest rate. There
has been significant growth in Islamic banking assets (11.4% in 2023), outpacing that of conventional
banking in Indonesia (6.4%). The regulatory environment is promoting more industry consolidation and
sector competitiveness, especially for larger sharia business units. This should help tackle existing
challenges the Islamic banking sector faces, such as stiff competition with conventional banks.
Source: (Fitch Ratings, 2024[1])

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  23

Figure 1.7. Higher interest rates have supported the Rupiah

A. Monetary and prudential policies B. Policy rate, inflation and exchange rate
% % Index 2020 = 100
12 7 112
Headline inflation (y-o-y)
IDN policy rate USA policy rate
6 Policy rate 109
10 Reserve req. ratio Real exchange rate (rhs)
5 106
8
4 103
6
3 100
4
2 97

2 1 94

0 0 91
Jan-2015

Jan-2016

Jan-2018

Jan-2019

Jan-2020

Jan-2021

Jan-2022

Jan-2023

Jan-2024
Jan-2017
Jul-2015

Jul-2016

Jul-2017

Jul-2018

Jul-2019

Jul-2020

Jul-2021

Jul-2022

Jul-2023

Jul-2024

Jan-2020

Jan-2021

Jan-2023

Jan-2024
Jan-2022
Jul-2020

Jul-2021

Jul-2022

Jul-2023

Jul-2024
Note: Real effective exchange rates are compiled with the adjustment of nominal effective exchange rates by relative consumer prices. Nominal
effective exchanges rates are geometric trade-weighted averages of bilateral exchange rates. An increase in the exchange rate indicates a
depreciation.
Source: OECD (2024), OECD Economic Outlook: Statistics and Projections (database); BIS; and CEIC.
StatLink 2 https://stat.link/yqos2c

While private sector credit growth has rebounded since the pandemic (Figure 1.8, Panel A) and its level
has increased from 26% of GDP in 2002 to 38% in 2022, it remains lower than in neighbouring ASEAN
economies (World Bank, 2024[2]). Equity and house prices have increased modestly in nominal terms over
the past two years, thus declining in real terms (Panel B); this limits risks of market corrections.

Figure 1.8. Credit and investment are dynamic, and asset prices are declining in real terms
A. Investment and credit growth B. Development of assets price
Y-o-y % changes Y-o-y % changes Index 2018 = 100
50 25 130
Credits to non-financial corporation Nominal house price Real house price
Credits to households Nominal shares price Real shares price
40 20 120
Gross fixed capital formation (rhs)
30 15
110
20 10
100
10 5
90
0 0

-10 -5 80

-20 -10 70
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2015Q1
2016Q1
2017Q1
2018Q1

2020Q1
2021Q1
2022Q1
2023Q1
2024Q1
2019Q1

2018Q1
2018Q3
2019Q1
2019Q3
2020Q1
2020Q3

2021Q3
2022Q1
2022Q3
2023Q1
2023Q3
2024Q1
2021Q1

Note: In Panel A, household credit refers to consumption loans in the CEIC database.
Source: OECD calculations based on OECD Economic Outlook: Statistics and Projections (database) and Bank Indonesia; and CEIC.
StatLink 2 https://stat.link/2yrvkn

Financial risks appear to be contained but close monitoring is needed

Indonesia’s prudent fiscal policy settings limit debt sustainability risks. After a suspension during the
COVID-19 pandemic, the 3% deficit ceiling was reinstated and has been met since 2022 (see below).

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24 

Sovereign stress risk is low according to the IMF’s Sovereign Risk and Debt Sustainability Framework
(IMF, 2023[3]). Sovereign debt spreads with US Treasury bonds remain stable compared with other ASEAN
economies (Figure 1.9, Panel A). Foreign holdings of Rupiah-denominated government debt have
decreased considerably since the pandemic, in absolute terms and in percentage of the total (Panel B).
Since March 2021, BI has replaced foreign investors as the main holder of government debt (see below),
and Indonesian banks have also increased their holdings from 4.8% of GDP in 2019 to 6.7% of GDP by
end-2023. Likewise, pension funds and insurance companies have increased their holdings as they are
required to hold at least 30% of their assets in government securities. Reduced foreign holdings of
sovereign debt make Indonesia less vulnerable to rollover risk. However, as BI eventually winds down its
holdings and withdraws liquidity, the capacity of the market to absorb additional debt may be tested if
foreign investors do not return to act as the marginal buyer on the primary market.

Figure 1.9. Foreign ownership of government debt has fallen

Distribution of government bond holdings
Bank Bank Indonesia Non-bank financial institutions Non residents
%
100

80

60

40

20

0
2019Q1

2019Q2

2019Q3

2019Q4

2020Q1

2020Q2

2020Q3

2020Q4

2021Q1

2021Q2

2021Q3

2021Q4

2022Q1

2022Q2

2022Q3

2022Q4

2023Q1

2023Q2

2023Q3

2023Q4

2024Q1

2024Q2

2024Q3
Note: Quarterly data refer to the data on the latest available date of March, June, September, and December for each year. Data for Bank
Indonesia includes government bonds used for monetary operations.
Source: Directorate General of Budget Financing and Risk Management (DJPPR).
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Indonesia’s banks are well-capitalized, with a capital adequacy ratio of 26.0% as of March 2024. Banks
have ample liquidity and foreign exchange exposures appear to be limited, with a net open position of 1.6%
in November 2023. Real domestic credit growth, which increased rapidly from early 2021, has slowed down
since mid-2022. The non-performing loans ratio peaked at 3.4% in mid-2021 and had declined to 2.9% by
end-June 2024. The loans-at-risk ratio has fallen from 24.2% in early 2021 to 12.6% in August 2023. The
IMF found systemic risk to be modest and stable in early 2023 (IMF, 2023[3]). The IMF’s growth-at-risk
analysis also suggests moderate and manageable risks to output growth. The financial sector remains
resilient despite ‘high for longer’ interest rates, as suggested by the IMF solvency stress test. IMF analysis
suggests that the share of vulnerable firms (whose interest coverage ratio is below 1) could increase from
21% to 28% due to rising interest rates (IMF, 2023[3]) but the risks to banks are manageable as they have
increased loan provisions. Loan classification standards were relaxed during the pandemic, and after
multiple extensions this credit restructuring policy was rightly terminated in March 2024.
The economy and the financial sector are also exposed to climate risks: the Financial Services Authority
(OJK) established a climate risk stress testing programme in 2021 covering 47 financial institutions including
banks, insurers, pension funds and securities firms. In March 2024, OJK issued new Climate Risk
Management and Scenario Analysis guidelines, which inter alia require all banks to factor in climate risks
in their lending decisions from 2026 onwards. Finally, as discussed below, the debt of state-owned
enterprises has increased and warrants adequate monitoring.

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  25

Monetary policy should remain cautious

The monetary policy stance is currently balanced, with high interest rates but ample liquidity. The real rate
is above the IMF’s estimate of a 1-2% neutral rate (IMF, 2023[3]). Further reductions in the policy rate
should remain prudent and data-dependent. Indonesia has shallow foreign exchange markets, and the use
of interventions may be warranted in response to some external shocks, such as shocks triggered by
sudden changes in investor risk appetite (Basu et al., 2023[4]). However, BI should remain cautious in using
reserves to stabilise the exchange rate and should rely more on other monetary policy tools to attain its
statutory goal.
BI’s purchases of government securities on the primary market between 2020 and 2022 were conducted
under a ‘burden-sharing’ agreement with the Ministry of Finance. BI agreed to take on the interest cost of
this intervention by pledging to return the yield to the government in full at the bonds’ redemption. Between
end-2019 and end-2021, BI holdings of government bonds tripled from IDR 260 trillion to 800 trillion (5%
of GDP in 2021), its share of total outstanding securities almost doubling, from 9.5% to 17.1%. The 2023
Financial Sector Omnibus Law (FSOL) states that Government Bonds (SBN) purchases in the primary
market are only carried out: 1) during crises, 2) under prudent fiscal policy, and 3) in line with the financial
capabilities of the central bank. BI also conducted this operation in a targeted, temporary and transparent
manner. BI has appropriately ended its primary market purchases and in particular the burden sharing
mechanism (Table 1.3), as recommended in the 2021 Survey (OECD, 2021[5]). The burden-sharing
mechanism was appropriate during the pandemic but should only be used against significant economic
and financial stress, transparently and with well-defined exit conditions. Other central banks have used
monetary financing tools during the pandemic under various institutional arrangements, and FSOL rightly
provides safeguards to monetary policy independence.
Bank Indonesia’s sovereign-debt holdings should consequently decline due to redemptions, though they
could remain significant due to secondary purchases, in particular as collateral of BI’s new Rupiah
securities (SRBI, launched in September 2023). The SRBI is a tradable monetary instrument which uses
government securities (SBN) as the underlying asset, instead of the previous non-tradable ones. These
securities have proved attractive for foreign investors – who as of June 2024 owned around 26% of them
– helping to support the financial account and the foreign exchange reserves. This has also led banks to
swap long-term SBN for SRBIs. As a result, BI’s net ownership of SBNs (excluding the SBN held for open
market operations) has risen from 16.1% in September 2023 to 21.4% in June 2024, in contrast to its gross
ownership which remains unchanged from 24.7% to 24.5%. Gradually reducing these large holdings of
government securities could prove warranted.

Table 1.3. Past OECD recommendations on monetary policy

Past OECD recommendations Actions taken since the 2021 survey
Phase out the ‘burden-sharing’ agreement, as envisaged. This policy has been terminated, though BI’s holding of government
debt remain significant.
Bank Indonesia’s independence should not be weakened. A proposal to include parliamentarians in BI’s monetary policy
committee was introduced in Parliament, but successfully defeated. The
Financial Sector Omnibus Law provides greater clarity and safeguards for
emergency central bank interventions during crises.

Raising more revenues and making spending more efficient is essential

Under Law No 17 of 2003, the budget deficit must remain below 3% of GDP and the public debt below
60% of GDP. The deficit ceiling was only breached during the pandemic, with a temporary amendment to
the law. Following general-government (OECD-defined) deficits of 5.7% of GDP in 2020 and 4.3% in 2021,
fiscal consolidation led to a return to normalcy in 2022 with a deficit of 2.2% of GDP. For 2023 a deficit of

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26 

2.8% of GDP was budgeted (to support growth and purchasing power amid global uncertainties). However,
tax revenues proved 12.6% larger than planned, resulting in a deficit of 1.7% of GDP (Indrawati, Satriawan
and Abdurohman, 2024[6]) (Figure 1.10, Panel A). The deficit increases modestly in the 2024 budget to
allow for new spending initiatives, but it is expected to remain within the 3% limit over the projection horizon
(Table 1.1). Public debt as a share of GDP also increased during the pandemic but has stabilised since
(Figure 1.10, Panel B) and is expected to decrease in the future, while local governments carry little debt.

Figure 1.10. Indonesia has returned its fiscal deficit to below 3% of GDP
A. Government net lending B. General government debt
% of GDP % of GDP
2 90
2022 2015
75
0

60
-2
45
-4
30

-6
IDN MYS PHL 15

THA VNM
-8 0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 VNM IDN THA PHL MYS

Note: In Panel B, debt data refer to the total stock of debt liabilities issued by general government. Government net lending and the debt-to-GDP
ratio may be different between IMF and OECD data due to different compilation methods.
Source: IMF Global Debt Database
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Upward trends in spending needs will add to fiscal pressures

Indonesia’s government expenditures remain low in regional comparison. For instance, as of 2022
spending was 17.4% of GDP, compared with 24.5% in Thailand, 24.7% in Malaysia, 18.7% in Vietnam and
25.9% in the Philippines. This low level of spending reflects the limited development of public provision in
key areas, including health, education, social assistance, pensions and infrastructure. Provision can be
expected to increase over time reflecting increasing societal demand as Indonesia’s economy develops
further. Demand for publicly supported health and pensions is likely to rise further as the population begins
to age. Additionally, adaptation to climate change and related natural disasters and decarbonisation will
require significant public investments over the next decades (Chapter 4).
Converging from current government spending levels (estimated at 17.4% for 2024) towards a regional
average spending ratio of 23% over the next 20 years would represent an increase of 5.6 percentage
points. Additional investments in emissions reduction and climate adaptation (Chapter 4) could add another
1.4 percentage points over the next ten years. Taken together, this 7 percentage-point increase of the
spending ratio will require a significant increase in tax revenues and ensuring that spending is effectively
allocated and spent (see below). The President-elect has proposed to substantially increase the tax-to-
GDP ratio by 2029. He also aims to increase the country’s GDP growth rate from 5% to 7%. Yet, if taxation
fails to increase in line with increased spending, and if GDP growth does not accelerate, the debt-to-GDP
ratio could rise by 6 percentage points by 2045. On the other hand, higher taxation and faster growth would
ensure that the debt-to-GDP keeps declining from current levels (Figure 1.11). Furthermore, the current
low effective rate of taxation generates a relatively high deficit-to-taxation ratio, which can lead to higher

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  27

volatility in investors’ appetite for sovereign debt. Hence, the commitment to respect the ceilings for the public
debt and fiscal deficit should be renewed and fiscal prudence remains warranted.

Indonesia still benefits from a demographic dividend, which however is due to end as the productive-age
share of the population will decline after 2030, when ageing will eventually offset the fall in fertility. While the
current pension system will not bring significant fiscal pressures over the next 20 years, this is partly because
the coverage and pension pay-outs are low (see below). In the past, providing for old-age and disability was
mostly left to families and communities. Even in the public sector and in state-owned enterprises (SOEs)
where coverage is greater, pension provision is often inadequate and has to be complemented by personal
savings. But as the population ages, families cannot be expected to address the needs of older and younger
dependents. Hence it is important to widen social insurance coverage by enlisting small-and-medium
enterprises (SMEs) and self-employed workers and ensure that the level of benefits is adequate (Box 1.3).

Figure 1.11. Increased demand for public spending could put public finances under stress
A. Rising expenditures scenario B. Debt to GDP ratio
% of GDP % of GDP General government total liabilities
30 50
Constant spending Green investments
25 Additional general spending 45

20 40

15 35

10 30
Baseline

25 Fiscal reforms
5
Fiscal & growth reforms

0 20
2025 2030 2035 2040 2045 2010 2015 2020 2025 2030 2035 2040 2045

Note: In all scenarios, GDP growth and inflation are in line with OECD Economic Outlook projections to 2025. The baseline scenario assumes
inflation (in the GDP deflator) of 2.5% from 2026, and GDP growth of 5% between 2026 and 2035, before decelerating to 4% between 2036 and
2045. The ratio of government spending to GDP is expected to increase by 0.5 percentage points annually between 2026 and 2030 as green
investments increase substantially, and by 0.3 percentage points annually over the following fifteen years. However, government revenue is
only expected to increase by 0.3 percentage points of GDP per year between 2026 and 2045. Hence, the deficit would increase by 1 percentage
points of GDP over the next five years, from its current value. In the reform scenario, GDP growth and inflation remain unchanged, but increased
taxation and efficiency savings help to absorb new spending without increasing the deficit. With reform and higher growth, GDP growth converges
to 7% over the next decade, and the deficit does not increase thanks to fiscal reforms.
Source: OECD Economic Outlook, No. 115; IMF, World Economic Outlook database; and OECD calculations.
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28 

Box 1.3. Indonesia’s old-age pension systems

Schemes for private-sector employees
Since 2015, social insurance in the private sector combines two old-age schemes:
• Retirement lump sum (JHT): Employers and employees contribute respectively 3.7% and 2%
of wages. The employee may withdraw the accumulated funds (with accrued interest) at age
56 (or earlier in case of death, permanent disability, or leaving the workforce), as a lump sum
payment. This scheme is mandatory for large, medium and small firms (covering about
18 million workers at end-2023), but affiliation is optional for micro firms and non-wage workers.
Voluntary affiliation remains limited, at about 1% of non-wage workers and micro firms.
• Retirement pension (JP): Employers and employees contribute respectively 2% and 1% of wages.
The scheme only applies to large and medium firms (covering about 14 million workers at end-
2023), and the pension accrual rate is set at 1% for each year of contribution. Currently set at
58, the retirement age increases by one year every three years, towards 65 in 2043.
Different avenues are available to increase pension coverage. At a minimum, the JP enrolment
exemption for smaller firms should be restricted to micro enterprises, and efforts to increase awareness
of old age financial needs and the JHT among informal workers should be stepped up. If small firms
and informal workers are unwilling or unable to contribute (especially if contribution rates eventually
increase), the government might consider lowering contribution rates for them, and bearing the
difference. With reduced or flat-rate contributions, the cost of providing social insurance to gig workers
could be partially borne by the government (Kolev, La and Manfredi, 2023[7]). Alternatively, the
government could introduce a means-tested old age benefit to ensure a minimal degree of coverage
for the workforce. The benefit could also be a complement to the existing schemes.
The pension system for private-sector employees looks to be financially viable for some time to come,
but policy should nevertheless look at increasing pension contribution rates in the long run. The 3%
contribution (employer and employee) towards JP pension annuities is expected to exceed the scheme’s
expenditures until 2053, and reserves will be exhausted around 2072. Eventually, contributions will need
to increase: at 8.7%, contributions (JP and JHT combined) are the lowest in ASEAN, as is the pension
coverage (Nguyen and Phiengphathai, 2023[8]). Policy should anyway start paying closer attention to
labour force participation among older cohorts. Absent improvements in workplace health and
professional opportunities for seniors, contributions could prove insufficient for the old-age schemes,
and contribution rates would need to further increase to keep pensions sufficiently adequate. Overall,
providing adequate pensions is likely to require an increase in contributions over the next decades.
Schemes for public sector employees
In the public sector (national and local civil service, military) and in many SOEs, workers are entitled to a
pay-as-you-go (PAYG) defined benefit pension, as well as a lump-sum old-age savings payout. The
pension is equal to 2.5% of the final basic salary, multiplied by years of services (up to 80%). The old-age
savings payout is also proportional to the final basic salary and length of service. However, this high
replacement ratio only applies to the basic salary and excludes performance pay and other allowances.
As such, even in the public sector, pensions are often low, and insufficient in the absence of support from
families or personal savings. The government has floated the idea of replacing the public sector PAYG
system with fully-funded pensions, though this has not been implemented yet. Existing civil servants would
stay in the old PAYG system (where they would be allowed to top up the contribution rates voluntarily), while
the new fully-funded scheme would apply to new recruits. In the very long run, this has the potential of
shielding the government from increased future unfunded pension costs as the population ages (and if
the number of civil servants increases). However, during the transition (possibly 30 years), the
government would pay the pensions of retired personnel, as well as the contributions of active personnel.
Source: OECD Pensions at a Glance (OECD, 2023[9]); and (ILO, 2022[10]).

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  29

Increasing tax revenues by making the tax structure more efficient

Levels of taxation have historically been low in Indonesia, limiting the ability of the government to finance
priority initiatives. Echoing government spending (see above), Indonesia’s tax revenues remain among the
lowest in the ASEAN context (Figure 1.12, Panel A). Informality and a low degree of tax compliance are
key challenges (Hapsari et al., 2023[11]). In comparison with OECD and Asia-Pacific peers, in Indonesia a
larger fraction of the budget comes from corporate income taxation (CIT), as well as VAT and other goods
and services taxes (GST). However, CIT, VAT and GST receipts are among the lowest as a share of GDP,
and other taxes (e.g., personal income, excise and property taxes) are extremely low (OECD, 2023[12]). Volatility
in tax receipts is increased by the influence of world commodity prices on extraction royalties and CIT in the
commodity sector. Indeed, commodity prices have partly accounted for the decline in the tax revenues-to-
GDP ratio before the pandemic and its recovery since 2022 (Figure 1.12, Panel B). The President-elect
has set the goal of lifting state revenues from the current 13.5% to 23% of GDP by 2029.

Figure 1.12. The tax ratio remains low in Indonesia

A. General government revenue B. Indonesia, tax and other receipts
% of GDP % of GDP
25 20
Indonesia Malaysia Personal Corporate Social security
Philippines Singapore Property VAT & sales Excise
Thailand Viet Nam Trade Other
21 16

17 12

13 8

9 4

5 0
2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022
2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Source: OECD (2023), Global Revenue Statistics Database.

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The 2021 Tax Regulation Harmonization Law (HPP Law) remains the most significant tax reform of recent
years. This law included provisions to improve tax compliance and increase the tax ratio, alongside
pandemic recovery measures. Motor vehicles buyers were prime beneficiaries of these economic recovery
measures, with a temporarily reduced Luxury Sales Tax (subject to local-content rules and emission
standards). This tax incentive has now been narrowed to electric vehicles. VAT on the purchase of
residential property was also partially borne by the government, but after multiple extensions, this
exemption has been narrowed (Table 1.4).
As regards long-term tax reform, the 2021 HPP Law introduced a new 35% personal income tax bracket
for taxable income exceeding IDR 5 billion (USD 300 000). The Law also increased the corporate income
tax rate from 20% to 22%. The VAT rate was increased from 10% to 11% in April 2022; an increase to
12% is scheduled for January 2025. The law also increased excise taxes on cigarettes and e-cigarettes. It
also established a carbon tax through a carbon exchange (see Chapter 4); setting a rate of IDR 30 000
(USD 2) per ton for the coal sector in 2022, with expansion to other sectors planned for 2025. The reduced
presumptive income tax levied on turnover of young small businesses at a rate of 0.5% (instead of the
corporate income tax) has been maintained, while taxes on entertainment activities (bars, restaurants,
discotheques) have increased. The HPP Law also streamlined the rules regarding tax withholding for
shareholders and in-kind benefits for employees, with a narrower set of tax-exempt benefits.

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30 

Table 1.4. Past OECD recommendations on raising revenues

Past OECD recommendations Actions taken since the 2021 survey
Freeze the basic tax allowance for individuals to broaden the tax base. The HPP Law increased the basic tax allowance of the personal income
Gradually lower thresholds for paying the top two rates of personal tax from IDR 50mln to 60mln, while other tax thresholds have stayed
income tax. unchanged. An additional bracket in the personal income tax has been
created for taxable income exceeding IDR 5bln, with a 35% rate.
Include fringe benefits and employer allowances in taxable income. HPP has streamlined the taxation of in-kind benefits, with more limited
Reduce differences in the tax treatment of personal savings across sources. scope for tax deductible (employer) and tax-exempt (employee) benefits.
Shift from tax holidays towards cost-based tax incentives. Impose Many COVID-19-related tax holidays were subject to sunset clauses, though
sunset clauses on all new tax incentives to ensure regular reviews. some have been regularly extended for short or long periods.
Tighten eligibility for the turnover tax (instead of corporate income tax) Regulation 55 of 2022 has maintained the current turnover tax regime for
to very small firms and link registration to access to additional non- businesses with gross revenue between IDR 500mln and 4.8bln (USD
financial benefits. 30 000 to 300 000), for a maximum of four years.
Broaden the VAT base by removing most exemptions, especially for VAT classification has been streamlined, including for financial services.
intermediate goods, replacing local sales tax with VAT, and lower the The VAT rate was increased to 11% in April 2022 and is set to increase to
threshold for compulsory registration. Compensate sub-national governments 12% in January 2025. Temporary tax holidays for VAT on some residential
for lost sales tax revenue. Over the medium term, raise the VAT rate. properties have been introduced, notably in Nusantara.
Increase and harmonise tobacco excise across products. Tobacco excise tax has been increased in 2023 and 2024 but hand-made
clove cigarettes remain subject to significantly lower taxation.
A new tax on e-cigarettes has been implemented in 2024.
Link the level of motor vehicle taxes to their carbon emissions. The Luxury Sales Tax is based on the price and cylinder capacity of cars.
Continue to phase out energy subsidies, then increase taxation of energy. A tax exemption was granted for low-emission cars compliant with
Introduce a simple carbon tax at a low rate. minimum domestic content requirements after the pandemic, to support
the industry. The tax holiday now applies only to electric-battery cars.

Raising tax revenues further is essential. As argued in past Surveys (OECD, 2018[8]; 2021[3]) and by the IMF
(de Mooij, 2018[13]), a medium-term revenue strategy would facilitate an increase in the tax-to-GDP ratio.
Further reforms of VAT, excise, income, and property taxation as well as social security need to be key
ingredients:
• VAT: Businesses with a turnover below IDR 4.8 billion (USD 300 000) remain exempt from VAT.
This threshold is higher than in most OECD countries (OECD, 2022[14]) and much higher than in
Thailand and the Philippines, where it is about USD 50 000. Lowering the VAT liability threshold, as
well as reducing the number of sectors where VAT is not applied, would increase VAT collections
from both newly liable and already-liable ones.
• Other taxes on goods: Total excise taxation in Indonesia remains low in comparison with other
ASEAN economies. Given air pollution externalities and emission reduction goals, there are some
opportunities for win-win moves in raising fuel excise taxes and reducing subsidies on fuels, though
political sensitiveness has to be overcome. While the Luxury Sales Tax (LST) is borne by affluent
households, this tax is complex and induces under-declaration. Taxing car ownership, rather than
car purchases, could make the system less prone to under-declarations. Excise taxation on
cigarettes should also be further increased, to raise revenues and improve health, as smoking remains
a massive health challenge in Indonesia and brings considerable economic losses (WHO, 2020[15]).
• Personal income taxation (PIT): Thresholds remain very high: the basic allowance, at IDR 54mln,
is about 65% of GDP per capita and the 25% tax bracket starts at incomes above IDR 250mln (300%
of GDP per capita). As a result, the growing middle class is largely shielded from PIT: in 2017, only
10% of the population was actively paying PIT, against an ASEAN average of 15% (IMF, 2024[16]).
A reform of the tax treatment of in-kind-benefit will increase the tax base. Nevertheless, there is scope
to reduce taxation thresholds. As argued in (OECD, 2021[5]), the first PIT threshold should be frozen, so
as to fall in real terms, while the higher thresholds should be lowered in value. Ensuring tax compliance
and fighting tax evasion among very high earners could also further raise government revenue.
• Corporate income taxation (CIT): The CIT rate is set at 22% in Indonesia, which is in line with the
international average of about 21% (OECD, 2023[17]). Rather than raising the CIT rate, Indonesia
has scope to broaden the tax base by reforming and narrowing the small business presumptive tax

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  31

regime, and by abolishing tax incentives or by making them less generous. Indonesia should also
ensure that its tax incentives remain compatible with the Global Minimum Tax agreement.
• Property taxes: Since 2012, the land and building tax has been largely devolved to local
governments, in line with international practice. At 0.3% of GDP, property taxation is low in
comparison with the ASEAN average. The nominal taxation rate is 0.5% of the appraisal value, but
this appraisal value is between 20% (for properties below IDR 1 billion) and 40% (above 1 billion) of
the estimated sales value hence the effective rate is between 0.1% and 0.2% of the property’s sales
value. Allowing local authorities to increase appraisal values to 100% of the sales value and
investing in centralised cadastre and valuation tools, could significantly raise revenues for local
governments. Such valuation tools would also allow the gradual rollout of inheritance taxation.
• Social insurance: A rollout of social insurance is underway and provides an opportunity to raise revenue
through social contributions, as taxpayers’ willingness to pay can increase in exchange of future new
rights for pension and insurance (OECD, 2019[18]). Currently, businesses with 20 or fewer employees
are subject to lower employer social contributions, and the informal sector is not covered. The social
contribution exemption should be narrowed to those sectors which are most at risk of reverting to
informality. Also, small-firm thresholds should be lowered or applied only to unincorporated firms, to
reduce the incentives to split businesses in smaller units. By increasing the benefits associated with social
contributions and awareness, workers could also have a stronger incentive to request to be declared
and covered in full. Full coverage of all workers should remain the long-term objective of social policy.
Further strengthening enforcement is also needed. Tax avoidance remains common among larger firms
and high-income individuals (Ibrahim, T and Rusydi, 2021[19]), but improving tax capacity is also necessary
if exemption thresholds are lowered for small firms and middle-class individuals (notably on VAT and PIT),
as described above. Indonesia has made substantial progress over the past decade in improving tax
enforcement, notably for CIT (Basri et al., 2021[20]), and the President-elect has signalled further
improvements as a priority. This will notably involve efforts in digitalisation and use of third-party data
(Box 1.4). Taken together, these tax reform measures could significantly increase tax revenues (Table 1.5).

Table 1.5. Illustrative impact of structural tax reforms

Medium-term fiscal impact of structural tax reforms, in GDP percentage points
Increased social spending (health, pensions, education, maternity, childcare, poverty eradication…) 5.6
Investment needs for the green transition 1.4
Total additional spending 7.0
Value Added Tax (reduce registration threshold and replace luxury sales tax with VAT) 0.8
Fuel excise 0.5
Tobacco taxation 0.7
Corporate Income Tax (reduce SME thresholds and reform small business regime and tax incentives) 1.0
Personal Income Tax (reduce basic allowance and higher tax band thresholds) 0.7
Social Security Contributions (broaden coverage to workers in smaller firms and gradually increase pension contributions) 0.5
Property tax (reform appraisal value and improve valuation tools) 0.3
Tax administration (improved compliance for VAT and PIT, digitalisation and third-party data, increased staffing) 1.0
Subsidy reform (reintroduce automatic rules, reduce price subsidies and shift to targeted subsidies for low-income families) 1.0
Spending efficiency (conducting spending reviews and ensuring efficient allocation of funds and incentives for local governments) 0.5
Total increase in tax revenues and savings on spending 7.0
Source: (IMF, 2024[16]) and OECD Staff estimates.

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32 

Box 1.4. Key factors for improving tax administration

To improve tax revenue collection, international experience suggests that the following elements are key:
• making full use of digitalisation, which requires sufficient connectivity and capable tax
personnel.
• strengthening compliance risk management, including through automated risk profiling.
• adopting computer systems to process third-party data and prefilling returns.
• adequately staffing tax administration agencies with qualified and incentivised personnel.
Some examples of good practices include:
• Jordan: requires proof that taxes have been paid for business licence renewal.
• Uganda: phone text reminders to households and businesses about tax filing deadlines are
estimated to have tax payments by 7% (Cohen, 2024[21]).
• Costa Rica: emails reminding businesses about tax enforcement, underscoring the possibility
of audit, business closure, and being shamed publicly is estimated to have increased the tax
collection ratio by 3.4 percentage points (Brockmeyer et al., 2019[22]).
Source: (World Bank, 2017[23]) (IMF, 2024[16]) (Okunogbe and Tourek, 2024[24])

Arbitrating between conflicting spending priorities and reducing budget volatility

Limited fiscal space accentuates the need to arbitrate between spending priorities. Additional spending
should only be funded via tax increases; hence the sequencing of new spending will need to be carefully
designed, with an emphasis on education and health (see Chapter 2) as well as infrastructure. This
sequencing of spending must be underpinned by sound cost-benefit analysis, and strict monitoring of
costs.
The current cyclicality of the fiscal position also requires attention. As the amount of interest payment and
subsidies depends on global financial conditions and commodity prices, the high share of variable expenses
makes funding for other items of the budget more volatile, notably investments in infrastructures and human
capital. As such, a reordering of the government’s spending priorities would not only free up some of the current
fiscal space, but it would also make investments more stable, avoiding the risks associated to stop-and-go
cycles. Eventually, it would also free space for more countercyclical fiscal policies.

Ensuring efficient spending at the central and subnational level

Around the world, spending reviews have become an increasingly common tool of budget governance
(OECD, 2021[25]). Conducting them regularly has been identified by the OECD as a key feature of quality
budget institutions (OECD, 2022[26]), along with clear objectives, sound economic assumptions, multi-year
expenditure baselines, top-down expenditure ceilings, informed spending decisions (for example, green or
gender budgeting) and budget transparency. Consolidating all forms of expenses is also important,
including loans or implicit subsidies, whose cost should be estimated, accounted, and/or funded upfront.
Alongside external spending reviews, Indonesia would benefit from carrying its own regular spending reviews,
possibly as part of the regular five-year middle term development plans, or more frequently.
The World Bank’s exhaustive Public Expenditure Review of Indonesia (2020[27]) highlighted the
inconsistencies between the definitions of programmes, over time and between the planning and budget
frameworks. These inconsistencies make it hard to properly assess public spending performance. Better
coordination between the planning and finance ministries is also warranted. Some progress has been
made in monitoring and reporting spending data, but scope remains to improve data systems further and
enhance the quality and accountability of government spending. The Review also sheds light on

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  33

inefficiencies in fiscal transfers to subnational government. The General Allocation Grant (DAU) is based
on districts’ wage bills and the gap between fiscal needs and fiscal capacity. This provides an incentive to
overspend on personnel, rather than earmark funds for investments. Districts would be more incentivised
to fully use their taxation capacities if the fiscal gap was based on potential rather than actual revenues.
The Review also suggested to experiment with performance-based intergovernmental transfers, though
this would require strong implementation and governance capacity at the local level.
Coordination between the different levels of government is especially important for health and education
services, where local governments are in the frontline. By law, 20% of the budget is earmarked for
education, but performance gaps remain significant (see Chapter 2). Districts account for the bulk of
education spending but differ in their capacity to manage education performance. Improving their fiscal
and administrative capacity, and the coordination with the central government, would allow them to better
deliver quality education. Public health expenditure is low in regional comparison; equipment, training and
drugs availability are often insufficient, especially in remote areas. Addressing the financial and institutional
fragmentation of the health system and introducing a better design of service delivery is also essential.
Introducing more performance-based financing for health and education will help in making spending more
efficient, but it will require good data and administrative capacity from local governments. For social
assistance programmes, coordination with subnational governments and agencies should aim at
increasing supply-side provision (along subsidising demand), notably in remote areas (World Bank,
2020[27]). Digitalisation offers opportunities in this regard (Chapter 3).
A strengthening and enlargement of the free school lunch programme has been announced, where
nutritious food is served in schools or can be taken home. This programme is commendable but subject to
implementation difficulties, in terms of logistics and funding. Milk production is notably insufficient for
instance (FAO, 2023[28]), and delivering food across the archipelago will prove challenging. The programme
will be implemented in phases and its cost is estimated at USD 4.3 billion in the 2025 budget, possibly
increasing to up to USD 30 billion, or 14% of the government’s budget. Hence a flexible and targeted
approach will prove essential to ensure the programme’s effectiveness and fiscal sustainability, as in other
countries such as India, which in 2021 provided free lunches to 118 million students enrolled in 1.12 million
schools. According to assessments, India has proved successful at keeping costs under control. A decentralised
approach – the programme being conducted by state governments with help and subsidies from the central
government – has helped to ensure flexibility and limit the exposure of the central government (Bakri,
2024[29]).

Better targeting energy subsidies

Energy subsidies (electricity, fuel and liquefied petroleum gas – LPG) account for a significant share of the
government’s budget. While they were cut in the mid-2010s (see Chapter 4), they were increased in 2018
to stabilise end-user fuel prices, and in 2021 the subsidy-related government budget reached
IDR 243 trillion (USD 16 billion). There has been some welcome refocussing of support to low-income
consumers in 2022, yet the subsidies reached IDR 211 trillion (USD 14 billion) in 2023 for fuel, LPG and
electricity, while direct cash assistance towards low-income households were not renewed. Currently, only
the electricity subsidy policy for low-income households is well targeted; subsidised 3kg LPG cylinders are
supposed to benefit poorer households, but many other individuals also receive them. However, the
government has announced in early 2024 that these will eventually be restricted to the poorest households,
through customer preregistration. Efforts should be made to ensure that this policy remains targeted.
Eventually, the authorities need to move back to automatic formulas for fuel and electricity prices that allow
global energy prices to pass through to retail prices and imply lower subsidies, to make the central budget
less linked on commodity prices, and as a first step towards phasing out untargeted subsidies. Targeted cash
assistance remains more cost-effective and redistributive than subsidies, but the priority should also be in
helping poorer households in their transition towards cleaner technologies (see Chapter 4).

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34 

Limiting the fiscal exposure towards SOEs and infrastructure projects

Indonesia’s large SOE sector (see Chapter 2) also exposes the government to fiscal risks. SOE losses
have no immediate fiscal implications if they can borrow without being accounted for in the government’s
unconsolidated balance sheet. However, their rising debt stock can force periodic recapitalisation by the
government, and the frontier between bailouts and government equity injection can be hard to draw (IMF,
2024[16]). Some of Indonesia’s SOEs have been hit hard by the COVID-19 pandemic and its aftermath. For
instance, in mid-2023, the government recapitalised some SOEs in the construction sector, to the tune of
USD 2 billion. In 2020, the electricity company PLN was also recapitalised by USD 2.4 billion. Such amounts,
while modest as a fraction of GDP, account for a significant share of the government’s budget. Given the
limited ability of the government to increase tax receipts and the cost of raising additional debt, such
contingent expenses can crowd out priority spending initiatives. A systematic consolidation of the debt and
losses of all non-financial SOEs should be considered. This could increase transparency and reduce scope for
government to make excessive use of SOEs to conduct off-balance investments and subsidies.
Financial management of SOEs needs to improve. As a general rule, subsidies for goods and services
should be reduced to reflect true prices. When SOEs carry public interest activities (such as providing
subsidised goods or services), the associated costs should be transparently and regularly passed on to
the government, rather than absorbed as losses (warranting future recapitalisation) or indirectly subsidised.
Such indirect subsidies have, at times, included favourable financing terms from state-owned banks,
competition or regulatory leniency on other unrelated business activities, or subsidised inputs provided by
other SOEs. When SOEs have explicit or implicit government guarantees, great scrutiny should be applied
to ensure that they do not expand outside their core business. Finally, while the central government is not
directly exposed to provincially- and municipally- owned enterprises, the same degree of scrutiny should
be applied to limit the exposure of local government.
Risks to government finances from Public-Private-Partnerships (PPPs) need to be contained, notably in
infrastructure projects. Operational risks require a fine ex ante assessment, to ensure that the risk-sharing
mechanism between the government and the private partner remains appropriate and sound. Finally, the
cost of some flagship infrastructure projects should be closely monitored, to ensure that government
spending does not unduly favour parts of the country through off-balance PPP or SOE investments, at the
expense of less developed regions, and other spending priorities.

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Findings and recommendations

MAIN FINDINGS RECOMMENDATIONS (Key recommendations in bold)

Upholding the credibility of monetary policy
Inflation has moderated, though inflationary risks persist. Maintain prudent forward looking, data-dependent monetary policy,
making interest rate cuts conditional upon inflation developments.
Bank Indonesia has ended its primary purchases but remains the largest Evaluate the size of government bond holdings in the central bank’s
holder of government securities. balance sheet.
Increasing tax revenues and maintaining sound fiscal policy
Fiscal policy has been prudent over the past two decades and debt Avoid fiscal slippage, ensure the value for money of new spending
remains moderate. Yet, borrowing costs remain high and limited taxation commitments and maintain the deficit to GDP ratio below the
revenues expose the country to debt rollover risks. mandated ceiling.
Public provision of key services can be expected to grow over time Ensure a medium-term fiscal strategy that takes steps to increase
reflecting increasing societal demand and rising investment needs as revenues as a share of GDP in order to fund spending priorities,
Indonesia’s economy develops further. notably in education, infrastructure and reducing informality.
Fiscal revenues are modest in international comparison, including Broaden the tax base, including by lowering the personal income
relative to other countries in the region. This limits space for counter- tax basic allowance (PTKP) and upper thresholds of the tax schedule.
cyclical actions as well as future social and green spending needs. Broaden the VAT base and lower the compulsory registration threshold.
Tax avoidance remains common among businesses and high-income Improve tax revenue collection by making full use of digitalisation, third-
individuals as well as in the informal sector of the economy. party data, and automated risk profiling. Ensure adequate staffing of the
tax administration.
Carbon taxation has recently been introduced through carbon exchanges for Finalise the roadmap for carbon pricing and consider broadening taxation
coal-powered electricity generation (Chapter 4) but remains low and limited. to new sectors as well as gradually increasing the level over time.
Property taxation rates, and revenues collected from them, are low in Allow local authorities to increase appraisal values to the full estimated
comparison with the ASEAN average. Property valuations for tax sales value. Invest in centralised cadastre and valuation tools.
purposes are well below market prices.
The tobacco excise tax was increased in both 2023 and 2024 but Excise taxation on cigarettes should also be further increased and
remains low in international comparison. Smoking remains a significant harmonized across products; including on hand-rolled clove cigarettes.
health challenge in Indonesia and brings considerable economic losses.
Arbitrating spending priorities
Energy subsidies represent a sizable fraction of spending on social Gradually reduce and better target energy subsidies. Ensure that
assistance and fluctuate over time with international commodity prices. regulated tariffs adjust symmetrically to global energy price movements.
See also Chapter 4.
Limited fiscal space accentuates the need to arbitrate between spending Ensure new spending projects are subject to comprehensive cost benefit
priorities, and new projects are exposed to a risk of cost overruns. analyses and monitor their costs.
The government plans to extend the free nutritious meal programme, with Extend the free nutritious meal programme gradually across regions.
considerable implementation challenges for costs, sourcing and delivery. Target it to individuals in greatest need and ensure value for money.
SOEs are sometimes used as vehicles for off-balance-sheet fiscal policy. Ensure full transparency of the fiscal implications of SOEs’ actions, including
by providing greater disclosure of the link between government and SOEs.
Social insurance coverage and pensions
Enrolment in the old-age cash lump-sum programme (JHT) is voluntary Raise awareness of the lump-sum pension scheme among non-wage
for micro firms and non-wage workers. workers and extend the scheme to micro firms. Consider covering the
contribution, in part or in full, subject to fiscal capacity.
Coverage for the old-age pension scheme (JP) remains limited to Extend old-age pension coverage to workers in small firms by lowering
medium and large firms. the exemption size threshold for mandatory social contributions. Consider
covering the contribution for smallest firms, subject to fiscal capacity.
Pension coverage and contributions may prove insufficient to tackle Consider raising pension contribution rates in the long run.
population ageing, despite the planned gradual increase in the retirement
age to 65 by 2043.

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36 

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  37

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38 

2 Accelerating growth and attaining

socioeconomic convergence

Chares Dennery, OECD

Indonesia has maintained steady economic growth over the past quarter of a
century and has made sizable advancements in reducing extreme poverty and
improving living standards over the longer term. Yet the rise in GDP per capita
has not been as fast as in many peer countries and labour productivity trends
have been somewhat disappointing. As such, more needs to be done to reach
advanced-economy status by 2045, which the authorities are aiming for.
Indonesia has room to benefit more from integration in global value chains.
Education, skills and participation in formal employment should be enhanced,
while the environment for business and competition can improve further.
Industrial and trade policies should be targeted, monitored, and time-bound.

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  39

Economic convergence has stalled

Indonesia has maintained steady overall economic growth over the past quarter of a century. Indeed, the
country’s share of global GDP increased from 0.3% in 1998 to 1.3% in 2022. The rise in GDP per capita
has been substantial (from USD 6 100 to USD 14 100, in PPP terms (constant 2021 USD), between 2000
and 2023), although this increase has not been as large as in some peer countries. Consequently,
Indonesia has progressively fallen behind the other emerging economies in the G20, and China in
particular. Correspondingly, economic convergence (Kremer, Willis and You, 2022[1]) towards richer
economies in the OECD has largely stalled over the past decade (Figure 2.1). Indonesia’s GDP per capita
has hovered around 25% of the OECD average since the early 2010s.

Figure 2.1. In recent years GDP per capita has stopped catching-up with the OECD area
A. GDP per capita for selected countries B. GDP per capita relative to OECD
USD (log scale) % of OECD average
35 Indonesia
IDN IND MYS
G20 emerging economies
PHL THA VNM
32 000 G20 emerging economies excluding China
30

16 000 25

8 000 20

4 000 15

2 000 10
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Note: Data are based on nominal GDP adjusted for purchasing power parity (PPP, constant 2021 international dollars in Panel A and current
international dollars in Panel B). G20 emerging economies excluding Indonesia: Argentina, Brazil, China, India, Mexico, Russia, Saudi Arabia,
South Africa, and Türkiye.
Source: World Bank (2024), World Development Indicators.
StatLink 2 https://stat.link/g6bf8e

Socio-economic progress on other fronts has been strong. Indonesia has made significant advancements
in reducing extreme poverty. While the rate of poverty increased temporarily during the pandemic, it has
since receded, and decline in multidimensional poverty has been steady despite the pandemic (Figure 2.2,
Panel A). This has been due in part to higher labour participation and employment levels, a rise in minimum
wages, and expansion of social assistance programmes. On the other hand, the share of informality and
self-employment is higher than before the pandemic, and the boom in commodity exports has not been
shared evenly; these two factors have contributed to increasing inequality in urban areas in 2020-23, but it
has receded in 2024 (Panel B).

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40 

Figure 2.2. Poverty continues to trend downwards

A. Monetary and multidimensional poverty B. Gini index, 2017-2024
% Scale from 0 to 1 Index
14 0.25 0.42
Share of poor population
Multidimensional poverty index (rhs)
12 0.20 0.40
0.38
10 0.15
0.36
Urban Rural Nation-wide
8 0.10
0.34

6 0.05 0.32

4 0.00 0.30

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Mar-24
Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22

Sep-23
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Note: In Panel A, poor population refer to people living below the national poverty line.
Source: Indonesian Nutritional Status Survey (SSGI); and The PRAKARS (2024), Indeks Kemiskinan Multidimensi Indonesia 2012-2021.
StatLink 2 https://stat.link/t9oleh

Box 2.1. Reducing stunting

Stunting (impaired child growth and development due to malnutrition and frequent infections) has been
a persistent issue in Indonesia for decades. It can lead to lasting impairments to physical and cognitive
abilities and consequently lifelong disadvantages in terms of health, life expectancy, skills and labour
market outcomes. Indonesia has made considerable progress over the past decade (Figure 2.3). Among
children aged under 5 years, the prevalence of stunting has fallen from 37% in 2013 to 30.8% in 2018
and 21.5% in 2023. A key campaign in recent years has been the National Strategy to Accelerate
Stunting Prevention, launched in 2017. The strategy commits 24 ministries and around USD 4billion per
year, as well as local governments, to tackle the root causes of stunting. One key element is ensuring
more, and better, food for infants and young children at risk from stunting and their mothers. Other measures
include improvements to sanitation, access to clean water and basic health services. Initially rolled out in
districts with the highest incidences stunting, the strategy has been extended to all districts. As for similar
campaigns in other countries, key elements have included engagement and oversight at the highest level
of government, coordination across different levels of government as well as sufficient public financing
and good data collection to help target households and areas most in need (Murthi, 2022[2]).

Figure 2.3. Child malnutrition has steadily declined

%
50
2013 2018 2021

40

30

20

10

0
Stunting Wasting Overweight

Note: Data in 2021 for stunting and wasting come from the Indonesian Nutritional Status Survey.
Source: UNICEF/WHO/World Bank Joint Child Malnutrition Estimates; and Indonesian Nutritional Status Survey (SSGI).
StatLink 2 https://stat.link/oelca6

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The following sections of this chapter first underscore that weak productivity has played a role in Indonesia’s
limited catch up in average GDP per capita. The chapter also emphasises the potential role that further
integration in global trade and value chains could play in improving economic performance. The remainder
of the chapter considers policy options for strengthening long-run economic performance under two
themes: employment and skills, and the business environment.

Productivity levels are modest and integration in global value chains is limited
Productivity is the main determinant of long-term GDP growth and Indonesia lags behind its peers.
Contrary to other ASEAN countries, total factor productivity has been decreasing (Figure 2.4, Panel A).
Also, GDP per worker is relatively low compared with some peers, including Thailand and Malaysia. Labour
productivity has also grown more slowly than in the rest of ASEAN5. With such considerations in mind, the
government has established a National Productivity Institute (LPN) in 2023, with a mandate to promote
productivity-enhancing reforms as in several OECD countries (Renda and Dougherty, 2017[3]). The
decomposition of labour productivity growth reveals the relevance of non-ICT capital deepening (Panel C).
However, this does not mean that digitalisation is irrelevant as non-ICT investment often requires good
digital infrastructure.

Figure 2.4. Productivity performance has been weak

A. Total factor productivity B. GDP per worker, 2021
Index 2010 = 100 USD, thousands
140 200
CHN IND IDN KOR
130
MYS THA VNM 160

120
120
110
80
100

40
90

80 0
IND
VNM

IDN

JPN
THA
CHN
MYS

KOR
TUR
USA
SGP
PHL
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

C. Decomposition of labour productivity growth, 2015-21

% pts %
10 10
ICT capital deepening Non-ICT capital deepening Labour quality
8 8
Total factor productivity Labour productivity (rhs)
6 6

4 4

2 2

0 0

-2 -2
IDN

IND

CHN
JPN

USA

THA

TUR
MYS

PHL

KOR

VNM
SGP

Note: In Panel B, data are based on GDP at constant prices per worker using the 2017 PPP.
Source: APO Productivity Databook 2023.
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42 

Indicators suggest Indonesia has scope for deeper, and more technologically advanced, trade. Exports
and imports together represented 45% of GDP in 2022, versus 72% in the Philippines. Values substantially
above 100% are seen in some other ASEAN peers. Similarly, foreign direct investment (FDI) inflows were
equal to 1.9% of GDP, as against 4.4% in Vietnam and 3.6% in Malaysia. While the first indicator may
reflect the large size of the domestic market, this very factor should make investing in Indonesia particularly
important in the global strategy of MNEs. Additional evidence of scope to strengthen participation in
globalisation is provided by the high-tech share of Indonesia’s manufactured exports (Figure 2.5, Panel A).
Indeed, the share has declined. In 2010, 12.1% of Indonesia’s exports were high-tech; by 2019 the share
was 8.1%. Other South-east Asian countries like the Philippines and Vietnam have, respectively, the
highest share and the fastest growth of medium- and high-tech manufactured exports. Also reflecting
relatively low participation in globalisation, the foreign content of Indonesian exports has long remained
smaller than the ASEAN and OECD averages (Panel B). This share decreased from 15% to 11% between
2008 and 2020. Similarly, the share of domestic value added that is exported in the form of intermediate
goods (natural resources) and is used in final goods production abroad shows a ‘de-integration’ trend. An
enterprise survey by the World Bank points to relatively low engagement in foreign trade (Panel C and D).
Meanwhile, the potential to further develop tourism is large, Indonesia having 10 out of the 27 ASEAN5
sites on the UNESCO World Heritage List (Box 2.2).

Figure 2.5. Participation in global value chains is low, and relatively few firms engage in foreign trade

A. Share of medium- and high-tech manufactured B. Foreign value-added content of gross exports
exports
% of total manufactured exports % of gross exports
100 40
Indonesia ASEAN
2021 2010
G20 OECD
80
30

60
20
40

10
20

0 0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IDN

IND

TUR

CHN

THA
CHL
AUS

BRA
SAU
NZL

EGY

ARG
ZAF
CRI
VNM
COL

MYS

SGP
MEX
PHL

C. Exporting firms, international comparison D. Exporting firms, by size

% of the surveyed firms % of the surveyed firms
75 50
Indonesia (2023)
2023 2015
, East Asia & Pacific
60 40
Upper Middle Income

45 30

30 20

15 10

0 0
Firms exporting directly Manufacturing firms using inputs Small Medium Large Total Small Medium Large Total
of foreign origin Firms exporting directly Manufacturing firms using inputs
of foreign origin
Note: In Panel C and D; the data show the number of firms surveyed where exports account for at least 10% of annual sales. The size of the
firm is determined by the number of employees: 5 to 19 (small), 20 to 99 (medium), and 100 or more (large).
Source: OECD TiVA indicators (http://oe.cd/tiva) and TiVA country notes; World Bank Databank; United Nations Industrial Development Organization
(UNIDO), Competitive Industrial Performance (CIP) database; and World Bank, Enterprise Surveys Database and Indonesia 2023 Country Profile.
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  43

Box 2.2. Boosting tourism

In 2019, out of 16 million international arrivals (of which around 10 million international arrivals by air),
about 6 million were recorded at Bali airport. The project “10 New Balis” was launched in 2016 and
aimed to promote ten other destinations, later gradually narrowed down to five (Borobudur, Labuan
Bajo, Lake Toba, Likupang, and Mandalika). The COVID-19 pandemic hit tourism hard, with 2023
arrivals merely recovering to their pre-pandemic levels, rather than the original forecasts. As highlighted
in the World Economic Forum’s Travel and Tourism Development Index (World Economic Forum,
2024[4]), Indonesia is relatively well placed to attract tourists, with a score of 4.46 (out of 7) and ranking
22nd in the world. Overall, the country performs better than the world average and the Southeast Asia
average along most dimensions: it fares well in terms of prioritising tourism (3rd) and the natural
resources it offers (8th). Yet, the Forum’s Index points to scope for improvement in health and hygiene
(89th in the world), tourist services and infrastructure (86th), ICT readiness (73rd), as well as openness
to travel and tourism (69th).
As noted in the 2018 Survey (OECD, 2018[5]), establishing new tourism destinations is challenging.
Attracting tourism typically requires improved transport infrastructure and hotels, but also high-speed
internet capacity and a skilled workforce. It also requires increased capacity for waste management and
water treatment and attention on preserving the natural environment, as uncontrolled tourism can lead
to serious damage to water, soils and nature. Cooperation with, and assistance for, local communities,
governments and stakeholders is essential to make tourism work in the long run.
Source: (World Economic Forum, 2024[4]), Statistics Indonesia (BPS)

Increasing employment rates and strengthening human capital

Indonesia has room to increase labour force participation and to boost human capital. Key challenges include
reducing labour-market informality, closing gender gaps, and improving education and training.

Reducing informality in the labour market

Informal employment in Indonesia remains widespread. Despite a declining trend in past decades, around
60% of the workforce is estimated to be in informal types of employment, a higher share than in
neighbouring countries. Informal employment includes unpaid household workers, employees in the
informal business sector, as well as informal workers in formal firms. Informality is particularly high in
agriculture and low-skilled services, and for women (Hapsari et al., 2023[6]). Productivity and salaries tend
to be lower in informal firms, and provinces with greater informality also tend to be poorer. Social insurance
programmes (old age, work accident, unemployment) have been introduced in recent years, but many of
them only cover employees in larger firms. Informal and small-firm workers must rely heavily on family or
community assistance, and during the COVID-19 pandemic some of them have left the labour market or
moved to more informal occupations. More generally, Indonesia has long been characterised by a strongly
dual labour market, with extensive employment and social protections in large firms, but with broad
exemptions or enforcement difficulties in smaller firms and the informal sector.
An Omnibus Law on Job Creation was issued in March 2023, after the initial 2020 law had been suspended
by the Supreme Court in 2021. The law includes measures to encourage the formal sector by making
labour regulations more flexible in formal firms (and thus reducing the incentives to operate informally). In
line with past OECD recommendations (Table 2.1), the law replaced municipal (and often also sectoral)
minimum wages with provincial ones, based on inflation and economic growth; the law also brought greater
flexibility for part-time work and overtime. Oversight for terminating employment was reduced, and the

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44 

maximum severance pay was reduced from 32 to 19 months, with an additional six months paid by a newly
created unemployment insurance scheme. While the law rightly aims at reducing labour market duality, it
is too early to gauge the scale of its positive impacts. The Omnibus law also included provisions to reduce
business regulation (see below).

Table 2.1. Past OECD recommendations on fighting informality and enhancing inclusion
Past OECD recommendations Actions taken since the 2021 survey
Pilot lower levels of employment protection and discounted minimum Guidelines for green special economic zones, which include indicators to
wages for youth in special economic zones. If successful, extend them. create inclusive growth, have been developed. No other action taken.
Review the level of statutory minimum wages in each province to better align The formula for calculating provincial minimum wages has been amended
them with local characteristics. to follow economic growth and inflation.
Promote female employment through public campaigns. Target more No action taken.
women in lifelong training programmes. Support the construction of more
childcare facilities. Enforce laws promoting gender equality.
Expand the unemployment insurance scheme together with business No action taken but the unemployment insurance scheme is scheduled
associations and trade unions. to be reviewed periodically.

Narrowing gender gaps

The gender gap in labour force participation remains significant in Indonesia, and higher than in some
other EMERG20 and most OECD economies (Figure 2.6). Women remain over-represented in informal
jobs, and underrepresented in more qualified formal jobs, despite substantial improvements in education
attainment.

Figure 2.6. The gender gap in labour force participation remains significant
Female labour force participation rate, 15-64 years, 2022
% percentage points
100 100
Female Gender gap (rhs)
80 80

60 60

40 40

20 20

0 0
ITA
ZAF

LTU

FIN
IRL
IND

IDN

ISR

JPN

NZL

ISL
TUR
MEX

GRE
KOR

LUX

FRA
COL

CZE

ESP

SVK
HUN
SVN

LVA
GBR
DEU

CAN
NOR
DEN

CHE

NLD
CRI

CHL
BRA

BEL
POL
USA

AUT

PRT
AUS

SWE
EST
OECD

Note: 2019 for Indonesia. The gender gap corresponds to the percentage-points difference between male and female labour force participation rate.
Source: OECD (2024), OECD Employment database.
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In the short run, promoting formal entrepreneurship opportunities – notably through financial education, micro-
lending, and ease of business – can increase female labour force participation and formalisation of the
self-employed (Mukhlisah, 2024[7]). In particular, efforts to develop and formalise the care economy can
empower women and make societies more resilient (OECD, 2024[8]). Improving women’s education and
skills is key for access to formal, better-paying, jobs. Enrolment in tertiary education is already higher for
women than for men, and it is all the more important to ensure women have avenues to deploy their skills

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  45

in the workplace. Adapting cultural norms is important as in Indonesia men are often still seen as more
legitimate breadwinners and therefore deserving hiring priority (OECD, 2024[8]).
Strengthening support for maternity leave and childcare services are part of the solution to increasing the
employment of women. While the law provides for three months of maternity leave with full wages, the cost
of this benefit is fully borne by the employer. This contributes to low compliance, especially in small firms
(Setyonaluri et al., 2023[9]). Also, workers in the informal sector receive some maternity health coverage, but no
maternity leave. Shifting the financing of maternity leave to the government, in part or in full, would help
increase coverage. Also, by making maternity less costly for employers, women may be more likely to be
offered jobs. Policy should also ensure that mothers are not unduly penalised when they resume working
after pregnancy or childcare leave. Early Childhood Development (ECD) was introduced within the 2003
National Education System Law but progress has been limited; the enrolment rate has been less than 40%
(UNICEF, 2020[10]). Greater access to affordable early childhood education facilities would help in this
respect, when combined with enhanced efforts to guarantee the quality of both education institutions
(accreditation is still optional) and teaching personnel.

Improving education

As elsewhere, learning deteriorated during the pandemic. The OECD’s Programme for International
Student Assessment (PISA) assesses the learning performance of 15-year-old students in mathematics,
reading, and science. According to the latest results (OECD, 2023[11]), performance declined in Indonesia
between 2018 and 2022, as in most OECD countries. This is largely due to pandemic-induced school
closures, though a decline was already observable in Indonesia before 2018 (Figure 2.7). In 2022 as in
previous years, Indonesian students scored significantly worse than the OECD averages in mathematics,
reading, and science. Variance by province is large: in 2018, average performance was about 40 to 50 points
higher in Jakarta and Yogyakarta than the national average, across all three subjects (OECD, 2019[12]).

Figure 2.7. Student performance in PISA tests is low and has declined in recent years
Mean student score over time
Reading Mathematics Sciences
525 525 525
Indonesia OECD Indonesia OECD Indonesia OECD
500 500 500
475 475 475
450 450 450
425 425 425
400 400 400
375 375 375
350 350 350
2006 2009 2012 2015 2018 2022 2006 2009 2012 2015 2018 2022 2006 2009 2012 2015 2018 2022

Note: The OECD’s Programme for International Student Assessment (PISA) measures 15-year-olds’ ability to use their reading, mathematics and science
knowledge in tests based on real-life scenarios. The OECD aggregate covers 23 OECD countries. It does not include Austria, Chile, Colombia, Costa
Rica, Estonia, Israel, Lithuania, Luxembourg, the Netherlands, the Slovak Republic, Slovenia, Spain, Türkiye, the United Kingdom, and the United States.
Source: OECD, PISA 2022 Database, Tables I.B1.5.4, I.B1.5.5 and I.B1.5.6.
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Historically, infant malnutrition has contributed to poor education performance in primary schools, with
intellectual abilities permanently scarred by stunting (Box 2.1). The strong push towards ending
malnutrition, including through the free school lunch programme, will better prepare children for learning
and growing. But improving education will also require large investments in infrastructure, teacher training

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46 

and retention, as well as reducing the number of students dropping out of school. As such the free school
lunch programme should not be funded by cuts elsewhere in the education budget.
Recent education reform has aligned with recommendations detailed in the 2021 Survey of Indonesia
(OECD, 2021[13]) (Table 2.2). Measures underway include a roll out of an ambitious curriculum reform
(Merdeka Belajar, or emancipated learning) that relies on digital teaching tools (OECD, 2024[14]). It aims to
shift education towards student-centred learning, critical thinking, creativity, problem-solving abilities, and
holistic development. All secondary and post-secondary levels must introduce the reform’s new curriculum
by end-2024. The teachers’ digital platform, Platform Merdeka Mengajar includes tutorials and resources
on the new curriculum along with management and planning tool. A programme that trains “learning
leaders” is being used as part of the campaign to ensure teachers are familiar with the new system.
Yet differences in student achievement at the national exam (Ujian Nasional, UN) remain significant across
regions, between rural and urban areas, between public and private schools, and between secular and
religious schools (World Bank, 2020[15]). Implementing the curriculum reform uniformly across schools will
be key to ensure that all pupils share a broader core knowledge to succeed (Box 2.3). Past efforts have
lifted educational attainment but, as of 2022, only 57% of Indonesians aged 25 and above had completed
a lower secondary degree. Public education is free and funded by local governments through grants from
the central government. However, out-of-pocket expenditures remain considerable (these include books,
stationery, school uniforms, and transport), especially in secondary schools. Sending one child to
secondary school can represent 24% of household average expenditure (World Bank, 2020[15]). Increasing
resources available to schools and making education more affordable is among the key reasons why tax
revenues should be lifted over time (Chapter 1). Further progress in digitalisation would also help in
improving school performance (Chapter 3).

Box 2.3. Primary and secondary education in Indonesia

All Indonesian citizens must undertake 12 years of compulsory education, with six years in elementary
school, three years in junior high school, and another three years in senior high school. While enrolment
is nearly universal in primary and junior high schools (in 2022, net enrolment rates equalled 99% and
95% respectively), it remains more limited in senior high schools (with an 82% net enrolment rate).
Schools in Indonesia are either secular or religious (the latter are mostly Islamic). The Ministry of
Education and Culture (MEC) supervises both secular and Sekolah Islam schools, with the same
secular curriculum (to which Sekolah Islam schools add their own Islamic curricula). Madrasah, which
are more strongly religious Islamic schools, are organised by the Ministry of Religious Affairs, and
combine Islamic teachings with secular subjects, to varying degrees. Finally, there are Pesantren, which
are independent, charity-funded schools, usually in rural areas and focusing on Islamic teachings; as
such their supervision by the government remains more limited.
Source: Unesco Institute for Statistics

Indonesia has a relatively high share of youth that is not in education, employment or training. While the
youth unemployment rate declined from 26% in 2005 to 13% in 2023, it remains above ASEAN peers such
as Malaysia (10%), the Philippines (7%), and Thailand (5%). Data from the OECD’s Programme for the
International Assessment of Adult Competencies (PIAAC) show that Indonesian adults have some of the
lowest skills across all countries surveyed (OECD, 2016[16]). For instance, they are the lowest scoring of
all adults surveyed for information-processing skills, which are among the most required in the future of
work. To make sure Indonesia remains competitive and productive, adult learning should become one of
its priorities, as the country does not have yet a strong skills development system. As argued in the 2021
Survey, local governments and businesses should be more involved in designing vocational courses so
that these better reflect local labour market needs (OECD, 2021[13]). Skills anticipation exercises help
policymakers identify skills in need (OECD, 2023[17]), and information collection can focus first on priority

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  47

sectors, as in Finland (CEDEFOP, 2019[18]). As in Malaysia (OECD, 2019[19]), the government should
centralise information and list occupations that are skilled, in high demand and of strategic importance.
Improving tertiary education, both in universities and vocational schools, is important for making the
workforce more productive, skilled, and adapted to the needs of the modern economy. The enrolment rate
in tertiary education increased from 8.4% in 1990 to 42.6% in 2022 and is close to other middle-income
countries. However, low past enrolment means the share of the adult population with tertiary education is
small. As of 2022, the share of 25-64 year-olds who have completed tertiary education was 13%, the lowest
share in the G20 (on a par with India). Attainment for women has been increasing rapidly; between 2015
and 2022 it increased from 15% to 21%. Further increasing tertiary enrolment among school leavers and
widening access to tertiary education in the adult population will be important. More broadly, Indonesia has
scope to raise the quality of its tertiary institutions. There are nine Indonesian universities among the world’s
top 1000, fewer than in any other EMERG20 country, with relatively poor research output and weak ties with
the business sector (see the section below on innovation).

Table 2.2. Past OECD recommendations on education and training

Past OECD recommendations Actions taken since the 2021 survey
Consider lowering the starting age of compulsory education. No action taken.
Review the number of schools and envisage using multi-grade teaching. No action taken.
Collect best practices to introduce performance metrics in the allocation of The ‘Emancipated Learning’ programme aims to better target poorer and
education funds at the school and district levels. Better take into account the less performing schools with higher school grants. Learning communities
number and characteristics of students when setting government transfers. are also being developed to share teaching best practices.
Increase the number of teachers with permanent contracts. Reinforce the role A significant number of ‘honorary teachers’ have been converted to
of education credentials in hiring decisions for contract and honorary teachers. permanent contracts.
Invest more in information and communication technology infrastructure for A digital ‘emancipated teaching platform’ has been developed, along with
pedagogical purposes in primary and secondary schools. a digital ‘education scorecard’
Review and improve the supervision of vocational schools and teachers. Tax incentives are provided to encourage apprenticeships and vocational
Increase the role of business associations and trade unions in managing and training. More flexibility in adjusting the curriculum locally has been
organising apprenticeships. introduced in 2022, but local governments seldom use it.

Policies to strengthen the business environment

Pro-competition regulation, easier conditions for doing business and success in combatting bribery and
corruption, can facilitate firms’ entry and exit, encourage innovation and allow more efficient firms to
succeed and grow. In turn, this can increase investment and employment, thereby lifting aggregate
productivity, output per capita and living standards. For countries like Indonesia where many businesses
are far from technological frontiers, the adoption of know-how and technology through diffusion and
spillovers is a key channel for moving towards higher productivity.

Making markets more competitive through better regulation

The 2023 OECD Product Market Regulation (PMR) data point to a number of improvements in Indonesia’s
business environment (Figure 2.8). There have been several pro-competitive reforms implemented over
recent years, often echoing recommendations of past Surveys (Table 2.3). In particular, barriers to trade
and foreign investment have been reduced, as well as the administrative and regulatory burdens.
Nonetheless, in most dimensions of the PMR, the business environment in Indonesia remains less
favourable than in the average of OECD members. Much of this reflects a relatively high degree of state
involvement in the economy (Figure 2.8). Barriers to entry and conduct are widespread in network sectors
and many professional services and the regulation of lobbying activities remains very limited (Box 2.4).
Furthermore, state ownership is widespread. This potentially ramps up market distortions, especially as
the governance of state-owned enterprises (SOEs) is not fully aligned with OECD best practices aimed at
ensuring a level playing field between SOEs and private firms (Asian Development Bank, 2022[20]).

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48 

Figure 2.8. Despite progress, Indonesia’s PMR scores still indicate a relatively restrictive environment
for business
Product Market Regulation Index, by category
Indonesia (2023/2024) Indonesia (2018) Average of 5 best Average of 5 worst OECD average
Index from 0 (most) to 6 (least)
6 competition-friendly regulation

0
Public Procurement

Tariff Barriers
Lobbying regulation

Barriers to FDI
Administrative Requirements for
Interaction with Stakeholders
Governance of SOEs

Retail Price Controls and

Barriers to Competition in Network

Scope of Public Ownership

Barriers to Entry in Network

Administrative and Regulatory

Licences and permits

Barriers to Competition in Service

Assessment of Impact on

Barriers to Trade Facilitation

Barriers to entry in Service Sectors

Competition
Regulation

Sectors

New Firms

Burden
Sectors
Sectors

Note: All averages include only OECD countries. Information refers to laws and regulation in force on 1 January 2024 (1 January 2018 for 2018
values). Licences and Permits, Lobbying, and Public Ownership are not indicators, but components of other indicators. The name of some low
level indicators has been edited for presentational purposes: Administrative and Regulatory Burden = Communication and Simplification of
Administrative and Regulatory Burden, Administrative Requirements for New Firms = Administrative Requirements for Limited Liability
Companies and Personally-owned Enterprises, Barriers to Competition in Service Sectors = Involvement in Business Operations in Service
Sectors, Barriers to Competition in Network Sectors = Involvement in Business Operations in Network Sectors
Source: OECD 2023-2024 PMR database (May 2024).
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Table 2.3. Past OECD recommendations on State-Owned Enterprises and government intervention
Past OECD recommendations Actions taken since the 2021 survey
Improve SOEs’ corporate governance to align with global best practices. Several regulations have been issued to increase SOEs’ transparency
Reinforce financial reporting of operating companies before establishing and integrity, including Ministerial Decree No. PER-2/MBU/03/2023.
sectoral holding companies.
SOEs should always be subject to competition law and be held Activities that are not deemed strategic are not exempt from competition
responsible when abusing their dominant market position. law, but enforcement remains limited. SOEs have been mandated to
implement the recent Competition Compliance Programme of the
Competition Supervisory Commission (KPPU Regulation 1/2022).
Review existing restrictions on FDI, eliminate those that generate costs The Omnibus Law on Job Creation has opened most sectors to FDI, but
without producing benefits, and monitor the remaining ones. several regulatory restrictions and discriminatory measures remain.

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  49

Box 2.4. Recent regulatory reforms in Indonesia

Since 2020, Indonesia has carried out various reforms that have improved the regulatory conditions for
business covered by the OECD’s product-market indicators:
Price controls. In 2022, price ceilings were removed for soybeans, sugar, shallots, meat, and chilies,
and replaced by a reference price. Yet price controls remain, notably on some other staple goods
(bulk cooking oil and rice), gasoline and liquid petroleum gas. Retail prices for domestic passenger
transports (air, rail or coach) and some professional services also remain regulated.
Public procurement. Since 2021, tender documentation must be published online and it is available
free of charge. Yet, splitting tenders into smaller lots for goods, services and public works
remains optional for contracting authorities, making bidding difficult for smaller firms.
Furthermore, foreign participation in tenders faces considerable hurdles.
Assessment of impact of new legislation on competition. Since 2022 there is a requirement for new
primary legislation to be subject to either a Regulatory Impact Assessment, a Cost Benefit Analysis,
or an analysis of Rule, Opportunity, Capacity, Communication, Interest, Process and Ideology.
Administrative requirements for new firms. The number of administrative bodies to be contacted to
establish a Limited Liability Companies decreased from seven to five and for Personally-owned
Enterprises from three to two. This number is still relatively high.

The Omnibus Law on Job Creation not only increases labour market flexibility (see above), it also
streamlines regulations in some sectors, and reduces restrictions on foreign direct investment; some of
these elements were implemented as early as 2021. Furthermore, the law introduces a new risk-based
assessment, relaxing environmental certification for a medium-risk business and requiring a business
license for high-risk business. The authority for granting permits was handed from the local level to the
central government. Initial impact assessments suggests that domestic and foreign direct investment –
realised and planned – significantly increased in sectors liberalised by the reform (Montfaucon, Senelwa
and Doarest, 2023[21]).

Narrowing the scope of State-Owned Enterprises

State-Owned Enterprises (SOEs) continue to play a substantial role in Indonesia’s economy. The scope
of their activities and market share is higher than the OECD average, and often higher than comparable
emerging market economies. As of 2021, SOEs overseen by the Ministry of State-Owned Enterprises
(MSOE) held USD 600 billion in assets (52% of GDP in 2021). There are also numerous smaller
enterprises owned by provincial or municipal governments. The SOEs are spread across many sectors,
including manufacturing and four of the five largest banks. Notable SOEs include PLN (electricity),
Pertamina (oil and natural gas), Garuda Indonesia (air transport), Telkom, Bank Mandiri, Bank Rakyat,
Krakatau Steel, Pupuk (fertilisers), and Waskita (construction). The legislation on SOEs distinguishes
between those that operate for profit and those conducting business on behalf of government. SOEs fall
under two main types: perum (fully state-owned and expected to conduct business on behalf of the public
interest) and perseo (for profit limited liability company with full or majority state-ownership). Perseo SOEs
are expected to act as profit-maximising companies rather than government agencies.
Weak and declining financial and operational performance among SOEs is a key concern (Asian
Development Bank, 2020[22]). In 2019, 43 out of 114 of Indonesia’s SOEs failed to meet even low thresholds
for financial viability and the COVID pandemic and the global energy crisis have likely further aggravated
the problems. One explanation is that, even when defined as “for profit”, the SOEs are often the instrument
of government policies, for instance, providing goods, services or employment at subsidised rates.
Compensation from government for these activities is sometimes delayed, weakening the SOEs financial

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50 

position. Other concerns revolve around SOE investment and financing and the relation of these with
government accounts. Using SOEs to raise funds for infrastructure investment can partially reduce
pressure on the government’s borrowing capacity, but the implicit or explicit state guarantees on SOEs
borrowing represent a liability. Also, the role of government as shareholder can bring risks of moral hazard,
especially when the firm is tasked with implementing some of the government’s policies, rather than being
free to pursue profit-maximisation.
SOE exemptions from antitrust law also raise issues. Under article 51 of the 1999 Competition Law, SOEs
are exempted for activities tied to social assistance or national development objectives. While this
exemption normally does not apply when SOEs or their subsidiaries engage in activities unrelated to their
core national development business, SOEs can nevertheless cross-subsidize their operations in other
competitive markets. This distorts competition and gives SOEs an unfair advantage over their privately-
owned competitors. SOEs should be subjected to stronger scrutiny under competition law and the scope
of exempted activities should be narrowed. Apart from the risk of abusive cross-subsidisation of activities,
horizontal diversification can also lead to inefficiencies if the business logic of such diversification is poor.
SOEs should refrain from entering or staying in markets that are poorly related to their core business.
There has been a welcome consolidation of the SOE sector. The authorities have long pledged to
“rightsize” the SOE sector, largely through mergers. Past progress has been limited; in 2019 there were
still 142 central government SOEs. However, a major consolidation in January 2023, shrunk the number
to 41 and the goal is to reduce the number to 30 SOEs over the next decade. These SOEs are grouped
into 12 clusters (telecoms and media, energy, tourism, insurance and pension funds, banks, food and
fertilisers, infrastructure, plantation and forestry, mining, manufacturing, logistics, health). This consolidation
has potential to increase the performance of the merged companies, though it requires a thorough and
transparent assessment of their business and financial situation. However, consolidation will not resolve
all the challenges of the SOE sector. As argued in past Surveys, there is value in developing a national
ownership policy to guide the partial or full listing of more SOEs (OECD, 2021[13]). At present there is no
active privatisation programme, but the incoming President has signalled a desire to make progress on
this front, notably for state-owned hotels. In addition, stricter application of global standards such as the
OECD Guidelines on Corporate Governance of SOEs (OECD, 2024[23]) would help SOE performance.
Best practice in SOE’s has multiple dimensions (OECD, 2024[24]). As regards monitoring performance,
Korea, New Zealand and Sweden have been cited as among the most advanced, with comprehensive
performance agreements that extend across their entire SOE sectors (Brumby and Gökgür, 2021[25]).

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  51

Combatting corruption must remain a priority

Fighting corruption is a long-standing government priority, although perceptions of corruption and

challenges to public integrity remain prevalent (Figure 2.9, Panel A). A key institution has been the
Corruption Eradication Commission (KPK), which deals with high-level corruption cases. The Commission
has been key in changing public perceptions about graft (Box 2.5).

Box 2.5. The Corruption Eradication Commission (KPK)

Established in 2002, the KPK has prosecuted several ministers, governors and judges, as well as
parliamentarians (national or regional) and high-ranking civil servants (Butt, 2019[26]). From January 2022
to December 2023, KPK investigated 281 cases and prosecuted more than 200 corruption cases. The
international anti‐corruption body Transparency International (2021[27]) ranked the KPK one of the best-
known anti‐corruption agencies in Asia in 2020. Aside from its prosecution role, the KPK also conducts
monitoring, prevention and education. In preventing corruption, the KPK carries out risk assessment on
government systems and provides recommendations to mitigate the risk of corruption.

Legislation transforming the KPK from an independent authority to an executive agency in 2019 has raised
concerns. The law placed the KPK under the oversight of a supervisory body, which must be notified (but
does not authorise) activities such as wire-tapping, searches and seizures. The supervisory body can also
hear complaints on ethics violations by employees of the KPK. The law also stipulated that KPK employees
were part of the civil service. The KPK is free to select its employees but only from the pool of civil servants;
in 2021, more than 50 KPK employees were removed after failing a civic knowledge test that was required
to become civil servants. The legislation has been criticised by some as a move to politicize the agency
and weaken its ability to prosecute corruption (Transparency International, 2021[27])
Overall, the loss of operational autonomy of the KPK seems to be of greatest concern, and ex post
oversight would likely be more warranted than ex ante supervision. In order to address these concerns:
The KPK should be free to hire the most suitable and qualified personnel and investigators, if need be,
outside the pool of civil service employees; unless nepotism or irregularities are suspected, these
decisions should rest with the Commission.
Allegations against KPK employees (including police officers and prosecutors working for the KPK)
could perhaps be better addressed by the Ombudsman than a multi-member board.
While it is crucial that the KPK works efficiently with police agencies and prosecutors, this is better
achieved by subjecting them to the KPK’s authority in corruption cases than subjecting the KPK to
the supervision of these agencies and their representatives.
More generally, in the appointment of members of courts and independent authorities, parliament and
government bodies should respect the independence of the appointees.
There is scope to also strengthen anti-corruption measures in the areas of international business
transactions and lobbying. As argued in the 2021 Survey (OECD, 2021[13]), Indonesia should criminalise
the bribery of foreign public officials and enact corporate liability for corruption offences as a party to the
UN Convention against Corruption and as a G20 member. These legislative changes are also part of the
OECD Convention on Combating the Bribery of Foreign Public Officials in International Business
Transactions (the Anti-Bribery Convention). Clearer definitions and regulations on lobbying and conflicts
of interest should also be introduced, notably for members of Parliament and local politicians; currently
direct bribery is prosecuted while trading of political influence is often not a criminal offence. As shown in
the PMR lobbying indicator (Figure 2.8), Indonesia currently stands far from international best practice. In
addition, increasing fines for corruption or ethics violations, and making convicted politicians ineligible to
run for office, at least for a few years, could strengthen deterrence.

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52 

Figure 2.9. Corruption is still perceived to be widespread

A. Corruption Perceptions Index B. Control of corruption
Scale: 0 (worst) to 100 (best), 2023 Scale: -2.5 (worst) to 2.5 (best), 2022
90 2.0
80 1.5
70 1.0
60 0.5
50
0.0
40
-0.5
30
20 -1.0
10 -1.5
0 -2.0

IDN

IND
BRA

TUR
THA

FRA
ZAF
CHN

JPN
MEX

PHL

ARG
EMERG20

MYS
KOR
COL

OECD
IDN

IND

ZAF

JPN
MEX
TUR

THA

ARG
BRA

CHN
MYS
KOR

FRA

DEU
PHL

COL
EMERG20

OECD
C. Evolution of "Control of Corruption" D. Corruption by sector, "Control of Corruption"
Scale: -2.5 (worst) to 2.5 (best), 2022 Scale: 0 (worst) to 1 (best), 2023
2
Indonesia ASEAN Indonesia ASEAN
EMERG20 OECD EMERG20 OECD
Executive bribery
1 1
0.75
Executive
Judicial corruption 0.5
0 embezzlement
0.25
0

-1
Legislature corruption Public sector bribery

-2 Public sector
1996 1999 2002 2005 2008 2011 2014 2017 2020
embezzlement

Note: EMERG20 refer to G20 emerging countries excluding Indonesia (Argentina, Brazil, China, India, Mexico, Türkiye, and South Africa). Data
for this group are calculated as an unweighted average. Panel B shows the point estimate and the margin of error. Panel D shows sector-based
subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy
Project, V-Dem Dataset v12.
StatLink 2 https://stat.link/37oqjv

Opening up further to trade and foreign investment

Indonesia is engaging in a number of new trade agreements (Box 2.6), but considerable regulatory and
policy-driven obstacles to trade will remain even if these are successfully concluded. Evidence suggests
Indonesia’s tariff and non-tariff measures hurt firm’s productivity and employment, with a more severe
impact on smaller firms (Gupta, 2023[28]).

Box 2.6. Recent trade agreements completed or underway

Indonesia has struck various bilateral and multilateral trade agreements recently and others are being
negotiated. The Regional Comprehensive Economic Partnership – which includes the ten ASEAN
countries, as well as Australia, China, Japan, Korea, and New Zealand – entered into force in January
2023 for Indonesia. The country also signed Comprehensive Economic Partnership Agreements with
Australia and Korea in 2020. A free trade agreement with the European Free Trade Association
(Iceland, Liechtenstein, Norway, and Switzerland) entered into force in January 2022. On the other
hand, negotiations with the European Union (Indonesia’s fifth-largest trading partner) have been
underway since 2016 and have yet to be concluded. Some of Indonesia’s industrial and trade policies
have proved to be a roadblock in negotiations with partners.

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  53

Tariff barriers are low in Indonesia while the evidence is mixed for non-tariff barriers. According to the
World Bank’s World Development Indicators, Indonesia had an unweighted average tariff of 6% across
traded goods, and a weighted average of 1.8%. Both averages are similar to the world averages and have
been relatively stable over the past 20 years. As elsewhere, non-tariff restrictions can impede trade; for
instance, unintentional (or perhaps otherwise) barriers in technical standards or in border processing. An
estimate of the ad-valorem equivalent of non-tariff barriers (Cadot, Gourdon and van Tongeren, 2018[29])
suggests, overall, they are relatively low in Indonesia (Figure 2.10, Panel A). As regards more specific non-
tariff barriers, Indonesia applies only a small number of anti-dumping trade restrictions, fewer than the US
or the EU (Figure 2.10, Panel C). However, Indonesia imposes a relatively large number of local content
policies and criteria for public procurement (Figure 2.10, Panel B).
Indonesia is endeavouring to fine-tune its system of import and export licences. Import licenses have
historically been used to promote import substitution industrialisation. More recently, export restrictions
have been used to lower the price of food commodities and promote downstream processing industries
(see below). A Commodity Balance Mechanism (NK), introduced under Presidential Regulation n° 32/2022,
aims to balance the country’s supply and demand for certain commodities (including meat, fishery, rice,
salt, and sugar). Data provided by businesses are used to identify excess supply or demand and
adjustments to quotas and licenses for exports and imports are made accordingly. One potential advantage
of the NK system is shorter and more transparent permit processes. However, accurately identifying the
state of demand and supply and responding in a timely way is inherently challenging, not least as past
data may not be relevant for ongoing and future needs. In a welcome move, the authorities decided recently
not to go ahead with a planned extension of the Mechanism to certain types of plastics. Plans for extending
the Mechanism to other goods should also be reconsidered. A more open trading system, where demand
and supply adjustment are largely driven by price movements, would be more efficient and transparent.
Indonesia has scope to reduce barriers to trade in services. Boosting trade in services, particularly in high-
value-adding sectors, can bring addition benefits through knowledge transfer, for instance. The OECD
Services Trade Restrictiveness Index (STRI) provides information on regulations affecting trade in services
in 22 sectors. According to this indicator, Indonesia’s international services trade is more restricted than
that in other ASEAN economies such as Singapore, Malaysia, and Vietnam, and significantly more than
the OECD average (Figure 2.11, Panel A). Furthermore, the OECD data suggest restrictions have
increased between 2014 and 2023 across many sectors. Restrictions are particularly heavy in legal
services, accounting, and telecoms. Restrictions on foreign entry feature in many sectors. Barriers to
competition specifically hinder trade in telecommunications and air transport (Figure 2.11, Panel C).

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54 

Figure 2.10. Non-tariff trade barriers are broadly low but include numerous local-content requirements
A. Ad-valorem equivalents of non-tariff measures by importer
Estimated % impact on the domestic price of goods
20
Sanitary and phyto sanitary Technical barriers to trade Border control measures Quantitative restrictions

16

12

0
THA MYS MEX IDN IND CHN ESP FRA DEU CHL GBR VNM JPN COL USA AUS TUR BRA CAN PHL NZL ARG

B. Local content requirements C. Anti-dumping measures

In effect as of 12 May 2024 In effect as of end 2023
Number of measures Number
140 Public procurement localisation Other localisation 500
Local operations Local labour
120
Local content 400
100

80 300

60
200

40
100
20

0 0

TUR
JPN

IDN

THA

IND
PHL
VNM

ZAF
MYS

KOR

CAN
ARG
CHN

BRA

USA
EU
ITA

IDN
IND
TUR
JPN

FRA
THA

CAN
AUS
BRA

CHN
ZAF

USA
GBR

MYS
MEX
VNM

ARG

Note: In Panel A, the ad-valorem equivalent (AVE) of a non-tariff measure is the proportional rise in the domestic price of the goods to which it
is applied, relative to a counterfactual where it is not applied, as defined in Cadot, Gourdon and van Tongeren (2018). In Panel B, OECD
calculations based on Global Trade Alert database covering commercial policy interventions since November 2008. In terms of local operations,
labour and content, each category includes requirements and incentives.
Source: Cadot, O., J. Gourdon and F. van Tongeren (2018), "Estimating Ad Valorem Equivalents of Non-Tariff Measures: Combining Price-
Based and Quantity-Based Approaches", OECD Trade Policy Papers, No. 215; Global Trade Alert (www.globaltradealert.org); WTO.
StatLink 2 https://stat.link/kih14c

There has been an encouraging reduction in the scope of direct restrictions on foreign-direct investment
(FDI). Inward FDI is relatively low in Indonesia, when compared to other ASEAN nations such as Malaysia
or Thailand (Figure 2.11, Panel B). Prior to 2020, direct restrictions on FDI applied to numerous sectors of
the economy. The Omnibus Law on Job Creation (see above) significantly narrowed the scope of direct
FDI restrictions. Notably, heavy restrictions were lifted as regards investment in airports, mining, and
construction services. Direct FDI restrictions now only apply to six fairly narrow product categories (cannabis,
gambling, fishing of endangered species, coral extraction, alcohol, industries using ozone-depleting
materials and chemical weapons). Inward FDI flows have increased substantially in recent years in some
of the liberalised sectors, notably in the extraction and processing of base metals, though in other sectors
results have been mixed (Montfaucon, Senelwa and Doarest, 2023[21]).

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  55

Figure 2.11. Regulatory restrictions are high on services trade and foreign direct investment

Note: The STRI database records measures on a most favoured nation (MFN) basis towards third countries. Air transport and road freight cover only
commercial establishment (with accompanying movement of people). The indices are based on laws and regulations in force on 31 October 2023.
The FDI Regulatory Restrictiveness Index (FDI Index) measures statutory restrictions on foreign direct investment across 22 economic sectors. The
index scale ranges from 0 (open) to 1 (closed).
Source: OECD STRI database, OECD FDI Statistics; OECD FDI Regulatory Restrictiveness Index; ASEAN Statistics; and World Bank.
StatLink 2 https://stat.link/vn5ejh

However, there remain many indirect discriminatory impediments on foreign direct investment that are not
tackled by the 2023 Omnibus Law or by other measures. Impediments include increased capital
requirements, local content rules (as mentioned above), and unequal access to public procurement
(OECD, 2020[30]). For example, in mining foreign investors are required to sell 51% of holdings to local
investors within ten years. FDI restrictions in services sectors (see above) are also often indirect
discriminatory impediments. The Indonesian economy would greatly benefit from reducing these
discriminatory measures.

Down-streaming industrial policies must be closely monitored

As part of the national medium-term development plan (RPJMN) 2020-2024 (Indonesian Presidency,
2020[31]), the Indonesian authorities have been providing tax and non-tax incentives and imposing export
restrictions to encourage downstream processing of Indonesia’s commodities, notably nickel. The aim is
to reduce dependence on global commodity buyers, as well as to boost regional development and
manufacturing employment. Indonesia accounts for nearly half of global output in nickel ore, which has

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56 

been the primary focus of such initiatives. Policy has oscillated between tariffs and export bans, in search
of a formulation that prompts downstream processing while also continuing to attract investors’ interest.
An export tariff was introduced in 2012. An outright export ban was introduced in 2014 and replaced again
with tariffs in 2017. The export ban was reinstated in January 2020, along with a domestic processing
requirement on raw nickel ore. The export ban and domestic processing requirement appear to have had
greater effect. FDI has increased substantially with numerous new nickel smelters operating, or under
construction. Much of the investment originates from China. Exports of ferronickel and processed nickel
have surged in value from USD 4.5 billion in 2019 to USD 19.6 billion in 2022, while nickel ore exports
have stopped. The IMF estimates that less than one third of this increase is due to higher global nickel
prices, with the rest plausibly coming from higher value added from smelting activities and higher export
volumes (IMF, 2023[32]). The authorities are contemplating policies to incentivise deeper nickel down-
streaming – notably the production of electric batteries and vehicles – and extending down-streaming
polices to other commodities (copper, bauxite, tin or agricultural goods).
Though the down-streaming strategy pursues some worthy goals – and industrial policies have played a
major role in the industrial development of some countries like Korea in the past (Box 2.7) – the cost and
benefits for the Indonesian economy should be thoroughly assessed and periodically reviewed. Evaluation
of industrial policies is key to ensure they reach their intended impacts (Criscuolo et al., 2022[33]): targeted
industrial strategies can achieve structural transformation and growth, but evaluation and regular re-
assessment of these strategies are needed. On average, fiscal incentives for extraction and processing
has amounted to about 0.4% of GDP between 2016 and 2022; while this is small, it represents about 10%
of the government’s annual discretionary spending. The risk of building significant overcapacity in the targeted
sectors is also sizable. This has, for instance, happened in the global steel industry subsidies from numerous
countries have led to excess capacity (Mercier and Giua, 2023[34]). Against the risk of resource misallocation
and rent-seeking, the down-streaming strategy should include provisions such as sunset clauses to
minimise any possible detrimental impact on competition. Another risk of this policy is reaction from trading
partners (IMF, 2023[35]). This has already happened in the case of nickel; the European Union has
challenged the export ban and domestic processing requirement at the WTO (the case remains undecided).
More broadly, policy towards business should adhere to sound principles. The objectives of industrial policies
supporting specific sectors, such as support for down-streaming, should be defined narrowly but also
sensibly (Goldstein, 2002[36]). Notably, there are risks in aiming for specific shares of employment in
manufacturing or processing sectors as this can push business excessively towards using low productivity
(but high employment) production techniques (Rodrik, 2015[37]). Also, industrial policies should not detract
from efforts to improve the general business environment, including through creating better jobs in services
through pro-competition business regulations. This can be a more promising growth strategy than heavy
manufacturing for absorbing new workers into middle-class occupations (Rodrik and Stiglitz, 2024[38]).

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Box 2.7. Supply and demand industrial policies in OECD and non-OECD countries
The case for industrial policies has gained new traction across OECD and non-OECD countries in
recent years (Aiginger and Rodrik, 2020[39]); this has been most notable in steel, green technology
(wind, solar, electric batteries and electric vehicles) as well as semi-conductors. Industrial policies aim
to structurally improve the performance of the domestic private business sector, typically in terms of
productivity growth, innovation, sustainability, resilience, or strategic autonomy. In emerging
economies, industrial policies often also aim to increase value added and/or employment in some or all
manufacturing sectors. Criscuolo et al. (2022[40]) and Juhász, Lane and Rodrik (2023[41]) review the
empirical literature on the effectiveness of industrial policy instruments, distinguishing between demand-
pull instruments and two types of supply-push instruments: those that improve firm performance
(“within” firm instruments) and those that affect industry dynamics (“between” or framework instruments).
Korea is often heralded as a model for successful industrial policies. Lane (2021[42]) analyses Korea’s
Heavy and Chemical Industry (HCI) drive of the 1970s and finds statistical support for positive impact
on firm growth and productivity from measures such as directed credits, tax incentives and tariff
exemptions for imported inputs. Kim, Lee and Shin (2021[43]) find similar patterns for plant growth and
output, but they suggest that HCI may have led to some misallocation. Choi and Levchenko (2021[44])
also find that the HCI drive led to higher long-term growth for subsidised firms, and that the long-run
welfare effect was between 3% and 4%. Recent studies have examined the effect of place-based
policies in the European Union, aimed at boosting investment and employment in peripheral or
distressed regions. Criscuolo et al. (2019[45]) evaluate a British programme whose aim was to create
and safeguard employment in manufacturing. The policy was successful in creating jobs and reducing
unemployment, but with no spillover effect on total factor productivity. Cingano et al. (2022[46]) study a
similar programme in Italy, aimed at job creation, primarily in manufacturing. Eligible firms increased
investment and employment, with little spillover to places and firms outside the programme.
The literature suggests industry policy that combines complementary instruments is more likely to be
successful. R&D tax credits and subsidies are effective in stimulating R&D and innovation, while skill
and knowledge transfer policies are key complementary instruments. Access to financing (loans,
guarantees) and inputs (skill and knowledge transfer policies) are good complements to enhance
technology diffusion. Evidence on the effectiveness of targeted grants and subsidies is more limited.
The scarce existing evidence suggests that small firms benefit more from these instruments than large
domestic businesses and foreign investors. Demand-side instruments play an increasingly important role
in transformative industrial strategies, but evidence on their effectiveness is still lacking, even if public
procurement have a role to play in stimulating innovation when demand emerges from the public sector
(e.g., aerospace, defence, infrastructures).
Evidence also shows that improving the policy environment for business, notably as regards competition
and trade policies, is key in enabling the most productive firms to grow and is an important channel for
structural change. Competition policy promotes efficiency-enhancing resource reallocation and,
indirectly, incentivises firms to innovate and adopt new technologies. Shielding domestic firms from
international competitors through trade policies or other regulations is most often inefficient as it can
encourage rent-seeking. Hence, industrial and competition policies often work against each other. As
such, industrial policies require a constant assessment of their costs and benefits, against other less
costly or less discriminatory policies. Governments should be vigilant against the risk of entrenching
vested interests, and to avoid continued targeted support to unproductive sectors.
Source: (Criscuolo et al., 2022[40]) and (Juhász, Lane and Rodrik, 2023[41])

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58 

Encouraging innovation

Indonesia generally ranks poorly in terms of innovation readiness. In the World Intellectual Property
Organisation’s (WIPO) Global Innovation Index, Indonesia has climbed from 72 nd in 2010 (INSEAD,
2011[47]) to 61st in 2023 (WIPO, 2023[48]). However, it remains the worst ranked ASEAN5 country and is
also surpassed by Vietnam. Patenting activity in information and communication technologies is relatively
low (Figure 2.12, Panel A). Meanwhile, expenditure on research and development (GERD) has grown from
0.09% of GDP in 2013 to 0.28% in 2020 (Figure 2.12, Panel B) but this is significantly below the ASEAN
average of 1.07%. GERD has predominantly been government driven—public sector shares of GERD is
84.6%, whereas the private sector share is 7.3% (Figure 2.12, Panel C). Very little private R&D activity is
undertaken in the manufacturing sector, except in large companies (Hill and Tandon, 2010[49]).
Indonesia’s low level of R&D is echoed in its research skill base. There were only 400 R&D personnel per million
inhabitants in 2020, compared with 7 225 in Singapore, 2 024 in Thailand, 779 in Viet Nam, and 726 in
Malaysia (Panel D). The number of STEM tertiary students remains low, thought this is expected to increase.
Indonesia is projected to produce 3.7% of global STEM graduates by 2030, making it one of the highest
producers in the world (Oliss, McFaul and Riddick, 2023[50]). In terms of scientific research, proxied by
peer-reviewed academic publications, Indonesia has grown from 0.03% of the world total in 2003 to 0.96%
in 2022, although mostly thanks to large increases in conference proceedings and low-impact publications.
On the other hand, participation of women in R&D and innovation is relatively strong, although it can be
further improved. Women comprise 44% of R&D personnel, 38% of researchers in business enterprises
and in government, and 21% of researchers in higher education. Female researchers with doctorate
qualifications stand at 36% and female researchers with master’s qualifications at 49% (UNESCO-UIS).
There is scope to strengthen Indonesia’s protection of intellectual property rights (IPRs), including for
software and other digital services. The 2016 Patent Law improved the general framework, although the
patentability criteria for incremental innovations are ill-defined and the grounds and procedures for issuing
compulsory licenses fail to fully protect the interests of innovative firms (US State Department, 2023[51]).
Overall, holders of intellectual property rights in Indonesia face challenges in protection and enforcement,
as testified by widespread piracy and counterfeiting and the presence of the country in the European
Commission’s priority 3 watchlist (European Commission, 2023[52]). Poor enforcement is of particular
concern regarding dangerous counterfeit products (such as pharmaceutics and spare parts) and should
be addressed through deterrent-level penalties for IPR infringement in physical markets and online.
R&D funding has been criticised for being compromised by uncompetitive and opaque allocation mechanisms
and ineffective management, as well as for being spread too thinly across projects (2018 study by the
Corruption Eradication Commission). The R&D funding system, and in particular the Indonesian Science
Fund, has also been compromised by slow disbursement, cumbersome administrative procedures, and
single-year funding (Asian Development Bank, 2020[53]). Science and technology have received increasing
attention in the national policy agenda. In 2019, the law on the National System of Science and Technology
(2019) introduced new tax incentives for R&D. In 2021 a new Ministry of Education, Culture, Research,
and Technology (MoRTHE) was established, along with the new National Research and Innovation Agency
(Badan Riset Dan Inovasi Nasional, BRIN). In 2023, BRIN received IDR 6.39 trillion (USD 408 million) from
the state budget, equal to 0.03% of GDP. It will be crucial to avoid undue political pressures in BRIN’s
governance and programme of work. Also, the time taken to fund research needs to be shortened.
In addition to developing R&D funding support the Indonesian government has introduced a range of
measures to encourage innovation and entrepreneurship. These include tax incentives, simplified business
registration procedures and funding support for early-stage startups. A 300% super tax deduction for R&D
activities was introduced in 2019, but uptake of the incentive has been very modest (Kristanti and Saptono,
2024[54]). The “1000 Digital Startups National Movement” programme, launched in 2016, includes awareness,
tutoring and mentoring support for digital startups. Other programmes for start-ups include Startup Inovasi
Indonesia and Startup Studio Indonesia. The latter aims to nurture 150 early-stage businesses by 2024. Help

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  59

with financing includes the Merah Putih Fund, a government-backed financing vehicle bringing together five
state-owned venture-capital companies.
Figure 2.12. Research and development activity is relatively low

A. ICT patents
Number 2020 2010 Number
969
600 30000
30 000

500 25000
25 000

400 20000
20 000

300 15000
15 000

200 10000
10 000

100 5000
5 000

0 0
0
ARG THA IDN PHL MEX ZAF TUR BRA MYS SGP IND KOR USA CHN JPN

B. Government expenditure on research and C. GERD financed by business,

development (GERD), 2021 or latest year 2021 or latest year
% of GDP % of total GERD
3.5 100

3.0
80
2.5

2.0 60

1.5 40

1.0
20
0.5

0.0 0
IDN

IND

TUR

JPN
ZAF

CHN
EGY

MEX
ARG

MYS

BRA
SGP
IDN

IND
VNM
MEX
CHL

THA
TUR

JPN
ARG
ZAF
SAU

MYS
BRA

ARE
SGP
CHN

Per million active population D. Number of full-time equivalent researchers, 2021 or latest year
18 000

15 000

12 000

9 000

6 000

3 000

0
IND IDN MEX ZAF VNM MYS SAU ARG CHN THA ARE TUR JPN SGP KOR

Note: In Panel A, IP5 patent families refer to patents that have been filed in at least two IP offices worldwide, one of which among the Five IP
Offices (namely the European Patent Office, the Japan Patent Office, the Korean Intellectual Property Office, the US Patent and Trademark
Office and the State Intellectual Property Office of the People Republic of China). Counting patents according to the inventor’s country of
residence is the most relevant for measuring the technological innovativeness of researchers and laboratories located in a given country.
Source: OECD (2024), OECD Patents Statistics; UIS Database (2024), Science, technology and innovation; Global Innovation Index 2023; and
OECD calculations based on UNESCO (2024), UIS Statistics and World Bank.
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Findings and recommendations

MAIN FINDINGS RECOMMENDATIONS (Key recommendations in bold)
Addressing informality and gender gaps
Informal employment remains widespread, with an overrepresentation of women. Monitor the impact of the 2023 Omnibus Law, and further simplify labour
Reduction in informality can in part be achieved by improved tax collection market regulations if deemed opportune. Further simplify the regulatory
(Chapter 1) but work on other fronts is needed too. The 2023 Omnibus Law environment for firms to encourage formalization.
on Job Creation encourages the formalisation by loosening labour regulations.
Employers must provide 3-months paid maternity leave, but compliance Shift the funding of maternity leave from employer to social
can be low, especially in small firms. This contributes to lower levels of insurance or general taxation; focus support on low-wage earners.
female labour force participation and formal employment.
Gender gaps in labour force participation remain high. Promote entrepreneurship opportunities for women, formalise the care economy,
and address cultural biases that discriminate against women in the workplace.
Improving education
School performance has fallen according to PISA indicators, and Further improve education, including by harmonising the
Indonesia remains significantly below other OECD economies. Different secondary-school curricula and ensuring consistency nationally, to
curricula apply to secular and religious schools with large heterogeneity. provide a broader core knowledge across all pupils.
Primary school attendance is nearly universal, but attendance and Reduce out-of-pocket costs of secondary education for low-income
attainment are limited in secondary schools, partly due to out-of-pocket families by expanding state funding over time.
costs (transports, books, uniforms, etc).
PIAAC data shows that Indonesian adults have low skills, notably in Expand vocational training and improve teaching quality.
information-processing. Vocational training represents a high proportion of Give local governments and businesses a greater say and technical
secondary schooling but does not always correspond to local workforce capacity in defining local needs for vocational training.
needs. Local governments have flexibility to adjust the curriculum but
seldom use it.
Lack of skills in the general population is a drag on productivity and puts Conduct regular skill anticipation exercises, first in priority sectors.
workers at risk in the context of the green and digital transitions. Provide a centralised and regularly updated list of occupations and skills
that are in high demand and of strategic importance.
Developing a strategy for State-Owned Enterprises (SOEs) and improving their governance
The scope of SOEs and their share of GDP are higher than the OECD Develop a state ownership strategy that defines more clearly the
average, as well as comparable emerging market economies. sectors where government ownership remains relevant.
A clear case for government ownership is lacking in some sectors. Privatise or divest those SOEs where government ownership is not warranted.
Profitability remains low for SOEs and accountability is often subpar. New Implement core provisions of the 2024 OECD Guidelines for SOEs, in
guidelines have been introduced for SOE governance. In addition, there has order to improve SOEs’ corporate governance.
been progress in improving financial reporting.
SOEs are not exempt from competition law when conducting strategic Subject SOEs to competition law and intervene when abusing their
interest activities yet abuse of dominant positions remains widespread. dominant market position in non-strategic activities.
SOEs are mandated to implement the Competition Compliance Programme
of the Competition Supervisory Commission (KPPU Regulation 1/2022).
Upholding public sector integrity
The autonomy of the Corruption Eradication Commission (KPK) has Safeguard the independence, autonomy and authority of the KPK to
been hindered by the 2019 reform, leading to perceptions of a lack of ensure the effective prevention, detection and investigation of corruption.
independence.
Indonesia does not criminalise the bribery of foreign officials, as Align legislation more closely with the UN Convention against Corruption
prescribed by the UN Convention against Corruption. and maintain momentum in joining the OECD Anti-Bribery Convention.
Monitoring the efficiency of trade and industrial policies
Trade restrictions remain widespread (including the recently introduced Reduce the number of sectors where import and export quotas apply;
Commodity Balance Mechanism) and hinder participation in global value chains. do not expand the Commodity Balance Mechanism to other goods.
Proactive policies have been introduced to develop domestic downstream Ensure industrial policy addresses market failures and subject policy
activities. Some success has been achieved in developing nickel smelters and measures to cost-benefit analysis in relation to precisely defined targets.
processing facilities, but implementation risks remain very significant.
Trade in services remains highly restricted. Remove unwarranted restrictions against trade in services.
Most sectors are now open to FDI, yet foreign-owned firms remain Level the playing field further by reducing provisions in public
discriminated by a range of domestic preference policies. procurement, antitrust and other domains that may favour domestic firms.
Improving innovation policies
The 2016 Patent Law improved the general patent framework, although Better protect intellectual property rights by making penalties for
the patentability criteria for incremental innovations are ill-defined and the infringements in physical and online markets more deterring.
grounds and procedures for issuing compulsory licenses fail to fully
protect the interests of innovative firms.
Spending on R&D is low and the national system of innovation suffers Shield BRIN’s governance and action from undue political pressures and
from institutional inefficiencies. The funding of the National Research and ensure speedy allocation of resources.
Innovation Agency (BRIN, established in 2021) remains low and the
allocation of funds to research too slow.

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  61

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3 Making the digital transformation

work for all

Andrea Goldstein, OECD

Indonesia has made considerable advances in digitalisation and it ranks well

in mobile telephony penetration. The rollout of 5G, however, has been slow and
fixed broadband penetration and coverage is low. Notwithstanding the success
of several unicorn companies and digitally based venture capital projects, the
business sector in general makes a comparatively low use of digital tools.
Digitalisation of government services is advancing but there is scope for more
and better. Policy priorities to accelerate digital transformation should include
ensuring independent regulation, improving digital skills across the whole
population, enhancing e-delivery of government services, reinforcing cyber-
security, and better ensuring data privacy.

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With the appropriate reforms, digitalisation can accelerate economic growth

The continuous integration of digital technologies, including broadband connectivity, artificial intelligence,
and machine learning, into economies has the potential to bring about considerable benefits, in particular
for emerging market economies, including Indonesia, where much technology in use is still distant from
the frontier (OECD, 2020[1]). High-quality broadband connections make it more efficient to conduct
interactions within and among firms, as well as between firms and customers, thereby increasing total factor
productivity. Affordable access to information and communication technologies (ICT) boosts automation of
routine tasks and frees resources for other investments, including in innovation. More broadly, digitalisation
can improve the delivery of education, health and other social services, smoothen the functioning of labour
and financial markets, and make policymakers more accountable to voters.
Wider and deeper digitalisation can potentially accelerate growth and help Indonesia reach the aspirational
goals set for the centenary of Independence in 2045 – which include becoming a high-income country free
from poverty, as highlighted in the country’s long-term development plans (RPJPN) 2025-2045 (Indonesian
Presidency, 2024[2]). An expanded digital economy could add 11% to Indonesia’s GDP over the next two
decades (Asian Development Bank, 2022[3]). Recognition of the opportunity to reap further benefits from
digitalisation, while also addressing its challenges, is illustrated in the many related policy initiatives
underway. In addition to an overarching digital roadmap, strategic plans have been made to accelerate
digitalisation in specific sectors, embrace artificial intelligence, and address cybersecurity. The policy effort is
illustrated by the many Presidential and Government Regulations (Box 3.1).
In some respects, Indonesia’s digital transition is progressing well. Mobile telephony subscriptions per 100
inhabitants are comparable to those of peers (Figure 3.1, Panel B), and similarly for usage rates (ITU,
2024[4]). Electronic commerce is well-developed and the digital ecosystem is vibrant, as shown inter alia
by the considerable number of “unicorns,” i.e. startup companies valued at over USD 1 billion which are
privately owned and not listed on a stock exchange (see below). In addition, as elsewhere, the pandemic
has prompted advances in the application of online technologies for remote work, education, and medical
assistance. Also, the availability of digital databases and trusted data exchange helped advances in e-
government.
However, in some other dimensions Indonesia’s digital transition is too slow. This is partly due to the
challenges of providing infrastructure and services across an archipelago of 17 000 islands. Fixed
broadband penetration is relatively low (OECD, 2023[5]) and the roll out of 5G mobile technology remains
at an early stage, with coverage limited to 15% of the population in late 2023, according to GSMA
Intelligence (2023[6]), one of the lowest in Southeast Asia. Broader connectivity issues in remote areas,
partly reflecting the specific technical and economic challenges of Indonesia’s geography, contribute to
wide digital divides.
This chapter first outlines the main features of the connectivity landscape in Indonesia and highlights some
of the key issues. It then examines digitalisation issues relating to private sector development, finance, e-
government, education, online data privacy, and cyber-security.

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Box 3.1. Digitalisation strategies and policies

Several policy plans have been unveiled in recent years that aim at deepening digitalisation, including:
• Digital Indonesia Roadmap, 2021-2024: a strategic blueprint focusing on four issues: digital
society, digital infrastructure, digital economy and digital administration.
• Strategic Development Plan 2020-2024 (Ministry of Communications and Informatics): focuses
on advancing digital transformation across business, society and government, enhancing the
provision of communication infrastructure throughout Indonesia, and increasing transparency
in public information and communication management.
• Making Indonesia 4.0: aims to accelerate digital transformation in five sectors (food & drinks,
automotive, textiles, electronics, and chemicals) through tax and financial incentives.
• National Artificial Intelligence Strategy 2020–2045 (Strategi Nasional Kecerdasan Artifisial):
focuses on four areas: ethics and policies; data and infrastructure; talent development; and
industrial research and innovation.
• Cybersecurity Enhancement Strategy: focuses on protecting ICT infrastructure and sensitive data.
• National Strategy for Financial Inclusion provides the legal basis to set financial inclusion targets
and is complemented by the Digital Finance Innovation Roadmap and Action Plan 2020-2024
and the Payment System Blueprint 2025.
• The Digital Industry Development Master Plan for 2023-2045 was prepared by Bappenas in
November 2022.
These strategies have prompted numerous detailed policy actions, the most important of which include:
• Presidential Regulation No. 95/2018 on e-Government.
• Presidential Regulation No. 39/2019 on the consolidation and integration of various government
data under One Data Indonesia (Satu Data Indonesia/SDI).
• Presidential Regulation No. 74/2017 on E-Commerce Roadmap.
• Presidential Regulation No. 82/2023 on Accelerating Digital Transformation and Integration of
National Digital Services.
• Electronic Information and Transactions Act, Presidential Regulation, and Minister of
Communication and Informatics (Kemenkominfo) Regulation.
• Private Electronic System Operators (Permenkominfo 5/2020).
• Governance of Electronic Certification Operations (Permenkominfo 11/2022).
• Law No. 27/2022 concerning Personal Data Protection.
• National Strategy of the Indonesian Digital Economy 2023 (Stranas Ekodig).

Strengthening broadband connectivity

Indonesia’s telecoms network has yet to shift fully to 5G
Over the past decade, Indonesia’s communication market has grown rapidly. Between 2011 and 2017, the
number of mobile subscriptions per 100 inhabitants grew from 101 to 163, before descending to 115 in
2022 as users switched from multiple pre-paid SIM cards to all-inclusive subscription packages (Figure 3.1,
Panel A). According to the National Socioeconomic Survey (Susenas), the share of households accessing
the internet (at a speed of 256Kbps in the past three months) nearly doubled from 42% to 82% between
2011 and 2022. The share of households with a broadband connection at home, which was as modest as
5% in 2011, as of 2022 was approaching the OECD unweighted average (87% vs. 91%) (OECD, 2024[7]).
4G is the most widely used mobile technology in Indonesia, accounting for 85% of connections in 2022.
This indicator is second only to Malaysia (94% of connections) in Southeast Asia (OECD, 2023[5]). The 4G

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network coverage is wide (97% of the population in 2022) and mobile broadband services are affordable
(ITU, 2024[4]). On the other hand, 5G services were first deployed in 2021, but rollout has been relatively
slow, partly due to the country’s geography. In December 2023, 5G population coverage stood at 16%,
compared to 90% in Thailand (GSMA Intelligence, 2024[8]). A government target to bring 5G coverage to
4G coverage levels by 2024/2025 seems unlikely to be met.
Broadband’s greater capacity means it is particularly important for sectors that have large data and internet
needs. In terms of infrastructure, broadband requires the deployment of future-proof, high-performance
backbone and backhaul networks capable of delivering high-quality services to the end-user. In particular, it
is necessary to deploy fibre backhaul networks closer to the end-user to enable 5G. The last mile to reach
the end-user is completed by access networks of different technologies, wired or wireless, fixed or mobile
(e.g. fibre-to-the-home, hybrid fibre-coaxial, fixed wireless access, satellite, 4G, 5G), complementing each other
to deliver the required broadband services according to technical, geographical, or economic efficiency criteria.

Figure 3.1. The mobile market is saturated but fixed broadband penetration is low
A. Mobile cellular and fixed telephone B. Broadband subscriptions per 100 inhabitants, 2022
subscriptions
Per 100 inhabitants Per 100 inhabitants Per 100 inhabitants
200 20 250
Mobile cellular subscriptions
Fixed telephone subscriptions (rhs) Mobile Fixed
160 16 200

120 12 150

80 8 100

40 4 50

0 0 0
IND

BRA

IDN

USA
TUR

THA
PHL

ZAF

JPN
MEX
VNM
CHL
CHN

KOR

MYS
COL

DEU

OECD

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

C. Prices of fixed-broadband basket (5GB), 2023 D. Number of fibre-based subscribers, September 2023
% of GNI per capita % of total households
6 100

5
80

4
60
3
40
2

1 20

0 0
JPN

IND

IDN
CHN
USA
DEU

TUR

CHL
BRA

COL
ZAF
KOR

MEX

ARG
OECD

ZAF
IND

IDN

JPN
DEU

TUR

ARG
COL

USA

MEX
CHL
BRA
BRA

KOR
CHN

Note: In Panel C and D, unweighted average for the OECD aggregate. In Panel D, the fibre penetration rate is the share of the number of
subscribers for Fibre to the Home (FTTH) and Fibre to the Building (FTTB) in the total households.
Source: The OECD Broadband Statistics Database, www.oecd.org/sti/broadband/broadband-statistics/, (OECD, 2024[9]; 2023[5]), World Bank,
ITU World Telecommunication/ICT Indicators Database; and FTTH Council Europe, FTTH/B Global Ranking 2024.
StatLink 2 https://stat.link/z2vsrx

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While mobile broadband penetration is high, fixed broadband penetration is low, both in international
comparison (Figure 3.1, Panel B) and relative to Southeast Asia (OECD, 2023[5]). In 2016, there were two
fixed broadband subscriptions per 100 inhabitants, by 2022 they had only risen to 4.9 subscriptions. Take
up has been largely via ‘triple-play’ service plans that bundle fixed broadband with fixed voice and internet
protocol TV (IPTV) (Mendoza, 2023[10]). In 2021, almost half of households (44%) cited high costs as the
main reason for not subscribing to fixed broadband services (Wibisana et al., 2022[11]). Widespread access
to fixed broadband is necessary for ensuring a comprehensive communication infrastructure. Fixed
broadband is complementary to mobile access technologies and can help increase capacity and
performance of all broadband access technologies. Although mobile broadband prices are relatively
affordable in terms of purchasing power (OECD, 2023[5]), Indonesia is one of the most expensive emerging
markets for fixed broadband (Panel C). Quality and speed are additional concerns. While the number of fixed
broadband subscriptions per 100 inhabitants providing services at reasonable speed is similar to far
wealthier countries (Figure 3.2, Panel A), in February 2024 Indonesia’s fixed broadband speed was the
slowest in a comparison of selected emerging and ASEAN economies (Figure 3.2, Panel B). The deployment
of high-speed fixed infrastructure is therefore important to increase fixed broadband performance, with 5G
networks relying mostly on backbone and backhaul fibre networks (Figure 3.1, Panel D).

Figure 3.2. Broadband speed is low

A. Fixed-broadband subscriptions with speed 10 B. Broadband performance by type
Mbit/s and above, 2022 or latest year Median download speed, February 2024
Per 100 inhabitants Mbps
5 350
Fixed broadband Mobile broadband
300
4
250
3
200

150
2
100
1
50

0 0
JPN
IDN

GRC

MEX
IND
ARG

VNM

MYS
TUR

BRA

SGP
ZAF

AUS

SAU

CHN
ARE
PHL
CRI

COL

NZL

THA

CHL
SAU
IND

IDN

BRA
ARE
VNM
GRC

THA

TUR
ZAF

JPN
MYS
SGP

NZL

CHN
CHL

CRI
ARG
MEX
COL

Note: Data collected and aggregated by Ookla’s Speedtest® Methodology (Ookla, 2023[12]). The term 'speed' refers to “advertised download
speed” in ITU data and to the time needed to pull data from a server on the internet in Ookla data.
Source: ITU and Ookla®, (2024), Speedtest Global Index ® (https://www.speedtest.net/global-index).
StatLink 2 https://stat.link/3b5x97

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Connectivity divides are geographic and socio-economic

Geography, as well as socio-economic factors, play a role in differences in digital take up in Indonesia.
Take up is particularly low in Indonesia’s “3T Regions” (i.e., disadvantaged, frontier, and remote regions).
Indeed, the take up gap between Java and the rest of Indonesia, already large, is widening, as is the gap
between urban and rural areas (Xuyao, Satria and Kurniawati, 2023[12]). While some provinces such as
Kep, Bangka Belitung and Jambi have substantially improved the penetration rate, others such as Papua
Barat and Sulawesi have disappointed. The urban-rural differential is the eighth largest among 35
representative comparable countries (Figure 3.3). In terms of gender, despite digital access rising between
2020 and 2022 from 51% to 64% among the female population, the gap vis-à-vis the male population
remained stable at six percentage points (OECD, 2024[13]). Results from a statistical model indicates that
age, education level and region are the most significant determinants of internet access (Box 3.2).

Figure 3.3. The digital divide between urban and rural areas is deep
Share of broadband connections, 2023 or latest year

% of households
120
Households living in large urban areas Households living in rural areas
100

80

60

40

20

0
ISR

IDN

PRT

LVA

FIN
NLD

LUX
CHL

ITA

CZE
FRA

AUT
ISL
ZAF

JPN
LTU

EST
IRL

BEL

HUN
COL
BRA

USA
EGY

GRC

DEU

OECD

POL

SVK
SVN

SWE
DNK
ESP
GBR

NOR

CHE
Note: According to the OECD Regional Typology a region is classified as rural if more than half of the population lives in local units with a population
density below 150 inhabitants per square kilometre and urban if less than 15% live in such low-density local units. Some differences in the definitions
of urban and rural region could be found for Brazil, Chile, the United States, and Japan. See the source for more details.
Source: OECD (2024[14]), “Disparity in broadband uptake between urban and rural households”, OECD Going Digital Toolkit,
https://goingdigital.oecd.org/indicator/17 (accessed on 5 August 2024).
StatLink 2 https://stat.link/8qm3f5

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Box 3.2. What explains the divide in Internet access in Indonesia?

Microdata from 2022 National Socioeconomic Survey (SUSENAS) can be used to estimate the
probability of having access to the Internet according to different characteristics. The results of a
statistical estimation are shown below. The calculation includes individual (such as age, gender,
education, employment, rural/urban location) and household characteristics (wealth, proxied by car
ownership, and region) over a sample of around 670 000 individuals aged 18 to 75.
The estimated probability of being connected to the Internet for a non-working (either unemployed or
inactive) woman aged 60–75 years, with low education, living in a rural area and in a household with
no fixed assets, is 30% (Figure 3.4). By moving to an urban area, the same woman would increase her
probability of using the Internet by only a few percentage points, whereas if she was an urban woman
aged 18-29 with an upper secondary degree the probability would jump to 60%. Region of residence,
wealth, and gender are also estimated to affect the probability: if this younger, urban, and higher
educated woman was employed and living in Western Indonesia, the probability would be close to 80%.
However, changes in this profile, such as owning a car and being a man, play a marginal role.

Figure 3.4. Estimated probability of having access to internet

Probability from baseline with incremental changes in individual characteristics
%
100

80

60

40

20

0
Baseline Urban Age 30-59 Age 18-29 Upper High Employed Central Western Car owner Men
secondary education Indonesia Indonesia
Age Education Region

Note: The baseline refers to women aged 60 or above, with low education (i.e., low secondary or lower), not working (unemployed or inactive), living
in a household with no car, in rural areas of Eastern Indonesia. The bar shows the estimated average probability of accessing Internet.
Estimates are obtained through a probit estimation controlling for age, gender, education, employment status, rural location, car ownership and
regional effects.
Source: OECD calculations using 2022 National Socioeconomic Survey (SUSENAS, 2022).
StatLink 2 https://stat.link/x0w5z4

Facilitating investment for broadband connectivity

Developing ICT infrastructure to support the digital transformation has been a major component of the
national medium-term development plan (RPJMN) 2020–2024 (Indonesian Presidency, 2020[15]). The
Palapa Ring project, a nationwide high-speed backbone network which required the laying of more than
35 000 kilometres of land and sea fibre-optic cables, has substantially widened connectivity. The USD 1.5
billion project brought 4G internet services to all of Indonesia’s 514 kota/kabupaten (cities/districts). But
challenges remain. Especially in rural districts in 3T regions, profitability concerns discouraged operators
using the Palapa Ring to provide infrastructure to connect the landing stations of submarine cables to
medium and small towns (OECD, 2023[5]). Satellite internet has engineering advantages in overcoming
geographical challenges but is more vulnerable to weather conditions and requires high capital investment.

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Three geostationary multifunction satellites (SATRIA, for SAteliT Republik IndonesiA) are to be launched
before 2030 to improve internet coverage in the 3T Regions.
Further investment will depend on progress in tackling two issues that increase the price and limit the
quality of Indonesia’s fixed broadband connectivity (OECD, 2023[5]). First, fixed broadband operators have
proven reluctant to share passive infrastructure, while this is a widespread practice among mobile
networks. Insofar as ducts, poles, rights-of-ways, manholes, and civil works account for as much as three
quarters of the installation and maintenance costs for fixed broadband, sharing costs among providers
would be advantageous and result in higher investments (Wibisana et al., 2022[11]). The Omnibus Law on
Job Creation (see Chapter 2) also mandates passive infrastructure sharing and the next step in this regard
is the issuance of implementing regulation. This will require effective leadership to coordinate the
government agencies involved. In addition, there is value in streamlining environmental and other permits
required for installing digital infrastructure into integrated licences. Secondly, Indonesia’s licensing regime
requires service providers to bid for service-specific licenses (OECD, 2023[5]). Simplifying communication
licensing regimes considerably reduces transaction costs, facilitates market entry and speed ups
administrative processes for network deployment. As such, OECD countries have moved away from
service-based licenses towards single-class licence models based on a “registry” (OECD, 2020[16]).

Reforming communication regulation

Following liberalisation in 1999, around a dozen operators entered the market. Enhanced competition brought
lower prices, but low margins depressed corporate results and led to progressive consolidation. In 2022,
the merger of the second- and third-largest carriers to create Indosat Ooredoo Hutchison (Indosat) was
approved. There are still four major carriers in operation, and this may be more than is optimal according
to some experts. For instance, Eliott et al. (2023[17]) claim “consolidation presents a trade-off for consumers:
faster downloads at the cost of higher prices. […] Total surplus is maximized at three firms.”
Partly government-owned incumbents still play an important role in both the fixed and mobile markets. In
fixed broadband, Telkom Indonesia accounted for about 80% of the residential market and 90% of the
business market at end-2021 (OECD, 2023[5]). Moreover, the government is the sole owner of “Series A”
shares in both the state-owned fixed telephony carriers and in Indosat (in which PT Perusahaan Pengelola
Aset, a state-owned asset management company, holds a 9.6% stake). Series A shares grant veto rights over
some key business decisions and appointments, which means that in practice the government retains
influence over the strategy of the main competitor to the largest telecom SOE (OECD, 2023[5]).
At present Indonesia does not have an independent regulatory body for the telecoms sector. The
Telecommunications Regulatory Body (Badan Regulasi Telekomunikasi Indonesia, or BRTI), established
in 2003, was given independent powers to issue licenses and resolve disputes. Yet it was not fully independent
of the Ministry of Communications and Informatics (Kominfo) (OECD, 2023[5]). Furthermore, the selection
and appointment criteria for BRTI leadership were unclear and staffing and budget were limited. BRTI was
disbanded in 2020 following a governmental decision to streamline functions. This move is at odds with
recommendations of the OECD’s Council on Broadband Connectivity that call for regulatory decisions in
the communication sector to be made “in an independent, impartial, objective (evidence- and knowledge-
based), proportionate, and consistent manner” (OECD, 2021[18]). Relying on independent economic
regulators is a standard practice in OECD countries. For example, Mexico’s Federal Telecommunications
Institute (IFT), created in 2013, is assessed as an autonomous public agency, independent in its decisions and
function, with its own legal status and resources (OECD, 2017[19]; 2024[20]).
Given the presence of incumbent state owned/controlled operators, it is important that Indonesia’s
communication regulation aligns with competitive neutrality principles (OECD, 2023[5]). These principles
aim to ensure that all players (e.g., public, private, Indonesian, or foreign) face the same set of rules around
competition (OECD, 2021[21]). There is indeed a risk that entities with state ownership may receive favourable
treatment, for instance in access to essential facilities or government tenders. The authorities should

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consider conducting a competitive neutrality review in the communication sector along the lines of the
OECD Competitive Neutrality Reviews: Small-Package Delivery Services in Indonesia (OECD, 2021[22]), which
uses the OECD’s Competition Assessment Toolkit to identify ways to encourage greater competition.
There are specific shortfalls in regulation of the communication sector (OECD, 2023[5]). Indonesia lacks a
phone number portability guarantee. It also imposes high barriers to foreign equity ownership (e.g., there
are shareholding limitations on fixed telecommunication networks and internet telephony for public
purpose, plus requirements to reserve certain management positions for Indonesian nationals).
Furthermore, land ownership restrictions raise the cost of installing telecommunications towers and
secondary spectrum trading is prohibited. Concerning number portability, the Chilean experience with the
web-based facility “Me quiero salir” (I want to break free) created by SERNAC (the National Consumers’
Agency) may be relevant for Indonesia. This service facilitates contract cancellation, making it easier to
change provider (OECD, 2022[23]). Barriers to interconnections among network operators, as well as some
restrictions on cross-border data flows, also make Indonesia relatively closed to digital trade (OECD, 2021[22]).

Improving spectrum management

Efficient spectrum management can be a key enabler for investment in communication services (OECD,
2022[24]). In terms of assignment (i.e. making spectrum available in the market), experience across the
OECD has shown that transparent and well-designed licensing regimes, including auctions, provide legal
certainty, with the aim of fostering long-term investment and catering to innovation (OECD, 2022[24]).
Indonesia faces issues with the availability and use of mobile spectrum. There is a shortage of spectrum
for providing high-speed mobile broadband in urban areas (Zagdanski, Bahia and Castells, 2023 [6]).
Government auctions of new spectrum have been postponed on numerous occasions and are currently
expected to take place at end-2024 at the earliest. Advancing with the planned spectrum auctions would
help resolve these issues and promote the deployment of mobile networks (OECD, 2023[5]). In this vein, spectrum
licences could be assigned for a longer period than the current ten years, to increase incentives to invest
in network development. In most OECD member countries, spectrum licences have duration periods
ranging from 10 to 30 years, with clear conditions for licence renewals and revocation (Crean, 2022[25]).

Making the universal service fund more efficient

Universal telecoms service provisions are important in the Indonesian context, as a significant fraction of
households are seen by authorities as commercially unviable customers. A universal service programme
began in 2003. It was initially financed directly from the national budget, but in 2005 it switched to a funding
model in which communication operators paid 0.75% (later raised to 1.25%) of gross revenues (GSMA,
2013[26]). The fund is administered by the Telecommunications and Information Accessibility Body (BAKTI).
BAKTI’s main activities comprise: i) building base transceiver stations; ii) implementing the Akses Internet
programme to provide free satellite Internet services to schools, health centres and other public buildings,
and iii) initiating the Palapa Ring and iv) the SATRIA satellite programme.
Research points to scope for operational improvements and greater transparency in the management of
BAKTI. A lack of capacity may have delayed disbursements and hampered effectiveness (UNESCAP,
2017[27]). Based on fieldwork research in Southwest Sumba District, Hunsa and Budiman (2023[28]) suggest
that further efforts should be made to increase transparency over the choice of priority areas of BAKTI’s
interventions, visibility over medium-term plans, and communication and accountability vis-à-vis business,
local communities, and other stakeholders.

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Facilitating digitalisation in the business sector

There is plenty of scope for businesses to make greater use of digital tools

While Indonesia hosts a relatively large number of “unicorns” and a venture capital market is developing
(Box 3.3), the wider business sector makes comparatively relatively little use of basic, let alone advanced,
digital tools and technologies (World Bank, 2021[29]). According to one survey only 6% of firms used new
technologies throughout their operations, 30% of them had adopted technology to an intermediate degree,
and 64% had adopted basic technology only (Asian Development Bank, 2020[30]). Around one in seven
medium-, small- and micro-sized enterprise (MSME) are estimated to use the internet for marketing and
delivering products and services (Wicaksono and Simangunsong, 2022[31]). The share of firms that operate
their own website is below the rate in ASEAN and G20 peers. However, along some other dimensions, such as
using foreign-licensed technology or having an R&D budget, Indonesia is not the worst-ranked (Figure 3.5).

Box 3.3. Indonesia’s unicorns and venture capital eco-system

Indonesia possesses some favourable characteristics for successful business start-ups: a large domestic
market, an emerging middle class and digital-savvy young population. It is home to eight ‘unicorns’ (start-
up companies with reaching a valuation of USD 1 billion, not listed on the stock market), the second largest
number in ASEAN after Singapore (which has 15 unicorns) (CB Insights, 2024[32]). Two of them, GoTo
and J&T Express, are “decacorns” (start-ups reaching a valuation of more than USD 10 billion).
GoTo was created in 2020 from the merger of two of Indonesia’s oldest unicorns, ride-hailing and payments
platform Gojek and e-commerce leader Tokopedia. GoTo is a super-app company (one of a handful in Asia),
that provides multiple services including payment and instant messaging services. In 2022 GoTo is estimated
to have had 63.8 million users, with 17.7 million merchants and to have accounted for between 1.8 and 2.2%
of Indonesia’s GDP (LPEM FEB UI, 2023[33]). GoTo was listed on the Indonesian Stock Exchange in 2022.
Indonesia’s venture capital market has been developing, together with private equity. Total value of deals
reached USD 3.6 billion in 2021-22. Initially the focus of investment was on into platform businesses,
particularly e-commerce, mobility and logistics. More recently interest has grown in climate tech,
particularly electric vehicles and battery technologies.

There is substantial evidence underscoring the potential benefits of greater use of digital technologies in
Indonesia, in particular internet use. Based on a survey of 1 100 firms, Damuri et al. (2018[34]) finds that an
online presence increases sales by 12%, more so for smaller firms. Falentina et al. (2021[35]) find positive
effects on local incomes, labour productivity, and exports in a study of internet use in the city of Yogyakarta.
A study using the Indonesia’s labour force survey finds internet adoption in rural Indonesia was associated
with a 29% increase in household income (Priyatna, 2022[36]). Yan Ing and Zhang (2023[37]) find that direct
imports of automation equipment by manufacturing companies is associated with strong performance on
several fronts, including output, employment, wages and productivity. Using the Indonesia Family Life Survey,
Kharisma (2022[38]) finds use of the internet strengthens social capital.

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Figure 3.5. Firms' adoption of digital technologies is modest

2023 or latest year
A. Percent of firms using technology B. Percent of firms having their C. Percent of firms that spend on
licensed from foreign companies own website R&D
% % %
18 90 18

15 75 15

12 60 12

9 45 9

6 30 6

3 15 3

0 0 0
IND

IDN

SGP

TUR
ZAF

MYS

VNM

MEX

IDN

IND
VNM

ZAF
MYS

SGP

TUR

MEX

IND

IDN

VNM

MEX

MYS

SGP
TUR

ZAF
Note: Data refer to 2022 for India, 2020 for South Africa and 2019 for Malaysia and Türkiye. The surveyed firms respond to the following
questions: does this establishment at present use technology licensed from a foreign-owned company, excluding office software?; at the present
time, does this establishment use its own website?; and during last fiscal year, did this establishment spend on formal research and development
activities, either in-house or contracted with other companies, excluding market research surveys?
Source: World Bank Enterprise Surveys Database.
StatLink 2 https://stat.link/rocgpk

Low adoption of digital technologies is particularly pronounced in agriculture (Mercy Corps and Rabo
Foundation, 2021[39]). Most farmers in Indonesia did not advance beyond primary school, are over 45 years
old, and do not use the internet. Networks of peers, family or friends are the main information source, only
about a fifth use social media to buy or sell, with under 5% active on e-commerce sites. Meanwhile,
evidence suggests Internet use positively and significantly affects farmers’ subjective well-being, in
particular in the lowest income quintile (Rahman et al., 2023[40]).
There are many policy initiatives aiming to facilitate the digital transformation of Micro, Small and Medium-
sized Enterprises (MSMEs). The government has launched initiatives such as Making Indonesia 4.0
Roadmap (in 2018), E-Commerce Roadmap (2019), and Go Digital Vision (2020). KADIN CIPTA facilitates
access to blockchain-based digital identity for industry and MSMEs that produce analytics and data available
to third parties. The Promise II Impact programme of the ILO focuses on strategies to improve SMEs’
productivity and scale and support the adoption of digital technology by regional development banks
(BPD), rural banks (BPR) and buyers. The Ministry of Trade runs a programme to promote education and
awareness among consumers regarding their rights in e-commerce.

Some aspects of regulation may be constraining digital adoption

Some regulatory initiatives have potential downsides for digital adoption. A case in point is Regulation 31
on “Business Licensing, Advertising, Guidance and Supervision of Business Entities Transacting Through
Electronic Systems”, issued in 2023. It introduces new requirements and restrictions for both onshore and
offshore e-commerce businesses, including a minimum price for imported goods, a prohibition on social
commerce platforms facilitating payment transactions, and ceilings on direct e-commerce purchases from
overseas. Limiting social-commerce platforms to “showcase goods and/or services” effectively prevents
any direct dealings between sellers and buyers and may damage the ability of e-commerce to support
SMEs. There are also some other additional compliance burdens imposed on e-commerce operators.
Violations may lead to administrative actions, including blocking of access to websites/platforms and
revocation of business licenses. The impact of these regulations on e-commerce should be monitored, and
the regulations should be amended if it is deemed necessary by this evaluation.

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As discussed in Chapter 2, the OECD’s Services Trade Restrictiveness Index (STRI) and Product Market
Regulation (PMR) database indicate very high regulation in the services sector and across other sectors
and regulatory areas. This is likely to be stifling technological adoption. Despite some liberalisation,
restrictions are particularly prevalent in legal, accounting, telecommunication, and insurance services, with
higher barriers to foreign investors’ entry and ampler command-and-control regulations than in regional
trade partners. The scope for better regulation (i.e., more conducive to competition) is particularly great in areas
such as network sectors, public procurement, governance of SOEs, and regulatory impact assessments
(Chapter 2).

Digitalisation can help increase financial inclusion

According to the World Bank Enterprise Survey, access to finance is the most commonly cited obstacle to
doing business for SMEs in Indonesia (Figure 3.6). Digital enterprises are particularly affected as their
assets are mostly intangible and hard to use as collateral. As of January 2024, lending to SMEs accounted
for only 21% of all bank lending (and 7% of GDP). Credit constraints are amplified for female borrowers,
who are more likely to lack collateral to secure loans, and for populations outside of Java. The main policy
instrument, Kredit Usaha Rakyat (KUR), is a partial credit guarantee programme that helps to fulfil the
collateral requirement hindering SMEs from accessing credit.

Figure 3.6. Access to finance is a significant problem for SMEs

Percentage of respondents
Small firms Medium-sized firms
2023 2009
Access to finance Access to finance

Crime and disorder Political instability

Corruption Crime, theft and disorder

Political instability Corruption

Informal sector practices Tax rates

Tax rates Informal sector practices

Inadequately educated workforce Business licensing and permits

Labor regulations Labor regulations

Business licensing and permits Inadequately educated workforce

0 10 20 30 40 50 60 0 10 20 30 40 50

Note: SMEs cover small firms (5 to 19 employees) and medium-sized firms (20 to 99 employees). The surveyed firms answer the question on
which element (out of a list of 15) is the biggest obstacle to them.
Source: World Bank Enterprise Surveys Database.
StatLink 2 https://stat.link/lhxav6

Though financial inclusion is improving, it remains a major socio-economic challenge in Indonesia.

According to the Global Findex 2021, bank account ownership increased from 20% in 2011 to 52% in
2021, largely due to increasing mobile money account ownership. According to the 2022 National Survey
of Financial Literacy and Inclusion (SNLIK), the level of financial inclusion (as measured by the use of
financial products and services) has reached 85%. Also, around 75 million Indonesians made a payment
through mobile phones in 2021, 33 million more than in 2014. While these advances are noteworthy, bank
account ownership in Indonesia significantly lags behind the rest of East Asia-Pacific and lower-middle
income country averages (as of 2021, 81% and 62%, respectively compared with 52% in Indonesia). Savers’
poor understanding of financial instruments and concerns surrounding online security and data breaches
contribute to Indonesia’s poor ranking (World Bank’s Global Findex Database 2021).

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The expansion of e-government (see previous sections) and the diffusion of digital wages can usefully
prompt households to start using financial services. For instance, the digitalisation of government payments
such as social assistance transfers will have motivated the opening of bank accounts. The switch to
cashless payments by the two main transfer programmes (the conditional PKH and the education-focused
PIP) has resulted in mass opening of saving accounts (World Bank, 2020[41]). Similarly, progress has been
made in promoting digital wage payments according to an ILO report (2023[42]).
Government is pressing on with dedicated interventions, such as the National Strategy for Financial
Inclusion 2020-2024 and the 2023 Development and Strengthening of the Financial Sector (P2SK)
Omnibus Law. In addition, Indonesia has adopted stand-alone financial inclusion strategies for women and
youth. Furthermore, women’s financial inclusion has improved substantially, resulting in their financial
literacy index surpassing that for men in 2022. The strategy for youth includes a survey to better understand
their financial behaviour and a programme for national youth ambassadors operating as influencers in
universities and social media.

Encouraging further growth of fintech

Fintech is among the sectors with considerable scope for growth in Indonesia. It has been growing rapidly,
from 51 fintech players in 2011 to 334 by 2022 (Kumar et al., 2023[43]). One segment of fintech comprises
businesses creating new payment mechanisms. Open banking services, which allow customers to share
financial information securely across banks and other financial institutions, are also developing. There are
reportedly 30 million borrower accounts, 60 million payments accounts and 9 million retail investor
accounts. The expansion of fintech is bringing competition between traditional commercial banks and
emerging players, such as P2P (peer-to-peer) lenders and digital banks. Fintech digital investment (e.g.,
robo-advisor) has also grown rapidly, although from a low base (IMF, 2024[44]).
Payment fintech is being facilitated by advances in technical regulation by Bank Indonesia (BI) in
collaboration with the Indonesian Association of Payment Systems. In 2019 BI launched Payment System
Blueprint 2025 that encouraged collaboration between banks and fintech; one measure was the
introduction of QR (Quick Response) codes standards. Furthermore, BI is sponsoring the National
Standard for Open API (Application Programme Interface) Payments (SNAP), which will further advance
digital transactions. Lastly, there is a new BI initiative on digital currency (Proyek Garuda). Indonesia
currently bans the use of cryptocurrencies as a means of payment but allows investment in them. BI aims
to ensure the fast, safe, and affordable digital operation of the Rupiah.
Fintech can be encouraged further by maintaining regulatory clarity, shifting towards principle-based
regulations, and supporting collaboration forums between regulators and fintech players. Also,
strengthening regulatory sandbox programmes encourages experimentation. Sandbox programmes
require attention to consumer protection and consumer feedback (concerning both the business idea and
its regulation). Flexible regulation may also take the form of reduced financial-service licencing
requirements, as in the Netherlands and the United Kingdom (these schemes usually impose a ceiling in
terms of number of customers or sales).

Seizing the potential of e-government

Governments can facilitate the economy-wide digital transformation by digitalising processes and the
services supplied to businesses and households (Sorbe et al., 2019[45]). Enhanced provision of e-
government services can also strengthen fiscal revenue collection and expenditures allocation, improve
public-sector efficiency, including in procurement. Individuals and businesses can benefit from more
responsive, accountable, and efficient public services.

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78 

Indonesia has been making progress in introducing e-government. The pandemic prompted the
introduction of digital administration in unemployment benefits, grants to the self-employed and to
employers, and state-guaranteed loans. Also, the share of individuals using the internet to interact with
public authorities increased rapidly during the crisis. However, Indonesia has considerable scope to further
develop e-government services (Figure 3.7). In 2022, the United Nations E-Government Readiness Index
ranked Indonesia as 77th out of 193 countries.

Figure 3.7. There is scope to further develop e-government

E-Government Development Index (EGDI), 2022
Scale from 0 to 1 (highest)
1.0

0.8

0.6

0.4

0.2

0.0
IND

IDN

THA

TUR
PHL

CZE

LVA

NLD
CHL

EST
VNM

ZAF

BRA

LTU

JPN

NZL
MEX
CRI

MYS
HUN

CHN
ARG
COL

SVK

POL
SAU

SVN

ARE
SGP
USA

AUS
Note: The EGDI is a composite indicator which measures the readiness and capacity of national institutions to use ICTs to deliver public
services. It is the weighted average of three normalized indices: 1) telecommunications Infrastructure Index; 2) Human capital Index; and 3)
Online Service Index. The higher EGDI, the higher the level of e-government development in a country.
Source: UN e-Government Knowledge base (UNeGovKB).
StatLink 2 https://stat.link/ayi217

Ensuring safe and secure digital infrastructures

Digital security, as elsewhere, is a growing issue, though data suggest incidents are less common than in
some peer countries. A survey of cybersecurity managers found that only around 30% reported no
cybersecurity incident in the past 12 months (Figure 3.8, Panel A). This share was somewhat higher in
Korea but was even lower in some other countries in the region. An indicator of commitment to
cybersecurity (Panel B) suggests the country is performing worse than most countries in the region. Data
leaks have hit various large institutions, including some major banks and the social security agency (Habir
and Negara, 2023[46]). In 2021, the National Cyber and Crypto Agency (Badan Siber dan Sandi Negara,
BSSN) estimated the economic losses from cyberattacks at IDR 14.2 trillion (USD 860 million) (Sapulette
and Muchtar, 2023[47]).
Indonesia currently does not have a specific cybersecurity law. Provisions on cybersecurity are mainly
covered in Law No. 19 of 2016 on Electronic Information and Transactions and Government Regulation
No. 71 of 2019 on the Implementation of Electronic Systems and Transactions. There are also some further
implementing regulations issued by the National Cyber and Code Agency (Badan Siber dan Sandi
Negara - BSSN).
Data leaks have hit various large institutions, including some major banks and the social security agency.
Indonesia’s privacy policies include the 2022 Personal Data Protection bill (with a two-year transition
period), which sets corporate fines (equal to up to 2% of annual revenue) for data breach. Individuals can
be jailed for up to six years for falsifying personal data for personal gain or up to five years for gathering
personal data illegally. Users are entitled to compensation for data breaches and can withdraw consent to use
their data. The law draws inspiration from the European Union legislation, although the penalties are milder.

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To augment these legal provisions, consideration should be given to establishing an independent commission
for data privacy and information provision along the lines, for instance, of those established in Australia and
Singapore (Box 3.4).

Figure 3.8. As elsewhere, cybersecurity incidents are common

A. Percent of respondents reporting no B. Global Cybersecurity performance Index
% cybersecurity incident in past 12 months Scale from 0 to 10 (best)
50
10

40
8

30 6

20 4

10 2

0 0
VNM IND JPN SGP THA MYS IDN PHL CHN KOR MEX PHL VNM IDN THA CHN TUR KOR JPN MYS SGP

Note: In Panel A, data are based on a double-blind survey conducted in July 2023 of 4009 leaders responsible for cybersecurity in their
organizations, including executive leadership, security leadership, security management, and technical leadership for cybersecurity. The
respondents interviewed were based in 14 economies. In Panel B, the Global Cybersecurity Index measures the commitment of economies to
cybersecurity across several dimensions: legal measures, technical measures, organizational measures, capacity building, and cooperation.
Source: Cloudflare Inc. (2023), Securing the Future: Asia Pacific Cybersecurity Readiness Survey; and Wiley, Digital Skills Gap Index 2021.
StatLink 2 https://stat.link/028h45

Box 3.4. Protecting personal data – the experience of Australia and Singapore
The Office of the Australian Information Commissioner (OAIC) was established in 2010 (AIC Act) to
promote and uphold privacy and information access rights. It is an independent statutory agency within
the Attorney-General’s portfolio and is headed by the Australian Information Commissioner. The
Office’s primary functions are privacy, freedom of information and government information policy.
Responsibilities include conducting investigations, reviewing decisions, handling complaints, and
providing guidance and advice. In 2022-23, the Office (with staff headcount of 177) finalised 2 576
privacy complaints, resolving 84% of them within 12 months, and handled 11 672 privacy enquiries.
The Personal Data Protection Commission (PDPC) was established in 2013 as Singapore’s main
authority in matters relating to administration and enforcement of its Personal Data Protection Act. The
Commission’s activities include overseeing the Do Not Call Registry, a system to prevent individuals
receiving unwanted telemarketing messages. The Commission also conducts educational and outreach
activities to help organisations adopt good data protection practices.

Similar to elsewhere, Indonesia has developed an internet policy that, inter alia, aims to ensure data privacy
and limit harmful content. One measure is the Minister of Communication and Informatics Regulation No.
5 of 2020 on Private Electronic System Operators (MR5), which became effective in 2022. The Regulation
includes requirements for Internet platforms to register under new licensing rules that aim to protect
consumer data and ensure that online content is used in a “positive and productive” way and no content is
available which “disturbs public order”. The Regulation also includes a provision allowing the government
to demand access to electronic data without needing a court order.

Digitalisation is improving the delivery of key government services

Digitalisation has progressed well in several policy areas. As discussed in Chapter 1, one such area is
taxation. In public healthcare, the SatuSehat (One Health) platform, which was initially developed in 2020

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80 

for contact tracing and managing vaccination records, now includes telemedicine functions for virtual
doctor visits, enables patients to store their health records, and tracks treatment adherence. In addition,
digitalisation has helped BPJS Kesehatan, the single-payer national health social security programme, to
extend coverage, from 133 million users in 2014 to 262 million in late 2023. SatuSehat’s roll-out to cover
more than 30 000 health facilities across the country should be accelerated and information systems,
research, and health development should be better integrated (World Bank, 2024[48]).
Digitalisation of the judicial system has been underway for some time, including online trials and a digital
whistleblowing and oversight system (Support to the Justice Sector Reform in Indonesia, SIWAS).
However, digitalisation does not necessarily resolve systemic shortfalls of the legal system, such as those
in transparency, integrity, and accountability: sometimes it can amplify them. Given this, clarity should be
ensured in the interpretation of the principle of “open trial to the public” in the context of online trials
(UNODC, 2021[49]).
Indonesia began developing digital procurement in the early 2000s. The National Public Procurement
Agency (LKPP) has expanded its LPSE (Electronic Procurement Services) system across the country.
According to a report by the Asian Development Bank (2022[3]), LKPP was allocating about 86% of the
procurement budget through electronic channels, with savings estimated at more than USD 10.7 billion in
the 2015-18 period. However, similar to digitalisation in other areas, structural problems are not necessarily
resolved. For instance, digitalisation can facilitate the opening up of procurement to SMEs, disadvantaged
groups and local suppliers but may then require attention to quality safeguards.

Developing integrated one-stop digital services

With more transactions moving online, digital identity (ID) systems are gaining in importance. These
systems allow people to securely, and conveniently, verify their identity to both government and private
sector firms. In this regard, Indonesia has been consolidating the National ID (KTP), a unique number
obtained at birth, with the Tax Identification Number, created upon registration in the tax system. The
combined system, e-KTP, is accessed via a smartphone app. As of end-July 2023, 57.9 million accounts
have been integrated, accounting for 82% of individual taxpayers.
Roll out of a new digital identity card is underway that is designed to eventually replace the e-KTP system.
The Digital Population Identity (IKD) uses a single sign on (SSO) identifier and provides access to
government services online. The IKD app can be used as a "digital wallet" to store identity documents,
such child identity cards and birth certificates. The government is looking into adding features that support
vulnerable communities, such as the elderly or people with disabilities. Take-up of the service has been
sluggish: at end-2023, less than 8 million people had activated their IKD apps. As evidenced in other
countries, the use of digital identity has been instrumental in a comprehensive e-government (Box 3.5).

Box 3.5. Using digital IDs to access e-government: the experience of Estonia and Denmark
Digital transformation in government services began in Estonia in the early 2000s. A principle of digital-
by-default applies throughout government. It is estimated that 99% of Estonia’s public services are online
and that 98% of Estonian nationals use e-IDs. The latter are used to produce more than 10 million digital
signatures per year. Using electronic signature saves an estimated 2% of Estonian GDP each year.
In Denmark, 95% of the population uses a digital ID (NemID). NemID is combined with an administrative
portal (borger.dk) that is a one-stop-shop for most administrative processes. Citizens are also required
to register their bank account details, allowing smoother collection of taxes and delivery of benefits. In
addition, there is a messaging system for interacting with the government, Digital Post, which is used
by 94% of the population.
Source: (OECD, 2019[50])

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There remains considerable scope for further co-ordination across government data and consolidation of
online services. Co-ordination issues have arisen partly because Ministries have been launching digital
initiatives somewhat independently. The Ministry of Communications and Informatics (Kominfo) estimates
that there are 27 400 government online applications. The establishment of the SPBE (Electronic-Based
Government System) Coordination Team is welcome but there are significant challenges (World Bank, 2022[51]).
The scale of the data governance structure illustrates the challenges with data and metadata standardisation
(Tjondronegoro et al., 2022[52]). There are currently 632 data trustees, including 84 ministries and agencies
in 34 provinces. Low participation in data registration and discrepancies between data requirements and
production hinder implementation of efforts to link up and standardise data. Further, policies are not fully
harmonised between the central and regional levels of government and database experts are in short supply.
Successful digital transformation can be helped by awareness-raising and educational activities, both
within public administration and towards the general public. In this regard, the strong commitment of
political leadership determines the success of the entire process. Development of a comprehensive
national digital transformation agenda would help, along with tasking a central government authority to
spearhead the necessary political and bureaucratic support across multiple ministries.

Making the most of open government data

Similar to other countries, Indonesia is making more government data publicly available. This is motivated,
inter alia, by a desire to encourage innovative data-based services and research. In 2019 a set of data
harmonization regulations (Satu Data Indonesia) was introduced that strengthens the shareability,
accuracy, timeliness, and accountability of data sets in government ministries and agencies. An online
portal (data.go.id) provides access to the harmonized data. The data has, for instance, been used to
identify fraud and corruption in government procurement and other budget processes. Government is
collaborating with the National Research and Innovation Agency (Badan Riset dan Inovasi Nasional, BRIN)
to optimise the use of open government data. As more open data in machine-readable format becomes
available, initiatives are planned to engage community and neighbourhood groups. An influential and
pioneering experience has been Pulse Lab Jakarta, founded in 2012 as a partnership between the United
Nations and the government of Indonesia (Julliand, Sumadi and Karetji, 2021[53]) and upgraded in 2022
into a regional open data hub.
However, progress in achieving wider goals in open government has proved challenging. As a partner
country of the Open Government Partnership (OGP), Indonesia sets action plans on open government.
The sixth OGP National Action Plan (2020–2022) included 24 commitments. An assessment of progress
concluded that only half had been completed or substantially implemented. Moving forward, it will be
important to reinforce government implementation commitment, for instance in the form of presidential
decrees, to ensure priority budget allocations. The seventh Action Plan (2023–2024) includes
commitments on open contracting, access to justice, and combatting sexual violence.
A whole-of-government policy approach for data management reduces fragmentation and facilitates cross-
sectoral data sharing. Through Satu Data Indonesia has the key elements of data management. However,
implementation is still at a preliminary stage. In practice, the availability of reliable data varies widely across
government departments and the lack of data standards and interoperability hampers efforts to make
government action more effective (Islami, 2021[54]).

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Ensuring education and training is geared to digitalisation

Levels of both general and digital-specific education and skill influence the development of digitalisation.
These are also drivers of digital divide. In Indonesia, there remain sizeable shares of the population with relatively
low education attainment and correspondingly low engagement with digital technologies.

General educational attainment and ICT-related skills remain low

Shortfalls in the general level of education limit the capacity of the population to use digital tools and
services and hinder Indonesia’s capacity to reap the benefits of digitalisation. The OECD’s PISA scores
highlight the issues (see Chapter 2). Furthermore, Indonesian student skills seem particularly weak in subjects
most relevant for ICT and the digital economy. Almost no students in Indonesia were classified as top
performers in mathematics, compared to an OECD average (9% of students) which is itself much lower
than in the six Asian countries and economies participating in PISA (OECD, 2024[55]). As discussed in detail in
the previous Survey (2021[56]), misalignments of training offer with labour market add to the problem of shortfalls
in generic skills. The misalignment is possibly even larger in the case of specific digital skills.
Studies point to significant skill shortages in ICT-related employment in Indonesia and limited digital skills
in the workforce. According to (ILO, 2021[57]), Indonesia’s ICT sector employed an estimated 1 million
workers in 2020, with an additional 500 000 working as ICT professionals and technician roles across all sectors
that use ICT. Shortages are particularly acute for jobs such as web developer/web programmers and
graphic designers. (AWS/AlphaBeta, 2021[58]) estimate that around 75% of Indonesian workers are digitally
illiterate. A study by SMERU, Oxford, and UNESCAP (2022[59]) estimates that fewer than 1% of Indonesian
workers have advanced digital skills. It is telling that, while more than 96% of Indonesia’s training institutions
believe that their graduates are job-ready, barely a third of employers share this view (Jagannathan and
Geronimo, 2021[60]). Furthermore, women are severely underrepresented in Indonesia’s tech industry.
According to a 2020 report by McKinsey, women make up only 27% of the digital workforce, while the 2020
report by Women in Tech in Indonesia shows women hold only 12% of executive positions in ICT firms.
Technology and integration have increased the demand for higher-order general cognitive skills – such as
complex problem-solving, leadership, critical thinking, and advanced communication – that are transferable
across jobs. Therefore, modern tertiary education needs to cultivate in students a minimum threshold of
foundational skills. The additional year of general education that was added to undergraduate programmes
in China and Hong Kong in 2012 seems to have yielded some positive results (Lam, 2022[61]).

Policy momentum to boost workforce training needs to be maintained

Government needs to continue campaigns to strengthen skills training in the workforce. Less than 10% of
firms provide training to workers, compared with almost one-third in East Asia (World Bank, 2023[62]). The
government has launched a three-tier strategy to boost training for the digital economy. For professionals
and managers there is a national scholarship (DTS) and the Digital Leadership Academy. The Pre-
Employment Card Program (Kartu Prakerja) targets job seekers, workers affected by layoffs, and/or workers
in need of skills training. It offers skills training, upskilling, and reskilling, with a focus on digital skills. Skills
for Jobs Indonesia, launched in January 2023 in partnership with Microsoft, provides free-of-charge digital
literacy, hard and soft skills, and job preparation training. Looking forward, priority should be put on
improving the quality and relevance of training programmes being delivered at the local level, with more
industry involvement, including through apprenticeship programmes to promote training (OECD/ADB, 2020[63]).
Stronger training incentives for employers and individuals should be considered. Several OECD countries
encourage workplace training via subsidies or tax breaks for employers (OECD, 2022[23]). More such
measures should be considered in Indonesia. In addition, incentives for individuals to take up training
should be strengthened. For instance, personal account schemes allowing individuals to accumulate time

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  83

for training can help overcome time constraints for taking training courses. France has been using such accounts,
enabling employees to use training hours to acquire recognised qualifications or basic skills (Perez and
Vourc’h, 2020[64]). Such systems need strong guidance to ensure training is in relevant labour market fields.
They also need to subject training providers to robust quality assurance, and regularly evaluate the programmes.

Making greater use of digital tools in education

Indonesia is rolling out a major education reform that relies on the use of digital teaching tools. The reform,
Merdeka Belajar (Freedom to Learn), was launched in 2021 (see Chapter 2 for further details) entails
teachers using a digital platform Platform Merdeka Mengajar (Emancipated Teaching Platform) that
includes tutorials and resources on the new curriculum along with management and planning tool. A
programme that trains “learning leaders” is used as part of the campaign to ensure teachers are familiar with the
new system.
Education policy also aims to increase use of ICT in vocational education and training. Specific projects
include the development of two systems of ICT-based learning media, PembaTIK and MembaTIK, the
former specifically for teachers and latter for the general public. Another example is Rapor Pendidikan
(Education Scorecard), a platform that provides performance information and helps schools and teachers
to refine their teaching methods.
Rolling out digital education tools is particularly challenging in Indonesia. Teachers often lack the
appropriate skills. In 2020, 67% of teachers reported difficulties in operating devices and using online
learning platforms (UNICEF, 2021[65]). Furthermore, training programmes to address this issue are often
inadequate (Yarrow et al., 2022[66]) and teacher absence from training can be high. Many schools do not
have internet connections. Only 55% of schools operating under the Ministry of Education and Culture
have some form of internet connection, for instance.

Digital skills in the government sector need strengthening

Several reports underscore shortfalls in the number of government employees with strong digital skills
(SMERU/GIZ/BGS, 2023[67]). Less than one in every 400 government employees have professional digital
skills (Pranata Komputer, or Prakom, functional positions) and vacancies for Prakom posts are often not
filled. Retention is challenging due competition from the private sector. Increased use of external services
would help resolve this issue along with provisions for higher wages in government posts with hard-to-fill
openings.

Helping households and workers handle digitalisation

All over the world, digitalisation is changing the nature of work (OECD, 2023[68]). It is producing the
automation of some tasks, creating new types of tasks, shifts to more flexible forms of employment (such
as “gig economy” work) and new flexibilities in working practices. Employers are demanding specific skills
and the design of labour market, education and training policies should respond effectively to current and
forthcoming challenges. Among the digital occupations, software developers, programmers and engineers,
data scientists and data engineers have experienced some of the most notable rates of growth in most
countries (OECD, 2022[69]).
Recent OECD research finds that 27% of jobs in Indonesia are in occupations at high-risk of automation
(including from AI). A McKinsey report (Das et al., 2019[70]) estimates that in Indonesia about 16% of the
total hours worked could be automated, but also concludes that job losses would be more than
compensated for by new labour demand. Working from home is particularly appealing in Indonesia’s large
cities, especially Jakarta, as commuting times are long. Estimates of the average commuting time in
Jakarta range from 80-120 minutes (Suharto, Kusuma and Wijaya, 2021[71]). Digital technologies also lie

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behind the rise of the gig economy (Permana, Izzati and Askar, 2022[72]). Approximately 2.3 million
Indonesians are estimated to provide services where digital platforms have become important, such as
accommodation and transportation.
Alongside the benefits in terms of productivity and flexibility, digitalisation brings risks for employees.
Moreover, awareness of social protection among gig-workers, mostly as ride-hailing drivers, food delivery
riders and couriers, is scarce. In this regard, BPJS Kesehatan could cooperate further with online
application-based companies to disseminate the importance of contributing to social security for such
workers. As regards working from home, Indonesia faces similar issues as elsewhere with concerns about
isolation, lack of team engagement, and occupational safety and health.
Governments can support adjustment to digitalisation by ensuring good-quality labour market information
services and support. In this regard the government has built SIAPkerja, a digital system that integrates all
services related to employment, including skills training, job placement and industrial relations. Similar
initiatives to upgrade labour market services are undertaken in countries such as Spain, India, Uruguay,
Morocco, and the Netherlands (OECD/ADB, 2020[63]). In addition, Indonesia has integrated the Social
Security Provider for Employment (BPJS Ketenagakerjaan) which manages the cash benefit payment, with
the national job platform Karirhub-Sistem Informasi Ketenagakerjaan (Karirhub-Sisnaker).

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Findings and recommendations

MAIN FINDINGS RECOMMENDATIONS (Key recommendations in bold)
Strengthening broadband connectivity
Nationwide deployment of 5G infrastructure is particularly costly given Subject digital infrastructure investments to granular cost-benefit
Indonesia’s archipelagic geography. analysis.
Rollout of high-speed internet infrastructure needs to be faster. Reduce barriers to broadband deployment through simplified
The communication regulator has been suppressed. Direct and indirect procedures for obtaining permits for infrastructure installation,
state participation in communication operators generates potential including for access to public infrastructure.
conflicts of interest and risks undermining competitive neutrality. Establish a fully independent and well-resourced communication
regulator.
Fixed broadband penetration is low and rural/urban disparities are large. Consider amending spectrum framework and assigning additional
spectrum to support 5G deployment.
The digital economy poses new challenges for competition policy. Systematically review the competitive pressures on digital sectors by
conducting market studies and applying the guidelines of the OECD’s
Competition Assessment Toolkit.
Facilitating digitalisation in the business sector
The business potential of digital transformation is not being fully exploited. Further boost public support to SMEs, in cooperation with the business
Adoption of digital tools lags OECD countries, particularly among SMEs. sector, through targeted programmes to facilitate the adoption of digital
tools.
One of the most important barriers to the growth of start-ups is access to Promote further the development of the fintech sector, venture capital,
finance. angel investors and alternative financing for start-ups and SMEs.
Digital services face several barriers, as in other service sectors (see To facilitate the digital transformation, lower tariffs and non-tariff barriers,
Chapter 2). The 2023 STRI score is above the OECD average, and the reduce trade costs, and promote greater regulatory interoperability.
score has increased slightly compared to 2022. Assess the impact of the new e-commerce regulation.
Innovation centres and start-up incubators and accelerators suffer from limited Recruit more experienced employees with expertise across the sector to
management capacity, lack of dedicated full-time staff, and the failure to facilitate collaboration within the innovation ecosystem.
establish standard operating procedures and to secure sustained funding.
Seizing the potential of e-government
Poor safety and security limit the benefits from online transactions. Guarantee independent oversight to strengthen the credibility of the Law
on Personal Data Protection.
Digital security is lagging behind while the emergence of new types of Step-up investment in digital security and promote information across the
threats can have a significant impact on financial stability. society about how to manage risk.
Awareness of cybersecurity and privacy issues is scarce. Integrate digital security and awareness throughout the educational
system and in adult education. Develop subsidiary regulations and
mobilize support for policy implementation.
There have been important advances towards integrated one-stop digital Reach 100% penetration of the Universal digital identity and accelerate
services, in particular the rolling out of a new digital identity card (IKD). activation of the e-KTP.
However, rollout has been slow.
There remains considerable scope for further co-ordination across Rationalize existing initiatives and freeze new ones, make progress in
government data and consolidation of online services, as several data and metadata standardisation, encourage participation in data
ministries have launched their own ambitious public digital initiatives. The registration and reduce discrepancies between data requirements and
establishment of the SPBE (Electronic-Based Government System) production.
Coordination Team is welcome but there are significant challenges. Reinforce the powers of the SPBE Coordination Team.
Digitalisation has enhanced transparency in public procurement. Some Create equal treatment of SOEs and the private sector with regard to
deficiencies remain, such as preferences granted to SOEs and local government procurement. Align the delays to submit a bid with the size
suppliers. and complexity of the tender. This is particularly important in technically
complex projects where it may take time to develop accurate cost estimates.
Policy initiatives to use big data in real-time decisions suffer from overlap Develop a comprehensive national digital transformation agenda and
across different ministries or government institutions. task a central government authority with multi-ministry oversight to
spearhead the necessary political and bureaucratic support.
Ensuring education and training is geared to digitalisation
The foundation and specific skills for harnessing digitalisation are weak. Give digital competences more prominence in the school
The pool of ICT professionals is small and the gender composition is biased. curriculum, upgrade the digital skills of teachers and principals,
and encourage girls’ participation in STEM education.
Up to 50% of jobs are at risk of automation. Semi- and non-qualified blue Fully revise firm-provided training programmes to increase relevance and
and white collars are particularly vulnerable. quality of training and better target participation to vulnerable workers.
The quality and relevance of training programmes is very often poor.

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4 Pressing ahead with the green

transition

Andrea Goldstein, OECD

Indonesia has ambitious goals in transitioning to a green economy, most

notably it aims to achieve net-zero greenhouse gas emissions by 2060 or
sooner. The country is vulnerable to the environmental and social effects of
climate change and faces challenges to enhance mitigation, improve
adaptation, and increase resilience. Major issues in phasing out coal-fired
electricity generation and increasing renewable energy capacity can be
addressed through domestic policies, such as carbon taxation, public
investment in transmission, and international support. Greater investment in
public transportation as well as support for electric vehicles are also needed.
Progress has been made in switching households to clean fuels in cooking,
but further progress is needed, and buildings should be better insulated
against heat. For climate change adaptation, Indonesia has well-established
systems of disaster response that would still benefit from more granular
coverage. Market-based policies can help to address the greater risk of
drought in some areas of the country.

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Introduction

Indonesia has ambitious goals in transitioning to a green economy, most notably aiming to reach net-zero
greenhouse gas (GHG) emissions by 2060, after a peak in 2030 (Figure 4.1, Panel A). Recent years have
seen an increase in net emissions (Panel B), although in per capita terms Indonesia produces roughly half
as many GHG emissions as the OECD average. As for other emerging market economies, emission
reduction will be challenging, insofar as the high rate of economic growth necessary to achieve convergence in
living standards with OECD Members implies increases in emissions in the short term. Another challenge
for Indonesia is its heavy dependence on coal for energy supply. Ensuring energy security as the reliance
on coal decreases is a key aspect of the green transition. Meanwhile, Indonesia’s large and fertile land
mass provides opportunity to slow down net emissions through changes in land use, in particular by
eventually reversing deforestation.

Figure 4.1. Indonesia needs to sustain GHG emission reductions to reach net zero
A. GHG emissions: trends and targets, 2005-60 B. GHG total emissions per capita
Mt CO2 eq t CO2 eq
3 500 15
Total GHG emissions (Latest available data) Indonesia OECD
3 000 Total GHG emissions (reported to UNFCCC) EMERG20 ASEAN peers
BAU 2030 12
2 500
2030 target (CM1): -31.89% 9
2 000
2030 target (CM2): -43.20%
1 500
6
1 000
3
500

0 0
2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Net-zero target
(CM2)
Note: In Panel A, business-as-usual (BAU) projections and countermeasures (unconditional and conditional mitigation scenarios, CM1 and CM2)
from the Enhanced Nationally Determined Contribution - Report by Indonesia to the UNFCCC (2022). In Panel B, OECD calculations based on
EDGAR. Weighted averages for the aggregates by using population data in 2022. EMERG20 refers to G20 emerging economies excluding
Indonesia: Argentina, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and Türkiye. ASEAN peers refer to four peer countries
including Malaysia, Philippines, Thailand, and Vietnam.
Source: Laporan Inventarisasi Gas Rumah Kaca (GRK) Dan Monitoring, Pelaporan, Verifikasi (MPV) 2023, Volume 9, Januari 2024; MoEF
(2022), Enhanced Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change (UNFCCC);
and EDGAR (Emissions Database for Global Atmospheric Research) Community GHG Database, https://edgar.jrc.ec.europa.eu/report_2023.
StatLink 2 https://stat.link/wdskeg

In addition, Indonesia faces considerable challenges in climate-change adaptation. It is highly exposed to

higher average temperatures and extreme and unpredictable weather. According to OECD estimates
(2023[1]), average daily temperatures in Indonesia are likely to be 1°C higher than in the period 1985-2014
by 2050 even if the global community manages to sharply lower emissions. Recent analysis projects GDP
in 2050 to be up to 0.6% lower if global emissions are contained in line with the Paris Agreement (i.e. by
containing the increase in global temperatures below 2°C) but up to 4.4% lower if global average
temperatures rise by more than 3°C (Swiss Re Institute, 2021[2]). Moreover, under a high emissions
scenario, heat-related deaths among those aged 65 years could reach 53 per 100 000 annually by 2080,
compared with a historical baseline of 1 death per 100 000 (WHO, 2015[3]).
This chapter first considers past progress and future challenges in GHG emission reduction and domestic
energy sourcing. It then considers key issues in the green transition, notably policy responses in
manufacturing, the transport sector and sustainable buildings. A final section on adaptation covers disaster

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risk management, water resource issues, and how households and businesses can cope with climate
change challenges. The chapter’s focus on issues related to greenhouse gas emissions means that some
green transition issues are not covered. Protecting the environment and reducing pollution includes
challenges that are beyond the reduction of GHG emissions and climate-change adaptation. In particular,
air pollution continues to weigh heavily on the health of Indonesians. Also, there is work to do in preserving
Indonesia’s rich land and maritime wildlife; Indonesia remains the second largest producer of plastic
pollution, much of it ending up in rivers and oceans.

Past progress and future challenges in emission reduction

Reducing GHG emissions has been the core element of international climate change cooperation with the
aim of stabilizing atmospheric concentrations to avoid “dangerous anthropogenic interference with the
climate system.” Since 1997, industrialized countries and countries in transition to a market economy have
committed to achieve quantified emissions reduction targets for a basket of six GHGs. One key element
of this process has been the commitment of countries to regularly report their emissions to the UNFCCC.
Ensuring strong commitment on reporting is important, including for Indonesia.
In recent years, energy-related activities, peat fires and other land use (notably forestry) have been the largest
contributors to GHG emissions in Indonesia, though the latter have markedly declined (Figure 4.2,
Panel A). This mainly echoes efforts to reduce the pace of deforestation. Indeed, the reductions relating to land
use account for the slower growth rate in total net emissions seen in 2018-2022. Nonetheless, emissions have
been on a strong upward trend again since 2020. Emission reductions relating to changes in land use are
expected to make a sizeable contribution to meeting Indonesia’s global commitments looking forward (see
below).
Meanwhile, other GHG emissions continue to trend upwards – the decline during the pandemic was an
exception (Figure 4.2, Panel A). These emissions mainly comprise energy-related activities, the largest
component of which is power generation. Other energy-related components include transport and
manufacturing. However, there is progress underlying increasing emissions: emissions intensity in the
economy has been diminishing, i.e., emissions have been increasing by less than GDP. Between 2010
and 2022, emissions per unit of GDP fell by a little over 10% (Figure 4.3, Panel D). Part of this decline
reflects the extension of modern energy services to dwellings and consequent decline in the use of biomass
for residential cooking (IEA, 2022[4]). Emission intensity is now roughly the same as in ASEAN peers such
as Malaysia and Thailand (Figure 4.3, Panel C). Due to differences in geography and the availability of
natural resources, as well as faster policy progress, other emerging economies have achieved faster
reductions in emission intensity. For instance, emission intensity reduction in the ASEAN region as a whole
has been close to 20% (Figure 4.3, Panel D).

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Figure 4.2. Emissions continue to increase steadily, except those relating to land use
Mt CO2 eq A. GHG emissions by sector, 2000-22 B.GHG emissions by source, 2022
Peat fires Industrial
2 500
processes
6%
2 000 LULUCF Transport
(ex. peat 16%
fires) Power
1 500 Agriculture generation
Waste
13% Energy 29%
72%
Waste
1 000 Manufacturing
21%
IPPU Agriculture
500 9%
Other energy
Energy related Fugitive
0 5% emissions
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

1%

C. Final consumption of energy by sector, 2022 D. Sectoral contributions to achieving the 2030
NDC emission reduction target
Non-energy use, 4% Countermeaures with Countermeaures with conditional
% pts
Commercial unconditional mitigation scenario mitigation scenario
and public 0
Residential,
14% services, 4%
-10
Agriculture/for
Transport, estry/fishing/o
35% ther, 1% -20

-30

-40

Industry, Forestry Energy Waste Agriculture IPPU (<0.1)

42% -50

Note: In Panel A, IPPU refers to industrial processes and product use. In Panel B, the total emissions exclude LULUCF. In Panel D, forestry
includes other land uses. The target with countermeasures with conditional mitigation scenario is set up to 43% reduction from the business-as-
usual (BAU) projections.
Source: Laporan Inventarisasi Gas Rumah Kaca (GRK) Dan Monitoring, Pelaporan, Verifikasi (MPV) 2023, Volume 9, Januari 2024; MoEF
(2022), Enhanced Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change (UNFCCC);
and IEA (2024), IEA World Energy Statistics and Balances (database).
StatLink 2 https://stat.link/vgor5t

Indonesia has submitted ambitious plans to reduce GHG emissions relative to the baseline over recent
years (Box 4.1). In 2021 it updated the 2016 Nationally Determined Contribution (NDC). The update commits
to cut GHG emissions by 32%-43% (unconditionally and conditionally, respectively) by 2030, to also reach
peak emissions in 2030 and to achieve net-zero by 2060 or earlier. Substantial investments are required.
According to the national authorities, reaching the 2030 NDC target alone would require at least IDR 4.52
quadrillion (USD 310 billion, about 20% of 2023 GDP) in mitigation actions. In recognition of Indonesia’s
increased policy ambitions, the International Partners Group (composed of G7 countries, the EU, Denmark,
and Norway) in conjunction with leading financial institutions pledged to support the country with an initial
amount of USD 20 billion (see Box 4.4 on the Just Energy Transition Partnership), half of which will come
from the private sector, sovereign wealth funds, and philanthropic foundations. Timely advance on these
pledges will be important for helping Indonesia achieve its 2030 goal.

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Figure 4.3 Further decoupling is needed to achieve net zero emissions while raising living standards
A. GHG emissions changes Mtoe/ USD B. Energy intensity
GHG emissions, 2010-22 Total energy supply per unit of GDP, 2020 or 2021
% changes
60 240

50 200

40 160

30 120

20 80

10 40

0 0

ITA

IDN
JPN

IND

VNM
DNK
TUR

DEU

MEX
FRA

ARG
BRA

USA

MYS
THA
KOR
CHN
SAU
PHL

ZAF
RUS
OECD
-10
OECD EMERG20 ASEAN IDN
C. GHG intensity D. GHG intensity reductions
tCO2-eq Total GHG emissions per unit of GDP, 2022 GHG emissions per unit of GDP, 2010-22
/ 1000 USD % changes
0.90 0

0.75 -5

0.60 -10

0.45 -15

0.30 -20

0.15 -25

0.00 -30
ITA
DEU
JPN

MEX
IDN

IND
DNK
FRA

TUR
USA
KOR

MYS
ARG
THA
BRA
VNM
SAU
CHN
RUS
ZAF
PHL

ASEAN

EMERG20
OECD

OECD EMERG20 ASEAN IDN

Note: OECD calculations for the aggregates. EMERG20 refers to G20 emerging economies excluding Indonesia: Argentina, Brazil, China, India,
Mexico, South Africa, Saudi Arabia, Russia, and Türkiye. ASEAN refers to four peer countries including Malaysia, Philippines, Thailand, and
Viet Nam. In Panel C and D, GDP is expressed in USD (PPP, 2017 constant).
Source: EDGAR (Emissions Database for Global Atmospheric Research) Community GHG Database; World Bank (2024), World Development
Indicators; OECD (2022), OECD Environment Statistics (database); and Laporan Inventarisasi Gas Rumah Kaca (GRK) Dan Monitoring,
Pelaporan, Verifikasi (MPV) 2023, Volume 9, Januari 2024.
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Box 4.1. Indonesia’s main policy plans and goals for the green economy transition
The main policy goals and measures relating to the green economy transition are set out in the National
Determined Contribution (NDC) documents (as part of the Paris Agreement on climate change) and
the Long-Term Strategy on Low Carbon and Climate Resilient Development 2050.

Table 4.1. Main policy targets and measures for achieving the green economy transition
First NDC Updated NDC Long-Term Strategy on Low Carbon and
Climate Resilient Development 2050
Total greenhouse Reduce emissions by 26% Reduce emissions by 31.89% for Net-zero emissions in 2060 or sooner, with rapid
gas emissions (unconditional) or 41% CM 1 or 43.20% for CM 2 by 2030, decrease after 2030
(conditional) by 2030, compared to a BAU scenario, and
compared to a BAU scenario reach peak emissions in 2030
Energy industry CM 1: 11% or 314 Mt CM 1: 12.5% or 358 Mt CPOS 2 116 Mt in 2050
CM 2: 14% or 398 Mt CM 2: 15.5% or 445 Mt TRNS 1 439 Mt in 2050
LCCP 572 Mt in 2050
Buildings CPOS 272 Mt in 2050
TRNS 223 Mt in 2050
LCCP 120 Mt in 2050
Transport CM 1: 0.10% or 2.75 Mt CM 1: 0.2% or 7 Mt CPOS 70 Mt in 2050
CM 2: 0.11% or 3.25 Mt CM 2: 0.3% or 9 Mt TRNS 66 Mt in 2050
LCCP 50.2 Mt in 2050
Forestry CM 1: 0.32% or 9 Mt CM 1: 0.3% or 10 Mt LCCP net sink by 2030
CM 2: 0.13% or 4 Mt CM 2: 0.4% or 12 Mt (CPOS) and 76 Kg (LCCP) by 2050
Land use CM 1: 17.2% or 497 Mt CM 1: 17.4% or 500 Mt LCCP net sink by 2030
CM 2: 23% or 650 Mt CM 2: 25.4% or 729 Mt Indonesia aims to protect 120.3 Mha of forest,
including 14.9 Mha of peatland

Acronyms: BAU = business as usual; CM 1 and 2 = counter measures (unconditional and conditional commitments; CPOS = current policy
scenario (i.e., extended unconditional commitment); TRNS = transition scenario and LCCP = low-carbon scenario compatible with the Paris
Agreement.

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Table 4.2. Key green economy policy texts

Texts (ordered by date) Main provisions
Law on Forestry (No. 41/1999) Establishes a framework for sustainable forest management, including: i) designation of forest conservation
amended in 2020) zones and protected areas; ii) implementation of mandatory reforestation and afforestation projects; iii)
permits for sustainable use of forest resources with strict quotas and monitoring; iv) community-based forest
management programmes that involve local communities in forest protection.
Energy law (2007) Prioritizes domestic products and services when developing generating assets, including: i) mandatory use
of renewable energy sources in new energy projects; ii) financial incentives and subsidies for investments
in green energy technologies; iii) implementation of energy efficiency standards and regulations for
buildings and industries; iv) development of sustainable national and regional energy plans.
Law regarding Environmental Provides a comprehensive framework for safeguarding the environment, including: i) pollution control
protection and management measures including limits on emissions and discharges; ii) mandatory environmental impact assessments
(No. 32/2009) amended in 2020 (EIA) for all major projects; iii) comprehensive waste management regulations, including recycling and
hazardous waste disposal; iv) programmes for the restoration and rehabilitation of degraded ecosystems.
Law No. 18 of 2013 regarding Strengthens regulations to combat forest destruction, including: i) penalties for illegal logging and forest
Prevention and Eradication of encroachment; ii) requirements for companies to rehabilitate degraded forest lands; iii) community
Forest Damage, as amended by involvement in forest monitoring and enforcement; iv) strengthening forest management units and
the Job Creation Law enhancing surveillance systems.
Government Regulation No. Sets goals for: i) the share of renewables in total energy supply (at least 23% by 2025 and at least 31% by
79/2014 on National Energy 2050); ii) electricity demand (2 500 kWh per capita by 2025 and 7 000 kWh by 2050); iii) final energy
Policy intensity (1% annual cut between 2015 and 2025).
Government Regulation on Provides a national framework for carbon pricing instruments, including an Emissions Trading System
Environmental Economic (ETS) and commit to implement a trading system by 2025.
Instruments (No. 46/2017) and
Presidential Regulation 98/2021
Government Regulation No. Streamlines business licensing, including environmental permits, to promote sustainable investment
24/2018 on Electronically practices. Integrates environmental impact considerations into the business licensing process.
Integrated Business Licensing
Services (OSS)
Law No. 7/2021 on Introduces a carbon tax set at IDR 30 000 (USD 2) per ton of carbon dioxide equivalent (CO2e). The tax acts
Harmonisation of Tax as a floor if carbon prices on the Carbon Exchange fall below this minimum. Under the Financial Sector
Regulations and Financial Sector Omnibus Law (2023), the Financial Service Authority (OJK) supervises carbon trading and the Carbon
Omnibus Law (2023) Exchange.
Government Regulation No. 22 of Defines the organizational structure for environmental agencies.
2021 regarding Organization of
Environmental Protection and
Management
Government Regulation No. 23 of Defines the structure and mandate of forestry agencies, including: i) conservation programmes aimed at
2021 regarding Organization of protecting biodiversity and forest ecosystems; ii) support for community forestry initiatives and sustainable
Forestry use practices; iii) reforestation and afforestation projects to enhance forest cover and carbon sequestration.
2021-2030 Electricity Supply Between 2021 and 2030, renewables (of which almost half is hydro) are planned to make up more than
Business Plan (2021) half of capacity additions.
Presidential Regulation No. 112 of The Regulation covers, among others, selling price of electricity from renewables and the phasing out of
2022 on Acceleration of the coal-fired power plants. The construction of new coal-fired power plants is allowed if they: i) were registered
Development of Renewable Energy before the Regulation; ii) contribute significantly to job creation and national strategic interests; iii) commit
for Electricity Provision to reduce greenhouse gas emissions by at least 35% within a period of 10 years compared to the average
coal-fired power plant emissions in Indonesia in 2021; or iv) are set to operate until 2050 at the latest.
2019-2038 National Electricity Prioritizes renewable energy sources, particularly hydro power, for expanding electricity generation capacity.
General Plan (3rd Draft, 2023) Sets the goal of raising to 22% the share of renewable energy in the power generation mix by 2025 under PLN.
Source: (OECD, 2021[5]) and national authorities

Getting the right mix of instruments for decarbonisation

As elsewhere, Indonesia’s mix of policies needed for a successful and cost-effective transition to net-zero
GHG emissions must be aligned with the local context. Box 4.2 discusses available policy instruments and
their potential contribution to design and implement cost-effective and socially acceptable mitigation.
Emission pricing provides effective incentives to identify and deploy the lowest-cost policy mixes to cut

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emissions across all sectors and is well-recognised as a cornerstone for achieving the green energy
transition (OECD, 2023[6]). However, impacts on the cost of production and on the prices of goods and
services, need to be evaluated, and in some instances offset.

Carbon pricing and emissions trading

Introducing and gradually increasing carbon price is a key cost-effective policy instrument in mitigation
policy packages, as it not only reduces emissions but also generates revenue to support the green
transition. Vulnerable groups should be taken into consideration in the implementation of carbon pricing,
for example through targeted support, to limit the welfare losses from the green transition. Pricing and tax
instruments are under-developed in Indonesia’s policy mix, although progress has been made in recent
years, notably through Law No 7/2021 on Harmonisation of Tax Regulations (Table 4.2). So far, the
mitigation strategy has favoured non-market-based instruments, especially minimum performance
standards, labelling requirements, bans and phase-outs, over market-based instruments (D’Arcangelo,
Kruse and Pisu, 2023[7]). Market-based instruments contribute less to total climate action for Indonesia
than for the OECD area, whereas the contribution of targets, governance and climate data is considerably
larger. As of 2019, the environmentally related tax revenue (predominantly motor vehicle taxes) was
equivalent to less than 1% of GDP, against an average of 2.3% across OECD and non-OECD economies
(Lewis, 2019[8]). Since 2021, motor vehicles producing emission above 250 grams per litre of fuel are subject
to a 40% Luxury Sales Tax. The authorities explain that the slow rollout of emissions-based taxation is
partly due to concerns about the price passthrough of higher taxes and operational costs to consumers. In
September 2023, the Indonesian Stock Exchange launched the Indonesia Carbon Exchange (IDX
Carbon). In less than a year of operation, trading volumes and values have risen, although both the number
of projects and transaction frequency remain limited.

Figure 4.4. The contribution of market-based instruments to total climate action is limited
Climate policy mixes, 2022

Non market-based instruments Market-based instruments Targets, governance and climate data

Indonesia

Non OECD

OECD

0 20 40 60 80 100
%

Note: Based on Climate Actions and Policies Measurement Framework (CAPMF) which is a harmonised international climate policy database
to date with 130 policy instruments and climate actions (grouped into 56 policies), spanning the period 1990-2022 and covering 49 countries
(OECD, G20 and OECD accession candidate countries) and the EU 27. Market-based instruments are policy instruments that use markets,
prices and/or other monetary means to provide incentives for producers and consumers to reduce or eliminate environmental and other
externalities. Non market based instruments are instruments that work through the imposition of certain obligations or by installing non-monetary
incentives to change behaviour. See the source for more details.
Source: Nachtigall, D., et al. (2022), "The climate actions and policies measurement framework: A structured and harmonised climate policy
database to monitor countries' mitigation action", OECD Environment Working Papers, No. 203; and OECD Climate actions and policies
measurement framework database, https://oe.cd/dx/capmf.
StatLink 2 https://stat.link/ykiw0q

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Box 4.2. Using a mix of policy instruments to cut GHG emissions at lowest cost
Policy instruments to cut GHG emissions include regulations, taxes, and incentives for investing in
clean equipment and innovation. The mix of instruments differs from country to country. For example,
France focuses on regulations and investment aid directed towards transport, agriculture and
residential housing (OECD, 2021[9]). Denmark applies a GHG tax on transport fuels and non-district
heating, while providing R&D incentives targeted at mitigation (OECD, 2021[10]). Available policy
instruments can be grouped into incentive-based instruments, standards and regulations, and
complementary policies. Table 4.3 summarises the main characteristics of selected policy instruments.

Table 4.3. Comparing mitigation policy instruments

Contribution to abatement cost Administrative and fiscal Distributional and Political
Policy instrument
effectiveness costs social concerns acceptability
(a) Emission pricing and incentive-based instruments
Carbon pricing, e.g., Minimises costs to the extent it Monitoring emissions for GHG Regressive, unless Visible price
GHG tax or fuel excise equalises marginal abatement costs. tax implies potentially high flanked with increases can
taxes. Encourages innovation to reduce administrative costs. Lower compensation policies. lead to low
future abatement costs but does costs for fuel excise taxes. May lead to carbon acceptability.
not address coordination failures. Increased revenue. leakage.
Subsidies, e.g., feed-in- Compatible with minimising Targeting and establishing Regressive, as Cost reductions
tariffs. abatement costs depending on eligibility can lead to high favouring those who can lead to high
design, but risk of ‘picking administrative costs. can afford activities. acceptability.
winners’. Increased expenditure.
(b) Standards and regulations
Performance Cost effectiveness can be Certification can raise Regressive if High acceptability
standards, e.g., zero- limited, as abatement costs are administrative costs, but compliance requires if price effects
emission vehicles. not being equalised. overall administrative costs investments. are hidden;
Can reduce future abatement are low. required costly
costs by spurring innovation. Fiscal impact neutral. investments can
reduce
acceptability.
Does not equalise abatement costs Low administrative costs. No concerns. Fair acceptability.
Information requirements,
but can help to guide or `nudge’ Fiscal impact neutral.
e.g., building energy
consumption behaviour towards
efficiency certificates.
low emission alternatives.
(c) Complementary policies
Public infrastructure Can reduce overall abatement Moderate administrative costs. No concerns if High
investments, e.g., in costs by overcoming public good Increases expenditures. compatible with fiscal acceptability.
railway or electricity or coordination problem market balance.
network. failures.
Financial support Can reduce overall abatement Moderate administrative costs. Regressive, as High
policies, e.g., costs by addressing financial Increases expenditures, more favouring those who acceptability.
subsidised loans for frictions and coordination for grants than for loans. can afford activities.
renovations or vehicle problem market failures.
purchase subsidies.
Public procurement Cost effectiveness depends on Potentially moderate, for No concerns. Acceptability
policies (e.g. the area of procurement and instance if policy involves potentially
government vehicle policy detail. adding procurement criteria. compromised if
procurement stipulating there is substantial
the purchase of EVs). additional
expense.
Source: Leidecker et al. (2023[11]), adapted from D’Arcangelo et al. (2022[12])

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The development and implementation of a domestic Emissions Trading System (ETS) for the power and
industry sectors can help meet Indonesia’s enhanced NDC targets. Indonesia prices about 22% of its
carbon emissions from energy use and none were priced at an Effective Carbon Rate above EUR 60 per
tonne of CO2 (OECD, 2023[6]). Drawing on the lessons from the 2021 pilot scheme, the government intends
to continue developing and implementing ETS along with the planned carbon tax, for which no
implementation date has been set yet. The intensity based ETS for the power generation sector was
launched in February 2023, making electricity the second sector after road transport to be covered by a
carbon pricing instrument. A commitment to gradually increase carbon price and broaden its base will
shape expectations and drive investment in clean energy. This more stringent approach should be
complemented by other policy interventions, such as feed-in-tariffs for renewable energy and financing
mechanisms for energy efficiency. The application of climate budget tagging allows to improve the
allocation of public resources depending on policies’ distributional impact (Boutron et al., 2023[13]).

Reforming energy subsidies

Reforming energy subsidies and targeting them on vulnerable households is also key to encourage a
transition away from carbon. Energy subsidies (electricity, fuel and liquefied petroleum gas – LPG) account
for a significant share of the government’s budget (see Chapter 1). Under Indonesian law, energy subsidies
are meant to target the poor and vulnerable segments of the population, but many other households also
benefit. Subsidies were cut in the mid-2010s, combined with targeted support measures for the most
vulnerable households (Box 4.3). As a result, lower-income deciles now receive a higher share of these
subsidies than in the past. However, targeting could be improved further, as all income deciles benefit roughly
from the same proportion of total energy subsidies (World Bank, 2020[14]). Energy subsidies also distort
economic choices, acting as a drag to the energy transition. Shifting away from these subsidies to targeted
cash assistance would reduce this problem and is potentially more cost-effective and redistributive.

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Box 4.3. Cutting energy subsidies while shielding the most vulnerable – the experience of 2013-2018
In the early 2010s fuel subsidies absorbed over 20% of government spending, but 40% of subsidy benefits
went to the top income decile and less than 1% reached the lowest decile. Fuel subsidies were reduced
in June 2013 and again in November 2014. At the beginning of 2015, falling world oil prices provided
opportunity for the government to abolish the petrol and diesel price-setting regime. In the new system,
domestic petrol and diesel prices were linked to world prices through a semi-automatic formula, with
only diesel getting a fixed subsidy of IDR 1 000 (at the time, USD 0.08) a litre. In the original formulation,
the 2015 budget earmarked more than 13% of total government expenditure to fuel subsidies, but under
the reformed system the share spent was eventually whittled down to 1%. The subsidy cuts on petrol and
diesel in the mid-2010s allowed for substantial increase in spending elsewhere, notably areas linked to
social protection and infrastructure. This “capital injection” helped increase investments in infrastructure,
connectivity, food sovereignty, and other priorities identified in Indonesia’s medium-term development plan.

Figure 4.5. Implicit fuel subsidies have become more significant in recent years
A. Fuel subsidies B. Electricity subsidies
Explicit subsidies Implicit subsidies Total subsidies (rhs)
% of GDP % of central government spending % of GDP % of central government spending
3.0 30 3.0 30

2.5 25 2.5 25

2.0 20 2.0 20

1.5 15 1.5 15

1.0 10 1.0 10

0.5 5 0.5 5

0.0 0 0.0 0
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023
2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Note: World Bank's estimates for 2022 and 2023. Explicit subsidies are transfers from the central government to PLN and Pertamina for
providing energy at subsidised rates. Implicit subsidies are losses made by these SOEs when the explicit subsidy is insufficient to cover the
gap between costs and administered prices.
Source: (World Bank, 2020[14]), based on MoF, PT Pertamina and PLN statistics.
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Reform of electricity subsidies has also been carried out. Until 2012 all electricity customers were subsidised,
but this subsidy was gradually narrowed to the poorer 40% of the population, between 2012 and 2018. The
government has announced in early 2024 that subsidised 3-kilogram (kg) LPG cylinders commonly used
by households will eventually be restricted to the poorest households, through customer preregistration,
but as of now it remains untargeted and distorts demands for unsubsidised 5.5kg and 12kg LPG cylinders.
However, since the late 2010s there has been some relaxation of efforts to contain subsidies. Retail
prices for fuel and electricity were meant to adjust along semi-automatic formulas to global crude oil
prices and electricity costs, but the government has not systematically followed these rules: retail fuel
prices barely changed between 2016 and 2018 despite increasing global oil prices. As a result, the cost
of subsidising fuel and electricity has been increasingly borne by Pertamina and PLN, the country’s oil
and electricity SOEs. In 2018, these implicit subsidies had increased to IDR 59 trillion (USD 4.2 billion)
for fuel and IDR 71 trillion (USD 5 billion) for electricity (World Bank, 2020[14]).

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Decarbonising electricity generation

Indonesia’s electricity generation and distribution is primarily provided by the state-owned enterprise
Perusahaan Listrik Negara (PLN). Electricity generation accounts for around 30% of Indonesia’s GHG
emissions (Figure 4.6, Panel A). Excluding reductions relating to land use, the bulk of reductions under
Indonesia’s National Energy and Climate Plan are expected to come from energy use, primarily from electricity
generation. Peak demand may triple between 2010 and 2030 in a business-as-usual case, primarily driven by
air conditioning and with important contributions from lighting and refrigerators (McNeil, Karali and
Letschert, 2019[15]). Indonesia’s reliance on fossil fuels for electricity production remains high (Panel B),
while wind and solar are negligible in the generation mix as of 2024. Over the past decade or so, coal-
based electricity production has accelerated markedly, gas-based has also increased, while the use of oil
has declined (Panel C). Combined, hydro, bio and geothermal energy provide almost a fifth of total
electricity production.

Figure 4.6. In Indonesia, energy-related emissions dominate total GHG emissions

A. Share of GHG emissions from energy use, 2021 or latest available
% of total GHG emissions
100
Energy industries Transport Other sources of energy use
80

60

40

20

0
FIN

IDN

ITA

JPN
MEX

FRA

TUR

HUN

KOR
PRT

DNK

SVK

GRC

ESP

CZE

CHL

USA

NLD

POL

DEU
OECD

B. Electricity generation by energy source, C. Electricity produced in Indonesia by source of

2021 or 2022 energy
TWh
% of
Coal Oil Natural gas 200
electricity
Coal Oil
produced Nuclear Biofuels and waste Other renewables
100 Natural gas Hydro
160 Biofuels and waste Geothermal

80 Wind and solar

120
60

80
40

40
20

0 0
IDN

IND
ARG

ZAF
BRA

CHN

1990 1995 2000 2005 2010 2015 2020

OECD

Note: In Panel A, data refer to 2020 for Chile and Korea and to 2019 for Mexico. Data for Indonesia refer to 2022 and comes from the national
source. In Panel B, other renewables include hydro, wind, solar, geothermal and other energies. In Panel C, coal includes peat and oil shale
where relevant and hydro includes generation from pumped-hydro power stations.
Source: OECD (2024), Environment Statistics (database); IEA (2024), Electricity Information (database); and Laporan Inventarisasi Gas Rumah
Kaca (GRK) Dan Monitoring, Pelaporan, Verifikasi (MPV) 2023, Volume 9, January 2024.
StatLink 2 https://stat.link/b32vur

Analysis suggests the economic cost (measured as the level difference in GDP relative to baseline) of
pursuing Indonesia’s clean energy transition may be relatively small. OECD long-term scenarios suggest
that by 2050, cumulative mitigation costs associated with the energy transition amount to less than 9% of

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104 

baseline GDP for Indonesia and 11% of GDP for the G20 emerging-market area (Guillemette and Château,
2023[16]). The economic cost, in terms of lower output growth, from fast transition would be small and
concentrated in the 2020s. Furthermore, a faster transition would bring higher growth over the following
decades (Figure 4.7). By contrast, a slower transition would risk missing mitigation targets and would lead
to the emission of about 230 million additional tonnes of CO2 equivalent from energy use until 2050 – even
if net emissions are cut to zero by 2050.

Figure 4.7. Indonesia has a long way to go in decarbonising energy supply

A. Per cent of total primary energy supply from B. Megajoules of primary energy per unit of GDP
carbon-based sources
100 2023 10 2023
2050 in energy transition scenario 2050 in energy transition scenario
2050 in baseline scenario 2050 in baseline scenario
80 8

60 6

40 4

20 2

0 0
IDN

IND
BRA

USA

TUR

CHN

ZAF
EMERG20

MEX

ARG
OECD

TUR

IDN

IND
MEX

ARG

CHN

ZAF
BRA

USA

EMERG20
OECD
Note: Data comes from underlying data in figures 8 and 9 in the source. EMERG20 refers to G20 emerging economies including Indonesia: (i.e.,
Argentina, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, and Türkiye). In Panel A, carbon-based sources include
coal, oil and gas. In the energy transition scenario, coal is assumed to be eliminated by 2050, while the share of oil in primary energy is assumed
to decline to 5% and that of gas to 10%, except when these shares are already below these targets at the start of the projection period, in which
case they remain constant. In Panel B, GDP is expressed in USD at 2015 PPPs. Iceland is not included for the OECD aggregate, because it is
considered as an outlier due to the large share of geothermal heat in its energy mix.
Source: Guillemette, Y. and J. Château (2023), "Long-term scenarios: incorporating the energy transition", OECD Economic Policy Papers, No. 33.
StatLink 2 https://stat.link/osiptu

In broader terms, the largest potential benefits of climate mitigation accrue from the removal of domestic
policy distortions that contribute to emissions and create deadweight loss. For instance, gradually phasing
out untargeted fossil fuel subsidies would reduce air pollution and emissions, thus improving health outcomes
locally. On the other hand, pricing mechanisms would potentially have economy-wide impacts on households
in terms of employment and wages, with the largest impact in energy-intensive sectors. In Indonesia, however,
the social and economic cost of a carbon tax would be modest compared to the human and economic ones
produced by air pollution and other factors. Limiting the social impact can be helped gradual phase-out of
fuel subsidy reduction and by efforts to ensure vulnerable households receive sufficient support through other
means (such as regular welfare). Overall employment in energy-intensive sectors is indeed rather low: 10%
of total employment, though it is higher in coal-producing areas (World Bank, 2023[17]).

Phasing out coal

As part of the Just Energy Transition Partnership (JETP) scheme (Box 4.4), two coal-fired power plants
(CFPPs) out of 250 (representing about 2% of the national power capacity) are slated for early closure by
2040. More may close between 2030 and 2040, due to natural retirement, though CCFPs are relatively
young in Indonesia. In 2020, around 60% of the fleet was younger than 10 years, and 23% older than 20
years (IEA, 2020[18]). Estimates suggest the socio-economic benefits from closing coal power plants could
be up to four times the costs (Cui et al., 2022[19]), yet faster progress can be hindered by strong interest

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  105

groups locally. In the long run, retrofitting coal- and gas-fired plants to capture carbon or to run on hydrogen
can further reduce emissions from natural gas, although costs can be high (IEA, 2022[4]). Indonesia’s
CFPPs produce substantial emissions, while also contributing to overcapacity. The capacity margin in
Indonesia, particularly in the Java‐Bali system, is around 57% in 2022. This exceeds the operator’s targeted
capacity margin (30%) and is three to four times higher than international benchmarks needed to meet
peak demand and maintain a 15% reserve margin. Both MEMR and IEA modelling analyses indicate no
need for new CFPP after the current project pipeline, and project the phase out of unabated CFPPs (i.e.,
without substantial efforts to reduce the emissions produced throughout their life cycle) by the 2050s.
Presidential Regulation 112/2022 organises the gradual phase-out of CCFPs, though new CCFPs can still be
constructed if they were registered before the Regulation, or if they fall under specific conditions (Table 4.2).
Against this background, contractual adjustments are needed that simultaneously steer the coal- (and gas)
fired energy sector towards eventual decommissioning (or adoption of emission-eliminating technologies)
and ensure that plants operate more flexibly and at lower annual capacity factors. Accelerated retirements
can also help to reduce overcapacity in the system, if conducted carefully to preserve investor confidence
(IEA-MEMR, 2022[20]). International support, based on a detailed assessment of plant balance sheets,
should be provided to help Indonesia cover possible unrecovered capital (IEA-MEMR, 2022[20]). Under the
Energy Transition Mechanism (ETM) (Box 4.4), the ADB offers financial assistance to facilitate early
retirement of the coal fleet and one deal has been concluded in 2023. The 660-megawatt Cirebon-1 CFPP
in Western Java will likely be retired almost seven years earlier than scheduled. At the same time,
connecting new coal-powered units should be restricted to the adoption of advanced cleaner technologies
(Ramdlaningrum, 2024[21]).

Box 4.4. The Just Energy Transition Partnership and the Energy Transition Mechanism
The Just Energy Transition Partnership
The Just Energy Transition Partnerships (JETPs) are a new plurilateral intergovernmental structure for
accelerating the phase-out of fossil fuels and the rollout of renewable energy. JETPs coordinate financial
resources and technical assistance from several partners to a recipient country for phase-out. The first
JETP, worth about USD 8.5 billion, was announced at COP 26 in Glasgow in 2021, with South Africa.
Three more JTETPs have been agreed, with Indonesia (USD 20 billion), Senegal (USD 2.5 billion), and Vietnam
(USD 15.5 billion). Financing from both public and private sources include grants, loans, and investments.
These types of funding models are innovative insofar as they are “just” and imply a “partnership”. A “just”
energy transition must be implemented in an equitable and inclusive manner about its social consequences.
In affected populations and sectors, retraining and alternative business models not based on fossil fuels
are to be created for this purpose. The use of “partnership” emphasizes that these agreements are
tailored to the needs of the recipient country and that local decision-makers are actively involved.
The Energy Transition Mechanism
The Energy Transition Platform (ETP) is a special purpose platform tasked with the role of procuring the
financing for eligible projects, undertaken to early retire existing CFPPs and develop new renewable
power projects to replace the retired CFPPs. An SOE (PT Sarana Multi Infrastruktur) is tasked as the
Platform Manager to operate the ETP, assisted by a Guidance Committee to determine eligible projects.
Available facilities under the ETP are loan facilities, government investments, sovereign guarantees,
public private partnerships and any other type of facilities. The ETP's funds may be sourced from the
state budget or from international/governmental/multilateral institutions, local institutions, foreign
commercial or non-commercial institutions, philanthropical agencies or climate and infrastructure funds.
Under the ETM, the Cirebon-1 CFPP (660MW) is due to be decommissioned in 2035 instead of 2042.
Source: https://www.whitecase.com/insight-alert/indonesian-energy-transition-snapshot

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Increasing renewable energy generation capacity

Solar and wind have considerable potential for Indonesia, whose archipelagic feature is somewhat similar
to Greece where wind alone accounts for 21% of the generation mix (OECD, 2020[22]). For Indonesia, the
IEA expects a doubling of the share of renewables in power generation by 2030 to more than 35%. It also
projects solar power can provide as much as 50‐60% of electricity generation capacity needed to serve the
much bigger demand for electricity by 2060 (IEA, 2022[4]). The imminent operationalisation of the
10 Megawatt (MW) solar power plant in the new capital city testifies to Indonesia's commitment to
renewable energy. The state-owned electricity company, Perusahaan Listrik Negara (PLN), unveiled plans
to bolster renewable power capacity by 31.6 GW from 2024 to 2033 (Table 4.4). The potential for offshore
renewable energy is also considerable though this requires investment in grid infrastructure to connect to
centres of population. Greater deployment of small capacity offshore turbines and floating solar panels is
potentially a solution for remote and sparsely populated areas.

Table 4.4. Indonesia plans to expand the share of electricity generated from renewable sources
Indonesia Singapore Thailand Malaysia Philippines Vietnam
Share of renewables 13.1% (2023) 4.4% (2023) 17% (2021) 19% (2021) 22.4% (2021) 30% (2021)
Target 24.2% (2030) 30% (2035) 68% (2040) 40% (2035) 35% (2030) 39% (2030)

Source: Ministry of Energy and Mineral Resources of Indonesia; Sustainable Energy Development Authority (SEDA) Malaysia; Department of
Energy of the Republic of the Philippines; Singapore Energy Market Authority; Ministry of Energy of Thailand, Energy Policy, and Planning Office
(EPPO); Vietnam’s National Electricity Development Plan/Power Development Plan 8 (PDP8) and IEA.

Fewer barriers to installing renewable capacity and a better tariff setting system are needed. An IEA net-
zero roadmap for Indonesia (IEA, 2022[4]) underscores the need for simplified planning procedures and
engagement with local communities to facilitate new renewable capacity. Policy also needs to establish a
stable, substantial and multi‐year pipeline of auctions for renewables, with competitive and transparent
tariff‐setting. Current electricity tariff regulations do not favour wind and solar. Under previous regulations, the
tariffs received by producers were capped at around 85% of the state-owned vertically-integrated electricity
company’s (PLN) regional average generation cost (biaya pokok produksi, BPP). New regulation has replaced
the BPP benchmark with annual ceiling prices that vary regionally. Independent (i.e. non-PLN) power
producers bid for capacity below these ceiling prices under the PLN’s procurement process. Coal
producers are required to supply power at a maximum price (USD 70 per tonne for greater than 6 000
kilocalorie per kilogramme coal), which also limits the capacity for renewable generators to compete. The
maximum purchase price is 100% of the USD 70 benchmark for hydro and geothermal, biomass and ocean
wave and 85% of the BPP for solar PV and wind. Current tariff levels are viewed by most industry players
as too low to spur growth in renewable capacity. Institutional fragility – notably the lack of an independent
regulator with strong technical competency -- hinders the growth of private capital participation (Asian
Development Bank, 2021[23]). Local content requirements and high capital costs also dissuade investment.
A long-proposed presidential regulation on renewables to reform the tariff system and address other
barriers to deployment has yet to be fully implemented (OECD, 2021[5]). In parallel to major reform practical
steps that could be considered include, where feasible, mandating the use of renewable energy in public
spending and investment.
Further investments in the electricity system will be needed to ensure supply is reliable as the role of
renewable sources grows. Wind and solar output are intermittent and highly uncertain and, hence, non-
dispatchable (Delarue and Morris, 2015[24]). Insofar as it does not strongly align with electricity demand,
increased generation from renewables will require more ‘balancing capacity’ from other sources, or
complementary approaches, including storage (IEA, 2023[25]). Electricity grid expansion will also help
tackling the balancing capacity issue. More connections between Indonesia’s islands grids are planned
which will help exploit the large potential for renewable energy sources on many islands (OECD, 2020[22]).

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Better integrating Indonesia’s electricity network with neighbouring countries will also add more balancing
capacity by enlarging the pool of potential energy suppliers. The recently-initiated Brunei Darussalam–
Indonesia–Malaysia-Philippines Power Integration Project will complement existing efforts towards
realising the ASEAN Power Grid.
In the longer run and on larger islands, smart meters and dynamic pricing can help make electricity
consumption more responsive to supply conditions and reduce system stress and the need for balancing
capacity (IEA, 2022[4]). Smart meters use wireless technology to inform consumers about their electricity
consumption in real-time. Meanwhile, time-varying pricing (dynamic pricing) provides financial incentives
to shift electricity demand to periods when supply is more plentiful. In mid-2020, PLN launched a plan to
install 79 million smart meters over seven years, although the roll-out appears to run behind schedule.
Dynamic pricing contracts have not yet been introduced and their take-up could be boosted by simplified
electricity bills (ACER/CEER, 2021[26]),

Promoting smart manufacturing

For Indonesia’s industry, which for the past few decades has under-performed both regional peers and
other sectors of the economy (World Bank, 2023[17]), the green transition combined with smart
manufacturing represent potential opportunities. The production of materials and goods account for a
quarter of total national CO2 emissions and reaching the Net Zero goals requires investments in low-carbon
technologies, often imported, that can be costly, complex to operate and maintain and untested in
developing countries. Weak awareness is also a concern: individual companies, especially small and
medium-sized businesses, often underestimate the importance of fighting climate change and lack the
expertise and knowledge for adopting greenhouse gas emissions accounting, setting reduction targets,
and developing tailored strategies to reach them. On the other hand, the country enjoys favourable
conditions to participate in key segments of global value chains, such as cell manufacturing, active
materials, raw material mining and refining, and battery pack assembly. Indonesia has significantly
increased high-quality nickel production in recent years, building on its strength in catering mainly for the
stainless-steel sector.
In order to encourage large energy users to adopt more efficient practices, stakeholders have launched
several initiatives. The main industrial energy efficiency policy is Government Regulation 70/2009, which
requires all companies with an annual energy consumption exceeding 6 000 tonnes of oil equivalent (toe)
to appoint an energy manager, develop an energy conservation plan, perform an energy audit and report
energy consumption to government. Other initiatives include plans for sustainability reporting by business.
However, existing regulations are not intended to cover less energy-intensive sectors, where the largest
opportunities exist and where electric motor-driven systems are common. Minimum Energy Performance
Standards (MEPS) are in place for air conditioning, but the absence of standards for electric motors means
there is a huge opportunity for improvement (IEA, 2021[27]). It is estimated that if Indonesia were to
introduce a requirement that electric motors had at least IE2 level efficiency, the same as in China, it could
avoid nearly 2200 GWh of industrial electricity use by 2030. In nickel, the Ministry of National Development
Planning (Bappenas) has initiated the decarbonization roadmap with the support of WRI Indonesia
(Bappenas, 2024[28]). Food and beverages, textiles, construction, wholesale and retail trade, and electrical
equipment and electronics have been identified by Bappenas for their potential in adopting circular
economy principles and practices. The development of carbon pricing will eventually favour the adoption
of more efficient manufacturing technologies.

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Reducing emissions in the transport sector

Transport, which accounts for around one third of final energy consumption and around one sixth of GHG
emissions, is expected to increase fast as per capita income rises and mobility aspirations increase.
Transport-related CO2 emissions per GDP unit are twice as high as the OECD average (Figure 4.8). Motor
vehicle transport, the main transport means for both passengers and goods in Indonesia, will need to
transition to low- or zero-emissions. Furthermore, reducing the use of petroleum and diesel fuel vehicles,
particularly in urban areas, is important to address Indonesia’s air quality problems (Box 4.5). Greening
the vehicle fleet can be accompanied by specific initiatives to make public transport more attractive or road
transport more efficient. Technological advances can reduce future abatement costs for still hard-to-
decarbonise transport modes, including for ferries which account for 12% of emissions from passenger
transport in Indonesia (Box 4.6).

Box 4.5. Indonesia’s air quality challenges

Swift intervention is needed to confront the air quality crisis. Indonesia is consistently ranked among
the worst-performing countries in the Air Quality Index (AQI). In August 2023, airborne pollutants such
as dust, soot, and smoke in the Special Capital Region (DKI) Jakarta were measured at 116.7
micrograms per cubic meter—over 23 times the safety threshold of the World Health Organization
(ICLEI-SEAS, 2024[29]). Several areas in DKI Jakarta have been designated as Low-Emission Zones
since February 2021, with most areas in Jakarta targeted to be emission-free by 2030.

Figure 4.8. There is ample room for reducing GHG emissions from road transport
CO2 emissions from combustion per unit of GDP from road and other transports, 2021
tCO2 per million USD
150
Road Other transports
120

90

60

30

0
FIN

ISR

IND

IDN
IRL

JPN
ISL

ITA

TUR
CHE

NLD
DNK

DEU

FRA

CHN

LUX

CZE

HUN

LVA

SVN

LTU
ARG

ZAF

THA
NOR
GBR

BEL

AUT
AUS

ESP
PRT
SVK

USA

CAN
KOR
NZL

EST

GRC

VNM
CHL

POL
COL

BRA

RUS
SAU
SWE

EMERG20

MEX
PHL
CRI

ASEAN

MYS
OECD

Note: EMERG20 refers to G20 emerging economies excluding Indonesia: Argentina, Brazil, China, India, Mexico, South Africa, Saudi Arabia,
Russia, and Türkiye. ASEAN refers to four peer countries including Malaysia, Philippines, Thailand, and Vietnam.
Source: IEA (2023), GHG emissions from energy; and World Bank (2024), World Development Indicators.
StatLink 2 https://stat.link/s6pejc

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Box 4.6. Cutting emissions from shipping without raising the cost of transporting people and goods
Maritime transport accounted for 2.5% of global emissions from energy in 2020. Ships owned by
Indonesians account for 10.8% of the world’s vessels, making it the number one country in this regard,
although in terms of dead weight Indonesia accounts for a much lower share (1.3%) (IEA, 2022[4]).
Moving the sector to carbon neutrality is challenging as feasible fuel technologies for long distance bulk
transport are yet to emerge (UNCTAD, 2023[30]).There are currently no emission-reduction targets in
Indonesia’s enhanced NDC for the domestic shipping and maritime transport sectors. However, policy
actions are being taken. The use of biodiesel in shipping is being encouraged by offsetting the difference
in price between biodiesel and fossil diesel using funds collected from levies on palm oil exports and
managed by the Oil Palm Plantation Fund Management Agency (BPDPKS).
There is scope for electrification of some ferry routes. Of the ten most used ferry routes in Indonesia
(which carried 74% of all ferry passengers in 2021) eight are suitable for electrification (as the journeys
are relatively short). For example, electrifying the ferry between Java and Bali could significantly reduce
emissions produced by 6.2 million passengers each year.
Source: https://seads.adb.org/solutions/indonesia-can-lead-way-ocean-based-climate-action

Transitioning to zero-emission vehicles

Greening the vehicle fleet is a gradual process, especially in emerging market economies as households
and businesses have limited financial resources to invest in new vehicles. Moreover, electric vehicles (EVs)
can contribute to decarbonise the economy only if electricity decarbonises first. In Indonesia, where car
ownership trails behind richer ASEAN peers such as Malaysia and Thailand, buying used cars is common,
with second-hand cars accounting for the majority of cars in circulation (McKinsey, 2021[31]). While price
gaps between new electric and combustion engine cars may disappear within the next few years (Lutsey
and Nicholas, 2019[32]), used combustion engine cars are likely to remain substantially cheaper for some
time.
Indonesia lags behind other countries in adopting zero-emission vehicles. Both the share of zero-emission
vehicles in the existing fleet (Figure 4.9) and in new registrations is among the lowest in the G20
(Figure 4.10). In 2022, EVs made up less than 2% of new cars on Indonesia’s roads (IEA, 2023[33]). The
launch of several hybrid models drove the increase in EV sales to 5.9% by end-September 2023. Most EV
cars are in the hybrid segment, dominated by Chinese and Korean brands. Government targets aim for 2
million passenger EVs and 13 million electric motorcycles (the largest market segment in the country and
contributor to 26% of all transport GHG emissions) by 2030.

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Figure 4.9. The car fleet is smaller than in ASEAN peers

A. Registered motor vehicles, 2022 or latest year B. Electric car registrations, 2022 and 2023
Number of vehicles per 1 000 inhabitants Number of registrations per 1 000 inhabitants
1 200 1.5
2023 2022
1 000 1.3

800 1.0

600 0.8

400 0.5

200 0.3

0 0.0
Vietnam Philippines Indonesia Thailand Malaysia IDN MYS VNM THA

Note: OECD calculations based on ASEAN (2024) for Panel A and IEA (2024) for Panel B. In Panel A, the data refer to 2022, except for Vietnam
which refers to 2020. Electric cars refer to battery electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV).
Source: ASEAN (2024), Transport Statistics (database); IEA (2024), "Global EV Outlook 2024: Moving towards increased affordability", April;
and World Bank, World Development Indicators.
StatLink 2 https://stat.link/fynreo

Figure 4.10. Electric vehicles diffusion is slow in Indonesia

Sales share of electric cars
%
40

30

20

10

0
2017 2021 2023 2017 2021 2023 2017 2021 2023 2017 2021 2023 2017 2021 2023 2017 2021 2023 2017 2021 2023 2017 2021 2023
Thailand India Vietnam Indonesia Malaysia China Europe United States

Note: Electric cars refer to battery electric vehicles (BEV) and plug-in hybrid electric vehicles (PHEV).
Source: IEA (2024), "Global EV Outlook 2024: Moving towards increased affordability", April.
StatLink 2 https://stat.link/obhmu3

Various incentives have been introduced to boost both EV sales and domestic production. Tax incentives
since 2022 have included reducing the VAT rate on EVs from 11% to 1% and removing the luxury tax. The
Electric Car Down Payment, Sales Tax and Import Tax Waiver is due to end in 2025. The government is
also offering around USD 500 towards the purchase of an EV. It aims to provide this for sales of 200 000
e-motorcycles and 35 900 electric cars, as well as the conversion of 50 000 combustion-engine motorcycles
to electric propulsion. Local-content conditions are being introduced to qualify for the subsidy, which should
be directed at light vehicles which are used extensively. Indonesia’s Financial Stability Authority (OJK) is
expanding its Sustainable Finance Taxonomy to cover transportation sector.

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Higher taxes on combustion-engine vehicles, possibly as part of a feebate to subsidise EV purchase and
buyback of older vehicles, should be considered. Rechannelling a tax on the purchase of high-emission
vehicles emitters to EV purchase incentives (a feebate) has met with some success in several countries, for
instance France, Thailand, and Singapore (Wappelhorst, 2022[34]). However, the households that buy electric
vehicles, and benefit from the subsidies, are largely higher income. Subsidising zero-emission rental services
could provide better access for low-income households. Subsidising loans rather than providing grants for
purchasing zero emission vehicles, as done in Scotland, addresses financial constraints by overcoming
high upfront costs of electric vehicles and mobilises more private funding (ICCT, 2020[35]).
Further development of the EV charging network is underway but has a long way to go. Perusahaan Listrik
Negara (PLN), the state-owned power company, has been appointed to establish the EV charging
infrastructure and aims to invest USD 1 billion by 2030. Leveraging more private capital and ensuring
public support concentrates on areas where charging points are neither commercially nor financially viable,
could further bolster network density. Regulatory measures could include making the installation of publicly
accessible charging points obligatory for petrol stations or other focal points (IEA, 2021[36]). Germany, for
example, plans to negotiate voluntary commitments by petrol-station companies to equip 75% of petrol
stations with charging points by 2026, and to mandate this if the goal is missed (Bundesregierung, 2020[37]).
The Indian model of scooter battery swapping stations could also prove useful in Indonesia’s largest cities.
Tighter restrictions for using fossil-fuel cars in large cities would encourage more buyers to choose a zero-
emission vehicle. Some such measures are underway. In the new capital city, Nusantara, the plan is for
government vehicles to utilize environmentally smart technology. The DKI Jakarta government aims to
have completed bus electrification by 2030. This plan will contribute to a 60% estimated reduction in vehicle
emissions and a 28% reduction in noise pollution. Similar urban electrification targets for public transit
could be adopted elsewhere and extended to taxis, ride-hailing cars, and motorcycles. Enforcing and
expanding restrictions based on vehicle emissions, for example through road pricing, congestion charges,
priority lanes, emission-free zones or parking regulations, would add to the benefits of zero-emission cars.
Amsterdam, Oslo, Paris, Rome, London, and Milan are planning to phase out fossil-fuel cars and provide
discounts or easier parking for electric vehicles (ICCT, 2020[35]).

Encouraging a shift from road to rail

Scope for more intercity rail transport is considerable, particularly in Java, which is home to around half of
Indonesia’s population. The mainly single-track rail network accounts for about 7% of the non-metropolitan
passenger market and only around 0.6% of goods transported (Asian Development Bank, 2016[38]). A key
issue is the relatively limited scope the rail network. In addition, poor maintenance, dilapidated rolling stock,
slow trains, frequent delays, and insecurity contribute to users’ dissatisfaction and further accentuates
structural problems. It is estimated that shifting passenger and freight from road to rail would cut 83% of
GHG emissions generated by transport between cities. Reductions in road transport would also help
address air pollution, traffic congestion and road accidents, which are very high by global standards
(Figure 4.11, Panels A and B).
Welcome improvement in the rail network is underway. An investment of around USD 90 billion planned in
the National Railway Vision 2030 (RIPNAS, 2023[39]). Much of the investment is in network renovation,
notably installing double tracks on major trunk rail lines, reviving dormant tracks (there are some 2 500 km
of unused track, mainly on Java), and promoting inter-modality. The state railway company, PT Kereta Api
Indonesia (PT KAI), is investing in freight locomotives that operate with biodiesel blends up to B35 (i.e., a
mixture of 35 % biodiesel and 65 % diesel fuel). The new Makassar–Parepare railway has received strong
passengers’ support, although freight users are still rather cautious due to single-track configuration,
vulnerability to natural hazards, and uncompetitive pricing (Partnership for Australia-Indonesia Research,
2022[40]). The Jakarta-Bandung project, operational since late 2023, is the first high-speed railway in
Southeast Asia. PT KAI should be granted greater managerial autonomy, while the relationship between

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it and government should evolve and create the foundations for expanded private participation. Given the
poor results of the current, restrictive regulatory environment (Figure 4.12, Panel B), the use of competitive
tenders to allocate public service contracts could sustain investment and improve service quality (Vitale
and Terrero, 2022[41]).

Figure 4.11. Using cars less would reduce Indonesia’s high incidence of accidents and congestion
A. Number of persons killed in road accidents, B. Congestion level in large cities
Per million inhabitants2022 or latest year Minutes %
200 35 70
Travel time per 10 km (rhs) Congestion level
30 60
160
25 50
120 20 40

80 15 30
10 20
40
5 10
0 0 0
VNM

IDN

MYS
THA

Note: In Panel A, data for Vietnam refer to 2020. In Panel B, the congestion level refers to the average additional time (in percent) lost to traffic,
relative to driving in free-flow conditions.
Source: ASEAN (2024), Transport Statistics (database); World Bank (2024), World Development Indicators; and TomTom Traffic Index 2023.
StatLink 2 https://stat.link/f267w1

Figure 4.12. Investing more in rail would make train use more attractive
B. Regulation in rail industry
% of real GDP A. Investment in infrastructure, 2020 OECD Sectoral product market regulation Indicator
(2015 USD) Index scale from 0 to 6 (most restrictive)
5.0 6
Rail Road Airport Port OECD 5 best OECD average
5 OECD 5 worst
4.0
4
3.0
3
2.0
2
1.0 1

0.0 0
IND

IDN
THA

ZAF

CHN
SAU

TUR

BRA

RUS
MEX

ASEAN

PHL

VNM

MYS

ARG
EMERG20

IDN
TUR
CAN
USA
BRA
JPN

AUS
GBR

KOR
NZL

ZAF

CHL

MEX
CRI
COL

Note: ASEAN refers to four peer countries including Malaysia, Philippines, Thailand, and Vietnam. EMERG20 refers to G20 emerging economies
excluding Indonesia: Argentina, Brazil, China, India, Mexico, South Africa, Saudi Arabia, and Türkiye. In Panel B, information refers to laws and
regulation in force on 1 May 2024.
Source: Global Infrastructure Hub Infrastructure Monitor; and OECD PMR database and OECD-WBG PMR database for 2023/2024.
StatLink 2 https://stat.link/ny7sua

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Improving public transport systems

Making travelling by public transport more attractive, particularly in urban areas, would help cut car use. In
Indonesia, many people prefer travelling by car because public transport is slow, does not cover the entire
journey, or requires switching between different transport modes. Nearly 50% of female passengers experienced
sexual harassment on public transportation, further dissuading use (Asian Development Bank, 2023[42]).
In major metropolitan areas, the public transport modal share can be as low as 3% (Asian Development
Bank, 2016[38]). This strong car (or motorcycle) preference reflects a policy bias towards individual mobility
that contributes to Indonesia’s bad performance in terms of road safety, injuries, and fatalities (WHO,
2023[43]). There is scope to further invest in urban transportation, though limited resources require sound
cost-benefit analysis.
There is scope to make different public transport modes work together more seamlessly with digital
technologies, for example by promoting Mobility-as-a-Service or offering integrated ticketing and shared
transport modes such as on-demand taxi-buses to cover the last kilometre (ITF, 2017[44]). Better
incorporating transit in urban development planning would make using public transport cheaper by bringing
terminals closer to where people live, work, and shop (ITF, 2021[45]). Non-motorised transport (i.e., walking
and biking) could be encouraged through changes in land-use regulations, investment in walkability and
dedicated road lanes, and public awareness campaigns. A concerted policy push is needed, so that public
transport reaches critical mass.

Shifting to cleaner household energy use and making buildings more energy
efficient

Buildings and related domestic activity are responsible for 19.5% of Indonesia’s energy consumption,
mostly in the form of cooking and water heating (IEA, 2021[46]). Thanks to the progress in broadening
access to electricity (switch to electrical lighting is practically complete), emissions from lighting with
kerosene and other combustible fuels have been largely eliminated over the last decade. According to the
most recent annual socio‐economic survey, only 0.8% of households reported using a non‐electrical
source as their main source of lighting (BPS, 2022[47]).
Also, a majority of households are now using liquefied petroleum gas (LPG) instead of biomass (usually
wood) for cooking. Biomass generates several times the emissions per unit of heat compared with LPG.
Switching away from biomass in cooking brings other benefits (including less exposure to wood smoke
and less time spent gathering fuel), especially for women and children, who traditionally perform most
household work. Indonesia’s kerosene-to-LPG programme that ran from 2007 to 2012 promoted significant
shift to LPG (see Box 4.6). As of 2021, almost 85% of Indonesian households used LPG as their primary
cooking fuel (BPS, 2022[47]). Nonetheless, as of 2022 around 41 million Indonesians were still without
access to clean cooking (IEA, 2023). Indonesia is a major supporter and contributor to the on-going global
discussions on clean cooking. It is engaged in high-level international policy dialogues (such as through
the Health and Energy Platform of Action and the G20-endorsed Initiative on Clean Cooking and Energy
Access) and research and innovation programmes (through the Modern Energy Cooking Services and the
Clean Cooking Alliance).

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Box 4.7. Indonesia’s kerosene-to-LPG programme (2007-2012)

Indonesia’s kerosene-to-LPG conversion programme for cooking between 2007 and 2012 is widely
acclaimed. As part of the fuel subsidy and energy reform program, the government supported the liquid
propane gas sector, including manufacture of smaller LPG containers. It also conducted awareness
campaigns and provided subsidies targeting poor consumers. As a result, 50 million households
switched to LPG cooking, mainly from wood-based cooking, over the five years of the programme.

Ensuring buildings are better insulated against the heat will increase in importance as climates change
further. Renovating existing residential buildings and raising the energy efficiency of new housing would
additionally help to reduce households' energy bills and the high incidence of energy poverty. Law No.
36/2005 introduced obligatory energy conservation measures for buildings larger than 500 m 2. The
measures included mandatory energy audit and preparation of energy conservation plans and reports.
Subsequent revisions of the law have extended the obligation to complex buildings (these include offices,
industrial facilities, and buildings consuming more than 6 000 tons of oil equivalent per year).
There is scope to expand energy-efficiency actions on existing buildings. Most policy, such as the National
Green Building Guidelines, applies to new buildings and could be extended to existing commercial
buildings/retrofits that currently only require audits and implementing green requirements when feasible.
The public sector, which owns 22% of the building stock, should catalyse efforts in investing in energy
efficiency. This may prompt greater compliance with regulation among landlords in the private sector. Cities
and regions can also plan a way forward by creating a common vision for a broad array of public and
private stakeholders, devising effective regulatory frameworks for decarbonising buildings, and introducing
a monitoring and evaluation scheme for policy outcomes (OECD, 2022[48]).
Obstacles to investing in energy-saving renovation need to be overcome. Supporting loans with on-bill
repayment can address the challenge of access to finance. Poorer households may be assisted through
grants. Agreeing on renovations may be easier when upfront costs are fully financed through future energy
savings (Nita, 2023[49]). Also, there may be scope to further support renovations in multi-owner buildings
by changes to the relevant legal arrangements, for example to promote majority-based decision-making
and individual metering (Edwards, 2020[50]). Energy service companies can provide financing to
commercial owners with larger renovation projects, where savings are high enough to repay the costs of
setting up these services (Nita, 2023[49]). General incentive for energy-saving renovation may lie in tax
measures, for instance by a reduced rate of the land and buildings tax (Pajak Bumi dan Bangunan, PBB)
for buildings passing certain energy efficiency criteria. In addition, information campaigns can help
overcome lack of awareness or scepticism on the opportunities and benefits of retrofits.

Reducing emissions and protecting ecosystems in land- and sea-use

Indonesia’s agricultural sector produces GHG emissions, but it also has substantial capacity as a carbon
sink. Emissions include, for instance, methane emissions from rice cultivation. Meanwhile, Indonesia’s
capacity as a carbon sink is compromised by deforestation and peatland degradation from fires. As shown
above (Figure 4.2), recent years have seen a decline in the contribution to emissions from peat fires and
from deforestation. The rate of deforestation is the lowest in 20 years. This is a welcome sign of policy
success. As an example of policy efforts, according to Bappenas, the surface reserved for social forestry
has expanded ten-fold from 500 000 hectares in 2014 to 5 million hectares by 2023.
To achieve the FOLU (Forestry and Other Land Use) Net Sink 2030 objectives, policy aims to further reduce
deforestation, increase reforestation and promote sustainable peatland management. Restoration of 2 million
hectares of peatlands and rehabilitation of another 12 million hectares of degraded land is planned. At the
heart of this effort is the Sustainable Landscapes Project, a collaborative initiative involving Bappenas, the

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Ministry of Environment and Forestry, the National Institute of Public Administration (NIPA), and the
Indonesian Environment Fund (IEF). However, as with land-use policies elsewhere, executing the planned
changes and ensuring that implementation is sustained is challenging. Tackling illegal deforestation requires
further clarification of land rights and vigorous law enforcement (OECD, 2019[51]).
Indonesia is one of the most important countries globally for ocean-based climate change mitigation. It is
the largest archipelagic country in the world, with an offshore area three times the size of its land area.
Given Indonesia’s extensive coastline and coastal population, rising sea levels and coastline erosion will
make some coastal areas, including Jakarta, unsuitable for living or business activities and damage
existing infrastructure. More than a fifth of the coastline is vulnerable to a 1 metre rise in sea level –
estimates range from a rise of 0.2 metres to 2 metres by 2100.
Indonesia’s policy as regards oceans and related activities could be developed further. Its NDC includes
ocean-related measures: blue carbon, offshore renewable energy, and shipping. However, there is scope
for greater coverage. For instance, reporting on mangrove deterioration is included in NDC reporting, while
degradation of seagrass meadows is not (Climateworks Centre, 2023[52]).

Preparing workers for the green economy

Indonesia’s decarbonization efforts will bring substantial economic change to some sectors and regions,
with both positive and negative implications for workers. This may require some policy intervention to
ensure a smooth adjustment (OECD, 2024[53]). Not all workers will have the skills to transition to new jobs.
In specific localities, heavy job loss due to climate change policies (for instance, the closure of coal mines)
may require offsetting interventions to avoid long-term unemployment and socio-economic costs. In other
localities, demand for copper and nickel may boost employment. This intervention can, under certain
circumstances, facilitate the transition of workers to “green” jobs, with the exception of those in highly
automatable occupations, who may require more extensive re-skilling (Fankhaeser, Sehlleier and Stern,
2008[54]). A simulation exercise conducted for Indonesia illustrates that a global energy transition would
result in employment losses concentrated in the fossil fuel value chain (i.e., related to coal), while
employment gains would occur across multiple sectors such as electricity and gas, construction, and
mining of metals (OECD, 2024[55]). Using the JETP current investment scenario, an additional renewable
generation capacity of 52.2 GW will be built as well as approximately USD 19.7 billion worth of transmission
infrastructure, translating into roughly 383 000 jobs between 2023-30 (JETP Indonesia, 2023[56]).
Climate change may negatively affect a wide range of sectors, beyond energy and natural resources
(Figure 4.13). For instance, the shift to zero-emission vehicles will impact the motor repair sector. The
sizable shares of Indonesia’s workers in such industries will require support to reskill and shift to new work
opportunities. Indonesia’s large number of self-employed or workers in very small enterprises are likely to
need particular support. Extreme and less predictable weather may modify tourism patterns, bringing
further structural change.

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Figure 4.13. Climate change is a challenge for workers, but the green transition opens new opportunities
A. Natural disaster-linked vulnerabilities B. Indonesia could be among the largest
are significant for half of Indonesian workers beneficiaries of the global energy transition
Share of workers exposed and vulnerable to floods or droughts, Net employment change by 2030
by level of exposure and vulnerability under the 2DS compared with the 6DS
%
High Medium Low 1.0
Vulnerability
Indonesia

0.8

Exposure 0.6

Vulnerability 0.4
Viet Nam

0.2
Exposure
0.0
0 20 40 60 80 100

IND

IDN
USA

POL
RUS

NLD

FRA

CHN
TUR
AUS
SVK
GRC

CAN

DEU

ZAF
JPN
BRA
MEX

GBR

KOR
%
Note: In Panel B, this exercise compares a “business-as-usual” emission scenario (referred to as a 6 degrees scenario – 6DS) with a “sustainable
development” scenario (referred to as a 2 degrees scenario – 2DS) in 2030. The first scenario should be interpreted as a particularly pessimistic pathway,
where CO2 emissions reach 44 gigatonnes globally in 2030. In this scenario, global average temperature is on a path to increase by approximately 5.5°C
by 2050 and then stabilise at approximately 4°C by 2100. The second scenario is the “sustainable development” or 2DS. It consists of a hypothetical
pathway where there is at least a 50% probability of the average global temperature not increasing by more than 2°C compared to pre-industrial levels.
This means reducing the 34 gigatonnes of CO2 emissions recorded globally in 2019 to 27 gigatonnes in 2030, which is 39% lower than in the 6DS.
Source: OECD (2024), Towards Greener and More Inclusive Societies in Southeast Asia, Development Centre Studies.
StatLink 2 https://stat.link/t76wyi

To mitigate the adverse social consequences of the energy transition, policy makers should provide early
support before layoffs, implement social protection measures, and invest in local development for negatively
affected areas, with effects depending on policy choices, industry mix and workers’ skills. This underlines
the importance of further building the capacity and effectiveness of active labour market policies (ALMPs), in
particular to develop green skills, which currently are still lacking, and provide social support functions such
as career planning, job placement, upskilling and reskilling, and financial assistance. Indonesia already has
systems in place that provide these types of activation service. For instance, the Pre-Employment Card
Programme (Kartu Prakerja) is a competency development programme that combines temporary social
assistance with skills development to help laid-off workers and job seekers (OECD, 2024[55]). Therefore,
part of the policy solution will lie in ensuring current ALMPs have capacity for the green transition. The on-
going preparation of the Human Resource Development Roadmap for Green Jobs provides a unique
opportunity to ensure policy coherence in government intervention.

Adapting to a changing climate

Adaptation efforts help reduce current and future vulnerability and exposure to the social, economic, and
environmental impacts of climate change, including slow- and sudden onset weather extremes. To help
countries build resilience, the OECD Recommendation on the Governance of Critical Risks (2014[57]) calls
on governments to identify and assess risks taking interlinkages into account, invest more in risk
prevention, develop flexible capacities for preparedness, response and recovery, and establish transparent
and accountable risk management systems.

Enhancing disaster risks management is a priority

Indonesia is vulnerable to a range of natural hazards, including but not limited to weather related hazards.
It lies on the Pacific “Ring of Fire”, one of the planet’s most exposed zones to phenomena related to tectonic
plate movements; volcanic eruptions, earthquakes, and tsunamis. Two of the most catastrophic natural

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disasters in human history – the Tambora eruption in 1815 and the Indian Ocean tsunami in 2004 – took
place in Indonesia. The country is home to 76 active volcanoes. However, over 90% of recorded disasters
are hydrometeorological in nature, including floods, landslides, strong winds, droughts, and hurricanes
(Figure 4.14) and the ensuing economic losses are considerable (Figure 4.15).
Forest fires bring particular challenges. For several days in 2015, forest fires in Indonesia emitted more
carbon dioxide than the entire United States economy and are estimated to have caused more than USD
16 billion in economic losses, with more than 100 000 premature deaths (Edwards, 2020[50]). El Niño events
explain most of the year-on-year variation in fire, but variance at village levels can be explained by
remoteness, development, and use of fire for land clearing before planting crops in traditional agriculture.
Urbanisation and population growth have increased exposure to extreme heat days. Indonesia ranks
among the countries with the highest observed annual changes in rainfall causing the north to become
wetter and the south drier. Since the 1990s, relative sea-level rise has on average risen by approximately
4.97 millimetres per year, putting the 175 million people living on the coast (70% of the total population) at
risk (OECD, forthcoming[58]).
Climate resilience has been identified as an important objective by the national government and is one of
the pillars of Indonesia’s new long-term development plan (RPJPN) 2025-45, notably by building
infrastructure to reduce disaster risks. The National Disaster Management Authority (BNPB) (established
in 2008) coordinates the relevant line ministries and agencies at all stages of disaster management: pre-
disaster preparedness, emergency response, post-disaster recovery, and risk transfer mechanisms. The
BNPB’s budget has been expanding since the late 2010s. Indonesia's proactive approach to disaster risk
management reflects a commitment to safeguarding its people and assets against the unpredictable nature
of disasters (Table 4.5). This holistic and data-driven approach ensures that the country is better prepared
to face future challenges, thereby minimizing the economic and social impacts of disasters. However, there
is scope to improve some aspects of the disaster management system. In particular, (Juwitasari, 2022[59])
points to need to increase the density of Indonesia’s early warning system (EWS) network such that there is
at least a station every 50 to 100 kilometres. There is also need for more timely, standardised, and
comparable data on risks, occurrences, impacts, and financing related to disasters and disaster
management (OECD, forthcoming[58]).

Table 4.5. Main initiatives in disaster risk management

Implementation of In accordance with Presidential Regulation Number 75 of 2021, Indonesia has established disaster savings funds, which are
Disaster Pooling mainly sourced from the State Budget (APBN) and Regional Budgets (APBD). This fund is designed to bolster fiscal resilience
Funds against disaster risks.
Risk Transfer To further safeguard against disaster-related losses, Indonesia is implementing risk transfer strategies through the purchase
Mechanisms of insurance and other financial instruments.
Allocation of Disaster Every year, the APBN allocates a portion of disaster reserve funds to risk retention. By maintaining reserves and leveraging
Reserve Funds the funds, governments can provide immediate relief and support recovery efforts.
Development of The Ministry of Finance, through its Directorate General of Budget Financing and Risk Management (DJPPR), is developing
Risk Modeling by models to better understand and manage disaster risks. The models’ outputs, including the Maximum Possible Loss (MPL)
DJPPR and Average Annual Loss (AAL), are used to better target disaster risk management strategies at the local level.
Formulating a Building on the insights gained from risk modeling, the Ministry of Finance (DJPPR) is developing a comprehensive disaster
Disaster Risk risk financing strategy. This strategy will include a detailed implementation roadmap.
Financing

Public infrastructure and housing need to become better adapted to climate-related extreme weather events
(OECD, 2018[60]). As Indonesia’s population becomes more affluent, combined with rising temperatures,
the use of air conditioning and other home appliances will increase (CMCC, 2022[61]). Earlier evaluation of
the potential effects of climate change in public infrastructure project design and selection can reduce the
longer-term costs of increased emissions. Additional measures could incorporate adaptation concerns into
infrastructure planning and procurement procedures (OECD, 2018[60]).

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Figure 4.14. Floods are the most frequent climate-related events

Climate-related events by type and trend, 2000-23
Number
30
Drought Flood Mass movement (wet)
Storm Wildfire Trend
25

20

15

10

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023
Note: Based on CRED/UCLouvain (2024), the International Disaster Database (EM-DAT, www.emdat.be).
Source: OECD, “Adapting infrastructure to changing climatic conditions: The case of Indonesia”, OECD Environment Policy Papers (forthcoming).
StatLink 2 https://stat.link/7lbjzc

Figure 4.15. Extreme weather and climate-related events damage the economy
Estimated cumulative losses per thousand unit of GDP between 1980 and 2023
USD per 1000 unit of GDP (current, 2022)
180

150

120

90

60

30

0
TUR RUS MYS IDN BRA ZAF CHN ARG MEX OECD IND VNM PHL THA

Note: Data on cumulative losses are based on climatological, meteorological, and hydrological disasters. The figures vary according to the
proportion of damage that is insured and do not therefore reflect the real cost of damage.
Source: OECD calculations based on CRED/UCLouvain (2024), the International Disaster Database (EM-DAT, www.emdat.be), Accessed on 22 May 2024.
StatLink 2 https://stat.link/0zjs6d

Improving water management

Climate change projections point to an increasing severity of weather-related disasters. Precipitation trends
in Indonesia are complex, though overall it seems likely that rainfall will rise, also in intensity, but that
droughts as well may become more frequent (CMCC, 2022[61]). Droughts greatly impact agriculture but
also the wider community. Some areas of Indonesia are already susceptible to water shortages. For
instance, in major tourism destinations large demand pressures can strain water provision. Indicators
suggest overall water scarcity is moderate in Indonesia in international comparison (Figure 4.16, Panel A).
However, OECD assessment points to increased frequency of water scarcity in much of Java along with
Bali, Nusa Tenggara, and Sulawesi. Projections to 2045 indicate further intensification due to climate
change, land degradation and unsustainable water usage (OECD, 2023[1]).

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Figure 4.16. The agriculture sector relies heavily on freshwater, while water stress is relatively moderate
% of renewable internal A. Total freshwater withdrawal as % of renewable internal freshwater resources
freshwater resources and per capita, 2020 or latest available m³ per inhabitant
100 2 500
m³ per capita
Total freshwater withdrawal as % of renewable internal
freshwater resources
80 Total freshwater withdrawal per capita 2 000

60 1 500

40 1 000

20 500

0 0
FIN

IDN
IRL

FRA

ITA

IND
JPN

THA

TUR

NLD
BRA

NZL

CHL

PHL

ESP

ZAF
MYS

CAN
RUS

ARG

ASEAN
AUS

USA

CHN
MEX
VNM
DEU

KOR
OECD

% of the total
freshwater withdrawal B. Share of freshwater withdrawals in the agricultural sector,
2020 or latest available
100

80

60

40

20

0
FIN

MYS

ARG

IDN

IND

VNM
IRL

ITA
KOR

JPN

MEX
DEU

NLD
CAN
FRA

RUS

USA

BRA
CHN
AUS

TUR
THA
ZAF
ESP
NZL

ASEAN
PHL

CHL
OECD

Note: Annual freshwater withdrawals refer to total water withdrawals, not counting evaporation losses from storage basins. Withdrawals include
water from desalination plants in countries where they are a significant source. Renewable internal freshwater resources flows refer to internal
renewable resources (internal river flows and groundwater from rainfall) in the country. Withdrawals for agriculture are total withdrawals for
irrigation and livestock production. ASEAN refer to four peer countries including Malaysia, Philippines, Thailand, and Vietnam.
Source: World Bank (2024), World Development Indicators based on food and Agriculture Organization of the United Nations; and OECD
calculations.
StatLink 2 https://stat.link/3e6yho

Increased frequency and duration of droughts amplifies the need to ensure efficient water use. In general,
water in Indonesia is used less efficiently than in other countries. For example, water abstraction is high
and is mostly for irrigation in agriculture (Figure 4.16, Panel B). Nearly half of irrigation systems are
considered ‘in bad condition’, and a non-negligible part is categorised as ‘ruinous’ (World Bank, 2022[62]).
There is also a problem with groundwater level decline, linked to insufficient monitoring and illegal
abstraction, e.g., for industry or high-rise buildings (OECD, 2019[51]). According to the Asian Development
Bank (2024[63]), approximately 77% of households in Indonesia have access to basic sanitation facilities
such as septic tanks, but only 7% have access to safely managed sanitation that ensures the proper
disposal of household waste to wastewater treatment plants. Better reflecting water scarcity in water prices
would encourage businesses and households to use water more efficiently and reinforce cost recovery
(OECD, 2019[51]). There is also potential to develop nature-based solutions that involve the planned and
deliberate use of ecosystem services to improve water quantity and quality and increase protection and
resilience to climate change (OECD, 2023[1]).

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Several water management reforms have been introduced recently, including revisions of the legal and
regulatory framework relating to the implementation of the 2019 Water Law and the 2020 Omnibus Law.
Adoption of four draft government regulations on drinking water, water sources, water resource
management, and irrigation is ongoing. Establishing an independent economic regulator that supervises
and reviews tariff reforms would be major breakthroughs in securing a stable revenue stream for water
providers and setting tariffs at cost-recovery levels (OECD, 2023[1]). Recent discussions on a nationwide,
uniform water tariff warrant caution. Depending on the way it is set (i.e. whether it is a uniform tariff level,
tariff formula, tariff structure, uniform at bulk water supply or at retail), the uniform water tariff may jeopardise the
cost recovery of water services.

Helping people and businesses cope with climate change damages

Given the repeated and intensifying nature of climate related extreme events it is important to promote
climate adaptation across all of government and society. This requires conducting downscaled and
regularly updated climate risk assessments, which help understand the exposure and vulnerability of
social, economic and environmental assets and hence assists the prioritisation of adaptation interventions.
Effective adaptation also requires clear roles and responsibilities and all levels of government and non-
governmental actors. An over-reliance on the government to conduct emergency response and to fund the
recovery and rehabilitation of assets disincentivises adaptation investments.
For the financial burden to manage the costs of disasters not to rest on the government’s shoulders it is
important to identify effective risk transfer instruments. Where the government provides compensation for
damages it is important to design compensation mechanisms that build back better and that avoid paying
for repeated damages to the same assets in the same locations. Private insurance does not necessarily
dovetail with government compensation or provide coverage in other types of events. This uncertain
coverage limits support for economic recovery from disasters (OECD, 2023[64]). In Indonesia, insurance
coverage for damages from extreme weather events is low compared to the OECD average, but higher
than in other middle-income countries (Figure 4.17). The government can take the lead in these
circumstances, as shown by the State Asset Insurance programme which was launched in 2019 to cover
over 1 300 Kemenkeu-owned buildings and was expanded to 10 ministries/agencies in 2020. By 2023, it
has insured over 5 000 public assets with a total sum insured of USD 2.5 billion. The programme is part of
the Disaster Risk Financing and Insurance (DRFI) Strategy, whereby the government is taking a more
proactive approach.
There is scope to expand climate-related private catastrophe risk insurance in Indonesia. Law No. 4/2023
concerning the Development and Strengthening of the Financial Sector (UU P2SK) paves the way for
expanding the coverage of existing compulsory insurance to include fires and natural disasters (Wasono,
2023[65]). However, more frequent extreme weather events will raise costs for insurance and could
challenge insurability. In general, expanding measures for mandatory insurance to existing buildings and
more areas could reduce insurance costs through risk pooling and limit fiscal exposure for compensating
losses (European Commission, 2018[66]) (OECD, 2021[67]), although distributional effects may be negative.
An example of government intervention to help ensure insurance coverage is the Danish Storm Council,
an independent body that helps with technical expertise to assess damages and provide compensation for
climate-related damage to individuals and firms protected by fire insurance (OECD, 2021[67]). Indonesia’s
insurance markets, at any rate, are still at an early development with less than 3% of the population covered
by building insurance. Increasing market penetration is key. Governmental support of private risk financing
should be considered, for example through re-insurance (G20/OECD, 2012[68]). Insurance companies, for
their part, should promote risk awareness and financial literacy, offer affordable products, and fully exploit
digitalisation (OJK, 2023[69]), building on compulsory insurance as mandated by Financial Service Omnibus Law
(FSOL) and the Rice Farming Insurance Product (Asuransi Usaha Tani Padi).

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More broadly, there may be significant returns to ramping up public awareness of climate-change risks and
the exposure of certain areas. Cognitive biases can limit awareness of such risks and delay response. Policies
can help to overcome these biases by providing information and encourage limiting exposure (Economides
et al., 2018[70]). Informing firms and households of adaptation options can steer them towards adopting
protective behaviour, such as limiting outdoor activities during heatwaves or preparing for floods.
Developing a communication strategy to assure the information reaches people in the most affected
communities would allow to better leverage existing knowledge to improve the impact of these plans. The
integration of climate change adaptation into development planning is another area where progress has
been recorded, although obstacles remain such as a lack of effective coordination, unavailability of detailed
information and vulnerability assessments at national and sub-national levels, and challenges in tracking
adaptation-related investment (Green Climate Fund, 2021[71]).

Figure 4.17. Indonesia’s insurance coverage for climate-related damage is higher than in peers
Share of catastrophe losses insured by type of risk, 2000-2019
%
60
Earthquake Flood Storm
50

40

30

20
Storm: 0%

10

0
India Philippines Indonesia OECD

Note: OECD calculations. The share of catastrophe losses insured may be lower in some countries due to limits in the availability or collection
of relevant data on insured losses. If only events with reported data on insured losses are included in the calculation, the estimated share of
losses insured increases to 10.8% for India flood and 8.5% for India storm; 11.4% for Indonesia earthquake and 15.0% for Indonesia flood;
20.0% for Philippines earthquake, 4.5% for Philippines flood and 9.4% for Philippines storm. For OECD countries, the difference is only marginal
if events without a reported insured loss are excluded.
Source: OECD (2020), "Leveraging the role of property catastrophe reinsurance markets: The Case of India, Indonesia, Myanmar and the Philippines".
StatLink 2 https://stat.link/h8dib6

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Findings and recommendations

MAIN FINDINGS RECOMMENDATIONS (Key recommendations in bold)
Getting the right mix of instruments for decarbonisation
The effective price of carbon is distorted by poorly targeted fuel subsidies. Gradually reduce energy subsidies (including on LPG) and
Subsidies on liquid petroleum gas (LPG) are meant to only benefit compensate vulnerable households through better targeted support.
targeted households, but many other households also receive them.
Carbon pricing markets remain at an early stage of development. Introduce a carbon tax and commit to gradually increasing the carbon
price and broadening its base.
Decarbonising electricity generation
A carbon exchange has been introduced for coal-fired power plants, but Complement the carbon tax with other policy interventions, including feed-in-
direct carbon taxation mechanisms have yet to be implemented. tariffs for renewable energy and financing mechanisms for energy efficiency.
Coal-fired power plants generate over half of Indonesia’s electricity Accelerate early decommissioning of coal-fired power plants,
supply. Support for transition away from coal includes funds from the conditional on funds’ availability and energy security considerations.
international multi-donor Just Energy Transition Partnership (JETP). Consider retrofitting coal- and gas-fired power plants with carbon capture
or to run on hydrogen as technologies develop further.
There is scope to improve the structure of electricity supply. The State Transfer regulatory responsibilities to a new independent authority.
electricity company is the sole off-taker on the electricity market and Provide this body with appropriate technical capacity and financial resources.
regulation makes renewable power prices unattractive. Establish a robust, stable, substantial, and multi-year pipeline of auctions
for renewable-energy generation, with competitive and transparent tariff-
setting.
Renewable sources account for only a small share of electricity Increase investment to improve grid stability, including through more
generation. As elsewhere, periods of peak electricity demand do not align interconnections between islands and with the ASEAN Power Grid.
with peak supply from renewable sources, but this could be partly tackled
through better storage and interconnection technologies.
Reducing emissions in the transport sector
Indonesia’s road vehicle fleet is relatively old, transition to low- and zero- Better target subsidies for electric vehicles (EV) purchases and tax
GHG emissions vehicles has been marginal so far. exemptions and increase investment in the EV ecosystem.
Mass urban and intercity transport systems are underdeveloped. High Increase investments in mass urban and intercity transport
reliance on road transport, especially internal-combustion engine systems, subjecting projects to rigorous cost-benefit analysis.
vehicles, contributes to greenhouse gas emissions, high levels of road Gradually dissuade car use, for example by introducing road pricing
fatalities and traffic congestion, as well as poor urban air quality. and congestion charges.
Expand priority lanes and emission-free zones for low-emission vehicles.
The mainly single-track railway network is less dense and used less than Substantially increase investments to improve the quality of railway
in most OECD and peer countries. Users are dissatisfied with the quality services, expand the rail network (including but not limited to high-speed
of rail services. Investment in rail as a share of GDP is low. services) and increase its use.
Shifting to cleaner household energy sources and making buildings more energy-efficient
Public policies have helped transition from using biomass for cooking to Track progress in clean cooking deployment, including through periodic
liquid petroleum gas, which produces less GHG and is less health surveys, and in reducing the cost of switching to cleaner fuels; make this
damaging. Yet around 12% of households still use biomass fuels. information publicly available.
Many households receive subsidised LPG stoves and cylinders, with Improve targeting of LPG subsidies to the most vulnerable households
insufficient targeting toward the neediest; the fiscal cost is substantial. and communities.
Access to finance deters investment in building retrofits, along with a lack Expand renovation measures especially for government and commercial
of information about the potential energy savings. buildings. Improve enforcement of existing building codes. Provide subsidised
loans with on-bill repayment schemes to mobilise more private capital.
Emission-reduction and ecosystem protection in land- and sea-use
Effective public policies have reduced deforestation to its lowest rate in 20 years. Press on with reducing net deforestation, including through increasing
Ambitious emission reduction objectives require further deforestation cuts. reforestation, and promoting sustainable peatland management. Closely
monitor implementation.
Welcome efforts are being made to address emission and ecosystem Work further on expanding the scope of ecosystem monitoring, for instance
issues in the ocean and to tap into opportunities for offshore wind power. as regards the inclusion of seagrass meadows in NDC reporting.
Ensure full exploration of opportunities for offshore wind and solar generation.

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Adaptation policies to prepare people and the economy for a changing climate
Awareness of climate change and the potential implications and solutions Further develop public education and communication strategies to raise
is limited in some segments of the population. awareness on climate change risks and solutions.
Indonesia has extensive disaster management systems. Nevertheless, Improve warning systems, enhance zoning and permitting rules, and invest
the early warning system is under-equipped. in equipment that reduces damages from more frequent and intense forest
fires and other natural catastrophes.
Negative impacts of climate change can be reduced by adapting public Incorporate climate resilience planning for the future climate into
infrastructure and reallocating activities away from more affected areas. infrastructure planning, procurement and spatial planning rules.
Indonesia’s coastal cities are particularly vulnerable to climate change.
Climate change is projected to reduce freshwater availability in some Adjust water prices to better reflect water scarcity and supply costs.
parts of the country. Fresh water abstraction is relatively high, and water Consider replacing social water tariffs with income transfers not directly
is used less efficiently than in other countries. linked to water consumption.
Insurance coverage for damages from extreme weather events is low and Develop insurance markets for extreme weather events and consider
compensation delays and amounts are uncertain. government support, for example through re-insurance.
Benefitting from the green transition, in terms of more and better jobs, Boost active labour market policies, training and re-skilling, targeting workers
requires appropriate reskilling and upskilling programmes. whose jobs are more at risk, with the participation of the private sector.

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OECD Economic Surveys
INDONESIA
Indonesia’s economy has rebounded from the COVID‑19 recession and inflation has declined considerably,
but exposure to global uncertainty remains high. Monetary policy must remain prudent, forward looking
and data‑dependent. Fiscal policy needs to ensure the budget deficit remains below the mandated ceiling.
Government spending and revenue are low in international comparison and future spending pressures require
an increase in tax revenues over the medium term. Indonesia has scope to boost productivity and long‑term
growth prospects though encouraging women’s employment alongside continued improvement to educational
attainment, and improvement to the business environment. Greater efforts in combatting corruption would help
foster a more competitive and productive business sector. Indonesia has further scope to harness digitalisation.
Geographic, gender and age‑related gaps in individuals’ access to, and adoption of, the Internet and related
tools need to be closed. Indonesia is vulnerable to the impacts of global warming. The country’s goal
of reaching net‑zero greenhouse gas emissions by 2060 is challenging in the context of economic convergence
and the country’s reliance on coal.
SPECIAL FEATURES: SOCIO‑ECONOMIC CONVERGENCE, DIGITALISATION, GREEN TRANSITION

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