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The Indonesia Competitiveness Report 2011

Sustaining the Growth Momentum

Thierry Geiger, World Economic Forum
June 2011

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011
Sustaining the Growth Momentum

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011 is published by the World Economic Forum and is the result of a collaboration between the Centre for Global Competitiveness and Performance and the Centre for Regional Strategies’ Asia Team. Professor Klaus Schwab, Executive Chairman, World Economic Forum Robert Greenhill, Chief Business Officer, World Economic Forum
CENTRE FOR GLOBAL COMPETITIVENESS AND PERFORMANCE

Thierry Geiger, Associate Director, Economist Jennifer Blanke, Director, Lead Economist Ciara Browne, Associate Director, Senior Community Manager Roberto Crotti, Junior Economist Margareta Drzeniek Hanouz, Director, Senior Economist Satu Kauhanen, Team Coordinator Pearl Samandari Massoudi, Community Manager
ASIA TEAM, CENTRE FOR REGIONAL STRATEGIES

Sushant Palakurthi Rao, Director, Head of Asia Clara Chung, Community Manager for Asia and Pacific, Global Leadership Fellow Anne-Catherine Gay des Combes, Team Coordinator Maryam Hassimi, Community Manager for India and South Asia, Global Leadership Fellow Jaeyoung Lee, Community Manager for Asia and Pacific, Global Leadership Fellow We would like to extend a special thank you to Gilly Nadel for her excellent copyediting work and Neil Weinberg for his superb graphic design. World Economic Forum Geneva Copyright © 2011 by the World Economic Forum All rights reserved. No part of this publication can be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise without the prior permission of the World Economic Forum. Printed and bound in Indonesia. ISBN-10: 92-95044-78-9 ISBN-13: 978-92-95044-78-4 For additional information and material related to this publication and to The Global Competitiveness Report 2010–2011, please visit www.weforum.org/gcr.

Indonesia Competitiveness Report 2011 © World Economic Forum

Contents

Preface
by Klaus Schwab, World Economic Forum

v

Executive Summary Indonesia’s Competitiveness: Sustaining the Growth Momentum
by Thierry Geiger, World Economic Forum

vii 1

The Global Competitiveness Index Framework ........................ 2 Overview of Indonesia’s Performance in the Global Competitiveness Index .................................................. 5 Indonesia’s Competitiveness in the Twelve Pillars of Competitiveness ...........................................10 Conclusion............................................................................... 25 Notes....................................................................................... 26 References .............................................................................. 27

Appendix A: Computation and Structure of the Global Comptitiveness Index Appendix B: Technical Notes and Sources Appendix C: Indonesia Country Profile

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Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

Preface
KLAUS SCHWAB Executive Chairman, World Economic Forum

The Indonesia Competitiveness Report 2011 is being released at the occasion of the 20th annual World Economic Forum on East Asia and at a critical juncture for Indonesia’s economic future. Indeed, the past two decades have seen remarkable transformation in Indonesia in political and economic terms. The difficulties of the 1997 Asian financial crisis ushered in a time of political and economic reform, which has led to the country today standing as the third fastestgrowing economy in Asia, a member of the G20, and the world’s largest Muslim democracy. As a result of Indonesia’s improved fundamentals, the economy withstood the recent global economic crisis, supported by a booming domestic market and a sounder financial sector. In this context, it is natural to predict a bright future for the country—and for the region as a whole, which is expected to contribute some 50 percent to global GDP growth in the next five years. Yet, as this Report describes, a number of challenges remain, which must be addressed in order to ensure that Indonesia sustains the recent positive momentum into the future. The World Economic Forum has played a facilitating role in promoting economic growth and development of countries for more than 30 years, by providing detailed assessments of the productive potential of nations worldwide through The Global Competitiveness Report series. In this context, The Indonesia Competitiveness Report 2011 is a contribution to understanding the key factors determining prosperity and economic growth in Indonesia. The Report identifies the obstacles that might hinder Indonesia’s remarkable growth going forward, as well as the notable advantages it can build upon, benchmarking the country against other large, emerging markets, as well as regional players. It thus offers Indonesian policymakers and business leaders an important tool in the formulation of improved economic policies and institutional reforms.

The Report could not have been put together without the leadership and enthusiasm of its author, Thierry Geiger. Appreciation also goes to Robert Greenhill, Chief Business Officer, and Jennifer Blanke, Director of the Centre for Global Competitiveness and Performance, and her team: Ciara Browne, Roberto Crotti, Margareta Drzeniek Hanouz, Satu Kauhanen, and Pearl Samandari Massoudi. The Asia team, led by Sushant Palakurthi Rao, also provided valuable support and guidance. I would also like to recognize our excellent collaboration with the Chair of the World Economic Forum’s Global Agenda Council on Competitiveness, Dr. Mari Elka Pagenstu, Minister of Trade of the Republic of Indonesia. Finally, I would also like to convey my sincere gratitude to our Partner Institute’s representative in Indonesia, Tulus Tambunan, from the Center for Industry, SME & Business Competition Studies at the University of Trisakti, as well as the business executives, who took the time to participate in our Executive Opinion Survey, and whose valuable feedback made the publication of this Report possible.

Indonesia Competitiveness Report 2011 © World Economic Forum

Preface

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Indonesia Competitiveness Report 2011 © World Economic Forum

Executive Summary

Following the Asian financial crisis and the end of Suharto’s regime in 1998, Indonesia has embarked on an impressive growth trajectory and is poised to become an economic heavyweight very soon. Indonesia is already the world’s 17th largest economy and the 6th largest among developing countries. Indonesia’s economy is also very dynamic, having grown at an annualized rate of 5 percent between 2001 and 2010. Indonesia has weathered the latest global economic crisis remarkably well and, in 2010, it was the third fastestgrowing G20 country. It is against this backdrop that The Indonesia Competitiveness Report 2011 is released, ahead of the 20th World Economic Forum on East Asia, which takes place in Jakarta for the first time. The Report takes stock of Indonesia’s competitiveness landscape, drawing on the results of the Global Competitiveness Index (GCI). It identifies the notable advantages it can build upon as well as the obstacles to the country’s development and the threats to its growth. Introduced in 2005, the GCI is a comprehensive composite indicator that captures the microeconomic and macroeconomic foundations of national competitiveness. Competitiveness is defined as the set of institutions, policies, and factors that determine the level of productivity of a country. Productivity, in turn, influences the level of prosperity that can be attained. The GCI comprises 110 indicators organized in 12 categories—the 12 pillars of competitiveness. Those are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. The overall picture painted by the GCI of Indonesia’s competitiveness has been brightening over the years, and the latest assessment is mostly positive. Indonesia ranks 44th out of 139 economies in the GCI 2010. Since 2005, Indonesia has improved its score on each of the 12 pillars. As a result of these positive dynamics, Indonesia’s rank improved by 10 places, making it the most improved country among G20 countries over this period. Indonesia is better positioned than most countries at a similar stage of development. It consistently outperforms—often by a sizeable margin—the averages for

the lower middle income group and the Developing Asia region. Indonesia compares favorably with the BRICS, with the notable exception of China (27th). It precedes India (51st), South Africa (54th), Brazil (59th), and Russia (63rd) by a small margin. Within ASEAN, a trade area characterized by profound diversity, Indonesia ranks in the middle of the pack, well behind Singapore (3rd) and Malaysia (26th) but far ahead of the Philippines (85th) and Cambodia (109th). Indonesia, Vietnam (59th), and Thailand (38th) are relatively close, but the driving forces of their competitiveness differ. Among Indonesia’s strengths, the macroeconomic environment stands out (35th out of 139). Fast growth and sound fiscal management have put the country on a strong fiscal footing. The debt burden has been drastically reduced, and Indonesia’s credit rating has been upgraded. Savings and investments are also increasing. In the current context of rising global commodity prices, inflation represents the most immediate threat to the stability of the macroeconomic environment. In other areas, access to basic education is nearly universal, and its quality has been improving (49th on the primary education pillar). Efforts now should be directed at raising secondary and tertiary education enrolment (66th on the higher education and training pillar). Among the factors that will become critical in the coming years, the efficiency of the goods market is also relatively well assessed (49th), thanks to a competitive tax regime and intense competition, but bureaucracy and trade barriers of all sorts still stand in the way. Businesses are becoming increasingly sophisticated (37th) thanks to relatively deep clusters, efficient management, and the migration of firms to higher segments of the value chain. Finally, the large size of the market confers a notable advantage (15th). As one of the world’s 20 largest economies, Indonesia boasts a large pool of potential consumers, as well as a rapidly growing middle class, of great interest to both local businesses and foreign investors. However, much more must be done to improve Indonesia’s competitiveness and therefore fully reap the benefits of international trade. In addition, a more integrated ASEAN would offer opportunities for streamlined regional supply chains, while offering new channels of distribution. As the 2011 Chair of the organization, Indonesia can play a catalytic role in the realisation of the ASEAN Economic Community by 2015.

Indonesia Competitiveness Report 2011 © World Economic Forum

Executive Summary

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Executive Summary

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One of the most glaring shortcomings is the state of Indonesia’s infrastructure (82nd). Despite notable improvements, its roads and railroads remain are in poor condition, and the capacity of seaports remains limited. Energy infrastructure is of major concern, as well. The uptake of information and communication technologies also remains limited among businesses, as well as within the population at large. Mobile telephony is spreading fast, but Internet access, especially at high speed, remains the privilege of the very few. As a result, Indonesia places 91st in the technological readiness pillar, its lowest ranking among the 12 pillars. With regard to human resources, the health situation is holding back Indonesia’s competitiveness (99th). A high infant mortality rate, the burden of communicable diseases, and the prevalence of malnutrition highlight the worrisome situation. Another major area of concern relates to the allocation of human resources due to the rigidity of the labor market (84th), which contributes to a high degree of informality and precarious working conditions, and which hinders the reallocation of the labor force to more productive sectors as Indonesia develops. Finally, Indonesia must continue strengthening the institutional framework (61st). Corruption remains widespread at all levels of the administration, and bureaucracy is still too burdensome. Greater transparency and predictability are needed in the policy-making process. And the security situation, although far better than in the past, is still a concern to the business community. Growth will not make any of these problems disappear and could indeed exacerbate some of them. Indonesia cannot therefore be complacent. Its vigorous development generates new needs and sets new standards among businesses, investors, and consumers, making a situation deemed satisfactory today not acceptable a few years from now. Also, with one-fifth of the population still living in extreme poverty and half barely above the threshold, rising inequality, and high prices for food, fuel, and gas, there is a risk of social unrest. If the economy cannot create enough jobs outside the agriculture sector for the growing population of educated youths, the consequences could be dire and Indonesia’s demographic dividend become a liability. Pervasive corruption, if not tackled, could also fuel discontent. Yet, based on the findings of the Report, one can be cautiously optimistic that Indonesia will successfully take up these challenges.

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia’s Competitiveness: Sustaining the Growth Momentum
THIERY GEIGER World Economic Forum

Indonesia’s economic development has come a long way over the past decade. Following the near economic collapse caused by the 1997 Asian financial crisis and the end of Suharto’s regime in 1998, Indonesia has embarked on an impressive growth. A sprawling archipelago of some 17,000 islands and 238 million people, Indonesia is the world’s 3rd biggest democracy and the 17th largest economy (see Table 1). Indonesia’s economy is not only large, it is also very dynamic, growing at an annualized rate of nearly 5 percent between 2001 and 2010, up from 3.3 percent in the previous decade (which was marked by crisis). Like many developing and emerging Asian economies, Indonesia has weathered the latest global economic crisis remarkably well. GDP growth exceeded 6 percent in 2008 and 2010, and in 2009—the height of the crisis— was still a robust 4.6 percent. In 2010, it was the third fastest-growing G20 country. For the period 20112016, the International Monetary Fund (IMF) predicts that growth will accelerate to 5.7 percent (see Table 2), approaching the forecasted rates for China (7.9) and India (6.7).1 Indonesia is already the 6th largest developing country in terms of GDP and is poised to become an economic heavyweight in the years to come. Indeed, some predict it will be among the world’s ten biggest economies around 2030.2 And before that happens, Indonesia could become the second “I” in the BRIICS acronym of the group composed of Brazil, Russia, India, Indonesia, China, and South Africa. Indonesia has grown much richer (see Figure 1), too. When controlling for inflation, GDP per capita has increased sixfold since 1960. Over the past 25 years, Indonesia has made significant strides in the fight against extreme poverty (see Figure 2). In 1984, some 65 percent of Indonesia’s population lived on less than $1.25 a day at purchasing power parity (PPP). In 2000, in the aftermath of the Asian financial crisis, it was still the case for half of the population. A decade later, the share is less than 19 percent, close to China’s rate and less than half that of India. However, it must be noted that as much as 51 percent of the population still live with less than PPP $2 a day.3 Parallel to this rise to economic prominence, Indonesia has become somewhat more involved in international affairs, although its engagement remains limited and governed by the principle of non-alignment. A non-permanent member of the United Nations

Table 1: GDP (billions US$, current prices), 2010
Country Amount Rank*

United States China Japan Germany France United Kingdom Brazil Italy Canada India Russian Federation Spain Australia Mexico Korea, Rep. Netherlands Turkey Indonesia Switzerland Poland South Africa
Source: IMF 2011. * 2000 rank in brackets

14,658 5,878 5,459 3,316 2,583 2,247 2,090 2,055 1,574 1,538 1,465 1,410 1,236 1,039 1,007 783 742 707 524 469 357

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 28

(1) (6) (2) (3) (5) (4) (10) (7) (8) (13) (17) (11) (14) (9) (12) (15) (16) (20) (18) (19) (30)

Security Council in 2007-08 and a member of the G20, Indonesia also assumed in 2011 the rotating presidency of the Association of Southeast Asian Nations (ASEAN), of which it is the most populous country. Against this background, the World Economic Forum selected Jakarta as the venue for its 20th annual Summit on East Asia. It is therefore particularly timely and relevant for the Forum’s Centre for Global Competitiveness and Performance to take stock of Indonesia’s competitiveness landscape, drawing on the findings of the Global Competitiveness Index (GCI). One question that arises is whether Indonesia has the factors in place to sustain its remarkable growth momentum. Another question is how to make this growth more inclusive. While most headline indicators point in the right direction, many challenges remain, which, if not addressed, will imperil Indonesia’s development. With one-fifth of the population still living in extreme poverty and half of it barely above the threshold (see Table 2), rising inequality, and high prices for food, fuel, and gas, there is a risk of social unrest. If the economy cannot create enough jobs outside the agriculture sector, which employs 40 percent of the labor force,

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

Table 2: Key socio-economic indicators for selected countries
Global Competitiveness Index 2010–2011 GDP (US$ billion)*

Share of world total (PPP, %) 2010

GDP per capita (US$)* 2010 1991– 2000†

GDP real CAGR (US$)* 2001–2010 2011–2016‡

Score (1-7)

Rank (out of139)

2010

Singapore Malaysia China Thailand Indonesia India Brazil Vietnam Russia Philippines

5.5 4.9 4.8 4.5 4.4 4.3 4.3 4.3 4.2 4.0

3 26 27 38 44 51 58 59 63 85

223 238 5,878 319 707 1,538 2,090 104 1,465 189

0.4 0.6 13.6 0.8 1.4 5.4 2.9 0.4 3.0 0.5

43,117 8,423 4,382 4,992 3,015 1,265 10,816 1,174 10,437 2,007

6.5 6.1 9.5 3.6 3.3 5.3 2.4 7.0 –2.1 3.1

5.7 4.5 9.6 4.1 4.8 7.1 3.4 6.5 4.2 4.5

3.5 4.2 7.9 4.0 5.7 6.7 3.4 6.0 3.5 4.1
(Cont’d.)

2

for the growing population of educated youths—and thus benefits from the “demographic dividend”—the consequences could be dire. Unfulfilled promises to tackle corruption could also fuel discontent. Through the lens of the GCI, the Report aims to provide some answers to these interrogations by identifying the notable advantages Indonesia can build upon and the obstacles that hinder its development. By doing so, we hope to provide a useful tool for Indonesia’s business, government, and civil society leaders in setting their agenda for the decade to come. The overall picture painted by the GCI of Indonesia’s competitiveness has been brightening over the years, and the latest assessment is indeed relatively positive. Indonesia’s favorable macroeconomic situation, strengthening institutional framework, more and better education, and large market are among the factors that have contributed to its recent economic success. But in several other areas, the situation is worrisome, notably in terms of public health, infrastructure, labor market inefficiency, and technological readiness. All these issues require urgent and decisive action. The next section introduces the GCI framework and data employed to assess the competitiveness of nations. The section that follows provides an overview of Indonesia’s performance in the GCI in an international context and from a historical perspective, followed by a deeper analysis of the country’s performance in the 12 pillars of competitiveness. The Global Competitiveness Index Framework Introduced in 2005, the GCI has become one of the most respected and broadly used tools to assess the competitiveness of nations.4 The GCI is a highly comprehensive composite indicator—or index—that captures the microeconomic and macroeconomic foundations of national competitiveness. Competitiveness is defined as the set of institutions, policies, and factors that

determine the level of productivity of a country.5 Productivity, in turn, influences the level of prosperity that can be attained. Given the complex nature of competitiveness, the Index identifies 12 pillars of competitiveness (see Figure 3), reflecting the diverse and interrelated factors that have a bearing on long-term potential for sustained growth and prosperity. The 12 pillars of the GCI are:6 • 1st pillar: Institutions—The quality of public and private institutions, including government efficiency, security levels, corporate governance, and perceived fairness and transparency of public institutions • 2nd pillar: Infrastructure—The quality and extent of general and specific infrastructure, including roads, railroads, ports, air transport, electricity, and telephony • 3rd pillar: Macroeconomic environment—The stability and soundness of the macroeconomic environment, including the government budget balance, public debt, inflation, the national savings rate, the interest rate spread, and the country credit rating • 4th pillar: Health and primary education—The general health level of a country’s population and the quality of, and access to, basic education • 5th pillar: Higher education and training—The quality of, and access to, secondary and universitylevel education and the quality of on-the-job training • 6th pillar: Goods market efficiency—The extent of domestic and foreign competition in a given market and the quality of demand conditions

Indonesia Competitiveness Report 2011 © World Economic Forum

Table 2: Key socio-economic indicators for selected countries (cont’d.)
Population (million) Human Development Index 2010 % of pop. below poverty line, latest year available

2010

2050‡

Score (0-1)

Rank (out of 169)

PPP $1.25

PPP $2.00

Singapore Malaysia China Thailand Indonesia India Brazil Vietnam Russia Philippines

5 28 1,341 64 234 1,216 193 88 140 94

5 40 1,417 73 288 1,614 219 112 116 146

0.85 0.74 0.66 0.65 0.60 0.52 0.70 0.57 0.72 0.64

27 57 88 92 108 119 73 113 64 97

n/a 0.0 15.9 10.8 18.7 41.6 3.8 13.1 0.0 22.6

n/a 2.3 36.3 26.5 50.6 75.6 9.9 38.5 0.1 45
‡ Projections

Sources: World Economic Forum 2010c; IMF 2011; UN 2008; UNDP 2010; World Bank 2011a. * Current prices ** Compound annual growth rate (authors’ calculations) † For Russian Federation, CAGR is for 1992-2000

• 7th pillar: Labor market efficiency—The flexibility of the labor market and the degree to which it ensures the efficient allocation and use of talent • 8th pillar: Financial market development—The extent to which the financial market ensures the availability and best allocation of capital • 9th pillar: Technological readiness—The penetration of information and communication technologies (ICT) and firms’ capacity to adopt and leverage technology to enhance their productivity • 10th pillar: Market size—The size of the domestic market as well as the export markets • 11th pillar: Business sophistication—At the firm level, the degree of sophistication of operations and company strategies and the presence and development of clusters • 12th pillar: Innovation—The national potential to generate endogenous innovation Underpinning this methodological framework is the idea that, although all 12 categories matter in determining each country’s competitiveness, each does so to a varying extent, depending on each country’s stage of economic development. Factors that crucially drive national competitiveness evolve as economies move along the development path. In this sense, the GCI builds upon well-known theories of stages of development classifying economies into three stages: factor-driven, efficiency-driven and innovation-driven.7 In the initial, factor-driven, stage, countries compete based on their factor endowments—primarily unskilled labor and natural resources—with their economies often based on commodities and/or basic manufactured

products. Critical for competitiveness at this stage are efficient public and private institutions (1st pillar); well-developed infrastructure (2nd pillar); good macroeconomic fundamentals (3rd pillar); and a healthy and literate labor force (4th pillar). As countries progress to the efficiency-driven stage, their competitiveness becomes increasingly based upon well-functioning factor markets and efficient production processes and practices at the firm level. Important elements at this stage include quality higher education and training (5th pillar); efficient markets for goods and services (6th pillar); flexible and well-functioning labor markets (7th pillar); sophisticated financial markets (8th pillar); a large domestic and/or foreign market allowing for economies of scale (9th pillar); and the ability to leverage existing technologies, notably ICT, in the national production system (10th pillar). In the most advanced, innovation-driven, stage, countries are able to sustain higher wages and the associated standard of living only if their businesses can compete by offering new and unique products. At this stage, companies must compete through innovation (12th pillar), producing new and different goods using the most sophisticated production processes (11th pillar). Countries are allocated to the different stages of development according to their level of GDP per capita at market exchange rates, used as a proxy for wages. This criterion is complemented by a second one, the extent to which countries are factor driven, using as a proxy the share of exports of mineral products in total exports. The assumption is that countries whose exports are more than 70 percent mineral products are, to a large extent, factor driven. The concept of stages of development is integrated into the GCI by attributing higher relative weights to those pillars that are more relevant for a country, given its particular stage of development. In other words, although all 12 pillars matter to a certain extent for all countries, the relative importance of each one depends

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

Figure 1: GDP and GNI per capita evolution

300,000

1,000

800

180,000

600

120,000

400

60,000

200

0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

0

Source: World Bank 2011a

4

Figure 2: Poverty trends for selected countries

CHINA EAST ASIA CHINA INDIA EAST ASIA BRAZIL

100

% of population below poverty line (PPP $1.25)

80

INDIA INDONESIA Indonesia BRAZIL Brazil CHINA CHINA China INDONESIA EAST ASIA EAST ASIA East Asia & Pacific INDIA India INDIA BRAZIL BRAZIL INDONESIA INDONESIA

60

40

20

0

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: World Bank 2011a.

Indonesia Competitiveness Report 2011 © World Economic Forum

GNI per capita (constant 2000 US$)

GDP (constant 2000 US$ millions)

240,000

GDP GNI per capita

Figure 3: The 12 pillars of competitiveness

Basic requirements
1. 2. 3. 4. Institutions Infrastructure Macroeconomic environment Health and primary education Key for

factor-driven
economies

Efficiency enhancers
5. 6. 7. 8. 9. 10. Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Key for

efficiency-driven
economies

Innovation and sophistication factors
11. Business sophistication 12. Innovation

Key for

innovation-driven
economies

on a country’s particular stage of development. To take this into account, the pillars are organized into three subindeces, each critical to a particular stage of development. The basic requirements subindex groups those pillars most critical for countries in the factor-driven stage. The efficiency enhancers subindex includes those pillars critical for countries in the efficiency-driven stage. And the innovation and sophistication factors subindex includes the pillars critical to countries in the innovation-driven stage. The specific weights attributed to each subindex in each stage of development are shown in Table 3.8 With a GDP per capita of US$2,329 as of 2009, Indonesia is currently transitioning from the factordriven stage of development to the efficiency-driven stage. Indonesia’s competitiveness depends heavily on the basic requirements as well as on the efficiencyenhancing pillars. The four pillars of the basic requirements subindex account for 53 percent of Indonesia’s overall GCI score, while those in the efficiency enhancers subindex account for 40 percent of the score. Much less weight is placed on the two pillars of the innovation and sophistication factors subindex—just 7 percent. Based on IMF estimates and our allocation criteria, Indonesia will soon be fully entering the efficiencydriven stage, joining China, Malaysia, and Thailand. As a result, the weights placed on the more complex areas will be adjusted slightly upward (see Table 3).

The GCI is composed of 110 individual indicators, representing a combination of statistical and survey data. Statistical data capture quantitative factors, such as inflation rates, public debt, or educational enrollment rates, and are collected by international organizations, including the IMF, the World Bank, and various United Nations agencies. Internationally collected and validated data ensure comparability across countries. The survey data gauge dimensions that are more qualitative in nature or for which no hard data are available for a large number of countries, but which are nonetheless crucial for providing a comprehensive picture of the competitiveness landscape of a country. Most of the survey data are derived from the Executive Opinion Survey, a study conducted annually by the World Economic Forum. Box 1 provides more information about this unique tool, which gathered the opinion of 13,607 business people from 139 economies in 2010. Overview of Indonesia’s Performance in the Global Competitiveness Index Indonesia’s performance in the GCI has been improving steadily over the past six years. Ranked 44th among the 139 economies in the 2010 edition of the GCI (see Table 4), Indonesia has been improving its overall score each year since the 2005 edition, when the 12-pillar framework described above was introduced.9 Although the World Economic Forum has been assessing the

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

Figure 4: Evolution in the GCI ranking for selected countries

100

Vietnam Thailand

80

Vietnam Vietnam Thailand

Singapore

Philippines Vietnam Singapore 60 Malaysia Thailand Thailand Philippines Indonesia Singapore Singapore Vietnam Malaysia India Philippines 40 Philippines Thailand Vietnam Indonesia Vietnam China Malaysia Vietnam Malaysia Singapore Thailand Indonesia Thailand Thailand India Brazil Brazil Indonesia Thailand 20 Indonesia Vietnam Singapore Singapore Philippines China China Vietnam Singapore Singapore Malaysia India Philippines Philippines India Malaysia India Thailand Brazil Philippines China Philippines China Indonesia Malaysia 0 Singapore Malaysia Brazil Malaysia 2005 2006 2007 2009 Brazil 2008 India Indonesia Philippines Indonesia 54/131 54/114 54/122 55/133 54/134 Indonesia China India Malaysia India India Brazil China Indonesia China China Note: Numbers in blue beneath the figure indicate Indonesia’s rank and coverage in each edition of the GCI. Brazil India Brazil Brazil China

Percentile (100 is top)

2010
44/139

6 competitiveness of nations since 1979, and Indonesia since 1994, methodological changes introduced over the years do not make a longer-term comparison possible. Indonesia’s present rank of 44th stands 10 places higher than its rank in 2005. Given the expansion in the number of countries studied from 114 to 139, the progression is all the more remarkable. In 2005, Indonesia ranked in the 53rd percentile—i.e., 53 percent of countries ranked lower then Indonesia (see Figure 4). Today, over two thirds of countries place lower than Indonesia (68th percentile). Another way to understand how Indonesia has improved in the context of the increasing number of

Brazil

countries is to consider how Indonesia’s performance compares with only those countries that were included in 2005, so that changes in the ranking are not caused by countries that were included subsequently. Within this group of 114 countries, Indonesia’s rank increased from 54th in 2005 to 39th in 2010. This has made Indonesia the most improved country among G20 countries over the period. Among ASEAN countries included in the GCI ranking, Indonesia ranks 5th out of eight, behind Singapore, Malaysia, Brunei Darussalam, and Thailand (Laos and Myanmar are not covered). The average score for the other ASEAN countries is slightly higher

Table 3: GCI stages of development and weights of subindices
STAGES OF DEVELOPMENT Factor-driven (1) Transition stage Efficiency-driven (2) Transition stage Innovation-driven (3)

GDP per capita (US$) thresholds* Subindex

<2,000

2,000-2,999

3,000-8,999

9,000-17,000

>17,000

Basic Requirements Efficiency Enhancers Innovation and sophistication factors
Examples (based on GCI 2010-2011 classification)

60% 35% 5%
India, Philippines Vietnam

40-60% 35-50% 5-10%
Indonesia

40% 50% 10%
Brazil , China Malaysia, South Africa, Thailand

20-40% 50% 10-30%
Chile

20% 50% 30%
Singapore

* For countries with a high dependency on mineral resources, GDP per capita is not the sole criterion for determination of the stage of development. See text for details.

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Table 4: The Global Competitiveness Index 2010–2011
RANK WITHIN COUNTRY GROUP
Rank Economy Score Developing Asia ASEAN Rank Economy Score

RANK WITHIN COUNTRY GROUP
Developing Asia ASEAN

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69

Switzerland Sweden Singapore United States Germany Japan Finland Netherlands Denmark Canada Hong Kong SAR United Kingdom Taiwan, China Norway France Australia Qatar Austria Belgium Luxembourg Saudi Arabia Korea, Rep. New Zealand Israel United Arab Emirates Malaysia China Brunei Darussalam Ireland Chile Iceland Tunisia Estonia Oman Kuwait Czech Republic Bahrain Thailand Poland Cyprus Puerto Rico Spain Barbados Indonesia Slovenia Portugal Lithuania Italy Montenegro Malta India Hungary Panama South Africa Mauritius Costa Rica Azerbaijan Brazil Vietnam Slovak Republic Turkey Sri Lanka Russian Federation Uruguay Jordan Mexico Romania Colombia Iran

5.63 5.56 5.48 5.43 5.39 5.37 5.37 5.33 5.32 5.30 5.30 5.25 5.21 5.14 5.13 5.11 5.10 5.09 5.07 5.05 4.95 4.93 4.92 4.91 4.89 4.88 4.84 4.75 4.74 4.69 4.68 4.65 4.61 4.61 4.59 4.57 4.54 4.51 4.51 4.5 4.49 4.49 4.45 4.43 4.42 4.38 4.38 4.37 4.36 4.34 4.33 4.33 4.33 4.32 4.32 4.31 4.29 4.28 4.27 4.25 4.25 4.25 4.24 4.23 4.21 4.19 4.16 4.14 4.14

1

1 2 3

2 3

4

4

5

5

6

7

6

8

(Cont’d.)
Note: See text for details.

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139

Latvia Bulgaria Kazakhstan Peru Namibia Morocco Botswana Croatia Guatemala Macedonia, FYR Rwanda Egypt El Salvador Greece Trinidad and Tobago Philippines Algeria Argentina Albania Ukraine Gambia, The Honduras Lebanon Georgia Moldova Jamaica Serbia Syria Armenia Mongolia Libya Dominican Republic Bosnia and Herzegovina Benin Senegal Ecuador Kenya Bangladesh Bolivia Cambodia Guyana Cameroon Nicaragua Tanzania Ghana Zambia Tajikistan Cape Verde Uganda Ethiopia Paraguay Kyrgyz Republic Venezuela Pakistan Madagascar Malawi Swaziland Nigeria Lesotho Côte d’Ivoire Nepal Mozambique Mali Timor-Leste Burkina Faso Mauritania Zimbabwe Burundi Angola Chad

4.14 4.13 4.12 4.11 4.09 4.08 4.05 4.04 4.04 4.02 4.00 4.00 3.99 3.99 3.97 3.96 3.96 3.95 3.94 3.90 3.90 3.89 3.89 3.86 3.86 3.85 3.84 3.79 3.76 3.75 3.74 3.72 3.70 3.69 3.67 3.65 3.65 3.64 3.64 3.63 3.62 3.58 3.57 3.56 3.56 3.55 3.53 3.51 3.51 3.51 3.49 3.49 3.48 3.48 3.46 3.45 3.40 3.38 3.36 3.35 3.34 3.32 3.28 3.23 3.20 3.14 3.03 2.96 2.93 2.73

9

7

10 11 8

12

13

14

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

Box 1: The Executive Opinion Survey
To compute GCI rankings, the World Economic Forum draws data from two sources: international organizations and national sources, as well as the Forum’s own Executive Opinion Survey (Survey). The Survey is a one-of-a-kind tool that captures timely and vital information that is not available on a global level and comparable basis through other statistics. The data gathered thus provide a unique source of insight and a qualitative portrait of each nation’s economic and business environment. Of the 110 variables that compose the GCI, 80 indicators come from the Survey. The Survey is conducted annually by the World Economic Forum in nearly 140 economies, including all those covered by the Global Competiveness Index. The respondents are business executives who are asked to assess specific aspects of the business environment in the country in which they are based. For each question, respondents are asked to give their opinion about the situation in the country in which they operate, compared with a global norm. To conduct the Survey in each country, the Forum relies on a network of over 150 Partner Institutes. Typically, the Partner Institutes are recognized economics departments of national universities, independent research institutes, or business organizations. In Indonesia, the Forum has been partnering since 2009 with the Centre for Industry, SME and Business Competition Studies at the University of Trisakti. To ensure that the sample is selected consistently around the world, a detailed set of guidelines has been developed by the Forum for the Partner Institutes to target top business executives, ensuring a strong representation of the most sizeable employers. In addition to relying on Partner Institutes to collect surveys in their respective countries, the Forum’s member and partner companies are also invited to participate in the Survey. Sample sizes vary according to the size of the economy. In 2010, a record 13,607 responses were collected, 86 of them from Indonesia. Once the data are entered, they are subjected to a rigorous quality-control process. Incomplete responses are dropped and tests are run to detect and exclude outlying individual answers (univariate) and responses (multivariate). Individual answers to each question are then aggregated at the country level and combined with results from the previous year, following a weighted moving average approach. The weighting scheme is composed of two overlapping elements: we give each response an equal weight by placing more weight on the larger of the two samples; at the same time, we apply a discount factor to the previous year’s results, thereby placing more weight on the most recent responses. The final country scores thus obtained are used in the computation of the GCI and other Forum composite indicators, including the Enabling Trade Index, the Networked Readiness Index, and the Travel & Tourism Competitiveness Index. For more information about the Survey’s process and methodology, refer to Browne and Geiger (2010).

8

than Indonesia’s. One of the most striking features of ASEAN countries is their profound diversity. A true political and economic patchwork, ASEAN brings together some of the most and least advanced economies in the world. Singapore is 80 times richer than Myanmar, while Indonesia is nearly 50 times more populous than Singapore, with its 5 million people. Diversity also defines ASEAN’s competitiveness landscape. Its members span almost the entire GCI ranking, from 3rd-placed Singapore to Cambodia at 109th. Among the countries transitioning to or already in the efficiency-driven stage of development, Indonesia ranks 9th out of 55. This group comprises countries with a GDP per capita between US$2,000 and US$9,000, as well as much richer countries reclassified in this lower stage because of their extreme dependency on mineral resources, including Qatar, Saudi Arabia, Kuwait, and Brunei Darussalam. With a GDP per capita of US$2,329, Indonesia is one of the lowest-income countries of this very populated group, yet it already features in its top 10.10 Table 5 presents Indonesia’s performance in an international context (top and middle sections) and over time (bottom section) for the overall GCI and the 12 pillars. The redder the shading, the worse the performance in terms of ranking (closer to the bottom rank of 139) and score (closer to the lowest possible score of 1.0). At the other end of the spectrum, the greener the shading, the better the performance in terms of ranking (closer to the top rank) or score (closer to the best possible score of 7.0). In the middle of the color spectrum, the yellow shading indicates a performance close to the median (69 for the ranking and 4.0 for the score). The table sorts countries according to their overall rank (score) in the GCI. The middle section also reports the score of the best performer, as well as the unweighted average scores for the ASEAN countries, the lower middle income group, and the Developing Asia region.11 Although scores here are rounded to the nearest decimal place, full precision is used to determine the rankings. The top section of the heatmap highlights Indonesia’s performance in terms of rank, that is, in relative terms. Among the notable competitive advantages, the macroeconomic environment (35th) is particularly favorable, thanks to more prudent and sounder management in recent years; Indonesia’s situation is significantly better than that of any of its developing economy peers (35th) except China (4th). The combined size of its domestic and export markets (15th) provides Indonesia with an important advantage compared with smaller economies in terms of the potential for economies of scale and foreign direct investment. It is notable that Indonesia also performs comparatively well in the more complex areas of business sophistication (37th) and innovation (36th).

Indonesia Competitiveness Report 2011 © World Economic Forum

Table 5: The GCI Heatmap
3rd pillar: Macroeconomic environment

2nd pillar: Infrastructure

Global Competitiveness Index 2010-2011

9th pillar: Technological readiness

6th pillar: Goods market efficiency

10th pillar: Market size

5th pillar: Higher education and training

Country/Economy

Singapore Malaysia China Thailand Indonesia India South Africa Brazil Vietnam Russian Federation Philippines

3 26 27 38 44 51 54 58 59 63 85

1 42 49 64 61 58 47 93 74 118 125

5 30 50 35 82 86 63 62 83 47 104

33 41 4 46 35 73 43 111 85 79 68

3 34 37 80 62 104 129 87 65 53 90

5 49 60 59 66 85 75 3 93 50 73

1 27 43 41 49 71 40 114 60 123 97

1 35 38 24 84 92 97 96 30 57 111

2 7 57 51 62 17 9 50 65 125 75

11 40 78 68 91 86 76 54 65 69 95

41 29 2 23 15 4 25 10 35 8 37

15 25 41 48 37 44 38 31 64 101 60

12th pillar: Innovation

1st pillar: Institutions

4th pillar: Health and primary education

8th pillar: Financial market development

11th pillar: Business sophistication

Rank (out of 139 economies)

9 24 26 52 36 39 44 42 49 57 111

3rd pillar: Macroeconomic environment

2nd pillar: Infrastructure

Global Competitiveness Index 2010-2011

9th pillar: Technological readiness

6th pillar: Goods market efficiency

Score (1–7 scale, 7 best)

10th pillar: Market size

5th pillar: Higher education and training

Country/Economy

12th pillar: Innovation

1st pillar: Institutions

4th pillar: Health and primary education

8th pillar: Financial market development

11th pillar: Business sophistication

7th pillar: Labor market efficiency

Best performer Singapore Malaysia China Thailand ASEAN Indonesia India South Africa Brazil Vietnam Russian Federation Developing Asia Philippines Lower middle income

5.6 5.5 4.9 4.8 4.5 4.5 4.4 4.3 4.3 4.3 4.3 4.2 4.1 4.0 3.8

6.1 6.1 4.6 4.4 4.0 4.3 4.0 4.0 4.4 3.6 3.8 3.2 3.8 3.1 3.6

6.8 6.2 5.0 4.4 4.8 4.2 3.6 3.5 4.0 4.0 3.6 4.5 3.4 2.9 3.2

6.6 5.2 5.0 6.1 4.9 4.9 5.2 4.5 5.0 4.0 4.5 4.5 4.7 4.6 4.4

6.8 6.7 6.2 6.2 5.6 5.8 5.8 5.2 4.1 5.5 5.7 5.9 5.3 5.4 5.0

6.1 5.8 4.6 4.2 4.3 4.2 4.2 3.9 4.0 4.3 3.6 4.6 3.6 4.0 3.5

5.7 5.7 4.8 4.4 4.5 4.4 4.3 4.1 4.5 3.7 4.2 3.6 4.1 3.9 3.9

5.9 5.9 4.7 4.7 4.8 4.9 4.2 4.2 4.1 4.1 4.8 4.5 4.3 3.9 4.1

5.9 5.8 5.3 4.3 4.4 4.6 4.2 4.9 5.3 4.4 4.2 3.2 4.2 4.0 3.8

6.1 5.3 4.2 3.4 3.6 3.8 3.2 3.3 3.5 3.9 3.6 3.6 3.2 3.2 3.1

6.7 4.5 4.7 6.7 4.9 4.1 5.2 6.1 4.8 5.6 4.6 5.7 4.2 4.5 3.4

5.9 5.1 4.8 4.3 4.2 4.2 4.4 4.3 4.4 4.5 4.0 3.5 3.9 4.0 3.6

5.6 5.0 4.1 3.9 3.3 3.5 3.7 3.6 3.5 3.5 3.4 3.2 3.1 2.7 2.9

Global Competitiveness Index 2010-2011

3rd pillar: Macroeconomic environment

2nd pillar: Infrastructure

9th pillar: Technological readiness

6th pillar: Goods market efficiency

10th pillar: Market size

5th pillar: Higher education and training

GCI edition

2005 2006 2007 2008 2009 2010

4.0 4.2 4.2 4.3 4.3 4.4

3.7 3.7 3.9 3.9 4.0 4.0

3.4 2.8 2.7 3.0 3.2 3.6

4.5 4.8 4.6 4.9 4.8 5.2

4.9 5.4 5.3 5.3 5.2 5.8

3.7 3.8 4.0 3.9 3.9 4.2

4.0 4.7 5.1 4.7 4.5 4.3

3.9 4.3 4.7 4.6 4.3 4.2

4.1 4.2 4.6 4.5 4.3 4.2

2.8 2.8 3.0 3.0 3.2 3.2

5.1 5.4 5.2 5.1 5.2 5.2

4.0 4.3 4.6 4.5 4.5 4.4

Best Note: See text for details.

Median/Average

Indonesia Competitiveness Report 2011 © World Economic Forum

12th pillar: Innovation

1st pillar: Institutions

4th pillar: Health and primary education

8th pillar: Financial market development

11th pillar: Business sophistication

7th pillar: Labor market efficiency

Evolution in Indonesia’s score across GCI editions

3.4 3.5 3.6 3.4 3.6 3.7

Worst

The Indonesia Competitiveness Report 2011

7th pillar: Labor market efficiency

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The Indonesia Competitiveness Report 2011

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Such an analysis of the rankings thus provides key insights into Indonesia’s comparative performance. This is complemented by an analysis of the scores on which the rankings are based, which provide a more absolute sense of where Indonesia stands in the various areas. The middle section of the heatmap shows that, although Indonesia ranks fairly high in terms of business sophistication and innovation, it gets only an average mark for the former (4.4) and an even lower one for the latter (3.7). This is explained by the fact that the most innovative economies are well ahead of the rest in this area, among them the United States (1st), Switzerland (2nd), Finland (3rd), Japan (4th), Sweden (5th), Israel (6th), and Taiwan (7th). For these countries, their innovation capacity is not only a desirable feature but an absolute necessity for driving their productivity and competitiveness. For Indonesia, by contrast, it is not yet a priority, as improvements in other areas can still bring about significant productivity gains. Yet a relatively strong performance in the most sophisticated areas of competitiveness bodes well for Indonesia’s longer-term ambitions. On the downside, the three weakest areas—and thus of a darker red shade in the table—are the dire state of infrastructure (82nd), the inefficiencies in the labor market (84th), and the low level of technological adoption (91st). Of less concern are the quality of institutions (61st), the health situation and primary education (62nd), higher education and training (66th), and financial market development (62nd), but all offer considerable room for improvement, as shown in the next section. The bottom of Table 5 shows the evolution in score in the six editions of the GCI and reveals that Indonesia has improved on each of the 12 pillars. As a result of these positive dynamics, Indonesia’s score in the overall GCI has improved by 0.4, resulting in the 10-rank improvement discussed above. The progression has been particularly remarkable in the macroeconomic environment (+0.7) and health and primary education (+0.9), due to improvements in basic education and despite the alarming health situation. Higher education is also better assessed (+0.5). Meanwhile, the infrastructure pillar has gotten only slightly more yellow, and the technological readiness pillar is still very much of an orange shade, pointing to serious shortcomings in both categories. This section of the table also reveals that evolution is not necessarily unidirectional. Needs and expectations may evolve. That is the case for infrastructure and the efficiency of the goods, financial, and labor markets. Placing Indonesia’s performance in a regional context, its marks are significantly higher than the Developing Asia region average, with the two notable exceptions of labor market efficiency (a small deficit of 0.1) and technological readiness (same score of 3.2). Within ASEAN, Indonesia typically trails Singapore,

Brunei Darussalam (not shown), Malaysia, and Thailand in the different components of the GCI, except in the macroeconomic environment pillar and the market size pillar. On the other hand, Indonesia consistently outshines the Philippines and Cambodia (not shown) by a wide margin, and also outperforms Vietnam in 10 of the 12 pillars. The picture is even more favorable when compared with the average performance of the lower middle income group. Despite some nuances, Indonesia’s overall performance and evolution are largely positive, and truly outstanding in certain aspects, given its stage of development. Yet the country should not be complacent. As Indonesia grows richer, factors in its development are evolving and many areas continue to require serious attention. Improving on these factors will keep the virtuous circle of development, growth, and more development going. Some 40 percent of Indonesia’s labor force is still employed in agriculture, which accounts for 16 percent of Indonesia’s GDP. This imbalance betrays the low level of productivity of agriculture and the low value-added jobs it offers. Improving yields in agriculture is of paramount necessity to raising the income of rural populations, where vast pockets of poverty persist. But this will not be enough to significantly reduce the gap between the share of agriculture in the labor force and its contribution to the economy. Workers must transfer to more productive industries in the manufacturing sectors. Addressing the pressing issues in infrastructure, education, market efficiency, and technological readiness, while strengthening the institutional framework, will help a great deal in this transition. While the analysis in this section has provided a broad sense of Indonesia’s strengths and weaknesses, it is possible to develop a more nuanced analysis by looking into the details of the individual pillars. It is to this analysis that we now turn. Indonesia’s Competitiveness in the Twelve Pillars of Competitiveness In this section, Indonesia’s competitiveness is analyzed in greater detail in each of the 12 pillars of the GCI. The detailed country profile in Appendix B is a useful complement to this section, as it provides detailed information on Indonesia’s performance in each of the 110 indicators of the GCI.
1. Institutions

Transparent and well-functioning institutions provide the framework within which all stakeholders of the society—individuals, businesses, and the government— are able to interact efficiently, do business, and create wealth. Economic activity does not take place in a vacuum. The quality of institutions has a strong bearing on competitiveness and growth. It influences investment decisions and the organization of production, and

Indonesia Competitiveness Report 2011 © World Economic Forum

plays a central role in the ways societies distribute the benefits and bear the costs of development strategies and policies. The GCI includes the quality of institutions as one of the basic requirements for a country to be competitive. The institutions pillar has two components. The public institutions subpillar, which accounts for 75 percent of the pillar score, assesses different dimensions related to the quality and efficiency of the national institutional environment. Notably, the protection of property rights, public ethics standards, and the efficiency of public administration are taken into account, together with the security situation in the country. The private institutions subpillar, in turn, measures the quality of corporate ethics and accountability displayed by firms. Indonesia ranks 61st in this pillar, with a score of 4.0 on a 1-to-7 scale, where 7 is the best possible score.12 Over the past few years, Indonesia’s public institutions have become more efficient, transparent, and business friendly (4.0, 57th). However, significant room for improvement remains. Among the group of comparators, Singapore (6.1) boasts the most effective and business-friendly institutions in the world, still significantly better than those in Indonesia. Indonesia also trails Malaysia (4.62, 42nd) and China (4.4, 49th) by a sizeable margin, but is on par with India (4.0, 58th) and Thailand (4.0, 64th). Indonesia’s public institutions are also assessed as much better than those in Brazil (3.6, 93rd) and the Philippines (3.1, 125th), as well as the East Asia and Pacific region (0.6 higher in score) and the lower middle income group (0.26 higher). The prevalence of corruption is an important component of the institutions pillar. In past decades, corruption was a major problem. The advent of democracy in recent years has contributed to bringing more transparency and accountability to the government. Political campaigns have promised to tackle corruption and administrations have made efforts toward that end. The Corruption Eradication Commission (known as KPK for its Bahasa acronym), created in 2002, is an independent body that has been given considerable powers to root out corruption. Yet, despite such efforts, corruption and bureaucracy continue to be among the top concerns of the business community (see Figure 5). In 2010, Indonesian executives who participated in the Executive Opinion Survey cited corruption as the second most problematic factor for doing business. Almost 30 percent of them selected it as the single most problematic one. Indeed, Indonesia has improved only marginally in the various measures related to corruption since 2005 (see Figure 6). It ranks a very low 95th for the prevalence of bribery, with a score of 3.1. It ranks an average 60th for the diversion of public funds and 51st for the level of trust in politicians. The independence of the judiciary (67th) is assessed more favorably than in the past

(0.4 higher), but considerable room for improvement remains. On these four indicators, Indonesia scores systematically lower than the ASEAN average. However, it is better than, or on par with, the Developing Asia region as a whole, and compares even more favorably with the lower middle income group. Finally, Indonesia stands out with its 28th rank on the indicator measuring favoritism in decisions rendered by politicians, thus outshining its peers in the region and income group, although the low score of 3.9 calls for more efforts. The overall effectiveness of government is assessed as better than in many developing countries (47th). Yet its score of 3.9 is a full two points below bestperforming Singapore (5.9). Within this component, a major concern of the business community is the lack of transparency of policymaking—Indonesia ranks 91st on this measure. While this represents an improvement compared with just a few years ago (131st and last in 2007), greater transparency would improve the predictability of the policymaking process and, more generally, the business climate. Also, the fact that respondents to the Executive Opinion Survey 2010 rated bureaucracy as the most problematic factor (16.2 percent) for doing business, ahead of infrastructure and corruption, contrasts with the more positive results of the GCI. The perceived level of security has improved markedly, with a gain of 0.6 points compared with 2005. That year marked the end of a series of bombings that started in 2002 and that had an impact on the survey results.13 The situation improved in 2006 and again in 2007, when Indonesia ranked 44th. But since then, the situation has deteriorated again. Indonesia now ranks 91st, with a score of 4.6. The business costs incurred by terrorism, organized crime, and petty crime and violence have increased, while the reliability of police services, despite improving continuously since 2005, remains low by international standards (80th with a score of 4.0), partly due to corruption problems. Finally, the judiciary is perceived as not sufficiently strict, and regulation somewhat inadequate in terms of intellectual property and property rights protection. In this dimension, too, the situation has improved since 2005 but remains a cause for concern. Indonesia ranks 74th with a score of 4.0, up from 3.8 in 2005. In the private institutions subpillar, which makes up 25 percent of the pillar score, Indonesia ranks 75th as a result of performance that has barely improved since 2005. Among the five measures of this pillar, insufficient business ethics, as perceived by the business community itself, is particularly alarming. Indonesia ranks 99th with a lower score (3.5) than in 2005 (3.8). At least the indicators related to corporate accountability are pointing in the right direction: the strength of accounting and reporting standards (78th), the efficacy of corporate boards (54th), and the strength of investor protection (33rd) are all on the rise.

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

2. Infrastructure

12

Well-functioning and extensive infrastructures play a fundamental role in enhancing the growth prospects of an economy. Both the extent and the quality of infrastructure are important in raising private-sector productivity and investment rates, particularly the adequate functioning of roads, railroads, ports, and air transport, as well as a reliable energy supply and telecommunications network. Good infrastructure contributes to lowering inequalities by connecting poor communities to important markets, allowing children in remote areas to attend school, and providing access to sanitation and potable water, among other benefits. Indonesia’s infrastructure, ranked 82nd, requires improvements across many areas. It is well behind more advanced ASEAN members Singapore (5th), Malaysia (30th), and Thailand (35th), and also less developed than China (50th) and Brazil (62nd). Other countries that also face infrastructure inadequacies are Vietnam (83rd), India (86th), and the Philippines (104th), all large Asian economies experiencing rapid economic growth, massive urbanization, a rising middle class, and increased openness to trade. These trends increase the demand for infrastructure and strain that which already exists, creating bottlenecks and highlighting existing shortages. For instance, the number of vehicles in Indonesia quadrupled over the past decade to reach 11.3 million.14 At the same time, by some estimates, 40 percent of the population remains without access to electricity, and the demand for it increases by 8 percent a year.15 The insufficient supply and quality of transport, energy, and telecommunications infrastructures seriously limit Indonesia’s output capacity. The manufacturing and export sectors particularly suffer as this state of affairs translates into limited connectivity and handling capacity, high costs, delays in shipments, and production loss. Indeed, the inadequate supply of infrastructure was among the top three concerns of those business leaders who responded to the Executive Opinion Survey in 2010 (see Figure 5). Demand for infrastructure grows proportionally with the economy. In order to meet this demand, investment must therefore increase. In addition, the costs of maintaining and upgrading existing infrastructure should not be underestimated.16 Unfortunately, Indonesia suffers from a protracted lack of investment in this area. Further, the geography and the tropical climate of this country of some 17,000 islands provide a challenging environment for infrastructure deployment. It is important to note that the assessment has been improving over the years, with a gain of 0.7 since 2006 in the pillar, thanks to significant improvements in several of its components (see Figure 7). Yet Indonesia has been losing ground in relative terms, falling from the 78th to 82nd position in the infrastructure pillar,

given that other countries are moving more quickly to improve their infrastructure.17 The situation of Indonesia is not an isolated case, and its performance is largely in line with the Developing Asia region and the lower middle income group averages (see Figure 8). Many developing countries struggle to add infrastructure capacity to meet the needs of their booming economies. Vietnam (83rd) and India (86th) are two examples. Looking at the different modes of transport, Indonesia ranks a low 84th for the quality of its roads. The World Bank estimates that only 55 percent of Indonesian roads are paved, compared with an average of 80 percent for Malaysia, the Philippines, Thailand, and Vietnam as a group.18 Ports in Indonesia also require improvements. They are ranked a low 96th, on par with Vietnam (97th) and ahead of only the Philippines (131st) among ASEAN countries. This is of particular concern given the country’s dependence on water transport. Even Cambodia ranks higher at 82nd, despite its more basic stage of development. The Liner Shipping Connectivity Index created by the United Nations Conference on Trade and Development confirms the magnitude of the problem. Indonesia scores a mere 25.7 (41st out of 162 countries). The score is unchanged from 2004 (25.9), and alarmingly low compared with best-performing China (132.5), 3rd-ranked Singapore (99.5), and Malaysia (10th, 81.2). The total carrying capacity of liners serving Indonesia is just 202,000 twenty-foot equivalent units, the same as Vietnam but half that of Thailand, and 17 times and 14 times less than Singapore and Malaysia, respectively. As for the state of the country’s railroad infrastructure, it is equally mediocre. And its score of 3.0 is significantly lower than in 2005. Among the four main transportation modes, air transport infrastructure is the only one that stands out positively with a score of 4.6, despite a middling rank of 69th. Airlines in Indonesia have been adding capacity at breakneck pace, with Indonesia now the 21st largest market when measured in terms of available seat kilometers.19 Inadequate energy infrastructure is also holding back the country’s competitiveness. The business community has indicated increasing concern about the poor reliability and shortages that characterize the network. Indonesia ranks 97th in this indicator with a score of 3.7. The situation has been deteriorating over the years, as the state power company, which operates 85 percent of generating capacity and has a monopoly on transmission and sales, has struggled to meet demand. The government is stepping up its efforts to improve power supplies. A law introduced in 2009 allows private investors and local authorities to generate, transmit, and sell electricity without having to work with the state firm.20

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 5: The most problematic factors for doing business in Indonesia in 2010

Percentage of respondents who ranked factor as most problematic Inefficient government bureaucracy Corruption Inadequate supply of infrastructure Access to financing Inflation Government instability/coups Policy instability Tax regulations Inadequately educated workforce Restrictive labor regulations Poor work ethic in national labor force Crime and theft Tax rates Poor public health Foreign currency regulations 0 5 10 15 20
23% 29% 8% 12% 2% 6% 2% 2% 2% 3% 3% 3% 0% 1% 0%

Shares (% of weighted total) n Indonesia Developing Asia Lower middle income

Source: World Economic Forum, Executive Opinion Survey. Note: from a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them from 1 (most problematic) to 5. The bars in the figure show the responses weighted according to their rankings.

Figure 6: Selected measures of ethics and corruption in the GCI 2010-2011

5

Score (1–7 scale, 7 is best)

4

3

2

1 Diversion of public funds Public trust of politicians Irregular payments and bribes† Judicial independence Favoritism in decisions of government officials

n Indonesia

n Indonesia (2005)*

n  ASEAN

n Developing Asia

n Lower middle income

Source: World Economic Forum, Executive Opinion Survey. * Scores of Indonesia in the GCI 2005. † No comparable measure for 2005.

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011

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The Indonesia Competitiveness Report 2011

Figure 7: Evolution in the assessment of Indonesia’s transport infrastructure quality

Electricity supply Electricity supply Air transport Electricity supply Electricity supply Air transport

7

6

Air Air transport transport Port Electricity supply Electricity supply Railroad Port Port Port Railroad Railroad Air transport Roads Roads Railroad Railroad Roads Port
Roads Roads Railroad Roads

Port Air transport

Score (1–7 scale)

5

4

3

2

1 2005 2006 2007 2008 2009 2010

Source: World Economic Forum, Executive Opinion Survey.

14 Finally, the telecommunications network remains insufficiently developed, with only 14 landlines per 100 population (82nd), despite a nearly fourfold increase since 2004, and this partly explains the still low penetration of the Internet (8.7 percent, 107th). On the other hand, mobile telephony is spreading faster, compensating somewhat for the lower penetration of landlines and providing access not only to the Internet, but also to a number of basic services, such as banking or education. The government has made infrastructure a priority. It announced in its Medium Term Development Plan 2010–2014 that it would invest the equivalent of 5 percent of GDP each year in infrastructure development, about two-thirds of which will be financed by private investment—including foreign investors—through public-private partnerships.
3. Macroeconomic environment

The stability of the macroeconomic environment is important for business and, therefore, for the overall competitiveness of a country. Although it is certainly true that macroeconomic stability alone cannot increase the productivity of a nation, it is also recognized that macroeconomic disarray harms the economy. High interest payments crowd out more productive public investments. Running fiscal deficits limits the government’s ability to react to business cycles. Firms cannot operate efficiently when inflation rates are out of control. The macroeconomic environment pillar includes six indicators: the government budget balance, public

debt, inflation, the national savings rate, the interest rate spread, and the country credit rating. Together, these indicators account for 12 percent of Indonesia’s overall GCI score. Over the past five years, thanks to sounder macroeconomic management, Indonesia has cut budget deficits, reduced its debt-to-GDP ratio to well below 30 percent, and brought inflation under control (see Figure 9). This improved situation has been a key enabler of Indonesia’s economic vitality over the past decade. Indonesia now ranks 35th in the macroeconomic stability pillar. It stands on a much stronger footing than India (73rd), Russia (79th), and Brazil (111th). Among ASEAN members, it receives a better assessment than Malaysia (41st), Thailand (46th), and the Philippines (68th). Only China (4th) and Singapore (33rd) have more stable macroeconomic environments. In the past, Indonesia had always been ranked significantly lower, most notably in 2007, when it was ranked 89th. Indonesia has not experienced double-digit inflation since 2006. Up to that year, price volatility and bouts of high inflation were common. Going forward, however, strong growth and high international commodity prices will make it more challenging to contain inflation. For 2011, Bank Indonesia (BI), the central bank, has set an inflation target of 5 percent, allowing for an upward or downward deviation of 1 percent. In the first three months of 2011, inflation has been slightly above the upper limit, hovering around 7

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 8: Infrastructure quality in Indonesia and selected country groups

7

6

n n n n

Indonesia Developing Asia Lower middle income ASEAN

Score (1–7 scale, 7 is best)

5

4

3

2

1 Roads Railroads Ports Air transport Electricity

Source: World Economic Forum, Executive Opinion Survey.

percent.21 The IMF predicts it will average 7.1 percent for the year.22 Although it is unlikely to get out of control, inflation remains one of the biggest threats to Indonesia’s growth in the short term. Further, inflation most harms the poor and tends to exacerbate inequality, because the share of food in consumption is typically much higher among the poor, and sustained high inflation could lead to social tensions. 23 Indeed, the soaring price of soybeans triggered riots in Indonesia in 2008. The government has already taken measures to rein in inflation, including the suspension of duties on selected food imports. In addition, the appreciation of the rupiah against the dollar is providing a cushion against imported inflation. Many analysts, however, consider that the government has been slow to respond to the latest bout of inflation. In addition, some believe that a target of 3.5-5.5 percent by 2014 is actually too timid and should be revised downward to enhance BI’s credibility and lower inflation expectations.24 Indonesia’s sovereign debt has not yet earned an investment-grade rating. The GCI includes an aggregate measure of sovereign debt quality based on the risk of default. Indonesia ranks 71st with a score of 50.1 out of 100, just ahead of the Philippines (75th) and Vietnam (78th), but well behind China (32nd) and Brazil and India (50th), all rated investment grade.25 However, given Indonesia’s good recent fiscal track record, low indebtedness, strengthening currency, strong resilience throughout the global economic crisis, and increased foreign reserves, the possibility is growing that this will

change in the future. In April 2011, Standard & Poor’s was the last of the three major rating agencies to raise Indonesia’s long-term debt rating to one notch below investment grade, with a positive outlook. Some analysts believe that Indonesia’s debt could be upgraded to investment grade within a year or two, provided that Indonesia addresses some of the pressing issues discussed in the present study, such as upgrading infrastructure.26 Indonesia’s savings rate represents 33 percent of its GDP. This is high by international standards—the 16th highest among the GCI sample—but not unusual in Asia. China, India, and Vietnam all boast savings rates well above 30 percent. The savings rate is an indication of the country’s domestic capacity for investment, which is an important driver of growth. High rates of capital formation mean that a country’s stock of assets is not just growing but also incorporating more technology, which itself is generating productivity gains. Consumption is still the engine of growth, accounting for 50 percent of Indonesia’s growth in 2010 and 55 percent of its GDP, down from 68 percent in 2003.27 Meanwhile, the share of gross fixed investment surged from 19.5 percent to a record 32.2 percent in 2010.28 In order to sustain a growth rate of 7 percent, some experts say that Indonesia should raise investment levels further.29 The government has a responsibility to finance investments of a public nature, with the help of the private sector. Its satisfactory fiscal situation will be tested in the coming years, as spending will need to expand to finance pro-growth reforms and programs, not only

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Figure 9: Selected macroeconomic indicators for Indonesia
General government balance (% of GDP) General government gross debt (% of GDP)
100

80

60

General government balance (% of GDP) Inflation (period average, average, year-on-year % change) Inflation (period year-on-year % change) General government General government gross debt (% of GDP) gross debt (% of GDP) General government General government balance (% of GDP) Inflation (period average, year-on-year % change) balance (% of GDP) General government gross debt (% of GDP)

Percent

40

Inflation (period average, year-on-year % change)
20

0 1990 –20 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: IMF 2011.

16 in infrastructure, as discussed above, but also in higher education, health, and social protection (see below). To create the necessary fiscal room, the government will need to broaden its tax base and thus incentivize firms to join the formal sector. In addition, a further reduction in debt, coupled with an improved country credit rating, would result in lower interest payments and free up additional financial resources.
4. Health and primary education

The 4th and last pillar composing the basic requirements subindex covers health and primary education and accounts for 12 percent of Indonesia’s overall GCI score. A healthy workforce is vital to a country’s competitiveness and productivity. Poor health leads to significant costs to business, as workers that are ill are often absent or operate at lower levels of efficiency. In addition to health, this pillar takes into account attainment of basic education, along with its quality. Workers with little formal education can often carry out only simple manual work and find it much more difficult to adapt to more advanced production processes and techniques. Lack of basic education can therefore become a constraint on business development, with firms finding it difficult to move up the value chain by producing more sophisticated or value-intensive products, and with workers finding it difficult to obtain gainful employment. Indonesia places 62nd as a result of a very mixed performance in these two subpillars. The country ranks a poor 99th in the health subpillar, compared with a

more satisfactory 49th in the primary education subpillar. The health situation in Indonesia is problematic on several accounts. Health outcomes, including life expectancy, infant mortality, child malnutrition, and communicable disease incidence, reveal the magnitude of a problem that affects many countries in the region (see Figure 10). Yet it is particularly acute in Indonesia. Indonesian health figures are systematically worse than the East Asia and Pacific regional average. Only India presents a more unfavorable overall situation. By contrast, China, with six times the population of Indonesia, is characterized by much better indicators in this area, having seen significant improvements over recent decades. Since 2005, Indonesia has actually lost ground in the GCI in the health category, not only to the best performers but also in absolute terms. Infant mortality, for instance, has not improved since 2005, still standing at a high 30 deaths per 1000 live births, and placing the country 97th on this indicator. Malaria also is a major issue. Outside sub-Saharan Africa, only Bangladesh, Cambodia, and Guyana display a higher incidence rate. Employers in Indonesia surveyed through the Executive Opinion Survey continue to be highly concerned about the adverse effects of this disease on the productivity of their employees (106th). The picture is very much the same with regard to tuberculosis. Malnutrition is also prevalent: 18 percent of children under 5 are underweight and, as of 2007, 13 percent of the population suffered from undernourishment (World Bank 2011a).

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 10: Selected health indicators for selected countries and regions

300

250

200

n Indonesia n East Asia & Pacific (developing only) n China

n n n n

India Malaysia Philippines Vietnam

150

100

50

0 Improved water source (% of population with access), 2008 Improved sanitation facilities (% of population with access), 2008 Life expectancy at birth, total (years), 2009 Mortality rate, infant (per 1,000 live births), 2009 Incidence of tuberculosis (per 100,000 people), 2009* Incidence of tuberculosis (per 100,000 people), 2009

Source: World Bank 2011a. * Incidence rate of tuberculosis in India is 280 cases per 100,000 population, but the corresponding bar was broken for the sake of readability.

A chronic lack of infrastructure contributes to the poor health outcomes. Only 52 percent of the population has access to improved sanitation facilities, and the share drops to 36 percent in rural areas.30 Furthermore, 80 percent of the population has access to improved water sources, which is 8-17 percentage points lower than all comparator countries, including less-developed India (88 percent) and Vietnam (94 percent). A number of other factors add to the problem, including lack of information, limited access to healthcare, and shortages of personnel. For instance, the World Bank estimates that 40 percent of doctors are absent without valid reason during official public working hours.31 Education will have a major bearing on Indonesia’s transition towards higher stages of economic development. Indonesia has made some progress in improving access to, and the quality of, primary and secondary education (see next section). For decades, Indonesia has boasted quasi-universal access to primary education, with a net enrollment rate hovering around 95 percent. In addition, there has been a recent improvement in the quality of primary education, albeit from a low base. This might be a sign that government efforts in recent years to boost enrollment rates and, increasingly, the quality and relevance of education may be starting to bear fruit. Indeed, the literacy rate stands at a very high 90 percent, on par with China and Brazil, and far better than India’s rate. Education spending has significantly increased in recent years, and, since 2006, national education

spending has been higher than for any other sector, exceeding 16 percent of total expenditures or 3.5 percent of GDP. Indonesia has a constitutional target of allocating 20 percent of central and local budgets to education. In 2002, the government reaffirmed this spending target and revised the Constitution to emphasize the right of all citizens to education. Furthermore, Law 20/2003 states that there should be no fees for basic education. 32
5. Higher education and training

Higher education and training is the first of the six pillars that constitute the efficiency enhancers subindex (see Figure 3), each accounting for 7 percent of Indonesia’s overall GCI score. Altogether, these six categories represent key enablers of Indonesia’s productivity, given its stage of development. In the coming years they will become even more important, as Indonesia transitions fully into the efficiency-driven stage of development, and shortcomings will become ever more hazardous. Access to quality higher education and training is crucial for economies looking to move up the value chain beyond simple production processes and products. In particular, today’s globalizing economy requires economies to nurture pools of well-educated workers who are able to adapt rapidly to their changing environment. This pillar measures secondary and university enrollment rates, as well as the quality of education as assessed by the business community. The extent of staff training is also taken into consideration because of the

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Table 6: The Enabling Trade Index 2010 rankings (out of 125 economies) for selected countries
ENABLING TRADE INDEX Domestic market access Foreign market access Efficiency of customs administration Efficiency of import-export procedures Transparency of border administration

Country

Market access

Border administration

Singapore Malaysia China Thailand Indonesia Vietnam India Philippines Cambodia

1 30 48 60 68 71 84 92 102

1 31 79 113 60 50 115 64 40

2 34 81 124 45 58 115 100 96

16 41 83 18 79 47 50 31 6

1 44 48 41 67 88 68 74 96

1 48 40 36 67 107 62 56 89

1 29 33 14 44 54 72 55 96

2 52 56 71 88 104 75 119 120
(Cont’d.)

18

importance of vocational and continuous on-the-job training for ensuring constant upgrading of workers’ skills. Projections by the Asian Development Bank (2010b) show that skill development, especially in the lower-income regional economies, is possibly the most critical prerequisite for realizing the vast human and economic potential of the Asian region. Higher incomes, a larger middle class, and the self-sustaining prosperity they stimulate can be built only on the foundation of a skilled and productive labor force that generates significant value added and higher income, channeling this into sustained long-term expenditure, savings, and investment. Indonesia ranks 66th in this pillar with a score of 4.2, receiving a better assessment than the Developing Asia (3.6) and lower middle income group (3.5) averages. Much better-ranked than India (86th) and Vietnam (93rd), Indonesia is on par with the Philippines (73rd), Brazil (58th), Thailand (59th), and China (60th) among comparator countries. All these countries have made remarkable strides in terms of access to basic education. Now the challenge for all of them, though to different extents, is to further improve the quality and attainment of basic education and to boost access to, and the quality of, higher education. Trends are positive for Indonesia, which has improved steadily since 2005, when it ranked 72nd among 114 economies with a score of 3.7. The gross secondary enrollment rate has improved from about 60 percent in 2003 to 80 percent in 2009, and now stands higher than in India and China. The university enrollment rate rose from 16 to 21.3 percent between 2003 and 2008. In its Medium Term Development Plan 2010-2014, the Indonesian government has made education a ”national priority,” with a target of gross enrollment rates of 85 percent in

secondary education and 30 percent at the university level. There has also been a positive trend in the quality of higher education. The business community considers that the educational system is now somewhat better at meeting the needs of the business sector. Indonesia ranks 40th with a score of 4.3, up from 3.8 in 2005. The quality of math and science education is also improving (46th), as is the quality of management training (55th). An important source of knowledge and an effective means of communication, the Internet has become more prevalent in schools, too. Finally, Indonesia ranks 41st in on-the-job training. This dimension is of particular significance in Indonesia given the low attainment rate at the university level. Many companies have put in place internal programs to train or retrain employees. This will be an important lever in Indonesia’s competiveness going forward, compensating somewhat for the still less-than-universal enrollment rates in the formal educational system.
6. Goods market efficiency

Countries with efficient goods markets are well positioned to generate the right mix of products and services given supply-and-demand conditions, as well as to ensure that these goods can be most effectively traded in the economy. Healthy market competition, both domestic and foreign, is important in driving market efficiency, and thus business productivity, by ensuring that the most efficient firms producing goods demanded by the market are those that thrive. The best possible environment for the exchange of goods requires the minimum of impediments to business activity through government intervention. For example, competitiveness is hindered by extortionary or burdensome taxes, by restrictive and discriminatory rules on foreign ownership, and by barriers to trade. Market efficiency also depends

Indonesia Competitiveness Report 2011 © World Economic Forum

Table 6: The Enabling Trade Index 2010 rankings (out of 125 economies) for selected countries (cont’d.)
Availability and quality of transport infrastructure Availability and quality of transport services

Country

ENABLING TRADE INDEX

Transport and communications infrastructure

Availability and use of ICTs

Business environment

Regulatory environment

Physical security

Singapore Malaysia China Thailand Indonesia Vietnam India Philippines Cambodia

1 30 48 60 68 71 84 92 102

7 24 43 40 85 68 81 83 116

7 13 57 40 80 103 78 106 115

1 17 18 26 73 31 59 38 112

16 43 70 73 90 59 93 87 117

2 51 41 71 60 64 58 103 88

1 35 43 53 48 60 47 106 87

12 79 44 84 76 66 69 99 91

Source: World Economic Forum 2010a.

on demand conditions such as customer orientation and buyer sophistication. With a score of 4.4, Indonesia ranks 49th in the goods market efficiency pillar (see Table 5). It is one of its best rankings across the 12 categories, on a par with Thailand (41st, 4.5) and China (43rd, 4.4) and just ahead of Vietnam (4.2, 60th). Indonesia’s goods markets are much more efficient than those of the Philippines (97th, 3.9) and Brazil (114th, 3.6). However, it must be noted that some countries in the region are even more efficient, especially Singapore (1st, 5.7), but also Malaysia (27th, 4.7) and Thailand (41st, 4.5). Competition has been intensifying in the domestic market (50th), favored by relatively effective anti-trust regulation (35th).33 On the demand side, as is being seen elsewhere in Asia, the growing Indonesian middle class ensures that consumers are becoming increasingly sophisticated and demanding (41st). This, too, encourages firms to improve constantly on productivity, product quality, and variety. The tax regime in Indonesia is competitive by international standards and does not represent a major deterrent to work or investment in Indonesia. The country ranks 17th in this area, ahead of all the comparator countries barring Singapore (3rd). The World Bank estimates that, on average, the total corporate tax rate represents 38 percent of profits, which is nearly 30 percentage points less burdensome than in China and India. While this is good news for businesses, it also requires the government to widen its tax base. The tax-to-GDP ratio, at 11.7 percent, remains low by international standards.34 Reforming tax administration and encouraging more businesses to join the formal sector could generate additional resources to finance the investments highlighted elsewhere in this report for improving public health, education, and infrastructure, while preserving a tax regime that is not burdensome to doing business.

Competition could be strengthened and business activity further stimulated if business creation were made easier. It requires on average nine procedures (88th) and as long as 60 days (121st) to start a business.35 Although this represents a significant absolute improvement compared with just five years ago—the time to start a business has been slashed by 60 percent and the number of procedures cut by 25 percent—other countries are moving even faster. The consequence is that, on a relative basis, Indonesia has actually fallen in the rankings of both indicators. Indeed, Indonesia still ranks 159th out of 183 economies on the World Bank’s Starting a Business Index, which also includes measures of the cost and the minimum capital required to start a business. Goods market efficiency is also driven by foreign competition, and here there are some shortcomings. Access to the domestic market and the conditions for foreign firms and investors to compete on a level playing field with domestic firms could be improved (80th). On the positive side, the prevalence of foreign ownership is more widespread (54th) than in Vietnam (114th), China (103rd), the Philippines (104th), and even India (80th). Yet, when it comes to merchandise trade, a number of tariff and non-tariff barriers persist, while customs procedures are extremely burdensome. Despite having improved its score by almost a full point to 3.9 over the past four years, the country ranks 89th on this measure. This poor showing is in line with the findings of the Enabling Trade Index, a comprehensive benchmarking tool that assesses the performance of 125 countries on over 50 trade-enabling factors beyond market access (see Table 6). The 2010 edition reveals the poor efficiency and lack of transparency that characterize border administration in several ASEAN countries, including Indonesia (67th for efficiency and 88th for transparency), Vietnam (107th and 104th), the

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The Indonesia Competitiveness Report 2011

Philippines (56th and 119th), and Cambodia (89th and 120th), in stark contrast to best-performing Singapore (1st and 2nd).36 This, coupled with the urgent need to upgrade transport and communication infrastructures, not only undermines the competitiveness of exporters, but also hinders the entry of foreign actors into domestic markets, including Indonesia’s.
7. Labor market efficiency

20

The proper functioning of the labor market is critical for ensuring that workers are allocated to their most efficient use in the economy and provided with incentives to give their best effort in their jobs. Therefore, labor markets must have the flexibility to shift workers from one sector of activity to another and allow for wages to be set based on the needs of the economy. Efficient labor markets must also ensure a clear relationship between worker incentives and their efforts. In order to facilitate the mobility of labor across sectors—which is made necessary by the rapid development of its economy—Indonesia must be able to rely on an efficient labor market. Yet Indonesia ranks a low 84th in this pillar, a position that has been deteriorating markedly since our 2007 assessment, when it ranked 34th. It placed 43rd in 2008 and 75th in 2009. Indonesia’s labor markets now are assessed as less efficient than those of Thailand (24th), Vietnam (30th), Malaysia (35th), and China (38th). With the exception of India (92nd) and the Philippines (111th), Indonesia trails its peers within the East Asia and Pacific region. The minimum wage has become the main mechanism for setting wages, and firms apply it by default rather than entering into collective bargaining. In the GCI, Indonesia ranks 98th for the flexibility of wage determination—a severe deterioration since 2007. Furthermore, according to the World Bank, severance payments for permanent employees are equivalent to 103 weeks of salary, placing the country 127th out of 135 countries for which the data are available among GCI countries. Elsewhere in the region, dismissing a permanent employee in the Philippines and China is almost as costly (91 weeks, tied at 114th) and Vietnam (87 weeks, 108th). On the other hand, severance payments in India and Malaysia are about half those in Indonesia. The adverse consequences of this inflexibility on Indonesia’s economy are many. First, it contributes to the slow growth in high value-added jobs.37 Second, it encourages informality, as businesses are deterred from joining the formal sector. It is estimated that about twothirds of the labor force works in the informal sector, where conditions and wages are poor and protection often inexistent.38 Third, employers are deterred by prohibitive severance costs from hiring permanent workers. Instead, they resort to outsourcing and temporary hiring. Inflexibility therefore creates a two-tier labor-force

market, in which some privileged workers enjoy high job security and others live in precarious conditions.39 Whereas a lack of flexibility has become a serious concern, Indonesia fares somewhat better in the second component of the pillar, which assesses the efficient use of talent (55th). Indonesia does not suffer from a serious brain drain problem (27th), and the country is able to retain its talented workers better than many other emerging economies. It is in the same league as India (34th) and China (37th). However, the participation of women in the labor force remains very low. 86 percent of the male working-age population is employed or looking for a job, compared with 52 percent of working-age women. This yields a ratio of .58, which places Indonesia in the 109th position in this dimension. Indeed, Indonesia ranks a low 87th out of 134 countries in The Global Gender Gap Report 2010, which measures the level of gender equality around the world. The authors find that, while Indonesia has higher-than-average levels of political empowerment (58th), the country scores low on economic participation (100th), educational attainment (95th), and health (105th).40 Greater integration of women into the workforce would reinforce Indonesia’s competitiveness going forward.
8. Financial market development

A sound and well-functioning financial sector is needed to allocate savings and foreign investment to their most productive uses. It does so by channeling resources to the best entrepreneurial or investment projects based on expected rates of return and risk, with minimal transaction costs. Well-developed financial markets make capital available for private-sector investment from such sources as loans from a sound banking sector, properly regulated securities exchanges, venture capital, and other financial products. In order to fulfill its role, the banking sector needs to be trustworthy and transparent, and—as has been made so clear recently—financial markets need appropriate regulation to protect investors and other members of society at large. Indonesia ranks 62nd in the financial market development pillar of the GCI with a score of 4.2, on a par with China (57th) and Vietnam (65th), and ahead of the Philippines (75th). Within the ASEAN region, India ranks an outstanding 17th, albeit at a fair distance from Singapore (2nd) and Malaysia (7th). As Table 5 shows, this is the second most static pillar in terms of evolution since 2005, with only the market size pillar seeing less change over the period. The Asian financial crisis of 1997 and the ensuing crisis brought Indonesia’s banks near bankruptcy but accelerated the economic reform process. Today, the availability of financial services and general access to financing is high by international standards. Yet, despite improvements, the banking sector remains somewhat fragile, and confidence in financial

Indonesia Competitiveness Report 2011 © World Economic Forum

institutions remains low (107th). Indeed, access to credit would be enhanced if protection of lenders and borrowers improved: Indonesia ranks a low 103rd out of the 136 GCI countries covered by the Doing Business Legal Rights Index (LRI), with a score of 3 on a 0-to10 scale, the same score as the Philippines and Brazil. Indonesia lags significantly behind not only best-performing Singapore and Malaysia (both receiving a top score of 10), but also India and Vietnam (both ranked 20th with a score of 8) and China (60th, 6). In the seven years since the creation of the LRI, Indonesia’s score has not changed, whereas India, China, and Vietnam have made notable strides.41
9. Technological readiness

Throughout the ages, technological improvements have enabled firms to compete and prosper. The technological readiness pillar is made up of two components. The first, technological absorption, measures the agility with which firms harness new technologies to enhance productivity. Whether the technology used has or has not been developed within national borders is irrelevant for its ability to enhance productivity. The central point is that the firms operating in the country have access to advanced products and blueprints and the ability to use them. In this context, the level of technology available to firms in a country needs to be distinguished from the country’s ability to innovate and expand the frontiers of knowledge. That is why the GCI distinguishes technological readiness from innovation, which is incorporated in the 12th and last pillar (see below). The second component, ICT use, assesses the use by the population at large of information and telecommunications technologies (ICTs). ICTs allow for better communication and lower transaction costs. They also improve access to basic services, including education and banking, and give rise to new business opportunities. More generally, an ICT-literate population is more likely to harness the opportunities offered by an increasingly digitized world. Technological readiness is the weakest aspect of Indonesia’s performance in the GCI. Ranked 91st with a score of 3.2, it trails Singapore (11th) and Malaysia (40th), both hi-tech powerhouses, as well as Vietnam (65th), Thailand (68th), and China (78th). It also trails Brazil (54th) by a significant margin, but is less far behind India (86th). It is in line with the regional average (3.3) and the lower middle income group average (3.1). With regard to ICT absorption by businesses, Indonesia ranks 63rd with a score of 4.9, at the level of Thailand (59th, 5.0), the Philippines (66th, 4.9) and Vietnam (73rd, 4.8), and well ahead of China (83rd, 4.6), but at a distance from Singapore (3rd, 6.1), Malaysia (35th, 5.5), India (40th, 5.3), and Brazil (44th, 5.3). Scorewise, Indonesia has improved markedly on all three indicators, but its ranking remains middling: new

technologies are more available than in the past (77th, 4.8, up from 3.6 in 2005), notably thanks to foreign direct investment (54th, 4.9, up from 4.7), and firms are much more prompt at adopting them (65th, 4.9, up from 4.0). Beyond the business sector, however, large and populous developing and emerging countries face a major challenge in deploying ICTs. They typically display much lower penetration rates than smaller or wealthier countries. Indonesia is no exception. The country ranks 103rd on the ICT use component of the technology readiness pillar, with the Philippines (106th) and India (118th) somewhat lower in the rankings. ICTs are already much more widespread in China (78th), which is richer but much larger, as well as Vietnam (70th), which is smaller yet with lower income per capita. The fastest-spreading technology in Indonesia is, perhaps not surprisingly, mobile telephony. All of the comparator countries have been displaying year-on-year double-digit growth (see Figure 11). Vietnam already boasts over 110 mobile subscriptions per 100 population, and the Philippines has also passed the “100 per 100” mark. In Indonesia, mobile phone penetration has reached 70 percent, ahead of even China and India, where the penetration rates are around 50 percent.42 While it is only a matter of a few years before the vast majority of Indonesians own a mobile phone, the picture is much different when it comes to the Internet. There are fewer than 10 Internet users per 100 population (see Figure 12). This measure includes those who access the web from a cell phone, even at low speed. A study by the World Bank conducted in 2008 revealed that only 5.7 percent of surveyed firms used the Internet to communicate with suppliers and clients, compared with 29 percent for the East Asia and Pacific region.43 There are 74 subscribers to Internet broadband service for every 10,000 people—or 0.74 percent. Broadband access is much more widespread—but still very low by international standards—in the Philippines (1.9 percent), Vietnam (3.7 percent), and China, where it is approaching 10 percent. Yet high-speed broadband is becoming a prerequisite to fully leveraging the Internet, given the proliferating number of Internet users, amount of information, especially of multimedia content, and number of applications requiring considerable bandwidth, such as cloud computing and Voice-over-Internet Protocols. Countries must therefore deploy the necessary infrastructure to boost their international bandwidth in order to offer their citizens faster and cheaper access to the web. Governments must take the lead to finance these massive investments in collaboration with the private sector. But they also have an important role to play in creating the market conditions for operators and

Indonesia Competitiveness Report 2011 © World Economic Forum

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Thailand
China

The Indonesia Competitiveness Report 2011

Vietnam Singapore
India Figure 11: Mobile cellular subscriptions per 100 population China

Philippines Singapore Philippines

China

150

120

90

60

Singapore India Malaysia India China India Philippines Indonesia Singapore China Indonesia Malaysia China PhilippinesPhilippines Vietnam Singapore Singapore India India Malaysia Indonesia Thailand ThailandChina China India Philippines Indonesia Indonesia Vietnam Vietnam Singapore Brazil Philippines Malaysia Vietnam Thailand India Malaysia Indonesia Thailand Brazil Philippines Indonesia Vietnam Brazil Malaysia Vietnam Thailand Indonesia Thailand Brazil Vietnam Brazil Thailand Brazil

Per 100 population

30

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ITU 2010.

22 Internet service providers to offer a range of services that accommodate broadband needs at competitive prices.
10. Market size

Access to a large market plays an important role in enhancing national productivity, as it allows companies to benefit from economies of scale in their production processes and strategies. Historically, the market available to firms has been constrained by national borders. In the era of globalization, international markets have become a substitute for domestic markets, especially for small countries. Export markets also offer channels of diffusion for products and services, thus allowing for even bigger economies of scale. The GCI includes a comprehensive definition of market size by taking into account the size of both domestic and foreign markets, thereby gauging the overall market available to economies that are open to foreign trade. A G20 member, Indonesia ranks 15th in the market size pillar and 5th among all developing countries, behind only the traditional BRICs of China (2nd), India (4th), Russia (9th), and Brazil (10th). A fast-growing domestic market of almost 240 million people with a growing middle class provides significant opportunities to both local and foreign investors, with the latter ensuring spillovers in terms of capital investment, technology, and knowledge transfer. Between 1999 and 2009, the share of the middle class increased significantly from about 25 to 43 percent of the population (see Table 7). The average household consumption expenditure per

head has now reached PPP $2,662, which is nearly half those of Brazil ($5,718) and Malaysia ($5,828), and higher than those of the Philippines ($2,274), China ($2,199), India ($1,711), and Vietnam ($1,529).44 Yet more could be done to reap the potential benefits of trade. Indonesia ranks 21st in the foreign market size subpillar, well behind China (1st), India and Singapore (11th), Malaysia (16th), and Thailand (17th). Exports are dominated by commodities, with fuels and mining products accounting for 36.4 percent of exports and agricultural products accounting for 21.1 percent. The great majority of Indonesian firms do not venture beyond the border. The World Bank reckons that a mere 4.1 percent of Indonesian firms export. By comparison, the average share of exporting firms in the East Asia and Pacific region, including Indonesia, is 19.9 percent. It is 20.5 percent in Vietnam and 12.2 percent in the Philippines. Although no recent data are available for China, the share was already 24.5 percent in 2003.45 As the discussion of the 6th pillar shows, many obstacles to trade persist (see Table 6). Indonesian exporters face relatively high tariffs abroad, but poor transport infrastructure and services, as well as inefficient customs administration, play an equally important role in explaining Indonesia’s modest trade performance. Indonesia’s ASEAN membership provides significant potential for Indonesian firms looking to expand into new markets in the region. Indonesia is by far ASEAN’s largest market, accounting for almost 40 percent of the group’s GDP and population. This also makes Indonesia a natural base for investors interested

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 12: Penetration rates of selected technologies in Indonesia

10

Internet users (%) Internet users (%) Internet Internet users subscriptions per 100 inhabitants Internet users (%) Broadband Internet subscriptions inhabitants Internet subscriptions per 100 Households with a computer with a computer Proportion of households Internet subscriptions per 100 inhabitants Proportion of households with a computer Proportion of households with a computer

8

per 100 population

6

4

2

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ITU 2010.

in penetrating these fast-growing markets. Furthermore, the entry into effect in 2010 of the ASEAN-China Free Trade Agreement (ACFTA) has created the world’s largest trade area by population and the third largest by GDP. Substantial tariff reductions should boost trade among participating countries and offer new opportunities for Indonesian exporters. The ACTFA is expected to improve what has been a disappointing regional trend in recent years. Over the past two decades, the overall volume of trade of ASEAN members has grown 11 percent per year on average, but the share of trade represented by intraregional trade has stagnated. Over the past decade, the share of intra-ASEAN exports barely increased, from 19 percent of all exports in 2000 to only 23 percent in 2008, while intra-European-Union and intra-NAFTA trade represent, respectively, 65.8 percent and 44.3 percent of each area’s total trade.46 The extreme diversity of ASEAN’s members may explain why it has so far made little progress towards economic integration in 40 years of existence. This failure represents significant potential going forward.
11. Business sophistication

The last two pillars of the GCI assess the most sophisticated aspects of a county’s competitiveness, namely business sophistication and innovation. As countries grow richer, these dimensions become increasingly important to sustain higher wages and the associated standard of living. Business sophistication is conducive to higher efficiency in the production of goods and services. This

leads to increased productivity, thus enhancing a nation’s competitiveness. Business sophistication refers to the quality of a country’s business networks as well as the quality of individual firms’ operations and strategies. This is particularly important for countries at an advanced stage of development, when the more basic sources of productivity improvement have been exhausted to a large extent. The pillar takes into account the quality of national business networks and supporting industries, which are captured using variables on the quantity and quality of local suppliers and the extent of their interaction. When companies and suppliers from a particular sector are interconnected in geographically proximate groups (“clusters”), efficiency is heightened, greater opportunities for innovation are created, and barriers to entry for new firms are reduced. Individual firms’ operations and strategies (branding, marketing, the presence of a value chain, and the manufacture of unique and cutting-edge products) lead to sophisticated and modern business processes. While business sophistication is not among the critical drivers of its competitiveness yet, Indonesia already performs relatively well in this pillar, ranking 37th. Yet its score of 4.4 out of 7 suggests room for improvement (see Table 5). It is slightly ahead of China (41st, 4.3), India (44th, 4.3) and Thailand (48th, 4.2), and well ahead of the Developing Asia (3.9) and the lower middle income group (3.6) averages. On the other hand, Indonesia has less sophisticated businesses than Singapore (15th, 5.1) and Malaysia (25th, 4.8), as well as Brazil (31st, 4.5). This is an area where Indonesia has

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Table 7: Expenditure per person per day (constant 2005 PPP $) for Indonesia
National Amount 1999 2009 1999 Urban 2009 1999 Rural 2009

<$1.25 $1.25–$2
Middle class

42.2 32.8 25.0 20.1 3.5 1.2 0.3 0.0

24.6 32.4 42.7 30.9 7.5 3.3 1.1 0.2

23.4 32.4 44.0 33.0 7.6 2.8 0.6 0.1

12.2 25.5 62.0 40.0 13.2 6.5 2.2 0.3

53.5 32.9 13.6 12.4 0.9 0.2 0.0 0.0

33.7 37.5 28.7 24.3 3.3 0.9 0.3 0.1

$2-$20 (Total) $2–$4 $4–$6 $6–$10 $10–$20 >$20
Source: Adapted from ADB 2010b. Note: Percentages do not add up because of roundings.

24

been showing clear progress, with a gain of 0.4 in its score since 2005. The country has relatively well-developed clusters (24th) with many local suppliers (43rd), although they are generally of middling quality (61st). Indonesian firms are also characterized by sophisticated operations and strategies. They are increasingly present across the value chain (26th) and retain control over the international distribution of their products (33rd). On the other hand, marketing strategies (56th) and production processes (52nd) are not yet at world-class levels. Despite Indonesia’s good showing in the business sophistication pillar, Indonesian private companies remain small by international standards, and few have truly global operations. In 2010, no publicly-listed company made the The Financial Times’ Global 500 or Fortune 500 lists. Indonesia placed only ten firms in Forbes’ Global 2000 list, five of them from the banking sector, including highest-ranked Bank Mandiri (796th).47 This is well behind China (84 companies among the top 2000), India (56 companies), and Brazil (33 companies). Indonesia’s largest firms are stateowned enterprises, including Pertamina, the world’s largest exporter of liquefied natural gas. It is possible that the relatively high scores in this area are attributable to the brisk development of certain key industries, including banking, oil and gas, and telecommunications. These leaders will undoubtedly contribute to improving the degree of business sophistication in Indonesia, and will continue providing examples to other companies of sophisticated business models as Indonesia moves up the development path.
12. Innovation

The last pillar of the GCI assesses the extent to which countries are innovative. Although substantial gains can be obtained by improving institutions, building infrastructure, fostering market efficiency, or developing skills, these factors eventually meet diminishing returns.

Innovation is therefore particularly important for economies near the technological frontier, as adopting or adapting exogenous technologies no longer suffices. At its present stage of development, Indonesia can still generate significant productivity gains with more widespread impact on living standards by improving in less sophisticated areas. Nonetheless, innovation will become an increasingly important area of focus in the future. An innovation-enabling environment is typically supported by both the public and the private sectors. In particular, it requires sufficient investment in research and development, especially by the private sector; highquality scientific research institutions; extensive collaboration in research between universities and industry; and the protection of intellectual property. Indonesia ranks 36th in the innovation pillar (see Table 5). Its score of 3.7, up from 3.4 in 2005, now places the country at the level of China (3.9, 26th), India (3.6, 39th), and Brazil (3.5, 42nd). It also represents a significant advantage over the Philippines (2.73, 111th) and is much better than Indonesia’s country group (2.9) and regional (3.1) averages. However, beyond the seemingly good ranking, Indonesia’s mark is mediocre in absolute terms and betrays a very limited capacity to innovate. Best performers in this pillar, including the United States (1st), Switzerland (2nd), Finland (3rd), and Japan (4th), along with a few other advanced economies, including Singapore (9th), are in a league of their own in this pillar. The average score for the top 10 countries is 5.4, still 5.0 for the top 20, and a precipitously lower 4.1 for the group of countries ranked 20th to 40th, to which Indonesia belongs. On most of the component indicators, its marks are below or around the mean score. Yet they earn the country good rankings, again due to the fact that only a handful of economies are truly innovation-driven. The quality of research institutions is still rather middling (4.2, 44th), and collaboration with the private

Indonesia Competitiveness Report 2011 © World Economic Forum

Table 8: Patenting rate per million population for selected countries
USPTO utility patent grants, 2009
Per mio pop. Rank /139

WIPO PCT applications, 2010
Per mio pop. Rank /139

Singapore Malaysia South Africa Russian Federation China India Brazil Thailand Philippines Vietnam Indonesia

92.8 5.7 1.2 1.9 1.4 0.5 0.3 0.6 0.3 0.0 0.0

16 36 37 41 46 52 64 66 82 88 91

127.7 11.0 9.3 5.6 3.9 2.3 1.0 1.0 0.2 0.1 0.1

11 29 51 43 49 61 65 59 71 87 89

Source: USPTO and WIPO

sector relatively weak (4.2, 38th) though strengthening (+0.6 since 2005). Company spending on research and development is also somewhat low (4.0, 26th) but also increasing (+0.5). While the environment is conducive to innovation at a level similar to those of India, China, and Brazil, this has not yet led to a significant increase in Indonesia’s patenting activity, which remains weak. For instance, in 2009, the United States Patents and Trademark Office (USPTO) granted only three utility patents to residents of Indonesia. The GCI includes the USPTO patents-to-population ratio as a proxy for innovation activity, and Indonesia’s rate of 0.0125 patents per million population is one of the lowest ratios among all countries included in the GCI (91th). As Table 8 shows, the picture is very much the same when considering the number of patent applications under the World Intellectual Property Organization’s Patent Cooperation Treaty, a more international measure of patenting activity.48 Indonesia ranks a low 89th for the number of PCT applications, with 0.7 applications per million population. Overall, the necessary environment for innovation is improving, which will be important going forward, but actual innovation activity in Indonesia has not yet exploited the opportunity. Conclusion Over the past decade, Indonesia has been experiencing remarkable growth and has become a major player in the world economy. Through the lens of the GCI, this Report has analyzed Indonesia’s competitiveness landscape to identify the factors that will contribute to sustaining its growth momentum, as well as those that pose a threat to it. The findings allow us to be cautiously optimistic. First of all, the dynamics are positive and indeed impressive. An analysis of Indonesia’s historical performance in the GCI reveals that the country has improved in all 12 pillars of the Index since 2005.

As a result, Indonesia has climbed in the overall ranking and is now 44th among the 139 economies covered by the GCI. Second, Indonesia is better positioned than most countries at a similar stage of development. It consistently outperforms—often by a sizeable margin—the averages for the lower middle income group and the developing Asia region. Indonesia compares very favorably with the BRICS, with the notable exception of China, which outperforms its peers in most dimensions. Within ASEAN, a trade area characterized by profound diversity, Indonesia ranks in the middle of the pack, well behind Singapore and Malaysia but far ahead of the Philippines and Cambodia. Indonesia, Vietnam, and Thailand are relatively close, but the driving forces of their competitiveness differ. Among Indonesia’s strengths, the macroeconomic environment stands out. Robust growth and sound fiscal management have put the country on a strong fiscal footing. In the current context of rising global commodity prices, inflation represents the most immediate threat to the stability of the macroeconomic environment. Furthermore, access to basic education is nearly universal, and its quality has been improving. The adult literacy rate stands at a high 90 percent. Efforts now should be directed at raising secondary and tertiary education enrollment. Among the factors that will become critical in the coming years, the efficiency of the goods market is also relatively well assessed, thanks to a competitive tax regime and intense competition, but bureaucracy and trade barriers of all sorts still stand in the way. Businesses are becoming increasingly sophisticated thanks to relatively deep clusters, efficient management, and the migration of firms to higher segments of the value chain. Finally, the large size of the market confers a notable advantage. As one of the world’s 20 largest economies, Indonesia boasts a large pool of potential consumers, as well as a rapidly growing middle class, of great interest to both local businesses and foreign investors. However, much more must be done to improve Indonesia’s competitiveness and therefore fully reap the benefits of international trade. In addition, a more integrated ASEAN would offer opportunities for streamlined regional supply chains, while offering new channels of distribution. As the 2011 Chair of the organization, Indonesia can play a catalytic role in the realisation of the ASEAN Economic Community by 2015. One of the most glaring shortcomings is the state of Indonesia’s infrastructure. Its roads and railroads are generally in poor condition, and the capacity of seaports is extremely limited. The insufficient supply of electricity is also of major concern. The uptake of information and communication technologies also remains limited among businesses, as well as within the population at large. Mobile telephony is spreading fast, but Internet

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access, especially at high speed, remains the privilege of the very few. With regard to human capital, the health situation is holding back Indonesia’s competitiveness, demonstrated by a high infant mortality rate, the burden of communicable diseases, and the prevalence of malnutrition. Another major area of concern relates to the allocation of human resources due to the labor market’s rigidity, which contributes to a high degree of informality and precarious working conditions, and hinders the reallocation of the labor force to more productive sectors as Indonesia develops. Finally, although public institutions are better assessed than in the past, corruption remains widespread at all levels of the administration, and bureaucracy is still too burdensome. Greater transparency and predictability are needed in the policy-making process. This situation also makes it more difficult to achieve the improvements needed in the areas described above. Growth will not make any of these concerns disappear and could exacerbate some of them. Growth may generate new needs and set new standards among businesses, investors, and consumers, making a situation deemed satisfactory today not acceptable in a few years. It could raise the expectations of the population at large, those of Indonesia’s youth, its workers, its consumers, and the many people who have yet to benefit from the economy’s growth. Indonesia must therefore rise to the challenge. In this light, it is encouraging to note that the government of Indonesia has also identified many of these areas for specific attention. In its Medium Term Development Plan 2010–2014, the government has identified eleven “national priorities” that will attract significant attention and resources through 2014, namely (1) reform of the bureaucracy and administration; (2) education; (3) health; (4) reducing poverty; (5) food security; (6) infrastructure; (7) investment in the business sector; (8) energy; (9) environment and natural disasters; (10) left-behind, frontline, most outer, and post-conflict regions; and (11) culture, creativity, and technological innovation.49 In each area, the government has set quantitative targets to be met within five years. They cover most of the challenges identified in the present Report. As long as the country continues to make concerted efforts towards improvement in these key areas, there is every reason to expect that Indonesia will continue to improve its competitiveness in the years to come. Notes
1. Authors’ calculation of compound annual growth rate based on IMF 2011. 2. EIU 2011b. 3. Poverty data are from World Bank 2011a.

4. The GCI was developed by Xavier Sala-i-Martin of Columbia University in collaboration with the World Economic Forum’s Centre for Global Competitiveness and Performance. 5. As the definition makes clear, the concept of competitiveness underlying the GCI includes both static and dynamic components, since productivity not only determines a country’s capacity to sustain a high level of income, but also, through its impact on rates of return to investment, national growth potential. 6. See Appendix A for the detailed structure of the Index. More detail about the definition of each pillar is provided in the pillar-bypillar analysis of Indonesia’s performance below. 7. For details, see Sala-i-Martin et al. 2010. 8. The weights have been derived from a maximum likelihood regression. 9. For the sake of readability, in the remainder of this text we refer to the year when the GCI was released (e.g. 2008) rather than the edition (e.g. 2008–2009). 10. This 2009 figure was used to determine the stage of development when computing the GCI 2010–2011 in July 2010. According to IMF preliminary estimates, Indonesia’s GDP per capita surged to US$3,015 in 2010. That is, Indonesia is to become a Stage 2 country in the next iteration of the GCI. 11. Only the countries covered by the GCI are included in the computation of the average scores. Indonesia, which belongs to each of these groups, is excluded from the computation of the average. ASEAN comprises Brunei Darussalam, Cambodia, Malaysia, Philippines, Singapore, Thailand, and Vietnam. Developing Asia comprises Bangladesh, Brunei Darussalam, Cambodia, China, India, Malaysia, Nepal, Pakistan, Philippines, Sri Lanka, Thailand, Timor-Leste, and Vietnam (IMF classification as of 26 July 2010). Lower middle income group comprises Angola, Armenia, Bolivia, Cameroon, Cape Verde, China, Côte d’Ivoire, Ecuador, Egypt, El Salvador, Georgia, Guatemala, Guyana, Honduras, India, Jordan, Lesotho, Moldova, Mongolia, Morocco, Nicaragua, Nigeria, Pakistan, Paraguay, Philippines, Senegal, Sri Lanka, Swaziland, Syria, Thailand, Timor-Leste, Tunisia, Ukraine, and Vietnam (World Bank classification as of July 26th, 2010). 12. In the GCI, scores of aggregates measures, including subpillars, pillars, and overall GCI, are on a 1-to-7 scale, where 7 is the best possible score. 13. See EIU 2011c. 14. Pilling et al. 2011. 15. Deutsch and Soble 2011 and ADB 2010a. 16. For instance, it is estimated that, to meet demand, Asia will need to invest US$1.8 trillion in transport infrastructure alone over the period 2010-2020, out of which US$700 billion—or 40 percent— are for replacing and upgrading existing infrastructure. See ADBI 2009 for a detailed account of the infrastructure challenge in Asia. 17. Here the comparison is made with 2006, as prior to this year the composition of the infrastructure pillar differed slightly. 18. Figures cited by OECD 2010, page 7. 19. This variable measures the total passenger-carrying capacity of all scheduled flights, including domestic flights, originating from a country. It is computed by taking the number of seats available on each flight multiplied by the flight distance in kilometers, summing the result across all scheduled flights in a week during January (winter schedule) and July (summer schedule) 2010, and taking the average capacity of the two weeks. 20. See ADB 2010, p. 202 and ff. 21. See Decree No.143/PMK.011/2010, Minister of Finance, Indonesia. Data on inflation were retrieved from Bank Indonesia’s website, http://www.bi.go.id/web/en/Moneter/Inflasi/Data+Inflasi/, on April 29, 2011. 22. IMF 2011.

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23. Food, including tobacco and beverages, accounts for 36.2 percent in the calculation of Indonesia’s consumer price index. See ADB 2011 for a detailed discussion of the consequences of inflation in commodity prices on growth and poverty in Asia. 24. See, for example, Adam 2011, EIU 2011a, Financial Times 2011, OECD 2010. 25. This measure of credit rating developed by Institutional Investors is based on information provided by senior economists and sovereign-debt analysts at leading global banks and moneymanagement and securities firms. Twice a year, the respondents grade each country on a scale of 0 to 100, with 100 representing the least chance of default. 26. See, for example, ADB 2011, p. 187, and Wiranto 2011. 27. EIU 2011b. 28. See ADB 2011, p. 185. 29. See, for example, World Bank 2010. 30. All figures are for 2008 and from World Bank 2011a. 31. World Bank 2009. 32. World Bank 2009. 33. The Commission for the Supervision of Business Competition (KPPU, for its Bahasa acronym), in charge of enforcing competition law, made the news in early 2010 when it issued fines amounting to over US$100 million in several cases, including a case of fuel surcharge price fixing involving 13 airlines and a case of bid rigging by three companies. In the same year, the 1999 law prohibiting monopolistic practices and unfair business competition was strengthened by the entry into force of an anti-monopoly law regulating the notification of mergers and acquisitions. 34. ADB 2011. 35. All the Doing Business figures used in the GCI 2010-2011 are from the 2010 edition of the Doing Business Report. They may, therefore, differ from the 2011 edition. See WB/IFC 2010 and 2011. 36. See World Economic Forum 2010a. 37. See World Bank 2009 and Widianto 2008. 38. ADB 2011. 39. See OECD 2010 for more on labor informality in Indonesia. 40. See World Economic Forum 2010d. 41. Historical data available from the Doing Business project website, http://www.doingbusiness.org/custom-query. 42. The numbers cited in this section are from the December 2010 update of the World Telecommunication Indicators 2010 database (see ITU 2010). Unless stated otherwise, they are for 2009. Released in September 2010, the GCI 2010–2011 used the June 2010 edition of the database. The numbers cited in this section may therefore differ from those reported in The Global Competitiveness Report 2010–2011. 43. See World Bank 2011b. 44. Author’s calculations based on World Bank 2011a. Numbers are adjusted to account for differences in costs of living and expressed in international—or purchasing power parity (PPP)—dollars. 45. See World Bank 2011b for details and methodology. Data for Indonesia, Philippines, and Vietnam are for 2009. Regional averages are a simple average of country-level point estimates using the latest data available for each country. 46. See World Economic Forum 2010a for a detailed account of ASEAN’s trade performance and obstacles to economic integration. 47. The full list is available at “The World’s Leading Companies,” Forbes, http://www.forbes.com/2010/04/21/global-2000-leadingworld-business-global-2000-10_land.html.

48. The Patent Cooperation Treaty offers inventors and industry a means for obtaining patent protection internationally. By filing one “international” patent application under this system, intellectual property owners can seek protection of an invention simultaneously in each of a large number of countries. For more information, consult “PCT: The International Patent System,” World Intellectual Property Organization, at http://www.wipo.int/pct/. 49. See MNDP 2010.

References
Adam, S. 2011. “Indonesia Risks Losing Investor ‘Sheen’ as Economic Revamp Slows.” Bloomberg L.P. April 25, 2011. Available at http://www.bloomberg.com/news/2011-04-25/indonesia-riskslosing-investor-sheen-as-economy-revamp-slows.html. Asian Development Bank (ADB). 2010a. Asian Development Outlook 2010—Macroeconomic Management Beyond the Crisis. Mandaluyong City, Philippines: Asian Development Bank. Asian Development Bank (ADB). 2010b. Key Indicators for Asia and the Pacific 2010. Mandaluyong City, Philippines: Asian Development Bank. Asian Development Bank (ADB). 2011. Asia Development Outlook 2011—South-South Economic Links. Mandaluyong City, Philippines: Asian Development Bank. Asian Development Bank Institute (ADBI). 2009. Infrastructure for a Seamless Asia. Tokyo: Asian Development Bank Institute. Browne, C. and T. Geiger. 2010. “The Executive Opinion Survey: The Business Executives’ Insight into their Operating Environment.” The Global Competitiveness Report 2010–2011. Geneva: World Economic Forum. Deutsch, A. 2010. “Indonesia’s middle class comes of age.” Financial Times. November 18, 2010. Deutsch, A. and J. Soble. 2010. “Japan takes stake in Indonesia’s future.” Financial Times. September 29, 2010. Economist Intelligence Unit (EIU). 2011a. “Country Outlook: Indonesia.” http://www.eiu.com/public/ (accessed May 2, 2011). Economist Intelligence Unit (EIU). 2011b. “CountryData Database.” http://www.eiu.com/public/ (accessed May 2, 2011). Economist Intelligence Unit (EIU). 2011c. Country Report: Indonesia. April 2011. Wimbledon, UK: IntypeLibra. Financial Times. 2011. “Indonesia.” Lex column. Print edition. January 10, 2011. International Monetary Fund (IMF). 2011. World Economic Outlook Database. Washington, DC: International Monetary Fund. April 2011. International Telecommunication Union (ITU). 2010. The World Telecommunication/ICT Indicators Database 2010 (December update). December 2010. Geneva, Switzerland: International Telecommunication Union. Organization for Economic Co-operation and Development (OECD). 2010. OECD Economic Surveys: Inodnesia 2010. (Overview). November 2010. Available from http://www.oecd.org/dataoecd/3/24/46266398.pdf. Ministry of National Development Planning (MNDP). 2010. Regulation of the President of the Republic of Indonesia Number 5 of 2010 Regarding the National Medium-Term Development Plan (RPJMN) 2010-2014 – Book I. Pilling, D., K. Hille, and A. Kazmi. 2011. “Asia: the rise of the middle class.” Financial Times. January 4, 2011. Pisu, M. 2010. “Tackling the infrastructure challenge in Indonesia.” Economics Department Working Paper No. 809. Paris: Organization for Economic Co-operation and Development. Sala-i-Martin, X., J. Blanke, M. Drzeniek Hanouz, T. Geiger, and I. Mia. 2010. “The Global Competitiveness Index 2010–2011: Looking Beyond the Global Economic Crisis.” The Global Competitiveness Report 2010-2011. Geneva: World Economic Forum.

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United Nations Secretariat (UN). 2008. World Population Prospects: The 2008 Revision. Population Division of the Department of Economic and Social Affairs. New York, NY: United Nations. United Nations Development Programme (UNDP). 2010. The Human Development Report 2010—The Real Wealth of Nations: Pathways to Human Development. New York, NY: United Nations Development Programme. Widianto, B. 2008. “Labour Market in Indonesia: Current Emerging Issues in Employment and Skills Development.” Presentation at joint ILO-OECD Experts Meeting. Jakarta, Indonesia, December 3, 2008. Wiranto, W. 2011. “Why Indonesia Deserves a Credit Upgrade.” Financial Times. January 10, 2011. World Bank. 2009. “Indonesia Development Policy Review—Enhancing Government Effectiveness in a Democratic and Decentralized Indonesia.” Working paper No. 53451. November 2009. World Bank. 2010. Indonesia Economic Quarterly: Maximizing Opportunities, Managing Risks. December 2010. World Bank/International Finance Corporation(WB/IFC). 2009. Doing Business: Reforming through Difficult Times. New York, NY: Palgrave MacMillan. World Bank/International Finance Corporation (WB/IFC). 2010. Doing Business: Making a Difference for Entrepreneurs. New York, NY: Palgrave MacMillan. World Bank. 2011a. World Development Indicators and Global Development Finance Database. Available at http://data.worldbank.org/data-catalog/world-development-indicators (downloaded April 17, 2011). World Bank. 2011b. Enterprise Surveys Database. Available at www. enterprise surveys.org/customquery/ (accessed April 29, 2011).

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World Economic Forum. 2010a. Enabling Trade in the Greater A SEAN Region—Findings from the Enabling Trade Index 2010. Eds. M. Drezniek Hanouz and T. Geiger. Geneva: World Economic Forum. World Economic Forum. 2010b. The Financial Development Report 2010. New York: World Economic Forum USA. World Economic Forum. 2010c. The Global Competitiveness Report 2010-2011. Ed. K. Schwab. Geneva: World Economic Forum. World Economic Forum. 2010d. The Global Gender Gap Report 2010. Eds. R.Hausmann, L. Tyson, and S. Zahidi. Geneva: World Economic Forum.

Indonesia Competitiveness Report 2011 © World Economic Forum

Appendix A: Computation and structure of the Global Competitiveness Index 2010 This appendix presents the structure of the Global Competitiveness Index 2010 (GCI). The number preceding the period indicates to which pillar the variable belongs (e.g., variable 1.01 belongs to the 1st pillar and variable 12.04 belongs to the 12th pillar). The computation of the GCI is based on successive aggregations of scores from the indicator level (i.e., the most aggregated level) all the way up to the overall GCI score. Unless otherwise mentioned, we use an arithmetic mean to aggregate individual variables within a category.a For higher aggregation levels, we use the percentage shown next to each category. This percentage represents the category’s weight within its immediate parent category. Reported percentages are rounded to the nearest integer, but exact figures are used in the calculation of the GCI. For example, the score a country achieves in Pillar 9 accounts for 17 percent of this country’s score in the efficiency enhancers subindex, irrespective of the country’s stage of development. Similarly, the score achieved on the subpillar transport infrastructure accounts for 50 percent of the score of the infrastructure pillar. Unlike the case for lower levels of aggregation, the weight put on each of the three subindexes (basic requirements, efficiency enhancers, and innovation and sophistication factors) is not fixed. Instead, it depends on each country’s stage of development, as discussed in the chapter.b For instance, in the case of Indonesia, currently in transition from stage 1 to stage 2, the score in the basic requirements subindex accounts for 53 percent of its overall GCI score, while it represents just 20 percent of the overall GCI score of Germany, a country in the third stage of development. Variables that are not derived from the Executive Opinion Survey (the Survey) are identified by an asterisk ( * ) in the following pages. The Technical Notes and Sources section in Appendix B provides detailed information about the indicators. To make the aggregation possible, these variables are transformed onto a 1-to-7 scale to align them with the Survey results. We apply a min-max transformation, which preserves the order of, and the relative distance between, country scores.c Variables that are followed by the designation “1/2” enter the GCI in two different pillars; to avoid double counting, we assign a half-weight to each instance.d
Weight (%) within immediate parent category

BASIC REQUIREMENTS

1st pillar: Institutions ................................................ 25%
A. Public institutions ................................................... 75% 1. Property rights ......................................................................... 20% 1.01 Property rights 1.02 Intellectual property protection 1/2 2. Ethics and corruption ............................................................. 20% 1.03 Diversion of public funds 1.04 Public trust of politicians 1.05 Irregular payments and bribes 3. Undue influence ...................................................................... 20% 1.06 Judicial independence 1.07 Favoritism in decisions of government officials 4. Government inefficiency........................................................ 20% 1.08 Wastefulness of government spending 1.09 Burden of government regulation 1.10 Efficiency of legal framework in settling disputes 1.11 Efficiency of legal framework in challenging regulations 1.12 Transparency of government policymaking 5. Security ..................................................................................... 20% 1.13 Business costs of terrorism 1.14 Business costs of crime and violence 1.15 Organized crime 1.16 Reliability of police services B. Private institutions ................................................. 25% 1. Corporate ethics...................................................................... 50% 1.17 Ethical behavior of firms 2. Accountability .......................................................................... 50% 1.18 Strength of auditing and reporting standards 1.19 Efficacy of corporate boards 1.20 Protection of minority shareholders’ interests 1.21 Strength of investor protection*

2nd pillar: Infrastructure .......................................... 25%
A. Transport infrastructure......................................... 50% 2.01 Quality of overall infrastructure 2.02 Quality of roads 2.03 Quality of railroad infrastructure 2.04 Quality of port infrastructure 2.05 Quality of air transport infrastructure 2.06 Available seat kilometers* B. Energy and telephony infrastructure .................... 50% 2.07 Quality of electricity supply 2.08 Fixed telephone lines* 1/2 2.09 Mobile telephone subscriptions* 1/2

3rd pillar: Macroeconomic environment .............. 25%
3.01 3.02 3.03 3.04 3.05 3.06 Government budget balance* National savings rate* Inflation* e Interest rate spread* Government debt* Country credit rating*

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The Indonesia Competitiveness Report 2011: Appendices

Appendix A: Computation and structure of the Global Competitiveness Index 2010 (cont’d.) 4th pillar: Health and primary education .............. 25%
A. Health....................................................................... 50% 4.01 Business impact of malaria f 4.02 Malaria incidence* f 4.03 Business impact of tuberculosis f 4.04 Tuberculosis incidence* f 4.05 Business impact of HIV/AIDS f 4.06 HIV prevalence* f 4.07 Infant mortality* 4.08 Life expectancy* B. Primary education................................................... 50% 4.09 Quality of primary education 4.10 Primary education enrollment rate* g 7.03 7.04 7.05 6.04 B. Efficient 7.06 7.07 7.08 7.09 Rigidity of employment* Hiring and firing practices Redundancy costs* Extent and effect of taxation 1/2 use of talent ............................................. 50% Pay and productivity Reliance on professional management 1/2 Brain drain Female participation in labor force*

8th pillar: Financial market development............. 17%
A. Efficiency ................................................................. 50% 8.01 Availability of financial services 8.02 Affordability of financial services 8.03 Financing through local equity market 8.04 Ease of access to loans 8.05 Venture capital availability 8.06 Restriction on capital flows B. Trustworthiness and confidence ........................... 50% 8.07 Soundness of banks 8.08 Regulation of securities exchanges 8.09 Legal rights index*

EFFICIENCY ENHANCERS

5th pillar: Higher education and training ............. 17%
A. Quantity of education ............................................ 33% 5.01 Secondary education enrollment rate* 5.02 Tertiary education enrollment rate* B. Quality of education ............................................... 33% 5.03 Quality of the educational system 5.04 Quality of math and science education 5.05 Quality of management schools 5.06 Internet access in schools C. On-the-job training ................................................. 33% 5.07 Local availability of specialized research and training services 5.08 Extent of staff training

9th pillar: Technological readiness ....................... 17%
A. Technological adoption.......................................... 50% 9.01 Availability of latest technologies 9.02 Firm-level technology absorption 9.03 FDI and technology transfer B. ICT use ..................................................................... 50% 9.04 Internet users* 9.05 Broadband Internet subscriptions* 9.06 Internet bandwidth* 2.08 Fixed telephone lines* 1/2 2.09 Mobile telephone subscriptions* 1/2

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6th pillar: Goods market efficiency ....................... 17%
A. Competition ............................................................ 67% 1. Domestic competition .................................................. variable h 6.01 Intensity of local competition 6.02 Extent of market dominance 6.03 Effectiveness of anti-monopoly policy 6.04 Extent and effect of taxation 1/2 6.05 Total tax rate* 6.06 Number of procedures required to start a business* i 6.07 Time required to start a business* i 6.08 Agricultural policy costs 2. Foreign competition ...................................................... variable h 6.09 Prevalence of trade barriers 6.10 Trade tariffs* 6.11 Prevalence of foreign ownership 6.12 Business impact of rules on FDI 6.13 Burden of customs procedures 10.04 Imports as a percentage of GDP* g B. Quality of demand conditions ............................... 33% 6.14 Degree of customer orientation 6.15 Buyer sophistication

10th pillar: Market size ............................................ 17%
A. Domestic market size ............................................. 75% 10.01 Domestic market size index* j B. Foreign market size ................................................ 25% 10.02 Foreign market size index* k

INNOVATION AND SOPHISTICATION FACTORS

11th pillar: Business sophistication ...................... 50%
11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 7.07 Local supplier quantity Local supplier quality State of cluster development Nature of competitive advantage Value chain breadth Control of international distribution Production process sophistication Extent of marketing Willingness to delegate authority Reliance on professional management 1/2

7th pillar: Labor market efficiency......................... 17%
A. Flexibility ................................................................. 50% 7.01 Cooperation in labor-employer relations 7.02 Flexibility of wage determination

(Cont’d.)

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Appendix A: Computation and structure of the Global Competitiveness Index 2010 (cont’d.) 12th pillar: Innovation ............................................... 50%
12.01 12.02 12.03 12.04 12.05 Capacity for innovation Quality of scientific research institutions Company spending on R&D University-industry collaboration in R&D Government procurement of advanced technology products 12.06 Availability of scientists and engineers 12.07 Utility patents* 1.02 Intellectual property protection 1/2
h The competition subpillar is the weighted average of two components: domestic competition and foreign competition. In both components, the included variables provide an indication of the extent to which competition is distorted. The relative importance of these distortions depends on the relative size of domestic versus foreign competition. This interaction between the domestic market and the foreign market is captured by the way we determine the weights of the two components. Domestic competition is the sum of consumption (C), investment (I), government spending (G), and exports (X), while foreign competition is equal to imports (M). Thus we assign a weight of (C + I + G + X)/ (C + I + G + X + M) to domestic competition and a weight of M/ (C + I + G + X + M) to foreign competition. i Variables 6.06 and 6.07 combine to form one single variable. j The size of the domestic market is constructed by taking the natural log of the sum of the gross domestic product valued at purchasing power parity (PPP) plus the total value (PPP estimates) of imports of goods and services, minus the total value (PPP estimates) of exports of goods and services. Data are then normalized on a 1-to-7 scale. PPP estimates of imports and exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the data tables section of The Global Competitiveness Report 2010–2011. k The size of the foreign market is estimated as the natural log of the total value (PPP estimates) of exports of goods and services, normalized on a 1-to-7 scale. PPP estimates of exports are obtained by taking the product of exports as a percentage of GDP and GDP valued at PPP. The underlying data are reported in the data tables of The Global Competitiveness Report 2010–2011.

Notes
a Formally, for a category i composed of K indicators, we have:
K

categoryi

k=1

indicatork K

b See Table 3 on page 6 for weightings. c Formally, we have: (country score – sample minimum) (sample maximum – sample minimum)

6x

+ 1

The sample minimum and sample maximum are, respectively, the lowest and highest country scores in the sample of economies covered by the GCI. In some instances, adjustments were made to account for extreme outliers. For those indicators for which a higher value indicates a worse outcome (e.g., disease incidence, government debt), the transformation formula takes the following form, thus ensuring that 1 and 7 still corresponds to the worst and best possible outcomes, respectively: (country score – sample minimum) (sample maximum – sample minimum)

–6 x

+ 7

d For those categories that contain one or several half-weight variables, country scores for those groups are computed as follows: (sum of scores on full-weight variables) + (count of full-weight variables) + x (sum of scores on half-weight variables) x (count of half-weight variables)

e To capture the idea that both high inflation and deflation are detrimental, inflation enters the model in a U-shaped manner as follows: for values of inflation between 0.5 and 2.9 percent, a country receives the highest possible score of 7. Outside this range, scores decrease linearly as they move away from these values. f The impact of malaria, tuberculosis, and HIV/AIDS on competitiveness depends not only on their respective incidence rates but also on how costly they are for business. Therefore, to estimate the impact of each of the three diseases, we combine its incidence rate with the Survey question on its perceived cost to businesses. To combine these data we first take the ratio of each country’s disease incidence rate relative to the highest incidence rate in the whole sample. The inverse of this ratio is then multiplied by each country’s score on the related Survey question. This product is then normalized to a 1-to-7 scale. Note that countries with zero reported incidence receive a 7, regardless of their scores on the related Survey question. g For this variable we first apply a log-transformation and then a min-max transformation.

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Indonesia Competitiveness Report 2011 © World Economic Forum

Appendix B: Technical Notes and Sources This section provides detailed definitions and sources for all the indicators that enter the Global Competitiveness Index 2010–2011 (GCI). For each indicator, the title appears on the fist line, preceded by its number to allow for quick reference. The numbering refers to the data tables section of The Global Competitiveness Report 2010–2011, available free of charge from www.weforum.org/gcr. Underneath is a description of the indicator or, in the case of the Executive Opinion Survey data, the full question and the associated responses.
1ST PILLAR: INSTITUTIONS
1.01 Property rights
How would you rate the protection of property rights, including financial assets, in your country? [1 = very weak; 7 = very strong] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.02 Intellectual property protection
How would you rate intellectual property protection, including anti-counterfeiting measures, in your country? [1 = very weak; 7 = very strong] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.03 Diversion of public funds
In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption? [1 = very common; 7 = never occurs] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.04 Public trust of politicians
How would you rate the level of public trust in the ethical standards of politicians in your country? [1 = very low; 7 = very high] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.05 Irregular payments and bribes
This indicator represents the average score across the five components of the following Executive Opinion Survey question: In your country, how common is it for firms to make undocumented extra payments or bribes connected with (a) imports and exports; (b) public utilities; (c) annual tax payments; (d) awarding of public contracts and licenses; (e) obtaining favorable judicial decisions. The answer to each question ranges from 1 (very common) to 7 (never occurs). | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.06 Judicial independence
To what extent is the judiciary in your country independent from influences of members of government, citizens, or firms? [1 = heavily influenced; 7 = entirely independent] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.07 Favoritism in decisions of government officials
To what extent do government officials in your country show favoritism to well-connected firms and individuals when deciding upon policies and contracts? [1 = always show favoritism; 7 = never show favoritism] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.08 Wastefulness of government spending
How would you rate the composition of public spending in your country? [1 = extremely wasteful; 7 = highly efficient in providing necessary goods and services] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010 (Cont’d.)

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Appendix B: Technical Notes and Sources (cont’d.)
1.09 Burden of government regulation
How burdensome is it for businesses in your country to comply with governmental administrative requirements (e.g., permits, regulations, reporting)? [1 = extremely burdensome; 7 = not burdensome at all] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.17 Ethical behavior of firms
How would you compare the corporate ethics (ethical behavior in interactions with public officials, politicians, and other enterprises) of firms in your country with those of other countries in the world? [1 = among the worst in the world; 7 = among the best in the world] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.10 Efficiency of legal framework in settling disputes
How efficient is the legal framework in your country for private businesses in settling disputes? [1 = extremely inefficient; 7 = highly efficient] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.18 Strength of auditing and reporting standards
In your country, how would you assess financial auditing and reporting standards regarding company financial performance? [1 = extremely weak; 7 = extremely strong] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.11 Efficiency of legal framework in challenging regulations
How efficient is the legal framework in your country for private businesses in challenging the legality of government actions and/or regulations? [1 = extremely inefficient; 7 = highly efficient] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.19 Efficacy of corporate boards
How would you characterize corporate governance by investors and boards of directors in your country? [1 = management has little accountability to investors and boards; 7 = investors and boards exert strong supervision of management decisions] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.12 Transparency of government policymaking
How easy is it for businesses in your country to obtain information about changes in government policies and regulations affecting their activities? [1 = impossible; 7 = extremely easy] | 2009–10 weighted average

1.20 Protection of minority shareholders’ interests
In your country, to what extent are the interests of minority shareholders protected by the legal system? [1 = not protected at all; 7 = fully protected] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

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Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.13 Business costs of terrorism
To what extent does the threat of terrorism impose costs on businesses in your country? [1 = significant costs; 7 = no costs] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.21 Strength of investor protection
Strength of Investor Protection Index on a 0–10 (best) scale | 2009 Source: The World Bank, Doing Business 2010

1.14 Business costs of crime and violence
To what extent does the incidence of crime and violence impose costs on businesses in your country? [1 = significant costs; 7 = no costs] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

2ND PILLAR: INFRASTRUCTURE
2.01 Quality of overall infrastructure
How would you assess general infrastructure (e.g., transport, telephony, and energy) in your country? [1 = extremely underdeveloped; 7 = extensive and efficient by international standards] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.15 Organized crime
To what extent does organized crime (mafia-oriented racketeering, extortion) impose costs on businesses in your country? [1 = significant costs; 7 = no costs] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

2.02 Quality of roads
How would you assess roads in your country? [1 = extremely underdeveloped; 7 = extensive and efficient by international standards] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

1.16 Reliability of police services
To what extent can police services be relied upon to enforce law and order in your country? [1 = cannot be relied upon at all; 7 = can always be relied upon] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

2.03 Quality of railroad infrastructure
How would you assess the railroad system in your country? [1 = extremely underdeveloped; 7 = extensive and efficient by international standards] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

(Cont’d.)

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Appendix B: Technical Notes and Sources (cont’d.)
2.04 Quality of port infrastructure
How would you assess port facilities in your country? [1 = extremely underdeveloped; 7 = well developed and efficient by international standards] For landlocked countries, the question is as follows: How accessible are port facilities? [1 = extremely inaccessible; 7 = extremely accessible] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

3.03 Inflation
Annual percent change in consumer price index (year average) | 2009 Sources: International Monetary Fund, World Economic Outlook Database (April 2010); national sources Notes: Economies are ranked in ascending order for presentation purposes only. See Appendix of Chapter 1 for details about the treatment of deflationary countries in the Global Competitiveness Index.

2.05 Quality of air transport infrastructure
How would you assess passenger air transport infrastructure in your country? [1 = extremely underdeveloped; 7 = extensive and efficient by international standards] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

3.04 Interest rate spread
Average interest rate spread between typical lending and deposit rates | 2009 Sources: Economist Intelligence Unit, CountryData Database (July 2010); International Monetary Fund, International Financial Statistics (July 2010); national sources

3.05 Government debt 2.06 Available airline seat kilometers
Scheduled available airline seat kilometers per week originating in country (in millions) | January 2010 and July 2010 average Sources: International Air Transport Association, SRS Analyser; national sources General government gross debt as a percentage of GDP | 2009 Sources: African Development Bank; African Development Bank and OECD Development Centre, Africa Economic Outlook (retrieved July 6, 2010); European Bank for Reconstruction and Development; International Monetary Fund; Economist Intelligence Unit, CountryData Database (July 2010); national sources

2.07 Quality of electricity supply
How would you assess the quality of the electricity supply in your country (lack of interruptions and lack of voltage fluctuations)? [1 = insufficient and suffers frequent interruptions; 7 = sufficient and reliable] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

3.06 Country credit rating
Expert assessment of the probability of sovereign debt default on a 0–100 (lowest probability) scale | September 2009 Source: © Institutional Investor, 2010. No further copying or transmission of this material is allowed without the express permission of Institutional Investor (publisher@institutionalinvestor.com).

2.08 Fixed telephone lines
Number of active fixed telephone lines per 100 population | 2009 Sources: International Telecommunication Union, World Telecommunication/ICT Indicators 2010 (June 2010 edition); national sources

4TH PILLAR: HEALTH AND PRIMARY EDUCATION
4.01 Business impact of malaria
How serious an impact do you consider malaria will have on your company in the next five years (e.g., death, disability, medical and funeral expenses, productivity and absenteeism, recruitment and training expenses, revenues)? [1 = a serious impact; 7 = no impact at all] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

2.09 Mobile telephone subscriptions
Number of mobile cellular telephone subscriptions per 100 population | 2009 Sources: International Telecommunication Union, World Telecommunication/ICT Indicators 2010 (June 2010 edition); national sources

3RD PILLAR: MACROECONOMIC ENVIRONMENT
3.01 Government budget balance
Government budget balance as a percentage of GDP | 2009 Sources: African Development Bank; European Bank for Reconstruction and Development; Inter-American Development Bank; International Monetary Fund; Organisation for Economic Co-operation and Development; Economist Intelligence Unit, CountryData Database (July 2010); national sources

4.02 Malaria incidence
Number of malaria cases per 100,000 population | 2006 Sources: World Health Organization, World Malaria Report 2008; national sources

4.03 Business impact of tuberculosis
How serious an impact do you consider tuberculosis will have on your company in the next five years (e.g., death, disability, medical and funeral expenses, productivity and absenteeism, recruitment and training expenses, revenues)? [1 = a serious impact; 7 = no impact at all] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

3.02 National savings rate
National savings rate as a percentage of GDP | 2009 Sources: Economist Intelligence Unit, CountryData Database (June/July 2010); International Monetary Fund; The World Bank Group,World dataBank (July 2010); national sources

4.04 Tuberculosis incidence
Number of tuberculosis cases per 100,000 population | 2008 Source: The World Bank, Data Catalog (retrieved July 27,(Cont’d.) 2010)

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Appendix B: Technical Notes and Sources (cont’d.)
4.05 Business impact of HIV/AIDS
How serious an impact do you consider HIV/AIDS will have on your company in the next five years (e.g., death, disability, medical and funeral expenses, productivity and absenteeism, recruitment and training expenses, revenues)? [1 = a serious impact; 7 = no impact at all] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5.04 Quality of math and science education
How would you assess the quality of math and science education in your country’s schools? [1 = poor; 7 = excellent – among the best in the world] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5.05 Quality of management schools
How would you assess the quality of management or business schools in your country? [1 = poor; 7 = excellent – among the best in the world] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

4.06 HIV prevalence
HIV prevalence as a percentage of adults aged 15–49 years | 2007 Sources: UNAIDS/World Health Organization, 2008 Report on the Global AIDS Epidemic; United Nations Development Programme, Human Development Report 2007/2008; national sources

5.06 Internet access in schools
How would you rate the level of access to the Internet in schools in your country? [1 = very limited; 7 = extensive] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

4.07 Infant mortality
Infant (children aged 0–12 months) mortality per 1,000 live births | 2008 Sources: The World Bank, Data Catalog (retrieved June 23, 2010); national sources

5.07 Local availability of specialized research and training services
In your country, to what extent are high-quality, specialized training services available? [1 = not available; 7 = widely available] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

4.08 Life expectancy
Life expectancy at birth (years) | 2008 Source: The World Bank, Data Catalog (retrieved July 27, 2010); national source

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4.09 Quality of primary education
How would you assess the quality of primary schools in your country? [1 = poor; 7 = excellent—among the best in the world] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5.08 Extent of staff training
To what extent do companies in your country invest in training and employee development? [1 = hardly at all; 7 = to a great extent] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

4.10 Primary education enrollment rate
Net primary education enrollment rate | 2008 Sources: UNESCO Institute for Statistics (retrieved July 16, 2010); The World Bank, EdStats query (retrieved July 16, 2010); national sources

6TH PILLAR: GOODS MARKET EFFICIENCY
6.01 Intensity of local competition
How would you assess the intensity of competition in the local markets in your country? [1 = limited in most industries; 7 = intense in most industries] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5TH PILLAR: HIGHER EDUCATION AND TRAINING
5.01 Secondary education enrollment rate
Gross secondary education enrollment rate | 2008 Sources: UNESCO Institute for Statistics (retrieved July 16, 2010); national sources

6.02 Extent of market dominance
How would you characterize corporate activity in your country? [1 = dominated by a few business groups; 7 = spread among many firms] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5.02 Tertiary education enrollment rate
Gross tertiary education enrollment rate | 2008 Sources: UNESCO Institute for Statistics (retrieved July 16, 2010); national sources

6.03 Effectiveness of anti-monopoly policy
To what extent does anti-monopoly policy promote competition in your country? [1 = does not promote competition; 7 = effectively promotes competition] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

5.03 Quality of the educational system
How well does the educational system in your country meet the needs of a competitive economy? [1 = not well at all; 7 = very well] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

(Cont’d.)

Indonesia Competitiveness Report 2011 © World Economic Forum

Appendix B: Technical Notes and Sources (cont’d.)
6.04 Extent and effect of taxation
What impact does the level of taxes in your country have on incentives to work or invest? [1 = significantly limits incentives to work or invest; 7 = has no impact on incentives to work or invest] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.14 Degree of customer orientation
How well do companies in your country treat customers? [1 = generally treat their customers badly; 7 = are highly responsive to customers and customer retention] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.05 Total tax rate
This variable is a combination of profit tax (% of profits), labor tax and contribution (% of profits), and other taxes (% of profits) | 2009 Source: The World Bank, Doing Business 2010

6.15 Buyer sophistication
In your country, how do buyers make purchasing decisions? [1 = based solely on the lowest price; 7 = based on a sophisticated analysis of performance attributes] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.06 Number of procedures required to start a business
Number of procedures required to start a business | 2009 Source: The World Bank, Doing Business 2010

6.07 Time required to start a business
Number of days required to start a business | 2009 Source: The World Bank, Doing Business 2010

7TH PILLAR: LABOR MARKET EFFICIENCY
7.01 Cooperation in labor-employer relations
How would you characterize labor-employer relations in your country? [1 = generally confrontational; 7 = generally cooperative] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.08 Agricultural policy costs
How would you assess the agricultural policy in your country? [1 = excessively burdensome for the economy; 7 = balances the interests of taxpayers, consumers, and producers] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

7.02 Flexibility of wage determination
How are wages generally set in your country? [1 = by a centralized bargaining process; 7 = up to each individual company] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.09 Prevalence of trade barriers
In your country, to what extent do tariff and non-tariff barriers limit the ability of imported goods to compete in the domestic market? [1 = strongly limit; 7 = do not limit] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

7.03 Rigidity of employment
Rigidity of Employment Index on a 0–100 (worst) scale | 2009 Source: The World Bank, Doing Business 2010

6.10 Trade tariffs
Trade-weighted average tariff rate | 2009 Source: International Trade Centre

7.04 Hiring and firing practices
How would you characterize the hiring and firing of workers in your country? [1 = impeded by regulations; 7 = flexibly determined by employers] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.11 Prevalence of foreign ownership
How prevalent is foreign ownership of companies in your country? [1 = very rare; 7 = highly prevalent] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

7.05 Redundancy costs
Redundancy costs in weeks of salary | 2009 Source: The World Bank, Doing Business 2010

6.12 Business impact of rules on FDI
To what extent do rules governing foreign direct investment (FDI) encourage or discourage it? [1 = strongly discourage FDI; 7 = strongly encourage FDI] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

7.06 Pay and productivity
To what extent is pay in your country related to productivity? [1 = not related to worker productivity; 7 = strongly related to worker productivity] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

6.13 Burden of customs procedures
How would you rate the level of efficiency of customs procedures (related to the entry and exit of merchandise) in your country? [1 = extremely inefficient; 7 = extremely efficient] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

7.07 Reliance on professional management
In your country, who holds senior management positions? [1 = usually relatives or friends without regard to merit; 7 = mostly professional managers chosen for merit and qualifications] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010 (Cont’d.)

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Appendix B: Technical Notes and Sources (cont’d.)
7.08 Brain drain
Does your country retain and attract talented people? [1 = no, the best and brightest normally leave to pursue opportunities in other countries; 7 = yes, there are many opportunities for talented people within the country] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.07 Soundness of banks
How would you assess the soundness of banks in your country? [1 = insolvent and may require a government bailout; 7 = generally healthy with sound balance sheets] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.08 Regulation of securities exchanges 7.09 Female participation in labor force
Female-to-male participation ratio in the labor force | 2008 Source: International Labour Organization, KIILM Net (retrieved June 28, 2010) How would you assess the regulation and supervision of securities exchanges in your country? [1 = ineffective; 7 = effective] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.09 Legal rights index

8TH PILLAR: FINANCIAL MARKET DEVELOPMENT
8.01 Availability of financial services
To what extent does competition among providers of financial services in your country ensure the provision of financial services at affordable prices? [1 = not at all; 7 = extremely well] | 2010 Source: World Economic Forum, Executive Opinion Survey 2009, 2010

Degree of legal protection of borrowers and lenders’ rights on a 0–10 (best) scale | 2009 Source: The World Bank, Doing Business 2010

9TH PILLAR: TECHNOLOGICAL READINESS
9.01 Availability of latest technologies
To what extent are the latest technologies available in your country? [1 = not available; 7 = widely available] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.02 Affordability of financial services

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To what extent does competition among providers of financial services in your country ensure the provision of financial services at affordable prices? [1 = not at all; 7 = extremely well] | 2010 Source: World Economic Forum, Executive Opinion Survey 2009, 2010

9.02 Firm-level technology absorption
To what extent do businesses in your country absorb new technology? [1 = not at all; 7 = aggressively absorb] | 2009– 10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.03 Financing through local equity market
How easy is it to raise money by issuing shares on the stock market in your country? [1 = very difficult; 7 = very easy] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

9.03 FDI and technology transfer
To what extent does foreign direct investment (FDI) bring new technology into your country? [1 = not at all; 7 = fdi is a key source of new technology] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

8.04 Ease of access to loans
How easy is it to obtain a bank loan in your country with only a good business plan and no collateral? [1 = very difficult; 7 = very easy] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

9.04 Internet users
Number of estimated Internet users per 100 population | 2009 Sources: International Telecommunication Union, World Telecommunication/ICT Indicators (June 2010 edition); The World Bank, Data Catalog (retrieved July 19, 2010); national sources

8.05 Venture capital availability
In your country, how easy is it for entrepreneurs with innovative but risky projects to find venture capital? [1 = very difficult; 7 = very easy] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

9.05 Broadband Internet subscriptions
Number of fixed broadband Internet subscriptions per 100 population | 2009 Source: International Telecommunication Union, World Telecommunication/ICT Indicators (June 2010 edition)

8.06 Restriction on capital flows
How restrictive are regulations in your country related to international capital flows? [1 = highly restrictive; 7 = not restrictive at all] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

(Cont’d.)

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Appendix B: Technical Notes and Sources (cont’d.)
9.06 Internet bandwidth
International Internet bandwidth (Mb/s) per 10,000 population | 2007 Sources: International Telecommunication Union, World Telecommunication/ICT Indicators (June 2010 edition); national sources

11.03 State of cluster development
In your country’s economy, how prevalent are well-developed and deep clusters? [1 = nonexistent; 7 = widespread in many fields] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

11.04 Nature of competitive advantage

10TH PILLAR: MARKET SIZE
10.01 Domestic market size index
Sum of gross domestic product plus value of imports of goods and services, minus value of exports of goods and services, normalized on a 1–7 (best) scale | 2009 Source: Authors’ calculation. For more details please refer to Appendix A in Chapter 1.1 of this Report

What is the nature of competitive advantage of your country’s companies in international markets based upon? [1 = low-cost or natural resources; 7 = unique products and processes] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

11.05 Value chain breadth
In your country, do exporting companies have a narrow or broad presence in the value chain? [1 = narrow, primarily involved in individual steps of the value chain (e.g., resource extraction or production); 7 = broad, present across the entire value chain (i.e., do not only produce but also perform product design, marketing sales, logistics, and after-sales services)] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

10.02 Foreign market size index
Value of exports of goods and services, normalized on a 1–7 (best) scale | 2009 Source: Authors’ calculation. For more details please refer to Appendix A in Chapter 1.1 of this Report

10.03 GDP (PPP)
Gross domestic product valued at purchasing power parity in billions of international dollars | 2009 Sources: International Monetary Fund, World Economic Outlook Database (April 2010); national sources

11.06 Control of international distribution
To what extent are international distribution and marketing from your country owned and controlled by domestic companies? [1 = not at all, they take place through foreign companies; 7 = extensively, they are primarily owned and controlled by domestic companies] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

10.04 Imports as a percentage of GDP
Imports of goods and services as a percentage of gross domestic product | 2009 Sources: Economist Intelligence Unit, CountryData Database (retrieved July 1, 2010); The World Bank, Data Catalog (retrieved July 13, 2010); national sources

11.07 Production process sophistication
In your country, how sophisticated are production processes? [1 = not at all—labor-intensive methods or previous generations of process technology prevail; 7 = highly—the world’s best and most efficient process technology prevails] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

10.05 Exports as a percentage of GDP
Exports of goods and services as a percentage of gross domestic product | 2009 Sources: Economist Intelligence Unit, CountryData Database (retrieved July 1, 2010); The World Bank, Data Catalog (retrieved July 14, 2010); national sources

11.08 Extent of marketing
In your country, to what extent do companies use sophisticated marketing tools and techniques? [1 = very little; 7 = extensively] | 2009–10 weighted average

11TH PILLAR: BUSINESS SOPHISTICATION
11.01 Local supplier quantity
How numerous are local suppliers in your country? [1 = largely nonexistent; 7 = very numerous] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

Source: World Economic Forum, Executive Opinion Survey 2009, 2010

11.09 Willingness to delegate authority
In your country, how do you assess the willingness to delegate authority to subordinates? [1 = low—top management controls all important decisions; 7 = high—authority is mostly delegated to business unit heads and other lowerlevel managers] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

11.02 Local supplier quality
How would you assess the quality of local suppliers in your country? [1 = very poor; 7 = very good] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

(Cont’d.)

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Appendix B: Technical Notes and Sources (cont’d.)
12TH PILLAR: INNOVATION
12.01 Capacity for innovation
In your country, how do companies obtain technology? [1 = exclusively from licensing or imitating foreign companies; 7 = by conducting formal research and pioneering their own new products and processes] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

12.02 Quality of scientific research institutions
How would you assess the quality of scientific research institutions in your country? [1 = very poor; 7 = the best in their field internationally] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

12.03 Company spending on R&D
To what extent do companies in your country spend on R&D? [1 = do not spend on R&D; 7 = spend heavily on R&D] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

12.04 University-industry collaboration in R&D
To what extent do business and universities collaborate on research and development (R&D) in your country? [1 = do not collaborate at all; 7 = collaborate extensively] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

40

12.05 Government procurement of advanced technology products
Do government procurement decisions foster technological innovation in your country? [1 = no, not at all; 7 = yes, extremely effectively] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

12.06 Availability of scientists and engineers
To what extent are scientists and engineers available in your country? [1 = not at all; 7 = widely available] | 2009–10 weighted average Source: World Economic Forum, Executive Opinion Survey 2009, 2010

12.07 Utility patents per million population
Number of utility patents (i.e., patents for invention) granted in 2009, per million population | 2009 Source: The United States Patent and Trademark Office

Indonesia Competitiveness Report 2011 © World Economic Forum

Appendix C: Indonesia Competitiveness Profile The next two pages detail the performance of Indonesia in the Global Competitiveness Index (GCI) 2010-2011 on all its aggregate components and 110 indicators. This appendix complements the tables and figures in the main text of the report by allowing for a more granular analysis, and includes the following columns: • INDICATOR, UNITS: This column contains the title of each component and each indicator and the units by which it is expressed—for example, “years” or “% GDP.” Indicators derived from the Executive Opinion Survey are identified by an asterisk; these variables are always expressed as scores on a 1–7 scale, with 7 being the most desirable score. • RANK/139: This column reports Indonesia’s position among the 139 economies covered by the GCI 2010–2011. • SCORE: This column reports Indonesia’s score on each of the variables comprising the GCI. Next to the score, a colored square indicates whether the indicator constitutes an advantage n or a disadvantage n for the country. For Indonesia, as for all economies ranked between 11 and 50 in the overall GCI, any individual variable ranked higher than or equal to the country’s overall rank—44th in the case of Indonesia—is considered an advantage. Any variable ranked lower than the country’s overall rank is considered a disadvantage. • TREND 2005–10: This column highlights a positive (upward arrow) or negative (downward arrow) difference between the scores obtained by Indonesia in the 2005 and the 2010 editions of the GCI for each variable. • ASEAN, DEVELOPING ASIA: For the sake of comparison, we report the average score for ASEAN and the Developing Asia countries in the gray area of the page. In both cases, Indonesia is excluded from the computation of the average. See Endnote 11 of the Chapter for the classification. • BEST PERFORMER: The two columns under this heading report the score and name of the bestperforming economy for each aggregate measure or indicator. When several countries share first rank, the number of these economies is reported in parentheses in the second column.

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011: Appendices

41

The Indonesia Competitiveness Report 2011: Appendices

Indonesia
The Global Competitiveness Index in detail
Indonesia
INDICATOR, UNITS RANK/139 SCORE (1–7)

n  Competitive advantage Trend
2005–10

n  Competitive disadvantage Best performer
SCORE ECONOMY

ASEAN
SCORE

Developing Asia
SCORE

Global Competitiveness Index 2010–2011 ................... 44 ............ 4.4 ...................... ➚ 
Basic requirements .......................................................................60 .............. 4.6 ........................... ➚ Efficiency enhancers ....................................................................51 .............. 4.2 ........................... ➚ Innovation and sophistication factors .......................................37 .............. 4.1 ........................... ➚

4.5 ..............4.1 ...........5.6 ..... Switzerland
4.8 ................. 4.3 ..............6.1 .......Hong Kong SAR 4.3 ................. 3.9 ..............5.5 .......Singapore 3.8 ................. 3.5 ..............5.7 .......Japan

1st pillar: Institutions ...................................................... 61 ............ 4.0 ...................... ➚ 
1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 Property rights*........................................................... 84 ........... 4.0 ....... n .........  ➚  Intellectual property protection* ................................. 58 ........... 3.8 ....... n .........  ➚  Diversion of public funds* .......................................... 60 ........... 3.5 ....... n .........  ➚  Public trust of politicians* ........................................... 51 ........... 3.3 ....... n .........  ➚  Irregular payments and bribes* .................................. 95 ........... 3.4 ....... n ........ n/a Judicial independence* ............................................... 67 ........... 3.8 ....... n .........  ➚  Favoritism in decisions of government officials* ........ 28 ........... 3.9 ....... n .........  ➚  Wastefulness of government spending* .................... 30 ........... 4.2 ....... n .........  ➚  Burden of government regulation* ............................. 36 ........... 3.7 ....... n .........  ➚  Efficiency of legal sys. in settling disputes* ............... 60 ........... 3.8 ....... n ........ n/a Efficiency of legal sys. in challenging regs* ................ 55 ........... 3.9 ....... n ........ n/a Transparency of government policymaking* ............... 91 ........... 4.1 ....... n .........  ➚  Business costs of terrorism* .....................................101 ........... 5.1 ....... n .........  ➚  Business costs of crime and violence* ...................... 75 ........... 4.7 ....... n .........  ➚  Organized crime* ........................................................ 98 ........... 4.7 ....... n .........  ➚  Reliability of police services* ...................................... 80 ........... 4.0 ....... n .........  ➚  Ethical behavior of firms* ........................................... 99 ........... 3.5 ....... n .........  ➘  Strength of auditing and reporting standards* ........... 78 ........... 4.6 ....... n .........  ➚  Efficacy of corporate boards* ..................................... 54 ........... 4.7 ....... n .........  ➚  Protection of minority shareholders’ interests* .......... 48 ........... 4.6 ....... n .........  ➚  Strength of investor protection, index 0–10 (best) ...... 33 ........... 6.0 ....... n ........ n/a

4.3 ..............3.8 ...........6.1 ..... Singapore
4.5 ............ 4.0..........6.4 .....Switzerland 3.7 ............ 3.2..........6.2 .....Sweden 3.9 ............ 3.3..........6.6 .....New Zealand 3.7 ............ 2.9..........6.4 .....Singapore 4.2 ............ 3.5..........6.7 .....New Zealand 4.1 ............ 3.9..........6.8 .....New Zealand 3.5 ............ 3.1..........6.0 .....Sweden 3.9 ............ 3.4..........6.1 .....Singapore 3.6 ............ 3.3..........5.5 .....Singapore 4.2 ............ 3.7..........6.3 .....Singapore 4.0 ............ 3.6..........5.8 .....Sweden 4.4 ............ 4.1..........6.3 .....Singapore 5.1 ............ 4.7..........6.8 .....Uruguay 4.9 ............ 4.4..........6.6 .....Syria 5.4 ............ 4.8..........6.9 .....Rwanda 4.5 ............ 3.9..........6.6 .....Finland 4.4 ............ 3.8..........6.8 .....Sweden 4.9 ............ 4.5..........6.4 .....South Africa 4.8 ............ 4.4..........5.9 .....Sweden 4.6 ............ 4.1..........6.0 .....Sweden 6.0 ............ 5.5..........9.7 .....New Zealand

42

2nd pillar: Infrastructure................................................. 82 ............ 3.6 ...................... ➚ 
2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 Quality of overall infrastructure* ................................. 90 ........... 3.7 ....... n .........  ➚  Quality of roads* ......................................................... 84 ........... 3.5 ....... n ........ n/a Quality of railroad infrastructure* ................................ 56 ........... 3.0 ....... n .........  ➘  Quality of port infrastructure* ..................................... 96 ........... 3.6 ....... n .........  ➘  Quality of air transport infrastructure* ........................ 69 ........... 4.6 ....... n .........  ➚  Available airline seat kilometers, million...................... 21 .... 1,450.9 ....... n ........ n/a Quality of electricity supply*....................................... 97 ........... 3.6 ....... n .........  ➘  Fixed telephone lines/100 pop. ................................... 82 ......... 14.8 ....... n .........  ➚  Mobile telephone subscriptions/100 pop. ................... 98 ......... 69.2 ....... n .........  ➚ 

4.2 ..............3.4 ...........6.8 ..... Hong Kong SAR
4.6 ............ 3.8..........6.8 .....Switzerland 4.6 ............ 3.7..........6.6 .....Singapore 3.3 ............ 3.0..........6.8 .....Switzerland 4.6 ............ 3.9..........6.8 .....Hong Kong SAR 5.1 ............ 4.4..........6.9 .....Hong Kong SAR 946.5 ..... 1,339.2. 31,076.0 .....United States 4.8 ............ 3.6..........6.9 .....Hong Kong SAR 17 ...........10.4........63.2 .....Taiwan, China .9 99.9 .......... 65.6......232.1 .....United Arab Emirates

3rd pillar: Macroeconomic environment .................... 35 ............ 5.2 ...................... ➚ 
3.01 3.02 3.03 3.04 3.05 3.06 Government budget balance, % GDP......................... 41 ......... –2.6 ....... n .........  ➘  National savings rate, % GDP ..................................... 16 ......... 32.9 ....... n .........  ➚  Inflation, annual % change .......................................... 92 ........... 4.8 ....... n .........  ➘  Interest rate spread, % ............................................... 66 ........... 5.2 ....... n .........  ➘  Government debt, % GDP .......................................... 51 ..........31.1 ....... n .........  ➘  Country credit rating, 0–100 (best) ............................. 72 ......... 50.1 ....... n ........ n/a

4.9 ..............4.7 ...........6.6 ..... Brunei Darussalam
-4.1 ............ 9.4...... 178.0 .....Timor-Leste 30.9 .......... 30.6........54.1 .....Kuwait 1.6 ............ 5.1. [0.5;2.9]......Multiple (44) 5.7 ............ 6.2.........-0.6 .....Netherlands 59.3 .......... 45.7..........0.0 .....Timor-Leste 57 .......... 43.0........92.8 .....Switzerland .0

4th pillar: Health and primary education .................... 62 ............ 5.8 ...................... ➚ 
4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 Business impact of malaria* ......................................106 ........... 4.8 ....... n .........  ➚  Malaria incidence/100,000 pop. ................................. 111 ......1100.2 ....... n .........  ➚  Business impact of tuberculosis* ..............................102 ........... 4.7 ....... n .........  ➚  Tuberculosis incidence/100,000 pop. .........................105 ....... 189.0 ....... n .........  ➘  Business impact of HIV/AIDS* ................................... 95 ........... 4.7 ....... n .........  ➚  HIV prevalence, % adult pop. ..................................... 55 ........... 0.2 ....... n .........  ➚  Infant mortality, deaths/1,000 live births..................... 97 ......... 30.7 ....... n .........  ➘  Life expectancy, years ................................................. 91 ......... 70.8 ....... n .........  ➚  Quality of primary education* ..................................... 55 ........... 4.1 ....... n .........  ➚  Primary education enrollment, net % ......................... 52 ......... 95.7 ....... n .........  ➘ 

5.8 ..............5.3 ...........6.8 ..... Belgium
5.2 ............ 4.9.. n/appl ........Multiple (71) 506.3 ...... 4492.7..........0.0 .....Multiple (9) 5.0 ............ 4.8...........7 .....Finland .0 188.4 ........ 209.9..........0.0 .....Multiple (2) 4.9 ............ 4.8..........6.7 .....Norway 0.6 ............ 0.4........<0.1 .....Multiple (21) 19.0 .......... 34.2.......... 1.8 .....Hong Kong SAR 72.6 .......... 69.2........82.6 .....Japan 4.2 ............ 3.5..........6.6 .....Finland 92.8 .......... 88.3...... 100.0 .....Costa Rica

5th pillar: Higher education and training .................... 66 ............ 4.2 ...................... ➚ 
5.01 5.02 5.03 5.04 5.05 5.06 5.07 5.08 Secondary education enrollment, gross % ................. 95 ..........74.4 ....... n .........  ➚  Tertiary education enrollment rate, gross %............... 89 ..........21.3 ....... n .........  ➚  Quality of the educational system* ............................ 40 ........... 4.3 ....... n .........  ➚  Quality of math and science education* .................... 46 ........... 4.5 ....... n .........  ➚  Quality of management schools* ............................... 55 ........... 4.4 ....... n .........  ➚  Internet access in schools*......................................... 50 ........... 4.5 ....... n .........  ➚  Availability of research & training services*................ 52 ........... 4.4 ....... n .........  ➚  Extent of staff training* .............................................. 36 ........... 4.4 ....... n .........  ➚ 

4.2 ..............3.6 ...........6.1 ..... Finland
76.0 .......... 63.4...... 149.3 .....Australia 28.3 ........... 17 ........98.1 .....Korea, Rep. .2 4.3 ............ 3.8..........6.1 .....Singapore 4.4 ............ 3.9..........6.5 .....Singapore 4.3 ............ 4.0..........6.1 .....Qatar 4.6 ............ 3.8..........6.8 .....Iceland 4.0 ............ 3.7..........6.5 .....Switzerland 4.4 ............ 3.9..........5.7 .....Sweden

* Out of 1–7 (best) scale. This indicator is derived from the World Economic Forum’s Executive Opinion Survey.

Indonesia Competitiveness Report 2011 © World Economic Forum

The Global Competitiveness Index in detail
Indonesia
INDICATOR, UNITS RANK/139 SCORE (1–7)

n  Competitive advantage Trend
2005–10

n  Competitive disadvantage Best performer
SCORE ECONOMY

ASEAN
SCORE

Developing Asia
SCORE

6th pillar: Goods market efficiency ............................. 49 ............ 4.3 ...................... ➚ 
6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 6.11 6.12 6.13 6.14 6.15 Intensity of local competition* .................................... 54 ........... 5.1 ....... n .........  ➚  Extent of market dominance*..................................... 42 ........... 4.2 ....... n .........  ➚  Effectiveness of antimonopoly policy*........................ 35 ........... 4.6 ....... n .........  ➚  Extent and effect of taxation* ......................................17 ........... 4.4 ....... n .........  ➚  Total tax rate, % profits............................................... 60 .......... 37 ....... n ........ n/a .6 No. procedures to start a business ............................. 88 ........... 9.0 ....... n .........  ➘  No. days to start a business ..................................... 121 ......... 60.0 ....... n .........  ➘  Agricultural policy costs* ............................................ 22 ........... 4.4 ....... n .........  ➚  Prevalence of trade barriers* ...................................... 58 ........... 4.7 ....... n .........  ➚  Trade tariffs, % duty.................................................... 48 ........... 3.8 ....... n ........ n/a Prevalence of foreign ownership*............................... 54 ........... 4.9 ....... n .........  ➚  Business impact of rules on FDI* ............................... 49 ........... 5.0 ....... n .........  ➚  Burden of customs procedures* ................................ 89 ........... 3.9 ....... n .........  ➘  Degree of customer orientation* ................................ 60 ........... 4.8 ....... n .........  ➚  Buyer sophistication* .................................................. 35 ........... 3.9 ....... n .........  ➘ 

4.4 ..............4.1 ...........5.7 ..... Singapore
5.0 ............ 4.8..........6.1 .....Taiwan, China 3.9 ............ 3.8..........5.9 .....Germany 4.3 ............ 4.0..........5.8 .....Sweden 4.1 ............ 3.9..........6.1 .....Bahrain 34.5 .......... 39.4..........0.2 .....Timor-Leste 10.3 ...........10.3.......... 1.0 .....Multiple (2) 49.9 .......... 48.4.......... 1.0 .....New Zealand 4.3 ............ 4.0..........5.9 .....New Zealand 4.7 ............ 4.3..........6.4 .....Qatar 6.0 ...........10.7..........0.0 .....Hong Kong SAR 4.8 ............ 4.3..........6.3 .....Slovak Republic 5.2 ............ 4.9..........6.5 .....Singapore 4.2 ............ 3.9..........6.5 .....Hong Kong SAR 5.0 ............ 4.6..........6.4 .....Japan 3.8 ............ 3.6..........5.2 .....Japan

7th pillar: Labor market efficiency ............................... 84 ............ 4.2 ...................... ➚ 
7.01 7 .02 7 .03 7 .04 7 .05 7 .06 7 .07 7 .08 7 .09 Cooperation in labor-employer relations* .................... 47 ........... 4.6 ....... n .........  ➚  Flexibility of wage determination* .............................. 98 ........... 4.6 ....... n .........  ➚  Rigidity of employment index, 0–100 (worst) ........... 100 ......... 40.0 ....... n .........  ➘  Hiring and firing practices* ......................................... 38 ........... 4.4 ....... n .........  ➚  Redundancy costs* ................................................... 127 ....... 108.0 ....... n .........  ➘  Pay and productivity* .................................................. 20 ........... 4.6 ....... n .........  ➚  Reliance on professional management* ..................... 57 ........... 4.5 ....... n .........  ➚  Brain drain* ................................................................. 27 ........... 4.6 ....... n .........  ➚  Females in labor force, ratio to males ........................109 ........... 0.58 ..... n ........ n/a

4.9 ..............4.3 ...........5.9 ..... Singapore
5.0 ............ 4.4..........6.2 .....Singapore 5.3 ............ 5.0..........6.4 .....Hong Kong SAR 15.3 .......... 25.9..........0.0 .....Multiple (7) 4.4 ............ 4.0..........6.0 .....Hong Kong SAR 50.6 .......... 78.1..........0.0 .....Multiple (4) 4.7 ............ 4.2..........5.6 .....Singapore 4.8 ............ 4.4..........6.5 .....Sweden 4.1 ............ 3.6..........6.3 .....Switzerland 0.8 ............ 0.7.......... 1.16 ...Mozambique

8th pillar: Financial market development ................... 62 ............ 4.2 ...................... ➚ 
8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 Availability of financial services* ................................. 59 ........... 4.8 ....... n ........ n/a Affordability of financial services* .............................. 59 ........... 4.4 ....... n ........ n/a Financing through local equity market* ...................... 13 ........... 4.6 ....... n .........  ➘  Ease of access to loans* ............................................ 14 ........... 4.0 ....... n .........  ➚  Venture capital availability* ........................................... 9 ........... 3.9 ....... n .........  ➚  Restriction on capital flows* ....................................... 49 ........... 4.8 ....... n ........ n/a Soundness of banks*.................................................. 92 ........... 4.7 ....... n .........  ➚  Regulation of securities exchanges*........................... 49 ........... 4.6 ....... n .........  ➚  Legal rights index, 0–10 (best) ...................................103 ........... 3.0 ....... n .........  ➘ 

4.6 ..............4.2 ...........5.9 ..... Hong Kong SAR
5.0 ............ 4.5..........6.6 .....Switzerland 4.8 ............ 4.3..........6.0 .....Switzerland 3.8 ............ 3.8..........5.2 .....Qatar 3.4 ............ 3.1..........5.0 .....Qatar 3.1 ............ 2.8..........4.4 .....Hong Kong SAR 4.6 ............ 4.1..........6.5 .....Hong Kong SAR 5.4 ............ 5.1..........6.7 .....Canada 4.4 ............ 4.2..........6.0 .....South Africa 7 ............ 5.9........ 10.0 .....Multiple (5) .1

9th pillar: Technological readiness.............................. 91 ............ 3.2 ...................... ➚ 
9.01 9.02 9.03 9.04 9.05 9.06 Availability of latest technologies* .............................. 77 ........... 4.8 ....... n .........  ➚  Firm-level technology absorption* .............................. 65 ........... 4.9 ....... n .........  ➚  FDI and technology transfer* ...................................... 54 ........... 4.9 ....... n .........  ➚  Internet users/100 pop. ..............................................107 ........... 8.7 ....... n .........  ➚  Broadband Internet subscriptions/100 pop. ................ 99 ........... 0.7 ....... n ........ n/a Internet bandwidth, Mb/s per 10,000 pop. ................102 ............1.1 ....... n ........ n/a

3.8 ..............3.2 ...........6.1 ..... Sweden
5.1 ............ 4.7..........6.8 .....Sweden 5.1 ............ 4.7..........6.5 .....Iceland 5.0 ............ 4.6..........6.3 .....Ireland 39.2 ...........19.5........93.5 .....Iceland 5.9 ............ 2.1........ 41.1 .....Sweden 45.0 ............. 7 .72,825.30 ...Luxembourg .0

10th pillar: Market size ................................................... 15 ............ 5.2 ...................... ➚ 
10.01 Domestic market size index, 1–7 (best) ...................... 15 ........... 5.1 ....... n .........  ➚  10.02 Foreign market size index, 1–7 (best) ......................... 23 ........... 5.5 ....... n .........  ➚ 

4.1 ..............4.2 ...........6.9 ..... United States
3.8 ............ 4.0...........7 .....United States .0 5.0 ............ 4.6...........7 .....China .0

11th pillar: Business sophistication ............................ 37 ............ 4.4 ...................... ➚ 
11.01 11.02 11.03 11.04 11.05 11.06 11.07 11.08 11.09 Local supplier quantity* .............................................. 43 ........... 5.0 ....... n .........  ➚  Local supplier quality*................................................. 61 ........... 4.6 ....... n .........  ➚  State of cluster development*.................................... 24 ........... 4.5 ....... n .........  ➚  Nature of competitive advantage* .............................. 33 ........... 4.1 ....... n .........  ➚  Value chain breadth* ................................................... 26 ........... 4.4 ....... n .........  ➚  Control of international distribution* ........................... 33 ........... 4.4 ....... n .........  ➚  Production process sophistication* ............................ 52 ........... 4.0 ....... n .........  ➚  Extent of marketing*................................................... 56 ........... 4.4 ....... n .........  ➘  Willingness to delegate authority* ............................. 32 ........... 4.1 ....... n .........  ➚ 

4.2 ..............3.9 ...........5.9 ..... Japan
4.8 ............ 4.7..........6.4 .....Japan 4.5 ............ 4.3..........6.3 .....Austria 4.3 ............ 4.0..........5.5 .....Italy 3.6 ............ 3.2..........6.4 .....Japan 3.9 ............ 3.6..........6.3 .....Germany 4.1 ............ 3.9..........5.6 .....Japan 3.9 ............ 3.4..........6.6 .....Japan 4.3 ............ 3.9..........6.0 .....United States 3.9 ............ 3.5..........6.5 .....Sweden

12th pillar: Innovation ..................................................... 36 ............ 3.7 ...................... ➚ 
12.01 12.02 12.03 12.04 12.05 12.06 12.07 Capacity for innovation* .............................................. 30 ........... 3.7 ....... n .........  ➚  Quality of scientific research institutions* .................. 44 ........... 4.2 ....... n .........  ➚  Company spending on R&D*...................................... 26 ........... 4.0 ....... n .........  ➚  University-industry collaboration in R&D*................... 38 ........... 4.2 ....... n .........  ➚  Gov’t procurement of advanced tech.*....................... 30 ........... 4.2 ....... n .........  ➚  Availability of scientists and engineers* ..................... 31 ........... 4.7 ....... n .........  ➚  Utility patents/million pop. .......................................... 89 ........... 0.0 ....... n .........  ➘ 

3.5 ..............3.1 ...........5.7 ..... United States
3.3 ............ 3.1..........5.9 .....Germany 3.8 ............ 3.4..........6.2 .....Israel 3.6 ............ 3.2..........6.0 .....Sweden 4.0 ............ 3.5..........5.8 .....United States 4.1 ............ 3.7..........5.5 .....Qatar 4.1 ............ 3.9..........6.0 .....Finland 14.5 ............ 0.8.......287 .....Taiwan, China .1

Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness Report 2011: Appendices

Indonesia

43

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and headquarterd in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)

Indonesia Competitiveness Report 2011 © World Economic Forum