Direktorat Perencanaan Makro Dan Analisis Statistik Indonesia Growth Diagnostics English Language

Indonesia Growth Diagnostics:
Strategic Priority to Boost Economic Growth
Ministry of National Development Planning/

National Development Planning Agency
Directorate for Macroeconomic Planning and Statistical Analysis

Indonesia Growth Diagnostics

Supervisor
Eka Chandra Buana, S.E., M.A.
Authors
Mochammad Firman Hidayat, S.E., M.A.
Adhi Nugroho Saputro, M.Sc.
Bertha Fania Maula, S.E.
Cover Design
Hamdan Hasan, S.Kom.
Data Visualization
Bertha Fania Maula, S.E.
Sekar Sanding Kinanthi, S.E.

Jalan Taman Suropati Nomor 2

Jakarta 10310
Tel. (021) 3193 6207
Fax. (021) 3145 374
www.bappenas.go.id
ii | Indonesia Growth Diagnostics

Acknowledgments
The Growth Diagnostics study, to identify the most binding constraint of Indonesia’s economic growth, started in early
2018. Previously in December 2017, we invited Prof. Ricardo Hausmann from Harvard University to give a public
lecture and workshop regarding Growth Diagnostics in Jakarta with funding from the Australian Government through
the Department of Foreign Affairs and Trade (DFAT). We would like to thank DFAT for making it possible for us to learn
about the tools and mechanics of Growth Diagnostics directly from Prof. Ricardo Hausmann.
The whole research activities and writing process of this report is a joint work between Directorate for Macroeconomic
Planning and Statistical Analysis Bappenas and PROSPERA. Therefore, we would like to thank PROSPERA for doing this
collaborative research from the beginning until the report is published. We received valuable support from PROSPERA
for the analytical process of the study, the preparation of final outputs, and the facilitation of holding a discussion and
in-depth interviews with related stakeholders.
We are indebted by many stakeholders that gave us inputs for preparing the study through a series of Focus Group
Discussion (FGD) held in 2018.
The cross-directorate discussion in internal Bappenas helped us mapping the initial findings of the study and thus we
are thankful for their inputs and supports.
We also want to thank private sector representatives who actively participated in our FGDs sharing their perspective
on factors that hindering business activities in Indonesia. We benefited from discussion with Deloitte Indonesia, PWC
(Pricewaterhouse Coopers), Bukalapak, Tokopedia, PT GE Operations Indonesia, PT Tira Austenite Tbk, HighScope
Indonesia, PT Pacto Ltd, Maersk Line, PT Naku Freight Indonesia, and PT Mayora Indah Tbk. Moreover, we also gained
perspectives from the smaller scale business through the SME representatives under the supervision of UKM Center
FEB UI, IncuBie IPB, PEAC Bromo, and PT Permodalan Nasional Madani (PNM).
Besides, we also received valuable inputs on several discussion topics from public and research institutions that
contributed in our FGDs, namely Ministry of Trade, Ministry of Industry, Otoritas Jasa Keuangan (OJK), the SMERU
Research Institute, Lembaga Demografi FEB UI, and Centre for Strategic and International Studies (CSIS).
Most importantly, we would like to thank experts in economics and related field that we approached for in-depth
interviews, invited in FGDs, and asked for the feedback to improve our study:
• Prof. Dorodjatun Kuntjoro-Jakti • Prof. Arief Anshory Yusuf, Ph.D.

• Prof. Mari Elka Pangestu, Ph.D. • Faisal H. Basri, S.E., M.A.
• Dr. Muhammad Chatib Basri, S.E., M.Ec. • Prof. Dr. Mohamad Ikhsan, S.E., M.A.
• William Wallace, Ph.D. • Anton Hermanto Gunawan, S.E., M.A., M.Phil.
• Prof. Geoffrey J.D. Hewings • Teguh Dartanto, S.E., M.Ec., Ph.D.
• Prof. Budy P. Resosudarmo, Ph.D. • Haryo Aswicahyono, Ph.D.
• Dr. Asep Suryahadi • Turro S. Wongkaren, Ph.D.
vi | Indonesia Growth Diagnostics

Ministry of National Development Planning/National Develoment Planning Agency
Table of Contents
FOREWORD .................................................................................................................................................................III
FOREWORD ................................................................................................................................................................ IV
FOREWORD ................................................................................................................................................................. V
ACKNOWLEDGMENTS ................................................................................................................................................ VI
TABLE OF CONTENTS ...................................................................................................................................................III
LIST OF FIGURES ......................................................................................................................................................... IV
EXECUTIVE SUMMARY ................................................................................................................................................. 1
1. INDONESIA GROWTH STORY ................................................................................................................................ 3
1.1. DECLINING TREND GROWTH ....................................................................................................................................... 3
1.2. PRODUCTIVITY PROBLEM ............................................................................................................................................ 3
1.3. GROWTH QUESTION .................................................................................................................................................. 4
2. GROWTH DIAGNOSTICS ....................................................................................................................................... 5
3. REGULATIONS AND INSTITUTIONS AS THE MOST BINDING CONSTRAINT ............................................................ 6
3.1. INVESTMENT FINANCING: ISSUE WITH INTERMEDIATION ................................................................................................... 6
3.2. GEOGRAPHY: UNDERLINING THE NEED FOR INFRASTRUCTURE ............................................................................................ 7
3.3. HUMAN CAPITAL (FUTURE BINDING CONSTRAINT): SKILLS, BASIC EDUCATION, AND HEALTH IMPROVEMENT IS CRITICAL .............. 7
Skills..................................................................................................................................................................... 7
Education ............................................................................................................................................................ 8
Health .................................................................................................................................................................. 9
3.4. INFRASTRUCTURE: LACKING PARTICULARLY FOR CONNECTIVITY ........................................................................................ 10
Connectivity ....................................................................................................................................................... 10
Energy ............................................................................................................................................................... 11
Digital ................................................................................................................................................................ 12
Water and Sanitation ........................................................................................................................................ 12
3.5. MARKET FAILURE: UNREALIZED POTENTIAL .................................................................................................................. 12
3.6. MACRO RISK: LOW TAX RECEIPT LIMITS PUBLIC GOODS DELIVERY ................................................................................... 13
3.7. REGULATIONS AND INSTITUTIONS (THE MOST BINDING CONSTRAINT): BETTER COORDINATED POLICIES TO BOOST GROWTH ...... 13
CONCLUSION .............................................................................................................................................................. 16
REFERENCES ............................................................................................................................................................... 17
APPENDICES ............................................................................................................................................................... 19
Indonesia Growth Diagnostics | iii

List of Figures
Figure 1. Binding Constraint Illustration .............................................................................................................................. 1
Figure 2. Diagnostic Tree ..................................................................................................................................................... 5
Figure 3. Indonesia Economic Growth ............................................................................................................................... 19
Figure 4. GDP per Capita Trend ......................................................................................................................................... 19
Figure 5. Indonesia Potential Growth ................................................................................................................................ 19
Figure 6. Total Factor Productivity ..................................................................................................................................... 19
Figure 7. Share of Manufacturing & GDP per Capita ......................................................................................................... 20
Figure 8. High-Technology Exports .................................................................................................................................... 20
Figure 9. Accumulation of Fixed Capital Investment of Machinery and Equipment, 2007-2016 ...................................... 20
Figure 10. Infrastructure Capital Stock .............................................................................................................................. 20
Figure 11. FDI Net Inflows vs. GDP per Capita, 2017 ......................................................................................................... 20
Figure 12. Indonesia Incremental Capital-Output Ratio .................................................................................................... 20
Figure 13. Gross Domestic Savings vs. GDP per Capita, 2017 ............................................................................................ 21
Figure 14. FDI Net Inflows .................................................................................................................................................. 21
Figure 15. Real Lending Rate vs. GDP per Capita, Average 2015-2017.............................................................................. 21
Figure 16. Nominal Lending Rate, vs. GDP per Capita, Average 2015-2017 ...................................................................... 21
Figure 17. Real Lending Rate and Investment Rate ........................................................................................................... 22
Figure 18. Biggest Obstacles in Doing Business in Indonesia ............................................................................................. 22
Figure 19. Indonesia Investment Composition .................................................................................................................. 22
Figure 20. Net Interest Margin .......................................................................................................................................... 22
Figure 21. Financial System Interlinkages, Malaysia .......................................................................................................... 22
Figure 22. Financial System Interlinkages, Indonesia ........................................................................................................ 22
Figure 23. Labour Force Distribution by Education, 2016 ................................................................................................. 23
Figure 24. Labour Force with Tertiary Education............................................................................................................... 23
Figure 25. Agriculture Employment vs. GDP per Capita, 2017 .......................................................................................... 23
Figure 26. Informal Employment vs. GDP per Capita, 2017 .............................................................................................. 23
Figure 27. Returns to Secondary Education ....................................................................................................................... 24
Figure 28. Unemployment Rate by Education ................................................................................................................... 24
Figure 29. Returns to Tertiary Education ........................................................................................................................... 24
Figure 30. Skills of Working Age Population ...................................................................................................................... 24
Figure 31. Skills Mismatch in Indonesia ............................................................................................................................. 24
Figure 32. Net Wage Effects of being Skills Mismatch ....................................................................................................... 24
Figure 33. Mean Years of Schooling ................................................................................................................................... 25
Figure 34. Mean Years of Schooling vs. GDP per Capita, 2017 .......................................................................................... 25
Figure 35. Gross Enrolment Ratio ...................................................................................................................................... 25
Figure 36. School Enrolment, Tertiary ............................................................................................................................... 25
Figure 37. Returns to Education vs. GDP per Capita, 2010 ................................................................................................ 25
Figure 38. Returns to Education, Indonesia ....................................................................................................................... 25
Figure 39. Trends in International Mathematics and Science Study (TIMSS), 2015 .......................................................... 26
Figure 40. Programme for International Student Assessment (PISA), 2015 ...................................................................... 26
Figure 41. PISA Score Projection, Indonesia ...................................................................................................................... 26
Figure 42. TIMSS Score Projection, Indonesia ................................................................................................................... 26
Figure 43. Indicators Related to Quality of University ....................................................................................................... 26
Figure 44. Indonesia University Ranking Classification ...................................................................................................... 26
Figure 45. The Global Innovation Index 2018 .................................................................................................................... 27
Figure 46. The Human Capital Index 2018 ......................................................................................................................... 27
Figure 47. Life Expectancy at Birth .................................................................................................................................... 27
Figure 48. Infant Mortality Rate ........................................................................................................................................ 27
Figure 49. Maternal Mortality Ratio .................................................................................................................................. 27
Figure 50. Stunting Prevalence vs. GDP per Capita, 2016 ................................................................................................. 27
Figure 51. Immunization Rate, 2017 .................................................................................................................................. 28
Figure 52. Cause of Death by Communicable Diseases and Maternal, Prenatal and Nutrition Conditions ...................... 28
iv | Indonesia Growth Diagnostics

Figure 53. Cause of Death by Non-Communicable Diseases ............................................................................................. 28

Figure 54. Mortality from CVD, Cancer, Diabetes or CRD .................................................................................................. 28
Figure 55. Health Facilities per 10,000 Population ............................................................................................................ 28
Figure 56. Trend in Male Smoking Prevalence ................................................................................................................... 28
Figure 57. Male Smoking Prevalence vs. GDP per capita, 2016 ......................................................................................... 29
Figure 58. Most Recent Survey of Youth Tobacco Use (Age 13-15) ................................................................................... 29
Figure 59. Road Connectivity Index, 2017.......................................................................................................................... 29
Figure 60. Road Density, 2014 ........................................................................................................................................... 29
Figure 61. Quality of Roads, 2017 ...................................................................................................................................... 30
Figure 62. Quality of Port Infrastructure, 2017 .................................................................................................................. 30
Figure 63. Airports per Million Square Kilometre, 2013 .................................................................................................... 30
Figure 64. Quality of Air Transport Infrastructure, 2017 ................................................................................................... 30
Figure 65. Railroad Density, 2017 ...................................................................................................................................... 30
Figure 66. Efficiency of Train Services, 2017 ...................................................................................................................... 30
Figure 67. Problematic Factors for Doing Business in Indonesia ....................................................................................... 31
Figure 68. Electrification Ratio, Indonesia ......................................................................................................................... 31
Figure 69. Electrification Ratio, Peer Countries ................................................................................................................. 31
Figure 70. Electrification Ratio by Consumption Decile ..................................................................................................... 31
Figure 71. System Average Interruption Frequency Index (SAIFI) ..................................................................................... 31
Figure 72. System Average Interruption Duration Index (SAIDI) ....................................................................................... 31
Figure 73. Electrification Ratio (% of Households) by Region, 2017 .................................................................................. 32
Figure 74. System Average Interruption Frequency Index (SAIFI) by Region, 2017 ........................................................... 32
Figure 75. System Average Interruption Duration Index (SAIDI) by Region, 2017 ............................................................. 32
Figure 76. Quality of Electricity Supply, 2017 .................................................................................................................... 33
Figure 77. Broadband Subscriptions, 2017 ........................................................................................................................ 33
Figure 78. Broadband Speed, 2017 .................................................................................................................................... 33
Figure 79. Access to Basic Water Services, 2015 ............................................................................................................... 33
Figure 80. Access to Basic Sanitation Services, 2015 ......................................................................................................... 33
Figure 81. Access to Water Supply by Quintile 2018, Urban ............................................................................................. 33
Figure 82. Access to Water Supply by Quintile 2018, Rural ............................................................................................... 34
Figure 83. Firms Experiencing Water Insufficiencies ......................................................................................................... 34
Figure 84. Indonesia’s Export by Type of Commodity........................................................................................................ 34
Figure 85. Export Composition by Product, 1995 - 2017 ................................................................................................... 35
Figure 86. Complexity Outlook Index & Economic Complexity Index, 2016 ...................................................................... 35
Figure 87. Economic Complexity Index vs. GDP per Capita, 2016 ...................................................................................... 35
Figure 88. External Debt & Reserve Adequacy .................................................................................................................. 36
Figure 89. External Debt & Current Account Balance ........................................................................................................ 36
Figure 90. Central Government Debt ................................................................................................................................. 36
Figure 91. Tax Ratio vs. GDP per Capita, 2016 ................................................................................................................... 36
Figure 92. Government Expenditure on Education vs. GDP per Capita, 2015 ................................................................... 37
Figure 93. Government Expenditure on Health ................................................................................................................. 37
Figure 94. The Missing Middle, 2013 ................................................................................................................................. 37
Figure 95. Regulatory Index, 2017 ..................................................................................................................................... 37
Figure 96. Legal System and Property Right Index, 2017 ................................................................................................... 37
Figure 97. Rule of Law Index, 2017 .................................................................................................................................... 37
Figure 98. Cost of Redundancy Dismissal, 2018 ................................................................................................................. 38
Figure 99. Percent of Firms Offering Formal Training ........................................................................................................ 38
Figure 100. FDI Regulatory Restrictiveness Index, 2018 .................................................................................................... 38
Figure 101. Inward FDI Stock, 2018 ................................................................................................................................... 38
Figure 102. Time Required to Start a Business, 2019 ........................................................................................................ 38
Figure 103. Score on Trading across Borders, 2019 ........................................................................................................... 39
Figure 104. Rank in the Ease of Paying Taxes, 2019........................................................................................................... 39
Figure 105. Cost to Export and Import, 2019 ..................................................................................................................... 39
Figure 106. Effective Rate of Protection, 2015 .................................................................................................................. 39
Figure 107. Most Problematic Factors for Doing Business in Indonesia ............................................................................ 39
Indonesia Growth Diagnostics | v

ii | Indonesia Growth Diagnostics

Executive Summary
Countries need many things to grow, but they are highly complementary, and resources are limited. Hence, the
development plan needs to prioritize and resolve the most binding constraint to get the maximum return. The “most
binding constraint” is the one constraint that will prevent the economy from growing faster even if other reform needs
are addressed. The growth diagnostic is a framework for identifying the binding constraints to growth. It is an iterative
process that starts with identifying the growth question and follows a diagnostic decision tree.
This study is produced as a background study for the 2020-2024 National Development Plan. The study itself adopts
the original diagnostic tree and seeks to answer a growth question: what the most binding constraint to the low level
of innovation and productive investment i.e., how to get investment that delivers higher productivity. This is on the
background that Indonesia’s growth has been declining in the past decades. At the same time, Indonesia’s investment
to income ratio is one of the highest in the world suggesting that investment effectiveness is low.
The study found that regulations and institutions are the most binding constraint to growth. Existing regulations do not
support business creation and development and tend to be restrictive. Institutions here refer to the setting which
produces those regulations, in particular: lack of strategic alignment, weak supervision, and overlapping institutional
responsibilities. It also points to corruption and bureaucratic inefficiency. This conclusion was a common theme not
only with private business but also in social sectors like health and education.
Inefficient regulations create high fixed costs. Therefore, it generates a missing middle phenomenon in Indonesia: large
companies can bear high fixed costs, medium companies cannot compete, and small companies choose to be outside
of the regulation – causing a large informal sector. Compared to other countries, existing regulations tend to be
protectionist and the cost related to labour and taxation is very high. Widespread middlemen practice also indicate
regulations and institutions as the most binding constraint as economic agents attempt to bypass it.
Figure 1. Binding Constraint Illustration
Indonesia Growth Diagnostics | 1

There are three main areas identified as the regulatory constraints: labour, trade, and investment.
First, in labour regulation, the cost of firing workers in Indonesia is high. This means firms employ staff on temporary
contracts and do not develop their professional skills through training. Indonesian firms also struggle to navigate costly
and complex regulations to hire skilled foreign workers. This places Indonesian firms at a disadvantage.
Second, exporters and importers face high administrative costs owing to excess licenses and regulations. At the same
time, “non-tariff barriers” to trade such as licenses and quotas increase the cost of living in Indonesia by 8%.
Third is investment policy, Indonesia is among the most restrictive countries in the world for foreign direct investment.
The negative list discourages foreign firms from setting up businesses in Indonesia that could attract technology,
create jobs and boost exports. This issue is not only for the manufacturing sector but even worse for the services
sector. There are also skewed competition treatment, for instance, tax exemptions towards small businesses. This
discourages Indonesian firms from expanding and becoming more productive through economies of scale. Even more,
there are sectors closed for the domestic private competition such as seaports industry which is dominated by less
efficient state-owned firms.
The evidence is also apparent across sectors. In the education sector, foreign nationals could not obtain academic
tenure in Indonesian universities preventing know-how transfer. In the health sector, there is a lengthy process to
obtain BPOM license making some drugs unavailable in Indonesia. Some evidence also points to the weak institutional
setting. For instance, in 2018 there were up to 30 ready-to-operate ports with no road access. This is due to weak
coordination between central government who built the ports and local government who has the authority to build
the roads. Within the central government itself, there is a conflicting role on the budget process between three
agencies: Bappenas and Fiscal Policy Agency, MoF and Treasury, MoF resulting in a budget that doesn’t reflect
development priority.
The study also identifies human capital as the future binding constraint, particularly given the development of the
digital economy and the aspiration to adopt industry 4.0 – the development of high technology manufacturing sector.
Skills and education will become the next binding constraint in the rapid advancement of technology particularly as the
quality of education in Indonesia are worrying.
Overall the study suggests that priority should be given to improvements in regulations particularly the ones that
hamper business development and productivity growth. And, to the institutional improvement, mainly on the clarity of
roles and authority, including the role as the policy conductor and development regulator. In addressing the future
constraint on human capital, policy actions need to focus on reforming basic education and teaching, opening
investment in tertiary education, incentivizing diaspora engagement and focus on children’s nutrition.
2 | Indonesia Growth Diagnostics

1. Indonesia Growth Story

Indonesia’s growth story is one of the most impressive in the world. Since the early 1960s Indonesian GDP per capita
has grown more than six-fold. Only a handful of other countries have matched this achievement, namely China, India,
and South Korea. Indonesia’s poverty rate fell to single digits for the first time in 2018. This is significant because
almost half of the population was poor after the Asian financial crisis in late 1990s.
1.1. Declining Trend Growth

The pace of Indonesian economic growth today is slower that it was before Asian financial crisis (Figure 3). During
2000-2018 Indonesia’s economy expanded by 5.3 percent a year on average compared with 7.0 percent during 1980-
1997.
Slower growth means that Indonesia has failed to match the economic advances of its peers in East Asia. During the
past decade, Indonesia’s progress in closing the gap in GDP per capita with Malaysia and Thailand has stalled (Figure
4). During the same period, the Philippines and Vietnam managed to narrow the gap in GDP per capita with Indonesia.
China’s GDP per capita doubled during this period.
Indonesia’s slower and stagnant growth stems from structural rather than cyclical issues. The declining growth rate is a
result of declining production capacity – potential output. Bappenas (2017) shows that current potential GDP growth is
5.1-5.3 percent and this figure continues to decline (Figure 5).
At the same time, Indonesia aspires to become a high-income country within the next two decades. Bappenas (2018a)
shows that Indonesia need to grow at least by six percent each year in order to avoid a middle-income trap.
Sustainable and targeted structural reform is necessary to obtain higher growth and achieve this goal.
1.2. Productivity Problem

Slower productivity growth is the main reason for the declining growth of potential output. Before the Asian crisis,
Indonesia’s productivity was one of the highest in the region—above Malaysia, Thailand, Vietnam, the Philippines, and
China1 (Figure 6). But Bappenas (2017) estimates show a decline in Indonesia’s total factor productivity growth during
the past 15 years. Today Indonesia’s productivity is among the lowest in the region.
Productivity in agriculture and services are especially low. This indicates that the structural transformation of the
economy has not gone smoothly. Ideally an economy would advance from being built around agriculture and natural
resources to higher value-added activities such as manufacturing then services. However, this does not mean that one
sector is more important than the others: the transition from resources to high-value manufacturing would, for
example, also require supporting services such as logistics, insurance, and accounting.
In Indonesia, more than 30 percent of the labour force works in the agricultural sector where productivity is low.
Meanwhile, manufacturing’s share of economy activity is declining (although it is still high compared with other
countries). Nonetheless, the declining trend is worrying because it is happening at an earlier stage of the economy’s
development compared with other countries such as Malaysia and Thailand (Figure 7). In those two countries, the
decline in manufacturing’s share of the economy began after peaking at around 30 percent of GDP and at a higher
level of per capita GDP.
Indonesia’s manufacturing sector is more productive than other parts of the economy, but it is still not productive
enough to compete globally. Indonesia’s manufacturing exports are low compared with its peers. Its exports are
dominated by commodities and simple manufacturing products, mainly garments. Indonesia has been left behind
when it comes to making more complex products that require more advanced technology (Figure 8). There has been
little export diversification in recent decades. In 1970 Indonesia’s exports were dominated by commodities, mainly
rubber and oil. The composition is not much different today, with exports still dominated by commodities (palm oil and
coal). Fifty years ago, Thailand and Malaysia also exported mostly commodities but since then they successfully
diversified. Today their exports are dominated by manufactured products, mainly electronics.
1
In this study, when referring to peer countries, it refers to Malaysia, Thailand, Vietnam, the Philippines, and China.

1.3. Growth Question

Indonesia successfully transformed its economy during the 1980s when it built up the manufacturing sector. However,
after the Asian crisis structural transformation has stalled, as evidenced by the failure to develop exports of more
advanced manufactured goods.
Lack of innovation is a major obstacle to export diversification. Indonesia ranks 85th out of 126 countries in the Global
Innovation Index (2018). Compared with peer countries, Indonesia is wanting in both product and process innovation.
Indonesia introduced only four new export products during 2000-2015, much lower than Vietnam and the Philippines,
which created 51 and 27 new export products, respectively. It is widely known that innovation could drive productivity
and in turn contribute to higher economic growth.
In Indonesia, the share of investment to GDP is one of the highest in the world. It means that investment has not been
directed toward activities that could support higher productivity growth. This is shown by four main observations.
First, the accumulation of machinery and equipment in Indonesia during the past decade has been significantly lower
than in peer countries (Figure 9). Without this type of investment, the manufacturing industry cannot grow optimally
owing to the depreciation of machinery and equipment as well as outdated technology. Second, Indonesia’s
infrastructure capital stock as a percent of GDP is low compared with peer countries. Massive infrastructure
investment in recent years has managed to stop the decline but more is required to return the capital stock to the level
seen before the Asian crisis (Figure 10). Third, foreign direct investment (FDI) is low in Indonesia (Figure 11). FDI is
important because it enables the transfer of “know-how”. Fourth, Indonesia’s overall investment effectiveness is
declining and low compared with its peers (Figure 12). This points to a declining return on investment.
This study seeks to answer a growth question: what is the most binding constraint to the low level of innovation and
productive investment, i.e. investment with high productivity return. This study follows the growth diagnostic method
introduced by economists Ricardo Haussmann, Dani Rodrik and Andres Velasco.

2. Growth Diagnostics
Countries need many things to grow, but they are highly complementary, and resources are limited. Hence, the
development plan needs to prioritize and resolve the “most binding constraint” to get the maximum return. The most
binding constraint is the one that will prevent the economy from growing faster even if other problems are addressed.
The growth diagnostic is a framework for identifying the binding constraints to growth. It is an iterative process that
starts with identifying the growth question and then follows a diagnostic decision tree: posit a hypothesis that can
account for the symptoms and search for further testable implications of the hypotheses and repeat these steps until
they converge and the most binding constraint is identified.
The method was developed by Ricardo Hausmann, Dani Rodrik and Andres Velasco in 2015 and has been adopted by
over 20 countries. If a constraint is binding, then: (i) the (shadow) price of the constraint should be high; (ii)
movements in the constraint should produce significant movements in the objective function (e.g. GDP); (iii) agents in
the economy should be attempting to overcome or bypass the constraint; and (iv) “camels and hippos”: agents less
intensive in that constraint should be more likely to survive and thrive, and vice versa.
The study itself adopts the original diagnostic tree and seeks to answer a growth question: what is the most binding
constraint to raising the low level of innovation and productive investment, i.e. how to get investment that delivers
higher productivity.
Figure 2. Diagnostic Tree
Problem: low levels of

productive investment and
innovation
Low return to
High cost of finance
economic activity
Low social Low Low domestic savings + Bad local finance/

returns appropriability bad international finance intermediation
Government Market
failures failures
Poor Low Bad Micro risks: Macro risks: Information Coordination Low High risk High cost
geography human infrastructure regulation, financial, externalities: externalities competition
capital institution i.e., monetary, “self-
legal system, fiscal discovery”
corruption instability

3. Regulations and Institutions as the Most Binding Constraint

The diagnostic tree is the guiding framework for this section. First, we look at the right side of the tree on the cost of
finance. Once we conclude that the cost of finance is not the main issue, we then move to the left side of the tree, on
the return to economic activity. We look at social issues first, starting with geography followed by human capital and
then infrastructure. We then move to the appropriability issue, both for the market and the government. The latter
encompass both macro and micro risks.2
3.1. Investment Financing: Issue with Intermediation

In this section, we look at the issue of financing investment. First, we look at the supply of financing both from foreign
and domestic sources and then examine in more detail domestic financing where government has more power to
intervene. We found that investment financing is not a binding constraint for investment. Shopping malls, for instance,
are considered to offer higher returns over more productive investments such as factories. This suggests that the issue
is more on the appropriability or the social return. Low foreign financing (FDI) is also supportive of this argument
because foreign financing is independent of issues surrounding the domestic financial system.
Nevertheless, there is an important caveat here. The size of the domestic financial system in Indonesia is small and it is
dominated by banks. More importantly, intermediation is low—thus driving inefficient investment. This is because
investors have to compete for intermediated finance and the competition ensures finance is allocated to investments
with the highest returns. Without the competition made possible by intermediation, finance flows to less productive
investments.
At 31.6 percent of GDP in 2018, domestic savings in Indonesia are higher than most peer countries at similar stages of
development (Figure 13). At the same time, non-resident investors’ trust and appetite for Indonesian assets is strong.
Indonesian government paper is considered investment grade by all major credit rating agencies. Nevertheless, foreign
direct investment in Indonesia is low compared with other countries (Figure 14)—even with assured access to foreign
finance. Therefore, the issue is not the supply of financing but must be something else. Next, we look at access to
finance.
Only half of adults in Indonesia have a bank account. This figure is low compared with Malaysia and Thailand where at
least 80 percent of people have access to bank. It is a similar story for business where only six out of ten Indonesian
companies have a bank account. The cost of finance is also not an issue given that lending rates are low and
comparable to other countries in real and nominal term, respectively (Figure 15 and Figure 16). Changes to the lending
rate do not have a meaningful correlation with the investment level. In fact, Figure 17 shows the contrary: investment
tends to pick up when inflation-adjusted lending rates increase.
Indonesia also has high investment figures despite financing issues. The latest World Bank Enterprise Survey shows
that financing is not considered as the biggest obstacle to doing business (Figure 18).
Nonetheless, most investment is not directed into areas with the highest returns. Figure 19 suggests that the issue is
the lack of financial intermediation, as only 15 percent of investment is delivered through intermediation. This lack of
intermediation means that the competition that would allocate investment to areas with the highest returns is limited.
The lack of intermediation also came up during our discussion with financial institutions. Indonesia’s domestic savings
is high compared with its peers. Yet only a small fraction goes to the formal financial system. Hence deposit-taking
institutions (banks) are competing for limited funds by offering high deposit rates. Among others, these three issues
were identified as the root causes: low financial literacy, lack of trust in the financial system, and low financial
inclusion.
The issue surrounding financial intermediation is exacerbated by inefficiency among banks themselves. Banks are
highly segmented, limiting competition. This causes high operational costs and in turn drives the high net interest
margin (Figure 20). Risk is another important driver of high net interest margin. Long-term investors such as those
involved in insurance and pensions are scarce in Indonesia. This causes a mismatch in maturities where deposits are
2
The flow in this report has been adjusted to tell the story in a more coherent way. While it may not reflect the actual process
which has many iterations, the findings are consistent.

mostly short term but high-return investments usually require long-term financing. As shown in Figure 21, Indonesia’s
financial intermediation is heavily concentrated in banks only. The size is also small and less diversified compared with
Malaysia (Figure 22).
Although lack of financial intermediation is a significant shortcoming that needs to be addressed, the financial system
overall is not currently a binding constraint. Investment with lower economic returns, such as shopping malls over
factories, can thrive in Indonesia. This suggests that the issue is more about appropriability or social return. Low
foreign financing (FDI) is also supportive of this argument because foreign financing has nothing to do with the issues
surrounding the domestic financial system.
3.2. Geography: Underlining the Need for Infrastructure

Since the cost of finance is not a binding constraint, we look at the left side of the diagnostic tree, starting with
geography. On the one hand, Indonesia is a vast archipelagic country with more than 70 percent sea area. This poses
huge challenges for transport and communication between locations in Indonesia. Large numbers of remote and
isolated areas separated by sea, dense forests, or mountainous terrain contributes to high logistics cost in Indonesia.
Geography could also explain the evolution of economic development that differs between regions. On the other
hand, Indonesia’s geography could also be an asset. Indonesia’s has an economically strategic location, situated on
major international maritime trade routes.
Further research is needed here. However, we argue that improving infrastructure, especially connectivity, is key for
Indonesia to overcome its geographical challenges and reap the rewards of its strategic location.
3.3. Human Capital (Future Binding Constraint): Skills, Basic Education, and Health Improvement is
Critical
This section looks at human capital issues, covering skills, education and health. Human capital determines the labour
quality which in turn affects productivity. Labour productivity improvement has significant potential to boost
Indonesia’s growth given almost three quarter of its population is of working age.
Although access to education has been improved significantly in Indonesia, the quality of education has been slower to
improve. The slow pace of improvement in PISA Assessments, for instance, suggests a wider gap in the quality of
education with peer countries. Meanwhile, despite significant improvement, health indicators and facilities are still left
behind compared with peer countries. Furthermore, there is a higher risk coming from poor health conditions
indicated by high prevalence of stunting, rising non-communicable diseases, and high smoking prevalence among
teenagers. With the rise of disruptive technologies and global competition, we conclude that education and health
may constrain economic growth in the future.
We found that skills, in particular the lack of high-skilled labour, to be one of the binding constraints to growth.
Employment is still dominated by those with primary education or less. The proportion of high-skilled workers across
industries is also below that of peer countries. Indonesia’s low skills reflect the high rate of agricultural and informal
employment. Skills mismatches are also a concern. More than half of Indonesian workers do not have the skills wanted
by employers. Although training can significantly increase wages of those who learn the right skills, this itself points to
shortages of skills in the labour market.
Skills
Indonesia’s workforce is dominated by those with primary education or less (Figure 23). Compared with its peers, the
proportion of labour with secondary education background is relatively high while those with tertiary education is low
despite increasing in recent years (Figure 24).
High agriculture and informal employment in Indonesia suggesting that low skilled labour dominate the workforce.
Approximately 30.2 percent of workers are farmers as of 2018 (Figure 25), higher than the average of peer countries.
Moreover, the rate of informality in agriculture is more than 90 percent in Indonesia, based on OECD estimates (2018).
Meanwhile, informal employment in non-agricultural sectors is above 70 percent. The number is significantly higher
than other countries (Figure 26). Women, young people, and less educated people are more likely to work in the
informal sector (OECD, 2018). The same study suggests that informality exists across regions in Indonesia, typically
contributing to lower productivity, lower wages, less training, and poorer working conditions.

High informality often exists when workers do not possess skills for jobs in the higher-paying formal sector (OECD,
2018). However, strict labour regulation in Indonesia that make it costly to fire workers also discourages employers
from hiring low-skilled labour (Allen, 2016) and thus contributes to informality. As the problem of high costs
discourages employers from adding formal or permanent workers, this is also associated with less training (Figure 99).
More on this will be explained in the regulations and institutions section.
Mid-skill, that is labour with secondary education background, comes second in Indonesian workforce demography.
The returns to secondary education are higher compared with peer countries (Figure 27). This indicates a high demand
for labour with this level of education. However, unemployment among secondary-educated workers is also higher
than other countries and other levels of schooling (Figure 28). This points to the uneven quality of secondary education
as well as premise that the high return to the secondary education may be rooted from the minimum wage regulation
in Indonesia.
The returns to tertiary education in Indonesia are low compared with its peers (Figure 29), indicating that the economy
may not be looking for high-skilled labour. The fastest-growing economic sectors in Indonesia are also those that make
intensive use of low-to-medium skills such as agriculture, trade and low-end manufacturing. In other words, despite
limited supply, there is also a low demand for high-skilled labour.
It is important to note that the actual skills of labour may not be fully reflected by education level. Pritchett (2016)
found that the skills of workers with tertiary education in Indonesia is similar to those of workers with less-than-upper-
secondary education in Denmark (Figure 30). Hence the issue could be worse than what the figures suggested as they
do not capture the quality of education.
Training is one of the solutions to address mismatches between people’s skills and the skills required for jobs in
Indonesia. Horizontal and vertical skills mismatches3 4 existed for more than half of total workers in Indonesia with no
significant improvement from 2008 to 2015 (Figure 31). Moreover, a study by the OECD (2016) found that Indonesia
has the largest prevalence of mismatch by field of study, with one in two workers is doing jobs unrelated to their
studies.
The skills mismatch keeps wages low (Samudra, 2018) (Figure 32). However, training could compensate for this
negative wage effect. Samudra (2018) argues that training acts as a “cushion” for the wage penalty of being
horizontally and vertically mismatched. There is a significant increase in wages from training, indicating a high price of
skills owing to skills shortages in labour market. Furthermore, it is crucial that Indonesia’s labour force is able to adapt
by improving its skills in an age of automation and other technological disruption.
Education
Indonesia has recorded a significant improvement in educational quantity over the past two decades. The average
number of years an Indonesian aged 25 or older has spent in school doubled from four years in 1990 to eight years in
2017 (Figure 33). Although this improvement is impressive, the average years of schooling in Indonesia is still less than
peer countries with similar levels of per capita income (Figure 34).
Indonesia’s gross participation rate for primary and secondary education is on a par with peer countries (Figure 35).
Meanwhile, the gross participation rate for tertiary education has improved significantly since 1990, although it is still
less than peer countries (Figure 36).
The return on every year of additional education is similar with peer countries (Montenegro and Patrinos, 2014)
(Figure 37). Nonetheless, the return has been declining since the mid-1990s (Figure 38). This suggests that education is
not the binding constraint to growth.
Even so, the quality of education is still wanting compared with peer countries. Indonesia’s scores in both the OECD’s
Programme for International Student Assessment and the IEA’s Trends in International Mathematics and Science Study
are evidence education quality is lagging (Figure 39 and Figure 40). Indonesia is in the bottom third of countries, with
lowest PISA score in 2015, far behind the OECD average. The World Bank (2018) shows that the improvement in
Indonesian education quality is very slow. At the current pace, Indonesia will not match the average PISA score of
3
Horizontal Mismatch: the type/field of education or skills is inappropriate for the job.
4
Vertical Mismatch: the qualification/education level is lower (underqualified) or higher (overqualified) than the requirement.

OECD countries until 2065—and this assumes there is no improvement in those countries (Figure 41). Indonesia’s
TIMSS score points to declining abilities in mathematics (Figure 42).
The Global Innovation Index (2018) shows that tertiary education in Indonesia is shut off from the rest of the world as
reflected by the low mobility of home students (Figure 43). Malaysia’s tertiary education is much more open. Three of
its universities are ranked among the world’s 25 best institutions. Indonesia’s best university come 37 th in the world
rankings. That is better than Thailand, the Philippines and Vietnam. Yet there is huge variance in the quality of
Indonesian universities. Based on Ministry of Higher Education’s rankings for 2018, only 14 universities across
Indonesia (0.7 percent) belong to the first cluster (Figure 44). The rest are not nearly so good.
Although we do not believe that education is a binding constraint at this stage, there is a high probability of it
constraining economic growth in the future. The quantity and quality of education in Indonesia is not sufficiently high
to prepare the workforce for increased global competition and technological disruption. This is particularly concerning
given that education is the main factor to produce skilled labour and innovation that will ensure high productivity in
the long term.
The existing skills mismatch may suggest that the education system is poor at teaching the skills needed for work.
Moreover, the World Economic Forum (2016) predicts that science, technology, engineering, and mathematics (STEM),
as well as soft skills, will be the skills most sought after by employers in the future (by 2020). Indonesia comes near the
bottom of PISA and TIMSS assessments in these areas. But the OECD (2018) estimates that ensuring today’s students
are equipped with basic skills by raising the PISA score to Thailand’s current level would increase Indonesia’s average
GDP growth by 0.6 percentage points a year from 2020 to 2060. Unfortunately, soft skills are not yet an important part
of education in Indonesia. This contrasts with advanced countries such as Singapore and South Korea which put them
at the core of their national curriculums.
The Global Innovation Index and Human Capital Index reveal separate concerns about Indonesia’s human capital,
including education. Indonesia’s Global Innovation Index score for human capital and research has declined steadily
since 2013. The country also scored lower than peer countries in 2018 (Figure 45). This indicates that human capital
and research is insufficient to support innovation in Indonesia. Indonesia also ranks below neighbouring countries such
as Singapore, Vietnam, Malaysia, Thailand and the Philippines in the Human Capital Index 5 (World Bank, 2018) (Figure
46). This could mean that the next generation of Indonesian workers will be less productive than those in other
countries.
Considering all the evidence, we categorise education as a future binding constraint to Indonesia’s economic growth.
Health
Indonesia’s health outcomes have improved significantly. Life expectancy at birth has risen sharply although it is still
below peer countries (Figure 47). Infant and maternal mortality has also been reduced significantly in the past two
decades to rates nearly similar with peer countries (Figure 48 and Figure 49).
However, the quality of children’s health and nutrition is relatively low compared with peer countries. This is reflected
in high prevalence of stunting (Figure 50) although in recent years the figure has dropped. Immunisation rates for
children below the age of 5, including those for measles and hepatitis B, are still below those of peer countries (Figure
51).
Deaths from communicable diseases, deaths during pregnancy and childbirth, and deaths from poor nutrition are still
relatively high in Indonesia (Figure 52). There has been improved in the recent years, however, suggesting that health
intervention is working. Nevertheless, the government budget for improving health infrastructure and health workers
is lacking compared with peer countries (Figure 93).
Meanwhile, deaths from non-communicable disease have increased, as expected as there are growing middle class
(Figure 53). In particular, the prevalence of cardiovascular diseases, cancer, diabetes, and chronic respiratory diseases
in Indonesia is higher than peer countries (Figure 54). A higher rate of non-communicable disease will increase demand
5
The index is measured in terms of the productivity of the next generation of workers relative to the benchmark of complete
education and full health.

for health facilities. Yet health facilities such as number of doctors and hospital beds per 10,000 people is still far below
peer countries (Figure 55).
An important consideration is the high prevalence of smoking in Indonesia. Among adult men, smoking rates continue
to increase, in contrast with other countries (Figure 56). In fact, Indonesia is one of the countries with highest rates of
male smokers in the world (Figure 57). Recent surveys also suggest that the smoking among teenagers is also
widespread in Indonesia (Figure 58).
Although several indicators show improvements to health, there are still many areas of concern that could impact
labour productivity negatively over the long term. Moreover, the Human Capital Index released by the World Bank
(2018) based on the current state of health, along with education, shows that Indonesia is being left behind by
neighbouring countries. Taking into account the potential impact of current health and education, Indonesia’s long-
term labour productivity is predicted to be lower than that in Singapore, Vietnam, Malaysia, Thailand and the
Philippines.
Stunting, in particular, could mean that children’s brains fail to develop to full cognitive potential (World Bank, 2018).
This would hinder children’s abilities to perform well at school and in turn make them less productive when they enter
the labour market. Meanwhile, the high prevalence of smoking among teenagers heightens the risk of premature
deaths from non-communicable diseases. This could lower lifetime earnings.
Improvements to health are essential for a more productive labour force going forward. Human capital itself is
categorised as a nation’s productive wealth. Poor health would retard growth in human capital as it affects lifetime
earnings (World Bank, 2018). As Indonesia is approaching its lowest-ever dependency ratio, with more than half the
population in their productive years, poor health will give penalty to reap the optimal growth.
Looking at current condition of human capital and its possible condition in the future, we categorise health, along with
education, as future binding constraints to economic growth.
3.4. Infrastructure: Lacking Particularly for Connectivity

In this section, we look at infrastructure as part of our examination into whether social return is the most binding
constraint for generating investment with higher returns. We found that infrastructure, in particular connectivity, is
still a major constraint for Indonesia. Spanning almost 2 million square km and spread across 17,000 islands, Indonesia
needs a vast amount of infrastructure. However, a lack of investment in the past has led to a decline in the
infrastructure capital stock. Recent government’s effort to boost infrastructure have halted the decline but not enough
to return the capital stock to previous levels or to put it on a par with peer countries.
Poor logistics limit opportunities for economic diversification and contribute to price disparities. For example, regions
with limited access to markets owing to poor freight logistics (such as Papua) have less diversified economies than
well-connected regions (such as West Java). This is because higher value-added goods need to meet tight delivery
schedules cheaply, reliably and predictably.
We identify water and sanitation as potential problems in the future. The supply of surface water is projected to
decline mainly owing to an increase in economic activity that is not environmentally friendly. The natural carrying
capacity, i.e. the ability of natural ecosystem to support continued growth within the limit of abundance of resource
and within the tolerance of environmental degradation, is also in declining and so making economic growth
sustainable must be factored in the development agenda.
Connectivity
High logistics costs are a major drag on the economy. In 2016 logistics costs were equivalent to 27 percent of
Indonesian GDP.6 High logistics cost drag down firms’ profitability. The World Bank (2015) shows that total logistics
costs incurred by Indonesian manufacturers represent 25 percent of sales, higher than both Thailand (15 percent) and
Malaysia (13 percent). The World Bank also suggests that poor infrastructure contributes to high logistics costs by
generating congestion, inefficiency, and unreliability. It also shows that poor logistics limit opportunities for economic
diversification and contribute to price disparities.
6 INDii calculation.

The cost of congestion is most relevant for roads. Underinvestment has adversely affected the capacity as well as the
quality of the nation’s road network and driven up logistics costs. Travel speeds are relatively low (approximately 40
km/hr) due to a high volume-to-capacity ratio. Only 18 percent of vehicles travel without experiencing jams. To travel
100 km, it takes between 2.5 and 4 hours, which is much longer than in neighbouring countries. Approximately 40
percent of national roads in Java and Bali are congested. Nearly 60 percent of roads are less than seven metres wide.
Indonesia’s road transport infrastructure lags other countries’ in term of connectivity, density, and quality (Figure 59,
Figure 60, and Figure 61). Demand for road transport rose by 7 percent a year between 2013 and 2016. This outstrips
the supply of new roads, which grew by about 5 percent a year between 2009 and 2016 to 87,800 lane-km. Extensive
congestion is prevalent in main areas. This trend is expected to continue as vehicle-ownership increases. Current levels
of vehicle ownership in Indonesia are still relatively low, with 87 motor vehicles (excluding motorcycles) per 1,000
people.
The road transport network is struggling to cope with this exponential growth, mainly because of delays building new
roads, persistent and substantial underinvestment, and weak planning capability at all levels of government for
network expansion. This, in turn, has led to imbalanced growth of the network and uneven access in different regions
of the country (especially in rural areas). The sector also faces other major challenges, such as road safety, congestion,
and pollution in urban areas. Congestion is concentrated on major roads in arterial corridors—reflecting a lack of high-
capacity expressways and dual-carriageways.
Inefficient and unreliable sea transport also increase costs for firms. Indonesia’s ports perform poorly relative to global
benchmarks (Figure 62). Average productivity of ports under Pelindo 3 and 4 is approximately 22 containers per hour.
Some ports are much more productive than others, with the worst ports managing to process only 13 containers per
hour, and the best dedicated container terminals processing to 29 boxes per hour. The average vessel turnaround time
is about 2.1 days. This is much slower than the global average of 1.4 days and is comparable to the slowest tier of ports
in South Asia (which do not face much competition). Vessels also spend only around half (54 percent) of their berth
time effectively (loading and unloading). World Bank study also found that sea freight costs are driven by the high
value of time required for transportation (due to congestion and inefficiency), not the direct tariff or price paid for the
transportation service.
Indonesia’s air transport infrastructure—as measured by airports per million square km, and air transport quality
(Figure 63 and Figure 64)—is in line with that of other countries at a similar stage of development. The Government
aims to develop tourism. Airport investment could support this ambition.
Indonesia’s rail transport infrastructure is slightly below that of other countries at a similar stage of development but
similar to other ASEAN countries, measured by railway density and efficiency of train service (Figure 65 and Figure 66).
As an archipelago, railway won’t be freights. Nonetheless, rail development should be the big and fast-growing cities.
Infrastructure is still one of the top constraints for doing business in Indonesia, according to the latest WEF survey
(Figure 67), although it is not considered to be as much as a problem as it was in the past. our discussions with large
manufacturing companies produced interesting findings. For large players, it is cheaper to build multiple factories to
make the same products in different parts of Indonesia than it is to pay the high costs of moving goods around the
archipelago. This means the producers do not achieve economies of scale, costing productivity.
Energy
The electrification ratio (the proportion of households with some form of electricity) increased rapidly over 2010-2018
(Figure 68 and Figure 69. Electrification Ratio, Peer CountriesFigure 69) to 97.5 percent. At the same time, access to
electricity improved for lower-income households so that the electrification rate is now broadly similar across all
income groups (Figure 70). As such, improving electrification is no longer a pressing priority, at least at the national
level.
Demand for electricity grew more slowly than expected in recent years, meaning that investment plans exceeded
requirements. The largest demand for electricity came from Java where the manufacturing sector is thriving. As a
result, PLN was able to maintain electricity reserves close to, or in excess of, its targets in most years.
However, the national electrification ratio masks substantial regional disparities between western and eastern
Indonesia. Almost all districts in western Indonesia have electrification rates of more than 80 percent, while there are

10 districts in Papua where less than 20 percent of households have electricity (Figure 73). Connecting these remaining
districts will be challenging and expensive because most of them are in remote areas.
There is also a need to improve the quality and reliability of electricity, as demonstrated by the average duration of
power cuts and the number of power cuts per year. Both indicators have worsened in recent years (Figure 71 and
Figure 72) and are higher in eastern Indonesia (Figure 74 and Figure 75). Many industries run their own back-up
electricity generators, especially outside Java.
Improving access to electricity for remote areas is important. However, Indonesia’s national electrification rate is
higher than those of other countries at a similar level of development (Figure 69). However, the quality of electricity
supply is still below the average (Figure 76). Given that most electricity demand has been met, electricity is not a
pressing constraint for Indonesia, although intervention is still needed to improve reliability and extend coverage to all
households.
Digital
ICT infrastructure, as indicated by the number of broadband subscriptions and connection speeds, is below the
average of countries at the same level of development (Figure 77 and Figure 78). However, there is a megaproject in
place to significantly improve ICT infrastructure: the “Palapa Ring” broadband project. Improved ICT infrastructure is
the backbone of the digital economy. At the same time, soft infrastructure, such as technology regulation and skills
development, is needed. Even so, digital infrastructure is not currently a binding constraint, given the rapid
development of Indonesian digital start-ups. Unequal access to technology is still the main challenge. At present the
digital economy can only grow rapidly in Java and Bali where digital infrastructure is more developed than in other
regions.
Water and Sanitation

Access to water supply and sanitation (WSS) services has improved over the past decade. Indeed, Indonesia reached its
Millennium Development Goal (MDG) for water supply, with 89 percent of its citizens benefiting from access to
improved water supply in 2016 (Figure 79). The MDG for sanitation was missed by a narrow margin (Figure 80). The
Government is now targeting universal access to water supply and sanitation services, in line with the new Sustainable
Development Goals (SDGs).
However, access to WSS services is unequal between the rich and poor, between rural and urban households (Figure
81 and Figure 82), and between the different regions of Indonesia. For example, in rural areas, 57 percent of the
poorest quintile have access to water services compared to 93 percent in the highest quintile. In sanitation, only 66
percent of the poorest quintile have access to improved sanitation compared to 89 percent in the highest quintile.
Improving access to WSS services is particularly important because of the recognized link between poor sanitation,
water-borne diseases, malnutrition and stunting (chronic malnutrition).
While improving access to clean water and sanitation to provide basic service for the low-income population is
important, access to clean water seems to not be a constraint for firms (Figure 83). Nonetheless, Bappenas study
(2018b) shows that water scarcity will become a challenge in Indonesia going forward. Unsustainable business practice
has worsened the environment condition. This requires immediate actions to stop the deterioration of water quantity.
3.5. Market Failure: Unrealized Potential

This section looks at market failure—the inability of the market to generate new economic activity. As discussed
previously, Indonesian exports have not developed or diversified in recent decades. Also, Indonesia lags behind in term
of innovation. Nonetheless, this study sees slow self-discovery as a consequence, not cause, of the growth constraint.
Since the 1980s Indonesian exports have been dominated by resource-based manufacturing products. This peaked
during the commodity boom (Figure 84). Low-value industries such as garments and footwear have been established
but these have not developed into higher value-added manufacturing exports. As a result, exports remain dominated
by resource-based manufacturing (Figure 85) and are heavily dependent on the cycle in commodity prices. Since the
end of the commodity boom, export performance has been declining.

The complexity outlook index, an index that shows how easy it is for a country to develop a new product, suggests that
Indonesia is actually in a good position. Indonesia has higher potential compared with other countries. However, this
potential is yet to be realized, as shown by a low score in the economic complexity index (Figure 86 and Figure 87).
Not only does Indonesia lack high-value-added manufacturing, the services sector is also dominated by the low-end
activities such as retails (micro and small kiosk) and tourism (particularly car rental). The modern financial services,
business services and logistics services that could support manufacturing are lacking. Limited data on the services
sectors means that it is not possible in this study to provide a similar level of analysis for services as for other sectors.
3.6. Macro Risk: Low Tax Receipt Limits Public Goods Delivery
This section examines whether the macroeconomic and fiscal positions are the binding constraint to growth. We found
that the macroeconomic condition is relatively stable and supportive of business, despite some risks related to the
external balance, i.e. financing the current-account deficit. Macroeconomic stability is also reflected in more
manageable inflation, lower exchange-rate volatility, adequate official reserves, and prudent fiscal management.
However, we note that fiscal revenue is low owing to low tax receipts. Compared with peer countries, Indonesia has
one of the lowest tax-to-GDP ratios. This translates into low fiscal spending. For instance, even though Indonesia
spends at least 20 percent of its annual budget on education, the amount it actually spends is less than peer countries.
Indonesia’s macroeconomic management is good. On the external side, reserves have been built up and are at a safe
level (Figure 88). The current account is still manageable although more could be done to attract more sustainable
financing, FDI. External debt is also relatively low compared with the peer countries (Figure 89). On the domestic side,
inflation is low and manageable, particularly in recent years.
Fiscal sustainability has also improved. Governments have kept to the commitment to keep the fiscal deficit under 3
percent of GDP. Government debt as share of GDP has declined and is low compared with other countries (Figure 90).
The fiscal rule also states that the government must keep public debt under 60 percent of GDP.
Nonetheless, low revenue combined with the commitment to prudent fiscal management have limited the
government’s ability to provide necessary public goods. More than 80 percent of revenue comes from taxation but
receipts have followed a declining trend. Indonesia collects the equivalent of less than 11 percent of GDP in taxes
(Figure 91) compared with 15 percent in peer countries such as Thailand and Malaysia. This represents a significant
decline compared with the years before the Asian financial crisis when Indonesia collected as much as 16 percent of
GDP in taxes.
Tax collection is largely determined by the performance of commodity-related sectors. In the past five years,
Indonesia’s declining tax receipts were driven by a fall in income tax from oil and gas. from 0.9-1 percent of GDP to 0.3-
0.4 percent of GDP. The tax base is also small owing to low compliance. In 2018, the number of registered taxpayers
was 39.2 million. Of that figure, only 18 million earned taxable income, of which only 60 percent filed a tax report.
Nonetheless, the main issue is tax policy. VAT receipt is low compared with other countries, mainly because of multiple
exemptions.
Low tax receipts translate into to low public expenditure. This limits the delivery of necessary public goods, such as on
education and health (Figure 92 and Figure 93). Indonesia’s capital spending is low compared with other countries.
When the government removed fuel subsidy in late 2014, it created space for more capital spending. This enabled the
delivery of many long-awaited infrastructure projects.
3.7. Regulations and Institutions (the Most Binding Constraint): Better Coordinated Policies to Boost
Growth
This section examines regulations and institutions. It concludes that they are the most binding constraint to growth.
Existing regulations do not support business creation and development and they tend to be restrictive. Institutions
here refer to the setting which produces those regulations, in particular: lack of strategic alignment, weak supervision,
and overlapping institutional responsibilities. It also points to corruption and bureaucratic inefficiency. Weak
regulations and institutions were a common complaint not only among private business but also among social sectors
such as health and education.

Inefficient regulations create high fixed costs. Therefore, it generates a “missing middle” phenomenon in Indonesia
(Figure 94): large companies can bear high fixed costs, medium companies cannot compete, and small companies
choose to be outside of regulation – causing a large informal sector. Compared with other countries, existing
regulations tend to be protectionist, and costs related to labour and taxation is very high. Widespread middlemen also
indicate regulations and institutions to be the most binding constraint as economic agents attempt to bypass them.
Compared with peer countries, Indonesia has a low regulatory index score (Figure 95). The index reflects perceptions
of the government’s ability to make and implement regulations/policies that support business development. In other
business-related regulations, such as property rights, legal system, and rule of law, Indonesia also ranks low compared
with other countries (Figure 96 and Figure 97).
Data from Global Trade Alert suggest that the number of new regulations issued by Indonesia is greater compared with
other countries. While that figure could mean active participation of government in the international trade and
investment, the type of intervention suggests that these interventions are mostly protective. They do not support
international trade and investment.
Regulatory constraints cover three main areas: labour, investment, and trade.
First, labour regulation. The cost of firing workers in Indonesia is high. This means firms employ staff on temporary
contracts and do not develop their professional skills through training (Figure 99). Figure 98 shows that in order to fire
Indonesian workers with 1, 5, and 10 years tenure, it costs 57.8 weeks of salary on average. This is two times more
than in Turkey, four times more than in Brazil, and six times more than in South Africa.
Indonesian firms also struggle to navigate costly and complex regulations to hire skilled foreign workers. This places
Indonesian firms at a disadvantage. As an illustration, for a firm to be able to hire foreign skills, it needs to acquire
RPTKA, IMA, VITAS, KITAS, MERP, and a residence permit. The annual cost to get IMTA is USD 1,200, or 35 percent of
income per capita in Indonesia. Foreign skills are also limited into few sectors only with services sector being the most
restrictive. With these limitations, only about 74,000 permits were granted in 2016. This is equivalent to just 0.03
percent of the population.
Second is investment policy. Indonesia is among the most restrictive countries in the world for foreign direct
investment (Figure 100). Restrictions on FDI through the negative list discourage foreign firms, especially export-
oriented firms, from setting up business in Indonesia. The service sector is one example where developed is hindered
by highly restrictive regulation. As a result, Indonesia has low foreign direct investment (Figure 101).
Despite recent improvement in investment climate, as reflected in improvements in the ease of doing business rank,
Indonesia still ranks poorly in few important areas such as starting a business, trading across border, and ease of
paying taxes (Figure 102, Figure 103, and Figure 104). For instance, it takes 19.6 days to start a business in Indonesia
compared with only 4.5 and 1.5 days in Thailand and Singapore, respectively. Moreover, Indonesia ranks 112 th in the
ease of paying taxes whereas Singapore and Thailand rank 3rd and 36th, respectively. It should be remembered that
Indonesia is not alone in seeking to improve the ease of doing business. Indonesia is competing with other countries
that are undertaking similar reforms.
Regulations do not create right incentives for businesses to grow. For instance, tax exemptions for small businesses
discourage Indonesian firms from expanding and becoming more productive through economies of scale.
Third, Indonesian exporters and importers face high administrative costs owing to excess licenses and regulations. It
takes longer and is more expensive to export from Indonesia compared with neighbouring countries such Malaysia,
Thailand and Singapore (Figure 105). At the same time, “non-tariff barriers” to trade such as licenses and quotas
increase the cost of living in Indonesia by 8 percent (Figure 106).
The evidence of regulatory constraints is apparent across sectors. In education, foreign nationals are not permitted to
obtain academic tenure in Indonesian universities, preventing the transfer of valuable “know-how”. In health, there is
a lengthy process to obtain a BPOM license, making some drugs unavailable in Indonesia.
There are examples of success when Indonesia has pursued more open investment policies. Indonesia recently has
recorded a success story in opening its investment policy. The domestic film has grown rapidly since rules on foreign
ownership were relaxed in 2016, with 600 new cinema screens opening during the past three years. The number of
cinema-goers also grew, from 16 million in 2015 to 43 million in 2017. The larger market has created opportunities that

have allowed domestic film-makes to match foreign competitors. A locally produced film, “Dilan 1991”, beat the
Hollywood blockbuster “Avengers: Infinity War” in Indonesia. Another example of a successful domestically produced
film is “The Night Come for Us”, which became the most-watched action film on Netflix.
Corruption and Inefficient bureaucracy are the first and second as the most problematic factors for doing business in
the latest Executive Opinion Survey by the World Economic Forum (Figure 107). Policy instability is also considered one
of the most problematic factors for doing business. This is consistent with our own focus group discussions and
interviews with the private sector. Businesses complained about conflicting regulations between various government
ministries and agencies. On top of that, regulations tend to be short-lived. Within the government itself, officials
recognise weak coordination across agencies and high “sectoral ego” as the underlying reason for weak coordination.
Weak coordination is evident between the various layers of public administration. At the central level, planning,
budgeting, implementation, and monitoring and evaluation are done by different agencies that do not communicate
well with each other. As a result, what is implemented often differs from what was planned. For instance, dams are
built but this is not followed by irrigation systems, or ports are built but there is no road access. Weak monitoring and
evaluation, along with a lack of enforcement mechanisms, mean that these are recurring issues.
A lack of alignment between central and local government adds further complexity. The policy direction set by the
central government is often not followed by local authorities. This is evident in the latest central government effort to
open up to investment by simplifying the business licensing process. It was not matched by a similar spirit by most
local authorities.
There is also an issue of overlapping institutional responsibility. This is especially apparent in the case of government
intervention for small and micro enterprises. Small and micro enterprises themselves complain that they receive the
same government training or other support over and over again. Data collection is another area of overlap. Each
government agency collects its own data and does not share its findings, resulting in different interpretations, and
sometimes leading to conflicting government intervention.

Conclusion
The study found that regulations and institutions are the most binding constraint to economic growth in Indonesia.
Existing regulations tend to be restrictive and they do not support business creation and development. Institutions
here refer to the setting which produces those regulations, in particular: a lack of strategic alignment, weak
supervision, and overlapping institutional responsibilities. Corruption and bureaucratic inefficiency are also problems.
These complaints were a common theme among private businesses and also among social sectors such as health and
education.
Inefficient regulations create high fixed costs. This generates a “missing middle” phenomenon in Indonesia: large
companies can bear high fixed costs, medium companies cannot compete, and small companies choose to be outside
of the regulation – causing a large informal sector. Compared with other countries, existing regulations tend to be
protectionist and the costs related to labour and taxation are very high. Widespread middlemen also indicate that
regulations and institutions are the most binding constraint as economic agents attempt to bypass them.
The study also identifies human capital as the future binding constraint, particularly given the development of the
digital economy and the aspiration to develop Industry 4.0–high-tech manufacturing. Skills and education will become
the next binding constraint as technology advances rapidly. The low quality of education and health in Indonesia is
worrying.
Overall the study suggests that priority should be given to improvements in regulations, particularly ones that hamper
the growth of business and productivity. Institutional improvements should focus on the clarity of roles and authority,
including the role of policy conductor and development regulator. To address the future constraint of human capital,
policy need to focus on reforming basic education and teaching, opening investment in tertiary education, incentivizing
diaspora engagement, and focus on children’s nutrition.

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Appendices
1. Figures on Growth Story Indicators
Figure 3. Indonesia Economic Growth Figure 4. GDP per Capita Trend

12000
GDP per Capita (Constant 2010 US$)

low base 10000
growth oil manufacturing
oil
15 boom growth &
bust 8000
Indonesia Economic Growth (% YoY)
commodity
liberalization
boom
10
6000
5
4000
Average Average Average
0
1968-1979 1980-1996 2000-2018
2000
-5 7.5% 6.4% 5.3%
0
-10 Asia Financial 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Crisis
-15 Indonesia China Philippines
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Malaysia Thailand Vietnam
Sources: CEIC Sources: World Development Indicators
Figure 5. Indonesia Potential Growth Figure 6. Total Factor Productivity

0,7
Indonesia Potential Growth (%)
TFP level at current PPPs (USA=1)
6,03
0,6
Bappenas projection of potential
5,56 growth (“baseline" scenario)
0,5
5,17
5,01 5,03 5,10
4,88 4,95 4,94 4,91 4,90 4,89
4,87
0,4
0,3
1963 1969 1975 1981 1987 1993 1999 2005 2011 2017
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Indonesia China Malaysia
Philippines Thailand
Sources: Bappenas (2018a) Sources: World Development Indicators

Figure 7. Share of Manufacturing & GDP per Capita Figure 8. High-Technology Exports
32 80
Manufacturing, value added (% of GDP)
1999
2000
(% manufactured products)
2004
High-Technology Exports
2010 2003
2007
2008 2001
29 2001 2006 2002 60
2002 2005
2003
20042009 1998
2003
2004 2008
1997
2000 2011 1996 2005
2002
2006 2000
2005 2006
1991 1999
2007 2012
1997 2001 1994
2013
1992 2009 2014
20151995
26 1990 1998 2016 2007 40
1999 19932017
1992
1996
1993 1997
1995 1991
1998 19941996
2008
1995 1990
2009
1994 2010
2011
2012 20
23 2014
2013
2015
1993
2010 2017
2016
1992 2011
2012
1991 2014
2013
2015
2016
20 2017 0
8,3 8,8 9,3 9,8 10,3 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
GDP per capita, PPP (constant 2011 international $), log Indonesia China Malaysia
Indonesia Malaysia Thailand Philippines Thailand Vietnam
Sources: World Development Indicators Sources: World Development Indicators
Figure 9. Accumulation of Fixed Capital Investment of Figure 10. Infrastructure Capital Stock
Machinery and Equipment, 2007-2016
200
64,4 62,9 Infrastructure Capital Stock (% of GDP)
Accumulation of Fixed Capital Investment
of Machinery and Equipment (% of GDP)
57,9 160
49,1 Average excluding Japan (70%)

120
40,9
80
40
20,1
Germany
Spain
China
Poland
Japan
India
South Africa
Indonesia (2017)
Brazil
United Kingdom
Canada
Italy
United States
Indonesia Malaysia Mexico Philippines Thailand South Africa
Sources: Indonesia – Prospera Infradashboard & McKinsey Sources: Indonesia – Prospera Infradashboard & McKinsey
Figure 11. FDI Net Inflows vs. GDP per Capita, 2017 Figure 12. Indonesia Incremental Capital-Output Ratio
40
NLD 10
Incremental Capital-Output Ratio
HKG
30
FDI, net inflows (% of GDP)
MLT
8
20 SGP 6
MOZ
SLE
COG MNG
VCT
GEO PLW MNE
MRT
MDV LUX
10 STP
LAO GRD 4
LBR MMR ALB
LCA PANSYC
NIC VNM SRBAZE ATG
GIN GHA CPVGUY JAM
FJI BRB
TKM SVK FINSWECHE
EST
ETH HND JORNAM COL SUR
CRI BHSISR
KNA
NERMWI MDGHTI LBN
DOM
BFA
TCD BRA MEX
MKD BGR HRVLVA CZEOMN
PRT AUT BRN
COD RWASLBSENVUT ZMB
TGOUGA PHL EGYPER MYS AUS
BEN TZA CMR MDAINDBOLUKR
MAR ARM BIHTUNBWA BLRGNQ
MUS TUR
CHL LTU
POL GBR
SVN FRA DEUUSA ARE
CAF
MLI
GNB ZWE
COM TJK CIV PSE
LSO
KIR NPL KENBGD
TUV SDNNGA
PAK WSMSLVBLZPRY
GTM IDN
LKA
ECU
THA
CHN ARG RUS
KAZ
GRC
IRN ROU KOR
NZL CAN
BHR
JPN DNK QAT 2
0 BDI GMB
YEM
AFG MHL TLS
UZB
PNG TON SWZ
KGZ
BTNDMA
ZAF
DZA ITA
ESP SAU NOR
KWT
IRL
URY TTO
IRQ
AGO
BEL
-10 HUN 0
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
6 8 10 12
GDP per capita, PPP (constant 2011 international $), log
Sources: World Development Indicators Sources: CEIC

2. Figures on Finance Indicators
Figure 13. Gross Domestic Savings vs. GDP per Capita, 2017 Figure 14. FDI Net Inflows
80 15
Foreign direct investment, net inflows

Gross domestic savings (% of GDP)
60 QAT 10
IRL
BRNSGP
ARE LUX
COG
CHN GAB
(% of GDP)
40 MNG DZA IRNPAN KAZ
MLT
KOR
TLS
IDN
THA
BWA MYSCZE
OMN
SAUCHE 5
NLD KWT
AGO
MMRIND BTN LKA AZE
BLR HUN
RUSEST
GNQ SVN SWE NOR
AUT
DNK
DEU
BGD VNM PRY ECU TURSVK ISL
BEL
ETH TZA MRT BGR CHL POL ESP AUS
LAOMAR GEO PER MEX HRV
ROUSYC ITAFRA
FIN
CAN
HKG
20 COD NERUGA
BFA
CIV GHA
CMR
SDN UZB
CPV
ZAF
MKD
DOM
COL
LVA
CRI URY BHS LTU
PRTCYP GBR
TCD SEN NGA GUY
NIC PHL
BLZ
BRA
IRQ ARG
MDG BEN GINNPL BOL UKR SRB
MUSGRC
0
RWA HND ALB
ARMTUN
JAM
AFG
MLI PAK NAM MNE
MOZ TGO
MWI
GNB KEN GTM
KGZ BIHPLW
JOR EGY BRB
0 CAF
COM
ZWE TJK SLV
SWZ VCT
LBN
SLE
HTI
-5
PSE
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
-20
6 8 10 12 Indonesia China Malaysia
GDP per capita, PPP (constant 2011 international $), log Philippines Thailand Vietnam
Sources: CEIC Sources: World Development Indicators
Figure 15. Real Lending Rate vs. GDP per Capita, Average Figure 16. Nominal Lending Rate, vs. GDP per Capita, Average
2015-2017 2015-2017
45 40
Real lending interest rate (%), average
IRQ
Nominal leding interest rate (%),
BRA
TLS
GMB ARG
30 30
average 2015-2017
TJK
GMB TJK UGA KGZ

MOZ STP VEN
2015-2017
UGA KGZ
FSM
COD HND UKRPRY MNG
MRT BHR QAT SLE
15 STP HND
PRY
ARM MNG IRN
PERDOM OMN
KWT
BRN 20 RWA
TZA MRT NGA ARM
AGO JAM PER AZE
IRN
RWA FSM
KEN
AFG SYCTTO BDI AFG DOM URY
LBR MOZ DJI GUY AZE BTN EGY
TZA JAM
BTN CRI LBR ZMB
TLS MMR GTM SUR BLR RUS
COD
COM
SLE ZWE
SLB PSE
KENCIVPNG PAK
CPV
NGA
WSM
MMR
GTM
BOLBLZ
IND XKXJOR
IDN
DMA
GEO
DZABRB URY
ALBCOL
VCT
LCAMDV
GRD
ATGKNA
MUSRUS
HTI
SSD LSODJI
MDA GUY
NIC
IDN
GEO
COL
CRI
IRQ SYC
BFA BEN LSO TON
NIC
VNM
MDA LKALBN PAN COM SLB BGD MDV
NER PHL SWZ ZAF ISL
AUS IND SWZ
CPV ZAF
BLZ NAMLKA
BDI TGO MLI SEN BGD ZMB AGO NAMBIH MKD
SRB
SURMNE
BGRROU NZL CHE SGP WSM VCT ATGKNA
HTI FJI EGY
CHN BLR
THA
BWA MYS CZE ITA
ISR
KOR
HKG
CANUSASMR MAC PNG PAK JORDMA
TON BOL XKX LBN LCA
ALBGRD
DZA MUS
BRB PAN
TTO
0 VUT MEX CHLBHS
ARG HUN
JPN 10 ZWE
PSE VNM MNE
MKDBWA BGR
ISL
GNB NER TGO
GNB
BFA MLI
BENSEN CIV PHL FJI BIH SRB MEX ROU
CHL NZL AUS HKG BRN
BHR
OMN SGPMAC
THA
CHN BHS
MYS KWT QAT
UKR CZEITA
ISR
KOR USA
VUT CAN SMRCHE
HUN
JPN
-15 0
6 8 10 12 6 8 10 12
GDP per capita, PPP (constant 2011 international $), log, GDP per capita, PPP (constant 2011 international $), log,
average 2015-2017 average 2015-2017

Figure 17. Real Lending Rate and Investment Rate Figure 18. Biggest Obstacles in Doing Business in Indonesia
11 Transportation
Tax Rate
2016
2015
Tax Administration
2012 Informal Practices
Real interest rate (%)
7 2014
2017
2013 Political Instability
2009
2011
Labor Regulation
Skilled Labor
3
Electricity
Customs and Trade Regulation
Crime and Security
-1 Business Courts 2015
2010
Corruption
2009
2008 Business Permits
-5 Access to Land
27 30 33 36 Access to Finance
Gross capital formation (% of GDP) % 0 10 20 30 40 50
Sources: World Development Indicators Sources: World Bank Enterprise Surveys
Figure 19. Indonesia Investment Composition Figure 20. Net Interest Margin
35 6
Investment Composition (%)
30
Net Interest Margin (%)

5
25 Banks
4
20 Capital Markets 3
15
Foreign 2
10
1
Financed not through
5
intermediation 0
- 2012 2013 2014 2015 2016 2017 2018
2015
2016
2017
2018p
2019p
2020p
2021p
2022p
2023p
2024p
Indonesia Philippines Egypt
Sources: Prospera’s Calculation Sources: Prospera’s Calculation
Figure 21. Financial System Interlinkages, Indonesia Figure 22. Financial System Interlinkages, Malaysia
Sources: Bappenas and Prosperas’ calculation Sources: International Monetary Fund (2014)

3. Figures on Human Capital Indicators
Figure 23. Labour Force Distribution by Education, 2016 Figure 24. Labour Force with Tertiary Education
35%
Labour Force – Tertiary Education

Vietnam 13 55 20 12
30%
Thailand 21 40 22 17 25%
20%
Philippines 1 67 5 26
15% 12,3% 12,7%
11,4%
Malaysia 10,4%
3 30 44 24 9,5% 10,0%
10% 8,1% 8,5%
Indonesia 14 45 30 12 5%
2010 2011 2012 2013 2014 2015 2016 2017
0% 20% 40% 60% 80% 100% Indonesia Malaysia Philippines

Less than Primary Primary Secondary Tertiary Thailand Vietnam
Sources: International Labour Organization Sources: International Labour Organization
Figure 25. Agriculture Employment vs. GDP per Capita, 2017 Figure 26. Informal Employment vs. GDP per Capita, 2017
100 100
Informal Employment (% of total non-
BDI
Agriculture Employment (% of total
CAF TCD
MWI GNB
COD CIV
80
agricultural employment)
NER MRT
MOZMDG
UGAZWE
ETH GIN
NPL
SLB
CPV SWZ
80 BOL
SSDRWA TZA VUT
60 SLE AFG CMR LAO
GNQ
HND GTM
MLI BTN IDN
employment)
COM SEN
TJK ZMBSDN MMR
AGO
CIV PRY
YEM BEN SLV ECU
LBR PAK IND NAM
40 HTI GHA VNM FJIGEOALB GAB 60
TGO KENBGD COG NGA MAR AZE PER
MDA ARM THA VNM COL
TON
NIC BOL
GTM IDN SWZ DOM MUS
BFA
GMB KGZ HND TLSPHL ECU LKA
MNG
PER
BWA PSE EGY
EGY
UZB PRYNAM ROU
20 STP
PNG SLVJAMBIH CHN IRN TUR
MEX KAZ
MDV
BLZ
UKR TUNLCA DZA PAN
GUY COL
DOM
CRILBY PAN
LSO PSE BRA BLR
TKM
MNE
VCTZAF MDV HRV
MUS
BGR
MYS
LVA
RUS LTU OMNSAU
PRT
40 CHL
WSM CHLHUN SVN NZL
KOR
ESP AUT IRL
JOR SURVEN
LBN BRBURY BHS
EST
TTO
SVK ITA
CYP
CZE FIN
JPN
FRA ISL
AUS
DNK
NLDCHE
KWT CRI
CAN
SWEUSANOR
0 ARG ISRMLTBEL
GBRDEU
BHR HKGARE LUX QAT
BRNSGP ZAF
MNG
ARM URY
-20 20
6 8 10 12 7,5 8,5 9,5 10,5
GDP per capita, PPP (constant 2011 international $), log GDP per capita, PPP (constant 2011 international $), log

Figure 27. Returns to Secondary Education Figure 28. Unemployment Rate by Education
18 10
Returns to education, secondary (%)
Unemployment Rate (%)

8
13 6
8
2
0
3 Indonesia Malaysia Philippines Thailand Vietnam
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (2017) (2016) (2016) (2016) (2017)
Indonesia Thailand Malaysia
Less than primary Primary Secondary Tertiary Total
Philippines India Pakistan
Sources: Montenegro and Patrinos (2014) Sources: International Labour Organization
Figure 29. Returns to Tertiary Education Figure 30. Skills of Working Age Population
33 292
PIAAC Literacy Proficiency
264
234 234
206
Returns to education, tertiary
28 169
23
18 Jakarta - Jakarta - Jakarta - Denmark - Denmark - Denmark -

Less than Upper Tertiary Less than Upper Tertiary
13 Upper Secondary Upper Secondary
Secondary Secondary
8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sources: Pritchett (2016)
Indonesia Thailand Malaysia Note: Based on OECD Programme for International Assessment of
Philippines India Pakistan Adult Competencies (PIAAC) 2016
Sources: Montenegro and Patrinos (2014)
Figure 31. Skills Mismatch in Indonesia Figure 32. Net Wage Effects of being Skills Mismatch
Underqualified Vertical Mismatch Horizontal Mismatch

Mismatch
Vertical
Well- Matched 30
Net Effects on Wage (%)
20
Overqualified 10
Mismatch 0
Horizontal
Mismatch
-10
Somewhat Match -20
2008 2015 2008 2015 2008 2015 2008 2015 2008 2015 2008 2015
Match
Base Controlling Interacting Base Controlling Interacting
0 10 20 30 40 50 for with for Training with
Skills Mismatch (%) Training Training Training
Underqualified Overqualified Somewhat Match Mismatch

2008 2015
Sources: Samudra (2018) Sources: Samudra (2018)

Note: Using Sakernas August round data Note: Using Sakernas August round data

Figure 33. Mean Years of Schooling Figure 34. Mean Years of Schooling vs. GDP per Capita, 2017
15
DEU
11 CAN USACHE
LTUISR GBRAUS
GEO LVA ESTCZE JPN
SVK NZL DNK NOR
IRL
PLW BLR POLSVN FIN ISLSWE
(Population aged 25 and over)

CYPKOR AUTNLD LUX
RUS HKG
ARM BGR KAZHUN BEL
MDA UZB FRA SGP
(Population aged 25 and over)
TON UKR MNE HRV MLT
Mean years of schooling

SRB BHS
ROU TTO
9 TJK
KGZMHL
WSM JOR
BLZ
FJI LKA
AZE
BRB
VEN
GRC
CHL MYS ITA
ARE
Mean years of schooling
10 JAM
MNG
ZAF
ALB
BIHMKD TKMIRN
ARG
PAN
SYC
ESP
OMN
QAT
PHL BHRSAU
PSE PER BWA MUS ATG PRT BRN
BOL LCA CRI
ECU
VCT LBN GRD MEX URY
GUY PRY SUR GAB KNA
COL
7
ZWE
KIR FSM
VNM
IDN
DMA
DZA
CHN
BRA
THA
TUR
EGY
TUN KWT
ZMBGHA SLV LBY
COD VUT NIC NAM IRQ
KEN HND IND GTM
SWZ
LSO
STPCMR COG
NGACPV MDV
MDGUGA
TZA BGD
SLB MAR GNQ
HTI
5 5 LBR
MWI
COM
TGO
SSD NPL
CIV
PNG
MRT
PAK AGO
MMR
LAO
TLS
CAF
RWA
AFG SDN
MOZ SLEGMB BEN
BDI YEM
GNB SEN BTN
ETH GIN
TCDMLI
NER
3 BFA
1990 1995 2000 2005 2010 2015

0
Indonesia Thailand Malaysia 6 8 10 12
Philippines Vietnam China GDP per capita, PPP (constant 2011 international $), log
Sources: Barro-Lee Dataset Sources: Barro-Lee Dataset & World Development Indicators
Figure 35. Gross Enrolment Ratio Figure 36. School Enrolment, Tertiary
60
School enrollment, tertiary (% gross)

120
Gross Enrolment Ratio (%)
100 50
80
40
60
30
40
20
20
0 10
Indonesia Malaysia Philippines Thailand Vietnam China
(2017) (2017) (2017) (2016) (2016) (2017) 0
Primary Secondary Tertiary 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Indonesia Thailand Malaysia
Vietnam China Philippines
Sources: UNDP (2018)
Sources: World Development Indicators
Figure 37. Returns to Education vs. GDP per Capita, 2010 Figure 38. Returns to Education, Indonesia
28 12
Mincerian returns to education
11
Returns to Education (%)
23 RWA
10
ZAF 9
18
UGA 8 7,9
MUS DEU
AUS
13 TUV HUN
KOR USA 7
ZMB HND LTU
LVA MYS
MDG COL ROU POL
URY
PAK
IDN MEX
PAN PRT
SVN
LUX 6
MNG DOM ARG MLT
CZE NLD
NPL TUR FRA AUT
STP PHL PRY PER BGR SVK ESPGBR
NOR
8 PNG GEO ECU FIN 5
EST GRC ITA ISL DNK
BEL
SWE
4
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
3
7 8 9 10 11 12
Sources: Bappenas’ Calculation
Note: Using Sakernas August round
Sources: Montenegro and Patrinos (2014) & World Development
Indicators

Figure 39. Trends in International Mathematics and Science Figure 40. Programme for International Student Assessment
Study (TIMSS), 2015 (PISA), 2015
Singapore Hong Kong

Hong Kong Singapore
South Korea Japan
Chinese Taipei South Korea
Japan China
Average Score Vietnam
Turkey OECD Average
Chile Thailand
Indonesia Indonesia
0 100 200 300 400 500 600 700 0 100 200 300 400 500 600
Mathematics Science Mathematics Reading Science
Sources: TIMSS, Martin et al (2015) Sources: PISA, OECD (2016)
Figure 41. PISA Score Projection, Indonesia Figure 42. TIMSS Score Projection, Indonesia
550 500
500 TIMSS Score 450

PISA Score
450 400
400 350
350 300
1998 2000 2002 2004 2006 2008 2010 2012
300 Mathematics Score (Non-Islamic Schools)

2000 2015 2030 2045 2060 2075 2090 Mathematics Score
International Mean
Mathematics Reading
Linear (Mathematics Score)
Mathematics (Projection) Reading (Projection)
Mathemtics (OECD Average) Reading (OECD Average)
Sources: The SMERU Research Institute (2018)
Sources: World Development Report 2018, World Bank
Figure 43. Indicators Related to Quality of University Figure 44. Indonesia University Ranking Classification
QS university Cluster 1
Global Tertiary inbound Cluster 5
ranking, average 1%
Innovation mobility 8%
score top 3
Index 2018 Cluster 2
% Rank Index Rank
3%
Singapore 19.2 5 70.2 13
Malaysia 9.3 21 49.3 25
Japan 3.4 58 80.4 8 Cluster 3
Cluster 4
15%
South Korea 1.7 77 77.1 9 73%
Thailand 0.5 88 32.9 38
China 0.3 97 82.3 5
Vietnam 0.2 99 0 78
Indonesia 0.1 103 34.9 37 Sources: Ministry of Research, Technology & Higher Education (2018)
Philippines 0.1 104 24.4 48
Sources: Global Innovation Index (2018)

Figure 45. The Global Innovation Index 2018 Figure 46. The Human Capital Index 2018
Singapore
1
INSTITUTIONS South Korea
2
Japan
(Global Rank in 2018)
134 115 87 84 65 55 48 46 3
HUMAN CAPITAL &
CREATIVE OUTPUTS
RESEARCH
China
Country
Vietnam
KNOWLEDGE & Malaysia
INFRASTRUCTURE
TECHNOLOGY OUTPUTS
Thailand
BUSINESS MARKET Philippines
SOPHISTICATION SOPHISTICATION
Indonesia
India
INDONESIA MALAYSIA THAILAND Pakistan
PHILIPPINES VIETNAM CHINA 0 0,2 0,4 0,6 0,8 1
Sources: Global Innovation Index (2018) Sources: World Bank (2018)
Figure 47. Life Expectancy at Birth Figure 48. Infant Mortality Rate
79 80
Life expectancy at birth, total (years)
(per 1,000 live births)

Mortality rate, infant
74 60
69 40
64 20
59 0
1980 1985 1990 1995 2000 2005 2010 2015 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Indonesia Thailand Malaysia Indonesia Thailand Malaysia
Philippines Vietnam China Philippines Vietnam China
Figure 49. Maternal Mortality Ratio Figure 50. Stunting Prevalence vs. GDP per Capita, 2016
500 60
Maternal mortality ratio (modeled
BDI
Child malnutrition, stunting (moderate
or severe) (% under age 5), 2010-2016
estimate, per 100,000 live births)
400 MDG
YEM GTM
PAK
LAO
NGA
COD NER MOZ
300 40 CAF AFG

ETH
TCD ZMB
SDN
MWI SLE IND
AGO
RWA BGD IDN
NPL
BEN TZA
GIN
LSO PHL
BTN
LBR SLB CMR
COM BWA
MLI
MMR
200 TGO
GNB
UGA
BFA ZWE
VUT MRT
TJK
KEN
ZAF
GNQ
SWZ
GMB VNM
ECU NRU
HND NAMALB
HTI EGY IRQ
CIV COG
20 GHA
UZB
MDV PAN
MYS
BRN
100 SEN STP NIC

BOL
LKA
AZE
GAB
BLZ
MAR
SLV PER
KGZ COL TKMMEX
GUY GEO MNG DZA TTO
TUV TUN MNE URY
THA
ARM BIH TUR
SUR
TON JOR CHN
BRB KAZSYC
0 PSE
MDA
WSM
JAM
PRY
BRA
SRB
DOM
MKD
CRI
JPN
1990 1995 2000 2005 2010 2015 LCA

CHL
KOR AUS USA
0
Sources: World Development Indicators Sources: UNICEF, WHO & World Development Indicators

Figure 51. Immunization Rate, 2017 Figure 52. Cause of Death by Communicable Diseases and
Maternal, Prenatal and Nutrition Conditions
Indonesia 40
Cause of death, by communicable

diseases & maternal, prenatal &
nutrition conditions (% of total)
Malaysia
Thailand 30
Vietnam
20
Philippines
China
10
0 20 40 60 80 100
DPT (% of children ages 12-23 months) 0

HepB3 (% of one-year-old children) 2000 2002 2004 2006 2008 2010 2012 2014 2016
Measles (% of children ages 12-23 months) Indonesia Thailand Malaysia
Sources: World Development Indicators Philippines Vietnam China
Figure 53. Cause of Death by Non-Communicable Diseases Figure 54. Mortality from CVD, Cancer, Diabetes or CRD
35
Mortality from CVD, cancer, diabetes, or
90 CRD between exact ages 30 and 70 (%)
communicable diseases (% of total)
SLE YEM GUYFJI

30 AFG MNG
TKM
85 KIR
CIV
EGY
Cause of death, by non-
LAO PHL
SWZ KAZ
80
HTI LSO
FSM SDN IDN
ZAF
RUS
25 MLI
TJK KGZ MDAUZB UKRGEO
PAK
MMR
TGO TCD SLB
VUT TONIND BTN VCT BLR
BGR
CAF
BDI MDG
COM HUN
75 GIN
UGA NPL CMR
BFA BGD
NGA BLZ ARM AZE MUS
ATG
SUR IRQ ROU GNQ
LVA
NAM GRD SYCTTO
GMB GHA WSM MNE LTU
20 COD
NER GNB BEN
ZWE
MKDBWA
70 MOZ ETH RWA SEN STP MRT
JOR LCA SRBDOM POL
LBR TZA ZMB BIHLBN
VNMBOL PRY LKA
CPV ALB BRA
CHN URY MYSSVK
MWI COG
AGO HRV EST SAU AREBRN
TUNCOLBRB TUR
65 15 GTM
JAM
ARGBHS
MEX
CZE USA
QAT
NIC THA
DZA GAB
HND SLV
KEN MDV
ECUPER PAN SVN
60 MAR
CRI
CHL
GRC DEU
BEL
AUT
PRTCYPMLT
GBRDNK
NLD
FRA
10 ESP FIN
NZL
ITA CAN
ISR
IRL
SWE NOR SGP
AUS
ISL
LUX
55 JPN
KOR
CHE
2000 2002 2004 2006 2008 2010 2012 2014 2016

5
Figure 55. Health Facilities per 10,000 Population Figure 56. Trend in Male Smoking Prevalence
42 85
Smoking prevalence, males
75
26
(% of adults)
21
19 17,9 65
15,1
12,8 12
10
8,1 8,2 55
3,7
45
Malaysia Thailand China Philippines Indonesia Vietnam
35
Medical Doctors (per 10,000 people) Hospital Beds (per 10,000 people) 2000 2004 2008 2012 2016
Sources: World Health Organization & World Development Indicators Indonesia Thailand Malaysia
Note: The latest data available in 2010-2017 Philippines Vietnam China

Figure 57. Male Smoking Prevalence vs. GDP per capita, 2016 Figure 58. Most Recent Survey of Youth Tobacco Use
(Age 13-15)
0 5 10 15 20 25 30
Smoking prevalence, males
IDN Malaysia (2016)

80
TUN
Indonesia (2015)
(% of adults)
KIR RUS
GEO MDV
60 LSO
KGZ
COG
LAO ARM EGY ALB GRC CYP
LVA Thailand (2015)
UKR BIH CHNMNE
BGD MDA VNMMAR MNG BLR
TON BGR KAZ
SUR AZE MYS
SLE PHL LBN
SRB MUS CHL
TUR KOR
NPL PAK
WSM NRU
THA HRV LTU
ROU SVK
ESTCZE
ARE China (2014)
SYC ISRFRA
40 VUT MMR FJI
NAM ZAF BWA HUN
POL
ESP
JPNDEU
MOZ
GMBZWE
YEM DZA PRT MLTBEL
AUT
CHE
BRN
JAM
MWI COM BFA
TZA
ZMB UZB
LKA ARG ITA
SVN GBR SAU
NLD
USAIRL
SGP
LUX QAT South Korea (2016)
HTI MLI PLW FIN
RWA KEN IND PRY MEX BHS NOR
SLV DOM URY SWE
DNK
LBR BRA
CRI NZL CAN
UGA SEN CPV SWZ AUS
20 NER TGO
BEN ECU COL
BRB ISL Singapore (2012)
NGA PAN
ETH GHA
Vietnam (2014)
0
6 7 8 9 10 11 12
Japan (2014)
GDP per capita, PPP (constant 2011 international $), log Prevalence (%) MALE FEMALE
Sources: World Development Indicators Sources: World Health Organization
4. Figures on Infrastructure Indicators
Figure 59. Road Connectivity Index, 2017 Figure 60. Road Density, 2014
120
Road density (km/100 km2)
100 12 CZE BEL

Road connectivity index,
ESP USA
SAU
SWE
NAM ZAF
MEX
ARG DEU
FRACAN
BWA CHL PRT OMN AUS LUX
CHN FIN
CZE BEL
LTU ITA
ISR CHE
NLD
0-100 (best)
LVA
80 ZWE MAR DZA TUR
HUN GBR
POL
AUT
DNKCHEARE
DEU
BEN CIV
SRBVEN IRN RUS
URY
EST
SVK KWT
BRN
IRL QAT 9
UKR
JOR EGY HRV CYP HUN
SWZ THA KAZ SVN NZL
JPN
GMB
BFA ZMB PAK
NGA BGR GRC
ROU
MWI GEO
TUN BRA
DOM
MDAIND SVK NLD
60 UGA
KEN GHA AGO SLV ISL GBR
MOZSLE MLI SEN
TZA PAN
MRT NIC ECU
BIHMKD
PRY PER LBN
COL
AZE NOR 6 POLSVN
AUT
COD TCD LSO LKA ITAFRA
ISR
GIN HND VNM MNG
LBR CMR ARM CRI DNK
40 BDI
KGZ
BOL
JAM
ALB HRV
ROU JPN
YEM SRB
ETH
NPLTJK BGD IDN KOR
CPV TTO UKR BGR
RWA MNE MYS MDA
PHL
3 MKD BLR
LVAPRT
LTU
ESP
IRL
20 LAO
IND
ARM
GEOBIH
AZE EST SWEUSA
GTM BGD FIN
SWZ ZAF GRC
TUN MEX TUR
HTI PAKVNM
UZB THA ARG NOR
MOZ TJKCMR MARJOREGY CHN
TKM
IRQIRN
BRA
GAB R…
CHL
MYS
KAZ CAN
0 0 COD BFA CIV
KGZMRT
SDN IDN DZAPER
MNG SAU
6 8 10 12 6 8 10 12
Sources: WEF Global Competitiveness Index 2018 & World Sources: FAO Land Portal and World Development Indicators
Development Indicators

Figure 61. Quality of Roads, 2017 Figure 62. Quality of Port Infrastructure, 2017
7 7
NLD
SGP
HKG
Quality of port infrastructure,

CHEARE SGP PAN FIN ARE
Quality of roads, 1-7 (best)
HKG BEL
JPN NLD ISL
6 PRT FRAAUT
DNK
USA
EST QAT
USA ESP
NZL
GBRDEU
SWE NOR
MYS CAN
KOR
OMN DNK
DEU MLT
JPN
HRV ESP SWE LUX QAT NAM PRT KOR
FIN LVA FRABHR IRL
CHL
MYS
CAN 5 MAR
JAM URY
CHL
SVN
AUS
1-7 (best)
BHR ZAF DOM LTU
5 RWA ECU
NAM TUR CYP
ISR GBR
IND
EGY
ECU
AZE
CHN
ISR
HRV CYPOMN
SAU
LUX
KEN JOR LKA GRC
TUR
SYC CHE
AZE SAU
AUS BRN GMB SEN HND ITA
SWZ LTU
EST NZL THA
MEX
IRL MUSRUSPOL
CHN GEOALB MNE BGR
NIC IND
MAR
ZAF MUSGRC
MEX PANSYC SVN
ITA BEL
ISL
BEN
PAK IDN
COL
IRN
TTO
AUT BRN
KWT
KEN ALB DOMTHA NOR VNM PER ARG
LKA HUN MOZMDG BGDGHA CPVGTM
SWZ
4 GMB TJK SLVJOR
BTN IRNIDN POL
TTO
SVK
KWT
GIN TZA
UKR
SLV
LBN
DZA
CRI
ROU CZE
GHAPAK CPV JAMEGY CZE
LBR
SLE PRY TUN
KAZ
HUN
HND GEO BWA ZWE CMR NIC BRABWA
SEN
ZMB ARMTUN 3 LSO SRB SVK
NGA PHL
MLI RWA
TZA DZAMNE BDI
UGA VNM BGR COD ETH VEN
ETH LAO ARG
URY YEMHTI
UGA MRT
SRB MLT ARM
SLE PHL MNGBRA MDA
BGD GTM ZMB LAO
3 LBR
BDI BEN
PER
BIHCOL LVA
RUS
KAZ MWI BIH
MWI ZWE NPL VEN TCD TJK BTN
ROU MLI
TCD KGZ LBNCRI
LSOCMR NGA
MDA NPL
MOZ UKR
YEM GIN PRY KGZ MNG
MDG
2 COD HTI MRT 1
6 8 10 12 6 8 10 12
Sources: WEF Global Competitiveness Index 2018 & World Sources: World Development Indicators
Figure 63. Airports per Million Square Kilometre, 2013 Figure 64. Quality of Air Transport Infrastructure, 2017
10000
8
Quality of air transport infrastructure,
GRD
FSM
TON SGP
8000 NLDHKGARE
Airports per million km2
KNA FIN CHE QAT

6 PAN KORCAN
ESP
DNK
DEU
ISL
SWE
USANOR
ATG MYS NZLFRA
MLT BEL LUX
ZAF AZE JPN
PLW JOR PRTCYP
TUR ISR GBR IRL
URYLVA CZE AUSAUT
ECU
JAM EGY THA EST
6000 BHS
1-7 (best)
KEN CHN MUSGRC BHR SAU

GMB
RWA
IND
MARARM
NAM IDN DOM
CRI
SYC ITA
RUS
CHLPOL
OMN
BRN
BHR TJK GEO MEX
BGRHRV LTUSVN
ETH BTN LKA SRBMNE
4 MLI
SEN MDA SWZ
PAK CPV UKR TUN BRA
GHA
HND
COL
ALB
PER BWAARG ROUHUN
KAZTTO
ZWE NICVNM
LAOSLV LBN
DZA IRN
MOZMDG BEN GTM SVK
4000 UGA
GIN TZA BGD
ZMB
KGZ MNG KWT
BDICOD TCD
LBR SLE CMR NGA PHL
SLV LCA PRI
MLT HTI BIH VEN
CRI NPL MRT PRY
MWI
GTM
JAM DMA
VUT
CPV BRBMUS ISR 2 YEM
2000 COM
STP BLZ
PRY GBRDNKHKG
FJI PAN
ECU CZE
CYP DEU CHE
SLB PNG NIC
WSM
HRV BEL USA LSO
KOR
HND MEX LTU ISL
LSO PHL SWZ
BOL COLLBN URY
DOM LVA SVNTTOFRA NLD
SVK
PRT LUX
HTIZWE DJI GUY BGR
VEN CHL
GRC AUT
IRL
SWE AREKWT QAT
SRB BIH MKD BRA
ZAF NZL FIN
JPN
LBR MWI GNB
BDI TGO RWA
MDGUGA NPL
TZA
KEN
TJKCMRKGZMRT
BGD MDA
PAK
LAO
VNM JOR
AGO
ARM
UKR
L…GEO
BTN EGYALBCHN
NAM
MNE
SUR
IRQ IDN
AZE
IRN
THA
TUN
GAB
BWA
ARGHUN
BLR
ROU
MYS
TURKAZ
EST
POL
ESPITA OMN
GNQ CAN NOR BRN
0 CAF NERMOZGIN
ETH SLE
GMB
BFAAFG
BEN
MLI SEN
TCD CIV YEM
GHAMMR
SDN UZB
IND
NGA MAR PERMNG
DZA
TKM RUS AUSSAU 0
6 8 10 12 6 8 10 12
Sources: CIA World Factbook & World Development Indicators Sources: CIA World Factbook & World Development Indicators
Figure 65. Railroad Density, 2017 Figure 66. Efficiency of Train Services, 2017
100 SRB HRV
ROUHUN
POL
SVK
SVN
CZE
ISR
ITA
KOR
FRA
GBR
BEL
JPNDEU
AUT
DNK
NLDCHE LUX 100
Railroad density (km/1000 km2)
JPN CHE
UKR BGR HKG
MDA
Efficiency of train services,
80 ESP
80 KOR NLD
SGP
IRL FIN
LVALTU ESP AUT
DEUUSA
PRT
EST MYS FRA
MKD
0-100 (best)
AZE CZE LUX

RUSPRT
60 AZE
USA 60 IND CHN PANHUNEST
GBRDNK NOR
ARM LKA LVALTU MLTCAN
SWE ARE
SWE IDN MUSKAZ
SVK
ISL
AUS
ISR BEL IRL
IND GEOBIH UKR GEO POL ITA
BGD IRN
MNE TJK MAR
FIN TTO NZL BRN
SWZ ZAF URYGRC OMNSAU
40 ZMB NZL 40 PAK VNM EGY
ZAFDZA
MNG BWA
BGR TUR
SVN
QAT
ALB RWA SWZ LKA
MDA ARM
TUN MEX
TUR
KENBGD
TUN
DOM MEX GRC
MNE
ETH CHL
HRV
PAK KGZ NAM ROU BHR KWT
THAARG NOR TZA CMR THA
SEN PERSRB
MOZSLE MLI CPV JOR BRA ARG
20 VNM CHN CHLMYS 20 BDI
TCD MRT
ZMB
ECU
BIH CRI
MWI ZWE
BEN KEN COD GMB GIN LAOPHL
JAM
JOR KAZ LBR MWI GHA SLV LBN
UGA SEN CAN COL
TZA
TJK MAR EGY IRN RUS ZWE NIC VEN
MOZ GHA NGA NAM BRA UGA NGA
BOL IDN YEM BEN PRY CYP
BFA KGZ
CMR
CIV URY
COD PHL DZA
PER
COL
MNG BWA PAN AUS NPL ALB
ETHMLI MRT SAU HND
0 VEN
0 LSO GTM
6 8 10 12 6 8 10 12

Figure 67. Problematic Factors for Doing Business in Figure 68. Electrification Ratio, Indonesia
Indonesia
100 97,5
Electrification ratio (% households)

Corruption
95
Inefficient government bureaucracy
Access to financing 90
Inadequate supply of infrastructure 85
Policy instability
80
Government instability/coups
Tax rates 75
Poor work ethic in national labor force
70
Tax regulation
Inflation 65
Inadequately educated workforce
60
Restrictive labor regulations
2010
2011
2012
2013
2014
2015
2016
2017
1H 2018
Crime and theft
Foreign currency regulations
Insufficient capacity to innovate % of firms Sources: PLN Statistics
Poor public health
0 2 4 6 8 10 12
Sources: WEF Executive Opinion Survey 2017
Figure 69. Electrification Ratio, Peer Countries Figure 70. Electrification Ratio by Consumption Decile
100 100
Access to electricity (% of population)
Electrification ratio (% households)
98
90
96
80 94
92
70
90
60 88
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1 2 3 4 5 6 7 8 9 10
Indonesia Thailand Malaysia Consumption decile
Philippines Vietnam China 2012 2013 2017
Sources: World Development Indicators Sources: Susenas & Podes, Prospera’s calculation
Figure 71. System Average Interruption Frequency Index Figure 72. System Average Interruption Duration Index
(SAIFI) (SAIDI)
16 30
SAIFI (times/year)
SAIDI (hours)
14 25
12
20
10
8 15
6 10
4
5
2
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Sources: PLN Statistics Sources: PLN Statistics

Figure 73. Electrification Ratio (% of Households) by Region, 2017
Sources: PLN Statistics

Notes: Yellow indicates better electrification ratio
Figure 74. System Average Interruption Frequency Index (SAIFI) by Region, 2017

Notes: Yellow indicates better SAIFI
Figure 75. System Average Interruption Duration Index (SAIDI) by Region, 2017

Notes: Yellow indicates better SAIDI

Figure 76. Quality of Electricity Supply, 2017 Figure 77. Broadband Subscriptions, 2017
8 100
Quality of electricity supply, 1-7 (best)
subscriptions (per 100 population)

CHE
FRA DNK NOR SGP
CHE
NLDHKG FRADNK
NLD
Fixed-broadband internet
FIN
JPN
GBRISL LUX
CAN
NZLBEL
CZE AUT
SWE ARE
SVNKOR
ISR
PRT ESPOMN DEU
BHR USA IRL
SAU
QAT 80 KOR
MLT
DEU
ISL
NOR
CHL GBR
6 BTN CRI
URY
HRVMYSSVKITA
EST
BEL
SWE
CAN
HKG
GTM
JOR CYP AUS LUX
MAR NAM AZE MUSGRC LTU
POL KWTBRN
PANLVA PRTCYPNZL USA
EGY
GEO PER THA
TUN ROU
RUS
CHN IRN SYCHUN
TTO MLT
GRC
SLV ARMECU
LAO BIHCOL MEX 60 ESPJPN
FIN
AUS
IND JAM SRB
ALB
BGR
MNE KAZ
EST
LTU
HUN CZE AUT IRL
SVN
RWA NIC
VNM
MDA
UKR
PHL
BRA
DZA
IDN TUR ISR
URYLVA ITA SGP
4 KEN
SWZ
MNG
LKA
ZAF
BWA BGR
HRV SVK
GMB SENTJK KGZ
BGD
HND
CHN ROU
UGA CPV LBN
SRB
MOZ
ETH
ZWE TZA
MLI NPLLSO
GHA
PAK ARG 40 BIH AZE POL
RUSTTO
GEO MKDMNEMUS
SLE ZMB PRY ARGCHL BHR
BDI
LBR GIN DOM SYC
TCD CMR MDA ARE
2 COD
MWI MDG
BEN MRT VEN
UKR COL
TUR
CRIMEX KAZ
BRA
LBN
20 ARM THA PAN SAU
HTI NGA VNM JAM ALB
ECU IRN MYS QAT
YEM VEN BRN
MNG DOM
SLV PERDZA OMN
JOR TUN
EGY
TZA KGZ
BGD MARPRY LKA
NICCPV PHL NAM
GTM
BOL
YEM ZWE NPL
HND
IND ZAFBWA
IDN KWT
0 0 LBR ETH
UGA
MOZSLEGMB
COD MWI
BDI GINSENLSO
BEN
RWA
BFA
TCD
HTI MLI KEN
TJK CIV
MRT
CMR GHAPAK
ZMB AGO
NGA LAOSWZ
6 8 10 12 6 8 10 12
Sources: WEF Global Competitiveness Index 2018 & World Sources: World Development Indicators
Figure 78. Broadband Speed, 2017 Figure 79. Access to Basic Water Services, 2015
100 TUV TON ARM
PRYEGY
JOR LCA
NRUPLW
CRIBGR
MEX
THA
BRB
ROU
MUS
ARGCHL
HRV
URY GRC
HUN
TUR
LVA
PRT
POL CYP
ISR
CZE
EST
SVN
SVK
R…LTU
IMLT
NZL
TAFRA
ESP
KORGBR
FIN
BEL
JPNISL
DEU
AUT
BHR
DNK
SWE
NLD
AUS
CAN HKG
CHE
SAU
USANOR
KWT
ARE
IRL SGPLUX
BRN MACQAT
Singapore (2) BGD BLZ MDV
UKR
BTN
WSMGUY DMA
BIH BRA
VCT CHN
TUN DZA
MNEBLR BHS
ATG MYS
IRN PAN
SUR
TKM
TTO
GTM
BOLSLVFJI
JAMGEOECU DOM
HND LKALBN
ALB SRB KAZ
VUT VNM PHL OMN
Access to basic water services FSM PAK IND
NPLPSE KGZ IDNPER
GAB
Malaysia (30) MDACPV
ZAF
IRQ
COM
NIC MAR MNG AZE
80 GMB STP
MHL
LAO
NAM BWA
DJI GHA
Thailand (45)
(% of population)
MLI SENTJK
CIV
LSO
LBR GNB TLS YEM MRT
GIN
MWI COG
MMRNGA SWZ
BEN
ZWE
Vietnam (89) HTIKIR
TGO AFG
SLB
CMR
ZMB
60 SLE KEN SDN
BDI RWA
Indonesia (92) CAF BFA
MDG SSD TZA GNQ
MOZ
NER
Philippines (97) COD TCD
AGO
40 ETH
UGA
China (152)
0 10 20 30 40 50 60 70 80 20
6 8 10 12
2017 2018 2019 Mean download speed GDP per capita, PPP (constant 2011 international $), log
Sources: cable.co.uk
Figure 80. Access to Basic Sanitation Services, 2015 Figure 81. Access to Water Supply by Quintile 2018, Urban
100 UZB PLW
ALB CRI
CHL EST
MYS
PRT
GRC
POL
HUN
KAZ
ISR
CYP
CZE
SVN
SVK NZL
JPN
MLT
ESP
KOR
ITA AUS
BHR
AUT
BEL
FIN
OMN
GBR
FRA SAU
DNK
SWE
DEU
ISL
CAN USA KWT
CHEARE
NLDHKGNOR
SGP QAT
100
PSE KGZ
TJK WSM UKRJOR MDV
FJI BIH TKM HRV
BRB URY
MNE ARGTURLTU BRN LUX
LKALBN
SRBTHA
Access to basic sanitation services
TON EGY
TUN BLR
MUS LVA TTO
TUV ARM
PRY LCAMKD
SLV BHS IRL
AZE
MEX
MHL BLZ VCT
GUY DZAIRN ATGRUS
JAM ECU BRA IRQBGR
MARGEO COL DOM ROU
80
% urban households
HND SUR
MDA VNM
NIC PHL
DMA GRD
PER PAN 75
CHN GNQ Piped on Premises
(% of population)
LAO ZAF
CPV
MMR
GTM IDN
NRU
RWA BTN
60 YEM PAK SWZ MNG BWA
Other Improved
VUT BOL
50
BDI DJI
SEN
NPL BGD
MWI TLS LSO MRT IND
40 GMB
KIR
AFG
ZWE STP
CMR AGO GAB Other Unimproved
COM SDN
NGA NAM 25
HTIMLI
SLB CIVZMB
KEN
CAF MOZ BFA
GIN GNB
TZA Surface Water
20 COD
LBR
UGA
SLE GHA COG
NER TGO BEN
MDG SSD
0
TCD
ETH
1 2 3 4 5
0
Consumption quintile
6 8 10 12
Sources: World Development Indicators Sources: Susenas

Figure 82. Access to Water Supply by Quintile 2018, Rural Figure 83. Firms Experiencing Water Insufficiencies
100 60
Firms experiencing water insufficiencies (%)

MWI YEM
75 SWZ
% rural households
AGO
DJI
CAF LSO
Piped on Premises
40
ETH
50 Other Improved KEN

GHA
TZA CPV
Other Unimproved MDG ZMB
ERI BEN NIC SUR
MLI
SLB SLV LBN
25 Surface Water NER
BDI
MRT HND BTN
PRY
BRB
BLZ
20 TLS
PSE
GTM JOR COL IRQ
COD SEN MUS RUS
CMR LAO XKX MYS(2015)
RWA ZWE NGA
GRD
LKA DOM
TGO UGA NPLTJK SDN UKRECU
SRB
CRI ARG BHS TTO
KGZ
0 TCDSSD PAK BOL BIH
KNA
TUR
MMR
VNM(2015) BWAMNE
MEX KAZ
AFG LVA
PHL(2015)VCT PAN EST
1 2 3 4 5 KHM
GEO
ALB
PER BRA BGR
BLR
URY
CZE
BGD MDAIND JAM EGYCHN(2012) AZEROU
HRV
Quintile ARM
MAR TUN
MKD
THA(2016)ATG POL
CHL
LTU ISR
0 GIN UZB DMA
LCA
IDN(2015) HUNSVK
SVN
6 7 8 9 10 11
Sources: Susenas GDP per capita, PPP (constant 2011 international $), log
Sources: World Bank Enterprise Surveys & World Development Indicators
5. Figures on Market Failure Indicators
Figure 84. Indonesia’s Export by Type of Commodity
100 2000s Commodity

90 Boom
Indonesia's Export by Type of
Commodity (USD Billion)
80
Commodities
70
60
Resource-Based Manufactures
50 Low-Tech Manufactures
40 Medium-Tech Manufactures
30 High-Tech Manufactures
20
10
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Sources: Prospera

Figure 85. Export Composition by Product, 1995 - 2017
Sources: CID Harvard
Figure 86. Complexity Outlook Index & Economic Complexity Figure 87. Economic Complexity Index vs. GDP per Capita,
Index, 2016 2016
3,5 IND
3,5
TUR JPN
2,5 2,5 CHE
Economic Complexity Index
Complexity Outlook Index
ESP KOR DEU

PRT SGP
IDN BGR CZE AUT
SWE
EGY HUNMNP GBRFINUSA
LTU NLD SVK SVN ITA FRA IRL
SRBCAN
HRV THA BEL TUV
1,5 GRC LVA DNK
EST
ROM LUX FIN 1,5 CHN MEX POL
MYS KNAEST
ROM
AND
BEL SMRDNK
LUX
BRA TUN
LBN POL
BLR MYSCHN GBR CHE THA MLT HKG NLD
UKR SVKHUN PHL WSM ISR
ZAF BIH ISR MEX FRA SVN SWE SGP
KOR BLR HRV GUM
ESP
VNM CYP HKG STP BIH PAN LTU
BRB PRT CYP CAN NOR
UGA PAN SRB LVA MAC
GRD
BGRASM
GTM RUS PHL SMR CPV
PAK LKA SLV
PSE IRL UKR TON
TUN LBN CRI TUR
DMA ISL
NORGUM RUSSYC BHR
0,5 ARG KGZ
NZLCRI
JOR
CZE 0,5 KGZ IND PSE
VNM FSM
MHL
SWZ
SLV
IDN
JOR LCAPLW
MNE BRAATG SAU ARE
NZL
MDA AND ITA BTN ARM COL URY GRC
BHS
TZA KEN MAR ARE NPL BLZMKD ZAF
SYRALB MUS
DOM
FJINPL
URY MAC WSM
MLT USA JPN SLE MDA EGY FJI DOM MUS CHL TTO
PER AUS COM GTM GEO JAM VCT
HND GEO CHLCOL SWZ
MKD DMA BRB SXM MNP
UGA
MLI LKA NAM
OMN KWT
QAT
SEN
KAZ PRK MNEBHR ABW RWA HND MAR GUYALB ARG
KAZ
ASM STP SEN MDV
IRNSUR AUS
MMR ARM SAU ISL GRD KNA AUT KEN
KHM TLS PRY
IRN NAM JAMBLZ
MLIOMN DJI TCACPV
TON PAK
LSO KIRUZB PERBWA GRL
-0,5 MDG UZB KHM RWA SLE ATG
PYFSYC
MHL -0,5 BDI LBRYEM TGO HTIBEN
CAFNER BGD
MMR NIC DZA
ECUZWE TGO
LAO
ETH
GHA BENPRYGUYQAT
NIC KWTCUW BHS
TTO LCA
FSMPLWCYM BMU TUV ZWE GHA BOLVUT
LAO TKM
MOZ
BRN MNG
CMR
BOL BGDLBR
DZA KIR NCLVCTCOM BTN MDGETH
GMB TJK
TZA SLB
CMR MNG ECU
LBY
GNQ
IRQ GAB COD
AGO LBY
SLB
AFG TKM
TJKCAF
NERYEM
BWA TLS
CUB
MDV
SUR
LSO
GRL
FRO COD AFG
TCD SSD CIV
COG AZE
GIN
PNG MRTMWI
GNB
NGA SDN GMB
VEN
ZMB VUT
ERI
SOM BDI
HTI MOZ ZMB SDN AGO BRN
BFA MWI AZE
BFA MRT
GNB GIN CIV COG
NGA
PNG GAB
-1,5 -1,5 IRQ GNQ
DEU TCD
-2,5 -2,5
-2,5 -1,5 -0,5 0,5 1,5 2,5 5 7 9 11
Economic Complexity Index GDP per capita, PPP (constant 2011 international $), log
(Controlling for GDP per Capita & Natural Resource Exports)
Sources: CID Harvard Sources: CID Harvard & World Development Indicators

6. Figures on Macro Risk Indicators
Figure 88. External Debt & Reserve Adequacy Figure 89. External Debt & Current Account Balance
Sources: International Monetary Fund Sources: International Monetary Fund

Note: Assessment of Reserve Adequacy (ARA) metric measures a
country's potential FX liquidity needs in adverse circumstances against
which reserves could be held as a precautionary buffer (IMF, 2019).
Figure 90. Central Government Debt Figure 91. Tax Ratio vs. GDP per Capita, 2016
40
ISL
80
Central government debt, total
LSO DNK
Tax Revenue (% GDP)
SYC
30
60 NAM
NZL SWE MAC
SLB ZAF GRC
JAM MLT AUT LUX
GBR
(% of GDP)
KIR
WSM URYLVA CYPITAFRA
GEO HUN ISR BEL
MOZ PRT
EST AUS
NLD NOR
ARM FIN
40 20 MDA UKR
BWA
BIH PLW BGR
TGO NPL IRL
MHL SLV ALB MUSTUR SVN
KGZ UZB MKD SVK
CHL LTU
BFA VUT NIC ROUPOL
MWI MLI SEN KENCIV
ZMB THA KOR
RWA CZE
PHLBTN PER CRI
BLR BHSMYS ESP SGP
UGA DOM
LBN
COL MEX
20 LAO
LKA BRA ARG
MNG
CAN
JPNDEUUSA
10 AGO
GTM
PRY IDN CHN
KAZ
RUS
CHE
BGD
PSE FSM MMR

0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
IRQ
0 ARE
6 7 8 9 10 11 12
Indonesia Thailand Malaysia Philippines
Phiippines GDP per capita, PPP (constant 2011 international $), log

Figure 92. Government Expenditure on Education vs. GDP per Figure 93. Government Expenditure on Health
Capita, 2015
10 4
Health Expenditure, public (% of GDP)

Government expenditure on
education, total (% of GDP)
8 ISL
SWE NOR 3
BTN
SEN UZB CRI FIN
BLZ TUN
BDI HND BEL
BRA CYPNZL
6 NER KGZGHA ZAF
ARG ISR
CZE
MWI GBR
TGO
VUT
KEN
TJK CPV
JAM
MEX LVA
ESTMLTFRAAUT
NLD
KOR AUS
2
PSE ECU CHE
MUS
CHLMYS SVN
ETH CIV BLR POL DEU
COG COL
MDV PRT
HUNSVK
COM BEN LCA TUR ESP
BFA NIC MNG LTU ITA
4 LBR
MLINPL STP
RWA
SLV PERSRB
RUS IRL
LUX
AFG
IDN
ALB
DMA HKG 1
HTI ROU
GTM AZE MAC
UGA CMR ARM IRN KAZ
KNA BHR
GINMDG PAK
COD LKA
2
SSD
0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0 GUY
6 8 10 12 Indonesia Thailand Malaysia

GDP per capita, PPP (constant 2011 international $), log Philippines Vietnam China
7. Figures on Regulation and Institution Indicators
Figure 94. The Missing Middle, 2013 Figure 95. Regulatory Index, 2017
120 4.000 8,72
GDP Contribution (in Trillion IDR)
3.500 7,13
Employment (Millions)
100 6,55 6,65

Regulatory Index
6,37 6,40
3.000
80
2.500
4,18
60 2.000
1.500
40
1.000
20
500
0 -
Brazil China India Indonesia Malaysia Thailand Vietnam
Micro Small Medium Large
Employment Nominal GDP Sources: Worldwide Governance Indicators 2018

Sources: Prospera
Figure 96. Legal System and Property Right Index, 2017 Figure 97. Rule of Law Index, 2017
5,76
Legal System & Property
5,63
5,10 5,43
5,17
Rule of Law Index
4,77 5,02
4,52 4,80 4,65
4,45 4,35
4,20
Right Index
4,09
Brazil China India Indonesia Malaysia Thailand Vietnam Brazil China India Indonesia Malaysia Thailand Vietnam
Sources: Worldwide Governance Indicators 2018 Sources: Worldwide Governance Indicators 2018

Figure 98. Cost of Redundancy Dismissal, 2018

80
57,8
70
60
50
36
27,4
27,4
24,6
23,9
40
30
20
10
0
United States of…

Iran, Islamic Republic…
Uruguay
Peru
Italy
China
Belgium
Zambia
Greece
Spain
Mauritius
Indonesia
Mozambique
Australia
Finland
Switzerland
Bahrain
Egypt
Bangladesh
Argentina
Viet Nam
Malaysia
El Salvador
Ghana
Turkey
Ecuador
Nepal
Netherlands
Japan
Singapore
Russian Federation
Brazil
Sweden
New Zealand
Sri Lanka
Mexico
Paraguay
Tunisia
Germany
France
Canada
Brunei Darussalam
Thailand
Honduras
Korea, Republic of
Pakistan
India
Iceland
United Kingdom
Denmark
Philippines
Sources: Global Innovation Index 2018

Note: Sum of notice period and severance pay for redundancy dismissal (in salary weeks, averages for workers with 1, 5, and 10 years of
tenure, with a minimum threshold of 8 weeks)
Figure 99. Percent of Firms Offering Formal Training Figure 100. FDI Regulatory Restrictiveness Index, 2018
80 WSM CHN(2012)
FDI Regulatory Restrictiveness Index 0,374
ECU
SWE 0,313
Firms offering formal training (%)
(0 = open, 1 = closed)
PER
KGZ GUY COL 0,251 0,252
FJI MNG
60 PHL(2015)
NIC
VEN
CHL 0,209
RWA GTMXKX CRI CZE
SLV URY
MRT BIH BWA BLR
BOL MEX
CAF KNA
HRV
VUT HND MKD
PRYVCTGRD RUS 0,117 0,130
SVK
SLB BRA BGR LTUSVN
40 KEN GHA ROU
ARG
CMR COG
IND ZAFSRB BHS
UGA CIV BRB POLEST
BDI MWI TGO TJK MDA
PAK
AFG NPL
TZA LSO NGA GAB
ZMB TUN TUR
KAZ TTO
NER LBN
ERI ZWE MAR
BTN
JAM NAM MUS ATGLVA
BFA ALB
AGO MNE
Vietnam
Malaysia
Indonesia
DOM
China
India
Myanmar
Philippines
LBRMOZ BGD
DJI VNM(2015)UKR IRQ
SLEETH
20 BEN
LKADMA
AZE
ISR
THA(2016) MYS(2015)
COD MLI
SSDSEN
GIN CPV ARM HUN
YEM BLZ LCA
MDG
GNB
PSE TON
UZB GEO EGY PAN
SDN
LAO
MMR
IDN(2015)
JOR
TLS SUR
0
6 7 8 9 10 11 Sources: OECD
Sources: World Bank Enterprise Surveys & World Development

Indicators
Figure 101. Inward FDI Stock, 2018 Figure 102. Time Required to Start a Business, 2019
60,1
Inward FDI Stock (% of GDP)
Philippines 31
45,7 Indonesia 19,6

43,0
Vietnam 17
25,1 Malaysia 13,5

22,1
China 8,6
12,1
Brunei Darussalam 5,5
Thailand 4,5
Vietnam Thailand Malaysia Philippines Indonesia China Singapore 1,5
Time Required to Start a Business (Days)

Sources: Country Fact Sheets 2019 – UNCTAD
Sources: Ease of Doing Business 2019 – World Bank

Figure 103. Score on Trading across Borders, 2019 Figure 104. Rank in the Ease of Paying Taxes, 2019
93 90 88 87 85 83 77 131
Score on Trading across Borders
Rank in the Ease of Paying Taxes

72 71 70 69 67
61
112
94
72
59
Malaysia
China
Vietnam
Indonesia
Singapore
Japan
Korea, Rep.
Thailand
India
East Asia & Pacific
Philippines
Indonesia - Surabaya
Indonesia - Jakarta
8
Vietnam Indonesia Phillipines Malaysia Thailand Singapore
Sources: Ease of Doing Business 2019 – World Bank Sources: Ease of Doing Business 2019 – World Bank
Figure 105. Cost to Export and Import, 2019

200
Documentary Compliance (USD)
160
Cost to Export and Import,
120
80
40
0
Malaysia
Vietnam
Indonesia
Singapore
China
Japan
Korea, Rep.
Philippines
Thailand
India
Indonesia - Surabaya
Indonesia - Jakarta
East Asia & Pacific
Cost to Import Cost to Export
Sources: Ease of Doing Business 2019 – World Bank
Figure 106. Effective Rate of Protection, 2015 Figure 107. Most Problematic Factors for Doing Business
in Indonesia
Food Crops
Metals & Metal Products Corruption
Chemical Inefficient government bureaucracy
Food, Beverages & Tobacco Access to financing
Non-Metal Products Inadequate supply of infrastructure
Machinery & Transport Equipment Policy instability
Livestock and Their Products
Government instability/coups
Other Manufacturing
Tax rates
Estate and Other Crops
Poor work ethic in national labor…
Textile, Apparel & Leather
Paper Products Tax regulation
Wood Products Inflation
Fisheries Inadequately educated workforce
Oil Refining & LNG Restrictive labor regulations
Oil & Gas Extraction Crime and theft
Forestry Foreign currency regulations
Other Mining Insufficient capacity to innovate
-40 -20 0 20 40 60 80
% of firms
Poor public health
Effective Rate of Protection (%)
0 2 4 6 8 10 12
Sources: Mark (2015) Sources: WEF Executive Opinion Survey 2017


Direktorat Perencanaan Makro Dan Analisis Statistik Indonesia Growth Diagnostics English Language

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Indonesia Growth Diagnostics:

Strategic Priority to Boost Economic Growth

Ministry of National Development Planning/

Ministry of National Development Planning/

Indonesia Growth Diagnostics:

Ministry of National Development Planning/

Jalan Taman Suropati Nomor 2

ii | Indonesia Growth Diagnostics

• Prof. Dorodjatun Kuntjoro-Jakti • Prof. Arief Anshory Yusuf, Ph.D.

vi | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | iii

iv | Indonesia Growth Diagnostics

Figure 53. Cause of Death by Non-Communicable Diseases ............................................................................................. 28

Indonesia Growth Diagnostics | v

ii | Indonesia Growth Diagnostics

Figure 1. Binding Constraint Illustration

Indonesia Growth Diagnostics | 1

2 | Indonesia Growth Diagnostics

1. Indonesia Growth Story

1.1. Declining Trend Growth

1.2. Productivity Problem

Indonesia Growth Diagnostics | 3

1.3. Growth Question

4 | Indonesia Growth Diagnostics

Figure 2. Diagnostic Tree

Problem: low levels of

Low social Low Low domestic savings + Bad local finance/

Indonesia Growth Diagnostics | 5

3. Regulations and Institutions as the Most Binding Constraint

3.1. Investment Financing: Issue with Intermediation

6 | Indonesia Growth Diagnostics

3.2. Geography: Underlining the Need for Infrastructure

Indonesia Growth Diagnostics | 7

8 | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | 9

3.4. Infrastructure: Lacking Particularly for Connectivity

10 | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | 11

Water and Sanitation

3.5. Market Failure: Unrealized Potential

12 | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | 13

14 | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | 15

16 | Indonesia Growth Diagnostics

Indonesia Growth Diagnostics | 17

18 | Indonesia Growth Diagnostics

1. Figures on Growth Story Indicators

Figure 3. Indonesia Economic Growth Figure 4. GDP per Capita Trend

GDP per Capita (Constant 2010 US$)

Sources: CEIC Sources: World Development Indicators

Figure 5. Indonesia Potential Growth Figure 6. Total Factor Productivity

TFP level at current PPPs (USA=1)

Sources: Bappenas (2018a) Sources: World Development Indicators

Indonesia Growth Diagnostics | 19

Sources: World Development Indicators Sources: World Development Indicators

49,1 Average excluding Japan (70%)

Sources: World Development Indicators Sources: CEIC

20 | Indonesia Growth Diagnostics

2. Figures on Finance Indicators

Foreign direct investment, net inflows

Sources: CEIC Sources: World Development Indicators