High barriers to investment and trade have limited Indonesia’s ability to attract export-oriented foreign direct investment, reduced its integration into the global economy, and increased the cost of food in the country. These limitations also have slowed the growth of manufacturing and non-commodity sectors. The lion’s share of jobs in the past decades have been created in the commodities and low-productivity service sectors, which often pay below middle-class wages.
As a result of the pandemic, Indonesia has entered its first recession in two decades. This has exacerbated the challenges the economy is facing in expanding into more sophisticated sectors to help create better-paying, higher-productivity jobs.
"The government is moving forward with an ambitious reform program to attract investment and increase Indonesia’s economic competitiveness. These reforms have the potential to support an economic transformation away from commodities and towards higher value-added sectors. This could provide a much-needed boost to the post-pandemic economic recovery," said Satu Kahkonen, World Bank Country Director for Indonesia and Timor-Leste, in a press release on Tuesday.
The Development Policy Operation (DPO) is structured around two pillars. The first aims to accelerate investment by opening more sectors to private investment, particularly foreign direct investment, bringing more high-skilled professionals to the labor market; and stimulating private investment in renewable energy. The second supports reform to trade policy to boost competitiveness and the economic recovery. The objective is to increase access to and affordability of basic food commodities and raw materials; as well as to facilitate access to manufacturing inputs.
The increased investments expected to be triggered by the reforms will however also need careful environmental management. The World Bank will work together with other development partners to assist the government to reinforce environmental management efforts across all sectors.
This DPO support to Indonesia’s ambitious trade and investment reforms is in line with the World Bank Group’s (WBG) longstanding engagement with the Government of Indonesia. The operation is fully aligned with the WBG’s recently adopted Country Partnership Framework (CPF), which identifies strengthening the competitiveness and resilience of the economy as a key pathway to eliminate poverty and increase shared prosperity.