Indonesia’s growth performance is improving, following a slow recovery from the 1997-98 financial crisis. Growth is becoming increasingly reliant on the dynamism of domestic demand, rather than net exports. Investment is picking up, despite considerable business-climate obstacles to entrepreneurship. Unemployment remains high, and labour informality is pervasive, due predominantly to an increasingly onerous labour code. The macroeconomic policy setting is by and large appropriate. Fiscal policy has been conducted responsibly and in an increasingly decentralised manner. Public indebtedness has been reduced, creating room in the budget for raising spending on much needed infrastructure development, human capital accumulation and social protection. Monetary policy is now conducted within a fully-fledged inflation-targeting regime. It has delivered disinflation, albeit to a level of inflation that remains above that of Indonesia’s trading partners. Efforts to enhance credibility in the monetary policy framework would be helpful. This Economic Assessment argues that the main barriers to raising the economy’s growth potential are to be found on the supply side of the economy. Indonesia will need to improve the business environment and make better use of labour inputs to put the economy on a higher growth trajectory. The country’s income gap relative to the OECD is sizeable, and several years of sustained growth will be needed to eliminate it.