Indonesia: Growth Performance and Policy Challenges

Indonesia’s growth performance is improving, following a slow recovery from the 1997-98 financialcrisis. Investment is picking up, despite considerable business-climate obstacles to entrepreneurship.Unemployment remains high, and labour informality is pervasive. Fiscal policy has been conductedresponsibly and in an increasingly decentralised manner. Monetary policy is now carried out within afully-fledged inflation-targeting framework. This paper argues that the main barriers to raising theeconomy’s growth potential are to be found on the supply side of the economy. Indonesia will need toimprove the business environment and to make better use of labour inputs to put the economy on a highergrowth trajectory. The country’s income gap relative to the OECD is sizeable, and several years ofsustained growth will be needed to eliminate it. This Working Paper relates to the 2008 OECD EconomicAssessment of Indonesia (www.oecd.org/eco/surveys/indonesia).