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2010 OECD Economic Surveys: Indonesia 2010

image of OECD Economic Surveys: Indonesia 2010

This 2010 edition of OECD's periodic survey of the Indonesian economy includes chapters covering achieving sustainable and inclusive growth, phasing out energy subsidies, tackling the infrastructure challenge, and enhancing the effectiveness of social policies. It finds that Indonesia's economy withstood the recent global crisis very well, thanks to appropriate stabilisation policies and increased economic and financial resilience.  Nevertheless, a number of institutional reforms and policy changes will be needed to deal with the several cross-cutting challenges of decentralisation, capacity-building at the local level, and improved economic governance.

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Assessment and recommendations

Indonesia weathered the global crisis very well. At 4.6%, real GDP growth in 2009 was the third highest in the G20, after China and India, and the economy is on track to achieve growth of around 6% this year and next. Lower international commodity prices, a sharp currency appreciation and a slowdown in domestic demand growth caused inflation to decelerate to a nine-year low of an average 4.4% in 2009 (2.8% year-on-year in December). Strong aggregate performance can be attributed to successful macroeconomic management, combining accommodative monetary policy and a moderate but timely fiscal impulse. But it also underlines the increased resilience of the economy in the face of external shocks, which stems from substantial macroeconomic and structural reforms undertaken since the Asian crisis. Indeed, the tremendous improvement in economic fundamentals over the last decade has led rating agencies to upgrade Indonesia’s sovereign rating, with an investment grade in prospect. The country has also benefited from its increasing integration with other ASEAN economies, and more recently with China. At the same time, low reliance on international trade with OECD countries and under-developed capital markets, together with low exposure to toxic assets, made the economy less vulnerable to advanced economies’ financial and economic developments. In addition, losses in formal-sector employment were absorbed by an expanding informal labour market. While the overall impact of the crisis was muted, the poorest appear to have been more affected, notwithstanding government assistance programmes.

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