2009 Index of Economic Freedom

Quick Facts

Population:

• 223.0 million

GDP (PPP):

• $770.5 billion
• 5.5% growth
• 5.1% 5-year compound annual growth
• $3454 per capita

Unemployment:

• 9.6%

Inflation (CPI):

• 6.4%

FDI Inflow:

• $5.6 billion

Indonesia’s economic freedom score is 53.4, making its economy the 131st freest in the 2009 Index. Its score has improved by 0.2 point since last year, reflecting modest improvements in trade and monetary freedom offset by declining scores in business freedom and government size. Indonesia is ranked 27th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average.

Indonesia has demonstrated some resilience in recent years, achieving an average economic growth rate of more than 5 percent over the past five years. Recent reform measures have put greater emphasis on improving the business climate, enhancing regional competitiveness, and creating a more vibrant private sector. Indonesia scores well in trade freedom, fiscal freedom, and government size. Public finance management has improved, and tariff barriers have been lowered.

However, institutional challenges to economic freedom linger. Starting a business takes more than twice as long as the world average, and regulations are onerous. Despite some progress, foreign investment remains restricted, and judicial enforcement is both erratic and non-transparent. Because of pervasive corruption, impartial adjudication of cases is not guaranteed.

Background Back to the top

Indonesia is the world's most populous Muslim-majority democracy. Since its long-standing authoritarian ruler, General Suharto, stepped down in 1998, Indonesia's nearly 250 million people have enjoyed the blossoming of a wide range of freedoms, and political participation is high. President Susilo Bambang Yudhoyono has cracked down on corruption and tried to attract much-needed foreign investment. Poor infrastructure and a weak rule of law remain major impediments to growth.

Business Freedom 46.7 Back to the top

The overall freedom to conduct a business is significantly restricted by Indonesia's regulatory environment. Starting a business takes twice the world average of 38 days. Obtaining a business license requires about the world average of 18 procedures. Closing a business is difficult and costly.

Trade Freedom 76.4 Back to the top

Indonesia's weighted average tariff rate was 4.3 percent in 2006. Import and export bans and restrictions, services market access barriers, non-transparent and arbitrary regulations, import and export licensing requirements, restrictive sanitary and phytosanitary regulations, weak enforcement of intellectual property rights, and customs valuation that can be inconsistent and prone to corruption add to the cost of trade. Fifteen points were deducted from Indonesia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 77.5 Back to the top

Indonesia has burdensome taxes. The top individual income tax rate is 35 percent, and the top corporate tax rate is 30 percent. Implementation of a tax reform package has been slow. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 11.0 percent.

Government Size 88.0 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 20 percent of GDP. State control of the economy is widespread. Targets for privatization include plantations, shipping enterprises, and a state insurance company, but action has been limited.

Monetary Freedom71.6 Back to the top

Inflation is relatively high, averaging 8.4 percent between 2005 and 2007. Fuel, housing, and health care are subsidized, and gasoline, electricity, liquefied petroleum gas, rice, cigarettes, cement, hospital services, potable/piped water, city transport, air transport, telephone charges, trains, salt, toll-road tariffs, and postage have administered prices set by the government. Ten points were deducted from Indonesia's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign investors face significant restrictions. In 2007, Indonesia updated its restricted investment list, prohibiting foreign and domestic investment in 23 sectors, reserving 43 sectors for small and medium-sized enterprises (SME) and 33 sectors for partnership, and opening 98 sectors to foreign investment. Corruption, contradictory and non-transparent regulations, and taxation and labor issues make negotiating and enforcing contracts difficult and the treatment of foreign investors unequal. Subject to restrictions, residents and non-residents may hold foreign exchange accounts. Most capital transactions are restricted. Non-residents may not purchase real estate.

Financial Freedom40.0 Back to the top

Indonesia's financial system has undergone restructuring and consolidation since the 1997 Asian financial crisis. The number of banks fell to 130 in early 2008 from 238 in 1997. Overall, banking supervision has been strengthened, and the efficiency of the banking system has been improving. Almost all banks taken over in the wake of the crisis have been privatized, but the state still owns five banks, three of which are among the largest in terms of assets. Non-performing loans in the banking sector have declined considerably, accounting for less than 6 percent of total loans. In 2008, the government announced its plans to set up a holding company for state-owned banks to comply with the Single Presence Policy, under which no investor may own a majority stake in more than one bank. Capital markets are developing, and the previous two stock exchanges were merged into the Indonesia Stock Exchange in 2007.

Property Rights30.0 Back to the top

Court rulings can be arbitrary and inconsistent, and corruption is substantial. Judges have been known to rule against foreigners in commercial disputes, ignoring contracts between the parties. It is difficult to get the courts to enforce international arbitration awards. Lack of clear land titles and the inability to own land in “fee simple” are also problems. Enforcement of intellectual property rights is weak

Freedom From Corruption23.0 Back to the top

Corruption is perceived as pervasive. Indonesia ranks 143rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Companies cite demands for irregular fees to obtain required permits or licenses as well as the awarding of government contracts and concessions based on personal relationships.

Labor Freedom50.9 Back to the top

Indonesia's restrictive labor regulations impede employment and productivity growth. The difficulty of laying off a worker creates a disincentive for additional hiring. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee can be costly.