2014 Index of Economic Freedom

Indonesia

overall score58.5
world rank100
Rule of Law

Property Rights30.0

Freedom From Corruption28.0

Limited Government

Government Spending89.8

Fiscal Freedom83.4

Regulatory Efficiency

Business Freedom54.8

Labor Freedom47.8

Monetary Freedom76.4

Open Markets

Trade Freedom74.8

Investment Freedom40.0

Financial Freedom60.0

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Quick Facts
  • Population:
    • 244.5 million
  • GDP (PPP):
    • $1.2 trillion
    • 6.2% growth
    • 5.9% 5-year compound annual growth
    • $4,977 per capita
  • Unemployment:
    • 6.2%
  • Inflation (CPI):
    • 4.3%
  • FDI Inflow:
    • $19.9 billion
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Indonesia’s economic freedom score is 58.5, making its economy the 100th freest in the 2014 Index. Its score is 1.6 points better than last year due to notable improvements in business freedom, investment freedom, and financial freedom that offset small declines in labor freedom and freedom from corruption. Indonesia is ranked 21st out of 42 countries in the Asia–Pacific region, and its overall score is the same as the regional average but below the world average.

Over the 20-year history of the Index, Indonesia has advanced its economic freedom score by about 4 points. This modest overall score increase has been relatively broad-based, facilitated by improvements in six of the 10 economic freedoms including trade freedom, freedom from corruption, and fiscal freedom, each of which gained 10 points or more.

Nonetheless, the Indonesian economy continues to be considered “mostly unfree” due to the lack of progress in other critical areas of economic freedom. Indonesia has lagged in promoting the effective rule of law. The judicial system remains vulnerable to political interference, and property rights are not strongly protected. Despite some progress, lingering corruption continues to undermine enforcement of the rule of law and hampers the realization of Indonesia’s full growth potential.

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Background

Indonesia is the world’s most populous Muslim-majority democracy. Since 1998, when long-standing authoritarian ruler General Suharto stepped down, Indonesia’s nearly 250 million people have enjoyed a widening range of political freedoms, and participation in the political process is high. President Susilo Bambang Yudhoyono has tried to address corruption and encourage much-needed foreign investment, but the weak rule of law remains a major impediment to attracting capital. As a member of the G-20 and a driving force within the Association of Southeast Asian Nations, Indonesia plays a growing role at the multilateral level. The increasingly modern and diversified economy has recovered from the global recession.

Rule of LawView Methodology

Property Rights 30.0 Create a Graph using this measurement

Freedom From Corruption 28.0 Create a Graph using this measurement

Corruption remains endemic. In 2013, the chief oil-and-gas regulator was arrested on corruption charges. In 2012, there were several high-profile convictions for bribery and money laundering. The judiciary has demonstrated its independence in some cases, but the court system remains plagued by corruption and other weaknesses. Property rights are generally respected, but enforcement is inefficient and uneven.

Limited GovernmentView Methodology

The top individual income tax rate is 30 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and a property tax. The overall tax burden is 11.8 percent of gross domestic income. Public spending is 19 percent of GDP, and public debt has fallen to 24 percent of gross domestic output. The government has raised subsidized fuel prices to help narrow fiscal shortfalls.

Regulatory EfficiencyView Methodology

Despite some progress, overall regulatory efficiency is weak. Launching a business takes more than a month on average, and licensing requirements cost slightly less than the level of average annual income. Regulations concerning the creation and termination of employment relationships are relatively costly. In June 2013, the legislature voted to reduce costly government subsidies for gasoline and diesel fuel.

Open MarketsView Methodology

Indonesia’s average tariff rate is only 2.6 percent, but import licensing and quotas further restrict trade. Foreign investment in several sectors of the economy requires government approval. The financial sector remains stable, and a Financial Services Authority has been formed to improve regulatory efficiency. The government has allowed more foreign involvement in the financial sector, although limits remain.

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