The Indonesia Competitiveness Report 2011

The Indonesia
Competitiveness Report 2011

Sustaining the Growth Momentum
Thierry Geiger, World Economic Forum

June 2011
Indonesia Competitiveness Report 2011 © World Economic Forum

The Indonesia Competitiveness
Report 2011

The Indonesia Competitiveness Report 2011 is published by
the World Economic Forum and is the result of a collaboration
between the Centre for Global Competitiveness and Performance
and the Centre for Regional Strategies’ Asia Team.
Professor Klaus Schwab,

Executive Chairman, World Economic Forum
Robert Greenhill,
Chief Business Officer, World Economic Forum
CENTRE FOR GLOBAL COMPETITIVENESS AND PERFORMANCE
Thierry Geiger, Associate Director, Economist
Jennifer Blanke, Director, Lead Economist
Ciara Browne, Associate Director, Senior Community Manager
Roberto Crotti, Junior Economist
Margareta Drzeniek Hanouz, Director, Senior Economist
Satu Kauhanen, Team Coordinator
Pearl Samandari Massoudi, Community Manager
ASIA TEAM, CENTRE FOR REGIONAL STRATEGIES
Sushant Palakurthi Rao, Director, Head of Asia
Clara Chung, Community Manager for Asia and Pacific,

Global Leadership Fellow
Anne-Catherine Gay des Combes, Team Coordinator
Maryam Hassimi, Community Manager for India and South Asia,

Jaeyoung Lee, Community Manager for Asia and Pacific,

We would like to extend a special thank you to Gilly Nadel for

her excellent copyediting work and Neil Weinberg for his superb
graphic design.
World Economic Forum

Geneva
Copyright © 2011
by the World Economic Forum
All rights reserved. No part of this publication can be reproduced,

stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, or otherwise without
the prior permission of the World Economic Forum.
Printed and bound in Indonesia.
ISBN-10: 92-95044-78-9
ISBN-13: 978-92-95044-78-4
For additional information and material related to this publication

and to The Global Competitiveness Report 2010–2011, please visit
www.weforum.org/gcr.

Contents
Preface v
by Klaus Schwab, World Economic Forum
Executive Summary vii
Indonesia’s Competitiveness: 1
by Thierry Geiger, World Economic Forum
The Global Competitiveness Index Framework......................... 2
Overview of Indonesia’s Performance in the

Global Competitiveness Index................................................... 5
Indonesia’s Competitiveness in the

Twelve Pillars of Competitiveness............................................10
Conclusion................................................................................ 25
Notes........................................................................................ 26
References............................................................................... 27
Appendix A: Computation and Structure of the 29

Global Comptitiveness Index
iii
Appendix B: Technical Notes and Sources 33
Appendix C: Indonesia Country Profile 41

Preface
Preface
KLAUS SCHWAB
Executive Chairman, World Economic Forum
The Indonesia Competitiveness Report 2011 is being The Report could not have been put together
released at the occasion of the 20th annual World without the leadership and enthusiasm of its author,
Economic Forum on East Asia and at a critical junc- Thierry Geiger. Appreciation also goes to Robert
ture for Indonesia’s economic future. Indeed, the past Greenhill, Chief Business Officer, and Jennifer Blanke,
two decades have seen remarkable transformation in Director of the Centre for Global Competitiveness and
Indonesia in political and economic terms. The dif- Performance, and her team: Ciara Browne, Roberto
ficulties of the 1997 Asian financial crisis ushered in Crotti, Margareta Drzeniek Hanouz, Satu Kauhanen,
a time of political and economic reform, which has and Pearl Samandari Massoudi. The Asia team, led by
led to the country today standing as the third fastest- Sushant Palakurthi Rao, also provided valuable sup-
growing economy in Asia, a member of the G20, and port and guidance. I would also like to recognize
the world’s largest Muslim democracy. As a result of our excellent collaboration with the Chair of the
Indonesia’s improved fundamentals, the economy with- World Economic Forum’s Global Agenda Council on
stood the recent global economic crisis, supported by Competitiveness, Dr. Mari Elka Pagenstu, Minister of
a booming domestic market and a sounder financial Trade of the Republic of Indonesia. Finally, I would
sector. also like to convey my sincere gratitude to our Partner
In this context, it is natural to predict a bright Institute’s representative in Indonesia, Tulus Tambunan,
future for the country—and for the region as a whole, from the Center for Industry, SME & Business v
which is expected to contribute some 50 percent to Competition Studies at the University of Trisakti, as
global GDP growth in the next five years. Yet, as this well as the business executives, who took the time
Report describes, a number of challenges remain, which to participate in our Executive Opinion Survey, and
must be addressed in order to ensure that Indonesia whose valuable feedback made the publication of this
sustains the recent positive momentum into the future. Report possible.
The World Economic Forum has played a fa-
cilitating role in promoting economic growth and
development of countries for more than 30 years,
by providing detailed assessments of the productive
potential of nations worldwide through The Global
Competitiveness Report series. In this context, The
Indonesia Competitiveness Report 2011 is a contribution
to understanding the key factors determining prosperity
and economic growth in Indonesia.
The Report identifies the obstacles that might
hinder Indonesia’s remarkable growth going forward,
as well as the notable advantages it can build upon,
benchmarking the country against other large, emerg-
ing markets, as well as regional players. It thus offers
Indonesian policymakers and business leaders an im-
portant tool in the formulation of improved economic
policies and institutional reforms.

Executive Summary
Executive Summary
Following the Asian financial crisis and the end of the lower middle income group and the Developing
Suharto’s regime in 1998, Indonesia has embarked on Asia region. Indonesia compares favorably with the
an impressive growth trajectory and is poised to be- BRICS, with the notable exception of China (27th). It
come an economic heavyweight very soon. Indonesia precedes India (51st), South Africa (54th), Brazil (59th),
is already the world’s 17th largest economy and the and Russia (63rd) by a small margin. Within ASEAN,
6th largest among developing countries. Indonesia’s a trade area characterized by profound diversity,
economy is also very dynamic, having grown at an Indonesia ranks in the middle of the pack, well behind
annualized rate of 5 percent between 2001 and 2010. Singapore (3rd) and Malaysia (26th) but far ahead of the
Indonesia has weathered the latest global economic cri- Philippines (85th) and Cambodia (109th). Indonesia,
sis remarkably well and, in 2010, it was the third fastest- Vietnam (59th), and Thailand (38th) are relatively close,
growing G20 country. but the driving forces of their competitiveness differ.
It is against this backdrop that The Indonesia Among Indonesia’s strengths, the macroeconomic
Competitiveness Report 2011 is released, ahead of the environment stands out (35th out of 139). Fast growth
20th World Economic Forum on East Asia, which takes and sound fiscal management have put the country on
place in Jakarta for the first time. The Report takes stock a strong fiscal footing. The debt burden has been dras-
of Indonesia’s competitiveness landscape, drawing on tically reduced, and Indonesia’s credit rating has been
the results of the Global Competitiveness Index (GCI). upgraded. Savings and investments are also increas- vii
It identifies the notable advantages it can build upon as ing. In the current context of rising global commodity
well as the obstacles to the country’s development and prices, inflation represents the most immediate threat
the threats to its growth. to the stability of the macroeconomic environment. In
Introduced in 2005, the GCI is a comprehensive other areas, access to basic education is nearly universal,
composite indicator that captures the microeconomic and its quality has been improving (49th on the primary
and macroeconomic foundations of national competi- education pillar). Efforts now should be directed at rais-
tiveness. Competitiveness is defined as the set of institutions, ing secondary and tertiary education enrolment (66th
policies, and factors that determine the level of productivity on the higher education and training pillar).
of a country. Productivity, in turn, influences the level Among the factors that will become critical in
of prosperity that can be attained. The GCI comprises the coming years, the efficiency of the goods market
110 indicators organized in 12 categories—the 12 pillars is also relatively well assessed (49th), thanks to a com-
of competitiveness. Those are: institutions, infrastruc- petitive tax regime and intense competition, but bu-
ture, macroeconomic environment, health and primary reaucracy and trade barriers of all sorts still stand in the
education, higher education and training, goods market way. Businesses are becoming increasingly sophisticated
efficiency, labor market efficiency, financial market de- (37th) thanks to relatively deep clusters, efficient man-
velopment, technological readiness, market size, busi- agement, and the migration of firms to higher segments
ness sophistication, and innovation. of the value chain. Finally, the large size of the mar-
The overall picture painted by the GCI of ket confers a notable advantage (15th). As one of the
Indonesia’s competitiveness has been brightening over world’s 20 largest economies, Indonesia boasts a large
the years, and the latest assessment is mostly positive. pool of potential consumers, as well as a rapidly grow-
Indonesia ranks 44th out of 139 economies in the GCI ing middle class, of great interest to both local busi-
2010. Since 2005, Indonesia has improved its score on nesses and foreign investors. However, much more
each of the 12 pillars. As a result of these positive dy- must be done to improve Indonesia’s competitiveness
namics, Indonesia’s rank improved by 10 places, mak- and therefore fully reap the benefits of international
ing it the most improved country among G20 countries trade. In addition, a more integrated ASEAN would
over this period. offer opportunities for streamlined regional supply
Indonesia is better positioned than most countries chains, while offering new channels of distribution. As
at a similar stage of development. It consistently out- the 2011 Chair of the organization, Indonesia can play a
performs—often by a sizeable margin—the averages for catalytic role in the realisation of the ASEAN Economic
Community by 2015.

Executive Summary
One of the most glaring shortcomings is the state

of Indonesia’s infrastructure (82nd). Despite notable
improvements, its roads and railroads remain are in poor
condition, and the capacity of seaports remains limited.
Energy infrastructure is of major concern, as well. The
uptake of information and communication technolo-
gies also remains limited among businesses, as well as
within the population at large. Mobile telephony is
spreading fast, but Internet access, especially at high
speed, remains the privilege of the very few. As a result,
Indonesia places 91st in the technological readiness pil-
lar, its lowest ranking among the 12 pillars.
With regard to human resources, the health situa-
tion is holding back Indonesia’s competitiveness (99th).
A high infant mortality rate, the burden of commu-
nicable diseases, and the prevalence of malnutrition
highlight the worrisome situation. Another major area
of concern relates to the allocation of human resources
due to the rigidity of the labor market (84th), which
contributes to a high degree of informality and precari-
ous working conditions, and which hinders the real-
location of the labor force to more productive sectors
as Indonesia develops. Finally, Indonesia must con-
tinue strengthening the institutional framework (61st).
Corruption remains widespread at all levels of the ad-
ministration, and bureaucracy is still too burdensome.
viii
Greater transparency and predictability are needed in
the policy-making process. And the security situation,
although far better than in the past, is still a concern to
the business community.
Growth will not make any of these problems
disappear and could indeed exacerbate some of them.
Indonesia cannot therefore be complacent. Its vigorous
development generates new needs and sets new
standards among businesses, investors, and consumers,
making a situation deemed satisfactory today not
acceptable a few years from now. Also, with one-fifth
of the population still living in extreme poverty and
half barely above the threshold, rising inequality, and
high prices for food, fuel, and gas, there is a risk of
social unrest. If the economy cannot create enough
jobs outside the agriculture sector for the growing
population of educated youths, the consequences could
be dire and Indonesia’s demographic dividend become a
liability. Pervasive corruption, if not tackled, could also
fuel discontent. Yet, based on the findings of the Report,
one can be cautiously optimistic that Indonesia will
successfully take up these challenges.

The Indonesia Competitiveness Report 2011
Indonesia’s Competitiveness:
THIERY GEIGER
World Economic Forum
Indonesia’s economic development has come a long Table 1: GDP (billions US$, current prices), 2010
way over the past decade. Following the near economic
Country Amount Rank*
collapse caused by the 1997 Asian financial crisis and
United States 14,658 1 (1)
the end of Suharto’s regime in 1998, Indonesia has em-
China 5,878 2 (6)
barked on an impressive growth. Japan 5,459 3 (2)
A sprawling archipelago of some 17,000 islands and Germany 3,316 4 (3)
238 million people, Indonesia is the world’s 3rd biggest France 2,583 5 (5)
democracy and the 17th largest economy (see Table 1). United Kingdom 2,247 6 (4)
Indonesia’s economy is not only large, it is also very Brazil 2,090 7 (10)
Italy 2,055 8 (7)
dynamic, growing at an annualized rate of nearly 5
Canada 1,574 9 (8)
percent between 2001 and 2010, up from 3.3 percent India 1,538 10 (13)
in the previous decade (which was marked by crisis). Russian Federation 1,465 11 (17)
Like many developing and emerging Asian economies, Spain 1,410 12 (11)
Indonesia has weathered the latest global economic cri- Australia 1,236 13 (14)
Mexico 1,039 14 (9)
sis remarkably well. GDP growth exceeded 6 percent in
Korea, Rep. 1,007 15 (12)
2008 and 2010, and in 2009—the height of the crisis— Netherlands 783 16 (15)
was still a robust 4.6 percent. In 2010, it was the third Turkey 742 17 (16)
1
fastest-growing G20 country. For the period 2011- Indonesia 707 18 (20)
2016, the International Monetary Fund (IMF) predicts Switzerland 524 19 (18)
that growth will accelerate to 5.7 percent (see Table 2), Poland 469 20 (19)
South Africa 357 28 (30)
approaching the forecasted rates for China (7.9) and
India (6.7).1 Indonesia is already the 6th largest develop- Source: IMF 2011.
* 2000 rank in brackets
ing country in terms of GDP and is poised to become
an economic heavyweight in the years to come. Indeed,
some predict it will be among the world’s ten biggest Security Council in 2007-08 and a member of the
economies around 2030.2 And before that happens, G20, Indonesia also assumed in 2011 the rotating presi-
Indonesia could become the second “I” in the BRIICS dency of the Association of Southeast Asian Nations
acronym of the group composed of Brazil, Russia, (ASEAN), of which it is the most populous country.
India, Indonesia, China, and South Africa. Against this background, the World Economic
Indonesia has grown much richer (see Figure 1), Forum selected Jakarta as the venue for its 20th an-
too. When controlling for inflation, GDP per capita nual Summit on East Asia. It is therefore particularly
has increased sixfold since 1960. Over the past 25 years, timely and relevant for the Forum’s Centre for Global
Indonesia has made significant strides in the fight against Competitiveness and Performance to take stock of
extreme poverty (see Figure 2). In 1984, some 65 per- Indonesia’s competitiveness landscape, drawing on the
cent of Indonesia’s population lived on less than $1.25 findings of the Global Competitiveness Index (GCI).
a day at purchasing power parity (PPP). In 2000, in the One question that arises is whether Indonesia has
aftermath of the Asian financial crisis, it was still the case the factors in place to sustain its remarkable growth mo-
for half of the population. A decade later, the share is mentum. Another question is how to make this growth
less than 19 percent, close to China’s rate and less than more inclusive. While most headline indicators point
half that of India. However, it must be noted that as in the right direction, many challenges remain, which,
much as 51 percent of the population still live with less if not addressed, will imperil Indonesia’s development.
than PPP $2 a day.3 With one-fifth of the population still living in extreme
Parallel to this rise to economic prominence, poverty and half of it barely above the threshold (see
Indonesia has become somewhat more involved in Table 2), rising inequality, and high prices for food,
international affairs, although its engagement remains fuel, and gas, there is a risk of social unrest. If the econ-
limited and governed by the principle of non-alignment. omy cannot create enough jobs outside the agriculture
A non-permanent member of the United Nations sector, which employs 40 percent of the labor force,

Table 2: Key socio-economic indicators for selected countries
Global Competitiveness Index GDP Share of world GDP per

2010–2011 (US$ billion)* total (PPP, %) capita (US$)* GDP real CAGR (US$)*
Score (1-7) Rank (out of139) 2010 2010 2010 1991– 2000† 2001–2010 2011–2016‡
Singapore 5.5 3 223 0.4 43,117 6.5 5.7 3.5

Malaysia 4.9 26 238 0.6 8,423 6.1 4.5 4.2
China 4.8 27 5,878 13.6 4,382 9.5 9.6 7.9
Thailand 4.5 38 319 0.8 4,992 3.6 4.1 4.0
Indonesia 4.4 44 707 1.4 3,015 3.3 4.8 5.7
India 4.3 51 1,538 5.4 1,265 5.3 7.1 6.7
Brazil 4.3 58 2,090 2.9 10,816 2.4 3.4 3.4
Vietnam 4.3 59 104 0.4 1,174 7.0 6.5 6.0
Russia 4.2 63 1,465 3.0 10,437 –2.1 4.2 3.5
Philippines 4.0 85 189 0.5 2,007 3.1 4.5 4.1
(Cont’d.)
for the growing population of educated youths—and determine the level of productivity of a country.5 Productivity,
thus benefits from the “demographic dividend”—the in turn, influences the level of prosperity that can be
consequences could be dire. Unfulfilled promises to attained.
tackle corruption could also fuel discontent. Given the complex nature of competitiveness, the
Through the lens of the GCI, the Report aims to Index identifies 12 pillars of competitiveness (see Figure 3),
provide some answers to these interrogations by identi- reflecting the diverse and interrelated factors that have a
fying the notable advantages Indonesia can build upon bearing on long-term potential for sustained growth and
and the obstacles that hinder its development. By doing prosperity. The 12 pillars of the GCI are:6
2
so, we hope to provide a useful tool for Indonesia’s
business, government, and civil society leaders in setting • 1st pillar: Institutions—The quality of public and
their agenda for the decade to come. private institutions, including government effi-
The overall picture painted by the GCI of ciency, security levels, corporate governance, and
Indonesia’s competitiveness has been brightening over perceived fairness and transparency of public
the years, and the latest assessment is indeed relatively institutions
positive. Indonesia’s favorable macroeconomic situation,
strengthening institutional framework, more and better • 2nd pillar: Infrastructure—The quality and extent
education, and large market are among the factors that of general and specific infrastructure, including
have contributed to its recent economic success. But in roads, railroads, ports, air transport, electricity, and
several other areas, the situation is worrisome, notably telephony
in terms of public health, infrastructure, labor market
inefficiency, and technological readiness. All these issues • 3rd pillar: Macroeconomic environment—The
require urgent and decisive action. stability and soundness of the macroeconomic
The next section introduces the GCI framework environment, including the government budget
and data employed to assess the competitiveness of na- balance, public debt, inflation, the national savings
tions. The section that follows provides an overview of rate, the interest rate spread, and the country
Indonesia’s performance in the GCI in an international credit rating
context and from a historical perspective, followed by a
deeper analysis of the country’s performance in the 12 • 4th pillar: Health and primary education—The
pillars of competitiveness. general health level of a country’s population and
the quality of, and access to, basic education
The Global Competitiveness Index Framework • 5th pillar: Higher education and training—The
Introduced in 2005, the GCI has become one of the quality of, and access to, secondary and university-
most respected and broadly used tools to assess the level education and the quality of on-the-job
competitiveness of nations.4 The GCI is a highly training
comprehensive composite indicator—or index—that
captures the microeconomic and macroeconomic foun- • 6th pillar: Goods market efficiency—The extent
dations of national competitiveness. Competitiveness is of domestic and foreign competition in a given
defined as the set of institutions, policies, and factors that market and the quality of demand conditions

Table 2: Key socio-economic indicators for selected countries (cont’d.)
% of pop. below poverty line,

Population (million) Human Development Index 2010 latest year available
2010 2050‡ Score (0-1) Rank (out of 169) PPP $1.25 PPP $2.00
Singapore 5 5 0.85 27 n/a n/a

Malaysia 28 40 0.74 57 0.0 2.3
China 1,341 1,417 0.66 88 15.9 36.3
Thailand 64 73 0.65 92 10.8 26.5
Indonesia 234 288 0.60 108 18.7 50.6
India 1,216 1,614 0.52 119 41.6 75.6
Brazil 193 219 0.70 73 3.8 9.9
Vietnam 88 112 0.57 113 13.1 38.5
Russia 140 116 0.72 64 0.0 0.1
Philippines 94 146 0.64 97 22.6 45
Sources: World Economic Forum 2010c; IMF 2011; UN 2008; UNDP 2010; World Bank 2011a.
* Current prices ** Compound annual growth rate (authors’ calculations) † For Russian Federation, CAGR is for 1992-2000 ‡ Projections
• 7th pillar: Labor market efficiency—The flexibility products. Critical for competitiveness at this stage are
of the labor market and the degree to which it efficient public and private institutions (1st pillar);
ensures the efficient allocation and use of talent well-developed infrastructure (2nd pillar); good macro-
economic fundamentals (3rd pillar); and a healthy and
• 8th pillar: Financial market development—The literate labor force (4th pillar).
extent to which the financial market ensures the As countries progress to the efficiency-driven stage,
availability and best allocation of capital their competitiveness becomes increasingly based upon
well-functioning factor markets and efficient produc-
3
• 9th pillar: Technological readiness—The tion processes and practices at the firm level. Important
penetration of information and communication elements at this stage include quality higher education
technologies (ICT) and firms’ capacity to adopt and training (5th pillar); efficient markets for goods and
and leverage technology to enhance their services (6th pillar); flexible and well-functioning labor
productivity markets (7th pillar); sophisticated financial markets (8th
pillar); a large domestic and/or foreign market allow-
• 10th pillar: Market size—The size of the domestic ing for economies of scale (9th pillar); and the ability
market as well as the export markets to leverage existing technologies, notably ICT, in the
national production system (10th pillar).
• 11th pillar: Business sophistication—At the firm In the most advanced, innovation-driven, stage,
level, the degree of sophistication of operations countries are able to sustain higher wages and the as-
and company strategies and the presence and sociated standard of living only if their businesses can
development of clusters compete by offering new and unique products. At this
stage, companies must compete through innovation
• 12th pillar: Innovation—The national potential to (12th pillar), producing new and different goods using
generate endogenous innovation the most sophisticated production processes (11th pillar).
Countries are allocated to the different stages of de-
Underpinning this methodological framework is velopment according to their level of GDP per capita at
the idea that, although all 12 categories matter in deter- market exchange rates, used as a proxy for wages. This
mining each country’s competitiveness, each does so to criterion is complemented by a second one, the extent
a varying extent, depending on each country’s stage of to which countries are factor driven, using as a proxy
economic development. Factors that crucially drive na- the share of exports of mineral products in total exports.
tional competitiveness evolve as economies move along The assumption is that countries whose exports are
the development path. In this sense, the GCI builds more than 70 percent mineral products are, to a large
upon well-known theories of stages of development extent, factor driven.
classifying economies into three stages: factor-driven, The concept of stages of development is integrated
efficiency-driven and innovation-driven.7 into the GCI by attributing higher relative weights to
In the initial, factor-driven, stage, countries compete those pillars that are more relevant for a country, given
based on their factor endowments—primarily unskilled its particular stage of development. In other words,
labor and natural resources—with their economies although all 12 pillars matter to a certain extent for all
often based on commodities and/or basic manufactured countries, the relative importance of each one depends

Figure 1: GDP and GNI per capita evolution
300,000
1,000
GDP
240,000
GNI per capita (constant 2000 US$)

GDP (constant 2000 US$ millions)
GNI per capita 800
180,000
600
120,000
400
60,000
200
0
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009
Source: World Bank 2011a
4 Figure 2: Poverty trends for selected countries CHINA

EAST ASIA
CHINA
INDIA
EAST ASIA
BRAZIL
INDIA
INDONESIA
Indonesia
100
Brazil
BRAZIL
% of population below poverty line (PPP $1.25)
CHINA
CHINA
China
INDONESIA
80 EAST
East ASIA
EASTAsia
ASIA& Pacific
India
INDIA
INDIA
BRAZIL
BRAZIL
60
INDONESIA
INDONESIA
40
20
0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Source: World Bank 2011a.

Figure 3: The 12 pillars of competitiveness
Basic requirements
1. Institutions Key for
2. Infrastructure factor-driven
3. Macroeconomic environment economies
4. Health and primary education
Efficiency enhancers
5. Higher education and training
6. Goods market efficiency Key for
7. Labor market efficiency efficiency-driven
8. Financial market development economies
9. Technological readiness
10. Market size
Innovation and sophistication factors Key for

11. Business sophistication innovation-driven
12. Innovation economies
on a country’s particular stage of development. To The GCI is composed of 110 individual indicators,
take this into account, the pillars are organized into representing a combination of statistical and survey data.
three subindeces, each critical to a particular stage of Statistical data capture quantitative factors, such as infla-
development. tion rates, public debt, or educational enrollment rates,
The basic requirements subindex groups those pillars and are collected by international organizations, in-
most critical for countries in the factor-driven stage. cluding the IMF, the World Bank, and various United
The efficiency enhancers subindex includes those pillars Nations agencies. Internationally collected and validated
critical for countries in the efficiency-driven stage. And data ensure comparability across countries. The survey
the innovation and sophistication factors subindex includes data gauge dimensions that are more qualitative in na-
the pillars critical to countries in the innovation-driven ture or for which no hard data are available for a large
stage. The specific weights attributed to each subindex number of countries, but which are nonetheless crucial
in each stage of development are shown in Table 3.8 for providing a comprehensive picture of the competi-
With a GDP per capita of US$2,329 as of 2009, tiveness landscape of a country. Most of the survey data
Indonesia is currently transitioning from the factor- are derived from the Executive Opinion Survey, a study
driven stage of development to the efficiency-driven conducted annually by the World Economic Forum.
stage. Indonesia’s competitiveness depends heavily on Box 1 provides more information about this unique
the basic requirements as well as on the efficiency- tool, which gathered the opinion of 13,607 business
enhancing pillars. The four pillars of the basic require- people from 139 economies in 2010.
ments subindex account for 53 percent of Indonesia’s
overall GCI score, while those in the efficiency enhanc- Overview of Indonesia’s Performance in the Global
ers subindex account for 40 percent of the score. Much Competitiveness Index
less weight is placed on the two pillars of the innova- Indonesia’s performance in the GCI has been improv-
tion and sophistication factors subindex—just 7 percent. ing steadily over the past six years. Ranked 44th among
Based on IMF estimates and our allocation criteria, the 139 economies in the 2010 edition of the GCI (see
Indonesia will soon be fully entering the efficiency- Table 4), Indonesia has been improving its overall score
driven stage, joining China, Malaysia, and Thailand. As each year since the 2005 edition, when the 12-pillar
a result, the weights placed on the more complex areas framework described above was introduced.9 Although
will be adjusted slightly upward (see Table 3). the World Economic Forum has been assessing the

Figure 4: Evolution in the GCI ranking for selected countries
100
Vietnam
Thailand
80 Vietnam Singapore
Thailand Philippines
Vietnam
Percentile (100 is top)
Vietnam
60 Singapore Malaysia
Thailand
Thailand
Philippines Indonesia
Singapore
Vietnam Singapore
Malaysia India
40 Philippines
Thailand Philippines Vietnam
Vietnam Indonesia China
Malaysia Vietnam
Singapore Malaysia Thailand
Indonesia Thailand Thailand India Brazil Brazil
Indonesia Thailand
20 Indonesia Vietnam Singapore
Singapore Philippines
Singapore China China Vietnam
Malaysia India
Malaysia India
Singapore
India Philippines Philippines
Philippines Brazil Thailand
China Philippines
0 Indonesia China Malaysia
Malaysia Singapore
Brazil Malaysia
2005 2006 India 2007 Brazil 2008 2009
Indonesia 2010
Indonesia
54/114 54/122 54/131 55/133 54/134 44/139 Philippines
Indonesia
China India
India Malaysia
India
Brazil China
China Indonesia
Note: Numbers in blue beneath the figure indicate Indonesia’s rank and coverage inChina
each edition of the GCI.
Brazil
Brazil India
Brazil
China
Brazil
6
competitiveness of nations since 1979, and Indonesia countries is to consider how Indonesia’s performance
since 1994, methodological changes introduced over the compares with only those countries that were included
years do not make a longer-term comparison possible. in 2005, so that changes in the ranking are not caused
Indonesia’s present rank of 44th stands 10 places by countries that were included subsequently. Within
higher than its rank in 2005. Given the expansion in the this group of 114 countries, Indonesia’s rank increased
number of countries studied from 114 to 139, the pro- from 54th in 2005 to 39th in 2010. This has made
gression is all the more remarkable. In 2005, Indonesia Indonesia the most improved country among G20
ranked in the 53rd percentile—i.e., 53 percent of coun- countries over the period.
tries ranked lower then Indonesia (see Figure 4). Today, Among ASEAN countries included in the GCI
over two thirds of countries place lower than Indonesia ranking, Indonesia ranks 5th out of eight, behind
(68th percentile). Singapore, Malaysia, Brunei Darussalam, and Thailand
Another way to understand how Indonesia has (Laos and Myanmar are not covered). The average
improved in the context of the increasing number of score for the other ASEAN countries is slightly higher
Table 3: GCI stages of development and weights of subindices
STAGES OF DEVELOPMENT
Factor-driven (1) Transition stage Efficiency-driven (2) Transition stage Innovation-driven (3)
GDP per capita (US$) thresholds* <2,000 2,000-2,999 3,000-8,999 9,000-17,000 >17,000
Subindex
Basic Requirements 60% 40-60% 40% 20-40% 20%
Efficiency Enhancers 35% 35-50% 50% 50% 50%
Innovation and sophistication factors 5% 5-10% 10% 10-30% 30%
Examples (based on India, Philippines Indonesia Brazil , China Chile Singapore
GCI 2010-2011 classification) Vietnam Malaysia, South
Africa, Thailand
* For countries with a high dependency on mineral resources, GDP per capita is not the sole criterion for determination of the stage of development. See text for
details.

Table 4: The Global Competitiveness Index 2010–2011
RANK WITHIN RANK WITHIN
COUNTRY GROUP COUNTRY GROUP
Rank Economy Score Developing Asia ASEAN Rank Economy Score Developing Asia ASEAN
1 Switzerland 5.63 70 Latvia 4.14

2 Sweden 5.56 71 Bulgaria 4.13
3 Singapore 5.48 1 72 Kazakhstan 4.12
4 United States 5.43 73 Peru 4.11
5 Germany 5.39 74 Namibia 4.09
6 Japan 5.37 75 Morocco 4.08
7 Finland 5.37 76 Botswana 4.05
8 Netherlands 5.33 77 Croatia 4.04
9 Denmark 5.32 78 Guatemala 4.04
10 Canada 5.30 79 Macedonia, FYR 4.02
11 Hong Kong SAR 5.30 80 Rwanda 4.00
12 United Kingdom 5.25 81 Egypt 4.00
13 Taiwan, China 5.21 82 El Salvador 3.99
14 Norway 5.14 83 Greece 3.99
15 France 5.13 84 Trinidad and Tobago 3.97
16 Australia 5.11 85 Philippines 3.96 9 7
17 Qatar 5.10 86 Algeria 3.96
18 Austria 5.09 87 Argentina 3.95
19 Belgium 5.07 88 Albania 3.94
20 Luxembourg 5.05 89 Ukraine 3.90
21 Saudi Arabia 4.95 90 Gambia, The 3.90
22 Korea, Rep. 4.93 91 Honduras 3.89
23 New Zealand 4.92 92 Lebanon 3.89
24 Israel 4.91 93 Georgia 3.86
25 United Arab Emirates 4.89 94 Moldova 3.86
26 Malaysia 4.88 1 2 95 Jamaica 3.85
27 China 4.84 2 96 Serbia 3.84
28 Brunei Darussalam 4.75 3 3 97 Syria 3.79
29 Ireland 4.74 98 Armenia 3.76
30 Chile 4.69 99 Mongolia 3.75
7
31 Iceland 4.68 100 Libya 3.74
32 Tunisia 4.65 101 Dominican Republic 3.72
33 Estonia 4.61 102 Bosnia and Herzegovina 3.70
34 Oman 4.61 103 Benin 3.69
35 Kuwait 4.59 104 Senegal 3.67
36 Czech Republic 4.57 105 Ecuador 3.65
37 Bahrain 4.54 106 Kenya 3.65
38 Thailand 4.51 4 4 107 Bangladesh 3.64 10
39 Poland 4.51 108 Bolivia 3.64
40 Cyprus 4.5 109 Cambodia 3.63 11 8
41 Puerto Rico 4.49 110 Guyana 3.62
42 Spain 4.49 111 Cameroon 3.58
43 Barbados 4.45 112 Nicaragua 3.57
44 Indonesia 4.43 5 5 113 Tanzania 3.56
45 Slovenia 4.42 114 Ghana 3.56
46 Portugal 4.38 115 Zambia 3.55
47 Lithuania 4.38 116 Tajikistan 3.53
48 Italy 4.37 117 Cape Verde 3.51
49 Montenegro 4.36 118 Uganda 3.51
50 Malta 4.34 119 Ethiopia 3.51
51 India 4.33 6 120 Paraguay 3.49
52 Hungary 4.33 121 Kyrgyz Republic 3.49
53 Panama 4.33 122 Venezuela 3.48
54 South Africa 4.32 123 Pakistan 3.48 12
55 Mauritius 4.32 124 Madagascar 3.46
56 Costa Rica 4.31 125 Malawi 3.45
57 Azerbaijan 4.29 126 Swaziland 3.40
58 Brazil 4.28 127 Nigeria 3.38
59 Vietnam 4.27 7 6 128 Lesotho 3.36
60 Slovak Republic 4.25 129 Côte d’Ivoire 3.35
61 Turkey 4.25 130 Nepal 3.34 13
62 Sri Lanka 4.25 8 131 Mozambique 3.32
63 Russian Federation 4.24 132 Mali 3.28
64 Uruguay 4.23 133 Timor-Leste 3.23 14
65 Jordan 4.21 134 Burkina Faso 3.20
66 Mexico 4.19 135 Mauritania 3.14
67 Romania 4.16 136 Zimbabwe 3.03
68 Colombia 4.14 137 Burundi 2.96
69 Iran 4.14 138 Angola 2.93
(Cont’d.) 139 Chad 2.73
Note: See text for details.

than Indonesia’s. One of the most striking features of

Box 1: The Executive Opinion Survey ASEAN countries is their profound diversity. A true
political and economic patchwork, ASEAN brings
To compute GCI rankings, the World Economic Forum draws together some of the most and least advanced econo-
data from two sources: international organizations and mies in the world. Singapore is 80 times richer than
national sources, as well as the Forum’s own Executive Myanmar, while Indonesia is nearly 50 times more
Opinion Survey (Survey). The Survey is a one-of-a-kind tool populous than Singapore, with its 5 million people.
that captures timely and vital information that is not avail- Diversity also defines ASEAN’s competitiveness land-
able on a global level and comparable basis through other scape. Its members span almost the entire GCI ranking,
statistics. The data gathered thus provide a unique source of
from 3rd-placed Singapore to Cambodia at 109th.
insight and a qualitative portrait of each nation’s economic
Among the countries transitioning to or already in
and business environment. Of the 110 variables that compose
the GCI, 80 indicators come from the Survey.
the efficiency-driven stage of development, Indonesia
The Survey is conducted annually by the World ranks 9th out of 55. This group comprises coun-
Economic Forum in nearly 140 economies, including all those tries with a GDP per capita between US$2,000 and
covered by the Global Competiveness Index. The respon- US$9,000, as well as much richer countries reclassified
dents are business executives who are asked to assess in this lower stage because of their extreme dependency
specific aspects of the business environment in the country on mineral resources, including Qatar, Saudi Arabia,
in which they are based. Kuwait, and Brunei Darussalam. With a GDP per capita
For each question, respondents are asked to give their of US$2,329, Indonesia is one of the lowest-income
opinion about the situation in the country in which they oper- countries of this very populated group, yet it already
ate, compared with a global norm. To conduct the Survey features in its top 10.10
in each country, the Forum relies on a network of over 150
Table 5 presents Indonesia’s performance in an
Partner Institutes. Typically, the Partner Institutes are rec-
international context (top and middle sections) and over
ognized economics departments of national universities,
independent research institutes, or business organizations.
time (bottom section) for the overall GCI and the 12
In Indonesia, the Forum has been partnering since 2009 pillars. The redder the shading, the worse the perfor-
with the Centre for Industry, SME and Business Competition mance in terms of ranking (closer to the bottom rank
8
Studies at the University of Trisakti. of 139) and score (closer to the lowest possible score
To ensure that the sample is selected consistently of 1.0). At the other end of the spectrum, the greener
around the world, a detailed set of guidelines has been the shading, the better the performance in terms of
developed by the Forum for the Partner Institutes to target ranking (closer to the top rank) or score (closer to the
top business executives, ensuring a strong representation of best possible score of 7.0). In the middle of the color
the most sizeable employers. In addition to relying on Partner spectrum, the yellow shading indicates a performance
Institutes to collect surveys in their respective countries, the close to the median (69 for the ranking and 4.0 for
Forum’s member and partner companies are also invited to
the score). The table sorts countries according to their
participate in the Survey. Sample sizes vary according to the
overall rank (score) in the GCI. The middle section also
size of the economy. In 2010, a record 13,607 responses were
collected, 86 of them from Indonesia.
reports the score of the best performer, as well as the
Once the data are entered, they are subjected to a unweighted average scores for the ASEAN countries,
rigorous quality-control process. Incomplete responses are the lower middle income group, and the Developing
dropped and tests are run to detect and exclude outlying Asia region.11 Although scores here are rounded to the
individual answers (univariate) and responses (multivariate). nearest decimal place, full precision is used to determine
Individual answers to each question are then aggregated at the rankings.
the country level and combined with results from the previ- The top section of the heatmap highlights
ous year, following a weighted moving average approach. Indonesia’s performance in terms of rank, that is, in rela-
The weighting scheme is composed of two overlapping tive terms. Among the notable competitive advantages,
elements: we give each response an equal weight by plac- the macroeconomic environment (35th) is particularly
ing more weight on the larger of the two samples; at the
favorable, thanks to more prudent and sounder manage-
same time, we apply a discount factor to the previous year’s
ment in recent years; Indonesia’s situation is significantly
results, thereby placing more weight on the most recent
responses.
better than that of any of its developing economy peers
The final country scores thus obtained are used in the (35th) except China (4th). The combined size of its
computation of the GCI and other Forum composite indica- domestic and export markets (15th) provides Indonesia
tors, including the Enabling Trade Index, the Networked with an important advantage compared with smaller
Readiness Index, and the Travel & Tourism Competitiveness economies in terms of the potential for economies of
Index. For more information about the Survey’s process and scale and foreign direct investment. It is notable that
methodology, refer to Browne and Geiger (2010). Indonesia also performs comparatively well in the more
complex areas of business sophistication (37th) and in-
novation (36th).

Table 5: The GCI Heatmap
Rank
3rd pillar: Macroeconomic

2nd pillar: Infrastructure
Global Competitiveness
9th pillar: Technological

6th pillar: Goods market
10th pillar: Market size

education and training
(out of 139 economies)
12th pillar: Innovation

1st pillar: Institutions
4th pillar: Health and
market development
11th pillar: Business

8th pillar: Financial
primary education
market efficiency
5th pillar: Higher
Index 2010-2011
7th pillar: Labor
sophistication
environment
efficiency
readiness
Country/Economy
Singapore 3 1 5 33 3 5 1 1 2 11 41 15 9
Malaysia 26 42 30 41 34 49 27 35 7 40 29 25 24
China 27 49 50 4 37 60 43 38 57 78 2 41 26
Thailand 38 64 35 46 80 59 41 24 51 68 23 48 52
Indonesia 44 61 82 35 62 66 49 84 62 91 15 37 36
India 51 58 86 73 104 85 71 92 17 86 4 44 39
South Africa 54 47 63 43 129 75 40 97 9 76 25 38 44
Brazil 58 93 62 111 87 3 114 96 50 54 10 31 42
Vietnam 59 74 83 85 65 93 60 30 65 65 35 64 49
Russian Federation 63 118 47 79 53 50 123 57 125 69 8 101 57
Philippines 85 125 104 68 90 73 97 111 75 95 37 60 111
Score


(1–7 scale, 7 best)

market development

primary education
market efficiency
5th pillar: Higher
Index 2010-2011
7th pillar: Labor
sophistication
environment
efficiency
readiness
Country/Economy
9
Best performer 5.6 6.1 6.8 6.6 6.8 6.1 5.7 5.9 5.9 6.1 6.7 5.9 5.6
Singapore 5.5 6.1 6.2 5.2 6.7 5.8 5.7 5.9 5.8 5.3 4.5 5.1 5.0
Malaysia 4.9 4.6 5.0 5.0 6.2 4.6 4.8 4.7 5.3 4.2 4.7 4.8 4.1
China 4.8 4.4 4.4 6.1 6.2 4.2 4.4 4.7 4.3 3.4 6.7 4.3 3.9
Thailand 4.5 4.0 4.8 4.9 5.6 4.3 4.5 4.8 4.4 3.6 4.9 4.2 3.3
ASEAN 4.5 4.3 4.2 4.9 5.8 4.2 4.4 4.9 4.6 3.8 4.1 4.2 3.5
Indonesia 4.4 4.0 3.6 5.2 5.8 4.2 4.3 4.2 4.2 3.2 5.2 4.4 3.7
India 4.3 4.0 3.5 4.5 5.2 3.9 4.1 4.2 4.9 3.3 6.1 4.3 3.6
South Africa 4.3 4.4 4.0 5.0 4.1 4.0 4.5 4.1 5.3 3.5 4.8 4.4 3.5
Brazil 4.3 3.6 4.0 4.0 5.5 4.3 3.7 4.1 4.4 3.9 5.6 4.5 3.5
Vietnam 4.3 3.8 3.6 4.5 5.7 3.6 4.2 4.8 4.2 3.6 4.6 4.0 3.4
Russian Federation 4.2 3.2 4.5 4.5 5.9 4.6 3.6 4.5 3.2 3.6 5.7 3.5 3.2
Developing Asia 4.1 3.8 3.4 4.7 5.3 3.6 4.1 4.3 4.2 3.2 4.2 3.9 3.1
Philippines 4.0 3.1 2.9 4.6 5.4 4.0 3.9 3.9 4.0 3.2 4.5 4.0 2.7
Lower middle income 3.8 3.6 3.2 4.4 5.0 3.5 3.9 4.1 3.8 3.1 3.4 3.6 2.9
Evolution in


Indonesia’s score
market development

primary education
across GCI editions

market efficiency
5th pillar: Higher
Index 2010-2011
7th pillar: Labor
sophistication
environment
efficiency
readiness
GCI edition
2005 4.0 3.7 3.4 4.5 4.9 3.7 4.0 3.9 4.1 2.8 5.1 4.0 3.4
2006 4.2 3.7 2.8 4.8 5.4 3.8 4.7 4.3 4.2 2.8 5.4 4.3 3.5
2007 4.2 3.9 2.7 4.6 5.3 4.0 5.1 4.7 4.6 3.0 5.2 4.6 3.6
2008 4.3 3.9 3.0 4.9 5.3 3.9 4.7 4.6 4.5 3.0 5.1 4.5 3.4
2009 4.3 4.0 3.2 4.8 5.2 3.9 4.5 4.3 4.3 3.2 5.2 4.5 3.6
2010 4.4 4.0 3.6 5.2 5.8 4.2 4.3 4.2 4.2 3.2 5.2 4.4 3.7
Best Median/Average Worst

Note: See text for details.

Such an analysis of the rankings thus provides key Brunei Darussalam (not shown), Malaysia, and Thailand
insights into Indonesia’s comparative performance. This in the different components of the GCI, except in the
is complemented by an analysis of the scores on which macroeconomic environment pillar and the market size
the rankings are based, which provide a more absolute pillar. On the other hand, Indonesia consistently out-
sense of where Indonesia stands in the various areas. shines the Philippines and Cambodia (not shown) by
The middle section of the heatmap shows that, although a wide margin, and also outperforms Vietnam in 10 of
Indonesia ranks fairly high in terms of business sophisti- the 12 pillars. The picture is even more favorable when
cation and innovation, it gets only an average mark for compared with the average performance of the lower
the former (4.4) and an even lower one for the latter middle income group.
(3.7). This is explained by the fact that the most in- Despite some nuances, Indonesia’s overall per-
novative economies are well ahead of the rest in this formance and evolution are largely positive, and truly
area, among them the United States (1st), Switzerland outstanding in certain aspects, given its stage of devel-
(2nd), Finland (3rd), Japan (4th), Sweden (5th), Israel opment. Yet the country should not be complacent.
(6th), and Taiwan (7th). For these countries, their in- As Indonesia grows richer, factors in its development
novation capacity is not only a desirable feature but are evolving and many areas continue to require seri-
an absolute necessity for driving their productivity and ous attention. Improving on these factors will keep the
competitiveness. For Indonesia, by contrast, it is not yet virtuous circle of development, growth, and more de-
a priority, as improvements in other areas can still bring velopment going. Some 40 percent of Indonesia’s labor
about significant productivity gains. Yet a relatively force is still employed in agriculture, which accounts for
strong performance in the most sophisticated areas of 16 percent of Indonesia’s GDP. This imbalance betrays
competitiveness bodes well for Indonesia’s longer-term the low level of productivity of agriculture and the low
ambitions. value-added jobs it offers. Improving yields in agricul-
On the downside, the three weakest areas—and ture is of paramount necessity to raising the income of
thus of a darker red shade in the table—are the dire rural populations, where vast pockets of poverty persist.
state of infrastructure (82nd), the inefficiencies in the But this will not be enough to significantly reduce
labor market (84th), and the low level of technologi- the gap between the share of agriculture in the labor
10
cal adoption (91st). Of less concern are the quality of force and its contribution to the economy. Workers
institutions (61st), the health situation and primary must transfer to more productive industries in the
education (62nd), higher education and training (66th), manufacturing sectors. Addressing the pressing issues in
and financial market development (62nd), but all offer infrastructure, education, market efficiency, and tech-
considerable room for improvement, as shown in the nological readiness, while strengthening the institutional
next section. framework, will help a great deal in this transition.
The bottom of Table 5 shows the evolution in While the analysis in this section has provided a
score in the six editions of the GCI and reveals that broad sense of Indonesia’s strengths and weaknesses, it
Indonesia has improved on each of the 12 pillars. As a is possible to develop a more nuanced analysis by look-
result of these positive dynamics, Indonesia’s score in ing into the details of the individual pillars. It is to this
the overall GCI has improved by 0.4, resulting in the analysis that we now turn.
10-rank improvement discussed above. The progression
has been particularly remarkable in the macroeconomic
environment (+0.7) and health and primary education Indonesia’s Competitiveness in the Twelve Pillars of
(+0.9), due to improvements in basic education and Competitiveness
despite the alarming health situation. Higher education In this section, Indonesia’s competitiveness is analyzed
is also better assessed (+0.5). Meanwhile, the infrastruc- in greater detail in each of the 12 pillars of the GCI.
ture pillar has gotten only slightly more yellow, and the The detailed country profile in Appendix B is a useful
technological readiness pillar is still very much of an complement to this section, as it provides detailed infor-
orange shade, pointing to serious shortcomings in both mation on Indonesia’s performance in each of the 110
categories. This section of the table also reveals that indicators of the GCI.
evolution is not necessarily unidirectional. Needs and
expectations may evolve. That is the case for infrastruc- 1. Institutions
ture and the efficiency of the goods, financial, and labor Transparent and well-functioning institutions provide
markets. the framework within which all stakeholders of the
Placing Indonesia’s performance in a regional society—individuals, businesses, and the government—
context, its marks are significantly higher than the are able to interact efficiently, do business, and cre-
Developing Asia region average, with the two notable ate wealth. Economic activity does not take place in a
exceptions of labor market efficiency (a small deficit vacuum. The quality of institutions has a strong bearing
of 0.1) and technological readiness (same score of 3.2). on competitiveness and growth. It influences invest-
Within ASEAN, Indonesia typically trails Singapore, ment decisions and the organization of production, and

plays a central role in the ways societies distribute the (0.4 higher), but considerable room for improvement
benefits and bear the costs of development strategies remains. On these four indicators, Indonesia scores sys-
and policies. The GCI includes the quality of institu- tematically lower than the ASEAN average. However,
tions as one of the basic requirements for a country to it is better than, or on par with, the Developing Asia
be competitive. region as a whole, and compares even more favorably
The institutions pillar has two components. The with the lower middle income group. Finally, Indonesia
public institutions subpillar, which accounts for 75 stands out with its 28th rank on the indicator measur-
percent of the pillar score, assesses different dimensions ing favoritism in decisions rendered by politicians, thus
related to the quality and efficiency of the national insti- outshining its peers in the region and income group,
tutional environment. Notably, the protection of prop- although the low score of 3.9 calls for more efforts.
erty rights, public ethics standards, and the efficiency of The overall effectiveness of government is assessed
public administration are taken into account, together as better than in many developing countries (47th).
with the security situation in the country. The private Yet its score of 3.9 is a full two points below best-
institutions subpillar, in turn, measures the quality of performing Singapore (5.9). Within this component, a
corporate ethics and accountability displayed by firms. major concern of the business community is the lack
Indonesia ranks 61st in this pillar, with a score of transparency of policymaking—Indonesia ranks 91st
of 4.0 on a 1-to-7 scale, where 7 is the best possible on this measure. While this represents an improvement
score.12 Over the past few years, Indonesia’s public compared with just a few years ago (131st and last in
institutions have become more efficient, transparent, 2007), greater transparency would improve the predict-
and business friendly (4.0, 57th). However, significant ability of the policymaking process and, more generally,
room for improvement remains. Among the group of the business climate. Also, the fact that respondents to
comparators, Singapore (6.1) boasts the most effective the Executive Opinion Survey 2010 rated bureaucracy
and business-friendly institutions in the world, still sig- as the most problematic factor (16.2 percent) for doing
nificantly better than those in Indonesia. Indonesia also business, ahead of infrastructure and corruption, con-
trails Malaysia (4.62, 42nd) and China (4.4, 49th) by a trasts with the more positive results of the GCI.
sizeable margin, but is on par with India (4.0, 58th) and The perceived level of security has improved mark-
11
Thailand (4.0, 64th). Indonesia’s public institutions are edly, with a gain of 0.6 points compared with 2005.
also assessed as much better than those in Brazil (3.6, That year marked the end of a series of bombings that
93rd) and the Philippines (3.1, 125th), as well as the started in 2002 and that had an impact on the survey
East Asia and Pacific region (0.6 higher in score) and results.13 The situation improved in 2006 and again in
the lower middle income group (0.26 higher). 2007, when Indonesia ranked 44th. But since then, the
The prevalence of corruption is an important com- situation has deteriorated again. Indonesia now ranks
ponent of the institutions pillar. In past decades, corrup- 91st, with a score of 4.6. The business costs incurred
tion was a major problem. The advent of democracy in by terrorism, organized crime, and petty crime and
recent years has contributed to bringing more transpar- violence have increased, while the reliability of police
ency and accountability to the government. Political services, despite improving continuously since 2005,
campaigns have promised to tackle corruption and remains low by international standards (80th with a
administrations have made efforts toward that end. The score of 4.0), partly due to corruption problems.
Corruption Eradication Commission (known as KPK Finally, the judiciary is perceived as not sufficiently
for its Bahasa acronym), created in 2002, is an indepen- strict, and regulation somewhat inadequate in terms of
dent body that has been given considerable powers to intellectual property and property rights protection. In this di-
root out corruption. mension, too, the situation has improved since 2005 but
Yet, despite such efforts, corruption and bureau- remains a cause for concern. Indonesia ranks 74th with
cracy continue to be among the top concerns of the a score of 4.0, up from 3.8 in 2005.
business community (see Figure 5). In 2010, Indonesian In the private institutions subpillar, which makes
executives who participated in the Executive Opinion up 25 percent of the pillar score, Indonesia ranks 75th
Survey cited corruption as the second most problematic as a result of performance that has barely improved
factor for doing business. Almost 30 percent of them since 2005. Among the five measures of this pillar,
selected it as the single most problematic one. insufficient business ethics, as perceived by the busi-
Indeed, Indonesia has improved only marginally in ness community itself, is particularly alarming. Indonesia
the various measures related to corruption since 2005 ranks 99th with a lower score (3.5) than in 2005 (3.8).
(see Figure 6). It ranks a very low 95th for the preva- At least the indicators related to corporate accountabil-
lence of bribery, with a score of 3.1. It ranks an average ity are pointing in the right direction: the strength of
60th for the diversion of public funds and 51st for the accounting and reporting standards (78th), the efficacy
level of trust in politicians. The independence of the ju- of corporate boards (54th), and the strength of investor
diciary (67th) is assessed more favorably than in the past protection (33rd) are all on the rise.

2. Infrastructure given that other countries are moving more quickly to

Well-functioning and extensive infrastructures play a improve their infrastructure.17
fundamental role in enhancing the growth prospects The situation of Indonesia is not an isolated
of an economy. Both the extent and the quality of case, and its performance is largely in line with the
infrastructure are important in raising private-sector Developing Asia region and the lower middle income
productivity and investment rates, particularly the group averages (see Figure 8). Many developing coun-
adequate functioning of roads, railroads, ports, and tries struggle to add infrastructure capacity to meet the
air transport, as well as a reliable energy supply and needs of their booming economies. Vietnam (83rd) and
telecommunications network. Good infrastructure India (86th) are two examples.
contributes to lowering inequalities by connecting poor Looking at the different modes of transport,
communities to important markets, allowing children in Indonesia ranks a low 84th for the quality of its roads.
remote areas to attend school, and providing access to The World Bank estimates that only 55 percent of
sanitation and potable water, among other benefits. Indonesian roads are paved, compared with an average
Indonesia’s infrastructure, ranked 82nd, requires of 80 percent for Malaysia, the Philippines, Thailand,
improvements across many areas. It is well behind more and Vietnam as a group.18
advanced ASEAN members Singapore (5th), Malaysia Ports in Indonesia also require improvements.
(30th), and Thailand (35th), and also less developed They are ranked a low 96th, on par with Vietnam
than China (50th) and Brazil (62nd). Other countries (97th) and ahead of only the Philippines (131st) among
that also face infrastructure inadequacies are Vietnam ASEAN countries. This is of particular concern given
(83rd), India (86th), and the Philippines (104th), all the country’s dependence on water transport. Even
large Asian economies experiencing rapid economic Cambodia ranks higher at 82nd, despite its more basic
growth, massive urbanization, a rising middle class, and stage of development. The Liner Shipping Connectivity
increased openness to trade. These trends increase the Index created by the United Nations Conference on
demand for infrastructure and strain that which al- Trade and Development confirms the magnitude of
ready exists, creating bottlenecks and highlighting ex- the problem. Indonesia scores a mere 25.7 (41st out
isting shortages. For instance, the number of vehicles of 162 countries). The score is unchanged from 2004
12
in Indonesia quadrupled over the past decade to reach (25.9), and alarmingly low compared with best-per-
11.3 million.14 At the same time, by some estimates, forming China (132.5), 3rd-ranked Singapore (99.5),
40 percent of the population remains without access to and Malaysia (10th, 81.2). The total carrying capacity
electricity, and the demand for it increases by 8 percent of liners serving Indonesia is just 202,000 twenty-foot
a year.15 equivalent units, the same as Vietnam but half that of
The insufficient supply and quality of transport, Thailand, and 17 times and 14 times less than Singapore
energy, and telecommunications infrastructures seriously and Malaysia, respectively. As for the state of the coun-
limit Indonesia’s output capacity. The manufacturing try’s railroad infrastructure, it is equally mediocre. And
and export sectors particularly suffer as this state of af- its score of 3.0 is significantly lower than in 2005.
fairs translates into limited connectivity and handling Among the four main transportation modes, air
capacity, high costs, delays in shipments, and production transport infrastructure is the only one that stands out
loss. Indeed, the inadequate supply of infrastructure was positively with a score of 4.6, despite a middling rank
among the top three concerns of those business lead- of 69th. Airlines in Indonesia have been adding capac-
ers who responded to the Executive Opinion Survey in ity at breakneck pace, with Indonesia now the 21st
2010 (see Figure 5). largest market when measured in terms of available seat
Demand for infrastructure grows proportion- kilometers.19
ally with the economy. In order to meet this demand, Inadequate energy infrastructure is also holding
investment must therefore increase. In addition, the back the country’s competitiveness. The business com-
costs of maintaining and upgrading existing infrastruc- munity has indicated increasing concern about the poor
ture should not be underestimated.16 Unfortunately, reliability and shortages that characterize the network.
Indonesia suffers from a protracted lack of investment Indonesia ranks 97th in this indicator with a score of
in this area. Further, the geography and the tropical 3.7. The situation has been deteriorating over the years,
climate of this country of some 17,000 islands provide as the state power company, which operates 85 percent
a challenging environment for infrastructure deploy- of generating capacity and has a monopoly on trans-
ment. It is important to note that the assessment has mission and sales, has struggled to meet demand. The
been improving over the years, with a gain of 0.7 since government is stepping up its efforts to improve power
2006 in the pillar, thanks to significant improvements in supplies. A law introduced in 2009 allows private inves-
several of its components (see Figure 7). Yet Indonesia tors and local authorities to generate, transmit, and sell
has been losing ground in relative terms, falling from electricity without having to work with the state firm.20
the 78th to 82nd position in the infrastructure pillar,

Figure 5: The most problematic factors for doing business in Indonesia in 2010
Percentage of respondents
who ranked factor
as most problematic
Inefficient government bureaucracy 23%

Corruption 29%
Inadequate supply of infrastructure 8%
Access to financing 12%
Inflation 2%
Government instability/coups 6%
Policy instability 2%
Tax regulations 2%
Inadequately educated workforce 2%
Restrictive labor regulations 3%
Poor work ethic in national labor force 3%
Crime and theft 3%
Tax rates 0%
Poor public health 1%
Foreign currency regulations 0%
0 5 10 15 20
Shares (% of weighted total)
n Indonesia Developing Asia Lower middle income
Source: World Economic Forum, Executive Opinion Survey.

Note: from a list of 15 factors, respondents were asked to select the five most problematic for doing business in their country and to rank them from 1 (most 13
problematic) to 5. The bars in the figure show the responses weighted according to their rankings.
Figure 6: Selected measures of ethics and corruption in the GCI 2010-2011
4
Score (1–7 scale, 7 is best)
1
Diversion of Public trust of Irregular payments Judicial Favoritism in decisions
public funds politicians and bribes† independence of government officials
n Indonesia n Indonesia (2005)* n ASEAN n Developing Asia n Lower middle income

* Scores of Indonesia in the GCI 2005. † No comparable measure for 2005.

Electricity supply
Figure 7: Evolution in the assessment of Indonesia’s transport infrastructure quality
Electricity supply
Air transport
Electricity
Electricity supply
supply
Air transport
Port
Air transport
7 Air transportAir transport
Port
Electricity supply
Electricity supply
Railroad
Port Port
Port
6
Railroad Railroad
Air transport
Roads Roads
Railroad
Railroad
5 Roads
Port
Score (1–7 scale)
Roads
Roads
4 Railroad
3 Roads
2005 2006 2007 2008 2009 2010
14
Finally, the telecommunications network remains debt, inflation, the national savings rate, the interest rate
insufficiently developed, with only 14 landlines per 100 spread, and the country credit rating. Together, these
population (82nd), despite a nearly fourfold increase indicators account for 12 percent of Indonesia’s overall
since 2004, and this partly explains the still low penetra- GCI score.
tion of the Internet (8.7 percent, 107th). On the other Over the past five years, thanks to sounder mac-
hand, mobile telephony is spreading faster, compensat- roeconomic management, Indonesia has cut budget
ing somewhat for the lower penetration of landlines and deficits, reduced its debt-to-GDP ratio to well below
providing access not only to the Internet, but also to a 30 percent, and brought inflation under control (see
number of basic services, such as banking or education. Figure 9). This improved situation has been a key en-
The government has made infrastructure a priority. abler of Indonesia’s economic vitality over the past de-
It announced in its Medium Term Development Plan cade. Indonesia now ranks 35th in the macroeconomic
2010–2014 that it would invest the equivalent of 5 per- stability pillar. It stands on a much stronger footing than
cent of GDP each year in infrastructure development, India (73rd), Russia (79th), and Brazil (111th). Among
about two-thirds of which will be financed by private ASEAN members, it receives a better assessment than
investment—including foreign investors—through Malaysia (41st), Thailand (46th), and the Philippines
public-private partnerships. (68th). Only China (4th) and Singapore (33rd) have
more stable macroeconomic environments. In the past,
3. Macroeconomic environment Indonesia had always been ranked significantly lower,
The stability of the macroeconomic environment is most notably in 2007, when it was ranked 89th.
important for business and, therefore, for the overall Indonesia has not experienced double-digit infla-
competitiveness of a country. Although it is certainly tion since 2006. Up to that year, price volatility and
true that macroeconomic stability alone cannot increase bouts of high inflation were common. Going forward,
the productivity of a nation, it is also recognized that however, strong growth and high international com-
macroeconomic disarray harms the economy. High modity prices will make it more challenging to contain
interest payments crowd out more productive public inflation. For 2011, Bank Indonesia (BI), the central
investments. Running fiscal deficits limits the govern- bank, has set an inflation target of 5 percent, allow-
ment’s ability to react to business cycles. Firms cannot ing for an upward or downward deviation of 1 per-
operate efficiently when inflation rates are out of con- cent. In the first three months of 2011, inflation has
trol. The macroeconomic environment pillar includes been slightly above the upper limit, hovering around 7
six indicators: the government budget balance, public

Figure 8: Infrastructure quality in Indonesia and selected country groups
7
n Indonesia
n Developing Asia
6 n Lower middle income
n ASEAN
Score (1–7 scale, 7 is best)
1
Roads Railroads Ports Air transport Electricity
15
percent.21 The IMF predicts it will average 7.1 percent change in the future. In April 2011, Standard & Poor’s
for the year.22 was the last of the three major rating agencies to raise
Although it is unlikely to get out of control, infla- Indonesia’s long-term debt rating to one notch below
tion remains one of the biggest threats to Indonesia’s investment grade, with a positive outlook. Some ana-
growth in the short term. Further, inflation most harms lysts believe that Indonesia’s debt could be upgraded to
the poor and tends to exacerbate inequality, because the investment grade within a year or two, provided that
share of food in consumption is typically much higher Indonesia addresses some of the pressing issues discussed
among the poor, and sustained high inflation could lead in the present study, such as upgrading infrastructure.26
to social tensions. 23 Indeed, the soaring price of soy- Indonesia’s savings rate represents 33 percent of its
beans triggered riots in Indonesia in 2008. GDP. This is high by international standards—the 16th
The government has already taken measures to rein highest among the GCI sample—but not unusual in
in inflation, including the suspension of duties on se- Asia. China, India, and Vietnam all boast savings rates
lected food imports. In addition, the appreciation of the well above 30 percent. The savings rate is an indica-
rupiah against the dollar is providing a cushion against tion of the country’s domestic capacity for investment,
imported inflation. Many analysts, however, consider which is an important driver of growth. High rates of
that the government has been slow to respond to the capital formation mean that a country’s stock of assets
latest bout of inflation. In addition, some believe that a is not just growing but also incorporating more tech-
target of 3.5-5.5 percent by 2014 is actually too timid nology, which itself is generating productivity gains.
and should be revised downward to enhance BI’s cred- Consumption is still the engine of growth, accounting
ibility and lower inflation expectations.24 for 50 percent of Indonesia’s growth in 2010 and 55
Indonesia’s sovereign debt has not yet earned an percent of its GDP, down from 68 percent in 2003.27
investment-grade rating. The GCI includes an aggregate Meanwhile, the share of gross fixed investment surged
measure of sovereign debt quality based on the risk of from 19.5 percent to a record 32.2 percent in 2010.28
default. Indonesia ranks 71st with a score of 50.1 out of In order to sustain a growth rate of 7 percent, some
100, just ahead of the Philippines (75th) and Vietnam experts say that Indonesia should raise investment levels
(78th), but well behind China (32nd) and Brazil and further.29
India (50th), all rated investment grade.25 However, The government has a responsibility to finance in-
given Indonesia’s good recent fiscal track record, low vestments of a public nature, with the help of the pri-
indebtedness, strengthening currency, strong resilience vate sector. Its satisfactory fiscal situation will be tested
throughout the global economic crisis, and increased in the coming years, as spending will need to expand
foreign reserves, the possibility is growing that this will to finance pro-growth reforms and programs, not only

Figure 9: Selected macroeconomic indicators for Indonesia

General government balance (% of GDP)
General government gross debt (% of GDP)
100 General
Inflation (period government balance (% of GDP)
average,
Inflation (period average, year-on-year % change)
year-on-year % change)
General government
80
gross debt (% of GDP)
General government
General government balance (% of GDP)
60 balance (% of GDP)

Percent
40
20
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
–20
Source: IMF 2011.
16
in infrastructure, as discussed above, but also in higher more satisfactory 49th in the primary education sub-
education, health, and social protection (see below). To pillar. The health situation in Indonesia is problematic
create the necessary fiscal room, the government will on several accounts. Health outcomes, including life
need to broaden its tax base and thus incentivize firms expectancy, infant mortality, child malnutrition, and
to join the formal sector. In addition, a further reduc- communicable disease incidence, reveal the magnitude
tion in debt, coupled with an improved country credit of a problem that affects many countries in the region
rating, would result in lower interest payments and free (see Figure 10). Yet it is particularly acute in Indonesia.
up additional financial resources. Indonesian health figures are systematically worse than
the East Asia and Pacific regional average. Only India
4. Health and primary education presents a more unfavorable overall situation. By con-
The 4th and last pillar composing the basic require- trast, China, with six times the population of Indonesia,
ments subindex covers health and primary educa- is characterized by much better indicators in this area,
tion and accounts for 12 percent of Indonesia’s overall having seen significant improvements over recent
GCI score. A healthy workforce is vital to a country’s decades.
competitiveness and productivity. Poor health leads to Since 2005, Indonesia has actually lost ground in
significant costs to business, as workers that are ill are the GCI in the health category, not only to the best
often absent or operate at lower levels of efficiency. In performers but also in absolute terms. Infant mortality,
addition to health, this pillar takes into account attain- for instance, has not improved since 2005, still standing
ment of basic education, along with its quality. Workers at a high 30 deaths per 1000 live births, and placing the
with little formal education can often carry out only country 97th on this indicator. Malaria also is a major
simple manual work and find it much more difficult issue. Outside sub-Saharan Africa, only Bangladesh,
to adapt to more advanced production processes and Cambodia, and Guyana display a higher incidence rate.
techniques. Lack of basic education can therefore be- Employers in Indonesia surveyed through the Executive
come a constraint on business development, with firms Opinion Survey continue to be highly concerned about
finding it difficult to move up the value chain by pro- the adverse effects of this disease on the productivity of
ducing more sophisticated or value-intensive products, their employees (106th). The picture is very much the
and with workers finding it difficult to obtain gainful same with regard to tuberculosis. Malnutrition is also
employment. prevalent: 18 percent of children under 5 are under-
Indonesia places 62nd as a result of a very mixed weight and, as of 2007, 13 percent of the population
performance in these two subpillars. The country ranks suffered from undernourishment (World Bank 2011a).
a poor 99th in the health subpillar, compared with a

Figure 10: Selected health indicators for selected countries and regions
300
250 n Indonesia n India

n East Asia & Pacific n Malaysia
(developing only) n Philippines
200 n China n Vietnam
150
100
50
0
Improved water Improved sanitation Life expectancy Mortality rate, Incidence of Incidence of
source (% of facilities (% of at birth, total infant (per 1,000 tuberculosis tuberculosis
population with population with (years), 2009 live births), 2009 (per 100,000 (per 100,000
access), 2008 access), 2008 people), 2009* people), 2009
Source: World Bank 2011a.

* Incidence rate of tuberculosis in India is 280 cases per 100,000 population, but the corresponding bar was broken for the sake of readability.
17
A chronic lack of infrastructure contributes to the spending has been higher than for any other sector, ex-
poor health outcomes. Only 52 percent of the popula- ceeding 16 percent of total expenditures or 3.5 percent
tion has access to improved sanitation facilities, and the of GDP. Indonesia has a constitutional target of allocat-
share drops to 36 percent in rural areas.30 Furthermore, ing 20 percent of central and local budgets to education.
80 percent of the population has access to improved In 2002, the government reaffirmed this spending target
water sources, which is 8-17 percentage points lower and revised the Constitution to emphasize the right of
than all comparator countries, including less-developed all citizens to education. Furthermore, Law 20/2003
India (88 percent) and Vietnam (94 percent). A number states that there should be no fees for basic education. 32
of other factors add to the problem, including lack of
information, limited access to healthcare, and shortages 5. Higher education and training
of personnel. For instance, the World Bank estimates Higher education and training is the first of the six
that 40 percent of doctors are absent without valid rea- pillars that constitute the efficiency enhancers subin-
son during official public working hours.31 dex (see Figure 3), each accounting for 7 percent of
Education will have a major bearing on Indonesia’s Indonesia’s overall GCI score. Altogether, these six cat-
transition towards higher stages of economic develop- egories represent key enablers of Indonesia’s productiv-
ment. Indonesia has made some progress in improving ity, given its stage of development. In the coming years
access to, and the quality of, primary and secondary they will become even more important, as Indonesia
education (see next section). For decades, Indonesia transitions fully into the efficiency-driven stage of de-
has boasted quasi-universal access to primary education, velopment, and shortcomings will become ever more
with a net enrollment rate hovering around 95 percent. hazardous.
In addition, there has been a recent improvement in the Access to quality higher education and training is
quality of primary education, albeit from a low base. crucial for economies looking to move up the value
This might be a sign that government efforts in recent chain beyond simple production processes and prod-
years to boost enrollment rates and, increasingly, the ucts. In particular, today’s globalizing economy requires
quality and relevance of education may be starting to economies to nurture pools of well-educated workers
bear fruit. Indeed, the literacy rate stands at a very high who are able to adapt rapidly to their changing envi-
90 percent, on par with China and Brazil, and far better ronment. This pillar measures secondary and university
than India’s rate. enrollment rates, as well as the quality of education as
Education spending has significantly increased assessed by the business community. The extent of staff
in recent years, and, since 2006, national education training is also taken into consideration because of the

Table 6: The Enabling Trade Index 2010 rankings (out of 125 economies) for selected countries
ENABLING Domestic Foreign Efficiency Efficiency of Transparency

TRADE Market market market Border of customs import-export of border
Country INDEX access access access administration administration procedures administration
Singapore 1 1 2 16 1 1 1 2
Malaysia 30 31 34 41 44 48 29 52
China 48 79 81 83 48 40 33 56
Thailand 60 113 124 18 41 36 14 71
Indonesia 68 60 45 79 67 67 44 88
Vietnam 71 50 58 47 88 107 54 104
India 84 115 115 50 68 62 72 75
Philippines 92 64 100 31 74 56 55 119
Cambodia 102 40 96 6 96 89 96 120
(Cont’d.)
importance of vocational and continuous on-the-job secondary education and 30 percent at the university
training for ensuring constant upgrading of workers’ level.
skills. There has also been a positive trend in the quality
Projections by the Asian Development Bank of higher education. The business community consid-
(2010b) show that skill development, especially in ers that the educational system is now somewhat better
the lower-income regional economies, is possibly the at meeting the needs of the business sector. Indonesia
most critical prerequisite for realizing the vast human ranks 40th with a score of 4.3, up from 3.8 in 2005.
18
and economic potential of the Asian region. Higher The quality of math and science education is also im-
incomes, a larger middle class, and the self-sustaining proving (46th), as is the quality of management training
prosperity they stimulate can be built only on the (55th). An important source of knowledge and an effec-
foundation of a skilled and productive labor force that tive means of communication, the Internet has become
generates significant value added and higher income, more prevalent in schools, too.
channeling this into sustained long-term expenditure, Finally, Indonesia ranks 41st in on-the-job training.
savings, and investment. This dimension is of particular significance in Indonesia
Indonesia ranks 66th in this pillar with a score of given the low attainment rate at the university level.
4.2, receiving a better assessment than the Developing Many companies have put in place internal programs
Asia (3.6) and lower middle income group (3.5) av- to train or retrain employees. This will be an impor-
erages. Much better-ranked than India (86th) and tant lever in Indonesia’s competiveness going forward,
Vietnam (93rd), Indonesia is on par with the Philippines compensating somewhat for the still less-than-universal
(73rd), Brazil (58th), Thailand (59th), and China (60th) enrollment rates in the formal educational system.
among comparator countries. All these countries have
made remarkable strides in terms of access to basic edu- 6. Goods market efficiency
cation. Now the challenge for all of them, though to Countries with efficient goods markets are well posi-
different extents, is to further improve the quality and tioned to generate the right mix of products and ser-
attainment of basic education and to boost access to, vices given supply-and-demand conditions, as well as to
and the quality of, higher education. Trends are posi- ensure that these goods can be most effectively traded
tive for Indonesia, which has improved steadily since in the economy. Healthy market competition, both
2005, when it ranked 72nd among 114 economies with domestic and foreign, is important in driving market
a score of 3.7. efficiency, and thus business productivity, by ensuring
The gross secondary enrollment rate has improved that the most efficient firms producing goods demanded
from about 60 percent in 2003 to 80 percent in 2009, by the market are those that thrive. The best possible
and now stands higher than in India and China. The environment for the exchange of goods requires the
university enrollment rate rose from 16 to 21.3 per- minimum of impediments to business activity through
cent between 2003 and 2008. In its Medium Term government intervention. For example, competitiveness
Development Plan 2010-2014, the Indonesian gov- is hindered by extortionary or burdensome taxes, by re-
ernment has made education a ”national priority,” strictive and discriminatory rules on foreign ownership,
with a target of gross enrollment rates of 85 percent in and by barriers to trade. Market efficiency also depends

Table 6: The Enabling Trade Index 2010 rankings (out of 125 economies) for selected countries (cont’d.)
Availability Availability
ENABLING Transport and and quality and quality Availability
TRADE communications of transport of transport and use of Business Regulatory Physical
Country INDEX infrastructure infrastructure services ICTs environment environment security
Singapore 1 7 7 1 16 2 1 12
Malaysia 30 24 13 17 43 51 35 79
China 48 43 57 18 70 41 43 44
Thailand 60 40 40 26 73 71 53 84
Indonesia 68 85 80 73 90 60 48 76
Vietnam 71 68 103 31 59 64 60 66
India 84 81 78 59 93 58 47 69
Philippines 92 83 106 38 87 103 106 99
Cambodia 102 116 115 112 117 88 87 91
Source: World Economic Forum 2010a.
on demand conditions such as customer orientation and Competition could be strengthened and business
buyer sophistication. activity further stimulated if business creation were
With a score of 4.4, Indonesia ranks 49th in the made easier. It requires on average nine procedures
goods market efficiency pillar (see Table 5). It is one (88th) and as long as 60 days (121st) to start a busi-
of its best rankings across the 12 categories, on a par ness.35 Although this represents a significant absolute
with Thailand (41st, 4.5) and China (43rd, 4.4) and just improvement compared with just five years ago—the
ahead of Vietnam (4.2, 60th). Indonesia’s goods markets time to start a business has been slashed by 60 percent
19
are much more efficient than those of the Philippines and the number of procedures cut by 25 percent—other
(97th, 3.9) and Brazil (114th, 3.6). However, it must countries are moving even faster. The consequence is
be noted that some countries in the region are even that, on a relative basis, Indonesia has actually fallen in
more efficient, especially Singapore (1st, 5.7), but also the rankings of both indicators. Indeed, Indonesia still
Malaysia (27th, 4.7) and Thailand (41st, 4.5). ranks 159th out of 183 economies on the World Bank’s
Competition has been intensifying in the domestic Starting a Business Index, which also includes measures
market (50th), favored by relatively effective anti-trust of the cost and the minimum capital required to start a
regulation (35th).33 On the demand side, as is being business.
seen elsewhere in Asia, the growing Indonesian middle Goods market efficiency is also driven by foreign
class ensures that consumers are becoming increasingly competition, and here there are some shortcomings.
sophisticated and demanding (41st). This, too, encour- Access to the domestic market and the conditions for
ages firms to improve constantly on productivity, prod- foreign firms and investors to compete on a level play-
uct quality, and variety. ing field with domestic firms could be improved (80th).
The tax regime in Indonesia is competitive by On the positive side, the prevalence of foreign owner-
international standards and does not represent a major ship is more widespread (54th) than in Vietnam (114th),
deterrent to work or investment in Indonesia. The China (103rd), the Philippines (104th), and even India
country ranks 17th in this area, ahead of all the com- (80th). Yet, when it comes to merchandise trade, a
parator countries barring Singapore (3rd). The World number of tariff and non-tariff barriers persist, while
Bank estimates that, on average, the total corporate tax customs procedures are extremely burdensome. Despite
rate represents 38 percent of profits, which is nearly having improved its score by almost a full point to 3.9
30 percentage points less burdensome than in China over the past four years, the country ranks 89th on this
and India. While this is good news for businesses, it measure.
also requires the government to widen its tax base. This poor showing is in line with the findings of
The tax-to-GDP ratio, at 11.7 percent, remains low the Enabling Trade Index, a comprehensive bench-
by international standards.34 Reforming tax administra- marking tool that assesses the performance of 125
tion and encouraging more businesses to join the formal countries on over 50 trade-enabling factors beyond
sector could generate additional resources to finance market access (see Table 6). The 2010 edition re-
the investments highlighted elsewhere in this report for veals the poor efficiency and lack of transparency that
improving public health, education, and infrastructure, characterize border administration in several ASEAN
while preserving a tax regime that is not burdensome to countries, including Indonesia (67th for efficiency and
doing business. 88th for transparency), Vietnam (107th and 104th), the

Philippines (56th and 119th), and Cambodia (89th and market, in which some privileged workers enjoy high
120th), in stark contrast to best-performing Singapore job security and others live in precarious conditions.39
(1st and 2nd).36 This, coupled with the urgent need to Whereas a lack of flexibility has become a serious
upgrade transport and communication infrastructures, concern, Indonesia fares somewhat better in the second
not only undermines the competitiveness of exporters, component of the pillar, which assesses the efficient use
but also hinders the entry of foreign actors into domes- of talent (55th). Indonesia does not suffer from a seri-
tic markets, including Indonesia’s. ous brain drain problem (27th), and the country is able
to retain its talented workers better than many other
7. Labor market efficiency emerging economies. It is in the same league as India
The proper functioning of the labor market is critical (34th) and China (37th).
for ensuring that workers are allocated to their most However, the participation of women in the labor
efficient use in the economy and provided with incen- force remains very low. 86 percent of the male work-
tives to give their best effort in their jobs. Therefore, ing-age population is employed or looking for a job,
labor markets must have the flexibility to shift work- compared with 52 percent of working-age women.
ers from one sector of activity to another and allow for This yields a ratio of .58, which places Indonesia in the
wages to be set based on the needs of the economy. 109th position in this dimension. Indeed, Indonesia
Efficient labor markets must also ensure a clear relation- ranks a low 87th out of 134 countries in The Global
ship between worker incentives and their efforts. Gender Gap Report 2010, which measures the level of
In order to facilitate the mobility of labor across gender equality around the world. The authors find
sectors—which is made necessary by the rapid that, while Indonesia has higher-than-average levels of
development of its economy—Indonesia must be able political empowerment (58th), the country scores low
to rely on an efficient labor market. Yet Indonesia on economic participation (100th), educational attain-
ranks a low 84th in this pillar, a position that has been ment (95th), and health (105th).40 Greater integration of
deteriorating markedly since our 2007 assessment, when women into the workforce would reinforce Indonesia’s
it ranked 34th. It placed 43rd in 2008 and 75th in competitiveness going forward.
2009. Indonesia’s labor markets now are assessed as less
20
efficient than those of Thailand (24th), Vietnam (30th), 8. Financial market development
Malaysia (35th), and China (38th). With the exception A sound and well-functioning financial sector is needed
of India (92nd) and the Philippines (111th), Indonesia to allocate savings and foreign investment to their most
trails its peers within the East Asia and Pacific region. productive uses. It does so by channeling resources to
The minimum wage has become the main mecha- the best entrepreneurial or investment projects based on
nism for setting wages, and firms apply it by default expected rates of return and risk, with minimal trans-
rather than entering into collective bargaining. In the action costs. Well-developed financial markets make
GCI, Indonesia ranks 98th for the flexibility of wage capital available for private-sector investment from such
determination—a severe deterioration since 2007. sources as loans from a sound banking sector, prop-
Furthermore, according to the World Bank, severance erly regulated securities exchanges, venture capital, and
payments for permanent employees are equivalent to other financial products. In order to fulfill its role, the
103 weeks of salary, placing the country 127th out of banking sector needs to be trustworthy and transparent,
135 countries for which the data are available among and—as has been made so clear recently—financial mar-
GCI countries. Elsewhere in the region, dismissing a kets need appropriate regulation to protect investors and
permanent employee in the Philippines and China is other members of society at large.
almost as costly (91 weeks, tied at 114th) and Vietnam Indonesia ranks 62nd in the financial market devel-
(87 weeks, 108th). On the other hand, severance pay- opment pillar of the GCI with a score of 4.2, on a par
ments in India and Malaysia are about half those in with China (57th) and Vietnam (65th), and ahead of the
Indonesia. Philippines (75th). Within the ASEAN region, India
The adverse consequences of this inflexibility on ranks an outstanding 17th, albeit at a fair distance from
Indonesia’s economy are many. First, it contributes to Singapore (2nd) and Malaysia (7th). As Table 5 shows,
the slow growth in high value-added jobs.37 Second, it this is the second most static pillar in terms of evolution
encourages informality, as businesses are deterred from since 2005, with only the market size pillar seeing less
joining the formal sector. It is estimated that about two- change over the period.
thirds of the labor force works in the informal sector, The Asian financial crisis of 1997 and the ensu-
where conditions and wages are poor and protection ing crisis brought Indonesia’s banks near bankruptcy
often inexistent.38 Third, employers are deterred by pro- but accelerated the economic reform process. Today,
hibitive severance costs from hiring permanent workers. the availability of financial services and general ac-
Instead, they resort to outsourcing and temporary hir- cess to financing is high by international standards.
ing. Inflexibility therefore creates a two-tier labor-force Yet, despite improvements, the banking sector re-
mains somewhat fragile, and confidence in financial

institutions remains low (107th). Indeed, access to credit technologies are more available than in the past (77th,
would be enhanced if protection of lenders and bor- 4.8, up from 3.6 in 2005), notably thanks to foreign
rowers improved: Indonesia ranks a low 103rd out of direct investment (54th, 4.9, up from 4.7), and firms are
the 136 GCI countries covered by the Doing Business much more prompt at adopting them (65th, 4.9,
Legal Rights Index (LRI), with a score of 3 on a 0-to- up from 4.0).
10 scale, the same score as the Philippines and Brazil. Beyond the business sector, however, large and
Indonesia lags significantly behind not only best-per- populous developing and emerging countries face a
forming Singapore and Malaysia (both receiving a top major challenge in deploying ICTs. They typically
score of 10), but also India and Vietnam (both ranked display much lower penetration rates than smaller or
20th with a score of 8) and China (60th, 6). In the wealthier countries. Indonesia is no exception. The
seven years since the creation of the LRI, Indonesia’s country ranks 103rd on the ICT use component of
score has not changed, whereas India, China, and the technology readiness pillar, with the Philippines
Vietnam have made notable strides.41 (106th) and India (118th) somewhat lower in the rank-
ings. ICTs are already much more widespread in China
9. Technological readiness (78th), which is richer but much larger, as well as
Throughout the ages, technological improvements have Vietnam (70th), which is smaller yet with lower income
enabled firms to compete and prosper. The technologi- per capita.
cal readiness pillar is made up of two components. The The fastest-spreading technology in Indonesia is,
first, technological absorption, measures the agility with perhaps not surprisingly, mobile telephony. All of the
which firms harness new technologies to enhance pro- comparator countries have been displaying year-on-year
ductivity. Whether the technology used has or has not double-digit growth (see Figure 11). Vietnam already
been developed within national borders is irrelevant for boasts over 110 mobile subscriptions per 100 popula-
its ability to enhance productivity. The central point is tion, and the Philippines has also passed the “100 per
that the firms operating in the country have access to 100” mark. In Indonesia, mobile phone penetration
advanced products and blueprints and the ability to use has reached 70 percent, ahead of even China and India,
them. In this context, the level of technology available where the penetration rates are around 50 percent.42
21
to firms in a country needs to be distinguished from the While it is only a matter of a few years before the
country’s ability to innovate and expand the frontiers of vast majority of Indonesians own a mobile phone, the
knowledge. That is why the GCI distinguishes techno- picture is much different when it comes to the Internet.
logical readiness from innovation, which is incorporated There are fewer than 10 Internet users per 100 popula-
in the 12th and last pillar (see below). tion (see Figure 12). This measure includes those who
The second component, ICT use, assesses the use access the web from a cell phone, even at low speed.
by the population at large of information and telecom- A study by the World Bank conducted in 2008 re-
munications technologies (ICTs). ICTs allow for better vealed that only 5.7 percent of surveyed firms used the
communication and lower transaction costs. They also Internet to communicate with suppliers and clients,
improve access to basic services, including education compared with 29 percent for the East Asia and Pacific
and banking, and give rise to new business opportuni- region.43
ties. More generally, an ICT-literate population is more There are 74 subscribers to Internet broadband
likely to harness the opportunities offered by an increas- service for every 10,000 people—or 0.74 percent.
ingly digitized world. Broadband access is much more widespread—but
Technological readiness is the weakest aspect of still very low by international standards—in the
Indonesia’s performance in the GCI. Ranked 91st with Philippines (1.9 percent), Vietnam (3.7 percent),
a score of 3.2, it trails Singapore (11th) and Malaysia and China, where it is approaching 10 percent. Yet
(40th), both hi-tech powerhouses, as well as Vietnam high-speed broadband is becoming a prerequisite to
(65th), Thailand (68th), and China (78th). It also trails fully leveraging the Internet, given the proliferating
Brazil (54th) by a significant margin, but is less far be- number of Internet users, amount of information,
hind India (86th). It is in line with the regional average especially of multimedia content, and number of
(3.3) and the lower middle income group average (3.1). applications requiring considerable bandwidth, such as
With regard to ICT absorption by businesses, cloud computing and Voice-over-Internet Protocols.
Indonesia ranks 63rd with a score of 4.9, at the level Countries must therefore deploy the necessary
of Thailand (59th, 5.0), the Philippines (66th, 4.9) infrastructure to boost their international bandwidth in
and Vietnam (73rd, 4.8), and well ahead of China order to offer their citizens faster and cheaper access to
(83rd, 4.6), but at a distance from Singapore (3rd, 6.1), the web. Governments must take the lead to finance
Malaysia (35th, 5.5), India (40th, 5.3), and Brazil (44th, these massive investments in collaboration with the
5.3). Scorewise, Indonesia has improved markedly on all private sector. But they also have an important role to
three indicators, but its ranking remains middling: new play in creating the market conditions for operators and

Thailand
China
Vietnam
Singapore
China
India
Figure 11: Mobile cellular subscriptions per 100 population
Philippines
Singapore China
Philippines
India Singapore
Malaysia
India
China
India
Philippines
Indonesia
China Singapore
150 Indonesia Malaysia
China PhilippinesPhilippines
Vietnam
Singapore Singapore
India India
Indonesia Malaysia
Thailand Thailand China China
India
Indonesia Philippines
Vietnam Vietnam Indonesia
120 Brazil Singapore
Philippines Malaysia
Thailand Vietnam
India
Malaysia Indonesia
Per 100 population
Brazil Thailand
90 Philippines
Indonesia Vietnam
Brazil
Malaysia
Vietnam Thailand
Indonesia
60 Thailand Brazil
Vietnam
Brazil
Thailand
30
Brazil
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ITU 2010.
22
Internet service providers to offer a range of services head has now reached PPP $2,662, which is nearly
that accommodate broadband needs at competitive half those of Brazil ($5,718) and Malaysia ($5,828), and
prices. higher than those of the Philippines ($2,274), China
($2,199), India ($1,711), and Vietnam ($1,529).44
10. Market size Yet more could be done to reap the potential
Access to a large market plays an important role in benefits of trade. Indonesia ranks 21st in the foreign
enhancing national productivity, as it allows companies market size subpillar, well behind China (1st), India and
to benefit from economies of scale in their production Singapore (11th), Malaysia (16th), and Thailand (17th).
processes and strategies. Historically, the market avail- Exports are dominated by commodities, with fuels and
able to firms has been constrained by national borders. mining products accounting for 36.4 percent of exports
In the era of globalization, international markets have and agricultural products accounting for 21.1 percent.
become a substitute for domestic markets, especially The great majority of Indonesian firms do not venture
for small countries. Export markets also offer channels beyond the border. The World Bank reckons that a
of diffusion for products and services, thus allowing for mere 4.1 percent of Indonesian firms export. By com-
even bigger economies of scale. The GCI includes a parison, the average share of exporting firms in the East
comprehensive definition of market size by taking into Asia and Pacific region, including Indonesia, is 19.9
account the size of both domestic and foreign markets, percent. It is 20.5 percent in Vietnam and 12.2 percent
thereby gauging the overall market available to econo- in the Philippines. Although no recent data are available
mies that are open to foreign trade. for China, the share was already 24.5 percent in 2003.45
A G20 member, Indonesia ranks 15th in the mar- As the discussion of the 6th pillar shows, many ob-
ket size pillar and 5th among all developing countries, stacles to trade persist (see Table 6). Indonesian export-
behind only the traditional BRICs of China (2nd), ers face relatively high tariffs abroad, but poor transport
India (4th), Russia (9th), and Brazil (10th). A fast-grow- infrastructure and services, as well as inefficient customs
ing domestic market of almost 240 million people with administration, play an equally important role in ex-
a growing middle class provides significant opportunities plaining Indonesia’s modest trade performance.
to both local and foreign investors, with the latter en- Indonesia’s ASEAN membership provides sig-
suring spillovers in terms of capital investment, technol- nificant potential for Indonesian firms looking to ex-
ogy, and knowledge transfer. Between 1999 and 2009, pand into new markets in the region. Indonesia is by
the share of the middle class increased significantly from far ASEAN’s largest market, accounting for almost 40
about 25 to 43 percent of the population (see Table 7). percent of the group’s GDP and population. This also
The average household consumption expenditure per makes Indonesia a natural base for investors interested

Figure 12: Penetration rates of selected technologies in Indonesia
10 Internet users (%)
Internet users (%)

Internet users
Internet subscriptions per 100 inhabitants
Internet users (%)
8 Broadband Internet subscriptions
Households with a computer
Proportion of households with a computer
per 100 population
6 Proportion of households with a computer
Proportion of households with a computer
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ITU 2010.
in penetrating these fast-growing markets. Furthermore, leads to increased productivity, thus enhancing a na-
23
the entry into effect in 2010 of the ASEAN-China Free tion’s competitiveness. Business sophistication refers to
Trade Agreement (ACFTA) has created the world’s the quality of a country’s business networks as well as
largest trade area by population and the third largest by the quality of individual firms’ operations and strate-
GDP. Substantial tariff reductions should boost trade gies. This is particularly important for countries at an
among participating countries and offer new opportuni- advanced stage of development, when the more basic
ties for Indonesian exporters. sources of productivity improvement have been ex-
The ACTFA is expected to improve what has been hausted to a large extent.
a disappointing regional trend in recent years. Over The pillar takes into account the quality of national
the past two decades, the overall volume of trade of business networks and supporting industries, which
ASEAN members has grown 11 percent per year on are captured using variables on the quantity and qual-
average, but the share of trade represented by intra- ity of local suppliers and the extent of their interaction.
regional trade has stagnated. Over the past decade, the When companies and suppliers from a particular sector
share of intra-ASEAN exports barely increased, from are interconnected in geographically proximate groups
19 percent of all exports in 2000 to only 23 percent in (“clusters”), efficiency is heightened, greater opportuni-
2008, while intra-European-Union and intra-NAFTA ties for innovation are created, and barriers to entry for
trade represent, respectively, 65.8 percent and 44.3 new firms are reduced. Individual firms’ operations and
percent of each area’s total trade.46 The extreme diver- strategies (branding, marketing, the presence of a value
sity of ASEAN’s members may explain why it has so chain, and the manufacture of unique and cutting-edge
far made little progress towards economic integration in products) lead to sophisticated and modern business
40 years of existence. This failure represents significant processes.
potential going forward. While business sophistication is not among the crit-
ical drivers of its competitiveness yet, Indonesia already
11. Business sophistication performs relatively well in this pillar, ranking 37th. Yet
The last two pillars of the GCI assess the most sophis- its score of 4.4 out of 7 suggests room for improve-
ticated aspects of a county’s competitiveness, namely ment (see Table 5). It is slightly ahead of China (41st,
business sophistication and innovation. As countries 4.3), India (44th, 4.3) and Thailand (48th, 4.2), and
grow richer, these dimensions become increasingly im- well ahead of the Developing Asia (3.9) and the lower
portant to sustain higher wages and the associated stan- middle income group (3.6) averages. On the other
dard of living. hand, Indonesia has less sophisticated businesses than
Business sophistication is conducive to higher ef- Singapore (15th, 5.1) and Malaysia (25th, 4.8), as well
ficiency in the production of goods and services. This as Brazil (31st, 4.5). This is an area where Indonesia has

Table 7: Expenditure per person per day (constant 2005 PPP $) for Indonesia
National Urban Rural
Amount 1999 2009 1999 2009 1999 2009
<$1.25 42.2 24.6 23.4 12.2 53.5 33.7

$1.25–$2 32.8 32.4 32.4 25.5 32.9 37.5
Middle class
$2-$20 (Total) 25.0 42.7 44.0 62.0 13.6 28.7
$2–$4 20.1 30.9 33.0 40.0 12.4 24.3
$4–$6 3.5 7.5 7.6 13.2 0.9 3.3
$6–$10 1.2 3.3 2.8 6.5 0.2 0.9
$10–$20 0.3 1.1 0.6 2.2 0.0 0.3
>$20 0.0 0.2 0.1 0.3 0.0 0.1
Source: Adapted from ADB 2010b.

Note: Percentages do not add up because of roundings.
been showing clear progress, with a gain of 0.4 in its Innovation is therefore particularly important for econ-
score since 2005. omies near the technological frontier, as adopting or
The country has relatively well-developed clusters adapting exogenous technologies no longer suffices.
(24th) with many local suppliers (43rd), although they At its present stage of development, Indonesia can
are generally of middling quality (61st). Indonesian firms still generate significant productivity gains with more
are also characterized by sophisticated operations and widespread impact on living standards by improving
strategies. They are increasingly present across the value in less sophisticated areas. Nonetheless, innovation will
24 chain (26th) and retain control over the international become an increasingly important area of focus in the
distribution of their products (33rd). On the other future. An innovation-enabling environment is typically
hand, marketing strategies (56th) and production pro- supported by both the public and the private sectors. In
cesses (52nd) are not yet at world-class levels. particular, it requires sufficient investment in research
Despite Indonesia’s good showing in the busi- and development, especially by the private sector; high-
ness sophistication pillar, Indonesian private companies quality scientific research institutions; extensive collabo-
remain small by international standards, and few have ration in research between universities and industry; and
truly global operations. In 2010, no publicly-listed the protection of intellectual property.
company made the The Financial Times’ Global 500 Indonesia ranks 36th in the innovation pillar (see
or Fortune 500 lists. Indonesia placed only ten firms in Table 5). Its score of 3.7, up from 3.4 in 2005, now
Forbes’ Global 2000 list, five of them from the bank- places the country at the level of China (3.9, 26th),
ing sector, including highest-ranked Bank Mandiri India (3.6, 39th), and Brazil (3.5, 42nd). It also repre-
(796th).47 This is well behind China (84 companies sents a significant advantage over the Philippines (2.73,
among the top 2000), India (56 companies), and Brazil 111th) and is much better than Indonesia’s country
(33 companies). Indonesia’s largest firms are state- group (2.9) and regional (3.1) averages.
owned enterprises, including Pertamina, the world’s However, beyond the seemingly good rank-
largest exporter of liquefied natural gas. It is possible ing, Indonesia’s mark is mediocre in absolute terms
that the relatively high scores in this area are attribut- and betrays a very limited capacity to innovate. Best
able to the brisk development of certain key industries, performers in this pillar, including the United States
including banking, oil and gas, and telecommunications. (1st), Switzerland (2nd), Finland (3rd), and Japan (4th),
These leaders will undoubtedly contribute to improving along with a few other advanced economies, includ-
the degree of business sophistication in Indonesia, and ing Singapore (9th), are in a league of their own in this
will continue providing examples to other companies of pillar. The average score for the top 10 countries is 5.4,
sophisticated business models as Indonesia moves up the still 5.0 for the top 20, and a precipitously lower 4.1 for
development path. the group of countries ranked 20th to 40th, to which
Indonesia belongs. On most of the component indica-
12. Innovation tors, its marks are below or around the mean score.
The last pillar of the GCI assesses the extent to which Yet they earn the country good rankings, again due
countries are innovative. Although substantial gains can to the fact that only a handful of economies are truly
be obtained by improving institutions, building infra- innovation-driven.
structure, fostering market efficiency, or developing The quality of research institutions is still rather
skills, these factors eventually meet diminishing returns. middling (4.2, 44th), and collaboration with the private

Table 8: Patenting rate per million population for As a result, Indonesia has climbed in the overall ranking
selected countries and is now 44th among the 139 economies covered by
the GCI.
USPTO utility WIPO PCT
patent grants, 2009 applications, 2010 Second, Indonesia is better positioned than most
Per mio pop. Rank /139 Per mio pop. Rank /139 countries at a similar stage of development. It consis-
Singapore 92.8 16 127.7 11
tently outperforms—often by a sizeable margin—the
Malaysia 5.7 36 11.0 29 averages for the lower middle income group and the
South Africa 1.2 37 9.3 51 developing Asia region. Indonesia compares very favor-
Russian Federation 1.9 41 5.6 43 ably with the BRICS, with the notable exception of
China 1.4 46 3.9 49 China, which outperforms its peers in most dimensions.
India 0.5 52 2.3 61
Within ASEAN, a trade area characterized by profound
Brazil 0.3 64 1.0 65
diversity, Indonesia ranks in the middle of the pack,
Thailand 0.6 66 1.0 59
Philippines 0.3 82 0.2 71 well behind Singapore and Malaysia but far ahead of
Vietnam 0.0 88 0.1 87 the Philippines and Cambodia. Indonesia, Vietnam, and
Indonesia 0.0 91 0.1 89 Thailand are relatively close, but the driving forces of
Source: USPTO and WIPO their competitiveness differ.
Among Indonesia’s strengths, the macroeconomic
environment stands out. Robust growth and sound fis-
sector relatively weak (4.2, 38th) though strengthening cal management have put the country on a strong fiscal
(+0.6 since 2005). Company spending on research and footing. In the current context of rising global com-
development is also somewhat low (4.0, 26th) but also modity prices, inflation represents the most immediate
increasing (+0.5). While the environment is conducive threat to the stability of the macroeconomic environ-
to innovation at a level similar to those of India, China, ment. Furthermore, access to basic education is nearly
and Brazil, this has not yet led to a significant increase universal, and its quality has been improving. The adult
in Indonesia’s patenting activity, which remains weak. literacy rate stands at a high 90 percent. Efforts now
For instance, in 2009, the United States Patents and should be directed at raising secondary and tertiary
25
Trademark Office (USPTO) granted only three utility education enrollment.
patents to residents of Indonesia. The GCI includes the Among the factors that will become critical in the
USPTO patents-to-population ratio as a proxy for in- coming years, the efficiency of the goods market is
novation activity, and Indonesia’s rate of 0.0125 pat- also relatively well assessed, thanks to a competitive tax
ents per million population is one of the lowest ratios regime and intense competition, but bureaucracy and
among all countries included in the GCI (91th). As trade barriers of all sorts still stand in the way. Businesses
Table 8 shows, the picture is very much the same when are becoming increasingly sophisticated thanks to rela-
considering the number of patent applications under tively deep clusters, efficient management, and the mi-
the World Intellectual Property Organization’s Patent gration of firms to higher segments of the value chain.
Cooperation Treaty, a more international measure of Finally, the large size of the market confers a
patenting activity.48 Indonesia ranks a low 89th for the notable advantage. As one of the world’s 20 largest
number of PCT applications, with 0.7 applications per economies, Indonesia boasts a large pool of potential
million population. consumers, as well as a rapidly growing middle class,
Overall, the necessary environment for innovation of great interest to both local businesses and foreign
is improving, which will be important going forward, investors. However, much more must be done to im-
but actual innovation activity in Indonesia has not yet prove Indonesia’s competitiveness and therefore fully
exploited the opportunity. reap the benefits of international trade. In addition, a
more integrated ASEAN would offer opportunities for
streamlined regional supply chains, while offering new
Conclusion channels of distribution. As the 2011 Chair of the orga-
Over the past decade, Indonesia has been experienc- nization, Indonesia can play a catalytic role in the reali-
ing remarkable growth and has become a major player sation of the ASEAN Economic Community by 2015.
in the world economy. Through the lens of the GCI, One of the most glaring shortcomings is the state
this Report has analyzed Indonesia’s competitiveness of Indonesia’s infrastructure. Its roads and railroads are
landscape to identify the factors that will contribute to generally in poor condition, and the capacity of seaports
sustaining its growth momentum, as well as those that is extremely limited. The insufficient supply of electric-
pose a threat to it. The findings allow us to be cau- ity is also of major concern. The uptake of information
tiously optimistic. First of all, the dynamics are positive and communication technologies also remains limited
and indeed impressive. An analysis of Indonesia’s his- among businesses, as well as within the population at
torical performance in the GCI reveals that the country large. Mobile telephony is spreading fast, but Internet
has improved in all 12 pillars of the Index since 2005.

access, especially at high speed, remains the privilege of 4. The GCI was developed by Xavier Sala-i-Martin of Columbia
University in collaboration with the World Economic Forum’s
the very few. Centre for Global Competitiveness and Performance.
With regard to human capital, the health situation
5. As the definition makes clear, the concept of competitiveness
is holding back Indonesia’s competitiveness, demon- underlying the GCI includes both static and dynamic components,
strated by a high infant mortality rate, the burden of since productivity not only determines a country’s capacity to sus-
tain a high level of income, but also, through its impact on rates
communicable diseases, and the prevalence of malnu- of return to investment, national growth potential.
trition. Another major area of concern relates to the 6. See Appendix A for the detailed structure of the Index. More
allocation of human resources due to the labor market’s detail about the definition of each pillar is provided in the pillar-by-
pillar analysis of Indonesia’s performance below.
rigidity, which contributes to a high degree of informal-
ity and precarious working conditions, and hinders the 7. For details, see Sala-i-Martin et al. 2010.
reallocation of the labor force to more productive sec- 8. The weights have been derived from a maximum likelihood
regression.
tors as Indonesia develops.
Finally, although public institutions are better as- 9. For the sake of readability, in the remainder of this text we refer
to the year when the GCI was released (e.g. 2008) rather than the
sessed than in the past, corruption remains widespread edition (e.g. 2008–2009).
at all levels of the administration, and bureaucracy is still
10. This 2009 figure was used to determine the stage of development
too burdensome. Greater transparency and predictability when computing the GCI 2010–2011 in July 2010. According to
are needed in the policy-making process. This situation IMF preliminary estimates, Indonesia’s GDP per capita surged
to US$3,015 in 2010. That is, Indonesia is to become a Stage 2
also makes it more difficult to achieve the improve- country in the next iteration of the GCI.
ments needed in the areas described above. 11. Only the countries covered by the GCI are included in the
Growth will not make any of these concerns computation of the average scores. Indonesia, which belongs
to each of these groups, is excluded from the computation of
disappear and could exacerbate some of them. Growth
the average. ASEAN comprises Brunei Darussalam, Cambodia,
may generate new needs and set new standards among Malaysia, Philippines, Singapore, Thailand, and Vietnam.
businesses, investors, and consumers, making a situation Developing Asia comprises Bangladesh, Brunei Darussalam,
Cambodia, China, India, Malaysia, Nepal, Pakistan, Philippines,
deemed satisfactory today not acceptable in a few years. Sri Lanka, Thailand, Timor-Leste, and Vietnam (IMF classification as
It could raise the expectations of the population at large, of 26 July 2010). Lower middle income group comprises Angola,
Armenia, Bolivia, Cameroon, Cape Verde, China, Côte d’Ivoire,
those of Indonesia’s youth, its workers, its consumers, Ecuador, Egypt, El Salvador, Georgia, Guatemala, Guyana,
26
and the many people who have yet to benefit from the Honduras, India, Jordan, Lesotho, Moldova, Mongolia, Morocco,
Nicaragua, Nigeria, Pakistan, Paraguay, Philippines, Senegal, Sri
economy’s growth. Indonesia must therefore rise to the Lanka, Swaziland, Syria, Thailand, Timor-Leste, Tunisia, Ukraine,
challenge. and Vietnam (World Bank classification as of July 26th, 2010).
In this light, it is encouraging to note that the 12. In the GCI, scores of aggregates measures, including subpillars,
government of Indonesia has also identified many of pillars, and overall GCI, are on a 1-to-7 scale, where 7 is the best
possible score.
these areas for specific attention. In its Medium Term
13. See EIU 2011c.
Development Plan 2010–2014, the government has
identified eleven “national priorities” that will attract 14. Pilling et al. 2011.
significant attention and resources through 2014, 15. Deutsch and Soble 2011 and ADB 2010a.
namely (1) reform of the bureaucracy and administra- 16. For instance, it is estimated that, to meet demand, Asia will need
tion; (2) education; (3) health; (4) reducing poverty; (5) to invest US$1.8 trillion in transport infrastructure alone over the
period 2010-2020, out of which US$700 billion—or 40 percent—
food security; (6) infrastructure; (7) investment in the are for replacing and upgrading existing infrastructure. See ADBI
business sector; (8) energy; (9) environment and natural 2009 for a detailed account of the infrastructure challenge in Asia.
disasters; (10) left-behind, frontline, most outer, and 17. Here the comparison is made with 2006, as prior to this year the
post-conflict regions; and (11) culture, creativity, and composition of the infrastructure pillar differed slightly.
technological innovation.49 In each area, the govern- 18. Figures cited by OECD 2010, page 7.
ment has set quantitative targets to be met within five 19. This variable measures the total passenger-carrying capacity of
years. They cover most of the challenges identified in all scheduled flights, including domestic flights, originating from
a country. It is computed by taking the number of seats avail-
the present Report. As long as the country continues to able on each flight multiplied by the flight distance in kilometers,
make concerted efforts towards improvement in these summing the result across all scheduled flights in a week during
January (winter schedule) and July (summer schedule) 2010, and
key areas, there is every reason to expect that Indonesia taking the average capacity of the two weeks.
will continue to improve its competitiveness in the
20. See ADB 2010, p. 202 and ff.
years to come.
21. See Decree No.143/PMK.011/2010, Minister of Finance,
Indonesia. Data on inflation were retrieved from Bank Indonesia’s
website, http://www.bi.go.id/web/en/Moneter/Inflasi/Data+Inflasi/,
Notes on April 29, 2011.
1. Authors’ calculation of compound annual growth rate based on 22. IMF 2011.
IMF 2011.
2. EIU 2011b.
3. Poverty data are from World Bank 2011a.

23. Food, including tobacco and beverages, accounts for 36.2 percent 48. The Patent Cooperation Treaty offers inventors and industry a
in the calculation of Indonesia’s consumer price index. See ADB means for obtaining patent protection internationally. By filing one
2011 for a detailed discussion of the consequences of inflation in “international” patent application under this system, intellectual
commodity prices on growth and poverty in Asia. property owners can seek protection of an invention simultane-
ously in each of a large number of countries. For more informa-
24. See, for example, Adam 2011, EIU 2011a, Financial Times 2011, tion, consult “PCT: The International Patent System,” World
OECD 2010. Intellectual Property Organization, at http://www.wipo.int/pct/.
25. This measure of credit rating developed by Institutional Investors 49. See MNDP 2010.
is based on information provided by senior economists and
sovereign-debt analysts at leading global banks and money-
management and securities firms. Twice a year, the respondents
grade each country on a scale of 0 to 100, with 100 representing
the least chance of default. References
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The Indonesia Competitiveness Report 2011: Appendices
Appendix A: Computation and structure of the Global Competitiveness Index 2010
This appendix presents the structure of the Global

Weight (%) within
immediate parent category
Competitiveness Index 2010 (GCI). The number pre-
ceding the period indicates to which pillar the variable BASIC REQUIREMENTS
belongs (e.g., variable 1.01 belongs to the 1st pillar and
variable 12.04 belongs to the 12th pillar). 1st pillar: Institutions................................................. 25%
The computation of the GCI is based on succes- A. Public institutions.................................................... 75%
sive aggregations of scores from the indicator level (i.e., 1. Property rights.......................................................................... 20%
the most aggregated level) all the way up to the over- 1.01 Property rights
all GCI score. Unless otherwise mentioned, we use an 1.02 Intellectual property protection 1/2
arithmetic mean to aggregate individual variables within 2. Ethics and corruption.............................................................. 20%
a category.a For higher aggregation levels, we use the 1.03 Diversion of public funds
1.04 Public trust of politicians
percentage shown next to each category. This percent-
1.05 Irregular payments and bribes
age represents the category’s weight within its immedi-
3. Undue influence....................................................................... 20%
ate parent category. Reported percentages are rounded
1.06 Judicial independence
to the nearest integer, but exact figures are used in 1.07 Favoritism in decisions of government officials
the calculation of the GCI. For example, the score a 4. Government inefficiency......................................................... 20%
country achieves in Pillar 9 accounts for 17 percent 1.08 Wastefulness of government spending
of this country’s score in the efficiency enhancers subin- 1.09 Burden of government regulation
dex, irrespective of the country’s stage of development. 1.10 Efficiency of legal framework in settling disputes
Similarly, the score achieved on the subpillar transport 1.11 Efficiency of legal framework in challenging
regulations
infrastructure accounts for 50 percent of the score of the
1.12 Transparency of government policymaking
infrastructure pillar.
5. Security...................................................................................... 20%
Unlike the case for lower levels of aggregation, the 1.13 Business costs of terrorism
weight put on each of the three subindexes (basic require- 1.14 Business costs of crime and violence 29
ments, efficiency enhancers, and innovation and sophistication 1.15 Organized crime
factors) is not fixed. Instead, it depends on each country’s 1.16 Reliability of police services
stage of development, as discussed in the chapter.b For B. Private institutions.................................................. 25%
instance, in the case of Indonesia, currently in transition 1. Corporate ethics....................................................................... 50%
from stage 1 to stage 2, the score in the basic requirements 1.17 Ethical behavior of firms
subindex accounts for 53 percent of its overall GCI 2. Accountability........................................................................... 50%
score, while it represents just 20 percent of the overall 1.18 Strength of auditing and reporting standards
1.19 Efficacy of corporate boards
GCI score of Germany, a country in the third stage of
1.20 Protection of minority shareholders’ interests
development. 1.21 Strength of investor protection*
Variables that are not derived from the Executive
Opinion Survey (the Survey) are identified by an
asterisk ( * ) in the following pages. The Technical Notes 2nd pillar: Infrastructure........................................... 25%
and Sources section in Appendix B provides detailed A. Transport infrastructure.......................................... 50%
2.01 Quality of overall infrastructure
information about the indicators. To make the aggre-
2.02 Quality of roads
gation possible, these variables are transformed onto a 2.03 Quality of railroad infrastructure
1-to-7 scale to align them with the Survey results. We 2.04 Quality of port infrastructure
apply a min-max transformation, which preserves the 2.05 Quality of air transport infrastructure
order of, and the relative distance between, country 2.06 Available seat kilometers*
scores.c B. Energy and telephony infrastructure..................... 50%
Variables that are followed by the designation 2.07 Quality of electricity supply
2.08 Fixed telephone lines* 1/2
“1/2” enter the GCI in two different pillars; to avoid
2.09 Mobile telephone subscriptions* 1/2
double counting, we assign a half-weight to each
instance.d
3rd pillar: Macroeconomic environment............... 25%
3.01 Government budget balance*
3.02 National savings rate*
3.03 Inflation* e
3.04 Interest rate spread*
3.05 Government debt*
3.06 Country credit rating*

Appendix A: Computation and structure of the Global Competitiveness Index 2010 (cont’d.)
4th pillar: Health and primary education............... 25% 7.03 Rigidity of employment*
7.04 Hiring and firing practices
A. Health........................................................................ 50%
7.05 Redundancy costs*
4.01 Business impact of malaria f
6.04 Extent and effect of taxation 1/2
4.02 Malaria incidence* f
4.03 Business impact of tuberculosis f B. Efficient use of talent.............................................. 50%
4.04 Tuberculosis incidence* f 7.06 Pay and productivity
4.05 Business impact of HIV/AIDS f 7.07 Reliance on professional management 1/2
4.06 HIV prevalence* f 7.08 Brain drain
4.07 Infant mortality* 7.09 Female participation in labor force*
4.08 Life expectancy*
B. Primary education.................................................... 50% 8th pillar: Financial market development.............. 17%
4.09 Quality of primary education
A. Efficiency.................................................................. 50%
4.10 Primary education enrollment rate* g
8.01 Availability of financial services
8.02 Affordability of financial services
8.03 Financing through local equity market
8.04 Ease of access to loans
EFFICIENCY ENHANCERS 8.05 Venture capital availability
8.06 Restriction on capital flows
5th pillar: Higher education and training.............. 17% B. Trustworthiness and confidence............................ 50%
A. Quantity of education............................................. 33% 8.07 Soundness of banks
5.01 Secondary education enrollment rate* 8.08 Regulation of securities exchanges
5.02 Tertiary education enrollment rate* 8.09 Legal rights index*
B. Quality of education................................................ 33%

5.03 Quality of the educational system 9th pillar: Technological readiness........................ 17%
5.04 Quality of math and science education
A. Technological adoption........................................... 50%
5.05 Quality of management schools
30 9.01 Availability of latest technologies
5.06 Internet access in schools
9.02 Firm-level technology absorption
C. On-the-job training.................................................. 33% 9.03 FDI and technology transfer
5.07 Local availability of specialized research
B. ICT use...................................................................... 50%
and training services
9.04 Internet users*
5.08 Extent of staff training
9.05 Broadband Internet subscriptions*
9.06 Internet bandwidth*
6th pillar: Goods market efficiency........................ 17% 2.08 Fixed telephone lines* 1/2
2.09 Mobile telephone subscriptions* 1/2
A. Competition............................................................. 67%
1. Domestic competition................................................... variable h
6.01 Intensity of local competition 10th pillar: Market size............................................. 17%
6.02 Extent of market dominance A. Domestic market size.............................................. 75%
6.03 Effectiveness of anti-monopoly policy 10.01 Domestic market size index* j
6.04 Extent and effect of taxation 1/2
B. Foreign market size................................................. 25%
6.05 Total tax rate*
10.02 Foreign market size index* k
6.06 Number of procedures required to
start a business* i
6.07 Time required to start a business* i
6.08 Agricultural policy costs
2. Foreign competition....................................................... variable h
INNOVATION AND SOPHISTICATION FACTORS
6.09 Prevalence of trade barriers
6.10 Trade tariffs* 11th pillar: Business sophistication....................... 50%
6.11 Prevalence of foreign ownership 11.01 Local supplier quantity
6.12 Business impact of rules on FDI 11.02 Local supplier quality
6.13 Burden of customs procedures 11.03 State of cluster development
10.04 Imports as a percentage of GDP* g 11.04 Nature of competitive advantage
B. Quality of demand conditions................................ 33% 11.05 Value chain breadth
6.14 Degree of customer orientation 11.06 Control of international distribution
6.15 Buyer sophistication 11.07 Production process sophistication
11.08 Extent of marketing
11.09 Willingness to delegate authority
7th pillar: Labor market efficiency.......................... 17% 7.07 Reliance on professional management 1/2
A. Flexibility.................................................................. 50%
7.01 Cooperation in labor-employer relations
7.02 Flexibility of wage determination (Cont’d.)


Appendix A: Computation and structure of the Global Competitiveness Index 2010 (cont’d.)
12th pillar: Innovation................................................ 50% h The competition subpillar is the weighted average of two com-
ponents: domestic competition and foreign competition. In both
12.01 Capacity for innovation
components, the included variables provide an indication of the
12.02 Quality of scientific research institutions extent to which competition is distorted. The relative importance
12.03 Company spending on R&D of these distortions depends on the relative size of domestic ver-
12.04 University-industry collaboration in R&D sus foreign competition. This interaction between the domestic
12.05 Government procurement of advanced technology market and the foreign market is captured by the way we deter-
mine the weights of the two components. Domestic competition
products is the sum of consumption (C), investment (I), government spend-
12.06 Availability of scientists and engineers ing (G), and exports (X), while foreign competition is equal to
12.07 Utility patents* imports (M). Thus we assign a weight of (C + I + G + X)/
1.02 Intellectual property protection 1/2 (C + I + G + X + M) to domestic competition and a weight of M/
(C + I + G + X + M) to foreign competition.
i Variables 6.06 and 6.07 combine to form one single variable.
j The size of the domestic market is constructed by taking the

natural log of the sum of the gross domestic product valued
Notes at purchasing power parity (PPP) plus the total value (PPP esti-
mates) of imports of goods and services, minus the total value
a Formally, for a category i composed of K indicators, we have:
(PPP estimates) of exports of goods and services. Data are
K then normalized on a 1-to-7 scale. PPP estimates of imports
indicatork and exports are obtained by taking the product of exports as
k=1
categoryi a percentage of GDP and GDP valued at PPP. The underly-
K ing data are reported in the data tables section of The Global
Competitiveness Report 2010–2011.
b See Table 3 on page 6 for weightings.
k The size of the foreign market is estimated as the natural log
c Formally, we have: of the total value (PPP estimates) of exports of goods and ser-
vices, normalized on a 1-to-7 scale. PPP estimates of exports are
obtained by taking the product of exports as a percentage of GDP
6x (country score – sample minimum) and GDP valued at PPP. The underlying data are reported in the
+ 1
(sample maximum – sample minimum) data tables of The Global Competitiveness Report 2010–2011.
The sample minimum and sample maximum are, respectively, the 31

lowest and highest country scores in the sample of economies
covered by the GCI. In some instances, adjustments were made
to account for extreme outliers. For those indicators for which a
higher value indicates a worse outcome (e.g., disease incidence,
government debt), the transformation formula takes the following
form, thus ensuring that 1 and 7 still corresponds to the worst
and best possible outcomes, respectively:
(country score – sample minimum)

–6 x + 7
(sample maximum – sample minimum)
d For those categories that contain one or several half-weight vari-

ables, country scores for those groups are computed as follows:
(sum of scores on full-weight variables) + x (sum of scores on half-weight variables)
(count of full-weight variables) + x (count of half-weight variables)

e To capture the idea that both high inflation and deflation are det-
rimental, inflation enters the model in a U-shaped manner as fol-
lows: for values of inflation between 0.5 and 2.9 percent, a coun-
try receives the highest possible score of 7. Outside this range,
scores decrease linearly as they move away from these values.
f The impact of malaria, tuberculosis, and HIV/AIDS on competitive-

ness depends not only on their respective incidence rates but also
on how costly they are for business. Therefore, to estimate the
impact of each of the three diseases, we combine its incidence
rate with the Survey question on its perceived cost to businesses.
To combine these data we first take the ratio of each country’s
disease incidence rate relative to the highest incidence rate in the
whole sample. The inverse of this ratio is then multiplied by each
country’s score on the related Survey question. This product is
then normalized to a 1-to-7 scale. Note that countries with zero
reported incidence receive a 7, regardless of their scores on the
related Survey question.
g For this variable we first apply a log-transformation and then a

min-max transformation.

Appendix B: Technical Notes and Sources
This section provides detailed definitions and sources for 1ST PILLAR: INSTITUTIONS
all the indicators that enter the Global Competitiveness
Index 2010–2011 (GCI). 1.01 Property rights
For each indicator, the title appears on the fist line, How would you rate the protection of property rights,
including financial assets, in your country? [1 = very weak; 7
preceded by its number to allow for quick reference. = very strong] | 2009–10 weighted average
The numbering refers to the data tables section of The
Source: World Economic Forum, Executive Opinion Survey
Global Competitiveness Report 2010–2011, available free 2009, 2010
of charge from www.weforum.org/gcr. Underneath
1.02 Intellectual property protection
is a description of the indicator or, in the case of the
How would you rate intellectual property protection, includ-
Executive Opinion Survey data, the full question and ing anti-counterfeiting measures, in your country? [1 = very
the associated responses. weak; 7 = very strong] | 2009–10 weighted average

2009, 2010
1.03 Diversion of public funds

In your country, how common is diversion of public funds
to companies, individuals, or groups due to corruption? [1
= very common; 7 = never occurs] | 2009–10 weighted aver-
age

2009, 2010
1.04 Public trust of politicians

How would you rate the level of public trust in the ethical
standards of politicians in your country? [1 = very low; 7 =
very high] | 2009–10 weighted average
Source: World Economic Forum, Executive Opinion Survey 33

2009, 2010
1.05 Irregular payments and bribes

This indicator represents the average score across the five
components of the following Executive Opinion Survey
question: In your country, how common is it for firms to
make undocumented extra payments or bribes connected
with (a) imports and exports; (b) public utilities; (c) annual
tax payments; (d) awarding of public contracts and licenses;
(e) obtaining favorable judicial decisions. The answer to
each question ranges from 1 (very common) to 7 (never
occurs). | 2009–10 weighted average

2009, 2010
1.06 Judicial independence

To what extent is the judiciary in your country independent
from influences of members of government, citizens, or
firms? [1 = heavily influenced; 7 = entirely independent] |
2009–10 weighted average

2009, 2010
1.07 Favoritism in decisions of government officials

To what extent do government officials in your country
show favoritism to well-connected firms and individuals
when deciding upon policies and contracts? [1 = always
show favoritism; 7 = never show favoritism] | 2009–10
weighted average

2009, 2010
1.08 Wastefulness of government spending

How would you rate the composition of public spending
in your country? [1 = extremely wasteful; 7 = highly effi-
cient in providing necessary goods and services] | 2009–10
weighted average

2009, 2010
(Cont’d.)

Appendix B: Technical Notes and Sources (cont’d.)
1.09 Burden of government regulation 1.17 Ethical behavior of firms

How burdensome is it for businesses in your country to How would you compare the corporate ethics (ethical
comply with governmental administrative requirements behavior in interactions with public officials, politicians,
(e.g., permits, regulations, reporting)? [1 = extremely bur- and other enterprises) of firms in your country with those
densome; 7 = not burdensome at all] | 2009–10 weighted of other countries in the world? [1 = among the worst in the
average world; 7 = among the best in the world] | 2009–10 weighted
average
2009, 2010 Source: World Economic Forum, Executive Opinion Survey
2009, 2010
1.10 Efficiency of legal framework in settling disputes
How efficient is the legal framework in your country for 1.18 Strength of auditing and reporting standards
private businesses in settling disputes? [1 = extremely inef- In your country, how would you assess financial audit-
ficient; 7 = highly efficient] | 2009–10 weighted average ing and reporting standards regarding company financial
performance? [1 = extremely weak; 7 = extremely strong] |
Source: World Economic Forum, Executive Opinion Survey 2009–10 weighted average
2009, 2010
1.11 Efficiency of legal framework in challenging regulations 2009, 2010
How efficient is the legal framework in your country for pri-
vate businesses in challenging the legality of government 1.19 Efficacy of corporate boards
actions and/or regulations? [1 = extremely inefficient; 7 = How would you characterize corporate governance by
highly efficient] | 2009–10 weighted average investors and boards of directors in your country? [1 = man-
agement has little accountability to investors and boards; 7
Source: World Economic Forum, Executive Opinion Survey = investors and boards exert strong supervision of manage-
2009, 2010 ment decisions] | 2009–10 weighted average

1.12 Transparency of government policymaking
2009, 2010
How easy is it for businesses in your country to obtain
information about changes in government policies and 1.20 Protection of minority shareholders’ interests
regulations affecting their activities? [1 = impossible; 7 =
In your country, to what extent are the interests of minority
extremely easy] | 2009–10 weighted average
shareholders protected by the legal system? [1 = not pro-
34 Source: World Economic Forum, Executive Opinion Survey tected at all; 7 = fully protected] | 2009–10 weighted average
2009, 2010
2009, 2010
1.13 Business costs of terrorism
To what extent does the threat of terrorism impose costs 1.21 Strength of investor protection
on businesses in your country? [1 = significant costs; 7 = no
Strength of Investor Protection Index on a 0–10 (best) scale
costs] | 2009–10 weighted average
| 2009
Source: The World Bank, Doing Business 2010
2009, 2010
1.14 Business costs of crime and violence

To what extent does the incidence of crime and violence
impose costs on businesses in your country? [1 = significant
costs; 7 = no costs] | 2009–10 weighted average
2ND PILLAR: INFRASTRUCTURE

2.01 Quality of overall infrastructure
2009, 2010
How would you assess general infrastructure (e.g., trans-
1.15 Organized crime port, telephony, and energy) in your country? [1 = extreme-
ly underdeveloped; 7 = extensive and efficient by interna-
To what extent does organized crime (mafia-oriented rack-
tional standards] | 2009–10 weighted average
eteering, extortion) impose costs on businesses in your
country? [1 = significant costs; 7 = no costs] | 2009–10 Source: World Economic Forum, Executive Opinion Survey
weighted average 2009, 2010
2.02 Quality of roads
2009, 2010
How would you assess roads in your country? [1 = extreme-
1.16 Reliability of police services ly underdeveloped; 7 = extensive and efficient by interna-
tional standards] | 2009–10 weighted average
To what extent can police services be relied upon to enforce
law and order in your country? [1 = cannot be relied upon Source: World Economic Forum, Executive Opinion Survey
at all; 7 = can always be relied upon] | 2009–10 weighted 2009, 2010
average
2.03 Quality of railroad infrastructure
2009, 2010 How would you assess the railroad system in your country?
[1 = extremely underdeveloped; 7 = extensive and efficient
by international standards] | 2009–10 weighted average

2009, 2010
(Cont’d.)

2.04 Quality of port infrastructure 3.03 Inflation

How would you assess port facilities in your country? [1 = Annual percent change in consumer price index (year aver-
extremely underdeveloped; 7 = well developed and efficient age) | 2009
by international standards]
For landlocked countries, the question is as follows: How Sources: International Monetary Fund, World Economic Outlook
accessible are port facilities? [1 = extremely inaccessible; 7 Database (April 2010); national sources
= extremely accessible] | 2009–10 weighted average Notes: Economies are ranked in ascending order for presen-
tation purposes only. See Appendix of Chapter 1 for details
Source: World Economic Forum, Executive Opinion Survey about the treatment of deflationary countries in the Global
2009, 2010 Competitiveness Index.
2.05 Quality of air transport infrastructure 3.04 Interest rate spread

How would you assess passenger air transport infrastruc- Average interest rate spread between typical lending and
ture in your country? [1 = extremely underdeveloped; 7 = deposit rates | 2009
extensive and efficient by international standards] | 2009–10
weighted average Sources: Economist Intelligence Unit, CountryData Database
(July 2010); International Monetary Fund, International Financial
Source: World Economic Forum, Executive Opinion Survey Statistics (July 2010); national sources
2009, 2010
3.05 Government debt
2.06 Available airline seat kilometers General government gross debt as a percentage of GDP |
Scheduled available airline seat kilometers per week origi- 2009
nating in country (in millions) | January 2010 and July 2010
average Sources: African Development Bank; African Development
Bank and OECD Development Centre, Africa Economic Outlook
Sources: International Air Transport Association, SRS Analyser; (retrieved July 6, 2010); European Bank for Reconstruction
national sources and Development; International Monetary Fund; Economist
Intelligence Unit, CountryData Database (July 2010); national
2.07 Quality of electricity supply sources
How would you assess the quality of the electricity supply
in your country (lack of interruptions and lack of voltage 3.06 Country credit rating
fluctuations)? [1 = insufficient and suffers frequent inter- Expert assessment of the probability of sovereign debt
ruptions; 7 = sufficient and reliable] | 2009–10 weighted default on a 0–100 (lowest probability) scale | September
average 2009 35
Source: World Economic Forum, Executive Opinion Survey Source: © Institutional Investor, 2010. No further copying or
2009, 2010 transmission of this material is allowed without the express
permission of Institutional Investor (publisher@institutionalinves-
2.08 Fixed telephone lines tor.com).
Number of active fixed telephone lines per 100 population
| 2009
Sources: International Telecommunication Union, World

Telecommunication/ICT Indicators 2010 (June 2010 edition); 4TH PILLAR: HEALTH AND PRIMARY EDUCATION
national sources
2.09 Mobile telephone subscriptions 4.01 Business impact of malaria

Number of mobile cellular telephone subscriptions per 100 How serious an impact do you consider malaria will have
population | 2009 on your company in the next five years (e.g., death, disabil-
ity, medical and funeral expenses, productivity and absen-
Sources: International Telecommunication Union, World teeism, recruitment and training expenses, revenues)? [1 =
Telecommunication/ICT Indicators 2010 (June 2010 edition); a serious impact; 7 = no impact at all] | 2009–10 weighted
national sources average

2009, 2010
3RD PILLAR: MACROECONOMIC ENVIRONMENT 4.02 Malaria incidence

Number of malaria cases per 100,000 population | 2006
3.01 Government budget balance Sources: World Health Organization, World Malaria Report
Government budget balance as a percentage of GDP | 2009 2008; national sources
Sources: African Development Bank; European Bank for 4.03 Business impact of tuberculosis
Reconstruction and Development; Inter-American Development How serious an impact do you consider tuberculosis will
Bank; International Monetary Fund; Organisation for Economic have on your company in the next five years (e.g., death,
Co-operation and Development; Economist Intelligence Unit, disability, medical and funeral expenses, productivity and
CountryData Database (July 2010); national sources absenteeism, recruitment and training expenses, revenues)?
[1 = a serious impact; 7 = no impact at all] | 2009–10 weight-
3.02 National savings rate ed average
National savings rate as a percentage of GDP | 2009
Sources: Economist Intelligence Unit, CountryData Database 2009, 2010
(June/July 2010); International Monetary Fund; The World Bank
Group,World dataBank (July 2010); national sources 4.04 Tuberculosis incidence
Number of tuberculosis cases per 100,000 population | 2008
Source: The World Bank, Data Catalog (retrieved July 27,(Cont’d.)

2010)

4.05 Business impact of HIV/AIDS 5.04 Quality of math and science education
How serious an impact do you consider HIV/AIDS will have How would you assess the quality of math and science edu-
on your company in the next five years (e.g., death, disabil- cation in your country’s schools? [1 = poor; 7 = excellent –
ity, medical and funeral expenses, productivity and absen- among the best in the world] | 2009–10 weighted average
teeism, recruitment and training expenses, revenues)? [1 =
a serious impact; 7 = no impact at all] | 2009–10 weighted Source: World Economic Forum, Executive Opinion Survey
average 2009, 2010
Source: World Economic Forum, Executive Opinion Survey 5.05 Quality of management schools
2009, 2010 How would you assess the quality of management or busi-
ness schools in your country? [1 = poor; 7 = excellent –
4.06 HIV prevalence among the best in the world] | 2009–10 weighted average
HIV prevalence as a percentage of adults aged 15–49 years
| 2007 Source: World Economic Forum, Executive Opinion Survey
2009, 2010
Sources: UNAIDS/World Health Organization, 2008 Report
on the Global AIDS Epidemic; United Nations Development 5.06 Internet access in schools
Programme, Human Development Report 2007/2008; national How would you rate the level of access to the Internet in
sources schools in your country? [1 = very limited; 7 = extensive] |
4.07 Infant mortality
Infant (children aged 0–12 months) mortality per 1,000 live Source: World Economic Forum, Executive Opinion Survey
births | 2008 2009, 2010
Sources: The World Bank, Data Catalog (retrieved June 23, 5.07 Local availability of specialized research and training
2010); national sources
services
4.08 Life expectancy In your country, to what extent are high-quality, specialized
training services available? [1 = not available; 7 = widely
Life expectancy at birth (years) | 2008
available] | 2009–10 weighted average
Source: The World Bank, Data Catalog (retrieved July 27, 2010);
national source
2009, 2010
36 4.09 Quality of primary education

5.08 Extent of staff training
How would you assess the quality of primary schools in
To what extent do companies in your country invest in
your country? [1 = poor; 7 = excellent—among the best in
training and employee development? [1 = hardly at all; 7 =
the world] | 2009–10 weighted average
to a great extent] | 2009–10 weighted average
2009, 2010
2009, 2010
4.10 Primary education enrollment rate

Net primary education enrollment rate | 2008
Sources: UNESCO Institute for Statistics (retrieved July 16,

2010); The World Bank, EdStats query (retrieved July 16, 2010); 6TH PILLAR: GOODS MARKET EFFICIENCY
national sources
6.01 Intensity of local competition
How would you assess the intensity of competition in the
local markets in your country? [1 = limited in most indus-
tries; 7 = intense in most industries] | 2009–10 weighted
5TH PILLAR: HIGHER EDUCATION AND TRAINING average

5.01 Secondary education enrollment rate 2009, 2010
Gross secondary education enrollment rate | 2008
6.02 Extent of market dominance
2010); national sources How would you characterize corporate activity in your coun-
try? [1 = dominated by a few business groups; 7 = spread
among many firms] | 2009–10 weighted average
5.02 Tertiary education enrollment rate
Gross tertiary education enrollment rate | 2008 Source: World Economic Forum, Executive Opinion Survey
2009, 2010
2010); national sources
6.03 Effectiveness of anti-monopoly policy
To what extent does anti-monopoly policy promote compe-
5.03 Quality of the educational system
tition in your country? [1 = does not promote competition;
How well does the educational system in your country meet 7 = effectively promotes competition] | 2009–10 weighted
the needs of a competitive economy? [1 = not well at all; 7 = average
very well] | 2009–10 weighted average
Source: World Economic Forum, Executive Opinion Survey 2009, 2010
2009, 2010
(Cont’d.)

6.04 Extent and effect of taxation 6.14 Degree of customer orientation

What impact does the level of taxes in your country have How well do companies in your country treat customers?
on incentives to work or invest? [1 = significantly limits [1 = generally treat their customers badly; 7 = are highly
incentives to work or invest; 7 = has no impact on incen- responsive to customers and customer retention] | 2009–10
tives to work or invest] | 2009–10 weighted average weighted average
Source: World Economic Forum, Executive Opinion Survey Source: World Economic Forum, Executive Opinion Survey
2009, 2010 2009, 2010
6.05 Total tax rate 6.15 Buyer sophistication

This variable is a combination of profit tax (% of profits), In your country, how do buyers make purchasing deci-
labor tax and contribution (% of profits), and other taxes (% sions? [1 = based solely on the lowest price; 7 = based on a
of profits) | 2009 sophisticated analysis of performance attributes] | 2009–10
weighted average
6.06 Number of procedures required to start a business 2009, 2010
Number of procedures required to start a business | 2009
6.07 Time required to start a business 7TH PILLAR: LABOR MARKET EFFICIENCY
Number of days required to start a business | 2009
Source: The World Bank, Doing Business 2010 7.01 Cooperation in labor-employer relations
How would you characterize labor-employer relations in
6.08 Agricultural policy costs your country? [1 = generally confrontational; 7 = generally
How would you assess the agricultural policy in your coun- cooperative] | 2009–10 weighted average
try? [1 = excessively burdensome for the economy; 7 = bal-
ances the interests of taxpayers, consumers, and producers]
2009, 2010
| 2009–10 weighted average
Source: World Economic Forum, Executive Opinion Survey 7.02 Flexibility of wage determination
2009, 2010 How are wages generally set in your country? [1 = by a 37
centralized bargaining process; 7 = up to each individual
6.09 Prevalence of trade barriers company] | 2009–10 weighted average
In your country, to what extent do tariff and non-tariff bar-
riers limit the ability of imported goods to compete in the
2009, 2010
domestic market? [1 = strongly limit; 7 = do not limit] |
7.03 Rigidity of employment
Source: World Economic Forum, Executive Opinion Survey Rigidity of Employment Index on a 0–100 (worst) scale |
2009, 2010 2009
6.10 Trade tariffs Source: The World Bank, Doing Business 2010
Trade-weighted average tariff rate | 2009
7.04 Hiring and firing practices
Source: International Trade Centre How would you characterize the hiring and firing of workers
in your country? [1 = impeded by regulations; 7 = flexibly
6.11 Prevalence of foreign ownership determined by employers] | 2009–10 weighted average
How prevalent is foreign ownership of companies in your
country? [1 = very rare; 7 = highly prevalent] | 2009–10
2009, 2010
weighted average
Source: World Economic Forum, Executive Opinion Survey 7.05 Redundancy costs
2009, 2010 Redundancy costs in weeks of salary | 2009
6.12 Business impact of rules on FDI Source: The World Bank, Doing Business 2010
To what extent do rules governing foreign direct investment
(FDI) encourage or discourage it? [1 = strongly discourage 7.06 Pay and productivity
FDI; 7 = strongly encourage FDI] | 2009–10 weighted aver- To what extent is pay in your country related to productiv-
age ity? [1 = not related to worker productivity; 7 = strongly
related to worker productivity] | 2009–10 weighted average
2009, 2010
6.13 Burden of customs procedures
How would you rate the level of efficiency of customs pro- 7.07 Reliance on professional management
cedures (related to the entry and exit of merchandise) in In your country, who holds senior management positions?
your country? [1 = extremely inefficient; 7 = extremely effi- [1 = usually relatives or friends without regard to merit; 7 =
cient] | 2009–10 weighted average mostly professional managers chosen for merit and qualifi-
cations] | 2009–10 weighted average
2009, 2010
(Cont’d.)

7.08 Brain drain 8.07 Soundness of banks

Does your country retain and attract talented people? [1 = How would you assess the soundness of banks in your
no, the best and brightest normally leave to pursue oppor- country? [1 = insolvent and may require a government
tunities in other countries; 7 = yes, there are many oppor- bailout; 7 = generally healthy with sound balance sheets] |
tunities for talented people within the country] | 2009–10 2009–10 weighted average
weighted average
Source: World Economic Forum, Executive Opinion Survey 2009, 2010
2009, 2010
8.08 Regulation of securities exchanges
7.09 Female participation in labor force How would you assess the regulation and supervision of
Female-to-male participation ratio in the labor force | 2008 securities exchanges in your country? [1 = ineffective; 7 =
effective] | 2009–10 weighted average
Source: International Labour Organization, KIILM Net (retrieved
June 28, 2010) Source: World Economic Forum, Executive Opinion Survey
2009, 2010
8.09 Legal rights index

Degree of legal protection of borrowers and lenders’ rights
8TH PILLAR: FINANCIAL MARKET DEVELOPMENT on a 0–10 (best) scale | 2009

8.01 Availability of financial services
To what extent does competition among providers of
financial services in your country ensure the provision of
financial services at affordable prices? [1 = not at all; 7 =
extremely well] | 2010 9TH PILLAR: TECHNOLOGICAL READINESS
2009, 2010 9.01 Availability of latest technologies
To what extent are the latest technologies available in your
8.02 Affordability of financial services country? [1 = not available; 7 = widely available] | 2009–10
To what extent does competition among providers of weighted average
38 financial services in your country ensure the provision of
financial services at affordable prices? [1 = not at all; 7 = Source: World Economic Forum, Executive Opinion Survey
extremely well] | 2010 2009, 2010
Source: World Economic Forum, Executive Opinion Survey 9.02 Firm-level technology absorption
2009, 2010 To what extent do businesses in your country absorb new
technology? [1 = not at all; 7 = aggressively absorb] | 2009–
8.03 Financing through local equity market 10 weighted average
How easy is it to raise money by issuing shares on the
stock market in your country? [1 = very difficult; 7 = very Source: World Economic Forum, Executive Opinion Survey
easy] | 2009–10 weighted average 2009, 2010
Source: World Economic Forum, Executive Opinion Survey 9.03 FDI and technology transfer
2009, 2010 To what extent does foreign direct investment (FDI) bring
new technology into your country? [1 = not at all; 7 = fdi is a
8.04 Ease of access to loans key source of new technology] | 2009–10 weighted average
How easy is it to obtain a bank loan in your country with
only a good business plan and no collateral? [1 = very dif- Source: World Economic Forum, Executive Opinion Survey
ficult; 7 = very easy] | 2009–10 weighted average 2009, 2010
Source: World Economic Forum, Executive Opinion Survey 9.04 Internet users
2009, 2010 Number of estimated Internet users per 100 population |
2009
8.05 Venture capital availability
In your country, how easy is it for entrepreneurs with inno- Sources: International Telecommunication Union, World
vative but risky projects to find venture capital? [1 = very Telecommunication/ICT Indicators (June 2010 edition); The
difficult; 7 = very easy] | 2009–10 weighted average World Bank, Data Catalog (retrieved July 19, 2010); national
sources
2009, 2010 9.05 Broadband Internet subscriptions
Number of fixed broadband Internet subscriptions per 100
8.06 Restriction on capital flows population | 2009
How restrictive are regulations in your country related to
international capital flows? [1 = highly restrictive; 7 = not Source: International Telecommunication Union, World
restrictive at all] | 2009–10 weighted average Telecommunication/ICT Indicators (June 2010 edition)

2009, 2010
(Cont’d.)

9.06 Internet bandwidth 11.03 State of cluster development

International Internet bandwidth (Mb/s) per 10,000 popula- In your country’s economy, how prevalent are well-devel-
tion | 2007 oped and deep clusters? [1 = nonexistent; 7 = widespread in
many fields] | 2009–10 weighted average
Sources: International Telecommunication Union, World
Telecommunication/ICT Indicators (June 2010 edition); national Source: World Economic Forum, Executive Opinion Survey
sources 2009, 2010
11.04 Nature of competitive advantage

What is the nature of competitive advantage of your coun-
try’s companies in international markets based upon? [1 =
10TH PILLAR: MARKET SIZE low-cost or natural resources; 7 = unique products and pro-
cesses] | 2009–10 weighted average
10.01 Domestic market size index Source: World Economic Forum, Executive Opinion Survey
Sum of gross domestic product plus value of imports of 2009, 2010
goods and services, minus value of exports of goods and
services, normalized on a 1–7 (best) scale | 2009 11.05 Value chain breadth
In your country, do exporting companies have a narrow
Source: Authors’ calculation. For more details please refer to or broad presence in the value chain? [1 = narrow, primar-
Appendix A in Chapter 1.1 of this Report ily involved in individual steps of the value chain (e.g.,
resource extraction or production); 7 = broad, present
10.02 Foreign market size index across the entire value chain (i.e., do not only produce but
Value of exports of goods and services, normalized on a 1–7 also perform product design, marketing sales, logistics, and
(best) scale | 2009 after-sales services)] | 2009–10 weighted average
Source: Authors’ calculation. For more details please refer to Source: World Economic Forum, Executive Opinion Survey
Appendix A in Chapter 1.1 of this Report 2009, 2010
10.03 GDP (PPP) 11.06 Control of international distribution

Gross domestic product valued at purchasing power parity To what extent are international distribution and market-
in billions of international dollars | 2009 ing from your country owned and controlled by domestic
companies? [1 = not at all, they take place through foreign
Sources: International Monetary Fund, World Economic Outlook companies; 7 = extensively, they are primarily owned and 39
Database (April 2010); national sources controlled by domestic companies] | 2009–10 weighted
average
10.04 Imports as a percentage of GDP
Imports of goods and services as a percentage of gross Source: World Economic Forum, Executive Opinion Survey
domestic product | 2009 2009, 2010
Sources: Economist Intelligence Unit, CountryData Database 11.07 Production process sophistication
(retrieved July 1, 2010); The World Bank, Data Catalog In your country, how sophisticated are production pro-
(retrieved July 13, 2010); national sources cesses? [1 = not at all—labor-intensive methods or previous
generations of process technology prevail; 7 = highly—the
10.05 Exports as a percentage of GDP world’s best and most efficient process technology prevails]
Exports of goods and services as a percentage of gross | 2009–10 weighted average
domestic product | 2009
Sources: Economist Intelligence Unit, CountryData Database 2009, 2010
(retrieved July 1, 2010); The World Bank, Data Catalog
(retrieved July 14, 2010); national sources 11.08 Extent of marketing
In your country, to what extent do companies use sophis-
ticated marketing tools and techniques? [1 = very little; 7 =
extensively] | 2009–10 weighted average
11TH PILLAR: BUSINESS SOPHISTICATION Source: World Economic Forum, Executive Opinion Survey
2009, 2010
11.01 Local supplier quantity 11.09 Willingness to delegate authority

How numerous are local suppliers in your country? [1 = In your country, how do you assess the willingness to
largely nonexistent; 7 = very numerous] | 2009–10 weighted delegate authority to subordinates? [1 = low—top manage-
average ment controls all important decisions; 7 = high—authority
is mostly delegated to business unit heads and other lower-
Source: World Economic Forum, Executive Opinion Survey level managers] | 2009–10 weighted average
2009, 2010
11.02 Local supplier quality 2009, 2010
How would you assess the quality of local suppliers in your
country? [1 = very poor; 7 = very good] | 2009–10 weighted
average

2009, 2010
(Cont’d.)

12TH PILLAR: INNOVATION
12.01 Capacity for innovation

In your country, how do companies obtain technology? [1 =
exclusively from licensing or imitating foreign companies; 7
= by conducting formal research and pioneering their own
new products and processes] | 2009–10 weighted average

2009, 2010
12.02 Quality of scientific research institutions

How would you assess the quality of scientific research
institutions in your country? [1 = very poor; 7 = the best in
their field internationally] | 2009–10 weighted average

2009, 2010
12.03 Company spending on R&D

To what extent do companies in your country spend on
R&D? [1 = do not spend on R&D; 7 = spend heavily on R&D]
| 2009–10 weighted average

2009, 2010
12.04 University-industry collaboration in R&D

To what extent do business and universities collaborate on
research and development (R&D) in your country? [1 = do
not collaborate at all; 7 = collaborate extensively] | 2009–10
weighted average
40
2009, 2010
12.05 Government procurement of advanced technology

products
Do government procurement decisions foster technologi-
cal innovation in your country? [1 = no, not at all; 7 = yes,
extremely effectively] | 2009–10 weighted average

2009, 2010
12.06 Availability of scientists and engineers

To what extent are scientists and engineers available in
your country? [1 = not at all; 7 = widely available] | 2009–10
weighted average

2009, 2010
12.07 Utility patents per million population

Number of utility patents (i.e., patents for invention) grant-
ed in 2009, per million population | 2009
Source: The United States Patent and Trademark Office

Appendix C: Indonesia Competitiveness Profile
The next two pages detail the performance of Indonesia

in the Global Competitiveness Index (GCI) 2010-2011
on all its aggregate components and 110 indicators. This
appendix complements the tables and figures in the
main text of the report by allowing for a more granular
analysis, and includes the following columns:
• INDICATOR, UNITS: This column contains

the title of each component and each indicator and
the units by which it is expressed—for example,
“years” or “% GDP.” Indicators derived from
the Executive Opinion Survey are identified by
an asterisk; these variables are always expressed
as scores on a 1–7 scale, with 7 being the most
desirable score.
• RANK/139: This column reports Indonesia’s

position among the 139 economies covered by the
GCI 2010–2011.
• SCORE: This column reports Indonesia’s score

on each of the variables comprising the GCI. Next
to the score, a colored square indicates whether
the indicator constitutes an advantage n or a 41
disadvantage n for the country. For Indonesia, as
for all economies ranked between 11 and 50 in
the overall GCI, any individual variable ranked
higher than or equal to the country’s overall
rank—44th in the case of Indonesia—is considered
an advantage. Any variable ranked lower than the
country’s overall rank is considered a disadvantage.
• TREND 2005–10: This column highlights a

positive (upward arrow) or negative (downward
arrow) difference between the scores obtained by
Indonesia in the 2005 and the 2010 editions of the
GCI for each variable.
• ASEAN, DEVELOPING ASIA: For the sake

of comparison, we report the average score for
ASEAN and the Developing Asia countries in the
gray area of the page. In both cases, Indonesia is
excluded from the computation of the average. See
Endnote 11 of the Chapter for the classification.
• BEST PERFORMER: The two columns under

this heading report the score and name of the best-
performing economy for each aggregate measure
or indicator. When several countries share first
rank, the number of these economies is reported in
parentheses in the second column.

Indonesia
The Global Competitiveness Index in detail n Competitive advantage n Competitive disadvantage

Developing Best
Indonesia
Trend ASEAN Asia performer
INDICATOR, UNITS RANK/139 SCORE (1–7) 2005–10 SCORE SCORE SCORE ECONOMY
Global Competitiveness Index 2010–2011.................... 44............. 4.4....................... ➚ 4.5...............4.1............5.6...... Switzerland

Basic requirements........................................................................60............... 4.6............................ ➚ 4.8.................. 4.3...............6.1........Hong Kong SAR
Efficiency enhancers.....................................................................51............... 4.2............................ ➚ 4.3.................. 3.9...............5.5........Singapore
Innovation and sophistication factors........................................37............... 4.1............................ ➚ 3.8.................. 3.5...............5.7........Japan
1st pillar: Institutions....................................................... 61............. 4.0....................... ➚ 4.3...............3.8............6.1...... Singapore

1.01 Property rights*........................................................... 84............ 4.0........ n.......... ➚ 4.5............. 4.0...........6.4......Switzerland
1.02 Intellectual property protection*.................................. 58............ 3.8........ n.......... ➚ 3.7............. 3.2...........6.2......Sweden
1.03 Diversion of public funds*........................................... 60............ 3.5........ n.......... ➚ 3.9............. 3.3...........6.6......New Zealand
1.04 Public trust of politicians*............................................ 51............ 3.3........ n.......... ➚ 3.7............. 2.9...........6.4......Singapore
1.05 Irregular payments and bribes*................................... 95............ 3.4........ n......... n/a 4.2............. 3.5...........6.7......New Zealand
1.06 Judicial independence*................................................ 67............ 3.8........ n.......... ➚ 4.1............. 3.9...........6.8......New Zealand
1.07 Favoritism in decisions of government officials*......... 28............ 3.9........ n.......... ➚ 3.5............. 3.1...........6.0......Sweden
1.08 Wastefulness of government spending*..................... 30............ 4.2........ n.......... ➚ 3.9............. 3.4...........6.1......Singapore
1.09 Burden of government regulation*.............................. 36............ 3.7........ n.......... ➚ 3.6............. 3.3...........5.5......Singapore
1.10 Efficiency of legal sys. in settling disputes*................ 60............ 3.8........ n......... n/a 4.2............. 3.7...........6.3......Singapore
1.11 Efficiency of legal sys. in challenging regs*................. 55............ 3.9........ n......... n/a 4.0............. 3.6...........5.8......Sweden
1.12 Transparency of government policymaking*................ 91............ 4.1........ n.......... ➚ 4.4............. 4.1...........6.3......Singapore
1.13 Business costs of terrorism*......................................101............ 5.1........ n.......... ➚ 5.1............. 4.7...........6.8......Uruguay
1.14 Business costs of crime and violence*....................... 75............ 4.7........ n.......... ➚ 4.9............. 4.4...........6.6......Syria
1.15 Organized crime*......................................................... 98............ 4.7........ n.......... ➚ 5.4............. 4.8...........6.9......Rwanda
1.16 Reliability of police services*....................................... 80............ 4.0........ n.......... ➚ 4.5............. 3.9...........6.6......Finland
1.17 Ethical behavior of firms*............................................ 99............ 3.5........ n.......... ➘ 4.4............. 3.8...........6.8......Sweden
1.18 Strength of auditing and reporting standards*............ 78............ 4.6........ n.......... ➚ 4.9............. 4.5...........6.4......South Africa
1.19 Efficacy of corporate boards*...................................... 54............ 4.7........ n.......... ➚ 4.8............. 4.4...........5.9......Sweden
1.20 Protection of minority shareholders’ interests*........... 48............ 4.6........ n.......... ➚ 4.6............. 4.1...........6.0......Sweden
1.21 Strength of investor protection, index 0–10 (best)....... 33............ 6.0........ n......... n/a 6.0............. 5.5...........9.7......New Zealand
42
2nd pillar: Infrastructure.................................................. 82............. 3.6....................... ➚ 4.2...............3.4............6.8...... Hong Kong SAR
2.01 Quality of overall infrastructure*.................................. 90............ 3.7........ n.......... ➚ 4.6............. 3.8...........6.8......Switzerland
2.02 Quality of roads*.......................................................... 84............ 3.5........ n......... n/a 4.6............. 3.7...........6.6......Singapore
2.03 Quality of railroad infrastructure*................................. 56............ 3.0........ n.......... ➘ 3.3............. 3.0...........6.8......Switzerland
2.04 Quality of port infrastructure*...................................... 96............ 3.6........ n.......... ➘ 4.6............. 3.9...........6.8......Hong Kong SAR
2.05 Quality of air transport infrastructure*......................... 69............ 4.6........ n.......... ➚ 5.1............. 4.4...........6.9......Hong Kong SAR
2.06 Available airline seat kilometers, million...................... 21..... 1,450.9........ n......... n/a 946.5...... 1,339.2.. 31,076.0......United States
2.07 Quality of electricity supply*........................................ 97............ 3.6........ n.......... ➘ 4.8............. 3.6...........6.9......Hong Kong SAR
2.08 Fixed telephone lines/100 pop..................................... 82.......... 14.8........ n.......... ➚ 17.9............10.4.........63.2......Taiwan, China
2.09 Mobile telephone subscriptions/100 pop..................... 98.......... 69.2........ n.......... ➚ 99.9........... 65.6.......232.1......United Arab Emirates
3rd pillar: Macroeconomic environment..................... 35............. 5.2....................... ➚ 4.9...............4.7............6.6...... Brunei Darussalam

3.01 Government budget balance, % GDP.......................... 41.......... –2.6........ n.......... ➘ -4.1............. 9.4....... 178.0......Timor-Leste
3.02 National savings rate, % GDP...................................... 16.......... 32.9........ n.......... ➚ 30.9........... 30.6.........54.1......Kuwait
3.03 Inflation, annual % change........................................... 92............ 4.8........ n.......... ➘ 1.6............. 5.1.. [0.5;2.9].......Multiple (44)
3.04 Interest rate spread, %................................................ 66............ 5.2........ n.......... ➘ 5.7............. 6.2..........-0.6......Netherlands
3.05 Government debt, % GDP........................................... 51...........31.1........ n.......... ➘ 59.3........... 45.7...........0.0......Timor-Leste
3.06 Country credit rating, 0–100 (best).............................. 72.......... 50.1........ n......... n/a 57.0........... 43.0.........92.8......Switzerland
4th pillar: Health and primary education..................... 62............. 5.8....................... ➚ 5.8...............5.3............6.8...... Belgium
4.01 Business impact of malaria*.......................................106............ 4.8........ n.......... ➚ 5.2............. 4.9... n/appl.........Multiple (71)
4.02 Malaria incidence/100,000 pop................................... 111.......1100.2........ n.......... ➚ 506.3....... 4492.7...........0.0......Multiple (9)
4.03 Business impact of tuberculosis*...............................102............ 4.7........ n.......... ➚ 5.0............. 4.8............7.0......Finland
4.04 Tuberculosis incidence/100,000 pop...........................105........ 189.0........ n.......... ➘ 188.4......... 209.9...........0.0......Multiple (2)
4.05 Business impact of HIV/AIDS*.................................... 95............ 4.7........ n.......... ➚ 4.9............. 4.8...........6.7......Norway
4.06 HIV prevalence, % adult pop....................................... 55............ 0.2........ n.......... ➚ 0.6............. 0.4.........<0.1......Multiple (21)
4.07 Infant mortality, deaths/1,000 live births...................... 97.......... 30.7........ n.......... ➘ 19.0........... 34.2........... 1.8......Hong Kong SAR
4.08 Life expectancy, years.................................................. 91.......... 70.8........ n.......... ➚ 72.6........... 69.2.........82.6......Japan
4.09 Quality of primary education*...................................... 55............ 4.1........ n.......... ➚ 4.2............. 3.5...........6.6......Finland
4.10 Primary education enrollment, net %.......................... 52.......... 95.7........ n.......... ➘ 92.8........... 88.3....... 100.0......Costa Rica
5th pillar: Higher education and training..................... 66............. 4.2....................... ➚ 4.2...............3.6............6.1...... Finland
5.01 Secondary education enrollment, gross %.................. 95...........74.4........ n.......... ➚ 76.0........... 63.4....... 149.3......Australia
5.02 Tertiary education enrollment rate, gross %................ 89...........21.3........ n.......... ➚ 28.3............ 17.2.........98.1......Korea, Rep.
5.03 Quality of the educational system*............................. 40............ 4.3........ n.......... ➚ 4.3............. 3.8...........6.1......Singapore
5.04 Quality of math and science education*..................... 46............ 4.5........ n.......... ➚ 4.4............. 3.9...........6.5......Singapore
5.05 Quality of management schools*................................ 55............ 4.4........ n.......... ➚ 4.3............. 4.0...........6.1......Qatar
5.06 Internet access in schools*......................................... 50............ 4.5........ n.......... ➚ 4.6............. 3.8...........6.8......Iceland
5.07 Availability of research & training services*................. 52............ 4.4........ n.......... ➚ 4.0............. 3.7...........6.5......Switzerland
5.08 Extent of staff training*............................................... 36............ 4.4........ n.......... ➚ 4.4............. 3.9...........5.7......Sweden
* Out of 1–7 (best) scale. This indicator is derived from the World Economic Forum’s
Executive Opinion Survey.

Indonesia

The Global Competitiveness Index in detail n Competitive advantage n Competitive disadvantage
Developing Best
Indonesia
Trend ASEAN Asia performer
INDICATOR, UNITS RANK/139 SCORE (1–7) 2005–10 SCORE SCORE SCORE ECONOMY
6th pillar: Goods market efficiency.............................. 49............. 4.3....................... ➚ 4.4...............4.1............5.7...... Singapore

6.01 Intensity of local competition*..................................... 54............ 5.1........ n.......... ➚ 5.0............. 4.8...........6.1......Taiwan, China
6.02 Extent of market dominance*...................................... 42............ 4.2........ n.......... ➚ 3.9............. 3.8...........5.9......Germany
6.03 Effectiveness of antimonopoly policy*........................ 35............ 4.6........ n.......... ➚ 4.3............. 4.0...........5.8......Sweden
6.04 Extent and effect of taxation*.......................................17............ 4.4........ n.......... ➚ 4.1............. 3.9...........6.1......Bahrain
6.05 Total tax rate, % profits............................................... 60........... 37.6........ n......... n/a 34.5........... 39.4...........0.2......Timor-Leste
6.06 No. procedures to start a business.............................. 88............ 9.0........ n.......... ➘ 10.3............10.3........... 1.0......Multiple (2)
6.07 No. days to start a business...................................... 121.......... 60.0........ n.......... ➘ 49.9........... 48.4........... 1.0......New Zealand
6.08 Agricultural policy costs*............................................. 22............ 4.4........ n.......... ➚ 4.3............. 4.0...........5.9......New Zealand
6.09 Prevalence of trade barriers*....................................... 58............ 4.7........ n.......... ➚ 4.7............. 4.3...........6.4......Qatar
6.10 Trade tariffs, % duty..................................................... 48............ 3.8........ n......... n/a 6.0............10.7...........0.0......Hong Kong SAR
6.11 Prevalence of foreign ownership*............................... 54............ 4.9........ n.......... ➚ 4.8............. 4.3...........6.3......Slovak Republic
6.12 Business impact of rules on FDI*................................ 49............ 5.0........ n.......... ➚ 5.2............. 4.9...........6.5......Singapore
6.13 Burden of customs procedures*................................. 89............ 3.9........ n.......... ➘ 4.2............. 3.9...........6.5......Hong Kong SAR
6.14 Degree of customer orientation*................................. 60............ 4.8........ n.......... ➚ 5.0............. 4.6...........6.4......Japan
6.15 Buyer sophistication*................................................... 35............ 3.9........ n.......... ➘ 3.8............. 3.6...........5.2......Japan
7th pillar: Labor market efficiency................................ 84............. 4.2....................... ➚ 4.9...............4.3............5.9...... Singapore

7.01 Cooperation in labor-employer relations*..................... 47............ 4.6........ n.......... ➚ 5.0............. 4.4...........6.2......Singapore
7.02 Flexibility of wage determination*............................... 98............ 4.6........ n.......... ➚ 5.3............. 5.0...........6.4......Hong Kong SAR
7.03 Rigidity of employment index, 0–100 (worst)............ 100.......... 40.0........ n.......... ➘ 15.3........... 25.9...........0.0......Multiple (7)
7.04 Hiring and firing practices*.......................................... 38............ 4.4........ n.......... ➚ 4.4............. 4.0...........6.0......Hong Kong SAR
7.05 Redundancy costs*.................................................... 127........ 108.0........ n.......... ➘ 50.6........... 78.1...........0.0......Multiple (4)
7.06 Pay and productivity*................................................... 20............ 4.6........ n.......... ➚ 4.7............. 4.2...........5.6......Singapore
7.07 Reliance on professional management*...................... 57............ 4.5........ n.......... ➚ 4.8............. 4.4...........6.5......Sweden
7.08 Brain drain*.................................................................. 27............ 4.6........ n.......... ➚ 4.1............. 3.6...........6.3......Switzerland
7.09 Females in labor force, ratio to males.........................109............ 0.58...... n......... n/a 0.8............. 0.7........... 1.16....Mozambique
43
8th pillar: Financial market development.................... 62............. 4.2....................... ➚ 4.6...............4.2............5.9...... Hong Kong SAR
8.01 Availability of financial services*.................................. 59............ 4.8........ n......... n/a 5.0............. 4.5...........6.6......Switzerland
8.02 Affordability of financial services*............................... 59............ 4.4........ n......... n/a 4.8............. 4.3...........6.0......Switzerland
8.03 Financing through local equity market*....................... 13............ 4.6........ n.......... ➘ 3.8............. 3.8...........5.2......Qatar
8.04 Ease of access to loans*............................................. 14............ 4.0........ n.......... ➚ 3.4............. 3.1...........5.0......Qatar
8.05 Venture capital availability*............................................ 9............ 3.9........ n.......... ➚ 3.1............. 2.8...........4.4......Hong Kong SAR
8.06 Restriction on capital flows*........................................ 49............ 4.8........ n......... n/a 4.6............. 4.1...........6.5......Hong Kong SAR
8.07 Soundness of banks*................................................... 92............ 4.7........ n.......... ➚ 5.4............. 5.1...........6.7......Canada
8.08 Regulation of securities exchanges*............................ 49............ 4.6........ n.......... ➚ 4.4............. 4.2...........6.0......South Africa
8.09 Legal rights index, 0–10 (best)....................................103............ 3.0........ n.......... ➘ 7.1............. 5.9......... 10.0......Multiple (5)
9th pillar: Technological readiness.............................. 91............. 3.2....................... ➚ 3.8...............3.2............6.1...... Sweden

9.01 Availability of latest technologies*............................... 77............ 4.8........ n.......... ➚ 5.1............. 4.7...........6.8......Sweden
9.02 Firm-level technology absorption*............................... 65............ 4.9........ n.......... ➚ 5.1............. 4.7...........6.5......Iceland
9.03 FDI and technology transfer*....................................... 54............ 4.9........ n.......... ➚ 5.0............. 4.6...........6.3......Ireland
9.04 Internet users/100 pop................................................107............ 8.7........ n.......... ➚ 39.2............19.5.........93.5......Iceland
9.05 Broadband Internet subscriptions/100 pop.................. 99............ 0.7........ n......... n/a 5.9............. 2.1......... 41.1......Sweden
9.06 Internet bandwidth, Mb/s per 10,000 pop..................102.............1.1........ n......... n/a 45.0.............. 7.0.. 72,825.30....Luxembourg
10th pillar: Market size.................................................... 15............. 5.2....................... ➚ 4.1...............4.2............6.9...... United States

10.01 Domestic market size index, 1–7 (best)....................... 15............ 5.1........ n.......... ➚ 3.8............. 4.0............7.0......United States
10.02 Foreign market size index, 1–7 (best).......................... 23............ 5.5........ n.......... ➚ 5.0............. 4.6............7.0......China
11th pillar: Business sophistication ............................. 37............. 4.4....................... ➚ 4.2...............3.9............5.9...... Japan

11.01 Local supplier quantity*............................................... 43............ 5.0........ n.......... ➚ 4.8............. 4.7...........6.4......Japan
11.02 Local supplier quality*.................................................. 61............ 4.6........ n.......... ➚ 4.5............. 4.3...........6.3......Austria
11.03 State of cluster development*..................................... 24............ 4.5........ n.......... ➚ 4.3............. 4.0...........5.5......Italy
11.04 Nature of competitive advantage*............................... 33............ 4.1........ n.......... ➚ 3.6............. 3.2...........6.4......Japan
11.05 Value chain breadth*.................................................... 26............ 4.4........ n.......... ➚ 3.9............. 3.6...........6.3......Germany
11.06 Control of international distribution*............................ 33............ 4.4........ n.......... ➚ 4.1............. 3.9...........5.6......Japan
11.07 Production process sophistication*............................. 52............ 4.0........ n.......... ➚ 3.9............. 3.4...........6.6......Japan
11.08 Extent of marketing*................................................... 56............ 4.4........ n.......... ➘ 4.3............. 3.9...........6.0......United States
11.09 Willingness to delegate authority*.............................. 32............ 4.1........ n.......... ➚ 3.9............. 3.5...........6.5......Sweden
12th pillar: Innovation...................................................... 36............. 3.7....................... ➚ 3.5...............3.1............5.7...... United States

12.01 Capacity for innovation*............................................... 30............ 3.7........ n.......... ➚ 3.3............. 3.1...........5.9......Germany
12.02 Quality of scientific research institutions*................... 44............ 4.2........ n.......... ➚ 3.8............. 3.4...........6.2......Israel
12.03 Company spending on R&D*....................................... 26............ 4.0........ n.......... ➚ 3.6............. 3.2...........6.0......Sweden
12.04 University-industry collaboration in R&D*................... 38............ 4.2........ n.......... ➚ 4.0............. 3.5...........5.8......United States
12.05 Gov’t procurement of advanced tech.*........................ 30............ 4.2........ n.......... ➚ 4.1............. 3.7...........5.5......Qatar
12.06 Availability of scientists and engineers*...................... 31............ 4.7........ n.......... ➚ 4.1............. 3.9...........6.0......Finland
12.07 Utility patents/million pop............................................ 89............ 0.0........ n.......... ➘ 14.5............. 0.8........287.1......Taiwan, China

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The Indonesia

Competitiveness Report 2011

Thierry Geiger, World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

Professor Klaus Schwab,

CENTRE FOR GLOBAL COMPETITIVENESS AND PERFORMANCE

Thierry Geiger, Associate Director, Economist

Jennifer Blanke, Director, Lead Economist

Ciara Browne, Associate Director, Senior Community Manager

Roberto Crotti, Junior Economist

Margareta Drzeniek Hanouz, Director, Senior Economist

Satu Kauhanen, Team Coordinator

Pearl Samandari Massoudi, Community Manager

ASIA TEAM, CENTRE FOR REGIONAL STRATEGIES

Sushant Palakurthi Rao, Director, Head of Asia

Clara Chung, Community Manager for Asia and Pacific,

Anne-Catherine Gay des Combes, Team Coordinator

Maryam Hassimi, Community Manager for India and South Asia,

Jaeyoung Lee, Community Manager for Asia and Pacific,

We would like to extend a special thank you to Gilly Nadel for

World Economic Forum

All rights reserved. No part of this publication can be reproduced,

Printed and bound in Indonesia.

For additional information and material related to this publication

Indonesia Competitiveness Report 2011 © World Economic Forum

Executive Summary vii

The Global Competitiveness Index Framework......................... 2

Overview of Indonesia’s Performance in the

Indonesia’s Competitiveness in the

Appendix A: Computation and Structure of the 29

Appendix B: Technical Notes and Sources 33

Appendix C: Indonesia Country Profile 41

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

One of the most glaring shortcomings is the state

Indonesia Competitiveness Report 2011 © World Economic Forum

Indonesia Competitiveness Report 2011 © World Economic Forum

Table 2: Key socio-economic indicators for selected countries

Global Competitiveness Index GDP Share of world GDP per

Singapore 5.5 3 223 0.4 43,117 6.5 5.7 3.5

Indonesia Competitiveness Report 2011 © World Economic Forum

% of pop. below poverty line,

Singapore 5 5 0.85 27 n/a n/a

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 1: GDP and GNI per capita evolution

GNI per capita (constant 2000 US$)

GNI per capita 800

Source: World Bank 2011a

4 Figure 2: Poverty trends for selected countries CHINA

Source: World Bank 2011a.

Indonesia Competitiveness Report 2011 © World Economic Forum

Innovation and sophistication factors Key for

Indonesia Competitiveness Report 2011 © World Economic Forum

Figure 4: Evolution in the GCI ranking for selected countries

Table 3: GCI stages of development and weights of subindices

Indonesia Competitiveness Report 2011 © World Economic Forum

1 Switzerland 5.63 70 Latvia 4.14

Note: See text for details.

Indonesia Competitiveness Report 2011 © World Economic Forum

than Indonesia’s. One of the most striking features of

Indonesia Competitiveness Report 2011 © World Economic Forum

3rd pillar: Macroeconomic