In the latest World Competitiveness Yearbook (2022) Indonesia ranked 44th overall (out a total of 63), which is significantly weaker than last year’s ranking (37th). While Indonesia’s investment and business environment is known to be plagued by several structural bottlenecks, we did witness an (overall) improving trend in the country’s rankings in global competitiveness indices over the past decade or so.
Therefore, it is important to take a closer at the factors that explain this decline in the latest ranking of the Swiss-based Institute for Management Development (IMD). For any country that is eager to attract capital-intensive foreign direct investment (FDI) commitments it is crucial to understand these factors, and to impose strategies to overcome the bottlenecks.
First, if we take a look at the table below, then we can see that Indonesia struggles to compete with its regional counterparts. While the small city state of Singapore is obviously a special case (since it is a leading global financial center equipped with a pro-business and cost-competitive environment, great infrastructure, and a highly skilled and cosmopolitan labor force), it is unfortunate that Indonesia – which is the largest economy in Southeast Asia – structurally fails to outperform Malaysia and Thailand in these rankings (Vietnam not being included in the IMD ranking).
What is interesting is that – based on research conducted by IMD – the ranking of Indonesia is quite volatile, either jumping or declining quite heavily between years.
However, the IMD’s peer group ranking for Indonesia in the Asia-Pacific is actually remarkably stable (unchanged between 2018 and 2021, while slipping one position in 2022).
What we assume is at play here is (since the ranking is partly based on perceptions) is that when a certain policy program is announced or imposed by the government of Indonesia, perceptions turn positive. However, once it turns out that the program fails to make the desired change, those positive perceptions wane the following year.
For example, it might just be that the landmark Omnibus Law on Job Creation (Law No. 11 of Year 2020) allowed the ‘government efficiency’ component in the ranking to improve from 31st to 26th between 2020 and 2021. However, one year later it is this component that shows the steepest dive (from 26th to 35th). Not coincidentally, the Constitutional Court of Indonesia decided in late-2021 that this Omnibus Law is unconstitutional and will need to be rectified within a two-year period (if not, then the whole Omnibus Law will become invalid).
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