In recent weeks, Indonesia has to cope with a large amount of negative publicity as large capital outflows from the country's financial markets occurred, partly due to weak economic results regarding the current account balance, inflation and the the rupiah. Interest rates are rising, thus eroding people's purchasing power and consequently curbing economic growth. However, the Global Competitiveness Index 2013-2014, released by World Economic Forum, contained a positive outcome for Southeast Asia's largest economy.
The Global Competitiveness Index measures the set of institutions, policies, as well as factors that set the sustainable current and medium-term levels of economic prosperity. In the 2013-2014 edition, after three consecutive years of decline, Indonesia rose from number 50 to number 38 out a total of 148 countries. The World Economic Forum made the following comments on Indonesia's performance in the 2013-2014 edition:
"After three years of gradual decline, Indonesia (38th) bounces back, posting one of the largest improvements in this year’s rankings. This positive development will contribute to sustaining Indonesia’s impressive growth momentum - GDP grew by 5.2 percent annually over the past decade. The country progresses in 10 of the 12 pillars of the Index, but its overall performance remains uneven. Indonesia improves the most in the infrastructure pillar, where it leapfrogs 17 places to 61st. After years of neglect, Indonesia has been boosting infrastructure spending to upgrade roads, ports, water facilities, and power plants, and our results suggest that these improvements have started to bear fruit. The efficiency of its labor market (103rd) has also improved considerably, although from a very low base. Rigidities in terms of wage setting and hiring and firing procedures, along with the weak participation of women in the workforce (115th), continue to undermine Indonesia’s performance in this pillar. But the quality of public and private institutions is improving (67th, up 5), with all indicators pointing in the right direction in this category. In particular, Indonesia ranks a satisfactory 45th in government efficiency and 54th for undue influence. The two main dark spots in this pillar remain bribery (106th) and security (104th). The country’s macroeconomic environment (26th) is characterized by a very small deficit (equivalent to 1.3 percent of GDP) and gross government debt representing 24 percent of GDP (30th), an inflation rate that is low by historical standards, and a savings rate exceeding 30 percent of GDP. Turning to the more sophisticated drivers of competitiveness, Indonesia’s technological readiness is also improving (75th, up 10), led by the private sector, which is increasingly aggressive in adopting the latest technologies (51st, up 13). The use of ICTs by the population at large remains comparatively low, but this is spreading rapidly (84th, up seven). One of the few areas where the situation has deteriorated is health (103rd). In particular, the incidence of communicable diseases and infant mortality rate are among the highest outside sub-Saharan Africa."
Although infrastructure investment is stated as being a major reason for Indonesia's improved performance in this year's index, it should be remembered that many infrastructure projects that are planned by the Indonesian government have not fully materialized yet. But the mere fact of more planning has convinced the World Economic Forum to place Indonesia higher on the ranking list.
The lack of adequate infrastructure (both in quantity and quality) causes Indonesia's logistics costs to rise steeply, thus reducing the country's competitiveness and attractiveness of the investment climate. According to data published by the Indonesian Chamber of Commerce and Industry (Kadin Indonesia) around 17 percent of a company's total expenditure in Indonesia is absorbed by logistics costs. In peer regional economies this number is below the ten percent mark. In particular transport costs are high; for land as well as sea.
The table below indicates the top five of most competitive countries based on the Global Competitiveness Index as well as Indonesia and its peer countries in the Southeast Asian region.
Source: Global Competitiveness Index 2013-2014