Jakarta — Indonesia's slide in the International Institute for Management Development's (IMD) World Competitiveness Ranking underscores deep-seated structural challenges that headline growth figures cannot mask. The country now sits at 48th out of 70 economies, a sharp drop from 27th in 2024 and 40th in 2025. While Singapore retains the top global spot, Malaysia (15th), Thailand (26th), and Vietnam (27th) have all pulled ahead, leaving Indonesia fifth in ASEAN.
The IMD assessment highlights a stark imbalance. Indonesia's macroeconomic fundamentals remain solid — inflation is stable, domestic demand is resilient, and GDP growth hovers around 5%, ranking 24th globally. Yet these strengths are increasingly offset by weaknesses in regulatory certainty, business efficiency, productivity, and institutional quality. Global investors, the data suggests, are now scrutinizing structural deficiencies more than top-line growth.
Jobless Growth and Industrial Strain
Investment inflows have reached record levels — 1,714 trillion rupiah in 2025 and nearly 500 trillion rupiah in the first quarter of 2026 alone. But much of this capital has flowed into capital-intensive sectors like nickel smelting and high-tech data centers, which contribute to GDP but create few jobs. Meanwhile, traditional labor-intensive industries — textiles, garments, and footwear — are under severe pressure.
Between 2024 and early 2026, major manufacturers including PT Sritex, PT Karya Mitra, PT Bitratex, and PT Sai Apparel closed factories or laid off workers. Industry leaders cite rising import costs, regulatory uncertainty, and competition from low-cost imports. By late 2025, several synthetic fiber producers had also ceased operations. As of February 2026, formal employment accounted for just 40.58% of the workforce, while informal employment swelled to nearly 60% — almost 88 million Indonesians. The official unemployment rate of 4.68% masks growing underemployment and declining job quality.
Energy disruptions have compounded these problems. Recurrent electricity supply issues and coal shortages have raised doubts about the reliability of Indonesia's industrial ecosystem. As we have reported, the country's coal wealth has not prevented power outages, undermining investor confidence.
Policy Trade-Offs and Human Capital Gaps
Monetary policy has added to the strain. Bank Indonesia raised its benchmark rate to 5.75% in June 2026 to defend the rupiah, increasing borrowing costs for businesses already grappling with weak demand and rising expenses. Fiscal policy presents another dilemma: the flagship Free Nutritious Meals program, even after cuts from 335 trillion to 268 trillion rupiah, consumes resources that could otherwise strengthen education, research, and teacher development.
Indonesia's poor performance in education and health is well-documented. The country ranks near the bottom globally in educational and health infrastructure. The latest PISA results show only a small fraction of Indonesian students achieving minimum competency in mathematics. Without meaningful improvements in human capital, long-term competitiveness will remain elusive. As we have argued, Indonesia needs more than foreign capital — it needs know-how to upgrade its workforce.
Governance concerns have also intensified. The establishment of Danantara, a new sovereign investment entity, has sparked debate over legal protections for certain financial instruments. Critics warn that weakening accountability standards could complicate Indonesia's OECD accession process and deter quality investment.
The Path Forward
Restoring competitiveness requires a comprehensive reform agenda. First, human capital development must be prioritized — protecting education spending and improving teaching quality are non-negotiable. Second, labor-intensive manufacturing needs revitalization through regulatory reform, targeted incentives, stronger safeguards against unfair imports, and reliable energy infrastructure. Third, institutional credibility must be strengthened, including clearer rules for entities like Danantara and consistent enforcement of regulations across national and local levels.
Indonesia's decline in competitiveness is not inevitable, but reversing it will demand more than administrative fixes. The Debottlenecking Task Force has unlocked some projects, but deeper institutional problems — regulatory overlap, bureaucratic fragmentation, and revenue-driven local policies — persist. Without addressing these foundations, Indonesia risks falling further behind its ASEAN peers in the race for sustainable, inclusive growth.
