Indonesia's Competitiveness Plummets Amidst Structural Weaknesses Undermining Growth

JAKARTA – Indonesia fell to 48th place out of 70 economies on this year’s International Institute for Management Development’s (IMD) World Competitiveness Ranking, down from 40th in 2025 and far below its peak position of 27th in 2024. The decline is no mere temporary setback but reflects deeper unresolved structural weaknesses. The ranking shows clearly that Indonesia trails many of its regional peers and competitive rivals. While Singapore remains the world’s most competitive economy, Malaysia climbed to 15th place, Thailand to 26th, and Vietnam to an impressive 27th. Indonesia now ranks only fifth in ASEAN, highlighting persistent shortcomings in regulatory certainty, business efficiency, productivity and institutional quality. The IMD’s assessment reveals a striking imbalance. Indonesia’s macroeconomic performance remains relatively strong, ranking 24th globally. Stable inflation, resilient domestic demand and economic growth of around 5% continue to provide an important cushion. Yet these strengths are increasingly unable to offset weaknesses in governance, infrastructure and human capital. The decline in competitiveness suggests that global investors are paying closer attention to structural deficiencies than to headline growth figures. Problems ranging from regulatory fragmentation and limited domestic financing to poor infrastructure and skills shortages continue to undermine productivity. Recent energy disruptions, including electricity supply problems and coal shortages, have reinforced concerns about the reliability of Indonesia’s industrial ecosystem. The paradox is that these weaknesses coexist with record investment inflows. Investment realization reached 1,714 trillion rupiah in 2025 and nearly 500 trillion rupiah in the first quarter of 2026 alone. Yet the surge in capital has not translated into broad-based employment opportunities, raising concerns that Indonesia has slid into a pattern of jobless growth. Much of the incoming investment has been concentrated in capital-intensive sectors such as nickel smelting and high-tech data centers. While these industries contribute significantly to gross domestic product, their capacity to absorb labor is limited. At the same time, traditional labor-intensive industries, including textiles, garments and footwear, face mounting pressures. Between 2024 and early 2026, a wave of factory closures and layoffs affected major textile manufacturers, including PT Sritex, PT Karya Mitra, PT Bitratex and PT Sai Apparel. Industry leaders have pointed to rising import costs, regulatory uncertainty surrounding import policies and intense competition from low-cost imported products. The pressure extended further upstream when several major synthetic fiber producers ceased operations toward the end of 2025. These developments are reflected in labor market data. As of February 2026, formal employment accounted for only 40.58% of the workforce, while informal employment expanded to nearly 60%, amounting to almost 88 million Indonesians. Although the official unemployment rate fell to 4.68%, the figure masks growing underemployment and declining job quality. Monetary policy has added further strain. To defend the rupiah, Bank Indonesia raised its benchmark interest rate to 5.75% in June 2026. While necessary for macroeconomic stability, higher borrowing costs have increased financing pressures on domestic businesses already struggling with weak demand and rising operational expenses. Fiscal policy presents another challenge. The government’s flagship Free Nutritious Meals program has become a major budgetary commitment, even after spending allocations were reduced from 335 trillion rupiah to 268 trillion rupiah. The scale of the program has intensified concerns about opportunity costs, particularly because resources that could strengthen education, research, teacher development and school infrastructure are increasingly constrained. These concerns are especially significant given Indonesia’s poor performance in education and health indicators. The country ranks near the bottom globally in educational and health infrastructure, while the last PISA results showed that only a small proportion of Indonesian students achieved minimum competency standards in mathematics. Without meaningful improvements in human capital, long-term competitiveness will remain difficult to achieve. To address declining competitiveness, the government has relied heavily on administrative measures such as the Debottlenecking Task Force to resolve investment obstacles. While such initiatives have helped unlock several major projects, they remain limited in their ability to tackle deeper institutional problems. Regulatory overlap, bureaucratic fragmentation, inconsistencies between national and local policies, and revenue-driven regional regulations continue to discourage investment and reduce efficiency. Governance concerns have also intensified since the establishment of Danantara, a new sovereign investment entity. Amendments to the legal framework governing the institution have sparked debate because they provide extensive legal protections for certain financial instruments issued under its authority. Critics argue that such provisions risk weakening accountability standards at a time when Indonesia is seeking closer integration with global investment and governance frameworks, including its ongoing accession process to the OECD. Restoring competitiveness, therefore, requires a more comprehensive reform agenda. First, Indonesia must place greater emphasis on human capital development by protecting education spending and improving teaching quality. Second, labor-intensive manufacturing should be revitalized through regulatory reform, targeted industrial incentives, stronger safeguards against unfair imports and more reliable energy infrastructure. Third, institutional credibility must be strengthened through higher standards of transparency, accountability and regulatory oversight. Indonesia’s recent decline in global competitiveness rankings should be viewed as an early warning rather than a statistical anomaly. The country still benefits from macroeconomic stability, abundant resources and a large domestic market. Yet these advantages alone will not guarantee sustained progress. Without credible institutional reforms and a renewed focus on productivity-enhancing investments, Indonesia risks remaining trapped in a cycle where growth figures appear impressive on paper while the foundations of long-term competitiveness erode on the ground. Ronny P. Sasmita, Ph.D, is senior analyst at the Indonesia Strategic and Economic Action Institution, a Jakarta-based think tank Thank you for registering! You must be logged in to post a comment.