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Small Business Effect

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INDONESIA
Economic Freedom Score
25 50 75 100 free
Most Least free 0

World Rank:

108

Regional Rank:

20

56.9

economic freedom score is making its econI ndonesia’slast year, withthe 2013 Index.56.9,score is 0.5finanomy the 108th freest in Its point better than significant improvements in

Freedom Trend
58 57 56 55 54 53 52

cial freedom and freedom from corruption that more than offset declines in business freedom and the management of public finance. Indonesia is ranked 20th out of 41 countries in the Asia–Pacific region, and its overall score is below the world average. Indonesia, Southeast Asia’s biggest economy, has undertaken wide-ranging reforms to address various structural weaknesses and improve competitiveness. Recent reform measures have put greater emphasis on improving regulatory efficiency, enhancing regional competitiveness, and creating a more vibrant private sector through modernization of the financial sector. Despite some progress, Indonesia’s growth potential remains fragile and hampered by inefficient legal and investment regimes. Political interference in the private economy discourages dynamic economic expansion, and pervasive corruption, exacerbated by a weak judicial system, adds business risk. During the first half of 2012, the government reintroduced trade and investment barriers that include limits on ownership of banks and mines and export taxes. backgRound: Indonesia is the world’s most populous Muslim-majority democracy. In the years since 1998, when longstanding authoritarian ruler General Suharto stepped down, Indonesia’s nearly 250 million people have enjoyed the blossoming of a wide range of political freedoms, and participation in the political process is high. President Susilo Bambang Yudhoyono has attacked corruption and tried to encourage muchneeded foreign investment, but the weak rule of law remains a major impediment to attracting capital. As a member of the G-20 and a driving force within the Association of Southeast Asian Nations, Indonesia plays a growing role in international economic policy discussions. The increasingly modern and diversified economy has recovered strongly from the global recession.
How Do We Measure Economic Freedom?

2009

2010

2011

2012

2013

Country Comparisons
Country World Average Regional Average Free Economies
0 20 40 60 80

56.9 59.6 57.4 84.5
100

Quick Facts population: 241.0 million gdp (ppp): $1.1 trillion 6.5% growth in 2011 5-year compound annual growth 5.9% $4,666 per capita unemployment: 6.6% inflation (cpi): 5.4% fdi inflow: $18.9 billion public debt: 25.0% of GDP
2011 data unless otherwise noted. Data compiled as of September 2012.

See page 477 for an explanation of the methodology or visit the Index Web site at heritage.org/index.

247

INDONESIA (continued)
THE TEN ECONOMIC FREEDOMS
Country World Average Rank

RULE OF LAW

Property Rights 30.0 Freedom from Corruption 30.0
0 20 40 60 80 100

94th 98th

Property rights are generally respected, but enforcement is inefficient and uneven. The judicial system is not fully independent and remains vulnerable to political influence. In the absence of an efficient legal framework, court rulings can be arbitrary and inconsistent. Corruption remains pervasive, although the Anti-Corruption Commission (KPK) launched a number of high-profile cases in 2012.

LIMITED GOVERNMENT

Fiscal Freedom 83.4 Government Spending 89.2
0 20 40 60 80 100

55th 14th

The top income tax rate is 30 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and a property tax. The overall tax burden equals 11.6 percent of total domestic income. Government spending has increased to 19 percent of GDP, and the budget deficit is 1.6 percent of GDP. Public debt is low at 25 percent of total domestic output.

REGULATORY EFFICIENCY

Business Freedom 50.2 Labor Freedom 50.8 Monetary Freedom 75.5
0 20 40 60 80 100

143rd 129th 87th

Launching a business takes more than a month on average, and licensing requirements cost slightly less than the level of average annual income. Overall regulatory efficiency is weak. Regulations concerning the creation and termination of employment relationships are relatively costly. State interference in the market distorts prices.

OPEN MARKETS

Trade Freedom 75.0 Investment Freedom 35.0 Financial Freedom 50.0
0 20 40 60 80 100

97th 128th 69th

The trade-weighted average tariff rate is 2.5 percent, but trade is constrained by costly non-tariff barriers. Although the country publicly welcomes foreign investment, many investors, both foreign and domestic, face inconsistencies in the investment codes and erratic enforcement. The financial sector remains stable, and the Financial Services Authority has been formed to improve the sector’s regulatory efficiency.

Score Changes
RULE OF LAW
Property Rights Freedom from Corruption 0 +2.0

LIMITED GOVERNMENT
Fiscal Freedom Government Spending –0.1 –2.4

REGULATORY EFFICIENCY
Business Freedom –4.4 Labor Freedom –1.3 Monetary Freedom +0.3

OPEN MARKETS
Trade Freedom +1.1 Investment Freedom 0 Financial Freedom +10.0

248

2013 Index of Economic Freedom

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