JAKARTA – Indonesia fell to 48th out of 70 economies in this year’s International Institute for Management Development (IMD) world competitiveness rankings, falling from 40th in 2025 and well below its peak position of 27th in 2024. The decline is not just a temporary reversal, but reflects deeper, unresolved structural weaknesses.
The ranking clearly shows that Indonesia trails many of its regional peers and competitive rivals. While Singapore remains the world’s most competitive economy, Malaysia climbed to 15th, Thailand to 26th and Vietnam to an impressive 27th. Indonesia now ranks only fifth in ASEAN, highlighting persistent deficiencies in regulatory certainty, business efficiency, productivity and institutional quality.
The IMD assessment reveals a striking imbalance. Indonesia’s macroeconomic performance remains relatively strong, ranking 24th globally. Sustained inflation, robust domestic demand and economic growth of around 5% continue to provide a significant cushion. However, these strengths are increasingly unable to compensate for weaknesses in governance, infrastructure and human capital.
The decline in competition suggests global investors are paying more attention structural shortfalls rather than the main growth figures. Problems ranging from regulatory fragmentation and limited domestic financing to poor infrastructure and skills shortages continue to undermine productivity. Recent power outages, including power 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. However, capital growth has not translated into broad-based employment opportunities, raising concerns that Indonesia has slipped into a pattern of rising unemployment.
Real economy under pressure
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, clothing and footwear, face increasing pressures.
Between 2024 and early 2026, a wave of factories 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 around import policies and intense competition from low-cost imported products. The pressure was further extended upstream when several major synthetic fiber producers ceased operations at the end of 2025.
These developments are reflected in the labor market data. From February 2026, formal employment INCLUDED for only 40.58% of the workforce, while informal employment expanded to nearly 60%, reaching almost 88 million Indonesians. Although the official unemployment rate fell to 4.68%, this figure masks the increase in underemployment and the decline in the quality of work.
Monetary policy has added further strains. To protect the rupiah, Bank Indonesia raised its base interest rate to 5.75% in June 2026. While necessary for macroeconomic stability, higher borrowing costs have increased financing pressures on domestic businesses already facing weak demand and rising operational costs.
Fiscal policy presents another challenge. The government’s flagship Free Nutritional Meals program has become a major budget 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, especially as resources to strengthen education, research, teacher development, and school infrastructure are increasingly limited.
These concerns are particularly relevant given Indonesia’s poor performance on education and health indicators. The country ranks near the bottom globally in education and health infrastructure, while last PISA the results showed that only a small proportion of Indonesian students achieved the minimum standards of competence in mathematics. Without significant improvements in human capital, long-term competitiveness will remain difficult to achieve.
Structural reform imperative
To address the decline in competition, the government has relied heavily on administrative measures such as the Debottlenecking Task Force to resolve investment barriers. While such initiatives have helped launch some major projects, they remain limited in their ability to address 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 wealth fund. Changes to the legal framework governing the institution have sparked debate because they provide broad legal protection 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 OECD membership process.
Therefore, restoring competitiveness requires a more comprehensive reform agenda. First, Indonesia should pay more attention to human capital development by protecting education spending and improving the quality of teaching.
Second, labor-intensive manufacturing must be revitalized through regulatory reform, targeted industrial incentives, stronger protections 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 seen as an early warning rather than a statistical anomaly. The country still benefits from macroeconomic stability, abundant resources and a large domestic market. However, these advantages alone will not guarantee sustainable progress.
Without credible institutional reforms and a renewed focus on productivity-enhancing investment, Indonesia risks being stuck in a cycle where growth figures look impressive on paper, while the foundations of long-term competitiveness erode on the ground.
Ronny P. Sasmita, Ph.D, is a senior analyst at the Indonesia Strategic and Economic Action Institute, a Jakarta-based think tank.
