Jakarta. Indonesia’s economic competitiveness continues to falter due to high investment costs and a shortage of skilled labor, with illegal fees and local intimidation compounding the country’s business climate challenges, according to economist Nailul Huda.

“These conditions have made Indonesia a high-cost economy, discouraging both domestic and foreign investors,” said Nailul, Director of Digital Economy at the Center of Economic and Law Studies (Celios), on Monday.

He said that borrowing costs are high due to Bank Indonesia’s 5.75 percent benchmark interest rate. Investors also face unofficial levies and extortion, often imposed by corrupt officials or thuggish groups posing as civic organizations.

“These are costs that ideally shouldn't exist but are nonetheless paid as part of an informal permitting process,” Huda said.

This inefficiency is reflected in Indonesia’s Incremental Capital Output Ratio (ICOR), which measures the investment required to generate a unit of economic output. In 2019, Indonesia’s ICOR stood at 6.8, well above the ASEAN average of 3.7 for the same year. Malaysia recorded an ICOR of 5.4, the Philippines 4.1, Thailand 4.4, and Vietnam 3.7. Indonesia’s ICOR surged to 8 in 2021 before declining to 6.2 in 2022, still higher than most regional peers.

“Investors must spend significantly more in Indonesia than in Vietnam or Malaysia to generate the same output, which highlights inefficiency in our economy,” he said.

The problem is more than just statistical. Two major electric vehicle (EV) projects in Indonesia --Vietnam's VinFast and China’s BYD-- have reportedly been disrupted by local civic groups, or ormas.

The Indonesian Industrial Estate Association (HKI) said disturbances from these groups, including blocked site access and demands for control over auxiliary services, have cost the country hundreds of trillions of rupiah in lost investment.

A recent viral video showed several ormas in Banten province appearing to request Rp5 trillion ($300 million) in "compensation" from Chinese firm Chengda Engineering Co., which is building the Chandra Asri Alkali project.

Still, Indonesia reached a historic milestone last year in terms of global competitiveness. For the first time, the country broke into the top 30 in the World Competitiveness Ranking 2024 by the International Institute for Management Development (IMD), climbing seven spots to rank 27 out of 67 countries with a score of 71.52. This marks Indonesia’s highest position since the index began tracking in 1997.

In Southeast Asia, Indonesia now ranks third in competitiveness, behind only Singapore, which tops the global list, and Thailand, ranked 25th.

Despite this achievement, Nailul warned that persistent issues, ranging from red tape and lawlessness to weak human capital, continue to weigh on Indonesia’s long-term investment appeal.

“The impact is clear, many global tech firms are now choosing Vietnam and Malaysia over Indonesia,” he said.

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