Reforms for a Formal and Prosperous Indonesia

Overview & Synopsis

Informality and job quality are among Indonesia’s most pivotal development challenges. Indonesia’s pace of formalization has consistently lagged economic growth, leaving large swaths of society outside the reach of regulation and social protection. This report is one of a three-part series focused on the essential challenges Indonesia must face to achieve its long-term aspirations for economic prosperity. This report focuses on the policy priorities specifically addressing the obstacles to formality and job quality in Indonesia. First, sustainably confronting the drivers of informality requires increasing government revenue, which is essential to financing state capacity and a social insurance system consistent with enforcing regulations and incentivizing high rates of formal employment. Second, the recommendations promoted in this report ultimately rely on efficiency and competition-focused policy reform to enable the productivity growth required to sustain better, more remunerative formal jobs, covered in depth in the Jobs and Growth Report. Employment informality is a spectrum, and though many workers in Indonesia have some benefits beyond pay, there are few who can be considered entirely formal. Government policy should prioritize aligning incentives that promote job-rich formal growth and prosperity. Promoting the government’s streamlined registration services and improving credit, banking, and fraud protection services can draw informal firms into the formal economy.