Regions and Countries

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p. 22 of 33 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy A. Summary of Key Development Challenges B. The ADB Strategy for Indonesia C. Strategic Areas of Engagement D. Operational Considerations V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : IV. ADB's Strategy

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A. Summary of Key Development Challenges

72. The introduction of far-reaching decentralization and democratization has set the stage for Indonesia to continue its transition to a modern and open economy. At the same time, it is faced with new and difficult challenges that need to be tackled with urgency to solidify and build on the gains achieved since the financial crisis. Foremost among these is the need for continued progress in implementing policy reforms in a systematic and timely manner. While the Government has actively pursued reforms over the last two years, the unfinished reform agenda has been delayed by slow legislative action and weak coordination. In addition, steady economic growth has not been accompanied by job creation commensurate with the growing labor force. Rising unemployment, if left uncontained, will undermine Government efforts to reduce the incidence of poverty, which is at risk owing to the large number of vulnerable groups in the country.

73. Decentralization has been seriously hampered by the lack of formal guidelines that would clearly define central and local relations, particularly assignment of functions, fiscal transfers, and accountability. Decentralization was not preceded nor accompanied by the strengthening of local capacity nor the setting up of mechanisms to enable local governments to assume their new-found roles and responsibilities. As a result, capacity development is critical to improving the delivery of social services and to protecting the environment and natural resources.

74. Indonesia needs to improve its public sector management for the economy to function more efficiently, and to encourage the private sector to invest. Intensified efforts to combat corruption must continue and so must the corollary policy reforms that seek to improve the country’s investment climate.

75. The challenges Indonesia faces as a middle income country (MIC) are varied and complex. The evolving world economic order, and regional and national realities demand that Indonesia must steer itself away from the business-as-usual mode of macroeconomic management, which has led to a slide in its ranking in global competitiveness, human development index and attractiveness as an investment destination.

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