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Indonesia’s Game-Changing Bid for OECD Membership

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Indonesia’s Game-Changing Bid for OECD Membership

Here are the three key areas that will be central to the country’s bid to join the exclusive global economic club.

Indonesia’s Game-Changing Bid for OECD Membership
Credit: Photo 166209968 © Piotr Swat |

Indonesia’s march toward joining the elite club of the Organization for Economic Cooperation and Development (OECD) is gaining momentum. The country’s bid for accession recently entered a new phase with the president’s appointment last month of a national team dedicated to accelerating the process, and the submission of Indonesia’s accession roadmap to OECD this month.

Why does OECD membership matter for Indonesia? First, Indonesia stands to align its policies to the best practices of other member countries, including high-standard legislation and government frameworks. This would be complemented by various forms of technical cooperation, such as the organization’s Joint Work Programs (JWPs), which focus on enacting sweeping national reforms and supporting Indonesia’s Medium-Term National Development Plan 2020-2025.

Second, OECD membership could potentially enhance Indonesia’s annual economic growth and help the nation escape the middle-income trap. The reforms required for accession could unlock Indonesia’s untapped economic potential, attracting a wave of new investment. While joining the OECD does not guarantee an immediate flood of foreign direct investment, associating with this elite club can potentially boost investor confidence. If managed strategically, membership could reduce the risk that Indonesia will be left “floating in the middle.”

Third, if Indonesia joins the OECD, it will become only the third Asian nation, alongside Japan and South Korea, to attain this coveted status. Membership would strengthen Indonesia’s position in the region but could also spur economic growth across the Association of Southeast Asian Nations (ASEAN) by promoting the wider adoption of OECD best practices. Such a development could inspire other ASEAN countries, such as Thailand and Malaysia, to consider joining the club or aligning with its initiatives. The membership would also mutually benefit OECD by enhancing its global relevance, influence, and inclusivity.

However, the requirements of OECD membership are stringent, requiring Indonesia to go beyond merely embracing core values such as democracy, human rights, and open and transparent markets. The accession process also demands extensive technical and structural reforms across several policy areas, three of which stand out: climate reform, digitizing the micro, small, and medium enterprises (MSMEs), and anti-corruption efforts. Progress in each of these three sectors has been relatively slow.

The Climate Action Tracker recently downgraded Indonesia’s climate action rating from “highly insufficient” to “critically insufficient” signaling that current efforts fall significantly short of meeting the country’s climate targets. In the digitalization sector, Indonesia’s MSMEs lag in digital transformation, with only 33 percent adopting digital technologies, indicating a need for accelerated efforts to spur growth and enhance competitiveness. Meanwhile, anti-corruption measures must improve to address Indonesia’s low ranking on Transparency International’s Corruption Perception Index. Reform in each of these issues is crucial, but implementing comprehensive and collective reform across all three sectors should be a priority, as they have been identified as key areas in Indonesia’s development agenda.

On the first issue, climate, Indonesia must prioritize environmental protection and ensure that its climate objectives are supported by effective public policies. This entails reversing and halting biodiversity loss and deforestation, promoting the drive for maximum emission reductions facilitated by public and private investments, and learning from countries with exemplary environmental reviews, which could offer valuable technical and financial assistance. These initiatives should be central to achieving the 2030 mitigation targets set by the Paris Agreement on climate change.

In parallel, Indonesia could enhance the coordination among ministries and agencies dealing with climate-related issues. Among the steps that Indonesia could take are to establish an autonomous body to manage climate affairs, create a comprehensive green growth map, and revise the tax incentives available to the energy sector. These initiatives are crucial for Indonesia to meet its commitment under the Paris Agreement, aiming to reduce emissions by 31.8 percent against the business-as-usual trajectory, or by 43 percent with support from international community by 2030.

The second crucial area for Indonesia is accelerating digitalization to position Indonesia as a frontrunner in the adoption of new technologies. A significant aspect of this strategy involves integrating MSMEs into global value chains, in a bid to drive investment, innovation, and job creation, while ensuring that the country’s trade and investment practices uphold the principles of open, competitive, and transparent markets. This approach is critical as Indonesia begins to enjoy its demographic “bonus,” when its large young population will swell the ranks of its workforce.

To facilitate this digital transformation, stakeholders must address regulatory hurdles, such as the country’s complex business permitting process, streamline regulations, especially for OECD members and potential investors, and otherwise foster a supportive environment for Indonesian MSMEs. The MSME sector accounted for around 61 percent of Indonesia’s GDP in 2023 and with almost 97 percent workforce absorption. Furthermore, Indonesia stands to capitalize on the anticipated surge in digital economic growth with the agreement on ASEAN’s Digital Economy Framework Agreement (DEFA), which its primary objective is to strengthen cross-border collaboration and promote frictionless trade on the digital economy in ASEAN. By 2030, Indonesia’s digital economy could account for nearly a third of ASEAN’s projected $2 trillion digital economy.

The third priority for Indonesia is reinforcing anti-corruption efforts, by improving internal controls and audits and complementing the work of Indonesia’s Corruption Eradication Commission, particularly in high-risk sectors like infrastructure, natural resources, and procurement by enhancing human resource capability and the digitalization process of the public service, which is already underway. To complement the government efforts, the public should be encouraged to participate in anti-corruption efforts to add a layer of transparency and social oversight.

More broadly, it will be crucial for Indonesia to establish an effective legislative and institutional framework for addressing corrupt practices, including cross-border bribery, actual assets recovery tracking, and corporate liability for these offenses. Also as part of G-20 countries, Indonesia is expected to adhere to the OECD Anti-Bribery Convention, which will send a strong signal to other members and international investors, reinforcing the country’s commitment to open governance. Success in these endeavors will create a positive business climate and overcome the possible damaging implications of corruption, which hampers the country’s full economic potential, erodes trust in markets and institutions, increases business costs, and undermines government efficiency.

The path to OECD membership is long, and if Indonesia’s reform efforts are slow and inconsistent, the accession process could face delays. Despite the obstacles that lie ahead, the country has already made notable progress in embracing OECD principles, adopting legal instruments, and actively engaging with the organization’s core bodies. But the prize is worth the fight; the endorsement of the world’s advanced economies could help secure Indonesia’s future prosperity and solidify its global bargaining position.