## GOLDEN VISION 2045: MAKING THE MOST OUT OF PUBLIC INVESTMENT

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### Introduction and strategic context
- Indonesia’s goal: reach high-income status by 2045, requiring sustained real growth "estimated around 5½ -6½ percent annually over the next two decades (Annex I.A)."
- Public investment scale-up—efficiently and prudently—is central to closing physical and human capital gaps.
- Structural challenges:
  - Public stock of capital per-capita is only "a quarter of that of the advanced economies."
  - Efficiency gap (distance to the spending efficiency frontier) remains large and "edged up in recent years."
  - Incremental Capital Output Ratio (ICOR) has risen, implying larger investment is required for the same unit increase in output.
- Fiscal constraint: scaling up is to be accommodated "within Indonesia’s longstanding fiscal rules" including the "3 percent of GDP fiscal deficit cap."

### Methodology
- Empirical approach (cross-country panel, local projections):
  - Public investment shocks identified as residuals from a public investment equation covering 1981-2024.
  - Local projections include interaction terms for efficiency gap (GAP) and public capital stock per capita (PCAP), normalized between 0 and 100.
  - Panel estimation exploits heterogeneities in GAP and PCAP.
- Structural approach (GIMF — Global Integrated Monetary and Fiscal Model):
  - Features: OLG households, liquidity-constrained agents, sectoral differentiation (non-tradables, tradables, Global Value Chain sector), inflation-forecast-based monetary policy, fiscal instruments.
  - Six-region implementation: Indonesia, United States, Euro Area, China, Rest of Asia, remaining countries; calibrated to GLORIA MRIO 2023 and 2023 Government Finance Statistics.
  - Key calibration: elasticity of output with respect to public capital (α_KG) set to "0.14" for all countries (Bom and Ligthart 2014).
  - Enhanced efficiency simulated by raising α_KG by "30 percent (from 0.14 to 0.18)."
- Simulation design in GIMF:
  - Public investment scale-up: public investment progressively increases "from 0.25 to 1 percentage points of GDP over the next twenty years."
  - Financing: initially fully deficit-financed; over time labor income tax is gradually increased to reduce deficit financing reliance.
  - Monetary policy: exogenous negative shocks to the policy rate such that overall monetary policy rate remains "slightly expansionary or broadly neutral."
  - Labor market: exogenous labor supply increase of "0.5 percent" introduced to reflect expected labor supply response.

### Main empirical-model findings
- Short-term impact of public investment is larger when:
  - The efficiency gap is smaller.
  - Initial public capital stock per capita is lower.
- Estimated short-term multipliers:
  - Output response on impact is larger—and statistically significant at the "90th percentile"—when efficiency gap is smaller.
  - Short-term multiplier about "0.8" when efficiency gap is at the "20th percentile" of the sample, falling to about "0.5" at the "80th percentile."
  - For Indonesia, based on 2024 GAP and PCAP, inferred short-term multiplier is "0.5."
  - Counterfactual: multiplier could be close to "0.7" if Indonesia’s efficiency gap narrowed to levels similar to advanced economies.

### Main GIMF structural-model results
- Baseline efficiency outcomes:
  - Real GDP increases by "about 0.7 percent" relative to baseline in the medium term (5 years).
  - Real GDP increases to "about 3 percent" in the long term (20 years).
  - Implied multiplier: "about 1.2" in the medium term and "about 2" in the long term.
- Enhanced efficiency (α_KG from 0.14 to 0.18):
  - Long-run multiplier rises substantially to "around 2.6" in the long run.
  - Mechanisms: more investment converted into productive public capital, faster capital accumulation, crowding-in private investment, higher potential output, real wages, and consumption.
- Contribution to Vision 2045:
  - Under enhanced efficiency, the public investment boost would close "about one-third of the long-run income gap relative to the high-income benchmark."
  - Public investment alone is insufficient; full convergence requires "broad-based structural reforms centered on sustained productivity improvement, human capital development, and strengthening the business environment."

### Policy implications and recommendations (public investment)
- Prioritize improving public investment efficiency to raise multipliers and maximize returns:
  - Raising investment efficiency (operationalized by α_KG from 0.14 to 0.18 in simulations) materially increases long-run gains—multiplier rises from "about 2" to "around 2.6."
  - Reducing the efficiency gap (toward advanced-economy levels) could raise the short-term multiplier from "0.5" toward "0.7."
- Scale up public investment prudently and sequence financing:
  - Progressive increase "from 0.25 to 1 percentage points of GDP over the next twenty years."
  - Use temporary deficit financing early, followed by gradual revenue mobilization (illustratively via labor income tax) to respect the "3 percent of GDP fiscal deficit cap."
- Complement public investment with broader structural reforms:
  - Reforms in productivity, human capital, and the business environment are necessary to achieve Vision 2045 targets.
- Account for demand and monetary interactions:
  - Simulations account for endogenous monetary tightening; policy sequencing and temporary accommodation can mitigate short-run drag while preserving long-run gains.
- Consider labor supply effects:
  - Simulations include an exogenous labor supply increase of "0.5 percent" to capture this channel.

### Reform and trade-integration scenario design
- Ambitious bilateral deepening with ASEAN, EU, Australia, Japan, Korea, New Zealand, United States, China, and India:
  - Conceptualized as deep trade agreements increasing bilateral depth scores to the conceptual maximum.
- Boosting human capital and logistics:
  - Investments and reforms to raise human capital and logistics to respective medians for OECD economies (alternatively approximated as an increase to the 95th percentile of EMs).
- Mapping reforms into the model (trade-cost / iceberg-cost representation):
  - All shocks mapped as reductions in iceberg costs.
  - Reduction in Indonesia’s non-tariff barriers captured as reductions in sector-specific bilateral iceberg costs faced by exporting firms in partner countries when selling to Indonesia: κ̂_m→IDN,s = exp{−(1/θ_s_S) * α̂_S_IDD_th × Δ_m,IDN_IDD_th}, S∈{Goods, Services}.
  - Reduction in export costs faced by Indonesian firms captured by κ̂_IDN→n,s = exp{−(1/θ_s_S) * [ α̂_S_IDD_th × Δ_m,IDN_IDD_th + α̂_S_HC × Δ_IDN_HC + α̂_S_LOG × Δ_IDN_LOG ] }, S∈{Goods, Services}.
  - Human capital and logistics improvements reduce iceberg costs vis-à-vis all trading partners.

### Main quantitative trade-integration results and channels
- Ambitious trade integration and reforms boost real GDP levels by "4.1 percent" in the medium- to long-term relative to baseline.
- Channels:
  - Lower non-tariff barriers enable cheaper imported intermediate inputs, enhancing productivity and output for domestic and export markets.
  - Reallocation toward sectors of comparative advantage driven by cheaper inputs and access to final goods.
  - Access to external markets raises demand for Indonesian output and further reallocation.
  - Improved human capital and logistics reduce trade costs and support exports.
  - Cumulative productivity-enhancing reallocations raise return to capital and boost investment.

### Sectoral impacts
- Unilateral opening (no reciprocal market access):
  - Many key sectors gain: commodities, textiles, motor vehicles, food, wood products.
  - All goods sector groups register gains in value added.
  - GVC-linked highly-traded goods sector makes the biggest contribution to overall increase in exports despite no assumed increase in foreign market access.
  - Various services sectors benefit via direct export rises or by facilitating goods exports and demand spillovers.
- Full bilateral reduction (reciprocal market access):
  - Indonesian firms further specialize where comparative advantage is strongest (e.g., electronic equipment, textiles, manufacturing downstream of commodities).
  - Services sectors gain via demand spillovers.
  - Fixed labor pool in the model dampens some gains from more GVC-linked sectors due to reallocation effects.

### Gains by partner, complementarities, and amplification channels
- Gains arise from both Indonesia lowering its own barriers and from partners granting market access; relative importance varies by partner.
  - Regional integration (Asia-Pacific partners) delivers large gains largely via Indonesia lowering its own barriers.
  - For partners such as the US and India, gains accrue more from partner market access.
- Complementarities with structural reforms:
  - Structural reforms raising sectoral TFP by between 1 and 10 percent amplify trade liberalization gains.
  - Example: Highly-traded goods’ small gain at baseline rises to about "4 percent" when sectoral TFP rises by 10 percent; modern services’ small negative impact can close when sectoral TFP rises by 10 percent.
- Additional amplifying factors not fully captured by the model:
  - FDI can generate productivity-enhancing spillovers, especially vertical greenfield FDI from advanced economies.
  - Intensification of intermediates use (higher intermediates intensity) can increase multiplier spillovers across upstream and downstream stages.
  - Back-of-the-envelope: if Indonesia had median ASEAN-level of intermediate inputs usage (roughly about the level of Thailand), GDP gains from trade integration would be about 40 percent higher.

### Policy implications and recommendations (trade and reforms)
- Large gains arise primarily from reducing Indonesia’s own non-tariff barriers—scope for unilateral action alongside deep integration.
- Complementary structural reforms are critical: logistics, human capital, digital infrastructure, financial deepening, governance, business climate.
  - These reduce trade costs, support exports directly, and help build new comparative advantages (GVC-linked manufacturing and modern services).
- Supportive measures needed to help workers transition so gains are broadly shared.

### Annex I — technical details, database, and key quantitative figures
- Real growth required for high-income status:
  - World Bank Group 2026 threshold extrapolated with nominal annual growth of high-income threshold: "2.3 percent."
  - Assumed average annual population growth: "about 0.5 percent."
  - Inflation assumption: "2.5 percent."
  - Resulting required annual real GDP growth under baseline assumptions: "5.3 percent."
  - Alternative higher required growth under different assumptions: "6.3 percent."
  - Note: chapter summary also cites a required sustained real growth "estimated around 5½ -6½ percent annually over the next two decades (Annex I.A)."
- Database sources and years:
  - Fiscal Monitor October 2025 database (IMF 2025).
  - ICSD 2021 (IMF’s Investment and Capital Stock Dataset).
  - Other macro variables sourced from IMF (2020), extended to 2024 using IMF’s WEO database.
- Fiscal simulation takeaway:
  - Revenue measures gradually yield around "0.3 percentage point of GDP."
  - These shifts would keep the overall fiscal deficit within the "3-percent ceiling" (compared with a starting point of "2.3 percent of GDP in 2024").
  - Illustrative boost in public investment can be accommodated with enhanced domestic revenue mobilization.
- GIMF extra results and figures referenced in Annex I (Annex I. Figure 1. Indonesia: GIMF Model Simulations).

*Source: Chapter "GOLDEN VISION 2045: MAKING THE MOST OUT OF PUBLIC INVESTMENT" (December 16, 2025), IMF.*

### References _____________________________________________________________________________ 13

### GOLDEN VISION 2045: MAKING THE MOST OUT OF PUBLIC INVESTMENT

### Introduction
- Indonesia aims to reach high-income status by 2045; this requires a sustained real growth rate "estimated around 5½ -6½ percent annually over the next two decades (Annex I.A)."
- Raising public investment—efficiently and prudently—is a central pillar of the Vision 2045 growth agenda to close gaps in physical and human capital.
- Key structural concerns:
  - Indonesia’s public stock of capital per-capita is only "a quarter of that of the advanced economies."
  - The efficiency gap (distance to the spending efficiency frontier) remains large; after a decline beginning in the 1990s the efficiency gap "edged up in recent years."
  - Incremental Capital Output Ratio (ICOR) has risen, implying larger investment is required for the same unit increase in output.
- Fiscal prudence: scaling up investment is to be accommodated "within Indonesia’s longstanding fiscal rules" including the "3 percent of GDP fiscal deficit cap."

### Methodology
- Two complementary approaches used to assess the public investment multiplier:
  - Empirical model (cross-country panel, local projections)
    - Identify public investment shocks as residuals from a public investment equation covering 1981-2024.
    - Local projections regressions include interaction terms for efficiency gap (GAP) and public capital stock per capita (PCAP), normalized between 0 and 100.
    - Panel estimation exploits heterogeneities in efficiency gaps and public capital stock per capita.
  - Structural model (GIMF — Global Integrated Monetary and Fiscal Model)
    - GIMF features OLG households, liquidity-constrained agents, sectoral differentiation (non-tradables, tradables, Global Value Chain sector), inflation-forecast-based monetary policy, and fiscal instruments.
    - Six-region implementation includes Indonesia, United States, Euro Area, China, Rest of Asia, and remaining countries; calibrated to GLORIA MRIO 2023 and 2023 Government Finance Statistics.
    - Key calibration: elasticity of output with respect to public capital (α_KG) set to "0.14" for all countries (Bom and Ligthart 2014).
    - Enhanced efficiency simulated by raising α_KG by "30 percent (from 0.14 to 0.18)."
- Simulation design in GIMF:
  - Public investment scale-up: public investment progressively increases "from 0.25 to 1 percentage points of GDP over the next twenty years."
  - Financing: initially fully deficit-financed; over time labor income tax is gradually increased to reduce deficit financing reliance.
  - Monetary policy: introduce exogenous negative shocks to the policy rate such that overall monetary policy rate remains "slightly expansionary or broadly neutral."
  - Labor market: exogenous labor supply increase of "0.5 percent" is introduced to reflect expected labor supply response.

### Main Results — Empirical Model
- The short-term impact of public investment is larger when:
  - The efficiency gap is smaller.
  - The initial public capital stock per capita is lower.
- Estimated short-term multipliers:
  - The output response on impact is larger—and statistically significant at the "90th percentile"—when efficiency gap is smaller.
  - Estimated short-term multiplier is "about 0.8" when the efficiency gap is at the "20th percentile" of the sample, falling to "about 0.5" at the "80th percentile."
  - For Indonesia, based on 2024 efficiency gap and public capital stock per capita, the inferred short-term multiplier is "0.5."
  - Counterfactual: multiplier could be close to "0.7" if Indonesia’s efficiency gap narrowed to levels similar to advanced economies.

### Main Results — GIMF Structural Model
- Under baseline efficiency:
  - Real GDP increases by "about 0.7 percent" relative to baseline in the medium term (5 years).
  - Real GDP increases to "about 3 percent" in the long term (20 years).
  - This implies a multiplier of "about 1.2" in the medium term and "about 2" in the long term.
- With enhanced efficiency (α_KG increased from 0.14 to 0.18):
  - Long-run multiplier rises substantially to "around 2.6" in the long run.
  - Higher efficiency converts more investment into productive public capital, accelerating capital accumulation, crowding-in private investment, and raising potential output, real wages, and consumption.
- Contribution to Vision 2045:
  - Under enhanced efficiency, the public investment boost would close "about one-third of the long-run income gap relative to the high-income benchmark."
  - Public investment alone is insufficient; achieving full convergence requires "broad-based structural reforms centered on sustained productivity improvement, human capital development, and strengthening the business environment."

### Policy Implications and Recommendations
- Prioritize improving public investment efficiency to raise multipliers and maximize returns:
  - Raising investment efficiency (operationalized by α_KG from 0.14 to 0.18 in simulations) materially increases long-run gains—multiplier rises from "about 2" to "around 2.6."
  - Reducing the efficiency gap (toward advanced-economy levels) could raise the short-term multiplier from "0.5" toward "0.7."
- Scale up public investment prudently and sequence financing:
  - Progressive increase in public investment "from 0.25 to 1 percentage points of GDP over the next twenty years."
  - Use temporary deficit financing early, followed by gradual revenue mobilization (illustratively via labor income tax) to respect the "3 percent of GDP fiscal deficit cap."
- Complement public investment with broader structural reforms:
  - Public investment must be combined with reforms in productivity, human capital, and the business environment to achieve the full Vision 2045 targets.
- Account for demand and monetary interactions:
  - Simulations account for endogenous monetary tightening; policy sequencing and temporary accommodation can mitigate short-run drag while preserving long-run gains.
- Consider labor supply effects:
  - Realistic long-run outcomes account for labor supply expansion; simulations use an exogenous labor supply increase of "0.5 percent" to capture this channel.

*Source: Chapter "GOLDEN VISION 2045: MAKING THE MOST OUT OF PUBLIC INVESTMENT" (December 16, 2025), IMF.*

### 17.      With revenue mobilization, public investment scale-up can be achieved while

### 17.      With revenue mobilization, public investment scale-up can be achieved while

### D. Conclusions and Policy Issues
- Scaling up public investment should be a key pillar of Indonesia’s pursuit of its Golden Vision, but this should be complemented by efforts to enhance its efficiency.
- Enhancing efficiency will require:
  - Strengthening public investment management (PIM) practices throughout government levels.
  - Boosting project selection through rigorous project appraisal considering positive spillovers.
  - Securing agile gatekeeping safeguards to minimize risks while avoiding bottlenecks.
  - Implementing multi-year budgeting frameworks to connect strategic spending plans with annual budgets.
- Quantitative findings and the call for enhancing efficiency broadly apply to investments by Danantara (Indonesia’s newly created sovereign wealth fund), though the analyses in this paper focus on (on-budget) public investment.
- There is also a role for broad-based structural reforms and private investment as Indonesia pursues its Golden Vision.
- Fiscal simulation takeaway:
  - Revenue measures gradually yield around 0.3 percentage point of GDP.
  - These shifts—taken together—would keep the overall fiscal deficit within the 3-percent ceiling (compared with a starting point of 2.3 percent of GDP in 2024).
  - While illustrative, this underscores that the 3-percent deficit cap can accommodate a boost in well-targeted priority spending if supported by enhanced domestic revenue mobilization.
- Note: Boosting public investment should also be accompanied by broad-based structural reforms (¶15), which would deliver additional growth and revenue dividends; in a holistic reform package, the impact on fiscal deficit would be smaller than the one illustrated in the current simulation.

### Annex I. Technical Details — A. Real Growth Required for High-Income Status
- High-income status threshold defined in terms of nominal GNI per-capita.
- To project the threshold in 2045:
  - Take the threshold set for 2026 by the World Bank Group and apply a nominal annual growth of 2.3 percent, based on historical trends of the threshold.
  - Assume an average annual population growth of about 0.5 percent (broadly in line with UN projections).
  - Assume inflation of 2.5 percent (mid-point of Indonesia’s inflation target range).
- These assumptions result in a required annual real GDP growth of 5.3 percent over the next two decades.
- A higher required growth of 6.3 percent would come from assumptions of a combination of higher high-income threshold growth, lower headline inflation, and higher population growth.
- For the WEO baseline, the long-term projection assumes the WEO annual real growth at end of the medium term.

### Annex I. Technical Details — B. Database
- Database compiled from multiple sources:
  - Public investment and efficiency gap from the Fiscal Monitor October 2025 database (IMF 2025).
  - Public capital stock per capita based on the IMF’s Investment and Capital Stock Dataset (ICSD 2021), extended using public investment flow data and adjusting for depreciation.
  - For Indonesia, public capital investment (above-the-line) from the fiscal accounts is taken as public investment.
  - Other macro variables sourced from IMF (2020), extended to 2024 using the IMF’s WEO database.
- For the ICOR calculation, the change in capital stock is proxied by the investment flow which abstracts away from depreciation.

### Annex I. Technical Details — C. GIMF Extra Results
- Dynamics of key macro variables are presented in response to the scale-up in public investment.
- Results are presented for both the baseline and enhanced efficiency versions.
- Annex I. Figure 1. Indonesia: GIMF Model Simulations (figures referenced in the text).

### Key quantitative figures and simulation parameters (preserved exactly as in source)
- Revenue measures gradually yield around 0.3 percentage point of GDP.
- Overall fiscal deficit kept within the 3-percent ceiling (compared with a starting point of 2.3 percent of GDP in 2024).
- Nominal annual growth of high-income threshold: 2.3 percent.
- Average annual population growth assumption: about 0.5 percent.
- Inflation assumption: 2.5 percent.
- Required annual real GDP growth under baseline assumptions: 5.3 percent.
- Alternative higher required growth under different assumptions: 6.3 percent.
- Data sources and years explicitly cited: Fiscal Monitor October 2025 database (IMF 2025); ICSD 2021; IMF (2020); extended to 2024 using IMF’s WEO database.

*Source: Excerpt from the IMF chapter/annex text provided in the content unit.*

### 10.      The model is used to simulate reform scenarios, with a focal case of ambitious opening

### 10.      The model is used to simulate reform scenarios, with a focal case of ambitious opening up with major trading partners and efforts to enhance logistics and human capital.

### Reform scenario design
- Ambitious bilateral deepening of key partnerships:
  - Mutual reduction of non-tariff barriers with ASEAN, the EU, Asia-Pacific advanced economies (Australia, Japan, Korea, New Zealand), the United States, China, and India.
  - Conceptualized as ambitious, deep trade agreements with comprehensive, legally enforceable coverage of WTO+ and WTO-X provisions, implemented as a counterfactual increase in bilateral depth scores to the conceptual maximum.
- Boosting human capital and logistics:
  - Investments and reforms to raise human capital and logistics to respective medians for OECD economies (alternatively approximated as an increase to the 95th percentile of EMs).
  - Focuses on the trade-cost-reducing aspect of such investments.

### Mapping of reforms into the model (trade-cost representation)
- All shocks are mapped as reductions in iceberg costs (encapsulating policy-induced and non-policy factors that raise the cost of trade).
- Reduction in Indonesia’s non-tariff barriers:
  - Captured as a reduction in sector-specific bilateral iceberg costs faced by exporting firms in partner countries when selling to Indonesia.
  - Transformation uses estimated relationship between changes of depth and exports (훼̂_S_IDD_th) and sector-specific elasticities of substitution (휃_s_S), applying goods and services sector-specific elasticities.
  - Expressed as: 휅̂_m→IDN,s = exp{−(1/휃_s_S) * 훼̂_S_IDD_th × Δ_m,IDN_IDD_th}, S∈{Goods, Services}.
- Reduction in export costs faced by Indonesian firms:
  - Captured by analogous first term for partner market access plus additive terms for human capital and logistics improvements.
  - Expressed as: 휅̂_IDN→n,s = exp{−(1/휃_s_S) * [ 훼̂_S_IDD_th × Δ_m,IDN_IDD_th + 훼̂_S_HC × Δ_IDN_HC + 훼̂_S_LOG × Δ_IDN_LOG ] }, S∈{Goods, Services}.
- Note: Improvements in human capital and logistics reduce iceberg costs vis-à-vis all trading partners (not only those with new agreements).

### Main quantitative results
- Ambitious trade integration and reforms outcome:
  - Boosts real GDP levels by 4.1 percent in the medium- to long-term relative to baseline.
- Channels driving GDP gains:
  - Lower non-tariff barriers enable cheaper imported intermediate inputs, enhancing firm productivity and output for domestic and export markets.
  - Reallocation of activity toward sectors of comparative advantage driven by cheaper inputs and access to final goods.
  - Access to external markets raises demand for Indonesian output and further reallocation toward comparative advantages.
  - Improved human capital and logistics reduce trade costs and support exports.
  - Cumulative productivity-enhancing reallocations raise return to capital and boost investment (reflected in an increased steady-state capital stock).

### Sectoral impacts — unilateral Indonesian opening (no reciprocal market access)
- Mechanisms affecting sectoral value added:
  - (i) Cheaper intermediate inputs for production.
  - (ii) Reallocation of domestic demand toward more accessible foreign products.
  - (iii) Spillovers from shifting demand across sectors.
- Sectoral outcomes:
  - Many key sectors gain, including commodities, textiles, motor vehicles, food, wood products.
  - All goods sector groups register gains in value added.
  - The GVC-linked highly-traded goods sector makes the biggest contribution to the overall increase in exports—despite no assumed increase in foreign market access—underscoring the importance of access to intermediate inputs.
  - Various services sectors also benefit via direct export rises or by facilitating goods exports and demand spillovers.

### Sectoral impacts — full bilateral reduction (reciprocal market access)
- Additional reallocation occurs when trading partners grant market access:
  - Indonesian firms further specialize where comparative advantage is strongest for domestic and foreign markets.
  - Net reallocation toward goods sectors where Indonesia’s comparative advantages lie (e.g., electronic equipment, textiles, manufacturing downstream of commodities).
  - Services sectors gain, including via demand spillovers.
  - With a fixed labor pool in the model, reallocation dampens some gains from more GVC-linked sectors.

### Gains by trading partner and channel decomposition
- Gains arise from both Indonesia lowering its own barriers and from partners granting market access; relative importance varies by partner.
- Regional integration (Asia-Pacific partners) delivers large gains largely via Indonesia lowering its own barriers—reflecting these partners’ roles in regional GVC networks as suppliers of intermediate inputs.
- For partners such as the US and India, gains accrue more from partner market access.
- Sectoral patterns by partner:
  - Opening to the US and EU generates gains across all goods sector groups; modern services do not gain from opening to these more competitive partners.
  - Opening to major Asia-Pacific economies (specialized in GVC-linked manufacturing) yields strongest gains outside the GVC-linked goods group (e.g., commodities, other goods).

### Complementarities with structural reforms
- Structural reforms are essential to reach high-income status and can broaden and deepen gains from trade liberalization.
- Key reform priorities (as noted in the chapter and IMF 2024a): logistics, investment and business climate, governance, digitalization, financial sector development, building human capital.
- Interaction between sectoral TFP-boosting structural reforms and trade liberalization:
  - Structural reforms assumed to raise relative sectoral TFP with considered gains between 1 and 10 percent.
  - Trade liberalization gains are amplified by these TFP-boosting reforms:
    - Example: Highly-traded goods’ small gain at baseline rises to about 4 percent when sectoral TFP rises by 10 percent.
    - Modern services’ small negative impact can close when sectoral TFP rises by 10 percent.
  - Mechanism: higher sectoral TFP strengthens comparative advantage; trade liberalization then allows firms to exploit productivity gains in foreign markets.
  - Other sectors continue to gain from trade liberalization despite labor reallocation toward the boosted sectors.

### Trade-induced investments, production changes, and potential amplification
- Additional factors not captured fully by the model could amplify gains:
  - FDI: Model does not distinguish productivity-enhancing properties of FDI; greenfield FDI can generate positive spillovers—particularly upstream and when originating from advanced economies—boosting productivity, especially via vertical FDI.
  - Intensification of intermediates use:
    - Model holds intermediates use shares fixed; in reality, trade liberalization can lead to more disintegrated, cross-border production requiring higher intermediates intensity.
    - Higher intermediates intensity generates multiplier spillovers across upstream and downstream stages.
- Indicative back-of-the-envelope simulation on intermediates use intensification:
  - A higher level of initial integration (IO-multiplier) is associated with greater real GDP gains from opening up.
  - If Indonesia had the median ASEAN-level of intermediate inputs usage (roughly about the level of Thailand), the GDP gains from trade integration would be about 40 percent higher.

### Policy implications and recommendations
- Significant gains arise primarily from reducing Indonesia’s own non-tariff barriers—pointing to scope for unilateral action alongside deep integration with partners.
- Complementary structural reforms (logistics, human capital, digital infrastructure, financial deepening, governance, business climate) are critical to:
  - Reduce trade costs and support exports directly.
  - Build new comparative advantages (notably in GVC-linked manufacturing and modern services), thereby amplifying gains from trade liberalization.
- Supportive measures should be in place to help workers transition to new opportunities to ensure gains are fully realized and broadly shared.

*Source: IMF chapter on Indonesia trade-integration simulations (content unit: 1idnea2026002-source-pdf).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1idnea2026002-source-pdf.pdf_