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Key messages

• Indonesia has made remarkable poverty reduction progress, with extreme poverty basically eradicated. Now, Indonesia can now turn to broadening its definition of poverty to commensurate with its middle-income status.

• Agriculture and low value-add (low-VA) services remained the most important drivers of poverty reduction, even though the work is often not very productive or sufficient to escape poverty. High-skilled jobs remain scarce in Indonesia, limiting pathways towards economic security.

• Low urban migration limits productivity gains as fewer workers can take advantage of positive agglomeration forces. Many women remained excluded from the labor force, constrained by cultural norms and home care responsibilities, thus limiting livelihoods opportunities for households.

• Human capital outcomes in Indonesia are improving but remain below peer countries, especially in several provinces in Eastern Indonesia, undermining productive potential of the population and exacerbating inequality.

• More than one-third of Indonesians remain economically insecure. They can be pushed into poverty upon a shock like COVID-19 or natural disasters, whose frequency and severity increases due to climate change.

• On the path to high-income, Indonesia¡¯s poverty reduction policies need to be broadened through a multi-pronged approach: creating better opportunities, protecting households against poverty, and focusing fiscal resources on pro-poor investments, while promoting better information and evidence for decision making.

• Policies can support the private sector to create better, higher-productivity jobs, in the context of climate change, the ongoing redesign of global value chains (GVCs), and digitalization.

• A combination of social assistance, social insurance, financial inclusion, and resilient infrastructure investments can help keep households out of poverty.

• Increasing tax revenues and removing inefficient subsidies can create fiscal space to make pro-poor investments, while increased sub-national administrative capacity can improve public services.