The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Indonesia's trade policy has evolved over the last 50 years. It has been influenced by the country's level of development and the conflict between openness and protectionism; external developments, such as commodity booms and busts and increased competition; and international commitments, whether multilateral or regional. As a result, trade policy has often been ambivalent and ineffective. Given that Indonesia has undergone various transformations and that the world is a different place from what it was in 1965, the country needs to take a more pragmatic and forward-looking stance. Trade policy needs to be part of a comprehensive strategy to improve competitiveness and diversify exports. If Indonesia is to be part of the new paradigm, where the production of goods and services is based on production networks and global value chains, its policy focus will need to shift from protecting and favouring sectors to promoting trade and industrial policies that encourage the flow of goods, services, and people.

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* The authors are very grateful to the many interviewees in Jakarta, who shared their insights and time, and to the members of the Indonesia Study Group at ANU, who provided extensive comments. Any errors are the authors' own. Rahardja's views are personal and do not necessarily reflect the views of the World Bank and its Board of Directors.

In the last four decades, Indonesia's economy demonstrated remarkable progress. After the devastating currency crises in 1998–99, growth recovered. With the help of commodity prices, Indonesia has become one of the largest middle-income countries in the world. All of this happened amidst the backdrop of delicate political transformations. It is far from clear, however, whether Indonesia can continue to follow the successful path of other industrialized countries in East Asia. We lay out key issues that are likely to hinder Indonesia's transformation to a high-income country and discuss constraints in policymaking that may require calibrating reform prescription with the new political landscape.