Indonesia Expects Sharp Policy U-Turn in 2020

Reportedly shocked by a September 2019 World Bank report that severe structural impediments hamper foreign investment, Indonesian President Joko Widodo’s government is planning changes over the next year that basically mean an economic U-turn away from the nationalistic policies that dominated his first term.

The report and other issues including the dire economic condition of the country’s inefficient and corrupt state-owned enterprises are said to have caused consternation in the cabinet, jolting the government into action after a first term in which the president proudly touted his success in wresting control of natural resources from foreign countries and displayed hostility to major Internet firms Facebook, Google and Amazon, seeking to force them to invest in data storage in the country.

It is uncertain however, if Jokowi, as the president is known, can pull it off. A country of 264 million people is hard to move in any direction, especially one with substandard infrastructure, a vast, inefficient bureaucracy that turns off investors, endemic corruption and one that is mired in superstition and increasingly leaning toward an unhealthy and severe version of Wahhabi Islam being taught in Saudi-financed madrassas.

But, a multinational businessman told Asia Sentinel, “The broad outlines of reform are beginning to emerge. They're going to open the economy to investment. The Muslim schools have been told to stop teaching about the caliphate and Jihad. The new education minister says they’re were going to do away with the national exam and instead teach people how to think and solve problems. The new omnibus law will apparently give Jokowi the authority to overrule stupid local labor laws. It's all actually very good.”

The first stirrings of change had nothing to do with economics and lots to do with society. Megawati Sukarnoputri, the leader of the Indonesian Democratic Party of Struggle (PDI-P), in a fiery speech to the party in August, called attention to rising Islamic fundamentalism, saying: “Don’t you fabricate each other’s beliefs as the only absolute truth. There is no absolute truth in this world, as if personal and group truths are absolute truths. Even though the absolute truth is only the owner, God Almighty, Allah. Such a strategy clearly endangers the integrity of the nation.”

Concerns remain, however. In its December 2019 quarterly report, the World Bank again warned that “it is crucial that Indonesia focuses on strengthening its domestic economy and enhancing longer term growth. Despite the 16 economic policy packages released by the government since September 2015, substantial structural bottlenecks remain in the labor and product markets. These include limited human capital development and associated skills mismatches; complex regulations especially at the level of sub-national governments; restrictions on FDI and a strong presence of SOEs that limits competition.”

In October, the president announced that his administration would introduce what he called an “omnibus law” designed to improve the investment climate to make it more attractive to foreigners. The broad outlines of that omnibus law were presented on December 12, to be introduced in the legislature this month.

Jokowi in a December 16 speech called on regional heads of government to revise regulations to bring them into alignment with the proposed omnibus law via the amendment of dozens of laws and articles.

“Our bureaucracy is like a large ship, we need a bureaucracy that is lean and flexible so that it responds quickly to any changes,” he said in Indonesian. “When the world changes, the response has to be fast. What changes in the world, our actions have to be fast. Don’t let it be because of our big ship. We want to deflect difficulties.”

Two bills would deal with job creation and taxation and would amend more than 1,000 prevailing laws that critics say have created roadblocks to foreign investment. Trailing legislation is being drafted as well. Together they would simplify licensing procedures and land procurement. Corporate income tax would be reduced from 25 percent to 20 percent by 2023. Tax penalties would be cut.

The biggest stumbling block is the country’s onerous labor laws, which successive governments have been attempting to reform for more than a decade. A 2003 labor law passed in the wake of the fall of the strongman Suharto has made it virtually impossible to lay off incompetent or unwanted workers. Dismissed workers are eligible to receive as much as 32 months’ worth of wages.

Although that resulted in employers “outsourcing” jobs to contract workers who weren’t covered by the 2003 law, organized labor in 2012 staged massive demonstrations forcing the government to ban the practice for a variety of such jobs. A year later, as many as 2 million workers took to the streets to demand additional protection from outsourcing.

With freedom to organize guaranteed by the constitution written after Suharto’s fall, the number of unions has exploded. The presence of so many proliferating labor groups frustrates employers as they often have to deal with more than one, sometimes dozens in negotiating collective agreements. They are now a formidable political force although formal employment is actually estimated at around 50 million of Indonesia’s 130-odd million workers. The rest are in the informal sector.

With growth slowing and expected to weaken further because of an expected global slowdown, “Indonesia’s GDP growth will continue to decline because of weak productivity and slowing labor force growth,” according to the September World Bank report, with commodity prices expected to fall, which would hurt the country’s GDP growth even more.

The current account, which records trade transactions with the rest of the world, currently runs a US$33 billion per year, with foreign direct investment only at US$22 billion, with a US$16 billion annual deficit, meaning Indonesia is financing its deficit with volatile capital from portfolio investors.

FDI, the report noted, “is not coming to Indonesia.” The country is cut out of global supply chains, meaning FDI is going to other countries partly because of costly, time-consuming and discretionary non-tariff measures countries because of confusing regulations and a hostile bureaucracy that requires letters of recommendation for all industrial inputs to make sure the necessary imports can’t be sourced locally. Restrictions on work permits for highly skilled professionals mean multinationals can’t bring in critically required staff. Import tariffs limit the import of key inputs for manufacturing. Rules are discretionary and inconsistent on the part of bureaucrats.

The country was unable to take part in the bonanza of investment from multinationals fleeing China because of the trade war instigated by US President Donald Trump. Moving factories to Indonesia is “risky, complicated and would take at least a year if not more while the process is certain and much shorter in Vietnam, Thailand, Malaysia, Singapore, and Taiwan,” the World Bank said.

By contrast, South Korean washing machine factories moved from China to Vietnam and Thailand in 60 days after the US imposed tariffs, with exports from those countries jumping soon after.

“Between June and August 2019,” the World Bank noted, “33 Chinese-listed companies announced plans to set up or expand production abroad: 23 of them are going to Vietnam and the remaining 10 are going to Cambodia, India, Malaysia, Mexico, Serbia, and Thailand. In 2017, 73 Japanese firms moved operations from Japan, China, and Singapore to Vietnam, 43 to Thailand, 11 to the Philippines and only 10 to Indonesia.”

No amount of tax incentives and/or tax holidays offered as a part of the president’s ambitious plans to lure investment “can correct these problems and make Indonesia internationally competitive in the automotive, textile, electronics, pharmaceutical and other manufacturing industries,” the report noted.

It was that sort of language that impelled the government to attempt to swerve away from his nationalist agenda.