Indonesia Seeks to Jump-Start Economy with Massive Regulatory Reform

But critics abound over secrecy, breadth of proposed legislation

By: Ainur Rohmah

Indonesian President Joko Widodo’s government may have bitten off more than it can chew in its effort to simplify regulations to attract foreign investment via two so-called omnibus bills in the house of representatives that critics charge are too complicated, opaque, too pro-business and too hasty.

Nonetheless, in a dramatic turnaround to the decades of protecting local business from international competition, the government is moving forward with its mission to simplify laws related to taxation and employment creation, arguing that overlapping regulations are strangling the economy. Reportedly the president was shocked into action by a World Bank report in September 2019 that laid out in detail the roadblocks to investment and the cost to the country.

Jokowi, as the president is universally known, first bared the idea of an omnibus law first appeared when President Joko "Jokowi" Widodo delivered his second inauguration address on October 20. 

"We must not be trapped in rigid regulations which would make it difficult for the public and businesspeople. We have to stop it," Jokowi said. He invited lawmakers at the central and regional levels to assist in massive legislative reform. 

"I have a report that there are 8,451 central regulations and 15,985 local regulations. We are experiencing hyper-regulation or regulation obesity," he told the constitutional court in a recent speech, adding that hyper-regulation has trapped the government in self-inflicted rules. 

Whether the strategy to capture such an enormous amount of deregulation in just two bills, however, has spurred concerns both in the business community and among activists. The omnibus law was designed by a task force formed by the government and the Indonesian Chamber of Commerce and Industry, or Kadin, consisting 138 people from business associations, academia and government. Activists have criticized the composition of the group over its dominance by businessmen.

“There are many cooks in the stew,” a source in the foreign business community said. “The timeline is for it to be passed 100 days after it is given to the House. It will cover a large number of areas, but nobody yet knows what it will look like.” 

Indonesia’s labor law is a particular – and controversial – target. The government, with the backing of the business community, has been trying to reform the law virtually since it was implemented in 2003 in the wake of the fall of the former strongman Suharto. The law makes it almost impossible to dismiss incompetent or unwanted workers. A dismissed worker is eligible to receive 32 months of wages. Attempts to amend the law by successive administrations have brought massive numbers of demonstrators to the streets of Jakarta and other cities across the country, forcing the governments to back down. 

Indonesia’s Ombudsman has criticized the process of drafting the two laws, saying it is unaccountable and exclusionary and hasn’t given the public an opportunity to provide input.

"Not all inputs can be accommodated. But public participation will open up space to think about the solutions to those who are disadvantaged with other schemes," said Ombudsman Member Ahmad Alamsyah Saragih, adding that his agency's request for an explanation of the draft had been rejected by the Coordinating Ministry for Economic Affairs. "This is the first time we have received such a rejection," he said.

"We can only access the draft that is spread on social media,” said Choirul Anam, a member of the National Human Rights Commission, or Komnas-HAM, complaining that the commission also hadn’t been given access to the official draft. The government, he said, has acknowledged that the draft in circulation isn’t official.

Officials, he said, should produce an official draft to allow public participation since the rules governing labor will have a major impact on them. He called the closed process of drafting violation of the constitution.  

Coordinating Minister for Maritime and Investment Luhut Binsar Pandjaitan dismissed the notion that the government is hiding something.

"In the long run, the omnibus law becomes our guide. And once again, don't think we are hiding something,” he said. “We don't need to lie to future generations." 

Finance Minister Sri Mulyani Indrawati explained that the core of the tax measure is to revise several tax laws into one at a time. Six points will be the focus including a corporate income tax cut, tax penalty interest reform, rearrangement of sanctions and interest penalties to improve tax compliance, and tax incentives in one cluster.

While a number of rules are to be relaxed in the Omnibus Law Employment Creation bill such as changing rules regarding minimum wage, facilitating business establishment permits and applying administrative instead of criminal sanctions against employers who break the rules.

There are at least three main objectives of the reforms – removing rules that impede investment as a step towards deregulation, making laws friendlier to investment, especially related to licensing, and giving the president power previously held by ministers and local governments to grant permits.

One of the most vociferous critics is Citra Referandum M. of the Indonesian People's Faction, which has objected to the law bill. The measure, she said, is a tool to legitimize environmentally damaging investment while ignoring the needs of civil society and indigenous peoples. She also criticized the secretive preparation of the draft law.

There are concerns, she said, over increasing centralization of authority to the central government over investment permits, which she described as likely to accelerate Indonesia’s environmental crisis via investment that increases environmental pollution and ecological disasters. She also called attention to the possibility of massive corruption due to a narrowed monitoring mechanism and removal of the people's right to sue, resulting in the impoverishment of farmers, fishermen, indigenous peoples, women and children, the disabled, and minority sexual, gender and religious groups.

 "The mandate of the constitution to protect and prosperity of the people is simply set aside under the pretext of bringing in investment," she said, accusing omnibus legislation of opening opportunities for criminalization, repression and state violence against the people, while providing legal immunity and privileges to entrepreneurs. "The rules in the Omnibus Law are exclusively made to prioritize the position of investors or corporations rather than protecting the democratic and constitutional rights of its people," she said.

There is a real concern over over-regulation, however. As the president pointed out, the pre-registration process for starting a business is governed by nine laws, two government and four different presidential regulations and 20 ministerial ones, costing vast amounts of time and money to cut through red tape even at the beginning.

For this reason, in addition to improving the law through the Omnibus Law, the government is also cutting down numerous other regulations. 

"Hopefully, our law will be much simpler, more flexible, faster, responsive in the face of the era of competition," Jokowi in his inaugural address.

Two measures 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. The draft related to taxation rules has been completed and has been submitted to parliament, while the draft for job creation is still being discussed and will be sent to parliament in the near future.