May 9, 2017– My recent visit to Indonesia underlined a defining feature of Indonesia’s political economy: ambiguity. The common theme among all my meetings with local as well as international business people was that contradictory regulations, shifting political winds, side-wise legal decisions, were all hampering an economy that should be growing above 5%. So every conversation was pregnant with a desire for something in short supply: clarity.
I recently read an interesting paper from Australia’s Lowy Institute that unfortunately concluded that Sadli’s Law may no longer apply to Indonesia. Named after Mohammad Sadli, former Mines and Energy Minister and a leading economist during Indonesia’s great rise out of poverty in the 1970’s– the law says “good times make for bad policy, and bad times make for good policy”. As I am often reminded by Indonesians, today’s Indonesia differs markedly from those days.
Here is a selected list of current ambiguities:
Local regulations vs national law and policy
A series of decentralization laws in 1999-2001 transferred a significant amount of authority and funds from the central government to local municipalities and provincial governments. But many of the new local regulations conflict with national regulations and impose shariah law contravening elements of the secular national Constitution. President Jokowi, through a series of deregulations packages begun in 2015, has eliminated thousands of burdensome and duplicative regulations. However, these actions have now been called into question and perhaps rescinded by an April 13 decision of the Constitutional Court that the central government or executive branch could not revoke a region’s laws without going through the Supreme Court first. Although some hailed the decision as saving regions from a potentially abusive central government, others say that Indonesia does not have a federalist system, regions receive most of their funding from the national government which then have a say on how the money is spent. Those groups hoping to establish shariah as the law of the land will be emboldened by the decision. The President’s goal of moving Indonesia to 40th from 91st in the World Bank’s ease of doing business rankings will not be met if this ambiguous situation persists.
Nationalism and COW renewal
Indonesia has made no recent attempts to rescind or amend the flawed 2009 Mining Law, although drafts were in circulation late last year. In fact, some would say the government is doubling down on the current law in perilous fashion. The law and its subsequent regulations have several inconsistencies/ambiguities that do not provide a clear path where international mining companies can renew or change their contracts with any reasonable degree of legal certainty. The government’s negotiation tactics with long time players appear driven by a narrative of foreign exploitation that helps politicians and their placeholders in senior ministerial positions gain public support. In a further ambiguity Freeport Indonesia now has been issued a temporary mining license (IUP) allowing it to export its copper/gold concentrates without giving up its rights under the COW. Indonesian leaders say they welcome foreign investment but hardly anyone new is investing in hard rock mining, and current mining investors are sitting on billions in future investments. New investors in other sectors ask why.
Using the law for political purposes
Its widely accepted that in a democracy the rule of law supersedes politics and that judicial and prosecutor decisions have nothing to do with electoral outcomes. This does not now seem to be the case in Indonesia. Last year the Christian Chinese governor of Jakarta was arrested and charged under an old blasphemy statute for insulting Islam during a campaign speech. Now that Ahok Purnama has lost in the April 19th election prosecutors have downgraded their charge to “publicly expressing feelings of hostility”. If convicted on May 9th Ahok will not face prison, only a suspended sentence. Clearly the police and prosecutors bowed to hard right Islamists “mobs” last year in a case that should have never seen the light of day. One of Indonesia’s ablest and least corrupt administrators, Ahok can remain governor until his term ends in October and he may now have a future in government service. The case ends with a logic of justice that will be viewed as “very Indonesian” but confusing to those tracking the progress of the rule of law.
Invest but don’t work here
One major complaint I heard in Indonesia was the government’s increased hassling of foreign expats with valid residency permits and the refusal to grant permanent residency status for investors, obviating routine visits to Singapore for renewal. One member with operations in Indonesia and Malaysia told me it took him only 4 days in Malaysia to get a permanent business residency permit. Indonesia should seriously hit the reset button on expat employment otherwise investment promotion rings hollow.
How far will “halal” regulations go A big unanswered question with the Halal Products Assurance Law of 2014 is will all phases of food and vaccine production, storage, and transport require halal certification. Is the government just creating an unenforceable nightmare that will downsize cross border transactions, destabilize existing prosecution, and chase away new investment. Will politics intrude to constrain the government’s ability to enable practical regulations that do not kill off life saying drug production. The regulations get fully implemented in 2019. There is still time for Indonesia to get this right.
The promise of the digital economy
could be snuffed by localization rules for data servers. Representatives from 100’s of local startups met with 25 Silicon Valley venture capital representatives in Bali April 19-21 the Global Ventures Summit, an event organized by AICC member Parkpine Capital that we cosponsored. The ambitions of many of these startups could get short circuited if Indonesia’s plan to require all on-line companies to host or use local data servers goes into effect.
My disturbing conclusion from all of this is that the promise of Indonesia’s post Suharto reform era is fading in the face of political forces that make it convenient to nurture anti-foreign sentiment and protectionism. The situation in Europe and the US certainly doesn’t help. Although many business opportunities can be fulfilled, many will be missed. Indonesia’s people believe openness and a global economy is a benefit, but yet they can be persuaded to strongly support self-sufficiency and “do it ourselves”. This ambiguity leaves many in our business communities uncertain. The Lowy Institute paper concludes: “The rise of capital and the imperatives of popular politics help explain why, in post-authoritarian Indonesia, nationalist policymaking has not met the fate that Sadli’s law predicts”. Meaning: bad times can make for bad policies.
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members)