Omnibus Struggles

October 2020

Commentary by Wayne Forrest
Its hard to focus on economic topics during a pandemic that continues to grow and spread.  But, it should not go unnoticed that the World Bank now predicts that the Indonesian economy will contract more than they had predicted only a few months ago and it issued a strongly worded warning for Indonesia to get a handle on the pandemic:  “It may be well into next year that Indonesia will come back to pre-pandemic levels of economic output, and it may take them even longer.” In June the Bank predicted zero percent growth and is now revised that to a 1.6-2% contraction.   As others have commented, now is a strategic time for Indonesia’s reform-minded government to push through structural changes that could help accelerate the country’s future recovery.  Its no secret that 7 years of 5% GDP growth, while acceptable, is below the nation’s potential.  So, what has President Jokowi’s administration and Parliament been doing?   To answer that is also an exercise in understanding an equation that is embedded in Indonesia socio-cultural-political environment: reform is inversely proportional to stability.  Indonesians, in my opinion, are basically conservative, and have a long memory of previous periods of instability.  Whats seem like sensible reform legislation to us is more consequential and anxiety-producing for them. Also, frankly, the transactional nature of Indonesia’s legislative politics is always an inhibiting factor.

Recognizing that the deregulation packages in Jokowi’s first term (2014-2019) did not attract sufficient foreign investment, especially those companies relocating from China, upon his reelection in 2019, the President announced a much more comprehensive initiative to make what he called “structural reforms”.  Wrapped into one omnibus bill, sold as a jobs creation bill, thousands of local and national regulations would be eliminated or harmonized, suffocating severance rules would be altered, many areas would be opened for foreign investment, and the central government would reassert its power to overrule local regulations.  Announced with fanfare the bill languished as COVID spread but has now resurfaced.  Some of its main features are listed on page 2.  Although its not yet law, and further changes could be made, it does appear that significant compromises on labor rules and other regulations have already occurred.  If so, the bill may still have a positive effect on the business climate, but more at the edges rather than at the core.  I worry Indonesia may have missed a significant opportunity to become dramatically more competitive for international direct investors, especially in manufacturing.

Looking at this within the context of Indonesia’s narrative over the past decade (perhaps longer), this development reflects not only the equation I mentioned above, but a series of ambiguities and contradictions that have long been identified. Expressed as tensions between opposites they are: democracy- authoritarianism, Islam-pluralism, openness-protectionism, central-regional government.    These were recently very well summarized in a perceptive article by seasoned journalist Ben Bland based, in part, on his interview with President Jokowi and discussions with his inner circle of advisors (Click here to read it) as well as in a commentary in the Jakarta Post by Emil Salim, a key minister during the New Order period of President Suharto in which he agrees with the theme of another recent publication: “Democracy in Indonesia: From Stagnation to Regression ?” (see article on page 3).   I do recommend a close reading of these pieces for any that want to broaden your understanding of contemporary Indonesia, but, permit me to give a quick summary, which unfortunately reduces a very nuanced analysis and may give an unintentional negative tone. Basically, President Jokowi is a political outsider who entered office with high-minded calls for a reformed bureaucracy, open and competitive economy, and social justice for all but has been hampered (some would argue defused) by not only an elite and oligarchic political party system with its heavy patronage underpinnings, but also by his own nationalist instincts and overriding concern with building infrastructure.  He presides, not so much over a set of ministries and government agencies managed by a centralized “West Wing” unit but an apparatus more akin to an imperial court with ministries in competition with each other for favor and attention, in part, because they are doled out to political parties as prizes for entering into a “coalition”.  The lack of a centralized policy delivery unit close to the President leads to weakness among the existing coordinating units and the reliance on trusted personalities to implement policy.  Indonesians experience this firsthand any time there is an emergency such as the current pandemic; a response eventually comes but is often too little and too late.  Well into the current pandemic, only a meager 32% of relief funds have been distributed. Business regulations and policies can be contradictory, especially at the local level, and judicial decisions in business cases can be so incoherent that even if there was no hint of corruption, attorneys are left shaking their heads in despair. The Omnibus addresses only some of this.

The rhetoric of the government regarding the role of international investment and trade reflects a long held duality:  When speaking to foreigners, Indonesian leaders openly court and welcome foreign investment and trade, however, domestic players are told to wean off imports and that they can build and manage all types of enterprises without foreigners.  Indeed, in recent years Indonesia has increasingly shown the door to long term foreign investors by either nationalizing parts of their enterprises or kicking them out by not renewing their long-term contracts.  Commenting on this “stand on your own two feet” rhetoric, an echo of Indonesia’s first President, Sukarno, Bland writes: “Protectionism runs deeper in Indonesia than many economists like to admit”.  State-owned enterprises (SOEs) have been given the yeoman’s share of the new infrastructure projects and state-owned banks, energy, mining, insurance, telecommuting, and steel companies are given prime positions in many market segments as well as the pole position in the race to receive mostly Chinese infrastructure finance.  Sotto voce, Indonesian private companies often complain about their lack of access and the SOE subsidies.

Its understandable that many Indonesians may see FDI through a neocolonialist lens as a tool of oppression, but very few Indonesians have ever resigned from a US bank, insurance, energy or mining company complaining about the work environment.   Its usually the opposite, and when they do leave, Indonesians form their own companies, or manage one set up by a family member or classmate.  Its these private companies that have brought innovation and entrepreneurship, delivering better products and services to Indonesia’s people.

I do have a ray of hope that the Omnibus will be transformational, but I am doubtful.  It would be wonderful if Indonesia could emerge from the pandemic and recession “cleansed” of many of the inhibiting mechanisms that retard business development.  The senior ministers and business leaders I encounter want Indonesia to be as attractive to FDI as Vietnam; they want to become a location for production leaving China or as industrial as Taiwan or South Korea.   But not having a one-party system, Indonesia, stuck with a coalition style of democratic government deformed as it is by its regressive tendency to older patronage norms, may not be able to get there.

Thus, I would advise managing expectations.  If even in a horrific pandemic Indonesia cannot muster the collective will to fully open the economy and reform a sclerotic labor law, those wonderful predictions that Indonesia becomes a developed economy by 2030 or 2040 will likely be off by a few decades if not longer.  Its distressing to imagine that Indonesia’s current demographic dividend (50% of the population under 30) could become a demographic time bomb.  But perhaps the wisdom and hope of 90-year-old Emil Salim for Indonesia’s young people will win the day: “Indonesia’s democracy (and reform process) is like the popular dance Poco-Poco, with two steps back and one step forward to the rhythm of cha-cha-cha music. Let’s pray that Indonesian democracy will follow the dance of Poco-Poco, but instead with one step back, 10 steps forwards to the rhythm of jazz music performed by millennials.”

(These remarks are solely the author’s and may not reflect the views of the American Indonesian Chamber of Commerce or its members)