Indonesian gov’t needs to push policy reform to attract FDI, economists say
ECONOMISTS have called on the Indonesian government to speed up deregulation and make policy reforms to boost the country’s ease of doing business, as President Joko “Jokowi” Widodo’s administration struggles to attract more foreign direct investment to support Indonesia’s sluggish economic growth.
University of Indonesia rector Arie Kuncoro told the Jakarta Post on Thursday that the government would need to develop soft infrastructure by easing the licence-procurement process and to speed up deregulation efforts to make doing business in the country faster and easier.
“The government needs to restructure the bureaucracy and regulations to boost efficiency and investments,” said Arie, who is also a senior economist, adding that there were several ongoing issues that the government would need to work on, such as labour regulations and the process of starting a business.
“The government should have the courage to change the Labour Law although it will not be easy as there is a complicated situation in which political processes and labour unions are involved,” said Arie, adding that: “The setting up of a business takes days to process, this needs to be shortened.”
The country’s ranking in the World Bank’s 2020 Ease of Doing Business (EODB) index has remained stagnant at 73rd out of 190 countries despite the government’s deregulation efforts and policy reform, undermining Jokowi’s target for Indonesia to be ranked 40th next year.
According to the report, released on Thursday by the Washington, DC-based lender, Indonesia scored 69.6 out of 100, an increase of 1.64 points. The increase was slightly higher than last year’s increase of 1.42 points to 67.96.
The World Bank has chosen Jakarta and Surabaya in East Java for the EODB survey as it highlighted the two cities as examples of Indonesia’s reforms regarding starting businesses, paying taxes, trading across borders, improving electricity and enforcing contracts, which are the index’s components.
In the report, the World Bank also highlighted Indonesia’s rigid employment and minimum wage regulations.
“Strict employment protection legislation shapes firms’ incentives to enter and exit the economy, which in turn has implications for job creation and economic growth . . . a 10 percentage point increase in the minimum wage in Indonesia was associated with a 0.8 percentage point decrease in employment on average,” the report reads.
Contacted separately, private lender Permata Bank chief economist Josua Pardede voiced a similar view as Arie by saying that the government would need to revise labour regulations deemed as hampering businesses from entering the country.
“Indonesia has tight labour regulations particularly on recruitment and with a constant increase of provincial minimum wages amounting to more than a five per cent increase annually,” said Josua.
He added that the government would need to conduct policy reform related to labour regulations. “Policy reform in labour regulations will enhance the ease of doing business in Indonesia and boost economic growth.”
Indonesia’s economy expanded by 5.05 per cent in the second quarter, the slowest pace in the last two years. Investment, which contributed more than 30 per cent of gross domestic product, grew only 5.01 per cent year-on-year in the same period.
Newly inaugurated Coordinating Economic Minister Airlangga Hartarto said he would hold talks with the Jakarta and Surabaya local administrations to find ways to improve the licensing process in the two cities.
“We will involve the regional administrations so that there will be improvements in licensing, particularly with regard to property, which was deemed troublesome [in the report],” said Airlangga at the State Palace in Jakarta on Thursday.
‘A warning sign’
Meanwhile,BankCentralAsia chief economist David Sumual said the report revealed that the government’s efforts were still relatively weak compared with other countries.
“This is a warning sign for Indonesia despite the efforts put in by the government [to boost investment] as it is also reflected by the country’s lower competitiveness ranking,” David told the Jakarta Post. “Several neighbouring countries have stronger structural reforms to streamline bureaucracy [than Indonesia].”
Recently the World Economic Forum’s global competitiveness index showed Indonesia’s ranking dropping five places this year to 50th out of 141 economies, scoring 65 out of 100 in the competitiveness performance, a 0.3 point drop from the previous year.
In the World Bank’s 2020 EODB report, Singapore maintained its position in second place, trailing New Zealand, while Vietnam fell one spot to the 70th place. Both Thailand and the Philippines rose six and 29 spots to 21st and 95th.
David further said the government would need to integrate regulations between the central government and regional administrations, saying the lack of coordination had resulted in time-consuming licence issuance.
“Other than that, the government would need to renew the labour regulations and issue omnibus laws [immediately].”
The government plans to issue omnibus laws in tax, job creation and small and medium enterprises, which will revise dozens of intertwined regulations that hamper investment.
Indonesian Employers Association deputy chairman Shinta W Kamdani said the government lacked policy breakthroughs to exercise the economic reform agenda demanded by investors and businesspeople, adding that government incentives were not sufficient to boost economic activities as businesspeople were having difficulties in claiming them.
“The situation is not improved because the economic policy packages [issued by the government a couple of years ago] are not being implemented as a result of an unprepared system, lack of law enforcement and conflicts of interest with regional administrations,” Shinta said on Thursday.
“We want Jokowi’s government to strengthen deregulation in business activities and consistently implement the deregulation as well as creating breakthroughs so that the efforts can have a significant impact on business players,” she added.