Rather than delay Indonesia’s long-discussed economic reforms, the coronavirus pandemic appears to have emboldened the government to make changes because many of the labour provisions also act as a short-term stimulus for boosting employment.

Boosting direct investment inflows from abroad – currently about 2 per cent of GDP – has to be the crux of Indonesia’s reform push. A World Bank study showed that the country failed to attract a single investment shifting from mainland China to Southeast Asia.

But as Indonesia will continue to run a current-account deficit for the foreseeable future, financing it through foreign direct investment will allow higher growth while cultivating higher-productivity export-oriented industries.

The main focus of the reforms is jobs. The cost of firing workers in Indonesia is the third highest in the world. A new law simplifies the process and cuts the maximum severance pay by 40 per cent. It also allows contract workers to be engaged indefinitely, lifting the three-year limit: that should provide a short-term stimulus to boost hiring during the pandemic, even though this risks creating more bifurcation in the labour force.

The new law also eases regulations on overtime and liberalises employment of foreign workers, which previously required ministerial approval. This should provide support for Indonesia’s burgeoning tech unicorns and remove a key impediment for investment from abroad.

The Negative Investment List, which prohibits foreign direct investment in certain sectors, can also now be revised. Only narcotics, gambling, endangered species, coral reefs, chemical weaponry and certain chemicals may remain on the list.

All businesses currently require at least one licence to operate – sometimes several from both central and local officials. But the reforms will mean only high-risk enterprises require a full business licence and simplifying the process to deal with just one agency should reduce the potential for corruption.

The success of the reforms will depend on effective implementation and much detail has yet to be finalised.

And not surprisingly the reforms have sparked protests from labour unions and concern about eliminating environmental permits for some businesses. However, maximum fines for environmental damage are being increased and burning forests could result in up to 15 years’ imprisonment.

Indonesia is also proposing a sovereign wealth fund. Such funds are usually established to invest budget surpluses, natural resource proceeds, trade balances or other sources of national wealth for future generations. Indonesia, however, runs an oil and gas deficit and relies on foreign financing to fund its persistent current-account deficit. Its sovereign wealth fund thus appears to be more of a conduit for attracting investment and a holding company for state-owned assets.

The government could inject an initial USD2 billion and add USD5 billion of stakes in state assets, but could lift the total to USD15 billion by attracting additional investment, including from other countries’ wealth funds.

First published 9 October 2020.

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