Indonesian policymakers more certain of need to ease labour laws to attract investments

Talk of amending the laws had frequently surfaced in the past years, but always faced opposition from the strong workers' unions - supported by opposition politicians - who managed to send any draft Bill back to the shelf.
Talk of amending the laws had frequently surfaced in the past years, but always faced opposition from the strong workers' unions - supported by opposition politicians - who managed to send any draft Bill back to the shelf.PHOTO: AFP

JAKARTA - Indonesia's top policymakers are now more certain about the need to amend its strict labour laws that have for more than a decade scared away investors because of hefty severance pay and benefits.

Talk of amending the laws had frequently surfaced in the past years, but always faced opposition from the strong workers' unions - supported by opposition politicians - who managed to send any draft Bill back to the shelf.

But today, the motivation to amend the laws has never been stronger, as the strict laws, passed in 2003, have had a harmful impact on trade and employment, said a senior government official who spoke on condition of anonymity.

Based on government data seen by The Straits Times, Indonesia recorded US$180 billion (S$248 billion) in exports last year, a little lower than that eight years ago.

Its regional competitor Vietnam saw exports surge from a mere US$83 billion in 2010 to US$245 billion last year, thanks to Samsung Electronics, now the biggest firm in Vietnam.

"More than a quarter of Vietnam's export revenue today is contributed by Samsung that actually wanted to invest heavily in Indonesia, but because of our regulations, they went with the alternative," the government official said.

The company set up its first Indonesian mobile phone factory in 2015 to cater to domestic consumers and has not yet expanded its operations.

The world's largest phone maker, which has eight factories in Vietnam, opened a new facility in India last year.

Indonesian labour laws stipulate generous payout packages. For example, employers must provide a minimum severance pay of six months' wages to terminate employees who have worked with the company for three years, and 12 months' wages to those who have worked for eight years.

 

This regulation still applies even if an employee is sacked due to unprofessional conduct such as stealing and fighting. A sacked employee is also entitled to a wide range of severance benefits.

Some companies planning to do a major downsizing to keep themselves running had instead opted for bankruptcy as they could not afford the hefty payouts as a result of laying off people. Others that went ahead with downsizing had to sustain net losses in their income statement for three to four years.

Indonesian Employers Association (Apindo) chairman Hariyadi Sukamdani described the labour laws as too favourable to employees - at a high cost to the economy.

He also said the high minimum wages in Jakarta and many other regions have added to business costs. Jakarta currently has a monthly minimum wage of 3.9 million rupiah (S$380).

The city and each of the 33 other regions are required to decide every year - based on a required formula - the amount of increment in the minimum wage in their respective regions.

"Jakarta municipal government officials and those in other places tend to act populist. They do not think objectively. And when they did act objectively and later were faced with street rallies, they easily changed their mind," Mr Hariyadi told The Straits Times.

He added that investors who are coming to Indonesia today are mostly from the capital-intensive industry, or companies that rely heavily on capital investment and employ less, although Indonesia still needs companies from the labour-intensive industry to absorb the unemployed.

Mr Fadhil Hasan, an executive of a palm oil company, agrees that the labour laws are biased towards people who have jobs, giving no protection to the unemployed. The laws, he said, should instead serve as a key policy instrument to create jobs, not to deter new jobs.

The minimum wage that is adjusted yearly should be based on an employee's productivity, he noted.

"Everyone is entitled to this guaranteed yearly increment, regardless of their individual performance. Pay increment should be conditional, depending on one's productivity."