Why regulatory obesity is a menace to Indonesia's economic health

It is lagging badly behind Asean rivals in the competition for foreign direct investment. Things could get rougher in post-Covid-19 world.

Given what is happening in the world, this doesn't seem to be a natural time for talking about how Indonesia can attract more foreign investment.

Covid-19 is battering the country, causing unemployment and poverty to spike while spawning worries of social unrest. The economy could well contract for the first time since tumultuous 1998, when Suharto was forced out as president after 32 years following deadly riots in Jakarta.

President Joko Widodo has had better years. The Indonesian leader, popularly known as Jokowi, has caught flak for the government's slow initial response to Covid-19, which is causing Indonesia considerable damage.

One side effect of the pandemic is that there can't be any spending this year - and probably for quite some time - on Mr Joko's ambitious plan to move the capital to Kalimantan on the island of Borneo. And a key Bill intended to improve the investment climate isn't going to be approved by Parliament any time soon, even though a large majority of members are from parties backing him.

While the subject won't be on Mr Joko's agenda soon, it is important that Indonesia work to bring in more foreign direct investment (FDI) than it has been getting, to create badly needed jobs and raise skills. There's often talk about a "demographic dividend" for Indonesia, as many of its 270 million people (it has the world's fourth-largest population) are young, but a lot of them don't have the skills required for a rapidly changing world of work.

Even before the virus invaded, Indonesia was struggling to increase FDI. That's one reason domestic economic growth in Mr Joko's first term was stuck at 5 per cent instead of reaching his target of 7 per cent. In January to March, according to government statistics that exclude oil and banking, Indonesia received 7 per cent less FDI than in 2019's last quarter. With the pandemic and partial lockdowns, the numbers are bound to be bad for the rest of this year.

But some people are hopeful of a silver lining in the pandemic's dark clouds, and a chance that more FDI will later come into Indonesia. One of them is Mr Fauzi Ichsan, an independent economist who has worked in both the private and public sectors.

"You can't waste a crisis," he says, noting that the 1997-98 Asian financial crisis produced significant reforms in Indonesia - and he thinks Covid-19 can too. The current crisis is "likely to create fresh impetus for future deregulation and liberalisation of the economy, particularly to attract private investment", Mr Fauzi maintains.

One hindrance to FDI is the government's "negative list" of sectors that are closed or have ceilings for foreign ownership. The list, around since the Suharto era, was significantly pared in 2016, but there remains a ban on telecommunication towers and caps on ownership in businesses including distribution, insurance, hospitals and some health services.

Other factors discouraging investment include red tape, corruption, a weak court system and a general coolness to foreign capital. In Suharto's time, when foreign capital poured into some sectors, there were already frustrations about the same issues. Some foreign executives joked that Indonesia was "a country that has great potential - and always will".

One hurdle - Indonesia's mountain of government regulations - was the focus at a recent webinar titled Attracting Foreign Direct Investment In The Post-Covid World.

"Cumbersome, opaque and constantly changing" was how a foreign banker in the webinar, hosted by the independent Centre for Indonesian Policy Studies, described Indonesian regulations. He noted that rules from different ministries sometimes conflicted with one another.

Mr Andree Surianta, a researcher at the centre, displayed statistics from the Ministry of Justice and Human Rights (peraturan.go.id) showing that since 1997, more than 15,000 ministerial regulations have been issued. About 14,000 of those have come in the past decade, an explosion that a 2011 law on ministries and agencies initiating their own regulations helped fuel. And decentralisation moves in post-Suharto Indonesia, which gave some powers to provinces and districts, have pumped up regional regulations; nearly 13,000 of these have been issued since 2005.

Mr Joko has been trying to do something about what he last year labelled "regulatory obesity". But he doesn't have anywhere near the power Suharto had in a different, pre-democracy time. The number of ministerial regulations has been declining; last year there were 1,240, compared with 1,703 in 2015, the first full year Mr Joko was in office.

He is also fully aware of how his country has been losing out to Vietnam for investment. Last year, the World Bank told him that of the 33 companies leaving China because of the trade war with the United States, 23 went to Vietnam, while others chose Malaysia, Thailand and Cambodia.

"Nobody came to Indonesia. Underline this. We have a problem," Mr Joko lamented to the media, adding that it could take two months to process a new investment in Vietnam, compared with years in Indonesia. Alluding to the coolness to FDI among some nationalistic citizens, the President said "no one should be allergic to investment" as it was essential to create jobs.

Making Indonesia more attractive to investors - domestic and foreign - was behind the drafting of an "omnibus" law submitted to Parliament this year. The title is short - Creating Jobs - while the submitted Bill ran to 1,028 pages, covering 11 "clusters" dealing with different topics. The Bill proposes to revoke articles in 283 existing laws.

Most public attention to the Bill has been on the labour cluster, which would allow companies to cut the amount of severance they must pay, which is now 32 months. In effect, the Bill reverses rules put in a 2003 law that increased rights for workers. Both foreign and domestic investors cite the onerous severance as a reason not to expand operations or employ more staff.

Labour unions, suppressed during the Suharto era and active again now, protested against the omnibus Bill. The protests, at a time when workers were losing jobs amid Covid-19, prompted a detaching of the labour part from the rest of the massive Bill, and it has been put aside for review. It's not clear when Parliament will debate the Bill's remaining parts, which cover environmental standards and other topics. Parliament is in recess till July, and with the battle against the pandemic far from over, it's unlikely to be any time soon.

The foreign banker at the webinar expressed the view that if the omnibus Bill is approved and there are other improvements in regulation, Indonesia "could be in a really good position to ramp up growth in the next three to five years".

The view is shared by the majority in the webinar. The 58 participants were polled on whether Indonesia was in a good position to compete with other Asean countries in attracting FDI. Surprisingly, 19 per cent said "definitely" while 59 per cent said "we're getting there".

But relative to Vietnam, Indonesia hasn't got there, and it's important that the country eventually does. Post-Covid-19, competition for FDI will intensify while there might be less of it to go around, says HSBC's chief Asean economist Joseph Incalcaterra. In this situation, he asserts, it is "more important than ever to see an acceleration in reform" in Indonesia.

• Richard Borsuk was the Wall Street Journal's Indonesia correspondent from 1987 to 1998. He is co-author, with Nancy Chng, of Liem Sioe Liong's Salim Group: The Business Pillar Of Suharto's Indonesia and is, at present, with business consultancy Researching Southeast Asia.

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A version of this article appeared in the print edition of The Straits Times on May 29, 2020, with the headline Why regulatory obesity is a menace to Indonesia's economic health. Subscribe