[Indonesia] Economists Advise Policy Reform To Attract FDI

Economists have advised the Indonesian government that policy reforms and speeded up deregulation efforts will make it easier to do business in the country, following the administration’s difficulties attracting foreign direct investment to boost slow economic growth, The Phnom Penh Post reports.

Speaking to the Jakarta Post, Arie Kuncoro - the University of Indonesia rector and senior economist - reportedly said the government would need to develop soft infrastructure through the easing of the licence-procurement process and sped up deregulation efforts so doing business in the country will become faster and easier.

“The government needs to restructure the bureaucracy and regulations to boost efficiency and investments,” said Mr Kuncoro, also drawing attention to several ongoing issues that the government would need to work on, like 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,” Mr Kuncoro said, adding, “The setting up of a business takes days to process, this needs to be shortened.”

Indonesia’s ranking in the World Bank’s 2020 Ease of Doing Business (EODB) index remains at 73rd place- out of 190 countries - despite deregulation efforts and policy reform, bringing into doubt President Joko “Jokowi” Widodo’s target for Indonesia to place 40th next year.

According to the report, released on October 24 by the World Bank, Indonesia scored 69.6 out of a possible 100 points, gaining 1.64 points. Last year’s increase was 1.42 points, rising to 67.96.

The World Bank selected Jakarta and Surabaya in East Java for the EODB survey, citing the cities as examples of Indonesia’s reforms around paying taxes, trading across borders, starting businesses, improving electricity and enforcing contracts, these are all components of the index.

The World Bank also highlighted Indonesia’s strict employment and minimum wage regulations in the report:

“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.”

Indonesia’s economy grew 5.05 per cent in the second quarter, its slowest growth in the past two years. Investment - contributed more than 30 per cent of gross domestic product - increased only 5.01 per cent year-on-year for the same period.

Airlangga Hartarto - the new Coordinating Economic Minister - said he would hold talks with local administrations in Jakarta and Surabaya 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 Mr Airlangga.

David Sumual - Bank Central Asia chief economist - said the report revealed the relative weakness of the government’s efforts compared to those of 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,” Mr Sumual told the Jakarta Post. “Several neighbouring countries have stronger structural reforms to streamline bureaucracy [than Indonesia].”

The Indonesian government intends to issue omnibus laws in tax, job creation and small and medium enterprises, revising the intertwined regulations currently hampering investment.

Source: The Phnom Penh Post