Indonesia’s President Joko Widodo has taken a big gamble. A key component of the 905-page omnibus law passed last week chisels away at the country’s wall of labor protections, making it a win for employers and investors. In response, tens of thousands of protesters have taken to the streets. Some have turned violent. While few politicians would be bold enough to take on labor reform with the economy buckling beneath a pandemic, Jokowi should stick to his guns. These changes are sorely needed and he is running out of time.
The legislation reduces the steep severance pay owed by employers, while some forthcoming regulations could make contract workers more attractive relative to full-time staff. Union leaders and provincial political chiefs have urged Jokowi, as the president is known, to rescind or soften parts of the law, which contains a kitchen sink of other provisions. Yet few, if any, countries in Asia have firing costs as high as Indonesia, or such complicated procedures to calculate severance. So while the initiatives aren’t perfect, they do mark a step forward. (Investors, for one, responded positively). With a young population, a growing middle class and plenty of natural resources, Indonesia ought to be an economic star. But growth was stuck at around 5% before the pandemic. Now, thanks to COVID-19, gross domestic product will likely contract this year for the first time since the Asian financial crisis.
That’s why capital needs a win right now. Foreigners have been retreating from the bond market, and now hold about 27% of the country’s debt, down from as high as 39% at the start of the year. That’s a problem, given the increase in borrowing required to fund coronavirus-relief spending. Indonesia also suffers from a persistent current-account deficit. The rupiah, meanwhile, was Asia’s worst performing currency last quarter, buffeted by communications snafus that raised questions about the independence of the central bank and how long it will have to monetize the budget.
Despite chipping away at some employee protections, the labor changes fall well short of dismantling them entirely. The maximum severance borne by bosses has been reduced to 19 months from 32 months. The government is likely to make up at least some of the difference from a new jobs fund created by the bill. It’s unclear whether this will be a mix of cash or less tangible benefits, such as worker training. Keep in mind, too, that few people actually received the severance they were entitled to under existing laws. Only a minority get any compensation at all, according to the World Bank. More than half of those who do receive less than the amount owed, with little recourse.
For all that injustice, the system wasn’t working too well for companies, either. Indonesia consistently ranks poorly in surveys assessing the ease of doing business. Soon after winning re-election last year, Jokowi told Bloomberg Editor-in-Chief John Micklethwait that he was eager to address investor complaints about restrictions on hiring and firing. He was only too aware that Indonesia must compete for investment dollars and emphasized the country had to become more than a raw-material giant. Protesters are probably also worried about what’s not in the bill.
The key issue of contract workers will be addressed in follow-up regulations likely to dribble out of Jokowi’s office over coming weeks and months. One question is the level of severance protection, according to Kevin O’Rourke, author of “Reformasi Weekly Review,” a Jakarta policy newsletter. The law removes a three-year cap on fixed contracts, which have been used as a workaround for employers reluctant to boost permanent payroll. Like Brazil, Indonesia is perennially the place with lots of potential. Some studies even depict it sharing commercial power later this century with China, India and the U.S., an unlikely proposition unless its cumbersome economic machinery can be streamlined. “At issue, primarily, is the ability of Indonesia to capture inward investment that has been flowing instead to other destinations for manufacturing, especially Vietnam,” O’Rourke wrote Friday. “The exceedingly high job-loss compensation levels stipulated … rarely benefited workers in practice — but they did serve to ward off potential investors, who regarded the regulatory landscape as treacherous.”
Jokowi won the presidency on his credentials as a small businessman-turned-populist reformer. But he has let down many people along the way. Jokowi’s newcomer status meant people could project whatever hopes and fears they wanted onto him, as a former minister observed to me last year. Executives saw Jokowi as one of them, a man who could free commerce from hidebound constraints. For the poor, he was the regular guy not beholden to special interests. Labor changes are always more palatable during good times, so Jokowi has his work cut out. He has had job-market reform in his sights for a while and this might be his best shot. The president is also in his second term and can’t run again. Soon jockeying will start for the 2024 elections, making dramatic shifts in policy harder still. Somewhere in those 905 pages of legislation is a hint of his legacy.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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