Written by Radi Akbar
The coronavirus pandemic has not just affected the daily lives of many people but has significantly changed the global economy. Due to the virus, the world is experiencing a global recession where many countries have high unemployment rates due to protocols to reduce the spreading of the virus. Although all countries are experiencing recessions, the most impacted are developing countries where most of their exports come from industries where in-person labor is required. To counteract the effects of the recession, many governments have engaged in stimulus fiscal policy, but Indonesia has a different plan.
The problem with Indonesia is that it cannot inject new money into the economy through their central bank primarily because of inflation and the potential depreciation of their currency, the rupiah (CNBC, 2019). Instead, the Indonesian government uses foreign loans to finance projects by the government, but that has its limits too (The Jakarta Post, 2020). Left with few options, the Indonesian government has decided to pass the controversial ‘Omnibus Law on Job Creation’ or ‘Omnibus Law Cipta Kerja’.
The law, which was passed on October 3rd, incited protests from labor groups and environmental activists, citing that the law ignores the well-being of both the environment and the workers. Although the law consists of 900 pages, the major changes to Indonesia’s economy are summed up in one word; deregulation.
Environment
One of the major changes that the Omnibus Law introduced is the deregulation of the environment. Before the law was passed, businesses that involved interactions with the local environment needed to submit a piece of document called the AMDAL, which analyzes the impact the business might have on the local environment. AMDAL takes into account the regional flora, fauna and the local culture. Now, only businesses with consequential effects to the environment need to submit an AMDAL and environmental experts aren’t required to be part of the analysis process.
The changes made were meant to allow more factories that will help foster growth and put less restraint on those developing or starting a business. However, the absence of AMDAL has obvious negative effects on the environment, primarily because of the lack of protection from the authorities. Indonesia is infamously a source of pollution in the South East Asian region. In 2019, the country burned 857,756 hectares of forest in the Kalimantan and Sumatra region, where neighboring Singapore and Malaysia are affected by the subsequent haze (Reuters, 2019). In 2019, Jakarta is ranked as 5th most polluted cities in the world (IQAir, 2019). The newly passed law would increase the number of lands repurposed for farms, plantations, factories, and housing, which would require even more forest burnings.
Labor
Another aspect of the Indonesian economy changed by the Omnibus Law is labor. First, employers must no longer adhere to regional minimum wage rates, instead, they follow the calculations made by the respective provincial governors, but this law does not apply to micro-businesses which only need to pay above the poverty line. Second, employees will only receive severance payment and payment in recognition of the length of service when they are laid off from work. Third, foreign workers will no longer require a permit to work. Finally, workers can no longer file a lawsuit against their employers to challenge the reasons for their lay-off.
The intent of these reforms was to deregulate the market for unskilled labor and make it more competitive by introducing a new supply of foreign workers. Classical macroeconomics dictates that when costs are reduced, it increases the investment part of the GDP, thus growing it. The desired effect would be the creation of more businesses in the country due to the minimized cost from cheaper labor. This is more important considering the strain that families face during the pandemic and the lack of support from the social security system that requires a paid premium. The obvious effect of these changes is its contribution to political instability, inciting a riot in the capital city recently which can discourage potential investors because of the prospects of another reformation like in 1998.
Investment
One novel thing to come from the law is the deregulation of foreign investment through the introduction of a sovereign wealth fund. Previously, the government needed to finance most of their projects through foreign loans since injecting new money into the economy would increase inflation and depreciate the Rupiah against the dollar. The introduction of foreign investment can significantly help the government in their projects by injecting new capital. However, Indonesia is notorious for its corruption and many political figures were charged for embezzlement of government funds (Bangkok Post, 2020). The worry of many citizens is that the new Sovereign Wealth Fund could end up like the 1MDB in neighboring Malaysia, where $700 million were embezzled by the country’s Prime Minister (New York Times, 2020). Although the government would still be held liable to its investors to make returns, the government can invest in financial instruments that would make the same return instead of financing government projects.
Increasing the investment part of the GDP by incentivizing businesses to operate and invest in Indonesian soil. However, economists need to be skeptical for unforeseen effects since laws don’t take place within a vacuum. The deregulation of the environment might increase the GDP in the short-run, but will inevitably harm the population of having a safe environment. Pollution can increase the chances of workers contracting respiratory disease costing more to the economy than just simply preserving the forest. The same goes for the deregulation of labor, where the introduction to foreign labor and minimum wages could grow the wealth gap between working class indonesians and their high middle class counterparts. Although the prospects of a Sovereign Wealth Fund seem optimistic and could help the country’s credit constraint, the lack of transparency and history of political corruption can drive away that capital from being used to invest in the development of the country.
Sources
- Samboh, Esther. “Guide to Omnibus Bill on Job Creation: 1,028 Pages in 10 Minutes.” The Jakarta Post, The Jakarta Post, 24 Feb. 2020, 10:07 AM, www.thejakartapost.com/news/2020/02/21/guide-to-omnibus-bill-on-job-creation-1028-pages-in-8-minutes.html.
- Staff, Reuters. “Area Burned in 2019 Forest Fires in Indonesia Exceeds 2018 – Official.” Reuters, Thomson Reuters, 21 Oct. 2019, 5:16 AM, www.reuters.com/article/us-southeast-asia-haze/area-burned-in-2019-forest-fires-in-indonesia-exceeds-2018-official-idUSKBN1X00VU.
- Lee, Yen Nee. “Indonesia Has a ‘Surprising’ Way to Fund a Larger Government Deficit – but Its Currency Suffers.” CNBC, CNBC, 21 Aug. 2020, 9:01 PM , www.cnbc.com/2020/08/21/indonesian-rupiah-weakens-as-central-bank-partly-funds-government-budget.html.
- Akhlas, Adrian Wail. “Indonesia Foreign Debt Rises as Govt Borrows from Multilateral Organizations.” The Jakarta Post, The Jakarta Post, 16 Oct. 2020, 08:34 AM, www.thejakartapost.com/news/2020/10/15/ri-foreign-debt-rises-as-govt-borrows-from-multilateral-organizations.html.
- Syeubakar, Abdurrahman. “Corruption in Jokowi’s Indonesia.” Https://Www.bangkokpost.com, Bangkok Post, 4 Sept. 2020, 4:00 AM, www.bangkokpost.com/opinion/opinion/1979635/corruption-in-jokowis-indonesia.
- Goldstein, Matthew. “Goldman Sachs Is Said to Admit Mistakes in 1MDB Scandal.” The New York Times, The New York Times, 20 Oct. 2020, www.nytimes.com/2020/10/20/business/goldman-sachs-1mdb-malaysia.html.