Indonesian President Joko Widodo has taken a big gamble. A key part of the 905-page omnibus law passed last week shears the country’s labor protection wall, making it a victory for employers and investors. In response, tens of thousands of protesters took to the streets. Some have become violent. While few politicians would be bold enough to undertake labor reform with an economy plagued by a pandemic, Jokowi would have to stick to his guns. These changes are badly needed and time is running out.
The legislation reduces the high severance pay owed by employers, while some upcoming regulations could make contract workers more attractive compared to full-time staff. Union leaders and provincial political leaders have urged Jokowi, as the president is known, to repeal or relax parts of the law, which contains akitchen sink other provisions. Yet few countries in Asia, if any, have severance costs as high as Indonesia, or such complicated procedures for calculating severance pay.
Thus, even if the initiatives are not perfect, they mark a step forward. (Investors, for one, responded positively). With a young population, a growing middle class and plenty of natural resources, Indonesia is expected to be an economic star. But the growth wasstuck at about 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 is why capital needs a victory now. The aliens werepulling out of the bond market, and now hold around 27% of the country’s debt, up from 39% at the start of the year. That’s a problem, given the increased borrowing needed to fund coronavirus relief spending. Indonesia also suffers from a persistent current account deficit. The rupee, meanwhile, was Asia’s worst performing currency in the last quarter, rocked by a communications snafus that raised questions about the independence of the
Despite the reduction in some employee protections, the workforce changes are far from dismantling them entirely. The maximum indemnity borne by employers has been reduced to 19 months from 32 months. The government is likely to make up at least part of the difference with a new jobs fund created by the bill. It is not known whether it will be a mix of money or less tangible benefits, such as worker training. Also, keep in mind that few people actually received the compensation to which they were entitled under the laws in force. Only a minority gets compensation, according to the World Bank. More than half of those who receive less than the amount owed, with little recourse.
Despite all this injustice, the system was not working too well for businesses either. Indonesia still ranks low in surveys rating the ease of doing business. Shortly after being re-elected last year, Jokowi told Bloomberg editor-in-chief John Micklethwait he was eager to speak.investor complaints about restrictions on hiring and firing. He was all too aware that Indonesia had to compete for investment dollars and stressed that the country had to becomemore than a commodity giant.
Protesters are also probably worried about what is not in the bill. The key issue of contract workers will be addressed in follow-up regulations that may leak out of Jokowi’s office in the weeks and months to come. One question is the level of protection of severance pay, according to Kevin O’Rourke, author of “Weekly review of the reform», A newsletter on the politics of Jakarta. The law removes
a three-year cap on fixed-term contracts, which has been used as a workaround for employers reluctant to increase the permanent payroll.
Like Brazil, Indonesia is still the place with a lot of potential. Some studies even describe him sharing trading power later this century with China, India and the United States, an unlikely proposition unless his heavy economic machine can be rationalized. “The main problem is Indonesia’s ability to capture foreign investment that has gone to other destinations for manufacturing, particularly Vietnam,” O’Rourke wrote on Friday. “The stipulated extremely high job loss compensation levels … rarely benefited workers in practice – but they served to ward off potential investors, who viewed the regulatory landscape as treacherous.
Jokowi won the presidency thanks to his credentials as a small businessman turned populist reformer. But he let many people down along the way. Jokowi’s newcomer status meant people could project any hopes and fears they wanted onto him, as a former minister pointed out to me last year. The rulers viewed Jokowi as one of them, a man who could free commerce from hidden constraints. To the poor, he was the ordinary type not beholden to special interests.
Job changes are always more acceptable during the good times, so Jokowi has his work cut out for him. He has had labor market reform on the horizon for some time and this may be his best chance. The president is also in his second term and can no longer stand. Soon the jockey will start for the 2024 election, making dramatic policy changes even more difficult. Somewhere in those 905 pages of legislation is a clue to his legacy.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
To contact the editor responsible for this story:
Rachel Rosenthal at [email protected]
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