Indonesian President Joko Widodo said he’ll introduce sweeping changes to labor rules by the end of the year and open up more sectors of the economy to foreign investment, delivering on some of the major reforms investors have been demanding.
Jokowi, as the president is known, said planned changes to the labor law will now only apply to new employees, proposals he’ll discuss with labor unions before taking them to parliament. By restricting the rules to new jobs only, Jokowi can attract businesses wanting to set up shop in Indonesia or looking to expand, while defusing opposition from labor groups.
Speaking from his home town of Solo in Central Java, Jokowi told Bloomberg’s Editor-in-Chief John Micklethwait that it’s his “first priority” to reform the labor rules. Businesses have long complained that generous severance packages, a complex minimum wage system and restrictions on hiring and firing workers make it difficult for them to expand operations.
“Every year there are 3 million new workers in the job market,” Jokowi said. “They must be given room to enter the job market. Second, we want to address investors’ complaints. We have to revise the law and we hope that more investment will create competition among companies to get better workers.”
Indonesia is trying to make up lost ground against regional peers vying for a slice of the business that’s relocating out of China amid that nation’s escalating trade war with the U.S. So far, smaller rivals like Vietnam are outperforming Indonesia, spurring Jokowi to enact economic reforms that investors have long been pushing authorities to make.
While touring a PT Pan Brothers’s garment factory earlier on Wednesday, the president said he’ll seek to make changes to the law “by the end of this year” at the latest. Job conditions and workers’ rights for those in existing jobs would be protected, he said.
What Bloomberg’s Economists Say
“President Joko Widodo’s continuation of reforms during his second term -- depending on implementation -- could increase potential growth by 1-2 percentage points over the next decade. That’s significant for an economy that expanded 5.2% in 2018.”
Relative to the size of its economy and population, Indonesia attracts little foreign direct investment. In a recent World Bank document presented to Jokowi, none of the 33 Chinese companies that announced plans to set up or expand production abroad between June and August chose Indonesia. They preferred locations such as Vietnam and Cambodia.
“We compete against other countries in attracting investment, to create jobs,” Jokowi said. The two main complaints he hears from investors are regarding employment in labor-intensive industries and licensing rules, he said. “We will work on these two as soon as possible.”
Ben Bland, director of the Southeast Asia project at the Lowy Institute, a policy thinktank in Sydney, said it remains to be seen whether Jokowi has the political capital to push ahead with the reforms outlined, particularly around changes to the labor market, or if he backs down in the face of resistance from trade unions and others. “When confronted with opposition, Jokowi is a guy who normally likes to go for consensus, not confrontation,” Bland said in an interview with Bloomberg Television.
The president said he’ll retain Sri Mulyani Indrawati, currently finance minister, in his cabinet, though he declined to say what role she’ll take. A former World Bank managing director, Indrawati has been spearheading efforts to boost tax revenue and keep the budget deficit under control.
Jokowi is keen to shore up the economy as global risks rise and the trade war wreaks havoc in the region. Growth has been stuck around 5% for most of his first term. The government has twice already revised its growth projections for this year lower, seeing expansion of 5.08% now, compared with an initial 5.3%. The economy is projected to grow 5.3% next year.