New Investment and Labor Law Attracts Investors
A policy of economic opening should turn Indonesia into an industrial location. The planned free trade agreement with the EU is still being negotiated. (A GTAI article translated by EKONID)
Indonesia has seen enormous increases in prosperity over the past two decades. The World Bank even included the archipelago in the category of upper-middle income economies on July 1, 2020. The per capita gross domestic product (GDP) is now around 4,000 US dollars. The COVID-19 pandemic is throwing the country back behind what it has achieved, but only temporarily.
After all, the archipelago has come through the crisis much better than any other member of ASEAN, with the exception of Vietnam, and many industries are on the up again. However, this is more due to country being less involved in the global economy than its neighbors. The ambitions are nevertheless great: According to official plans, the island state is to become an industrial country by 2045. But the path will take a considerable amount of time. In the short and medium term, even the level of industrial development in Malaysia and Thailand is unlikely to be achievable.
Structurally, Indonesia is largely an emerging country at a low level: The economy lives to a large extent from the export of fossil fuels, such as coal and gas; mineral raw materials such as copper and nickel; and agricultural goods such as palm oil and rubber. The industrial base, on the other hand, is small and is mainly limited to inexpensive contract manufacturing. The share of industry in economic output has fallen from 30 percent at the beginning of the millennium to below 20 percent. Many companies are dependent on the import of intermediate products, but at the same time are hardly integrated into international supply chains.
The greatest obstacle to further development is the low level of education and training. In international educational studies, the Indonesian youngsters always come up short. That is why the country is ill-equipped for a digital revolution. It is true that the government has launched a strategy called "Making Indonesia 4.0". But the digital infrastructure is underdeveloped and there are too few specialists who use or could operate the corresponding technologies.
Legal reform promises improvement
The domestic industry cannot develop dynamically enough on its own; it is dependent on foreign know-how. But investors are holding back. According to the World Bank, foreign direct investment in relation to economic output in Indonesia is far behind that in Vietnam, Malaysia and the Philippines. The reason for this has so far been the anti-investment legislation. For investors, Indonesia is by far the most difficult of the large ASEAN countries. Nevertheless, there has also been progress: Since President Joko Widodo took office, the archipelago has improved from 128th to 73rd in the World Bank's Doing Business Index.
This path is to be taken further: At the beginning of 2021 Jakarta reformed its investment law and labor law - as part of the so-called Omnibus Law on Job Creation law, the most important reform project for decades. Hundreds of economic sectors have been opened to foreign ownership, approval procedures have been simplified and the labor market has been significantly liberalized through lower severance payments and easier dismissals. It remains to be seen whether the reform will actually turn the island nation into an investment magnet.
Economic ties with China are becoming ever closer
The country has a high need for technology imports due to the lack of its own production. But the market is becoming more difficult for most supplier countries. The reason: China is securing an ever larger share of Indonesia's total imports. While this was 6 percent at the turn of the millennium and 15 percent in 2010, it will have skyrocketed to 28 percent by 2020. Chinese companies are leading suppliers in all major technology fields beyond the automotive industry - mostly by a large margin. For example, a remarkable 38 percent of all Indonesian imported machines came from the People's Republic in 2019. The RCEP free trade agreement agreed in November 2020 can further facilitate market access for China in the medium term.
The free trade agreement currently being negotiated between Indonesia and the EU could give the German export industry a boost. But no quick agreement is in sight at the moment. Negotiations were resumed in February 2021 after an eight-month break. According to observers, issues of contention are the issue of sustainability and the role of state-owned companies. Indonesia therefore prefers a less far-reaching agreement. The next round of negotiations is planned for July 2021.