Political Economy of the Sapu Jagat (one-size-fits-all) Law

Speed that is too low will make a plane stall. Likewise, the economy requires a minimum speed to be able to provide added value, employment opportunities and foreign exchange.

KOMPAS/PRIYOMBODO

Construction workers finish a concrete pillar on 14 Dec. 2019 at the site of the Light Rail Transit (LRT) Jabodebek project on Jl. H.R. Rasuna Said in South Jakarta. According to the World Bank Quarterly Report, Indonesia’s economic growth is estimated to reach 5 percent in 2019 and 5.1 percent in 2020.

Economic growth data shows that over the past five years, Indonesia has entered a cruising speed of 5 percent per year. This amount is enough to place Indonesia in second position among the G-20 countries. This growth is in accordance with the Philip curve concept, namely a balance between growth and inflation to maintain purchasing power.

Nevertheless, there are still aspirations for Indonesia to grow faster to get out of the trap of middle-income countries. A rough calculation shows that to grow in the range of 5.3-5.5 percent, investment growth of 8-9 percent is needed. Meanwhile, for growth higher than that, investment growth above 10 percent (double digit) is needed.

Also read : 2019 Economic Growth

Getting out of the trap of middle-income countries

The question is why investment growth in the 2015-2019 period has never been more than 7.94 percent per year. The answer is on the indicator of Indonesia\'s competitiveness (Global Competitiveness Report 2019) issued by the World Economic Forum. The report notes that Indonesia\'s competitiveness rating has declined from 45th position to 50th. The rating remains higher than the Philippines (64), Vietnam (67), India (68), and Laos (113), but below Malaysia (27) and Thailand (40).

The cause is the decline or at least stagnation of several important indicators. The complicated licensing procedures are reflected from the time to start a business that is ranked 103rd. The cost to start a business is ranked 67th. The health indicator ranks 96th out of 141 countries mainly because Indonesia\'s life expectancy ranks 95th.

The fundamental weakness about the ability of innovation makes Indonesia occupy the 74th position.

The level of the workforce education, which is still mostly at the elementary school level, has resulted in Indonesia being ranked 92nd for the length of school years. The good news is that the skills of the workforce are still ranked 36th even though the scores tend to decrease due to the low digital capabilities. The labor market gets a low rating because it is so rigid that it only ranks 119th.

The fundamental weakness about the ability of innovation makes Indonesia occupy the 74th position. The research and development or R&D is ranked 83rd.

ANTARA FOTO/HAFIDZ MUBARAK A

Workers load cement onto a ship at Sunda Kelapa Harbor, Jakarta, Friday (14/2/2020). The government will conduct detailed dissemination of information to people related to the job creation bill, which aims to create jobs so that it can support the country\'s economy.

Factors that make Indonesia remain a promising economy are inflation which ranks 1st for macro stability. Another factor that is difficult to be matched by other countries is the 7th rank of the domestic market.

The improving transportation infrastructure boosts Indonesia\'s position so that it is ranked 28th. However, other infrastructures are not too encouraging, for example, electricity, gas, drinking water, and sanitation which is ranked 103rd with a score of 87.5 for access to electricity and 85.6 for electricity quality.

The above description makes Indonesia quite prospective, but when viewed from the investment composition, the prominent type is the short-term portfolio capital. But for investors who want to make long-term commitments, such as setting up factories, are still hampered by the many obstacles in the field. These barriers ranging from overlapping licensing regulations up to the perceived labor market are not too flexible.

The improving transportation infrastructure boosts Indonesia\'s position so that it is ranked 28th.

This portfolio capital flow indeed increases economic liquidity so that it can increase growth through public consumption with wealth effects. However, very few of the wealth effects are transformed into production capacity. Only investment has an effect on increasing aggregate demand and production capacity at the same time.

If there are no extraordinary conditions that cause a reversal of capital flows, the demand side of the Indonesian economy is liquid enough to make it grow by an average of 5 percent by utilizing macro stability and the size of the domestic market. However, the existing domestic production capacity is not enough to make the economy grow higher than 5.3 percent without making the economy to be overheating in the form of soaring inflation and a swelling current account deficit that may exceed 4 percent of domestic product gross (GDP).

Indonesia\'s probability to grow significantly above 5 percent in the coming years using the business as usual recipes that have been running so far seems not too promising (Resosudarmo and Abdurohman [2018]). External shocks, such as the trade war and the coronavirus, can bring Indonesia to a lower equilibrium of growth that is not enough to create employment opportunities. The coronavirus outbreak is expected to reduce China\'s economic growth from 6 percent to 3.5 percent.

CENTERS FOR DISEASE CONTROL AND PREVENTION VIA AP

This illustration provided by the Centers for Disease Control and Prevention in January 2020 shows the 2019 Novel Coronavirus (2019-nCoV). This virus was identified as the cause of an outbreak of respiratory illness first detected in Wuhan, China.

Time-series data shows that for every 1 percent of the decline in the Chinese economy, it will also reduce Indonesia\'s economic growth by 0.2 percent. It means that Indonesia\'s economic growth will be eroded from 5 percent as it is now to 4.5 percent. This is a magnitude that has never been experienced by Indonesia in the last five years.

To increase growth, scale of economic deregulation is needed, such as in the mid 1980s. At that time Indonesia had to free itself from dependence on oil exports and wanted to develop sectors outside of oil as the basis for creating added value, employment opportunities, and foreign exchange earners (Kuncoro and Resosudarmo [2006]). After deregulation, economic growth surged from 2.53 percent in 1985 to 7.24 percent in 1990. As a result, the average growth between 1987 and 1993 reached 6.4 percent per year.

Economic reconfiguration

After 35 years, the effects of economic deregulation will fade with technological development, changes in economic structure, demographics, and community behavior. Moreover, there is also a state capture at the national and regional levels through excessive regulation which then burdens the economy.

Inhibiting bureaucracy and regulations

Krueger (1974) and Sheleifer (1993) explain that bureaucracy and regulations are made to improve welfare. However, in practice, because the bureaucracy holds a monopoly on making rules, regulations can be customized, rules are complicated or the process is made longer for seeking rents, not conducting supervision. With the absence of clarity when permits can be obtained, there are those who are willing to pay fees to bypass the bureaucracy (Kuncoro, 2004).

Experience from a number of countries shows that the high cost of entry into politics also explains why regulations at the national and regional levels are customized (Sheleifer and Vishny [1994] and Henderson and Kuncoro [2011]). Indirectly, Burgess et al (2012) confirms this by the increasing rate of deforestation and the increasing number of new regional political jurisdictions (regency and city level or Dati II) after 2000.

The scale of economic deregulation, such as in the mid 1980s, seems to be repeated with the sapu jagat (one-size-fits-all) approach or Omnibus Law. This is trying to increase the capacity of the economy so that the country gets out of steady state growth of 5 percent per year. From its name alone, the sapu jagat law is a sweeping reform, including licensing, local governments, environmental impact analysis (Amdal), up to the labor market.

KOMPAS/TOTOK WIJAYANTO

Labor activists hold banners ahead of a protest on Wednesday (12/2/2020) at the House of Representatives in Senayan, Jakarta. The protesters objected to the omnibus bill on job creation, which they claimed would sacrifice workers’ welfare for the sake of investment. They say that the bill threatens workers’ rights and welfare by excluding detailed provisions on minimum wage and the hourly wage system, eliminating severance pay, reducing work hours and altering the labor system.

In the new bill, only businesses that have important impacts on the socio-economic and cultural environment require Amdal. The criteria included in the analysis are impacts on land changes from their original natural conditions, exploitation of natural resources, socio-economics, conservation and cultural preservation, security risks, and the life of flora and fauna.

More detailed regulations will be made in government regulations. This bill eliminates half of Law No. 28 of 2002 concerning construction of buildings, or approximately 28 articles. Administrative requirements, such as building permits (IMB), building ownership status, land rights permits, building design permits, and building uses, are removed. Simple buildings, for example, will be exempt from these requirements so that the effect is also good for small, micro and medium enterprises (MSMEs), which incidentally are in the informal sector, will be quite large.

The most frequently debated are those related to employment because formal sector workers are stakeholders. In the new bill, the calculation of severance pay related to basic rights and length of work (UPMK) is maintained, while others are simplified or eliminated. Labor intensive industries are not required to pay regional minimum wages (UMR) and the governors have the authority to make their own remuneration formula for their regions.

The MSME sector is not required to pay regional minimum wages (UMR), but workers must be above the poverty line. The purpose of the draft labor law is to eliminate segmentation between the formal and informal sectors in the labor market so that it becomes an important part of national purchasing power flows.

KOMPAS/WAWAN H PRABOWO

Customers wait their turn to receive an explanation about the online single submission (OSS) service at the One-Stop Integrated Service (PTSP) outlet of the Investment Coordinating Board (BKPM) in Jakarta, Monday (14/1/2019).

Maintaining consumption-investment balance

With weakening exports, what must be maintained are the two main components of aggregate demand, namely consumption and investment. The average year-on-year (yoy) quarterly investment growth between 2015 and 2019, which reached 5.31 percent, is not enough to accumulate production capacity to grow above 5.2 percent. The sapu jagat law aims to boost investment by simplifying cross-sectoral business licensing in maritime and fisheries, agriculture, forestry, energy and natural resources, infrastructure, manufacturing, and trade so that investment grows 9 percent or more.

What should not be forgotten, this bill also influences public consumption through household income expectations of formal sector workers in the future. Public consumption has a share of around 54 percent of GDP that has played a role in maintaining 5 percent growth so far. Political communication must still be made to formal sector workers to ensure that the new bill will not reduce or even increase household income with new employment opportunities that will be created by joining the informal sector that has thus far been outside into the main purchasing power as a source of new growth.

To increase future income, the engine of growth must be strengthened first. Investment for the 2016-2019 period takes 32.6 percent of GDP, smaller than public consumption, but the difference in investment plays a role in creating production capacity for household income in the future.

As has been emphasized in the mass media, space for improvement remains open, there is still enough time for the community and stakeholders to provide input before the bill is passed into law.

Ari Kuncoro, Rector of the University of Indonesia