1. How far behind is Indonesia?
Of 33 Chinese companies that announced plans to set up or expand abroad from June to August, not one was planning to move to Indonesia, according to a presentation given to Widodo, known as Jokowi, by the World Bank in September. Twenty-three were set to move to Vietnam with the rest heading to Thailand, Cambodia, Malaysia, India, Mexico and Serbia. “Businesses are moving out of China but are not coming to Indonesia because Indonesia’s neighbors are more welcoming,” the World Bank said. Jokowi himself has complained that while a company can secure all the approvals needed to move to Vietnam in two months, in Indonesia it may take years. Foreign direct investment into Indonesia as a percentage of gross domestic product is low (and fairly stagnant) compared to its regional peers.
There’s textiles, Indonesia’s biggest exports after fossil fuels and palm oil. Local factories supply major retailers such as H&M, Walmart and J.C. Penney. Export value grew just over 5% to $13.2 billion in 2018 from $12.5 billion the year before, according to the Indonesian Textile Association. Still, Vietnam’s customs department reported $30.5 billion in textile and apparel exports in 2018, up nearly 17%.
3. What’s holding Indonesia back?
• Labor laws are rigid, with rules on hiring and firing that businesses regard as burdensome. Severance pay provisions are among the most generous in the world -- about 95 weeks for a worker with 10 years tenure -- behind only Sri Lanka and Sierra Leone, according to World Bank data. In Vietnam it’s about 43 weeks, in Thailand, 50.
• The regulatory landscape also can be a minefield. For example, some imports needed for manufacturing require a letter from the Ministry of Industry that is supposed to be issued in maximum five days, but typically takes three to six months or more.
• A history of “economic nationalism,” as illustrated by the government’s so-called Negative Investment List, which restricts foreign ownership in areas ranging from brewing to mining, telecommunications to education.
• Indonesia’s corporate tax rate of 25% is higher than regional rivals such as Vietnam and Thailand, although the government is planning a phased reduction to 20% starting in 2021.
• Indonesia’s manufacturing sector is cut off from global supply chains, according to the World Bank. Imports of components are subject to costly and time-consuming pre-shipment inspections and tariffs -- 15% for tires, 10% for cable igniters, gas engines and gear boxes, for example. That means any resulting exports aren’t competitive.
Indonesia was once counted among the “new Asian tigers” as industrialization fueled rapid economic growth. Manufacturing was strong in such sectors as food and beverage, paper and rubber. Twenty years ago exports were worth 53% of the country’s gross domestic product, ahead of Vietnam at 45% and Cambodia at 31%. But Indonesia was hard hit by the Asian financial crisis, which not only wrecked the economy but precipitated the downfall of the dictator Suharto. It has since been overtaken by both neighbors, with exports as a percentage of GDP sliding to 21% in 2018. In 2001 manufacturing contributed 29% to GDP. It has now fallen below 20%.
During his first term he rolled out new roads, airports and seaports to better connect the vast archipelago of more than 17,000 islands. The hundreds of billions of dollars being spent or planned on infrastructure aims in part to make it easier for companies to ship goods around Indonesia and overseas. He also focused on stabilizing the economy, bringing inflation down and improving government finances.
The nation-building program has started to pay dividends, with Indonesia rising to 46 on the World Bank’s 2018 Logistics Performance Index from 63rd in 2016. Indonesia also has jumped up the bank’s Ease of Doing Business Index as improvements were made in such areas as access to credit and registering property. But its 2019 ranking, No. 73, shows there’s still a long way to go.
After the World Bank presentation, the president demanded ministers work to remove the “handcuffs” on the economy. He has vowed to relax the Negative Investment List to help revive manufacturing. Seeking to satisfy both business and unions, he promised changes to the labor law would be limited to new hires, while current employees would see job protections and generous conditions preserved. The government has proposed an “omnibus law” that would scrap hundreds of rules, regulations and permits.
A need for jobs, primarily. The working-age population is growing by about 3 million people a year and has already hit 197 million, more than the combined populations of Japan and the U.K. That means the economy also needs to keep growing and creating jobs at a fast pace or it will face a growing unemployment problem, especially of young people, which can be a volatile. Indonesia already has a significant underemployment problem, with almost 30% of people with jobs working less than 35 hours a week. More than half of those working (56%) have informal jobs, such as house cleaning or on farms.
9. How much time does he have?
Given the nature of Indonesian politics, Widodo has two years at the most to make the necessary changes before jockeying begins ahead of the next presidential race in 2024. (He is limited to two terms.) With nationalist sentiment a perennial feature of Indonesian elections, measures to promote foreign investment like those Widodo has promised are likely to be put on hold. Meanwhile, the United Nations forecasts that by mid-century, for the first time ever in Indonesia, there will be more people aged over 65 than under the age of 15, meaning the working-age population will be in decline.
10. Is manufacturing the only answer?
Indonesia’s fast-growing e-commerce sector is already a major source of jobs, and Jokowi has vowed to improve the investment climate to support the digital economy. Indonesia already has five unicorns -- startups worth at least $1 billion -- including the ride-hailing and delivery app Gojek, the travel site Traveloka, e-wallet provider Ovo and online market places Bukalapak and Tokopedia. Gojek and rival Grab also connect small-and-medium enterprises to an already huge and rapidly growing consumer market. By 2022, online commerce could directly or indirectly support up to 26 million full-time-equivalent jobs, McKinsey & Co. estimates. By 2025, digital technology could raise Indonesia’s GDP by $150 billion, or an average 1.2 percentage points annually, McKinsey added.
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