JAKARTA — A new government directive requiring companies to hire 10 Indonesians for every expatriate is raising alarm among businesses and compounding concerns about the Joko Widodo administration’s growing protectionism.
New labour rules, announced on June 29 by the Ministry of Manpower and Transmigration, were followed three weeks later by the introduction of higher import duties on a variety of consumer goods, such as clothes, carpets, cars, alcohol, tea and coffee.
In a globalized world, Indonesia , paradoxically, is increasingly looking inward to try to spur economic growth and boost local employment. Gross domestic growth has languished at a six-year low of 4.6%, not helped by a slowing Chinese economy.
“The tightening of the rules is yet another indication of an inward-looking mood in economic policymaking in Indonesia at present,” Peter McCawley, Visiting Fellow at the Crawford School of Public Policy at Australian National University, told the Nikkei Asian Review.
The new employment requirement is part of a longstanding Indonesian government drive to boost the skill levels of local employees. With 2 million Indonesians entering the labor market every year, there is a pressing need to provide jobs. While the official unemployment rate in Indonesia of under 6% is below the OECD’s average, the real figure could be a lot higher in an economy in which cheap and casual labor is easily available.
Boston University’s Emeritus Professor Gustav Papanek, who has studied the Indonesian economy for more than five decades, said the stiff new regulations are not the best way to go about reshaping employment conditions. Furthermore, they could become a deterrent for would-be overseas investors in a country where organising paperwork for foreign employees is already a bureaucratic, often time-consuming, process.
“Indonesia needs to attract three times as much foreign direct investment as it attracts now, not discourage people,” Papanek said. “Give [domestic businesses] a tax or credit advantage, don’t set rules or prohibitions that depend on the decision of a civil servant who can delay and extract bribes.”
The creation of the new protective barrier around its local workforce has generated much worry. Philo Dellano, Managing Partner at PNB Law Firm in Jakarta, said that his office is fielding many queries from businesses confused by the government’s hiring announcement.
“It is not clear yet when it actually will be enforced, which causes some uncertainty at this moment,” Dellano said.
According to Dellano, other concerns for companies include new visa rules that make it harder for foreigners entering the country for one-off business meetings. In addition, the government has also said that a previously mooted requirement that foreigners learn Indonesian may be formally introduced later.
“A lot of companies have been asking questions,” said Narendra Adiyasa, Partner at Hiswara Bunjamin & Tandjung, a Jakarta law firm specializing in the protection of foreign investor interests.
The 10-month-old Indonesian government was elected on the mandate that it would stimulate the economy, which had been hit hard by a sharp reduction in commodities exports to China. World Bank data showed that Chinese imports from Indonesia grew on average 31.5% annually from 2005-11, but in 2012-2014, they were shrinking at an average of 7.8% per year.
“The economy is now facing declining investment, diminished job creation, and a fiscal shortfall,” wrote economists Arianto A. Patunru and Sjamsu Rahardja, in a new report Trade Protectionism in Indonesia: Bad times and bad policy, published by the Lowy Institute for International Policy.
“Relying only on protectionist policy may lead to industries that are forced to rely heavily on the domestic market… Limiting industry only to domestic growth risks missing the benefits of being part of global production chains.”
Indeed, Widodo’s government said that increasing tariffs on a range of consumer imports would help local industry, but economists pointed out that the move could instead fuel inflation at a time when the economy is weak and the rupiah at a 17-year low against the U.S. dollar.
Imported wine and spirits were slapped with taxes of 90% and 150% respectively, following a ban on the sale of alcohol in Indonesian mini-marts. More restrictions could still come after a looming parliamentary debate on a wider prohibition, raising concerns among drinks companies and on the tourist island of Bali.
“It was a surprise to us,” said Dendy Borman, board member of the International Spirit and Wine Association, referring to the tariff hike. “The impact will be to give incentive to [buy] black market alcohol.”
Tariffs on cars have also increased to 50% from 10%–40%; meat to 30% from 5% and; tea and coffee to 20% from 5%.
In addition, Widodo also wants to implement strict local content requirements for smartphones and automobiles sold in Indonesia.
All these moves contradict the spirit of the proposed Association of the Southeast Asian Nations Economic Community, which is to be implemented by the end of 2015 and should, in theory, lead to increased trade between member states.
The new tariffs are also a double-edged sword: even as they promise a boost to domestic producers competing against imported goods for the vast local market, they could also further dampen local consumer spending, which accounts for 55% of Indonesia’s GDP.
Consultancy McKinsey estimated that at the end of the 2004-2014 Susilo Bambang Yudhoyono presidency, Indonesia’s consumer class – those earning $7,500 per year at purchasing power parity rates – had grown to 45 million people on the back of 5-6% annual growth.
McKinsey reported that number could expand to more than 130 million by 2020, if growth continued. But growth has stalled and an estimated 100 million Indonesians live on less than the equivalent of $2 per day, meaning that Indonesia’s reliance on domestic consumer spending can only go so far.
“You’re raising prices and risking inflation, but you’re not encouraging exports, only producing for the domestic market, which though large, also contains tens of millions of poor people who do not have money to spend,” according to Boston University’s Papanek.
Indonesia’s focus on the domestic market at the expense of exports means that, contrary to government intentions, it is likely to miss the 7% per annum growth rates that President Widodo aspires to, Papanek said.