Indonesia’s incoming team of economic ministers faces a clear, if daunting, task: increase Indonesia’s economic competitiveness in terms of enhanced domestic productivity and as a destination for foreign investment.
The incoming administration must accept that while Indonesia is Southeast Asia’s largest country, the government cannot rest on the laurels of our macroeconomic fundamentals. Policymakers will need to take concrete actions and be prepared to invest significant political capital to attract and pour more and better-quality capital into the manufacturing, natural resources and agriculture sectors, if Indonesia is to move onto a higher, more sustainable growth path and provide employment to a rapidly growing workforce.
Japanese investment bank Nomura surveyed over 50 companies that had relocated their production facilities from the onset of the US-China trade war in April 2018 to August 2019, and found that 26 companies moved their factories to Vietnam, eight to Thailand and only two to Indonesia. The World Bank recently reported that 23 out of 33 surveyed companies relocating from China planned to establish new production sites in Vietnam.
Given its huge economy and labor force, Indonesia should be getting the lion’s share of investment moving out of China. But it isn’t. The new administration should acknowledge that Indonesia can learn from its regional neighbors, starting with its mindset toward foreign investment. Too many officials treat foreign investors with a “they need us more than we need them” attitude or assume that companies cannot afford to overlook Indonesia because of its market size. This mentality must change.
A comparison of economic policies across Southeast Asia will enable regulations that better position Indonesia vis-à-vis other markets. Indonesia can learn from best practices and take advantage of areas that other countries may have overlooked.
Just last month, the Thai Board of Investment approved the “Thailand Plus” incentive package, designed to attract companies relocating their operations from China. This includes a sizeable 50 percent reduction in corporate income tax for 5 years for large-scale investments that are submitted for approval by the fourth quarter of 2021. Interestingly, the Thai government noted candidly that the package was an attempt to best Vietnam, confirming that other ASEAN countries do not see Indonesia as their biggest competition.
The package also introduces incentives for companies to establish education programs in science, technology, engineering and mathematics, or vocational training institutions approved by Thailand’s Ministry of Higher Education, Science, Research and Innovation. Companies will be eligible for a 5-year corporate tax exemption for 100 percent of the investment cost of the training institution.
Indonesia also launched tax incentives to improve human resource capacity through Finance Ministry Regulation No. 128/2019, but at a considerably smaller scale than Thailand. Companies in Indonesia are eligible for gross income tax deductions of up to 200 percent of capacity-building investments that provide internships, learning sessions and training activities – activities that might be nice to have, but have less potential for long-term upskilling than vocational training institutions.
In benchmarking the investment competitiveness of other countries, Indonesia should not only assess quantitative incentives but also the attached conditions. A critical consideration for potential investors is the guaranteed duration of the investment incentive. This is a strength of Vietnam, which offers a preferential corporate income tax of 10 percent for 15 years in target sectors, including high technology, environmental protection, scientific research, infrastructural development, software production and renewable energy.
What also resonates well with investors is the clear use of grandfathering clauses that would protect investments against any future changes in policy. In recent years, Indonesia has frequently damaged its reputation in the global business community by changing the rules of the game after investments have been made.
One high-impact change that is easy to implement: improved communication with investors. The next team of economic ministers should explicitly highlight Indonesia’s recommitment to cutting red tape and to regulatory reform, private-sector-led development and attracting more foreign direct investment. This should be communicated internationally as well as domestically to persuade local audiences on the benefits of deeper integration with the global economy for Indonesia.
The government must also cut back on conflicting messages from ministers, which reinforces concerns about policy instability. A prime example occurred earlier this month, when President Joko “Jokowi” Widodo spoke about revising the 2003 Labor Law to reduce disincentives for the formal sector.
Yet, senior officials from the Manpower Ministry contradicted the President almost immediately, stating that there were no plans to revise the law. Such mixed signals undermine confidence in Indonesia’s policy framework, feed the perception that the government lacks coordination and consistency and deter new investment.
A vibrant public-private dialogue within the policymaking process is neither an erosion of sovereignty nor a loss of face for regulators. It is a win-win opportunity for both government and businesses. Last month, I met with senior officials at Vietnam’s Ministry of Information and Communication. The ministry wants more international technology companies to invest in Vietnam, partner with local companies, employ and train local workers, and manufacture domestically, thereby empowering the national tech and innovation sector. It is a vision not unlike Indonesia’s own Industry 4.0 and digital economy goals.
Vietnam’s communication ministry is proactively reaching out to the business community to ask what more the government can do to better enable foreign firms to partner with local businesses. Next month, the ministry is hosting a forum for global and local tech companies to provide their input, including suggestions on specific policies and incentives. The ministry recognizes that investors must be given good reasons to enter the Vietnamese market, particularly in the advanced technology sector, which requires sizeable capital investment.
It is important for the Indonesian government to be able to compete with countries such as Vietnam in wooing these global firms in the race to be the digital economy hub of Southeast Asia. Government leaders must assess whether a “tough stance” is really the most compelling approach, given what investors are hearing from other countries. Officials from all ministries must be able to communicate effectively and promote the benefits of investing in Indonesia. There is nothing intrinsically wrong about promoting local content and local manufacturing, but the government would be far more successful in achieving these goals if they were couched in “win-win” language that encourages, rather than mandates, investors.
Since President Jokowi’s reelection, the messages have started to improve. Senior officials have acknowledged that regulatory reform is needed to increase investment, that our regulatory framework is too burdensome, and that the “ease of doing business” in Indonesia remains a disincentive for many investors.
The responsibility for addressing these issues and other investment disincentives, such as poor confidence in the judiciary and concerns about corruption, will fall on the shoulders of the members of the next cabinet. But with a change in mindset, a strong and consistent leadership from the top and improved communication with businesses, what investors see as disincentives today can be turned into opportunities to correct Indonesia’s trajectory and realize its full potential as a globally competitive powerhouse.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.