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Jakarta Post

Omnibus law: Biggest ‘big bang’ reform ever

  • Vincent Lingga

    The Jakarta Post

Jakarta   /   Wed, October 7, 2020   /   08:46 am
Omnibus law: Biggest ‘big bang’ reform ever Hundreds of labors stage a protest in Jatiuwung, Tangerang, Banten on Monday, Oct. 5, 2020 to protest the Omnibus Law on job creation. In the protest, the workers say they will stage protests and strikes until Thursday. (Antara/Fauzan)

It is unfortunate that most headline stories about the newly passed Omnibus Law on Job Creation have singled out the most controversial of the thousands of provisions in its 905 pages, only to contribute to the public hostility toward what should be lauded as the most comprehensive “big bang” economic reform ever launched.

More than 90 percent of the law is actually designed to stimulate domestic and foreign investment by removing bureaucratic inefficiencies and excessive licensing requirements as well as opaque, overlapping and contradictory regulations that have long hindered competitiveness.

The House of Representatives was prompted to endorse the omnibus bill by the miserable failure of almost 20 reform packages that were launched from 2015 to 2019. Those reforms were largely ineffective because their implementation was undermined by the regulatory overlap and conflict deriving from about 80 laws as well as thousands of presidential regulations and ministerial decrees.

It would have taken more than a decade to revise the numerous laws and regulations through the process of conventional lawmaking and raucous deliberation with attendant politics. The economy, already mired in a recession, badly needs huge investments right now to boost growth and create jobs, and thereby reduce poverty and income inequality.

The omnibus law in a single stroke amends 79 laws and eliminates thousands of regulations inimical to business and investment. But it will take several months more to prepare all the technical regulations needed to implement the new law.

It is most imperative that the government now focuses its resources on completing all implementing regulations and disseminating them publicly, notably to local administrations, the business community and trade unions.

It is difficult to understand why the trade unions remain obsessed with opposing the labor provisions in the new omnibus law, because they essentially maintain the labor rights protected in the 2003 Labor Law. Moreover, only less than 30 percent of the estimated 131 million labor force work in the formal sector which is governed by the labor regulations. The other 70 percent are still trapped in the informal sector, thereby ineligible for the labor protection as regulated in the law.

The labor-intensive industries would remain unattractive to investors if the labor rules were not amended to boost the competitiveness of Indonesian labor against our Southeast Asian neighbors.

In a country not known for its worker productivity, the too-rigid labor regulations made it virtually impossible to terminate a permanent employee. This turned away countless potential investors and encouraged employers to avoid new hires while resorting to rolling contracts to outsource much of their extra work.

The old, inflexible labor rules were certainly a great disadvantage to employers, because companies today face a changing economic landscape that have varying impacts on different business sectors.

The amended provisions also will offer more flexibility in hiring contract and outsourced workers so companies can adapt to changes as they occur, which is the only certainty in today’s business climate – notwithstanding the pandemic.

Even without the inflexible labor regulations, our business sector has been suffering from major, inherent disadvantages in our economy: high logistics costs due to utterly poor infrastructure, excessive bureaucratic red tape and high interest rates.

We fully support workers’ demand for the compulsory minimum wages to at least meet the basic cost of living so they can lead decent lives. But we should also accept the basic premise that economic growth and job creation are in the public and national interests, and that they can be achieved only if there is industrial peace and equitable distribution of economic gains.

Understandably, the government should be heavily involved in the labor market because a freewheeling labor market will never favor the workers’ interests, given the unequal status and often opposing interests of employers and employees.

Labor policies that overly favor workers will stifle new investment and prompt companies to hire temporary workers. Employers want profits, the unions want better pay and the government wants a conducive investment climate.

These elements are not part of a zero-sum game, but are interdependent, as companies can remain profitable only if they take good care of their workers, and the combination of the two leads to increased competitiveness that attracts investments. Hence, economic growth and job creation go hand in hand in the common interest.

If the unions continue to hold strikes and street demonstrations to push their demand for higher wages and more generous welfare benefits at a time when we are in a coronavirus-induced recession, then their action will be entirely counterproductive.

The problem is that wage hikes are not sustainable if revenues don’t increase, whether by increased productivity, better infrastructure or higher sales.

But blaming the slow growth in formal jobs primarily on rigid labor rules could also mislead policy decisions in both the informal and formal sectors. The key to spurring jobs growth in the formal sector is investment policies that promote product diversification and facilitate business restructuring.

To reiterate, more than 90 percent of the provisions in the job creation omnibus law are appropriately designed to stimulate private investment and businesses.

However, the government should also realize the blunt fact that while the majority of the workforce is currently engaged in the rural sector, it is this very sector that policymakers have long neglected.

It is no wonder that the rural sector has the highest underemployment rate and lowest productivity, and will remain so unless the government boosts public investment in rural infrastructure and expands the coverage of its agricultural extension program.

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Senior editor at The Jakarta Post