Indonesia’s labour laws discourage investment and leave workers worse off: Experts

A business district in Jakarta, Indonesia, on Jan 5, 2020. Indonesia's economy has been growing at 5.5 per cent a year or less since 2014. PHOTO: EPA-EFE. Sketched by the Pan Pacific Agency.

JAKARTA, Feb 18, 2020, ST. Last week, Indonesia’s President Joko Widodo introduced legislation in parliament that would overhaul the country’s infamously inflexible labour laws that investors and experts say paradoxically leave workers worse off, The Straits Times reported.

Three quarters of the country’s non-agricultural workforce is in the informal sector, which includes those who work as housekeepers or casual construction labour who rarely benefit from the country’s labour laws that, among other things, provide for minimum wages as well as severance payments, according to the World Bank.

Indonesia’s neighbours have been doing a better job scooping up foreign direct investment in part because it is almost impossible to lay workers off or even let them go for cause.

Lawyers say, for instance, an employer cannot sack a worker caught stealing, without a conviction in court. And even then they are owed severance pay.

“The irony is that the labour protections that are meant to protect workers have actually left them worse off,” said Mr Tom Lembong, the former chairman of the Indonesia Investment Coordinating Board (BKPM).

Mr Lembong said that during his stint as BKPM chairman, which ended in October, foreign investors told him the labour rules were among the factors that made devoting resources to Indonesia too risky.

The other concerns included the highly unpredictable regulatory environment and opaque tax rules, Mr Lembong said.

“The inflexibility is proven. There is strong disincentive for businesses to offer permanent positions,” he said, referring to the labour laws.

Reform therefore is key for a government which has set the goal of generating jobs for millions of underemployed citizens desperate for a steady paycheck in the formal sector that would let them save and invest.

The economy has been growing at 5.5 percent a year or less since 2014, too slowly to soak them all up.

“The labour laws are one of the fundamental problems investors cite when they talk about expanding in Indonesia,” said Lin Neumann, managing director of the American Chamber of Commerce in Jakarta.

“Businesses want the flexibility to manage their workforce in such a way that merit and productivity are encouraged. We do not have that currently.”

Mr Joko, fresh from last year’s landslide re-election victory, is seizing on his political capital to push through reforms to the labour laws that date back to the time when the chairman of his own party, Megawati Sukarnoputri, was president.

Times have changed and Mr Joko now controls three-quarters of the seats in parliament through a coalition of allies.

The reforms seek more than 1,000 amendments to roughly 80 laws. The changes include offering unemployment insurance in exchange for reducing severance payments to a maximum of six months salary.

Workers with 10 years seniority are currently entitled to as much as 23 months salary – double the standard in Thailand.

The changes may appeal to manufacturers in consumer-facing industries such as apparel makers, which need to quickly calibrate worker numbers to accommodate seasonal fluctuations, said Mr James Castle co founder of business risk consultancy CastleAsia.

“A softening of these requirements should encourage more investment,” he said.

Even so, Mr David Welsh, country director of Southeast Asia of the Solidarity Center, a nonprofit aligned with the US-based labour federation AFL-CIO, said the reforms, in the garment sector at least, risk amounting to a “race to the bottom” – slashing benefits to appease big international brands that can afford to pay.

During the three months ended August – the most recent data available – Sweden’s H&M which has manufacturing facilities in Indonesia reported a gross profit margin of 50 percent before tax.

“International brands are fully capable of accommodating the current law in Indonesia and then some to put it mildly,” Mr Welsh said.

Indonesia’s economy grew 4.97 per cent in the three months ended December – the first time it fell under 5 per cent since the final quarter of 2016.

Foreign direct investment in 2019 slipped to US$28.2 billion ($39.2 billion) from US$29.3 billion the year before , according to government data.

Some two million people join the workforce each year and youth unemployment has been stuck at roughly 17 percent since 2010, according to data from the International Labor Organization.

Still, getting the reforms through parliament will be a tough slog owing to the country’s traditionally sceptical view of private investment, especially from overseas, Mr Castle said.

Labour unions have promised to continue protests that easily bring the downtown of this already nearly gridlocked capital to a standstill.

So far, though, Ms Megawati has been silent on the proposed reforms. Passing them would indicate reformers in Mr Joko’s cabinet have the upper hand.

“Getting the bills done may indicate that at last Indonesia is moving away from the inward-looking, defensive, patronage-first posture that has held the country back for so long,” said Mr Castle.

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