IO – We’ve seen the picture as crystal clear from early 2020. A wave of mass layoffs is taking place in every sector, from manufacturing to services. Krakatau Steel executed their plan to lay off 2,683 workers, mostly contract employees. Duniatex Mayhem is a major threat to textile and apparel sectors. A huge pile of debt and liquidity problems pose a threat of factory closure. Some factories have already closed in West Java and Banten, intending to move to Central Java in search of lower minimum wages. However, that’s only part of the story.
The other part of story is the factories shut down and intentionally changed to warehouses, as profits from imports are higher than those derived from creating local products. The Government commitment to build infrastructure projects comes at a steep price. Steel imports increase dramatically, wondering why Krakatau Steel is laying off workers and not hiring more people? It is clear that official policy still favors imports over local manufacturers.
Not only do conventional sectors face difficulties, but also ICT and the digital economy. Indosat cut an estimated 677 employees. Bukalapak announced a reduction of hundreds of employees in search of more efficiency and profit. Startups which rely more on foreign venture capital find themselves in this dangerous quandary. Coronavirus has shrunk investment from China, while other investors from Japan, Korea and Europe take a “wait and see” stance. Startups, already declared the new engine of growth, are failing. One generation of the 90 million Millennials in Indonesia will begin to see the inferno, doomsday in terms of job absorbtion. Some of these hope to enjoy a digital bonanza, but that hope soon fades away.
What went wrong?
One school of thought suggests that the economy is simply resetting, slowing down to a new normal. In fact, there is no new normal whatsoever. Carmen Reinhart is correct when she pointed out how commodity prices move like a roller coaster, unpredictably. If we look deeper at any new equilibrium, we may not find any. The low interest rate posted by Bank Indonesia policy is clearly not related to higher credit growth. Bank Indonesia is also trying so hard to reduce the initial down payment required for housing and vehicle loans; even so, consumer loan growth is declining. Liquidity is tight, and banks worry that expanding aggressively will end up with a higher number non-performing loans (NPL) on their hands. The B20 Government policy stipulating a mix of CPO with petroleum cannot yet affect any meaningful reduction in import volume. A lot of confusion, and once again this is no new normal: it is a new abnormal.
In fact, Indonesia’s economy is chronically ill for there are loopholes in policy that exacerbate the sickness. We cannot simply blame the Corona virus, trade war, or Brexit as deciding factors for economic frustation. Multiple factors in the domestic area also form part of the problem: instability of policy, favoritism of imports, relying too much on commodities and broadcasting a false alarm to business that we’re seeing recovery in the short term. Too much confidence can blind you, goes an old saw.
Alarming signals of an economic downturn were even sensed back in 2014, when commodity prices did a yo-yo up and down, but the Government perpetually put on a brave face to maintain investor and consumer confidence. Economic growth was assumed to hit 7% on average until 2019, while inflation would stay below target of 3.5%. Sounds like a great achievement, doesn’t it? The low inflation rate is not such an achievement; rather, it is a disaster. Lower inflation signifies lower consumption; it is the weakness on the demand side that worries business. When consumption growth is lower, sellers are not unnaturally afraid to raise prices. As a result, inflation slips below the target. However, this simple fact sometimes leads to a wrong conclusion: either the Government is ignorant of the situation, or they are simply misleading everyone. Many business buying the promises loaded up with more debt without measuring risk. It is thus no surprise why Jiwasraya and Duniatex recently failed to meet their obligations.
From a policy perspectives, chaos has erupted in many sectors. Uncertainties in food data production, conflicting stories from Ministry of Agriculture, Ministry of Trade and BPS confuse not only consumers but also businesses – those who need long-term assurance. Rice imports soar and Bulog spends big to rent new warehouses. Recently, however, Bulog was forced to reduce excess stock by dumping 20 tons of rice, equal to IDR 160 billion. We wonder why the government failed to set policy with an accurate calculation, rather than a short-term political agenda. The story of chaos in policy will not be a good sign to attract any new investment in agriculture.
The newly-revised anti-corruption law is another bad sign for the investment climate, for sure. Developed nation investors seek out countries with lower corruption rates, meaning their cost of doing business is not too high. Indonesia’s ICOR (Incremental Capital Output Ratio) stands at 6 – higher than peers, one factor being corruption infesting logistic or supply chains; thus, logistics cost business more than 24% of GDP. It is strange that Indonesia is going backward, while the government shamelessly claims the “ease of doing business” rating will rise after the anti-corruption law revision? The World Economic Forum, publisher of the Ease of Doing Business report, states openly that most problematic factor of doing business in Indonesia is corruption. Why does our government not recognize this simple fact?
Too many fiscal incentives, too little output
Who is to blame in terms of this fiscal policy frenzy? The obvious answer is the Ministry of Finance. During a cascade of 16 economic packages, Government was repeatedly urged to give big corporations more tax cuts. We heard “tax holidays”, “tax allowances” as new fiscal stimuli, increasing productivity and growth. That is the theory, while the reality is that while big business enjoys tax cuts growth of manufacturing is rapidly diving downward: it only hit 3.8% in 2019, far below 5.02% GDP growth.
The share of manufacturing i s moving nowhere ; we are certain to suffer from premature deindustrialization. Manufacturing share to GDP dipped below 20% in 2019. We predict it will be below 19% in 2020 – a curse of natural resources so real that during the Jokowi period the main focus of exports was still on commodities and not on manufactured products. Giving too many fiscal incentives was not the solution; in fact, it complicated the problem: Government was providing the wrong sort of aid.
More than IDR 221 trillion in fiscal spending was already wasted in tax cuts. Tax expenditures cost taxpayers more money. As a result, tax ratio in 2019 was the lowest in 50 years. During such a slowdown, we need more fiscal space to provide budget for subsidies, pushing industry to absorb more employment, but when the government faces a decline in tax revenue growth, they reach for only one single solution, which is cutting government spending or austerity measures.
Infrastructure projects are misappropriated: building empty international airports while infrastructure in the Special Economic Zone (KEK) lacks sufficient facilities to support manufacturing sectors. It is not odd when Unilever is the sole large company to set up their factory in KEK Sei Mangkei: where are the other great manufacturers?
Is Omnibus Law the answer?
Absolutely not: the Omnibus Law may generate great uncertainty rather than attracting new investment. With 15 Chapters and 174 acts to be revised, we should be concerned about how many new ministerial-level regulations will be launched once the omnibus law passes. Data from World Bank reported that during 2015-2018, when Jokowi declared deregulation, 6,300 new ministerial-level regulations were issued, underlining how over-regulation is a major source of policy uncertainty. Omnibus law might not push deregulation: instead, it could inspire a flurry of new regulations.
The process is very long; the debate unending. Parliament members also look for wider perspectives: how about voters’ opinions? What affects them? They cannot simply ignore voters’ perspectives even though Jokowi already has at least 60% support from political parties; the process may take an excruciatingly long time to pass, unlike the tax amnesty, which was done in a jiffy. The Employment Creation Omnibus Law (Cipta Kerja) will affect at least 130 million workers in Indonesia, so it is of critical importance to examine and make critical commentary on every single point in the draft. The sneaky, secretive drafting of the bill aroused the ire of labor unions, which promptly rejected it. The wave of layoffs and omnibus law make a perfect combination for mass protests in 2020, something never in the interest of business people.
However, there will be joy on the part of fly-by-night, low-quality investors as environmental permits are weakened, a flexible labor market makes it easy to hire and fire, and authority devolves back to centralized government – as in Soeharto’s New Order. Meanwhile, many well-respected, established companies are troubled, particularly those from developed countries. Their simple belief is that if capitalism wants to survive over the long run, business governance should accept fair wages for labor, pro-environment governance, and less corruption all through the system. Quality investment not only brings in more money in the long run, but also benefits society. We are convinced that low-quality investors will be prioritized by the Government. As we’ve seen in BKPM data, Indonesian investment has risen over the last five years – while employment absorbtion heads downward. We must put more emphasis on attracting high-quality investment, not the quick-buck exploiters. (Bhima Yudhistira Adhinegara)
Bhima Yudhistira Adhinegara graduated from Gadjah Mada University. He received his Masters degree from Bradford University, U.K. He is a researcher in economics and finance at INDEF.