Indonesia's Omnibus Law — A Changing Economic Climate

The controversial omnibus law will change how foreign investment is managed within the country.

As Indonesia seeks to solidify its global business position with a new omnibus law, critics are strongly objecting the legal changes. There are valid reasons behind Indonesia’s drive to streamline legislation, but the new law is creating controversy over its impact on workers, the environment and political corruption. To stay competitive, Indonesia needs to update its bureaucracy, but business development must be balanced with the protection of people and the environment. In this article, we delve into the controversy surrounding Indonesia’s new omnibus law.

We may brave human laws, but we cannot resist natural ones.” — Jules Verne

Anybody familiar with Indonesia knows that doing business within the country is fraught with regulatory difficulties. A bloated bureaucracy, corruption and prohibitive regulations present barriers to investment. However, a new business climate is driving Indonesia to make significant changes to its investment legislation. These changes represent challenges for a country with the world’s fourth-largest population.

As we have identified in our previous articles, the growing global demand for electric vehicles promises significant growth opportunities for Indonesia. Investors such as TeslaToyota and Hyundai are among the international auto manufacturers making multibillion-dollar investments into the country. Indonesia intends to leverage this growth to develop an internal market which will see the country become a global hub for both electric vehicles and battery technology. Combined with a drive to develop downstream mining processes for commodities, these developments herald a new era of business growth within the country.

These emerging opportunities have contributed to the development of Indonesia’s new omnibus law, which aims to streamline the country’s business regulations. Updated employment laws, new land acquisition rules and improved licensing services will all contribute to greater foreign investment. A further law aims to eliminate Indonesia’s dividend tax and reduce corporate income tax to 20% by 2022. Reducing bureaucracy and improving the financial climate for investors represent some of the more palatable aspects of the new omnibus law.

However controversial elements of the omnibus law have stimulated significant opposition, both internally and internationally. During 2020 there were protests from worker’s unions, student groups and religious conservatives around Indonesia. A letter was also sent to the Indonesian government from 35 large international investors. These investors cited concerns over potential environmental degradation which could be caused by the new law. The 1,187 pages of the omnibus law revise over 70 existing laws and was signed by President Joko “Jokowi” Widodo on November 2nd. However, two of Indonesia’s largest trade unions have now filed for a judicial review at the county’s Constitutional Court.

There are a number of key points of contention for opponents of the omnibus law. In general, they can be grouped into environmental protection, employment rights and the control of corruption. Opponents claim that the new legislation will make it easier for businesses to undertake projects which have a negative impact on the environment. Both deforestation and water resource management have been problematic in the past and it is feared that increased industrial growth will compound these issues. Critics also fear that increasing industrial output will adversely impact Indonesia’s ability to meet the Paris Agreement on climate change.

Labour unions are concerned that the new rules will provide employees with less protection from predatory employers. Unionists contest that the omnibus law erodes worker’s rights by amending the rules concerning contract workers, severance pay and outsourcing. There are also claims that the changes were enacted without sufficient consultation with the trade unions. Although corruption and nepotism are deeply ingrained in Indonesia’s economy, legislation in 2004 divested centralised power from Jakarta to Indonesia’s regional governments. Amendments contained within the omnibus law seek to reverse some of this autonomy, which is creating a power struggle between regional politicians and Jakarta’s political elite.

Indonesia’s previous legislation placed regulatory burdens on foreign investors which were not conducive to economic growth. The country now aims to capitalise on its natural and human resources to significantly increase GDP over the next two decades. Positioning Indonesia as a hub for the emerging electric vehicle market is just one of several strategies that will improve economic output but relies heavily on foreign investment. There can be no doubt that reforming Indonesia’s bureaucracy will help to achieve these goals, but opponents are concerned about the wider environmental and socioeconomic impacts of the new law.

As Indonesia moves forward with the omnibus law it must walk a fine line between the drive for economic growth and the custodianship of its human and natural resources. It remains to be seen how well the country will manage these challenges but these goals may have been better achieved through smaller, tighter legislation.

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