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Nikkei Forum Jakarta

Indonesia seeks greater 'economic complexity' through omnibus bills

Government aims to pass investment legislation in 100 days, minister says

Luhut Binsar Pandjaitan, the coordinating minister for maritime and investment affairs, delivers the keynote address during Nikkei Forum in Jakarta on Feb. 25. (Photo by Ken Kobayashi)

JAKARTA -- Indonesia hopes its sweeping omnibus bills will attract investment as it seeks to diversify its economy and escape the "middle-income trap," the country's coordinating minister for maritime and investment affairs, Luhut Binsar Pandjaitan, told the Nikkei Forum Jakarta 2020 on Tuesday.

The government earlier in February submitted to parliament a draft of an omnibus bill on taxation and another on job creation. The bills, which stirred up opposition, especially on labor issues, are aimed at boosting investment in downstream industry projects and others, according to the minister.

Provisions include lower severance pay for laid off workers, lower corporate taxes and a more business-friendly tax regime. The bills also seek to cut red tape by giving more authority to the central government over licensing. Investors in Indonesia have often complained about opaque and overlapping laws on business permits in regions.

"Some investors have raised the issue of local governments. In the omnibus bills, if there are problems, we can overrule [local governments]. We cannot make it [take] too long to get a license," Pandjaitan said at the forum, whose theme is "a New Indonesia."

Pandjaitan said the bills are part of the government's strategy to "increase economic complexity through investment," adding, "hopefully, in 100 days, we'll see the result."

He called the changes necessary, saying Indonesia has for decades relied too heavily on exports of unprocessed commodities. This helped the country grow rapidly to middle-income status during the commodity boom, Pandjaitan said. But it has led to declining average export growth in the past three decades, with low manufacturing growth.

Indonesia lags far behind Vietnam in this respect, the minister said. As a result, the country's transition from middle to higher income levels has slowed, putting Southeast Asia's largest economy in a middle-income trap. He added Indonesia must move quickly to address this situation because the growth of the population in its productive years is slowing. The economy needs to "grow fast before it grows old," Pandjaitan said.

Lippo Group director John Riady speaks during Nikkei Forum in Jakarta on Feb. 25. (Photo by Ken Kobayashi)

John Riady, director of the Lippo Group conglomerate, agreed that reform is an urgent priority, citing studies that find Indonesia has only 15 to 20 years to make the changes needed to escape the trap. "Time is running out. This is our last chance to get it right. If we don't get it right, we will be stuck in the middle-income trap," he told the forum. Riady welcomed the bills, saying they cover the "most critical areas."

"I'm confident that this will jump-start growth. It will move growth from 5% to 6% to 6.5%, and that's what Indonesia needs to create enough jobs," he said.

Despite not being directly involved in value-added manufacturing, Lippo, as a consumer-focused business focused on property, retail and health care, relies heavily on an expanding middle class for growth, Riady said.

Kanji Tojo, chairman of the Jakarta Japan Club, whose members include 715 Japanese companies operating in Indonesia, said the country in 2013 was a "shining star" to foreign investors from many countries. But over the past few years it has been outshone by regional peers Thailand and Vietnam.

Tojo said he supports the omnibus bills, noting that they address rising labor costs and red tape, which are among the top challenges faced by Japanese companies. He said that although some of the proposed changes may trigger disputes, they should be resolvable through discussion. He added that the government must ensure consistent implementation after the bills are passed into law.

JJC Chairman Kanji Tojo speaks during Nikkei Forum in Jakarta on Feb. 25. (Photo by Ken Kobayashi)

Tojo also highlighted the issue of human capital, citing the difficulties that Japanese companies in Indonesia face finding management level talent and technical and engineering staff.

"We're recommending [that Indonesia] use ... people's potential more to expand domestic and international competitiveness," Tojo said. "And [to achieve this], you need improvement of the business environment, human development and also infrastructure."

Pandjaitan added that one of the value-added industries that Indonesia wants to prioritize is development of lithium-ion batteries, as it looks to benefit from the growing popularity of electric vehicles around the world. Nickel is increasingly used in battery cathodes for EVs and Indonesia, as the world's largest nickel ore producer, can tap this resource to reach this goal, he said. "Indonesia has huge potential to be a key player in the lithium-[ion] battery industry."

He added that preparations for the industry are set to take off this year, supported by an expanding nickel production hub built in partnership with China in the town of Morowali in eastern Indonesia. Some plans, however, have been delayed by the new coronavirus outbreak in China and elsewhere. So far, Indonesia has had no confirmed cases of the disease.

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