Indonesia’s Improving Business Climate
Stanley Harsha
President of U.S.-Asia International Exchanges
In 2007, I took a trip to the City of Surakarta (Solo) in Central Java, in the historic heartland of Indonesia. I was serving as the Democracy Unit Chief at the U.S. Embassy in Jakarta, and had heard some news about the mayor of Solo, Joko Widodo, “Jokowi.” In just two years since being elected mayor, he was gaining a reputation as an effective, honest leader—at the time unheard of in Indonesia’s infant democracy. At that time, the U.S. Embassy had issued a travel warning for Americans to avoid Solo because of the threat of violent radical groups and terrorism. I had visited this cultural gem many times over the previous 20 years but the last time I visited in 2004, it had become a mess of corrupt government and hoodlum violence.
Mayor Jokowi asked me to accompany him for three days in his official duties, visiting constituents all day. Jokowi previously had no political ambitions. He was a furniture maker who built his small business into a medium manufacturing enterprise exporting to the U.S. and Europe. Business leaders asked him to run for mayor hoping that he could apply his management skills to government.
I observed how he had moved the poor from shantytowns to free government-built homes. He built modern infrastructure to revive small business, such as a centralized hygienic wet market where people enjoyed shopping, increasing revenue for all vendors. He cut red tape for business permits and reduced corruption, which sparked new hotels and other businesses to sprout up. And he worked with police to cajole and threaten radicals and terrorists, driving them from Solo. He provided free medical care and education for the poor, also never seen in Indonesia. In a few years, Solo became a major tourist destination for Indonesians and attracted international festivals. I asked Jokowi where he found the funds to provide all these services. He told me that once he eliminated corruption and inefficiency, he had ample funds to provide for the citizens. Jokowi became a national symbol of good governance with an international reputation.
Fast-forward seven years and Mayor Jokowi took office as President Jokowi. While his instincts are populist and thus protectionist, he nevertheless has instituted these same types of reforms at the national level, making Indonesia a much more business friendly country today than it was seven years ago.
Now is a good time for U.S. business to take a closer look at Indonesia, the largest economy in Southeast Asia, with tremendous growth potential and an economy set to reach $10 trillion by 2030, the world’s fourth-largest economy in terms of purchasing power parity. Enjoying consistent economic growth of 5-6% over the past two decades, similar growth is projected in the coming decades.
Rapid Economic Recovery from the Pandemic
The Covid-19 toll has been great, at least 44,000 dying to date, and new cases remain high. Still, Indonesia’s comprehensive response to Covid-19 was crucial in preventing a deeper economic downturn. The national recovery program strengthened health care and provided financial support to the most vulnerable households and businesses, all while practicing fiscal restraint to keep the debt to GDP ratio relatively low. Indonesia is procuring vaccine as widely as supplies permit and is on track to largely vaccinate the major population centers this year, perhaps even meeting its unrealistic goal of vaccinating two-thirds of the population of 270 million by early next year. Indonesia is already emerging from the Covid-19 recession with a predicted growth of 4-5% this year.
New Law Favors Investors
Admittedly, Indonesia’s human rights protections and press freedom—formerly a model for emerging democracies--have declined under Jokowi. On the other hand, he has banned violent, radical groups, a big step for providing peace and stability, and one that his predecessors were hesitant to take. He also has taken several major steps to address economic inefficiencies that had made Indonesia uncompetitive with Vietnam and several other Southeast nations. His administration has:
Built new roads, MRT lines, railroad lines, airports, electric grids, and modernized ports nationwide, along with creating business parks for foreign investors nationally.
Pushed through the 2020 omnibus employment creation bill, which:
Opens up 300 out of 348 sectors to foreign investment (allowing ownership by foreigners and removing other obstacles for permits).
Eliminates expensive and cumbersome rules that made it prohibitive for business owners to fire employees. These rules also made it very difficult to close or move factories.
Centralizes business permits at the federal level, eliminating local governments from the process, a step that should reduce the influence of corruption and red tape at the local levels (but perhaps not so much at the central government level).
Allows for contract employment of unlimited duration rather than only 2 or 3 years.
As the former U.S. Embassy Labor Attaché, I know first-hand from workers and employers that the former system made Indonesian workers less productive. Only about 6% of the workforce are union employees whose jobs are protected. The remaining contract employees were previously fired every 2-3 years, forcing employees to seek new jobs at entry-level salaries every few years, or face poverty. The new system, just being implemented, should allow employers greater flexibility in hiring, firing, and closing factories. Workers should benefit from more stable long-term employment and more jobs. All of this could increase productivity, making Indonesian workers more competitive with Vietnam, etc.
Good Sectors for Investment
Americans businesses are at a disadvantage in competing with businesses from China, Japan and other Asian countries which always will be natural trading partners, can operate better in the business climate, and can pay bribes. For the most part, it is difficult for Americans to compete with these countries in large infrastructure projects.
Still, many sectors are ripe for investors, particularly with the new rules. E-commerce is dynamic, with a dizzying array of start-ups by wealthy, young entrepreneurs with MBAs from the U.S., who introduced the Indonesian equivalent of Uber and Grubhub long before these started in the U.S., not to mention on-line home services, including hairstyling, home repair and maid service.
For tourism, Indonesia has great untapped potential with its expanses of white beaches, coral reefs, world class surfing, white water rivers, lush forests, and fascinating culture. Indonesia’s tourist industry remains underdeveloped outside of Bali. While western hoteliers and restaurants have saturated Bali, Americans can look to other islands such as Lombok, (the island next to Bali), or to Lampung, Bengkulu, and West Sumatra on Sumatra Island.
Other sectors suitable for American investment include: infrastructure, clean energy (bio, geothermal), electric vehicles, IT, telecommunications, agriculture, aquaculture, fishery products, consumer goods, clean water, wastewater systems, forest and water management, and health care infrastructure and technology, just to list a few examples. (Note: Of these, Colorado already has a healthy agricultural trader with Indonesia).
Manufacturing offers great potential to investors. While manufacturing is mostly for the domestic market, new regulations should favor manufactured exports. Indonesia’s top manufactured exports to the U.S. are shoes, apparel and textiles—just look at clothing labels. The 25% tariffs the Trump administration imposed on China mainly benefited Vietnam although some factories are moving to Indonesia. Remember that Indonesia is a stable democracy with strong worker rights protections, and carries little political baggage, all important factors for corporate social responsibility and image.
Indonesia is building industrial parks nationwide to lure manufacturers from China to Indonesia. China, Taiwan, Korea and other Asian countries are moving major operations to these industrial parks/special economic zones. Jokowi is heavily courting U.S. investors. He views China and the U.S. equally in terms of investment, whichever wants to play.
At least one American company, Alpan Solar Lamps of California, reportedly is moving its Xiamen, China factory to the Batang Industrial Park in Central Java, one of three such parks. This park, still in development, is located near the coastal city of Semarang, with access to a large port, airport, and trans-island railway and highway links. Most American factories are in the greater Jakarta area in West Java, the most expensive place to set up business, and heavily congested. Central Java has much lower labor and land costs, and a hard-working labor force. Furthermore, Central Java Governor Ganjar Pranowo has a reputation as an honest and effective leader who has implemented business friendly practices. Because of his national reputation, he is rumored as a viable candidate for president.
The Special Economic Zone in Batam/Banten islands in Riau Province near Singapore also is a haven for American manufacturers, who benefit from favorable re-export tariffs under the U.S.-Singapore-Indonesia Free Trade agreement. One American furniture manufacturer found North Sumatra, near Medan City, to be an excellent location for his factory, with its skilled, inexpensive labor, and close access to an international airport and a major seaport.
Indonesia still lacks an adequate supply of competent managers and skilled technical workers to meet burgeoning demand, but the government has invested heavily in higher and vocational education in recent years. This need also represents opportunities for U.S. community colleges to partner with Indonesian institutions to train instructors.
Good Local Managers Can Protect American Managers
Anyone doing business must have a reliable local partner or manager to deal with labor and navigate government red tape. Most importantly, an Indonesian manager can handle relations with immigration and other government officials, keeping the Americans out of trouble. As U.S. Consul General for Sumatra, I assisted a few American businesspersons who got themselves into a real pickle because they did not have good local managers. The American managers who had reliable Indonesian managers told me that they never had to concern themselves with these hassles, and that they found Indonesians to be excellent workers.
Anyone who wants to do business in Indonesia should consider hiring one of several excellent American consultants for advice and intelligence, or Indonesian consultants who provide similar services for lower fees. There are many Indonesian, American and Australian international attorneys whose services also are indispensable. It also helps to know the right Indonesian businesspersons and to meet with key government officials—from mayor and governors to ministry officials. Generally speaking, important Indonesians are accessible. Dealing with persons who can be trusted is crucial to doing business in Indonesia. Please also consider a visit to Indonesia as part of a small Colorado delegation, as this would open up better meetings with senior businesspersons and officials. U.S. delegations are treated like royalty in Indonesia.