Riots and Indonesia Omnibus Law: A Necessary Evil?

Riots, vandalism and potentially new Covid cluster, those described what happened in Indonesia yesterday rally. The new announced Omnibus Law (UU Cipta Kerja) sparked huge protest by labor unions and students in several cities’ despite of social distance instruction. At least nine bus shelters burned down, and several city parks destroyed. What is the thinking behind this law and why it’s so controversial? this article trying to provide balanced view towards the issue.

Prior to discuss its flaws, let’s start from its intention. Indonesia, with so many reasons, have most of ingredients to become prosperous country. Blessed by rich of natural resources, young and huge population, democratic and stable politics. However, those still not attractive enough to be considered as part of global supply chain. Despite of US-China trade war, international firm still reluctant to move its production to Indonesia. They prefer Vietnam, Thailand, Malaysia, or other SEA country for their offshore* activities. This make Jokowi so upset and speed up whatever necessary to fix this loss of opportunity.

Internally, Indonesia also desperately needs labor-intensive Foreign Direct Investments (FDI). The unemployment rate hit 6.9 million and keeps increasing due to Covid. On top of that, there are 2.9 million new workforces cohort with 87% of it with lower education level hence need to attract suitable industry to absorb it such as manufacturing. The FDI also will help to improve Indonesia’s balance of payment, which currently still deficit in current account due to low net export and primary income. The deficit so far got covered by positive Financial account, however, the structure account is more dominated by Portfolio Investment instead of FDI. The nature of Portfolio investment such as bonds is fragile due to it can be pulled away fast if the investor feels insecure (capital flight). Once it happened, it can shock the economy like what we experienced in 1998 financial crisis. While FDI, such as building factory, are more long term which gives more stability to the economy.

If the intention so noble, then why it got so many kickbacks? Well, the Omnibus Law not only trying to simplify regulations related to investments but also, in some extend, trying to reduce labor cost. To be competitive globally, the new law adjusted several regulations related to labor wages, working hours and outsourcing. For example, the new severance pays rules reducing labor income from initially 32x to maximum 25 times. This certainly big drop from labor point of view, however its already the highest in SEA compared with Vietnam and Thailand which only 10 times. This disappointment also fueled with so many hoaxes spread through social media that further “burn” their emotion with current suffer from Covid-19 economy crisis.

I am not an expert to give any recommendation to solve this issue but let me share a few points. The strategy to attract FDI and offshore is sounds, and the reduced labor benefit could be a necessary evil to achieve its goal for reducing unemployment. Despite that its surely reduce some labors benefit, but it will help those who currently don’t have any job, which they don’t have any union to talk about it.

However, the lack of proper execution for the law-making process create so many suspicious. To be fast is fine but it should still be proper. Policy makers also should bluntly explain their consideration instead of trying to cover some number and just saying it’s good for labor (while it’s not). Because good strategy should always come with good execution.

*Offshore is the process of procuring good or services across nations. Mainly driven by low cost production. The term also further lead to “global supply chain”.