The government of Joko Widodo faces heavy economic challenges. On one side, it must create 3-4 million new jobs each year. On the other hand, the state budget has always been closely connected to deficit. Investment then is declared to be the hope. But, it is not easy. In the midst of the national political chaos, Indonesia is also facing another problem, which is the lack of competitiveness.
In 2014, the World Bank, in its report on the ease of doing business in 189 countries, stated that Indonesia only ranked 114th. This rank was far below other Asian countries that were also our main competitors in attracting investment, such as Thailand (25), Vietnam (78), and Phillipine (95). The assessment category includes ease of starting a business, investment procedure, time needed to start up a business, cost, electricity, and the minimum capital.
This unfortunate news about competitiveness also came from the report of World Economic Forum (WEF) 2014-2015, which stated that Indonesia only ranked 34th. WEF also noted that the most problematic factor in doing business in Indonesia is corruption, with a corruption index of 15,7.
Also according to WEF, in the category of ease of doing business, the weakest aspect in Indonesia is legal certainty. Indonesia is only ranked 172th out of 189 countries. This low rank is mainly caused by corruption that remains high within the justice system.
Corruption and investment
Within the last decade, since the establishment of Corruption Eradication Commission or Komisi Pemberantasan Korupsi (KPK), Indonesia’s corruption image has actually gotten better. The business world has been giving a positive perception. Indonesia has continued to improve its rank. Transparency International noted that Indonesia was ranked 130th of 163 countries in 2006 and had improved to rank 107th of 182 countries in 2014.
Unfortunately, at the beginning of this new government, the corruption perception index can potentially worsen again. The conflict of KPK vs the Police, which is filled with prolonged political intrigue, and is largely broadcaster in many media, will definitely impact the belief of enterpreneurs towards legal certainty, corruption eradication, and political stability of this country.
Every year, Indonesia is faced with the reality of needing to create 3-4 million new jobs, while in the last few years, it can only create 1,2 million jobs.
The only way to be able to absorb millions of workers is by developing export oriented labor intensive manufacturing industry. In order to create 3-4 million jobs each year, Indonesia’s annual manufacturing export must grow by 22 percent.
However, instead of increasing 22 percent per year, Indonesia’s manufacturing export has only increased 6 percent from 1996 to 2014. In addition, labor intensive sector only grows 4 percent. This is closely related to Indonesia falling behind in terms of competitiveness compared to main competitor countries in attracting investment, particularly Vietnam, India, Thailand, even Bangladesh.
Wage and competitiveness
The manufacturing export market of a number of Asian countries, which are our main competitor, is way above Indonesia’s achievement. For example, India grows 169 percent, China 446 percent, Vietnam 1.397 percent, and even Bangladesh 202 percent, from 1996 to 2014 (Transformasi data, 2014). Except for Bangladesh, these competitor countries have better corruption index than Indonesia. As a result, the number of jobs that can be created is declining.
In addition, corruption perception that has not changed significantly, the availability of infrastructure, law enforcement, licensing, and investment cost remains to be done. However, there is one other factor that has a large impact towards the stagnant growth of manufacturing export, which is the relatively high labor cost.
The high labor cost in Indonesia is caused by the large increase of Provincial Minimum Wage (UMP), which in the last six years has risen by 115 percent, from Rp. 743.200 in 2008, to Rp 1.595.900. This rise is often triggered by political pressure and interest.
As a result, the average minimum wage in Indonesia in 2015 is above all of its competitors. Labor cost in Central Java for example, is far higher than in Bangladesh, the country with the lowest labor cost. The gap has increased from 16 US$ in 2014 to 31 US$ in 2015 (Transformasi data, 2015).
Rejuvenating corruption eradication
The Jokowi Government can no longer ignore the need to increase competitiveness. As the first step, Jokowi needs to act firm to resolve the KPK-Police conflict, with an anti corruption spirit. This conflict shapes an image to the international world that fighting against corruption has taken a step backward. This becomes a bad campaign for Indonesia in the eyes of foreign investor candidates.
In addition to resolving the KPK-Police conflict, Jokowi must also reemphasize this in the policy plan and bureaucratic service reform. The introduction of one door licensing service system by the Capital Investment Coordination Agency (BKPM) has a high symbolic value. But, this has to be done comprehensively and consistently to be able to deliver a huge impact to attract investment.
A clean justice system must be enforced. Corrupt and not transparent justice system is really a major influencer for investors.
Another contributor to the poor corruption perception in Indonesia is how vulnerable it is to conduct violations in tax payment. Preventing any direct contact between tax collector and taxpayer can overcome this issue.
Increasing competitiveness is the key to addressing the economic challenges faced by Jokowi’s government, which in the end will determine the social and political stability, something that is increasingly susceptible to conflicts. But, this requires hard work and boldness in taking risks. This is where the dignity of Jokowi is at stake, as he carries so many hope from the people during the presidential election.
*Senior Advisor at Transformasi, and Emeritus Professor of Economics in Boston University, United States of America.