Message to incoming ministers: Competitiveness needs change: Annisa Natalegawa

JAKARTA- Indonesia’s incoming team of economic ministers face a clear, if daunting, task: increase Indonesia’s economic competitiveness both in terms of enhanced domestic productivity and as a destination for foreign investment.

The incoming administration must accept that while Indonesia is Southeast Asia’s largest country, the government cannot rest on the laurels of our macroeconomic intrinsics. Policymakers will need to take determined actions, and be prepared to invest significant political capital, to attract and deploy more and better-quality capital into  manufacturing, natural resources and agriculture sectors if Indonesia is to move to a sustainably higher growth path and provide employment to a rapidly growing workforce.

Japanese investment bank Nomura surveyed over 50 companies that relocated production facilities since the onset of the US-China trade war from April 2018 to August 2019: 26 companies moved production to Vietnam, eight to Thailand, and only two to Indonesia. Similarly the World Bank recently reported that 23 out of 33 surveyed companies moving out of China plan to establish new production sites in Vietnam. 

Given its huge economy and labor force, Indonesia should be getting the lion share of investment shifting out of China. But it isn’t. Thus the new administration should acknowledge that Indonesia can learn from its regional neighbors, starting with the  mindset toward foreign investment. Too many officials have treated foreign investors with a “they need us more than we need them” attitude or assumed that companies cannot afford to overlook Indonesia due to its market size – this mentality must change.

A comparison of economic policies across Southeast Asia will enable regulations that better position Indonesia vis-à-vis other markets. Indonesia can learn from best practices, and take advantage of areas that other countries may have overlooked.

Just last month, the Thai Board of Investment approved the “Thailand Plus” Incentive package, designed to attract companies relocating operations from China. This includes a sizeable 50 percent reduction on corporate income tax for 5 years for large-scale investments submitted for approval by the fourth quarter of 2021. Interestingly, the Thai government candidly noted that the package is an attempt to best Vietnam – confirming that other ASEAN countries do not see Indonesia as their biggest competition. 

The package also introduces incentives for companies to establish education in science, technology, engineering and mathematics, or vocational training institutions approved by the Thailand’s Ministry of Higher Education, Science, Research and Innovation. Companies will be eligible for a 5-year corporate tax exemption for 100 percent of the training institution’s investment cost. 

Indonesia similarly launched tax incentives to improve human resource capacity through the Finance Ministry Regulation 128/2019, but at considerably smaller scale than Thailand. Companies in Indonesia are eligible for gross income tax deduction of up to 200 percent of capacity-building investments for providing internships, learning sessions and training activities – activities that, while nice to have, have less potential for long-term up-skilling than vocational training institutions. 

In benchmarking the investment competitiveness of other countries, Indonesia should not only assess quantitative incentives but also the attached conditions. A critical consideration for potential investors is the guaranteed time period for investment incentives. This is a strength of Vietnam, which offers a preferential 10 percent corporate income tax for 15 years in target sectors including high technology, environmental protection, scientific research, infrastructural development, software production and renewable energy. 

What also resonates well with investors is the use of clear grandfathering clauses that would protect investments against any future change in policy. In recent years Indonesia has frequently damaged its reputation within the global business community by changing the rules of the game after investments have been made.

One high-impact, easy to implement change: improved communications with investors. The next team of economic ministers should explicitly highlight Indonesia’s recommitment to cutting back on red tape, regulatory reform, private-sector-led development, and attracting more foreign direct investment. This should be communicated internationally and domestically as well, to persuade local audiences on the benefits to Indonesia of deeper integration with the global economy. 

The government must also cut back on conflicting messages from ministers, which reinforces concerns about policy instability. A prime example occurred earlier this month, when President Joko “Jokowi” Widodo spoke about revising the 2003 Labor Law to reduce disincentives to formal-sector employment. 

Yet senior officials from the Manpower Ministry, including at the minister-level, almost immediately contradicted the President, stating there are no plans to revise the law. Such mixed signals undermine confidence in Indonesia’s policy framework, feeds the perception that the government lacks coordination and consistency, and deters new investment. 

A vibrant public-private dialogue within the policymaking process is not erosion of sovereignty or a loss of face for regulators. It is a win-win opportunity for both the government and business. Last month, I met with senior officials at Vietnam’s Ministry of Information and Communication. The ministry wants more international technology companies to invest in Vietnam, partner with local companies, employ and train local workers, and manufacture domestically, thereby empowering the national tech and innovation sector. It is a vision not unlike Indonesia’s own Industry 4.0 and Digital Economy goals.

The ministry proactively reaches out to the business community to ask what more the government can do to better enable foreign firms to partner with local businesses. Next month the ministry is hosting a forum for global and local tech companies to provide their input, including suggestions on specific policies and incentives. The ministry recognizes that investors must be given good reason to enter the Vietnamese market, particularly in the advanced technology sector which requires sizeable capital investment. 

It is important for Indonesia’s government to be able to compete with countries such as Vietnam to woo these global firms, in the race to be the digital economic hub of Southeast Asia. Government leaders must assess whether a “tough stance” is really the most compelling line of persuasion, given what investors are hearing from other countries. Officials from all ministries need to be able to effectively communicate and market the benefits of investing in Indonesia. There is nothing intrinsically wrong about promoting local content and local manufacturing; but the government would be far more successful in achieving these goals if they were couched in “win-win” language that encourages rather than mandates investors. 

Since President Jokowi’s re-election, the messaging has started to improve. Senior officials have acknowledged that regulatory reform is needed to increase investment, that our regulatory framework is too burdensome, and that the “ease of doing business” in Indonesia remains a disincentive for many investors. 

The responsibility for addressing these issues, and other investment disincentives such as weak confidence in the judiciary and concerns about corruption, will fall on the shoulders of the next group of cabinet members. But with a change of mentality, strong and consistent leadership from the top, and improved communications with businesses, what are seen today as disincentives by investors can become an opportunity –   to right Indonesia’s trajectory and realize its full potential as a globally competitive powerhouse.
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(THE JAKARTA POST-)

Anissa Natalegawa, Managing director at the Asia Group Advisors.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.