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 competit...
http://www.voices.news/2019/10/message-to-incoming-ministers.html
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.