Indonesia’s top policymakers are now more certain than ever regarding the need to amend its strict labour laws. For more than a decade, Indonesia’s stringent labour laws have slowed foreign direct investment into the country’s economy.
Talks regarding the amendment of said laws are not a new occurrence. Over the years, the topic has been put on the table multiple times However, it has always been opposed by strong worker unions, supported by opposition politicians. Combined, they have managed to send any draft bill back to the shelf, nearly crushing any hope of review.
However, as of late, motivation to amend the strict laws is growing. Passed in 2003, said laws have had a comparatively negative impact on trade and employment.
According to the Straits Times, Indonesia had recorded US$180 billion in exports in 2018, a little lower compared to eight years ago. In comparison, Vietnam saw a huge surge in exports. In 2010, Vietnam recorded US$83 billion in exports. In 2018, that number had risen to US$245 billion, the majority of which was thanks to Samsung Electronics.
“More than a quarter of Vietnam’s export revenue today is contributed by Samsung, which actually wanted to invest heavily in Indonesia, but because of our regulations, they went with the alternative,” stated a senior government official.
In 2015, Samsung opened up its first Indonesia mobile phone factory to cater to the domestic market. Since then, it has yet to expand its operations. On the other hand, Vietnam has eight Samsung factories; with a new one opening in India in 2018.
The incredibly generous payout packages that are demanded by Indonesian labour laws is very likely to be one of the major reasons that businesses and investor are so hesitant to expand into the Indonesian market.
For example, employers must provide a minimum severance pay of six months’ wages to terminate employees who have worked with the company for three years, and 12 months’ wages to those who have worked for eight years.
Some companies, especially SMEs, who have had to downsize to keep themselves in operation, had to opt for bankruptcy instead because they could not afford the heavy payouts as a result of laying-off staff. Those that could survive the downsizing process had to suffer huge net losses to their bottom-line for upwards of three years.
Indonesian Employers Association chairman Hariyadi Sukamdani described the labour laws as too favourable to employees, at a high cost to the economy.
He also said the high minimum wages in Jakarta and many other regions have added to business costs. Jakarta has a monthly minimum wage of 3.9 million rupiah (Approx. US$277).
Sukamdani added that the majority of investors that come into Indonesia consists of capital-intensive industries, or firms that rely more heavily on capital investment and employ a lower number of staff. He also mentioned that Indonesia requires more labour-intensive industries to absorb the unemployed.