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Sustainable trade

Indonesia's "Omnibus Bill" weakens labor and environmental standards

Published 13 October 2020 | 5 minute read

Indonesia’s new “Omnibus Bill” aims to bolster foreign investment by streamlining business regulation and cutting red tape. But the Indonesia bill contains measures that run contrary to the concept of sustainable trade by, for example, rolling back environmental and labor standards. This approach is out of synch with the modern-day realities faced by companies.

The Indonesian Parliament has just approved a sweeping reform bill which aims to bolster foreign investment by streamlining business regulation and cutting red tape. Indonesia has been battered by the Covid economic slowdown and is in danger of tipping into recession for the first time since the Asian Financial Crisis of 1997-98. While the new measures would usefully attempt to simplify Indonesia’s notoriously byzantine regulatory maze, it would also roll back labor and environmental protections.  

The Omnibus Bill on Job Creation, approved by the Indonesian Parliament on October 5th, runs to more than 1000 pages and amends seventy-nine laws. Among other things, it reduces the corporate tax rate, eases the process and time required to obtain a business permit, reduces the list of investment-restricted industries, and establishes a US$5 billion sovereign wealth fund.

The bill however also includes provisions which reduce wages, job security, mandatory leave and severance pay. Contract or part-time workers can now be used to replace full time employees and regulations on the length of working hours have been eased.

Other provisions eliminate environmental reviews for many new projects and limit public input. Laws which enable the Indonesian government to sue companies engaged in illegal logging have been repealed. Indonesia’s plentiful rainforests play a critical global role in absorbing carbon emissions and limiting climate change, and the obvious concern is that these new regulations could further exacerbate already rampant deforestation.

Contrary to sustainable trade

All of this flies directly in the face of the concept of sustainable trade, which recognizes that although trade and investment are essential ingredients in economic development, they must be pursued in a way which also strengthens social capital and provides adequate environmental stewardship. This is the basic definition of sustainability first articulated by the UN Brundtland Commission in 1987, and these three pillars of sustainability – economic, social, and environmental – also form the basis for the Hinrich Foundation Sustainable Trade Index (STI).

The STI, developed by the Economist Intelligence Unit, benchmarks the trade sustainability of twenty Indo-Pacific economies by assessing a series of twenty-seven indicators grouped under each of the three pillars of sustainability. Perhaps not surprisingly, Indonesia placed near the bottom of the 2020 STI, ranking 17th overall out of the twenty economies surveyed.

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Sustainable Trade Index 2018

With its new reform bill, Indonesia is essentially wagering that it can benefit by pursuing less sustainability in its trade and economic policies. The implicit calculation is that lowered labor and environmental standards will make Indonesia more attractive to foreign investors. There is ample evidence to suggest that this is an erroneous assumption.

Business and investors driving sustainability

Old, cliched notions about business being eager to exploit weak labor and environmental standards are rapidly falling out of sync with current day realities. More and more companies have recognized that such approaches simply don’t make good business sense over the longer term and run contrary to the values held by their customers, investors, and employees. In fact, business is frequently ahead of government in its commitment to sustainability.

Encouragingly, that seems to be the case with Indonesia’s reform bill. We’ve already heard voices in the international investor community speaking out against the weakening of labor and environmental standards. A group of thirty-five investment firms with over US$4.1 trillion in assets under management have written to the Indonesian government expressing their concerns in no uncertain terms: “We fear that proposed changes to the permitting framework, environmental compliance monitoring, public consultation and sanctioning systems will have severe environmental, human rights and labor-related repercussions that introduce significant uncertainty and could impact the attractiveness of Indonesian markets.”

Investors are telling the Indonesian government pointblank that reduced environmental and labor standards make the country less attractive for investment. This is profound.

Meanwhile, the World Bank has praised provisions which eliminate discrimination against foreign investors but has been sharply critical of the backward steps on sustainability, warning of adverse impacts on health, safety, natural resources, and labor protections. According to one official, “It’s going to move Indonesia’s environmental legislation further away from international best practice and this is not basically helping Indonesia.”

Covid pandemic heightens need for trade sustainability

The Indonesian economy shrank by 5.32% in the second quarter of this year – largely as a result of the Covid pandemic – and the country has not benefited nearly as much as some of its neighbors from supply chain relocations in the wake of the US-China trade war. The administration of President Joko Widodo is clearly under growing pressure, and with its sweeping new legislation, it hopes to reverse both those trends.

But Indonesia’s bid to boost foreign investment by watering down labor and environmental protection is a mistake. No country can ever win a race to the bottom, despite any transitory, short-term benefits that might accrue.

Growing civil society disaffection over deteriorating labor conditions, manifested in violent street protests in Jakarta last week, will only weaken Indonesia’s political stability – a key ingredient for potential investors. Environmentally irresponsible natural resource extraction, leaving a literal and figurative haze over the entire region, will tarnish the companies involved and undermine future growth. This is not an attractive value proposition from any perspective.

In their letter to the Indonesian government, the group of concerned international investors offered some sage advice that all countries facing pandemic-related economic challenges would be wise to follow: “Retain a long-term view when developing plans for economic recovery from Covid-19, ensuring social and environmental considerations are central to Indonesia’s recovery.” The basic message – that economic growth must be accompanied by an equivalent commitment to strengthening social capital and providing environmental stewardship – is at the heart of trade sustainability. The Covid pandemic has only heightened the urgency of that message.

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Stephen Olson

From 2014 to January 2024, Mr. Olson was a Senior Research Fellow of the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international trade negotiator and served on the US negotiating team for the NAFTA negotiations.

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