Job Creation Law and Legal Certainty of Investment Climate
The Job Creation Law is a future law that will have a positive impact on the investment climate. Let's act wisely, so that Perppu No. 2/2022 is rolled out in accordance with the existing law and regulations.
Raymond Vernon’s very famous theory (1966), the Product Life Cycle Theory, is relevant to our understanding today. This theory says that there is no (foreign) investment that is not profit-oriented.
The basis or motive of all investment must be profit. Pham Hoang Mai also explains the same thing, as cited by Zaidun (2005).
For Indonesia, this is related to the existence of Law No. 11/2020 on Job Creation (UUCK), which was later annulled as conditionally unconstitutional in a Constitutional Court decision, which then led to the issuance of regulation in lieu of law (Perppu) No. 2/2022. It is very important to explain this to the public.
Why is it important? So as to clearly understand the presence of the Job Creation Law in conjunction with Perppu No. 2/2022, without noise, for the sake of the investment climate, which has always lagged behind other ASEAN countries such as Malaysia, Thailand, Singapore and Vietnam.
It must be admitted that the complicated permit procedures in our country are a classic problem that does not attract investment to Indonesia.
Objectively, permit bureaucracy is one obstacle to increasing investment through ease of doing business. This is reflected in the World Bank’s Ease of Doing Business (EoDB) report on 190 countries, including Indonesia. It acknowledges that Indonesia's EoDB rating continued to increase from 2015 to 2019. For example, its ranking went up from 114th (2015) to 109th (2016), and then to 91st (2017), 72nd (2018) and 73rd (2019). However, efforts in regulatory reform are still needed to increase the ease of doing business to attract more investment.
Even though Indonesia is in the group of upper middle income countries, we face the challenge of escaping the middle income trap, in which a country's economy cannot grow into a developing country (or high-income country).
Indonesia needs to escape this trap, because a country that is in the middle income trap will be weak in competitiveness. This is caused by being unable to compete against low-income countries that have cheaper labor costs and against high-income countries in terms of technology and productivity.
From the experience of successful countries, labor competitiveness and productivity are the mainstay to escape the middle income trap.
Efforts to overcome these challenges and obstacles, especially in the context of the Covid-19 pandemic, which has changed the patterns of economic activity and people's livelihoods, require a strong regulatory basis in laws.
At the same time, these laws must amend and refine various existing laws that still overlap, and this will take quite a long time, around 17 years, if they have to be amended one by one. These are just a few considerations why Indonesia needs the Job Creation Law in conjunction with Perppu No. 2/2022.
There is an unequal relationship between the countries that own capital and the recipient countries. This can be seen as below (Sumantoro, 1980; Pramono, 2007).
These are just a few considerations why Indonesia needs the Job Creation Law in conjunction with Perppu No. 2/2022.
First, foreign investors are always profit-oriented, while recipients expect the foreign capital they receive will help achieve their development goals. Second, foreign investors have a stronger bargaining and negotiating position, which can conflict with the interests of the recipient country in practice. Third, foreign investors have strong and broad business networks in the form of multinational corporations that serve the interests of the state and shareholders in the country of origin, making it difficult to serve the interests of the recipient countries.
Investors often demand several facilities that include first, consistent laws and regulations that guarantee legal certainty in the long term. Second, a permit procedure that is not complicated, which results in a high-cost economy. Third, investment and legal protection guarantees for intellectual property rights (IPR). Fourth, supporting facilities and infrastructure, including communication, transportation, banking, and insurance.
Improving the investment climate
In order for investors to be willing to bring their capital into Indonesia, matters related to laws and regulations that provide long-term legal and business certainty of course need to be improved. This is one aspect that has been improved through the Job Creation Law, in conjunction with Perppu No. 2/2022. The aim is, of course, to provide ease of investment in Indonesia.
The Job Creation Law is a breakthrough in bridging the problem of overlapping laws and regulations that do not support the investment climate. According to the data, at least 78 laws are spread across sectors such as mining, agriculture, forestry, environment, trade, spatial planning, and permits, all of which must be corrected.
If these laws must be reviewed one by one, it would take about 17 years. The Job Creation Law was made in the form of an omnibus law, which unfortunately the Constitutional Court did not justify because this method is not contained in Law No. 12/2011 on lawmaking. However, the Constitutional Court's decision must be respected on the basis of the maxim, res judicata pro veritate habetur (an adjudicated thing is regarded as the truth).
The government then amended Law No. 12/2011 with Law No. 13/022 on the Second Amendment to Law No. 12/2011, which included the omnibus law method. Taking into consideration that a state of emergency existed, the government issued Perppu No. 2/2022.
‘State of emergency’
The indicators of a state of emergency are: 1) weakening economic growth together with stagflation; 2) supply chain problems that effect limited supplies, especially for basic goods such as food and energy; 3) the Indonesian economy risks being impacted by visible global stagflation; and 4) an increasing need for a standard response by using a policy mix, particularly monetary and fiscal policies, which has been continuously strengthened since the start of the Covid-19 pandemic.
The Perppu’s issuance was decided by President Joko “Jokowi” Widodo in a bid to prevent Indonesia from entering into a stagflation (crisis).
Regarding the “state of emergency”, of course this discretion falls within the scope of the President's authority. On previous occasions, I noted several Perppu that did not explain the consideration of any “state of emergency”.
First, Perppu No. 1/1998 on Amendments to the Bankruptcy Law was issued during the 1997-1998 crisis. This Perppu was issued during a crisis when the consideration of “state of emergency” was heavily nuanced by economic considerations. At that time, the government had already spent Rp 600 trillion in bailout funds, without ever stating that the country was in a state of emergency (staad noodrechts).
The consideration was that the financial turmoil that had been occurring since mid-1997 had an unfavorable impact on the national economy and created great difficulty in the business sector to continue their activities, including fulfilling their obligations to creditors. No one made a fuss about this.
Second, Perppu No. 1/2000 on Free Trade Areas also does not mention that a state of emergency exists.
Third is Perppu No. 1/2004 on Amendments to Law No. 41/1999, which contains not a single sentence stating that the Perppu was issued due to a state of emergency. The consideration is that there is legal uncertainty in the mining sector in doing business in forest areas, especially among investors who already had permits or agreements prior to the enactment of the law, which can put the government in a difficult position in building an investment climate.
Fourth is Perppu No. 1/2014, which annulled Law No. 22/2014 on the Regional Head Elections (Pilkada) and also does not explain that a state of emergency exists. The reason used is that Law No. 22/2014 on the Election of Governors, Regents and Mayors, which indirectly regulates the elections through the provincial and regional legislative councils (DPRDs), has been widely rejected by the people. Apart from that, the decision-making process has also raised issues as well as a compelling urgency in line with Constitutional Court Decision No. 138/PUU-VII/2009.
Also read: Legal Politics of Job Creation Bill
Therefore, in my opinion, issuing Perppu No. 2/2022 as an anticipatory measure is the right action to take without having to wait for a crisis to occur first, when we will all be at a loss to get out of the crisis, not to mention if a chaotic situation like 1997-1998 is repeated. I am sure that if we think wisely and prudently, none of the nation's citizens would want the events of 1997-1998 to happen again.
Indonesia must learn from two crises, namely the 1997-1998 crisis that spent Rp 600 trillion of taxpayers’ money on a blanket guarantee policy that has not been fully recovered until now. Then, the 2008 crisis left behind the Bank Century case, which has also not been resolved until now. The bailout program of between Rp 7 trillion and Rp 8 trillion through the Deposit Insurance Corporation (LPS) can be repaid in full.
Impact of Job Creation Law
Let us wisely and prudently respond to this Perppu with a cool narrative that does not point fingers and oppose the government’s policies.
Let us, as a great nation, not be trapped by a debate that I think is unnecessary. In terms of investments for the progress and prosperity of the nation, we are already far behind our neighboring countries in ASEAN. With the birth of the Job Creation Law, US$20.1 million in foreign direct investment (FDI) to Indonesia was recorded in 2021, the second-largest in Southeast Asia.
The data show that investors have responded positively to efforts at structural reform through the Job Creation Law. Based on the World Bank's analysis in the Indonesia Economic Prospects (IEP) report released in December 2022, structural reform through the Job Creation Law has had a positive impact on increasing FDI in Indonesia, higher than the amount before the law was implemented.
Total FDI realization increased by an average 29.4 percent in the five quarters since the issuance (post-policy) of the Job Creation Law compared to the pre-policy period (five quarters before the law’s issuance).
To quote from the IEP, average FDI in the manufacturing sector increased 34.6 percent in the post-policy period. In the third quarter of 2022, gross FDI in the manufacturing sector had overtaken and surpassed non-manufacturing FDIs in 2020 and 2021. Domestic investment (PMDN) in the manufacturing sector in Q4 2021 was also higher than the pre-policy level, in line with the movement of FDI.
Structural reform through the Job Creation Law was also able to reduce trade and investment barriers in Indonesia. The OECD’s Product Market Regulation in Indonesia: An International Comparison, released on 12 Dec. 2022, stated that, based on initial identification results, the implementation of the Job Creation Law reduced the barriers to FDI by more than a third and reduced the barriers to trade and investment by almost 10 percent in 2021.
The Job Creation Law jo Perppu No. 2/2022 is a future law that will have a positive impact on the investment climate to support employment. Let's act wisely, so that Perppu No. 2/2022 is rolled out in accordance with the existing law and regulations.
Nindyo Pramono, Professor of Business Law, Gadjah Mada University
This article was translated by Kurniawan Siswo.