Indonesia’s economic challenges

Updated On: Jul 20, 2007

Amidst its efforts to boost its economic growth, Indonesia is facing many challenges.

The parliament has just approved the new investment law in March this year. It is expected that with the new law, Indonesia will be able to attract more domestic as well as foreign capital to the country. To attain the targeted economic growth of 6.3% this year, Indonesia will need 12.3% increase in investment (World Bank, 2007).

However, some laws and policies have to be adjusted. Indonesia has inadequate laws and sometimes inconsistent policies to reach its goal. Bureaucracy is a classic problem. The negative investment list issued in July setting limits on foreign investments in some sectors, for example, has created confusions.  More worrying is the negative perception created among investors about the “openness” of the investment climate.

Another apparently not well-thought through legislation has also surfaced. The parliament is in the process of enacting the Law on Limited Company. Article 74 requires each company to allocate its annual net profit for Corporate Social Responsibility (CSR). CSR is indeed a good program and has been proven to be successful in boosting a company’s image as well as community’s well-being.  The important principle of CSR is that it is a voluntary measure, which may set apart a great company from the others. Those opposed to the legislation have criticized that it is therefore absurd if the lawmakers want to make it obligatory.

Indonesian Employers Association (Apindo) Chairman, Sofjan Wanandi said obligatory CSR will just be another form of tax. The total tax a company has to pay in addition to 30 percent income tax will be around 34%. With such high taxation, added Sofjan, making CSR compulsory would damage the economy as investors would look to other countries that offered better investment climate. Indonesian Chamber of Commerce (Kadin) and Indonesian Business Links (IBL) also against the legislation said that the latter would violate the principles of good governance. Placing CSR on a statutory basis would be even counterproductive.  They added that to promote CSR, government should think of other options such as tax incentives. 

Another issue that has been the focus of public and media attention in Indonesia this week is the decision by Nike Inc, the world’s largest shoemaker, to end contract with its long-term supplier in Indonesia. This matter has been treated seriously by the Indonesian government because of Nike’s longstanding partnership in Indonesia. The vice president discussed it in a coordination meeting with three ministers, namely Minister of Trade, Minister of Industry and Minister of Labor. The foreseen impact of the contract termination is the mass dismissal of 14,000 workers of two companies owned by a well-known entrepreneur, Hartati Murdaya, who has been one of Nike’s first and biggest partners in Indonesia for 18 years. However, according to Erin Dobson, Nike’s director for corporate responsibility and communications, Nike promised to continue to source 20 percent of its footwear manufacturing in Indonesia and work with more than 30 contract factories in the country.

Nike explained that the decision to cease its order with its long-term Indonesia supplier was based on consistent failures to meet Nike’s minimum product quality and delivery standards over the past two years. On the other hand, Hartati believed that it was caused by the increasing wage of her factories’ workers, which is more than 1 million (S$ 170) rupiah a month. 

Feeling threatened, thousands of workers rallied in the country’s capital demanding Nike to re-consider its decision or come out with appropriate compensation.  But according to the regulation, Nike, as a buyer and not an investor, is not responsible for paying compensation to the workers. The government is challenged to be a good mediator and facilitator in this case.

The wider repercussions of the EU ban on Indonesian airlines is beginning to be felt as Saudi Arabia also gave notice to Indonesia that it is considering following the EU ban.  However, before the ban comes into effect, the kingdom is giving Indonesia a chance to have a dialogue and clarify about the safety of Indonesian airlines. A most recent report by AFP also noted that countries such as South Korea is puttingGarudaIndonesia’s national flag carrier, on a safety watch list.  But according to Antara, two spot checks by the South Korea’s Civil Aviation Safety Authority on a Garuda plane on 30 June and 3 July found no signs that the plane fell short of air safety and security standards. (20 July 2007)


Garuda put on S Korea’s airline safety watch list (Straits Times, 20 July 2007)

After EU, S. Arabia bans RI airlines (Jakarta Post, 17 July 2007)

S. Arabia waiting for RI`s explanation before flight ban comes into force (Antara, 17 July 2007)

Business wants CSR dropped from bill on corporations (Jakarta Post, 17 July 2007)

Govt welcomes Saudi request for info on RI planes` airworthiness: Minister (Antara, 17 July 2007)

Indonesia asks Saudi Arabia to audit airlines  (Jakarta Post, 18 July 2007)

Nike reaffirms commitment to Indonesia  (Jakarta Post,17 July 2007)

Investors confused by govt's new restrictions (Jakarta Post, 12 July 2007)