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NEWS UPDATES Asean Affairs     February 22, 2017  

Indonesia focuses on internal reform to enhance investment climate

While it is fully aware of the importance of promoting the country’s huge potential overseas, the Investment Coordinating Board (BKPM) aims to focus on overcoming domestic bottlenecks to improve the overall investment climate.

BKPM chief Thomas Lembong believes the most effective promotion can carried out by existing investors that have first-hand experience in the country.

“If we address our ‘internal work’, they can add their investment and also invite their suppliers to come here,” he said during a visit to The Jakarta Post on Monday. “That’s why we need to improve ourselves.”

Among the major issues the board expects to address are constantly changing regulations, burdensome taxes, lack of skilled labor, land zoning, permits and poor infrastructure.

On the tax issue, for instance, the board, in coordination with relevant institutions, has tried to shift various taxes from the manufacturing sector to service sectors, as they threatened to stifle its growth, Lembong said.

Around 70 percent of the country’s tax income comes from the manufacturing sector, followed by 20 percent from the financial sector and the rest from other sectors.

Even with that tax burden, the government has set a target to boost manufacturing by 8.4 percent by 2019 after five years of 4 percent annual growth, well below overall economic growth.

Once the country’s backbone, the manufacturing industry has struggled to perform because of a number of issues faced by business players, including high energy prices, poor infrastructure and high logistics costs.

The industry expanded by only 4.29 percent last year, lower than economic growth of 5.02 percent, while its contribution to the gross domestic product (GDP) was only 20.51 percent. Both indicators are lower than those seen during the heyday prior to the 1997-1998 economic crisis when the manufacturing industry outpaced economic growth and gave nearly 30 percent share to the GDP.

This dwindling share of the manufacturing industry to GDP has led to what some economists describe as deindustrialization.

Lembong suggested that at the same time, there needed to effort to improve the quality of human resources, as at present the local labor force mostly comprised unskilled workers.

“There is a dire need for ‘quicker solutions’, and we can achieve that by developing the workforce’s technical skills by improving vocational education,” he said.

The workforce could also benefit from the inclusion of more expats, which Lembong said had sparked a “nonsensical” fear of having foreign workers taking local jobs. In reality, only 0.1 percent of expat workers make up the workforce.

“It must be clear that foreign workers are not a threat to local jobs. A mental revolution needs to take place, especially among the public and in the political environment,” he said.

Optimism about the positive impact of internal reform is fueled by the revision of the negative investment list, which has allowed more foreign ownership in several lucrative sectors, such as the entertainment business and the pharmaceutical industry.

Lembong pointed out that the local film industry had particularly benefitted from more foreign control over their local operation with foreign production studios beginning to invest in Indonesian films, such as the recent collaboration by Hollywood studio FOX with a local studio to create a film based on Indonesia’s popular Wiro Sableng series.

Center of Reform on Economics (CORE) Indonesia executive director Mohammad Faisal said the most urgent of the five problems listed by the BKPM were ever-changing regulations and zoning permits, as foreign investors often struggled with even trying to figure out who was in charge of certain aspects.

This was especially true at the regional level, where regional governments tended to lack assistance or even pass the project to the central government.

“It’s often seen that regional governments are not on the same page as the central government or even the investors themselves. There is a lack of coordination, especially in areas where the governing system is not welldeveloped, let’s say, those outside Java,” Faisal said.

Other problems, such as infrastructure quality, are deemed fixable as long as there is a steady amount of funding and commitment.

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