Dynamic economy but hampered by state owned enterprises and the labour market
Indonesia has an increasingly dynamic economy, as evidenced by the flourishing e-commerce market and start-up environment.
Indonesia’s dynamism has been helped by successive governments taking steps to develop a more business-friendly environment. In 2017, Indonesia established a ministerial, provincial and regional task force to address and improve the inefficiencies that hamper business creation. In Jakarta, for example, in 2004 it took 181 days to start a business at a cost equivalent to 137% of GDP per capita. By 2019, it took 20 days at a cost of 6.1%. Indonesia now sits at 43rd in the world for the Environment for Business Creation element, up 23 places since 2009.
However, a significant number of sectors are still dominated by a few major players, a hangover from the Suharto years. In particular, State Owned Enterprises (SOEs) are still favoured by policymakers and regulators, who are yet to see the full value of effective competition policy. For instance, about 80% of public construction projects are being handled by SOEs. The finance sector is also dominated by state-owned banks, leading to the inefficient allocation of resources.
The Commission for Supervision of Business Competition (KPPU) was set up following the 1998 Asian Financial Crisis, to supervise the implementation of the Law concerning the Prohibition of Monopolistic Practices and Unfair Business Competition. However, it is relatively weak, has a small budget and only a limited ability to bring cases. A 2013 OECD survey of 49 countries highlighted that Indonesia was the second weakest in terms of being open to competition. To encourage competition, the Indonesian parliament recently approved an amendment of the Indonesian Competition Law. The draft law contains several new features that are designed to empower the competition regulator when handling monopolies and unfair competitions. However, Indonesia’s performance remains just above middling for market contestability, ranking 70th in the world for the Domestic Market Contestability element, down seven places from 10 years ago.
Another challenge for Indonesia is encouraging businesses to enter the formal economy, which will expand the current tax base. Formal employment surpassed informal employment only in 2011. One of the main restrictions to further growth of formal employment is the country’s restrictive labour laws. The average cost of redundancy is 57.8 weeks of salary, higher than all but three countries in the world. Indonesian employment contracts are also inflexible with fixed term contracts prohibited for permanent tasks. Indonesia ranks poorly for the Labour Market Flexibility element, at 119th, which is fourth lowest in the Asia-Pacific region.