Indonesia is among the economies with high restriction on foreign direct investment (FDI). The country is ranked at 44 out of 69 economies listed in the FDI Regulatory Restrictiveness Index 2018. Following this, the new government initiative known as omnibus bill on job creation seems having its ground. The bill is intended to boost investments, both domestic and foreign, in order to accelerate economic growth. Amid the COVID-19 pandemic, The House of Representatives Legislation Body (Baleg DPR-RI) and the government recently have decided to continue the deliberation of the bill.
The bill proposes to amend 73 laws in a bid to improve the investment climate. But labor unions immediately protested, claiming the draft will reduce worker rights, remuneration, and job security. The bill has been criticized as putting too much labor market flexibility by allowing hourly pay, relaxing outsourcing measure, and reducing severance pay.
Labor market flexibilization has gained increasing attention among policy makers, corporations, and labor unions. It occurs alongside changes in the global production networks, trade liberalization, and economic restructuring in most countries. Flexible labor regulations are favored by large corporations since they enhance competitiveness in business environment with rapidly changing markets and technologies, and may help them to adjust with economic crisis - like what is happening. Corporations seek flexible employment relations that permit the diminishing, reassignment, and redeployment of workforces with ease. Consequently, the pay structure and benefit systems provide less appreciation to job tenure (Stone, 2015; Eyck, 2003).
Labor market flexibility is often regarded as the opposite of labor rigidity, which is a big concern in the efforts to improve ease of doing business. Country like Indonesia, which is ranked at 73rd in the World Bank's Ease of Doing Business (EODB) 2020 index, should take it into concern as well. However, labor unions and experts warned it can cause economic and social insecurities, especially in the absent of proper social protection systems.
FDI and labor productivity
Will the omnibus bill deliver its promise to attract more FDIs? Answers to this question vary depending on what types of FDI we want to attract. For instance, if we target FDI in the primary or extractive sectors - known as resource-seeking FDI - then offer which combined access to natural resources and cheap wages will most effective. Similarly, if we would to confine the attractiveness on the labor intensive industries.
However, be cautious of the drawbacks from this approach. Labor flexibility tends to promote short-term contract. The situation will lead to underinvestment in human capital, hence hindering the pace of labor productivity growth.
Now, when we talk about the advantage from FDI, it is not merely about getting huge capital inflows. More important is to get transfers of advanced technology and know-how, typically in the manufacturing sectors. There is actually opportunity from the increase of FDI flows to medium and high-technology manufacturing sectors in developing economies (UNCTAD, 2014), where multinational corporations locate production facilities as part of a broader global value chain (GVC). This type of quality FDI provides better impacts to the economy, since it adds more export trade to the host economy. If we want to target this quality FDI, then we need different approach. We have to offer high labor productivity.
Unfortunately, a study by International Finance Corporation in 2019 showed a low level of labor productivity in Indonesia. The productivity of our workforce in the labor-intensive sectors falls below India, Vietnam, Brazil, China and Malaysia. Likewise in the capital-intensive sectors, we lag behind Thailand, Vietnam, the Philippines and Malaysia. Moreover, the Asian Development Bank report in 2016 also revealed that half of the Indonesian workforces were classified as under-qualified.
Hence, there is now urgency to focus on the improvement of our labor productivity. Labor productivity is a key precondition for high growth of output, employment and wages and central to long-term growth in living standards (OECD, 2018).
In conclusion, when we are targeting for quality FDI inflows, we do need to consider labor productivity over labor flexibility. Offering labor flexibility may help to attract more quantity of FDI inflows, primarily in the extractive or labor intensive industries. But this will happen at the expense of less social welfare and job security for the labor. Putting much flexibility will also discourage stable employment, career progression, and further investment in human capital.