Selective enforcement of labor rules cuts job opportunities

Daniel Kingsley, Jakarta

Indonesia's recently promulgated labor regulations have created a discerning attitude in the private sector towards export-oriented sectors.

Informal research shows that foreign and domestic stakeholders are not optimistic about maintaining current investment and new investment given the effect these laws are having on production costs and delivery schedules.

This applies to both foreign direct (FDI) and domestic investors, but the impact on employment may be most significant in institutions supported by FDI in export-oriented sectors, as these investors tend to also bring market access for exports.

To compound this problem, these regulations have been shown to be arbitrarily implemented. Foreign investors will look for other alternatives in the Asian region, add the unseen costs after careful risk evaluation and will research hidden costs associated with an arbitrary regulatory environment that is selectively enforced.

The private sector emerging from the reformation period should now be in a position to create employment as the government promotes macroeconomic stability. However, given that it is mostly consumer spending and repatriation of Indonesian capital that has fed a 4 percent growth rate over the past two years, it is necessary to evaluate the acute problems facing businesses and sectors that should be generating increases in employment.

Although the well-publicized issues of judicial reform and legal uncertainties are keeping some investors from choosing to invest in Indonesia, it is the over-regulated and selectively enforced labor laws that are a major factor in the decline in employment opportunities over the past two years.

We have conducted informal research by surveying commercial law offices, business associations, public accounting firms and public organizations, and the consensus is that the private sector has become over-regulated, and this has forced companies to stop operations and led to huge job losses in many sectors.

Now it is time for an end to the selective enforcement and the proliferation of new labor laws and regulations that stymie the private sector. An effort must be made by the government to focus on the short-term, realistic and obtainable goals that can support the number one need in Indonesia today: Jobs.

Workers rights are important in any democracy, but the practical reality is that the opportunity to have a job is one's most important right. If excessive labor regulations cause companies to close down or transfer operations to other competing nations, it is the employed worker who loses. The investor, entrepreneur and businessman lose as well, due to increased labor costs and declining profits.

A priority of the government should be to measure regulatory transparency and inequitable selectivity in regulatory enforcement. To measure the degree to which highly visible companies, such as international joint ventures and export- oriented firms, which are traditionally involved in high employment enterprises, are forced to deal with the new labor regulations.

In general, these regulations are increasing labor costs, but selective enforcement of these regulations are forcing companies in key sectors with high employment to close down.

In other words, the most transparent companies, those that follow best business practices, are choosing to leave Indonesia. Selective enforcement places a high burden on those companies, while those that are able to evade these regulations, are capable of continuing in business, but will generally not follow best business practices.

These will not be the foreign investors that Indonesia so desperately needs, namely those that operate with: A high number of employees; well established export markets; principles of international best business practice and a history of successful foreign/domestic partnerships.

Potential investors are waiting for equitable legal reform of the recently enacted laws and regulations that have forced so many companies to leave Indonesia.

Improving the environment for employees is important in an emerging democracy, but not at the expense of a decreased number of job opportunities. As additional new regulations are introduced and arbitrarily administered, those seeking new jobs will suffer the most -- usually the young and recent graduates.

It should be a government priority to allow these entrepreneurs and enterprises to operate competitively with their counterparts in other Southeast Asian countries and this requires equal enforcement of laws.

This is the challenge facing the Indonesian private sector in the globalization era. And to meet this challenge, the government must face the reality that legislative best practices and equitable enforcement of policy affecting the private sector are necessary to keep the private sector competitive with other developing economies.

The politicians should understand the power of the people's vote. The people proved this in 1999, and again in 2004. We have seen this in the recent legislative election, and the polls indicate that they are not satisfied with declining employment opportunities. Let's hope that the new legislatures and President note this as well: Jobs, and reversing the tide of unemployment will get them re-elected

The writer is a Managing Director of Trade Management and Development Services Ltd. and a private sector development consultant.