The Economic Impact of Indonesia’s Omnibus Law
By Sarina Tareen
Laws are usually introduced to address a specific issue. An omnibus law is different. The term omnibus, meaning “for all,” refers to a single piece of legislation that amends numerous laws at once instead of changing them individually. Black’s Law Dictionary defines omnibus legislation as “a law that includes several measures. In Indonesia, this was a legislative measure that was compatible with the rule of law provision in its Constitution. According to Article 1(3) of the 1945 Constitution, Indonesia is a State based on Law, and the purpose of the law is to foster justice, legal certainty, prosperity, and public welfare.
In this context, in October 2020, the Indonesian government introduced the Omnibus Law on Job Creation, one of the country’s largest economic reform programmes. The law made amendments in over 70 existing laws and introduced more than 1200 new provisions on labor, taxation, land acquisition, environment, business licensing and investment.
Its objectives were clear. The government aimed to ease business regulations, boost the business climate, bring in domestic and foreign investment, generate jobs, and speed up economic growth. It promised to boost economic growth by approximately 6% and create jobs for millions of jobless Indonesians and new entrants to the labor market. The reform also aimed to eliminate dividend tax and reduce corporate income tax to 20% by 2022. To achieve these goals, the law streamlined procedures for business licensing, business land acquisition and eliminated regulatory hurdles in numerous industries. It also rolled out unemployment insurance, enhanced support for micro, small, and medium-sized enterprises (MSMEs), and lowered corporate and dividend taxes to boost the investment climate in Indonesia.
The scope of the reform, however, made it hard to evaluate. The bill was more than 1,187 pages and changed much of the legal system in Indonesia. In 2021, the government issued dozens of implementing regulations to put the reforms into practice and provide greater legal certainty for investors. Five years later, the results are mixed. Research shows that Indonesia has made progress in simplifying regulations and improving administrative efficiency. Yet, foreign direct investment (FDI) in relation to GDP remains lower than in some ASEAN countries. This indicates that investment performance does not improve just through regulatory improvements. Investor confidence also depends on factors such as institutional quality, governance, legal certainty, infrastructure, and human capital.
One of the law’s most controversial reforms concerns labor. While the standard 40-hour working week remained unchanged, the law introduced greater flexibility through fixed-term contracts, outsourcing, and piece-rate payment systems. Article 88B permits that temporary workers can be paid by output rather than fixed wages. Supporters say that these changes make businesses more competitive and the labor market more flexible. Critics argue, however, that a production-based pay plan could undermine income stability because employees wouldn’t get paid if they don’t produce enough to reach minimum wage. The law has also raised environmental concerns. Critics argue that simplified licensing and environmental assessment procedures could weaken oversight of projects affecting forests and biodiversity. Some policy analyses suggest these changes may make it harder for Indonesia to meet its commitments under the Paris Agreement 2015. However, the government maintains that environmental protections remain in place.
In 2021, the Constitutional Court of Indonesia found the original law “conditionally unconstitutional” due to its lack of proper draftsmanship. Although the government later revised the legislation. Five years on, Indonesia’s Omnibus Law has simplified parts of the country’s regulatory framework. However, the evidence suggests that regulatory reform alone does not guarantee higher investment or long-term economic growth.