A Case of the Automotive Industry in Indonesia

Haryo Aswicahyono, David Christian and Adinova Faur

Chapter 6 in Reducing Unnecessary Regulatory Burdens in ASEAN: Country Studies, pp 143-175 from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: This chapter is based on a series of activities conducted by the Centre for Strategic and International Studies as part of the study of the Economic Research Institute for ASEAN and East Asia on reducing unnecessary regulatory burdens (RURB) for business. The centre conducted a country study in Indonesia aimed at identifying and developing solutions to RURB in a specific sector. Discussion in this chapter is limited to the automotive sector, which is among the most important of the Association of Southeast Asian Nations (ASEAN) priority integration sectors for Indonesia. The country study should be put into the context of regional (ASEAN) economic conditions in general and Indonesia’s in particular. Recent indicators in the country have shown a consistent slowing down in the economy in the last six years. Indonesia’s real economic growth in 2015 was 4.76%, the lowest in six years, before slightly improving to 5.02% in 2016. Many external and internal factors contribute to this slowing growth. Evidence suggests that some key sources of economic growth (e.g. trade activities) have weakened in recent years. More importantly, however, numerous domestic issues have been hampering the entry of foreign investment into the country. One such issue relates to the current regulatory regime. The regulations in Indonesia are seen as restrictive, excessive, and poorly designed or administered. The Organisation for Economic Co-operation and Development (2014) shows that the value of Indonesia’s Services Trade Restrictiveness Index is higher than the world average in each of the 18 services subsectors observed, indicating how restrictive the regulatory climate in Indonesia is towards foreign investment. Addressing the issue of excessive regulations, the president of Indonesia has recently trimmed down around 42,000 regulations that hinder investment. These are administered by a diverse set of public agencies from the presidential, ministerial, and central government levels down to the local government and district government levels. This speaks volumes of the excessive amount of regulations in Indonesia and, hence, the complications arising from it. A National Development Planning Agency tool for regulatory review process (Bappenas, 2015) lists options or checklists such as ‘Inconsistent’, ‘Duplication’, ‘Multi-interpretative’, and ‘Inoperative’, suggesting that many regulations fall into one or more of those categories. The lack of good regulatory practices is also well-documented by the IMD Survey of Competitiveness 2015 (IMD, 2015). To boost a weakening economy amid problematic domestic regulatory regime, the government has set up a massive deregulation initiative, embedded in several economic policy packages launched under President Jokowi’s administration. The government has been trying to streamline the number and procedures of regulations to facilitate even more economic activities. It is in this context that the findings from this study will become useful.

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