The importance of institutional quality: Reviewing the relevance of Indonesia’s Omnibus Law on national competitiveness

Abstract

Institutional quality is significantly relevant in determining national competitiveness when reflected in economic growth and successful development. Quality institutions manifest in robust ‘rules of the game’ reflected by sound governance and policymaking in at least four streams: social, economic, administrative, and political. Policy reforms intended to improve national competitiveness should aim to strengthen the streams simultaneously, whereas partial reforms could instead lead to poorer outcomes. Through the lens of institutional quality analysis, this paper critically reviews the relevance of Indonesia’s Job Creation Law, colloquially known as the Omnibus Law, to improve the country’s national competitiveness as conceptually intended. Declared as an overarching regulatory framework, the Law postulates Indonesia as prospecting for increased foreign investments. However, the Law is a partial policy reform as it overlooks the pivotal aspects necessary to improve institutional quality in Indonesia, such as inter-community relations, intellectual property regime certainty, quality vocational education, and meritocratic political recruitment. Thus, regardless of the opportunities, the Law may bring about, it may weaken national competitiveness instead. The Law is currently ruled conditionally unconstitutional by Indonesia’s Constitutional Court. If it is to be defended by the government, however, further multi-sectoral collaboration is necessary for the future implementation of the Law to enhance Indonesia’s institutional quality. In a more global context, this review indicates how developing nations should be mindful of various non-economic aspects (e.g., cultural and educational levels of the population) when undertaking policy reforms especially to enhance their national competitiveness. There may be future downsides to these implications and as it is too early to critically assess them, there is an opportunity through time and future research to do so.