Projecting the long-run impact of an economic reform: The case of the Indonesian Omnibus Law

Abstract

Indonesia has been seeking to improve its investment climate. The most recent development in this process is the enactment of a ‘Job Creation Law’, which aims to achieve improvement in the investment climate through simplifying red tape, eliminating large numbers of overlapping regulations, and adopting a Risk-Based Assessment approach to business licensing. In parallel with this development, the Indonesian Government is pursuing an Import Substitution Strategy (ISS) to help preserve external balance while fostering local activity. In this paper, the recursive dynamic GDyn-FS model of the global economy is used to highlight the positive impacts of improving the investment climate, on national investment and trade over time, and the flow-on impacts to industries and households. On the other hand, the analysis indicates that the pursuit of an ISS, while possibly favouring protected activities, is likely to act as an ongoing drag on the wider economy.