Indonesia's Omnibus Law as Financial Liberalization: Gains or Harms?

Deskripsi

The Omnibus Law on Job Creation as financial liberalization has been passed in Indonesia recently. The law is intended to attract new investment to Indonesia and improve the operation of the labour market. The policy sparked an economic discussion especially regarding to a possible deterioration in the national current account and an erosion of workers’ wages. This essay will cover the reform with reference to the debate between the impacts of financial repression and liberalization, respectively. By reference to the Solow-Swan model, this paper simulates effects from policy change of the reform using comparative static Global Trade Analysis Project (GTAP) model. The essay argues that effective reform could provide economic benefits through a reduction in the required rates of return on capital from lower country risk, an improvement in the productivity of financial service intermediaries, and an improvement in capital productivity across all sectors. The essay finds that effective policy implementation would bring gains to Indonesia’s economy and standard of living, while recognizing that there are potential risks in the implementation.