Capturing a ‘regulatory capture’?: A closer look at the Indonesian PERPPU on job creation

Capturing a ‘regulatory capture’?: A closer look at the Indonesian PERPPU on job creation

The enactment of the Indonesian PERPPU on job creation into an Act has sparked debate among legal observers. Is it merely aimed at inducing foreign investment, or are the interests of economic actors capturing the government?

In the 1970s, noble laureate George Stigler developed the ‘capture theory’, which postulates that the regulator/government agencies are often captured by the industries they are supposed to regulate. Stigler contrasted this with the public theory, arguing that regulations should correct market failures and thus serve the public interest. In the socio-legal discourse, championing one rationality over another in law-making is not uncommon. Take Mauro Zamboni’s work on politics and policy in the law-making process, for instance, in which he suggests that in the law-making process, various rationalities – economic, political, security, etc. – always come into play and compete with each other. Certainly, the outcome of a good law-making process or one based on the rule of law should uphold social welfare and the public interest, not only the dominating group’s interest. Otherwise, regulatory capture occurs.

To put this into context, let’s look at the Indonesian government’s controversial Regulation in Lieu of the Law (Peraturan Pemerintah Pengganti Undang-Undang/ PERPPU) on job creation. The new regulation was seen by many as the President’s attempt to short-circuit the annulment of the Job Creation Act 2020(Undang-Undang Cipta Kerja) by the Constitutional Court. The Job Creation Act in itself has been dubbed by many as a pro-capitalist law that primarily aims to streamline the investment process while sacrificing other aspects, such as environmental issues, workers’ security, and natural resource preservations. Therefore, the Job Creation Act plausibly fits into the ‘capture theory’ mentioned above. In late 2021, the Indonesian Constitutional Court annulled the Job Creation Act conditionally, meaning it mandated that the act needs to be revised within two years; otherwise, it would be permanently annulled. However, instead of taking visible action to revise the Act, the government issued the Job Creation PERPPU during the last year-end holiday – arguably to avoid public backlash.

Interestingly, in Indonesia, the PERPPU is a type of ‘emergency’ law that can be issued in certain emergencies. Indeed because of its nature, this type of law also significantly cuts off the ordinary legislating process. However, the catch is that the emergency situation is subject to a subjective assessment by the president. Nevertheless, on this occasion, some state agents stated that the reason for the impromptu issuing of this PERPPU is to prevent uncertainty that foreign investors might face, as Indonesia will rely more on investment and exports in 2023. What an ironic use of an ‘emergency’ measure. Some legal observers see this action as deceitful, and, based on the evidence, it could be labelled as a perfect example of regulatory capture. But, to know for certain, further analysis is needed.

To see whether the phenomena in Indonesia can be categorised in capture theory, we need to look into the essence of regulatory capture. In a broad sense, regulatory capture is an intervention by the special interest (usually economic actors) to the authorities (that are supposed to regulate them). The regulations impacted by the special interest include a broad area of regulations (specifically in economic fields) (Dal Bό, 2006). From the definitions, one essential element of regulatory capture is the economic actor’s influence on the authority. Here, the authority is seen as an actor meant to protect the public interest. However, because the private actor’s interest dominates the authority’s decision, the regulations and policies resulting from this process put the private actor’s interest on a pedestal and the others on the side. That is the reason why many Indonesian observers suspect the Indonesian government’s enthusiasm for championing the Job Creation Act through issuing the PERPPU with essentially the same content because the economic actors’ interests have captured the government. The assumption further speculates that the global economic actors’ interest has captured the Indonesian government. To support this speculation, some observers claim that the government is rolling out a ‘red carpet’ for foreign investors at the expense of ecologic considerations, the working-class’ well-being, and people’s land rights. Thus, in their opinion, the government is siding with the global economic actors’ interests instead of people’s welfare.

However, whether or not this phenomenon can be categorised as regulatory capture, we must prove which economic actor(s) are behind the process. It is virtually impossible to pinpoint which national or global economic actor is behind this process. One thing is clear: under President Jokowi’s leadership, Indonesia is trying hard to catch up with its South East Asian peers regarding foreign investment. In 2019, the Global Competitiveness Index (CGI) showed that compared to other countries in Asia Pacific, Indonesia ranked 11 out of 14 countries. The assessment was based on economic performance, the government’s efficiency, business efficiency, and infrastructure. This low rank was possibly affected by the complications of doing business in Indonesia, as it was notorious in South East Asia as being a country with the most complicated foreign investment process. Previously, the business licence process for foreign investment was spread across 57 laws and regulations. So, the idea behind the job creation Act is actually to significantly streamline the business licensing process to induce foreign investment and improve Indonesia’s position among its peers. However, in doing so, the government is apparently willing to compromise on other prevalent social and environmental issues.

Having discussed the situation in Indonesia, whether the law-making process of the Job Creation Act and the Job Creation PERPPU can obviously be categorised as regulatory capture is still debatable. Nevertheless, one thing is obvious – that the whole process of the Job Creation Act and Job Creation PERPPU is a perfect example of a bad legislating process. The legal observer heavily criticised the Job Creation Act as it did not involve adequate public participation, which is why it is problematic from various aspects, such as environmental, workers’ protection, indigenous people’s rights etc. The constitutional court ‘corrected’ this by giving time for the legislature to revise the act accordingly based on the rule of law. But, the government seems to have ‘tricked’ this judicial process by issuing the Job Creation PERPPU. Sadly, on 21 March 2023, the Indonesian House of Representatives (DPR RI) passed this Job Creation PERPPU into an Act, making the constitutional court’s decision left with no point. So even though, as discussed earlier, it is still debatable whether this whole scene can be categorised as regulatory capture, it seems to confirm people’s suspicion that the authority only focuses on economic interests and does not consider people’s voices, let alone a good law-making process.


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