At the end of 2019, a pandemic caught the world unprepared. The SARS-CoV-2 virus began spreading in Wuhan, China, before exploiting the interconnectedness that lies at the heart of the globalized economy. To halt the spread of COVID-19, many countries began closing their borders and restricting movements within. The integrity of global value chains (GVCs), which was already strained by the US-China trade war, took further blows when countries went into isolation. Multinational enterprises are beginning to rethink their dependence on China and governments are calling their corporations to return home (reshore) or move nearby (nearshore). With Southeast Asia potentially receiving the bulk of nearshoring in Asia, Indonesia is pushing for the biggest regulatory reform since the 1998 Asian financial crisis in order to benefit from this trend.

This chapter begins with an overview of the push for reshoring spurred on by the pandemic. It will then continue with an overview of Indonesia's economic condition and GVC participation prior to and during the pandemic. The section after this will highlight Indonesia's complex regulatory system, which deters foreign investors, and the reform efforts leading up to one of the most controversial pieces of legislation in the past twenty years: the Omnibus Law on Job Creation. This is then followed with several sections analysing the law, focusing on two parts of the law that try to balance large investment with small businesses through a budding GVC model. Finally, a brief consideration of potential complications that could undermine the investment and GVC goals of the law is presented.

Global Value Chains: The Unravelling

GVCs drive approximately half of global trade and their activities have boosted foreign direct investment (FDI) since 1990. Led by multinational enterprises, they depend on open borders and lean production methods to keep their production costs low. With international transport heavily restricted in 2020, some GVCs faced difficulty in securing the necessary flow of materials and were forced to stop or reduce their activities. Furloughing and retrenchment soon followed, causing demand to contract as well. It is estimated that this combined supply and demand shock will shrink international trade by 13–32 per cent and FDI by 30–40 per cent in 2020 and 2021.

Abstract

Food security has long been a contentious issue in Indonesia. As the country has graduated into the upper middle income group it still has to deal with ensuring people's access to food. The self-sufficiency ambition exacerbates this situation, as policies taken are often protectionist in nature, resulting in high domestic prices and thus hurting the poor, whose access to affordable food deteriorates. Now, the COVID-19 pandemic may further amplify food insecurity, leading to chronic hunger and lasting developmental challenges. We discuss the impact of the pandemic on Indonesia's food security by examining the global and regional food trade along with Indonesia's domestic food policies. We argue that the COVID-19 pandemic exposes the vulnerability in Indonesia's food systems, especially in terms of declining production trends, inadequate distribution capacity and trade limitations. Needed reforms include inviting more investment, supporting diversification of food supply, easing food trade flows and working with other countries to ensure regional food security.

Introduction

The COVID-19 pandemic is directly affecting food supply and demand globally, raising concerns over a potential food crisis on top of the existing health crisis. Mobility restrictions required to contain the spread of the virus disrupt the increasingly complex and interconnected food supply chain, from food production through processing, distribution and consumption, both domestically and globally. The disruption may result in food shortages, price spikes or price volatility that harms the livelihoods of people working in the supply chain and threatens food security, especially for the vulnerable poor. A joint report by the Food and Agriculture Organization of the United Nations (FAO), International Fund for Agriculture Development (IFAD), United Nations International Children's Fund (UNICEF), World Food Programme (WFP) and World Health Organization (WHO) estimated that, in 2019, 690 million people or 9 per cent of the world's population went hungry, and the COVID-19 pandemic may push another 83 million to 132 million people into chronic hunger (FAO et al. 2020).

Food insecurity risks during and after the pandemic will hit hard in Indonesia where, even before the pandemic, 9 per cent of the population or more than 22 million people were undernourished between 2017 and 2019.

BACKGROUND

The world is gradually recovering from the 2008–09 Global Financial Crisis. In 2017, for example, economic growth climbed back to 3 per cent. During this transition phase, however, the role of trade has been much smaller — thanks to the maturation of global value chains, the shift to robotization and the services economy, fluctuation in commodity prices, as well as rising protectionism around the world.

At the same time, more than 3 billion people still have to struggle to live with US$2.50 or less per day. The richest 10 per cent of the global population owns more than 85 per cent of the global wealth. Even in countries where poverty has gone down, inequality is on the rise — prompting social tensions. These factors are often seen as the main cause of the re-emergence of anti-globalization sentiments and seem to have encouraged world leaders to adopt populist, inward-looking policies. Examples of consequent surprises coming from the voting booths include Duterte, Brexit, and Trump among others. Moreover, often by riding on the back of this disdain for globalization, those in power display increasingly authoritarian inclinations — such as Erdogan in Turkey, Putin in Russia, and Xi in China, to name a few.

Indonesia is no exception. In this country, dissatisfaction with globalization has manifested itself in rising protectionism, rejection of foreign interference, and expressions of distrust of democracy — sometimes with a New Order flavour. The disappointment, nevertheless, is not totally unfounded. As in the case elsewhere, globalization — and nationalism — can bring both good and bad results, “boon and curse”, as Amartya Sen put it. Trade creates winners and losers, and in the absence of (1) wellfunctioning compensation mechanisms and (2) free movement of labour across sectors, the gains may remain concentrated in the hands of a few. And corruption only worsens this situation.

Nationalism in the economic sphere takes the form of protectionism — protecting domestic industries from foreign competition. It usually reveals itself in policies aimed at self-sufficiency in a number of commodities, including those of which Indonesia is a natural net importer.

The world is finally recovering from the 2007–08 global financial crisis. After contracting sharply in 2009 and increasing slowly in the subsequent years, world real GDP growth returned to 3 per cent in 2017. Ten years after the crisis, it appears that growth is at last showing sustainable signs of recovery. Other challenges remain, however. Trade growth has slowed and, despite an improvement in 2017, remains lower than before the global financial crisis. The slowdown in trade growth has been attributed to cycli¬cal factors and to structural factors such as a lack of productivity growth and the maturation of global value chains. Protectionism is another factor, although, to date, it is not so much the increase in protectionist measures as the high level of uncertainty about trade policy that is affecting trade.

The policy uncertainty stems primarily from the perceived lack of ben¬efits from globalisation. Almost half the world's population—that is, more than 3 billion people—have to survive on $2.50 or less every day. The richest 10 per cent of the global population owns more than 85 per cent of the global wealth. Inequality has increased even in the countries where poverty has declined. These factors are widely seen as the main causes of the re-emergence of anti-globalisation sentiment around the world, prompting leaders to adopt populist and inward-looking policies. The electoral consequences have been surprising; they include the election of Rodrigo Duterte in the Philippines, the success of the ‘leave’ campaign in the Brexit referendum in the United Kingdom and the election of Donald Trump in the United States. Meanwhile, those in power show an increas¬ingly authoritarian inclination—Erdoğan in Turkey, Putin in Russia and Xi in China, to name a few—often by exploiting the public's misgivings about globalisation.

In Indonesia, the discontent with globalisation is apparent in rising nationalism, a rejection of foreign interference and a distrust of democracy that is reminiscent of the New Order. The disappointment with globalisa¬tion is not entirely unjustified. In Indonesia as in many other countries, globalisation has had both good and bad results. Trade always creates both winners and losers, and in the absence of a well-functioning com¬pensation mechanism and the free movement of labour across sectors, the winners appear to be concentrated disproportionately among a small number of elites. Corruption has only worsened this situation, allow¬ing the dark side of globalisation to dominate.