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

Governments increasingly recognize the importance of improving national competitiveness, often measured by sustained economic growth, for economic advancement. This paper defines national competitiveness as a nation's sustainable economic progress, significantly influenced by institutional quality. Institutional quality encompasses robust 'rules of the game,' manifested in sound governance and policymaking across social, economic, administrative, and political spheres. Simultaneous strengthening of these areas is crucial for effective policy reforms; partial reforms may yield negative results. The paper examines Indonesia's Omnibus Law, a policy reform aimed at enhancing national competitiveness by attracting foreign investment, using the framework of institutional quality analysis. Enacted in 2020, this law faced both praise and criticism, ultimately deemed conditionally unconstitutional by the Constitutional Court. This raises the question of the Law's true relevance to Indonesia's national competitiveness, which this paper addresses by exploring the determinants of institutional quality and appraising the Omnibus Law's policy challenges within this framework. Unlike existing analyses focused on legal perspectives or investment increases, this paper contributes by examining the Law as a public policy aiming at national competitiveness, utilizing an institutional quality lens.

The literature emphasizes the crucial role of institutions in building competitive and sustainable economies. Institutions, defined as humanly devised constraints structuring social, political, and economic interactions (formal and informal rules), directly impact economic growth and development. While there's no consensus on the specific elements determining institutional quality, scholars point to factors like sound governance, rule of law, political stability, and regulatory quality (Kaufmann et al., 2003). Other studies highlight the importance of trade openness, education quality, human capital development, and ethnic harmony (Madni, 2019; Mamoon and Murshed, 2017; Lim et al., 2018; Lee, 2010). National competitiveness itself has diverse interpretations, ranging from a nation's overall prosperity to its global market share. The consensus is that partial reforms aimed at improving national competitiveness can result in poor outcomes, underlining the need for a comprehensive, multi-faceted approach (Addison and Baliamoune-Lutz, 2006; Lee et al., 2008).

This paper employs a critical narrative review to synthesize existing literature on Indonesia's Omnibus Law. This approach is suitable for analyzing recent policy reforms where extensive research is still developing. Sources included academic and grey literature (Web of Knowledge, Google Scholar, government documents, etc.). Desk research helped establish a theoretical framework identifying key institutional quality elements influencing national competitiveness (Figure 1). This framework was then applied to critically appraise the Omnibus Law as a policy, focusing on the government's actions and decisions, rather than solely on legal aspects. This approach resonates with critical policy studies, offering valuable insights into complex, dilemmatic policy situations that positivist approaches might struggle to fully capture.

The Omnibus Law's timeline (Figure 2) reveals a rapid legislative process. The analysis, using the four institutional quality streams (social, economic, administrative, and political), shows mixed results. **Social Stream:** Indonesia's fragile inter-ethnic and inter-religious relations are a concern. While the government claims consultations with civil society, major organizations like Nahdlatul Ulama and Muhammadiyah were largely excluded, leading to social unrest and criticism of the Law. **Economic Stream:** The Law aims to improve Indonesia's business climate and attract foreign direct investment (FDI). Figures 3 and 4 demonstrate that Indonesia lags behind its ASEAN neighbors in FDI inflow as a percentage of GDP. While the Law may offer potential benefits, concerns remain regarding its impact on intellectual property rights. Critics argue it weakens local IP protection, potentially harming small businesses (Riswandi, 2021). The existing regulatory environment suffers from inconsistencies between existing laws (Law 17/2003, Law 25/2004, Law 23/2004), potentially creating inefficiencies. **Administrative Stream:** The Law intends to simplify the business licensing process. However, Indonesia's decentralized system with conflicting regulations across different levels of government (OECD, 2020) remains a hurdle. The Law's human resources impact is largely ignored, despite evidence of a significant skills gap in Indonesia (Table 1 and Figure 6). The low quality and relevance of vocational education contributes to a large informal workforce, hindering competitiveness. **Political Stream:** The Law aims to reduce corruption. While Indonesia has shown progress in its Corruption Perception Index (CPI, Figure 7), the rapid passage of the Omnibus Law raises concerns about its process and transparency. The lack of meritocratic political recruitment undermines the quality of policymaking and the effectiveness of anti-corruption efforts, potentially weakening the rule of law and investor confidence.

The Omnibus Law, while potentially beneficial for economic growth if effectively implemented, operates within a complex and risky policy environment. Its potential for attracting FDI and streamlining business processes is counteracted by weaknesses in social stability, a challenging regulatory landscape, and a politically complex environment. The conditional unconstitutionality ruling underscores these shortcomings. The institutional quality framework reveals the Law's incompleteness. It neglects several vital areas: First, it fails to adequately address Indonesia's social dynamics, resulting in social instability; second, it undermines the local economy by weakening IP protection; third, it ignores the need to improve human resources, particularly through enhanced vocational education; and fourth, it does not address the challenges of political recruitment and corruption, affecting the overall implementation and long-term effectiveness. This reinforces the warning that partial policy reforms often yield unsustainable growth. The current political climate further undermines investor confidence.

Sustainable economic growth requires strong institutions across social, economic, administrative, and political spheres. The Omnibus Law, despite aiming to improve Indonesia's competitiveness, serves as an example of partial reform, neglecting crucial non-economic aspects. The Law's conditional unconstitutionality highlights its limitations. If the government continues to support the Omnibus Law, prioritizing multi-sectoral collaboration with civil society, religious organizations, academics, and political parties is crucial for its effectiveness and long-term impact. Future research should focus on the actual implementation of the Law and its consequent effects on Indonesia's national competitiveness.

This study is a critical narrative review based on existing literature. It does not incorporate primary data or detailed empirical analysis. The findings are based on the available information and may be subject to change as new research emerges and as the implementation of the Omnibus Law progresses. Furthermore, the analysis relies on existing theoretical frameworks and may not fully capture the nuances of the complex Indonesian context.