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

The study examines how institutional quality shapes national competitiveness, conceptualized as sustainable economic progress. It poses the central question: How relevant is Indonesia's Omnibus (Job Creation) Law to improving Indonesia’s national competitiveness? The paper argues that institutional quality is multidimensional—social, economic, administrative, and political—and that partial reforms risk poorer outcomes. The objectives are: (1) to explore perceived determinants of institutional quality and their relevance to national competitiveness; and (2) to appraise Indonesia’s Omnibus Law as a policy instrument through an institutional quality framework. The context is Indonesia’s rapid enactment of the Law in 2020 to attract investment during the COVID-19 period, mixed public reception, and a Constitutional Court ruling deeming it conditionally unconstitutional pending revision.

The literature links strong institutions to economic growth and competitiveness. Institutions, defined as formal and informal ‘rules of the game’ (North, 1991), influence political, economic, and social interactions. Governance quality indicators (Kaufmann et al., 2003)—rule of law, political stability, regulatory quality, government effectiveness, voice and accountability, and control of corruption—are central. Additional factors affecting institutional quality include trade openness, education and labor quality, ethnic harmony, intellectual property rights, and infrastructure (Rodrik et al., 2004; Williamson, 2000; Buitrago & Barbosa Camargo, 2021; Madni, 2019; Mamoon & Murshed, 2017). Evidence emphasizes human capital and vocational education as foundations for institutional quality (Lim et al., 2018; C. Lee, 2010). National competitiveness is framed as the capacity to achieve sustainable prosperity, contingent on a country’s development stage (S. K. Lee et al., 2008), and undermined by partial reforms (Addison & Baliamoune-Lutz, 2006). The review synthesizes these into four institutional quality streams critical to competitiveness: social (inter-ethnic/religious harmony, cultural literacy), economic (IPR regime, harmonized regulation, open trade), administrative (quality vocational education, streamlined permits, efficient bureaucracy), and political (control of corruption, meritocratic politics, transparent policymaking).

An exploratory critical narrative review was conducted to synthesize evolving academic and grey literature on Indonesia’s Omnibus Law, suitable for timely appraisal of recent reforms. Sources included Web of Knowledge, Google Scholar, government and policy documents, media, and other grey literature. Desk research was used to construct a conceptual framework (the four institutional-quality streams) to guide policy appraisal. The Law is appraised as a policy (course of governmental action), not strictly as a legal text. The approach aligns with critical policy studies, enabling analysis of complex policy dynamics beyond positivist methods.

• Social stream: Inter-ethnic and inter-religious relations in Indonesia are fragile, with a declining Religious Harmony Index (from 75.4 in 2015 to 73.8 in 2019). Key religious civil society stakeholders (e.g., Nahdlatul Ulama, Muhammadiyah) were insufficiently engaged in the Law’s formulation, fueling resistance and social instability that can undermine competitiveness.
• Economic stream: Indonesia’s net FDI inflows were modest and declining (about 2.8% of GDP in 2014 to 2.2% in 2019), and the 2009–2019 average lags most ASEAN peers. Regulatory uncertainty persists, notably in the intellectual property (IP) regime, where enforcement is weak; the film industry lost about Rp1.4 trillion (~US$100 million) to piracy in 2019. Critics argue the Law weakens local IP protections (e.g., patents), potentially reducing competitiveness for MSMEs and complicating the regulatory ecosystem.
• Administrative stream: Decentralized permit regimes have been fragmented and conflicting; the Law centralizes and streamlines licensing via OSS, potentially improving the investment climate. However, severe human capital constraints remain: of ~138 million in the labor force (2020), only ~40 million (33%) are skilled; ~70 million have junior high education or below, correlating with high informality. Vocational education often mismatches industry needs, and vocational graduates contribute disproportionately to unemployment.
• Political stream: While Indonesia’s CPI has improved since 1998, it has plateaued and remains relatively low globally. Concerns about non-meritocratic political recruitment and opaque, rapid lawmaking processes (e.g., fast-tracked ratification) signal weak policy certainty. On 25 Nov 2021, the Constitutional Court ruled the Law conditionally unconstitutional, requiring revisions within two years, sending mixed signals to investors. Overall: The Omnibus Law offers potential administrative and regulatory efficiencies but functions as a partial reform that overlooks critical social, human capital, IP, and political meritocracy dimensions of institutional quality; thus, it risks undermining rather than strengthening national competitiveness.

The appraisal shows the Law could bolster economic advancement through centralized, streamlined permitting and potentially improved openness to trade and investment. However, Indonesia’s policy environment is socially, economically, administratively, and politically complex. Partial reforms, as warned by the literature, often yield poor or unsustainable outcomes. The Law’s limited attention to intergroup relations, weak IP protection, human capital deficits (especially vocational education quality), and non-meritocratic politics undercuts institutional quality. The Constitutional Court’s conditional unconstitutionality ruling further heightens uncertainty, weakening signals of rule of law and policy certainty crucial for investment. Achieving competitiveness requires simultaneous strengthening across institutional streams and broad-based, multi-stakeholder collaboration, including religious and civil society organizations, academia, unions, business associations, and political parties.

Sustainable national competitiveness depends on strong institutional quality across social, economic, administrative, and political streams. The Omnibus Law signals a commitment to attract investment and streamline regulation but represents a partial reform that neglects inter-community relations, IP regime certainty, quality vocational education, and meritocratic political recruitment. Given the Constitutional Court’s conditional unconstitutionality ruling, the Law as currently designed is misaligned with Indonesia’s competitiveness goals. Future efforts should prioritize comprehensive, multi-sectoral collaboration and reforms spanning all institutional streams. Further empirical research on implementation and outcomes of the Law is needed as impacts unfold over time.

This work is a critical narrative review based on secondary academic and grey literature and desk research; no primary data were collected. The policy is recent and evolving, and it is too early to comprehensively assess long-term implementation outcomes or causal impacts. Findings are context-specific to Indonesia and may have limited generalizability.