Labor Day 2020
Commentary by Wayne Forrest
With unemployment at record levels in both the US and Indonesia amidst an ongoing pandemic I’ve been reflecting on Indonesia’s struggle to find meaningful employment for her growing population of 270 million. Of course, our two nations do not share Labor Day: Indonesia observes International Labor Day on May 1. Readers of this column may not know much about the nature of employment in Indonesia. Simply put, there are not enough good paying jobs with benefits to go around even though the country has made remarkable gains lowering absolute poverty and raising income levels over the past several decades.
So, how do people earn? They do so by being entrepreneurial and engaging in all manner of service and unskilled work. There is an involution to labor, meaning jobs are divided to absorb the surplus. For example, distribution of basic goods to Indonesia’s consumers move along large arteries down to tiny capillaries. The last few kilometers may involve several changes of hands and jerry cans on the side of a motorbike. Its estimated that 65% of Indonesia’s workforce is in the informal sector. These domestic helpers, construction day laborers, food stall workers, delivery people, agricultural field hands, watchmen, etc. do not pay taxes; their income is not included in GDP; and they do not receive unemployment benefits. They are paid in cash at the end of the day. Extended families manage child and elder care. Decades of searching for higher wages in manufacturing has led many younger Indonesians to leave rural areas for cities. Many have found successful employment, often in the textile industry, but not always, and naturally unemployment is highest in urban areas. The gold star job for the majority of Indonesia’s workforce (those with junior high school education and few skills) is in a factory, possibly one that employs union workers. But, only 3.6% of the workforce is unionized. In the decade after Tianaman Square (1991-1997) Indonesia did well in manufacturing, a good example being Mattel’s huge Barbie Doll factory, but after China joined the WTO in 2001 a lot of these jobs (and the potential for new ones) were sucked away. Indonesia (and its youthful President) are fighting to bring them back.
Formal sector jobs for high school and college graduates (especially office and digital) have increased as Indonesia’s economy grew but there remains relatively high unemployment among the ranks of the college educated due to low curriculum quality and job mismatches. Indonesia only requires education until grade 9 and only approximately 26% complete high school. Indonesian students rank low on international PISA tests and a 2019 World Bank report, “The Promise of Education in Indonesia”, revealed that 35 percent of Indonesian children are unable to read and understand a simple story by age 10. An analysis by the World Bank showed that 55 percent of Indonesians who complete school are functionally illiterate compared with only 14 percent in Vietnam and 20 percent of OECD member countries. This number is all the more startling when the national government reportedly spends 20% of its budget on education. A significant gender gap also remains even though increasingly numbers of women are joining the labor force even after marriage. Although all schools are under the government’s authority, about 50% are private, often religious-focused schools, especially junior and senior high schools. A new Minister of Education, Harvard-educated tech mogul Nadiem Makarim, is already running into difficulty promoting more STEM in a system that years ago moved away from its secular basis to one that has accommodated political Islamic interests, inserting religious teaching in the national curriculum.
Given this scenario two recent government imperatives stand out: attract manufacturing investment to get more people out of the informal sector, and keep people working during the pandemic. Currently, only 23% of allocated social COVID assistance funds have been spent, in part, because many of the people who need it most are the informal sector workers who are not registered in the national databases. Additionally, since the pandemic the Jokowi administration has been reluctant to impose lock-downs, knowing the huge impact they have on most of the workforce. The dilemma is tragic.
Indonesia’s approach to attracting manufacturing investment has been patchy, at best. After several previous administrations failed to add significantly to the nation’s road, rail, and ports, the Jokowi administration has made significant progress building them, forging a significant partnership with China who has acted as builder as well as financier. Still, logistics costs remain among the highest in the region because of many other costs that are not reduced even if travel time is. It remains cheaper to import fruit to Jakarta from China than Aceh (western tip of Sumatra). Subsidized fertilizers and floor price schemes are part of an effort to achieve food self sufficiency that would normally help keep agricultural workers employed, but inefficient distribution networks (often a needless series of middlemen) retard the incentives and wages: in Jakarta, the official minimum wage is $10.71 per day, three times what farmers earn. The incentives keep prices up but that can also be dicey; Indonesian-grown rice and beef is more costly than imported Thai rice and Indian beef, and if there is a bad harvest prices can skyrocket.
The cornerstone of Indonesia’s approach to manufacturing is to selectively ban exports of high value metals and create a network of new “turnkey” industrial estates, similar to what was established in the 1970’s on the island of Batam. This has been successful in nickel, where an export ban has led to significant investment in downstream processing, especially stainless steel. The jewel in the making is an electric vehicle battery factory under construction at Morowali (Halmahera island). Indonesia expects to eventually produce its own e-vehicles. I suspect they may be able to do this but only with a lot of imported components that could lead to a high price tag. Whether or not this value-added strategy can be applied in a widespread fashion remains to be seen. Its been no secret that the smelter imperative is uneconomic for copper and other metals, yet it persists. A 1980’s ban on sawn timber exports did not lead to enough downstream processing (furniture, plywood) to make up for the lost export revenue. Curiously, rubber, a product Indonesia has been able to export both in raw and manufactured form without import/export bans, does not serve as an example. Most of the industrial estates slated to absorb relocated production from China are still under construction. However, Batam, a free trade zone close to Singapore that took decades to develop, has now lost some of its competitive advantage as wages and electricity costs have increased. Some exporters there have said that the only thing keeping their operations viable is an undervalued currency.
After a series of deregulation packages during Jokowi’s first term (2014-2019) did not bring the manufacturing foreign investment Indonesia had hoped for and a World Bank report indicated that Vietnam received most of the investment from multinational companies moving their production out of China (due to US-China tariff wars), the President launched what he called “structural reforms”. Presented in the Omnibus Law on Job Creation, the legislation was supposed to have been passed last April. Besides harmonizing thousands of central and local government regulations, the bill’s signature provision are changes to the 2004 Labor Law. Drafted at the height of Asian Financial Crisis of 1998, the bill gives “formal” workers significant job security and mandates severance payments of a year’s wages, obviously a disincentive for manufacturing investment. In other fields, office workers for example, the law has been circumvented by artful use of contract workers supplied by outsourcing companies who can be more easily dismissed. The new law, if passed, will make it easier for employers to fire employees, removing an obstacle to manufacturing foreign investment. However, Indonesia’s Parliament has yet to agree on the exact terms of the labor provisions in the Omnibus, with significant members of PDI-P, the political party that drafted the 2004 bill, not yet on board. The highly touted “Jokowi consensus” (over 60% of Parliament) may not be as solid as it would appear.
One wonders what is holding legislators back in this time of pandemic and a real chance to grab outbound investment from China. Its got to be more than the unions that employ a small fraction of the overall labor force. And what of the rarely mentioned and perhaps more consequential “structural reforms” such as judicial, civil service, education, and taxation reform. Or the transactional political system that allows oligarchs that back a political party to get sweetheart deals when the party controls a ministry. These are what existing investors talk about even more than infrastructure. These are the things holding Indonesia back from reaching its enormous potential. Years of problematic judicial decisions have led today’s foreign investors to do deals with Indonesian partners in Singapore under a bullet-proof legal regime. Tens of thousands of good paying office jobs (accounting, financial, legal, and clerical) that put together these deals should be in Indonesia.