{"id":3741,"date":"2020-11-18T21:18:26","date_gmt":"2020-11-18T21:18:26","guid":{"rendered":"http:\/\/aiccusa.org\/?p=3741"},"modified":"2026-04-08T18:08:43","modified_gmt":"2026-04-08T18:08:43","slug":"labor-day-2020","status":"publish","type":"post","link":"https:\/\/aiccusa.org\/?p=3741","title":{"rendered":"Labor Day 2020"},"content":{"rendered":"\t\t
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September 2020<\/p>

Commentary by Wayne Forrest<\/em><\/p>

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.\u00a0 Of course, our two nations do not share Labor Day:\u00a0 Indonesia observes International Labor Day on May 1.\u00a0 Readers of this column may not know much about the nature of employment in Indonesia.\u00a0 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.<\/p><\/div>

So, how do people earn?\u00a0 They do so by being entrepreneurial and engaging in all manner of service and unskilled work.\u00a0 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.\u00a0\u00a0 Its estimated that 65% of Indonesia’s workforce is in the informal sector.\u00a0 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.\u00a0 Decades of searching for higher wages in manufacturing has led many younger Indonesians to leave rural areas for cities.\u00a0 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.\u00a0 But, only 3.6% of the workforce is unionized.\u00a0In 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.\u00a0 Indonesia (and its youthful President) are fighting to bring them back.<\/p><\/div>

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.\u00a0 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.<\/p><\/div>

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.\u00a0 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.<\/p><\/div>

Indonesia’s approach to attracting manufacturing investment has been patchy, at best.\u00a0 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.\u00a0 Still, logistics costs remain among the highest in the region because of many other costs that are not reduced even if travel time is.\u00a0 It remains cheaper to import fruit to Jakarta from China than Aceh (western tip of Sumatra).\u00a0 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:\u00a0 in Jakarta, the official minimum wage is $10.71 per day, three times what farmers earn.\u00a0 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.<\/p><\/div>

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.\u00a0 This has been successful in nickel, where an export ban has led to significant investment in downstream processing, especially stainless steel.\u00a0 The jewel in the making is an electric vehicle battery factory under construction at Morowali (Halmahera island).\u00a0 Indonesia expects to eventually produce its own e-vehicles.\u00a0 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.\u00a0\u00a0 Whether or not this value-added strategy can be applied in a widespread fashion remains to be seen.\u00a0 Its been no secret that the smelter imperative is uneconomic for copper and other metals, yet it persists.\u00a0 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.\u00a0 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.\u00a0 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.<\/p><\/div>

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”.\u00a0 Presented in the Omnibus Law on Job Creation, the legislation was supposed to have been passed last April.\u00a0 Besides harmonizing thousands of central and local government regulations, the bill’s signature provision are changes to the 2004 Labor Law.\u00a0 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.\u00a0 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.\u00a0 The new law, if passed, will make it easier for employers to fire employees, removing an obstacle to manufacturing foreign investment.\u00a0\u00a0 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\u00a0 bill, not yet on board.\u00a0 The highly touted “Jokowi consensus” (over 60% of Parliament) may not be as solid as it would appear.<\/p><\/div>

One wonders what is holding legislators back in this time of pandemic and a real chance to grab outbound investment from China.\u00a0 Its got to be more than the unions that employ a small fraction of the overall labor force.\u00a0\u00a0 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.\u00a0\u00a0 These are the things holding Indonesia back from reaching its enormous potential.\u00a0 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.\u00a0 Tens of thousands of good paying office jobs (accounting, financial, legal, and clerical) that put together these deals should be in Indonesia.<\/p><\/div>

So, this Labor Day 2020 I celebrate the workers of Indonesia and hope for their future success.\u00a0 And may the government achieve a clarity of vision to create an economy less based on who you know, than what you know.<\/div>
\u00a0<\/div>
(The writer’s opinions do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members) <\/em><\/div><\/div>

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September 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"elementor_theme","format":"standard","meta":{"footnotes":""},"categories":[7,8,11,62,25,1],"tags":[],"class_list":["post-3741","post","type-post","status-publish","format-standard","hentry","category-american-indonesian-chamber-of-commerce","category-asean","category-indonesia","category-nationalism","category-outlook-indonesia","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/3741","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3741"}],"version-history":[{"count":7,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/3741\/revisions"}],"predecessor-version":[{"id":9874,"href":"https:\/\/aiccusa.org\/index.php?rest_route=\/wp\/v2\/posts\/3741\/revisions\/9874"}],"wp:attachment":[{"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3741"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3741"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/aiccusa.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3741"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}