A New Year’s Resolution for Indonesia’s Economy: No More Jobless Growth

This article is the lastest piece of my writing that previously has been published on January 31, 2015 in the Malaysian Insider. However, no matter how vigorously you try to input any keyword of this “lost” article, Google would never show you this article, since my favorite portal, the Malaysian Insider, has just happened to shut down the website due to some controversial issues. Hereby, I attached the article through Medium, simply to enshrine my memory that I have ever been the part of Malaysian Insider.

Before the end of January, it is extremely important to analyze the main perils and challenges that Indonesia’s economy would overcome in the next coming months. Seventeen years ago, the impact of Asian Financial Crisis on Indonesia prompted a conclusion to the “sudden death of a little tiger economy”. However, tracing back its remarkable development within the last decade, sceptical scholars must reset their mind to believe there has been a new hope for this little tiger’s economy. The recent quarterly report issued by the World Bank has claimed that Indonesia is considerably in good position to respond the external fluctuations. Although its GDP growth (3.78 percent) in the third quarter of 2015, recorded the slowest pace since 2009, but Indonesia is far more comfortable than it was before the crisis. Indeed, the external debt ratios have fallen dramatically and the macroeconomic vulnerabilities have successfully been reduced through the containment of the fiscal deficit to within the legal limit of three percent of GDP. Accordingly, in September 2015, Rizal Ramli as Coordinating Minister for Maritime and Resources, cited Indonesia’s economic growth in 2016 will reach six percent due to an increase in government spending for supporting more investment.

A case in point, is the paramount condition that people anticipating for, only restricted to the economic growth and investment? Instead, apart from all of the aforementioned gains and hopes, Indonesia actually finds itself in the midst of another crisis. This time is a crisis of a well-managed policy for exploiting its demographic bonus insofar as less inclusive policy has been unexpectedly causing the incompatibility of employment shares, productivity rates, and income level in the aggregation of economic activities. From 1980 to 2010, Indonesia has experienced a significant transition period in the structure of its productive population. In 1971, the working age population was only 53.5 percent and by 2010, it was accounted for 65 percent of the total population. In 2014, the growing dominance of the working age population who entered the job market was more than tantalizing as it reached around 121 million people.

Ideally, the boon of this demographic bonus is projected to push more productivity and demands. The increases of working age population typically yield a window of opportunity for triggering the creativity and innovation as well as implying a stimulus for higher savings and investment, the rise of capital stocks, and offering a package of economic growth. On the contrary, this dividend accentuates different circumstances in Indonesia as the economic growth apparently does not patch something up in terms of employment shares. Demographic bonus becomes disaster as jobs do not materialize so that potentially backfire the development in which imposing high economic risks, stagnation, and income disparities.

Frankly speaking, despite Indonesia’s confidence in the interconnected global economy, unfortunately its gains belong to the jobless growth. Six percent of working age population in 2014 was unemployed and the share of vulnerable employment, including unpaid workers and informal sectors workers, is also higher in Indonesia compared to its regional peers. For Indonesian men, this number is accounted for 60 percent of total male employment force during the last decade, whereas this figure is around 70 percent for women. Given by the fact, this disenchanting jobless growth happens in almost aggregations of economics, and poses strong concerns on the manufacturing. For instance, from 2000 to 2008, manufacturing sector output grew by about 5.5 percent per annum, which generated an estimated 2.76 percent of employment growth. However, we have not seen any contributions from manufacturing sector to the share of employment while Indonesia’s employment record in the sector has exhibited slow growth and low elasticity for labor absorption. This sector is the second biggest contributor of GDP, but compared to the services and agriculture, it has the smallest share of employment, ranging from 13.7 to 15.6 percent in 2008. More precariously, by 2014, the manufacturing just absorbed 15.4 percent of working force. Meanwhile, the agriculture sector that contributed the least to GDP, continues its leading position in absorbing 40.8 percent of labor.

Those statistics outline two underlying issues. First, this stagnant share of employment is simply beating down the classic argument that emphasizing the growth of markets for its output will lead the possibility of using specialized labor inputs also grows. Although government has made a pitch to the Foreign Direct Investment (FDI) to be a part of country’s development, but the policy has been more likely to keep pace of economic growth than create employment. The most popular sectors for FDI in 2014 were Indonesia’s mining (USD $4.7 billion); food industry (USD $3.1 billion) ; transportation warehouse and telecommunication (USD $3.0 billion) ; metal, machinery, and electronic industry (USD $2.5 billion); and chemical and pharmaceutical industry (USD $2.3 billion). All of these sectors are not unskilled labor-intensive industries and having greater tendency to take advantage of technologies instead of human resources to boost productivity.

Second, the demographic bonus has been unexpectedly concentrated in the informal sectors and exploited in the low-paying sectors which impede the increased of income. It is mostly about the inadequate accumulation of knowledge and lacks of reliable human capital. According to the National Bureau of Statistics, approximately 9.73 million Indonesians of age 15 years and over has not attended formal schooling and sixty percent of Indonesia working forces is categorized as unskilled labor. It is certainly in the brink of crisis, as they would not be able to adapt with the technology-based firms that are greatly mushrooming in Indonesia’s economy today.

Thus, expecting government to no more sitting on the fence towards this issue is considered as a new year’s resolution. Just few days ago, on January 10th 2016, President Widodo announced a plan to spur foreign and local investment to Rp 595 trillion ($42.7 billion), with a special focus on manufacturing. The realization is expected to drive the manufacturing’s growth by 17 percent and bring Indonesia into a more competitive economy. This is undoubtedly a good signal for Indonesian economy. Nevertheless, things people waiting for in 2016, is absolutely the realization that is able to provide such a platform to exploit the demographic bonus through the emergence of new manufactured goods and product diversification that can absorb more employment. Indeed, Indonesia’s economic story within next few years would be determined by the quality of its demographic bonus instead of the quantity. Therefore, it is also expected that the investment will take social overhead capital into account in aims to stimulate the accumulation of knowledge and improve the quality of human resources in an era when competitiveness will be the major arbiter of manufacturing success.