Uplifting the Indonesian economy

Ambitious goals aside, the Indonesian economy won’t be able to keep up without serious labour reform, Asmiati Malik writes.

In April, Joko ‘Jokowi’ Widodo was officially elected president of Indonesia for the second time. Early in his administration, Widodo set an optimistic goal of reaching seven per cent economic growth.

Unfortunately, his substantial efforts to uplift economic growth by pouring 576 trillion rupiah (USD $400 billion) of government spending into public infrastructure did not have an impact of the scale he was hoping, and the economy’s growth has fallen short of his goal at roughly five per cent per year.

In the last two years, Jokowi’s administration has faced many economic and political problems, including attack from his political opponents, rising Islamic populism, and growing negative sentiment towards Chinese money and workers in the country.

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Jokowi also faces depreciation of the rupiah against the dollar, a trade war, and the national budget deficit.

Along with many other countries, Indonesia has been unable to gain any advantage from the US-China trade war and the slowdown of global economic growth.

Indonesia is running an $18.4 billion trade deficit with China as its main destination for commodities exports.

The national balance sheet also does not show a particularly optimistic outlook, as the government will run a 296 trillion rupiah deficit (USD $200 billion) in 2019.

Jokowi’s administration tried to widen the tax base by introducing a tax amnesty in 2017 to lure unreported funds by wealthy Indonesian citizens abroad. However, only 0.8 per cent of total taxpayers participated in the program.

This was not enough to push the economy beyond five per cent economic growth. Meanwhile, foreign debt has reached more than half of national income.

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Now he is in his second term, Jokowi is no longer optimistic about reaching seven per cent economic growth. Staying at five per cent would be a pessimistic goal, perhaps with six per cent as more realistic. Unfortunately for Jokowi though, average growth so far remains stuck closer to five per cent.

This clearly shows that Jokowi’s economic plans and strategies cannot yet generate value, nor a labour market for the 6.82 million unemployed people in Indonesia.

Facing this poor outlook, his administration has repeatedly blamed the trade war as the main reason for the slowdown of the Indonesian economy. The government seems to neglect the fact that their main commodity exports, including coal and crude palm oil, are no longer in high demand from the foreign market, and that the Indonesian labour market is becoming uncompetitive.

Meanwhile, Indonesian demand for import commodities, including crude oil and wheat, keep increasing from year to year. Oil is needed meet a growing energy demand, and wheat required to feed Indonesians day to day.

There is no sign that Indonesia will shift to renewable energy to curb its demand for oil any time soon, and the nation appears to have no intention to reduce its demand for wheat either – a commodity difficult to produce in Indonesia due to geographical challenges.

Indonesia’s problems could be exacerbated by the government’s plan to move the capital to Kalimantan, which will certainly increase expenditure but will further neglect the issue of increasing the national income.

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Facing macroeconomic issues including fiscal balance, a growing trade deficit, and excessive government spending, Jokowi’s administration is reluctant to touch core issues. He is failing to address a crucial issue negatively affecting the Indonesian economy, labour market reform.

Indonesia is one of the most expensive countries for labour when compared with its neighbours, but the president has ignored it.

His economic policy is not driven by market interests but instead influenced by an upsurge in nationalist desire for the economy to be ‘self-sufficient’.

Jokowi’s neglect of labour reform makes investors hesitant to invest and open factories in Indonesia.

This is especially the case for industries that require massive and cheap labour.

The administration continues to fail to learn from three main countries that successfully built and accumulated capital from labour-intensive industries – China, Japan, and South Korea. An expensive labour market makes Indonesia’s industries’ competitiveness lower than its neighbours.

If Widodo fails to address this, labour-intensive companies may move to other countries because of uncompetitive labour wages. As a comparison, Indonesian labour cost is already 234 per cent more expensive than Vietnam and similar to labour cost in China, a country which has already successfully shifted to high-skill manufacturing.

In all, reforming the labour market is the most important step Widodo can take. This will enable Indonesia to attract foreign investors to open manufacturing plants. This will grow the manufacturing industry, increase capital accumulation, and create more jobs. Whether he is willing and able to do so, however, remains to be seen.