Despite managing to grow at above 5 percent annually, the quality of economic growth is somewhat worrying as the country has been heavily dependent on business sector services, which normally employs less labor.

The production sector, especially  manufacturing, which absorbs a large amount of labor, only accounts for a small part of the economy.

In a newly published book called Indonesian Economic Landscape, noted economist Faisal Basri of the University of Indonesia highlighted how economic growth has been less balanced, whilst losing quality.

“Economic growth is too much dependent on the service sector which is non-tradeable,”
“The tradeable sector, [e.g. production and manufacturing] has shown limited growth, and tended to weaken.”

Faisal argued this was an anomaly for a developing economy. Most of Indonesia’s labor force are low-skilled that fit more in modest manufacturing rather than in services.

This, he said, has undermined efforts to reduce huge unemployment, as well as contributing to the widening gap on wealth and incomes.

Although the Central Statistics Agency (BPS) estimates formal unemployment will decline to 8 percent this year from 8.5 percent last year and 9.1 percent in 2007,  the agency is using different criteria to define unemployment since  2007.

The new criteria enable a scavenger who works for just one hour in week to be excluded from formal unemployment despite the fact that he or she is unemployed and has to do whatever to make ends meet.

Analysts believe unemployment now tops more than 40 million people, higher than the official figure of around 9 million.

Signs the inflating jobless rate is abating are nowhere to be seen as the economy is relying more on the informal sector to absorb employment. According to the BPS, 69 percent of the Indonesian population worked in the informal sector in 2007, up from 68.9 percent in 2006.

“The informal sector is not  ideal because in principle it is a way of life that emerges out of [the need for day-to-day] survival,” said Faisal.

“If this sector is expanding, it’s worth noting there’s  something wrong with the economy.”

Chairman of the Indonesian Chamber of Commerce and Industry (Kadin) M.S. Hidayat said the weakening of the formal sector, especially in manufacturing, was attributable to the country’s deteriorating business infrastructure and lagging  reform of the bureaucracy.

“These problems have hampered investment, discouraging businessmen from investing in the manufacturing sector which employs large-scale labor,” he said.

Persistent informal rent-seeking and mushrooming illegal fees at all levels of government have kept foreign investors at bay as they believe these problems are not only causing a high-cost economy, but also creating legal uncertainties in which business people are drawn into bribing state officials to gain favor and protection.

“On the high-cost economy and legal uncertainties, there is little sign of progress,” said chairman of the Indonesian Employer Association (Apindo) Sofjan Wanandi.

He also notes overlapping rules and regulations operated by central and local government agencies, undermining the investment climate.

“While classic problems remain unresolved, the economy is on auto pilot... Little has changed,” he said.

The main driver of economic growth has stayed the same in the past 10 years, with consumption leading and investment and exports remaining in the doldrums.

Indonesia’s ability to escape fairly unscathed from the recent global financial turmoil is considered by critics as reflecting  luck rather than a profoundly designed strategy.

This is because international trade only accounts for 29 percent of the gross domestic product (GDP), while most of the country’s exports comprise the raw materials (commodities) heavily needed by other countries for their own development, such as coal and palm oil.

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