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The Jakarta Post
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A wake-up call from Indonesia’s manufacturers to government

  • Erwin Aksa

Jakarta | Mon, December 10 2012 | 07:57 am

A recent incident saw labor union members shut down several factories in Indonesia by force as they demanded a higher minimum wage. This wreaked havoc in the country’s business certainty. Unfortunately, the government seems to believe it is the opposite.

As widely reported in the media, labor unions demanded that the government raise the national minimum wage by between 30 and 50 percent to around Rp 2.9 million (US$300).

Recently, the Jakarta provincial government set the provincial minimum wage at Rp 2.2 million, up by 40 percent from Rp 1.5 million in 2012.

As the government contemplated the request, some of the protests turned ugly. Those who refused to join the rallies were held hostage for hours.

The chaos prompted one of the country’s oldest foreign investors, whose footwear products has been famous among Indonesians for generations, to consider exiting the country after facing such threats (The Jakarta Post, Nov. 19).

As many as 200 footwear factories are at risk of suspending operations amid the disturbing conditions. This must not be taken lightly by the government and the protesting workers alike as these companies’ investment reached Rp 1.88 trillion (around $210 million) this year alone, according to the Indonesian Footwear Association (the Post, Nov. 7).

At the time of writing, many regions are still formulating new minimum wages for the next year and it will be no surprise that many “external factors” weigh the policymakers down in determining the new wages.

 What the government must realize at this last hour is that for labor-intensive companies, which employ tens of thousands of workers, it is virtually impossible to comply with higher wages if they have to come under the constant shocks that threaten their business sustainability. Whenever these shocks occur, businessmen are forced to make quick, often abrupt, decisions to relocate or to simply shut down operations.

Strategic long-term planning is becoming more difficult in the manufacturing sector. When abrupt decisions prevail, hundreds of thousands of workers will be in jeopardy as well.

Simply bowing down to the “pressure” to increase the minimum wages will guarantee the prosperity of the workers but only in the short-term and such gains will only be enjoyed by existing workers at the expense of future generation of work force.

As such, policymakers themselves need to be aware that wage levels are determined mainly as a function of workers prosperity, business sustainability, as well job market capacity to absorb new workers.

On top of these other factors consumers’ purchasing power, international competitiveness and political stability will determine the wage level.  

Labor-intensive companies in Indonesia have contributed a significant amount at the expense of potential higher profit, more production and easier quality control with the use of technology.

Most of these companies could have replaced manual workers with so-called “sophisticated” technology if they want.

Nevertheless, many have opted not to as part of their “social contribution” subsequently absorbing as many workers as possible.

On the other hand, while labor cost is crucial in business, the fact that the wage issue could take over other pressing matters as the number one national economic and social issue raises a fundamental question about the country’s sense of priority.

Everyone — mainly workers and policymakers — need to realize that Indonesia’s main attraction for business and investment has hardly been its cheap labor.

Quite uniquely, Indonesia’s main attraction is its overall production cost relative to its labor quality, the sheer size of its domestic market, its strategic position in Southeast Asia, access to international waters, political stability and recently rapidly growing middle class.

The key word here is “relative”, which means that the high and low level of labor cost is not the only factor that really concerns businesses.  If labor cost increases significantly while other factors — such as high distribution cost, red tape, corruption and bad infrastructure — remain unattended then we are all barking up the wrong tree.

If wage is always forced to become the short term cure to cover up other unattended structural problems, Indonesia’s attractiveness will soon be drained by its own policy making consensus.

It said the current minimum wage issue is an opportunity to turn the tables, to address policy making processes as well as substances. The current issue should not merely pit business owners against their workers. Instead, the government has a lot to be accountable for.

The labor issue becomes more pressing than it should be because it is an effect of the government’s lack of protection for existing business and investments, not a cause for the government’s heroic intervention.

For a start, every party concerned about the current labor issue should sit down together and begin asking the right questions.

Is the issue here really about underpaid workers, or is it about unnecessarily high cost and low quality of living that labors need to bear?

If it is the latter then it is the government’s responsibility to provide affordable and high quality healthcare, housing, education and transportation — the four major aspects that burden people’s living cost, and not businesses.  

Moreover, is it really wages level that burden businesses’ competitiveness and make business owners reluctant to adjust workers’ compensation, or is it the red tapes, corruption, and bad infrastructure that have taken away the flexibility of businesses to entertain demand from the workers?  

McKinsey’s comprehensive report titled ”Unleashing Indonesia’s Economic Potential” states that the country could easily become the world’s seventh largest economy by 2030, even bigger than the UK and Germany, if it can increase labor productivity by around 60 percent, on top of adding more and better workers to the economy. That certainly takes more than higher wages.

That will require higher quality of work, better skills and knowledge, use of innovation and technology, as well as workers’ peace of mind knowing that their family members are sufficiently taken care off.

At the end of the day, labor wage and benefits come under fixed cost on the business ledger. For businesses, any cost adjustments that are justifiable will always be negotiable even doable. On the contrary, a forced wage adjustment every other year is an uncertainty that is far from fixed.

The current labor issue reminds all of us that this is time for the government to confidently say to investors, business owners and also workers that the problems of high living cost and high cost of doing business are being fixed. Until then, we cannot blame businesses for rejecting the workers requests neither can we blame workers for demanding higher pay.   

The writer is a member of the Indonesian Chamber of Commerce and Industry (Kadin) and the National Economic Committee (KEN). The opinions expressed are his ow


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