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Commentary: Are we heading toward demographic bonus or disaster?
With no solid economic recovery in sight, Indonesia may be unable to fully tap into the benefits of a demographic dividend.
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Pledge to the nation: Students of junior and senior high schools in Bogor, West Java, attend the celebration of the Youth Pledge Day on Oct.28. (Antara/Arif Firmansyah)
I
ndonesia is entering the initial stage of the much-vaunted demographic dividend, which is expected to peak within 12 years. However, as the economy has been stagnating in the last few years, there is growing concern that the so-called demographic bonus could instead turn into a disaster.
The manufacturing industry and service sector, which are expected to absorb the largest part of the labor force, are shrouded in uncertainties, while efforts to help young people enhance their skills, so as to fill the growing job market, remain slow.
Indonesia is expected to reap from its huge working age group, which will reach 70 percent of the total population by 2030. Theoretically, the demographic structure will provide a window of opportunity for Indonesian people to live happier and more prosperously because most of them will earn quality jobs with fewer financial burdens.
However, with no solid economic recovery in sight, Indonesia may be unable to fully tap into the benefits of a demographic dividend. As growth hovers at around just 5 percent, Indonesia will find it difficult to provide the gigantic labor force with enough jobs.
To achieve the bonus, as the International Monetary Fund (IMF) notes, Indonesia will have to accelerate job creation for the working age population (15-64 years) and lower youth unemployment, which is significantly higher than other age groups, likely because of stringent labor regulations, low education quality and skill mismatches.
In its latest annual policy review on Indonesia, the IMF says addressing youth unemployment and reaping the benefits of the demographic dividend will require implementing structural reforms to accelerate growth and diversify the economy away from agriculture and toward industry and services that offer higher employment elasticity.
The key is in how Indonesia revitalizes the manufacturing sector, which has traditionally absorbed most of the workforce. Many, however, are skeptical over the labor-intensive sector playing its part, given the fact that its contribution to the country’s economy has declined in the last few years.
In the post-New Order era, the manufacturing industry (excluding oil and gas) contributed a record high 29 percent to gross domestic product (GDP) in 2001. Although it remained the main driver of the economy, its contribution to GDP fell to little more than 24 percent in 2011 and it further dropped to an average of 18 percent between 2012 and 2014. The downward trend reversed during the 2015-2017 period, when it rose to between 20 and 21 percent, although the growth rate stagnated at about 4 percent.
Apart from the positive trend in the role of the manufacturing sector in the economy over the last three years, the latest data on the amount of realized direct investment, especially in the industrial sector, is encouraging.
The latest data from the Investment Coordinating Board (BKPM) found that realized investment increased by 13 percent to Rp 692.8 trillion (US$53.5 billion), far exceeding the target. The significant jump occurred partly because of a series of economic packages issued by President Joko “Jokowi” Widodo last year as part of his bid to improve ease of doing business in the country.
The country’s exports and imports are also growing. In 2017, the 16 percent increase in non-oil exports and the 14.70 percent rise in the import of capital goods and raw materials indicate that the country’s manufacturing industry is on track to further strengthen its dominating role in the economy.
The upward trends continued in January of this year and the recovery is expected to accelerate in subsequent months as the government has pledged to not only perfect the ease of doing business but also provide more tax incentives, such as a tax holiday for labor intensive industries.
If the government fulfills its promise, there is no reason to doubt our ability to harvest the demographic bonus. The lingering question is whether we have prepared our huge labor force to take full advantage of the demographic dividend.
As the IMF has suggested, the government should invest in vocational education and training now, rather than later, to provide younger generations with the skills demanded by the labor market. The skills will help them take advantage of the increase in job opportunities.
The Industry Ministry has for years been involved in providing vocational education through a “link and match” program in cooperation with industry players and vocational schools. However, only a small number of students can benefit from this educational concept. University graduates are also unable to fill the vacant jobs because their skills do not meet the requirements.
A mismatch between the demand from the businesses and the pool of talent available in the market will stand between the country and its demographic bonus. We need an immediate breakthrough to solve the problem, or else the projected demographic dividend will instead be a devastating disaster.
