The Jakarta Post
Indonesia can double income per person and create 25 million good jobs in 10 years if it takes over 10 percent of China's market for labor-intensive manufactured exports. China supplies the world with its toys, electronics, garments, textiles, car and motorcycle parts and hundreds of other goods. But Chinese labor costs are rising rapidly as its labor force ages and shrinks. Factories are leaving China and new manufacturing investment is locating elsewhere.
If Indonesia can export 10 percent of the labor intensive manufactured goods that China now supplies to the world it will nearly triple manufactured exports, achieve double digit growth and create millions of good jobs.
Some analysts condemn competing for labor-intensive manufactured exports as taking part in a 'race to the bottom'. They explicitly reject the idea that Indonesia should compete with countries like Bangladesh for these jobs. They are missing the point. No one suggests that Indonesian wages should fall to Bangladesh levels.
Indonesia must compete with Vietnam, India, and, yes, Bangladesh, if jobs are to be found for the country's growing labor force. If not, workers will crowd into the informal sector where incomes are irregular and already close to Bangladesh levels. But Indonesia can compete while increasing the income of Indonesian workers.
The same analysts argue that Indonesia should expand the production of higher-value, more technologically advanced products like machinery and petrochemicals rather than shoes, furniture, textiles, garments and electronics. Indonesia can indeed expand its exports of higher-technology goods.
But a strategy that emphasizes technology-intensive goods has problems: [i] these industries require few workers so they will not provide jobs to the millions who need them. [ii] They do require many engineers and Indonesian engineers are two to four times as expensive as Indian. Only some firms will be able to compete internationally with that handicap. [iii] Above all, they will not provide productive, stable jobs for the 21 million workers who have not completed primary school and another 50 million who completed primary or secondary school.
At least 10 million of them are 'surplus' workers in very low productivity jobs. For instance, they work on tiny family plots that have more workers than needed; or they shine shoes in a square which already has enough shoe shiners. If these 10 million surplus workers were to work in export industries they would increase national income by nearly 12 percent. For the workers it would mean higher and more stable incomes.
Indonesia does not need to drive down wages to compete:
First, the wage gap between Indonesia and its competitors has become smaller as Bangladesh has increased its minimum wage by 70 percent and the value of the rupiah has fallen by one-third, which lowers Indonesian wages in dollar terms.
Second, by improving the infrastructure in Central Java, labor-intensive investments can be attracted to where the wage is already competitive with India and Vietnam. Allowing the rupiah exchange rate to decline boosts competitiveness. At Rp 13,500 (US$1,17) per dollar, Central Java wages are equivalent to $103 per month.
Stabilizing food prices would reduce upward pressure on wages and assure that workers do not suffer from inflation. The cost of labor regulations can be reduced while increasing their benefits for workers. For instance, severance-pay regulations impose high costs on firms but help few terminated workers. Industry-executed but government-financed training increases labor productivity.
Those who are pessimistic about Indonesia should look at Indonesia's rank on the Global Competitiveness Index. Most remarkably Indonesia moved from 74th in 2005 to 38th in 2013. With Bangladesh at 110th in both 2005 and 2013. Indonesia's advantage has roughly doubled. Other major competitors also ranked well below Indonesia in 2013.
Indonesia's weaknesses are evident as well. Infrastructure is better than Bangladesh's but lags behind Vietnam. Ease of doing business matters for exports where Indonesia is part of an international system dominated by non-Indonesians. Indonesia's rank on doing business is low (120th out of 148), but could readily be raised with a political decision to facilitate investment by foreigners in industries where they are needed for rapid
Corruption is another low rank that can be improved quickly by increasing its costs and reducing its benefits.
Table 2 makes it appear that Indonesia should have no difficulty competing in labor-intensive exports. But the evidence is that relatively high labor costs and other obstacles to doing business have taken their toll on job creation and growth.
In the 13 years since 2000, the quantity of manufactured exports has increased by less than 1 percent annually; the export value by only 5 percent; the value of labor-intensive exports only 3 percent, while a growth of 19 percent is needed to create jobs for those joining the labor force and to reduce the backlog of surplus labor.
Major steps for Indonesia to compete more effectively while increasing the purchasing power of workers include: [i] Massive investment in infrastructure, especially in areas producing labor-intensive manufactured exports. [ii] Reducing the costs of doing business and closing off opportunities for corruption. [iii] Some exchange rate depreciation is warranted to lower the price of labor in dollar terms, accompanied by steps to stabilize the prices of basic foods.[iv] On a voluntary basis change the rules on severance pay, benefiting both workers and employers.
The writer is professor of economics emeritus and president of Boston Institute for Developing Economies.
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