The question of whether Indonesia’s economy can remain competitive in today’s globalized world and still serve the best interests of its people is a daunting one. Any answer must begin by defining what decent work should be like, how many jobs the country is capable of producing and whether a good number of decent jobs makes any sense for a nation still competing to attract investment in labor-intensive industries.
Debates around these topics have gained steam in recent years as the government has found it increasingly difficult to attract investment and maintain yearly economic growth above 6% – it came in at 4.79% in 2015, the fifth consecutive yearly decline. More importantly, the government is assuming new responsibilities as a country moving to middle income status such as ensuring that jobs created do more for workers than allow them to subsist.
These issues were the focus of a conference in Jakarta in February examining the UN 2030 agenda’s role in sustainable job creation. The two-day meeting was organized by the International Labor Organization (ILO) and brought together panelists and delegates from three sides: unions, employers and state or international officials.
While the conference aimed to examine the challenges and opportunities presented by the newly-established UN development agenda, the 17 Sustainable Development Goals (SDGs), the conclusions were far from new. The main hurdle on the way for decent job creation continues to be a lack of tripartite dialogues and unwillingness to make compromises.
Another, of course, is the lack of a firm base from which to introduce changes. While the time for new changes may be right – Indonesia only has 15 years left to seize the advantages of a young demographic dividend – the Indonesian environment is as unripe for structural reforms as always, with bureaucracy slow, funding limited and educational standards still poor.
SDGs as guidance
Indonesia is familiar with the need to create jobs to sustain development in other areas. The SDGs map the interdependence between jobs and other development goals, including environmental conservation, climate action and maintaining peace. (For more on the SDGs and Indonesia, see: Indonesia and SDGs: A tortuous road ahead – Concord Review subscribers only, free trial available)
The ILO has a narrower view of which SDGs matter. The discussion paper for the Jakarta conference pointed to Goal 8 as the main shared objective. This commits all states to “promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all.” There are a number of other SDGs relevant to the mandate of the ILO, including Goal 1 of eradication of poverty and Goal 12 of responsible consumption and production.
The 17 Sustainable Development Goals (SDGs). UNDP
Khairul Anwar, director general for training and productivity development at the Manpower Ministry, said during the conference that, based on current initiatives to lift the skills of workers in Indonesia, “in principle, the government supports productivity, and thus the SDGs.”
But the SDGs, and particularly Goal 8, carry a series of objectives Indonesia is failing to meet, including guaranteeing at least 7% GDP growth per annum. Medium-term goals such as reducing the proportion of youth not in employment, education or training by 2020 and ending child labor by 2025 may also be more than the country can digest.
The ILO cannot offer solutions on how to remedy a slowing economy, but it has put forward a series of recommendations for bringing workers, employers and government officials to create decent jobs – opportunities for work that are “productive and deliver a fair income, security in the workplace and social protection for families, better prospects for personal development and social integration as well as freedom for people to express their concerns.”
An ILO roadmap
According to the ILO’s discussion paper, Indonesia must transform and diversify its economic and employment structures, particularly in the manufacturing and service sectors as well as move up the value chain in these sectors towards capital-intensive production. Real output in the manufacturing sector has expanded steadily between 2004 and 2014 and total employment in the sector rose by 45% over the decade.
The ILO says broad trends in output and employment within manufacturing in recent years imply that labor productivity has been improving, thus providing scope for wage increases – a point which employers attending the conference contested. Supporting the arguments of employers, the ILO did note that Indonesia has not captured “its fair share of foreign direct investment in capital-intensive manufacturing” which one would expect from a country with a large domestic market, competitive labor costs and strategic geographical location.
To remedy this situation the ILO proposes combining policies that promote “investment in sustainable enterprises, lifting skill levels, further strengthening social protection systems and establishing a durable system for wage setting and deepening social dialogue based on respect for fundamental principle and rights at work.”
The policies proposed by the ILO were not addressed directly by panelists but discussions painted a picture of where each of the parties (unions, employers and government) currently stand.
Lifting skills levels
The level of expenditure on education has been rising rapidly over the previous decade. Constitutionally, since 2009, the government has committed itself to spending at least 20% of its national budget on education, a commitment that applies to both central and local government budgets with basic education receiving the largest part. (For more on basic education, see Striving for quality in basic education – Concord Review subscribers only, free trial available)
However, because tax levels and public expenditure in Indonesia remain low by international standards, the actual amount spent on education by Indonesia is below the global average of 4.7% of GDP. Only a small percentage of this expenditure is going towards vocational training. In this regard, the ILO calls for companies and trade unions to enhance the “quality and the relevance of vocational education and collaborate with education and labor authorities.”
The ILO says that reforms that would encourage larger firms to invest in genuine long-term vocational training programs that combine on-the-job training with structured courses would make “good sense.”
Douglas Broderick, the UN Resident Coordinator for Indonesia, made the point at the beginning of the conference that “we are entering a world of training, training and re-training.” Manpower Minister Muhammad Hanif Dhakiri also reinforced this point.
“Creation of new jobs is highly related to raising education. Today, out of 120 million workers, only 20% has education higher than high school. Many of them who are of productive age don’t have reasons to return to formal education. And those who are working currently also have limited formal education and limited skills. That’s why their level of work and their level of welfare is also problematic. This is a big challenge for the government of Indonesia,” Dhakiri said.
The minister, presumably weary of discussing wages in front of a room full of unionists, said inequality between unskilled and skilled workers was one of the main factors behind “the current Gini ratio (a measure of the inequity of wealth distribution in society) of 0.4.” According to figures from the National Team for the Acceleration of Poverty Reduction (TNP2K) released in February, the Gini coefficient stood at 0.47 in Indonesian cities last year.
Manpower Minister Muhammad Hanif Dhakiri at the ILO conference in Jakarta on February 27. Concord Strategic
“(We) need to figure out how to increase the access (to training) and improvement of workers’ skill through vocational training. Those who are already working but do not have the right skills and competencies should, wherever they are, have access to skills training. Because once we equip them with this ‘defense capacity’ in the form of skills and competencies, then we can hope that the demographic dividend of Indonesia can really be a blessing for us,” the minister added.
One of Dhakiri’s staffers at the Manpower Ministry, Anwar, noted that funding is limited for the around 800 private and public vocational training institutions in Indonesia. Without providing concrete details, he said his ministry allocates the meager sum of Rp400 million to the AIM programs: Awareness, Improvement and Maintenance. “Awareness of the importance of productivity, improvement through productive tools improvement and maintenance of that productivity,” he explained briefly.
He clarified later in the conference that the Rp400 million is not all the funds his ministry contributes to vocational training, but he was also unable to provide a concrete figure or explain how much other ministries may be contributing. Currently, vocational training budgets for certain professions come directly from ministries overseeing the lines of work, such as the Health Ministry for doctors and nurses.
Communication of needs
A perceived lack of investment in training is not the only hurdle. Anwar said that in order to have a sustainable system of vocational training and certification, employers need to discuss their current skills demands with training institutions. “(Industries must) start considering something above high school certificate. Once there is recognition (of vocational certificates) there will be a clear path (to employment),” he said.
Employers represented by the Indonesia Employers Association (Apindo), the country’s major business lobby, mentioned poor skills and a lack of training as factors contributing to lower productivity. However, their criticism stopped short of providing solutions. Harijanto, a member of Apindo, said Indonesia cannot expect to attract investment in labor-intensive manufacturing when even companies in the garment industry continue to face a shortage of skilled workers.
He gave the example of a new factory being set up in Central Java which, he said, is currently training workers due to a lack of employable people with the required skills. He said that over the past five years, Indonesia has lost the lead in the garment and footwear industries to countries like Vietnam. He warned that Indonesia’s adequate infrastructure for such industries was one of the few factors preventing investors from moving to markets with cheaper labor costs like Myanmar.
Vivi Alatas, a senior economist at the World Bank, also made education her main talking point at the conference. Only around 35% of workers in Indonesia have received some form of training, even though surveys show the majority say they would like to have training, she said.
She did however note that employers are not yet seeing the difference, based on research, between trained and less-trained employees in many industries, which could explain the lack of interest in vocational programs by some Apindo members. Alatas called on industries to forge partnerships with the government to better address skills shortages.
Alatas talked about World Bank case studies on South Korea and Brazil to show that economies “similar in many ways to Indonesia” have succeeded in setting up vocational training systems.
South Korea is well known for its adoption of a government-led skills development system to assure industry the supply of a skilled workforce and to protect vulnerable groups in the population. A levy is taken from employees’ salaries to create a vocational training fund, which companies can access whenever they want to train their employees. Meanwhile, in Brazil, the country’s conditional cash transfer system, Bolsa Familia, requires unemployed cash recipients to sign up for vocational training courses.
Tying together time and resources for vocational training and access to better work opportunities are social protection programs providing a safety net for workers in and out of jobs. Rising inequality in Indonesia demonstrates that despite a larger part of the workforce joining the formal sector, wealth disparities continue to increase. According to a recent World Bank survey, social protection is ranked by Indonesians as one of the three most important policies for reducing inequality.
The ILO calls on the government to uphold the constitutional right to social security and notes it is already making good progress on extending the coverage of the National Health Insurance (JKN), which aims to cover 95% of the population by 2019, and the cash transfer family assistance program (PKH).
However, as Concord Strategic recently noted in Inequality: Gaining momentum? (Concord Review subscribers only, free trial available), Brazil’s Bolsa Familia program, the inspiration for the PKH, remains far more comprehensive and effective than its Indonesian sibling. While Brazil is reducing its level of inequality, albeit from the position of an already very unequal society, Indonesia is seeing its Gini coefficient rise.
President Joko Widodo distributing Indonesia Health Cards (KIS). Poskota News
The potential impact of social protection programs derives from their role in income protection and redistribution but also from their positive influence in human capital development and productivity. Andi Gani Nena Wea, president of the Confederation of All-Indonesian Workers Union (KSPSI), said decent work involves having access to health insurance, welfare, a decent wage… factors that “motivate workers to contribute more to their companies.”
Stephen Pursey, the ILO’s director of multilateral cooperation, pointed out that in recent years the percentage of workers in Indonesia without social protection fell from 69% to 38%. However, it is mostly the quality of such social protection programs that many critics say should be improved.
Social protection received little attention from other panelists at the conference, who were mostly concerned about wages, improving the tripartite dialogue and working towards higher economic growth.
Wages were, as one would expect, the most contentious issue at the conference. Last year, the government introduced a new policy which stipulates that minimum wages must be based on a combination of the inflation assumption and a region’s economic growth. The new scheme eliminates the previous process involving a tripartite negotiation between local leaders, unions and business owners and a basket of 64 basic prices known as the cost of living index (KHL). (For more on labor issues, see Unions eye new tack as wages, outsourcing lose appeal – Concord Review subscribers only, free trial available)
Although at least eight provinces failed to abide by the policy in setting this year’s minimum wage levels, most regions did, triggering large rallies. Thousands of workers in late November joined a national strike and dozens of rallies nationwide during four days of labor action.
The ILO has sided entirely with unions in this issue. In its discussion paper, it calls for collective bargaining over wages and working conditions to enable joint agreements between workers and employers about how the dividends of economic performance can be shared.
“Especially for countries like Indonesia, where labor-intensive, low-wage, low-productivity industries are seeking to move up the value-added ladder, it is essential to develop wage policy that reflects the complementarity between minimum wages set through tripartite consultations and collective bargaining over wages between workers and employers,” it said, adding that the SDGs also command “broad-based support from workers as well as employers.”
The ILO said that when a formula-based system has been implemented elsewhere, “the formula itself is often subject to tripartite dialogue,” which did not occur in Indonesia. It warned that “lack of agreement concerning wage-setting could continue to generate tensions and protests, hampering the construction of a broad consensus over an Indonesian strategy for sustainable development.”
Indonesia’s current policy not only contradicts the SDGs but also Convention 131 of the ILO on the setting of minimum wages – both of which Indonesia has committed to. Furthermore, the ILO warned that roughly one in two workers in Indonesia does not receive the wage they are legally entitled to.
While unionists attending the conference protested the regulation, the only government official to respond was Rudy Salahuddin, Deputy Minister for Creative Economy, Entrepreneurship, Cooperatives and SMEs at the Coordinating Ministry for Economic Affairs. Salahuddin said the current policy on minimum wages is “the best in the current situation” and said it would be “re-evaluated in five years.”
The positions of employers and unionists on the issue of minimum wages remained inflexible throughout the first day of the conference. Unionists argued that higher wages would have the benefit of boosting consumption and improving economic growth while employers rejected this position, saying Indonesia could not afford to be less competitive than regional neighbors bidding for foreign investment in labor-intensive industries.
Workers rally in Batam, Riau Islands. ANTARA
The failure to discuss possible solutions to these differences was indicative of the lack of tripartite social dialogue. A day after the conference, Minister Dhakiri was in Batam, Riau Islands standing by Coordinating Minister for Politics, Security and Legal Affairs Luhut Panjaitan as he urged the Riau Islands provincial government to issue regulations to confine protests to special zones.
“Demonstrations must be regulated, the locations must be fixed, securing investment is important,” Panjaitan said. The minister proposed venues such as the governor’s office, the Regional House of Representatives (DPRD) or the mayor’s office and a timeframe between 6:00 AM and 6:00 PM. He also urged the related authorities to ban ‘sweeping’ by unionists to force factory workers to join protests, which he said is one of the main concerns of business.
National Police chief Gen. Badrodin Haiti said he would follow the recommendations, including one to allow officers to open fire to disperse rallies. “There are standard operating procedures. If we reach procedure five, deploy water cannons. If protesters don’t disperse, (police) may shoot,” he said.
The announcement was a clear example of the repressive tactics which Felix Anthony, president of the International Trade Union Confederation (ITUC) for Asia-Pacific, denounced at the conference. Anthony expressed grave concern over a “recent deterioration” of social dialogue between workers, employers and the government in Indonesia.
He denounced the presence of thugs hired by companies to intimidate workers during rallies and harsh crackdowns by police. He said minimum wages in Indonesia are already less than half of China and called for the implementation of a living wage that ensured full participation of workers in society.
Other unionists claimed that employers have made no attempt to understand what a living wage means or what decent work should look like. KSPSI President Wea said external factors such as politics can also influence productivity. He said the impact on workers’ productivity of “scandals” involving mining giants Freeport McMoRan Inc and Newmont Mining could have been reduced if the workers had been actively involved in the issues facing the companies.
Wea was presumably referring to Freeport and Newmont’s contract negotiations with the government and a requirement introduced by the 2009 Mining Law requiring them to build smelters in the country. He did not specify how workers may have been able to play a role in this.
Confederation of Indonesia Prosperity Trade Union (KSBSI) president Mudhofir also denounced the large percentage of outsourced workers in many industries, which he claimed reached 60% nationally, discouraged companies from providing decent work opportunities and undermined workers’ participation in the production process.
President of the Confederation of All-Indonesian Workers Union (KSPSI) Andi Gani Nena Wea. ANTARA
Hopes and fears
Interactions at the conference gave evidence that the state of Indonesian labor affairs remains shaped by a government ready to provide tools for self-improvement but unwilling to address development priorities not favored by employers. Pursey, the ILO director of multilateral cooperation, asked the pertinent question of whether Indonesia “can get rich before it gets old.”
Panelists and delegates agreed that Indonesia must upgrade its investment and human capital through the quality of education, increased vocational training, and improved access to this vocational training for Indonesian youth. But with wage increases still limited and labor laws poorly enforced, the next decade could also be ripe for inequality to continue growing.
Indonesia is also competing for investment against developing countries making huge efforts to improve their own human capital. Harijanto from Apindo pointed out that by 2030 around 50% of workers in ASEAN will be Indonesian, but it is unlikely that 50% of investment in ASEAN will be in Indonesia unless major reforms take place and the skills of workers radically improve.
One reason to remain optimistic is the potential of technology to reshape the labor market over the next two decades. Izhari Mawardi, an associate director at Ernst and Young, said that it is highly likely that Indonesia will see technologies assisting entrepreneurs or people who are self-employed. Good examples of this, he said, are transport applications Go-Jek and Uber.
Hery Sudarmanto, director general of employment placement at the Manpower Ministry, also said that the government is currently implementing programs to boost entrepreneurship for people not accommodated by the formal sector or distant from employment opportunities. Sudarmanto gave the example of a current program which teaches the wives of urban migrants who remain in the countryside skills in husbandry and fish farming, allowing them to increase their income and remain productive.
Without such programs, improved access to quality education and structural reforms, Indonesia will remain in a state of “permanent fragility,” as ILO Deputy Director General for Field Operations and Partnerships Gilbert Houngbo called it – a country forced to sacrifice living standards and aspirations of diversifying its economy to accept any labor-intensive investment at any price.
A version of this article was first published by Concord Review on March 10, 2016. Free trial subscriptions are available.
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