The country has been headed in the right direction. Though Indonesia’s labor force is only one-tenth as productive as that of the U.S. and one-third as efficient as Malaysian workers, labor productivity has been rising. Over the past six years, the increase in GDP per worker has risen more in the archipelago than in Singapore, Malaysia, Thailand, or the Philippines.
But it has to do more, and it has to do it soon: In approximately five years, Indonesia will hit its demographic peak, at which point the working-age population will crest and the ratio of elderly people to those of working age will trough. “Demographic assets can also turn into liabilities” if countries don’t generate enough economic growth and prosperity, Santitarn Sathirathai, Head of Southeast Asia and India Economics at Credit Suisse, wrote in a recent report. “To climb the development ladder and escape the middle-income trap, Indonesia needs to increase labor productivity”. http://dialynewsonline.blogspot.com
Productivity can rise for two reasons. Workers can get better at what they already do, or they can move from labor-intensive sectors such as agriculture to higher-productivity service industry and professional jobs. Over the past five years, Indonesia has taken the former route. Rather than moving up the value chain, Indonesian labor has become more efficient due to sustained investment in areas such as transportation and communications.
But driving further productivity gains with investment will be more difficult going forward. Sathirathai notes that Indonesia, which exports tin, copper, and crude oil, has been hit hard by the end of the commodities supercycle and may have a hard time keeping up the pace of past advances. And if the country can’t invest more, it must invest better. Less corruption—Indonesia ranks 107th out of 175 countries on Transparency International’s corruption index—could also result in more productive public-sector investments. Another alternative: Clearing away restrictions on foreign direct investment to attract overseas dollars.
All that said, if the country is to achieve truly significant productivity gains, more Indonesian workers need to move to high productivity jobs. And for that, Indonesia needs a thorough overhaul of its labor market, starting with the education of its workforce. And there’s a long road ahead on that front. A smaller percentage of the Indonesian population advances beyond primary school than any other major Southeast Asian economy besides Thailand, points out Amlan Roy, Credit Suisse Head of Global Demographics and Pension Research. Fewer than 8 percent advance beyond high school. As a result, Indonesia’s workforce is skewed toward industry and agriculture jobs over service jobs, which require more skills. Indonesia could also become more productive if more women went to work. Only 51 percent of women participate in the labor force, compared to 84 percent of men.
Some relatively simple policy solutions would help too, starting with loosening the laws that make the country’s labor market uncompetitive. Indonesia ranks 110th out of 144 countries in the World Economic Forum’s Global Competitiveness Report, in part because of laws such as that which requires companies that want to fire an employee to pay nearly two years worth of severance wages. Needless to say, firms prefer to hire workers without formal contracts, and since such workers tend to be transient, companies don’t invest much in training them, which exacerbates the skilled worker shortage.
Based on demographics alone, Indonesia has the potential to grow more than 6 percent a year. But without fundamental reforms, economist Sathirathai believes the country will only grow 5.5-6.0 percent over the next few years. Jahanzeb Naseer, Credit Suisse Head of Indonesia Research, believes that banks and property companies will prosper as young Indonesians take out mortgages and purchase homes. But for the overall economy, what really counts is whether Indonesia can avoid the middle-income trap—that is, whether it can grow fast enough to become a wealthy country, rather than getting stuck in the liminal space between poverty and riches. The outcome depends on how fast the country can make some very big changes. http://dialynewsonline.blogspot.com
