Mon, 05 May 2008
Owais Parray, Jakarta

Is Indonesia back in the fast lane of economic growth? Indicators from the latter half of last year may seem to suggest so, but the global economy is likely to slow as a result of rising oil prices and a near recession in the U.S.

Indonesia may not necessarily feel the pinch from the contraction in the U.S. market, but the rise in energy and food prices will, at minimum, dampen economic optimism.

A rise in inflation will make it harder to maintain an expansionary monetary policy. Moreover, an increase in the price of essential food commodities poses challenges for the government's poverty reduction targets.

It is estimated that poor households spend 30-50 percent of their income on food. Naturally, an increase in the price of food items can considerably diminish their purchasing power. Even against this backdrop, many analysts remain positive about Indonesia's macroeconomic outlook. A growth rate of 6 percent and above is still achievable this year.

While debates on growth rates will undoubtedly continue, it is equally important to discuss what will be the quality of this future growth. Theoretically, a stable macroeconomic platform can spur investments, which in turn can lead to job creation, growth, and poverty reduction.

So the questions one must ask are: first, what is the likelihood of future economic growth translating into greater employment; and second, how it will impact poverty.

Let's look at the latter first. Indonesia was very successful in reducing poverty, particularly in periods of high economic growth. The monetary crisis in 1998 was a major setback, but even with modest growth rates over the last six years, the country has managed to recover to its pre-crisis poverty rate.

So, if we go by historical trends, future growth should lead to a further reduction of poverty in coming years. On the other hand, making future projections on employment based on previous trends is somewhat complicated. I will try to explain by looking at some features of the labor market and employment in Indonesia.

At 9 percent, the unemployment rate in Indonesia is one of the highest in Southeast Asia, and with current trends it is likely the Government will fall well short of reaching its employment target set in the 2004-2009 Medium-Term Development Plan (RPJM).

The Indonesian job market diversified significantly after the 1980s which had previously seen a high concentration of labor in agriculture and oil exports.

The manufacturing sector expanded through the 1980s and 90s, and continued to grow until the monetary crisis. Before the crisis, the share of agriculture in the GDP had declined, as jobs moved to manufacturing and the service sector. This is a common structural characteristic many countries have experienced as they transform from primarily agrarian economies to a diversified industrial base.

In South Korea, it is believed agricultural productivity improved appreciably only after it shed workers in the mid 1970s. At the moment, however, agriculture continues to be the dominant source of employment providing jobs for almost 40 percent of the labor force in the country.

Indonesia experienced high growth rates ranging from 5 percent in the first half of 1980s, to 6 percent in second half of 1980s, and then around 7 percent from the 1990s right through to the monetary crisis of 1997. Growth rates since 2000 have been rather modest, averaging around 4.5 percent, with 2007 being the best year with a growth rate of 6.3 percent.

In aggregate terms, there are now more people employed in Indonesia, but every year approximately 2 million people join the labor force. An increasing unemployment rate means jobs are not being created at a fast enough rate. In the last 15 years open unemployment has steadily risen from 2.6 percent in 1991 to 9.6 percent in 2007. Here we should note that the way the employment figures are calculated has been changed twice in the last 15 years thereby making comparisons between different periods quite difficult.

We will therefore use a crude method of comparing the two periods. In the pre-crisis period approximately 266,000 jobs were created annually for every percentage of GDP growth, whereas in the post crisis period for every 1 percent of GDP growth 272,000 jobs were created.

While one may be tempted to conclude that the quality of growth vis-a-vis employment is improving, it is possible many of these jobs may not be financially very attractive, as reflected by an increase of employment in the agricultural sector.

Now let us take a look at another important indicator of welfare: income. Literature on wages during the pre-crisis period suggests high growth rates led to improvements in labor productivity, wage increases (some studies suggest an increase of 6 percent annually), and also benefited women as more females were absorbed into the job market through labor intensive manufacturing. These improvements were not just a result of growth, but a combination of growth and adequate public investments in education and health.

In conclusion, one could say that in periods of high economic growth, poverty rates have also gone down commensurately. Data on growth and wages -- including to a large extent percentages of female workers in the labor market -- also seems to suggest a positive correlation. But the relationship between employment and growth is not very clear and needs to be examined further.

Inequality on the whole can also have a negative impact on growth. Work done by Hernando de Soto in Peru on property titles suggests that physical assets not only build human and social capital, but contribute positively to growth.

As the economy picks up speed, it is time to take a fresh look at an inclusive growth model for Indonesia to identify and strengthen the intricate links between employment, access to productive assets, and how low-income households accumulate wealth.

The writer is a development consultant. Views expressed here are strictly personal. He can be reached at owaisparray@hotmail.com



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