Investors in Indonesia let out a small sigh of relief when Heri Sudarmanto, the director of foreign workers, announced on October 19 that foreign workers would not be required to pass Indonesian language tests after all. Just three days earlier, an official with the manpower ministry told reporters that such a test would be implemented. The language requirement, which has been proposed and rescinded more than once, is just the latest attempt to shield sectors of the Indonesian economy from outside competition. Such measures are puzzling and counterproductive given President Joko “Jokowi” Widodo’s pleas for infrastructure investment dollars during every state visit he makes. Against the backdrop of economic protectionism, such pleas come across as: “Bring us the money and we’ll tell you how to spend it.”
Already foreign oil and gas workers face age limits and foreign lawyers are severely restricted in their activities. Companies were briefly required to employ a ten-to-one ratio of Indonesians to expats before the regulation was hastily dropped in late 2015. Some professions are entirely closed to foreigners, while certain industries, like onshore drilling, have been shut off from foreign investment. Control over the large Mahakam gas field is being transferred from France’s Total and Japan’s Inpex to overworked state-owned enterprise Pertamina when its lease expires in 2017.
It is not only foreign companies that should be concerned. The fact is that even if fifty thousand foreign investors lined up tomorrow to offer capital injections with no preconditions – if the administration could direct the money into whatever sectors it chose and hire only domestic employees – the necessary roads and power plants still wouldn’t get built. Domestic companies would end up sitting on a pile of unspent money, unable to fulfill their contracts, because they wouldn’t be able to hire enough people to get the work done.
Indonesia may be growing into a middle-income economy, but its workforce is stuck in poor country status. The skills gap between what employers need and what employees have is turning into a major bottleneck. The more barriers the government throws up to foreign expertise, the narrower the bottleneck becomes.
A 2008 World Bank survey showed that nearly seven in ten Indonesian manufacturing firms found it hard or very hard to fill professional positions. A 2013 report by Boston Consulting Group anticipated that companies will struggle to fill 40 to 60 percent of their middle manager positions and half of all entry-level positions by 2020. As the service sector grows, the number of administrative and managerial jobs is expected to rise from 36 percent to 55 percent by 2020. Indonesian schools simply are not cranking out enough qualified graduates to fill them.
Engineers are in particularly short supply. The economy is adding fifty thousand new engineering jobs every year, but universities are producing only thirty thousand engineers. This 40 percent gap between supply and demand is expected to grow to 70 percent by 2025. Processing firms in the large palm oil industry have taken to training their own engineers, which can take a year or more. There is widespread poaching of trained employees by competitors, driving up wages to unsustainable levels.
As the largest economy in Southeast Asia, Indonesia has a chance to exercise much influence over the new ASEAN Economic Community, a collaboration of ten regional nations into a single market and production base. Its young and urbanized labor force portends continued growth after other developed economies have begun slowing down. But estimates of 2015 growth were below 5 percent. Until the country makes structural reforms – improving infrastructure, cracking down on corruption, producing a more skilled workforce – it will fail to fulfill expectations.
Producing more next-generation workers isn’t simply a matter of changing curricula or offering more university programs. Indonesia’s education system is riddled with problems from primary school on up. Teacher absenteeism is high, especially in more remote schools, and many teachers are not qualified despite a recent glut of teaching school graduates. Memorization is the preferred method of student instruction rather than encouraging the creative thinking needed for high-skill work. Federal education spending, required by a 2002 law to be 20 percent of the budget, did not actually reach that threshold until 2009. Student enrollment, much improved for younger children, lags well behind the regional average for those over fifteen years old.
The latest Program for International Student Assessment (PISA) test in 2012, measuring reading ability, science, and math, rated Indonesian fifteen-year-olds next-to-last among sixty five countries. That dismal showing is unlikely to change much once the 2015 PISA results are released. In 2012, the education ministry announced that it was pulling science and English language from the primary school curriculum in favor of additional civics and religious instruction.
Universitas 21, a university network, ranked Indonesia’s higher education system forty-eighth out of fifty countries studied. The Times Higher Education World University Rankings placed no Indonesian schools in the global top six hundred. Very few Indonesians study abroad either, largely because of a lack of English language ability. The cost of higher education, even at public schools, can be prohibitively expensive for low-income students, which is partially to blame for the fact that three-quarters of all university students are from families in the top 40 percent of the income scale.
Education inputs are improving at least. Jokowi has guaranteed twelve years of free education to the poorest students by offering stipends to cover school fees. A new law requires every district to have its own community college, and for credits from those colleges to be transferable to four-year programs, which was not previously the case.
The government’s actions on education have been mostly positive, but the system started from a position of such disarray that it will take time for the reforms and additional spending to make a difference. For now, it is important that those crafting economic policy be aware of the problems of the education system. They should advise universities on what skills companies are looking for and help design curricula accordingly. Most of all, they should not exclude foreign companies and foreign workers, who may be the only ones capable of running particular industries. Keeping jobs open for Indonesians does little good if there are no Indonesians to fill them.