A better alternative for reducing unemployment

Alex Arifianto, Jakarta

During the past few weeks, Anis Chowdury, a consultant with the United Nations Support Facility for Indonesian Recovery (UNSFIR), has written two interesting articles for this newspaper. The first one, dated June 10, 2004, argued that Indonesia should adopt an unemployment and poverty reduction policy by creating public sector jobs (mostly in new infrastructure projects) and through job training programs.

The second one, dated June 16, 2004, prescribed that Indonesia should not shy away from using deficit spending to finance its public expenditure, provided that it is done moderately (between 3 percent to 5 percent of the country's GDP per year).

In these articles, Chowdury argued that because the Indonesian government has adopted a stringent fiscal policy in the past few decades, Indonesia has not invested adequately in crucial physical and human capital that could increase our long-term economic growth, such as in health, education and public infrastructure.

He also surmised that this policy has also lead us to spend very little on social welfare programs that would assist poor Indonesians to cope with the prolonged economic crisis (such as emergency public sector jobs and social safety net programs). As a result, millions of Indonesians were thrown back into poverty during the 1997/1998 economic crisis and many of them are struggling to recover from it even today.

It is correct that Indonesia's social development spending is considered to be one of the lowest in the region. Some have attributed this low social spending to the fact that Indonesia's Human Development Index (HDI) is stagnating (it ranked 112 out of 175 countries last year) and is lower than other countries in Southeast Asian. Thus, some argued that it might be necessary for the government to increase its social sector spending to improve Indonesia's human development indicators.

However, while an increase in social development spending might be desirable, any funds dedicated to finance this should come from clear and reliable sources. If we choose to fund these through deficit financing, while it might not create negative effects on the economy in the short run, in the long run, it might create adverse effects that could permanently damage the country's economy and increase poverty.

This could be seen from the experiences of many Latin American countries during the 1970s and 1980s, and also in Indonesia between 1959 and 1966. Once these countries started to finance public expenditure through deficit financing, they became addicted to it, because populist politicians and bureaucrats liked the idea that they could fund various costly government projects without the need to pay for them now. Thus, the amount of public spending financed through deficit financing in these countries increased dramatically.

As for Chowdury's suggestion that Indonesia reduce its unemployment by creating new public sector jobs in infrastructure projects, we should also look at past experiences to see whether the Indonesian government has the necessary resources to fund such programs and whether it has the capacity to successfully implement them.

Unfortunately, the government's past record in this matter is not something to be proud of. First of all, it simply has no additional resources to fund any job creation programs. It no longer has windfall revenues (e.g., from oil sales) at its disposal and with current outstanding foreign debt obligations totaling US$136 billion (or about Rp1,292 trillion), it simply has no resources to fund new spending programs such as the public sector jobs program proposed by Chowdury.

Furthermore, various studies have shown that past government intervention to create short-term jobs through public works projects were ineffective, given that they were not specifically targeted at the poorest citizens and were vulnerable to significant financial leakage. In the end, these programs were less successful in their aim to create sustainable jobs and reduce poverty among poor Indonesians.

In addition, other studies, including several that were done by SMERU during the past few years, show that many of the job losses in Indonesia could be attributed to the rapid increases in the local minimum wage (UMR), and on new labor regulations and taxes imposed by both central and local governments for businesses. These have prompted many employers to close their businesses and relocate overseas, thus leading to significant job losses and increased poverty among low-income workers.

In conclusion, instead of pursuing the course of action recommended by Chowdury, Indonesia would be better off pursuing policies that would reduce or eliminate these labor regulations and taxes and implement good governance practices, so that Indonesia's business competitiveness could be improved and investors would start putting their money in Indonesia again, creating new jobs that would lift poor Indonesians out of the vicious cycle of poverty.

Finally, while new social development spending is very important to increase our human development, such investment should not be financed through additional deficit spending, but instead through increasing efficiency in tax collection and more prudent use of our scarce public funds so that the resources dedicated to finance such expenditure would truly reached the intended target.

The writer (aarifianto@smeru.or.id) is a researcher with the SMERU Research Institute, a Jakarta-based public policy institute. The views expressed here are strictly personal.