A better alternative for reducing unemployment

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.