As Clinton would say: 'It's employment, stupid'

As Clinton would say: 'It's employment, stupid'

Anis Chowdhury, Jakarta

Former U.S. President Clinton had the economy as number one on
his agenda, epitomized by his famous comment, " it is the
economy, stupid". His presidency saw one of the longest spells of
economic growth in the U.S. history and a steady decline in
unemployment.

All the candidates in the coming presidential election of
Indonesia identified unemployment as the number one priority.
What lessons can the newly elected President of Indonesia draw
from the U.S. experience?

Unfortunately not much. Two main mechanisms that helped the
U.S. economy were faster economic growth and labor market
flexibility. None of these is likely to offer an immediate
solution. Why?

Indonesia's unemployment problem is much bigger than what
President Clinton had to tackle with in the U.S. President
Clinton did not have to deal with the consequences of the worst
economic crisis like that of Indonesia. Nor was his option
constrained by the policies designed to tackle a crisis. So, he
could follow the standard textbook solution -- create the
conditions for high economic growth and ensure labor market
flexibility.

In Indonesia, the economic crisis caused millions of people
lose their jobs. It is generally believed that the Indonesian
labor market was reasonably flexible. That is, real wage declines
when there is unemployment and workers can move between jobs and
sectors.

This flexibility downward of real wage and the ease of labor
movement between sectors prevented open unemployment from rising
dramatically despite the collapse of the economy by nearly 14
percent. Where then did these people who lost jobs go?
They did not have the luxury to refuse employment at any real
wage, and become what is called voluntarily unemployed not to be
counted in the official statistics of jobless.

Instead the bulk went back to the kampungs (rural areas) and
found some work in agriculture; some opened warungs (inns) and
others found jobs in the informal sector. This is evidenced by
data which show an increase in agricultural employment and a rise
in the informal sector. A large number of people who did find a
job in agriculture and warungs or informal sector are working
less than 35 hours. Thus, various estimates put the
underemployment at roughly one-third of the labor force.

Clearly this trend is not desirable -- with the maturing of
the economy we expect the informal sector and the agricultural
employment to decline. Almost all who are working less than 35
hours, want to work more -- the full 35 hours, but cannot find
jobs. This is an enormous waste of this country's potential.

President Clinton did not have this daunting task of bringing
one-third of the labor force back into full-time formal
employment that these people had before the crisis.
Economic growth of around 4 percent was sufficient for him. The
rest was taken care of by labor market flexibility.

For Indonesia, various estimates put a growth rate of about 5
percent that is necessary to create jobs for those joining the
labor force. Most analysts believe that economic growth will
hover around 4 percent-5 percent per annum and the prospect for a
higher growth rate in the near future is not very bright.

If the prospect for future growth is unlikely to be high
enough, will labor marker flexibility, that is reduction in real
wage, keep the situation under control? The answer is clearly no.
Why?

Look at the condition of poverty. Although the poverty rate
has fallen to about 18 percent from the peak of over 30 percent
during the crisis, various estimates show that nearly 40 percent-
50 percent of the population remains vulnerable to poverty. This
means that for the economy as a whole the real wage is already
too low and near the poverty line. Any drop in real wage will
push nearly half the population to poverty. This does not mean
that there is no scope for reducing real wage in some sectors,
but this cannot be an economy-wide solution.

Labor market flexibility has already done its job; it has
hidden open unemployment and created underemployment. Any further
drop in real wage will simply create more working poor. This is
specially so when the publicly provided social services such as
basic education and healthcare for the poor are in a total
shamble. Such an outcome is clearly contrary to the expectation
of progressive improvement in living standards. Soon people will
be asking what democracy has brought to them.

So what can the newly democratically elected President with an
employment agenda do?

The newly elected president has to adopt a new paradigm where
the public sector plays a leading role. This means a change from
the current market-driven paradigm of "growth-led employment" to
"employment-led growth". That is, employment is not seen as a by-
product of growth, but a driver of growth.

In this new paradigm the government takes an active role in
creating jobs through investment in infrastructure and retraining
those who have been out from the formal sector since the crisis.
The private sector responds as the domestic market expands due to
increased expenditure, as cost of production falls due to
improved infrastructure, and as productivity increases due to
better trained workforce. This creates a virtuous circle -- jobs
-- growth -- jobs.

Critics may find this alarming and term it as "populist".
Well, democracy is about responding to popular demands, and it
needs not be reckless. Nonetheless, one recognizes the danger of
public infrastructure investment may become a vehicle for
corruption and an instrument for vote buying politics. Solution
to this, however, does not lie in clipping the wings of the
government altogether. Rather the solution should be found in
building strong democratic institutions such as effective
opposition that can act as a check on such unscrupulous behavior
of the government.

There is a clear parallel here. The economic crisis in
Indonesia was a result of private sector's unscrupulous
behavior. No one suggests disbanding or snapping the private
sector altogether for this; what instead is required is effective
prudential regulation.

When we propose a leading role for the public sector for
employment creation, it does not necessarily mean stifling the
private sector or putting barriers to trade. It simply means the
state taking a leading role within an institutional framework of
democratic checks and balance in fulfilling people's aspiration
and lifting their standards of living by a variety of ways that
does not depend only on market.

The writer is Professor of Economics at University of Western
Sydney, Australia and currently is working as a consultant at
UNSFIR. This view is strictly personal