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