On unemployment: Squaring the circle II

Satish Mishra, Head, United Nations, Support Facility for Indonesian Recovery (UNSIR), Jakarta, satish.mishra@undp.org

Unemployment, as we saw, is not an easy subject. It is hard to define. It is difficult to measure. Governments do not find it easy to formulate and implement unemployment reducing policies. How do we begin to get a handle on the unemployment question in the current Indonesian situation?

Labour force statistics, even incomplete ones, provide a good starting point. They tell us that to understand the severity of the unemployment problem in Indonesia we should focus not on open but on "hidden", "disguised" or "under" employment". Open unemployment, defined as consisting of those who work less than 35 hours a week and are actively seeking a job, is in fact rather small.

What is worrying for Indonesia is that open unemployment has risen from a mere 2.8 percent in 1993 to around 4.7 percent at the outset of Krismon in 1997 to around 8.1 percent in 2001. It is often noted that the 2001 figure is not much higher than in several developed industrial countries. This is not much of a consolation to a country long used to very low levels of open unemployment.

The relative numbers of open and disguised unemployment illustrate the dimensions of the problem. Indonesia has a total workforce of some 98.8 million people. Out of this around 60 million are considered fully employed. An estimated 8 million are openly unemployed. The remaining 27.7 million persons are classed as underemployed". Note that the number of the disguised unemployed is four and a half times the number of openly unemployed.

The employment problem can therefore be divided into two constituent elements. The first is to stem the increase of open unemployment begun from the mid 1990s. The second is to reduce the incidence and volume of disguised unemployment. This means providing work such that each underemployed person becomes fully employed

That serves to put the unemployment problem in perspective. But we need more detail with respect to location and occupational patterns. The data at hand does give us some good starting indicators. Thus out of the 27.7 million underemployed, around 21 million or 76 percent live in the rural areas. The rest 6.5 million, 23.7 percent, are urban residents. This rural-urban spread is also reflected in the occupational patterns. Agriculture and forestry thus account for around 19 million underemployed. This is as much as 68 percent of the total number of disguised unemployed.

In addition, there are the regional variations in employment and unemployment. Thus Jakarta leads the country with some 65.5 percent of its workers in formal employment. Aceh has only 19 percent. Seen from another angle, informal sector jobs account for around 62 percent of all workers in Bengkulu and only 42 percent in Yogyakarta.

This structure of unemployment has some critical messages for policy. First, "going for growth", relying on a fixing of the banks and the large organized sector, will not be enough to solve the problem. This might make a dent on open unemployment if future growth is job absorptive rather than job shedding. But it is likely to be an expensive strategy. It costs much more to create a new job in the formal, urban sector than in others.

Second, with over 40 percent of the population already living in cities, labour absorption through the continuous migration from the villages is not sustainable. The urban areas already contain a significant pool of unemployed and underemployed, around 14.6 million of them. Migration of the old form is not a serious policy option.

Third, the disguised unemployed are not always free to undertake secondary jobs if these are far away or at peak activity times. Transport costs, family obligations and the pattern of seasonal farming activity limits the number of people who can travel far to supplement the number of hours worked. Thus aggregate unemployment provision strategies will provide only partial solutions.

This is where populism enters the story. Regional government will, of necessity, be a lead actor in the employment story. The old formula of roads, bridges and pylons might well have to be part of the game plan. But so would business incubation centers, cooperative processing and marketing of agricultural commodities. Then there are schools and clinics and safe water supply programs. These are all parts of the populist promise. But they also make sense in creating local employment opportunities. At current cost estimates they are still much cheaper than persuading banks to lend to all but the richest and the safest of borrowers.

The lesson is simple. The market cannot do it all. The state will have to play the lead role as thinker, organizer and initially at least the financier of last resort. But to be effective, the state will have to be both legitimate and accountable. Issues of regional balance and social justice will need to play a key part in public investment decisions. Accountability is more than good accounting. It requires not only checks and balances of a functioning democracy. It also needs the corrective of public information and public complaint.

I hear the groan of the sceptic. This is all utopian, he says. The state is corrupt. What is worse, it is also bankrupt. Politicians are driven by their own interests. They care nothing for the greatest good of the greatest number. This is a strange comment. How easy is it to forget that today's Indonesian economic reform is little more than a wholesale bail out of organized private business by the public purse?

Luckily, one does not have to choose between the state and the citizen. The question is setting appropriate boundaries for both. Other countries have experimented with different incentive systems. Management contracts, out-sourcing, civil society partnerships, watchdogs and management audits all constitute the armory of the modern democratic state.

But to move towards the appropriate institutional choices for Indonesia, we must first remove the blinkers. We must be able to weigh up all the alternatives. There is nothing sacrosanct about budget deficit or debt targets, nor about interest rates or inflation targets. Taxes are not fixed in stone. They can be changed, and are all the time, at times of crises and emergencies. Established democracies all over the world have done just that.

Fortunately, investors are cautious people. Stung by past crises, they tend to look beyond macroeconomic indicators to political and social variables. They have often used local knowledge and sentiment as barometers to guide their own. Reduced unemployment within a convincing local framework will appeal to them both as a signal for economic activity and political stability. We might do well to start working on that message.

The views expressed in this article are strictly personal.