Multilateral cooperation
Indonesia: Conclusions from the country-level consultation for the ECOSOC 2015 Integration Segment
Government, employer and worker representatives, academics and other stakeholders from Indonesia met on 24 February to review lessons learned and to adopt policy recommendations on decent work and sustainable development. Hosted by the ILO, the two-day meeting was part of preparations for the United Nations ECOSOC 2015 Integration Segment to be held in New York at the end of March. Under the theme “Achieving Sustainable Development through Employment Creation and Decent Work for All”, the meeting addressed key labour and employment issues.
On 24 and 25 February 2015 over 130 participants convened in Jakarta, Indonesia to discuss the theme: “achieving sustainable development through employment creation and decent work for all”. Participants were drawn from various Government ministries, trade unions and employers’ associations in eight regions of Indonesia, plus Indonesian and foreign academics, representatives from a range of UN agencies and members of the diplomatic corps. Topics discussed at the conference included economic restructuring; policies to narrow income inequality, including minimum wages and collective bargaining; green jobs; skills and productivity; labour migration; pensions in the formal sector; and rural development.
The conference demonstrated that Indonesia was an excellent country in which to examine more closely many of the issues being addressed at the ECOSOC Integration Segment in late March 2015. Participants discussed in detail the environmental, economic and social dimensions of sustainable development in Indonesia. They strongly endorsed the notion that Indonesia needs to make progress on all of these dimensions simultaneously.
On environmental issues, the conference noted that the Government had recently announced an ambitious target to reduce carbon emissions by 26 per cent, or 41 per cent with international assistance. Participants at the conference strongly endorsed the more ambitious target and supported the need for international assistance to reach this goal.
Given that deforestation and inappropriate land use currently contribute around 80 per cent of all carbon emissions in Indonesia, participants agreed that reforms to alter practices and curtail emissions from these sources must remain high priorities.
Studies presented during the conference demonstrated that Indonesia faces considerable challenges in transitioning to a low carbon development model. Evidence presented by the ILO suggested that less than 4 per cent of all current employment could be considered “green”. The ILO defines green jobs as those which are both environmentally sustainable and provide decent work. However, analytical work by several UN agencies demonstrated that a low carbon development model would have a positive impact on productivity, economic growth and employment in Indonesia.
Discussions concerning the economic dimension of sustainable development in Indonesia were facilitated by a number of detailed presentations by the Government, academics and UN agencies. Throughout the discussions there was general agreement about past trends in economic performance and broad agreement about the future priorities of economic policy.
All agreed that Indonesia had made impressive economic strides in the last decade and a half, with robust economic growth since the Asian economic crisis in the late 1990s. Economic growth accelerated slightly in the period 2005 to 2012, and averaged around 6 per cent p.a., thanks in large part to rising global prices for many of the commodities Indonesia exports. Global prices for coal, crude oil, rubber and crude palm oil increased threefold over this period. Up until recently, commodities comprised around 80 per cent of Indonesian exports.
The increased incomes and wealth generated by the global commodities boom had fuelled rising investment in the non-traded goods sector. Private construction investment in urban centres boomed. In fact, by 2012 building investment accounted for 85 per cent of total fixed investment. Meanwhile investment in capital equipment and improved technology in the manufacturing sector stagnated, and public investment in infrastructure remained subdued.
Indeed Indonesia lags well behind other middle income and emerging economies in terms of infrastructure investment. This is a point well recognised by the current Government, which has committed to using much of the fiscal space recently generated by cutting fuel subsidies (estimated at over 2 per cent of GDP) on investments in ports, roads and other critical public infrastructure.
All parties at the conference agreed that the current Government is definitely committed to fostering economic transformation, including the expansion of the manufacturing sector and the high-end services sector. There is however ongoing debate about the desired future focus of the manufacturing sector. During the conference some participants argued that the focus should be on absorbing very low productivity workers from the rural economy into an expanded labour intensive manufacturing sector. This would involve expanding industries like clothing, footwear and textiles. This would boost aggregate productivity, but would require keeping labour costs very competitive to attract foreign direct investment in these low wage sectors. During the conference other participants argued that the objective of policy should be to move up the “value chain” in manufacturing and to compete with countries like Malaysia. This would require greater emphasis on investments in capital equipment and technology.
This decision about the future structure of manufacturing has important ramifications for labour market policy, including wages policy, training and labour market regulation. In the area of skills and training, substantial investments are required regardless of the future structure of the manufacturing sector. But the skill set required for workers who produce textiles and those that produce computers are vastly different.
There was recognition that there is currently a significant skill mismatch, and the quality of training needs to improve substantially. The ILO argued that the teaching of technical skills and “soft-skills” should go hand in hand. Soft skills include the attitudes of workers; problem solving abilities; and the ability to work efficiently in teams. The ILO indicated it was ready to expand its assistance to Indonesia in these fields.
On the social dimension of sustainable development, participants recognised that the Government had made important public commitments to more inclusive growth. It was also noted that the increased prosperity generated by the strong recovery after the Asian economic crisis did, to some extent, “trickle down” to the poor. In fact there has been an impressive reduction in measured poverty levels. Recent improvements in poverty reduction programmes, low inflation, and increased minimum wages contributed to this outcome.
Despite the impressive nature of these official poverty figures, vast sections of the Indonesian population have consumption patterns, and living standards, that place them only marginally above the national poverty line. Thus large sections of society remain extremely vulnerable to any economic or environmental shocks that may hit Indonesia.
It was widely recognised that one of the major challenges confronting Indonesia is income inequality. The gap between rich and poor has expanded dramatically in the last decade. The Gini index is one widely used measure of income inequality. For Indonesia as a whole this index rose from 0.32 in 2004 to 0.41 in 2013. During the conference, the World Bank confirmed that these figures actually underestimated income inequality. In the last decade income inequality had been rising faster in Indonesia than in other emerging economies in Asia, except China. Inequality in Indonesia is compounded by vast differences in wages, incomes and the incidence of poverty in different provinces, as well as limited access to employment in the formal economy.
Participants agreed that sharp declines in measured poverty and rising income inequality can be explained, to a large degree, by labour market dynamics in the last decade. Given relatively robust economic growth in the last decade and a half, one would expect to see signs that the labour market has improved over this period. Indeed, the Government had recently met its objective of getting the aggregate unemployment rate below 6 per cent. Attention had focused on youth unemployment, which remains significant at around 22 per cent. A youth to total unemployment ratio above 3:1, as observed in Indonesia, is normally a cause for concern.
But an even bigger concern was the quality of jobs being generated. Some 45 per cent of all employees were in vulnerable employment and one-in-three are low-paid. More than half of all regular employees receive less than the minimum wage to which they are entitled, and among casual workers compliance with minimum wage rates is even lower. The ILO showed that one in three workers receiving low pay was considerable evidence that work that was previously in the formal sector was being “informalized”, with contracting out and home work on the rise.
During the conference some participants claimed that these trends supported the argument that labour costs were too high in the formal sector, and that labour regulations were too rigid to encourage the expansion of good quality wage employment. Representatives of employers’ associations pointed out that labour costs would increase further due to contributions employers will be required to make for health insurance and the pension system which will be introduced later in 2015. Employers emphasized that Indonesia would only fulfil its objective of becoming a high middle-income country if its industry remains internationally competitive. Critics of existing labour market institutions also pointed to the high proportion of employment still in the agriculture sector (around 34 per cent) and the failure of rural workers to make the transition into manufacturing and the service sector. They argue that it is imperative to maintain competitiveness by expanding the labour-intensive manufacturing sector while providing better job opportunities for those in rural areas.
Other participants at the conference focused on improving productivity in the manufacturing sector and moving up the “value chain”. They argued that Indonesia needs a more diversified and capital intensive manufacturing sector, plus a more pronounced move into the high end services sector. It was suggested that higher labour costs would encourage capital/ labour substitution and investments in technology.
During the conference trade union representatives pointed to the absolute level of wages rather than recent growth rates. They argued that minimum wage levels in Jakarta of around 220 US dollars a month were not at all excessive. Minimum wage rates of just 70 US dollars in manufacturing regions 300 kilometres from Jakarta were very low. They also noted that there was a major problem with the enforcement of minimum wages and other labour regulations, which was confirmed by data on the distribution of wages.
The ILO pointed out that it was not unusual to have differences of opinion about wages and labour costs. In her opening speech to the conference, the ILO Regional Director for Asia and the Pacific had indicated that these debates can be difficult in all countries. She urged all parties to enter into constructive dialogue on these issues and noted that there may be trade-offs and deals that can be reached if negotiations cover a package of reforms. The ILO Regional Director suggested that adjustments might be possible to the complex minimum wage fixing system in Indonesia if there was already in place a strong system of collective bargaining that covered the vast majority of workers and institutions to ensure compliance with labour laws and regulations.
During the conference trade union participants stated that dialogue between the social partners and the Government was expanding to cover a number of issues that had an impact on the living standards of workers. These issues were sometimes referred to as the “social wage” in other countries. The conference heard that discussions were taking place on tax thresholds, housing for the poor, improvements in health care and other social services.
The ILO noted that these developments were encouraging. They were consistent with the ideal of bargaining over a broader range of issues, rather than repeating the old arguments over minimum wages. The ILO indicated it was at the service of the Government and social partners to help take these issues forward. It was ready to provide technical support across the full range of labour market issues. The ILO indicated it would like to work with all constituents to help make the labour market in Indonesia more equitable and efficient. It was suggested that it may be possible to reach agreement around a well-balanced package of reforms that would serve the interests of the majority.
The conference demonstrated that Indonesia was an excellent country in which to examine more closely many of the issues being addressed at the ECOSOC Integration Segment in late March 2015. Participants discussed in detail the environmental, economic and social dimensions of sustainable development in Indonesia. They strongly endorsed the notion that Indonesia needs to make progress on all of these dimensions simultaneously.
On environmental issues, the conference noted that the Government had recently announced an ambitious target to reduce carbon emissions by 26 per cent, or 41 per cent with international assistance. Participants at the conference strongly endorsed the more ambitious target and supported the need for international assistance to reach this goal.
Given that deforestation and inappropriate land use currently contribute around 80 per cent of all carbon emissions in Indonesia, participants agreed that reforms to alter practices and curtail emissions from these sources must remain high priorities. Studies presented during the conference demonstrated that Indonesia faces considerable challenges in transitioning to a low carbon development model. Evidence presented by the ILO suggested that less than 4 per cent of all current employment could be considered “green”. The ILO defines green jobs as those which are both environmentally sustainable and provide decent work. However, analytical work by several UN agencies demonstrated that a low carbon development model would have a positive impact on productivity, economic growth and employment in Indonesia.
Discussions concerning the economic dimension of sustainable development in Indonesia were facilitated by a number of detailed presentations by the Government, academics and UN agencies. Throughout the discussions there was general agreement about past trends in economic performance and broad agreement about the future priorities of economic policy.
All agreed that Indonesia had made impressive economic strides in the last decade and a half, with robust economic growth since the Asian economic crisis in the late 1990s. Economic growth accelerated slightly in the period 2005 to 2012, and averaged around 6 per cent p.a., thanks in large part to rising global prices for many of the commodities Indonesia exports. Global prices for coal, crude oil, rubber and crude palm oil increased threefold over this period. Up until recently, commodities comprised around 80 per cent of Indonesian exports.
The increased incomes and wealth generated by the global commodities boom had fuelled rising investment in the non-traded goods sector. Private construction investment in urban centres boomed. In fact, by 2012 building investment accounted for 85 per cent of total fixed investment. Meanwhile investment in capital equipment and improved technology in the manufacturing sector stagnated, and public investment in infrastructure remained subdued.
Indeed Indonesia lags well behind other middle income and emerging economies in terms of infrastructure investment. This is a point well recognised by the current Government, which has committed to using much of the fiscal space recently generated by cutting fuel subsidies (estimated at over 2 per cent of GDP) on investments in ports, roads and other critical public infrastructure.
All parties at the conference agreed that the current Government is definitely committed to fostering economic transformation, including the expansion of the manufacturing sector and the high-end services sector. There is however ongoing debate about the desired future focus of the manufacturing sector. During the conference some participants argued that the focus should be on absorbing very low productivity workers from the rural economy into an expanded labour intensive manufacturing sector. This would involve expanding industries like clothing, footwear and textiles. This would boost aggregate productivity, but would require keeping labour costs very competitive to attract foreign direct investment in these low wage sectors. During the conference other participants argued that the objective of policy should be to move up the “value chain” in manufacturing and to compete with countries like Malaysia. This would require greater emphasis on investments in capital equipment and technology.
This decision about the future structure of manufacturing has important ramifications for labour market policy, including wages policy, training and labour market regulation. In the area of skills and training, substantial investments are required regardless of the future structure of the manufacturing sector. But the skill set required for workers who produce textiles and those that produce computers are vastly different. There was recognition that there is currently a significant skill mismatch, and the quality of training needs to improve substantially. The ILO argued that the teaching of technical skills and “soft-skills” should go hand in hand. Soft skills include the attitudes of workers; problem solving abilities; and the ability to work efficiently in teams. The ILO indicated it was ready to expand its assistance to Indonesia in these fields.
On the social dimension of sustainable development, participants recognised that the Government had made important public commitments to more inclusive growth. It was also noted that the increased prosperity generated by the strong recovery after the Asian economic crisis did, to some extent, “trickle down” to the poor. In fact there has been an impressive reduction in measured poverty levels. Recent improvements in poverty reduction programmes, low inflation, and increased minimum wages contributed to this outcome.
Despite the impressive nature of these official poverty figures, vast sections of the Indonesian population have consumption patterns, and living standards, that place them only marginally above the national poverty line. Thus large sections of society remain extremely vulnerable to any economic or environmental shocks that may hit Indonesia.
It was widely recognised that one of the major challenges confronting Indonesia is income inequality. The gap between rich and poor has expanded dramatically in the last decade. The Gini index is one widely used measure of income inequality. For Indonesia as a whole this index rose from 0.32 in 2004 to 0.41 in 2013. During the conference, the World Bank confirmed that these figures actually underestimated income inequality. In the last decade income inequality had been rising faster in Indonesia than in other emerging economies in Asia, except China. Inequality in Indonesia is compounded by vast differences in wages, incomes and the incidence of poverty in different provinces, as well as limited access to employment in the formal economy.
Participants agreed that sharp declines in measured poverty and rising income inequality can be explained, to a large degree, by labour market dynamics in the last decade. Given relatively robust economic growth in the last decade and a half, one would expect to see signs that the labour market has improved over this period. Indeed, the Government had recently met its objective of getting the aggregate unemployment rate below 6 per cent. Attention had focused on youth unemployment, which remains significant at around 22 per cent. A youth to total unemployment ratio above 3:1, as observed in Indonesia, is normally a cause for concern.
But an even bigger concern was the quality of jobs being generated. Some 45 per cent of all employees were in vulnerable employment and one-in-three are low-paid. More than half of all regular employees receive less than the minimum wage to which they are entitled, and among casual workers compliance with minimum wage rates is even lower. The ILO showed that one in three workers receiving low pay was considerable evidence that work that was previously in the formal sector was being “informalized”, with contracting out and home work on the rise.
During the conference some participants claimed that these trends supported the argument that labour costs were too high in the formal sector, and that labour regulations were too rigid to encourage the expansion of good quality wage employment. Representatives of employers’ associations pointed out that labour costs would increase further due to contributions employers will be required to make for health insurance and the pension system which will be introduced later in 2015. Employers emphasized that Indonesia would only fulfil its objective of becoming a high middle-income country if its industry remains internationally competitive. Critics of existing labour market institutions also pointed to the high proportion of employment still in the agriculture sector (around 34 per cent) and the failure of rural workers to make the transition into manufacturing and the service sector. They argue that it is imperative to maintain competitiveness by expanding the labour-intensive manufacturing sector while providing better job opportunities for those in rural areas.Other participants at the conference focused on improving productivity in the manufacturing sector and moving up the “value chain”. They argued that Indonesia needs a more diversified and capital intensive manufacturing sector, plus a more pronounced move into the high end services sector. It was suggested that higher labour costs would encourage capital/ labour substitution and investments in technology.
During the conference trade union representatives pointed to the absolute level of wages rather than recent growth rates. They argued that minimum wage levels in Jakarta of around 220 US dollars a month were not at all excessive. Minimum wage rates of just 70 US dollars in manufacturing regions 300 kilometres from Jakarta were very low. They also noted that there was a major problem with the enforcement of minimum wages and other labour regulations, which was confirmed by data on the distribution of wages.
The ILO pointed out that it was not unusual to have differences of opinion about wages and labour costs. In her opening speech to the conference, the ILO Regional Director for Asia and the Pacific had indicated that these debates can be difficult in all countries. She urged all parties to enter into constructive dialogue on these issues and noted that there may be trade-offs and deals that can be reached if negotiations cover a package of reforms. The ILO Regional Director suggested that adjustments might be possible to the complex minimum wage fixing system in Indonesia if there was already in place a strong system of collective bargaining that covered the vast majority of workers and institutions to ensure compliance with labour laws and regulations.
During the conference trade union participants stated that dialogue between the social partners and the Government was expanding to cover a number of issues that had an impact on the living standards of workers. These issues were sometimes referred to as the “social wage” in other countries. The conference heard that discussions were taking place on tax thresholds, housing for the poor, improvements in health care and other social services.
The ILO noted that these developments were encouraging. They were consistent with the ideal of bargaining over a broader range of issues, rather than repeating the old arguments over minimum wages. The ILO indicated it was at the service of the Government and social partners to help take these issues forward. It was ready to provide technical support across the full range of labour market issues. The ILO indicated it would like to work with all constituents to help make the labour market in Indonesia more equitable and efficient. It was suggested that it may be possible to reach agreement around a well-balanced package of reforms that would serve the interests of the majority.
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