How to create 3 million

jobs a year in Indonesia

Gustav F. Papanek, Lexington, Boston | Opinion | Mon, May 12 2014, 10:40 AM
















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Indonesia can double income per person and create 25 million good jobs in 10 years if it
takes over 10 percent of Chinas market for labor-intensive manufactured exports. China
supplies the world with its toys, electronics, garments, textiles, car and motorcycle parts and
hundreds of other goods. But Chinese labor costs are rising rapidly as its labor force ages
and shrinks. Factories are leaving China and new manufacturing investment is locating
elsewhere.

If Indonesia can export 10 percent of the labor intensive manufactured goods that China
now supplies to the world it will nearly triple manufactured exports, achieve double digit
growth and create millions of good jobs.

Some analysts condemn competing for labor-intensive manufactured exports as taking part
in a race to the bottom. They explicitly reject the idea that Indonesia should compete with
countries like Bangladesh for these jobs. They are missing the point. No one suggests that
Indonesian wages should fall to Bangladesh levels.

Indonesia must compete with Vietnam, India, and, yes, Bangladesh, if jobs are to be found
for the countrys growing labor force. If not, workers will crowd into the informal sector
where incomes are irregular and already close to Bangladesh levels. But Indonesia can
compete while increasing the income of Indonesian workers.

The same analysts argue that Indonesia should expand the production of higher-value,
more technologically advanced products like machinery and petrochemicals rather than
shoes, furniture, textiles, garments and electronics. Indonesia can indeed expand its
exports of higher-technology goods.

But a strategy that emphasizes technology-intensive goods has problems: [i] these
industries require few workers so they will not provide jobs to the millions who need them.
[ii] They do require many engineers and Indonesian engineers are two to four times as
expensive as Indian. Only some firms will be able to compete internationally with that
handicap. [iii] Above all, they will not provide productive, stable jobs for the 21 million
workers who have not completed primary school and another 50 million who completed
primary or secondary school.

At least 10 million of them are surplus workers in very low productivity jobs. For instance,
they work on tiny family plots that have more workers than needed; or they shine shoes in a
square which already has enough shoe shiners. If these 10 million surplus workers were to
work in export industries they would increase national income by nearly 12 percent. For the
workers it would mean higher and more stable incomes.







Indonesia does not need to drive down wages to compete:

First, the wage gap between Indonesia and its competitors has become smaller as
Bangladesh has increased its minimum wage by 70 percent and the value of the rupiah has
fallen by one-third, which lowers Indonesian wages in dollar terms.

Second, by improving the infrastructure in Central Java, labor-intensive investments can be
attracted to where the wage is already competitive with India and Vietnam. Allowing the
rupiah exchange rate to decline boosts competitiveness. At Rp 13,500 (US$1,17) per dollar,
Central Java wages are equivalent to $103 per month.

Stabilizing food prices would reduce upward pressure on wages and assure that workers do
not suffer from inflation. The cost of labor regulations can be reduced while increasing their
benefits for workers. For instance, severance-pay regulations impose high costs on firms
but help few terminated workers. Industry-executed but government-financed training
increases labor productivity.

Those who are pessimistic about Indonesia should look at Indonesias rank on the Global
Competitiveness Index. Most remarkably Indonesia moved from 74th in 2005 to 38th in
2013. With Bangladesh at 110th in both 2005 and 2013. Indonesias advantage has roughly
doubled. Other major competitors also ranked well below Indonesia in 2013.

Indonesias weaknesses are evident as well. Infrastructure is better than Bangladeshs but
lags behind Vietnam. Ease of doing business matters for exports where Indonesia is part of
an international system dominated by non-Indonesians. Indonesias rank on doing business
is low (120th out of 148), but could readily be raised with a political decision to facilitate
investment by foreigners in industries where they are needed for rapid
development.

Corruption is another low rank that can be improved quickly by increasing its costs and
reducing its benefits.

Table 2 makes it appear that Indonesia should have no difficulty competing in labor-
intensive exports. But the evidence is that relatively high labor costs and other obstacles to
doing business have taken their toll on job creation and growth.

In the 13 years since 2000, the quantity of manufactured exports has increased by less than
1 percent annually; the export value by only 5 percent; the value of labor-intensive exports
only 3 percent, while a growth of 19 percent is needed to create jobs for those joining the
labor force and to reduce the backlog of surplus labor.

Major steps for Indonesia to compete more effectively while increasing the purchasing
power of workers include: [i] Massive investment in infrastructure, especially in areas
producing labor-intensive manufactured exports. [ii] Reducing the costs of doing business
and closing off opportunities for corruption. [iii] Some exchange rate depreciation is
warranted to lower the price of labor in dollar terms, accompanied by steps to stabilize the
prices of basic foods.[iv] On a voluntary basis change the rules on severance pay,
benefiting both workers and employers.
Slowing China creates business
opportunities for RI
Linda Yulisman, The Jakarta Post, Jakarta | Business | Mon, May 12 2014, 11:57 AM

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Local industrial players have seen more opportunities to grab a small portion in global exports
as manufacturing in China, dubbed the worlds factory, continues to contract.

Chinas factory activity shrank for a fourth consecutive month in April as output and new orders
contracted during the month, while new export orders swung back to contraction after a
recovery appeared to be underway a month earlier, a recent survey by HSBC shows.

Electronic Producers Association (Gabel) deputy chairman for home appliances Sukiatno Halim
said that as Chinas electronics producers climbed up the value chain by producing high-tech
goods, there were more opportunities now in the market for Indonesia producers of certain low-
tech consumer goods, notably home appliances such as refrigerators and washing machines.

Demand for such electronic items are also expanding in the domestic market. We can produce
them on a massive scale and export part of the output, he said, adding that the competitive
edge resulted from efficient production.

Local manufacturers may tap into emerging markets in Southeast Asia, the Middle East and
Africa, where the product demand would be more or less similar, according to Sukiatno.

In stark contrast to China, HSBC Manufacturing Purchasing Managers Index (PMI) in Indonesia
peaked to an 11-month high since May last year, supported by faster incoming new orders and
expanding staffing numbers and stocks of purchases.

Apart from the short term outlook on its industry, China is struggling to maintain its status as
the factory of the world as its competitive edge in low-cost manufacturing erodes due to,
among others, higher labor wage.

Weakened foreign investment in China has started since early last year with a number of
producers from shirts to basic electronic components moving out to cheaper destinations like
Southeast Asia.

In a survey conducted by the Japan Bank for International Cooperation (JBIC) in the past year,
Indonesia for the first time overtook China as the most-wanted investment destination in Asia for
Japanese companies.

Indonesia will probably remain the top target for foreign direct investment (FDI) by Japanese
companies over the next five years, the agency said.

Indonesian Footwear Producers Association (Aprisindo) secretary-general Binsar Marpaung
said that new investments in the footwear industry began to enter Indonesia since mid-last year,
with some of them relocating from China.

Indonesia, along with Vietnam, is an alternative to manufacturers relocating from China for this
industrial sector, according to Binsar.

The investments are realized through setting up new factories or capacity expansion of existing
factories, he said.

Binsar said that Indonesian producers might see better prospects in markets previously
dominated by Chinas manufacturers, particularly North American and European countries.

Indonesian Institute of Sciences (LIPI) economist Latif Adam offered a different view to the
business groups, saying that Indonesia could only substitute China to a certain extent in the
consumer goods and labor-intensive manufacturing sectors, such as electronics, textile and
footwear.

But that is something that cannot be taken for granted and will take time, he said.

We need to do our homework, he added, pointing out to the improvement in the investment
climate, capacity building of human resources and enhancement in infrastructure to ease the
flow of goods.

Another important task, he said, would be to provide appropriate incentives to lure foreign
investors who already had a strong network of overseas buyers, both from China and other
countries, to invest here and boost their exports from Indonesia.

RI needs to be cautious
over outflows
Khoirul Amin, The Jakarta Post, Jakarta | Business | Mon, May 12 2014, 12:02 PM




















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Indonesia needs to be cautious over the steep increase in its overseas direct investments as the
figure may indicate fewer job domestic opportunities in the coming months, according to
economic observers.

Bank Indonesias (BI) latest data show that the countrys overseas direct investments
including equity and debts to subsidiaries abroad climbed to US$4 billion in the fourth quarter
of 2013 from $87 million the previous quarter.

The overseas investments have remained in the billions in the first quarter of this year, reaching
$1.5 billion.

Gadjah Mada University (UGM) economist Tony Prasetiantono said capital outflows were not
necessarily bad as it might indicate some companies were expanding abroad.

He, however, said the money could actually provide jobs for local people if invested in the
country.

When our overseas investments are on the rise, it may mean that certain local companies are
creating job opportunities abroad and not in our own country, he said.

Tony said that the countrys rising labor costs, lack of infrastructure and red tape might be
factors that were causing local businesspeople to opt to find better markets with less hurdles.

Indonesian Employers Association (Apindo) chairman Sofjan Wanandi said several companies
might also think that Indonesia was no longer an attractive place in terms of market or labor
costs.

Indonesias average minimum wage jumped by 5.5 percent between 2000 and 2011 but its
productivity only increased by 3.4 percent, while in China the figures were 7.2 percent and 10.1
percent, respectively, according to combined data from the World Bank and the International
Labor Organization (ILO).

Minimum wages in cities across Indonesia increased by 30 percent from 2010 to 2013, the
highest compared to Thailand (14.2 percent), China (8.4 percent), Vietnam (6.7 percent),
Cambodia (5.2 percent), Malaysia (3.3 percent) and the Philippines (3.1 percent), the data
shows.

Sofjan said, however, that the drastic surge of direct investments abroad might be down to
uncertainties ahead of the presidential election.

I think many businesspeople are still in a wait-and-see mode. They want to know how the
election and its result will affect their business. Under such circumstances, they prefer to play
safe by putting their money abroad, he said. Sofjan was confident many business players
would pull their money back to the country after a new administration is in place.

Meanwhile, Bank Mandiri chief economist Destry Damayanti said a big chunk of the overseas
direct investments were from local firms overseas expansion.

Some local companies are developing and therefore need to expand their market abroad, she
said, adding that several banks opened new branches overseas in the fourth quarter of 2013.

Destry, however, also did not rule out the possibility that some direct investments overseas
might be a result of the unfavorable domestic market situation in the fourth quarter last year as
well as uncertainty over the mineral ore export ban that was introduced on Jan. 12 this year.

Bank Indonesias statistics team meanwhile noted that the acquisition of overseas oil fields
became the major contributor for the dramatic increase in direct investments abroad. The team,
however, refused to provide further details.

Based on data made available to The Jakarta Post, almost half of the countrys $4 billion-
overseas direct investments in the fourth quarter of 2013 came from state oil and gas company
PT Pertamina.

Pertamina spent $175 billion in November last year for its acquisition of stakes in ConocoPhilips
Algeria Ltd., which previously controlled the 405a oil block comprising Menzel Lejmat North,
Ourhoud and EMK in Algeria.

Following the takeover, Pertamina now has participating rights in Menzel, Ourhood and EMK,
with 65 percent, 3.7 percent and 16.9 percent, respectively.

Pertamina is ready to work closely with Algerian state-owned oil and gas company Sonatrach
and Algerias state oil licensing body Alnaft to fully develop the oil potential of the block,
Pertamina president director Karen Agustiawan said previously.

Pertamina, through its subsidiary PT Pertamina Irak Eksplorasi, also in November last year
acquired 10 percent of ExxonMobils participating rights of West Qurna I block in Iraq.

Destry of Bank Mandiri said that an oil field acquisition was mainly aimed to increase oil
production of the concerned oil company(s) as well as to find onshore oil fields.

The concerned oil company[s] may want to find onshore oil fields that are operationally cheaper
[than offshore ones], but are now rarely found in Indonesia, she said.

Pertamina itself expects to produce 280.2 thousand barrels of oil per day (mbopd) this year,
consisting of 220.7 mbopd from existing working areas and 59.5 mbopd from areas made
available through acquisitions.

Growing outbound travelers
widen services trade deficit
Khoirul Amin, The Jakarta Post, Jakarta | Business | Wed, May 14 2014, 10:28 AM


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The growing trend of people choosing to travel overseas could be taken as an indication of a
strengthening economy.

However, as it turns out, outbound travelers have contributed to the state deficit, weighing
particularly heavily on services trade.

This is because travelers choosing to vacation abroad normally choose foreign carriers,
accommodation and tour packages.

Bank Indonesia (BI) recorded that the 7.7 million outbound travelers in 2013 had contributed to
an increase in the services trade deficit of US$12.07 billion from $10.3 billion the previous year.

The central bank noted that the services trade deficit in 2013 was mainly due to an increase in
freight services payment, due to ballooning imports, and partly due to transportation services
deficit.

BI data revealed a $1.4 billion deficit on transportation services was in line with an increase in
travel on foreign carriers.

According to a data from the Center for Aviation (CAPA), Malaysia-based budget carrier AirAsia
outperformed Lion Air by netting 5.9 million passengers from Indonesia last year, most of them
taking international flights.

Lion Air, meanwhile, flew 36 million passengers last year, with only one million flying
internationally, the data shows.

Tourism and Creative Economy Ministry spokesman Noviendi Makalam said, however, that the
deficit on transportation services would likely decrease as many more national flag carriers
served international routes.

Bu Mari has previously discussed with state-owned carrier Garuda Indonesia about its plan to
expand its international routes, he said, referring to Tourism and Creative Economy Minister
Mari Elka Pangestu.

Voicing a similar view, the president director of travel agency PT Bayu Buana, Pranowo
Gumulia, said that although demand for foreign carriers was still relatively high, the use of
national carriers was on the rise.

What I see is that many more customers have opted for Garuda since 2012 as it offers good
services and an extensive international network, just like its foreign counterparts, he said.

According to surveys conducted by the ministry, the number of outbound travelers using
national carriers increased from 25.32 percent of the total 5.05 million outbound travelers in
2009 to 43.18 percent of the total 6.7 million travelers in 2011.



While the use of national flag carriers is on the rise, the central bank unveiled that the growing
number of outbound travelers had resulted in a reduction of travel service payment surplus.

The spending gap between outbound and inbound travelers decreased to $1.4 billion last year
from $1.7 billion in 2011, according to the banks data.

In the first quarter this year considered low season BI recorded that travel service
payments decreased to $1.7 billion from $2.2 billion the previous quarter. However, the number
of outbound travelers stayed the same at 2 million people.

According to data from BI and the Tourism and Creative Economy Ministry, outbound travelers
surged to 8.3 million last year from only 4.9 million in 2008, while foreign tourists increased to
8.9 million from 6.2 million for the same period.

The BI statistics team said that between 65 and 70 percent of last years outbound travelers
went abroad for leisure, umrah (minor pilgrimage), haj and medical treatment, while the
remaining between 35 and 30 percent was for business.

Tony Prasetiantono, an economist with Gadjah Mada University (UGM), said that more
Indonesians were performing umrah because of an increase in expendable income as well as
cultural recognition [many respect those who have performed umrah or haj].

Around 150,000 people go to Mecca each month to perform umrah, he said.

The Religious Affairs Ministrys haj and umrah director general said previously that the number
of umrah pilgrims doubled last year to around 1 million from 500,000 in 2012.

The increasing number of outbound travelers was something inevitable as many people with
disposable income wanted to experience other countries, Bank Mandiri chief economist Destry
Damayanti said over the weekend.

What is important is how to attract foreigners visitors our country, she said, adding that the
government was developing infrastructure, such as new airports.

Association of Indonesian Tours and Travel Agents (ASITA) chairman Asnawi Bahar said that
targeting tourists from neighboring countries, such as Malaysia and Singapore, would probably
help attract more inbound travelers.

Deputy Tourism and Creative Economy Minister Sapta Nirwandar said that his ministry was
vigorously promoting non-traditional local tourist destinations to both locals and foreigners.

The ministry currently promotes 16 areas across the archipelago as National Tourism Strategic
Locations (KSPN), including Lake Toba in North Sumatra; Ende in East Nusa Tenggara; Toraja
in South Sulawesi; and Raja Ampat in West Papua.