Toward Inclusive Growth in Indonesia : Improving Trade and Employment Guntur Sugiyarto*) Asian Development Bank Conference on Trade and Employment in a Globalized World. Jakarta, Indonesia, 1-11 Desember 212 *) The views expressed here are those of the author and do not necessarily reflect the views or policies of the ADB.
Outline of Discussion 1. Key Outcomes: Economy Trade and Employment Labor Market (LM) and Employment 2. Problems in LM and Employment 3. Key Issues on Trade and Industry 4. Government Interventions 5. Concluding Remarks
Percent 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Failed Structural Transformation Declining industry replaced by service sector since 2 Higher growth of Agriculture compare than industry lately Four different areas with two red districts Growth of GDP by Sector: Agriculture, Manufacturing and Services, 1993-29 (%) 15. 1. 5.. -5. -1. -15. -2. GDP Agriculture Industry Services Source: Calculated from the Key Indicators for Asia and the Pacific
198 199 2 21 22 23 24 25 26 27 28 29 21 198 199 2 21 22 23 24 25 26 27 28 29 21 19 19 2 2 2 2 2 2 2 2 2 2 2 Employment in agriculture (% to total employment) Share of agriculture gva (% to gdp at 2 prices) Employment in agriculture (% to total employment) Share of agriculture gva (% to gdp at 2 prices) Employment in agriculture (% to total employment) Share of agriculture gva (% to gdp at 2 prices) Sectoral GVA and Employment Agriculture 6 Agr: Slowly declining and remain the main source of employment Industry: remain low and declining with increasing empl share. Hence decreasing productivity Services: relatively high and increasing 3 Industry 2 5 Services 45 5 55 25 19 45 45 5 18 4 4 4 45 2 17 16 35 3 35 35 3 4 15 15 25 25 35 3 Employment Agri GVA 1 14 13 Employment Ind GVA 2 15 3 Employment Svc GVA 2 15 25 5 12 11 1 5 25 1 5 2 1 2 Source: World Development Indicator Online
(Index, %) (unemployment rate, %) 2 Trade and Employment Weak link between Trade and Employment 12 18 16 1 14 8 12 1 6 8 6 4 2 Export Volume Index Import Volume Index Unemployment rate 4 2 21 22 23 24 25 26 27 28 29 21 Source: World Development Indicator Online
1993 1994 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Mn workers Labor Market Dynamics Working age (15+) population accounts for 172 million in 21, grew by 4m during 1993-21. 8 7 Stylized facts of labor market in Indonesia 18 16 Labor force participation rate was relatively stable at 66-68% Unemployment rate is relatively low and stable. Wage earners remain lower vs. pre-afc level as Self employed still dominant. 6 5 4 3 2 1-14 12 1 8 6 4 2 - Labor force participation rate Unemployment Rate Employee rate Participation, age 15+
1993 1994 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Employment by sector and education Employment Rates by Sector, 1993-29 (%) Agriculture remains dominant, followed by services and manufacturing industry. 6. 5. 4. 3. 2. 1. Higher among male and less educated groups. Workers by Education Level, 1993-29 (%) - Source: Calculated from Sakernas Agriculture Manufacture Services 45. 4. 35. 3. 25. 2. 15. 1. 5.. Less than primary school Primary school Junior secondary Senior secondary Tertiary Source: Calculated from Sakernas
1993 1994 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent 1993 1994 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Underemployment Underemployment Rates by Working Hours, 1993-29 (%) Underemployment is massive. Mostly in rural and among woman. Rural-urban gap remains the same, while womenmen gap narrows due to declining underemployment among women. 6 5 4 3 2 1 Less than 35 hours Less than 4 hours Source: Calculated from Sakernas Underemployment Rates by Residence, 1993-21 (%) 6 5 4 3 2 1 Urban Rural Total Source: Calculated from Sakernas
1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Percent Employment rate in formal and informal and by sector Formal 9. Informal 1. 8. 9. 7. 6. 5. 8. 7. 6. 5. 4. 4. 3. 3. 2. 2. 1. - 1. - AFC GFC AFC GFC Agriculture Manufacture Agriculture Manufacture Services Total Services Total Source: Staff estimates using data from BPS (various years), SAKERNAS.
1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Percent 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Percent Informal Employment Relatively widespread and tends to increase. Higher in rural and among women. Gender gap narrowing but not between rural and urban. Formal and Informal Employment Rates, 1993-29 (%) 7 6 5 4 3 2 1 Informal Source: Calculated from Sakernas Formal Informal Employment by Gender, 1993-29 (%) Informal Employment by Residence, 1993-29 (%) 8 7 6 5 4 3 2 1 9. 8. 7. 6. 5. 4. 3. 2. 1. - Male Female Total Urban Rural Total Source: Calculated from Sakernas
1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 (' Rp) (' Rp) 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 (' Rp) Wage: Nominal and Real Real Wage is stagnant. Nominal and Real Wages, 1993-29 (%) 14 Women earn less and the gender gap remains. 12 1 8 Service sector is the highest, followed by industry and agriculture sectors. 6 4 2 Nominal wages Real wages Source: Calculated from Sakernas. Note: for employee only. Real Monthly Wage by Sector, 1993-29 (Rp) Real Monthly Wage by Gender, 1993-29 (Rp) 35 35 3 3 25 25 2 2 15 15 1 1 5 5 Agriculture Manufacture Services Total Male Female Total Source: Calculated from Sakernas
1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 ' ' Monthly wage of employee by sector () Nominal wage rate Real wage rate (CPI deflator) 1,6 35 1,4 1,2 1, 8 6 4 2 3 25 2 15 1 5 - - AFC Agriculture Services Manufacture Total GFC AFC Agriculture Services Manufacture Total GFC Source: Staff estimates using data from BPS (various years), SAKERNAS.
Merchandise trade (% of gdp) Merchandise trade (% of GDP) Low trade-led growth Relatively flat, lack of a big improvement 25 2 15 1 5 2 21 22 23 24 25 26 27 28 29 21 211 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Philippines Source: ADB Key Indicators 212
35 VOLUME INDEX (2=1) Exports: relatively flat Imports: tend to increase but small Export 35 Import 3 3 25 25 2 2 15 15 1 1 5 5 21 22 23 24 25 26 27 28 29 21 21 22 23 24 25 26 27 28 29 21 Brunei Darussalam Indonesia Malaysia Cambodia Lao PDR Myanmar Brunei Darussalam Indonesia Malaysia Philippines Cambodia Lao PDR Myanmar Thailand Source: World Development Indicator Online
Simple mean, % Tariff rates Tariff rate, applied, simple mean (%) 9 8 7 Already low and decreasing 6 5 4 3 all products manufactured products primary products 2 1 2 21 22 23 24 25 26 27 29 21 Source: World Development Indicator Online
Indonesia: Destination of merchandise goods, 211 Exports Japan 16.57 China, People's Rep. of 11.27 United States 8.11 Singapore 9.6 Korea, Rep. of 8.5 India 6.55 Malaysia 5.4 Australia 2.74 Thailand 2.9 Netherlands 2.52 Limited destinations Traditional markets or trading partners Source: Key Indicators for Asia and the Pacific 212
Indonesia: Origin of Imports, 211 Imports Singapore 14.63 China, People's Rep. of 14.77 Japan 1.95 Malaysia 5.86 United States 6.11 Korea, Rep. of 7.33 Thailand 5.86 Saudi Arabia 3.6 Australia 2.92 India 2.44 Limited sources Traditional trading partners Source: Key Indicators for Asia and the Pacific 212
Production trade networks: importance of global supply chains All industries Not at the inner circle of GTN Relatively weak trade connections Source: Ferrarini (211)
Automotives industry Part of auto GTN but weak link to JPN Worse than THA Source: Ferrarini (211)
Electronics industry At the periphery with weak link to GTN Worse than SIN, THA, MAL, and PHI Source: Ferrarini (211)
Export Sophistication (EXPY) Average 21-27 Malaysia Mexico Philippines Algeria Poland Belarus China Thailand Costa Rica Nigeria Indonesia Latvia Lithuania Libya Venezuela Egypt Russia Iran Ukraine Brazil Azerbaijan Yemen Angola Uruguay South Africa Turkey Bulgaria Romania India Lebanon Panel A: Non-high income countries Ireland Switzerland Finland Japan Germany Sweden Singapore USA Denmark UK Hungary Austria Rep. of Korea France Czech Rep. Slovenia Belgium Netherlands Spain Canada Italy Slovakia New Zealand Oman Portugal Hong Kong UAE Kuwait Israel Saudi Arabia Panel B: High income countries 5, 1, 15, 2, 25, 5, 1, 15, 2, 25, Source: J. Felipe, et.al. 211 EXPY (25 PPP $), 21-27 Average Less sophisticated Improve sophistication
Diversification of Export Basket Low level: need to improve diversification 3 25 2 15 1 5 1962 1967 1972 1977 1982 1987 1992 1997 22 27 PRC India Indonesia Malaysia Pakistan Thailand Rep. of Korea Japan Singapore Spain Italy Portugal Source: J. Felipe, et.al. 211.
Level of Diversification Average 21-27 Better than sophistication Still need for improvement Poland China India Turkey Indonesia Bulgaria South Africa Thailand Romania Lithuania Brazil Ukraine Latvia Argentina Lebanon Egypt Belarus Viet Nam Mexico Tunisia Colombia Bosnia Guatemala Pakistan Kenya Panama Macedonia Jordan Uruguay Peru Panel A: Non-high income countries Germany Italy USA France Spain Belgium Czech Rep. Austria UK Netherlands Slovenia Denmark Greece Sweden Switzerland Canada Croatia Portugal Japan Slovakia Hungary Hong Kong Finland Rep. of Korea Israel New Zealand Australia Singapore Norway Ireland Panel B: High income countries 5 1 15 2 25 3 35 5 1 15 2 25 3 35 Source: J. Felipe, et.al. 211 Diversification, 21-27 Average
Ease of doing business index (1=most business-friendly) 18 Worse than comparable countries Getting worse Need some improvements 16 14 211 212 12 1 8 6 4 2 Malaysia Thailand Brunei Darussalam Vietnam Indonesia Cambodia Philippines Lao PDR Source: World Development Indicator Online
Number of days Number of days Lead time to trade, median (days) Exports: Relatively good and improving Imports: Worsening and need more improvement Exports Imports 7 9 6 8 5 27 21 7 6 27 21 4 5 3 4 2 3 2 1 1 Source: World Development Indicator Online
Index (1-low to 5-high) Logistics performance index 4 3.5 (1=low to 5=high) 27 212 Declining LP Lower than THAI and MAL 3 2.5 2 1.5 1.5 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Source: World Development Indicator Online
Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippin es Thailand Vietnam Index (1-low to 5-high) Index (1-low to 5-high) Logistics performance index Ability to track and trace consignments 4 3.5 (1=low to 5=high) Declining: need to improve the system and service performances 27 212 Competence and quality of logistics services 4 3.5 27 212 3 3 2.5 2.5 2 2 1.5 1.5 1 1.5.5 Source: World Development Indicator Online
Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Index (1-low to 5-high) Index (1-low to 5-high) Logistics performance index Ease of arranging competitively priced shipments 4 3.5 27 212 (1=low to 5=high) Declining: need to improve the system and service performances Efficiency of customs clearance process 4 3.5 27 212 3 3 2.5 2.5 2 2 1.5 1.5 1 1.5.5 Source: World Development Indicator Online
1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 Key Government Policies: Minimum Wage Key Problems: 1. Increasing significantly regardless of other factors, i.e. higher than Average and Median Wages. 2. Arbitrary across different districts: adverse effects of decentralization worsening the matter. 3. Increasing non-compliance to MW especially after 23. 4. Not an effective tool for social protection and poverty reduction, creating adverse effects. 5. Need to find a better way to determine MW to keep it relevant and competitive. Ratio of Minimum wage to median and average wage 1993 29 (%) Non-compliance to minimum wage by sector,1993-29 (%) 8. 7. 6. 5. 4. 3. 2. 1.. Agriculture Industry Services
Severance Pay Key Problems: 1. Firing is the most expensive. 2. Firms response by changing the labor contracts: output based or other more flexible arrangements. 3. Low enforcement. 4. High non-compliance. 5. Ineffective and creating adverse effects. Receipt of Severance Pay, as reported by terminated workers Source: Alatas and Newhouse (21, p. 15)
Reality of the Policies Minimum Wage Severance Pay Result: A cross-country survey comparing labor regulation rigidity, Indonesia ranked 157 out of 181 countries. Compared with its neighbors in the East Asia and Pacific, Indonesia ranked 23 out of 24 countries with no other country in the region has firing costs as expensive as Indonesia (WB 211).
Adverse Impacts Adverse effects of inconsistent rigid labor market regulations: 1. Driving away new investments (good firms), which are more likely to generate good jobs. 2. Encouraging existing (and new firms) to hire workers in short and less-permanent terms. 3. Creating more uncertainties, worsening governance (corruption) issue and investment climate. 4. Discouraging existing firms to expand and improve the quality of working relationship. 5. Lowering potential growth.
Concluding Remarks 1. The economy: needs to grow faster and generate more good jobs to cater the growing number of labor force and to improve the overall quality of employment. 2. Trade : second generation of reforms 3. Employment: As LM is very fragmented, improving the quality of employment must include addressing informality and underutilization issues, in addition to gender, urbanity etc. Labor Market: workers always bear the costs of any economic downturns and the existing growth does not guarantee for quality employments. Therefore, a separate policy intervention is needed to improve LM and the quality of employment. Moreover, workers and self employed are trapped in lose-lose situation and reforming LM only will not solve the problem. A more comprehensive reform is needed including improving the investment climate and revamping the industrial policy to strengthen the performance of industry sector.
Thank You!
Additional Slides: LM Policies Increasing labor productivity: higher labor productivity leads to increased employment and higher wages that would be beneficial to workers. Improving industrial relation: unions and collective bargaining to maximize aggregate utility. Improving labor quality at entry, including improving quality of education and training and reducing education and skill mismatch to improve skill and competitiveness of workers. Improve regulations and increase the role of public employment services to get a better labor market outcome.
Social Protection and Programs Social protection to formal sector only will miss target. Need to move to a combination of different social insurances. Developing informal and formal social system such as unemployment benefits, better public services, and microfinance. Three cluster systems of social programs: Social assistance and protection, Community empowerment, and Micro and small enterprise development.