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Fixing Indonesia's economy no labor of
love
By Bill Guerin
The
financial crisis of 1997 brought Indonesia's previously
spectacular economic growth to an abrupt halt. Going
through the ensuing rigors of massive political change,
economic reform and decentralization has left the
country ill-equipped to face the very latest challenges
of encouraging new inward investment.
The
bombings in Bali not only dealt a body blow to earlier
whiffs of optimism that the economy was truly on the
mend, but also have cast a giant shadow over the
short-term future of Indonesia.
Substantial
improvement had taken place in the macro-economy,
external debt had been successfully rescheduled through
the Paris and London Club deals and the massive
sovereign debt had been reduced both as a percentage of
gross domestic product (GDP) and in total amounts.
Inflation had been threatening danger but the rupiah and
the Jakarta stock market had strengthened.
Then
the bombers struck in Bali, the tourist resort island
that was said to have been many people's only knowledge
of Indonesia.
The carnage in Kuta has forced a
brand-new set of priorities on the administration of
President Megawati Sukarnoputri, and the fight against
terrorism will perforce take precedence over the
priority of providing jobs for Indonesians.
The
problems are multi-dimensional: the sheer scale of the
jobless figures, the friction between workers and
employers, the very limited availability of government
funds, the stalled privatization program and doubts
about the will and commitment of the government all make
the burden a heavy one.
Jobs are desperately
needed. Though last month's Central Bureau of Statistics
(BPS) survey estimated the number of jobless Indonesians
at only 8.4 million, former manpower minister Bomer
Pasaribu says the figures are totally out of touch.
Pasaribu said the number of unemployed was
between 40 million and 45 million because the "disguised
unemployed" or those working less than 35 hours per week
were not included in the BPS survey results. This
squares with the Indonesian Chamber of Commerce (KADIN)
estimate that 50 million adults nationwide, half of the
current labor force, are out of work or not fully
employed.
In an era of drastic change in
Indonesia's labor situation, as fledgling labor unions
experiment with new freedoms and the government
struggles to draft new legislation that protects the
rights of both workers and businesses alike, continuing
controversy over the government's failure to deal with
labor legislation to the satisfaction of all parties has
played a part in the negative investment sentiment.
There are 62 labor unions registered at the
national level but they have been unable to succeed in
satisfying the demands or needs of their members. The
labor laws currently in force leave workers out on a
limb, as there is no time frame specified for settlement
of an industrial dispute, and neither are any penalties
proscribed for employers who ignore a tribunal's verdict
in favor of the workers.
Indonesia's most famous
labor activist, Muchtar Pakpahan, head of the SBSI
(Indonesian Prosperity Trade Union), says the two new
embryo labor bills in parliament have been modified so
much by the House of Representatives (DPR) that "they
don't please either workers or investors, but they
please politicians".
The absence of clear
guidelines for relations between employers and workers,
added to increasingly strident labor demands, is a
recipe for disaster and certain to spook further
would-be investors lurking outside a country that is
seen as doing precious little to promote its advantages
or put its house in order.
Wages are also a
highly contentious issue. Before regional autonomy was
implemented last year there had been standardized
regional minimum wages, or UMR (Upah Minimum Regional),
which were determined unilaterally by the Ministry of
Manpower in Jakarta. Central government no longer plays
a part. Local bureaucracies determine regional minimum
wages through tripartite wage committees and the deals
need to be approved only by the provincial governors.
The problem with this is that many employers do
not pay the agreed rates, either because they are
genuinely unable to increase the cost of the labor
component of their business, because they know the
workers rights are so weak or because of the ease with
which they can hire thugs to bully and intimidate
workers into submission.
The labor unrest,
foreign-investor disputes with local shareholders
because of the almost complete absence of legal
certainty, the Manulife fiasco and now the widespread
security fears were all crucial factors in causing a
dearth of foreign investors.
The government has
also been unable to kickstart its struggling
privatization program, once seen as the salvation of the
economy. Reform has scarcely touched the state-owned
enterprises (SOEs) and with such a high fiscal deficit,
the government's options remain limited. Privatization
has turned into a string of postponements,
cancellations, inactivity and neglect. Increasing
investor skepticism was hardly surprising.
The
poor performance and misuse of resources in many of
these state companies is a public secret. While some
progress has been made since 1998 in reducing blatant
corruption, the ongoing climate of legal impunity in
Indonesia, coupled with the difficulties of introducing
best practices into SOEs, means that the core problem of
corruption remains a major impediment to an improvement
in performance.
The socio-economic plight of the
workers and the poor of Indonesia needs to become a
matter of daily priority and concern for the
politicians. This is all the more crucial given that
increased poverty and despair may spawn a breeding
ground for the rabid fundamentalism that, until now, has
originated only from a few small pockets across the
country.
But can the politicians rise to the
occasion? In the mad dash to generate budget revenues
and argue over new regulations, few in the corridors of
power in Jakarta have been asking themselves: How will
our decisions affect the investment and business
climate?
The Indonesian Bank Restructuring
Agency (IBRA) this week complained that legislators were
responsible for delays in the planned selloffs of three
banks. For example, IBRA wants to sell 71 percent of the
government's 99.36 percent stake in Bank Danamon, as
part of the reform agreed with the International
Monetary Fund (IMF) in the last Letter of Intent. Bank
Danamon should have come under the hammer by the end of
July but the sale of the "crown jewel", Bank Central
Asia (BCA), took almost two years to conclude.
IBRA chairman Syafruddin Temengung said progress
was so slow that he had asked State Minister for State
Enterprises Laksamana Sukardi to send a letter to seek
the support of the legislature. Although state-asset
sales do not require the DPR's approval, the government
is clearly wary of bypassing legislators who are likely
to create a political furor if they have not been asked
to agree the specifics of each and every selloff of
national assets.
IBRA was accused last month of
offering bribes to some legislators to smooth the path.
A couple of legislators blew the whistle but IBRA denied
the charges.
The 2003 state budget in any case
left little room to maneuver and was mainly geared at
servicing the country's massive sovereign debt levels
rather than drive the economy and stimulate growth. The
most recent (August) amendment to the draft budget
proposed a Rp54.5 trillion (US$5.9 billion) expenditure,
equivalent to some 2.8 percent of GDP, on development.
A substantial increase in development spending,
most of it on infrastructure, will be needed to stem the
rising jobless figures. The government has announced
that it will do just that, saying on Tuesday it would
raise development spending for 2003, but has given no
figures or details of what will be involved.
Any
increase in development spending and the consequent hike
in the budget deficit need to be accompanied by new and
creative ways of stimulating the badly needed growth
that will follow on from meaningful increases in job
opportunities. Growth will follow on from any increased
domestic consumption by those who are currently out of
the loop, ie, the jobless.
The deficit in the
August version of the draft budget was about Rp26
trillion or 1.3 percent of GDP, but injecting sufficient
cash for development will widen the gap substantially.
During most of the New Order era, agriculture
was the backbone of healthy employment figures, which
rarely rose above 3 percent, but now this sector is
reeling from the poor state of the economy and is no
longer be able to absorb those thrown out of work in the
factories and thus mask the specter of massive
unemployment. Yet creating the jobs needed for the
estimated 2 million workers entering employment each
year needs an annual growth rate of at least 6 percent.
This level of growth can only be attained
through investment. Most local companies are not able or
willing to make substantial investments, and domestic
banks are currently unable to carry out their role of
financial intermediaries thus eliminating a major source
of capital for domestic business.
Sustainable
economic growth can only be achieved through investment.
The past two years saw Indonesia reach 3-4 percent
growth on the back of strong domestic consumption amid
the drop in foreign and domestic investment and falling
exports.
For the foreseeable future Indonesia
will only be able to count on foreign investors, though
it is fairly safe to assume that creditor countries will
be ready, post-Kuta, to provide more loans to help cover
the larger-than-expected budget deficit. The country
will be dependent on such external resources, either
investments or loans, for a long time to come.
Allocating the funds needed for infrastructure
development in Bali alone will widen the budget deficit.
The plunge in hotel occupancy rates in Bali, now down to
single digits, in effect means the island is on the
brink of collapse, and needs emergency aid to rebuild
the infrastructure.
Confidence is another matter
altogether. Not only did the bombers knock Bali off the
radar screens of would-be tourists, but they reached out
to the international business community, bolstering the
already negative perception of Indonesia.
Conservative estimates suggest that Indonesia
will need more than $130 billion in investment over the
next decade to provide an infrastructure that can
support the growth of 6-7 percent per annum necessary to
absorb these new entrants into the labor force and
prevent the country from lagging farther behind its
competitors, such as China and Vietnam, as a competitive
industrial platform.
Short of a revolution in
state practices, a more equitable distribution of
Indonesia's undoubted wealth, and a true reformation of
society, the stage is being set for a crisis in
government.
(©2002 Asia Times Online Co, Ltd.
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