Poverty, human development and the Indonesian labour market: issues, evidence and policy implications

1
Poverty, human development and the Indonesian
labour market issues, evidence and policy
implications

• Iyanatul Islam
• Email i.islam_at_griffith.edu.au
• UNDP-IPC international conference on employment,
  Brasilia, 11-12 January, 2005

2
The context past achievements, current
constraints and future challenges

• During rapid growth phase of the Surharto era
  1976-1997, labour market-poverty nexus was
  quite robust
• Income poverty fell on a sustained basis as
  workers moved from low productivity agriculture
  to more productive non-agricultural activities
• Some degree of skill deepening took place
• Real wages grew at 5 per cent p.a. 1976-1997
• Generally, strong correlation between real wage
  growth and reductions in consumption poverty
  but some exceptions
• 1997 financial crisis temporarily reversed the
  virtuous process of declining poverty and robust
  labour market performance
• Macroeconomic stability restored, recovery in
  place since 2000, PRSP initiated in 2004
• But labour market outcomes still modest
• Need to break the shackles of macroeconomic
  conservatism and craft employment-friendly growth
  strategy to support Indonesias renewed
  commitment to poverty reduction

3
Poverty and human development in the post-crisis
era

• According to US 1 a day poverty line, head count
  ratio in 2002 a little lower than pre-crisis
  benchmark, but not according to US 2 a day
  poverty
• Both poverty lines show that consumption poverty
  has fallen from its peak in 1999
• Depth and severity of poverty lower than 1999 but
  still above 1996 level
• Real wages in 2002/3 now about 10 to 30 per cent
  higher than 1999
• Still, 35 per cent of Indonesians vulnerable to
  at least a transient spell of poverty
• Crisis does not seem to have impaired human
  development but some areas of concern
• Progress in child health stalled after 1999
• Goal to attain universal enrollment for boys and
  girls in secondary education will be difficult to
  achieve
• Nation will meet MDGs as a whole, but bottom 20
  per cent will fail to achieve targets, while 30
  per cent of provinces will fail to meet at least
  one target

4
Labour market outcomes in the post-crisis era

• Share of wage employment has fallen between 1997
  and 2001
• Relative size of informal sector has gone up
• Employment growth in manufacturing has declined
  from 2.8 per cent p.a in 1994-1997 period to 0.6
  per cent since then
• Employment elasticity in manufacturing lower now
  than in the past
• Open unemployment rate has gone up to 9.0 per
  cent in 2002 from 5.0 per cent in 1997
• Youth unemployment high and persistent and
  accounts for 60 per cent of total stock of
  unemployed
• Involunary underemployment at 11 per cent
  higher than 1996
• Gender disparities persist in the labour market
  females have low labour force participation rates
  and educational attainments, are over-represented
  in part-time employment and urban informal sector
• Women entrepreneurs face multiple constraints
• Spatial mobility of labour an important feature
  of the Indonesian labour market, but affected by
  various impediments and large number of
  internally displaced persons IDPs

5
Policy issues

• Need for return of rapid and equitable growth
• There is a need to create 2.5 to 3 million jobs
  annually
• Requires growth rate of 5-6 per cent p.a.
• Growth has not exceeded 4 per cent p.a. since
  1999
• But emphasis should be on equitable growth,
  rather than growth per se
• Inequality has gone up in recent years
  1999-2002
• Estimates suggest that poverty would have been 4
  percentage point lower in the absence of an
  increase in inequality

6
Policy issues

• Moving away from macroeconomic conservatism
• Macroeconomic framework preoccupied with
  inflation targeting and fiscal consolidation
• This is a legacy of the 1997 financial crisis
  when restoration of macroeconomic stability under
  IMF tutelage was a priority
• It is now necessary to break the shackles of
  macroeconomic conservatism and focus on the
  financing needs of a national poverty reduction
  strategy
• Preliminary estimates in latest National Human
  Development Report suggest doubling of fiscal
  resources to support universal provision of
  basic health and education
• Need to complement this HD-driven approach with
  job creation targets
• Set policy parameters within this job creation
  target and identify ways of enhancing sectoral
  and aggregate employment elasticity

7
Policy issues

• Identifying sectors with employment potential
• Indonesian Governments White Paper has focused
  on development of agri-business to stimulate
  off-farm employment opportunities
• Also emphasis on development of SMEs
• These are welcome developments, but more
  attention needs to be paid to judicious
  interventions, such as
• Improving security of land tenure
• Assisting farmers to diversify through better
  information provision
• Removing/mitigating bureaucratic impediments to
  new business opportunities for SMEs
• Strengthening policy coordination between central
  government, local government and private sector

8
Policy issues

• Public investment in infrastructure
• Recent study suggests that Indonesia has
  significant weaknesses in infrastructure
  facilities, especially in rural areas
• There is a strong linkage between growth, poverty
  reduction and investment in infrastructure
• Public investment in infrastructure can be
  readily crafted as an employment creation tool
• One study on Indonesia has shown that use of
  labour-based methods of production in
  infrastructure investment can generate 1.2
  million durable jobs over four years
• Global evidence suggests that such labour-based
  infrastructure programs create five times as much
  employment as equipment-intensive methods
• Such programs are less costly 10-30 per cent,
  save foreign exchange 50-60 per cent relative
  to equipment-intensive methods

9
Policy issues

• Reaping the benefits of labour mobility
• Nourishing spatial mobility of labour is an
  important aspect of pro-poor labour market policy
  in Indonesia
• This will need initiatives in a number of areas
• Removing impediments to travel by investing in
  transport and communication
• Efficiently monitoring and setting standards for
  the migration industry
• Improving the labour market information system
  for prospective migrants
• Providing secure, flexible and fast means of
  harnessing remittances
• Looking after vulnerable migrants especially
  women who work overseas and IDPs

10
Policy issues

• Wage policy
• Aggressive pursuit of minimum wage policy to
  increase the returns to labour was a hallmark of
  the Suharto era
• This practice has continued in the post-Suharto
  era
• Econometric evidence suggests that during the
  rapid growth phase minimum wages could be
  absorbed without hurting employment prospects
• This is less valid now, given slow growth
• Hence, minimum wage should no longer be mandatory
  but should be used to monitor conditions of the
  working poor
• Investment in human capital is a more effective
  way of improving the lives of the working poor
• This will mean paying greater attention to EFA
  goals and improving quality of education

11
Policy issues

• Labour market flexibility and labour rights
• In 1999, Indonesia became the first Asian country
  to ratify all the core ILO conventions on
  fundamental principles and rights at work
• Since then, the government has moved to reform
  labour laws so that they are compatible with
  upholding labour rights
• Critics complain that this will impede labour
  market flexibility and hurt employment prospects
• Global evidence suggests that the link between
  labour market flexibility and rapid employment
  growth is tenuous
• Hence, policy makers should be wary of
  uncritically embracing the mantra of labour
  market flexibility
• Challenge is to sustain a growth strategy that
  provides jobs under conditions of freedom,
  dignity, equity and security

12
Policy issues

• Decentralization and MDGs sharing the fruits of
  growth
• Indonesia has moved from a highly centralized
  system that prevailed for three decades to
  decentralized governance over the last five years
• This is a commendable achievement
• This new system must now be harnessed to ensure
  that the fruits of growth are shared equitably
  across the regional communities of Indonesia
• As noted, while Indonesia as a whole is likely to
  attain the MDGs, many regional communities will
  not
• Tackling this challenge will require monitoring
  MDGs at district-level
• As the latest Human Development Report suggests,
  a promising start has been made in this direction