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ECONOMIC CAPACITY TO ABSORB LABOUR AT LOWEST EBB DESPITE GROWTH


Wednesday September 13, 2006

Indonesia’s capacity to provide employment in 2006 is at its lowest level compared to the past 10 years as labour-intensive industries are declining, reports Kompas daily. 

Quoting Deputy Minister for National Development, Bambang Widianto, the article mentions that today, the capacity of the real sector to absorb new employees is at a low 42,000 people with every one percent economic growth. In 2001, this figure was 253,000 and in 2003 it was 248,000 persons per percentage growth. In 1994, when Indonesia
’s economy grew at 7.57% rate, the real sector could provide 370,000 new jobs per one percent growth. 

Explaining this phenomenon, Bambang Widianto explained that at a relatively high rate of growth, the economy can absorb higher numbers of new labour per percentage growth, as compared to a relatively low growth, that we have today. During low growth, the private sector will cut costs, and reduce the number of labour employed. 

Before the economic crisis, Indonesia
’s economy grew between 7 to 8 percent, while post crisis, economic growth slowed down to between 3.83% to 5.7%. Correspondingly, prior to the crisis, Indonesia’s industry grew by around 11%, peaking in 1994 by 13.52%.However, post-crisis industrial sector growth slowed down to between 3.6% to 7.5% per annum.    

In the past, Indonesia
’s absorption capacity of new labour force has never stood lower than 100,000 per percentage growth, however today this has dropped to 42,000 only. Strangely enough, if in the past, each year 1.5 million to 2 million new job seekers entered the market, this year, this number has also dropped to around 500, 000 only, which may mean that more people continue with studies, and/or do not seek jobs. 

Separately,  Kompas reports, that Adviser to the Coordinating Minister for the Economy, Mohamad Ikhsan explained that changes in the composition of the manufacturing industry has also changed trends, since capital intensive industries are increasing, while the number of labour intensive industries are declining. 

For this reason, it is important to accelerate improvements in productivity and in the investment climate. Meanwhile, awaiting the enactment of the revised Labour Law, labour-intensive industries will wait out. In the interim, the government has launched the national program on community empowerment. 

Government’s Community Empowering Program 

This Community Empowering program is explained by the Jakarta Post. The paper reports that the Indonesian government is seeking to create jobs for 15 million people over the next three years as part of an expanded poverty alleviation campaign. The government would prioritize two programs to reach that goal: namely people empowerment and the biofuel program, reported The
Jakarta Post. 

Coordinating Minister for the People's Welfare Aburizal Bakrie claimed that the people empowering program has actually been operational since 1998 in 34,200 villages across the country.

The program is expected to generate jobs for 12.5 million people, assuming that each project will absorb 250 people in a specific area during three years, said Minister Aburizal. "The projects are effective, but we need to expand them to 50,000 more villages by 2009," he said after last week’s cabinet meeting "While, the types of projects will be determined based on local conditions. "The remaining 2.5 million jobs are expected to come on line as the government opens plantations to support its biofuel program.

Critics have called the anti-poverty projects ineffective, pointing to the steady rise in the number of poor people over the past few years. But Aburizal said that without the programs, poverty would have been even worse.

"We hope that the coordination between the relevant Cabinet ministers can be better. We have agreed that 20 percent of the total state budget allocated for poverty alleviation will go to these two programs," he said.
The government has increased next year's poverty alleviation budget to 51 trillion rupiah (US$5.6 billion), from 43 trillion rupiah (US$4.7 billion) in 2006.(quoted from English.eastday.com from
Shanghai

Indonesia’s Growing Balloon Economy 

In this context, it is interesting to read the article in Kompas entitled :”The Balloon Economy”, written by Prasetyantoko, now studying at the University of Lyon, France. 

According to Prasetyantoko, when an economy grows, but does not generate employment, this is caused by an overactive financial sector that develops out of proportion compared to the real sector. 

Especially, when the financial sector grows whereas its function of intermediation stalls. Thus we see that after the economic crisis, Indonesia
’s financial sector tends to dominate in line with global trends. 

Globally, since the 1980’s, the global financial sector has experienced revolutionary growth, as new investment instruments were introduced. However, amidst the collapse of the real sector, the rapid growth of the financial sector will create a so-called “balloon economy”.

Prasetyantoko continues, The Economist magazine in 2005 noted that between 2003-2005, the world equity market grew by an astounding 60%, and when calculated for the period of the past ten years, then this means a phenomenal growth of 3,000 percent.  In today’s global liberal economy, experts warn that a crisis in the exchange rate will often trigger a crisis in the banking sector, thus causing a twin crisis. 

In Indonesia
, the causality between the liberalization of the financial sector and the pursuant economic crisis is very evident. Due to the over-exposure of Indonesia’s financial system to the global system, Indonesia’s financial liberalization was followed by a severe crisis.  For, even after ten years, its effects are still felt on Indonesia’s investment capacity, economic growth and absorption of labour that have not recovered until today. Worst still, new regulations have not been replaced and enforced through poor governance.

Another manner on how experts detect the growth of a balloon economy is by comparing the growth of tradable sectors to non-tradable sectors. Tornell and Westermann (2002) explained that during good times when credit lending is booming, the non-tradable sector will grow faster than the tradable sector. 

In Indonesia
, however, says Prasetyantoko, there exists an imbalance (asymmetric financing opportunity) between the two sectors, when measuring cash flow against the level of corporate investments. 

Data reveal that prior to the crisis, the tradable sectors had larger financing constraints compared to the non-tradable sector, since loans tended to be given to non-tradable rather than to tradable sectors. 

Nonetheless, after the crisis, it appears from data available, that the property sector, which is non-tradable, continued to enjoy growth. These are indications, therefore, that after the crisis, the Indonesian economy continues to grow further away from the real sector. 

World Bank data further reveal that in 2004, Indonesia
’s tradable sector grew by 2.9%, while the non-tradable sectors grew at 7.2%. In 2005, this ratio widened to 3.5% and 8% respectively.  On the other hand, agriculture (which is tradable) grew by 2.1% only in 2004 and 2.5% in 2005. It is clear, therefore, that Indonesia’s tradable sector lags further and further behind the non-tradable sector. 

Meanwhile, in 2006 median percentage growth of trading at
Jakarta ’s Stock Exchange neared 3.3%, which is the highest in the region, compared to ’s 1.4% growth, ’s 2% and ’s 2.1%. 

These data show that while Indonesia
’s financial sector is growing at a fast rate, the real sector is nearing collapse. Therefore, Indonesia must be forewarned that it should not grow further into a balloon economy, warns Prasetyantoko.  

(Sources: Kompas , 5 and 12 September 2006)                                                    (Tuti Sunario)