Iyanatul Islam Email: i.islam@griffith.au

1. Poverty, human development and the Indonesian labour market: issues, evidence and policy implications Iyanatul Islam Email: i.islam@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 Indonesia’s 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 Government’s 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