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10 December
2015

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 Women Homeworkers and their families, Asahan, North Sumatra, Indonesia by the International Labour Organization in Asia and the Pacific.

Creating more and better jobs through ASEAN: Strategies for Indonesia to leverage regional integration


The end of 2015 marks the integration of one of the most dynamic markets in the world – the Association of Southeast Asian Nations (ASEAN). While much of the world was reeling from the impact of the Great Recession from 2009 to 2013, the regional bloc posted impressive Gross Domestic Product (GDP) growth rates – averaging 5.1 percent per annum.[i] Foreign Direct Investment in ASEAN grew by 18 percent in the last two years alone, reaching US$ 136.2 billion in 2014.[ii] It comes as no surprise therefore that policymakers and investors from around the world see ASEAN as a critical emerging market that has the power to lift the global economy and boost the ranks of the global middle class.

But if ASEAN is to realize these ambitions, the leaders of the regional community must aspire to not only achieve higher GDP growth rates but also to create more and better jobs for its burgeoning youth population. This is particularly true for Indonesia – a country representing 40 percent of ASEAN’s economic output as well as 40 percent of its population.[iii],[iv]

While Indonesia’s macroeconomic indicators have remained stable and resilient over the past decade, trends in the country’s labor market are mixed. On the one hand, Indonesia has made impressive progress in moving workers from the informal to the formal economy – with only 52 percent of Indonesian workers laboring in the informal economy in 2015, compared to nearly 66 percent in 2011.[v] Wages for formal economy workers have also risen significantly – with the average minimum wage increasing by 61.8 percent in real terms between 2007 and 2013.

But on the other hand, wages for those working in small, informal economic enterprises[1] have barely risen – recording an increase of just 9.5 percent in real terms between 2007 and 2013.[vi]

In other words, the Indonesian growth story seems to have mostly benefitted those with access to jobs in the formal economy. The majority of workers have not witnessed an appreciable rise in their purchasing power.

Moreover, the decline of Indonesia’s manufacturing sector further threatens the positive trend of workers entering the formal economy. Only 38 percent of Indonesia’s exports were manufactured goods in 2013, compared to 45 percent in 2006 and 56 percent in 2001. In Thailand and the Philippines – Indonesia’s ASEAN peers – the figures are much higher: 76 and 79 percent, respectively.[vii] The current trend is worrisome, as manufacturing has historically created a stable base of formal economy jobs in the Indonesian labor market.

The most pressing concern for Indonesia is youth unemployment, which stood at nearly 22 percent in 2013.[viii] Among ASEAN countries, Indonesia is the worst performer when it comes to providing its young people with productive work. Among major emerging economies globally, only South Africa has a higher rate of youth unemployment than Indonesia. And given that over 43 million of ASEAN’s 111.6 million residents aged 15 to 24 live in Indonesia, the lack of jobs for young people threatens the economic prospects for the entire region.[ix]

So how do regional trade and ASEAN fit into the future of Indonesia’s employment landscape?

Economic integration presents both a challenge and an opportunity for Indonesia to sustain the progress it has achieved, while addressing the many obstacles it faces in advancing the goal of shared prosperity.

On the positive side is the rapidly expanding middle class in the region, which will create new markets for Indonesian products and services. For example, Vietnam’s “middle and affluent class” is projected to grow to up to two-thirds of the size of Thailand’s by 2020.[x] Such developments will lead to increased consumption and regional trade, benefitting certain job-creating sectors in Indonesia – the logistics industry, for example.

At the same time, increased integration will lead to greater competition in the region. Indonesia must ensure that its industries and workers – including those who migrate – reap the benefits of a growing regional economy. In the context of regional competition, Indonesia is unlikely to sustain such impressive gains in terms of formalizing workers unless it addresses the eroding competitiveness of its manufacturing sector – including important industries like food processing – in which ASEAN peers are stronger players.
This report presents five steps Indonesia’s government must urgently take to leverage ASEAN integration toward the creation of more and better jobs for its people.

[1] The Indonesian government defines “small industry” as a business with between 5 and 19 employees. (see: http://www.bps.go.id/Subjek/view/id/170)

[i] ASEAN. 2014. ASEAN Finance and Macro-economic Surveillance Unit Database.

[ii] ASEAN. 2015. ASEAN Foreign Direct Investment Statistics Database

[iii] Vinayak HV, Fraser Thompson, and Oliver Tonby. 2014. Understanding ASEAN: Seven things you need to know. McKinsey & Company. http://www.mckinsey.com/insights/public_sector/understanding_asean_seven_things_you_need_to_know

[iv] World Bank. 2012. World Development Indicators.

[v] 2015 Data from Badan Pusat Statistik. 2015.

2011 Data from Tim Nasional Perceptan Penanggulangan Kemiskinan (TNP2K). 2012. Available at: http://data.tnp2k.go.id/?q=content/keadaan-ketenagakerjaan-februari-2012-bag2

[vi] Calculated using numbers sourced from:

Badan Pusat Statistik.2015. Wage Statistics (BPS) dan Kemenakertrans.

Available at: http://www.bps.go.id/linkTabelStatis/view/id/1428.

Deflator is CPI.

[vii] World Bank. 2015. World Development Indicators. Available at: http://data.worldbank.org/indicator/TX.VAL.MANF.ZS.UN

[viii] World Bank. 2015, ibid.

[ix] IndexMundi. 2015. Indonesia Age structure.

[x] Aparna Bharadwaj, Douglas Jackson, Vaishali Rastogi and Tuomas Rinne. 2013. Vietnam and Myanmar: Southeast Asia’s New Growth Frontiers. BCG Perspectives, The Boston Consulting Group. https://www.bcgperspectives.com/content/articles/consumer_insight_growth_vietnam_myanmar_southeast_asia_new_growth_frontier/?chapter=2


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