Indonesia Needs Fundamental Reform

Finance Minister Sri Mulyani conveyed the potential for direct and indirect investment in the country, in the presence of foreign investors in the Indonesia Investment Forum 2018 in Nusa Dua, Bali, Tuesday (9/10/2018).

Indonesia faces a number of challenges, among which is the need to improve the quality of its workforce. Vocational training must be tied to industry in order to provide quality labor.

JAKARTA, KOMPAS — Investment and household consumption are the backbone of the Indonesian economy. Investment contributed 2.17 percent to the country’s 2018 economic growth of 5.17 percent.

However, high investment is still needed for economic growth, as reflected in the additional investment required to spur gross domestic product (GDP), or Incremental Capital Output Ratio (ICOR).

According to Statistics Indonesia (BPS), Indonesia\'s ICOR is 6.3. This indicates that 6.3 units of additional investment are needed to produce one unit of output. Indonesia’s ICOR is higher than those of neighboring countries with average growth of less than 5 percent such as Malaysia, the Philippines, Thailand, Vietnam and India.

Nawir Messi, an economist at the Institute for Development of Economics and Finance (Indef), said that based on Indonesia’s ICOR, high additional investment was still needed to boost economic growth.

One of the reasons for Indonesia\'s high ICOR was the high cost of labor. The wage increase is not proportionate to increases in productivity. Few specialized and skilled workers are available. With such a condition, the country has found it difficult to attract foreign direct investment.

"There is a need for reform to touch on fundamental issues of the supply side. Without such reform, we will be unable to escape the middle-income trap," said Nawir.

Indonesia’s ICOR was relatively low in 2013 at 4.5, but this rose to 6.8 in 2014. Statistics Indonesia data shows that in August 2018, of the 124.01 million working population, only 50.46 million people, or 40.69 percent, had elementary school education.

Separately, Economic Coordinating Minister Darmin Nasution said Indonesia’s ICOR was relatively high at around 6. Ideally, the ICOR of lower middle-income countries like Indonesia was around 4. He said this ICOR could be achieved if the country was able to develop its domestic industry consistently and sustainably over the next two to three years.

For this reason, the government was focusing its industrial policies on the supply side. Human resource quality also needed improvement, and the government had prepared vocational training and educational programs for this year. "Vocational education will be synergized with the Industry 4.0 policy," said Darmin.

The government has allocated 20 percent of the 2019 state budget towards education, or Rp 492.5 trillion.

Unfriendly

The business world has deemed labor as the country’s primary challenge. Business leaders have said that one growing trend was increased investment in technology. This kind of investment was needed to improve production efficiency amid the increasingly fierce global competition.

On the other hand, Indonesia had a large workforce, part of which found it difficult to enter the high-tech industry sector. "In the past, during the New Order era, economic growth of 1 percent was able to provide employment for 400,000 people. Today, this would create jobs for less than 200,000 people. This is the greatest challenge for us," said Anton J. Supit, the deputy chairman of employment and industrial relations at the Indonesian Chamber of Commerce and Industry (Kadin).

According to Anton, the challenges of globalization, including Industry 4.0, were not friendly towards countries that had a large workforce with a low level of education. Therefore, it was necessary to have appropriate policies for labor-intensive industries and improve the labor quality to keep up with the market demand.

"Without these efforts, the low-educated workforce will not be able to enter Industry 4.0, which requires higher qualifications," he said.

Investment Coordinating Board (BKPM) data shows that Rp 185.9 trillion in investment was realized in the fourth quarter, which also showed that 255,239 Indonesian workers were employed. In the fourth quarter of 2017, investments of Rp 179.6 trillion were realized to provide jobs for 350,399 people.

Anton said the answer to this problem was vocational education. The government had allocated large funds to improve human resource quality. "However, businessmen must also realize that we can survive only through vocational education," he said.

Sanny Iskandar, the Indonesian Employers Association’s (Apindo) deputy chairman of property and economic zones, believed that vocational education programs at industrial estates were one of the most effective ways to ready workers.

"Vocational programs in industrial estates must coordinate with industry and vocational high schools," he said, adding that 25 industrial zones existed along the Jakarta-Cikampek toll road. At least 4,806 industrial companies operated in this area and employed about 950,000 workers.

BKPM chairman Thomas Lembong said that Indonesia’s ease of doing business must be improved through simplified licensing. Implementing an online single submission (OSS) system could reduce the time and costs of obtaining the appropriate licenses for starting a business.

The World Bank’s Doing Business 2019 report ranks Indonesia 73rd, far below Malaysia at 15th, Thailand at 27th and Vietnam at 69th. (KRN/CAS)