Toward Inclusive Growth in Indonesia : Improving Trade and - - PowerPoint PPT Presentation

Toward Inclusive Growth in Indonesia : Improving Trade and Employment

Guntur Sugiyarto*) Asian Development Bank

Conference on Trade and Employment in a Globalized World. Jakarta, Indonesia, 10-11 Desember 2012

*) The views expressed here are those of the author and do not necessarily reflect the views or policies of the ADB.

Outline of Discussion

1. Key Outcomes:

– Economy – Trade and Employment – Labor Market (LM) and Employment

• 2. Problems in LM and Employment
• 3. Key Issues on Trade and Industry
• 4. Government Interventions
• 5. Concluding Remarks

Failed Structural Transformation

• Declining industry replaced by service sector since 2000
• Higher growth of Agriculture compare than industry lately
• Four different areas with two “red districts”

Source: Calculated from the Key Indicators for Asia and the Pacific

• 20.0
• 15.0
• 10.0
• 5.0

0.0 5.0 10.0 15.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Percent GDP Agriculture Industry Services

Growth of GDP by Sector: Agriculture, Manufacturing and Services, 1993-2009 (%)

Sectoral GVA and Employment

Agriculture

5 10 15 20 25 30 20 25 30 35 40 45 50 55 60 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Share of agriculture gva (% to gdp at 2000 prices) Employment in agriculture (% to total employment)

Employment Agri GVA

Industry

5 10 15 20 25 30 35 40 45 50 10 11 12 13 14 15 16 17 18 19 20 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Share of agriculture gva (% to gdp at 2000 prices) Employment in agriculture (% to total employment)

Employment Ind GVA

5 10 15 20 25 30 35 40 45 50 20 25 30 35 40 45 19… 19… 20… 20… 20… 20… 20… 20… 20… 20… 20… 20… 20… Share of agriculture gva (% to gdp at 2000 prices) Employment in agriculture (% to total employment)

Employment Svc GVA

Services

Source: World Development Indicator Online

• Agr: Slowly declining and remain the main source of employment
• Industry: remain low and declining with increasing empl share.

Hence decreasing productivity

• Services: relatively high and increasing

Trade and Employment

2 4 6 8 10 12 20 40 60 80 100 120 140 160 180 200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (unemployment rate, %) (Index, %) Export Volume Index Import Volume Index Unemployment rate

Source: World Development Indicator Online

• Weak link between Trade and Employment

Labor Market Dynamics

• 20

40 60 80 100 120 140 160 180

• 10

20 30 40 50 60 70 80

1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Mn workers Percent Labor force participation rate Unemployment Rate Employee rate Participation, age 15+

Stylized facts of labor market in Indonesia

• Working age (15+) population

accounts for 172 million in 2010, grew by 40m during 1993-2010.

• Labor force participation rate

was relatively stable at 66-68%

• Unemployment rate is relatively

low and stable.

• Wage earners remain lower vs.

pre-AFC level as Self employed still dominant.

Employment by sector and education

• Agriculture remains

dominant, followed by services and manufacturing industry.

• Higher among male and less

educated groups.

Workers by Education Level, 1993-2009 (%) Employment Rates by Sector, 1993-2009 (%)

Source: Calculated from Sakernas Source: Calculated from Sakernas

• 10.0

Underemployment

• Underemployment is

massive.

• Mostly in rural and among

woman.

• Rural-urban gap remains

the same, while women- men gap narrows due to declining underemployment among women.

Underemployment Rates by Residence, 1993-2010 (%) Underemployment Rates by Working Hours, 1993-2009 (%)

Source: Calculated from Sakernas Source: Calculated from Sakernas

Employment rate in formal and informal and by sector

Formal Informal

• 10.0

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 AFC GFC Percent

Agriculture Manufacture Services Total

• 10.0

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 AFC GFC Percent

Agriculture Manufacture Services Total

Source: Staff estimates using data from BPS (various years), SAKERNAS.

Informal Employment

• Relatively widespread and

tends to increase.

• Higher in rural and among

women.

• Gender gap narrowing but

not between rural and urban.

Informal Employment by Residence, 1993-2009 (%) Formal and Informal Employment Rates, 1993-2009 (%)

Source: Calculated from Sakernas Source: Calculated from Sakernas

• 10.0

Informal Employment by Gender, 1993-2009 (%)

Wage: Nominal and Real

• Real Wage is stagnant.
• Women earn less and the

gender gap remains.

• Service sector is the highest,

followed by industry and agriculture sectors.

Real Monthly Wage by Gender, 1993-2009 (000Rp) Nominal and Real Wages, 1993-2009 (%)

Source: Calculated from Sakernas. Note: for employee only. Source: Calculated from Sakernas

Real Monthly Wage by Sector, 1993-2009 (000Rp)

Monthly wage of employee by sector (000)

Nominal wage rate

• 50

100 150 200 250 300 350 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 AFC GFC '000

Agriculture Manufacture Services Total

Real wage rate (CPI deflator)

• 200

400 600 800 1,000 1,200 1,400 1,600 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 AFC GFC '000

Agriculture Manufacture Services Total

Source: Staff estimates using data from BPS (various years), SAKERNAS.

Merchandise trade (% of GDP)

50 100 150 200 250 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Merchandise trade (% of gdp) Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Philippines

Source: ADB Key Indicators 2012

• Low trade-led growth
• Relatively flat, lack of a big improvement

VOLUME INDEX (2000=100)

Export Import

50 100 150 200 250 300 350

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar 50 100 150 200 250 300 350 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand

Source: World Development Indicator Online

• Exports: relatively flat
• Imports: tend to increase but small

Tariff rates

Tariff rate, applied, simple mean (%)

1 2 3 4 5 6 7 8 9 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 Simple mean, %

all products manufactured products primary products Source: World Development Indicator Online

• Already low and decreasing

Japan

16.57

China, People's Rep. of

11.27

United States

8.11

Singapore

9.06

Korea, Rep. of

8.05

India

6.55

Malaysia

5.40

Australia

2.74

Thailand

2.90

Netherlands

2.52

Exports

Indonesia: Destination of merchandise goods, 2011

Source: Key Indicators for Asia and the Pacific 2012

• Limited destinations
• Traditional markets or trading partners

Singapore

14.63

China, People's Rep. of

14.77

Japan

10.95

Malaysia

5.86

United States

6.11

Korea, Rep. of

7.33

Thailand

5.86

Saudi Arabia

3.06

Australia

2.92

India

2.44

Imports

Indonesia: Origin of Imports, 2011

Source: Key Indicators for Asia and the Pacific 2012

• Limited sources
• Traditional trading partners

Production trade networks: importance of global supply chains

Source: Ferrarini (2011)

All industries

• Not at the inner circle of GTN
• Relatively weak trade connections

Automotives industry

Source: Ferrarini (2011)

• Part of auto GTN but weak link to JPN
• Worse than THA

Electronics industry

Source: Ferrarini (2011)

• At the periphery with weak link to GTN
• Worse than SIN, THA, MAL, and PHI

Export Sophistication (EXPY)

Average 2001-2007

5,000 10,000 15,000 20,000 25,000 Lebanon India Romania Bulgaria Turkey South Africa Uruguay Angola Yemen Azerbaijan Brazil Ukraine Iran Russia Egypt Venezuela Libya Lithuania Latvia Indonesia Nigeria Costa Rica Thailand China Belarus Poland Algeria Philippines Mexico Malaysia

Panel A: Non-high income countries

5,000 10,000 15,000 20,000 25,000 Saudi Arabia Israel Kuwait UAE Hong Kong Portugal Oman New Zealand Slovakia Italy Canada Spain Netherlands Belgium Slovenia Czech Rep. France

• Rep. of Korea

Austria Hungary UK Denmark USA Singapore Sweden Germany Japan Finland Switzerland Ireland

Panel B: High income countries EXPY (2005 PPP $), 2001-2007 Average

Source: J. Felipe, et.al. 2011

• Less sophisticated
• Improve sophistication

Diversification of Export Basket

Source: J. Felipe, et.al. 2011.

50 100 150 200 250 300 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 PRC India Indonesia Malaysia Pakistan Thailand

• Rep. of Korea

Japan Singapore Spain Italy Portugal

• Low level: need to improve diversification

Level of Diversification

Average 2001-2007

50 100 150 200 250 300 350 Peru Uruguay Jordan Macedonia Panama Kenya Pakistan Guatemala Bosnia Colombia Tunisia Mexico Viet Nam Belarus Egypt Lebanon Argentina Latvia Ukraine Brazil Lithuania Romania Thailand South Africa Bulgaria Indonesia Turkey India China Poland

Panel A: Non-high income countries

50 100 150 200 250 300 350 Ireland Norway Singapore Australia New Zealand Israel

• Rep. of Korea

Finland Hong Kong Hungary Slovakia Japan Portugal Croatia Canada Switzerland Sweden Greece Denmark Slovenia Netherlands UK Austria Czech Rep. Belgium Spain France USA Italy Germany

Panel B: High income countries Diversification, 2001-2007 Average

Source: J. Felipe, et.al. 2011

• Better than sophistication
• Still need for improvement

Ease of doing business index (1=most business-friendly)

20 40 60 80 100 120 140 160 180 Malaysia Thailand Brunei Darussalam Vietnam Indonesia Cambodia Philippines Lao PDR

2011 2012

Source: World Development Indicator Online

• Worse than comparable countries
• Getting worse
• Need some improvements

Lead time to trade, median (days)

Exports

1 2 3 4 5 6 7 Number of days 2007 2010

Imports

1 2 3 4 5 6 7 8 9 Number of days 2007 2010

Source: World Development Indicator Online

• Exports: Relatively good and improving
• Imports: Worsening and need more improvement

Logistics performance index

(1=low to 5=high)

0.5 1 1.5 2 2.5 3 3.5 4 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Index (1-low to 5-high)

2007 2012

Source: World Development Indicator Online

• Declining LP
• Lower than THAI and MAL

Logistics performance index

(1=low to 5=high)

Ability to track and trace consignments

Competence and quality of logistics services

0.5 1 1.5 2 2.5 3 3.5 4 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Index (1-low to 5-high)

2007 2012

0.5 1 1.5 2 2.5 3 3.5 4 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippin es Thailand Vietnam Index (1-low to 5-high)

2007 2012

Source: World Development Indicator Online

• Declining: need to improve the system and service performances

Logistics performance index

(1=low to 5=high)

Ease of arranging competitively priced shipments Efficiency of customs clearance process

0.5 1 1.5 2 2.5 3 3.5 4 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Index (1-low to 5-high)

2007 2012

0.5 1 1.5 2 2.5 3 3.5 4 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Vietnam Index (1-low to 5-high)

2007 2012

Source: World Development Indicator Online

• Declining: need to improve the system and service performances

Key Government Policies: Minimum Wage

• Key Problems:
• 1. Increasing significantly

regardless of other factors, i.e. higher than Average and Median Wages.

• 2. Arbitrary across different

districts: adverse effects of decentralization worsening the matter.

• 3. Increasing non-compliance to

MW especially after 2003.

• 4. Not an effective tool for social

protection and poverty reduction, creating adverse effects.

• 5. Need to find a better way to

determine MW to keep it relevant and competitive.

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Agriculture Industry Services

Ratio of Minimum wage to median and average wage 1993 – 2009 (%) Non-compliance to minimum wage by sector,1993-2009 (%)

Severance Pay

• Key Problems:

1. Firing is the most expensive. 2. Firms response by changing the labor contracts:

• utput based or other more flexible

arrangements.

3. Low enforcement . 4. High non-compliance. 5. Ineffective and creating adverse effects.

Receipt of Severance Pay, as reported by terminated workers Source: Alatas and Newhouse (2010, p. 15)

Reality of the Policies

• Minimum Wage
• Severance Pay

Result:

A cross-country survey comparing labor regulation rigidity, Indonesia ranked 157 out of 181 countries. Compared with its neighbors in the East Asia and Pacific, Indonesia ranked 23

• ut
• f

24 countries with no other country in the region has firing costs as expensive as Indonesia (WB 2011).

Adverse Impacts

• Adverse effects of inconsistent rigid labor market

regulations: 1. Driving away new investments (good firms), which are more likely to generate good jobs.

• 2. Encouraging existing (and new firms) to hire workers in

short and less-permanent terms.

• 3. Creating more uncertainties, worsening governance

(corruption) issue and investment climate.

• 4. Discouraging existing firms to expand and improve the

quality of working relationship.

• 5. Lowering potential growth.

Concluding Remarks

1. The economy: needs to grow faster and generate more good jobs to cater the growing number of labor force and to improve the overall quality of employment. 2. Trade : second generation of reforms 3. Employment:

– As LM is very fragmented, improving the quality of employment must include addressing informality and underutilization issues, in addition to gender, urbanity etc. – Labor Market: workers always bear the costs of any economic downturns and the existing growth does not guarantee for quality employments. Therefore, a separate policy intervention is needed to improve LM and the quality of employment. – Moreover, workers and self employed are trapped in “lose-lose situation” and reforming LM only will not solve the problem. A more comprehensive reform is needed including improving the investment climate and revamping the industrial policy to strengthen the performance of industry sector.

Th Than ank k You

• u!

Additional Slides: LM Policies

• Increasing labor productivity: higher labor productivity

leads to increased employment and higher wages that would be beneficial to workers.

• Improving industrial relation: unions and collective

bargaining to maximize aggregate utility.

• Improving labor quality at entry, including improving

quality of education and training and reducing education and skill mismatch to improve skill and competitiveness of workers.

• Improve regulations and increase the role of public

employment services to get a better labor market

• utcome.

Social Protection and Programs

• Social protection to formal sector only will miss
• target. Need to move to a combination of

different social insurances.

• Developing informal and formal social system

such as unemployment benefits, better public services, and microfinance.

• Three cluster systems of social programs: Social

assistance and protection, Community empowerment, and Micro and small enterprise development.