October 23, 2024
JAKARTA – In their seminal book, BRICS or Bust?, Hartmut Elsenhans and Salvatore Babones set out the proposition that middle-income economies often become ensnared in what is known as the middle-income trap. The result is that while it is relatively easy for poor economies to develop into middle-income economies, it is notoriously difficult for middle-income economies to become high-income economies. Indeed, the empirical evidence is clear: Few economies across the globe have been able to make the successful leap from middle-income to high-income in recent decades, with Singapore being a notable exception.
This has important implications for Indonesia. Having survived tribulations such as the 1998 Asian financial crisis and the COVID-19 pandemic in our economic development journey, Indonesia is now on solid footing as a middle-income economy. But what is now confronting us may just be our greatest challenge yet.
According to Elsenhans and Babones, becoming a middle-income economy requires only moderate productivity and a moderately competent administration; conversely, becoming a high-income economy requires nothing short of high productivity, as well as strong and effective governance. Failure to achieve excellence in either or both dimensions invariably results in the middle-income trap. Capitalizing on Indonesia’s demographic dividend As Indonesia prepares to surmount this middle-income trap over the next few decades, it has one unique advantage working in its favor: a sizeable demographic dividend, which is expected to peak in the 2030s with 68 percent of Indonesians at their productive working age.
In a speech delivered by outgoing President Joko “Jokowi” Widodo in 2023 during the unveiling of the final phase of the 2025-2045 National Long-Term Development Plan (RPJPN), he spoke of how the plan intends to ride on this demographic dividend to propel economic growth toward a per capita income of US$30,000 — at which point Indonesia would be considered a high-income economy under the Golden Indonesia 2045 vision.
The President, however, did point out a crucial caveat: Indonesia’s demographic dividend is a “crisitunity”, a double-edged sword that could be an opportunity or a disaster depending on how it is wielded. What ensued shortly thereafter was a national debate on the Job Creation Law and its adequacy to support the nation’s lofty Golden Indonesia 2045 ambitions.
Enacted on Nov. 2, 2020, amid much anticipation, the law had sought to create a more business-friendly environment by simplifying business licensing processes and providing financing, resources and incentives to businesses, especially those considered to be micro, small and medium enterprises (MSMEs).
As its name suggests, a significant part of this law also entails reforming labor regulations to make it easier for businesses to hire and manage employees, and thereby enhance Indonesia’s overall workforce participation. Among concerns raised by labor unions, environmental groups and other civic organizations were the effectiveness of the law in actual job creation, particularly within the context of Indonesia’s post-pandemic recovery, as well as social and environmental concerns, such as workers’ rights, job security and sustainability practices.
Several provisions of the law, such as those relating to outsourcing and employment models, had also been deemed to be slightly vague, leading to marketplace confusion among businesses and other stakeholders.
Job Creation Law as the demand side of the equation All things considered, however, our view is that it is still too soon to reach a definitive verdict on whether the law has been successful in achieving what it set out to do. Given that we are still in the midst of our post-pandemic recovery — and in the throes of the ongoing high-interest rate environment — many effects of the law may not be directly observable. For example, an investor may find it easier to do business in Indonesia with the law in place, but may be withholding their investment in view of the economic uncertainty. Nevertheless, to the law’s credit, it has provided much-needed assurance to many Indonesian businesses.
Although it must be acknowledged that the law remains vague in some areas, it is without a doubt a step up from the previous patchwork of overlapping regulations that ran counter to business needs. What remains to be addressed are certain policies pertaining to the levying of value-added and other taxes on businesses that might be perceived as sending mixed signals about government support, as well as greater inclusion of other stakeholders in the conversation to counter perceptions that businesses are benefitting at the expense of workers or other segments of society.
Above all, however, it is important that we are able to recognize the inherent limitations of Job Creation Law — that is, the fact that it is capable only of addressing the demand-side of the job market equation.
To understand this, it is important to draw the distinction between a high population of productive workers and high productivity; having the former does not inherently equate to having the latter. In order for Indonesia to realize its demographic dividend, its productive population must be productively employed. Otherwise, the flipside would be high unemployment and associated poverty —the “crisitunity” alluded to by the President.
By design, the law can only work on the demand-side of the equation by increasing the demand for Indonesian workers, but it cannot address the supply-side of the equation, which entails the development of productive and high-quality Indonesian workers. Addressing the supply side of the equation This brings us to the critical question: How can Indonesia tackle the supply-side of the job market equation to support its Golden Indonesia 2045 vision?
For starters, we believe that the Job Creation Law should be matched with the appropriate education and social policies. Currently, most policies focus on readying job-seekers for immediate placement opportunities. What is needed, however, are more future-ready and transferable skills that are not only in demand today, but also sufficiently resilient against future obsolescence.
Secondly, education policies must seek to inculcate the values of a productive culture from an early age. Such cultural education should be designed and delivered within the context of Indonesia’s norms and cultures, by promoting the Indonesian identity as a cultural unit working together productively to thrive in the world.
Finally, technology must be embraced as an ally and productivity enabler. This requires education and social policies that not only incentivize people to learn about technology and leverage it in productive ways, but also help to tackle mindsets and resistance against technology adoption.
Taken together, we believe that a concerted set of efforts on both the demand-side and supply-side of the job market equation are needed to enable Indonesia to attain the levels of economic productivity required to reap its sizeable demographic dividend.
It must be underscored, however, that a high level of productivity alone is a necessary, but not sufficient, condition for Indonesia to attain its ambitious Golden Indonesia 2045 goals. For that to happen, Elsenhans and Babones tell us that we need both high productivity, as well as strong and effective governance —meaning that all of us in business, government and civic society must step up to our respective roles in rallying around the cause.