IO – After falling into Covid-induced recession in 2020, the Indonesian economy, along with the global economy, is projected to enter a recovery phase in 2021. Adaptation to the pandemic, in government policies and public behavior, as well as the start of community vaccination program, are crucial factors that are expected to drive economic expansion this year. Nevertheless, the continuing threat from resurgence of Covid-19 cases will hinder the pace of economic growth, going forward. Given the latest developments, the Indonesian economy is estimated to contract by 2% in 2020 and grow by 3%-4% in 2021.
One of the biggest fallouts from the pandemic that must be dealt with is the widespread unemployment and scarce job opportunities, in particular the formal sector. In fact, even before the
pandemic, creating enough new jobs and improving the quality of the workforce had become major and persistent problems. Although the open unemployment rate has continued to decline from year to year, Indonesia is still lagging behind its ASEAN neighbors in reducing unemployment. In 2019, open unemployment in Indonesia reached
7.05 million people or 5.28% of the total workforce. This is above the Philippines (5.07%), and way above Malaysia (3.3%), Singapore (3.0%), Vietnam (1.99%), and Thailand (0.98%) for a comparable period.
The unemployment scenario will become more complex if we take into account not just open unemployment (defined by Statistics Indonesia/BPS as people working less than one hour per week) but also those with a relatively low number of working hours, such as part time workers, underemployed, unpaid workers – who are numerous.
With Indonesia’s economy ravaged by the pandemic in 2020, the problem with unemployment has inevitably become very complex. Social and travel restrictions devised as a response to the outbreak have caused many companies to suffer losses and become forced to lay off workers. In fact, many of them had to close shop and lay off all of their workers. More concerning is the owners and workers of micro and small businesses who, due to declining customers, lost their livelihoods and income. Quantitatively, this group is much larger, as they dominate the Indonesian economy from urban to rural areas.
A BPS survey in July 2020 found that 82.9% of companies in Indonesia saw their revenue plummet. For micro, small and medium enterprise (MSME), the figure even reached 84.2%. Geo-
graphically, companies in Java and Bali saw the largest drop. As a result, no fewer than 35.5% of the companies were forced to rationalize their workforce during the pandemic. In some sectors, such as manufacturing and hospitality, it was even worse as more than half of businesses were forced to retrench.
Among those who are employed, workers in the informal sector are by far the largest group. Limited job opportunities in the formal sector have forced many job seekers to work in the informal sector. Before the pandemic, between 2014 to 2019, of the 10 million jobs generated the majority were in the informal sector. The number of informal workers, which tended to increase prior to the pandemic, has risen sharply during the pandemic. In August 2019, the percentage of the population working in the informal sector was 59.3% of the total workforce, but in August 2020 that figure jumped to 63.3%. This is understandable, because many people who work in the formal sector were furloughed or laid off by their companies, so they have to find other source of income. And the most likely option is to make a living in the informal sector, where they don’t have to obtain a permit and pay burdensome tax, if at all. (FIGURE-2)
Fortunately, the rapid digitalization trend, especially in the last few years, has been a blessing to many MSME business players in the informal sector. When largescale social restrictions (PSBB) were imposed, it didn’t only impact social mobility and activities, but also trade transactions and production. This despite the fact that public consumption potential, especially in the upper-middle income group, is still relatively vigorous. This further accelerated the switch to online transactions. The relatively fast growth of e-commerce before the pandemic has shot up during the pandemic. The increase in online shopping transactions was particularly evident in staple goods such as food, beverages and non-food daily necessities. During the implementation of the PSBB in the Q2-2020, the number of people shopping online for the first time increased by 51%. The value of e-commerce sales reached Rp36 trillion, an increase of 26% year on year. The number of daily transactions increased to 4.8 million in Q2-2020 from 3.1 million in a comparable period. Meanwhile, in terms of volume, online sales have expanded 5 to 10 times.
However, not all MSMEs know how to take advantage of e-commerce and compete in the online marketplace. Micro businesses, in particular, were still constrained not only in terms of facilities and infrastructure, but also technical expertise and insight, especially on the online market consumer preferences.
Furthermore, not all types of businesses can easily switch to online platforms. Businesses that sell products, especially basic needs and fast-moving consumer goods (FMCG), can easily move their business online. However, those who offer services and specific characteristic such as location and store atmosphere will find it difficult to pivot. As a result, many businesses saw a drastic decline in sales during the pandemic. In fact, BPS survey in July 2020 found that 46.5% of companies still didn’t make use of online marketing.
In line with limited job opportunities in the formal sector, what is also worth noting is the upward trend of unemployment among young, educated people in Indonesia in recent years. Rising unemployment among this group has even surpassed that of the old with a low education cohort.
If we look at BPS statistics on the structure of open unemployment in Indonesia in the last few years, the open unemployment rate among young people between the ages of 25 and 34, is on the rise, even before the pandemic. In the 25–29-year-old cohort it has increased from 6.97% in 2018 to 7.19% in 2019. Meanwhile, for the 30-34 age group it increased from 3.44% to 3.52% in the same period. According to the World Bank, in general Indonesia’s youth unemployment rate is also one of the highest in Southeast Asia, reaching 17.64%, far above the Philippines, Singapore, Vietnam, Malaysia and Thailand.
Similarly, based on educational backgrounds, unemployment among high school and university graduates has tended to increase, while declining among junior high school graduates and below, even though during the pandemic the latter also increased. This is due to contraction in the job market in the formal sector, considering that highly-educated workers generally have higher salary expectations more likely offered by the formal sector. Also, jobs in the formal sector are seen as more promising not only in terms of salary, but also other benefits such as health and accident benefits, holiday bonuses and so on. (FIGURE-3)
This condition certainly presents a complex challenge for Indonesia in its efforts to catch up with other countries. It also happens in an era during which Indonesia is entering the era of the demographic bonus, where the number of productive-age population is far higher than the non-productive ones, so that the dependency ratio is at the lowest.
Demographic bonus is a golden opportunity for a country to boost its economy because the demographic structure is at its highest level of productivity. Therefore, the demographic bonus is known as the window of opportunity. However, the window of opportunity will not be open forever. Each country will pass through the demographic-dividend period as its population ages, as is currently experienced by many developed countries, such as Japan and most European countries.
Indonesia’s dependency ratio has been on a downward trajectory for more than a decade. The country’s dependency ratio was 50.5 in 2010; a decade on it fell to 47.7. This will continue until it bottoms out (peak demographic bonus) in 2030 predictably at 46.9.
We can draw a valuable lesson from the success of East Asian countries such as Japan, Korea and China, in making an economic leap at the peak of their demographic bonus in the past. At that time, the main economic engine they prioritized was the manufacturing industry, and it was evident from the double-digit growth the countries experienced. The success of Korea in particular has become a role model in many countries around the world because it was able to transform from one of the poorest (low-income) countries to a high-income country in just a few decades.
For Indonesia, where its demographic bonus is seen in the current digital era, the challenges it is facing is by no means the same as those faced by East Asian countries during their own peak. Efforts to emulate the economic miracle these countries have made through industrialization will not be a walk in the park. On the contrary, when it is supposed to reap its demographic bonus, Indonesia is actually experiencing deindustrialization (prematurely), which is marked by sluggish growth of the manufacturing industry below GDP growth even for more than 15 years.
Because the manufacturing industry is one of the more labor-intensive sectors that creates a lot of jobs, deindustrialization has caused the slow absorption of labor in this sector which in turn impacted the country’s job creation capacity. Moreover, the manufacturing industry has increasingly become more capital-intensive in line with technological advances and tougher business competition, which demands higher efficiency in the production process. Meanwhile, service sectors that are developing more rapidly have a lower labor absorption capacity, with demand for more specific skills that cannot easily be met by Indonesia’s human capital, dominated by middle to lower-education groups. (FIGURE-4)
As the Covid-19 pandemic pushed Indonesia into recession, taking advantage of the demographic bonus and making the hopeful economic leap will be increasingly tough. In this respect, Indonesia urgently needs to have transformative policy breakthroughs in order to quickly emerge from recessionary pressures and maximize the benefits of a demographic bonus that will expire in around the next two to three decades.
A proper job creation strategy must be a top priority in the economic recovery program. And this is inseparable from a strategy to attract new investments, especially labor-intensive ones, either by the government or private investors. The implementation of a
Job Creation Law and its supporting regulations the government is currently working on can reduce barriers to investment and job creation. Apart from a number of controversies it generated prior to its passage, there are several things that need to be noted and anticipated in the enactment of this law, especially during its implementation later on.
First, the Omnibus Law should not only encourage investment in terms of quantity, but also the quality. In particular, it needs to ensure that the inbound investment is properly targeted so that it can absorb maximum number of local workers. This is one way to ensure that increased investment can actually have a direct impact on job creation and improved public welfare as the law envisions.
This is very important, considering previous experience showing that the rate of labor absorption from inbound investment is getting lower by each year. For example, in 2013 every one trillion Rupiah worth of investment could absorb an average of 4,951 workers. This rate continued to decline until only 2,272 people in 2016 and 1,277 people in 2019.
Secondly, the strategy to attract investment must also be complemented by policies aimed at creating multiplier effects for the national economy, namely by encouraging the highest possible growth of industry and supporting sectors as an integrated ecosystem. The entrance of foreign investors into the manufacturing industry, for example, needs to be accompanied by the creation of a supporting industries ecosystem that can become a supplier of raw materials, semi-finished goods, as well as various services needed by major industries. That way, the investment will not only create jobs but also foster the growth of small businesses around it.
In addition, the growth of these supporting industries can also reduce the imports of raw materials and auxiliary goods from overseas, which usually came with large foreign investments whose supply chain is generally transnational. We can learn from the lesson of foreign investment in the cellular phone industry in Indonesia, which has yet to generate the growth of component industries due to the lack of policy that encourages small and large business partnerships, including assistance for small businesses to meet the quality standards set forth by large corporations that should be able to buy their products, as well as empowerment of other small industries.
As for the increasing trend of young educated unemployment, apart from the need to accelerate job creation in the formal sector, the gap between the human capital quality and industrial needs also needs to be addressed. Government policy prioritizing the development of vocational education need to be continuously improved. Training programs for graduates must be properly designed so that they can produce skilled workers who can meet industry needs.
The pre-employment card program, which is one of the government’s signature policy and part of the National Economic Recovery program, is hoped to overcome these hurdles. Unfortunately, BPS survey in November 2020 showed that only around 22% of the pre-employment card recipients are unemployed. In addition, the training programs offered are still piecemeal and excessively focused on the online system. In fact, not all types of skills can be taught through online learning. For example, skills such as carving, sewing, batik making, and many more, require apprenticeship with a trainer.
Training programs should also not stand alone, but be integrated through partnerships with business/industry players, so that trainees are immediately employable. For training programs that target entrepreneurship, the training provided needs to be designed so that businesses set up through it align with market demand so it can grow. Equally important is the integration of training programs with access to funding.
Last but not least, to reap a maximum benefit from the demographic bonus and promote sustained economic recovery, job creation strategies can also be integrated with efforts to preserve the environment and reduce carbon emissions. This is necessary in order to promote high economic growth in the long term. Haphazard economic development without regard to its environmental impact can limit the carrying capacity of the environment and reduce the total productivity factor, which in turn will restrict the room for economic expansion itself. As a consequence, job creation capacity will be limited, and efforts to reduce unemployment will not be optimum.
If the factors restricting job creation described above aren’t addressed immediately, the gains from our demographic bonus will be limited and catching up with the development progress of other countries will become even more difficult. Moreover, if we consider the social impacts of high unemployment, from social jealousy to high crime rates, it is feared that the demographic bonus which we should have benefited from will turn into a demographic disaster. This is a major challenge that this nation must tackle together, involving various stakeholders. The government clearly plays a key role in this, but it must be supported by the private sector, academia, and obviously the community itself. (Mohammad Faisal)
Mohammad Faisal is executive director of the Center of Reform on Economics (CORE Indonesia). He holds a PhD in Political Economy from the University of Queensland, Australia and has extensive experience in various research and consultancy work in economics and development, including with several leading institutions, among others the World Bank, UNPF, ASEAN Secretariat, National Development Planning Agency (Bappenas), and the Ministry of Industry.