Infrastructure, manufacturing and job opportunity paradox

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Suhendra Ratu Prawiranegara
Public Infrastructure Observer

IO – The infrastructure sector has clearly been the priority (primary) sector during the Joko Widodo Government. Since 2014, the infrastructure budget in the State Budget (Anggaran Pendapatan dan Belanja Negara – “APBN”) has swollen year after year. This is because when creating the Medium-term Development Plan (Rencana Pembangunan Jangka Menengah – “RPJM”), Joko Widodo created an annual Government Work Plan (Rencana Kerja Pemerintah – “RKP”) that relies heavily on the infrastructure sector – a Government current priority, aligned with the principle that “money follows program” as the basis for their decisions.

According to data released by the Ministry of Finance’s Directorate General of Budgets, Government expenditure in 2017 was about Rp 1,998.5 trillion, growing year on year (YoY) at 7.2%. Infrastructure expenditure also underwent a spike in the same period as the previous year. According to this data, total infrastructure expenditure has grown 44.93% YoY throughout 2017. Along with the growth of the Government’s infrastructure expenditure, the positive implication is that the cons­truction sector has also been growing, about 7%.

However, the growth of infrastructure expenditures does not immediately generate a positive impact from a domestic economy perspective. This is obvious from the scope of labor absorption in the infrastructure sector (construction), which actually shows a downward trend. In August 2017, the construction sector contributed an estimated 6.73% to the creation of job opportunities, or lower than the achievement in the previous year at 6.74%. In fact, according to a statement made by the Institute for Development Economics and Finance (INDEF) in 2016, labor absorption in the infrastructure sector (construction) actually decreased by up to 230,000 workers.

This is a paradox in the infrastructure sector: on one hand, it requires large amounts of funding, which implies an increase in both Government and state-owned construction enterprise (Badan Usaha Milik Negara – “BUMN”) debt ratio. But on the other hand, the infrastructure sector is not yet a reliable and urgent sector that can create sufficient job opportunities to absorb labor and construction service.

Correlations between Manufacturing and Job Opportunities
Throughout 2017, the industrial sector contributed significantly to the absorption of labor, i.e. around 1.5 million workers. The industrial sector also contributes positively (strongly) to the structure of the national Gross Domestic Product (GDP). Industrial sector growth includes several sub-sectors: base metal growth at about 10.6%, transportation equipment industry growth at 5.6%, food and beverage sector growth at about 9.49%, machine and tool industry growth at about 6.45%, and chemicals and pharmaceutical sector growth at above 8% (source: Statement of the Minister of Industry in the 2018 National Industrial Outlook Seminar). In fact, the growth of the industrial sector is more linear and correlated to the provision of job opportunities and absorption of labor in comparison with the infrastructure sector (construction).

Ambiguity in the Construction of the Balang Island Bridge in East Kalimantan
Since the end of 2015, the Ministry of Public Works and People’s Housing (Pekerjaan Umum dan Perumahan Rakyat – “PUPR”) has set a program for the construction of the Balang Island Bridge in East Kalimantan. The general idea behind the program is to create inter-region connectivity, especially to and from the Municipality of Balikpapan and the Regency of Penajam Paser, as well as a job opportunity provision program. The budget was set at about Rp 1.3 trillion, funded by the APBN and a funding scheme originating from Shari’a Government Bonds (Surat Berharga Syariah Negara – “SBSN”).

The construction of Balang Island Bridge is planned for completion in 2019. However, in view of existing phenomena and realities in the field, this target will most likely be missed due to various complexities, which include issues with land acquisition, insufficient and misused budgets and insufficient labor. This is a real example that properly emphasizes the fact that the infrastructure sector (construction) is not the best sector for absorbing labor. It would be more beneficial – it would be more effective and efficient if this budget of Rp 1.3 trillion would be directed to developing the manufacturing industry, which exerts multiple effects on domestic economic growth and labor absorbtion.