Indonesia's Promise Could be Illusory

Anytime anyone says things are really good and getting better, I get nervous. That is how I am starting to feel about the McKinsey & Co. report released in September that claimed Indonesia was on target to surpass Germany and the UK by 2030 and become the world’s seventh largest economy.

Granted, it may happen — Indonesia’s big domestic market, rising consumer class and growing confidence are having a transformative effect.

But there is much to be done to get from here to there and not all the signs are positive. Consider this week’s general labor strike, which brought some 2 million workers into the street to peacefully demand an end to contract labor.

With so many favorable economic predictions being bandied about, it is no small wonder that the unions are becoming more militant. They want a bigger slice of the pie and Indonesia’s complex labor laws are not helping the situation.

As any employer here knows, it is notoriously difficult to fire permanent workers for any reason, and that fact has given rise to the use of outsourced workers on a contract basis. This fuels feelings of unfairness among regular workers who fear that future jobs will go to cheaper contract workers and that the formal labor sector won’t benefit. It is easy to see both side of this – both employers and workers need a better deal.

Is this being sorted out? The policies that led to the current labor laws came into effect under President Megawati Sukarnoputri, but getting misguided laws undone can be notoriously difficult. And this gets us to the present labor impasse, which is unlikely to be solved as 2014 elections loom and politicians use populism to lure voters. Beware of bad policies – they tend to have a long-term impact.

But with strikes growing and laborers becoming more militant, the current situation is just one factor that could hamper Indonesia’s march to McKinsey’s promised land. In addition, poor labor productivity was cited last week by the Organization for Economic Cooperation and Development as being a major threat to Indonesia’s steady rise.

OECD secretary general Angel Gurria said in Jakarta that poor infrastructure, educational deficits and lackluster social programs are keeping productivity low compared to neighboring countries. The OECD, less glowing perhaps than a private consulting firm, cautioned that the country’s vaunted young demographics won’t last forever and that the government has to act quickly on a range of issues from infrastructure and tax collection to education and social welfare.

The country is also seeing declining trade figures as a result of the slowdowns in China, India, Europe and the US. The rupiah has been the worst performing currency against the US dollar in Asia this year and it is expected to weaken further. Rising nationalist sentiment also is cited repeatedly by foreign investors as a worry.

In mining, regulatory uncertainty, local opposition and complex exploration rules have slowed new operations to a crawl. This past week, a US$1 billion gold mine in North Sumatra that opened in July abruptly shut down in the face of local protests that company officials claim were motivated by illegal mining interests in the area. The company laid off 2,000 workers. An official of the company, G-Resources, said it was the “first major mining investment of this size in Indonesia for more than 10 years” and that its troubles would be taken as a negative sign by foreign investors.

None of these things taken separately can be said to change the overall positive picture for Indonesia, but the country cannot afford to take it easy. If Indonesia is to go from being an under-performing also-ran, as it was for decades, to being a serious international economic powerhouse, it is not enough to cite outside optimism and wait for the returns.

If today’s problems are not addressed, tomorrow’s news may not be so good.

(A. Lin Neumann is a co-founder of Asia Sentinel. He wrote this for the Jakarta Globe.)