http://worldcat.org/entity/work/id/40187274

The Benefits of Growth for Indonesian Workers

August 1996 Does improving the conditions of workers in Indonesia require government interventions? Indonesia's rapid, broadly based pattern of growth has led to a spectacular reduction in poverty in the past 25 years. The model of development Indonesia adopted -- market-led growth combined with investments in physical and social infrastructure -- has proved to be the one most successful in alleviating poverty and benefiting workers in developing countries. The government's development efforts focused on agriculture (especially rice), education, and transport infrastructure. It emphasized providing opportunities for productive employment and gradually improving the quality of labor through education and training. The rates at which wages, employment, and incomes grew were left largely to market forces. Indonesian workers have been major beneficiaries of growth, but although the rapid growth of labor-intensive manufacturing has led to more jobs and higher wages, workers employed in these industries have expressed growing dissatisfaction. They complain about problems of child labor, the denial of centrally mandated wages and benefits to workers, poor working conditions, and the abuse of young female workers, who make up the bulk of the workforce. The government has tried to improve workers' wages and working conditions by centrally mandating higher labor standards, relying principally on minimum wages as a tool for doing so. Since 1989, minimum wages have tripled nominally and doubled in real terms. Enforcement has improved and, despite low compliance, at those higher levels minimum wages are beginning to bite. Indonesians are debating whether they need these labor-intensive industries and whether it is a mistake to base Indonesia's growth on cheap labor, because industries that exploit cheap labor could move to other countries. They argue that if labor is more expensive, manufacturers have no choice but to substitute some capital for labor, and to develop more sophisticated industries. However, Indonesia still has an abundant supply of labor and if labor-intensive industries are rejected, the capacity of the economy to absorb plentiful workers will be reduced. The main alternatives are to push up wages now (and risk the premature death of labor intensive industries) or to let wages be determined by market forces (in which case wages will rise slowly for the time being but industry's capacity to absorb labor will be higher) but strengthen institutions that could improve working conditions, such as labor unions. Agrawal recommends maintaining flexible labor markets and allowing market forces to set the pace of change, while strengthening labor unions. This paper -- a product of the Indonesia Policy and Operations Division, East Asia and Pacific, Country Department III -- is part of a larger effort in the department to develop a comprehensive labor market strategy for Indonesia. It was presented at a joint Ministry of Manpower-World Bank workshop, Indonesian Workers in the 21st Century, in Jakarta, April 2-4, 1996.

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