Indonesia’s rising labour costs could discourage investment

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Although external commodity price shocks and the declining value of the rupiah are the macro-economic trends dominating headlines about the Indonesian economy, some foreign investors still view labour policy and rising wages as greater challenges.

Unexpected trade surpluses of $42m in October and $130m in August were rare sources of good news across the second half of 2013. However, they were overshadowed by concerns that the current account deficit could hit $31bn by the end of the year, after the rupiah lost some 19% of its value against the dollar.

The decline has taken its toll on investor confidence, as the findings in a survey carried out by the British Chamber of Commerce Indonesia show. Just 60% of representatives from firms questioned said they felt confident about Indonesia’s economy, down from 83% last year.

According to the results of the survey, announced in late November, bureaucracy and corruption were again cited as the main challenges to doing business. However, labour policy reform was the fastest-rising concern, up from 47% to 63%.

Labour protests

A month earlier, protests had flared in Jakarta, after local administrators ignored calls for an increase in the minimum wage. The demonstrations, which were led by the largest labour unions, have sparked concerns that labour costs risk becoming uncompetitive. Unions are demanding a 50% increase in provincial minimum wages.

Following the protests, in early November, a dozen of Indonesia’s 33 governors raised the minimum wage in their localities by an average 19%, including an 11% increase in Jakarta.

The highest minimum wage rises awarded last year were recorded in the capital and East Kalimantan, where monthly salaries rose 43.87% to Rp2.2m ($180) and 48.86% to Rp1.75m ($150), respectively.

Reducing competitiveness

The increases have widened the gap between wages in Indonesia and those that prevail in some of its neighbours. In Myanmar, the unofficial minimum wage for garment producers stands at around $65 per month, while Cambodian workers based in the same sector earn a monthly salary of around $75.

“I think foreign investors will see [the latest increases] as a bad development, as they will find it difficult to predict the wage increase in the future,” Tio Nugroho, the owner of event-organising company, PT Taranggana Nata Asia, told the Wall Street Journal in early November.

Nugroho added that his company’s income fell around 30% during the first nine months of the year, after several clients cut promotional events to pay higher wages.

While unions point to rising inflation and growing business profits over the past decade, employers complain that productivity has remained static.

According to a report by the Center for Strategic and International Studies, a US-based think tank, productivity in Indonesia increased by 3.4% between 2000 and 2011, compared to 10.1% in China and 4.2% in Vietnam.

“Countries like Indonesia can’t continue to rely on natural resources or cheap labour. We have to move forward into the next stage of our development with ... innovation and technology,” the finance minister, Chatib Basri, told Reuters in August.

De-politicising the process

Dissent over the setting of a minimum wage has been compounded by the prospect of elections next year, both general and presidential, leading to concerns that political factions could target voters with wage rises.

Keen to avoid on-going politicisation of the minimum-wage-setting process, in August, President Susilo Bambang Yudhoyono signed an instruction that would link minimum wage changes to inflation. For labour-intensive sectors, the president proposed a wage rise of inflation plus 5%, with this figure set at inflation plus 10% for businesses operating in other areas of the economy.

In October, the World Bank praised the proposed changes, saying they would promote “a more evidence-based and less politicised wage-setting process”.

“Formula-based adjustment, if implemented, should make future minimum wage increases more predictable, reflect more closely local labour market developments and be better able to adjust to shocks,” the bank wrote in an October report.
It added that this reform “has the potential to improve certainty, simplicity and transparency in minimum-wage setting, supporting equity and balancing trade-offs”.

Given that productivity is unlikely to increase in tempo with salary rises and Indonesia’s infrastructure quality lags behind regional standards, improving the structure of the wage-setting process could hold the key to keeping employers, businesses and investors satisfied.

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