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Indonesia's key to escape middle-income trap lies in quality jobs for its young people

Straits Times - April 1, 2024

Linda Yulisman, Jakarta – Years of work at a factory enabled Ms Sari Sartika Dewi to enrol to study law at a private university in Karawang, West Java, in 2018.

Successfully juggling her full-time job and studies, she earned a bachelor's degree in 2022. With it, the 34-year-old divorcee hopes she can find a more decent job.

However, finding a role that suits her new qualifications may prove to be elusive in Indonesia, which, despite being South-east Asia's largest economy, faces an uphill task in providing its young people with quality employment.

Ms Sari's factory employer, a foreign shoemaker that produces sneakers for a global brand, pays her 5.2 million rupiah (S$440) a month, similar to the region's monthly minimum wage. The amount also covers social security.

"I consider my current workplace a stepping stone. I want to make a leap, but don't know how," Ms Sari told The Straits Times. "I am aware that thousands of people are seeking jobs. This makes me think twice about moving."

Unlike many of her Indonesian peers, Ms Sari holds a "middle-class" job, which pays a wage that can afford middle-class consumption and offers benefits and social security protection.

In 2023 prices, middle-class jobs pay around 5.2 million rupiah monthly, according to Dr Maria Monica Wihardja, visiting fellow at the ISEAS – Yusof Ishak Institute and a former World Bank economist.

Providing middle-class jobs is a challenge for Indonesia as it seeks to move up from an upper middle-income economy to a high-income country, the Washington-based World Bank says.

Many young people in Indonesia often find themselves trapped in menial jobs after completing their education. At shopping malls, train stations and other public spaces, young people working as cleaners are a common sight.

Still, for people aged 25 to 59 like Ms Sari, the unemployment rate is 3.07 per cent, which is below the national unemployment rate of 5.3 per cent, where there are 7.9 million jobless people out of a workforce of 147.7 million, according to Statistics Indonesia.

Conversely, the numbers are much worse for the younger generation. As at August 2023, the unemployment rate of the youth aged 15 to 24 was 19.4 per cent.

For train cleaner Niki Andriyawan, 24, who graduated from vocational school, the crowded workforce and tough competition for jobs has led him to "accept his place".

"I have an aspiration to get a new job as I want to work in a new environment. But now it is tough to find jobs. Even university graduates cannot easily get jobs," said the father of a seven-month-old baby who earns about 5 million rupiah monthly.

Indonesia's youth jobless rate, which in 2022 was at 13 per cent, is higher than that of its neighbours, such as the Philippines (6.3 per cent), Vietnam (7.4 per cent) and Thailand (4.5 per cent).

A high-income economy, in contrast, has a gross national income (GNI) of at least US$13,846 (S$18,700) or more per capita. Indonesia's GNI per capita stood at US$4,580 in 2022.

With annual economic growth of around 5 per cent, the world's fourth most-populous nation of more than 280 million last July regained its status as an upper middle-income country, which implies a GNI ranging between US$4,466 and US$13,845.

Indonesia had shortly entered the club of upper middle-income countries in 2020 after staying in the lower middle-income category for about three decades, before being stripped of the status again the following year as the Covid-19 pandemic decimated livelihoods.

Dr Maria said that Indonesia's economic policies have not been able to create more and better jobs for its young demography, especially those jobs that could afford a middle-class life.

"Foreign and domestic direct investments have not gone to the labour-intensive manufacturing sector but to the capital-intensive industry sector, including the smelter industry, and skill-intensive service sectors, including the digital economy sector," she told ST.

She added that "a broader industrial policy" that goes beyond the processing of critical minerals and commodities and revitalises labour-intensive manufacturing or builds an ecosystem to allow investment in emerging industries such as semiconductors is necessary.

Dr Maria also noted that for the young people, having the right skills becomes more important than just university degrees.

Economists believe that Indonesia is on track to maintain its status as an upper middle-income country in 2024 after growing by 5.05 per cent in 2023. But they see the need for greater economic expansion to join a high-income economy group.

Mr Bhima Yudhistira, executive director of think-tank Centre of Economic and Law Studies, and Dr Mohammad Faisal, the executive director of Core Indonesia, also a think-tank, said that industrialisation – which creates numerous jobs and upgrades labour skills – would be crucial for Indonesia to upgrade its status to a developed economy and avoid the middle-income trap.

"Almost all high-income countries have advanced through industrialisation, so the key is to strengthen our industrial capacity and competitiveness," said Mr Bhima, adding that the contribution of the manufacturing sector to gross domestic product must be increased from 18 per cent to 25 per cent.

He also noted that Indonesia must grow by 7 per cent to 8 per cent annually to upgrade its status to a high-income country by 2045.

Said Dr Mohammad: "Creating middle-class jobs with decent wages should be part of the industrialisation strategy. So we should not only spur the industry reliant on cheap labour, but also the industry that can create as many quality jobs."

Dr Maria said: "Indonesia has been a middle-income country for the past 30 years and, to an extent, it has been trapped as a middle-income country", she said.

"To unlock itself from this trap and graduate to a high-income economy, it needs to find additional drivers of economic growth. More importantly, it has to be higher-quality growth."

Besides measures like rolling out bread-and-butter public policies and diversifying its sources of economic growth, Indonesia should institutionalise reforms through membership in international organisations that comply with international standards and governance, such as the Organisation for Economic Cooperation and Development (OECD), said Dr Maria.

In February, the 38-nation group, dubbed the "club of developed economies", began talks on the accession of Indonesia, which is set to become its first South-east Asian member.

Former trade minister and chief of the investment coordinating board Muhammad Lutfi told ST that to escape the middle-income trap, Indonesia has to boost infrastructure development, attract greater direct investment and enhance the quality of human resources.

He said that much effort was expended in this direction by President Joko Widodo's nearly one-decade-old administration.

"We are preparing for a growth trajectory to skip the middle-income trap, which we should do before our demographic dividend ends. So we have a deadline as our demographic dividend will end between 2038 and 2040," he said.

Indonesia's median age was 29.9 in 2023, according to a United Nations estimate. Ms Sari continues to aim beyond her current middle-class job. "I want a more decent workplace. With my degree, I deserve a better job."

Source: https://www.straitstimes.com/asia/se-asia/indonesia-s-key-to-escape-middle-income-trap-lies-on-quality-jobs-for-its-young-peopl