Amid Global Financial Crisis, Indonesia Seizes Golden Opportunity

Rocky Intan

Tue Apr 02 2013

For Indonesias incredible resilience to the global financial crisis, it has been the norm to be
optimistic about the national economy. Bullish news about Indonesias present and future
economic performance seems to be everywhere. However, this should not render us
complacent. As American author Robert Greene put it, There is nothing more intoxicating
than victory, and nothing more dangerous.
One of the most underreported trends in international affairs is the rising labor cost in China.
In its database, the International Labor Organization reported that in 2007, annual labor cost
in China was around US$1,000, adjusted to purchasing power parity. In 2012, this jumped to
around $2,500. And this figure is expected to keep growing in the following years. The
migration of rural, agricultural workers to industrial cities has slowed due to aging population
and improved rural condition. This has resulted in an increase demand for workers, followed
by an increase in labor costs.
With their relatively low labor costs, it is developing countries, particularly those in AsiaPacific, that can and should take up Chinas share of industrial output. Multinational
companies calculate a myriad of factors in making investment decisions such as labor cost,
infrastructure, size of domestic market, trade openness, political stability, etc.
To not miss this golden opportunity, there are two factors that Indonesia needs to improve.
Manage recent wage rise wisely
As they strive to produce with the lowest possible cost in order to achieve the highest
possible profit, multinational companies have always regarded labor cost as one of the most
important factors in their investment decisions. Presently, average wage in Indonesia is 50
percent less than the average Chinese wage. After the hike takes into effect, average
Indonesian wage will only be 10 percent less than the average wage in China.
Wage rise can be a boost to the consumption-dominated national economy. Indeed,
Indonesias large domestic market is our advantage compared to our neighbors. The annual
labor cost of the Philippines, Thailand and Malaysia now stand respectively at around $2,000,
$2,400 and $5,000.
As Indonesias stands at $1,000, the 44 percent hike will narrow our advantage and make our
large domestic market as the only distinct factor on why companies should invest in our
country. Which is why such rise should be managed carefully so as to not erode our national
competitive advantage.
Improve both hard and soft infrastructure
Multinational companies invest based on a group of factors. And of course, companies do not
invest in China only because the labor costs are relatively low. They do also because China
possesses excellent both hard and soft infrastructure. And this is where Indonesia should and
can learn. Improve hard infrastructure such as transportation and energy. We cannot expect

companies to invest here if they are to be routinely bogged down by congested traffic and
blackout.
Improve soft infrastructure such as government bureaucracy and industrial supply chain. We
can lure companies better if we eliminate unnecessary bureaucratic red tapes and develop
clusters of companies supplying industrial spare parts to these companies.
It does take time for policies that emanate from these two factors of consideration to produce
the desired effects. Therefore, it is a welcomed development that several of them are already
being implemented. The Ministry of Trades introduction of import tax on cellular phones to
move Indonesia up the value chain is a case in point. However, our lag in the existence of
industrial supply chains compared with regional rivals serves as a useful reminder. More still
needs to be done for Indonesia to be the workshop of the world.
Isnt it time for iPhones to be assembled here, instead of in China? Seize the moment,
Indonesia.
http://www.csis.or.id/publications/page/amid_global_financial_crisis__indonesia_se
izes_golden_opportunity.html