Indonesia's Unemployment Question: Promise and Policy
Indonesia is already into the 11th year of its political and economic
transition which began with the advent of the Asian Economic Crisis.
Much has happened during that time. The political landscape has changed
beyond recognition. The economy is growing at around 5-6% per annum,
something which is still higher than most developing countries. The
macro economy is characterised by exchange rate stability and low
budget deficits. Taken together this should be a significant cause of
future optimism.
Despite these encouraging trends, two policy issues seem to be
intractable. The first is the public and business perception regarding
corruption in public life. The second is the persistence of high open
unemployment in the organised sector and considerable levels of
underemployment in the informal sectors, including agriculture. Against
the broad backcloth of political and economic recovery since the
economic crisis of 1997/98 this may seem to be
a relatively minor problem which could be ironed out as the economy grows. But to adopt this perspective would be a mistake.
Corruption goes to the heart of the nature of the state in developing
countries and feeds that argument that the best development policy is
one of reducing the state to a minimal set of functions relating to law
and order, foreign affairs and central banking. Continuing unemployment
feeds not only social unrest and loss of potential output but also
undermines the legitimacy of the new democratic political system.
In practice democratic states tend to be large and have grown even
larger over time. This is largely because the public demands the
efficient delivery of a range of public goods including human security,
environmental protection and social insurance. The idea of a minimalist
state, though popular in several brands of economic theory, has not
found much support in political practice of any functioning democratic
system. Despite Indonesia’s success over the
last ten years corruption and unemployment remain two of its most
intractable policy problems. Unless resolved they will inevitably
complicate the task of political consolidation to which the country is
presently committed.
This is not all. If the state is widely perceived as bloated and
corrupt, its credibility in mitigating the unemployment problem through
public investment or social insurance is placed in doubt. Hence, one of
historically most potent mechanisms of reducing unemployment in the
short run, through public works programs, is undermined simply because
the state cannot be trusted to administer such programs.
The
purpose of this paper is to identify the nature of these concerns and
to find mechanisms that the donor community could employ to respond
creatively to the challenges that are likely to emerge in this domain.
