6 - Indonesian Industrialisation: Jobless Growth?

Summary

East Asia is notable for its historically rapid rates of both industrialisation and poverty alleviation. These two trends are not unconnected. The region led the way among developing countries in its emphasis on labour-intensive, export-oriented industrialisation, commencing with Japan and the newly industrialising economies (NIEs), then spreading to the larger Southeast Asian economies, China and later South Asia (Athukorala 2010). The early emphasis was on products employing standardised technology, such as garments, footwear, toys and sporting goods. As the vertically integrated operations of multinational corporations began to spread – a process that came to be known as the ‘slicing up’ or fragmentation of the production process (Athukorala 2006; Kimura 2006) – the range of manufactures expanded and became increasingly technologically sophisticated. This phenomenon had transformative effects on labour markets and therefore living standards. It accelerated the process of structural transformation from agriculture to industry.

The international orientation of this type of industrialisation – in contrast to the traditional import-substituting model – resulted in countries specialising in activities in which they had a comparative advantage, that is, labour-intensive industries. The very rapid growth in employment, at wage levels which, while low, were above those prevailing in agriculture and the informal sector, offered a path out of poverty while absorbing the large pools of surplus labour. In Japan, the NIEs and later Malaysia, it provided the major demand-side explanation for the transition to tighter labour markets and higher wages. On the supply side, the main factors were the expansion of education and the process of technology acquisition.

Indonesia was a relative latecomer to this process of export-oriented, labour-intensive industrialisation. It lagged behind both the NIEs and its more advanced ASEAN neighbours, Malaysia and Thailand, principally because it was slower to adopt a comprehensive outward-looking strategy. In addition, its industrialisation experience was more recent and, for the decade from 1973, the oil boom had pushed the country's comparative advantage more towards the natural resource-based sectors. From the mid-1980s, however, Indonesia became increasingly ‘East Asia like’ in its industrialisation patterns. A sharp decline in oil prices boosted the competitiveness of non-oil tradables, and prompted the government to undertake a comprehensive reform program that embraced trade liberalisation, exchange rate depreciation, deregulation and more open policies towards foreign investment.