II - Trade Policy Options for Indonesia

Summary

Economic Policy

The extent to which Indonesia can actively participate in the GATT initiatives such as the ongoing Uruguay Round of multilateral trade negotiations (MTN), is partly dependent on the economic policy which the government adheres to. To understand the position taken so far by Indonesia on the various issues listed in the agenda of the ongoing trade talks, multilateral and otherwise, one needs to feature the basic economic problems preoccupying Indonesia today and in the immediate future.

Among those problems, the ones related to employment should perhaps be ranked first for various reasons. First, Indonesia's labour force is currently growing by 2.8 per cent or by 1.9 million people annually. Secondly, a large number of Indonesians were underemployed in 1985, estimated at about 23 per cent of the labour force. This calls for a growth rate which is much higher than the low 1.9 per cent and 3.2 per cent recorded in 1985 and 1986 respectively and a restructuring away from agriculture and mining (which in 1986 contributed 24 per cent and 18 per cent respectively to Gross Domestic Product) towards manufacturing whose share remained as low as 13.5 per cent in 1986 despite the rapid expansion since the early 1970s. Assuming an employment elasticity of GDP of 0.32 as estimated by the World Bank, the Indonesian economy needs to grow by about 8 per cent annually in order to generate sufficient employment for the new entrants to the labour force alone.

The exact contribution of export performance to overall employment generation in Indonesia is unknown. Using the labour coefficient of the input-output table, however, one can estimate the employment in the export sector. It increased from just 2.1 million in 1980 to 5.3 million in 1986. While the share of export in employment is much lower than its share in GDP, employment in some sub-sectors and some regions is strongly dependent on export.