WILL Indonesia benefit from its impending demographic dividend? Or will the country descend into chaos as millions of workers fail to find jobs?
The term demographic dividend refers to a rise in the rate of economic growth due to a growing share of working-age people in a population. The phenomenon is widely regarded as having played an important role in the so-called “econo- mic miracles” of economies such as South Korea and Taiwan in the latter part of the 20th century.
With nearly 60 per cent of its population under the age of 30, Indonesia seems poised for a similar economic transformation. According to data from the Coordinating Ministry for the Economy, 70 per cent of the country’s population will be between the ages of 15 and 64 by 2025. That would mean that by then, 100 working people would be supporting 32 people who are not in the workforce. This would be a massive improvement on the corresponding ratio in the 1970s, when 100 working people were supporting 72 people who were not in the labour force.
Of the countries in Asia, only India can expect such a dramatic demographic change.
Listening to the nation’s leaders in recent years, you would think that the outcome could only be positive. At the World Economic Forum on East Asia in August 2010, Investment Coordinating Board chairman Gita Wirjawan and then Trade Minister Mari Elka Pangestu described the coming change in Indonesia’s demographics as a bonus for investors. Both leaders added it to the traditional list of Indonesia’s attractions – an abundance of natural resources and growing consumer purchasing power.
But the impending change in the nation’s demographic profile carries dangers as well. Ominously, many of the problems facing the country today are the result of a rapidly growing population. Indonesia already faces huge housing, transportation, education and health- care problems. How will the country cope with the new challenge?
Special attention will need to be paid to the education system to ensure that it can accommodate the growing number of students entering the nation’s classrooms. A large working-age population without the skills necessary to earn a living could become a recipe for serious unrest.
Laws may also need to be modified. Removing the restrictions on the establishment of Indonesian campuses by foreign universities, for example, would go a long way towards encouraging competition in the market. This could potentially drive up standards. A World Bank report published in June last year has also called on the government to “accelerate the creation of entry-level jobs for youth by improving the flexibility of current labour regulations”.
Indeed, a wide range of current policies may need to be thought through again. Two international rating agencies recently awarded Indonesia investment grade status. This would improve Jakarta’s attraction to foreign investors and, as a result, create more jobs.
But the country may not be able to take full advantage of this without adopting a much tougher approach to environmental issues. This is because many of the world’s largest pension funds maintain strict sustainability guidelines that follow the United Nations’ principles for sustainable investment.
Indonesia’s current economic prosperity is largely based on relatively high commodity prices and a stable macro economy. But as the widely expected demographic dividend reaches its peak, such a favourable environment will be far from sufficient.
Labour-intensive industries will be essential. The performance of manufacturing, the very thing that could provide the necessary jobs, has been mediocre in recent years. Policymakers need to find out why and make the necessary adjustments now.
Mr Gita, who now serves as the country’s Trade Minister, says that Indonesia must also move up the value chain. “The challenge going forward is how to create value... Even my grandmother can sell coal,” he once joked.
The humour masks a dark reality.
Every year after the Idul Fitri holidays, the Jakarta municipal administration appeals to city workers not to bring unskilled relatives from their villages back with them to the capital to find work.
Jakarta is already densely populated, with fire-prone slums, inadequate supplies of clean water and serious transportation woes. It can hardly afford to accommodate more residents.
Invariably, appeals to curb Jakarta’s population fall on deaf ears, and the annual migration adds thousands to those seeking employment. The police regularly express concern that the newcomers, most of whom are believed to be poorly educated, might add to the crime rate. According to Jakarta’s manpower agency, there are already more than 500,000 unemployed people in the capital.
The impending change in Indonesia’s demographic profile may usher in a new era of prosperity. But it could just as easily mark the beginning of an economic decline the likes of which the country has not seen since the 1960s.
Much will depend on the decisions that the nation’s politicians make in the next few years.