Jun 01, 2015

Indonesia’s Slowing Economy and Workforce Challenges

Indonesia is the largest economy in South East Asia. Combined, the ten economies of the Association of Southeast Asian Nations (Asean) more than tripled in size between 2003 and 2013.  However, in the first quarter of 2015, Indonesia’s economy grew just 4.71 percent, the slowest pace since 2009. Many economists blame the decline on the new administration of President Joko Widodo. The government blames the weakening global economy for the sluggish growth. Indonesian producers rely on foreign markets, and similarly the domestic market relies on imported goods.

The Indonesian rupiah dropped 0.5 percent against the dollar to 13,044 in May 2015. It was the biggest decliner this year among the 11 Asian currencies that are tracked by Bloomberg. 

Indonesia’s Workforce Snapshot

Indonesia’s Workforce Snapshot

Source: BPS

Indonesia has a young workforce, with over 50 percent of its population, currently the world’s fourth largest, under the age of 30. A study by Indonesia’s Investment Coordinating Board (BKPM) projects that over the next 50 years the country’s population will experience a ‘demographic bonus” in which 60 to 70 percent of the population will be within the working age of 15 to 64.

However, as per the World Bank, 40 percent of Indonesians are living on less than $1.80 per day, and a large number of youth entering the workforce will exacerbate this problem. According to PriceWaterhouseCoopers (PwC), to achieve even a modest target of 6 percent annual GDP growth, Indonesia will require about 50 million skilled workers. Building a highly skilled and productive workforce will also improve Indonesia’s competitive advantage in ASEAN by attracting new investments and generating opportunities for growth.

“On the one hand, a war for talent in recruitment will continue to be present in the business; but on the other hand, companies can also address skills shortages by taking a fresh look at the talent within.” ~Marina Tusin, Partner for People and Change at PwC Indonesia

Skills Gap in Indonesia

According to the International Labour Organization (ILO), Indonesia finds it difficult to respond to the skills needs of their employers. It is projected that by 2020, Indonesia will only have 56 percent of the middle managers that companies need to run their businesses.

The country has a severe shortage of skilled labor due to migration of skilled workers to other countries and the lack of capacity to provide training.

Training programs that are available are often out of date, and do not meet the needs of the market. Also training is not accessible by all levels of the community. The ILO believes that among the largest skills and employability challenges that Indonesia faces, the need for a national skills development system, linkages between employers and training organizations, and access to skills development rank among the highest.

Today, 97 percent of Indonesia’s citizens receive a primary education, but only 23 percent of students make it to the tertiary level. This is partly due to the fact that many Indonesians cannot afford tuition or must drop out of school to support their family. 

Educational Attainment

Educational Attainment

Source: BPS

Indonesia’s Migrant Workers

Every year, about 700,000 documented Indonesian workers leave the country to find employment abroad. The primary destinations are the Middle East and Asia, with the two most common destinations being Malaysia and Saudi Arabia. Data from the National Agency for the Protection and Placement of Indonesian Migrant Workers (BNP2TKI) found that in 2009 , there were approximately 4.3 million Indonesians working overseas, contributing around $8.2 billion in remittances to the country’s national economy in 2008. The number of undocumented migrant workers is estimates to be 2 to 4 times higher. Approximately 75 percent of all documented Indonesian migrant workers are women, with the vast majority employed as domestic workers.

Just recently, Indonesia’s Minister of Manpower, Muhammad Hanif Dhakiri, implemented a new policy where Indonesia will stop sending domestic workers to 21 countries. This occurred after the execution of two Indonesian women in April 2015 in Saudi Arabia. These blacklisted countries include Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Egypt, Algeria, Iraq, Iran, Kuwaid, Lebanon, Libya, Morocco, Mauritiania, Oman, Pakistan, Palestine, South Sudan, Syria, Tunisia, Yemen, and Jordon. The country is also planning to tighten placements of domestic workers in parts of East and Southeast Asia – including Singapore, Hong Kong, and Malaysia – through measures such as auditing domestic help training centers.

Meanwhile, South Korea has recently invited Indonesian workers to work or train in their country. There are currently about 60,000 Indonesians working in companies in South Korea, especially in the technology industry. According to Indonesian Vice President Jusuf Kalla, South Korea is one of the biggest investors in Indonesia and is looking to enhance ties between the two countries through cooperation.

“Indonesia is looking more ‘fragile’ with each passing day. It’s not just that the economy is slowing sharply, but also that President Widodo is struggling to assert his authority on Indonesian politics.” ~Nicholas Spiro, Managing Director of Spiro Sovereign Strategy.