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Indonesia – Rising labour costs could discourage investment

16 December 2013

There are concerns that the current account deficit of Indonesia could hit USD 31 billion by the end of the year and the -19% devaluation of the rupiah has also taken its toll on investor confidence, according to a survey carried out by the British Chamber of Commerce Indonesia, reports the Borneo Post.

Only 60% of the firms questioned said they felt confident about Indonesia’s economy, down from 83% last year. According to the results of the survey, bureaucracy and corruption were again cited as the main challenges to business. However, labour policy reform was the fastest rising concern, rising from 47% in 2012 to 63% this year.

In October, protests flared in Jakarta after local administrators ignored calls for an increase in the minimum wage. The demonstrations, which were led by the largest labour unions, have sparked concerns that labour costs risk becoming uncompetitive.

Unions were demanding a +50% increase in the provincial minimum wage.

Following the protests, in early November, 12 of Indonesia’s 33 governors raised the minimum wage in their regions by an average of +19%, including a +11% increase in Jakarta.   

The increases have widened the gap between wages in Indonesia and those of neighbouring countries. In Indonesia, the highest regional minimum wage is around USD 180, compared with USD 65 in Myanmar and USD 75 in Cambodia.

Tio Nugroho, the owner of an event-organising company, told the Wall Street Journal in early November: “I think foreign investors will see [the latest increases] as a bad development, as they will find it difficult to predict the wage increase in the future.”

He added that his company’s income fell around -30% during the first nine months of the year, as a result of clients cutting events in order to pay for higher wages.

According to a report by the Centre for Strategic and International Studies, a US-based think tank, productivity in Indonesia increased by +3.4% between 2000 and 2011, compared to +10.1% in China and +4.2% in Vietnam.

Chatib Basri, Finance Minister, told Reuters in August: “Countries like Indonesia can’t continue to rely on natural resources or cheap labour. We have to move forward into the next stage of our development.”

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