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Indonesia and Globalization

What challenges does Indonesia’s private sector face in creating a viable middle class?

May 31, 2004

What challenges does Indonesia's private sector face in creating a viable middle class?

While recent problems in the West have shown the difficulty of maintaining business ethics in general, problems in developing countries are far more acute.

It is unrealistic to expect a developing country to be able to apply strong business ethics where the livelihood of the general population is poor.

In Indonesia, even the middle class have problems making ends meet. Young graduates entering a profession have starting salaries of around $80-$100 per month.

Job vacancies often attract applications from hundreds, if not thousands, of well-trained Indonesians. Salaries in general remain low, while living costs continue to increase.

The issue is how to generate prosperity at the private-sector level in order to increase the capacity of companies to provide more adequately for the workforce.

In this context, it is appropriate to address the question of why Indonesian business in general failed to broaden national prosperity during periods of double-digit growth.

In this respect, the short-term perspective of many Indonesian industries resulted in a lack of resources being devoted to investment in the future.

There are still today very few Indonesian companies that are geared to securing a leading edge in the future. Little investment is devoted to research and development and the focus on marketing remains inadequate.

Large sectors of the Indonesian economy continue to compete on high-volume, low-margin products.

For example, while the textile industry remains very vibrant internationally large sectors of the Indonesian industry continue to compete in relatively low-value segments of the market.

In many cases, Indonesian companies are producing goods with very low margins.

Footwear is another example where Indonesian industry is hard pressed to even cover labor costs, let alone generate the funds to contribute to the social and welfare fabric of the nation.

If anything, the competition now unleashed in the global economy is making the situation much worse.

Where Indonesian industry does not possess a comparative advantage in raw materials, we are forced to try to keep labor costs at a minimum in order to compete globally.

At the same time, the lowering of tariffs is unleashing competition on the domestic market. As a result, Indonesian industry is under intense competitive pressure.

A number of measures can be taken to try to improve wealth generation.

In specific eases, the government of Indonesia may encourage the development of research and development or improved marketing skills in certain sectors — or encourage investment in value-added sectors.

In other cases, we may wish to encourage investment in those sectors where Indonesia possesses a comparative advantage other than simply cheap labor costs.

Development of our own fishery and agricultural resources is an obvious example. Woodworking and furniture — and the paper and pulp industries — are also important.

Such initiatives are unlikely to succeed without the general commitment of the international community.

Unless markets are opened to Indonesian products in general, it is unlikely that Indonesia can generate the wealth to be able to establish an effective social and welfare system that would underpin sound business ethics in our society.

Indonesia has increasingly opened its markets to foreign competition. There is no doubt that the hidden hand of the market has improved efficiencies within the Indonesian economy. The process may, however, also have reduced the ability of the nation to generate income for social needs.

The positions of conglomerates and state enterprises are being challenged — and their ability to meet social and welfare objectives for their employees is increasingly being threatened.

While, on balance, the opening of the Indonesian market is irreversible as part of the process of globalization, it should be stressed clearly that sound business ethics in Indonesia will not just emerge on the basis of strengthening laws — and accounting principles.

Such ethics can only be underpinned through the generation of wealth. The private sector in Indonesia should not just be considering the bottom line of profit or maintaining favorable labor costs — but should also accept responsibility for improving social and welfare conditions.

To do so, it must be able to generate the income required. Access to foreign markets is therefore of crucial importance and lack of market access will not provide the wealth needed for Indonesia to institute favorable social and welfare conditions.

Excerpted from Frank-Jürgen Richter and Pamela C.M. Mar’s (editors) “Asia’s New Crisis: Renewal Through Total Ethical Management” © 2004 John Wiley & Sons (Asia) Pte Ltd. Used by permission of the publisher.