Gustav F. Papanek: The only way to help the poor is provide jobs

TEMPO.CO, Jakarta - For the second time this year, and against his doctor's advice, senior economist Gustav F. Papanek from Boston University returned to Indonesia. With a new government in place, this 87-year-old former advisor to the 'Berkeley Mafia' influential economists of the New Order era felt the need to address a very urgent problem: The declining income of the poor, which as he noted "is immoral and also politically undesirable; therefore, it is important to take substantial steps to increase their income. The only way you can do that is by providing industrial jobs."

Although he was unable to meet President Joko Widodo, he managed to meet Sofyan Djalil, Economic Coordinating Minister; General Moeldoko, Armed Forces Chief; and ChatibBasri, former Finance Minister, and gave talks in three universities and Bank Mandiri as well as numerous interviews with the media. In a packed schedule, averaging two presentations a day, he found ways to push his ideas.

Sadika Hamid from Tempo English met him recently for an interview.

You have met key persons in the new government. What do you think of the current economic team?

There are two things that distinguish this government. One is that I think the president really cares about poor people. That is a huge plus. The other thing that is striking is its total lack of experience. The heritage of the Suharto's administration was that there were always people around who had experience. As far as I can tell, there is nobody in the government who has had extensive experience in economic management and with international contacts, like Sri Mulyani and Chatib Basri. And this is a big complicated economy. I am tremendously worried, because the problems that Indonesians are going to face are very serious.

What are the urgent problems the economic team must tackle?

The short term problem is dealing with the external balance. Indonesia is running a balance of payments deficit, a trade deficit as well as a huge services deficit. Now that deficit is met from an inflow of capital. That is based on a high interest rate here, and low interest rate elsewhere. That situation is not going to continue forever because the interest rate in other countries will rise. When that happens, or when people become worried about Indonesia, money can flow out overnight. Indonesia can either raise the interest rate in order to still attract money, but that will slow down the economy. Or it can revalue (weaken) the currency.

Which measure would be best?

The central bank will be inclined to raise the interest rate because that does not result in increasing inflation. It just slows the economy. But the economy will not grow at five percent or four percent. It would be less. So my own view is Indonesia needs to anticipate the possibility of the outflow of short term foreign funds by adjusting the exchange rate now. In addition, Indonesia (needs) to have a tax reform program in order to raise more capital without damaging the economy. It is a difficult thing to do and it needs somebody who knows what they are doing. You want to do it in a way that encourages entrepreneurship, discourages consumption by the rich and supports consumption by the poor.

The new government plans to build 13 new industrial zones outside of Java. How do you view this program?

The large pool of poor people who are desperate for industrial jobs are in Central Java. In East Java there are areas of great poverty, and some in West Java and Lampung. The minimum wage in Central Java is less than half of what it is in Jabotabek. Industries are already moving there on their own because they are looking for low wages. The government must first focus its efforts in building infrastructure there, its biggest handicap. When the government gets some resources from reducing the fuel subsidy, it will have huge sums of money. If they invest first where there are factories who are producing for export, you can very quickly break into the world market.That will raise income, which will also raise taxes.

But the idea is to spread growth to other areas of Indonesia...

If you invest where you are not competitive, you do not get any increase of income, just increased losses. You will not have any funds to invest elsewhere.

The government wants to boost the maritime sector. Do you think that they are focusing on the right thing?

It is a good idea to have a good network of transportation. I think Jokowi has been correct in that respect. But if you build a lot of ports, that does not automatically create investment and development.

What should they invest on instead?

If you improve the port in Semarang, you will get huge returns because garment industries are already there. There is also a need for ports in Jakarta because TanjungPriok is at full capacity and there are factories here that have a high cost of shipping because the port was inadequate. There are some gains that can be made by improving fishing. But the Fisheries Minister herself said that she wants to reduce the number of fishermen because there are too many of them. It is not a place where you can create 20 million jobs.

How about manufacturing in the fisheries sector?

There are potentials, but we are only talking about thousands of people, not millions. You are adding two million (into the) labor force a year. So in five years you need 10 million new jobs.

What kind of industries would be best to create jobs?

All industries that are labor intensive and produce export goods: toys, kitchenware, electronics goods, fans, car parts the list is endless. Almost all of this has been produced by China, and Indonesia can do it too. But it can sell them only if it can produce it at the same cost as competing countries. Indonesia is a high cost economy because labor costs are high. You do not want to reduce them, so you have to improve efficiency.

How do the officials you met respond to these ideas?

They were positive but that does not mean that everybody fully understands what the alternatives are. The big decline in poverty here came between 1985-1992 when manufactured exports were expanding tremendously. About 1,5 million Indonesian workers found jobs in the export industries directly, and probably another one million indirectly. We can count the ones that had gotten jobs in the textile, garment and furniture industries in those eight years of growth. On the contrary when I was here the last time, I interviewed two producers here when the minimum wage was raised to Rp2.4 million. One looked around, what to do. One option was to move elsewhere in Indonesia where the wage was lower, so I asked him why he didn't put the factory in Semarang. He said he wanted to be near his factory. So what he did was reduce his labor force by 16 percent. He bought machines to substitute labor. He offered severance pay and others he paid to retire. He reduced labor and that's what happening. Not only will growth here be very slow, Indonesia will have missed the opportunities of taking over part of the Chinese market. Factories will move to Bangladesh, Vietnam or India. Indonesia will have wasted its demographic dividend. You have a large group of workers entering the labor force. You have a very small proportion of population who are either too old or too young to work. If your workers have good jobs, you have a demographic dividend. But if not you have a demographic nightmare. Crime will increase, so would demonstrations and the unrest will be increasingly difficult to manage. Without significant action Indonesia's economic growth would be very slow.

So when will you be coming back?

I do not know if I can come back at another time. I had to bargain hard to get my wife and doctor's permission to make this trip. (*)