Executive summary...page 2



Improving Lives and Indonesia’s EconomyWhite paper- proposal of legislative initiatives for the government of IndonesiaVladimir StroeExecutive summaryThe purpose of this paper is to highlight a feasible solution for the wide variety of social and economic problems faced by Indonesia. Each proposal is an actionable legislative initiative that can be pursued by the government in order to improve the situation of workers from Indonesia.Globalization has given multinational corporations to outsource effectively to developing countries, such as Indonesia. The low labor costs and permissive regulation encouraged the investment of foreign capital in developing countries. The drive to improve margins has negative side-effects on the local economy and society: low wages that cannot sustain a family, very high work hours, child labor, and increased inequality are but some of the issues affecting newly industrialized countries.In order to improve the social and economic condition of the country and laborers in the employ of the large corporations, a series of laws is proposed that seeks to strike a middle ground: between being passive and accepting of the labor abuses is as harmful as taking measure that are too extreme and encourage investors to withdraw capital from the country.Increasing the minimum wage and reducing work hours are the cornerstones of the proposed policies, which will improve quality of life for the workers and increase macro-level consumption. The arguments against increasing the minimum wage are analyzed and countered through statistical studies. Additional benefits that stem from these two measures are also explored. Other laws, such as an increase in educational spending, serve to counteract potential negative developments or increase the positive impact of increasing wages and reducing work hours. Table of contentsExecutive summary...page 2Introduction...page 4The Issue…page 5Problems within Indonesia…page 7Health and safety…page 7Transparency…page 8Minimum age…page 9Long working hours…page 9Lack of skills…page 9Low wages…page 9Labor rights page…page 10Potential routes…page 11Remaining passive…page 11Taking control of the country’s economy…page 12Implement social legislation while keeping Indonesia attractive to investors…page 13Proposed laws…page 13Increase minimum wage…page 13Strictly enforce minimum work age…page 15Increase investment in education…page 16Focus on regionalization…page 16Conclusion…page 16Works cited…page 17Introduction:The government of Indonesia should implement a variety of policy changes in order to deal with the realities of globalization. Opportunities and issues that must be addressed are being created by the offshoring of labor into comparatively undeveloped countries, such as Indonesia. International policy, spearheaded by the World Trade Organization, coupled with the advances from the past decades that reduced the costs of transportation and communication, the increased sophistication of financial instruments has forever changed the political, economic and social landscape. As a nation with less financial clout than fully industrialized nations and with incredible economic potential due to the sheer number of citizens, (an estimated of 252,164,800 for 2014), Indonesia faces a unique set of challenges.Once President Suharto took control of the country in 1968, a period of transformation started within the country with the encouragement of direct foreign investment into the Indonesian economy. This transformation coincided with a period in which, through the industrialized world, a sentiment of eagerness at the opportunity to engage in foreign trade and investment appeared. The prospect of reducing human capital costs through the offshoring of labor intensive manufacturing processes pushed western companies to find labor that was as cheap as possible. Until the political changes in 1968, Indonesia was, focused on resisting outside “imperialist” tendencies and assuring its independence. The Dutch colonization period had left deep scars that did not heal even after the independence obtained in 1945. The hostile stance to most western countries did not permit the development of strong economic and industrial connections with the rest of the world. The desire of western companies to offshore and the low minimum wage in Indonesia were conducive to large foreign investment and rapid industrialization within the country.Major corporations, such as Nike, Adidas, and Reebok have opened manufacturing facilities in Indonesia. These facilities have provided employment opportunities for a large part of the population. It is estimated that Nike alone offers employment to 100,000 Indonesians. The participation of foreign companies in the Indonesian economy not only provided employment, but aided the development of infrastructure that benefited local industry as well. The issue:Globalization and the offshoring on labor is not free of criticism, both in Indonesia and in countries from which manufacturing is being moved. Even staunch supporters of globalization and trade acknowledge that there are short-term spells of unemployment when jobs are reallocated (Bacchetta, 2011). However, there are many critics that disagree with the economic models, such as the Heckscher-Ohlin model, that assume perfectly competitive markets worldwide. It is hard to justify the existence of perfectly competitive markets even today when the internet has revolutionized communications. A perfectly competitive job market implies that every member within the market has access to perfect, complete information about the market. The wide-ranging connections worldwide have made it impossible for individual actors to value their work and remuneration accurately on a worldwide basis. The United States is a country from which many of the corporations offshoring to Indonesia originate. A study by Crino in 2009 found that service offshoring from the United States to other countries has mild negative effects on the employment of workers in low and medium-skilled occupations in the U.S.. And while there were more jobs created for high-skilled laborers, a net decrease in jobs was observed. This creates tension as people with fewer skills are being adversely affected stronger than their medium-skill and high-skill counterparts. Public sentiment in these countries have seen a shift, if however small, towards being skeptical of globalization. There was a weak, albeit present negative correlation between enthusiasm for globalization and the effect of offshoring on the labor share (Bacchetta, 2011) Are the western companies which outsource jobs to our country improving their profits while potentially harming the citizens of their originating country but benefiting our citizens? Even though they are affecting their citizens in a negative way, the people of Indonesia are also harmed by this tendency to outsource.It is argued that outsourcing merely offers more job opportunities, strengthens our labor force by interacting with advanced technology, increases trade and improves infrastructure. However, the primary reasons as to why these large corporations have relocated to Indonesia are that wages are lower and the environmental controls less strict. They are exploiting this situation to meet their own ends at the expense of the wellbeing of the workers there. Problems within Indonesia:What goes behind the gates of these manufacturing facilities is seldom known to people who do not work there or are not contracted by the corporations themselves. However, widespread abuses have been documented by the media and by labor NGO’s. Global Exchange, an advocacy group and non-governmental organization whose mission is to promote human rights and social, economic and environmental justice around the world have for many years studied the situation in Indonesia. In the following section we will present some of the pressing issues that are harming our society, perpetuated by these corporations. Information gathered about Nike Inc., one of our main investors in the country will be highlighted. However, the purpose of these examples is not to single out Nike Inc. as the single perpetrator of these actions. The policies that Nike employs are but a standard, especially within low-skill, labor intensive segments within our industry. Spurred by the activities of consumers within developed countries, NGO’s and government agencies, there has been a shift in the public stance that many of these companies have on labor issues. In 1998 for example, Phil Knight, the CEO of Nike, made a series of announcements regarding changes in the company’s attitude on labor rights. They promised improvements in safety, worker education, monitoring and support for employees. There have indeed been some improvements; however, issues still exists to this day, and they should serve as a call to action to issue legislation that helps ameliorate the problems facing our society. Indoor health and safety: The primary reason for the corporation’s reallocation of manufacturing is profits. While their desire to maximize profits is understandable and natural, the use of materials that are damaging to worker’s health is extremely common. These volatile organic compounds have been proven to cause symptoms from headaches to damage to liver, kidney and nervous system (). Many manufacturing corporations in the shoe and apparel industry use these materials for their convenience while disregarding the harmful effects on worker’s health.In 1997, a scandal concerning Nike, a company that manufactures in Indonesia, has erupted when “it was reveal that workers in one of its (Nike’s) contract factories were exposed to toxic fumes at up to 177 times the Vietnamese legal limit”(Connor, 2001). Since then, Nike has not stopped using materials that produce these toxic fumes. And while Nike has taken steps to inspect the factories it contracts for these emissions, they are not being transparent enough. Factory managers are given advanced notice, which is ample time to temporarily remove these problematic compounds from the factories. The test results are also not available to the public, making Nike and their contractors the only entity with access to information confirming whether the working conditions within their facilities are harmful or not to workers there. (Connor, 2001)Transparency: The issue of transparency was a main demand that labor activists and consumers had of the manufacturing practices that large manufacturing corporations employ. Initially, there was close to no effective monitoring of health, safety and labor regulations within factories. After sustained pressure from consumer groups and governments, there has been some progress. However, transparency has not been achieved. Taking Nike, one of our main manufacturing partners, as an example we can still see some major issues: “Nike’s program of annual factory monitoring by PricewaterhouseCoopers...lacks independence” (Connor, 2001). The fact that inspections are performed by company contractors instead of independent entities creates the possibility that these inspections are biased in favor of factory owners. There have been studies, such as those of Dara O’Rourke, an assistant professor at MIT, that documented how PwC audits had “significant and seemingly systematic biases” (O’Rourke, 2000) that obscured issues. This situation does not allow the initiation of effective policy changes as NGO’s, consumers and government authorities are not aware of the real situation present there. Minimum age within factories: Child labor is an unfortunate reality found in most sweatshops and the manufacturing facilities in Indonesia are no exception. We argue that it is an issue that has a large influence in our society, as 27% of our population is under the age of 14 (CIA, 2010). While the National Action Committee is an organization that has been created to eliminating the worst forms of child labor, it is still an issue that has repercussions throughout the years as children are working in low-skill jobs instead of gaining marketable skills. Child labor is also taking jobs away from adults that might support their family, increasing employer profits but decreasing family income. (Bacchetta, 2011)Long working hours: Unreasonable working hours are detrimental to the mental and physical health of the workers employed in these sweatshops, especially considering the repetitive tasks usually required in day to day work. Carpal tunnel syndrome is only one of the repetitive stress injuries caused by these repetitive tasks. The psychological health of workers is undoubtedly affected as well. Lack of Skill: Child labor and the long working hours compound in making our workforce less skilled in the long-term. Children and young adults are starting careers in low-paying, low-skill environments such as sweatshops that due to the long hours of work prevent them from acquiring more advanced skills through the educational system. Low wages: Since these corporations only need labor that is unskilled and easy to replace, they only pay the minimum wage to laborers employed there. Translated in U.S. Dollars, the current hourly lowest wage of $0.56 is barely adequate in sustaining one single person. This hourly wage is then woefully inadequate in sustaining a family, further leading to children taking jobs in order to supplement income. The low wages also have the adverse effect of lowering consumption across our economy. This tendency will make Indonesia a stronger net exporter of goods, but will create stagnation in the development of local industry and make us even more dependent on large multinational corporations for employment. Labor rights: Even for the large multinational corporations operating within our country’s borders, the capital expenditure needed to establish manufacturing and logistics are significant, which encourages them to try to keep manufacturing and logistics stable. This gives more leverage to workers, as unionizing would allow them to be more effective at negotiating salaries, work hours and safety issues. The typical stance that corporations employ is to discourage or even altogether suppress unionizing in their manufacturing facilities. Unlike China where independent unionizing is illegal, Indonesia has the legal framework that allows this unionizing to occur. Nike has an extensive history of failing to prevent suppression of unions in many of its contracting factories, including PT Nikomas Gemilang and PT ADF in Indonesia, as well as in other countries such as China, El Salvador, Cambodia, Bulgaria and Thailand (Connor, 2001). Currently, workers who incite unionization or try to speak against conditions in factories by contacting journalists are not protected, encouraging them to remain silent and not act against the conditions that they face.Potential routes:In response to these issues facing our society, we identify three potential stances that could be pursued, each with its unique set of challenges and opportunities. Remaining passive: One choice is to accept neoclassical economics entirely, and decide that not interfering at all in the situation is advisable. Foreign investments would undoubtedly increase, improving the manufacturing capabilities and infrastructure within the country. Wages would be kept at a minimum but would eventually rise according to the theory that social progress will be gradually spurred by the increased productivity of industry. Still, historically, the transition from the “sweatshop phase” has only happened through a combination of economic growth and social legislation. (Miller, 2003)Sweatshops were a reality in the United States in 1909. Only after the Shirtwaist strike of 1909, and the hardships caused by the Great Depression was legislation created to curb labor abuse through sweatshops through the Fair Labor Standards Act of 1938. Alan Howard of the Union of Needletrades, Industrial and Textile Employees stated that “more than one half of the workers in the U.S. apparel industry were organized and their real wages had been rising for decades” (Howard, 1997)Remaining passive would also mean that our dependence on the large multinational corporations would increase, making any legislative changes harder to implement in the future. The industrialization resulting from encouraging corporations to continue their business as usual can be seen as a positive effect. This would be a catalyst for increased inequality within our society. Studies such as Bernard and Jensen (1997), Amiti and Wei (2005) and Verhoogen (2008) observed increases in skill premiums and wage differences, which increase wage inequality. Adding more social unrest due to income disparity can be an issue hard to deal with considering the already present economic and political instability, corruption, persisting sectarian discontent and violence.Taking control of most of the country’s economy: The other stance we could take is increase state control over the capital already invested in the economy by nationalizing the invested capital. While in the short term this allows a high flexibility in decision making, thereby offering the opportunity to increase wages, improve safety conditions and redistributing wealth, there are high disadvantages in the medium and long-term. Nationalizing the foreign capital would undoubtedly put our country in a precarious position on an economic level as foreign investors would lose confidence in the economic stability that our country had provided. This would entice them to withdraw their capital and drastically reduce the amount of jobs offered to our workforce. Other countries, such as Venezuela, have attempted this method with very mixed results. According to an analysis from BBC, there are 27 ISDS (investor-state dispute settlement) cases against the Venezuelan government, as well as massive capital flight (). Our significantly reduced budget (due to less tax income from these companies) would have difficulties in coping with the demands of the workforce previously employed by these multinational companies. The unemployment rate would go up and there would be less foreign investment to reduce it, causing an economic recession that might take years if not decades to recover from. Implementing social legislation to help curb abuses while maintaining the country attractive to investors: A third option of only changing legislation that directly affects the most problematic areas in manufacturing while also raising wages and reducing work hours is possible. Since the massive investments by corporations in human and economic capital are already in place, as long as the cost of these policies to companies are not outweighed by the cost to relocate, it will be in companies’ best interest to comply to the new legislation and not transfer capital from Indonesia. Wages will increase and so will consumption , increasing the living standards within Indonesia. The proposed laws, as well as their advantages will be described in the next section of this report. Law proposalsIncreasing the minimum wage: One of the most controversial proposals, as well as one of the most effective ones, is increasing the minimal wage to a higher level. This change will offer workers the opportunity to sustain their family and not have to work incredibly long hours, thereby increasing their quality of life. Increasing the minimum wage however is not without criticism. The most common objection is that raising the minimum wage is a manipulation of the market that, does not produce any benefits and will only lead to the increase of prices as a result, nullifying any of the benefits that laborers might have gained. The U.S.’s Chamber of Commerce website even has an article criticizing minimum wage increases by presenting the opinion of a Market and Café owner in Alexandria, Virginia, who argues that in order to pay the new wages required, he would simply be forced to raise prices. (). We argue that the benefits in income that the higher income would bring to laborers would offset the drawback of increased prices. Research conducted in the U.S. suggests that there are some negative effects on prices that are insignificant when compared to the increased wages: a 10% increase in the minimum wage raised food prices by “no more than 4% and overall prices by no more than 0.4%. This is a small effect” (Lemos, 2004). The increase in valuable income then offers more benefits than the drawback of the increased prices.Another point of contention is that increasing the minimum wage will simply force companies to reduce their workforce and that the increased unemployment spending that the government would have to cover outweighs the benefit that employees would receive. An increased unemployment rate is certainly undesirable and more people with jobs but a slightly lower wage is preferable than much fewer employees but marginally higher salaries. The concern is, again, valid but there is research supporting this policy, particularly for large firms. No evidence was found that increases in minimum wage decreases employment. “It is noteworthy that although foreign firms have the reputation of being very sensitive to wage levels, in the six year period studied there was no evidence that they relocated in response to the minimum wage increases” (Alatas, 2004). The only downside found was for smaller companies which may have a small, but statistically significant reduction in employment. This tendency can be counteracted by programs that support small business development. Furthermore, no evidence for more firm closure or prevented openings were found, making a wage increase harmless to small producers if significantly supported (Alatas, 2004). An increase in minimum wage is “not a panacea” but “if judiciously chosen…can do more well than harm in breaking the poverty trap” (Dolado, 2000). “The mantra that minimum wages always cost jobs- and the insistence on a particular model of pay and employment that lies behind it- should be taken with great doses of skepticism, as many international instituions and national governments seem to be taking them nowadays” (Dolado, 2000)The benefits to an increased minimum wage do not stop only at providing increased income to laborers- it also affects our youth and their potential outcomes in life as well. There is significant evidence found that “the minimum wage reduces youth crime” (Kallem, 2004). It seems that the incentives of work discourage young adults from engaging in criminal behavior. “Burglary, larceny, and illegal drug sales were the most consistently affected by the minimum wage, and they are also the most likely to be driven by monetary concerns” and even murder rates were reduced by an increase in the minimum wage level (Kallem, 2004)While increasing the minimum wage is one change that would significantly change the socio-economic landscape of our country, other policies go hand-in-hand to increase employment, income and education.Strictly enforcing minimum a work age: Keeping the youth within the educational system is in the long run, a desirable action as the skill level of our workforce will increase and we will be able to develop more skill-intensive manufacturing, domestically and through foreign investment. According to F.A. Hayek, “workers can raise real wages above the level that would prevail on a free market only by limiting the supply, that is, by withholding part of labor” (Hayek, 1960). Enforcing the minimum work age not only makes increasing the minimum wage more feasible, but also encourages them to pursue education instead of immediately joining the workforce. Increasing investment in education: Simply reducing the possibility for child labor without providing an alternative would not lead to a beneficial outcome, as youths could turn to undocumented work or criminal activities. Investing in the educational system and insuring access to schooling would allow a gradual increase in labor skills and decrease juvenile delinquency.Focusing on regionalization instead of only globalization: While we live in an interconnected world and changes across the globe perpetuate impact every economy, regional factors are incredibly significant as well. Studies have found that “the regional factor has explained a larger fraction of business cycle variations in the North American, European, Oceanian and Asian regions over the past twenty-five years” (Hirata, 2013).Trade within our region can “promote a higher degree of business cycle synchronization across countries in a region” (Hirata, 2013). Cooperating with our neighbors through trade and specialization can make us less reliant on multinational corporations for employment and provide a more stable financial system that is easier to manage.Conclusion:The merits of globalization and the influx of capital in our country are impossible to deny. Inefficient management, however, can create unrest within our society, slow economic growth and weaken our country’s labor in the long run. Working together with large corporations and developing successful social legislation is the key to ensuing sustainable and equitable growth. Remaining uninvolved in these labor situations will lead to more income disparity and labor rights violations. Taking an aggressive and misguided stance of vilifying these companies is not the solution, as mutual benefits can be obtained through proper negotiation. A series of well-thought laws that increase minimum wage, strictly enforce a minimum work age, support education and diversifying of trade will allow continuous economic growth while preventing the emergence of social issues within our country. Works cited:Bacchetta, Marc, and Marion Jansen, eds.?Making globalization socially sustainable. World Trade Organization, 2011.Cia, C. I. A. "The world factbook."?Retrieved August?20 (2010): 2010.Connor, T. "Still Waiting For Nike to Do It: Nike’s Labor Pactices in the Three Years Since CEO Phil Knight’s Speech to the National Press Club."?Global Exchange, San Francisco?(2001).“An Introduction to Indoor Air Quality: Volatile Organic Compounds (VOCs)."?EPA. Environmental Protection Agency. Web. 18 Dec. 2014. <’Rourke, Dara. "Monitoring the monitors: a critique of PricewaterhouseCoopers (PwC) Labor Monitoring."?Cambridge. Available online (web. mit. edu/dorourke/ index. html)?(2000).Crino, R. 2009. “Offshoring, multinationals and labour market: A review of the empiricalliterature”, in Journal of Economic Surveys, Vol. 23, No. 2, pp. 197–249.Miller, John. "Why economists are wrong about sweatshops and the antisweatshop movement."?CHALLENGE-NEW YORK-?46.1 (2003): 93-122.Howard, Alan. 1997. "Labor, History, and Sweatshops in the New Global Economy.": Fashion, Free Trade, and the Rights of Garment Workers, ed. Andrew Ross, 151172. New York: VersoBernard, A.B.; Jensen, J.B. 1997. “Exporters, skill upgrading, and the wage gap”, in Journal ofInternational Economics, Vol. 42, Nos 1–2, pp. 3–31.Amiti, M.; Wei, S.J. 2005. “Fear of service outsourcing: Is it justified?”, in Economic Policy,Vol. 20, No. 42, pp. 308–347.Verhoogen, E. 2008. “Trade, quality upgrading and wage inequality in the Mexicanmanufacturing sector”, in Quarterly Journal of Economics, Vol. 123, No. 2, pp. 489–530."A Tale of Two Countries: Venezuela, the United States, and International Investment."?A Tale of Two Countries: Venezuela, the United States, and International Investment. Web. 18 Dec. 2014. <;."The Not-So-Sweet Impact of a Minimum Wage Increase."?The Not-So-Sweet Impact of a Minimum Wage Increase. Web. 18 Dec. 2014. <, Sara. "The effect of the minimum wage on prices." (2004).Alatas, Vivi, and Lisa A. Cameron. "Should Nike and Reebok pay higher wages? The impact of minimum wages on employment in a low income country."?The Impact of Minimum Wages on Employment in a Low Income Country (January 8, 2004)?(2004).Dolado, Juan José, Florentino Felgueroso, and Juan F. Jimeno. "The role of the minimum wage in the welfare state: an appraisal." (2000).Kallem, Andrew. "Youth Crime and the Minimum Wage."?Available at SSRN 545382?(2004).F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), p. 270Hirata, Mr Hideaki, Mr M. Ayhan Kose, and Mr Christopher Otrok.Regionalization vs. globalization. No. 13-19. International Monetary Fund, 2013. ................
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