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Is Indonesia In A Middle Income Trap?

posted Oct 2, 2015, 1:18 AM by Brook Ross
Abridged from:  East Asia Forum, 12 August 2015, Authors: Hal Hill, ANU, and Haryo Aswicahyono, CSIS, Jakarta

Lagging Education And Labour Rigidities

In education, Indonesia has achieved impressive gains since the 1970s. The country is now close to reaching universal literacy for its school-aged population and there is a general commitment to funding, with a 20 per cent mandate on the government’s budget. But the country lags in terms of high post-primary dropout rates and according to most comparative ‘quality’ indicators, such as international examinations.

Major challenges in higher education will become more pressing as Indonesia progresses through the ranks of the middle-income group. This sector is growing rapidly, but the government only spends 0.3 per cent of gross domestic product (GDP) on its historically state-operated universities. While most of the growth must thus come with private involvement, the government remains ambivalent about deregulating and internationalising the system. The quality of tertiary education is highly variable, with no institutions featuring prominently in international comparisons.

Educational challenges are compounded by related labour market problems of weak formal sector employment and skill mismatches. During 1966–96, formal sector employment and modern sector wages grew strongly. The Asian financial crisis resulted in a sharp fall in formal employment and real wages.

Democratisation unleashed powerful ‘pro-labour’ sentiments. Increased labour market regulation and slower growth resulted in anaemic formal sector employment growth, especially in the manufacturing sector, which had been a key source of dynamic growth. As a result, Indonesia lost competitiveness in international markets for labour-intensive manufactures.