The manufacturing sector in West Java has been an engine of growth within the province. This sector was the largest contributor of economic growth in the last two decades. More than any other sector, over 40 percent of the Gross Domestic Regional Product of West Java during the 1 990s came from the manufacturing sector. The growth of large and medium manufacturing, in particular, could be considered phenomenal compared to other provinces. Figure 4. 1 shows that, prior to the crisis, the number of large and medium establishments grew from 1 872 in 1 975, below that
3 The newly promoted Banten Province officially became a province in 200 1 . However, it was part of
West Java prior to 200 1 and, for the purpose of this thesis, was mainly regarded as part of West Java partly because some government functions were still conducted in West Java.
of East Java at the same period, to 4305 in 1 988 (exceeding East Java), and reached a peak of 6747 in 1 996. However, as with other major provinces that number also started to decline in 1 997 and has not recovered up to that level.
Figure 4.2 Map of West Java, Java Island, Indonesia , Java ZJea
Source: 2005 Microsoft Mappoint
A major contribution to the growth of manufacturing in West Java came from the textiles, garments, footwear and leather sub-sector (sub-sector 32) and the metal products, machinery, transport equipment and electronic components sub-sector (sub sector 38). Textiles, garments and footwear industries (TGF) are concentrated around Bandung city and district. Electronics, machinery and transport equipments are concentrated within the Botabek (Bogor, Tangerang and Bekasi) regions. Along with Jakarta, West Java has contributed the largest share of total GDP, as well as total GDP, for sub-sectors 32 and 38. The importance of these sub-sectors will be even more crucial as the province enters a new era of decentralisation. As provinces are relying more on their own income generation and less from central government contributions, the manufacturing sector will be a ripe target for the province's income generating activities, such as local taxes and levies.
West Java is also an area where export-oriented sectors are concentrated. Many industrial estates and bonded zones, such as MM2000 and the EJIP (East Jakarta Industrial Park) in Bekasi, are located in this province. In addition, the Bandung area is also known for its textile factories, garments centres and small-scale shoe manufacturers. Recently, the writer noticed during the fieldwork that Bandung had become a haven for second hand textile goods. Figure 4.3 shows that most of these establishments belong to subsector 3 1 (food, beverages and tobacco). However, most of these industries are not export-oriented and do not boast much investment from abroad compared with the next largest sub-sector in terms of the number of firms. The second most numerous is subsector 32 (textiles, garments, footwear and leather). Most of the establishments contain labour intensive and export-oriented establishments, especially garments and footwear. Sub-sector 38, which covers electronics, automotive assembling, and metal products were mostly capital intensive firms that tend to provide better remuneration for workers than other sub-sectors. In addition, the majority of establishments in sector 38 tend to have overseas capital (Lipsey and Sjoholm, 200 1 ). The majority of establishments in sub-sector 38 are also concentrated in the Jabotabek areas. For this reason, sub-sector 38, as well as 32 would be included in the fieldwork as they are part of the network of economic globalization.
Figure 4.3 Number of Large and Medium Manufacturing Establishments by Two-digit ISle in Indonesia, 1991-2000
� c Cl) E � � J:2 !'Cl ... Ifj w - 0 "- Cl) J:2 E :::l Z 6000 4000 3000 2000 1 99 1 1 992 1 993 1 994 1 995 1 996 1 997 1 998 1 999 2000 Year - 31 - 32 � 33 --*-34 ---.- 35 - 36 -+--37 -38 -39
Source: Statistics Indonesia, Large and Medium Manufacturing Industry publication,
. 4
vanous years
The Indonesian Labour Market
Indonesia has undergone profound changes in employment structure since the 1 970s. There was a shift of employment from the agricultural sector to the modern sectors such as manufacturing and service (McGee and Firman, 2000). The proportion of the labour force employed in the agricultural sector has decreased, while the proportion working in the manufacturing sector and the service sector has increased (Simanjuntak, 1 993, p. 60). Female employment during this period increased significantly, although most of the increase occurred In labour intensive manufacturing where wages were below that of their male counterparts and, in many cases, far below the minimum wage. With the exception of young women, who
4 Sectors 3 1 to 39 are I Sle codes version 2 dividing the manufacturing sector into 9 sub-sectors. Sector 3 1 covers the food, beverages and tobacco industries. Sector 32 covers the TGF sectors. Sector 33 covers the wood and wood product industries. Sector 34 covers paper products and printing. Sector 35 covers chemical and chemical industries. Sector 36 covers cement and clay industries. Sector 37 covers basic metal industries. Sector 3 8 covers electronics, metal products and automotive industries. And sector 39 covers other industries not belonging to 3 1 to 38.
dominate the work force in modern and foreign owned factories, women workers were stuck in stagnating sectors, while men managed to enter the booming sectors (Grijns and van Velzen, 1 993, p. 227). Even so, women that worked in the modern sector tended to have lower wages and conditions than their male counterpart (Grijns and van Velzen, 1 993, p. 227).
T bl 4 2 N a e . urn b er 0 f wor k ers m . I d n onesla 0 f M . I d t 1996 2001 am n us
Main Industry Year
Sector 1996 1 997 1998 1999 2000*) Agriculture, 36,500,3 1 0 34,789,927 39,4 1 4,765 38,378, 1 33 40,676,7 1 3 Forestry, Hunting and Mining and 752,954 875,280 674,597 725,739 - Quarrying Manufacturing 1 0,5704 1 5 1 1 ,008,95 1 9,933,622 1 1 ,5 1 5,955 1 1 ,64 1 ,756 Industry Electricity, Gas, 1 64, 1 42 233,237 1 47 ,849 1 88,3 2 1 - and Water Construction 3 ,779,055 4, 1 84,970 3,52 1 ,682 3,4 1 5 , 1 47 3,497,232 Wholesale Trade, 1 5,84 1 ,0 1 6 1 6,953,006 1 6,8 1 4,233 1 7,529,099 1 8,489,005 Retail Trade, Restaurants and Hotels Transportation, 3 ,936,280 4, 1 25,429 4, 1 53 ,707 4,206,067 4,553,855 Storage, and Communications Financing, 688,037 656,724 6 1 7 ,722 633,744 882,600 Insurance, Real Estate and Business Services Community, 1 1 ,657,565 1 2,574,844 1 2,394,272 1 2,224,654 9,574,009 Social, and Personal Services 2001 39,743,908 - 1 2,086, 1 22 - 3,837,554 1 7,469, 1 29 4,448,279 1 , 1 27,823 1 1 ,003,482 Others 1 ,2 1 5 3 , 1 6 1 522,560* *) 1 ,09 1 , 1 20**) Total 83,900,138 85,405,529 87,672,449 88,8 1 6,859
Source: Statistics Indonesia, Labour Force Survey, various years. *) Excluding Maluku Province
**) Including electricity and gas, mining and quarrying, and others.
89,837,730
McGee and Firman (2000) reported that labour in Indonesia, especially those in the modern urban sector in Java, suffered heavily during the financial crisis and the subsequent crises that followed. The manufacturing sector also suffered heavily
during the crisis with employment in large and medium manufacturing falling b y 449 000 workers (Thee, 2000, p. 437). However, due to their flexibility, Indonesian workers were able to find employment in the rural and urban informal sector (Manning, 2000; McGee and Firman, 2000). This is depicted in Table 4.2 where the number of workers in the agriculture, forestry, hunting and fishing actually increased by approximately 4, 625, 000, whereas other sectors experienced declines. The figure declined slightly in 2000, although the decline was probably attributed to those workers who shifted back to other sectors when the economy was recovering.
A major problem of the manufacturing industries in Indonesia is that the pressure of employment insecurity on labour is tremendous, especially with decreasing demand due to embargoes by United States on Indonesian textiles, the September 1 1 attacks and the WTO ruling on China's entrance into the WTO. Even prior of the crisis, the modem sector such as manufacturing only provided limited employment growth (Manning, 1 993 ; Manning, 1 998). As Table 4.2 shows, almost 50 percent of employment is still engaged in the agricultural sector. Moreover, only one third of the number of workers in the manufacturing sector is employed in large and medium firms where conditions were supposedly better. Now there are also growing labour freedoms due to a more democratic atmosphere, stemming from Indonesia's ratification of lLO Convention No. 87 on Freedom of Association (ILO, 2002). Yet, is there an economic rationale for allowing independent trade unions into Indonesian manufacturing besides human rights and social reasons? Economic recovery and industrial restructuring should also consider more balanced labour protection as a more efficient solution, e.g. taking into account both the needs of workers and business sustainability. More than any other reason, labour protection avoids costly confrontation between management and workers.
Even though in neo-classical economIC theory wages are usually set at market clearing rates, there is evidence that in part of the Indonesian modem sector wages are set according to an efficiency wage conceptS. The reason for paying wages above the
5 In economic theory, market clearing rates is an equilibrium condition where labour demand and
labour supply, in terms of wage level and employment, are exactly the same. It is depicted by the intersection of labour demand and supply. See Chapter Ill, Figure 3 . 1 , for an illustration.
market- clearing rate is to maintain high levels of productivity and to encourage greater commitment, reliability, and application of skills among workers (Manning, 1 998, p. 3 5). Higher wages could also be attributed to different characteristics of workers, such as education, and to avoid industrial conflicts. However, this type of wage applies to more capital-intensive and foreign-owned firms such as electronics and automotive parts. On average, these firms paid workers higher than locally owned firms across most types of workers (Lipsey and Sjoholm, 200 1 ) . The efficiency wage model can perhaps be applied to these large, foreign-owned firms, but most firms in Indonesia are locally owned and considerably smaller in size and in capital accumulation.
One of the government's stated development goals is to increase labour productivity. However, the minimum wage policy may not be a viable policy to pursue due to a potentially damaging effect on employment growth (Manning, 1 998, p. 286). This is especially crucial in light of the recent economic slowdown. Many manufacturing firms have had to lay-off their workers. Firms in the TGF sector were hard put to survive due to declining overseas demand. Basic economic theory suggested that the impact of minimum wages could only worsen the situation (See Chapter Ill). Significant increases in minimum wages in 200 1 and 2002, at the start of the decentralisation process, could potentially be damaging to both workers and businesses. Moreover, the increasing collective power of labour unions could also add to the uncertainty of the economic climate.