Indonesia during the late 1 9 80s and early 1 990s was arguably on the way to becoming a newly industrialised economy following in the footsteps of the Asian Tiger economies of South Korea, Taiwan, Singapore and Hongkong. As the share of agricultural employment has fallen, manufacturing, construction, trade, transport and services have all absorbed substantial amounts of labour (Manning, 1 993, p. 68). The country had successfully shifted from a totally agrarian state to light industry manufacturing. Table 4. 1 shows that since 1 990 the manufacturing sector gross domestic product (GDP) had exceeded agriculture. The service sector had also been growing significantly during the same period. The shift from import substitution to export orientation had ensured Indonesia's entry into the global market. The expansion of exports was also a key factor in output growth in addition to the rise in export-oriented investment (Akita and Hermawan, 2000; Thee, 2000). Deregulation and the so-called structural adjustment program packages during the 1 980s and 1 990s were proof that Indonesia's development trajectory followed those prescribed by the neo-liberal regimes of the West. Everything went according to plan until the financial crisis of 1 997. Prior to the crisis the real GDP growth had exceeded seven percent per annum during the 1 990s. The manufacturing sector, which accounted for approximately 25 percent of the total GDP, was the main export earner. An important source of growth was the non-oil manufacturing sector, especially in export-oriented industries such as garments and electronics. These sectors were also important in terms of labour absorption.
Lack of skills and education of workers mean that Indonesia chose the 'low road' to development in which industrialization depended on labour intensive sectors, such as textiles, garments and footwear (TGF). The 'low road' to development was primarily characterised by its high labour surplus and relatively low educated workforce, which attract multinational firms, but could backfire with decreased competitiveness. This type of development path also calls for control instead of labour freedom. Although workers were allowed to form firm-level unions, they were only allowed to join the state controlled All Indonesia Workers Union or SPSI. It was alleged that SPSI w as created as an instrument of control by the government, instead of representing workers' interests. It was often alleged that the SPSI leadership was often appointed
by the government and included military officers to fill leadership roles. The issue of labour rights and standards only started to emerge during the early 1 990s with the formation of rival trade unions and the murder of a female labour activist, and culminated in a violent demonstration in North Sumatera in 1 994. Since then, political pressures from within the country and abroad to improve working conditions became so strong that the government had to yield to their demands. One of those pressures was the threat of taking away Indonesia's GSP (Generalised System of Preferences) rights by the United States government, which threatened to derail the country's export oriented development path. Consequently, one of the government's responses was to pursue the minimum wage policy vigorously. Unfortunately, labour control was still in place until the economic crisis of 1 99 8 .
The financial crisis and the subsequent global economIC downturn significantly deflated Indonesia's perceived economic miracle. It was by far the worst affected economy in East Asia (Hill, 2000, p. 1 1 7). The crisis was partly triggered by the Thai Baht's crash in June 1 997, exposing Asian countries' weaknesses in unsustainable trade exchange, large external debt and a shaky financial system. The deregulation packages during the 1 980s which had been the chief catalyst of export-oriented development also turned out to be its Achilles heel as bad debt partly contributed to the collapse of the whole economic system. Indonesia's deregulated banking sector was the first to fall, followed by the whole economy in 1 998. This was aggravated by the fact that the political and social system was unable to cope with the crisis (Hill, 2000, p. 1 35). As shown in Table 4. 1 , real GDP shrank by 1 3 percent in 1 998, almost twice as much as the next affected economy, and the value of the Rupiah, the national currency, fell by more than 70 percent. The manufacturing sector also contracted by a similar margin as the decline in the GDP. There had been a rebound in some respects, but by 2000 real GDP had not reached the pre-crisis level of 1 997. Hill (2000) also stressed that the crisis encompassed social, economic, and political dimensions.
The crisis affected Indonesia politically, culminating in the fall of Soeharto's New Order regime in 1 998. Other significant changes included decentralization, in which local governments were given much greater autonomy to govern their own regions.
The mam reason for decentralisation was that the central government could not effectively provide for and finance all public services in a country so physically large and ethnically diverse (Smoke and Lewis, 1 996, p. 1 284). Perhaps an even more important reason, at least politically, was to prevent rebellious provinces seceding. Natural resource rich provinces such as Aceh and Papua had been attempting to seek self-rule from the central government for some time. By transferring significant authority from central control, local governments were being empowered through revenue sharing with the central government (Tambunan, 2000, p. 52). Local governments, especially those lacking natural resources, must eventually be able to generate their own revenues with little assistance from the central government. Thus, Indonesia has had to face not just the challenges of global economic integration but also decentralisation of power to the second tier local governments, which are district and city level. Indonesia's membership of international economic organisations such as the WTO and APEC, have ensured that it also has no choice but to join the global market (Tambunan, 2000, p. 5 1 ).
The Role of the Manufacturing Sector
Indonesia's manufacturing sector has been the engme of economIC growth and employment creation since the late 1 980s and early 1 990s. The important role of the manufacturing sector came to the fore after the New Order government was installed in the late 1 960s. However, accelerated manufacturing growth had only been achieved during the 1 980s via import substitution and funded by the oil boom. During the 1 990s, the most important developments were the marked slowdown in employment growth in agriculture and the acceleration in the rate of growth in job creation in manufacturing, construction, transport and communications (Manning, 1 997, p. 4). Job creation in manufacturing was due to export-oriented industrialization which was spearheaded by labour intensive light industries, such as garments and footwear in the 1 990s. By 1 995, nine-tenths of manufacturing output comprised of a diverse range of manufacturing products, including those mostly oriented for domestic markets such as motor vehicles, and those mainly for export such as wood products, garments, footwear and electronics (Booth, 1 999, p. 1 1 5).
The economic crisis of 1 998 changed all that dramatically. However, although the crisis slowed down growth of 1 0- 1 2 percent per annum from 1 990 to 1 996, to - 1 2 percent i n 1 998, the manufacturing sector i s still significantly important. In the year 2000 the manufacturing sector still contributed 26 percent of the total GDP and 1 8 percent of labour absorption, the third highest after agriculture and trade (see Table 4.2). However, since the recovery period ( 1 999-2000), the number of workers in the manufacturing sector has been steadily increasing. The sector is important in absorbing the increasing number of labour force entrants in the future because the government is still relying on the export-oriented development strategy.
The sector is still recovering from the onslaught of the crisis and the new challenges that must be faced. The future looks more and more uncertain, especially for industries that rely on low wages. In fact, some Indonesian scholars have suggested that due to the rigid labour policies, such as the minimum wage policy, increasing global competition and a high cost economy due to a high degree of rent seeking, Indonesia's non-oil manufacturing sector is experiencing a de-industrialization process, especially pertaining to labour intensive industries (Kompas, 2004). The issue of minimum wage legislation would certainly be part of that concern, especially now that local governments as well as trade unions have greater influence in minimum wage setting. Moreover, the fact that the government is still relying on EOI to spur economic growth could alter the way the government, especially local government, implements the minimum wage policy.