A risky page from China’s playbook: Wages are rising in Indonesia

December 20, 2012
December 20, 2012

Higher wages, higher value exports, higher consumer spending: the virtuous formula that China’s outgoing leadership has been pushing with mixed success is now reaching Indonesia.

Southeast Asia’s largest economy has been among the top destinations considered by western and even Chinese manufacturers looking to reshuffle production among rapid wage growth in China, the world’s top manufacturing base.

But Indonesia could lose some appeal as its own wages rise at an unprecedented pace. Last month, Jakarta’s newly elected governor approved a 44% increase in the minimum wage after a series of sometimes violent demonstrations through the year. His move in turn fueled demands by workers in other regions for comparable improvements and a number of other local administrations have quickly acceded. President Susilo Bambang Yudhoyono chimed in to declare,“The era of cheap labor and injustice is now over.”

Outcry has been fierce from the country’s apparel producers, whose trade group has warned that 100,000 jobs may be cut and that clothing imports will rise by one third as their competitiveness falls.

But some investment bank economists have predicted that stimulated consumer spending will preserve Indonesia’s attraction to many foreign investors. Indeed, foreign direct investment rose 27% in the first nine months of the year. Toyota, BMW, and Foxconn are among the multinationals that have announced or confirmed plans for major investments targeting the local market in recent weeks. Indonesia is also a big draw for capital-intensive natural resource companies who will not be put off by the minimum wage rises. The key for next year will be whether the business environment settles down so that productivity can increase.

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