Sustainable Economic Growth demands Investment in the Indonesian Workforce

Charles Vincent, Rob Daniel & Moray McLeish

Jakarta Globe - 19 June 2014

 

The search for talent is as acute as ever. PwC’s 2014 US CEO Survey revealed that 70 percent of US business leaders are concerned about the availability of key skills, a sharp increase over the 54 percent that reported themselves concerned in 2013. Evidently, even in the United States, highly valued skills are still hard to find.

The situation is even more acute in Indonesia, which rightly aspires to be a member of the Group of 10 nations by 2030, and it has promising potential. Indonesia is in the Emerging 7, or E7, along with Mexico, Turkey, and the BRIC countries of Brazil, Russia, India and China. It is projected that by 2050 the total gross domestic product of the E7 will be $138.2 trillion, or roughly double the total GDP of the Group of Seven countries.

A 2013 PwC study identified five “megatrends” the world is witnessing today - shifting economic power, accelerating urbanization, climate change, resource scarcity and demographic shifts. It is in the E7 that these megatrends are being most intensively played out. Indeed one of Indonesia’s major selling points is its abundant and young workforce; 50 percent of its population, currently the world’s fourth largest, is under the age of 30. A study Indonesia’s Investment Coordinating Board (BKPM) projected that over the next 50 years the country’s population will experience a ‘demographic bonus’ in which 60 percent to 70 percent of the population will be within the working ages of 15 to 64.

The key to economic success will therefore be in the ability of the country to take advantage of this natural dividend. But, according to the World Bank, 40 percent of Indonesians are living with less than Rp 12,400 per day, or around US$1.80 adjusted for purchasing power. Larger numbers of youth entering the workforce will therefore exacerbate this problem. To improve this situation obviously we need to increase the availability of jobs. The easy way to do this is to reduce the cost of each job, thereby creating more employment opportunities. But only providing more lower-paying, lower-skilled manual jobs is a trap.

 The so-called “race to the bottom” is created when wages are set so low that individuals are unable to create surplus income with which to educate themselves or their children in order to move up the value chain.  A competition then issues with other similar economies to be the lowest cost and therefore guarantee jobs, which, in turn, further traps the workforce into decline.

Another scenario is to focus on higher value-added jobs that are more productive, such as replacing labourers with a robot and a solitary but highly educated operator. This may seem to reduce the need for employment, but currently Indonesia is in a shortage of skilled labour for the skilled employment available.

To achieve even a modest target of 6 percent annual GDP growth, Indonesia will require around 50 million skilled workers. As an E7 country Indonesia is therefore emerging as a central battleground in the war for scarce talent.  Talent matched to the modern needs of our rapidly developing economy is tough to find.

A highly skilled and productive workforce will improve Indonesia’s competitive advantage in the Association of Southeast Asian Nations (Asean), attracting new investment and generating new opportunities for growth. Highly educated people who cannot find jobs are likely to create their own work as entrepreneurs, and in turn create jobs for others. 

This is so-called “drive up the value chain” that has served Singapore so well in the past. In order to do this you need a highly educated workforce in the first place to attract the right companies. But the issue with education is that it is a time-consuming and expensive investment. Without obvious and rapid returns on this investment individuals are unlikely to take the risk, preferring instead to play safe, with the risk that the total community will after the “race to the bottom”.

The first step to alleviate this bottle neck of labour resources is to improve the access and quality of education by reducing the risk. To achieve this, the government can increase the share of the budget for public education from the current 3 percent of annual GDP and strengthen governance to ensure access to public education in even in the most remote areas of the country. As a comparison, Malaysia has spent an average of 6 percent of annual GDP for its education sector.

Equally, corporations can benefit themselves from paying more attention to upgrading skills that support innovation.

“On the one hand, a war for talent in recruitment will continue to be present in business; but on the other hand, companies can also address skills shortages by taking a fresh look at the talent within,” comments Marina Tusin, Partner for People and Change at PwC Indonesia.  The significance of training—and retraining—programs are increasingly important in catalyzing transitions from old to new business models.

 

PwC found that businesses that manage to build up intellectual capital internally by continuously cultivating the next generation can experience a distinct advantage. “We’ve grown over the years, 27 percent to 29 percent a year, we’re always starting new parts of our business, which gives younger people a chance to be promoted and grow a new business for us. That sense of being in charge of things, of ownership, entrepreneurship, self-actualization, that’s really important,” said a chairman and CEO of an asset management company in the PwC 2014 US CEO Survey.

PwC has built a six-step strategic workforce planning framework. A useful tool developed to assist organizations to manage and develop their employees’ talent as a part of their strategic business planning. The first step is to define a company’s business strategy and the drivers for talent demand. Then formulate a model for future talent needs and analyze the supply of talent to identify and remediate talent gaps. Then companies can implement the remediation plan and monitor the impact, as well as maintain and manage the ongoing workforce planning process.

The Indonesian government together with the business community can define what type of development they envision for the future.

Our advice is to strive for sustainable economic growth fuelled by exponentially value-adding labour productivity achieved through quality education and increasingly skilled labour, and further thorough development of Indonesian talent.

 

Rob Daniel and Moray McLeish are  technical advisor in Sustainability and Climate Change practice, and Charles Vincent is leader PwC Consulting Indonesia.