A STUDY ON INDUSTRIALIZATION PROCESS AND ITS IMPACT ON THE EMPLOYMENT SECTOR : A CASE OF INDONESIA

Abstract

This study explores the relationship between Indonesia's industrial strategy and its impact on employment absorption, especially in manufacturing industry. Being endowed with abundant labor, Indonesian industrialization strategy should based on providing maximum employment. The focus of this study was to explore the performance of industrialization strategy in manufacturing employment absorption. Indonesia shifted its industrial strategy from import-substitution towards export-oriented in 1986, Since then, Indonesian exports dominated by commodities from manufacturing industries. Share of export from manufacturing is 84 percent from the nonoil total value of export. The importance of manufacturing export has considerably increased since Indonesia adopted export-oriented industrialization strategy. Hirschman's concentration index for export shows that there is a remarkable increase from 14 percent in import-substitution period to 55 percent in the export-oriented strategy. The regression analysis indicates that shifting in industrialization strategy has a positive and significant impact for manufacturing employment absorption, except for other manufacturing (ISIC39). This finding explains that the manufacturing employment absorption has benefited from export oriented industrialization strategy. In addition, the labor market condition, which reflected by the labor market elasticity, does not have a significant impact on the manufacturing employment absorption, except for textile industry. However, the regression coefficient of this industry shows a negative relationship between labor market elasticity and manufacturing employment absorption. This finding explains that the successes of textiles export is at the expense of employment absorption. This finding is also similar to Hill ( 1992) which concluded that the contribution of employment in value added growth for textiles industry is below the manufacturing average. As a consequence, the bargaining power of Jaber in this industry is very low. Another finding is the fact that input to output ratio both in labor and capital intensive industries did not change significantly during the period of the study. This finding supports the proposition that success of manufacturing export based mainly on the existence of cheap labor. The success story of industrial strategy shifting creates both direct and indirect employment. From the regression results, it is obvious that export has significantly affect direct manufacturing employment absorption for textiles, non-metallic mineral product, and other manufacturing industries. The indirect employment absorption measured through input-output analysis. The finding of this analysis indicated that in 1980, intra-industry inputs are higher than input from the other sector (inter-industry). It explains that industrial linkages are weak. However, intra-industry linkages tend to decrease in 1990. Based on input-output tables of 1980 and 1990, the industrial manufacturing sector has strong and increasing linkages with the service sector. On the other hand, their linkages with agricultural sector have become weaker. Therefore indirect employment absorption effect on the agricultural sector has declined over the period.