China Rebalancing Is Opportunity for Indonesian Low-Wage Economy

by Karlis Sana ( Bloomberg)

Indonesia stands to benefit as China rebalances its economy away from labor-intensive production and manufacturers look for low-cost bases elsewhere in the region, according to the Asian Development Bank. Low wages give countries such as Indonesia an advantage in attracting investment as China transitions from a reliance on manufacturing and heavy industry to an economy more focused on consumption, said Shang-Jin Wei, the chief economist at the ADB.

“As China, by necessity, has to transition out of labor-intensive sectors -- garments, electronics, others -- this presents huge opportunities for other countries with lower labor costs,” he said in an interview in Sydney on Sept. 9. “India, Bangladesh, Indonesia all want to pick up some of the things that China will be leaving behind.”

Minimum wages in China vary across the vast country -- from 1,000 yuan ($150) a month in some counties of the agrarian southwestern province of Guangxi to 2,190 yuan a month in the financial capital of Shanghai, according to local government data.

Global Competition

In Indonesia, the monthly minimum wage ranges from 1.43 million rupiah ($109) in East Nusa Tenggara to 3.1 million rupiah in the capital Jakarta, data from the statistics office show.

“Rising wages are a good thing for anyone who earns a wage but it also means that many industries where China used to be globally competitive -- electronic assembly, toys, garments, and so on -- are becoming much less competitive today,” Wei said. “Ten years ago, China’s labor costs were lower than half the countries in the world. Today, China’s labor costs are higher than most of the non-OECD countries in the world.”

To take advantage of the structural transformation in China, Indonesia needs “complementary policy reform” and better infrastructure, he said. “You have to have policy reforms to make it easier for domestic firms and foreign firms to operate,” he said. “Once you have those things in place then you can convert your low wage into an advantage.”

Indonesia ranks 109th out of 189 countries on the World Bank’s index measuring the ease of doing business, behind Sri Lanka and Kenya.President Joko Widodo, also known as Jokowi, has pledged to develop every inch of the archipelago, a string of more than 17,000 islands, by building more roads and ports and boosting electricity supply.

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