17 - Has Indonesia Passed the Lewis Turning Point and Does It Matter?

Summary

With the steady growth of population came also the elaboration and extension of mechanisms through which agricultural product was spread, if not altogether evenly, at least relatively so, … it [Javanese society] maintained a high degree of social and economic homogeneity by dividing the economic pie into a steadily increasing number of minute pieces, a process which I have referred elsewhere to as “shared poverty”.

(Geertz 1963, p. 97)

INTRODUCTION

Around 2010–11, observers of the Indonesian labour market were surprised by a sudden surge in formal sector employment after almost a decade when the informal sector and casual jobs had grown more strongly and a high percentage of the workforce was still engaged in agriculture. Unemployment and underemployment also showed signs of declining quite sharply. While growth had increased moderately after the global financial crisis of 2008–9, this was seemingly not enough to lead to such a major reversal in labour market trends.

Could the country be going through what has often been referred to as the “turning point” in economic development, slightly over a decade after one of the biggest economic downturns in modern history? This is denoted by a point (or a period) in time when unskilled labour begins to become scarce, wages rise, and the country begins to move into a phase of capital deepening and technological advancement (Lewis 1954). The changes mentioned above come just fifty years after the famous U.S. anthropologist Clifford Geertz wrote a brilliant but deeply pessimistic (and, in some respects, deeply flawed) account of agricultural involution on Java, the main island of Indonesia.1 In this treatise, in essence, he described the sort of process poor Asian countries went through prior to industrial transformation. That is, traditional societies based the distribution of output on average rather than marginal product rules — dividing up the pie — which enabled many more people to survive overcrowding in rural areas, under conditions of relative economic backwardness.

The dramatic rise in manufacturing exports in Japan and the East Asian “tigers”, in the 1950s to the 1980s, seemed to provide empirical support for the potential of a turning point, as an important phase in the development of rapidly growing and densely populated Asian economies. Identification of the turning point had important implications for industry and trade policy.