This in-depth look at Indonesia’s early 2000s export boom suggests that exports in the manufacturing category—such as electronics and textiles—improve employment opportunities in Indonesia, and commodity exports tend to reinforce existing inequalities.
With TWCF funding, the Center for Indonesian Policy Studies (CIPS) aims to bridge the gap in understanding trade's social and regional impacts in Indonesia through a series of five econometric studies.
As part of this series, CIPS recently published a study by researchers Fajar Oktiyanto of Australian National University, Riandy Laksono of Australian National University, and Yessi Vadila of Economic Research Institute for ASEAN and East Asia, titled Export Expansion and Labor Market Dynamics in Indonesia.
The working paper sheds light on how Indonesia’s export growth following China’s accession to the World Trade Organization (WTO) in 2001 has influenced wage and formal employment. It provides critical insights into the progressive impacts of manufacturing exports on labor market outcomes and offers valuable lessons for policymakers.
We asked the authors to share key findings from this research.
The study aimed to determine whether Indonesia’s export boom, triggered by the import demand shock from China’s WTO accession, improved labor market outcomes for Indonesians.
Unlike prior research that often focused on poverty and employment broadly, this analysis zeroes in on formal employment opportunities and cumulative earnings growth between 2000 and 2014. Using district-level data, the research compares regions with varying exposure to export growth and assesses impacts on wage growth and job formality.
Source: Authors’ estimation based on UN Comtrade data downloaded from the WITS database.
By leveraging Indonesia’s export data to China, the researchers identified causal links between export expansion and labor market improvements. The results indicate that manufacturing exports, rather than commodity exports, drove positive changes, fostering greater formal employment opportunities and promoting income growth, particularly among lower- and middle-income groups.
China’s accession to the WTO in 2001 marked a pivotal moment for global trade. The country’s import demand surged, growing by nearly 25% annually between 2001 and 2007, compared to a modest 10% annual growth before its accession. For Indonesia, this translated into a sharp increase in exports to China, growing three times faster than exports to other countries during the same period.
Source: Authors’ calculation based on UN Comtrade data downloaded from the WITS database.
This import demand shock provided a unique opportunity for Indonesia to expand its manufacturing and commodity exports. However, the study’s findings reveal that while commodities dominated export growth, the benefits to labor markets were significantly more pronounced in regions with substantial manufacturing activity.
One of the study’s key findings is the role of manufacturing exports in boosting formal employment. Between 2000 and 2014, individuals in districts more exposed to export expansion accumulated larger formal employment. These regions not only saw higher rates of transition from informal to formal employment but also provided more equitable labor market opportunities, addressing the long-standing challenges of precarious work and limited job security.
Lower- and middle-income groups benefited the most from this formal employment growth. Workers in these income brackets, particularly in regions with strong manufacturing activity, transitioned from informal to formal jobs more readily. This progressive impact contrasts with commodity-driven export growth, which had limited influence on reducing job precarity or improving earnings.
The concentration of benefits among lower- and middle-income groups can be attributed to several factors. First, manufacturing exports created jobs that matched the skill levels of these workers, enabling smoother transitions from informal employment. Second, the labor-intensive nature of manufacturing industries disproportionately favored regions with higher initial informality, providing opportunities for workers to enter formal employment.
Source: Authors’ calculation from Sakernas datasets.
The study also found that workers in the lowest and highest income brackets saw minimal benefits. For the lowest-income group, entrenched informality limited their ability to access new opportunities, while the highest-income group already enjoyed stable formal employment, minimizing the incremental benefits of export expansion. This outcome underlines the need for targeted policies to address these disparities and ensure broader inclusivity in labor market advancements.
The research underscores the contrasting impacts of different export categories. Manufacturing exports were associated with significant improvements in formal employment and income, particularly for the low to middle-income bracket, offering a path toward reducing inequality. In contrast, commodity exports, while contributing to overall trade growth, failed to produce similar labor market benefits. This distinction highlights the need for Indonesia to diversify its export base beyond resource-dependent industries.
Manufacturing exports, particularly in labor-intensive sectors such as textiles and electronics, not only created more jobs but also generated higher earnings for workers, contributing to progressive, equality-enhancing impacts. These industries require a stable and skilled workforce, encouraging investments in training and education that further amplify their positive impacts on the labor market. Conversely, commodity exports—largely driven by resources like palm oil and coal—tended to reinforce existing inequalities and failed to provide substantial improvements in job quality or security (Paz, 2014; Oktiyanto, 2024; Ulyssea, 2020).
Despite the positive impact of manufacturing exports, informality remains a persistent challenge in Indonesia. Over 50% of the workforce continues to rely on informal jobs, which lack job security and benefits. To address this, the study suggests several strategies:
● Scaling Up Manufacturing Exports: Policies that encourage investment in labor-intensive manufacturing industries can create more formal job opportunities.
● Enhancing Skills Training: Targeted vocational training programs can equip workers with the skills needed for formal employment in manufacturing sectors.
● Strengthening Labor Market Regulations: Enforcing existing labor laws and reducing barriers to formalization can encourage businesses to hire formally.
● Promoting Regional Development: Investments in infrastructure and industrial zones outside Java can help distribute manufacturing opportunities more equitably across the country.
Addressing informality requires a multi-faceted approach that combines economic incentives, regulatory reforms, and capacity-building initiatives. Policymakers must prioritize inclusive strategies that empower workers to transition into formal employment while ensuring that businesses have the support they need to comply with labor standards.
For regions reliant on commodity exports, policymakers must address persistent inequalities. Strategies include:
● Diversifying Economic Activities: Encouraging investments in manufacturing and
services sectors can reduce over-reliance on commodities.
● Redistributive Policies: Implementing social safety nets and targeted subsidies can
mitigate the adverse effects of commodity price volatility on vulnerable workers.
● Improving Resource Management: Strengthening governance in resource-dependent
regions can ensure that revenues from commodities are reinvested in education,
healthcare, and infrastructure.
The study emphasizes that while commodities will continue to play a role in Indonesia’s trade portfolio, their contribution to equitable labor market outcomes remains limited. Shifting the focus toward value-added industries is crucial for long-term economic sustainability and inclusivity.
Indonesia’s experience offers valuable insights for other developing countries grappling with the challenges of export-led growth. Diversifying exports to include manufacturing can yield better labor market outcomes, particularly for lower- and middle-income groups. Additionally, targeted policies to reduce informality and address regional disparities are essential for ensuring inclusive growth. Countries with similar reliance on commodities can draw lessons from Indonesia’s approach by:
● Investing in Manufacturing: Developing competitive advantages in manufacturing sectors can create sustainable employment opportunities.
● Balancing Export Portfolios: Reducing dependence on volatile commodity markets can stabilize income and employment levels.
● Adopting Inclusive Policies: Ensuring that export-driven growth benefits marginalized communities can enhance social and economic resilience.
These lessons underscore the importance of tailoring trade and labor policies to the unique contexts of developing economies while leveraging global trade opportunities to foster equitable growth.
As Indonesia continues to navigate its path toward inclusive growth, this research underscores the importance of diversifying exports beyond resource-based commodities, enhancing formal employment opportunities, and addressing the persistent challenges of informality.
Policymakers must prioritize strategies that empower workers, support businesses, and promote equitable economic progress. By focusing on manufacturing as a driver of growth, Indonesia can unlock the full potential of its labor market and set a benchmark for other developing economies.
