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A Critique of the Orthodox Approach to Indonesia's Growth and Employment Problems and Post Keynesian Alternatives

Authors

  • Anis Chowdhury,

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    • Based on Growth, Employment and Poverty Reduction: The Case Study of Indonesia, a report prepared for the ILO-Geneva, 2006. However, the authors are solely responsible for views expressed herein. An earlier version of it was presented at the Society of Heterodox Economists Conference, University of New South Wales, Australia, Dec. 11–12, 2006, and at the Conference on Capital and Poverty of the Global Poverty Research Centre, University of Manchester, July 2–4, 2007. We are grateful to the participants at these conferences for their comments. We have also received many valuable comments from two anonymous referees.

  • Iyanatul Islam


Abstract

Indonesia continues to bear the scars of the 1997 financial crisis, with the highest open unemployment rate in Southeast Asia. The orthodox interpretation is that the post-crisis era is typified by overly generous labor legislation granting higher minimum wages and other provisions; the rise in real wages adversely impacted the investment climate and employment growth. However, detailed sectoral analysis reveals very little evidence of a wage-driven profit squeeze. This article contends that Indonesia's current unemployment woes are best understood as the reflection of a demand-constrained economy, where important sectors are operating at around 70 percent of their capacity. It, thus, outlines an alternative macroeconomic policy framework in the Post Keynesian tradition.

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