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Indonesia’s Sense and Nonsense Business Talk 2012

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The Sense and Nonsense Business Talk 2012

One of the best observed and talked about events among the business communities in Indonesia was the Government’s decision to ‘substantially’ increase the level of minimum wage in Jakarta and across the nation. We are not going to discuss the government’s motives behind the increase but it is interesting to see how the argument put forward by the leaders of the business communities make little economic sense in this edge of improving expectation and knowledge.
I am going to approach my observation of the arguments of the leaders with the hard economic reasoning as well as the soft system mechanism in my attempt to walk us through this complex adaptive (annual) event.
It is a classical argument put forward by the business leaders that any wage increase without a simultaneous peddling up of prosperity will leave Indonesian companies at an irreversible disadvantage. To keep cost low, to maintain adequate demand levels, and to maintain the strategic posture they would have no other choice but to resort to lay-offs.
Those standing against a ‘substantial’ minimum wage increase basically stand on the general belief that productivity is crucial for international competitiveness. This is in my opinion is at best a misguided belief if not lazy thinking. Productivity is important but international competitiveness has nothing to do with it.
Now, while assuming all other things (innovativeness, skills, and monetary strength) being equal, let’s imagine the rest of Singapore is more productive across the board than Indonesia. In particular, let’s suppose that the number of hours required to produce a box of diaper or to assemble a single bus is as follows:
Hypothetical Labour Requirement
Hours Per Diaper Bus
Indonesia 500 500
Singapore 200 300

What will happen when Indonesia trades with Singapore? The exact result depends on the relative (internal as well external) demands for diapers and buses. The exact result depends on the size of the economies of Indonesia and Singapore, the trading rules and regulations that exist between and among them, but one thing is clear: workers in Indonesia will have to receive lower wages than workers in Singapore; if not, it would be cheaper to produce everything in Singapore and a ‘substantial’ minimum wage increase (like the one our business people continue to moan about) would simply drive Indonesia out of business. On the other hand wages in Indonesia cannot be much lower – otherwise it would be cheaper to produce everything here in spite of lower productivity. So the wage ratio must stand somewhere in between productivity and ratios in the two nations.
Yes one can see it right away what theoretically would happen. It is cheaper to produce buses in Indonesia because of the smaller productivity gap; but is cheaper to produce diapers in Singapore.
Indonesia is at absolute disadvantage in productivity in both cases, but it should manage to export the good in which it has comparative advantage, that is where its productivity relative to Singapore compared with relative productivity elsewhere is highest. We live in a world of relativity and everything must be seen in relative to others. Surely the common view is that a country will suffer if its productivity is inferior across the board relative to its competitors. After all if we lag behind our competitors in each and everything, how can we sell to the world markets? The right answer is that being less productive relative to others poses to dire problems. Of course a country whose productivity is low across the board is not going to have a high standard of living but that has little to do with the fact it must co-exist with more productive nations. In fact, the possibility of trading with more productive nations mitigates, rather than exacerbates, the consequences of low domestic productivity.
At a more micro level, eventually disequlibrium conditions will always disappear. New industries with high returns and high growth rates become phenomena of the past. As technology and market mature, profits get squeezed and co-evolving competitors contribute to drive selling rate faster than technology is driving down costs. Growth rates become replacement rates. This will be the time when capital and people will need to walk the renew path into these new industries so that they would arrive in time for the making of another season of great fortune.
I do in fact also have a problem with the commonly simplified translation and the measurement of productivity itself. Productivity is the sum and caused by so contributing elements. On the one hand there are the personal hard aspects as educational background, skills, knowledge and knowhow. On the other, we would be taking about culture, traditions, pay scale (the fulfilment of the basic needs all the way the Maslow’s chart), intention, motive, and the environment within which one has to perform. If we have done away for good the dull and emotionless scientific management concept of Frederick Winslow Taylor (1856-1915), we should know that an obsession with efficiency allows measureable benefits to overshadow less quantifiable social benefits completely, and social values get left behind. We also know that in positive psychology, flourishing is “to live within an optimal range of human functioning, one that connotes goodness, generativity, growth, and resilience.” Flourishing is the opposite of both pathology and languishing, which are described as living a life that feels both hollow and empty and in constant deprivation and depression.
Productivity, even in Indonesia and among Indonesian should not be regarded as static. The value of employees’ development in increasing motivation as one of the main driver of productivity is well researched and documented. Training and development (T&D) encompasses three main activities: training, education, and development. Garavan, Costine, and Heraty, of the Irish Institute of Training and Development, note that these ideas are often considered to be synonymous. However, to practitioners, they encompass three separate, although interrelated, activities
• Training: This activity is both focused upon, and evaluated against, the job that an individual currently holds.
• Education: This activity focuses upon the jobs that an individual may potentially hold in the future, and is evaluated against those jobs.
• Development: This activity focuses upon the activities that the organization employing the individual, or that the individual is part of, may partake in the future, and is although quite difficult to evaluate most observers agree that more than a simply random positive feedbacks and effects have been resulted.
How could one presumptuously argue that the improvement in motivation + the new sense of security and belonging + the extra spending power would not be equal to the differences between is defined as a ‘normal’ and the ‘substantial’ price increase?
I concur with Clark and Wilson (1961) that “The contributions of personal efforts which constitute the energies of organizations are yielded by individuals because of incentives…..The individual is always the basis strategic factor in organizations” (Chester Bernard as quoted by Clark and Wilson, 1961, p 132). These incentives do of course takes many different forms: monetary, social inclusion, personal development, sense of security, being part of a group, etc.

china li river

Other Thoughts

The above discussion again stands on the assumption that the really important thing for the Indonesian economy is selling goods and services on the world markets, with producing goods and services for ourselves a secondary and derivative activities. This of course should not and in fact is not case. The expansion of our domestic economy has been as much caused by a better appropriation of resources, increases in foreign and domestic investments (the rise of China has somewhat helped ameliorate the temporary decline of the West and Japan), improvement (though still comparatively far behind many of our neighbours) in infrastructures per education, medical facilities, information, etc have all led to a massive increase of the new middle classes and thus the needs for products and services. This is a fact that any company cannot afford to ignore. They must co-evolve with their competitive landscape. To move from simple focus on cost to lead with differentiation while remaining vigilance on the need to maintain cost effectiveness and efficiency in each and everything they do. This is the very essence of the reconstructionist approach per popularised by Kim and Mauborgne (2009). The evolution of reciprocation should be a solid platform for our companies and business leaders to work on as they work to lay out one ‘blue ocean’ after another.
No business organization has ever become rich by saving their money. The rich see opportunities to work and invest in situations where large disequilibrium exists. I concur with Thurow that “understanding, recognising and accepting the limits imposed by their genetic weaknesses is the beginning of wisdom for all organizations. The secret of success is finding places to employ one’s resources where those weaknesses are irrelevant”


Suggested Further Reading:

Beattie, Alan (2010). False Economy: A Surprising Economic of World History. Riverheads Book.
Clark PB and Wilson JQ (1961) Incentive Systems: A Theory of Organizations. Administrative Science Quarterly, 1961. (accessed 11 December 2012)
Thurow, Lester (2000). Creating Wealth: The New Rules For Individuals, Companies and Countries in a Knowledge-Based Economy. Nicholas Brealey Publishing.
Kim WC and Mauborgne R (2009), How strategy shapes structure, Harvard Business Review, 2009, (accessed 5 November 2012)
Krugman, Paul (1994). Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectation. WW Norton and Company
McKelvey, B. (2002) ‘Managing coevolutionary dynamics’. 18th EGOS Colloquium, 4-6 July, Barcelona. (accessed 13 December 2012)
Used with permission from Bill McKelvey, Professor Emeritus, UCLA Anderson School of Management
Sigmund, K (1998) Complex Adaptive Systems and the Evolution of Reciprocation. Ecosystems September 1998, Volume 1, Issue 5, pp 444-448. (accessed 12 December 2012)
Slywotzky, AJ (2011). Demand: Creating What People Love Before They Know They Want It. Headline Business Plus