A Failed State?

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ven in the clothing manufacturing business—a bulwark of developing Asian economies—the country seems to be giving away any competitive advantage it once had by way of a cheap labor force. Minimum wages in Indonesia have grown rapidly—in Jakarta, by nearly 40% this year alone—and now are higher than in more developed Thailand, relative to each country's per capita income. Unions are now pushing for ill-conceived labor laws that call for employers to pay workers whenever they go on strike—effectively forcing manufacturers to underwrite crippling work stoppages at their own factories.

At the same time, the number of unions has exploded, from one, carefully controlled union under Suharto, to 64 national unions, 247 regional ones, and at least 10,000 local workplace unions. Strikes, often violent, are on the rise. Last week, the Korean manager of a computer-case manufacturer was reportedly trapped in his office by 500 of his employees after he announced the company would close. The workers vowed not to let him leave until he promised to give them sufficient severance pay.

The message to manufacturers is clear: head for greener, safer pastures. Benny Soetrisno, head of the Indonesian Textile Association, says the industry is suffocating. Last year, Indonesian textile exports fell by 7%, to $7.6 billion. Soetrisno expects another 10% drop this year. "If we don't find a solution soon, the textile manufacturing sector could be dead by 2005," he warns, adding that 1.3 million jobs would be lost with it. "At this point, we're not growing at all. We are only trying to survive." Anton Supit, chairman of the Indonesian Footwear Association, tells a similar story. He expects exports of footwear to reach only $1.5 billion this year, down from $2.2 billion in 1996. The number of members in his association has dropped by more than half over the last 10 years; over the last six years, employment in shoe factories has fallen in half to 250,000. "If we look at our competitiveness, especially on price, we're not in a good position," he laments.

Neither are the workers. Yasin, who lost her job when her factory near Jakarta closed, says she can't go home to her poor rice-farming family in Bima, a town on the far-western island of Sumbawa. "The problem was that there were no jobs in my hometown," she says. Today, the cavernous buildings housing the assembly lines where she used to work are padlocked. The union and the factory's workers are camped out in the one building they have access to, which houses the union office and what used to be the "Nike School," where the sneaker company ran a supplemental education program. They intend to stay there, says Ahmad Saukani, the 35-year-old vice chairman of the company union, until they get fair severance pay. The target of the workers ire is PT Doson Indonesia, the company that ran the factory as a supplier for Nike. Still, about 2,000 workers protested outside of Nike's Jakarta headquarters in August.

Nike has offered them aid—microloans to start their own businesses, continued health care, and an offer to tell other suppliers to hire the laid off workers. But the factory is likely doomed. Chris Helzer, director of external affairs for Nike in Southeast Asia, says the company stopped placing orders with Doson because their product was substandard.

Overall, Nike, which accounts for about 120,000 Indonesian jobs, is not reducing its business in Indonesia, even after the Bali attack, Helzer says. But the company has been gradually shifting production elsewhere. In 1998, Indonesia accounted for 34% of Nike's total footwear output; this year that share will be in the "high 20s," according to Helzer. Meanwhile, Vietnam has skyrocketed from zero in 1995 to about 15% of production and Thailand's share has increased to about 15%. China remains the heavyweight, accounting for nearly 40% of production this year. In Indonesia, "We didn't see a whole lot of room for growth," Helzer says.

Union leaders say increased labor activism isn't the reason Indonesia's clothing and shoe sectors are fading. Dita Indah Sari, chairperson of the Front Nasional Perjuangan Buruh Indonesia union says that a poor global economy, excess capacity in industries like textiles, and security concerns are causing companies to scale back. "If the government can't solve the political problems, don't look for a social group to blame," she says.

Unfortunately, Megawati, Indonesia's third president since 1999, hasn't been up to the task. Even her supporters label her slow-moving and indecisive. Megawati was sworn in last year after a crisis during which her beleaguered predecessor, Abdurrahman Wahid, tried to call emergency rule to save himself from impeachment. Since then, she's been paralyzed by countervailing political forces. After years of repression, social groups of all types, from religious organizations to labor, are asserting themselves in Indonesia's new democracy, looking to right old wrongs and creating a cacophony of competing interests.

Some believe the Bali bombing may galvanize her government to take stronger action across the economy. Even in the aftermath of the attack, a foreign stock analyst is steadfastly upbeat about the country's prospects. "The economy is still growing," he says during a phone conversation, "and some companies are doing very well." Just then, a voice booms over an intercom behind him. He puts the phone down to listen, then picks it back up and says: "There's a bomb scare. I have to leave my office."