Caitlin Payne

Writing Sample

Part 3/3 from “Multinational Corporations in Indonesia”

Growth with Equity Paradigm in Indonesia

Indonesia is gaining momentum in the global market and rising from a LDC to a

lower-middle income country with GDP increasing and the growth of the middle class.

While this economic improvement may be good from a Traditional Paradigm perspective,

it is important to evaluate how the increasing presence of multinational corporations

impacts different sectors of the population. Increasing national income should help the

country as a whole improve but corruption and poor education systems in many

developing countries prevent the successful “trickle down” that the Traditional Paradigm

suggests. Indonesia is seeing improvements in many development factors but the

dispersion of these benefits is not as even as it could be and the presence of multinational

corporations is exacerbating these differences.

Since 2009 the World Bank reports that the percent of the population of Indonesia

living at or under the poverty line is down from 14.2 percent to 12 percent in 2012,

suggesting that development is occurring but when the statistic is evaluated for

differences in rural and urban populations, a large discrepancy appears. While rural and

urban poverty levels both dropped proportionately to the country-wide statistic, the rural

poverty level remains close to twice as high as the urban level with 15.1 percent and 8.8

percent respectively. This suggests that poverty as a whole is being reduced but the

increased income could be better used to help alleviate this gap. The Indonesian-

Investments Report contends that in the country’s economic reform period between 1999

and 2013, the Gini Ratio of the country has steadily risen from .36 to .41 as the

Indonesian capital owners’ benefit disproportionately from the economic growth, leaving

many sectors of the population behind. The outlook for Indonesia from a Growth With

Equity standpoint is not all bad however.

The United Nation’s Human Development Report states that the Human

Development Index of Indonesia has increased by 49 percent between 1980 and 2012

from .422 to .629 as life expectancy increased from 57.6 to 69.8 years and the mean years

of schooling increased from 3.1 to 5.8 years, close to the sixth grade level suggested by

GWE academics to maximize labor force competency, placing Indonesia amongst

“middle ranking” countries for HDI. For a “lower-middle” income country to have a

“middle” HDI ranking is a promising figure. UNICEF breaks down the Indonesian

education system and reports that since the implementation of compulsory nine year

schooling in 1994, primary school attendance rates are at 93 percent with little gender

gap. That changes however in secondary school where attendance drops to 61.6 percent

total with girls accounting for slightly higher attendance rates. The main educational

discrepancy lies in the rural-urban difference. Among all school-aged children in urban

areas, attendance is at 72 percent compared to 54 percent in rural areas. Income also has

an impact on education in Indonesia. The richest 20 percent of the population sends 72.2

percent of their children to school and the poorest 20 percent only send half of their

children to school. Because of the income gap between rural and urban areas, this

difference in education makes sense as rural families make less money and the

opportunity cost of sending their children to school rises as children become old enough

to contribute to household income. Indonesia’s improvement in HDI may be promising

but the steady increase in Gini Ratio and rural-urban education disparity suggests that the

country’s rapid economic growth is not being dispersed in the most utilitarian way. The

Traditional Paradigm would argue that multinational corporations increase investment

and provide jobs to natives, thereby increasing national income and “developing” the

country but this may not be the case as MNCs often exacerbate the existing economic

inequalities.

In an article for the National Bureau of Economic Research, Robert Lipsey argues

a TP perspective for MNCs in Indonesia, claiming that foreign-owned firms hire more

skilled workers, pay them higher wages than national firms, and implement more high-

tech capital-intensive methods. From a GWE standpoint, these are negative traits for

many laborers in Indonesia. First, by using capital-intensive techniques, these

corporations are not proving maximum employment opportunities to locals. Second, the

hiring of more educated, skilled workers continues to widen the gap between those who

can afford schooling and those who can not. Third, MNC’s tend to locate in cities where

the more educated natives live and where capital is more accessible, excluding rural

populations from employment opportunities. Education and income are already

significantly lower in rural areas and their exclusion by these foreign companies helps to

keep them in a cycle of poverty as the rest of the population sees increases in living

standards and income.

Multinational corporations have a positive place in Indonesia’s economy but most

of their benefits are focused on the educated urban populations. The rising income and

growing middle-class provides the country an opportunity for investment in the fertile

rural regions where labor is abundant. The discrepancy in rural and urban development

can be overcome if earnings and savings generated from MNCs are used to invest in high

value agriculture. The Global Business Guide states that Indonesia is already successful

in the export of raw coffee, palm oil, tea, cocoa, sugar, and rubber, but has not fully

utilized their land and labor resources to realize their production potential in these goods.

In addition to expanding their existing agricultural sector, Indonesia has also

underutilized value-adding techniques such as processing their own sugar, deriving

expensive chemicals and cosmetics from palm oil, and utilizing their climate to increase

silk production, similar to the Economist article on Brazil’s tropical fruit industry. Not

only will corporate investors have easier, local access to raw materials, but in this case,

rural populations will also benefit greatly as jobs in each sector increase with the

industrial demand. The harvesting of silk, tea, and palm oil are very labor intensive and

the items are too delicate to use machines on, resulting in sustainable agricultural jobs.

The industrial processing plants will find it cost effective to build industrial plants closer

to the raw materials, shifting some of the more high-skilled jobs away from the big cities,

giving rural populations a better chance of obtaining these jobs. Indonesia has

implemented a successful primary education program that sees high attendance even

among poor, rural, and female students. By increasing high-value agricultural jobs and

related industrial jobs, there will be less need for parents to pull their secondary level

children out of school, thereby increasing rural and low income education levels and

increasing family incomes, resulting in more rapid HDI growth and a lower Gini Ratio.