INTRODUCTION

Indonesia and India are the world's most populous nations, and are known for their diverse ethnic, linguistic, and religious mix (Nehru 2013). Apart from population and ethnic diversity, they also share one other important attribute—both countries witnessed rapid economic growth for well over a decade, and are seen as growth successes, at least for a part of their recent history (Indonesia for 1967–1996 and India for 1993–2010). Rapid, sustained economic growth is not a feature we witness in many developing countries—in fact, the Commission for Growth and Development (2008) finds that only ten countries from the developing world have experienced sustained growth in the post-World War II period: Botswana, Brazil, China, Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan, and Thailand. India would be added to this list if more recent growth data were available. What is also common to the growth experiences of Indonesia and India is that the period of rapid economic growth came to an end—in 1996 for Indonesia and in 2010 for India.

This chapter examines whether there were common causes for the end of rapid growth in these two very disparate countries. It does so by situating the growth experiences of these two countries within a wider understanding of the nature of economic growth in developing countries. In recent years, there has been a realisation that the emphasis in the previous growth empirics literature on long-run growth or levels of income is not compatible with the ‘stylised facts’ of economic growth (Pritchett 2000). Massive discrete changes in growth are common in developing countries, and most developing countries experience distinct growth episodes: growth accelerations and decelerations or collapses (Jerzmanowski 2006). If this is the case, it is not surprising that Indonesia and India had rapid growth episodes that eventually came to an end. While the East Asian financial crisis is seen as the catalyst for the end of rapid growth in Indonesia, and the ‘policy paralysis’ of the ruling government and the global slowdown are seen as the proximate causes of the growth slowdown in India, we argue in this chapter that there are deeper institutional factors that can explain the end of the rapid growth episodes in these two countries that are broadly similar.

Professor Hal Hill has been a tower of strength and inspiration for economic research on the Indonesian economy over almost three decades, both for international as well as Indonesian scholars. This author's academic career spanned much the same time period as Professor Hill's, both as a PhD scholar and a decade later as a researcher for 20 years at the Australian National University (ANU). Our interests have been similar—understanding the diversity and resilience of the Indonesian economy, often against all odds, internationally, and often in spite of the interventions by politicians in Jakarta. The author personally owes a great debt of gratitude for Hal Hill's support and a wonderful friendship, for much of this period, especially during his 20 years as a researcher at the ANU in 1991–2011. Terima kasih Pak.

During his career, Professor Hill developed a healthy scepticism of regulated markets in the Indonesian context. Partly, this scepticism reflects changes in the approaches to development policies among main-stream economists since the 1960s and 1970s when he began his career. It also manifests a judgment that successive Indonesian governments have been unable to keep their promise of improving efficiency and erasing inequities through market interventions, partly because of weak legal institutions and poor governance. In this chapter, I take up this theme by focusing on some of the effects of regulations of Indonesia's labour market in recent times.

One of Indonesia's main development problems is that a high proportion of the workforce—around two-thirds—are employed in low-productivity agriculture and in the informal sector. Mainly, this is related to Indonesia's stage in economic development as a lower middle-income country. The meagre stock of both physical capital per worker and human capital reflects Indonesia's stage of development. Not enough workers have moved into higher productivity jobs especially in manufacturing, and that transfer slowed after the Asian financial crisis of the late 1990s, despite reasonable and improving rates of economic growth in the 2000s (World Bank 2010b).

It has been suggested that both low productivity and high wages in some segments of the economy have contributed to high and rising unit labour costs relative to productivity, compared with neighbouring countries (Nellor 2013). That process has also contributed the poor employment record. Part of the problem relates to the dualistic structure of output in manufacturing, which is related to technology and market orientation.

What explains volatility in world food prices? Are the ‘fundamentals’ of supply and demand the basic factors? Can national or international policies towards food grain reserves help to stabilise food prices? What are food stocks ‘worth’ if the levels of grain reserves, especially in large countries, affect food trade policies in these countries? This effect would be the reverse of the usual causation where policies can directly affect the levels of both public and private stocks.

There are four basic ways the economics profession thinks about these questions.

The first is second nature to economists, who use basic supply and demand models as the fundamental explanation of price formation. The ‘fundamentals’ approach uses these models to generate an equilibrium price, where the global level of stocks is an exogenous factor that influences the probability of a price spike when there are shocks to supply or demand. A number of well-calibrated models using this structure are used routinely, especially by international research centres such as the Food and Agriculture Organization (FAO), the Food and Agricultural Policy Research Institute (FAPRI), and the International Food Policy Research Institute (IFPRI) to understand the impact of changing trends in supply and demand, and shocks, to food prices.

The second approach explicitly introduces the storability of the commodity into price formation. The supply of the storage model brings in expectations and makes stock levels endogenous with price formation. To be empirically useful, however, reasonably accurate and timely data on levels of stocks held by commercial trade are critical. These models have a long history, but the standard reference remains Williams and Wright (1991). A modern application with important implications for the role of biofuels in food price formation is Roberts and Schlenker (2013).

The third approach recognises that such stock data are often not available for commodities where individuals and small firms hold a major share of stocks between harvest and consumption, a factor that is especially important for the world rice market (Timmer 2009b). To cope with this reality of the industrial organisation of some commodity markets, a behavioural model adds hoarding by individuals, with levels of stocks in the hands of these agents largely unobserved but important for short-run price formation. In this approach, ‘non-traditional speculation’ in financial and commodities markets can also impact price formation without having a visible impact on measured stock levels (Timmer 2012).

Over 8 percent of humanity resides in Southeast Asia—much more than in any of North or South America, or Europe. Located on the sea routes between the global giants of India and China, it sometimes recedes from the view of the international community. Southeast Asia rarely attracts the attention in the old centres of scholarship in North America and Europe that is warranted by its importance and interest.

Southeast Asians have enjoyed a particular experience of modern economic development. That experience is important simply because it embodies the lives of a major part of humanity. It is also important because it provides an opportunity for observation of unique characteristics of modern economic development—in the words of the Editors of this book, a ‘laboratory’ for observation of new perspectives on the reality of development (p. 1).

People all over the world who are interested in modern economic development and sufficiently well informed to know how much Southeast Asia matters are hugely indebted to the life's work of Hal Hill that is honoured in this book. Through the forty years I have known him, Hill has worked steadily, diligently, and productively to understand the political, social, and economic contexts of development in Southeast Asia.

Hill has consistently and reliably brought insights from mainstream modern economic analysis to account in seeking to understand his subject. Hence the consistent reaffirmation in Hill's work of such established verities in economics as the value of free multilateral trade and the dangers that arise from well-meaning variations on the theme; the importance of sound fiscal and monetary policy; the value of market exchange to human welfare wherever the conditions for markets to work effectively are present; and the importance to successful development of effective interventions by government to provide public goods that are essential for development and to allow markets to contribute positively to development.

Hill does much more than this. His work recognises the importance of complex institutional realities that vary across countries and regions and are themselves changed by the experience of economic development. The embedding of his work through his professional life in a Department and School of scholars interested in development in Southeast Asia in all of its social and political complexity enriched his work.

Twenty years ago it seemed likely that Vietnam would follow the trail of the East Asian Tigers, emulating their success under the export-oriented industrialisation strategy. Conditions in Vietnam in the early 1990s were comparable to the initial conditions in Taiwan in the 1960s, Thailand in the 1970s, and China in the 1980s, when each successfully launched an export-oriented industrialisation strategy (Riedel 1993). Like those countries, Vietnam was modestly endowed with natural resources and amply endowed with human resources, with massive under- and unemployed labour in its densely populated rural sector. Like those countries at the outset of export-oriented industrialisation (EOI), industry was largely capital-intensive and state-owned. The level of industrial development in Vietnam was lower than that in the comparator countries when they launched the EOI strategy, but this could be judged an advantage for Vietnam since industrialisation under the import-substitution strategy that preceded EOI was generally inefficient. Vietnam's only disadvantage vis-à-vis its comparators was its relatively weak, practically non-existent private enterprise sector, but that was something other countries had demonstrated could be developed quickly by establishing a policy environment conducive to private investment that could draw on surplus labour in the countryside. There was no reason to doubt that Vietnam could and likely would follow the trail of its successful neighbors, possibly even surpassing their success.

In the early 1990s, Vietnam did, in fact, adopt many of the policies associated with EOI and subsequently, for about a decade, enjoyed relatively rapid growth, although not quite as rapid as the growth of the comparators during their take-off phase of EOI. Since 2006, however when Vietnam was at long last about to join the World Trade Organization (WTO), the momentum of export-oriented industrialisation dissipated and the economy entered a prolonged (and still ongoing) period of declining growth and rising macroeconomic instability (Pham and Riedel 2012).

Not surprisingly, many observers proclaim that Vietnam is stuck in the ‘middle-income trap’. The middle-income trap is routinely associated with the export-oriented industrialisation strategy which, it has been argued, leads to a dead end where prosperity is limited to the level of productivity of unskilled workers in labour-intensive manufacturing (Ketels et. al. 2010; World Bank 2010a). Calls for a new growth model and a new industrialisation strategy in Vietnam are commonplace.

This volume is a tribute to Hal Hill, one of the most distinguished and internationally renowned Australian development economists and a stimulating, considerate, and compassionate colleague and friend. Over a highly productive career spanning almost four decades, Hal has greatly advanced our understanding of the process of economic development and policy challenges, using Southeast Asia as his laboratory. The enthu-siastic response to our invitation to contribute to this volume from such a distinguished group of scholars who are at the forefront of their own chosen subject areas is a reflection of the high regard and esteem in which Hal is held in our profession. The span of nationalities of the contributors testifies to the international dimension of his research interests. We feel privileged to have the opportunity to compile and introduce this volume in honour of Hal Hill, ‘the economist and the man'.

Hal Hill was born in Melbourne in 1948. He grew up in three cities (Melbourne, Ballarat, and Bendigo) as his family moved with the postings of his father, a school headmaster in the Victorian public school system. Hal's original career ambition was to become a schoolteacher, following in the footsteps of his father.

After delaying sitting for the Higher School Certificate by one year to captain Bendigo High School's tennis team, Hal entered Monash University in 1967 under a Secondary Teachers Scholarship offered by the Victoria Department of Education. He graduated from Monash in 1970 and obtained a Diploma in Education from La Trobe University the following year.

Following a career experiment combining secondary school teaching with winemaking, Hal returned to Monash in 1973 as a Master's student. During the final year of this program, he was captivated by a seminar on the Indonesian economy given at Monash by Professor Heinz Arndt, the then Head of the Division of Economics (later renamed the Arndt-Corden Department of Economics) in the Research School of Pacific Studies (RSPS) of the Australian National University (ANU). In 1976 Hal moved to the ANU under a Commonwealth Postgraduate Research Award to undertake doctoral research under the joint supervision of Heinz Arndt and Peter McCawley.

After completing his PhD in 1980, Hal spent two years as a visiting scholar in the School of Economics at the University of Philippines, one of Southeast Asia's leading universities, under the International Devel-opment Program of Australian Universities and Colleges.

This chapter examines the effects of the recent resources boom and the government policy response on the structure of employment and incentives for human capital investments in the Indonesian economy. The key focus of the chapter is on the slow manufacturing growth and its implications for the demand for labour and, in particular, human capital development in the economy. It is argued that, in the absence of countervailing policies to mitigate the Dutch disease effects on the manufacturing sector, the resource export boom will tend to reduce growth of ‘good’ (i.e. skilled) jobs and will lower returns to education, especially at more advanced levels. In the long term the economy may, therefore, be less well positioned to make a transition to growth based on skills and innovation, but avoiding the ‘middle-income trap’.

The chapter begins with an overview of structural changes in the economy from a historical perspective, with a focus on how the resource export boom and government policy response impacts on manufacturing performance and the theoretical underpinnings of the postulated relationship between manufacturing performance and return to education. The next section provides an analytical narrative of the changing structure of employment and real wages in Indonesia. The following section reports the results of an econometric analysis of the impact of changes in the structure of labour-demand earnings, job security, returns to skills, and other factors likely to influence long-term economic wellbeing. The final section presents a summary of the key findings and policy implications.

INDONESIAN GROWTH AND STRUCTURAL CHANGE IN THE 2000s

In the 1980s and 1990s, the share of manufacturing in Indonesian GDP and merchandise exports increased continuously. At their peak in 2000, manufactures accounted for 29 percent of GDP and 57 percent of merchandise exports. In the subsequent decade, there has been a notable decline in these shares, falling to 24 percent of GDP and 34 percent of exports by 2012—the same as their 1993–94 levels.

The time pattern of manufacturing's share of GDP is generally expected to be non-linear as, with rising wealth, skill-intensive services become increasingly important sources of comparative advantage and income. Thus, the timing, pace, and extent of the decline in Indonesia appears unusual. This is evident in Figure 8.1, which plots manufacturing's share of GDP against the log of per capita income for a comparable group of East and Southeast Asian economies.

The existence and significance of ASEM as a forum for inter-regional relations between Asia and Europe is little appreciated in both regions, and even less in the rest of the world. Within Asia, only a small number of state officials and non-official actors have any real understanding of, or engagement with, ASEM. Nevertheless, ASEM has survived and even enlarged. Most Asian leaders have continued to attend the ASEM summits despite the frequent failure of their European counterparts to attend with a complete team and despite little attention being given to this inter-regional institution. Why is this? What has ASEM delivered to its Asian partners? If the sceptics and critics are right about ASEM's weaknesses, why has it been maintained? This puzzle provides the rationale for this investigation into why and how ASEM has sustained, from the Southeast Asian perspectives, given the challenges in maintaining multidimensional relations and the inter-regional character of ASEM. This concluding chapter brings together the various strands of the overarching arguments in this study, and in so doing seeks to make a contribution to the literature of ASEM.

Whereas other studies of ASEM have indicated the challenges and what have been perceived as failures of these inter-regional relations, a distinctive feature of this study is its focus precisely on the question of why ASEM has endured as long as it has. Scholarly articles and reports during the initial years of ASEM mostly consist of the excitement and hopes for the new framework of relations written in neoliberal perspectives or historical-cultural points of view (Stokhof and van der Velde 1999; CAEC 1997; Dent 1997/1998). The positive tone, however, largely disappeared and was replaced by the negative assessments and criticisms of ASEM when the relevance of the inter-regional relations seemed to wane after the Asian financial crisis (Dent 1999; Forster 1999; Richards and Kirkpatrick 1999). In addition, the relevance of ASEM was questioned after the attack on U.S. territory in 2001.