Indonesia’s Footwear Industry Hurt by Minimum Wage Growth Uncertainty
Foreign investors continue to be concerned about rapidly rising minimum wages in Indonesia. In Indonesian media it was reported that a total of sixteen investors, mostly from South Korea and Japan, cancelled their plans to establish footwear factories in Indonesia due to uncertainty over Indonesian minimum wage growth. In the last couple of years, minimum wages in Indonesia have grown sharply, possibly as a result of politicians looking for popular support ahead of regional elections.
Concerns about Indonesia’s minimum wage policy are not new. In recent years, minimum wages have grown significantly (in some provinces by an annual double digit growth figure for two consecutive years). As the minimum wage in the Greater Jakarta region became too costly, dozens of footwear manufacturers moved their plants to East Java or to other ASEAN member countries where wages are more competitive (such as Cambodia and Vietnam) in the past couple of years. Due to growing uncertainty about the country’s minimum wage policy, global credit rating agency Fitch Ratings warned last year that Indonesia needs to ensure that minimum wage growth is in line with the country's productivity growth in order to safeguard a conducive investment climate and stable economy.
Eddy Widjanarko, Chairman of the Indonesian Footwear Association (Aprisindo), confirmed that (uncertainty over) minimum wage growth is a main obstacle to foreign direct investment (FDI) in the country’s footwear industry. The footwear plants that were to be established by the sixteen foreign investors from South Korea and japan would have had a combined value of IDR 4.8 trillion (about USD $379 million). Widjanarko advises the government to provide more certainty about this matter, for example by revising minimum wages only once every five years so investors can make better calculations regarding their investment projects. He added that Indonesia, Southeast Asia’s largest economy, failed to achieve its USD $5 billion footwear export target in 2014, partly due to the cancelled investment projects of foreign investors. In 2014, Indonesia exported USD $4.1 billion worth of footwear, up 6.4 percent from the preceding year.
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