Challenges to Labor Market Policy in Emerging States

Challenges to Labor Market Policy in Emerging States

Jafar Suryomenggolo (National Graduate Institute for Policy Studies)


For many emerging states, formulating national economic policy vis-à-vis the labor market is part of the country’s development strategy. Such policy is mostly designed within industrial and macroeconomic management, and introduces and establishes new institutions in order to create favorable economic conditions. Resources, including labor, are integrated in an attempt to boost the nation’s economic development and ultimately improve the welfare of the entire population. In other words, labor market policy is about how the working population is conceived, managed, and regulated to support development objectives.

Law and legal institutions are considered part of this process. They matter because legal rules define and guarantee property rights, which are a precondition for economic development (see North 1990; Gray 1991). As such, law is not merely an abstract idea of justice, but has assumed specific functions, in particular, as an instrument to support and protect economic activities for development. International donors, such as the IMF and World Bank, advise and encourage emerging states to reform regulations that are often considered “out-dated” or “unfriendly” to business, and to set up “independent” institutions (sometimes, outside the judiciary) to combat political cultures characterized as corrupt and based on cronyism or worse, on “political dynasties.”

Indonesia provides an interesting example of this trend. During the 1970s -1980s, under the developmental state of the New Order regime, the country implemented a number of development projects, and by the early 1990s, was enjoying an impressive 8-9 percent annual economic growth. “Pembangunan” (development) became the key word of the day even though only a small fraction of the population, that eventually gave birth to the urban middle class, were enjoying the fruits of that development. The 1997 Asian financial crisis hit Indonesia hard and brought a dramatic political change in May 1998.

The IMF came to “rescue” the economy and introduced priorities that included a “good governance” project to transform the country’s public institutions in a battle against the widespread political ills of “KKN” (Korupsi, Kolusi, Nepotisme or Corruption, Collusion, Nepotism).  Legal reform was prescribed to increase institutional transparency and build the credibility of the newly democratizing government. And more importantly also, to safeguard national economic interests and improve corporate governance. A number of new legal institutions and business practices were introduced, transplanted, and developed to “democratize” Indonesia’s politics and liberalize its economy. Along with the economic restructuring program of the IMF, “labor law reform” was on its way: by as early as September 1998, Indonesia had signed a technical assistance agreement with the ILO to draft new labor regulations and ratify all eight fundamental ILO conventions. Basic labor rights are indeed now acknowledged in the written laws of Indonesia (in comparison to the complete absence of such laws during the oppressive New Order regime). However, the new set of labor regulations are designed to accommodate “labor market flexibility” in order to turn and maximize Indonesia’s demographic bonus as its “competitive advantage” by offering cheap labor in the global economy.

The Indonesian economy has performed well during the past ten years according to indicators of economic growth and labor productivity (stable and growing strongly, respectively). However, most of the country’s policymaking is still based on textbook economic prescriptions with generic and piecemeal solutions to technical problems. Income inequality remains a major issue. The KPK (Komisi Pemberantasan Korupsi or Corruption Eradication Commission) may have uplifted the general image of Indonesia’s public institutions, but legal reform is still far from securing an independent judicial system.  Labor court, a new institution established under the labor law reform, may perform efficiently as required by the law (to be “speedy, correct, just and inexpensive”), but with widespread employment insecurity in the labor market, workers find the labor court’s business of delivering justice hardly relevant to their day-to-day struggle to merely stay on the job, regardless of how precarious that job is. Tjandra (2016) notes that even when labor wins their case in the court, they are not satisfied with the overall performance of the court, as it often emphasizes formal procedures and many of its decisions have become “paper tiger.”

Indonesia’s experience of “labor law reform” illustrates how legal reform in emerging states may introduce, develop, and establish new institutions in the hope of delivering justice, but in the process becomes disconnected from the people (in Indonesia’s case, from the country’s working population) and from the intended outcomes of the formal judicial institutions. In turn, the people may question for what and for whom the reform is intended. Thus, fulfilling and maintaining constitutional obligations to improve welfare for the whole population becomes a major challenge for emerging states when crafting labor market policy.



Gray, Cheryl W. 1991. “Legal Process and Economic Development: A Case Study of

Indonesia,” World Development 19 (7): 763-777.

North, Douglas. 1990. Institutions, Institutional Change and Economic Performance.

Cambridge: Cambridge University Press.

Tjandra, Surya. 2016. Labour Law and Development in Indonesia. PhD. dissertation,   Leiden University.