A Critique of the Orthodox Approach to Indonesia's Growth and Employment Problems and Post Keynesian Alternatives

Anis Chowdhury and Iyanatul Islam

American Journal of Economics and Sociology, 2011, vol. 70, issue 1, pages 269-299

Abstract: Indonesia continues to bear the scars of the 1997 financial crisis, with the highest open unemployment rate in Southeast Asia. The orthodox interpretation is that the post-crisis era is typified by overly generous labor legislation granting higher minimum wages and other provisions; the rise in real wages adversely impacted the investment climate and employment growth. However, detailed sectoral analysis reveals very little evidence of a wage‐driven profit squeeze. This article contends that Indonesia's current unemployment woes are best understood as the reflection of a demand‐constrained economy, where important sectors are operating at around 70 percent of their capacity. It, thus, outlines an alternative macroeconomic policy framework in the Post Keynesian tradition.

Date: 2011
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