Nike in Indonesia – employing more than a hundred thousand workers

CROSSROADS (Toward Philippine Economic and Social Progress) - Gerardo P. Sicat - The Philippine Star

Indonesia is the most populous country of ASEAN with 243 million people. This is 2.4 times the Philippines’ population. Nike – the shoe company that produces those famous athletic shoes – set up factories in Indonesia because of the low wages there.

Today, typical workers can earn the equivalent of around $3.50 per day, which for a six day work-week amounts to $21. This is equivalent to P861 per week (at P41 - $1), P3,444 per month.

“Nike is highly labor-intensive.” Initially, Nike produced most of its shoes elsewhere in East Asia. As labor costs rose in these older locations – Japan, South Korea and Taiwan – Nike relocated its factories to China, Thailand, and Indonesia. Today, Nike also has plants in Vietnam.

Nike is not alone among world class enterprises. When faced with high costs of labor, they move capital to where costs could be cut. Thus, capital migrates to places where labor is available.

In Indonesia, Nike found a country with a supply of cheap labor. Even with its minimum wage policy, that “minimum wage” (then) was low enough to become an attractive incentive rather than a turnoff in their cost calculations.

Over the years, Nike expanded its factories across the country. They found labor in almost inexhaustible supply especially in poor urban areas around the island of Java. Tapping this labor, they trained and raised the industrial efficiency of Indonesian workers.

It helped that during the late 1980s, Indonesia undertook a major opening of its economy toward greater competition. They removed major trade and industrial barriers. They dismantled monopolies and stimulated competition within the whole economy. This happened despite the maintenance of remnants of protection in some sectors.

I have not seen actual employment figures, but according to some estimates Nike has around 171,000 employees associated with its factories and enterprises in Indonesia. Even if such reports may be widely off the mark, Nike’s direct scale of operations is truly large. Indonesia is the third biggest supplier of Nike sourced output for this giant corporation.

“Mutually beneficial experience.” Indonesia has gained substantial benefits from its association with Nike. In fact, it is a mutually beneficial relationship between Indonesia and Nike.

For Indonesia, many workers found steady jobs and the country managed to expand its share of world class industrial manufacturing for the international economy. (I am most interested on the benefits to the Indonesian economy. On this point, I will explain later). Globally, Indonesians feel a psychic sense of having arrived, producing a good that almost everybody wants to own.

On the part of Nike, access to Indonesia’s low cost labor enabled the company to maintain and expand its economic position. The success of the shoe business made it expand into garments and the production of other athletic equipment.

“Nike attracts criticism.” Nike’s success made it the central focus of attack by labor critics. Nike’s Indonesia operations have become a cause célèbre for do-gooders out to demonstrate vile corporate sins against labor.

A common criticism is that Nike exploits the poor countries where its factories are located. Denouncers call them sweatshops. They accuse the company of engaging in poor labor practices, paying its workers miserable wages, and pointing out unsafe or dangerous operations.

Of course, these criticisms have been made before. Many developing countries with successful growth stories were once industrial low wage workshops: Japan, China, Hong Kong, South Korea, Taiwan, and Thailand. Such countries have now moved out of the sphere of “sweatshops” and have become great industrial examples to the world.

“ ‘Labor employment zone’ idea in relation to the Nike factories.” I cited the Nike factories in Indonesia to demonstrate the effectiveness of employment–increasing policies. (In a country like ours where the minimum wage has become a high barrier toward employment creation, screening off such factories into labor employment zones like our export processing zones could become weapons for eradicating high unemployment and underemployment levels.)

In Indonesia, the Nike factories are a component of permissive national policies involving employment. They were located in the rural towns and in far off poorer regions and have helped to rescue thousands of families from poverty and the consequent malnutrition and illiteracy of their children. They helped to replace seasonal work with-year-round jobs, thereby banishing chancy employment patterns.

Several outcomes from this economic process – which many of our politicians and labor groups turn a blind eye to – began to take hold in the following way:

• A lot of women were employed in the factories, sometimes from the same family. The wage provided steady supplemental income to poor households. When additional members of the same family are employed, family incomes are multiplied.

• The aggregate wage bill paid by the factories raised the disposable incomes of the whole community. Such incomes spent induced new commercial and industrial activities to take place, therefore causing new and indirect employment within the community and the whole economy.

• Those who got employed received steady incomes that helped to contribute to their pension funds from the company. In addition, having sustained incomes enabled workers to save for their own investment needs as households: to improve their own housing; to have better health care and nutritional maintenance for the family; to improve their transport means; and, most of all, to raise their capacity to send their children to school and broaden their family goals.

In short, employed workers became productive citizens, essentially able to function on their own and not become dependent on the state for handouts, subsidies, and charities.

“New Indonesian minimum wage dynamics.” The Indonesian government recently went bold by raising minimum wages to levels much higher compared to the low and customary minimum wages of the past. Now the country faces new problems – the potential loss of many jobs already in place.

The problem also affects the Nike factories. In the face of low world demand, Nike also encounters problems of cost adjustments, even retrenchments. That means raising worker productivity through mechanization and eventual reduction of workers. There are nearby countries in Southeast Asia that also beckon as potential sites for Nike.

Many workers in Indonesia, facing potential loss of their jobs, have supported the request of the Nike plants to be exempted from the requirement of the new minimum wage. There are a lot of workers who would prefer to receive less than the mandated minimum wage rather than suffer loss of their jobs.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

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