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Inside Story

Narrowing Asia's gap between rich and poor

Will raising minimum wages in Indonesia and China help or hurt the lowest paid?
Last Modified: 07 Feb 2013 15:01

China and Indonesia have agreed to increase minimum wages to help narrow the gap between rich and poor.

The countries' economies are among the fastest growing in the world, but they are also witnessing growing social unrest.

Millions remain in poverty and workers are increasingly taking to the streets, holding strikes and protests to press their demands for more money.

"I think the minimum wage will hurt the economies of Indonesia and China because markets should determine the wage floor of the workers. If you put a minimum wage rate in the economy it creates distortion, it creates inefficiency, and it creates deadweight loss for the economy .... Most of it is done by politicians and politicians don't understand economics, they don't understand finance, they are more interested in holding on to their power. It hurts the least skilled workers who get slaughtered when the minimum wage rate is applied because most of the corporations they don't accept that and markets don't accept that."

- Shan Saeed, an economist and financial consultant

And it appears to be working. Salaries are being increased for the lowest paid workers. But the new minimum wage policy is likely to have a significant impact on the workforce in China and Indonesia.

Around 128 million people in China's rural areas have been defined as poor, earning an average of $368 a year.

China's government is proposing a minimum wage equivalent to 40 percent of average urban salaries. Based on a figure of $8,760 for Beijing, that would give a minimum wage of $3,504 a year - 10 times the average for China's rural poor.

In Indonesia, the governor of Jakarta has agreed to raise the minimum wage in the capital to $2,736 a year. That is an increase of 40 percent, and six times more than the global poverty level of $456 a year, as defined by the World Bank.

The concept of a minimum wage is not new. It was first established by New Zealand back in 1894 and has since been adopted by most countries. France offers the best deal with 60 percent of average earnings - working out at $12.40 an hour.

New Zealand has agreed on 59 percent, but of a higher average salary, giving $12.75 an hour. Britain has set a standard of 48 percent, giving $9.68 an hour.

And the US and Japan have set their benchmarks at 38 percent of average salaries: Japan's minimum wage ranges from $6.50 to $7.80, while the US has a minimum wage of $7.25.

So could raising wages in Indonesia and China burden production costs and hurt the people it is meant to help?

To discuss this, Inside Story, with presenter Sami Zeidan, is joined by guests: Said Iqbal, the president of the Federation of the Indonesian Metal Workers Union and leader of the Indonesian workers' protest movement; Rajiv Biswas, the senior director and Asia Pacific chief economist for IHS Global Insight; and Shan Saeed, an economist, financial consultant and adviser to companies in the Asia region.

"If we look at China, one of the big concerns is the growing disparities in incomes, particularly between coastal China and inland provinces. There is a lot of concern about the risk of social unrest and imbalances have developed in the Chinese economy, with a lot of benefits of economic growth going to the profits of the corporate sector. And one of the new government focuses and policies is to try to redress the balance because consumption as a share of GDP has declined for 30 years and it's now only one-third of GDP. This is not a sound balance for the future of the economy. In the last few years we have seen quite high increases in minimum wage increases for workers in China and that's starting to help in boosting private consumption .... It's not a magic solution but over the next decade we would expect to see that consumption as a share of GDP should gradually start to improve ....

Wages are still very competitive by Asian standards in Indonesia, but they can't forever compete just on pure low-cost unskilled labour .... We need to see more action from the corporate sector and the government to boost productivity."

Rajiv Biswas, the senior director and Asia Pacific chief economist for IHS Global Insight


 

ASIA'S ECONOMIC GROWTH

  • China's economy, the world's second largest, grew by 7.6 percent last year, albeit down from 9.1 percent in 2011
  • The Phillipine economy exceeded forecasts to grow by 6.6 percent in 2012, surging past the previous year's mark of 4.4 percent
  • Indonesia is at 6.2 percent, down from 6.5 percent in 2011
  • Europe's largest economy, Germany, could only manage growth of 0.7 percent last year - down from a modest three percent the year before

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Source:
Al Jazeera
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