To change its lagging labor force, Indonesia must take the long view.

Indonesia’s human capital development is middling. The Asian Financial Crisis resulted in a long-lasting premature transition to a services-based economy, with the resulting jobs having few opportunities for upskilling, let alone allowing people to enter the middle class. To change this, the new administration must reorient its focus to labour force productivity, which would include both domestic structural transformations and promoting high-skill labour migration.

After a decade of infrastructure development, it is time for the new Indonesian President Prabowo Subianto to focus on human capital development. To do this, the country must shift its understanding of productivity.

Indonesia scores lower on human capital metrics than its regional peers — ranking 0.54 out of 1 on the World Bank’s Human Capital Index and fifth out of 10 on the International Labour Organization’s ASEAN Labor Productivity ranking. Prabowo aims to boost human capital development through a Rp 400 trillion investment in the Free Nutritious Meal program for schoolchildren, which may improve upstream productivity issues but is plagued with logistical issues and criticism. Prabowo’s administration should not overlook a complementary downstream strategy — reforming Indonesia’s labour force.

Very few jobs being created in Indonesia today provide a pathway to the middle class. The country’s labour productivity is significantly lower than China’s and India’s, despite the similar labour demographics. This disparity can be traced to the 1997 Asian Financial Crisis, which led to Indonesia’s premature deindustrialisation in the early 2000s. Pre-crisis, rapid growth was driven by a manufacturing-led economy, representing 32 per cent of GDP. This share declined before Indonesia reached the necessary growth levels to transition to a knowledge-intensive service sector.

This marked the ‘downfall’ of Indonesia’s industrialisation. One key factor was the export basket shifting from majority of machinery and electronics to natural resources. The employment landscape also changed, with two-thirds of the workforce moving into low-end service jobs. Informal employment also rose to 70 per cent, as formal employment declined and people moved to rural areas. These persisting trends reflect the government’s inability to create middle-class jobs and develop a supply of skilled labour. In contrast, China and India were relatively insulated from the crisis, allowing industrialisation.

Against this industrial policy failure, Indonesia’s longstanding labour migration policy served as an employment buffer. The traditional focus on sending low-skill labourers abroad under private-to-private schemes continued, reaching 79 per cent of placements in 2023, with half being women employed as caregivers and housemaids. This number is alarming, considering such domestic occupations are vulnerable to abuse and offer little upskilling. The challenge in transforming this regime lies in the labour migration’s decentralised nature — hindering authorities’ ability to regulate, monitor and reform.

Less-educated labourers seek low-skilled jobs in neighbouring countries, opening a gap for local recruitment agencies to exploit and send undocumented migrant labourers abroad without proper training. Meanwhile, provincial governments, prioritising poverty reduction, emphasise quantity over quality in job placement. The Ministry of Manpower’s current push for more government-to-government agreements targeting higher-skilled occupations will be insufficient without a deeper understanding of these dynamics.

There are also 250,000 Indonesian emigrants in OECD countries. About 70 per cent are economically active, and over 50 per cent are highly educated. This indicates many of Indonesia’s skilled labourers are students who transition to working abroad. Yet this number is still low compared to India’s and China’s respective 3.12 million and 2.25 million.

For China and India, labour migration expands their global presence and facilitates a ‘brain-circulation’ to transfer knowledge. Both countries started early in the game — China began encouraging citizens to move abroad during the 1970s to catch up with global development. Through its Belt and Road Initiative, China has invested in infrastructure projects that bring workers to 150 countries.

India saw a rise in students studying abroad in the 1980s and 1990s, followed by a migration of professionals to the United States. Indian-born Silicon Valley entrepreneurs today raised capital from Asia’s financial markets and built Bangalore’s information and communication technology industry. China and India now account for 50 percent of global productivity growth.

Indonesia’s human capital development strategy is missing this focus on labour force productivity. Prabowo should focus on ensuring that people have access to opportunities. As labour productivity increases through cross-sector structural transformation and intra-sector efficiency, his administration needs to invest in training low-skilled labourers while promoting high-skilled workers abroad.

Structural transformation is critical to training the labour force. It would reallocate 40 per cent of low-end service sector employment to the manufacturing sector and 60 per cent of informal employment to formal jobs. Particular attention should be given to the recent rise of informal jobs on social media platforms. While such informal jobs are accessible with minimum qualifications and generate substantial incomes for many, they hamper Indonesia’s skill accumulation and the development of domestic industries.

Prabowo’s prioritisation of resource downstreaming may invigorate reindustrialisation. But his administration should leverage this economic nationalism into a broader human capital strategy. One example is incorporating semiconductor education into vocational educational and training programs to prepare skilled supply for the labour-intensive industries.

Promoting high-skilled labour abroad could enhance specific sectors’ efficiencies, particularly through skill accumulation. China and India have gradually seen the benefits of labour migration through knowledge transfers. Prabowo could lay the groundwork for a strategy that integrates this long game into its broader development and foreign policy agendas. Indonesia can be more strategic in sending its high-skilled workers to targeted sectors that serve domestic industrial needs. Diversifying OECD destination countries is also crucial for Indonesia’s broader ambition to become a regional investment hub.

Human capital development agenda must create decent jobs and opportunities for skill accumulation. Indonesia needs to shift from a ‘brain drain’ to ‘brain gain’ mentality that views each labour as an investment in Indonesia’s own knowledge and innovation. Transforming Indonesia’s human capital is a long game — one well worth playing.