Mulyani Kuncoro 2021 Improving Competitiveness

Bulletin of Indonesian Economic Studies
ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/cbie20
Improving Competitiveness Through Vocational

and Higher Education: Indonesia’s Vision For
Human Capital Development In 2019–2024
Sri Mulyani Indrawati & Ari Kuncoro
To cite this article: Sri Mulyani Indrawati & Ari Kuncoro (2021) Improving Competitiveness
Through Vocational and Higher Education: Indonesia’s Vision For Human Capital
Development In 2019–2024, Bulletin of Indonesian Economic Studies, 57:1, 29-59, DOI:
10.1080/00074918.2021.1909692
To link to this article: https://doi.org/10.1080/00074918.2021.1909692
Published online: 16 Apr 2021.
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Bulletin of Indonesian Economic Studies, Vol. 57, No. 1, 2021: 29–59
Policy Perspectives
IMPROVING COMPETITIVENESS THROUGH VOCATIONAL

AND HIGHER EDUCATION: INDONESIA’S VISION
FOR HUMAN CAPITAL DEVELOPMENT IN 2019–2024
Sri Mulyani Indrawati*

Ministry of Finance, Republic of Indonesia, and Faculty of Economics and Business,
Universitas Indonesia
Ari Kuncoro
Faculty of Economics and Business, Universitas Indonesia
This article explores Indonesia’s readiness to upgrade its human capital in response
to changes in population and economic structure in order to harness the technological
advances of the Fourth Industrial Revolution. The symptoms of premature deindustri-
alisation can be clearly observed in Indonesia, suggesting that it needs to improve its
productivity to adapt to digital disruption and structural economic change. Supply-
side advancement will require infrastructure and human resource development. On
the production side, Indonesia will need to revitalise its manufacturing, service and
resource-based sectors, treating them as value chains to be integrated into global
networks. Indonesia’s education policy framework to upgrade human resources and
improve the country’s competitiveness focuses on five areas: access to education;
quality of education; synergies between government, industry and higher education;
industry linkages; and incentives. Meanwhile, the disruption caused by the Covid-19
pandemic is forcing the Indonesian education system to instantly revolutionise its
teaching methods to adapt to pandemic and post-pandemic conditions.
Keywords: education, Fourth Industrial Revolution, human capital, productivity, reform,

structural change
JEL classifications: O14, O15, O33, I28
INTRODUCTION
To generate and maintain rapid economic growth, developing countries must
undergo an internal process of structural change (Todaro and Smith 2011). This
process is characterised by declining shares of output and labour in the agricultural
sector and increasing shares in industry and services. Like many other countries,
* The authors thank Teguh Dartanto, Kiki Verico, Qisha Quarina, Fandy Rahardi and Faizal
Moeis for their valuable input and excellent research assistance.
ISSN 0007-4918 print/ISSN 1472-7234 online/18/00029-59 © 2021 ANU Indonesia Project

http://dx.doi.org/10.1080/00074918.2021.1909692
30 Sri Mulyani Indrawati and Ari Kuncoro
FIGURE 1 Value Added in Agriculture, Manufacturing

and Services, 1983–2017 (% of GDP
50 Services Manufacturing Agriculture

43.6
42.4
40 33.4
39.3
32.0
30 37.1
26.8
24.1
21.5
20.2
20 19.6 22.7
19.7 15.3
16.1
10 13.4 13.2
0
1986 1990 1994 1998 2002 2006 2010 2014 2018
Source: World Development Indicators.
Indonesia has experienced changes in its economic structure; the share of output
of the manufacturing sector overtook the share of the agricultural sector in the
early 1990s, while the share of the services sector has remained consistently high
(figure 1).
Indonesia’s industrial sector started to grow rapidly in the late 1960s, establish-
ing the country as a significant industrial exporter by the mid-1980s. This growth
stopped abruptly when Indonesia was hit by a major financial crisis in 1997–98.
Since the crisis, the share of the industrial sector in GDP has tended to decline,
giving rise to warnings of premature deindustrialisation (Aswicahyono, Hill and
Narjoko 2011, 2013). This phenomenon deserves attention, because a strong and
competitive industrial sector is needed to create jobs and improve productivity
(Narjoko and Putra 2015).
The structural transformation from agriculture to modern sectors has been
accompanied by a change in the skills required in the labour market. Moeis et al.
(2020) find that, contrary to conventional wisdom, agricultural workers who move
into a non-agricultural (modern) sector as the economy becomes more advanced
do not necessarily become better off. Today’s labour market rewards social or
soft skills as the economy shifts towards services, and values critical thinking and
creativity, in addition to the mastery of technology, to develop a strong and com-
petitive manufacturing sector (Kuncoro 2012).
Indonesia enjoys the advantages of a strategic location, a culturally diverse
population, a relatively young and productive workforce, and a growing middle
class. The government acknowledges that the country’s problems lie mainly on
the supply side of the economy. The recent deterioration in the current and trade
accounts, as well as slow economic growth, demonstrates the need to improve
levels of productivity. Until 2012, the commodity boom masked the country’s
supply-side weaknesses (Kuncoro 2018). Improving supply-side productivity will
Indonesia’s Vision for Human Capital Development in 2019–2024 31
require upgrading not only infrastructure but also human resources, if Indonesia
is to remain competitive in the digital era (Indrawati 2018).
Indonesia has made significant achievements in education, as shown by steady
improvements in enrolment rates and years of schooling; the net enrolment rate for
senior secondary school, for example, increased from 43.77% in 2006 to 60.67% in
2018 (BPS 2018a). The seriousness of Indonesia’s commitment to universal access
to education is apparent in the legal requirement for the government to allocate
20% of the state budget to education. However, Indonesia still lags when it comes
to educational quality: in 2018 it ranked 71 out of 77 countries in reading, math-
ematics and science, as measured by the OECD’s Programme for International
Student Assessment (PISA).1
Moreover, the labour market is still dominated by workers with low levels
of education; in 2018 about 40% of workers had a primary school education or
less, and another 18% had only completed junior secondary school. If education
is a signal for worker productivity, as most of the literature in labour economics
assumes (see, for example, Borjas and van Ours 2010), then Indonesian work-
ers’ low levels of education raise doubts about whether Indonesia can prepare its
human resources to confront the changes in economic structure that are taking
place, towards modern sector dominance and the advanced technologies of the
Fourth Industrial Revolution.
The shift towards services and high-tech industries has created demand in
the labour market for more complex skills. This implies that educational institu-
tions will need to give students the skills to meet labour market expectations. In
other words, the type of education that schools and tertiary institutions provide
must be suited to the economic changes taking place (as suggested by Kiel 2016).
In response to this challenge, Indonesia must not only broaden access to educa-
tion but also ensure that the education provided is in line with changing labour
market demand.
Indonesia’s education policy framework to support human quality enhance-
ment focuses on five areas: access to education; quality of education; synergies
between government, industry and higher education; industry linkages; and incen-
tives. Indonesia has been attempting to improve access to higher education in
particular and to lift the quality of education across the nation. The government
has also been refining the vocational education curriculum to meet actual market
demand. It provides substantial fiscal incentives for education, such as tax exemp-
tions for books as well as incentives for R&D and vocational training (Indrawati and
Kuncoro 2019). These reforms are intended to increase Indonesia’s competitiveness
and pave the way for it to become an advanced country.
This article aims to explore Indonesia’s readiness to upgrade its human capi-
tal in the face of structural economic change and the technological advances of
the Fourth Industrial Revolution. It focuses on the education system, particularly
secondary vocational education and tertiary (higher) education because of their
relevance to the labour market. Vocational schools and training institutions will
need to provide the new skillsets required by the economy, including agility and
1. See https://factsmaps.com/pisa-2018-worldwide-ranking-average-score-of-mathematics-
science-reading/
adaptability. In Indonesia, students can enrol either in formal degree programs

in vocational schools, polytechnics and community colleges, or in the short-term,
non-degree programs offered by, for example, the government’s work training
centres (BLKs). The role of tertiary (higher) education, meanwhile, is to equip
workers with the advanced cognitive and soft skills that enhance critical thinking
and creativity, thereby increasing the country’s capacity to undertake R&D and
promote innovation.
This article has three main objectives: to describe the current challenges in the
Indonesian economy in the context of structural transformation and the Fourth
Industrial Revolution; to examine existing education policies in Indonesia in rela-
tion to fiscal policies; and to make recommendations on government policies to
strengthen vocational and higher education. In addition, the article outlines the
adjustments that are being made to the education system and to education policy
to cope with the challenges thrown up by the Covid-19 pandemic. The outbreak has
created a fundamental crisis for the education sector, particularly higher education,
not just in Indonesia but around the globe. Like other countries, Indonesia has been
forced to make abrupt changes to teaching processes as it seeks to adapt to the
‘new normal’ of Covid-19. But despite the real challenges of providing education at
this time, the pandemic may also provide a window of opportunity for Indonesia,
and especially the education sector, to accelerate its transformation towards the
Fourth Industrial Revolution.
The article proceeds as follows. Section 2 provides a literature review and a
framework for discussing structural economic change, new skillsets and human
capital. Section 3 discusses Indonesia’s economic structure and competitiveness,
section 4 examines the country’s technological capability and section 5 looks at the
quality of human capital in Indonesia. Sections 6, 7 and 8 focus on different aspects
of government policy with regard to vocational education and higher education,
including the government’s response to Covid-19. We summarise our thoughts on
the way forward for Indonesia in the conclusion.
LITERATURE REVIEW AND FRAMEWORK: STRUCTURAL CHANGE,

NEW SKILLSETS AND HUMAN CAPITAL DEVELOPMENT
Before the twenty-first century, many believed that to succeed in the workplace,
one needed above all to be good at reading, writing and arithmetic (Kiel 2016).
These academic skills—sometimes referred as hard skills or cognitive skills—were
thought to be the main determinant of worker productivity. Certainly, hard skills
are the main determinant of productivity and wages in the traditional human
capital model of wage determination (Groves 2005; Kiel 2016). However, Groves
(2005) insists that more than 60% of the variance in wages cannot be explained by
standard human capital models of wage determination, indicating that hard skills
alone do not explain the effect of human capital on labour market outcomes. Today,
there is a growing acknowledgement of the importance of soft skills, alongside
hard skills, in human capital development (Heckman 2000; Heckman, Stixrud and
Urzua 2006; Lleras 2008; Thiel and Thomsen 2013).
Soft skills act as a complement for workers to use hard skills more efficiently
(World Economic Forum 2016a, 2016b). The whole package of human capital deliv-
ers better labour market outcomes and long-term socio-economic achievements
FIGURE 2 Framework for Human Capital Investment

in Response to a Changing Environment
Human Production
Challenges Human capital investment capital stock process Goal (return)
Structural Higher Work Cognitive ability Productivity Welfare of

transformation education experiences (hard skills) improvement: society
agriculture;
Industrial Vocational Vocational Non-cognitive industry;
revolution education training ability (soft skills) services
Needs: Schooling for basic literacy Other skills

new skills,
literacy &
innovation Sociocultural environment
Source: Compiled from various sources.
(Heckman 2000; Cunha et al. 2006). In the modern theory of human capital invest-
ment, soft skills, as well as hard skills, significantly affect the level of wages.
Heckman, Stixrud and Urzua (2006), for example, find that soft skills raise wages
both through their direct effects on worker productivity and through their indirect
effects on schooling and work experience.
The World Economic Forum (2016a, 2016b) emphasises that, as an economy
changes, cognitive or hard skills such as problem solving, critical thinking and
decision-making will need to be supported by soft skills. This implies that the range
of skills required in the future will expand and become more complex. A major-
ity of employers surveyed in Indonesia agree that the requirement for skills will
continue to grow (di Gropello, Kruse and Tandon 2011). These skills will include
not only job-specific skills and experience, but also soft skills such as curiosity,
flexibility, creativity, critical thinking and adaptability.
Policy-making in Indonesia is heavily influenced by the theory of human capi-
tal investment introduced by Becker in 1993. Becker argues that wage rates are
determined by the accumulation of human capital, which in turn is achieved by
investing time and resources in cognitive ability (hard skills), non-cognitive ability
(soft skills) and other skillsets. The higher the stock of human capital, the higher
the wage a worker can obtain.
The human capital stock itself comprises the skills accumulated during one’s
lifetime. In order to develop human capital, one needs to invest in areas such as
education, training and work experience. Through human capital investment, the
individual acquires the hard skills and soft skills that comprise human capital.
Those skills will later affect the productivity of the worker, with a different weight
for each economic sector. Productivity is reflected in the worker’s wage rate, which
in the long run determines the worker’s socio-economic success.
Figure 2 describes the logical framework of this article, based on the idea that
human capital is the core of development and endogenous growth. Improvements
in human capital are driven by the changes in technology known as labour-saving
technological progress. Over time, labour-saving technology leads to labour-aug-
menting technological progress—improvements in the quality of the workforce as
TABLE 1 Average Annual Growth, by Sector, 2005–18 (%)
2005–09 2010–14 2015–18
Growth Share of Growth Share of Growth Share of

Sector rate GDP rate GDP rate GDP
Agriculture 3.3 13.2 3.4 12.6 3.7 13.3

Mining 1.8 8.4 1.7 7.4 0.1 8.4
Manufacturing 4.3 26.0 5.9 25.6 4.8 22.1
Utilities 8.0 0.7 5.5 0.8 3.5 1.2
Construction 7.0 5.9 6.7 6.5 6.1 10.3
Trade 6.2 16.2 7.3 17.8 4.2 16.9
Transportation 13.2 7.0 10.7 10.2 8.2 9.3
Finance 6.3 8.9 6.6 9.7 6.1 9.0
Services 5.5 8.8 5.9 9.4 5.5 9.6
GDP 5.6 6.0 4.6
Note: Manufacturing excludes oil and gas.

Source: CEIC Asia Database.
demand for unskilled workers falls and demand for highly trained workers with
specific skills and other attributes increases. Changes in technology are an essential
part of industrialisation, resulting in either primary sector enrichment, modern
sector enrichment or modern sector enlargement. Creating the right environment
for technological change depends on human quality improvement through the
acquisition of new skills, knowledge and know-how. In the short run, the way to
achieve this is to improve vocational school quality (both education and training).
In the long run, both cognitive and non-cognitive skills need to be consistently
improved. In the end, all of these improvements will increase the value added of
economic sectors and the economic welfare of society.
To summarise, the accumulation of human capital results from the decisions
people make to invest time and other resources in family members or themselves
(Becker 1993). As well as knowing how human capital investment works, policy-
makers need to know what kinds of skills are needed in the labour market, both
now and in the future, to ensure that the economy is able to maximise the benefit
of human capital as an input for the production process.
INDONESIA’S ECONOMIC STRUCTURE AND COMPETITIVENESS

Structurally, Indonesia has shifted from having an agriculture-dependent to a more
modern, manufacturing-dominated economy. The average share of the agricultural
sector in GDP fell from about 20% in 1983–90 to 13.3% in 2015–18. The share of
manufacturing also declined, from 26.0% in 2005–09 to 22.1% in 2015–18, but at a
slower pace than agriculture (table 1).
The slowdown in manufacturing growth accounts for the modest growth of
GDP, which has averaged about 5% in the post-2000 period. Manufacturing is
no longer the prime mover of the economy; rather, it has become a drag on GDP
FIGURE 3 Scores of Selected Asian Countries on the Logistics

Performance Index (LPI), 2007–18 (1 = lowest; 5 = highest)
5 2007 2010 2012 2014 2016 2018
0
ia
a
os
m
a
re
a
nd
sh
ne
di
si
in
es
La
de
la
ay
bo
tn
Ch
ap
i
n
pp
ai
la
do
al
ie
m
ng
Th
ng
ili
V
Ca
In
Si
Ph
Ba
Source: World Bank.
growth, simply because of its dominant share of the economy. Other sectors have
been unable to compensate fully for the impact of this decline in manufacturing
growth. For example, despite registering growth of 5.5% in 2015–18, the service
sector accounts for only 9.6% of GDP, hardly enough to make up the difference.
One reason for the slowdown in manufacturing lies in the nature of the products
being made in Indonesia—the country mainly manufactures low-end products that
rely heavily on cheap labour to achieve competitiveness. The scores of a range of
Asian countries on the Logistics Performance Index (LPI) show that Indonesia lags
behind peers such as Malaysia and Thailand, and is now competing with other
low-cost producers such as Cambodia, Vietnam and Laos (figure 3). The current
Indonesian government has implemented an ambitious infrastructure program to
lower the country’s logistics costs (Indrawati 2018). As a result, Indonesia’s ranking
on the LPI rose from 63 in 2016 to 46 in 2018, driven mostly by significant improve-
ments in infrastructure, international shipments and timeliness.
The natural solution for Indonesia is to ‘move up the ladder’ by manufacturing
higher-value-added products that can sustain higher wages. This could be achieved
by upgrading the quality of the labour force and improving the country’s capacity
to innovate. The workforce continues to be dominated by workers with a primary
school education or less, although the proportion in this category fell from 62.1%
in 2000 to 40.7% in 2018 (table 2). General and vocational senior secondary school
graduates comprised about 29% of the total workforce in 2018, while junior college
and university graduates comprised 2.8% and 9.4%, respectively.
The current levels of education might be sufficient to support advanced manu-
facturing if it were not for other problems plaguing the Indonesian education
system and making its graduates less competitive than those of other countries.
TABLE 2 Workforce, by Highest Level of Educational

Attainment, 2000–18 (% of workforce)
Primary Junior General Vocational

school secondary senior senior
education school secondary secondary Junior college
Year or less education school school or diploma University
2000 62.1 15.6 13.2 4.7 2.2 2.3

2005 55.4 20.4 12.8 6.0 2.3 3.2
2008 54.0 18.6 14.0 6.6 2.8 4.1
2010 50.4 19.1 14.7 8.2 2.8 4.9
2014 47.1 17.8 16.2 9.2 2.6 7.2
2015 44.3 18.0 17.3 9.4 2.7 8.3
2016 42.2 18.0 17.2 10.3 2.9 9.4
2017 42.1 17.9 17.5 10.4 2.7 9.4
2018 40.7 18.1 18.0 11.0 2.8 9.4
Source: BPS (2018b).
These weaknesses are reflected in the low PISA scores of 15-year-old Indonesian
students in maths, reading and science. The learning process in schools still relies
heavily on rote learning, recitation and the replication of content from textbooks,
while neglecting critical and creative thinking, communication and language skills,
and logic. Teacher quality is poor. To remedy this, there is an urgent need for a
national program aimed at upgrading the technical competencies and skills of
incumbent teachers. This program could start by ‘training the trainer’, that is, by
inviting the best teachers from all over Indonesia to deliver refresher courses to
other teachers.
INNOVATION, TECHNOLOGY AND R&D

Another way to move up the value chain in manufacturing is through innovation.
Innovation depends on R&D, which is an important factor in competitiveness
(Kuncoro 2012). Yet, Indonesia still has one of the world’s lowest proportions of
R&D expenditure to GDP: just 0.08% in 2013, rising to 0.23% in 2018 (table 3).
Because of this failure to invest in R&D, the share of high-tech exports in total
manufacturing exports has been declining (table 4). Instead, Indonesia continues
to rely on manufacturing exports in resource-based industries such as palm oil
that require less technological effort and involve less risk (Kuncoro 2018). If it is
to catch up with its peers, Indonesia will need to strengthen its innovation system,
with particular emphasis on R&D.
Indonesia’s low expenditure on R&D is reflected in its total factor productivity
(TFP) growth, which ranges from a negative number to a small positive number
(below 1%). This is below the norm for comparable Asian countries such as Malaysia,
Thailand, Korea and Taiwan, which recorded TFP growth of 0.9%, 1.8%, 1.5% and
2.0%, respectively, between 1960 and 1994 (Collins and Bosworth 1996, table 6).
TABLE 3 Countries with Lowest R&D Expenditure

as a Share of GDP, 2013 and 2018 (%)
2013 2018
Country Share of GDP Country Share of GDP
Mongolia 0.23 Brunei Darussalam 0.28

Bermuda 0.22 Bermuda 0.26
Armenia 0.22 Moldova 0.25
Azerbaijan 0.21 Colombia 0.24
Uzbekistan 0.20 Indonesia 0.23
Kazakhstan 0.17 Oman 0.22
Oman 0.17 Burundi 0.21
Kyrgyz Rep. 0.15 Macao SAR, China 0.20
Philippines 0.14 Bosnia and Herzegovina 0.20
Tajikistan 0.12 Armenia 0.19
Nicaragua 0.10 Azerbaijan 0.18
Sri Lanka 0.10 Uzbekistan 0.13
Indonesia 0.08 Peru 0.13
Georgia 0.08 Kazakhstan 0.12
Peru 0.08 Mongolia 0.10
El Savador 0.06 Tajikistan 0.10
Panama 0.06 Gambia 0.07
Trinidad and Tobago 0.06 Kuwait 0.06
Macao SAR, China 0.05 Iraq 0.04
Guatemala 0.04 Mauritania 0.01
Source: World Development Indicators.
TABLE 4 High-tech Exports of Selected Asian Countries,

1997–2014 (% of manufacturing exports)
Country 1997 2005 2010 2014
Indonesia 11.6 16.5 9.8 7.0

Malaysia 49.0 54.6 44.5 43.9
Thailand 30.8 26.7 24.0 20.4
Vietnam 0.1 5.4 8.6 26.9
Philippines 66.5 70.8 55.3 49.0
India 6.5 5.8 7.2 8.6
East Asia and Pacific 27.4 32.9 27.4 25.6
(excluding high-income
countries)
Source: World Bank.

A more recent study produced a better result, estimating TFP growth of 1.7% for
Indonesia in the 2000–07 period (van der Eng 2009). However, that growth may
have originated more from technology embodied in imported capital goods (pro-
cess innovation) rather than from product innovation.
The public research system in Indonesia consists of the R&D institutes of the
Ministry of Industry and the research institutes supervised by the Ministry of
Research and Technology. The two leading government research institutes are
the Indonesian Institute of Sciences (LIPI) and the Agency for the Assessment
and Application of Technology (BPPT). Their activities are circumscribed by their
budgets and are not necessarily linked to the needs of industry. Because of their
lack of funding and bureaucratic nature, these institutes tend not to perform
as well as similar R&D institutes in developed countries. To lift their perfor-
mance, the government research institutes need to improve their organisational
culture, cultivate linkages with industry and install professional management.
Government-mandated linkages with foreign research institutes, such as the new
policy requiring domestic universities to have some type of partnership with over-
seas universities, would also help to improve their performance.
In the private sector, the R&D activities that do exist are mostly in the form of
process innovation. Process innovation occurs when manufacturers substantially
improve their production processes by introducing new equipment or re-engineer-
ing operational processes. There are three situations in which process innovation
commonly takes place: when manufacturers set up a new production line; when
they install a new production system; and when they introduce new computers
or information technology to upgrade production facilities. This type of R&D may
result in cheaper or better products but it hardly ever leads to the development
of new products. This is not to say that product innovation does not exist at all
in Indonesia. Some firms are notable for conducting R&D in Indonesia, mainly
the Japanese motorcycle companies Honda and Yamaha. However, most foreign
firms prefer to locate their R&D units in Thailand because of its ready supply of
researchers, good university system and availability of supporting infrastructure
(Frankema and Lindblad 2006).
There are four areas where the government could speed up the process of
technology development. First, it should improve Indonesia’s access to foreign
technologies, including through foreign direct investment (FDI). Second, it should
boost collaboration in education, especially vocational and higher education, to
improve the quality of the country’s human resources. Third, it should facilitate
exchanges of staff between firms, at both the shopfloor and managerial levels, to
help fill the skilled worker void caused by the ageing of the population in countries
such as Japan. This would also help generate technology and information spillovers
between the private sector, higher education institutions and the government—the
so-called triple helix model of innovation. Finally, the government should ensure
the availability of supporting services for technology development.
IMPROVING THE QUALITY OF HUMAN CAPITAL

An economy is only as good as its people. In a country facing structural change
such as Indonesia, improving the skills and capacity of the population is particu-
larly important to lift productivity and increase output. Human capital itself is
FIGURE 4 Unemployment Rate, by Level of Education, 2017–19 (%)
10 February 2017
9.3
8.9
9 February 2018 8.5
7.9
8 February 2019
7.0 7.2 6.8 6.9
7
6.4 6.3 6.2
6
5.4 5.2
5.0 5.0
5
4 3.5
3 2.7 2.7
2
1
0
Primary Junior General Vocational Diploma University
secondary senior senior I/II/III
secondary secondary
Source: BPS (2019).
accumulated through the process of education. Education adds to the stock of both
knowledge and skills, improving the ability of workers to contribute later on to the
labour market. Thus, education is the key to revitalising the Indonesian economy.
Indonesia has high levels of participation in education, with the net primary, net
secondary and gross tertiary education participation rates reaching 93.5%, 78.3%
and 36.31%, respectively, in 2018. These levels of participation are almost on a par
with those in Malaysia and India. Between 2000 and 2018, the proportion of the
Indonesian working population with a primary school education or less fell from
62.1% to 40.7%, while the share with a junior college or university education rose
from 4.5% to 12.2% (table 2). Combined with Indonesia’s demographic bonus and
the opportunities offered by the Fourth Industrial Revolution, these higher levels
of education would seem to provide the perfect environment for Indonesian firms
and entrepreneurs to lift the productivity of their workforces. So far, however, these
opportunities have not translated into instant prosperity. With unemployment rates
falling only gradually over the last five years, increases in labour utilisation have
been modest at best. Behind this phenomenon lies a cautionary tale relating to the
quality of Indonesia’s human capital.
Figure 4 shows that unemployment is higher among people with high levels
of education (those with college or university degrees) than among Indonesians
with a primary school education or less. This is discouraging, as tertiary graduates
should be the core of the innovation system, providing both the practical skills and
flexibility to keep pace with rapid technological change. Figure 4 also indicates
that the graduates of secondary and tertiary vocational institutions (vocational
senior secondary schools and colleges) have the highest levels of unemployment.
This phenomenon is quite strange given that, in theory, vocational graduates are
supposed to be particularly well equipped to provide the skills needed by firms.
FIGURE 5 Literacy Proficiency Scores as Assessed by the OECD’s

Programme for International Assessment of Adult Competencies (PIAAC)
300 292
264
250 234 234
206
200
169
150
100
50
0
Jakarta: Jakarta: Jakarta: Denmark: Denmark: Denmark:
< senior senior tertiary < senior senior tertiary
secondary secondary secondary secondary
Source: Pritchett (2016).
In both cases, the explanation may lie with the quality of the education received
by these graduates.
Although Indonesia compares well with its Asian peers in terms of education
participation, this has not translated into better learning outcomes for students.
Pritchett (2016) finds that the typical tertiary graduate living in Jakarta achieves the
same literacy proficiency score as the typical lower secondary graduate living in
Denmark (figure 5). Suryadarma (2019), meanwhile, finds that only about 10% of
Indonesians with a senior secondary education or higher can be considered to have
above 4th grade competency. These findings show that there is an urgent need to
improve the quality of education, especially higher education, in Indonesia. This
is supported by the PISA ranking of countries, where Indonesia is still stuck at 71st
place out of 77 countries surveyed. Indonesia’s low PISA scores among 15-year-old
students in maths, reading and science are rooted in its learning processes, which
rely on rote learning, recitation and replication of textbooks’ contents rather than
encouraging critical thinking, creativity, language skills and logic.
There is also the problem of skills mismatch in the labour market, both vertical
and horizontal. According to Sakamoto and Sung (2018), the incidence of vertical
skills mismatch in Indonesia was about 52% in 2015 (p. 346), while the incidence
of horizontal skills mismatch in the manufacturing sector was about 60% for voca-
tional graduates and 80% for general graduates (p. 350). These mismatches cause
surpluses and deficits of human capital in the labour market, which may translate
into lower productivity of labour, as the skills workers require to do their jobs are
not the ones they have obtained in school. This happens especially among gradu-
ates with high levels of education, as their skillsets tend to become very specialised.
Sometimes, this specialised knowledge is not in line with the needs of industry,
causing skill mismatches or pockets of high unemployment.
In the case of vocational education, Newhouse and Suryadarma (2011) find

that vocational graduates enjoy some advantages in the labour market, such as a
higher chance of obtaining formal sector jobs, while Kuncoro (2018) finds that in
sectors such as manufacturing and modern services (tourism, finance and health),
vocational secondary school graduates are in higher demand and earn more than
general secondary school graduates.
However, other studies show that there is still a need to improve vocational
education. A joint study by the Organisation for Economic Co-operation and
Development and the Asian Development Bank concludes that students in the
vocational stream are subjected to a ‘dumb-downed’ version of the academic
curriculum from the general secondary stream, yet still do not receive adequate
hands-on learning to obtain the practical skills needed for future jobs (OECD and
ADB 2015, 33). Pasay and Quarina (2010) reach a similar conclusion, finding that
vocational graduates have lower rates of return to education in the labour market
than general secondary graduates. Pritadrajati (2018) also finds that vocational
school graduates perform poorly in terms of formal sector employment and income.
VOCATIONAL EDUCATION AND HIGHER EDUCATION

Vocational Education
Like some other countries, Indonesia has a dual system of education providing
both general and vocational education. The objective of general education is to pro-
vide students with academically oriented knowledge as a springboard for higher
education and training. The aim of vocational education, on the other hand, is
to provide students with practical skills and knowledge that are useful in the
daily life of society. The vocational curriculum comprises a blend of general and
occupation- or profession-specific knowledge. To ensure adaptability, the skills
provided by vocational schools must be transferable between occupations (Shavit
and Müller 1998).
In a World Bank study of Indonesia’s vocational training system and the
labour market published in 2011, di Gropello, Kruse and Tandon (2011) said that
Indonesia’s vocational education system did not accommodate the needs of indus-
try and employers, and contained weaknesses in supply-side components such as
teacher qualifications and industry-relevant training programs. From a cost–benefit
point of view, the authors said, it was not possible to justify large investments in
the vocational system at the expense of the general system, as was proposed at the
time (di Gropello, Kruse and Tandon 2011, 188).
More recent studies, however, suggest otherwise (Kuncoro 2018). Manufacturing
and modern services such as tourism, finance and health are increasingly seek-
ing competent graduates from vocational schools. Indeed, data on formal sector
employment among vocational secondary school graduates, and on wage premium
ratios, indicate that vocational students who find jobs after graduation do better
than those with a general secondary education (ADB 2014). Data from the 2015
Indonesian Labour Force Survey (Sakernas) confirm that, in general, vocational
secondary school graduates are slightly better paid than their counterparts in gen-
eral secondary schools (table 5).
The mobility of skilled and better-educated workers is expected to increase
with the establishment of the ASEAN Economic Community (AEC). To exploit
TABLE 5 Ratio of Secondary and Tertiary Graduates’

Earnings to Primary Graduates’ Earnings, 2005–15
Level of educational attainment 2005 2015
General junior secondary school 1.23 1.21

Vocational junior secondary school 1.70 1.51
General senior secondary school 1.72 1.62
Vocational senior secondary school 1.92 1.69
College (1–2 years) 2.25 2.23
Junior college (3 years) 2.51 2.40
University 2.95 3.10
Source: Calculated from Indonesian Labour Force Survey (Sakernas).
this opportunity, Indonesia will need to improve the standard of vocational and
higher education. One weakness of the formal vocational education system is that
the number of teachers with occupation-specific qualifications and work experi-
ence is relatively small compared with the number having academic (bachelor or
master—S1 or S2) degrees (Suharno, Pambudi and Harjanto 2020). Another is that
the schools’ laboratories and equipment are generally outdated. These deficiencies
suggest that the special characteristics of vocational schools are not adequately
addressed in their accreditation standards, which are basically the same as those
for general secondary schools. Table 6 describes the main elements of a successful
vocational education system, based on cross-country comparisons.
Non-formal Training
In addition to the formal institutions tasked with providing vocational education,
Indonesia has a network of non-formal institutions where workers can upgrade
their skills, including government-sponsored work training centres (BLKs). General
secondary school graduates can expect to match the wages earned by vocational
school graduates only if they undertake additional training conducted by non-
formal training providers such as the BLKs (Kuncoro 2012). Non-formal training is
clearly of value to employers. Nevertheless, firms are reluctant to invest in upgrad-
ing the skills of their workers because it is very hard to retain those workers once
they have retrained.
The government understands the link between non-formal training and higher
wages, but faces the dilemma of whether to prioritise the general education system
while providing more non-formal training opportunities for workers, or to expand
and upgrade the formal vocational education system (which would be more expen-
sive). At first glance the former might appear to be the better (and cheaper) option,
by providing the flexibility to bridge skill gaps. If Indonesia is to build a stronger
formal economy, however, it will need to strengthen its formal vocational education
system. With its clear focus on occupation-specific competencies and industry-
compliant qualifications, this system is likely to provide better long-term career
options for graduates, provided it also imparts a capacity for life-long learning.
TABLE 6 Elements of a Successful Vocational Education System
Element Action required
Relevant curriculums Involve all stakeholders (government, employers,

social partners, educational institutions) in curriculum
development, with clear areas of responsibility assigned
to each party
Close engagement with Establish a continuous feedback mechanism to keep
labour market employers, the private sector and the education system
informed about the types of skills required in the labour
market
High-quality schooling Provide sufficient funding to ensure availability of
appropriate teaching materials and well-trained
teachers
Incentives for training Provide a mix of public and private funding, as well as
providers and competition autonomy in teaching and staffing decisions
among training providers
High standard of training Establish a decentralised system of accreditation and
quality assurance and ensure competition between
training providers
Ability to switch between Ensure that the competencies and qualifications
general & vocational tracks acquired in the vocational track are sufficient to allow
students to switch to the general track
Source: Eichhorst et al. (2012, 4–5).
Higher Education
In Indonesia, the argument for supporting both vocational education and higher
education is that the easy phase of industrialisation has come to an end. Indonesia
needs to continue to climb up the ladder in manufacturing and services. To take
advantage of the opportunities opened up by the Fourth Industrial Revolution,
the government must provide a vocational system that teaches practical skills and
at the same time is flexible enough to adapt to rapid technological change. But
Indonesia must also invest in higher education because it is an integral part of the
innovation system.
The process of globalisation has made higher education more important than
ever before. Even poor countries cannot afford to neglect the development of higher
education; because of its role in the creation, adaptation and dissemination of
knowledge, it is a vital tool for developing countries to benefit from globalisation
(Indrawati 2018). Knowledge accumulation in higher education allows develop-
ing countries to advance along the learning curve without having to undergo the
lengthy and expensive process of discovery, by accessing ideas and technologies
developed elsewhere and putting them into practice after some modifications.
Indonesia lags behind neighbouring countries such as Malaysia and Thailand in
terms of higher education. Too many universities in Indonesia are simply teaching
institutions, still locked into old methods of learning, and the social function of
higher education as a creator, adaptor and disseminator of knowledge remains a
distant goal. University curriculums are too narrow; they should teach students
not only what is known now but also how to keep their knowledge up to date.
Problem-solving skills, flexibility and the ability to innovate are essential in today’s
fast-moving world.
State universities make up only 4% of the total number of higher education
institutions in Indonesia but account for 32% of total enrolments (Hill and Thee
2012). Very few of these state universities have achieved an international ranking
that puts them among Asia’s best universities as listed by Quacquarelli Symonds
(QS), and only three have managed to stay there consistently over the years:
Universitas Indonesia (UI), the Bandung Institute of Technology (ITB) and Gadjah
Mada University (UGM) (table 7).
Table 8 describes some of the actions the government and individual institu-
tions could take to strengthen the innovation system in Indonesia. The government
has two major roles in facilitating research: financing research collaboration;
and streamlining regulations to support collaboration. At the institutional level,
researchers must be involved in any relevant forums for collaborative research and
continually improve their research skills. Collaboration between government and
individual research institutions is also useful to identify areas of common inter-
est between domestic and foreign research institutes, and to bring them together.
These activities would help to upgrade the skills of Indonesian researchers to meet
international standards, while also creating spillovers of knowledge and know-
how from abroad.
FISCAL POLICIES TO SUPPORT VOCATIONAL AND HIGHER

EDUCATION
Expenditure Policies
The government has implemented several programs to increase the coverage and
quality of vocational education and develop the skills needed in the labour force.
In 2017, the Ministry of Religion opened hundreds of Islamic vocational senior
secondary schools (madrasah aliyah kejuruan) as part of a program to expand access
to vocational education and improve the job prospects of Islamic schools’ gradu-
ates. To lift standards in the labour force, the government set a target of providing
vocational training to more than 1.1 million people by 2019, while another 1.5
million were expected to obtain certificates of competency through the programs
run by various ministries.
The revitalisation of vocational education—including both the formal and non-
formal vocational institutions—is being coordinated by the Ministry of Education
and Culture (Kementerian Pendidikan dan Kebudayaan 2016). The formal voca-
tional institutions, such as vocational schools, polytechnics and community
colleges, were expected to enrol 1.16 million students in 2019, with a budget of
Rp 7.6 trillion. With ministry help, 132 vocational senior secondary schools have
formed links with business and industry, with further collaborations expected
in the future.
In the non-formal sector, the government allocated Rp 11.18 trillion in 2019 (40%
more than in 2018) to help 16 ministries establish work training centres (BLKs) in 34
TABLE 7 Indonesian Universities in the Top 400 Quacquarelli

Symonds (QS) Asia University Rankings, 2018
University Ranking
Universitas Indonesia (UI) 54

Bandung Institute of Technology (ITB) 65
Gadjah Mada University (UGM) 85
Bogor Agricultural University (IPB) 147
Airlangga University (UNAIR) 171
Universitas Padjadjaran (UNPAD) 176
Institut Teknologi Sepuluh Nopember (ITS) 232
Diponegoro University 240
Bina Nusantara University (BINUS) 251–260
Universitas Brawijaya (UB) 291–300
Hasanuddin University 301–350
Universitas Muhammadiyah Surakarta 301–350
Atma Jaya Catholic University Jakarta 351–400
Universitas Pelita Harapan 351–400
Udayana University 351–400
Universitas Sebelas Maret Surakarta (UNS) 351–400
Parahyangan Catholic University (UNPAR) 351–400
Source: QS Top Universities.
TABLE 8 International Collaboration to Strengthen

the Innovation System in Indonesia
Level of collaboration Action required
Government Provide increased or better-targeted funding for collaborative

research (by both the overseas and Indonesian government)
Carry out regulatory reform to streamline procedures for
research collaboration
Individual institutions Investigate joint opportunities to improve research skills
Host relevant forums and events to promote cooperation
between domestic and overseas institutions
Government and Arrange short-term exchanges of researchers, funded by
individual institutions government or institutions, to support capacity building and
promote cooperation among researchers
Create a research portal to connect international and Indonesian
researchers, promote the strengths and interests of the
respective sectors and become a repository for collaborative
research
Conduct a mapping exercise to identify areas of international
and Indonesian research expertise

provinces targeting 2 million attendees. It also allocated Rp 3.58 trillion to short-term

training programs of less than 1 year, expected to attract 850,800 students in 2019.
As noted earlier, the government is obliged to allocate 20% of the government
budget to education. Some of this money has been used to create an endowment
fund for education called the Education Fund Management Institute (LPDP).
It provides scholarships for young scholars to study at top universities both in
Indonesia and abroad, to give them the best possible educational experience. Over
time, this scholarship program should help to improve the quality of human
capital at the tertiary level. The LPDP is complemented by an endowment fund
for research, established with funding of about Rp 990 billion in the 2019 budget.
Its purpose is provide more opportunities for young scientists to receive fund-
ing for research projects, particularly those that are likely to contribute to the
development of advanced manufacturing products. The scale of the resources
directed towards higher education through these two funds makes it essential to
ensure that they are professionally managed, with procedures in place to select
the most promising research projects and secure the best possible results from
the available funding.
Tax Expenditures to Promote Labour Intensity and Research

In addition to its programs to improve both the quantity and quality of human
resources, the government has developed an innovative tax expenditure policy to
stimulate research and create jobs. Government Regulation (PP) 45/2019 provides
a tax deduction for companies that participate in vocational training and R&D
activities. In some cases, this deduction could potentially amount to 200% of a
company’s total R&D costs. The intention of the regulation is to boost investment
in labour-intensive industries and create employment opportunities. To achieve
this, the government needs to persuade businesspeople and manufacturers to
actively and consistently upgrade the quality of their workers.
According to article 29A of the regulation, domestic taxpayers who undertake
new investments or business expansions in labour-intensive industries and have
not received other tax facilities are eligible to receive a net income tax deduction
of 60% of their investment costs. This deduction includes the utilisation of land
for business activities. Article 29B states that domestic taxpayers who carry out
work practices, apprenticeships or learning activities in the context of developing
competency-based human resources can obtain a gross income tax deduction of
up to 200% of the total costs incurred for those activities.
FUTURE POLICIES ON HIGHER EDUCATION

A Way Forward: Beyond Fiscal Policies
Fiscal policies involving both expenditure and tax incentives are necessary to
improve the quality of human capital in Indonesia but are not sufficient by them-
selves to prepare the country for an era of structural transformation and creative
disruption. De Ree et al. (2018) found that a policy change that led to a permanent
doubling of teachers’ salaries did not lead to an improvement in student learning
outcomes. Thus, fiscal policies aimed at improving the quality of human capital
need to be complemented by other reforms in the higher education system, such
as research ecosystem development.
TABLE 9 Gap Analysis in Higher Education in Indonesia
Current situation
Component in higher education What should be done How to narrow the gap
Curriculum Very rigid and overly Develop more Deregulate curriculum

regulated adaptive, flexible and development
Few incentives for dynamic curriculum Review curriculum
student learning in
other fields
Teaching Dominated by lecturer Encourage active Provide refresher
methods monologues student learning courses and sabbatical
& content Little use of technology Use a mix of online leave for faculty
for teaching activities and offline teaching members
Out-of-date topics that methods Make better use of
do not reflect the latest Offer massive online technology
scientific and other open courses (MOOCs)
developments Use a contextual
Loose links between approach to teaching
content and real-world
context
Research Lack of a research Improve quantity and Provide incentives for
mindset quality of research researchers based on
Heavily focused on both the quality and
quantity quantity of publications
Community Little engagement with Connect with Provide incentives
engagement other stakeholders government and to engage with other
private sector through stakeholders
triple helix model of
innovation
International Little exposure Encourage Provide funding
collaboration to international collaboration with to promote
community overseas institutions internationalisation
Governance Overly regulated and Provide institutional Provide greater
lacking in autonomy autonomy autonomy for
universities to manage
their own activities
Source: Compiled from various sources, such as Oey-Gardiner et al. (2017).
When the private sector is less active in R&D, then the higher education sector
becomes the major contributor to scientific discovery and knowledge and thus the
major force in invention and innovation. Universities play an important role not
only in imparting knowledge and skills to their students, but also in preparing
them to enter and compete in the labour force. To meet the challenges in higher
education, curriculums, teaching methods, research incentives and governance
systems need to be progressively reformed. Table 9 shows the gap between what
has been done and what should be done in higher education in Indonesia.
There is a trend in many countries, including China and Singapore, to redi-

rect the curriculum away from excessive specialisation and towards generalism,
in order to produce people who are able to think independently and innova-
tively (Economist 2018). Epstein (2019) questions the traditional belief that early
specialisation is the key to success. In professions with complex, interrelated, fast-
changing and unpredictable elements, early specialisation does not help; rather,
a broader way of thinking that can adapt to context and changing circumstances
is needed. The insights of generalist thinking are particularly useful to deal with
the disruption caused by developments in artificial intelligence (AI), big data and
connectivity. With AI, machines are able to carry out tasks requiring technical and
tactical skills, while humans require the ability to think strategically and holistically.
To make the most of big data and connectivity, humans need to have synthetic–
analytic skills based on interdisciplinary and transdisciplinary insights. Therefore,
Indonesia needs to develop more adaptive, flexible and dynamic curriculums that
allow university students to study outside their fields and gain interdisciplinary
and transdisciplinary insights.
The year 2014 was a pivotal one for the Indonesian higher education system.
In that year, the Directorate General of Higher Education was moved from the
Ministry of Education and Culture to the Ministry of Research and Technology,
signalling the government’s determination to strengthen the links between higher
education and research. The new Ministry of Research, Technology and Higher
Education asked the top state-owned universities to increase their international
exposure by collaborating with reputable overseas universities. This has pro-
vided valuable experience in how to proceed with such partnerships. First, the
Indonesian institution needs to build a strong foundation with a trustworthy and
reliable overseas partner to solve problems as they arise. This includes both par-
ties managing their expectations of the relationship. Second, both parties need
to understand the cultural, political and regulatory context in which the other is
operating, including the inevitability of bureaucratic delays. Finally, careful plan-
ning is needed to establish a support structure that sets out the responsibilities
and expectations of both parties in areas such as logistics, scientific results and
financial monitoring.
Academics have been calling for some time for a sharper focus on the rela-
tionship between university research, research productivity and stakeholder
involvement (Pandey and Pattnaik 2015, 169–70). Not all research leads to imme-
diate gains; researchers therefore need to consider what it takes to produce
high-quality research, how various stakeholders should interact with each other
and what measures can be taken to increase research productivity. In the case of
Indonesia, there is an obvious need to develop a research ecosystem—a system to
allow a community of researchers to interact with each other, their environment
and other stakeholders in such a way that knowledge is transferred between them.
Nugroho (2019) identifies several problems with the research ecosystem in
Indonesia, including the lack of a shared vision on the importance of research;
unclear institutional design (strategy and coordination); lack of a peer review cul-
ture; rigid administrative procedures governing research funding; failure to secure
funding from non-government sources; an unclear incentive system for promoting
collaboration and interdisciplinary research among researchers; and an incentive
system focused on the quantity rather than the quality of research. For instance,
in Indonesia researchers are awarded more points for being the first author of an
article published by an unknown local journal than for being the fourth author of
an article published by a top-tier journal such as The Lancet.
New Program, New Hope: Kampus Merdeka

The Directorate General of Higher Education was transferred back to the Ministry
of Education and Culture in 2019, but the efforts to improve higher education
did not skip a beat. The ministry has continued to create progressive programs
for higher education development, including the Freedom to Learn: Independent
Campus (Merdeka Belajar: Kampus Merdeka) program, which, as its title suggests,
aims to provide greater freedom and flexibility for students and other university
stakeholders.
The Kampus Merdeka reforms can be seen as a way to deregulate the highly
regulated higher education system in Indonesia, aiming to create a learning envi-
ronment that is less rigid, more innovative and more suited to the needs of each
university. To implement the reforms, the education minister has issued regula-
tions in relation to: (1) the creation of new study programs; (2) the establishment
of a higher-education accreditation system; (3) the authority for state universities
to become autonomous legal entities (PTN-BH); and (4) the ability for students to
take subjects outside their direct study programs for three semesters (see table 10
for details).
Some view these regulations as a breath of fresh air, likely to improve the
quality of learning processes and education. Indeed, some higher education institu-
tions had already taken steps to provide greater course flexibility, even before the
implementation of the new regulations. For example, the undergraduate program
in the Department of Economics, Universitas Indonesia, already had the most flex-
ible curriculum in the university, allowing students to take courses outside the
university (through, for example, certified online courses), and making its courses
fully transferable.
Nevertheless, the Kampus Merdeka program is not without its critics. Some
argue that it is very much about adopting the ‘free market’ approach of liberalism,
which is not pro-poor. The policy of allowing state universities to become autono-
mous legal entities, for instance, could prompt state universities to commercialise
their activities, resulting in discrimination against students from low-income
backgrounds. In addition, some universities may not have the capacity to develop
new, more flexible curriculums, and some teaching staff may experience reductions
in teaching hours, leading to lower incomes or even job losses.
In view of the mixed response to the Kampus Merdeka program, strong leader-
ship may be required to implement the four sets of policies. To overcome resistance
to the regulations among higher education institutions, the Ministry of Education
and Culture could implement the program sporadically, rolling out several pilot
programs prior to implementing the regulations nationally. The aim of the pilot
projects would be to obtain a better understanding of the current situation at the
institutional level, in order to determine whether the new policies should be imple-
mented as a ‘one-size-fits-all’ package or adjusted according to each institution’s
situation. It would also be advisable to collaborate with academic associations such
as the Association of Faculty of Economics and Business in Indonesia (AFEBI) , in
order to promote understanding and acceptance of the aims of the new policies.
TABLE 10 Kampus Merdeka Regulations
No. Policy Legal Basis Aim Expected Outcome
1. Permits the establishment of new study Ministry of Education To give both state and These changes will give universities
program(s) by universities, subject to them and Culture private universities greater flexibility to adapt quickly to the
having level A or B accreditation and having Regulations 5/2020 more autonomy to changing and dynamic nature of the labour
worked with (world-class) third parties such and 7/2020 establish new study market, by allowing them to provide study
as companies, NGOs (e.g. UN, World Bank), programs programs that are suited to the needs of
multilateral institutions and/or the top 100 the market. This should help to reduce
universities in the QS ranking. The new study the problem of mismatch between the
program(s) should not be in the fields of education system and the labour market.
health or education.
2. Permits automatic re-accreditation for Ministry of Education To reduce the Lecturers and university staff will no longer
universities and study programs after five and Culture administrative be heavily burdened by administrative
years, as well as voluntary requests at Regulation 5/2020 burden on lecturers tasks.
any time for upgraded accreditation for and other university
universities and study programs with level B staff
or C accreditation.
3. Allows state universities to become Ministry of Education To make it easier More state universities will become
autonomous legal entities (PTN-BH) and Culture for state universities PTN-BH.
without the need to have a certain level of Regulations 4/2020 to become PTN-BH
accreditation. and 6/2020 by simplifying
the administrative
requirements
4. Permits students to take courses outside Ministry of Education To provide more Students will have more options to take
their departments/study programs for three and Culture flexibility and subjects that are relevant to their needs
semesters, consisting of two semesters of Regulation 3/2020 opportunities and skills, and greater freedom to choose
courses for credit outside the university and for students, by subjects that build their capacity in
one semester of courses for credit at the same allowing them to particular areas.
university. explore subject areas Students will also be able to benefit from
Also, broadens the activities that students outside their chosen higher-quality courses and teaching
can take for credit by changing the definition study programs, processes.
of a ‘semester credit unit’ from a ‘study including through
hour’ to an ‘activity hour’. Such activities courses outside their
can include class learning, internships, universities
social work, exchange programs, research,
entrepreneurship, independent study and
teaching in remote areas.

Covid-19 and Higher Education: Threat or Opportunity?

On 2 March 2020 President Joko Widodo announced that the first case of Covid-19
in Indonesia had been identified, and on 11 March the World Health Organization
officially declared Covid-19 a pandemic. To stop the spread of the virus, leaders
and policymakers around the world have instituted regional or country-wide lock-
downs, introduced quarantines and placed restrictions on people’s mobility. Such
policies have been particularly disruptive for the education sector: universities have
been forced to postpone or even cancel courses, while secondary schools have had
to adapt to local lockdowns. In Indonesia, about 68 million students, including 9.9
million senior secondary school students (general and vocational) and 8 million
university students, have been affected by Covid-19-related policies (Anna, Yusuf
and Satriatna 2020).
Following the declaration of the pandemic, universities in both developed and
developing countries took quick action to ensure the safety of students and staff,
including by suspending face-to-face classes, closing their campuses and switching
to online learning. As of 6 April 2020, 170 countries and communities had closed
their tertiary education institutions, thus disrupting, or even ending, the studies
of more than 220 million students (Bassett 2020). Students who had planned to
study abroad have been particularly badly affected by the spread of Covid-19, as
they face travel restrictions, social distancing measures, periods of isolation and
quarantine, and campus as well as border closures.
Like their counterparts in other parts of the world, tertiary education institu-
tions in Indonesia responded quickly to the pandemic by cancelling classes and
other campus activities, replacing the conventional face-to-face lectures with
online lectures and moving graduation ceremonies online. By 14 March 2020,
nearly 20 universities had closed their campuses, including Universitas Indonesia,
Universitas Gadjah Mada, Bandung Institute of Technology (ITB), Binus University,
Universitas Atma Jaya, Universitas Hasanuddin and Bogor Agricultural University
(IPB). Schooling from the primary through to upper secondary level was also dis-
rupted by Covid-19. Schools were closed and online learning was implemented on
a massive scale, in a rush. In March 2020, the Ministry of Education and Culture
announced that it would not hold any of the usual National Examinations (Ujian
Nasional) (Circular Letter 4/2020). Instead, schools would assess students’ perfor-
mance based on report card grades, assignments and school exams.
In the same month, the education ministry published regulations setting out
how education would be conducted during the pandemic. It stated that universities
situated in areas where the virus had been detected would have to continue their
courses through online methods (Circular Letter 36962/2020). In April, a survey
conducted by the ministry found that 94.73% of higher education institutions had
moved their courses online (Widyanuratikah 2020). The Directorate General of
Higher Education said that it would allow universities to choose any platform for
their online study programs, as long as they could ensure that all students were
able to access it. The directorate has also been advocating the sharing of materials
and lectures between universities in order to improve access for all universities.
The ministry’s survey also found that about 70% of university students were
ready to study online through applications. To facilitate tertiary students’ studies,
the ministry created an online learning platform called SPADA, and formed part-
nerships with international companies such as Google and Quipper and domestic
companies (mainly start-ups) such as Ruangguru, Zenius and Kelas Pintar to help
FIGURE 6 Proportion of Population with Internet Access, by Region (%)
Internet access (%)

< 8.96 38.48–42.56
8.96–21.96 42.57–48.47
21.97–29.04 48.48–55.76
29.05–34.35 55.77–63.65
34.36–38.47 < 63.65
Source: Authors’ calculations, based on 2019 Susenas.
teachers and students recreate the teaching–learning experience in an online setting.

The ministry also developed policies to reduce the financial burden on students,
such as creating partnerships with cellular companies to provide cheap internet
packages and free access to education sites for students, providing financial sup-
port for 400,000 poor students through the Smart Indonesia Card for Colleges
(KIP-K) and allowing students who dropped out in 2020 an extra semester to finish
their programs.
Although the Ministry of Education and Culture took speedy action to reduce
the impact of the pandemic on students, the disruption to education caused by
Covid-19 is still creating problems. These include a reduction in the quality of the
education being delivered and an increase in inequality in educational attainment
between regions and income groups (Anna, Yusuf and Satriatna 2020; Sparrow,
Dartanto and Hartwig 2020). As noted above, the switch from face-to-face classes
to online distance learning was implemented on a massive scale and at great
speed, without time to prepare the necessary infrastructure. The fundamental
requirements for effective online education are good internet access, internet con-
nectivity and communications technology. Although the survey by the Ministry
of Education and Culture found that about 70% of university students were ready
to study online through applications, the latest data from the 2019 National Socio-
economic Survey (Susenas) indicate that internet access is still widely unequal
across regions, with regions in the eastern part of Indonesia being particularly
poorly served (figure 6).
While higher education institutions are well equipped with good-quality infra-
structure and technology to support online learning, students who have had to
return to their hometowns owing to university closures may not enjoy the same
level of access to infrastructure. Difficulty in accessing online classes and materials
would adversely affect the quality of such students’ learning. Moreover, there is a
FIGURE 7 Students’ Access to Internet,

by Income Decile (% of cohort)
120 Prim ary Secondary Tertiary
100 95 97
90 91 92 93
86 87 85
83 80
80 75
72 75
66 69
62
60 55 58
48 49
40 37
29
23 25
18 20
20 13 16
10
0
1 2 3 4 5 6 7 8 9 10
misperception that e-learning and e-classes are less demanding than face-to-face
courses (Amemado 2020). In fact, online learning requires not only that students
have access to good-quality infrastructure, but also that they are able to keep up
with the latest technology and adapt to the new teaching methods. In Europe and
Latin America, other challenges for teaching staff during Covid-19 have included
keeping students engaged, self-motivated and self-organised, and maintaining
course quality (Amemado 2020).
It is widely acknowledged that the adverse impacts of Covid-19 are likely to be
more pronounced for lower-income groups, poorly funded institutions and people
living in remote regions (Altbach and de Wit 2020; Anna, Yusuf and Satriatna 2020;
Sparrow, Dartanto and Hartwig 2020). In Indonesia, access to the internet and
technology is much worse for students living in remote regions. As indicated in
figures 7 and 8, students from higher-income groups have better access to the inter-
net and higher utilisation of the internet for educational purposes. Thus, ensuring
that all students have equal access to online education remains a critical challenge
for Indonesia.
All of the challenges discussed so far apply not only to Indonesia but also
to other countries worldwide. African universities are suffering from a lack of
infrastructure and connectivity (Amemado 2020; Tamrat and Teferra 2020), while
universities in the US, Europe, Australia, India, China and Latin America are facing
disruption due to the closure of campuses and sudden shift to online learning.
Universities that are highly dependent on international students for their revenue
are particularly badly affected, as quarantine requirements and border closures
have sharply reduced the flow of international students (Altbach and de Wit 2020;
Amemado 2020; Rumbley 2020).
Despite these challenges, the Covid-19 crisis also provides a window of oppor-
tunity to accelerate structural economic change and the transformation towards the
Fourth Industrial Revolution. Although it occurred so abruptly, the shift to online
learning and the use of digital platforms can be expected to remain in place for the
FIGURE 8 Students’ Internet Use for Educational Purposes,

by Income Decile (% of cohort)
50 Prim ary Secondary Tertiary
40 41
40 38 39
37 37 36 37
34 35
30 29
27
24 24 25 24 24 25
23 23 23 23
20 18 19
17 16
15 15
13 13
10
0
1 2 3 4 5 6 7 8 9 10
foreseeable future. This may create the momentum for a cultural shift not only in
the education system, but also in other sectors and in society in general. If Indonesia
can seize this opportunity to increase the use and acceptance of technology, then
both the economy and society will be the beneficiaries.
As this article was being written, Indonesia was preparing itself for life in the
‘new normal’ era of Covid-19. In June 2020, the Ministry of Education and Culture
was preparing to reopen schools and universities in stages in regions with no active
cases of Covid-19. The plan provided for additional safety protocols such as physi-
cal distancing, the compulsory use of masks and the provision of clean sanitation
and hand-washing facilities. The ministry’s regulations on online learning will
continue to play an important role in the ‘new normal’, supported by training for
teachers and lecturers in online study methods. Several studies have argued that
a return to the status quo ante after the pandemic is not possible, anywhere in the
world (Altbach and de Wit 2020; Hunter and Sparnon 2020). Thus, Indonesia will
have to be prepared to transform all sectors and aspects of life, in a context where
a shift to an online and virtual environment is unavoidable.
CONCLUSION
Indonesia’s economic growth has been stagnant at about 5% since the turn of the
century, owing to the decline in the international prices for major primary prod-
uct exports such as oil, gas, palm oil and rubber. At the same time manufacturing
sector growth has slowed, reducing its contribution to GDP. Indonesia needs to
reduce its dependence on the primary sector, which is vulnerable to volatility in
international commodity prices, and boost its manufacturing sector. In addition,
it must cope with structural transformation and evolve to take advantage of the
opportunities afforded by the Fourth Industrial Revolution.
The solution to these challenges is to improve human capital. In the short run,
the low-hanging fruit is to improve the quality of vocational schools in order to
bridge the gap between industry demand for skilled labour and the schools’ capac-
ity to supply it. Some of the measures Eichhorst et al. (2012) propose to improve
the quality of vocational education include developing more relevant curriculums,
engaging with the labour market, improving the quality of schooling, providing
incentives for training providers, maintaining a high standard of training and
avoiding the dead-end vocational track problem (where students are stuck in the
vocational system, and cannot transfer to the general track).
In the longer run, this article proposes improving and streamlining curriculums
from the primary school through to the tertiary level. In addition, identifying the
gaps in higher education should extend to teaching methods and content, research
capacity, community engagement, international collaboration and good govern-
ance. Because additional funding does not necessarily improve the quality of
research, this article argues that the best way to improve the research capacity of
Indonesian universities is to develop a system of incentives and disincentives, as
well as a system for monitoring and managing it.
This article has shown that most Indonesian workers are poorly educated and
working as low-skilled labour in the low-value-added sector. Over the past five
years, Indonesia has been carrying out massive infrastructure projects, leading to a
reduction in logistics costs. The benefits of lower logistics costs will not be fully real-
ised until Indonesia has a much larger pool of skilled and highly educated workers.
Improving the quality of human resources needs to start with primary education,
where children should be taught basic subjects such as maths, reading and science
in ways that stimulate creative thinking rather than by memorising reading materi-
als. As well as reviewing the curriculum, Indonesia needs to improve the quality
of teachers and instructors, with one idea being to invite Indonesia’s best teachers
to deliver refresher courses to other teachers and instructors.
To keep abreast of the advances in technology during the Fourth Industrial
Revolution, Indonesia also needs to pay serious attention to the role of R&D in
human capital development, in order to reduce the gap in innovation and invention
and increase the capacity to produce high-tech exports. This would also increase
Indonesia’s TFP and, in the end, speed up the pace of economic growth.
Despite the numerous challenges, the Covid-19 pandemic has created an oppor-
tunity for Indonesia to accelerate its structural transformation towards the Fourth
Industrial Revolution. In view of the unavoidable shift to online and digital culture,
it is essential to ensure that Indonesia has the infrastructure and skills to employ
digital technology.
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Improving Competitiveness Through Vocational

Sri Mulyani Indrawati & Ari Kuncoro

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IMPROVING COMPETITIVENESS THROUGH VOCATIONAL

Sri Mulyani Indrawati*

Keywords: education, Fourth Industrial Revolution, human capital, productivity, reform,

ISSN 0007-4918 print/ISSN 1472-7234 online/18/00029-59 © 2021 ANU Indonesia Project

FIGURE 1 Value Added in Agriculture, Manufacturing

50 Services Manufacturing Agriculture

Source: World Development Indicators.

adaptability. In Indonesia, students can enrol either in formal degree programs

LITERATURE REVIEW AND FRAMEWORK: STRUCTURAL CHANGE,

FIGURE 2 Framework for Human Capital Investment

Structural Higher Work Cognitive ability Productivity Welfare of

Needs: Schooling for basic literacy Other skills

Source: Compiled from various sources.

TABLE 1 Average Annual Growth, by Sector, 2005–18 (%)

2005–09 2010–14 2015–18

Growth Share of Growth Share of Growth Share of

Agriculture 3.3 13.2 3.4 12.6 3.7 13.3

Note: Manufacturing excludes oil and gas.

INDONESIA’S ECONOMIC STRUCTURE AND COMPETITIVENESS

FIGURE 3 Scores of Selected Asian Countries on the Logistics

5 2007 2010 2012 2014 2016 2018

Source: World Bank.

TABLE 2 Workforce, by Highest Level of Educational

Primary Junior General Vocational

2000 62.1 15.6 13.2 4.7 2.2 2.3

Source: BPS (2018b).

INNOVATION, TECHNOLOGY AND R&D

TABLE 3 Countries with Lowest R&D Expenditure

Country Share of GDP Country Share of GDP

Mongolia 0.23 Brunei Darussalam 0.28

Source: World Development Indicators.

TABLE 4 High-tech Exports of Selected Asian Countries,

Country 1997 2005 2010 2014

Indonesia 11.6 16.5 9.8 7.0

Source: World Bank.

IMPROVING THE QUALITY OF HUMAN CAPITAL

FIGURE 4 Unemployment Rate, by Level of Education, 2017–19 (%)

Source: BPS (2019).

FIGURE 5 Literacy Proficiency Scores as Assessed by the OECD’s

Source: Pritchett (2016).

In the case of vocational education, Newhouse and Suryadarma (2011) find

VOCATIONAL EDUCATION AND HIGHER EDUCATION

TABLE 5 Ratio of Secondary and Tertiary Graduates’

Level of educational attainment 2005 2015

General junior secondary school 1.23 1.21

Source: Calculated from Indonesian Labour Force Survey (Sakernas).

TABLE 6 Elements of a Successful Vocational Education System

Element Action required

Relevant curriculums Involve all stakeholders (government, employers,