ABSTRACT
This chapter explores the apparent loss of manufacturing competitiveness over the past two decades, focusing in particular on the upward trend in manufacturing unit labour costs (ULC) during the post Asian Financial Crisis (AFC) commodity boom. It discusses the factors that contributed to this upward trend in unit labour costs, to discern whether the trend reflects the impact of labour market policy, following the adoption of the Labor Law in 2003, other sectoral policies that might have affected productivity trends, notably the relative high rate of inflation in Indonesia during post-AFC commodity boom. The chapter explores the factors driving Indonesia's relatively high inflation rate during this period and concludes that it likely reflected a combination of inflation shocks from food prices and fuel subsidy. The monetary and exchange rate policy stance by Bank Indonesia that did not sufficiently combat the legacy of high inflation expectation following the AFC and demand-pull inflation as a result of the commodity boom.
