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Fighting the fear of poverty

Article - September 3, 2012
Jamsostek aims to match the growth of the new middle-class with a corresponding increase in social security coverage
The conventional wisdom in Indonesia attributes the nation’s resilience to global economic fluctuations to the high levels of consumer spending, which accounted for between 60-70% of GDP last year. According to Credit Suisse Group AG, from 1999 to December 2011, the average wealth per adult increased fivefold, to over $12,000. This booming group of middle-class consumers can be viewed as the engine of Indonesia’s current economic stability and prosperity.

Indonesia has not followed the export-oriented growth model adopted by many of its neighbors, which in times of global economic stability has kept its GDP growth rate at a relatively modest level. However, during these times of global volatility, Indonesia’s voracious domestic demand has kept the country largely insulated from the market-crushing forces falling upon its once-booming neighbours.

While many would interpret Indonesia’s present situation as an example of Keynes’ emphasis on aggregate demand, it is also necessary to remember his emphasis on the psychological nature of economic interactions. Precautionary savings occur when a population does not feel that their livelihoods are secure. It is for this reason that the International Labour Organization argues that social security plays an important role in times of crisis to stabilise aggregate demand and increase resilience against economic shocks.

The extension of social and health insurance to a population of 240 million is a challenge, particularly when approximately 60% of the population works in the informal sector. However, Indonesia has been making huge strides in reducing the fear of poverty through the work of state-owned company Jamsostek. Under the leadership of Hotbonar Sinaga, Jamsostek has revolutionised social security by establishing a business model that constantly improves benefits for its members through its sound financial management.

“In 2010, our net profit was 1.513 trillion rupiah (EUR 128 million) and according to the estimates from our accounting team our net profit for 2011 was 2.043 trillion. This is an increase of more than 30%,” says Mr Sinaga.

With these increased profits, Jamsostek has increased the death benefit for its members by 25%, and expanded their healthcare coverage. “Before, we didn’t cover heart attacks, we didn’t cover haemodialysis and we didn’t cover cancer, but as of December 1 2011 we now cover all of these critical illnesses.”

These improvements in benefits have resulted in more than a 20% increase in health insurance subscribers, but Mr Sinaga will not rest there. The CEO wants to provide social security for sectors of the population that have historically been excluded: informal sector workers, youth and women.

“Looking at our future market, firstly they are young and secondly they are female. Why? Because the most important decisions made in a family and a community are usually done by women,” argues Mr Sinaga.

These ambitious targets seem more than plausible for this thriving company. Two years ago, Sinaga established the Jamsostek Investment Company (JIC) as the subsidiary in charge of managing investments in employment generating industries such as infrastructure, agribusiness and mining. Mr Sinaga explains that the JIC also buys bonds and shares issued by public companies. “Our capital provides them with liquidity with which they can invest more, expand and set up more factories, thereby having a multiplier effect, creating employment and ultimately creating more members of Jamsostek.”

The medium to long-term strategy for Jamsostek’s investments have allowed them to take advantage of the current volatility in capital markets – recently buying assets at reduced prices. This has prompted them to set their year-end target at Rp 125 trillion (EUR 10.5 billion), up 9% from last year.

The financial success of Jamsostek illustrates a model for social security that others would be well-served to emulate. Their long-term investment strategy serves as a catalyst for sustainable growth of businesses while simultaneously supporting employment creation. The company’s benefit enhancement and expanding membership functions to reduce risk for workers, supporting aggregate demand in a country that is now being driven by consumer spending.