JAKARTA, Reuter - Western nations must speak out about labour abuse in Indonesia and encourage the government to allow free trade unions or the country could be headed for trouble, said the head of a group that will lend Jakarta $4.6 billion this year.

Johannes Pronk, chairman of the Inter-Governmental Group on Indonesia (IGGI) which groups rich countries and institutions that give Jakarta cheap loans each year, said IGGI members should support unions in Indonesia as they do at home.

"I cannot understand why a member state of IGGI is asking Indonesia to foster the private sector without strengthening the position of the labour unions," Pronk, also Dutch Minister for Development Cooperation, told a news conference.

He said as the government pushed the private sector to take investment and job-creation into its own hands there was a danger that competetive cost-cutting would come down heavily on wages, which he said are already too low.

"Labour costs are too low and there is a certain degree of exploitation of labour." He said such exploitation contributed to a growing gap between rich and poor "which may tend towards instability."

Indonesian factories are among the lowest payers in the world, with the minimum wage averaging around 60 cents a day, 58 per cent of what a single man needs to stay alive, according to Manpower Minister Cosmas Batubara.

"Everybody tells me you have very good labour laws in Indonesia. The problem is labour laws are very often not being implemented," Pronk, told the news conference at the end of a seven-day visit to Indonesia.

"The only solution is to have stronger labour unions which are free labour unions, not controlled labour unions."

Indonesia says the single government-backed All-Indonesia Workers Union (SPSI) is all the country needs.

Workers call the group toothless and say they don't like the fact its leadership is dominated by former military men.

The government refuses to recognise the Solidarity Free Trade Union established last year. Solidarity activists have been arrested following marches to parliament by workers complaining their employers abuse regulations.

International labour activists say industrial nations keen to get a look in at major communications and other contracts in Indonesia's booming economy more or less ignore labour abuses like pitiful wages, forced overtime and illegal child labour.

Some of the worst offenders are Asian-owned factories which have stamped on labour costs to help them win lucrative contracts from major U.S. shoe makers, activists say.

The Labor government of IGGI member Australia is actively campaigning for Indonesia to hold the chair of the next International Labour Conference, a periodical meeting of the United Nations International Labour Organisation.

Pronk, who met with Solidarity during his visit, said Jakarta should recognise the union. Better labour rights were an essential part of stable development, he said.

"When I say that in contacts with governments in the West they all nod, and that has to be followed up," he said.

The outspoken minister recognised there were governments who would rather not offend Jakarta by criticising its treatment of workers.

"But their position is just not tenable," he said. "I really think it may become an IGGI issue...and that will in my view have some effect."

Besides multilateral institutions, the 21-member IGGI is dominated by Japan, western European nations and the United States.