Indonesia Is Better Than This
Commentary by Wayne Forrest
45 years ago, when I first lived in Indonesia, I naively thought by 2024 it would be further along on its development pathway, that most houses would have running water, electricity, and its children educated to the 12th grade. I felt certain that its size, democracy, resources, diversity, the creativity of its people and general openness to outsiders would allow the country to join the ranks of the world’s developed nations. Along the way it became clear that Indonesia was achieving some of these benchmarks such as electrification, basic literacy, reduced poverty and better life expectancy, but others remained a work in progress (indoor plumbing, education through 12th grade, formal employment). Even with all its material advances, approximately 60-70% of its 276 million people remain informally employed working as day laborers of one kind or another, stunting still effects 36% of children, and adult reading comprehension is quite low (2nd grade level). Centralized sewer systems are mostly found in urban areas and compulsory education ends at grade 9. Inconsistent policies and forms of corruption remain, hampering the country’s performance and its future. The cliché “two steps forward one step back” comes to mind.
Among Indonesia’s 7 Presidents, two have been particularly focused on development, especially job creation and infrastructure: Suharto and Jokowi. With obvious differences (the main one being Suharto was supported by the power of the military) each minimized politics and built a broad consensus across elites and among the public. Whether it was rural electrification, irrigation, roads, airports, bridges, access to seeds and healthcare, cheap energy and fertilizers, they got things done and were popular leaders. Indonesia’s other Presidents had their own accomplishments: Sukarno unified the independence movement; built an Indonesian identity, and planted the seeds of national unity; Habibie provided the legislation for representative democracy, a free press, and decentralization; Wahid (Gus Dur) returned the military to their barracks and began the ongoing battle against corruption; Megawati brought a measure of stability following the havoc unleashed by the Asian Financial Crisis of 1998; and Susilo Bambang Yudhoyono (SBY) furthered electoral, economic and environmental reforms, brought GDP to a G20 level, and strengthened Indonesia’s global standing through proactive diplomacy.
Conspicuously, none focused much on legal, judicial, and bureaucratic reforms. The common threads running through all these administrations, perhaps a continuing legacy of colonialism and nationalism, are: an interventionist state that doesn’t quite trust the private sector, large state enterprises that control huge swaths of the economy, energy and food subsidies remain political necessities, competent macroeconomic policymaking focused on foreign capital, inconsistent microeconomic policy, judicial decisions focused on favored domestic players often to the detriment of foreign companies, and large leakages from Ministerial budgets and SOEs due to patronage and corruption. Much like the nation’s beloved wayang (shadow puppet theater) Indonesia reflects the continuous struggle of good vs evil, competence vs incompetence.
I did not foresee 30 years ago, when the private sector was developing Indonesia’s plentiful natural resources (much of it based on contracts with foreign companies) that they would be nationalized. I thought the production sharing contracts (oil/gas) and contracts of work (mining) artfully allowed the government to avoid risk and save resources for public investments. I did not realize how strong was the desire of the government to operate these resources as a matter of national pride. Currently, without the technical and financial resources of multinationals, oil and gas production has dropped significantly and there has been almost no new exploration for hard rock minerals. The stories of major multinationals being shown the door (i.e. Total, Chevron, Newmont, Georgia Pacific, Uniroyal, Weyerhauser) reverberate, affecting the mindset of others that might come in.
Nor did I expect that Indonesia would return to a protectionist trade policy of import substitution after having failed at it at other times in the past. This week the Industry Ministry accused the Trade Ministry of being too open after it had relaxed a 2023 regulation after the business community protested it was too restrictive. After all these years ambiguity and confusion remain in the bureaucracy.
If Indonesia is looking for reasons why EU and US companies are not investing in the country at the pace they would expect given the front end reforms that have been made, its leadership should look no further than what is currently happening with its leading copper miners and the sorry saga of their export permits. They could also look at the thousands of shipping containers that backed up in ports after the Trade Ministry released a poorly executed regulation designed to mandate the use of local products or recent developments with the new capital, Nusantara.
Copper
Amman Minerals began as a subsidiary of Newmont Mining and operates a copper and gold mine on the eastern Indonesian island of Sumbawa. Facing demands to build an expensive smelter it was not convinced it needed and renegotiate its contract prematurely, Newmont divested and left Indonesia. Operating a much larger copper and gold mine, Freeport McMoRan successfully renegotiated its contract and agreed to build a smelter. It remains in Indonesia. Both Amman and Freeport shares are now majority owned by the government or other local players. The construction of local smelters was greatly slowed down by the pandemic and the companies have been issued export permits subject to the progress of smelter construction. However, even after agreeing to grant export permits for copper concentrates through December 2024 the government is engaged in what appears to outsiders as an amateurish finger pointing delaying exercise. The Ministry of Mining says the permit is granted but is waiting for the Finance Ministry and the Ministry of Trade, that grants the permits, says it hasn’t received the appropriate documentation from Mining. This has gone on for months. Maybe there’s an issue with the export duty. But this is not a first-time request and clearly local smelters cannot yet absorb all the concentrate that is produced. It’s happened several times in the past. One would think the fact that the government is a majority shareholder in both operations would have smoothed the process. This issue will, I predict, eventually be resolved but it raises questions in the minds of potential investors. Why is there not more bureaucratic competency.
Trade
Worried about a flood of inexpensive imports and a falling exchange rate Indonesia the Trade Ministry issued a regulation in late 2023 requiring importers to receive import permits. Presumably the Ministry would be filtering out products where a locally made equivalent was available. Similarly, the regulation stated that residents and tourists could only bring 2 electronic devices into the country. At the same time, it required exporters to sequester 30% of their proceeds in an Indonesian bank for 90 days. Chaos ensued. The policies not only created confusion and huge lines at airports, it caused an outcry from businesses that could not find compatible replacement products locally as well as a backlog of thousands of containers. Things got so bad two senior economic ministers (Finance Minister Sri Mulyani and Coordinating Economics Minister Airlangga Hartarto) had to publicly travel to Jakarta’s port in an attempt to debottleneck it. Things have improved at the ports and some of the more onerous requirements have been relaxed, but the policy on exports remains with no noticeable effect on the exchange rate. Meanwhile the regulation takes out of circulation working capital that could be used for job-creating investment. Just this week the Industry Ministry begged the Trade Ministry to reinstate the previous policy to prevent imports from damaging local industry. (Read Story Here)
Nusantara: Indonesia’s New Capital
When President Jokowi unveiled his idealistic plan in 2015 to transfer Indonesia’s capital to a shining new green city to be built out of the jungle in Kalimantan, I hailed it as Indonesia’s “moonshot”, a once in a generation project that could galvanize its youth and provide an emphatic boost to local industries much like the spinoffs created by NASA. But with finances heavily dependent on foreign investment which has yet to materialize and the departure of its top 2 officials only a few months before the official transfer, questions of its viability are surfacing. One major factor that is under reported is how data will be linked and transferred as government ministries are transferred. This week the government revealed a major hack so large that 10 foreign governments have been asked to help. At least one of the national data centers hit by the cyber attack had only 2% of its data backed up, a stunning revelation. Plans for President Prabowo’s October 20 inauguration in Nusantara have now been changed; it will take place in Jakarta. By then President Jokowi is slated to have moved to a new office in the partially built city, but his successor may not follow him. His eyes are reported to be on other projects. A white elephant may be in the making.
AICC is committed to Indonesia’s success. Our members engage with Indonesia daily and respect the achievements of its people. These recent cases display a very uneven policy environment and a lack of connection to real world business and economics. Watching these scenarios unfold I feel like I stepped back to an earlier era where risk analysts only advised trade with Indonesia but don’t invest. Combined with the lagging social indicators I mentioned at the beginning of this commentary, I fear Indonesia’s ambition to reach developed nation status and join the OECD, earning its much talked about “demographic dividend”, is now faltering. We who are engaged with the country know its products and people are better than this. I sincerely hope the next government can put things right.
(These views are the author’s and may not reflect those of AICC or its members.)