Who Would You Rather Work For?

Commentary by Wayne Forrest

Populist nationalism is now widespread throughout the world. It takes many forms and in Indonesia it rears its head like clockwork during every Presidential campaign. The basic sentiment is that foreign trade or companies must be curtailed so we can manage our own destinies either as a nation or as individuals. Its very frustrating to those of us engaged in international trade and investment who uphold democratic principles rather than colonialist practices, to read the rhetoric that emerges from the campaigns of almost all of Indonesia’s candidates. The words lead to distortionary economic policies such as export and import bans adding risks to do doing business. There are winners and losers: usually government-owned companies and networks of private companies who have strong connections to ruling coalitions. Indonesia’s people aren’t told about the costs, only the benefits.

The leader in Indonesia’s polls, Prabowo Subianto, recently said something very similar to what Indonesia’s current President often says: “We have experienced hundreds of years of subjugation by foreigners – and we understand from our history that we must safeguard our wealth. Our wealth has continually been taken away from us. It is not us who have gone to Europe – rather, it is Europeans who came here. They came seeking riches – our rubber, our oil, everything – and they treated us like slaves.” He went on to pledge to require down-streaming to 21 commodities in eight economic sectors, namely: coal, nickel, tin, copper, bauxite, iron, gold, silver, asphalt, oil, gas, palm oil, rubber, biofuel, turpentine, shrimp, seaweed and salt. Ganjar Pranowo, #2 in polls, has said similar things.

Hopefully, the policy will not be extended to coffee, tea, spices, and herbal products such as kratom; that would truly be disastrous. Imagine Indonesia demanding that only roasted coffee can be exported. The cost of transporting vacuum sealed cans needed to preserve flavor would be prohibitive.

The imperative to “add value” is understandable, every country wants higher wage manufacturing. But import substitution often creates price increases and shortages. Currently, a lot of Indonesian nickel is sitting around waiting for industry to catch up and local content mandates have caused shortages of electric battery components. (See Story) In 2007 and 2008 China’s economy required huge mineral imports but Indonesia’s 2003 draft mining law (interpreted to require smelters) had led many firms to cease exploration operations. Indonesia was caught short and left huge amounts of money on the table. Similarly, the rattan export ban in the 1980’s did not lead to significant down-streaming or extra revenue from furniture manufacturing; instead, it energized the use of synthetic rattan elsewhere.

I know most of AICC members, and US companies in general, do not believe that they are treating Indonesians as slaves. Nor does Prabowo. However, like populists worldwide, he and other Indonesian politicians actually no longer believe in free trade and comparative advantage, or if they do, only under specific conditions.

The path Indonesia has been on for the past 10 years, and will continue, is to add wealth to the public sector, through creation and elevation of state and regionally held companies supported by local content policies and export/import restrictions. Even when the private sector has created downstream activities the government has set up its own company as well. For example, there is a new state-owned battery company, as well as one to retail halal products. The lack of trust in the private sector is apparent. Indonesia continues to demand foreign mining companies divest more of their shares to the state based on a spurious premise that state ownership leads to more benefits. Indonesia’s people don’t realize the large sums the state has borrowed to buy shares –they could have sold them to the public-money that could have been invested in the new capital or increasing compulsory education from the 9th to the 12th year. However, they do see the headlines about corruption and mismangement at state-owned companies. A large state insurance company, PT Jiwasraya, perpetuated a Ponzi scheme that caused over $1.15 billion in losses. PT Waskita Karya, a state road construction company, has been so mismanaged that it may be delisted by the country’s bourse and has needed direct cash injections.

Which brings me to the question at the top of this commentary. Given a choice to work for a state-owned enterprise or a foreign company, most Indonesians would take the foreign company in a heartbeat. But yet their political leaders seem to be saying the opposite. I guess that’s the nature of populism.

(These views are the author’s and may not reflect those of AICC or its members.)