Is Indonesia Moving Toward a Command Economy?
Commentary by Wayne Forrest
If your country was labeled a command economy, it usually wasn’t a good thing. Your reputation would be top-down, inefficient administration, ruled by central planners removed from the granularity of markets. The State could never know enough, leading to shortages and misallocation of resources. Often the goal of a command economy was self sufficiency and independence from global markets. We think of command economies as top-down economic systems featuring centralized allocation of resources, prices set administratively, dominance of state ownership in major industries, and production targets and quotas. The classic command economies historically were China and the Soviet Union. Their models eventually failed and were replaced by a mixed economy model where private ownership was reintroduced. (North Korea remains a command economy.) Indonesia has always been a mixed economy with a large number of state-owned enterprises, many of which (i.e. plantations, banks) had been Dutch-owned during the colonial period. It may be moving more towards a command economy out of mistrust of globalism.
Since President Prabowo took office, and more recently after start of the US/Israel- Iran War, a debate has been sharpening over the role of the State in Indonesia’s economy. Even before the Iranian conflict, Prabowo made policy decisions to use the instruments of the State to spur food and energy self-sufficiency as well as implement widespread social programs through efforts like the Free Nutritious Meals Program, the creation of thousands of village cooperatives, and a government investment authority (Danantara). Could the market achieve the same results without sacrificing $billions of government funds? At least for now, it doesn’t look like it will get the chance. When asked for his opinion on Indonesia’s push for self-reliance in a March 17 interview President Prabowo said: “Now, the world is getting smaller, everything is interconnected. Conflict in one place impacts the entire world,” he said, stressing that import dependency was a liability in a world riddled with war.
Few political leaders today speak of globalization positively, but it will never going away. If Prabowo is right that “everything is connected” than at some point cooperation has to return to the equation. A future leader is going to see that a “make my country self-sufficient in everything” strategy is a zero sum, pointless strategy. The danger is that before that happens governments will increasingly believe that they can plan the future, bringing in the dreaded command economy control features mentioned earlier. I am concerned that this is exactly what Indonesia is currently doing. I’ll discuss three examples: the Papua food estate, mining policy, and food distribution, leaving the issue of Danantara, the government’s new agency for investment and SOE management, for a future commentary.
Papua Rice Estate
The Indonesian government continues to clear land for a huge rice and sugar/biofuel estate in Papua the size of Maryland. Although other crops will be grown (cassava, corn, palm oil) rice is the major one. Ever since President Suharto first achieved rice self-sufficiency during the period 1984-1990 population growth and El Nino (periodic droughts) have made it difficult to sustain.
It has never been proven that Indonesia can produce rice at a large scale. In 1995 Suharto attempted to clear 1 million hectares in Central Kalimantan’s peat lands but the project was scuttled when the initial yields were poor. President Jokowi unsuccessfully attempted to revive the project in 2020. Trial rice plots in the proposed 3 million hectare Papua food estate (which government planners call the “granary to the world”) have also failed. Previous research by a senior agricultural ministry official done during the SBY Administration (2009-2019) in America’s rice heartlands of Arkansas and California identified major difficulties in creating and seeding huge plots of land. I helped set up many of her appointments, interviewing her after she had completed her work. She told me one of the major stumbling blocks would be the lack of pilots trained to drop seeds a meter or so above the large paddies to prevent winds from carrying them away. Variable rainfall and soil quality were other factors.
Even if sugar can be successfully grown, its biofuel (ethanol) can substitute for only 10% of fossil fuel in Indonesia’s gasolines. In contrast, Indonesia has successfully created a palm-based biodiesel program that has eliminated 40% of diesel imports. However, because its used only in trucks, buses, and other large vehicles, rather than motorcycles and cars, it can’t solve Indonesia’s dependency on energy imports.
Through much of AICC’s history the argument was that Indonesia was in a strong position to achieve food security rather than food self-sufficiency. Whether it was surplus US rice, wheat, corn, sugar, soybeans exported to Indonesia by our members under the PL 480 program or readily available rice from Thailand, Indonesia did not have to worry about access to fundamental food supplies. But today, Indonesia does not trust the global system. Sadly, not many nations do. In the same Jakarta Post interview Prabowo cited the Russia-Ukraine war as an example of how distant conflicts can disrupt local stability, where war between two major wheat producers triggered a global spike in food prices.
Mining Production Quotas
Indonesia’s Mining Ministry believes it knows better than the mining companies themselves how much ore they should produce and process. Beginning in 2025 it instituted a quota system with the aim of raising international prices, especially for nickel. Acting as a “price manager” typical of command economies, the government’s annual quotas are disrupting the sector. Without adjustments some coal companies may have to shutter operations. Ironically, given that Indonesia is the #2 nickel miner in the world, its processors are adapting by buying ore from the Philippines, and others may not fulfill their contracts unless the government modifies its policy.
Red and White Village Cooperatives
I doubt Indonesia will ever be labeled a command economy. Its private sector, although circumscribed by a large state-owned sector, is very large and dominates retail/distribution, services, information technology, and manufacturing. However, this could change if President Prabowo’s program to create village cooperatives scale to all of Indonesia’s rural communities. It will ultimately create a vast state system integrating food distribution (rice, cooking oil, flour, fertilizer) with government entities (including the proposed Papua estate) bypassing the private sector. The government believes it can deliver the sembako (crucial items for daily living) at lower prices, applying subsidies as necessary. The cooperatives will also be given seeds, training, and financing to grow food for the government’s new free meals program aimed at 80 million per day. Mirroring similar efforts in India and China the system may end up delivering the stated benefits but could also be marred by mismanagement (shortages) and corruption.
Most economies in the world today are mixed, featuring a vigorous private sector as well as the State, either as the owner of key industries (such as mining and energy in Indonesia) or a major buyer of goods and services (US). But unlike in the command economies many Indonesian state-owned enterprises are publicly listed (banks, mining, telecommunications). Because over 65% of Indonesians voters are economically challenged, they can easily side with politicians who blame “foreign interests” and “middleman” for their woes. President Prabowo’s rhetoric often reflects this reality. Since voters often rely on food and energy subsidies, they usually support state intervention. However, these same voters also share a displeasure with the patronage embedded in the system that elects representatives as well as the government that is supposed to serve them.
For the purpose of space, I did not discuss the government’s move to shift 30% of its budget to create Danantara, a hybrid investment agency and holding company for SOE’s; itself, another example of new state intervention.
Only time will tell if it will be Indonesia’s people or a handful of connected business groups that will derive the benefit from Indonesia’s recent move towards a command economy.
(These views are the author’s and may not reflect those of AICC or its members.)