Prabowo’s Economic Blueprint
Commentary by Wayne Forrest
To understand the direction of economic policy under President Prabowo Subianto, it may be useful to begin not with the latest budget, the rupiah or even Danantara, but with Article 33 of Indonesia’s Constitution.
Little known outside Indonesia, Article 33 embodies a conception of the economy quite different from the liberal market model usually associated with successful emerging economies. Its quite short; 5 sentences:
- The economy is organized as a joint endeavor based upon the principles of brotherhood.
- Important sectors of production for the country and affect the life of the people are under the powers of the state.
- The land and the water as well as the natural resources therein are controlled by the state and utilized for the optimal welfare of the people.
- National economy is conducted on the basis of economic democracy upholding the principles of togetherness, fair based efficiency, sustainability, environment-oriented, independency, and keeping a balance in the progress and unity of the national economy.
- Further provisions regarding to the implementation of this Article are regulated by law.
Article 33 dates to Indonesia’s founding and has influenced Indonesian economic policy in various ways for eight decades. What is different today is the prominence President Prabowo gives it and the breadth of government intervention he believes it authorizes. In the past private companies would develop natural resources through contracts with the state, but lately its government companies, some newly formed, themselves. Its not just state enterprises exerting a greater role in the economy, its also more interventionist government policy.
“This is our economic blueprint,” Prabowo told Parliament in May, after reciting the article paragraph by paragraph. He left little doubt about his interpretation. Indonesia, he said, needs “the role of the state,” “state protection” and “oversight.” Most succinctly, he declared: “The state must be present.” On prices he has said “I tell my cabinet, formulate prices for nickel, gold. Every price must be determined by us” And “If they don’t support our price, then they don’t have to buy it. We can use it ourselves.”
Prabowo does not reject capitalism or markets. He describes his preferred model as a “middle path economy” taking what he considers the best elements of both socialism and capitalism. He praises competition, innovation, entrepreneurship, risk-taking and private investment. But markets, in this conception, operate within a framework in which the state reserves considerable authority to intervene when market outcomes conflict with national development objectives, social equity or government interpretations of the national interest.
That distinction is increasingly important for understanding contemporary Indonesia.
During Prabowo’s presidency, the state has not simply become larger. Economic authority is becoming more concentrated. Simultaneously Danantara is shuttering or merging under-performing state enterprises while enlarging their economic footprint of others. The newly formed DSI (PT Danantara Sumberdaya Indonesia) will monitor coal, nickel, gold, palm oil exports to detect under-invoicing and possibly set prices in the future. A minerals exchange will be created that will compete with similar exchanges around the world, in particular the London Metals Exchange. State-owned banks are being used to finance government priorities such as the Free Meals Initiative, Red and White Cooperatives, and a program to build 3 million homes. Other initiatives with huge funding requirements include the Giant Sea Wall (north of Jakarta), coal to ethanol, localized solar panel production, as well as the ongoing project to create Nusantara, Indonesia’s new capital city. Jakarta has reduced transfers to regional governments while questioning aspects of the decentralization that followed Reformasi.
At the same time, the boundary between conventional government expenditure and the wider financial activities of the state is becoming harder to discern.
This is where Article 33 becomes more than an interesting constitutional provision. It provides an intellectual and constitutional foundation for an economic system in which Danantara, state-owned enterprises, state banks and other public institutions can be mobilized to accomplish objectives that might otherwise have been pursued through the state budget or left to private markets. Furthermore, if the objective is noncommercial, the state now has the means to pursue it, and the expenditure, given it is technically a Danantara investment, remains off-budget.
The result presents an unusual problem for investors. Indonesia’s headline fiscal indicators remain relatively reassuring. Government debt remains moderate by international standards and the formal budget deficit remains constrained by the statutory ceiling of 3 percent of GDP. Yet those numbers increasingly describe only part of the state’s economic activity. Government-directed lending, SOE liabilities, Danantara financing, guarantees and other contingent obligations do not necessarily constitute sovereign debt. But neither are they irrelevant to an assessment of the state’s ultimate financial exposure.
The same question increasingly extends to monetary policy. Bank Indonesia must maintain currency and price stability while operating in an environment in which the government wants rapid growth, substantial investment and affordable financing. As the state’s development ambitions expand, the boundary between fiscal objectives and monetary policy consequently is attracting greater scrutiny.
Seen in this context, the recent change of finance minister (markets reacted positively) may matter less than initially assumed. A respected technocrat can impose discipline on the formal budget and reassure investors without necessarily changing the President’s underlying economic philosophy.
Prabowo has already told us what that philosophy is. Article 33 is his “economic blueprint.”
The larger question is what happens when the ambitions of that blueprint encounter the disciplines imposed by capital markets.
(The above remarks are the author’s and may not reflect the views of AICC or its members.)