“Resource Nationalism” Clouds Indonesia’s Economic Prospects

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“Resource Nationalism” Clouds Indonesia’s Economic Prospects

While protectionist measures are partly due to the upcoming election, they’re increasingly a fact-of-life in Indonesia.

In Indonesia, considered by many to be one of the most promising economies alongside China in Asia, there has been an increase in regulatory changes in a variety of sectors ranging from mining to oil. Although attributable to political competition between elite factions ahead of the 2014 presidential elections, many of the changes are also indicative of growing “resource nationalism” within the country, which raises serious concerns about the predictability of the business environment and long-term economic growth. To ignore this trend is to miss what could be a crucial factor in the future of Indonesia’s growth.

In the mining sector, foreign investors heralded the 2009 mining law as a breakthrough in Indonesia’s extractive sector since it allowed foreigners to obtain full mining licenses for the first time. The government has since adopted various, more protectionist measures including a law adopted earlier this year that effectively strips foreigners of their control over mining assets by requiring them to divest at least 51 percent of their shares to Indonesian buyers after 10-years of operation. Finally, new regulations have been adopted to reserve coal for the domestic market as well as new export duties and the use of a government benchmark price.

When it comes to oil and gas, a new cabotage law adopted in 2008 requires vessels operating in Indonesian waters to be registered as Indonesian-flagged. The government sees the new regulation as a stepping-stone towards an independent shipping industry that will help the country absorb labor increases.

This trend is also apparent in the commodities and livestock industry. In December 2011, Indonesia’s trade minister issued several decrees to ban the export of raw rattan to ensure low-cost rattan supply for the domestic furniture industry. In May 2012, Indonesia’s Minister for State Enterprises urged state-owned palm plantations to accommodate 100,000 cattle in an effort to strengthen Indonesia’s beef industry. At the same time, he announced plans to strengthen the import quota on cheaper Australian meat.

There are several reasons for this growing resource nationalism, including:

·         Increased government confidence: Foreign investment and demand for Indonesian resources have been at an all-time high since 1998 and the government seems determined to make the most out of this situation. In the second quarter of this year, foreign direct investment soared to 56.1 trillion rupiah ($5.92 billion) for the quarter, over 16.3% of which was in the mining industry.

·         Historical experience combined with newly democratic politics: A former colonial state, independent Indonesia has always been wary of foreign acquisition of its resources. In fact, article 33 of the Indonesian constitution requires the government to control natural resources and important public utilities. Due to the country’s colonial past, championing resource nationalism is also popular with Indonesian citizens and is increasingly used by politicians to secure voters.

·         Vested economic interests: Politically well-connected economic interests are often behind new regulations and the arbitrary application of legal documents. Bumi Resources, for instance, became Indonesia’s top coal producer only after foreign companies such as BHP Billiton and Rio Tinto were forced to sell their assets. Likewise, aforementioned beef import quotas provide an advantage to import-license holders that are linked to the Islamic Prosperous Justice Party, which controls the Ministry of Agriculture.

·         Yudhoyono entering ‘lame-duck’ period: In addition to introducing good governance rhetoric in Indonesian politics, Yudhoyono’s reputation was built on sustaining a relatively predictable regulatory environment. As the president’s second term is coming to an end, Yudhoyono’s hold on power is slipping. The recent policy changes are indicative of the president’s incapacity to control political dynamics.

·         Political maneuvers ahead of the 2014 elections: Many of the taxes and royalties imposed on foreign companies are populist moves by politicians competing for the presidential office in 2014. Already in 2009, some politicians with vested business interests made resource nationalism a core issue of their campaign, including threats to review contracts with foreign companies in the extractive industry.

Growing resource nationalism in Indonesia should be understood in the context of political maneuvering ahead of the 2014 presidential election. In the past, policy shifts that were announced prior to elections were often watered down afterwards.

However, politicians today are unlikely to pursue long-term sustainable economic development policies even after 2014 due to the imperatives politicians operating in newly democratic Indonesia now face. These new factors include: ill-consolidated parties, non-programmatic politics, and the establishment of private networks to structure the electorate, all of which requires money. Resource nationalism and the policies that ensue from it are therefore unlikely to disappear completely even after 2014.

Michael Buehler is an Assistant Professor of Political Science at Northern Illinois University, and an Associate Fellow with the Asia Society.