A commonly held view of Indonesia’s recent, more protectionist policy decisions (i.e. mineral export bans, beef and horticulture import restrictions, mining divestment rules) is that they are motivated by populist politics leading to the 2014 election. Followers of this view say that once the election is over, Indonesian policymaking will somehow shift back to a more internationalist position. That may be true, but it could also be wishful thinking. A more accurate view may be that a more confident leadership –proud of the nation’s economic resilience in the face of global slowdown, has renewed their belief in paternalist capitalism, the notion that the private sector has a more limited role to play, and that economic development still needs to be controlled by a paternalist state. Its not a new view for Indonesians, and certainly understandable given their colonial experience. Some background:
Since Indonesia’s independence the state has accounted for huge swaths of the economy (i.e. agriculture, transportation, utilities, heavy industry, communications), allowing the private sector only to be involved in sectors it could not afford to develop on its own. (oil/gas, mining, distribution, light manufacturing) President Sukarno attempted to combine socialism with nationalism and his successor President Suharto kept many socialist tendencies (5 year plans, agricultural cooperatives) while establishing a myriad of state mandated monopolies, some privately owned. Over time –and as various economic crises demanded– the State deregulated, gave up key monopolies (steel making, media, rice distribution), reduced sole importer agencies, and began to partially privatize (through equity offerings, and public-private partnerships) some state owned enterprises (power generation, airlines, telecommunications), especially once capital markets opened to foreign investors in 1988. A series of ever changing, and at times confusing, negative investment lists has been employed for decades, restricting foreign ownership in many sectors, as well as opening up others that were previously closed. One could argue that these policies (implemented by a vast bureaucracy) did more to reward well connected local business groups (and their bureaucratic enablers) than develop world class players and led to the inefficient allocations of resources as well as high logistical and bureaucratic costs. But, politically, these policies paid dividends to whoever advocated them.
Post 1998 democratic reforms and the political stability ushered in with the 2004 election (and 2009 reelection) of President Yudhoyono returned Indonesia to the strong 6%+ growth rates it had achieved in the Suharto era even amidst a world wide depression. Yudhoyono’s administration implemented further reforms. The private sector grew and with it, dramatic increases in local as well as foreign direct investment.
During Yudhoyono’s s first term (2004-2009), government statements and initiatives were highly solicitous of foreign companies and investors; the private sector was in many ways unshackled. The state was moving to becoming much more of a regulator of markets rather than an intervener in them. But his second term (2009-2014) has brought many of the restrictions mentioned above, the majority of which are based on creating more value-added industries. Examples are: ban on raw rattan exports to encourage local furniture production, export ban on minerals and requirements to build local smelters. The State here is saying, we think its better for the economy to have more local downstream production of our natural resources and since local and foreign investors aren’t doing it, we will mandate it.
I believe the policy shift resulted more from the 2008 economic crisis when Indonesia maintained its growth rather than politics. Leaders saw that not having a fully open market economy buffered them and was a positive not a negative. The world slow down and continuing high rates of poverty and less than optimal job growth became a context in which the government’s natural paternalist impulses could come to the fore.
Representative of the renewed sense of state “paternalist” capitalism are remarks President Yudhoyono made on April 30 at a National Development Planning Meeting:
“For Indonesia, we all must do this: do not just let everything follow market mechanisms.