American Indonesian Chamber of Commerce


Return of Paternalist Capitalism

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.
[That is] very dangerous. The state must take part in having responsibility for the economic conditions of the country… Countries which are very capitalistic and which have surrendered all sorts of things to the market are now making corrections and improvements…When the world experienced an economic crisis, we tried as hard as possible for our economy to continue to grow and to possess sufficient resilience. In the middle of an economy that is still in crisis, if our economic resilience is low, our economy could easily falter. Many countries worry because their economic resilience is not strong –once buffered, it unravels, and the economy can collapse.”

Set in the policy arena, this “not too much capitalism” attitude leads to a recent decision not to allow the private sector to build toll roads in Sumatra. According to Coordinating Minister for the Economy Hatta Radjasa:  “Because this project is a [government] assignment, the view is that it [must be performed] by a state enterprise that is 100 percent controlled by the state,” he said. In fairness, the Minister also remarked that the private sector might be given subcontracts. 

Another example has been the government’s continuing commitment to energy subsidies that are approaching 20% of the national budget.  Believing that they are crucial to the support the millions on the edge of poverty, even though they mostly support the middle to upper class vehicle owners, political leaders face huge political risks to eliminate them or scale them back, although recently the government has been publicly discussing the need to charge more for gasoline.    Most leaders know that abolishing them would free the huge sums necessary to build a modern infrastructure that would lower logistics cost and accelerate development.  But, apparently here politics trumps paternalism. 

Will the 2014 mark a change from this recent tilt away from a more liberal trade and investment regime?  This is doubtful in my view.   Most Indonesians—including the huge base of young voters, respond to nationalist, broad side politics, whether it comes directly from politicians or from the mosque.    So, for example, students demonstrating in Riau have recently demanded the government not allow Chevron to extend its contract over the Siak block. Although Chevron’s share (10%) of the production is hardly “domination”, the prevailing view as articulated by the students and uncontested by the government or local politicians—is that “This foreign domination of our natural resources has increased in recent years thanks to our regulations, which support free competition. As a consequence, local companies must become ‘the step-children’ when it comes to exploiting the resources”.   

Although Indonesia will remain a strong destination for trade and investment, this return of paternalist economic decision-making will increase risks and may require work-around behavior on the part of foreign firms, similar to what was common in previous eras. 

(These opinions are solely those of the writer and do not necessarily express those of the members of the American Indonesian Chamber of Commerce)