Indonesia has been plundered since the Dutch collected nutmeg and cloves from the archipelago they called the East Indies 400 years ago. With treasures strung across 17,000 islands, it’s home to the world’s largest gold mine and exports the most power-station coal, palm oil and tin. Indonesia’s identity was forged by a half-century of sometimes savage dictatorship that sold its riches overseas. Now the country is taking steps to keep more of that wealth at home as the 10-year rule of its first freely elected president comes to an end. A rising tide of economic nationalism threatens to undo the formula that helped bring much-needed investment to the world’s fourth-most-populous nation and its 250 million people.
Jakarta Governor Joko Widodo won the July 9 presidential election with 53 percent of the vote and his win was validated in August by the Constitutional Court. Both Widodo and opponent Prabowo Subianto had promised to renegotiate contracts with foreign companies, keep more resources for domestic use and restrict overseas investment in the nation’s banks. A protectionist tone was set by current President Susilo Bambang Yudhoyono. In January, Indonesia banned the export of metal ores in order to encourage the construction of smelters, arguing that too much wealth was leaving the country and shifted to refineries overseas. The move led to mine closings, thousands of lost jobs and a global surge in nickel prices. Newmont Mining has filed for international arbitration in an effort to resume shipments of copper ore from its Batu Hijau complex on the island of Sumbawa. The government also wants to reset the terms of mining deals struck in the 1980s and 1990s during the three-decade rule of former strongman Suharto. Widodo represents a new generation of Indonesian politicians: a 53-year-old self-made furniture seller and can-do bureaucrat focused on cutting graft and red tape. He ran on a platform of concern for common people.
The island chain, so vast it would stretch from New York to Alaska, was the seat of Buddhist and Hindu empires a thousand years ago, before turning to Islam through Arab trade. After more than 300 years as a Dutch colony, Indonesia won independence at the end of World War II. The first president, Sukarno, was known for fiery anti-Western rhetoric; he was overthrown by army general Suharto after a 1965 coup. Suharto’s reign gave the country stability and stronger economic growth. It also enriched his friends and family until 1998, when the Asian financial crisis sent student protesters into the streets. A nascent democracy emerged, though the nation’s history of feudal, colonial and military rule meant wealth was concentrated among oligarchs and the political elite; more than 40 percent of people earn less than $2 a day. Indonesia ranks close to Ethiopia and near the bottom in surveys on corruption and the ease of doing business. A lack of roads and ports means it’s cheaper to ship goods to China than across the archipelago. Mining accounts for about 12 percent of the economy and more than half of exports come from commodities such as coal, gas and palm oil. Global consumer companies are lured by Indonesia’s young population (with half under 30) and by a middle class expected to double to 141 million by 2020.
Indonesia’s leaders want to wean the country off of commodities and push investment in value-added manufacturing and services to emulate the success of countries like South Korea and create a more even distribution of wealth. With a population hungry for jobs, there is fertile ground for the elite to paint the issue in nationalist terms and blame foreigners to win votes and serve its own interests. After all, countries from Australia to Zimbabwe are pursuing similar drives to earn more from their resources. Critics including the World Bank say such policies often backfire, and that driving away investors could cost Indonesia more than $6.5 billion in lost taxes and royalties over the next three years. That could exacerbate an economic slowdown and cripple efforts to build roads, schools, hospitals and other infrastructure.
The Reference Shelf
- “Investment in Flux,” a March 2014 economic quarterly report on Indonesia from the World Bank.
- A May 2014 article from Bloomberg Markets on how Indonesia’s rising wealth is attracting foreign investment.
- “Indonesia Etc.,” a 2014 book by Elizabeth Pisani.
- “Reformasi: The Struggle for Power in Post-Soeharto Indonesia,” a 2002 book by Kevin O’Rourke.
- “The Year of Living Dangerously,” a 1982 movie by Peter Weir based on a novel by Christopher Koch.