(Bloomberg) -- Indonesia has been plundered since the Dutch began collecting nutmeg and cloves from what they called the East Indies 400 years ago. Its mineral treasures, scattered across 17,000 islands, include the world’s largest gold mine and second-biggest copper mine. Commodities account for more than half its exports, which include the most power-station coal, palm oil and tin. Indonesia’s modern identity was forged by decades of sometimes savage dictatorship that sold the country’s riches overseas. In recent years the nation has sought to keep more wealth at home for the benefit of its 265 million people. Amid sputtering economic growth, the pursuit of resource nationalism has proven to be a vote-getter but is threatening to undo the formula that for years brought much-needed foreign investment to the world’s third-biggest democracy.
Indonesia’s size, resources and location should give it a “natural appeal” to investors. Consumer-product companies are lured by its youth (half the population is under 30) and by a middle class expected to double to 141 million by 2020. But the country has underperformed. OECD data showed foreign direct investment at $22 billion in 2017, an improvement over past years but far behind the nearly $43 billion that went to neighboring Australia. While Indonesia that same year topped a global index of mineral potential by the Fraser Institute, a Canadian think tank, it did poorly in terms of investor perception, ranking 99th out of 104 mining jurisdictions covered. Indonesia in recent years has banned the export of metal ores to encourage domestic smelting, leading to mine closings and a surge in nickel prices. Newmont Mining Corp. and BHP Billiton Ltd. both sold their mines to local players. (The ban was later relaxed.) Energy companies such as Total SA and Chevron Corp. were pressured to cede assets. Freeport-McMoRan recently agreed to divest majority ownership in its massive copper mine to the state for a license to operate until 2041. The government has moved to make it easier for foreigners to get work permits, but also imposed a language requirement. It recently ordered oil producers to sell only to state refiner PT Pertamina in a bid to shore up Indonesia’s flagging currency, the rupiah.
The island chain, so vast it would stretch from New York to Alaska, was the seat of Buddhist and Hindu empires a millennium ago before turning to Islam through Arab traders. It endured centuries as a Dutch colony before winning independence after World War II. The first president, Sukarno, was known for fiery anti-Western rhetoric. He was overthrown in the late 1960s by the then-army chief, General Suharto, whose bloody, dictatorial reign brought stability while enriching his family and friends. In 1998, the Asian financial crisis sent student protesters into the streets, forcing Suharto out. A parliamentary democracy emerged, though the history of feudal, colonial and military rule meant wealth was highly concentrated among the elite; about 28 percent of Indonesians earn less than $3.10 a day. Indonesia does poorly 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.
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. President Joko Widodo, known as Jokowi, who is running for re-election in 2019, denies Indonesia is protectionist but casts himself as a champion of resource nationalism. After all, countries from Australia to Zimbabwe are pursuing similar drives to earn more from their resources. Critics including the World Bank argue Indonesia needs to focus on overhauling education and infrastructure to lift productivity and boost its economy. Jokowi’s opponent, retired army General Prabowo Subianto, said on the campaign trail that Indonesia shouldn’t be “a lackey and slave to other nations,” meaning that whoever wins in 2019, resource nationalism seems set to endure.
The Reference Shelf
- The pull of protectionism gets stronger as the 2019 presidential election nears.
- Jokowi insists Indonesia is open for business in a Bloomberg TV interview.
- Bloomberg Markets on how Indonesia’s rising wealth is attracting foreign investment.
- QuickTakes on the resource curse and deforestation, and QuickTake Q&As on Indonesia's tax amnesty and its flip-flop on mineral exports.
- “Indonesia Etc.,” a 2014 book by Elizabeth Pisani.
- “The Year of Living Dangerously,” a 1982 movie by Peter Weir based on a novel by Christopher Koch.
Neil Chatterjee contributed to the original version of this article.
©2018 Bloomberg L.P.