It has been reported that some foreign investors have expressed their concerns about the policies being made by the government’s economic team. They feel that freedom to invest in Indonesia is being reduced.
Many new rules are regarded as limiting, to the extent that the Western media is starting to frame this phenomenon as “alarming”.
This view gained wide audience after the recent publication of an article by a Jakarta-based analyst Kevin O’Rourke, which suggested that protectionism, trade restrictions and limitation of foreign ownership are becoming increasingly prevalent in the country. O’Rourke argued that these are the conditions most worrying to investors.
On a more technical level, O’Rourke also questioned the policy of renegotiating contracts, restrictions on foreign equity in the mining sector, and the cessation of mineral exports.
A series of policies, which he called nationalistic and protectionist, were labeled with the term “Hattanomics”. It suggests that Hatta Rajasa, the country’s coordinating economic minister, is the mastermind behind such policies.
The policies and rules referred to by O’Rourke, among others, are those related to mineral export duties, restrictions on meat imports, limiting the entrance ports of imports and ownership by foreign mining companies.
The new Government Regulation (PP) No. 24/2012 – a revision of the previous PP No. 23/2010, requires foreign investors to divest their holdings in mining companies operating in Indonesia. Foreigners can only own 49 percent of the total original shares.By the tenth year of operating in Indonesia, the remaining 51 percent of shares must go to Indonesians.
The divestment is gradual: 20 percent in the sixth year of operating, 30 percent in the seventh year, 37 percent in the eighth year, 44 percent in the ninth, and finally 51 percent in the tenth year.
Apart from O’Rourke’s analysis, the debate on economic issues related to national and foreign ownership in Indonesia has been a major topic since the reform era. Some political groups even brought this issue to a constitutional level — emphaszing Article 33 of the Constitution as their justification.
It is generally believed however that the New Order era, which for 32 years was very hospitable to foreign investment was also the root cause of the debate.
The contesting arguments escalated mainly after it became known that “investment” in mining sectors was causing severe environmental damage. Since then, a large part of the people has supported the creation of “regulations” on foreign investment which are aimed at ensuring profits to our country.
An example of foreign investment that disadvantages Indonesia is the export of Tangguh LNG to China. In 2008, former vice president Jusuf Kalla estimated the potential loss from the Tangguh contract could reach Rp 700 trillion (over US$72 billion).
When the Tangguh contract was signed in 2002, the agreed selling price was only $3.3 per million Btu (British thermal unit) with a flat rate for 25 years.
The assumption of oil prices at that time was $25 per barrel, far below the current price which hovers above $100 per barrel.
SBY’s economic team in 2006 and 2008 started re-negotiation of the Tangguh LNG exports to China to achieve a reasonable price adjustment. Such steps need to be taken in numerous disadvantageous contracts with foreign investors.
Hatta, the target of O’Rourke’s “attack”, denied the claim that he is the brains behind the decrease in investment. Hatta insisted instead that Indonesia adheres to the principles of an open economy which allows the active participation of domestic and international investors in many development projects in the country.
Another crucial fact is that Indonesia currently does not rely solely on the state budget to spur development, especially for the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI). Regional development and infrastructure expansion are now integrated in one blueprint for future development.
To realize MP3EI, Hatta is offering to investors the opportunity to invest in toll road projects, ports, airports and other highlights of the economic master plan. The point is clear. Indonesia is not a closed country; investors need not worry.
However, the openness of our economy is not necessarily free from regulations. That is the state’s role, which represents the broader interests of the nation and its people. This is how we should interpret the term “Hattanomics”. “Is it appropriate that Indonesia receive a royalty of merely 1 percent?” asked Hatta rhetorically. “We therefore must renegotiate” he said.
Hatta says that what the government is doing and has done, is solely for the national interests of Indonesia.
As an example he cited the decision to restrict imports of beef as part of the effort to protect domestic cattle farmers. The state must protect its national interests as mandated by the Constitution.
Hatta’s policy of tightening certain import regulations and re-negotiating a number of international agreements deemed no longer fair are in line with the economic priorities of the President and the Indonesian economy.
The President wants the Indonesian economy to adopt a middle way. Indonesia does not follow the doctrines of the Washington Consensus, dubbed neoliberalism.
While acknowledging the benefits of efficiency derived from the free market; state intervention is also at times very necessary. As a developing country, Indonesia’s goals are not merely economic growth, but also job creation and poverty reduction. These three goals are what we want to pursue to become a resilient emerging economy.
It is not enough for Indonesia to be a natural resource-based economy. Even though Indonesia is widely known for its richness in natural resources, President Susilo Bambang Yudhoyono insisted that Indonesia could not base its economic development and people’s welfare on natural resources.
On the contrary, the manufacturing and service sectors should be strengthened so that Indonesia gains added value for its economy.
O’Rourke’s analysis of “Hattanomics” certainly did not come out of the blue. It is not derived from only one government’s current economic policy.
In the past two to three years, Indonesia’s economic direction could be interpreted as becoming more prudent and aimed at “self defense”, mainly against Chinese low-end manufactured goods. The Indonesian government has taken measures in response to the flood of Chinese products.
Hatta took three steps to balance the ASEAN-China Free Trade Area (ACFTA), the agreement behind most of the influx of Chinese products into the ASEAN market. First, the ACFTA should ensure balanced trading practices within the agreement.
If this condition is not met, it is necessary to renegotiate the terms of the deal. Second, there should be measures to ensure that domestic industries do not suffer from the negative effect of application of the ACFTA.
Therefore, there are now safeguards in place to protect local economic interests. Third, the government should endeavor to increase the capacity of domestic industries through provision of better access to infrastructure and increased levels of competitiveness.
We can conclude that foreign investors should not be too concerned about “Hattanomics”. These policies aim to protect domestic business interests, giving them time to strengthen before exposing them to a more competitive world. I hope that in the long term, with these policies we can move towards a sustainable, enduring growth for the Indonesian economy.
The writer is the executive director Developing CountriesStudies Center (DCSC) Indonesia