Indonesia's Economy : Between Feudalism , Corruption & The Abundant Resources Curse

By nominal GDP, Indonesia has entered the G20 since 2009 with a total nominal GDP of 1.1 Trillion US dollars and percapita nominal of 3900 US dollars ;ranked 16 and 114 respectfully. Purchasing Power Parity is even more significant. It is as big as Poland and Sweden combined; the biggest in South East Asia and mostly domestic driven ;67% of GDP generated by domestic economic activities. The closest ASEAN economy, the size of Indonesia, would be Thailand, and it is not even half the size. It is as big as Singapore, Malaysia, and the Philippines combined. Indonesia’s industrial output is almost twice the output of Turkey’s if we go by nominal worth. It is the absolute biggest palm oil and its derivatives producer, more than 55% of palm oil products in the world are manufactured in Indonesia. Singaporean palm oil products are usually a repackaged Indonesian and Malaysian OLEO stuff. It has the 5th biggest population, thus a large population base as a potential market. In short, it is very, very big but insular and not very reliant on Import-Export. Welcome to The Atlantis Report. Indonesia is too much Jakarta and Java-centric. Strange to think that Jakarta as the biggest urban economy in Southeast Asia, even bigger than Singapore and the entire Philippines. Most people think Singapore as the richest city in Southeast Asia, sorry to burst your bubble, but since 2014, Jakarta is the richest in Southeast Asia in terms of GDP Nominal. Jakarta’s GDP stood at more than US$ 320 Billion, while Singapore's GDP stood at US$303 Billion. And with Jakarta’s GDP projected to surpass US$ 400 billion, Jakarta continues to dominates. Its this domination by Jakarta and Java that brought a detrimental effect on the rest of Indonesia. While Jakarta is heavily developing. Java is also not so far behind in development. But the rest of Indonesia, in Papua; in East Nusa Tenggar; and even in Jakarta itself, poverty is persistent. The problem is not that Indonesia is “poor and cashless” and has no income, Indonesia has a lot of revenue channels, but it is so concentrated and so unfairly distributed that only a handful of people get to reap the benefit of it. Until these structural problems get fixed or at least addressed, then Indonesia will continue to be “mostly underdeveloped.” So why is Indonesia still a un underdeveloped country? Many people would say it is because of corruption, laziness, incompetence, lack of discipline, etc. Yes, it’s all true. I’ll have to admit to those things. But there are several other factors. #1. Geography. Indonesia is the largest archipelagic state on earth, and the largest island nation, with 1,904,569 square kilometers of land areas, 3,544,744.9 square kilometers of sea areas. Due to this, Indonesia also possesses vast natural resources. But how about japan? ; and the U.K? They are Island nations too and with less abundant natural resources. Well, what’s the point of having a vast natural resource when the transportations are inadequate. Not anybody’s fault, but transporting goods from Java to Papua is way more challenging than transporting goods from Honshu island to Hokkaido. Between Honshu-Hokkaido, there is Seikan tunnel that connects both islands, allowing for the economy to grow properly. Ah yes, because of the transportation difficulty (via airplanes, which can only carry little), many consumer goods found in Papua are expensive, as much as 3–4 times more than the same type of goods found in Java. Also, transportation by sea would be lengthy. As a result, development in Eastern Indonesia is often delayed compared to their Western counterparts. As for the comparison with Singapore? Well, it’s not fair. Why? Singapore is a small country, and although it has less natural resources, they are more easily managed. Compare that to Indonesia, which has 260 million or so people, 45 - 50 times more than Singapore. (Actually, if you judge Indonesia by Jakarta itself, it may qualify as a developed nation, with US$ 14,726,99 per capita GRP. Compared to East Nusa Tenggara at US$ 1,147 and Papua at US$ 5,777). Another analogy of “vast natural resources but underdeveloped” would be the Democratic Republic of Congo. Aside from being riddled with corruption and civil wars, Congo has a notoriously unforgiving terrain, with rugged hills, mountains, rivers, etc. Thus making settlement and development progress halted. #2. Age. Indonesia is a relatively young nation, very young compared to the UK and Japan, or even the US itself that has lasted for centuries. So you guessed it, they are still developing and learning how to become and manage such a massive nation. #3. History. Historically, the development of Indonesia has been centralized within the Java region or occasionally Sumatra during New Order (Orde Baru) only after the Reformation period. The development started to be more progressive in other parts of Indonesia, such as Papua, Moluccas (Maluku), Borneo (Kalimantan), etc. And there are many other factors. Again, I won’t talk about corruption, incompetence, or lack of discipline, because many people know it and admit it. Some politics scholars believe that Indonesia follows the assumption of resource curse—which portrays the condition when a state found huge amount of resources whereas they have yet to establish a stable governmental institution, thus ended up exploiting raw materials while depending itself to a developed nation to process the resource with required advanced technology. This thus creates a cycle of dependency on the international market on raw materials and tax revenue from investors. Angola’s current condition after the oil boom in 2002 is a perfect illustration of this assumption, with corrupt politicians, no suitable clean water source for more than 70% of its population, and prices skyrocketing in its capital. Norway, on the other hand, had established its governmental institutions and required policies long before the oil boom, thus making it one of the most successful oil-exporting states. Their policies of foreign investment on oil extraction are very limiting with high rates. So what about Indonesia? Well, after Independence Day, particularly during the New Order era, Indonesia has depended on foreign investments as one of its national income sources. In the energy sector, the country has been conducting biddings on oil and gas explorations, which can only be conducted with sufficient technology. The national petroleum company, Pertamina, has been buying from extraction companies owned by foreign countries, such as Chevron, because they cannot do exploration on their own. Indonesia gets its income in this sector with tax revenue acquired from these companies— but it’s not that simple. So the country has this fiscal policy called production sharing contract (PSC) that basically says the government will shoulder all-around production cost (from extraction, construction, distribution) to ease foreign investment bidding process because they don’t have the technology and they need the resources. This is where it gets tricky—companies tend to play the numbers to get reimbursed way over actual production cost. Interestingly, this cost usually also consisted of the company’s CSR funds. So technically, it was not the company that gives back to the citizens; it was their money in the first place. On the other hand, the country does have a diverse set of resources. This means that the state economy doesn’t necessarily depend on just one product on the market, and some products can be processed by the locals without advanced technology. That being said, the main drawback is that most of their export products are raw materials, therefore having a considerably low price in the international market, following the idea of the resource curse. We haven’t even talked about state investment. It might be weird for a state with an abundance of resources to not have a wealth fund, but that’s how Indonesia is. The government does not have any savings allocated for the time when their resources are depleted—this is funny as even Angola has one. The income from all industries is being counted as a whole national income (APBN). Compare that with Norwegians which their government has more than 1 billion US Dollars worth of out-of-country investments generated from their oil revenue wealth fund. No savings and no notable investment, Indonesia basically depend on foreign investments and cheap export products. The state simply doesn’t look forward enough. I did hear that some local governments are planning on proposing to allocate savings from local business activities, though. Let’s see the result a few years in the future. Many people believe corruption is a major problem in why Indonesia is underdeveloped. Russia, Ukraine, and Iran are some countries in which people consider them corrupt countries even more corrupt than Indonesia itself. But these countries have relatively high HDI and income compared to Indonesia. Why? Because both countries spend more on education and research. Corruption is like a hole in a bucket. It reduces the contents but doesn’t change the capacity. You need to increase bucket's capacity in order to make it able to accommodate higher income than loss. In order to develop Indonesia, they should not only eradicate corruption but also increase the capacity of the economy itself with more innovation so that the economy depends not only on natural resources. Research and education are also very important, but it has never been a top priority of the government, and they don't even care about it. Indonesians are more likely to concerned about rises in the price of basic commodities than when the government doesn't improve the quality of education. The ratio of Indonesian education spending is only better than the Philippines, Turkey, Pakistan, and most of the poor countries in sub-Saharan Africa and Asia. Even countries with way higher nominal GDP like the US, Germany, and Brazil spend more their GDP on education than Indonesia. The government is likely too frugal in terms of education. And this is the result. Compared to other G20 members, the spending on research is just better than Saudi Arabia. With less than 0.1% of GDP, it is just like completely nothing more than merely a formality. Let alone the number of published research papers and or its application. Now you may get the reason why in terms of agriculture, Indonesia is now behind its neighbors. In Conclusion: Why Indonesia is still an underdeveloped country. I have been thinking long and hard about this, and my humble conclusion can be summed up into one word: feudalism. Indonesia has long been blamed for being a centralist state. This perception stems from their first two leaders: Soekarno and Soeharto. In a sense, it makes sense. Foreign media and common uneducated people love to put faces on the front page, and these two figures are extremely charismatic. They made a front that Indonesia is strong and united under one person- themselves. At a glance, this seems true. Their presidential system ensures that the Palace holds a lot of power. This includes military power, strong legislative authority (except if or until the Senate shut it down), and a significant measure of judicial power (has the monopoly on giving clemency). However, behind the scenes, the system is not very centralized, after all. The most dangerous failure of the government system is the messed up political parties. There is no ‘identity’ in the political parties — no set of rules, only interests, and money. What happened naturally when political parties are driven by interest and money instead of idealism is pseudo-feudalism. The president may seem in control, but to be a president in a democratic country requires votes. Political parties ‘control’ votes. In order to become a president, a person must make trades and concessions to political parties, in turn strengthening the power of the political parties. The continuous cycle of favors eventually made a system in which each region and provinces are ruled by ‘influential people’ who hands overvotes to would-be presidents and, in turn, being ‘rewarded’ by support from the central government. This support goes very far, indeed. Take Banten’s ruling dynasty, for example. The central government turns a blind eye for years on the fact that one family controls a significant number of prestigious governmental positions and political power. They were finally forced to act when a combination of opposition’s political maneuvering and the CEC managed to expose the rampant corruption that follows such a dynasty… but they had knowingly allowed such a regional dynasty occurring for over eight years. Other regions, while not entirely exposed, have it worse. There are governors who managed to install their families in the local courts, police, army, and legislative seats- effectively creating a de facto small kingdoms within the Republic. This is feudalism. In my opinion, this is the largest hindrance to the central government’s effort to improve Indonesia. Why do you think that the House of Representatives is the most corrupt institution in the country? By itself, it may not be that much of a problem. But leave it alone long enough, and suddenly you have a corruption cancer in every facet of the society. Then education starts failing. The business starts getting more expensive. Tax problems are popping up right and left. Police brutality here. Strong mafia boss there. And by each problem, the ‘influential person’ grew stronger and more secure. The spiral goes on and on. This was The Atlantis Report. Please Like. Share. And Subscribe. Thank You.









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