The metals value chain and the rise of New Developmentalism in Indonesia

With the election of Jokowi, we have seen the implementation of new industrial policies which have focused on value-add metal commodities export with SOEs at the center of the policy.

The Thai currency crisis which was caused by the unavailability of forex reserves on the part of the Thai central bank, had by late 1997 started to proliferate across East and South East Asia, first hitting South Korea and later on Indonesia, with this price of both the Thai Bath and the Korean Won against the price of the US dollar dropped precipitously, with the Bhat and Won dropping by around 40% and 34% respectively.

This drop subsequently triggered a massive recession across all the economies, the recovery from the recession was pretty rapid for most of the countries which were affected since by 1998-1999 the growth in the economy had been restored, yet it was far from desirable for all the parties involved, the Developmentalist and State Capitalist economic architecture which characterized the economies of this region at the time had been dismantled through the financial restructuring programs introduced by the IMF and hence neoliberal policies had made their way to the region.

The reforms which were introduced such as floating currency exchanges and central bank independence were supposed to restore the high growth rates across the region, but in fact led to the opposite, the destruction of state-led developmentalism and the empowerment of the technocratic class which mirrored the Japnese central bank revolt in 1994 had led to a structural decline in real and nominal growth rates across all the countries except for China(which had been growing from a very low base at the time and also didn’t restructure it’s economy in accordance with IMF’s recommendations), taking the best case of South Korea which already had a structurally declining rate of growth since the early 1990s, stemming from reasons such as graduation to high-income status to the short term industrial stagnation in the automobile industry, had restored good growth rates of around 5% a year from the year 2000-2008 and post the global financial crisis in 2008 the growth had slowed down to 3% on average which was the mean for OECD countries across the world , this growth although slower than what had come before was still good enough to give the average South Korean the same living standard and Income to that of the average Japanese or average EU-27 citizen.

A comparison of South Korean and Japanese GDP per capita over 60 years in current US prices, shows a picture of convergence with even slower growth in South Korea post the Asian financial crisis, the other reason is that Japanese GDP per capita hasn’t grown since the 1994 bubble burst.

But a gloomier picture might be seen if we look south, to take the example of Thailand an export-led economy with a large electronics industry and an emerging tourism sector, at the time the hard disk industry had been taking off with all the major manufacturers now in Thailand due to low labor costs, a good regulatory environment, and adequate infrastructure, to top this Korean and Japanese corporations had already been established manufacturers in the Thai automobile industry, these factors clubbed together had led to the rapid growth of both services and merchandise exports from the 1980s onwards, consequentially Thailand had started to achieve East Asia style economic growth for almost a decade thus the divergence between Thailand and South Korea which had started in the early 1980s was expected to close if this high growth could be maintained.

But this was not to be, since the financial crisis busted this dream of convergence the financial restructuring had also led to an overall structural decline in the yearly economic growth, the growth slowing from an average rate of 8.94% between 1986-1996, to around 4.4% for the next decade, which has since then slowed to around 3.8% each year.

Thailand’s GDP per capita (Constant US$, 2015) is indicated above.

Thailand’s economy didn’t recover to pre-crisis levels when measured in 2015 constant $ until the year 2002, while the same didn’t happen for the current US$ until the year 2005, which indicates a 9-year loss of economic potential.

Thailand’s economy suffered the most out of all the ASEAN economies, yet its economy grew significantly by about 150% before the pandemic when measured in current US$ although when compared to the South Korean economy which had started at a higher base of around 13000 US$ had grown by 170% by the year 2021, while economies such as Indonesia which had started from a lower base of around 1050US$ had grown by a very significant 330% by the year 2021.

The Indonesian economy had its discontents, its state-led Industrial system had to be disestablished and the currency was floated in the market-leading to enormous depreciation relative to the US $, the economic output of the country could only recover to pre-crisis levels in 2003, and the restructuring of the financial system which was expected to restore economic growth to pre-crisis levels which were around 7.5% that would also be attained without the financial volatility and cronyism which had become a part of the old developmentalist regime. But these promises didn’t quite come true as after the recovery the economy has only grown at an average rate of 5.35% in real terms between the years 2002 and 2021.

The sluggish economy had by the late 2000s created a backlash inside the political system strong enough for the reinvigoration of nationalist economic policies. This resulted in the election of President Jokowi Widodo who ran on a contra platform when contrasted to his predecessors, his policies can best be described as a form of Reformed Developmentalism, where the State’s institutions and SOEs play a larger role in the economy but the major part where this system departs from its forefather is the question of supply chain integration and monetary stability as it relates to the expansion of the economy.

SOEs have been mobilized since the Jokowi election of 2014, to accelerate both infrastructure capabilities and industrial development in general, but the large difference between the new and old policies is the degree of economic freedom enjoyed by Indonesian entrepreneurs, while the old State Capitalist system expected a limited role for the individual innovator in the growth of the economy, this paradigm understands that although upstream industries such as infrastructure and metals production might be carried out by reformed SOEs and Private Public Partnerships, the downstream value add component must be carried out by medium or large scale enterprises which may be privately held or listed publicly, thus for the sake of making value add exports more competitive the private enterprises are awarded much more freedom and are expected to play a larger role, in specialized manufacturing.

Quoting Kyunghoon Kim from “Key Features of Indonesia’s State Capitalism Under Jokowi”.

Stretching the scope of the state-owned sector, government-owned funds with developmental missions have also grown under Jokowi. The most notable cases were the Indonesia Endowment Fund for Education (LPDP) and the State Asset Management Agency (LMAN). LPDP, the assets of which increased from 18 trillion rupiahs in 2014 to 54 trillion rupiahs in 2019, acts as a sovereign wealth fund and has begun to diversify financial investment into, for example, state enterprises’ bonds (LPDP 2015, 2020; Republik Indonesia, 2020a). LMAN, initially created to manage the state’s underutilized assets, was transformed into a land bank that would provide direct or bridging funding for land acquisition in infrastructure projects. As of November 2020, this institution had provided funding for 83 National Strategic Projects, amounting to 62 trillion rupiahs, with a large share flowing into state enterprises (Habibah, 2020). Furthermore, state-owned development financiers with the core mission of accelerating infrastructure development have expanded notably. The assets of Sarana Multi Infrastruktur (SMI) increased from 9 trillion rupiahs in 2014 to 76 trillion rupiahs in 2019 (SMI, 2019; SMI, 2020). In 2019, SMI’s financing was concentrated in infrastructure segments promoted by the Jokowi government, such as toll roads (51% of the total), electricity (20%), and other transportation (16%). SMI also holds a 30% stake in Indonesia Infrastructure Finance, a long-term financier co-owned by International Finance Corporation, Asian Development Bank, Deutsche Investitions-und Entwicklungsgesellschaft, and Sumitomo Mitsui Banking Corporation. The government also established a sovereign wealth fund called the Indonesia Investment Authority in 2021. To stimulate national development, the fund received an initial capital of 15 trillion rupiahs, followed by a five-fold expansion of money to 75 trillion rupiahs.

State-owned enterprises have since 2014 been injected with large quantities of capital resources, expanding their assets and in turn expanding their influence on the overall economy and industrial structure, this has also coincided with the maintenance of economic freedoms in the high and mid-tech sectors, with the state-dominating the low-tech sectors.

The result of such industrial policies has been increasingly higher foreign direct investments away from the low-value add mining sector which is now under the control of SOEs and Private-Public-Partnerships, and towards the more value add and now increasingly export-oriented metals refining sector which has more of a private presence.

Thus we have witnessed a rapid rise both in stainless steel and refined nickel articles being exported, while the export of metal ores has declined progressively since most of the ore’s production is now directed towards fulfilling the needs of the newly emergent metals export industry.

The demand for EVs has increased rapidly all across the large markets and nickel is an important part of the EV supply chain, manufacturers across the Asia-Pacific, North America, and the EU are also looking at a China+1 strategy to diversify their rare earth metals supply chain, hence Indonesia which already has developed a local value add metals industry can plug into this supply chain dramatically growing its exports, but it remains to be seen if the recent gains which have been seen in the metals industry can be replicated across other commodities and manufactured articles which supplement the EV supply chain globally.

If the right balance of upstream industrial policy and downstream liberalization is met, Indonesia might be sitting on a new rapid growth trajectory.

References:

Kim, K. (2022). Key Features of Indonesia’s State Capitalism Under Jokowi. Journal of ASEAN Studies, 10(2), 207−226. https:/doi.org/10.21512/jas.v10i2.9075

Asian Development Bank. (2019). Policies to support the development of Indonesia’s manufacturing sector during 2020–2024. (A Joint ABD-BAPPENAS Report).

Carney, R. (2015). The stabilizing state: State capitalism as a response to financial globalization in one-party regimes. Review of International Political Economy, 22(4), 838–873. https://doi.org/10.1080/09692290.2014.958091

Indonesia’s uncertain climb up the nickel value chain. (n.d.). Lowy Institute. https://www.lowyinstitute.org/the-interpreter/indonesia-s-uncertain-climb-nickel-value-chain