The above quote is from Indonesian President Joko Widodo, expressed in January 2022. The statement refers to the Indonesian government’s ambition to make more use of the country’s abundant natural resources. The problem so far has been that Indonesia is a major exporter of natural resources in more or less raw form (shipping cheap minerals, in large volumes, to foreign destinations where the minerals are processed, thus encouraging the industrialization at the export destination).
However, it is a situation that involves several missed opportunities for Indonesia. For example, by focusing on mineral ore exports, Indonesia struggles to develop its own processing industries, which means it remains at the bottom of the (global) value chain. Ideally, export-oriented industrialization in Indonesia produces value-added goods that allow Indonesia to move up in global value and logistics chains.
Large-scale, export-oriented industrialization would make the Indonesian economy more stable because, while raw (or barely processed) natural resources are generally subject to high price volatility in international markets, processed have a much more stable value, so export earnings become more important. stable accordingly. We saw it in the 2000s when the commodity boom was a blessing for the Indonesian economy. However, the situation deteriorated in the 2010s – when commodity prices generally plunged – causing Indonesia to face a growing current account deficit that undermined the confidence of foreign institutions and investors in the fundamentals of the economy. the Indonesian economy. Thus, the Indonesian economy seems too linked to the volatility of commodity prices. Therefore, when exports are not dominated by more or less commodities, Indonesia’s trade balance, current account balance and even the rupiah rate are bound to become more stable accordingly.
Moreover, if Indonesia sells its natural resources in large quantities and quickly, then the country will see its abundance of natural resources reduced sharply in a few decades, which will make it less attractive to invest in the industrial transformation of natural resources. in Indonesia at some point in the future. Thus, it is important to keep enough reserves for future use (at home) to attract investment.
But the shift to “value-added natural resources” is a process that does not succeed on its own, the main reason being that Indonesia’s investment environment is not the most favorable, while it is also too attractive for established players to content themselves with earning income from the export of unprocessed natural resources (especially in times of high commodity prices) without having to consider capital-intensive investments. And so, top-down encouragement is needed.
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