Prabowo government inherits problematic extractive economy - Academia

Resident Prabowo Subianto inherits an economy that, compared to a decade ago, is more dependent on extractive industries, consumes far more coal and is more dependent on trade with China than ever before. These are important challenges for the next administration – and it will take immense political will to pursue reforms that can put Indonesia on the path to a more sustainable growth model.

One of outgoing president Joko “Jokowi” Widodo’s key legacy projects has been the rapid expansion of a nickel downstreaming industry, and Prabowo plans to stay the course downstream. Starting in 2020, with a ban on the export of raw nickel, Jokowi forced foreign investors who wanted access to Indonesian nickel to invest their money in a nascent national smelting industry. The majority of these investors were from China, which imports the vast majority of Indonesia’s nickel to feed its steel industry back home.

Officially, this policy has been considered an economic success. The smelter made a significant contribution to regional GDPs across the country’s nickel belt, provided new jobs for domestic workers and increased export earnings. This growth story, however, is complicated by a series of serious negative externalities that have now been widely documented in the local and international press.

In many of the nickel smelting parks there is irreversible environmental damage and coal-fired power plants in these industrial parks are increasing greenhouse gas emissions in Indonesia. In fact, Jokowi has recorded a massive increase in domestic coal consumption, more than doubling since 2014 and with a particularly large increase between 2021 and 2022, when many smelters came into operation.

The distributive benefits of the sector are limited. Local people living around nickel mines and smelters have experienced minimal income growth, and in some cases inequality and poverty rates have increased in nickel mining districts. The majority of higher-skilled industrial jobs are held by national or international migrants, while the local population predominantly works in unskilled labor or providing informal services. And due to environmental degradation, many local residents who relied on agricultural and fishing occupations find it increasingly difficult to earn a living.

Human development and ecological sustainability seem to have fallen into oblivion. In short, the industry’s accelerated expansion has sacrificed a long-term vision for sustainable growth. But Indonesia’s leadership has, over time, come to understand the extent to which these social and environmental externalities can become economic challenges – for example, poor environmental, social and governance (ESG) standards and excessive Chinese ownership now impede Indonesia from accessing US markets. .

There are ways for Prabowo’s new government to reform the sector and make sustainable development a central focus. In fact, a shift towards sustainability is needed to align with Prabowo’s Asta Cita, harmonizing Vision 5 (the continuation of downstreaming) and Vision 6 (village economic development).