October 25, 2024
JAKARTA – President Prabowo Subianto inherits an economy that, compared with a decade ago, is more reliant upon extractive industries, consumes far more coal and is more dependent upon trade with China than ever before. These are major challenges for the incoming 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 major legacy projects has been the rapid expansion of a nickel downstreaming industry, and Prabowo plans to stay the downstream course. Starting in 2020 with the raw nickel export ban, Jokowi forced foreign investors who wanted access to Indonesian nickel to pour their money into a nascent domestic smelting industry. Most 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 touted as an economic success. Smelting has made a significant contribution to regional GDPs across the country’s nickel belt, provided new jobs for domestic workers and boosted export revenues. This story of growth, however, is complicated by a range of serious negative externalities that have now been documented extensively in both the local and international press.
At many of the nickel smelting parks there is irreversible environmental damage, and coal-fired power stations in these industrial parks are increasing Indonesia’s greenhouse gas emissions. Indeed, Jokowi over saw a massive increase in domestic coal consumption, more than doubling since 2014 and with a particularly large spike between 2021 and 2022 when many smelters came online.
The sector’s distributional benefits 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. Most of the more skilled industrial jobs are held by international or internal domestic migrants, while the local population predominantly works in unskilled labor or in the provision of informal services. And due to environmental degradation, many local residents who relied on agricultural and fishing-based occupations are finding it increasingly difficult to eke out a living.
Human development and ecological sustainability seem to have fallen by the wayside. In short, the industry’s fast-paced expansion 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 block Indonesia from accessing United States markets.
There are ways Prabowo’s new government can reform the sector and make sustainable development more of a central focus. Indeed, a shift toward sustainability is necessary to align with Prabowo’s Asta Cita, harmonizing Vision 5 (the continuation of downstreaming) and Vision 6 (village economic development).
The new government should prioritize ways to generate more state revenue from this sector. Many of the early contracts offered companies remarkably attractive investment terms, denying the government a larger take of the profits through taxes and royalties and weakening corporate social responsibility (CSR) and ESG obligations. Indonesia knows how to get more out of foreign companies (there are stringent divestment requirements for foreign mining companies in upstream mining, for example), and more can be done to tax the sector appropriately and to demand effective CSR programs moving forward. New revenues can then be reinvested into local infrastructure and institutions.
Although roads and electricity networks have developed to meet the needs of the nickel companies, the government can make a much bigger commitment to reinvesting in schools, health services, clean water, sanitation systems and housing across the country’s nickel belt. This is essential to manage the migrant worker population and build local human capital capability. Given the loss of livelihood in parts of Sulawesi and Maluku resulting from poor environmental practices, local employment should be a concern for both local and national policymakers.
Environmental restoration presents a unique opportunity to develop and employ local resources, creating a new, constructive source of income. At current rates, Indonesian nickel will be depleted in the next two decades. How then are these provinces, formerly reliant on fishing and agricultural practices and made nonviable due to environmental destruction, meant to generate wealth? To fit into the picture of a “Golden Indonesia” in 2045, attention needs to be given to environmental restoration now. Although companies have land reclamation obligations, these are inadequate and are rarely fulfilled.
Finally, the government can find ways to attract a much more diverse set of investors into the industry, and carve out more space for companies committed to mining with high ESG standards and in turn meet growing and long-term international demand for “green” critical minerals.
International research shows that firms and countries with high ESG standards get more value from their extractive industries over the long term. There is potential for Indonesia to learn from its own conglomerates as they start to expand their international mining investments to places like Australia with high ESG demands. None of these are easy reforms. Reversing poor ESG standards and weening the sector, and the economy more broadly, off coal is a decades-long job, especially in a country where the coal lobby is mostly inside the government itself.
Still, international pressures are growing and to maximize the industry’s economic benefits and minimize harm, a Prabowo administration can do much better than Jokowi— but it will take political will.
Given Prabowo and his tycoon brother, Hashim, have their own extractive business interests, it is understandable that green energy advocates are skeptical that the new administration will build the sort of supportive political coalitions necessary to reform the extractive economy. But reform can sometimes come from places we least expect.
Prabowo cares about his own and Indonesia’s international image and reputation; a greener and more sustainable extractive industry would be a surprising, but remarkable and lasting legacy for the new president to leave behind.