Insight: It’s all about rent seeking, not nationalism

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If you had talked to global CEOs on the Fortune 500 list or heads of private equity and hedge funds earlier this year, you would have noticed there was a discernable buzz about the attractions of investing in Indonesia.

With the eurozone in crisis mode, an anemic US economic recovery and the BRIC countries facing slower growth, investors began to set their sights more firmly on Southeast Asia’s largest economy.

Looking at the deep structural challenges facing China and India, it is easy to conclude that Indonesia is a low-risk hedge against the possibility that Asia’s twin giants will not manage anytime soon to repeat their respective performances of double-digit growth; and, despite its problems with corruption and red tape, one could safely argue that Indonesia is a relatively less difficult place to set up operations and make a decent profit.

Given this favorable competitive backdrop, Indonesia should be able to generate substantially larger inflows of direct and portfolio investment.

Yet, in an almost inexplicable policy U-turn, the Yudhoyono administration has somehow concluded that the best way to leverage Indonesia’s strengths is to make life more difficult for foreign investors.

As one example, take the new policies affecting the mining sector. Requirements for investing in smelter operations, the imposition of export taxes on a wide range of minerals and the obligation on foreign mining companies to divest their majority shares to local entities are playing well with the nationalist choir.

Indonesia’s new mining polices are cause for corporate boardrooms across the globe to reassess their plans. Instead of a thriving mining sector, these policies will induce many foreign operators to divest their shares and seek their fortunes elsewhere.

Others, already having bet huge amounts of capital in Indonesia, might decide to continue operations and take their losses — but the bottom line is they will be much less inclined to invest additional capital in the future.

Instead of creating a win-win situation, the end result is both foreign investors and Indonesia come out losing.

These new policy measures are deeply worrisome, and not only because they don’t make good economic sense.

Although they are not saying so in public, the international business community is coming to the conclusion there has been a surge in economic nationalism.

Besides the policy fiasco delivered to the mining industry, cumbersome regulations on import licenses have also been put in place.

Then there is the central bank’s drawn out deliberations on policies that will place an equity cap on foreign ownership of local banks.

What does the Yudhoyono administration actually want? If you listen to the chatter of government officials on some days, it appears they are eager to attract foreign investment.

But their actions are not matching their words and there is a palpable fear about the possibility of more nationalist policies looming on the horizon.

This uncertainty about the future is starting to spoil the climate for foreign direct investment (FDI). The timing could not be worse: As the global economy sits on a precarious ledge with the world economic slowdown and eurozone crises, the end result may be strategic withdrawal or another prolonged circle of “wait and see”.

Logic thrown asunder, there must be reasons for such folly. One obvious reason is the Yudhoyono administration’s severe lack of leadership in economic policy.

Yudhoyono has never delivered a clear message or a road map on the direction he would like to see for economic policy.

The economic Cabinet under Yudhoyono receives no guidance or political cover from the President. Trying to sidestep the wishes of the rich elite is not only difficult but is also a potential landmine for policymakers, since many of the country’s tycoons have close connections to the palace.

Another reason for the recent surge in “nationalist” policies is related to the 2014 elections. Indonesia’s political parties are already beginning to prepare for the legislative and presidential elections, and this year’s main priority for party bosses is to raise cash.

It is no coincidence that the new energy and mineral resources minister was a major fund-raiser on Yudhoyono’s past presidential campaigns. The fact that he has no background in the natural-resource sector, a concern for many investors, is beside the point.

Other high-ranking Cabinet members with heavy sway over policy making are also known to have tight relationships with the Yudhoyono family and they have bet their future political careers on cementing ties with the President’s Democratic Party.

Once you understand the realities of Indonesian politics, the question of why “nationalism” has just begun to feature more prominently becomes less of a mystery.

What passes for nationalism in public is, when you scratch the surface, something totally different underneath.

Instead of serving the greater national cause, these policies are tailored by the political elite to create rent-seeking opportunities.

Hence, foreign investors should stand corrected: Indonesia’s bad policies in the recent past have nothing to do with nationalism.

The writer is a former coordinating economic minister.