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How Indonesia should navigate the new Washington Consensus
There is a very real possibility that Indonesia will be stuck in exporting lower value-added semi-processed minerals to developed countries where batteries and electric vehicles (EVs) will be made.
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Adding value: A nickel smelter operates at PT Virtue Dragon Nickel Industry (VDNI) in Konawe, Southeast Sulawesi, on Sept. 21, 2022. Indonesia has vowed to carry on its downstream program to add value to its nickel exports. (AFP/Andry Denisah)
“A promise made, but not kept” is how one of the highest-ranking officials in a country recently portrayed the impacts of “deep trade liberalization.” He added that instead of clinging on to the old Washington Consensus, we need to “forge a new consensus.”
You would be forgiven to think that it was uttered by a dignitary from the Global South, after all many in developing countries have been long-standing critiques of the existing global economic order. Nevertheless, the statement was actually delivered by Jake Sullivan, the national security advisor to the president of the United States.
Despite the raging partisan rift in the US, one of the few things that US Republicans and Democrats can agree on, as demonstrated by the bipartisan CHIPS Act, is that the old consensus is no longer sacrosanct.
Unlike the erstwhile precepts which see the role of the state as limited to that of a regulatory state, maintaining the rule of law and providing essential public goods, the emerging “entrepreneurial state” consensus, as popularized by Mariana Mazzucato from University College London, states that the government can and should take on more important roles in shaping markets to achieve broader social and environmental goals.
Arguably, the most monumental embodiment of the new consensus is the Inflation Reduction Act (IRA) that was passed last year by the US Congress. The IRA unleashes nearly US$400 billion in federal government spending that would not only help energy transition but also galvanize domestic investment in clean energy including in electric vehicles (EVs) as the expenditure comes with numerous strings such as local content rules.
The US is not alone in the developed world. European Commission President Ursula von der Leyen has repeatedly made the case for mobilizing state funds to finance investments in green supply chains under the European Green Deal. There is a growing sense across both sides of the Atlantic that the triple challenges of deindustrialization, geopolitics, and climate change require a paradigmatic change in economic policy thinking.
Those challenges are not exclusive to the developed world. The stagnation of Indonesia’s manufacturing since the end of the 1998 Asian financial crisis has slowed the creation of middle-class jobs, impeding the aspiration of millions of Indonesians to graduate into the middle class. Thus, we too need to jettison the old consensus and embrace the new one.
