“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.

However, it is unfortunate that the new consensus represents a double-edged sword for Indonesia. While on one hand it legitimizes a more proactive approach to development including Indonesia’s own downstream agenda, on the other hand the new consensus, in its current form, is likely to have zero-sum implications for developing countries like Indonesia.

Indonesia does offer incentives for both investors and consumers, but with its limited fiscal capacity, it will unlikely be able to participate in the race to the bottom in green subsidies, hampering Indonesia’s ability to attract investments in emerging industries. One such case is the EV industry.

The IRA has massively spurred investments in the EV supply chains, with a total of $50 billion in investments newly announced in the US since the passing of the bill. Many of these investments could have gone to developing countries, including Indonesia.

This scenario thus poses a threat to the Indonesian government’s aim of the nickel downstream industry. There is a very real possibility that Indonesia will be stuck in exporting lower value-added semi-processed minerals to developed countries where the batteries and EVs will be made as they become the new magnets for investment.

How should Indonesia then respond to this? Bilateral negotiations with the US and the European Union as well as multilateral forums such as the Indo-Pacific Economic Forum (IPEF) will be instrumental in securing Indonesia’s place in emerging green value chains. Indonesia holds significant leverage due to its control over the critical minerals used in the energy transition: nickel, bauxite and copper, among others. This leverage should be used to negotiate local content rule waivers for exports such as EVs. If successful, green incentives in developed countries will instead also benefit Indonesia by effectively supporting our downstream exports.

Furthermore, developed countries and Indonesia actually have more in common. Both understand that the current reality where the global green supply chain is excessively dependent on one country is neither desirable nor economically tenable in the long run. With its fast-growing economy, immense critical resources and commitment to collaborate with all, Indonesia is an indispensable partner for a more diversified and resilient green supply chain. 

Aside from partnering with major economies, Indonesia should also refine its own policy under the new consensus. There is still room for the country to devise better-targeted incentives to support the more critical parts of the supply chain and achieve broader social goals. As is often pointed out by Harvard economist Dani Rodrik, the challenge is not whether to do industrial policy, but how to do it right.

downstIndonesia’s current nickel smelters and refineries are emission intensive as they are mostly powered by coal. This diminishes the emission reduction impact of EVs and generates negative externalities to surrounding communities. To nudge the private sector in the right direction, the government could consider attaching conditionalities such as emission intensity reduction to tax incentives.

Not only is this worth pursuing for its own sake to safeguard our environment, there is also a competitiveness imperative to such policies. The implementation of carbon-based tariffs, such as the one recently passed by the EU in the form of the Carbon Border Adjustment Mechanism (CBAM), will also likely affect the competitiveness of emission-intensive exports.

In this regard, policy efforts to attract investments in green industrial parks powered by renewable energy are a step in the right direction.

While the emerging new Washington Consensus has some potential downside toward Indonesia’s industrialization ambitions, at the very least it should offer clarity that the times are indeed changing. Instead of an auto-pilot state, we need an entrepreneurial one to take on the daunting challenges of the 21^st century.  

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Faris Abdurrachman is an economist-in-training who is currently a Master’s candidate in Quantitative Economics at NYU Stern, and Dimas Muhamad is a public-policy analyst. The views expressed are their own.