Monday, December 23, 2013

Indonesia’s ore export ban: What would Sukarno do?

If Sukarno were still alive and leading the country now, perhaps he would have banged the table in a Cabinet meeting in fury, screaming his frustration right into the faces of his ministers on how they had been so weak and bowed to pressure exerted by foreign mining firms in the new mining law

The law, which will ban exports of raw minerals starting Jan. 12 next year, was initially introduced to help Indonesia curtail its dependency on exporting raw natural resources by promoting the development of value-added industry, at the same time stopping the country’s highly priced raw minerals from being exploited by foreign mining giants.

The 2014 raw ore export ban has been on the table for years, long enough for foreign mining firms operating here to prepare themselves, yet they have been kicking the can down the road, crying foul over the obligation to build mineral-processing smelters because such an idea, in their view, was not commercially feasible.

Truthfully speaking, the foreign mining firms have taken the issue lightly. Perhaps the perception that all Indonesian bylaws are negotiable, that all government officials would be easy to persuade, that this country might need foreign investors more than the other way around, have made them to think that such a ban might be no more than a bluff.

So as the deadline draws near and the House of Representatives showed its seriousness to enforce the law, the foreign mining firms were shocked.

They then did everything from lobbying top economic ministers, to giving counter-bluffs in the media over the potential layoffs and huge economic losses that could materialize if the ban on raw mineral expoerts took place.

What foreign mining companies like Freeport-McMoran Copper & Gold Inc. forget is that an Indonesian law is still a law.

No matter how seemingly weak the country and the officials who enforce it, and now matter how powerful and influential your company is, an Indonesian law is something that all firms operating on this country’s soil must comply to.

Imagine that today the 21st century Sukarno surfed the Internet using his gadget and unexpectedly bumped into the news published by Bloomberg newswire on Dec. 17, titled “Indonesia’s Cabinet to Discuss Ore Ban Amid Freeport Queries”.

What would Indonesia’s first president say to Coordinating Economic Minister Hatta Rajasa, Energy and Mineral Resources Minister Jero Wacik, Industry Minister MS Hidayat and Finance Minister Chatib Basri?

“I, together with the other founding fathers, sacrificed soul and blood for the independence of Indonesia…but now you lads allow this country to be dictated and steered by a US company like Freeport,” Sukarno might say. “What kind of ‘independent’ nation is this?”

In many cases during his presidency, Sukarno was known for overindulgent nationalism and excessive hatred toward foreign firms (especially to the US: He was legendary for his “go to hell with your aid” remark).

However, Sukarno’s nationalistic viewpoint couldn’t be more relevant today. This is because in the case of the new mining law, many foreign mining firms have crafted strong propaganda of how their contribution to the economy is so immense, and that Indonesia needs them more than they need us and our natural resources — while in reality, it may be the other way around.

Nationalism can breed both bad and good policies. For instance, nationalistic sentiment that threatens to impede the plan to revise negative investments’ list (DNI) can be seen as bad, as it could limit the foreign direct investment inflows that Indonesia needs for strong, sustainable economic growth in the long run.

But, the nationalistic plan to ban raw mineral exports next year is a good policy, as it could help Indonesia climb up the supply chain by exporting more value-added goods, which eventually would lead to higher export earnings in the long-run, followed by other positive multiplier effects to the economy, such as higher absorption of skilled labor in the mining sector.

Of course, there shall be short-term pains if the law really proceeds. A potential loss from the implementation of the export ban would be US$6 billion, which would add to the country’s current account deficit by at least 0.6 percent of gross domestic product (GDP) next year, according to the World Bank.

But even the international organization acknowledged that the mineral exports ban would be beneficial for Indonesia in the long-run.

“From 2015, the ban would result in a relatively neutral impact on the trade balance, relative to the baseline, as […] gains from higher value processed exports begin to offset the loss of unprocessed mineral exports arising from the ban,” the World Bank wrote in its quarterly economic report released this week.

In other words, the implementation of the raw ore export ban to Indonesia will be like medicine injected into the body: It is bitter and painful in the near-term, but will turn out to be very beneficial for us in years to come.

Indonesia’s economy has stagnated at the middle-income level for a really long time, and critics have pointed out that only a bold, out-of-the-box policymaking mind set could help this country to jump up to the manufacturing level and thus avoid the “middle-income trap”. For our policymakers, now may be the right time to do just that.

If mining firms complain that smelters to process raw minerals cannot be completed until 2016 or 2017, then it’s their fault for underestimating the issue — Indonesia has given them enough time, now they need to think on how to expedite the smelters’ building process, if they want to avoid incurring bigger economic losses.

It is important for government officials to maintain credibility in its policymaking and law formulating process, because what’s at stake here is our country’s reputation in the eyes of foreign investors.

Were Sukarno still alive, there’s no doubt that he would have shouted to his ministers to go ahead with the law, and then motivated the people to rally behind the government.

Afterward, the whole international community shall know that a law in this country is non-negotiable and Indonesia can get really tough on that — hence, they will never take any issues with the government lightly again in the future.
Putera Satria Sambijantoro, journalist at The Jakarta Post.

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