A wake-up call to revive commodity-based growth

Indonesia is endowed with huge resources and potential for commodity-based development. Realizing that the country has lagged behind and lost the opportunity to tap huge potentials from manufacturing, IT industry and high technology development, the country needs to look at its own capital and resources.

The country has 17,508 islands, 6,000 of which are inhabited, covering a total land mass of 1,919,317 square kilometers. With the additional surrounding sea area it makes up Indonesia is a generally recognized territory (land and sea) of about 5 million square kilometers with abundant terrestrial as well as marine resources to tap. With a population of 246.9 million and a 121 million workforce, Indonesia is a super power when it comes to production and market potentials.

It is the commodity-based industry development that can revive the Indonesian economy. As the archipelagic country, Indonesia is blessed with huge land mass potential for agriculture and abundant with mineral for mining and agriculture development bounded by the ocean that is rich in fish and biota.

Despite vastness and richness of natural resource and massive population, however, Indonesia remains as a typical irony of the third world country. The country economy still depends on commodity-based development and growth, struggling with efforts to improve governance, stubborn poverty level and regional development.

The cacophony interplay among vast natural resource and market potential, challenging governance and the need for necessary skills based human resources has prevented sustainable economic growth and thwarted the best opportunity to further upgrade Indonesia'??s economy. After years of stable economic growth, the average growth of over 6 percent is seen as one of the new emerging economies in the world, however, the country is caught off with abrupt turns and change in mood. The rosy picture has turned bleaker thanks to the domino effect of the economic crisis in other parts of the globe.

The country'??s policy direction is now heading to the left with the introduction of protectionist and nationalist policies, including on commodity-based industry. Counterproductive policies, such as imposing an export tax on raw minerals prior to the introduction of a full export ban in 2014, divestment of foreign-owned mining companies, and tighter conditions on ownership of Indonesian banks demonstrate lack of government clarity on how to mitigate the economic challenges. Further, observers are weary that the government will likely take a more populist policy ahead of presidential and parliamentarian election scheduled for 2014, which could dissuade investors to review their investment portfolio in the country.

Despite such woeful economic performance, the unpopular export tax imposed to CPO remains in place. The export tax and duty or other forms of levies were introduced in 1994, when the palm oil industry was starting to thrive and showing economic credentials. It was levied up until 40-60 percent, and with slumped CPO price, it is at about 9.25 percent. There was no effort from the government on how to sustain the motor of economic growth.

We have seen how the impressive economic performance turned sour. Growth is slowing down, the rupiah is dismal and at its lowest rate against the green buck, while the inflation rose to as much as 8.79 percent in August 2013, the highest in four years.

The impressive economic growth over the past decade is attributed to three main factors: growing demand for commodities, thriving domestic consumption and revival of the manufacturing sector. However, few argued on the importance of sustaining commodity-driven growth, and even the government has mistreated the commodity-based industry with the stipulations of unfavorable policies and taxation on the commodity-based industrialization.

Consequently, the jittery commodity market and spiraling prices due to economic downturn in China and India directly affect the economic performance of Indonesia. Such economic conundrums may be temporary, however, it exposes the country'??s dependence on commodity-based industry and trade.

Commodity-based industry and development are often seen as typical third world country traits, we see the government wanting a drastic shift from commodity- to manufacturing- and technology-based economic growth by instituting counterproductive policies. As a result, the authority has been throwing the opportunity to sustain commodity-based economic growth. When the commodity-driven crisis took place, the government desperately rushed to help revive commodity-based industry but to no avail.

We need to be fair in addressing the commodity issues. Strong demand of commodity, particularly coal and palm oil is the backbone of the country'??s respectable economic growth. However, we sometimes fail to recognize that the country'??s dependence on the commodity, as the largest crude palm oil (CPO) producer and one of coal exporters are highly vulnerable to the commodity prices and market volatility.

Indonesia has to transform its economic development policy and framework to balance the focus on export-oriented commodity and entertaining domestic needs. The whole policy framework on natural resource and commodity needs to be thoroughly reviewed.

Philosophically, the government needs to review the policy framework for commodity development. A new paradigm must be in place in managing commodity-based industry. The government needs to reset the decentralized governance scheme and balance the power among various layers of authorities of central, provincial, district and village levels.

Commodity-based industry and economic growth should be revived through a favorable policy framework conducive for investments and resource development. There are key steps to be immediately taken to revive and sustain commodity-based industry and development.

First is to set the government policy right. The government should stay away from protectionism policies, and instead create a healthy and favorable investment climate. As a commodity dependent country, Indonesia has to capitalize the resource development in a sustainable manner rather than unjustifiable efforts to curbing it.

Second, we need to attend to and disentangle bureaucratic red tapes and bad governance which have been plagued the country, and simultaneously provide incentives to commodity-based industry through tax incentives, infrastructure development and market facilities. The government should help the business in managing the market volatility through policy framework as well as support services.

Third is to set a new commodity-based industry and development on the basis of diversification of products, such as conversion of palm oil for biofuels, and producing added value of products by promoting downstream industry. The government has rightly promoted to export added value products rather than marketing raw materials, but it has to be consistently supported with investment incentives. Nevertheless, we need to work harder to improve technological and manufacturing capabilities to process the commodity '?? raw materials '?? through improvement of skills and expertise base and deepened industrial structures.

Fourth is to create and strengthen domestic markets for locally produced commodities. With a thriving middle class of over 120 million people, the markets for commodities are wide open to capitalize. The government needs to set a coherent policy to align and connect the dots of producers, supply chains and consumers as a prerequisite of to bolster national economic from within.

And lastly, the government needs to set a national target to allow further development and expansion of our commodity-based industry in a sustainable manner, including expansion of oil palm plantations and mining. Such development must take place only in permitted areas in accordance with land use and zoning and stringent industry standards on environmental stewardship and social responsibility.

Indonesia, as one of the emerging economic giants has to capitalize on its own resources, be it natural resource and human resource as a precious economic capital for commodity-based industry development toward steady national economic growth.

Commodity-based development remains capable as the mainstay of Indonesia'??s economic growth and development performance. To sustain it, the government has to change the way they govern and manage the vast resources and potentials while utilizing the thriving domestic markets.