Indonesia’s Restrained State Capitalism: Development and Policy Challenges

ABSTRACT

From the mid-2010s, the Indonesian government began to strengthen its direct participation in the economy by investing significantly in and via state-owned enterprises. Since the ownership reorganisation of state enterprises has been slow in the past, the government continues to hold a large portfolio of companies in diverse industries. Fiscal space was created after reducing fuel subsidies, enabling the government to inject a large amount of capital into state enterprises. The government’s control over the financial industry has also contributed to state enterprises’ expansion. However, state capitalism looks quite different now than the period before the Asian economic crisis. Economic and political changes of the past two decades have resulted in various domestic forces keeping the government’s aggressive mobilisation of state enterprises in check. Therefore, the recent state enterprise-centred development strategy in Indonesia can be described as “restrained state capitalism.”

KEYWORDS:

• State capitalism
• state-owned enterprise
• infrastructure
• industrialisation

Acknowledgments

The author thanks Andy Sumner, Peter Kingstone and Howard Dick for valuable comments on his research and two anonymous referees for constructive suggestions on this article.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1. “Policy space” is defined as governments’ ability to independently decide economic goals and experiment with policy tools to achieve these goals at their own pace.

2. The GICS consists of 68 industries. SOEs are assigned to an industry based on their major business operations. Therefore, if all of their business activities are included then the number of industries in which they are present is expected to be higher. SOE assets are based on 2015 data (Republik Indonesia 2016b, L. 128–L. 130).

3. This analysis is based on the information from 20 listed majority state-owned enterprises’ 2017 annual reports.

4. There were episodic changes in subsidised fuel prices to deal with the budget problem, but they were not sufficient to offset the rise in global energy prices and oil consumption.

5. I thank two anonymous referees and Howard Dick for raising these issues.