The Indonesian state and the strategic use of foreign capital

Abstract

Indonesia is a net debtor country, meaning typically more investment flows into Indonesia than goes out. This is an important driver of growth, but can also create strategic and economic liabilities as foreign creditors establish claims on Indonesian assets. This paper uses the concept of defensive economic statecraft to explain how the Indonesian state has taken actions to mitigate these vulnerabilities by deepening domestic capital markets, accumulating foreign exchange reserves, intermediating inflows through SOEs and forcing investment into strategic sectors. Although foreign investment involves risks and trade-offs, this paper analyzes some of the mechanisms by which net debtor countries like Indonesia can mitigate such risks.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Sekretariat Kabinet Republik Indonesia. Pidato Presiden RI Pada Indonesia-China, Trade, Investment, and Economic Forum, Beijing, RRT, 9 November 2014. Speech (in Indonesian) can be accessed at: https://setkab.go.id/pidato-presiden-ri-pada-indonesia-china-trade-investment-and-economic-forum-beijing-rrt-9-november-2014/

2 This data can be obtained from Bank Indonesia’s monthly statistical reports which are available on its website: https://www.bi.go.id/id/statistik/ekonomi-keuangan/seki/Default.aspx

3 Note that 2020 and 2021 saw unusually high levels of bond activity as the government turned to deficit-financed spending to inject billions of dollars into the economy to counteract the impact of COVID-19.

4 This data is available on the Investment Coordinating Board’s data portal https://nswi.bkpm.go.id/data_statistik

5 In 2021 the Lombok International Airport was the first airport in Indonesia whose management was contracted out to a private operator, Changi Airport International.