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Overcoming
Indonesia’s ‘resource curse’
Will Hickey ; Twice
Fulbright Professor of Energy And Human Resources, Chair of Global Management
at Solbridge Int. School of Business in Daejeon, South Korea
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JAKARTA
POST, 18 September 2012
Last month economics Nobel Laureate Joseph Stiglitz had a column
in The Jakarta Post about the resource curse. Stiglitz was awarded a Nobel
prize based on so-called “asymmetric information” theories, that being insiders
profiting exceedingly well from hidden knowledge in any transaction, especially
in regards to developing countries and investment.
He discusses how much natural resource wealth is in Africa, and it will soon have a negative effect on its economies. I agree with most of Stiglitz points, but disagree with one Stiglitz point in particular about employment. This is very important to countries with resources such as Indonesia, Mongolia, and Nigeria. Stiglitz claims, as do many other “resource curse” economists like Jeffrey Sachs at Columbia University, that natural resources have “little job creation, [and] unemployment rises”.
Yet, many jobs are created, just not with the host citizens! However, with transparency and ownership in the resources, a plethora of value added jobs can be created domestically via clustering.
Clustering is an economic concept that focuses on a main industry driver. Government policy is conducive to that driver by way of educational initiatives and tax breaks. The idea is to create a downstream network of content and knowledge support.
The State of Alaska also has a robust oil and mining industry. Many people are employed in these businesses. Transparency and ownership contribute enormously to gain-sharing when many are involved. These areas include exploration, drilling, pipelines, environmental controls and shipping. These jobs also provide high living standards.
Of course, this did not come easily for Alaska, the oil companies especially British Petroleum, (BP) in 1976 fought very hard against these reforms. In essence, they wanted Alaska to be a supply depot for oil reserves and to make Alaska along the lines of similar oil rich places, where the populace is seen and not heard. The populist governor at the time, Jay Hammond, let the oil companies know that the resources belonged to all Alaskans, not only to the companies, and not to future government budgets.
This is similarly echoed in Article 33 of the Indonesian Constitution. With a lack of transparency, the people may not align with “the government”, they can and do have different interests and directive.
This then creates the asymmetric information tangent that Stiglitz is famous for, whereby certain people capitalize on inside information at the expense of everyone else. Transparency is necessary, or else the society suffers overall.
In places like the US State of Alaska, a resource dividend is also given each year to all citizens regardless of their economic status of about US$1,100. This dividend is not only from oil (of which Alaska’s North Slope has vast reserves) but is fungible and derived from gross oil, gas and mineral revenues under Alaska’s borders.
In other words, what the people in Alaska receive in cash is effectively a part ownership outcome of their own resources. I would ascertain that the Indonesian fuel subsidy could be gradually removed if people can then see the revenues from the resources (oil and mining) accruing into jobs creation, healthcare and upgraded education projects. Stiglitz notes this success in transparency initiatives also.
It then appears that there are three levels to successfully getting past the resource curse: At macro, meso and micro economic levels. Most World Bank, IMF and international economists like Stiglitz focus on the macro level only.
In other words: they are pointing out the obvious. The macro level is in identifying the issues, such as hot money inflows, foreign direct investment (FDI), cost and quality of labor and amount of natural resources. For example, Indonesia is obviously benefiting tremendously from the China investment boom in resource demand.
The micro level is set by content providers, contractors and local and foreign entrepreneurs, in other words, the actual work where the rubber meets the road in regards to the resources. Recently, ExxonMobil ran an ad in the Aug. 19 issue of Tempo magazine, stating that (Exxon Mobil in Indonesia) “works hard to build the capacity of local people and businesses” and that “90 percent of our employees are Indonesian”.
What is not noted is that most big oil and big mining are run by an army of contractors, not by multi-nationals. The few hundreds that ExxonMobil employs are dwarfed by the thousands hired by their contractors. Contractors are usually under no obligation to develop anyone, and with contractors, it’s always a lowest cost game. Most of contractors provide content or specialized labor. This is the crucible for skills transfer. If ExxonMobil is serious about this, why not have an education transfer mandate with all their contractors via local universities? They can transfer horizontal drilling, reservoir management, finance, and organizational capacity skills so Indonesians can eventually assume the core jobs mantle.
It is the meso or middle level between what the economists observe about a country (the macro such as Indonesia with vast coal reserves) and what is actually happening on the ground ( the micro where a bevy of mining contractors from abroad and with mining expertise and shipping experience) that is of most interest.
Effectively, the meso level is the policy level. The policy level is the glue between macro and micro. Good policy assures an effective fit between the two levels. A poor or nonexistent policy contributes to inefficient outcomes. To this end, a focus on macro investment issues without developing a policy to contribute to societal gain-share of Indonesia’s resources will create asymmetries.
The policy then, like the US State of Alaska, should be focused on upgrading living standards. If a direct dividend payment is not feasible due to a large population, such as which Indonesia or Nigeria have, (and previous problems have been demonstrated with one-off payments in lieu of the fuel subsidy such as direct cash transfer in 2005), then other policy tools exist.
As mentioned in my previous articles, the Norwegian policy focus for oil wealth is one of health care, education and pensions for their people. The UK policy (due to the Labor government’s insistence with big oil in the 1960’s) was one of jobs creation and employment. Even Australia has a vibrant localized mining policy, where significant jobs creation is realized through mining cluster development in places such as Perth and Roxbury Downs in South Australia.
A cluster is a group of activities that are centered around a specific industry driver and supported by government policy, such as education initiatives in university curricula or tax and land incentives for developing local people. These clusters in natural resource economies are not merely about upstream drilling for oil or mining coal, but rather in creating value added to their commodities and in facilitating downstream people expertise in production enhancement. When one considers the outcomes of policy in skills and export related industrial activity in these clusters, employment opportunities soar.
This is where Stiglitz misses something with his macro view only. Natural resource ownership, if defined in a policy that emulates Article 33 of the Indonesian constitution has the potential to redefine Indonesia as a leader in the mining and oil industry. It might be added that simply dictating that exports carry a “value added” component by 2014 is not a solid policy, and will get the end run by clever companies offloading to subsidiaries.
Without a clear and transparent policy defining this meso level of ownership, things like fuel subsidies and Foxconn investment will be the temporary antidote to ownership and where asymmetric information distorts Indonesia’s economic outputs. ●
He discusses how much natural resource wealth is in Africa, and it will soon have a negative effect on its economies. I agree with most of Stiglitz points, but disagree with one Stiglitz point in particular about employment. This is very important to countries with resources such as Indonesia, Mongolia, and Nigeria. Stiglitz claims, as do many other “resource curse” economists like Jeffrey Sachs at Columbia University, that natural resources have “little job creation, [and] unemployment rises”.
Yet, many jobs are created, just not with the host citizens! However, with transparency and ownership in the resources, a plethora of value added jobs can be created domestically via clustering.
Clustering is an economic concept that focuses on a main industry driver. Government policy is conducive to that driver by way of educational initiatives and tax breaks. The idea is to create a downstream network of content and knowledge support.
The State of Alaska also has a robust oil and mining industry. Many people are employed in these businesses. Transparency and ownership contribute enormously to gain-sharing when many are involved. These areas include exploration, drilling, pipelines, environmental controls and shipping. These jobs also provide high living standards.
Of course, this did not come easily for Alaska, the oil companies especially British Petroleum, (BP) in 1976 fought very hard against these reforms. In essence, they wanted Alaska to be a supply depot for oil reserves and to make Alaska along the lines of similar oil rich places, where the populace is seen and not heard. The populist governor at the time, Jay Hammond, let the oil companies know that the resources belonged to all Alaskans, not only to the companies, and not to future government budgets.
This is similarly echoed in Article 33 of the Indonesian Constitution. With a lack of transparency, the people may not align with “the government”, they can and do have different interests and directive.
This then creates the asymmetric information tangent that Stiglitz is famous for, whereby certain people capitalize on inside information at the expense of everyone else. Transparency is necessary, or else the society suffers overall.
In places like the US State of Alaska, a resource dividend is also given each year to all citizens regardless of their economic status of about US$1,100. This dividend is not only from oil (of which Alaska’s North Slope has vast reserves) but is fungible and derived from gross oil, gas and mineral revenues under Alaska’s borders.
In other words, what the people in Alaska receive in cash is effectively a part ownership outcome of their own resources. I would ascertain that the Indonesian fuel subsidy could be gradually removed if people can then see the revenues from the resources (oil and mining) accruing into jobs creation, healthcare and upgraded education projects. Stiglitz notes this success in transparency initiatives also.
It then appears that there are three levels to successfully getting past the resource curse: At macro, meso and micro economic levels. Most World Bank, IMF and international economists like Stiglitz focus on the macro level only.
In other words: they are pointing out the obvious. The macro level is in identifying the issues, such as hot money inflows, foreign direct investment (FDI), cost and quality of labor and amount of natural resources. For example, Indonesia is obviously benefiting tremendously from the China investment boom in resource demand.
The micro level is set by content providers, contractors and local and foreign entrepreneurs, in other words, the actual work where the rubber meets the road in regards to the resources. Recently, ExxonMobil ran an ad in the Aug. 19 issue of Tempo magazine, stating that (Exxon Mobil in Indonesia) “works hard to build the capacity of local people and businesses” and that “90 percent of our employees are Indonesian”.
What is not noted is that most big oil and big mining are run by an army of contractors, not by multi-nationals. The few hundreds that ExxonMobil employs are dwarfed by the thousands hired by their contractors. Contractors are usually under no obligation to develop anyone, and with contractors, it’s always a lowest cost game. Most of contractors provide content or specialized labor. This is the crucible for skills transfer. If ExxonMobil is serious about this, why not have an education transfer mandate with all their contractors via local universities? They can transfer horizontal drilling, reservoir management, finance, and organizational capacity skills so Indonesians can eventually assume the core jobs mantle.
It is the meso or middle level between what the economists observe about a country (the macro such as Indonesia with vast coal reserves) and what is actually happening on the ground ( the micro where a bevy of mining contractors from abroad and with mining expertise and shipping experience) that is of most interest.
Effectively, the meso level is the policy level. The policy level is the glue between macro and micro. Good policy assures an effective fit between the two levels. A poor or nonexistent policy contributes to inefficient outcomes. To this end, a focus on macro investment issues without developing a policy to contribute to societal gain-share of Indonesia’s resources will create asymmetries.
The policy then, like the US State of Alaska, should be focused on upgrading living standards. If a direct dividend payment is not feasible due to a large population, such as which Indonesia or Nigeria have, (and previous problems have been demonstrated with one-off payments in lieu of the fuel subsidy such as direct cash transfer in 2005), then other policy tools exist.
As mentioned in my previous articles, the Norwegian policy focus for oil wealth is one of health care, education and pensions for their people. The UK policy (due to the Labor government’s insistence with big oil in the 1960’s) was one of jobs creation and employment. Even Australia has a vibrant localized mining policy, where significant jobs creation is realized through mining cluster development in places such as Perth and Roxbury Downs in South Australia.
A cluster is a group of activities that are centered around a specific industry driver and supported by government policy, such as education initiatives in university curricula or tax and land incentives for developing local people. These clusters in natural resource economies are not merely about upstream drilling for oil or mining coal, but rather in creating value added to their commodities and in facilitating downstream people expertise in production enhancement. When one considers the outcomes of policy in skills and export related industrial activity in these clusters, employment opportunities soar.
This is where Stiglitz misses something with his macro view only. Natural resource ownership, if defined in a policy that emulates Article 33 of the Indonesian constitution has the potential to redefine Indonesia as a leader in the mining and oil industry. It might be added that simply dictating that exports carry a “value added” component by 2014 is not a solid policy, and will get the end run by clever companies offloading to subsidiaries.
Without a clear and transparent policy defining this meso level of ownership, things like fuel subsidies and Foxconn investment will be the temporary antidote to ownership and where asymmetric information distorts Indonesia’s economic outputs. ●
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