Something Is Wrong With Indonesian Economy | Dark Side of Indonesia’s Economic Boom | The Blueprint

The largest economy of Southeast Asia is in deep trouble. Have a look at this chart. The nominal GDP of Indonesia stands at nearly $1.5 trillion, way ahead of any other Southeast Asian economy. This is because for nearly two decades, Indonesia felt completely unstoppable. While Western giants struggled through recessions and high inflation, Indonesia quietly clipped along at a rock-solid 5-6% annual growth rate, year after year. Its capital city, Jakarta, transformed into a dazzling forest of glass skyscrapers. Bullet trains carved through the lush hills of Java. International tech companies, global banks and car manufacturers rushed into the country with billions in foreign direct investments. And its growth was because of its unmatchable natural wealth. Buried beneath its tropical rainforests and volcanic islands lies the world's largest reserve of nickel, the critical metal essential for electric car batteries, renewable energy storage and modern industrial steel. So, Indonesia held the ultimate winning lottery ticket for the 21st century. It was rich, it was growing fast and it was sitting right at the centre of the global green energy revolution. But now, Indonesia's economic foundation is cracking open. The national currency, the rupiah, plunged 8% to record lows near 18,000 to the dollar. The Jakarta stock market, which had been heading for a record above 9,000, fell by a third, becoming the worst performing stock market this year. Foreign investors pulled billions out of Indonesian assets. The Financial Times calculated that global funds sold a net $3.9 billion worth of stocks this year, the largest sell-off since just before the 1997-98 Asian financial crisis. Apart from this, in just five years, nearly 9.5 million people have fallen out of Indonesia's middle class. The middle class shrunk from 57 million citizens down to under 48 million. Millions of hard-working families who thought they had achieved stability are now slipping backwards towards vulnerability and poverty. Traditional manufacturing has collapsed, from making up nearly a third of the country's GDP to below 20%. Factories producing clothes, shoes, electronics and auto parts are shutting down across the country, laying off hundreds of thousands of workers. But how did one of Asia's most promising tiger economies, sitting on a mountain of high-demand natural resources, walk directly into an economic collapse? Let's understand the blueprints behind it. To fix an economy, you first have to understand what makes it weak. For decades, Indonesia suffered from what economists call the resource curse. Indonesia had immense natural wealth. Coal, palm oil, copper and nickel. But instead of turning those minerals into finished goods at home, it simply dug the raw dirt out of the ground and shipped it off to rich nations for cheap. Foreign countries refined that dirt into high-value products, captured all the profits and sold the expensive finished goods back to Indonesia. In 2020, the Indonesian government decided enough was enough. They launched a master plan known as Hilirisasi, or downstream. Under this plan, Indonesia banned all exports of raw nickel ore. The message to the world was if you want your nickel, you cannot just mine it and leave. You must bring your money, your engineers and your technology to Indonesia. You must build multi-billion dollar processing smelters on our soil, employ our people and help us become an industrial superpower. At first, it looked like a stroke of genius. Billions of dollars in foreign capital poured in. Remote islands like Sulawesi and North Maluku transformed overnight into gigantic industrial hubs. Indonesia's export revenue skyrocketed from just a few billion dollars to more than 30 billion dollars in a matter of years. However, two critical problems went completely unnoticed during the boom. First, Indonesia created an immense global supply glut. Smelters were built at such breakneck speed, Indonesia ended up supplying over 50% of the entire planet's nickel. The market down suddenly. Because of this reason, global nickel prices crashed by over 40%. The very metal Indonesia banked its future on suddenly lost massive value, turning profitable smelters into razor-thin operations. Second, who actually built and controlled those smelters? Well, almost all of this downstreaming infrastructure was financed, constructed and operated by Chinese industrial conglomerates. To process raw nickel into usable metal, these smelters require massive amounts of continuous cheap electricity. Because remote islands lacked green grids, these plants were powered by hundreds of newly built, highly polluting coal-fired power stations. This created a massive geopolitical wall. When Western nations, particularly the United States and the European Union, introduced massive green subsidies like the US Inflation Reduction Act, they included strict rules. To qualify for subsidies, electric vehicle batteries could not rely on Chinese-owned supply chains, nor could they come from heavily carbon-intensive coal processing. Indonesia had spent billions building a nickel empire, only to discover that the Western world's car makers could not easily buy its refined products. So basically, Indonesia didn't diversify its industrial power. It simply replaced its old dependence on raw dirt with a new, complete dependence on Chinese factories and Chinese capital. While billions of dollars flowed into mega-smelters on distant islands, a silent tragedy was unfolding across Java, where over half of Indonesia's 280 million citizens actually live. Economists call this phenomenon premature de-industrialisation. When an emerging nation grows normally, it relies on labour-intensive manufacturing. Factories that make garments, shoes, toys and small electronics employ millions of everyday people. These jobs don't require high-level engineering degrees. They take farmers and rural workers, give them regular paychecks, health benefits and a steady ladder into the middle class. But in Indonesia, the government focused all of its energy, tax holidays and subsidies on high-tech mineral downstream, so traditional manufacturing was left behind. At the same time, cheap, heavily subsidised consumer goods from international markets flooded domestic stores, undercutting local businesses. Across industrial regions like West Java, textile factories that had operated for 30 years began shutting down one after another. This is the reason why, in recent years, tens of thousands of factory workers lost their livelihoods in single regions alone. You might ask, didn't the booming nickel industry hire all those laid-off workers? Well, the short answer is no. Mineral processing is highly capital-intensive, not labour-intensive. It takes hundreds of millions of dollars to build an automated smelting furnace, but the same furnace only needs a few hundred specialised technicians to run it, many of whom were brought in as foreign specialists. According to industrial estimates, creating just one job in a modern nickel smelter costs hundreds of thousands of dollars in capital investment. In contrast, building a textile or assembly plant requires very little capital per job and employs thousands of everyday citizens. Now, because the factory jobs vanished, laid-off workers had nowhere to turn except the informal economy. Today, nearly 60% of all working Indonesians are trapped in the informal sector. They work as app-based delivery drivers, roadside food vendors, daily manual labourers and informal couriers. They have no steady salary, no benefits, so household budgets collapse. People stop buying appliances, they delay purchasing homes and they cut back on basic consumer goods. This explains the mystery of why Indonesia's headline GDP numbers looked respectable while the middle class lost 10 million people. Now, Indonesia faces an even tougher challenge. It is running out of money, space and time. To keep the public satisfied and maintain stability, the government is leaning heavily on massive, expensive populist promises. The most prominent example is an ambitious national programme to provide free nutritious meals to over 80 million school children across the country. While feeding children is a noble goal, the price tag is staggering, estimated at over $30 billion annually once fully rolled out. At the same time, Indonesia has committed tens of billions of dollars to another monumental project, building a brand new, ultra-modern capital city called Nusantara, deep inside the jungles of East Kalimantan. The government decided to relocate the capital because Jakarta is rapidly sinking, congested and prone to severe flooding. However, foreign private investors have been hesitant to put their own money into building this new jungle capital. As a result, the national budget is being forced to shoulder the heavy financial burden of roads, government buildings and basic utilities. Here lies the dangerous fiscal trap. By law, Indonesia maintains a strict fiscal rule. The government budget deficit cannot exceed 3% of GDP. This rule was put in place decades ago to protect the nation from out-of-control borrowing and currency collapse. But with billions tied up in national megaprojects and massive welfare programmes, the government's budget is stretched to its absolute limit. To fund these commitments without breaking the law, Jakarta is forced to pull back on the very thing that actually builds long-term prosperity. Public education, worker retraining, healthcare infrastructure and local research. The story of the Indonesian economy is a powerful lesson for the modern world. Having trillions of dollars worth of critical green minerals in your soil does not guarantee automatic prosperity. What do you think about this? Do let us know in the comments down below. Until next time, thanks for watching The Blue Prince.