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Will Oil Impoverish Indonesia?

Posted on: Monday, 27 March 2006, 09:00 CST

By William Pesek Jr.

Few facts say more about Indonesia's dysfunctional economy: The only Asian member of the Organization of Petroleum Exporting Countries is also a net importer of crude oil most months of the year.

That would almost be comical, were it not for the fact that more than half of Indonesia's 239 million people live on less than $2 a day. The country has not benefited from its abundant reserves of oil, a natural resource that leaders in countries like China spend virtually every waking moment searching for. That neglect might soon be over, now that Indonesia has signed a deal to extract oil from the $2.6 billion Cepu field, the country's biggest untapped reserve of the resource. The agreement with Exxon Mobil and Pertamina, Indonesia's state oil company, is expected to provide a huge boost to the economy.

Or will it?

The project will generate $3.3 billion a year to be shared by the government, Exxon and Pertamina, in that order. Higher tax revenue will leave more money for job creation, education and health care, as well as better roads, bridges and ports. During the four-year dispute over the field, Indonesia's fuel-import bill reached as much as $1.6 billion a month

Investors appreciate the calculated risk that President Susilo Bambang Yudhoyono took by allowing Exxon, a U.S. company, to take charge of the long-delayed plan. His gutsy move to sideline Pertamina shows that he is putting economic realism ahead of nationalism. That could generate a multiplier effect by encouraging more investors to consider Indonesia anew.

Yet Indonesia now faces a sticky question that confronts all oil- rich nations: Is oil a blessing or a curse?

Commodity-created wealth rarely trickles down very far into an economy, never mind to those living in poverty. Economists call this the "paradox of plenty," and Indonesia needs to counter this aggressively.

All too often, inhabitants of resource-rich nations fail to prosper from treasures like oil, gold or diamonds. Politicians and their cronies get wealthy, while the needs of the struggling masses are ignored. That has been Indonesia's experience far more often than not.

History is littered with examples of how oil wealth leads to a kind of economic-policy tunnel vision. Awash in oil, governments lose incentive to create other viable industries. They have little time for agriculture, textiles or manufacturing industries that could employ much of the population. Why bother when the real money is in oil?

"Oil promises to make you rich, but instead it makes you poor," the Stanford University economist Terry Lynn Karl wrote in "The Paradox of Plenty: Oil Booms and Petro-States." Her 1997 book, which focuses on Algeria, Indonesia, Iran, Nigeria and Venezuela, is even more relevant today amid near-record oil prices.

The instant windfall from commodity exports can destroy a nation's competitiveness. By contrast, adversity and the absence of natural resources can urge on a small nation, encouraging it to work harder to succeed.

Singapore is a perfect example. The city-state barely has drinking water, let alone oil; yet its per-capita income is $23,636, compared with $906 in Indonesia.

In many parts of the Middle East and Africa, crude oil at $62 a barrel is leaving few reasons to diversify economies. While poverty is less of a concern for Russia, that nation is a more recent example of how oil revenue distracts leaders from modernizing financial systems.

Will Indonesia resist the oil curse? So far, Yudhoyono is saying the right things. Only time will tell if he succeeds in fighting the ineptness and corruption that keeps growth from reaching those who most need it.

It is encouraging that Yudhoyono intervened directly in the Cepu oil field issue to win investor confidence. Indonesia needs more of it; growth in the $258 billion economy slowed to 4.9 percent in the last three months of 2005 amid tepid overseas investment.

International investors will enter Indonesia only if they believe revenue from oil and other commodities is being used productively. Yudhoyono also needs to convince a public that has grown wary of foreign companies profiting from the country's natural resources.

In the past week, protests took place against the Indonesian operations of Newmont Mining, Freeport-McMoRan Copper & Gold and Exxon. Keeping these operations running, and attracting more such investment, is vital if Indonesia is to increase growth. Mining companies account for more than 10 percent of Indonesia's economy.

"Often mining companies do deals with local elites, sometimes corrupt local elites, and local communities don't feel they have a fair share," said Bruce Gale, a Jakarta political-risk consultant who has covered Southeast Asia since 1998.

Protesters do have a point. The perception that multinational companies make more money from Indonesia than Indonesians do is well supported. The government has an uphill climb in convincing the populace that siding with foreign investors can work to the people's benefit.

It can indeed, so long as the government makes sure its oil wealth gets into the hands of the poor.

Source: International Herald Tribune

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