China: A lesson in economic development for Indonesia

A recent trip to Wuhan and Chongging, two major industrial hubs on Yangzte River, confirmed this. 

What is noticeable is the amount of ongoing roadwork, thousands of tons of concrete and steel being utilized to produce larger freeways, overhead light railways, under-river MTR tunnels and new Maglev train foundations. 

Also noticeable on a drive through the landscape are that most houses and complexes are fitted with solar water-heating systems. China is trying many types of energy diversification: solar, hydro and nuclear. 

Indonesia, or any developing country with a high level of unemployment and an over-reliance on oil and coal to power their economies, should take notice of China’s state capitalism rubric that puts domestic interests and development first. This model does have its problems, especially in regards to democracy and dissent, but the sum in this case is greater than the parts. 

About 30 years ago, China was an economic backwater, with a huge impoverished population where the majority utilised bicycles as their main mode of transportation. China did not have a resource economy blessed with oil or minerals to ease its development transition. 

This is notable that many countries with resources, especially those in Africa, have failed to develop meaningfully.

How did China pull this off where others who started out with more have fallen short? There are several factors, but two top the list: First, in the 1980s under Deng Xiaoping, China opened up to foreign investment by granting investors all types of concessions on land, taxes and workforce in SEZ (Special Economic Zones). 

Second, the mechanism was largely utilised by way of 50/50 joint ventures (JV). The JV formed the conduit ensuring skills and technology transfer to local workforce, and the Chinese side was a state-owned company, not in immediate competition with the investing actor. 

This model worked well for a long time, and has added significantly to China’s foreign exchange reserves. It has also driven up labour costs with the rising living standards. China no longer wants labour intensive, low value-added investments on its coast. It wants companies to move inland, to places such as Sichuan, Yunnan, and Guizhou provinces. Labour is cheaper there but infrastructure and skilled workers are also lacking.

Many companies now pursue the so-called “China+1” strategy, whereby they keep a foot in China with one plant, while investing in a comparable plant in Vietnam, Indonesia or the Philippines. If things don’t work out, or labour savings don’t materialise, then they can return to their Chinese operations. The point of all this is that focused investment attached to tech transfer and skills building, despite numerous democratic and political fits and starts, have put China on the economic map. 

Indonesia has oil, coal, iron ore, all resources that China wants and needs to keep its export machine humming, and to fuel the ongoing boom in China proper. Instead of just exporting raw materials, Indonesia, by way of Trade Minister Gita Wirjawan, should take a page from the Chinese playbook and use it on them or any other country (India, South Korea or Taiwan etc) that is mostly seeking to exploit resources. These countries are hungry for Indonesian resources and are only looking for raw materials to utilise in their own gain share. 

With large amounts of Chinese investment recently approved by the Trade Ministry, Wirjawan should be aware of these facts, and that neighbours such as Malaysia have long stopped selling only raw materials and are following the Chinese SEZ and joint-venture model. 

Trade agreements that are made without any ensured technology transfer or mandated skills development will be hollow agreements. Indonesia is selling valuable, exhaustible resources for next to nothing for other countries’ economic benefit and welfare.

This is only ensuring that Indonesia will continue to lag in development long term, despite its short-term economic “feel good sugar high” due to high coal and oil prices today. 

This is one sector investment. Since most foreign investment in Indonesia is for resources, it has become a crucial economic “cluster” that must be the focus of real change and development initiative. Currently, Indonesia’s energy “umbrella agreements” and “mining laws” require little if any educational initiative for skills transfer. 

While Indonesia is a net oil importer, many unexplored regions have probable reserves of oil, liquefied natural gas (LNG) and coal bed methane (CBM). These fossil fuels currently contribute to 15 per cent of revenue to the Indonesian economy. Chinese National Oil companies (CNOOC, Sinopec and PetroChina) are investing heavily in undeveloped offshore oil tracts in the Java Sea and further east in Indonesia under the rubric of PSC (production-sharing contracts), even though many Western firms have pulled out due to uncertain legal regimes of the PSC. 

China also does not shy away from doing service contracts, which are usually anathema to international oil companies (IOCs) when dealing in new projects in developing countries, as they do not guarantee profitability. 

This also says a lot about risks China takes to ensure its access to resources. Only financing by a “state actor” can ride out this type of investment uncertainty. 

It clearly demonstrates the stark difference between liberal capitalism (ensuring profits, thereby needing a clear legal framework) and the state-capital model that China thrives on as profits are not the overriding concern. Partnering with IOCs (like Total or Repsol) for tech transfer and using all political power to insure those resources is the goal. 

The mining sector may be a better indicator of what is going on here. Due to high mineral prices over the past 20 years and vast demands at home (similar to Indonesia with coal), China, which also has vast coal reserves, has focused on selective investment only and value-added projects that will add to in-depth mining know-how and sustainability. Many of the Contract of Works or mining authorisations handed out to foreign investors in Indonesia do not carry the same focus. 

It is interesting to note that the upcoming ban on the export of unprocessed raw materials in Indonesia in 2014 will do little to solve this problem of skills development and tech transfer. Simply, the business owners that have the current technology to upgrade the ores and minerals (such as smelters) will reap all the profits of this business. 

The point of all this is not advertise how successful the Chinese investment model is, but to rather get people like Wirjawan and the Trade Ministry onboard with successful investment models that benchmark sustainability and create a more diverse industry in Indonesia. 

Another point is that this will take a sustained governmental effort of working in conjunction with the legislature, the Education and Culture Ministry and the Trade Ministry to coordinate (and legislate) a skills upgrade. Strategic education then is the root of empowerment. 

In summary, China’s state capitalism model for economic development has served it well. The focus on working closely with foreign companies to ensure technology upgrades with attendant skills transfer is combined. 

If the energy sector is going to be the current trump card of Indonesia’s economy, educational and skills initiative need to be attached to it and mandated in law. 

 

Will Hickey, a former US Fulbright professor of energy and human resources, is an associate professor of management at Solbridge International School of Business in Busan, South Korea.