Indonesia, explained.
Go local (Ryan Rayburn/IMF Photo)
Indonesia should not copy the green plans of rich countries
The World Bank and IMF have dropped their old hostility to intervention – Indonesia should use the opening to shape its own path.
Indonesia, explained.
Go local (Ryan Rayburn/IMF Photo)
The World Bank and IMF have dropped their old hostility to intervention – Indonesia should use the opening to shape its own path.
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Indonesia should not copy the green plans of rich countriesIndonesia should not copy the green plans of rich countries
Around the world, governments are working hard to build factories that make solar panels, batteries, electric cars and other low-carbon products. To do this, they give companies money, tax cuts and special rules. This approach is called “green industrial policy”.
The United States, with the 2022 Inflation Reduction Act, offered large tax credits for clean energy and clean technology made in America, although these were cut back (Opens in new window) under the Trump administration.
Europe took a different road. In 2024, it adopted (Opens in new window) the EU Net-Zero Industry Act, which aims to make at least 40% of the clean technology Europe needs inside Europe by 2030.
Both plans share one goal. Rich countries want to bring factories home, depend less on China and protect jobs for their own workers. Climate matters, but competition and security matter just as much.
Should Indonesia follow the same path? It should learn from these plans, but not copy them. They were made to solve other countries’ problems.
American green policy asks how to keep good factory jobs. Indonesia must ask how to create good jobs for millions of people who have never had one.
Next week, the annual meetings of the International Monetary Fund (IMF) and the World Bank take place (Opens in new window) in Bangkok from 12 to 18 October. It is the first time the meetings have come to Southeast Asia since Bali in 2018, and a chance for the region to help shape the global economy.
The timing matters, because the World Bank has changed its mind about industrial policy. For decades, it advised developing countries to leave industry to the market. This year, in its report “Industrial Policy for Development: Approaches in the 21st Century”, it accepted (Opens in new window) that governments can play an active role in building industries.
But Indonesia’s situation is very different from that of rich countries, in four ways.
First, Indonesia does not have the same money. The United States can borrow very large amounts. Indonesia’s law limits (Opens in new window) the budget deficit to 3% of GDP. In August, the Finance Minister projected (Opens in new window) that this year’s deficit would reach about 2.85%. Parliament is debating whether to change the limit. Either way, a trillion-dollar subsidy program would take money away from schools, health and roads.
Second, the starting point is different. Rich countries are protecting strong industries. Indonesia is still building its own. In the early 2000s, manufacturing made up (Opens in new window) about 32% of the Indonesian economy. Today it stands (Opens in new window) at around 19%. Economists call this “premature deindustrialisation”: factories are shrinking before the country has become rich.
Third, around 60% of Indonesian workers earn (Opens in new window) their living in informal jobs. They have no contracts, no insurance and often low pay. American green policy asks how to keep good factory jobs. Indonesia must ask how to create good jobs for millions of people who have never had one.
Fourth, Indonesia has the world’s largest reserves of nickel, a key battery metal. In 2020, the government banned (Opens in new window) the export of raw nickel ore to push companies to process it here. This is industrial policy based on resources, not large subsidies.
The last time the annual meetings came to the region (World Bank/Flickr)
For rich countries, green industrial policy is mainly about competition and security. For Indonesia, it should be about development: using clean energy to become a high-income country.
The government’s target is 2045. The World Bank has warned (Opens in new window) that this goal will need something close to a “miracle”. Many countries get stuck at middle income for decades.
The energy transition could help Indonesia avoid this trap, because countries that join new supply chains early can learn new skills and build new industries. This is where the IMF and the World Bank can help, or get in the way.
The IMF has not always been helpful. In 2023, it called on (Opens in new window) Indonesia to lift its ban on raw mineral exports and not to extend it to other minerals. Indonesia refused. The evidence is mixed. A World Bank study found (Opens in new window) that an earlier version of the ban raised the value Indonesia added to its exports, but also drew in small, inefficient firms. The lesson is better design, not dropping the policy. In Bangkok, Indonesia should ask the IMF for advice on how to make resource-based industrial policy work, rather than advice to abandon it.
The World Bank’s chief economist, Indermit Gill, names (Opens in new window) three conditions for success: a large enough market, a capable government and enough public money. Indonesia has the first. It needs help with the other two.
On money, Indonesia should ask the World Bank for cheaper, long-term loans and guarantees for clean power and new factories. More than 94% of the power used to process nickel comes (Opens in new window) from coal. A budget near its legal limit cannot pay to clean that up.
On capacity, it should ask for help building the skills of agencies that design, monitor and, when needed, end industrial policies, and ask both institutions to judge success by jobs, skills and wages, not by tonnes of nickel processed or investment dollars announced.
Other Southeast Asian countries face the same limits on money and the same need for jobs, so they can make this case together in Bangkok.
Rich countries wrote green plans for their own needs. Next week, Southeast Asia has a chance to make sure the world’s two biggest development institutions support plans written for its needs too.
About the authors
Bhima Yudhistira Adhinegara
Bhima Yudhistira Adhinegara is the Executive Director of Center of Economic and Law Studies (CELIOS), an Indonesia-based economic think tank.
Muhammad Zulfikar Rakhmat
Muhammad Zulfikar Rakhmat Director of China-Indonesia Desk at Center of Economic and Law Studies (CELIOS) in Jakarta.
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