Indonesia’s Barter Model Pays Dividends

Having averaged about 5.5% growth over the past five years, Indonesia now nurtures a desire to join the BRIC league.

It pays to shake hands with somebody you aspire to be. Having averaged about 5.5 per cent growth over the past five years, Indonesia now nurtures a desire to join the BRIC (Brazil-Russia-India-China) league. To achieve this goal, it is negotiating with almost every country, including India, with which it agreed last week to double bilateral trade to touch $25 billion by 2015.  It also received $15.12 billion in investment promises from Indian companies. “[The] majority of MoUs include infrastructure development and strategic industries that will have a tremendous trickledown effect on Indonesia’s economy” says Gita Wirjawan, chairman of the Indonesia Investment Coordination Board.

It could be a mistake to see this as an agreement between two thriving democracies or one between emerging economies. This similarity exists by default. Indonesia is also opening its doors to foreign investment without being seen as cosying up to either the US or China.

But how come Indian, Chinese, Japanese, South Korean companies are lining up to invest in a young democracy that is still a bit tainted with corruption and struggling to reform its restrictive investment environment?

The answer lies in Indonesia’s vast natural resources. But despite being resource rich, it remained poor for long as it had been selling the natural resources for cash to its Asian neighbours. The modern day ‘cash transaction’ model has now given way to the ancient ‘barter’ model: international companies are given access to its resources in exchange for rail, road, ports, telecommunications and power projects—a game changer that utilises Indonesia’s resources
to catalyse greater economic development.

Unable to fire their racing economies with domestic energy resources, both China and India are eager importers of coal. “Most investment pacts by Indian companies—Reliance, Tata, Adani and SAIL—relate to sourcing of coal from Indonesia,” says OP Lohia, who chairs the IndiaIndonesia Joint Business Council. Better quality Indonesian coal is a logical answer to India’s huge appetite for energy resources. And, says Arvind Mahajan, an analyst with KPMG, “Indonesia’s proximity to India reduces logistical costs for power projects in India.”

The new investment pacts should be a winwin scenario for both India and Indonesia: Indian companies receive coal and other minerals; Indonesia gets Indian expertise in creating world class infrastructure. The Adani group of companies will make rail lines, power plants and ports; SAIL will set up steel plants; and GVK will build airports.

About The Author

Shailendra Tyagi