Can We Reverse the Resource Curse at the Local Level in Indonesia?

This op-ed originally appeared in The Jakarta Post.

Indonesia is a classic example of a country that has overcome the oil curse. This was partly due to wiser spending politics as we weathered extremely volatile global oil prices between 1974 and 1989. Eventually, we moved from an oil-dependent economy to a more diversified one.

A looming quandary is whether we can repeat the same story in resource-rich districts and provinces. It is clear that the central government needs to work with these localities to make progress and avoid the resource curse.

Following the post-Suharto decentralization, the power to authorize mining licenses and exploit natural resources was transferred to local governments. Resource revenue-sharing mechanisms resulted in improved benefits in some local areas. In most cases, however, the result has been mixed, if not negative.

Most resource-rich districts and provinces lack the necessary technical capacity and political commitment to use these funds and authority for the people’s welfare. Resource-rich districts and provinces face the so-called “Dutch disease,” where petroleum and mining rents dominate the local economy and thwart development of other sectors; and pro-cyclical spending due to volatile commodity prices.

Video still from “Fueling the Future: Indonesia Plans for its New Oil Wealth”

Indonesia’s revenue-transfer system has exposed local economies to volatile oil, gas, coal and mineral prices. As a result, many resource-rich districts and provinces have gone through fiscal crises in recent years as a result of low commodity prices. Additionally, local-level patronage politics plays a significant role in diverting resource revenues toward elite groups and away from local populations.

At the same time, the central government still lacks necessary policy instruments to help sub-national governments better use these resources. A number of major policy issues need to be addressed.

The decision to extract and the granting of mining licenses need to follow a proper mechanism. Policy research by the Natural Resource Governance Institute (NRGI) on Indonesia’s decentralized mining system shows that the speed of decentralized power to sub-national governments to authorize mining licenses outpaced the latter’s capacity to perform this role. This has resulted in mismanagement and corruption.

Local community input must also be gathered. Our new program at the University of Gadjah Mada, called Resource Governance in Asia Pacific (RegINA), has produced qualitative research drawing from an in-depth study of four resource-rich districts in Indonesia. The study focuses on the relationship between local knowledge about managing natural resources and the decision to extract.

We found that community needs and concerns are often ignored. Communities have an important voice in how to sustainably manage natural resources. Clear policy guidance on free prior informed consent (FPIC) in the mining industry decision chain would allow them to have their voices heard in the decisions about whether or not to extract.

Extractive-industry revenue should be used to transform a resource-based economy toward diversified and sustainable development and to ensure some revenues are set aside for future generations.

Bojonegoro, East Java, is one district that is transforming finite resources into more sustainable local development and intergenerational benefit. An oil-rich district, Bojonegoro is known for its policy innovations, which address social conflicts, empower the local workforce and tackle poverty using resource revenues. (Watch “Fueling the Future: Indonesia Plans for its New Oil Wealth” from NRGI predecessor organization Revenue Watch Institute.)

Under the leadership of Suyoto (popularly known as Kang Yoto), Bojonegoro has started to establish an oil fund that would help to manage pro-cyclical spending in the district. At the same time, a portion of funding will go toward future generations through investment in education.

There are other local innovations to reverse or prevent the resource curse in localities. But in a unitary state like Indonesia, the role of the central government is indispensable in supporting policy innovations and providing guidance to make sure that extractive resources are turned into sustainable development.

Now that revisions of petroleum and mining laws are being discussed in the House of Representatives Indonesia may have the chance to repeat the success story of the 1980s at the local level by establishing stronger rules on anticorruption in petroleum and mining licenses; adopting the FPIC mechanism; and instituting rules on natural-resource funds at the local level.

Hasrul Hanif is a lecturer at the School of Politics and Government at University of Gadjah Mada and Emanuel Bria is the Asia-Pacific senior officer at the Natural Resource Governance Institute (NRGI).