3 min read –
Indonesia’s Commodity Trap –
Escaping the Dutch Curse –
Path to Diversification –
In economics, “Dutch disease” (also known as the “Dutch curse”) describes a paradoxical affliction where a boom in natural resource exports strengthens a country’s currency, inflating costs and eroding competitiveness in other sectors like manufacturing for ex.
This leads to deindustrialization, job losses, and stagnant long-term growth, despite short-term boom revenues.
The term, coined by The Economist in 1977, originated from the Netherlands’ experience in the late 1960s.
After discovering massive natural gas fields in the North Sea in 1959, the Dutch guilder appreciated sharply, causing manufacturing output to fall by nearly 10% in the early 1970s and unemployment to surge.
The concept, formalized by economists W. Max Corden and J. Peter Neary in 1982, draws from earlier observations like Spain’s 16th-century gold influx from the Americas, which fueled inflation and economic decline.
Historical examples abound.
The UK’s North Sea oil boom in the 1970s accelerated deindustrialization, contributing to recessions in the 1980s.
Venezuela’s oil dependency since the 1920s has trapped it in cycles of boom and bust, with GDP per capita halving since 2013.
Nigeria’s petroleum surge in the 1970s sidelined agriculture, leaving over 40% of its population in poverty today.
Today, several resource-rich nations are in or flirt with this trap.
Angola, Africa’s second-largest oil exporter, saw its non-oil sectors shrink as oil accounted for 95% of exports in 2024, exacerbating inequality.
The Democratic Republic of Congo relies on cobalt and copper for 70% of exports, yet manufacturing contributes just 6% to GDP amid currency volatility.
Equatorial Guinea’s oil dominance (90% of exports) has yielded high per-capita income but negligible diversification, with poverty affecting 76% of citizens.
Indonesia fits this pattern.
Indonesia’s commodity dependence mirrors these vulnerabilities, as confirmed by IMF analyses and recent studies showing manufacturing’s share of GDP dipping to 17.2% in 2024 from 22% in 2010.
Indonesia, Southeast Asia’s largest economy with a 2024 GDP of $1.5 trillion and 5% growth, remains anchored to raw materials.
Agriculture, mining, and energy employ 30% of the workforce and drive exports, but at the cost of broader development.
Key commodities dominate: Coal and mineral fuels comprise about 20% of total exports ($60 billion in 2024), fueling power plants in China and India but exposing the economy to price swings.
Palm oil, the world’s top non-oil export, accounts for 10-12% ($30-35 billion), supporting 4 million jobs yet sparking deforestation debates.
Nickel, vital for EV batteries, surged to 8% of exports ($25 billion) post-downstreaming bans, positioning Indonesia as the global leader.
Oil and gas add another 5-7% ($15-20 billion), though production has declined.
Collectively, the natural resource sectors underpin about 50% of exports, per 2024 trade data, far outpacing manufacturing’s faltering role (10-15% of exports).
This overreliance has appreciated the rupiah, squeezed non-commodity sectors, and fueled deindustrialization trends akin to Dutch disease.
Notably, the term has no link to Indonesia’s Dutch colonial era (1602-1949), when the East India Company exploited spices and resources.
If we could advise the Indonesian government, we would suggest 3 steps.
1
Accelerate downstreaming. Make raw commodities impossible or difficult to be exported in their raw form unless they are first transformed into higher-value products within Indonesia. Do this beyond nickel : for palm oil (e.g., biofuels) and coal (e.g., chemicals) via incentives, targeting a 20% to 50% export value boost (only for coal and palm oil) by 2030 while creating more local high-skilled jobs.
2
Build on the newly launched Danantara sovereign wealth fund, managing ~$900 billion in state-owned enterprise assets, to channel commodity revenues effectively.
Modeled on Norway’s Oil Fund for transparency and long-term focus, allocate at least 30% of boom revenues directly into education, vocational training, and R&D in tech, renewables, and digital manufacturing.
This would lift the tax-to-GDP ratio (how much of a country’s economic output is collected as taxes) from ~10% to 15% by 2030, foster innovation hubs in Java and Sumatra, and safeguard against boom-bust cycles.
Prioritize independent governance audits to build investor trust, ensuring Danantara evolves as a resilient engine for inclusive growth.
3
Liberalize trade pacts like RCEP to draw FDI (foreign direct investments) into manufacturing, subsidizing SMEs for export diversification into electronics and textiles, aiming to raise their GDP share to 25% by 2035.
These aren’t quick fixes but strategic pivots toward resilience.
Indonesia’s demographic dividend (70% under 40) demands action now.
What’s your suggestion to the Indonesian government? Let us know in the comments on LinkedIn (link below).
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Picture: investopedia