Improving the Benefit of Natural Resources Endowment to Economic Welfare in Indonesia: A Mixed-Method Analysis

Abstract

This paper analyses the relationship between natural resources endowment and economic welfare in Indonesia, and examines how to further benefit from natural resources through the factors of government institutions, industry value-added, and foreign direct investment (FDI). A sequential explanatory mixed-method design was used. It starts with a quantitative analysis using time-series data at the national level from 1990 to 2017 and continues with key-informant interviews to obtain further explanations from the quantitative analysis results. The findings show that the contribution of natural resources to economic welfare in Indonesia is positive only in the short term. It has helped build Indonesian development but has not been able to create economic welfare, especially for the local community. Improving institutional quality, primarily through environmental law enforcement, and increasing industry value-added, is important to create a bigger multiplier effect from natural resource rents that will benefit economic welfare. Nevertheless, FDI in the natural resource sector could be harmful to economic welfare; thus, it should be applied only to a capital intensive and high technology exploitation that State-owned enterprises are not capable of undertaking. This study also found that the regulation relates to natural resources revenue sharing needs to be improved, particularly in terms of the formula that use provincial boundaries for sharing distribution.