The Indonesian state and the strategic use of foreign capital

Abstract

Indonesia is a net debtor country, meaning typically more investment flows into Indonesia than goes out. This is an important driver of growth, but can also create strategic and economic liabilities as foreign creditors establish claims on Indonesian assets. This paper uses the concept of defensive economic statecraft to explain how the Indonesian state has taken actions to mitigate these vulnerabilities by deepening domestic capital markets, accumulating foreign exchange reserves, intermediating inflows through SOEs and forcing investment into strategic sectors. Although foreign investment involves risks and trade-offs, this paper analyzes some of the mechanisms by which net debtor countries like Indonesia can mitigate such risks.