By Ernie Bower

The world has found Indonesia and it wants to invest.  However, under the granular focus brought on by outstanding growth and decades of latent opportunity, Indonesia’s ambiguity about how much investment and trade it wants has been revealed. U.S. companies and policymakers need to go to a new level of engagement to find alignment with their Indonesian counterparts. The fact is, both sides are interested in the same things, and a paradigm shift could offer relief, prevent counterproductive policies from being implemented, and spur sustained historic new investment and growth levels.

Indonesia’s economic situation is draped in a certain irony. The country worked hard for many years to get the attention of investors. The archipelagic nation comprised of more than 17,000 islands had a certain allure as the largest country and largest economy in ASEAN. As Soeharto fell, the country was focused on political reforms, not business and economics, becoming the world’s third-largest democracy. In addition, seemingly endemic problems ranging from lack of infrastructure to corruption to political risk assessments kept many potential investors at arm’s length. Even the world’s largest companies, those deploying proactive regional strategies in Southeast Asia, found that their market penetration and sales in Indonesia underperformed globally and relative to other ASEAN countries.

The macroeconomic situation has changed. Indonesia is now bounding forward as a large economy with a GDP of approximately $1 trillion that grew by 6.5 percent last year. The World Bank projects GDP growth will continue at 6.1 percent this year. Politics are relatively stable. Indonesians are looking to move ahead, make money, and invest in the future. They are innovators and social media mavens, creative and open to new ideas.

As investors press their noses against the proverbial shop-front window of Indonesia, peering in at the multitudinous opportunities on display, they are becoming more and more frustrated with a set of policies that smack of economic nationalism. These policies appear to want to force investors to do what investors would prefer to do without a regulatory gun to their head—namely, invest in the country. In that sense, such policies are counterproductive.

Indonesia’s proposed new Trade Law offers many relevant examples. Armed with the country’s strong macroeconomic performance, consumer-fueled growth, and over-confidence borne of an economy that has arrived, Indonesian policymakers have tabled a dizzying array of new regulations. These seek to protect local companies, implement old-fashioned import-substitution requirements, and require foreign companies to give up control, equity, and the power to distribute their goods while demanding that they invest.

These policies do not appear to be coordinated, but instead are the response of a bureaucracy under enormous pressures from a few well-resourced local interests focusing on aspects of the economy they hope to protect. There is also an ideological dimension, namely a long standing skepticism of capitalism and the market which is particularly embedded in some parts of the bureaucracy.

These factors are combined with an entirely rational desire to ensure Indonesia is involved in making value-added products, not just supplying raw materials for more developed economies to turn into higher value products.

However, the bureaucracy does not have the level of experience and coordination needed to marry these objectives with incentives that will result in attracting the desired value-added investment. To do so requires a careful linkage between line ministries, investment promotion, and finance. Lastly, Indonesia’s constitution promotes a defensive ideology by emphasizing that natural resources belong to the state. In the end, these factors combine and the result is that many of the proposed new regulations affect other ministries and are inconsistent with Indonesia’s laws and its international commitments.

The current policy dynamic needs to shift. It has set Indonesian policy and investors on opposite sides of the table, and this does not need to be the case. U.S. companies and trade policy officials should proactively work to change the paradigm.

The fact is that U.S. companies want the same things that Indonesians want: they want Indonesians to have more equity in their companies and growth in their economy; they want to create jobs and invest in training, education, and communities; they want to bring money and technology to Indonesia and implement nationwide business plans. U.S. companies are well poised – and eager – to support the Indonesian government’s ambitious new Master Plan for the Acceleration and Expansion of Economic Development (MP3Ei).

While U.S. companies and their Indonesian counterparts are just a step away from alignment, the same is true for trade and economic officials. For instance, USTR just announced a new model for bilateral investment treaties, commonly known as BITs, with adjustments to seek progress in large developing economies like China and India. That new model should be tabled with Indonesia as soon as possible.

History shows that protectionist policies can push countries into a middle-income trap, unable to invest in infrastructure and missing the ingredients of long-term growth and innovation. Indonesian policymakers are right to be deeply concerned about Indonesia becoming “stuck.” However, allowing laws that force divestment or localization kills investment and exploration, and creates the equivalent of regulatory extortion. The proposed Indonesian mining law, for example, contains policies that will force divestment, limit future exploration, and undercut stated goals of enhancing investment in valued-added development of metals and energy in Indonesia.

The situation begs the question of what Indonesia’s economic growth numbers could be if leaders were empowered to make new deals and coordinate policies that brought investment and international standards to Indonesia. Growth rates of 6.5 percent could be closer to 8 or 9 percent.

Indonesia faces a key decision point. Should it use this time, when the world wants to participate and invest in Indonesia’s growth, to put in place forward-looking policies that encourage investors and empower local companies? Or should it play defense and protect a near-term opportunity for large domestic companies to dominate their respective sectors and soak up the benefits of the current growth cycle?

Indonesia has the vision to make the determination to build a sustainable foundation for growth that builds equity, capabilities and opportunities for its citizens.  Good partners should support and encourage that strategy.

Ernest Z. Bower is senior adviser & director of the Southeast Asia Program at CSIS.