13th annual Municipal Finance Conference


13th annual Municipal Finance Conference



Indonesia’s Green Prosperity

On November 19, 2011, in Bali, Indonesia, Secretary of State Hillary Clinton signed a new partnership agreement with the Government of Indonesia providing more than $600 million of U.S. aid through the Millennium Challenge Corporation (MCC). More than half of these investments are dedicated to “green prosperity”—the sound idea that sustainable natural resource management and clean energy technologies accelerate economic growth and poverty alleviation.

What does this mean in practical terms? New U.S. funds will help Indonesia make wiser land-use decisions by, for example, guiding future palm oil plantations away from pristine rainforests and toward abandoned, degraded lands, which are abundant. These “land swaps” hold enormous potential. While palm oil plantations on degraded lands require higher up-front investments (and are therefore uncommon without government intervention), over time plantations on degraded lands are usually more productive and profitable than palm plantations grown in newly deforested and drained peat lands.

The United States can provide affordable bridge loans and long-term financing, and technical assistance to help local communities map surrounding lands, clarify land-rights and develop community-supported strategies. In so doing the United States can help Indonesia increase economic growth, strengthen its democracy, reduce illegally logging, respect the rights of forest-dependent communities, conserve threatened tropical forests and orangutans, and reduce a major source of climate pollution.

Investments in renewable energy—such as modest sized hydropower projects and geothermal power plants—are also contemplated in the new green prosperity program and can also provide important benefits. Affordable, clean electricity in rural communities spurs business development and lays the foundation for long-term growth by enabling school children to study in the evenings.

The green prosperity program represents an important milestone in Indonesia’s own development and a step forward in modernizing U.S. foreign aid programs.

Nowhere is green growth a more pressing need than Indonesia. Natural resources are a major part of the Indonesian economy, but Indonesia’s runaway deforestation and wetland destruction, driven by illegal logging and unchecked expansion of oil palm and pulpwood plantations, threaten Indonesia’s social stability, national security, environment, health, and future economic growth.

For a long time Indonesia’s forest economy has been notoriously inefficient and corrupt, with profiteering and resource exploitation often trampling the rights of the rural poor. Pulp, paper, timber, and oil palm companies and powerful syndicates have routinely seized the ancestral lands of local communities [1]. The resulting dislocation, economic and upheaval exacerbate social tensions by further marginalizing the struggling rural majority.

Across Indonesia overbuilt pulp and paper mill capacity is driving illegal logging, causing the disappearance of old-growth native forests and costing the government nearly $2 billion in lost tax revenue annually [2]. Rapidly expanding palm oil plantations also are taking the place of healthy forests and wetlands. Deforestation in Indonesia is so prevalent that at current rates of destruction, old-growth native forests could disappear within 30 years [3] with devastating consequences for the poor, wildlife and the world’s climate [4]. Indonesia is the third-largest greenhouse gas emitter, behind only China and the United States [5], and destructive land-use practices account for 85 percent of Indonesia’s emissions, while the resulting oil palm and forest products sectors contribute less than 8 percent to its GDP [6]. Fires caused by the draining of peat-land soils are not only an exceptionally large source of emissions, but also result in economic losses estimated at $4 billion annually, causing major health problems in local populations through smoke inhalation [7] .

In this context, Indonesia’s decision to focus the bulk of new U.S. foreign aid resources on sustainable land-use and clean energy is a cause for hope. Indonesia deserves credit for prioritizing not just growth, but green growth in its partnership with the United States.

The investments announced by Secretary Clinton are also in America’s vital national interest. Indonesia’s strategic importance to the United States is difficult to overstate. As the world’s most populous Muslim nation, its third largest democracy, and an example of religious tolerance in Southeast Asia, Indonesia is an essential partner in promoting democracy, and combating Islamic extremism and terrorism. The United States has major economic and military interests in the shipping lanes around Indonesia, where close to half of the total global merchant fleet capacity transits. Indonesia is a major U.S. trade partner ($18 billion annually) with a large and growing economy (18th largest globally with 5 percent annual growth).

The Millennium Challenge Corporation deserves recognition for responding to Indonesia’s growing interest in green prosperity, and for understanding the essential role that natural resource management and renewable energy play in the MCC’s objective of poverty reduction through sustainable economic growth. The MCC has a strong tradition of investing only in projects that achieve a high rate of economic return for local communities (at least 10 percent) and this green prosperity program is designed to ensure the same. In short, the MCC is innovating while staying true to its mission.

Of course, success is far from guaranteed. Mismanagement and corruption are deeply embedded in Indonesia’s land-use sectors, and entrenched interests will fight against efforts to increase transparency and rationalize natural resource decisions. Indonesia will need to sustain the political will to overcome these challenges at all levels of government.

The MCC will also need to continue innovating by more fully and accurately measuring the economic benefits of proposed green prosperity investments. The MCC should measure not only the immediate jobs and income its projects create but also the broader societal benefits of proposed investments. Well-designed projects that avoid pollution and environmental degradation can lower heath care costs, improve water quality and security, increase agricultural productivity, and safeguard traditional sources of income (such as fruits, nuts and other forest products). These very real benefits must not be ignored, and recent advances in modern economics mean they no longer need to be.

Regardless of the challenges ahead, we must welcome the new bilateral compact between the United States and Indonesia to seek out a new, green prosperity. It’s the right vision and a good start.

[1] Chip Fay and Martua Sirait, in Which Way Forward?: People, Forests, and Policymaking in Indonesia, 2004.
[2] USAID, Growing Conflict and Unrest in Indonesian Forests, 2004; Human Rights Watch, Wild Money, 2009.
[3] United Nations Food and Agriculture Organization.
[4] U.S. Census Bureau and World Bank.
[5] United Nations Food and Agriculture Organization; World Resources Institute.
[6] The National Development and Planning Agency of Indonesia (Bappenas), Reducing carbon emissions from Indonesia’s peat lands, 2009.
[7] The Indonesian National Board on Climate Change, Fact Sheet – Carbon Emissions and Development, 9-6-2010.