Chinese investments in Indonesia : an Indonesian pivot to China?

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Chinese investments in Indonesia. An Indonesian

pivot to China?

Name: dhr. Petrus J. H. (Pieter) van den Heuvel

Student Number: 10891609

Email: p.j.h.vandenheuvel@gmail.com Programme: Master Contemporary Asian Studies

Supervisor: Mr Dr L.G.H. (Laurens) Bakker

Second readers: Mrs Dr L.J. (Luisa) Steur & dhr. Dr G. (Gerben) Nooteboom MSc Word count: 19,558

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Theory is always for someone, and for some purpose. (Cox, 1981, p. 207)

Statement of originality

This document is written by master’s student Petrus J. H. (Pieter) van den Heuvel, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Graduate School of Social Sciences of the University of Amsterdam is responsible solely for the supervision of completion of the work, not for the contents.

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List of abbreviations

AIIB Asian Infrastructure Investment Bank ASEAN Association of South-east Asian Nations

Bappenas Badan Perencanaan Pembangunan Nasional (Ministry of National

Development Planning/Indonesian National Development Planning Agency) BKPM Badan Koordinasi Penanaman Modal (Indonesian Investment Coordinating

Board)

BUMN Badan Usaha Milik Negara (State-Owned Enterprise) CCP Chinese Communist Party

CDB China Development Bank CEXIM Export-Import Bank of China CREC China Railway Group Limited

CTCE Tiesiju Civil Engineering Group Co., Ltd. DAC Development Assistance Committee FDI Foreign Direct Investments

GDP Gross Domestic Product IDR Indonesian Rupiah

IIGF PT Penjaminan Infrastruktur Indonesia (Indonesia Infrastructure Guarantee Fund)

IMF International Monetary Fund

KPK Komisi Pemberantasan Korupsi (Indonesian Corruption Eradication Commission)

MP3EI Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Masterplan for Acceleration and Expansion of Indonesia’s Economic Development)

NIL Negative Investment List ODA official development assistance

OECD Organisation for Economic Co-operation and Development PPP Public Private Partnership

PT KCIC Perseroan Terbatas Kereta Cepat Indonesia Cina (Fast Train Indonesia China Company)

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1. Introduction

As a child, one of my most prized possessions was a large map of the world. It was pinned on the wall by my bed, and I would stare at it every night before I went to sleep. Before long, I had memorised the names and locations of all the countries, noting their capital cities, as well as the oceans and seas, and the rivers that flowed in to them; the names of major mountain ranges and deserts, written in urgent italics, thrilled with adventure and danger. (Frankopan, 2015, p.1)

This is how Peter Frankopan introduces his book The Silk Roads: A New History of the World, in which he offers an alternative canon of world history, using the ancient Silk Road, instead of the classic western dogma of ancient Greeks, the Roman Empire and Enlightenment. Although the wall-sized map in my room depicted the European continent only, it still amazed me as much as a child as Peter Frankopan describes it above. I learned the geographic names on the map. A map which did not show land borders. It made me curious about the world beyond the lines portrayed on my wall. While the European continent is the far end of the ancient Silk Road, it is also a place where East and West met in historical times. Apart from the land route through central Asia, the ancient Silk Road also had a sea route passing south Asia. Cultural exchange, religious encounters and economic transactions made several civilisations along the route prosper.

In 2013, China announced the then called Silk Road Economic Belt. It was later rebranded as the One Belt One Road initiative. The name resembles the ambition of regeneration of the ancient Silk Road and is gratefully coined as such by the Chinese government. It is expected that infrastructure projects, under the umbrella of the One Belt One Road initiative, such as rail links and seaports, will cost $900 billion to develop on the Asian and African continent. Although it is not clear what the initiative exactly entails, due to vague Chinese branding, China is determined to invest massively in connecting its industries with the world market through the One Belt One Road initiative (Phillips, 12 May 2017). Around the same time, Indonesian President Joko Widodo, commonly known as Jokowi, started to focus its own national development plan on infrastructure projects at the start of his presidency mid-2014 to make the country’s economy more competitive.

As a result, the Indonesian development plan perfectly bridges with China’s One Belt One Road initiative. While Indonesia looks for finances to achieve its development plan,

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- 6 - China has a big pot of money to invest. As McKinsey (n.d.) puts it: “The Indonesians were quite clearly excited about how is this going to play out. How is Chinese infrastructure investment going to make a difference in a place where they need that?”. Although financial help is welcome for the Indonesian government to carry out its development plan, as they are only capable of financing 40 per cent of it through government funding, historical Indonesian-Chinese relations might be problematic to welcome help from China with open arms. Despite these problematic relations, is Indonesia pivoting towards China in order to get its infrastructure development plan done? The problems that Indonesian-Chinese relations face in a number of facets and the wish of Indonesia to develop its infrastructure result in conflicting interests. In this thesis, I will look at how Indonesian policy-makers are dealing with these issues.

This thesis will start with unpacking the puzzle that Chinese investments in Indonesia defines. I will do that by setting out both the Indonesian-Chinese relations at the macro level as well as their relations at the micro level. The context and debate section is divided into three chapters. Chapter two will focus on the new powerful position and potential for China at the international stage, with both an economic as well as a political increasing role. In addition, I will contextualise the position of Indonesia in this changing environment in macroeconomics and international politics with a politically and economically rising China. Chapter three will follow with a political and economic context from Indonesia’s perspective. Here, I will also deal with the economic policy of Indonesia and their approach to foreign direct investments. Also, I will stress out the importance of the need for improving infrastructure in Indonesia and how Indonesia applies its development plans to do so. Finally, I will discuss the socio-cultural relations between Indonesia and China, and between Indonesia and its ethnic Chinese minority internally in chapter four. These relations at the micro level include old longstanding debates concerning identity in Indonesia, in which ethnic Chinese are being discriminated at. These political, economic and socio-cultural alignments that I will discuss in the chapters two, three and four cannot be seen in isolation from each other. All these elements together characterise a complex relationship between Indonesia and China.

After these chapters of context and debate, I will present a theoretical framework in chapter five. This will be the basis for my analysis of the Indonesian approach to Chinese foreign direct investments in the country. This framework is based on risk management in policy and regulation, based on pyramidal stages and several types of risk. This framework will help analysing how the Indonesian government assesses a potential risk of Chinese

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- 7 - investments in their country. With these tools in hand, I will answer my research question: how does the Indonesian government deal with Chinese investments to implement its national development plan in a changing geopolitical arena with an increasing role for China? Looking at the agency of various actors in Indonesia, I will examine how the Indonesian government manages and regulates foreign investments in its infrastructure. To do so, I will take the planned 140-kilometre-long high-speed train project that should connect Jakarta with Bandung as a case. This case is selected as many factors that are mentioned above are combined in it. The high-speed train is a politically sensitive project for a number of reasons. Both China and Japan were running for the concession to build and operate the line. Overall, both the macro level and the micro level alignment come together in this project and its policy-making process. Hence, this project is, an ideal case for a first-hand analysis of the actual events of Chinese investment in Indonesia. Finally, I will conclude and discuss the implications of my findings and propose challenges for future research.

1.1 Relevance

There are a number of reasons to think why unpacking the position of Indonesia towards Chinese investments are relevant. First, it is obvious that China is a rising power. This also has implications for the position of Indonesia in the region. This issue and the future prospects of a peaceful rise of China is widely debated among scholars. Whether this question can be discussed within classical theories in International Relations, or new perspectives are needed, is one of the main paradigms among International Relations theorists.1_{The increasing influence in the economy of neighbouring countries, partially due} to the One Belt One Road initiative, is also discussed among political scientists, among others. Another group of scholars focus on the possible detrimental effects of Chinese aid in African states with weak governmental institutions, where China invests in infrastructure to extract essential natural resources for its own industries. Moreover, the share of Chinese investments tends to be higher in weak African states. It is argued that this is not caused by a specific focus of Chinese investors on such countries, but unlike western investors, they are rather indifferent to the type of regime (Chen, Dollar & Tang, 2015). Yet, contrary to many African countries, Indonesia is not a weak state. However, it has different issues with China, linked to their common history which has been problematic at times. This historical

1_{See for example Mearsheimer, J. J. (2010). The gathering storm: China’s challenge to US power in Asia. The}

Chinese Journal of International Politics, 3(4), 381-396; Ikenberry, G. J. (2008). The rise of China and the future

of the West: can the liberal system survive?. Foreign affairs, 23-37 and Shambaugh, D. (2011). Coping with a conflicted China. The Washington Quarterly, 34(1), 7-27.

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- 8 - background makes Indonesia a deviant case compared to poor and weak states which heavily rely on development aid. While Indonesia has ambitious plans to improve its infrastructure, the country is also looking outwards to finance these plans. Little has been written about the Indonesian position at the governmental level regarding this issue. Hence, I will contribute to clear this gap in this thesis.

1.2 Methods

For this research, I have collected data during fieldwork to offer an explanation to how Indonesia deals with Chinese investments to implement its national development plan in a changing geopolitical arena with an increasing role for China. In order to do so, I have done a case study in Jakarta, Indonesia. While I have focused on Chinese foreign direct investments in Indonesia in general, I have also gathered information about the high-speed train project more specifically. I use Gerrings’ work in order to classify my case study research. Gerring distinguishes a number of research designs, depending on the number of cases in the study and whether or not there is a temporal variation. Using his classification model, this research is defined as a single-case study, using a synchronic analysis. This research represents a single point in time, for the reason that policy is not static. While Indonesia is the case, separate infrastructure projects are sites of management. The various government agencies that execute the foreign direct investment regulations of Indonesia work synergistically. As such, the high-speed train project which I will discuss in this thesis is a site of management. I use this project to show how Indonesia deals with Chinese investments. Case study research involves a “comprehensive examination of a phenomenon”. As a result, context and case mingle together. The fieldwork in Jakarta has resulted in a better understanding of the context of Chinese investments in Indonesia and the context in Jakarta in particular. Moreover, experiencing the real-life context is a complementary method together with a historical and contextual analysis (Gerring, 2007, p. 17-18, 29-30).

During this three-month fieldwork period, I have interviewed a number of actors concerning foreign investments in Jakarta, on which my arguments in this thesis are based. I connected with scientists, journalists, policy-makers and employees involved with the construction of the Jakarta-Bandung high-speed train line during my time in Jakarta. Furthermore, I interviewed consultants who are involved with Chinese investments in Indonesia. A full list of interviews can be found in the Appendix. Respondents were mostly contacted via email. In some cases, I was introduced to people by friends I made during my stay in Jakarta. I used semi-structured interviews to collect data on their respective

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- 9 - perspectives of Chinese investments in Indonesia. The duration of the interviews was typically between one and two hours. As my Bahasa Indonesia is limited to a few basic words and short sentences only, most interviews were conducted in English. Only two interviews were held in Dutch, which was our common mother tongue in both cases. Interviews were typically held at the office of the interviewee or we met in a mall. The form of a semi-structured interview was chosen for practical reasons. On the one hand, it gave me the opportunity to make a shortlist of questions that I wanted to address, while it also gave the respondent the opportunity to give wider information on topics she or he wanted to talk about. This primary data was collected between 31 December 2017 and 30 March 2018. All interviewees were informed about the purpose of collecting information for a master’s thesis and were asked their consent about this, either in the process of getting in touch with them, before the start of the interview, or both. Secondary data were collected before, during and after the fieldwork. This includes data to prepare for interviews on the position of a ministry or employer on foreign investments. Lastly, not only the interviews themselves but also living there and getting around has been an added value both personally as well as for understanding the context in this research.

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2. A rising China

Although the focal point of this thesis is the position of Indonesia, I will start with discussing developments of a rising China and the political and economic implications of their growing position in the world arena in this chapter. Then, I will examine how these developments affect Indonesia and their approach to China. As I will mainly focus on the position of China in this chapter, I will shift my focus to Indonesia’s political and economic policy in the third chapter.

2.1 China’s dream

China proposed a project which resembles the historical Silk Road in 2013. In September of that year, China’s President Xi Jinping announced the Silk Road Economic Belt in Astana, Kazakhstan. This “Belt” should connect China over land with Europe. The Maritime Silk Road was announced one month later, on 10 October 2013, in Jakarta, Indonesia, by Xi Jinping as well. This second “Road” is designed to connect south-east Asia with China. Later, both initiatives were put under one umbrella term, the One Belt, One Road initiative or Belt and Road Initiative (Yu, 2017, p. 353). The network should connect China with central Asia and Europe, south Asia and east Africa, and south-east Asia. The country is investing heavily in this network, with an expected amount totalling $900 billion in infrastructure and energy supply projects. The idea is that the One Belt One Road initiative should boost economic development in both China as well as the other regions which will be connected. Over the past decade, China has already increased its economic power dramatically by building an export-oriented industry. Its economy rose with double-digit numbers for a long time. Although this pace has slowed down to about 7 per cent for the past couple of years, it is still impressive. However, the Chinese growth is mainly based on its export economy, rather than consumer expenditures. In a time when more developing countries adopt the policy to accelerate growth by developing an export market, this might culminate into overproduction. The danger of overaccumulation in China, which is an “excessive investment and over dependence on demand from other countries”, boosts the need for new markets to export its products, as it can potentially result in an economic crisis (Hung, 2008, pp. 150-151, 168-169).

At the same time, the USA, the biggest export market for Chinese goods, with 18 per cent of total exports, is recently trying to close the trade deficit with China with $200 billion (Wildau, 2018). The One Belt One Road initiative is designed to better connect Chinese

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- 11 - industries with the world market and, as a result, to get better access to new markets to export its products. New markets in south-east Asia could, therefore, be a substitute for other markets to compensate losses elsewhere, as well as draw upon new growth. Although US’ approach to free trade and Chinese export surplus has only altered recently to protectionist measures, it is an extra reason for China to explore new export markets. One of the receivers of – so-called – aid in accordance with the One Belt One Road initiative is Indonesia. Indonesia and China signed a Comprehensive Strategic Partnership in Jakarta a week before the Maritime Silk Road was announced. This partnership already calls for strengthening cooperation on the field of economy and development between the two countries. The Maritime Silk Road is the name for the network of overseas infrastructure as part of the One Belt One Road initiative. Thus, the Maritime Silk Road is used as a vehicle for this partnership. The Maritime Silk road was originally a plan for maritime cooperation between China and the ASEAN (the Association of South-east Asian Nations, a regional organisation with ten member states in south-east Asia). However, the project has extended its area westwards to other parts of Asia and even to the African continent (China Daily, 2013; Ministry of Foreign Affairs of the Republic of Indonesia, 2013; Tiezzi, 2014).

The funding of infrastructure projects under the One Belt One Road initiative is categorised as “aid” by China. However, Chinese aid does often not match the official definition of aid. The official definition of aid, or official development assistance (ODA), according to the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) is defined as:

those flows to countries and territories on the DAC List of ODA Recipients and to multilateral institutions which are:

i. provided by official agencies, including state and local governments, or by their executive agencies; and

ii. each transaction of which:

a) is administered with the promotion of the economic development and welfare of developing countries as its main objective; and

b) is concessional in character and conveys a grant element of at least 25 per cent

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- 12 - However, China’s official finance can only be accounted as official development assistance for a small share of the total. Most assistance fall in the category Other Official Flows (OOF), which is defined as “non-concessional in terms (< 25% grant element)” and “primarily intended for commercial or representational purposes”. Moreover, Chinese aid is of a different nature than that of classic donors. While classic donors tend to focus on social sectors, China is aimed at productive sectors. Out of the total official finance of $350 billion between 2000 and 2014, more than $130 billion was allocated to energy generation and supply, and almost $90 billion was allocated to the transport and storage sector (Aiddata, 2017). Another difference is that Chinese aid is not given through development agencies, but through state-owned institutions.

Swedlund focuses on the erosion of the bargaining power of traditional donors from the Development Assistance Committee in African states due to Chinese involvement in financing development. Or, from the receiving perspective, whether this could surge the bargaining power of African states. She notes that Chinese investments have caused that African countries can finally freely choose from potential lenders and can use this as a bargain (Swedlund, 2017, pp. 389-393). By assuming this, she also assumes that Western DAC members have been a homogeneous group. That traditional ODA donors are a homogeneous group is a questionable note. In the case of Indonesia, the country now has another option to choose from as well. Apart from its classic main investor Japan, China has come into play as a considerable actor. Besides focusing on the giving actor, I will also focus on the receiving actor in my thesis. From that perspective, Swedlund notes that a policy-maker might not acknowledge openly that he or she, or the institution he or she is working for, might lose on its sovereignty.

The hint of the ancient Silk Road, as suggested in the introduction, seems a smart choice from a diplomatic perspective. It does not directly resemble a ubiquitous economic plan at first sight. The ancient Silk Road suggests an economic and cultural interaction and interdependence, not merely focused on the interest of China alone. However, together with the Asian Infrastructure and Investment Bank (AIIB), the One Belt One Road initiative can dramatically modify the basis of the world economy. The main purpose of the AIIB is to help in developing a wide range of infrastructure projects on the Asian continent and beyond to integrate economies. It is not a coincidence that the AIIB was announced in October 2013 as well, by Xi Jinping in the Indonesian Parliament (AIIB, 2018; The Economist, 4 October 2013). Therefore, this institution is designed to help to implement the One Belt One Road initiative. The world economy can be altered dramatically, as, if China’s proposal works out,

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- 13 - it leads to an extensive infrastructure network with branches that are all leading to China. McKinsey makes a comparison with the Marshall Plan, which helped Europe recover after the Second World War. To put this in perspective, China plans to spend a twelvefold of money in the One Belt One Road initiative compared to the Marshall Plan, measured in current dollars (McKinsey, n.d.).

There are multiple motivations for China to invest in infrastructure throughout Asia. First, the One Belt One Road initiative offers Chinese companies business deals to invest abroad. As a result, it can export knowledge in infrastructure building, and sell its overcapacity in several industries, such as in the construction sector, abroad. Second, the project can connect industries in western regions of China and bring economic growth to these less developed regions in western China. Third, and more important for the case I will focus on here, it will help neighbouring Asian countries to improve and modernise their infrastructure. By helping them, China is able to integrate the region economically with China. Connecting Asian countries with China by rail and ports will boost trade and development for both sides. Better connectivity can supply necessary raw materials for China’s industry and is beneficial for other countries to industrialise. Together, these form one way for China to pursue its Chinese Dream. The Chinese Dream was coined by President Xi Jinping in 2013. The goal of China is to emerge as a global leader. Political influence and economic integration will help China to pursue this goal. Instead of following international rules and norms, it ultimately wants to form these international institutions itself. The One Belt One Road initiative gives China the opportunity to give itself a central position in Asia and the world, as many Asian countries look at China for economic opportunities. Just as it had an important position in past times with the ancient Silk Road (Yu, 2017, pp. 357, 358).

Numbers show that China is a key actor in the regional economy and, hence, on the regional political stage. For Indonesia, China is by far the biggest import and export partner. China accounts for over 20 per cent of both Indonesian imports and exports. These trade numbers have grown sharply in the past two decades. As a result, China is not only a major economic actor but also an important political and strategic actor in Indonesia, as much as it is in other ASEAN countries (CIA World Factbook, 2018; Yu, 2014, p. 14). In addition, according to Guild (25 October 2017), China is steadily taking over the leadership position of the US in south-east Asia. He notes that several countries in the region are now entailed in the Chinese supply chain. And south-east Asian states are welcoming the vast amount of Chinese investments.

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- 14 - One of the most considerable and at the same time politically controversial projects in Indonesia which is financed by China is a planned high-speed rail from Jakarta to Bandung. Yu (2014) is one of the few scholars who analysed the high-speed rail battle between Japan and China, and more generally the efforts towards infrastructure development in south-east Asia. However, he does that primarily from the Chinese perspective, focusing on the challenges that China meets. Later on, I will offer an analysis based on the Indonesian perspective towards infrastructure development by China in Indonesia. The reason that China wants to export its high-speed rail technology is based on their efforts to promote and increase its economic and diplomatic power in the region. As Yu notes, there are a number of reasons for China to carry out its high-speed rail diplomacy as part of the One Belt One Road initiative. First, it is a way to pursue its influence in the region as part of their national interest. It offers China’s infrastructure corporations projects to grow its businesses abroad and promotes high-value-added industries to develop. And second, economic cooperation between China and countries in south-east Asia is a way to show that a peaceful rise of China is possible, despite the territorial disputes, especially in the South China Sea, that China has with neighbouring countries. Moreover, building high-speed railways also shows China’s progress from labour-intensive production to high-technology production (Yu, 2014, pp. 15-16, 23-24). However, the Chinese effort to connect south-east Asia with high-speed rail links, sometimes called China’s railway diplomacy, has not been very successful so far.

Despite the railway diplomacy, few lines are actually under construction. The construction of a high-speed train link between Thailand and China via Laos has started in December 2017. However, a track that should connect Kuala Lumpur with Singapore has been cancelled for the time being while a line which will connect Bangkok with Chiang Mai in the north of Thailand is under construction. Yet, the latter is a cooperation between Thailand and Japan. Other proposed projects see problems along the way as well. Lines in Vietnam and Myanmar are cancelled for now. Of course, such expensive infrastructure projects are often politically sensitive. Moreover, China tends to overvalue the potential economic impact of infrastructure projects, both nationally as abroad (Ming, 2018; Reuters, 2017; Jotikasthira, 2018; Kynge, Peel & Bland, 2017; Bataineh, Bennon & Fukuyama, 2018; Kratz & Pavlićević, 2017). The high-speed train that should connect Jakarta and Bandung is the first Chinese built project abroad that has effectively started constructing, after a long decision-making process. It is not only a project of prestige for Indonesia to build a state-of-the-art train connection between the most populous and the third-biggest city of the country, the reputation of China’s high-speed rail industry is also at stake to deliver its first foreign

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- 15 - track without considerable technical issues or delays, as stated in an interview by a Chinese team member of CTCE Railway Group on 21 February 2018.

2.2 Indonesia’s economic nightmare

In this section, I will discuss the position of Indonesia as a self-proclaimed regional power in south-east Asia and how too much influence from a foreign power in this region, and from China specifically, would be a nightmare for Indonesia.

While both China and Japan contest each other to be the regional hegemon in south-east Asia, Indonesia sees itself as the regional leader within ASEAN. This means that Indonesia tries to seek a balance between both Japan and China. However, there is a dilemma for Indonesia. On the one hand, it needs foreign investments to boost its economic development, as the national government does not have the financial capacity to implement all infrastructure plans in the spacious country with over 17.000 islands. China has been taking that role of external financer more and more over the past decade with aid and cheap loans. On the other hand, Indonesia has a problematic history with China and the Chinese diaspora. I will look into these socio-cultural issues regarding ethnic Chinese more deeply in the fourth chapter.

Nowadays, China’s undemocratic values and power of the Chinese Communist Party (CCP) could be a threat to Indonesian democratic values. The influence of the Party abroad and the lack of criticism allowed within China are worrisome developments if they can get ground in democratic countries, argues Clive Hamilton in an interview in The Australian. The argument is that Chinese involvement could surge the sovereignty of a receiving state, as China could influence foreign institutions (Callick, 21 February 2018). As a result, this could be an argument for Indonesia to treat China differently than other countries, or at least with caution.

Investing in Indonesian infrastructure is needed to accelerate its economic growth. However, its bad investment climate prevents investors from investing in Indonesian projects (Bland, 2017a). Nonetheless, as part of the One Belt One Road initiative, China increased its investments in Indonesia. According to the World Bank, Indonesia ranks 63 in its 2016 report on logistics. According to the American Chamber of Commerce in Indonesia, the high costs of logistics are a limiting factor for manufacturing in Indonesia. While in Thailand logistics costs account for 16 per cent of GDP, in Indonesia this is at a 50 per cent higher rate (American Chamber of Commerce Indonesia, 2016). As Yu focuses on the Chinese ambition to be involved and build infrastructure in south-east Asia, it is relevant to look into the

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- 16 - perspective of the receiving countries of these investments. What for China seems to be a contest with Japan to deliver the best infrastructure projects in the region, is for Indonesia a choice between two competing candidates to improve its infrastructure and improve its economy.

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3. Indonesia’s dream interpretation

In this chapter, I will look at the Indonesian economic and political policies. I will offer a view on the Indonesian place in the international order and how they ideally see themselves in this order. Furthermore, I will show how Indonesia has had a changing view on foreign direct investments over the past decades. Then I will briefly discuss Indonesia’s economic outlook to make the importance of investing in its infrastructure clear. The goal of this thesis is to examine how Indonesia deals with Chinese investments to implement its national development plan in a changing geopolitical arena with an increasing role for China. In answering this research question, it is essential to examine the needs to invest in infrastructure in Indonesia. This includes details about the status of the current infrastructure in Indonesia and the financing of existing programmes. Furthermore, I will stress out how the rising power of China is important in the world, the south-east Asian region and for Indonesia in particular.

3.1 Indonesia China relations at the macro level

After the coup in Indonesia in 1965, China and Indonesia did not have diplomatic relations until late 1990. Although China denied any involvement in the coup, the case still influenced bilateral relations between the two states. As a result, a wide mistrust in Indonesia towards China remained after their rapprochement. China’s help in the aftermath of the Asian financial crisis of 1997 through regional development was important to create confidence about China’s peaceful aim in the region and in Indonesia in particular (Nabbs-Keller, 2011, p. 27). As China’s power is growing, it is perceived as a revisionist state. This is for states in south-east Asia a reason to rethink their stance towards their big neighbour. In International Relations theory, there are ideas on how smaller states should deal with Great Powers. Both balancing and bandwagoning are strategies that such countries can use. Although these strategies characterise opposite actions, they can be used at the same time.

Waltz was the first one to coin the term balancing within structural realism theory of International Relations. According to Waltz, states primarily seek survival, which they can achieve through power. Balancing suggests a state to join the weaker coalition, while bandwagoning suggests that a state joins the more powerful coalition (Waltz, 1979, p. 126). Roy argues that both strategies are used in different fields by Indonesia regarding their position towards China. Roy notes that Indonesia is a case of what he calls low-intensity balancing. Roy suggests that Indonesia bets on two sides of the coin. While the ASEAN, thus

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- 18 - Indonesia as well, is against foreign military bases on its territory, the US has a limited military presence in a number of south-east Asian states (Holmes, 9 August 2017). However, member states are mostly focusing on cooperating economically to enjoy the perks of China’s economic growth. Although Indonesia does not see itself as an ally of the United States either, it sees China as a possible military threat which should be contained. Tensions in the South China Sea between China and neighbouring states amplify that China could be a military threat for Indonesia. Although Indonesia does not claim vast areas in the South China Sea compared with other ASEAN member states, there are tensions between Indonesia and China about the Natuna Islands. These islands are claimed by Indonesia, China and Taiwan. In general, Indonesia takes a position to neither of the Great Powers. However, China is seen as a greater threat to Indonesia’s sovereignty (2005, 31-319).

The new position of China has implications for other actors in the world. While we have been living in a Washington Consensus society, it is to be expected that China will form rules in international institutions more and more, in what would be called a Beijing Consensus. The Washington Consensus is an economic system in which the United States, as the main great economic and political power in the world, predominantly determines political and economic rules through multilateral institutions. Washington in this concept is referred to as “both the political Washington of Congress and senior members of the administration and the technocratic Washington of the international financial institutions, the economic agencies of the US government, the Federal Reserve Board, and the think tanks” (Williamson, 1990). Thus, a Beijing Consensus means that China would determine such rules through their respective institutions and think tanks. Beijing based bilateral and multilateral institutions, such as the Asian Infrastructure Investment Bank (AIIB), China Development Bank (CDB) and the Export-Import Bank of China (CEXIM) could be a substitute for Washington based institutions such as the World Bank and the IMF. These institutions are already used for the benefit of executing China’s One Belt One Road initiative (Bataineh, Bennon & Fukuyama, 2018). Whether these institutions could replace the institutions that form the Washington Consensus over time is debated among scholars (Feigenbaum, 2017).

As Pattiradjawane stresses, the shift in economic power on the world stage to China makes it possible for Indonesia to balance its strategy between Great Powers, which now are the US, Japan and China in the region. In the Asia Power Index by Lowy Institute, Indonesia ranks only 10th, with a score of twenty out of hundred, while China ranks second with a score of 75,5. The US remains the main power in the Asia-Pacific (Lowy Institute, 2018). However, interdependence between Indonesia and China has risen (Pattiradjawane, 2016, p.

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- 19 - 260). Indonesia’s foreign policy is historically based on four strategies. The first is to ensure that Indonesia’s voice is heard. Second, to preserve the status quo in the region, to ensure Indonesia’s interests. The third strategy is to limit the presence of Great Powers in Indonesia and the region, which could potentially curb Indonesia’s leadership in the region. And lastly, to embed national interests in multilateral agreements and institutions to increase Indonesia’s capability. The ASEAN is an important tool for this last strategy. The third strategy, the strategy of non-alignment, has been one of the two functions of the ASEAN for the region (Weatherbee, 2013, pp. 16-17, 59).

What then, is Indonesia’s national interest? As we have seen, Indonesia sees itself as a south-east Asian regional power, and the ASEAN is a tool for the Indonesian government to exercise its power. According to Pattiradjawane, the Indonesian interest is twofold. Both prosperity for Indonesia itself, as well as stability in the region, is in its interest. He puts regional stability as a requisite for the ultimate interest of Indonesia, which is national and regional development (2016, p. 266). Also, the dispute in the South China Sea is a problematic topic for relations between Indonesia and China, because the dispute challenges the status quo. Although Indonesia’s involvement in this dispute is limited – both have a small coincidental area which is claimed by both states – China’s claim does affect ASEAN member states and hence, it projects a greater great-power influence in its surrounding waters.

3.2 History of foreign direct investments in Indonesia

Indonesia is an economically fast-growing south-east Asian country. Its economy has been growing roughly between 5 and 6 per cent per year since 2010 (World Bank, 2017a). According to Piketty, the recent economic development in developing states, such as Indonesia, is made possible by their ability to invest in itself rather than investments from third parties (2014, p. 72). However, the poor infrastructure in Indonesia limits future growth in the country. Therefore, investing in infrastructure is key to future growth, and therefore the Indonesian government is focusing on improving infrastructure through several finance programmes (Word Bank, 2017b). Yet, Indonesia has limited resources to finance its infrastructure investment plan and is looking overseas for help. Among the financers are Chinese investment banks, such as the Asian Infrastructure and Investment bank (AIIB) and the China Road and Bridge Corporation (CRBC). As Indonesia is in dire need of infrastructure investments, and its own financial possibilities are limited, loans from

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- 20 - international institutions can be helpful. However, they can also form a risk. Possible risks are financial liabilities and losing its sovereignty in the decision-making process.

What is, in general, the approach of Indonesia towards foreign direct investments? To understand the contemporary state of the Indonesian approach to foreign direct investments into the country, I will elaborate briefly on the modern history of capital in Indonesia. Three phases of economic strategy can be defined according to Robison. The first stage, from 1965 to 1975, defines an economic policy to pursue high economic growth through foreign private investments. The second phase is a reaction to that open economy policy and is defined by economic nationalism and was executed until the early 1980s. Finally, when Indonesian institutions became incapable to finance its national industrialisation programme, it opened up a bit again in the 1980s (2009, p. 132). Lindblad defines in a more recent article three slightly different phases. The first phase from 1966 to 1982 is a period of “economic rehabilitation” from the postcolonial era, helped by the oil boom in those years. During the second phase until the Asian financial crisis in 1997, Indonesia underwent a structural economic change. The last phase after the economic crisis is defined by a slow recovery from the economic crisis (2015, pp. 218-219). In this first phase, foreign direct investments were thought to create initial economic development. However, this approach changed in the 1970s, when policy became more restrictive towards foreign direct investment. Joint ventures were required, and indigenous Indonesians had to be trained. While the income from foreign direct investments declined, the oil boom increased income from natural resources.

Van Zanden and Marks mention the “open-door policy” in the early period of Suharto in the late 1960s to attract new capital as well. However, there was a setback in the early 1970s, after which FDI inflow surged. Protests and more restrictive policies regarding FDI made the country less interesting for foreign investors. However, the oil boom of that time resulted in little economic repercussions, as the oil exports were a welcoming substitute income for the Indonesian government. When oil prices decreased again in the 1980s, the restrictive foreign investment regime became a burden, and deregulation measures were taken again. When deregulation measures finally showed an effect on net FDI income in the mid-1990s, the Asian financial crisis of 1997 started kicking in (2012, pp. 176-178). While some scholars argue that nationalist tendencies among policy-makers have been a reason for generally tight regulations regarding FDI, or economic growth and an increasing FDI go hand in hand, Lindblad argues that this is not the case for Indonesia. The natural resources the country has makes it relatively “insensitive” to changes in FDI income (2015, pp. 218,

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233-- 21 233-- 234). As a result, the policy regarding foreign direct investments has been changing quite a bit over the years. Uncertainty is not in the interest of foreign investors.

The Indonesian current economic policy is based on two pillars according to Basri, a former chair of the Indonesian Investment Coordinating Board (BKPM) and Indonesian Minister of Finance in 2013-2014, and Patunru. On the one hand, this means opening up to the world market and investing in an export economy. On the other hand, the economic policy focuses on creating and maintaining a stable internal market. They note that the level of protectionism is relatively low at the moment, although there have been some minor setbacks (2012, pp. 191-192). Nevertheless, Indonesia has opened up its economy to foreign investors by making changes in the Negative Investment List. The ease of doing business has improved in Indonesia as a result of the efforts of the Jokowi administration. On the World Bank list of doing business, the country has moved up from place 106 in 2015 to the 72nd place in 2017 out of 189 economies. Also, the Asia Power Index gives high grades for the variable of future trends, in which Indonesia ranks fourth. The institute measures future trends using projections of economic size, military expenditure and working-age population in 2030 as indicators (World Bank, 2018; Lowy Institute, 2018).

A similar view has professor Supancana, whom I interviewed at UNIKA Atma Jaya in Jakarta on 16 January 2018. The natural resources, its huge internal market and the demographic bonus of many young Indonesians are all advantages for Indonesia. However, as he admits, there are a couple of important disadvantages that restrict economic growth. These include the bureaucracy, nepotism, political insecurity and that the population is not highly skilled. As a result of the latter, Indonesia has a relatively low productivity. As Robison and Hadiz also stress, Indonesia is the country of high economic expectations but fails to deliver. Some argue that weak institutions, an inexperienced corps diplomatique, the middle-income trap and changing global economy are to blame for falling behind the long and high expectations of an Indonesian dream. The Indonesian dream may be out of their sight for now, as the nation is looking abroad to the real big economic powers such as China for investments in infrastructure and energy projects. Indonesia lacks a development bank to play a serious role as a regional power (2017, pp. 896, 899).

To invest in infrastructure, Indonesia needs a lot of money. However, the government is only able to finance 40 per cent of the plans during the term of President Jokowi. The rest of the financing needs to be found through other resources. State-owned enterprises (SOEs) are one way to finance infrastructure works. Also, domestic and foreign investors are considered to help to finance through public-private partnerships.

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3.3 Indonesian infrastructure investment plan

Indonesian infrastructure is not competitive if you compare it with other countries. Some of Indonesia’s cities are notoriously among the most congested in the world. According to the World Economic Forum, Indonesia ranks number 64 in quality of roads. The quality of railroad infrastructure is ranked 30th and port infrastructure is ranked 72nd. Especially the level of its port infrastructure is striking for an island nation such as Indonesia. The performance of Indonesia and four selected ASEAN countries can be seen in Table 1. Indonesia is listed fourth in most subunits compared to these relevant neighbouring countries, behind Thailand. Only the Indonesian railroad infrastructure qualifies relatively well.

Table 1: Quality of Transport infrastructure, score 1-7 (best) and between brackets ranking out of 137 listed countries (World Economic Forum, 2018).

To make the pressure for infrastructure investments clearer, an estimated extra of $550 trillion investment in infrastructure, on top of the money already planned by governments, is needed for south-east Asia, due to economic development, with a growing middle-class, and ongoing urbanisation (Goldman Sachs, 2013). The report expects that Indonesia would have 24 million more urban residents by 2020, which puts an increasing pressure on its urban infrastructure. On top of that, while it would be undue to compare Indonesia with developed western countries, a comparison with neighbouring states is appropriate. Looking at other ASEAN countries, especially Singapore and Malaysia are doing better on the quality of their infrastructure. To become more competitive and boost its economic growth, the Indonesian government has several development plans. These include a National Long-Term Development Plan (Rencana Pembangunan Jangka Panjang Nasional), covering 2005-2025, which is divided into four Medium-Term Development Plans (Rencana Pembangunan Jangka Menengah Nasional), and a Masterplan for Acceleration and expansion of Indonesia’s Economic Development (Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia, MP3EI). The Medium-Term Development Plan is a

Quality of Road infrastructure Quality of railroad infrastructure Quality of port infrastructure Quality of air transport infrastructure Overall Indonesia 4.1 (64) 4.2 (30) 4.0 (72) 4.8 (51) 4.1 (68) Singapore 6.3 (2) 5.9 (4) 6.7 (2) 6.9 (1) 6.4 (2) Malaysia 5.3 (23) 5.0 (14) 5.4 (20) 5.7 (21) 5.3 (21) Thailand 4.3 (59) 2.6 (72) 4.3 (63) 5.2 (39) 4.1 (67) Viet Nam 3.4 (92) 3.0 (59) 3.7 (82) 3.8 (103) 3.6 (89)

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- 23 - project designed by the president, which directs policies and programmes of ministries (Bappenas, 2004). Not coincidently, the Medium-Term Development Plans coincide with the election term of the president. As a result, a president can easily leave his mark on the development programme, which is also important for their reputation.

The current MP3EI plan is an ambitious plan which aims for Indonesia to become a developed country by 2025. Three core goals comprise this plan. First, decreasing the distribution costs and expanding the industrial value chain. Second, take measures to become a more competitive economy, both locally as well as internationally. And third, to become a more innovation-driven economy (Indonesia Investments, n.d.). The current third National Medium-Term Development Plan covers 2015-2019. Regarding infrastructure, it focuses on better and more efficient financing of infrastructure projects. As developing infrastructure is considered important, but finances are limited, alternatives such as public-private partnerships are considered. The purpose is to achieve goals to show improvements in its infrastructure in the third year of the Medium-Term Development Plan. The focus of the plan is on infrastructure in the widest form to strengthen national connectivity in order to enable balanced economic growth. These plans can be developed through public-private cooperation and private funding. Furthermore, trade between the ASEAN bloc should be promoted, as well as small and medium-sized businesses (Bappenas, 2014, pp. 5-14, 14, 30, 37, 6-103).2

2_{Unfortunately, the English language Bappenas link to the 2015-2019 Medium-Term Development Plan refers}

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4. Indonesia-China relations at the micro

level – a cultural contradiction

While I have been focusing on the economic and political perspectives at the macro level until now, I will now shift to the socio-cultural affairs which define the Indonesia– China relations. To emphasise the importance of the argument that Indonesia should in theory not be keen to address Chinese investors, I will examine the multifarious history between Indonesia and China. This dates back to the colonial times of the Dutch in the Dutch East Indies. In this chapter, I will also include discussions about the contemporary perceptions of Indonesians towards Chinese to unpack the political and social sensitivity regarding Chinese involvement in Indonesia. This includes a short historical outline of Chinese in Indonesia and the view of Indonesians on China at the micro level nowadays. However, I will not elaborate extensively on the history of Indonesia, as I do not intend to write and discuss a historical reflection here. Together with the economic and political perspectives as discussed in chapter 2 and 3, this will develop the argument that Chinese investments come with a conflicting interest in Indonesia.

According to the World Fact Book (2018), Chinese form just over one per cent of the population of Indonesia. This means that approximately 3 million ethnic Chinese citizens live in Indonesia. While Chinese have been present in what is now called Indonesia for centuries, Indonesia and China have a long, and sometimes turbulent history together. Although ethnic Chinese already live in Indonesia for generations, they are still considered as non-natives. This construct to ethnicity dates back to the colonial era when several ethnic groups were defined by the Dutch colonial administration. The discrimination against the Chinese in Indonesia also dates back to this time, with registration and restrictive laws for ethnic Chinese (Lindsey, 2005, pp. 42-43). First, in the colonial era, Chinese men often married indigenous women, as there were not many Chinese women on Java. These Indo-Chinese are called Peranakan. Totok, on the other hand, refers to full blood Chinese in Indonesia. The Peranakan mostly mingled, and their culture adapted to that of the indigenous people in Java (Suryadinata, 1993, p. 78).

In the post-colonial times, Chinese were incorporated in Indonesian nationalist statebuilding, although this did not mean that the minority group was treated equally. Moreover, a more recent event that has shaped the perception of Chinese in Indonesia in post-colonial Indonesian history is the coup in 1965, which was assigned to Chinese communists

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- 25 - (Suryadinata, 1990, p. 683).3_{This event did not only have political consequences at the} macro level, as discussed in the previous chapter, it also had an influence at the personal level. In the months after, many communists and ethnic Chinese were killed, as terrifyingly pictured in the 2012 documentary The Act of Killing. Moreover, during the New Order regime of President Suharto, who was in office from 1968 to 1998, a regime of assimilation was held for the Chinese minority. The Chinese had to adopt official indigenous cultures as a result of this regime. Nonetheless, they were still categorised as the “Other”, or non-pribumi (non-native) as opposed to pribumi (native). This is a dichotomic distinction of a constructed culture of indigenous versus foreign people. Moreover, in 1966, ethnic Chinese were forced to change their surnames into Indonesian sounding ones (Hoon, 2006, pp. 149-152). This makes clear that ethnic Chinese have been discriminated against. This was also done by denying the group access to state-owned universities, marginalising their language and culture and access to public service and employment. Despite these discriminatory measures, the Chinese-Indonesian minority was not limited in their – and the country’s – economic expansion. Indonesian Chinese have relatively many businesses in trading and industry (Suryadinata, 1978, p. 142). Moreover, among the richest Indonesians are many from the Chinese minority. The combination of imposed assimilation to the Chinese and at the same time marginalising the group is a problematic set of policies, which was one of the causes for the anti-Chinese riots in the wake of the Asian financial crisis in 1998, according to Hoon (2006, pp. 152-153).

As a result, Chinese Indonesians still have the majority of capital. Also, under Suharto, the Chinese Indonesian elite was kept in place. Second, a coup in 1965, which was allegedly supported by China, resulted in mass killings of ethnic Chinese and communists. While Suharto broke diplomatic ties with China, and the alleged interference of China in Indonesia politics stopped, the regime institutionalised the split of citizenship of non-pribumi and pribumi (Aguilar, 2001, pp. 516-517). Furthermore, there had been attacks on ethnic Chinese during the 1990s too, during the Asian financial crisis. However, it is also noteworthy to mention that demonstrations against foreign ownership have not always solely

3_{In the days after the coup of October 1965, President Mao had hopes that the Indonesian Communist Party}

(PKI) would gain power. However, Suharto gained power and fought against China. Moreover, the Indonesian army attacked the Chinese embassy in April 1966 before diplomatic relations between the two states were suspended in October 1967 (Zhou, 2015, pp. 224-225). For a deeper understanding of the 1965 coup and the relations with China at that time, see Zhou, T. (2015). Ambivalent Alliance: Chinese Policy towards Indonesia, 1960–1965. The China Quarterly, 221, 208-22

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- 26 - focused on Chinese. Notably, Japanese cars were set on fire during violent riots against foreign ownership of businesses in January 1974 (Van Zanden & Marks, 2012, p. 177).

As a result of these aforementioned events, the general attitude of the Indonesian population towards Chinese and Chinese Indonesians is somewhat unfavourable. This also affects the perception of Indonesians on China. Fitriani distinguishes a number of different perceptions concerning the rise of China among various Indonesian actors. These perceptions differ among various actors such as the military, political elites, government officers and the business community with Chinese connections on the one hand and whether you look at the economic or military power of China on the other hand. These various perspectives show the ambivalent view regarding China in Indonesian society. One stakeholder that she specifically highlights is the Indonesian military. Although their perception is generally negative, due to negative perceptions among the grand public, they are in a split (2018, pp. 1-2). There have been attempts of security cooperation between the Indonesian and Chinese military. The U.S. had placed an embargo on the Indonesian military in 1991, after a bloody massacre in East Timor. The U.S. policy towards Indonesia became gradually stricter in the years up to 1999 (Berrigan, 2001). This ban lasted until 2006 when the U.S. undersecretary acknowledged the democratic reforms made in the years before (U.S. Department of State, 2006). However, the weapon ban caused the Indonesian military to collaborate with China to transform its military apparatus and build a defence industry to maintain its military equipment. Although genuine intentions were stated by Chinese officials, such as the signing of a Memorandum of Understanding to collaborate with the Indonesian military to create a security cooperation, it seems that promises from China to ensure security and invest in the modernisation of Indonesian forces have not been kept.

Fitriani also argues that the Indonesian perception of Chinese is diverse within the society. At the same time, Indonesian cooperation with the United States is as much a troubled one. Indonesia likes to see itself as a regional power, as it is the largest country within the ASEAN (Fitriani, 2018, pp 7-13). Furthermore, there is a distinct difference of opinion among Indonesians per field of cooperation with China according to Pattiradjawane. Looking at cooperation in the sea and air transport, only 7 per cent of respondents see China as the most favourable country, while 22, respectively 25 per cent of respondents see the United States and Japan as the most favourable country to have good relations within this field. Possibly, rising tensions over the dispute in the South China Sea influences the opinion regarding cooperation in this field. At the same time, China is clearly favourable as a future economic and trade partner over Japan and particularly over the USA, as you can see in Table

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- 27 - 2 (2016, p. 276). This is especially notable, as the One Belt One Road initiative is positioned as an economic cooperation, although it cannot be dissociated with a political and cultural partnership.

Field of cooperation China USA Japan Other/DK

Have the best cooperation with Indonesia in the last 10 years

18 % 20 % 27 % 35 %

An IMPORTANT country for Indonesia in the future

16 % 22 % 29 % 33 %

Cooperation in the fields of economy and trade in the future

44 % 9 % 29 % 18 %

Cooperation areas of sea and air transport in the future

7 % 22 % 25 % 46 %

Table 2: Opinion of Indonesians on cooperation in various fields (Pattiradjawane, 2016, p. 276).

Pew Research questioned whether respondents view a number of countries as favourable or unfavourable since 2005.4 The surveys were conducted in the second quarter of each year. The exact statement that respondents were asked in the face-to-face survey was “Please tell me if you have a very favorable, somewhat favorable, somewhat unfavorable or very unfavorable opinion of country X?”. The sample size is 1000 adults, nationwide. However, Papua and remote areas were not surveyed. The results, as can be seen in Figure 1, fluctuate over the years, and there is not a clear long-term trend visible. Pew Research found a height in both 2005 and 2013, with respectively 73 and 70 per cent of respondents answering (very) favourable. While the Maritime Silk Road was announced in October 2013. In the other years, they find less favourable numbers. For 2017, the last year with data accessible, they found a decade low of an only 55 per cent favourable response to the question. This can possibly be explained by rumours about an influx of Chinese workers into Indonesia (The Straits Times, 30 December 2016). Pew Research also questioned Indonesians on their opinion of the United States and for a few years on Japan. For the United States, it seems that results particularly depend on which president is in office. Indonesians clearly had a more positive view of the United States during Obama's presidency from 2009 until 2016 in comparison to Bush’ presidency. And again, with Trump in office, the popularity tumbled. Therefore, it seems that the view of Indonesians about China is much

4_{Pew Research data for China and Japan available for the years 2005 - 2017, with the exception of 2012 and}

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- 28 - more stable compared with their view about the United States. Although there is little data for Japan available, it seems that, based on the data of 2013-2015, the view of Indonesians towards Japan is generally at a more favourable pace compared with their view on the other two countries.

Figure 1: Perception of Indonesians towards selected countries in selected years (Pew Research Center, 2018).

Although the Indonesian society is rooted on the basis of five principles which together form the national philosophy of Pancasila, and its national motto is Bhinekka Tunggal Ika, which means “unity in diversity”, and some big historical crises are past, there may still be latent discrimination against the Chinese-Indonesian minority and Chinese. This latent discrimination may rise up again in the surge of political events, such as elections or a new crisis. At the same time, Jokowi uses the growing economic power of China to help to invest in Indonesian development. This financial capacity of China offers Jokowi a chance to increase development investments and roll out his development plan for Indonesia. Considering the perception about Chinese, this offers a clear dilemma for Jokowi, with possible political repercussions as a result.

Many of the richest Indonesian families have Chinese roots. Moreover, Ahok, governor of Jakarta between 2014 and 2017, who was jailed in a politically charged court case for blasphemy, has Chinese roots too. Furthermore, the Islamic leader who led the controversial protests against Ahok announced to shift his focus to the unequal distribution of capital, focusing on the Chinese minority and foreign direct investments from China. These

38 30 ₂₉ 37 63 59 54 61 ₅₉ 62 48 73 62 65 58 59 58 67 70 ₆₆ 63 55 79 ₇₇ 71 0 10 20 30 40 50 60 70 80 90 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Do you have a favorable or unfavorable view of...?

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- 29 - recent cases of anti-Chinese sentiments fear Chinese investors. Moreover, there have been rumours of a flood of Chinese workers coming to Indonesia taking jobs and depriving working standards (Bland, 2017b; Allard & Da Costa, 2017). Although these fears are merely based on rumours, it once again stipulates ethnic tensions towards Chinese.

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5. Theory: policy and risk

In this chapter, I will set out a framework of risk management which will assess the Indonesian approach towards Chinese foreign direct investments in infrastructure in Indonesia. I will use this framework to analyse how Indonesia manages infrastructure investments in the next chapter. As I made clear in the previous chapters, Chinese interference in Indonesian economy could be a risk factor at both a political, economic and socio-cultural level. This framework is designed to address these risk factors and ultimately to analyse how Indonesian actors deal with such risks.

5.1 Risk and regulation

Knowing that foreign direct investment from anywhere, let alone the emerging superpower China, could be a powerful force in the Indonesian society, the Indonesian government will have systems in place to deal with the potential threats of undesirable consequences. These systems can be both legal and quasi-legal. Simultaneously, it has to balance that against the potential of over-management whereby the strict rules may create too much burden on foreign investors and push back desirable investments. The regulatory craft of Indonesia here is important regarding both the socio-cultural concerns of the Indonesian-Chinese relationship as well as the economic desirability of Indonesian-Chinese investments. These combine fray and different, possibly conflicting interests for policy-makers. As I will later analyse the risk assessment of Indonesian policy-makers, I will develop the possible risk theoretically in this chapter.

The purpose of regulations is to diminish the threat of undesirable consequences. Therefore, a widespread set of regulations can be used to adjust behaviour. However, too much regulation with the initial purpose to prevent risk may have an undesirable effect on businesses. Risk and regulation are therefore two coherent terms. As Haines puts it: “Risk and regulation are brought together through scientific and technical assessments combined with economic analyses to determine when, what kind and how much regulatory control should be forthcoming to reduce particular risk to an acceptable level” (Haines, 2017, pp. 181-182). As policy and regulations are an answer to risk, one should determine what risk is.

So, how can we define risk? Haines describes three ideal types of risk. The first type is what he calls actuarial risk and is “the possibility of harm to an individual, collective or the environment arising out of an unwanted event” (2017, p. 183). I will focus on the possible harm to Indonesia as a collective, and not on individuals, nor on the environment, as foreign

Chinese investments in Indonesia : an Indonesian pivot to China?