When state capitalism fails to keep destructive entrepreneurs at bay

When President Prabowo Subianto took office, Indonesia embarked on a path toward state capitalism. The government introduced a massive sovereign wealth fund and enacted policies aimed at transitioning commercial activities from private entities to the state. Article 33, Paragraph 3 of the 1945 Constitution became a rallying cry, emphasizing the state's presence in strategic sectors, particularly natural resources. The goal was to bolster national resilience and prevent revenue leakage.

However, the application of "the state must be present" has taken a troubling turn, morphing into "the state must get a cut" (negara harus dapat jatah). This shift may be motivated by the urgent need to boost state revenue, but without robust state monitoring, it risks being exploited by politically connected rent-seekers. To comprehend how well-intentioned state intervention can deteriorate into rent extraction, one must examine the legal framework outlined in Article 33.

Indonesian constitutional experts generally define state control of resources as policymaking authority, executed through four instruments: regulation, administration, management, and oversight. These tools are intended to collaborate towards the collective prosperity of the people. Direct economic participation, via state-owned enterprises (SOEs), falls under the management function, which permits private participation.

However, professional management was never meant to replace the state's role as a neutral regulator, impartial administrator, and objective supervisor of the market.

When the government leverages its regulatory power to issue licenses to its own commercial managers without adequate oversight, a rent-seeking loophole emerges. By creating new administrative barriers without sufficient monitoring, the government opens the door to extracting public value for private gain.