In 2015, the United Nations (UN) presented its Sustainable Development Goals as a universal blueprint for the world to address pressing global challenges, which include issues such as economic inequality, environmental degradation, and climate change. But, for developing countries worldwide, these goals seemingly pose a conundrum – how can they achieve the industrial development required to lift their populace out of poverty while preserving their natural environment?
The Indonesian archipelago is no exception, being home to both one of the world’s fastest developing economies and some of the most biodiverse regions on the planet; its government faces the challenge of reconciling both these qualities. To this end, special economic zones (SEZs) across Indonesia now play a crucial role in the government’s push to create an environment of “investment and job creation with green development” to usher in an era of green and sustainable economic growth.
The economic inequality between Java and the less-developed peripheral regions is a significant feature of the Indonesian economy, originating from the Dutch colonial period. To address this, the Indonesian government embarked on a political and economic decentralisation programme in the 1990s, granting greater autonomy to the different regions across the country.
Due to its location-specific nature, SEZs are a way for the central government to increase and enhance the participation of local and regional authorities in promoting economic development . Overall, this strategy alleviates economic inequality by creating new economic nodes in provinces and regions that were historically deprived and underdeveloped. This way, different regions of Indonesia could enjoy the benefits of economic agglomeration and develop their regional economic strengths and international competitiveness as an investment destination.
The SEZ strategy sought to empower local municipalities to manage their environmental footprint. Since local communities would most acutely feel the consequences of environmental mismanagement, SEZs would be naturally incentivised to balance their responsibilities. Yet, Indonesian SEZs have struggled to meet these goals, hampered by the intrinsic environmental costs of SEZs and weak institutional regulations.
Direct Environmental Effects of SEZs
One example is the Batam, Bintan and Karimun (BBK) FTZs which have experienced widespread environmental degradation due to infrastructural development. Land reclamation projects in the northern sub-districts of Bengkong Laut, Sadai and Tanjung Buntung have destroyed 90 per cent of mangrove forests, affecting coastal communities and coral reefs. These activities had knock-on effects on coastal communities that relied on the mangroves for their livelihoods. The deterioration in quality and destruction of nearby coral reefs significantly reduced fish stocks.
Even SEZs without direct industrial reclamation, like those specialising in tourism, have hurt the coastal and marine environment. SEZs, such as Tanjung Kelayang, have caused damage to the coastal and marine environment due to increased local human activity like tourism. A study found that 34 per cent of the total damage to coral reefs in the surrounding region could be traced back to non-natural human activities.
Indonesian SEZs have struggled to manage the classic problem of negative externalities generated by rapid economic development. However, the inability of local municipalities to mitigate environmental degradation is partly the result of counterproductive environmental regulation and the influence of foreign powers.
Extenuating circumstances that worsen SEZ’s environmental degradation
Crucially, Indonesia's liberal regulations are standard tools for SEZs to attract foreign investment, but they are misaligned with green development initiatives. For example, the 2020 Job Creation Act - or “Omnibus Law” - sought to reduce regulations to stimulate a beleaguered economy after the COVID-19 pandemic by reducing deregulatory oversight .
Additionally, while the decentralisation of economic authority in the 1990s sought to empower local policy-makers, it also weakened the power of national environmental regulations and protections. The Environmental Impact Management Agency (BAPEDAL), responsible for overseeing pollution in Indonesia, saw its powers and influence diluted.
This deprived local governments of technical and legal expertise to enforce environmental regulations, thus allowing businesses to continue their environmentally harmful practices without consequence.
External influence by foreign investors has also shaped how SEZs are implemented in Indonesia. Chinese firms have poured capital into Indonesia by taking stakes in SEZs as part of China’s ambitious Belt and Road Initiative (BRI). Despite commitments to a “Green Belt and Road Initiative”, the BRI features a high reliance on coal-fired plants, extractive mining activities and carbon-emitting infrastructure, and can be seen as China exporting its pollution-heavy economic development model to the global south.
Mitigation efforts
In light of these concerns, Indonesia strives to continue “greening” its SEZs and avert the environmental degradation associated with the abovementioned factors. Their efforts involve enforcing strict regulations that direct SEZs towards net positive environmental impact. By partnering with policy experts such as the Global Green Growth Institute, Indonesia is taking a research-driven approach to SEZ management. Coupled with stricter requirements on maintaining biodiversity, Indonesia intends to incorporate environmental preservation into industrial development.
It is also taking a firmer hand towards Foreign Direct Investment through its SEZs. By pivoting towards goods servicing the green economy, such as lithium-ion batteries, Indonesia is capitalising on emerging green industries, reducing its environmental footprint while stimulating its productive capacity.
While SEZs effectively promote economic progress, the onus is on government regulation to enshrine sustainability in its development strategy.
Read the full case study Green Special Economic Zones (SEZs): Can Indonesia Promote Sustainable Growth Through SEZs? written by Sean Becker and Teo Geng Cheng, which was awarded the Distinguished Prize in the Case Writing Competition 2022/23 at the Lee Kuan Yew School of Public Policy. Access more case studies from the Lee Kuan Yew School of Public Policy.