Guest Article by Nisa Fathia Rahma

Indonesia’s struggle to escape its 5% growth ceiling reflects deep institutional constraints rather than a temporary slowdown. While the government has turned to the Danantara sovereign wealth fund to drive development, without regulatory certainty, meritocratic governance, and rule of law, state-directed capital risks reinforcing rather than resolving economic stagnation.

Indonesia’s new government administration is facing a harsh reality check from the global economy. While President Prabowo targets eight percent economic growth,  the OECD Economic Outlook 2025 projects differently: Indonesia’s growth is expected to slow to 4.7% in 2025 and 4.8% in 2026. 

Although the OECD has termed this dip a “soft patch,” the data represents a deeper, structural constraint. For years, Indonesia has been caught in a middle-income trap: the classic symptom of a low-productivity economy that fails to rise above the 5% growth threshold. In an attempt to break this ceiling, Jakarta is turning to a new, massive instrument of state intervention: a consolidated sovereign wealth fund named “Danantara”. 

The goal of Danantara is ambitious: to centralize the management of state assets, direct strategic national investment, and manage capital flows to fuel sustainable growth. It is modeled, in part, on successful sovereign funds like Singapore’s Temasek or the mechanisms of China’s state capitalism. However, this strategy, which doubles down on the state’s dominant role in the economy, is a high-risk gamble. 

The project is likely to fail not because the idea of a sovereign wealth fund is inherently bad, but because its implementation relies on a flawed diagnosis of Indonesia’s economic stagnation. Indonesia’s inability to break the 5% barrier is not due to a lack of capital concentration; it is the product of a toxic political history and institutional weakness. By ignoring the institutional rot of the “rentier state,” Danantara risks becoming a vehicle for debt and patronage rather than development.

The Ghost of the Rentier State

To understand why Danantara is a precarious solution, one must understand the root of the problem. Indonesia’s stagnation is a legacy of its history as a “rentier state.” Even decades after the fall of President Soeharto, the political economy remains structurally dependent on the extraction of natural resources—timber, oil, coal, and now, nickel.

In a rentier economy, the government derives a significant portion of its revenue from external rents (selling commodities abroad) rather than from taxing the productive activity of its citizens. As theory from the 1970s suggests, this severs the basic accountability relationship between the state and society. When a state is funded by foreign commodity sales, it has little incentive to build a productive, innovative, and educated society. Instead, it creates a culture of patronage, where the state’s primary function is to distribute the spoils of resource wealth to political allies to maintain stability.

This “rentier mentality” undermines risk-taking and innovation, trapping the country in a cycle of commodity dependency. We see this today in the current obsession with “hilirisasi” (downstreaming): a policy that, while economically logical on paper, often devolves into state-protected monopolies and rent-seeking behavior rather than fostering a competitive manufacturing sector.

Danantara and the Illusion of Wealth Creation

This context explains why the creation of Danantara is so fragile. The OECD report explicitly warns that grand projects like this will likely be “financed by spending cuts elsewhere.” Sovereign wealth funds in resource-rich developing nations often create the illusion of wealth without the substance. They do not necessarily create new value; they merely move existing money around.

By consolidating assets from major state-owned enterprises (SOEs) like PLN (energy), Pertamina (oil and gas), and state banks into one entity, the government hopes to leverage these assets to attract foreign capital. However, without a transformation in the “real economy,” the government is simply financializing its own budget. It repeats the habits of old rentiers: spending state funds on mega-projects rather than doing the hard work of regulatory reform to create a productive private sector.

Misreading the “East Asian Model”

Proponents of Danantara often point to the “East Asian Model,” specifically the success of Japan, South Korea, and increasingly, China, as justification for strong state intervention. On the surface, Danantara seems to be a tool for this kind of national developmental strategy. But this interpretation contradicts the core logic of what made those nations successful.

A true developmental state requires what sociologist Peter Evans called “embedded autonomy.” This refers to a bureaucracy that is deeply connected to the private sector (to understand what industry needs) but also sufficiently insulated from political pressure (to say “no” to corruption and rent-seeking).

In Japan, the legendary Ministry of International Trade and Industry (MITI) was staffed by a hyper-meritocratic civil service that drove the nation’s vision. In China, the State-Owned Assets Supervision and Administration Commission (SASAC) manages state enterprises with a ruthless focus on performance metrics and Party discipline. While the Chinese model has its own deep flaws, its state capitalism is underpinned by a strong, disciplined organizational structure that prioritizes national strategic goals over individual enrichment.

Indonesia attempts to copy the form of these institutions (the Sovereign Wealth Fund) without the substance (the meritocracy and discipline). This is “cargo cult” economics—building the runway and hoping the planes land, without understanding how aviation works.

Political Capture and the Loss of Seriousness

The absence of “embedded autonomy” in Indonesia is glaringly visible in the leadership of Danantara. The institution appears politically captured from its inception. The appointment of Rosan Roeslani, President Prabowo’s former campaign chief, as the head of this massive fund signals that political loyalty outweighs technocratic competence.

The rationale—citing his “political and business connections”—is the exact opposite of the developmental state principle. In a meritocracy, one chooses a leader based on their ability to insulate the fund from politics. By choosing a politically connected CEO to steer the assets of Indonesia’s largest SOEs, the government reinforces the suspicion that Danantara will serve as a vehicle to align the interests of state power and oligarchic capital. It risks becoming a “slush fund” for political maintenance rather than an engine for economic growth.

This lack of institutional seriousness was recently reflected when Danantara sent 36 SOE directors for expensive executive training in Switzerland. This incident serves as a perfect microcosm of the problem. A developmental state’s institutions are characterized by a lean, single-minded focus on the mission—whether it be export promotion or technological upgrading.

Transforming a critical economic body into a provider of luxury human resource retreats is a fundamental misallocation of attention. It suggests that the priority is not national development, but the maintenance of elite perks. It positions the public as sponsors of an elite lifestyle, which is antithetical to a state supposedly promoting broad-based growth.

The China Comparison: Form vs. Function

For observers of Sino-Southeast Asian relations, Indonesia’s move is particularly telling. Jakarta is eager to replicate China’s rapid infrastructure-led growth. However, China’s growth was not achieved solely by throwing money at SOEs; it was achieved through fierce competition between local governments, a high savings rate, and a manufacturing ecosystem that Indonesia currently lacks.

By copying the structure of Chinese state capitalism (consolidated state assets) without the underlying discipline or the manufacturing base, Indonesia risks importing the inefficiencies of China’s system (high debt, ghost cities, wasteful spending) without capturing the dynamic growth that propelled China to superpower status.

The Real Path Forward

A sovereign wealth fund is only as effective as the institutions that govern it. Without a robust, independent, and capable bureaucracy to steer it, Danantara risks being captured by the very forces that keep Indonesia in the middle-income trap.

The biggest obstacle to Indonesia’s growth is not a lack of state-directed capital. It is a high-cost economy plagued by regulatory uncertainty, legal inconsistency, and corruption. The answer is not to double down on state-directed economics via a super-holding company, but to address the structural fundamentals.

Real growth comes from creating a fair, predictable business environment where success is determined by innovation rather than political connections. It requires strengthening the Corruption Eradication Commission (KPK), simplifying bureaucracy, and ensuring legal certainty.

The question now is whether Danantara will change the system or be consumed by it. Is this a legitimate step toward a more efficient future, or is it merely the same old rentier system rebranded for global attraction? Unless the government addresses the political rot at the core of the economy, Danantara will likely remain a monument to missed potential, keeping Indonesia stuck firmly in its 5% trap.

Image credits: Photo by Afif Ramdhasuma on Unsplash

Nisa Fathia Rahma
Nisa is a graduate Political Science student at the Indonesian International Islamic University. Majoring in Political Science, she has a strong interest in comparative politics, inequality, and economic development, which drives her academic and research pursuits.