Economy

The Green Economy, Interethnic Conflict, Corporate Mining, and West Papua

The practical implications of the United States’ commitment to reducing CO2 emissions and slowing climate change are substantial. The government’s deficit funding of green energy infrastructure can only be financed by borrowing, taxing, and/or the printing of money and the inevitable inflation tax on all those holding American dollars.

President Biden’s commitment to switch the American automobile fleet from combustion engine to electric vehicles will double the amount of copper used to produce cars. Similarly, a dollar devaluation is likely to drive demand for gold as investors seek refuge from a depreciating asset. The beneficiaries of the shift to a green economy are likely to be big mining companies that will benefit as prices for their products climb.

Much of the mining for the resources necessary to develop sustainable economies occurs in the developing world, including significant mines in Chile, Peru, the Democratic Republic of the Congo, and Indonesia. The increasing demand for strategic metals to combat climate change in the developed world increases mining activity, activity that can disrupt local ecological services on which people in the developing world rely. Ironically, developing countries and poor people living near the equator, presumably hurt most by global warming, also bear substantial environmental costs for addressing the problem.

Of course, mining companies want to make a profit, and it is not surprising that they are supportive of public policy initiatives that will increase the demand and the price of their products.  Making a profit in mining requires these companies to navigate the complex politics of the developing world, the interests of local people, and environmental impacts that cause both local harm and global outrage. The story of Freeport-McMoRan’s Grasberg mine, located in the Indonesian province of Papua, illustrates these challenges nicely.

Freeport-McMoRan is climbing toward controlling 50 percent of the world’s copper market. The Grasberg mine accounts for the world’s second-largest deposit of copper reserves and the largest gold reserves. Freeport-McMoRan, through its subsidiary PT Freeport Indonesia, owned 60 percent, and Rio Tinto owned 40 percent of the mine before transferring a controlling share of the mine (51.2 percent) to the Indonesian company PT Inalum in 2018. The Indonesian government facilitated this transfer by threatening not to renew the mine lease for an additional twenty years. Astutely responding to political pressures is an essential ingredient to managing profitable mining ventures.

The politics of the Grasberg mine are complex. The governing elites of Indonesia, a former colony of the Netherlands, are ambivalent toward multinational corporations. On one hand, they benefit from the capital and expertise companies like Freeport-McMoRan and Rio Tinto bring to the country. Billions of tax dollars come to the government from the mine, and profits flow to state-owned enterprises. On the other, there is the fear that globalization is a mask for a neo-colonial grab for the country’s resources – doing nothing for its economic development. This nationalistic narrative of desire and fear threatens operations of the mine and its profitability.

A current batch of export bans instituted by Indonesia illustrates how the hand of the government can disrupt markets. In 2020, the government banned nickel ore exports and is now considering implementing bans on bauxite ore and copper ore. The government believes that keeping raw materials at home may be a path to economic development through providing relatively cheap resources to local manufacturers. Export bans appear to violate the rules of the World Trade Organization and do violate the law of comparative advantage. State-centered planning has better than even odds of making the average Indonesian poorer rather than richer, though those strategically located among the governing elites will be richer.

The building of the Indonesian state through industrial policy – justified through underdevelopment purportedly caused by colonialism – is not without ironies. Indonesia is itself a colonial power. Much of Indonesia’s mineral wealth is in the provinces of West Papua and Papua – territories that were annexed by the Indonesian state in 1969 through an outcome of a disputed referendum where the Indonesians pressured Papuan elders to vote for union with Indonesia, ironically named the Act of Free Choice.

The peculiar geography of Papua facilitated the development of diverse tribal communities. The giant island of New Guinea accounts for about .001 to .002 of the world’s population but with 200-700 languages spoken accounts for about one quarter of the world’s linguistic diversity. Subsistence agriculture, hunting, fishing, gift-giving, and intertribal warfare were dominant features of the social order of the island and play a significant role in the social order even today.

Before abandoning their colony to Indonesia, the Dutch helped develop Papuan nationalism. The Indonesian government encountered considerable resistance to incorporating West Papua and Papua into their state. Nevertheless, the region’s wealth has proven a strong incentive to hold on to these territories despite considerable costs.

Since the Dutch left in 1962, the Free Papua Movement (Organisasi Papua Merdeka) has waged a guerilla war against the Indonesian state. The Indonesians have killed between 100,000 and 300,000 Papuans during this struggle. The Indonesian state has responded to this challenge by giving greater autonomy to its Papuan territories even as it has sponsored migration that has shifted the island’s demographics, making indigenous Papuans roughly half of the territories’ current population of over 5,437,000.

Development projects like the Grasberg mine have tended to benefit the Indonesian government more than the inhabitants of Papua. For example, the recent deal that has given the Indonesian government a controlling stake in the Grasberg mine has shared only 20 percent of its stake with Papuan interests. The deprivation of ecological services such as loss of fisheries due to strip mining operations falls entirely on the shoulders of local people. It is not hard to understand how deals like this that neglect local property rights or diminish concerns associated with these rights would create resentments that fuel tensions between the Papuans and the Indonesian state.

West Papua counts for around 22 percent of the Indonesian archipelago landmass. Migrants come from around the archipelago to seek jobs in the mining, lumber, and oil industries that offer them a chance to improve their circumstances.  If indigenous Papuans view these migrants as unwelcome guests, that does not bode well for peace on the island. Figuring out a property rights regime that is acceptable to all parties to make this migration politically more palatable will take considerable legal and political energy.

The fate of the Panguna mine in Papua New Guinea offers a warning of what can happen if local concerns are not properly addressed. Like Grasberg, Panguna has large copper, gold, and silver deposits. The mine, located on the island of Bougainville and managed by a subsidiary of Rio Tinto of Australia, provided the Papua New Guinean government a large share of the country’s GDP.  The Bougainvilleas received only a tiny portion of these profits even as they bore substantial costs from mining operations. The Jaba River was poisoned. Wildlife became extinct. Local people became ill. Children were born with birth defects. In 1988, the Bougainvilleas rebelled. Credible threats of secession from New Guinea led to the closure of the mine in 1989. As of today, the mine remains closed.

Attention to local property rights concerns can limit the profitability of mining ventures. Still, a robust property rights regime is an essential component for developing market economies that meet human needs so well. Freeport-McMoRan has secured a twenty-year lease of the Grasberg mine ending in 2041. The legal niceties of corporate law have not eliminated the complex political context that could threaten the security of future business operations.

It is strange how President Biden and other world leaders’ desires to save the planet from global warming can be the impetus for local environmental crises that are more immediate in their consequences than the global warming on the horizon. When a global recovery from the Corona pandemic comes, demand for the metals that a green economy will need will push the price of these metals upward. As the profits of mining corporations soar, the resentments of local people are likely to contribute to political instability and threats to corporate profits.  Unless the Indonesian state and corporations like Freeport-McMoRan are very skillful in establishing general rules that allow the indigenous Papuans to thrive, they will find themselves in the unenviable position of using violence to suppress dissent or abandoning profitable concerns central to the national and global economies. Building market economies based upon well-defined and protected property rights is not easy, but that is Indonesia’s task. If they fail at this task, interethnic conflict will plague the country. As of now, ethnic tensions in West Papua are growing, and rumors of a racial slur spark riots that may spill over and negatively impact business investments.

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