It was the Greek philosopher Plato (c. 427–347 BC) who argued that the state should maintain strong control over economic life and limit excessive private ownership. His ideas — which later became one of the philosophical roots of socialist economic thought — emphasized that economic activities should not be left entirely to free-market mechanisms, but instead guided by the state in accordance with principles of justice and morality. In his ideal state named Polis, Plato advocated forms of collective ownership to prevent excessive inequality between the rich and the poor, which he believed could eventually lead to social conflict and instability.

The debate over the proper role of the state in the economy, first explored in Plato’s “Republic,” has once again become increasingly relevant today. Amid global uncertainty, trade fragmentation, and intensifying geo-economic competition, many countries are reasserting a more active state role in economic development. Sovereign wealth funds, development banks, industrial policies, and government intervention in strategic sectors have increasingly become part of the economic architecture of modern states.

Indonesia is certainly not outside this global trend. The establishment of Daya Anagata Nusantara (Danantara), the strengthening of downstream industrial policies, the consolidation of strategic supply chains, and various initiatives aimed at reinforcing food, energy, and industrial resilience all reflect the state’s growing desire to play a more active role in managing long-term economic risks. In certain circumstances — particularly when markets fail to provide long-term financing or when strategic national interests are at stake — a stronger state presence can indeed become a legitimate and necessary policy instrument.

Yet, as with any major shift in economic design, the central question is NOT whether the state should play a role, but how to ensure that an expanded state role strengthens national economic resilience without creating new forms of concentrated risk.

Article 33 of the 1945 Constitution has long positioned the state as an important actor in Indonesia’s economy. However, the phrase “controlled by the state” does not necessarily imply that the state must directly operate every economic activity. Indonesia’s Constitutional Court, in several of its rulings, has interpreted state control as the authority to regulate, supervise, formulate policy, and ensure that economic activities generate the greatest benefit for society. Essentially, the Constitutional Court decisions continue to provide room for private participation as long as the state maintains its regulatory, supervisory, and public interest protection functions.  In other words, the constitutional mandate speaks more about strategic state leadership than operational expansion of the state into all areas of economic activity.

In modern economies, a strong state is often measured not by how extensively it directly operates businesses, but by its ability to build healthy markets, create policy certainty, manage systemic risks, and attract long-term investment. The state functions as an “architect of markets” and a “risk absorber of last resort,” rather than a permanent replacement for market mechanisms.

In many countries, sovereign wealth funds serve as strategic investment instruments to support economic transformation. Temasek in Singapore, Mubadala in the United Arab Emirates, and Saudi Arabia’s Public Investment Fund all function as managers of national investment portfolios, catalysts for industrial modernization, and providers of long-term strategic financing. Their strength lies precisely in the discipline of their mandates: focusing on strategic investment management rather than directly operating as many sectors of the economy as possible.

Experiences from a number of countries show that when the state moves too far in replacing market mechanisms and concentrates too many economic functions within highly centralized structures, economic flexibility and innovative capacity tend to weaken. Over time, such concentration of risk may create systemic vulnerabilities.

China offers a different lesson. The success of modern Chinese economic development has not been determined solely by the scale of state intervention, but by its ability to maintain a balance between strategic state control, market discipline, competition, and openness to innovation. The continued availability of competitive space for private enterprises and China’s deep integration into global markets have become important factors in preserving economic flexibility and innovation capacity.

In Indonesia’s context, Danantara has the potential to play a similarly important role. With its large asset base and capacity to consolidate national financing, it could help strengthen downstream industries, strategic infrastructure, renewable energy, and other priority sectors. However, the larger the role of an institution becomes, the more important it is to ensure clarity of mandate, strong governance, and clear institutional boundaries.

This becomes increasingly relevant because the challenges of the 21st-century economy are no longer limited to growth alone, but also involve the management of systemic risk. In a healthy economy, institutional diversification and the distribution of decision-making centers are themselves important sources of resilience. The financial world recognizes the importance of avoiding concentration risk. Modern energy systems are built with redundancy to minimize single points of failure. Even the architecture of the global internet is designed in a decentralized manner so that it can continue functioning when one node experiences disruption.

The same principle is equally relevant to the management of a national economy. When too many economic functions become concentrated in too few institutions — ranging from financing, distribution, trade, logistics, and strategic commodity management — the risks of a “single point of failure” inevitably increase. Under such conditions, governance failures, policy mistakes, or disruptions affecting one institution can rapidly spread across multiple sectors and generate significant economic costs.

For that reason, strengthening the role of the state should not be equated with narrowing the space for private sector participation or reducing institutional diversity within the economy. On the contrary, an effective state should ensure the creation of a healthy, competitive, and adaptive economic ecosystem. In many cases, strengthening cooperatives, SMEs, and national industries will prove more sustainable when pursued through productivity enhancement, access to financing, technology adoption, and supply-chain integration — rather than through the narrowing of economic space for these actors.

Experiences across many countries demonstrate that resilient economies are usually supported by a balanced combination of a strong state, a dynamic private sector, and competitive market institutions. These elements complement rather than replace one another. The state indeed has an important role in addressing market failures, developing strategic sectors, and safeguarding national interests. Yet at the same time, the state must also ensure that the expansion of its role does not unintentionally create new rigidities, reduce economic flexibility, or concentrate excessive risks in too few institutions.

Ultimately, Indonesia’s greatest challenge is not choosing between the state and the market. The real challenge lies in designing a national economic system capable of maintaining balance between state effectiveness, market dynamism, and long-term systemic resilience. In an increasingly complex and uncertain world, the ability to manage this balance will determine whether Indonesia succeeds in developing a truly strong economy — or merely one that appears strong, yet remains vulnerable to major shocks when a single institutional node fails.

In the end, the outcome of economic management depends greatly on how the state positions itself within the market, because the strength of the state lies not only in its ability to enter markets, but also in its wisdom in determining when markets themselves should be allowed to function without so much state intervention.
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Iman Pambagyo is the Trade Ministry’s Director General of International Trade Negotiations (2012-2014, 2016-2020) and Indonesia’s Ambassador to the WTO (2014-2015).
 

The views expressed in this article are those of the author.

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