Indonesia Could Be 10th Largest Economy: But here are the Challenges

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Indonesia Could Be 10th Largest Economy: But here are the Challenges

that partially controls the Malacca Strait helps to provide a safeguard for its energy imports and trade flows through the strategic waterway. Chinese arms exports can be expected to continue in line with the perceived acute vulnerability of its energy imports.

Indonesia-India Relations

Indonesia and India enjoy longstanding ties. President Soekarno was a guest of honour at India’s independency ceremony on 26 January 1950. Both countries experienced colonialism and both Soekarno and Indian Prime Minister Jawaharlal Nehru were founding fathers of the Non-Alignment Movement. The relationship with India was suspended during the 1968-98 New Order period because Indonesia’s foreign policy was aligned with the US and the West. During that time, Indonesia received substantial aid from Western countries (particularly the US), to support infrastructure development while in contrast, India’s political and economic systems were heading more towards socialism. Relations were restored in 1998 as post-Soeharto Indonesia saw the potential of India as an economic partner.

Economic relations between Indonesia and India have matured, with both countries experiencing significant growth over the past seven years. They are both now labelled as emerging market economies and both are members of the G20. The two countries also have similar domestic issues, such as corruption, inefficient bureaucracies, poverty, unemployment and terrorism.

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President Yudhoyono has heavily promoted Indian-Indonesian trade, having initiated in 2005 a Strategic Partnership with India. The growth in bilateral trade has been substantial, growing from US$6.2 billion in 2006 to US$16.2 billion in 2011. Both countries have set a target of US$45 billion in bilateral trade by 2015.

Indian-Indonesian reciprocity also extends to the military sphere. The Indian and Indonesian Navies enjoy high levels of co-operation and understanding fostered through regular co-ordinated patrols and exercises such as the multinational MILAN naval exercise. Recognising the strategic importance of the Malacca Strait, the waterway has been the focus of co-ordinated patrols operated by both navies. From February to March 2012, components of the Indian and Indonesian armies engaged in Exercise Garuda-Shakti, hosted by the Indian Counter-Insurgency Jungle Warfare School. The exercise was designed to simulate perceived non-conventional threats faced by both countries.

The rationale for the Indonesian-Indian relationship is based on future challenges expected in South-East Asia. As China and India now seem increasingly to be competing on a geostrategic level, Indonesia is geographically positioned – or even caught – between the two. Indonesia’s position as a guardian of the Malacca Strait means that both India and, especially, China have a strategic interest in Indonesia’s continuing growth and stability.

Indonesia-Australia Relations and Prospects

Three major recent events continue to have symbolic importance in Australia-Indonesia relations: the 1999 East Timor intervention and the Bali bombings of 2002 and 2005. Since then, both countries have made great efforts to improve bilateral relations. Leaders of both countries have met each other at least 15 times in various fora; their foreign ministers have met for more than 60 different occasions since 2000. The regularity of these visits has culminated in significant boosts to the relationship, with the 2006 Lombok Agreement being a highlight.Regular bilateral dialogue mechanisms are held, including the Annual Leaders’ Meeting, the 2+2 Ministerial Meeting of the Foreign and Defence Ministers and the Indonesia-Australia Dialogue. The Indonesia-Australia Dialogue inaugurated on 4 October 2011 is an industry platform to facilitate discussion between Indonesia and Australia on issues relating to the bilateral relationship. The dialogue, though mostly industry-centred, received strong support from the Department of Foreign Affairs and Trade and the Indonesian Ministry of Foreign Affairs.

The 4 July 2012 meeting between Prime Minister Gillard and President Yudhoyono in Darwin took on an increased significance following the Australian invitation to Washington to rotate US Marines through Darwin. The topics discussed were heavily influenced by that initiative. President Yudhoyono called for a joint military exercise between the US, China, Australia and Indonesia, with a focus on humanitarian relief operations.

Another area of interest in the bilateral relationship is illegal immigration. At the Darwin summit, Prime Minister Gillard pressured the Yudhoyono Government to do more to break the people-smuggling networks. President Yudhoyono agreed, but also requested that Australia release 54 Indonesians imprisoned in Australia on people-smuggling charges.

A fortnight after the Darwin meeting, Foreign Ministers Bob Carr and Marty Natalegawa met in Jakarta to explore further co-operation in combating illegal immigration. Mr Natalegawa highlighted the importance of the Bali Process agreement as the basis for co-operation with scope for increased collaboration. Both countries saw the need for an agreement involving Basarnas, the Indonesian national search and rescue agency, and Australian agencies. The agreement was to authorise the entry of Australian naval vessels into Indonesian territorial waters for search and rescue purposes and was effectively launched following the September 2012 visit to Indonesia by Defence Minister Stephen Smith and Home Affairs Minister Jason Clare.

The agreement aroused concern over sovereignty fears, with the Jakarta Post reporting that, ‘T.B. Hasanuddin, who chairs the House of Representatives’ Commission overseeing defence and foreign affairs, said the agreement must not allow Australia to impinge on Indonesian sovereignty.’[2] In response, the Commander of the Indonesian National Armed Forces(Tentara Nasional Indonesia, orTNI), Admiral Agus Suhartono, confirmed that Indonesia’s sovereignty will remain intact because access would only be given for humanitarian assistance, with only specific zones approved by the TNI to be accessed by Australian vessels. This was subsequently followed up by a meeting by Prime Minister Kevin Rudd and President Yudhoyono on 5 July 2013. Both leaders supported the need for a region-wide approach to the issue, rather than a bilateral focus between a transit state and the destination state.

The prospects for enhanced Australian trade with Indonesia appear promising. Estimates based on the rapid growth of the Indonesian economy suggest that it could surpass Australia as early as 2017.[3]  To achieve that will require significant foreign investment and a robust trading system. In such areas, Australia has much to offer. Australian investment in Indonesia amounted to $6.74 billion in 2012; in the other direction, Indonesian investment in Australia stood at $595 million. The Department of Foreign Affairs and Trade recognises that the economies of both Indonesia and Australia are remarkably complimentary, in many areas such as defence industry, infrastructure, and foodstuffs. The synergy between the Australian and Indonesian economies is likely to increase as Jakarta and Canberra sign off on the Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA). The first, two-stage, round of IA-CEPA negotiations finished on 26-27 March 2013 but, given the scope of the undertaking, it will be some time before a final product is produced.

Austrade has listed four key areas in which Australian companies can increase their investments in Indonesia:

  •     Services: focussing on science and technology, finance and health services.
  •     Infrastructure: focussing on “green” building design and health infrastructure.
  •     Environmental: renewable energies and water management.
  •     Food security.

Two-way merchandise trade between Australia and Indonesia currently stands at $11.2 billion and is expected to increase to $15 billion by 2015. Even so, Australia is not fully capitalising on Indonesia’s remarkable growth and there is certainly room to grow much further. Indonesia is experiencing an economic boom, has large amounts of natural resources, is geographically close and has a large youthful workforce and a

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