As it tallies votes from Wednesday’s election, Indonesia’s economic outlook is strong. What does that mean for the region?
BEIJING-(IDB) : Despite a mild economic slowdown amidst China’s economic rebalancing
and the U.S. Federal Reserve tapering—and despite a dip in Indonesian
shares following a surprisingly weak performance
by the favorites in Wednesday’s parliamentary election—the general
direction of Indonesia’s economy seems clear: onwards and upwards. Since
the Asian Financial Crisis and the fall of Suharto, Jakarta has learned
lessons, expedited political reforms, and taken economic strides that
today constitute a platform from which Southeast Asia’s largest country
can continue to build on what it has achieved to date. That’s not to say
corruption, infrastructure deficiencies
and inequality do not remain problems for whoever takes the political
baton after President Susilo Bambang Yudhoyono, but Indonesia’s economic
trajectory is bending sharply in the right direction.
Since the turn of the century, Indonesia’s economy has been one of
the world’s best-performing and most consistent. Since 2001, the country
has averaged 5.4 percent growth, far faster than the global average,
despite the shocks of the global financial downturn. That growth has
facilitated the fall of gross government debt from 95.1 percent of GDP
in 2000 to around 26 percent today, the lowest of any ASEAN member-state
except Brunei Darussalam, and enough for Fitch and Moody’s to grant Indonesia’s debt investment grade status.
Indonesia has gone from being the world’s 27th largest economy in 2000
(nominal GDP) to the 16th largest today—an impressive leap in just
Much more is expected to come. Indonesia is forecast to have the world’s seventh largest economy by 2030, surpassing the U.K. and Germany according to a report by McKinsey Global Institute, and the fourth largest in 2040
according to a Citibank report, trailing only China, India and the
United States. While such projections are often over-reliant on
extrapolating current trends, there is little doubt that Indonesia
stands to benefit immensely from a rebalancing of the global economy
towards the Asia-Pacific and from the demographic dividend of the
country’s young population. The former will ensure relatively high
ubiquity of capital, technology and demand in Indonesian markets, while
the latter will ensure that the workforce will be able to maintain
productivity and a low dependency ratio between workers and dependents,
thereby setting the foundation for decades of robust growth and healthy
The regional implications of this economic rise will be very significant, even if gradual.
A bigger and more robust economy means that defense spending will
continue to rise, albeit from an extremely low base. Indonesia currently
spends less than 1 percent of its GDP on defense, at around $8 billion
annually. In comparison, Singapore has a military budget of $12 billion,
more than 4 percent of its GDP, while Australia spends $26 billion. By
any measure, Indonesia lags well behind its neighbors relative to its
size; however, its rapid economic growth has facilitated sharp annual
defense budget increases, such as the 9 percent increase announced in August 2013.
This much-needed growth comes as Indonesia attempts to increase defense
spending to 1.5 percent of GDP by 2015, or a projected $14 billion, as sought by Yudyohono.
While this target will not be met by next year, it at least recognizes
Indonesia’s military potential and sets a spending benchmark.
Much of this defense budget growth, particularly a $15 billion kit
announced in 2010, will be allocated to equipment procurement and
modernization. The country’s 2010 Strategic Defence Plan
outlined a modernization vision that included 10 jet fighter squadrons,
274 ships and a dozen submarines by 2024—a significant qualitative and
quantitative leap from Indonesia’s current military capabilities, even
if the targets do not seem entirely realistic.
purchases are congruent with the vision, such as the purchase of six
Sukhoi Su-30MK2s that were delivered last September and which completed a
squadron of advanced air-superiority fighters consisting of sixteen
Su-27 SKM and Su-30 MK2 jets. Similar major procurements and orders have
included dozens of F-16 and Su-35 fighters, advanced air defense systems from Thales, Boeing AH-64 Apache Longbow gunship helicopters and more than hundred world-renowned German Leopard tanks.
As it bolsters its military, Indonesia’s weight and importance in the
region’s balance of power will only grow, particularly with respect to
the U.S. and China. As Washington and Beijing seem set for an era of
strategic rivalry across the Asia-Pacific, bringing Jakarta into one or
the other’s sphere of influence becomes ever more appealing. For the
U.S., greater security and economic cooperation with Indonesia, at the
relative expense of China, helps strengthen and coalesce a grouping of
states—which includes Japan, the Philippines and India—that is wary of
China’s rise and territorial claims.
China’s recent claim to the Natuna waters
that are part of Indonesia’s Riau Islands could convince some
Indonesian policymakers to lean towards Washington and hedge against
Chinese assertiveness in the South China Sea. On the other hand, the
seeming inevitability of China’s rise to great-power status, amidst the
uncertainty of the viability and extent of America’s Asia “pivot” and
security guarantees, constitutes a good case for Indonesia to move
closer to Beijing and leverage China’s unprecedented economic force and
growing military heft.
However, the most likely strategic disposition, to use former Vice
President Mohammad Hatta’s expression from 1948, remains having a “free
and active” Indonesian foreign policy. As opposed to relatively passive
non-alignment during the Cold War, Indonesia—on the back of rapid
economic growth and growing power—is increasingly likely to see itself
as entitled to a prominent role in the region and the world in its own
right, and in light of its own interests and potential. Jakarta is
therefore likely to seek prosperity and cooperation equally with both
the U.S. and China, as opposed to creating any form of dependency on one
power in the face of the other. Moreover, Indonesia might be uniquely
positioned in trying to arrest any escalation in the region or prevent
the entrenchment of a paradigm of strategic rivalry that could harm its
own interests and development priorities.
This independent streak is likely to take Indonesian foreign policy
beyond the Asia-Pacific. As recent engagement with the Middle East
shows, Indonesia increasingly sees itself as an important actor in the
Muslim World. In late January, the country signed a defense cooperation agreement
with Saudi Arabia—Jakarta’s first such agreement with an Arab
state—which covered military industry cooperation, counter-terrorism and
joint training. In 2012, Indonesia also co-sponsored UN General
Assembly Resolution 67/19 on the statehood of Palestine, with foreign minister Marty Natalegawa delivering a strong speech
in defense of the Palestinians’ choices and policies regarding Israel.
This seems to be a natural extension of a more confident Indonesia more
willing to articulate its population’s solidarity with Middle Eastern
As for Australia, Indonesia’s economic rise will shift the power
dynamic and importance of the bilateral relationship. Indonesian GDP, on
the basis of purchasing power parity, overtook Australia’s in 2004 and
is today thirty percent bigger, and that gap will only expand as
Indonesia outgrows Australia by a ratio of 2 to 1, with the IMF
predicting 6 percent growth for Indonesia to the end of this decade
compared with around 3 percent for Australia.
This will not only enhance
Indonesia’s economic primacy over Australia and entrench Prime Minister
Tony Abbott’s maxim of “less Geneva and more Jakarta,”
it will also shift the balance of power within the relationship.
Australia’s dominance and transactional approach to the relationship
will have to give way to a more balanced and strategic one, as Canberra
comes to terms with the fact that a burgeoning Asian power of more than
250 million people cradles Australia’s northern borders.
Indonesia’s economic rise will therefore pave the way for significant
geopolitical change. The country’s economic growth engine is of such
vigor relative to the rest of the world—perhaps surpassed only by China
amongst the world’s twenty largest economies—that a military and
strategic dividend for Jakarta is inevitable. Projected timeframes and
Indonesian goals will shift with movements in the domestic and regional
landscape, but the fact remains Indonesia will have more clout in the
future than it’s ever had before. Source : Diplomat