Indonesia Matters: The role and ambitions of a rising power

Indonesia’s success in entrenching democracy and its rapid economic growth has propelled the country into a position of regional and global power.  The country has undergone immense political change in the last few years, moving from authoritarian rule to a robust and vibrant democracy and building a dynamic economy after being crippled by the 1997-98 Asian financial crisis.  Indonesia’s “soft power” as a moderate Muslim majority nation is also growing, both in the neighbourhood and beyond.

“Our experience has taught us that sustainable economic development is only possible if there is political development too,” said Hassan Wirajuda, former Indonesian Minister of Foreign Affairs. Indonesia has long been the driving force behind ASEAN (Association of Southeast Asian Nations) and is active in helping to settle regional disputes, such as in the South China Sea. As a G20 member, Indonesia is also looking beyond Asia and is an important player for Europe and the US in terms of maritime security. Daniel Novotny, Director of Global Europe, said: “It is telling that Indonesia managed to push Australia, New Zealand, India, Russia and the US to come to the East Asia Summit.”

Indonesia’s reformasi after the Asian crisis of 1997-98 transformed the country. The strategic reforms undertaken unpicked 33 years of authoritarian rule and embedded democracy into the nation’s fabric. The measures unleashed a dynamic economy and GDP has accelerated. With 70 per cent of GDP based on domestic consumption, growth appears sustainable and Indonesia’s credit rating has been restored to investment grade. According to McKinsey, Indonesia is poised to become the 7^th largest economy by 2030, ahead of UK and Germany.  As Arif Havas Oegroseno, Ambassador of Indonesia to the EU, said: “We defy the belief that democracy is not compatible with growth or with Islam. We are the country of Mission Impossible.”

The Indonesian economy must overcome a number of challenges to sustain its growth rate. Theo Thomas, Senior Public Sector Specialist at the World Bank Office in Jakarta, said: “The economy is benefiting from a democracy dividend. But while 6 per cent growth sounds good, we think it could do better. It could be 7%-9%.” The lack of infrastructure is holding back growth. This includes physical infrastructure, available land, and a lack of skilled workers for building projects. The country also needs to avoid the middle income trap, with 50m citizens already classified as middle class.

The rapid pace of change has thrown up social and governance issues that the country must confront. While the education budget has increased by 20%, there are not necessarily commensurate improvements in outcomes. Mark Crossey, Director Programmes at British Council Indonesia, said: “The breakneck speed of legislative challenges means teachers and schools are catching up with demands.” Qualified teachers are in high demand and there are shortfalls in school inspectors. Poverty is still an issue, with an estimated 94m Indonesian citizens close to the poverty line. In addition, the devolution of politics to local government has created frictions and fiefdoms.

The EU has been slow to recognise Indonesia’s multi-faceted rise. The Partnership and Co-operation Agreement (PCA) signed in 2009 has yet to be ratified. Ana Gomes, MEP and Rapporteur for the EU-Indonesia PCA, said: “In Europe we are still failing to appreciate that Indonesia matters. It is not just about size and wealth, but about a success story of democratic transformation.” There are many shared values between Indonesia and the EU that can be built upon: diverse cultures and languages; a belief in democracy and peace, and a desire for regional and global co-operation. “We are in real danger of missing an opportunity with our Indonesian partners,” said Pierre Vimont, Executive Secretary General of the European External Action Service. Opening the conference, Shada Islam, Head of Policy at Friends of Europe said it was important that the EU and Indonesia: recognised each other as strategic partners; organised regular summits to ensure engagement at the highest level and started negotiations on a Comprehensive Economic Partnership Agreement.

While a so-called “scoping exercise” on a free trade and investment agreement was under way,  Mauro Petriccione, Director for Asia at the European Commission, said: “Current policy is cumbersome for business, protectionist and not always open. Moving up the value chain is good, but trade restrictions are not.”