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Author: Stephen Olson, PCG Asia
Originally published on Diplomatist

If the Indonesian leadership continues to demonstrate deft handling of its international relations and manages to avoid a major economic recoil, there is an opportunity for it to play a more formidable role on the global stage, according to Stephen Olson

By virtue of its extremely large domestic market, low labour costs, impressive growth, expanding middle class, and preferential access to ASEAN and China, Indonesia has become a highly significant market in its own right, a logical springboard into China, and a leader amongst it ASEAN brethren

With its steadily increasing economic might and strategic influence, the Southeast Asian island archipelago of Indonesia has moved itself front and centre on the global stage. Indonesia’s hosting of this year’s Asia Pacific Economic Council (APEC) forum was hailed by the leader of at least one Asia Pacific country in attendance for producing the “best APEC” meeting ever. And with Chinese President Xi capitalising effectively on the absence of his American counterpart, the meeting garnered worldwide headlines and attention for the commentary it provided on the US and Chinese competition for influence in the Asia Pacific.

Little more than a month later, Indonesia was once again at the epicentre of global economic diplomacy, as the Ministerial Meeting of the World Trade Organisation (WTO) convened in Bali. After almost a dozen years of futile negotiations to bring the Doha Round of global trade negotiations to a successful conclusion, the Bali negotiations were finally able to salvage a scaled-down package of trade liberalisation measures – the so-called “Bali Package”. While far less ambitious than the originally conceived Doha Round agenda, these measures are nonetheless expected to deliver a considerable boost to the global economy of as much as $1 trillion. Indonesian President Yudhoyono and Trade Minister Gita Wirjawan were both given high marks for their stewardship and their efforts to bring the negotiations to a successful conclusion.

While the hosting of these two major international diplomatic and economic events within such short order was largely coincidental, they do serve to symbolise Indonesia’s growing heft and presence on the international stage. How has Indonesia – a country convulsed by political upheaval and economic crisis less than 15 years ago – managed to carve out such a central role for itself? The answer is – Strong economic growth, a favourable set of global strategic circumstances, competent leadership, and a fair amount of good luck.

Start with the basics: Indonesia is big. With a population of over 250 million, Indonesia is the fourth most populous nation in the world, and the largest economy in the Southeast Asia. Indonesia’s large population provides both an abundant pool of cost-completive labour to help drive exports, as well as a substantial source of local demand.

Beyond Impressive Economic Growth

An aggressive reform agenda enacted during President Yudhoyono’s first term (2004-09) – including significant reforms in the finance sector, and tax and customs regimes, along with enhanced capital market development and supervision – are generally credited with setting the stage for growth. The administration also won plaudits from multilateral agencies for its stringent fiscal management, resulting in a debt to GDP ratio of less than 25 percent, and a fiscal deficit of less than three percent.

Propelled by prudent macroeconomic management, strong domestic consumption and investment, and rising prices for its commodity exports such as palm oil, copper, and rubber, Indonesian growth rates have been exceptionally strong over the past decade – generally in the 5-6.5 percent range, except during the global financial crisis. And even during the darkest days of the crisis, while many major economies were contracting, Indonesia managed to grow at a rate of 4.6 percent in 2009. Indeed, Indonesia, China, and India were the only G20 members to maintain positive growth that year.

Indonesia’s credit rating returned to investment-grade status in 2011, and the Boston Consulting Group estimates that the number of middle-class and affluent consumers could double to 141 million by 2020 – a figure which is higher than the entire population of Thailand.

Importantly, the population of Indonesia is not only large and becoming wealthier, it is also young. While the two largest economies in Asia, China and Japan, will inevitably wrestle with severe demographic challenges in the decades to come as a result of aging populations, more than half of Indonesia’s citizens are under the age of 30.

Beyond Indonesia’s impressive economic statistics, something even more revealing is happening. In boardrooms, factory floors, and conference halls across Asia, the conversation is turning more and more towards Indonesia as the preferred platform for servicing Southeast Asia as well as China. Yes, Singapore is a richer, better developed economy. But it is a city state with a tiny market of hardly more than five million citizens, and a cost structure which many find prohibitively high. Thailand provides a market which is substantially larger than Singapore’s (although only about half the size of Indonesia’s), but serious questions over political stability still remain. Malaysia features a prominent government hand in the economy, racial preferences, and a sometimes ambivalent attitude towards foreign products and investors. The Philippines is a considerably smaller economy, lacking Indonesia’s rising middle-class, and Vietnam is a Communist country with an economy that is far from market-based.

By virtue of its extremely large domestic market, low labour costs, impressive growth, expanding middle-class, and preferential access to ASEAN and China, Indonesia has become a highly significant market in its own right, a logical springboard into China, and a leader amongst its ASEAN brethren. A growing chorus of economists and analysts have made the case that Indonesia’s economic success story makes it a legitimate candidate for inclusion in the BRICS club of leading, emerging economic powers.

Potholes in the Economic Road Ahead

However, in fairness it should be pointed out that some have begun to wonder if the Indonesian growth story might soon be hitting a few road-blocks. The IMF recently downgraded its 2013 growth estimates from 6.3 percent to 5.25 percent, citing weakening demand for commodity exports, dropping commodity prices, and potential capital outflows associated with the onset of the US Federal Reserve’s tapering policy. Indonesia’s widening current account deficit will become even more difficult to finance, as access to capital grows less abundant. And the Indonesian currency has suffered sharp decreases – especially after the US Federal Reserve dropped hints over the summer about the likelihood of tapering.

Glaring deficiencies in infrastructure will become even more evident, and unless addressed in a meaningful way, will create a progressively greater obstacle to continued growth. Highways, roads, ports, and airports are not uniformly adequate, and in some cases are woefully deficient. Power outages still occur with unacceptable frequency across the nation, and high-speed internet connectivity is still a dream in too many places. Years of super-charged growth are beginning to put upward pressure on wages, which could serve to undercut one of the strongest assets the nation possesses.

Finally, although Indonesia is certainly not alone in this regard, corruption continues at unacceptably high levels, and in some respects is inter-woven into the fabric of daily life and business. On balance therefore, while a continuation of fairly solid and sustained growth seems likely, no one should assume that the economic road ahead for Indonesia will be free from pot holes.

Head of the ‘Middle Power’ Class

From a geo-strategic point of view, Indonesia personifies in many respects the potential role and influence that middle powers can now aspire to wield. In addition to its impressive economic growth, Indonesia also offers a highly relevant model on transitioning successfully from dictatorship to democracy, as well as providing a powerful rebuke to those who wonder if Islam is somehow incompatible with democracy and economic vibrancy.

Indonesia’s increasing economic might and socio-political stability are occurring at an especially propitious moment. The days of a unipolar international system led by the United States are over, and the playing field is now open for Indonesia and other leading middle powers such as Brazil, Turkey, and South Africa, to assert themselves on the global stage in a way that would have been incomprehensible 10 years ago.

The global financial crisis not only weakened the US economically, it also undermined the ability (and some would argue, the desire) of the US to lead on the global stage. While China has been most effective in taking advantage of this new landscape to assert itself more forcefully, a number of middle powers are also feeling empowered to articulate and pursue economic and strategic policies which reflect their own national interests. This is essentially the dynamics that has thrust the G20 into a far more prominent role.

Indonesia has managed to skilfully walk an extremely fine line in its diplomacy, maintaining its historically close relationship with the US, while at the same time, forging even closer links with China. Indeed, Indonesia and China signed cooperative agreements in a number of areas at the Bali APEC Summit, and agreed to upgrade their relationship to a comprehensive strategic partnership. This has allowed Indonesia to play a leadership role not only locally (within ASEAN) and regionally (within APEC), but also globally (within the G20).

The Global Stage Beckons

Whether it be on global economic issues being dealt with in the International Monetary Fund, strategic issues being debated at the UN, or trade issues being negotiated at the WTO, Indonesia can now assert itself, its interests, and its viewpoints more forcefully – and can reasonably expect the rest of the world to be willing to listen.

Looking back now on the early years of Indonesia’s transition to democracy roughly 15 years ago, it is striking to note just how dire so many of the predictions were. The conventional wisdom in many quarters was that Indonesia was in effect an “Asian Yugoslavia”, heading inevitably towards a messy disintegration.

Today – with its voice in international forums being heard louder than ever, and its large and growing economy more prominently on the radar screen of the international investor and business community – Indonesia has managed not only to survive intact, but to move to the head of the “Middle Power” class.

The further one progresses up the league tables, however, the tougher the competition typically becomes. That appears to be the case for Indonesia, and the challenges the country will face – especially to continue its rapid economic growth and development – should not be underestimated. But if the Indonesian leadership can continue to demonstrate a deft handling of its international relations, and mange to avoid a major economic setback, there is an opportunity – and indeed, a need – for Indonesia to play a more formidable role on the global stage than it has at any other time in its history.