Indonesia's rise and its regional implications

The Global Competitiveness Report in 2010 and the recent MGI report serve to confirm Indonesia’s potential. According to McKinsey, growth has been due to several changes. Firstly, in addition to Jakarta, growing middle-sized cities such as Medan and Surabaya will contribute significantly to GDP. Secondly, Indonesia’s economic growth is not only driven by its rich natural resources, but also by domestic consumption and services. Thirdly, Indonesia’s productivity gains also came primarily from improvement in various sectors. In this case, Indonesia’s economy is now built on a more stable and diversified foundation than many external observers have assumed.

Whether we adopt a favourable or sceptical view of the MGI report, the fact is that Indonesia does have potential capacity. One prominent factor is an expanding productive workforce. According to the Indonesian Central Statistics Agency (BPS), in 2012, those aged between 1-29 comprised approximately 55 per cent of the total population. Following such trends, MGI argues that in 2030, 135 million people will become part of the consumer or middle class and 113 million skilled workers will join the labour force. 

In the future, an expanding middle class should raise Indonesia’s potential by increasing savings and spending power, while enhancing productivity. The resulting growth will make Indonesia stronger than any Asian economy other than China and India. 

The broader resurgence of Asia will also benefit Indonesia as the unprecedented economic transformation of China and India will increase demand for energy. In 2010, China became the largest export destination for Indonesian coal and was generating approximately US$3.6 billion in revenue; followed by India’s purchase of $2 billion in coal exports. Therefore, the resurgence of Asia’s economies will accelerate demand for a range of resources and commodities supplied by Indonesia.

Indonesia, however, is confronted with a security dilemma given the current uncertainty in politics in the Asia-Pacific region; geopolitical turbulence in disputed waters; and the emergence of new sources of conflict involving resources. 

Against this backdrop, Indonesia’s quest to improve its military capability, if realised, will influence the regional balance. In previous years, Indonesia was never able to meet its defence budget. In 2008 only 28 per cent of the overall budget was fulfilled by the government. Economic growth should help Indonesia to build up its military. Indonesia has recently passed a Defence Industry Law, demonstrating a political will to increase its military capability. But as the regional power balance shifts, it could potentially stimulate a reaction from Australia, Malaysia and Singapore, especially over border issues, such as the unresolved dispute over Ambalat with Malaysia.

The alternative scenario is that Indonesia will increase its importance by fostering a peaceful regional order particularly within Asean, and promoting cooperation between conflicting stakeholders, such as China and the US. Engaging the big powers via a regional platform where they can communicate their interests is important to avoid misperceptions, particularly amidst the current volatile atmosphere in Asia.

Geopolitical tensions could draw Indonesia and other regional countries into a protracted conflict and set back economic development. Against this backdrop, Indonesia chose to play a constructive role by forging a consensus to manage maritime disputes in the wake of the failure of the recent Asean Ministerial Meeting on the South China Sea. Recently, Indonesia also circulated a draft code of conduct in the South China Sea to Asean foreign ministers as a confidence-building measure. This initiative is a manifestation of Indonesia’s benign rise, which should be a positive force for regional peace.

There are at least three key determinants in Indonesia’s future rise. The first is the vision of Indonesia’s future president after 2014, whoever that may be, which will determine the next phase of Indonesia’s foreign policy. Secondly, domestic sentiments on certain issues are also important in terms of their impact on Indonesia’s foreign policy. Islamic nuances in foreign policy are already evident as a consequence of domestic pressures, for example concerns about the plight of the Rohingya community in Myanmar; advocating an anti-blasphemy law in the UN; and Foreign Minister Marty Natalegawa’s recent call for nations to review diplomatic ties with Israel and to boycott its products in solidarity with Palestine.

The final determinant is whether Indonesia will be able to effectively play its part in institutionalising regional cooperation to face the growing quest for influence between the US and China.

Indonesia still faces domestic problems such as corruption, inequality, issues of governance and government effectiveness, and communal tensions, which can stand in the way of its rise. Therefore, whether Indonesia can fulfill its potential as an emerging medium power really depends on how successfully it can capitalise on its current growth trajectory.

 

Emirza Adi Syailendra is a research analyst at the Indonesia Programme of the S Rajaratnam of International Studies, Nanyang Technological University, Singapore.