Indonesia matters: The role and ambitions of a rising power

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1 Indonesia matters: The role and ambitions of a rising power Way ahead The EU and Indonesia should: recognise each other as strategic partners. organise an annual EU-Indonesia summit engage with each other at the highest level. spend more time and energy weaving stronger ties to reflect their changing political and economic landscapes. start with a broadening of the current EU-Indonesia Partnership and Cooperation Agreement should be broadened. focus on encouraging people-topeople contacts and student exchanges. start negotiations on a Comprehensive Economic Partnership Agreement. policy briefing Indonesia matters. Once a struggling, developing nation, stifled by years of authoritarian rule, Indonesia is now a vibrant, dynamic democracy, an aspiring middle power and one of Asia s most exciting but still relatively under-estimated and under-reported success stories. As Southeast Asia s most populous nation and largest economy, Indonesia is widely recognised as the natural leader of the 10-member Association of Southeast Asian Nations (ASEAN). Through its membership of the Group of 20 (G20), as well as the Islamic Conference Organisation, Indonesia is extending its influence beyond the immediate neighbourhood. Indonesia is the driving force behind many Asian regional integration initiatives and has become a strong advocate of human rights and democracy. With half of the world s trade passing its northern maritime border, it has a strategic role in ensuring safe and secure international navigation. With a population of over 240 million, a still-strong national economy, a youthful population and a fast-rising middle class, business opportunities abound. Not surprisingly, investors are flocking in. A report by the McKinsey Global Institute says that by 2030, Indonesia could become the world s 7 th -largest economy (up from 16 th largest today), overtaking Germany and the United Kingdom. Not plain sailing It s not plain sailing, however. Indonesian policymakers face an array of challenges as they seek to keep the economy on track and meet ambitious national targets for growth and development. Indonesia s GDP grew by 6.2 per cent last year, slightly below 6.5 per cent in The country has attracted record levels of new foreign investment, with domestic investment also reaching a record high as familyowned conglomerates build new shopping malls, housing estates and hospitals. President Susilo Bambang Yudhoyono, now at the end of his second and final term, aspires for growth rates of nearer 7 per cent a year before he steps down next year. However, as elections draw nearer, signs of rising economic nationalism and slowing economic reform cause concern. Many also fear a rise in intolerance and extremism and demand stronger government action to protect religious minorities. The country may become tolerant to intolerance, warns a senior Indonesian journalist. This policy briefing seeks to spotlight Indonesia s many achievements in consolidating democracy, improving human rights and managing its economic rise while also illustrating the vast task ahead as policymakers seek further economic reform, try to remove infrastructure bottlenecks and also work to preserve the country s religious and cultural diversity in the face of extremist June 2013»

2 forces. It highlights Indonesia s relations with its key neighbours and its pivotal position within ASEAN. The briefing also sets out an agenda for a stronger EU-Indonesia partnership which would recognise the country as a strategic partner. Indonesia - Country profile Courted by admirers Indonesia s rise and transformation are having an impact on its immediate neighbourhood and the wider world. US President Barack Obama has put Indonesia high on his foreign policy agenda. His visit to the country in November 2010 was viewed as a strong endorsement of Indonesia s growing global clout. Key players within the neighbourhood are also scrambling to forge closer ties with Jakarta: China and Indonesia say they have a relationship based on trust, in contrast to Beijing s difficult ties with other ASEAN countries. As such, Jakarta is playing a leading role in seeking an easing of tensions in the South China Sea where China and ASEAN members Vietnam and the Philippines have staked out competing territorial claims. Indonesia is also being courted by India and Australia while Japan and Taiwan continue to be leading investors. EU must catch up The EU is lagging behind. The EU has yet to fully recognise Indonesia s changing regional and global profile in either words or deeds. A key foreign policy challenge for European governments is to inject more depth and substance into their still largely uninspiring relationships with the country. The conclusion of an EU Indonesian Partnership and Cooperation Agreement in 2009 is a step in the right direction, as are plans to sign a Comprehensive Economic Partnership Agreement. However, the relationship needs to become stronger and more strategic, reflecting the changing nature of both Indonesia and the EU. Suggestions that the EU and Indonesia hold their first-ever summit and that Indonesia be added to the list of Europe s strategic partners should be investigated further. Forging stronger EU Indonesia ties is pivotal if the EU is to hammer out a new strategy for Asia and dispel a growing perception in the region that Europe is irrelevant and insignificant. Driving force within ASEAN Land area: 1,904,569 sq km Population: 251,160,124 (July 2013 est.) GDP: Euros (2011) Main Exports: oil and gas, electrical appliances, plywood, textiles, rubber. Partners: Japan 16.6%, China 11.3%, Singapore 9.1%, US 8.1%, South Korea 8.1%, India 6.6%, Malaysia 5.4% (2011) Main Imports: machinery and equipment, chemicals, fuels, foodstuffs. Partners: China 14.8%, Singapore 14.6%, Japan 11%, South Korea 7.3%, US 6.1%, Thailand 5.9%, Malaysia 5.9% (2011) Young Demographic Profile: Over 40% below 25 years Urban Population: 44% of total population (2010) Religions: Muslim 86.1%, Protestant 5.7%, Roman Catholic 3%, Hindu 1.8%, other or unspecified 3.4% (2000 census) Source: CIA World Factbook, World Bank Indonesia has long been the driving force behind ASEAN. According to traditional government discourse, ASEAN is the cornerstone of Indonesia s foreign policy. Indonesia is working hard, both publicly and behind the scenes, to inject new vigour and dynamism into ASEAN, persuading other ASEAN member states to start working together on two new agendas previously considered taboo: democracy and human rights. Jakarta has also taken the lead in pressing for the participation of civil society in ASEAN affairs, the adoption of the ASEAN Charter, and the establishment of the ASEAN Inter- Governmental Commission on Human Rights (AICHR). In encouraging political reform in Myanmar, Indonesia has sought to translate its internal reform experience into a strategic democratisation agenda for ASEAN. During Indonesia s presidency of ASEAN in 2011, Foreign Minister Marty Natalegawa outlined three major tasks for Jakarta: to make tangible progress towards an ASEAN Community; establish a dynamic equilibrium between ASEAN and the major powers; and, ensure that ASEAN can be a peacemaker in a complex world. Promoting the ASEAN Inter-Connectivity Master Plan, an inventory of on-going and planned infrastructure investment both within ASEAN and in the wider region was also top of the agenda. June

3 ASEAN members are, however, watching Jakarta s changing regional and global profile with a degree of wariness. There is concern that as it becomes stronger and more ambitious, Indonesia may break away from ASEAN, charting an independent course both within the region and on the global stage. For the moment, for all its focus on creating and maintaining good relations with a thousand friends, it is the region itself where Indonesia is most visible and most influential. The truth is that membership of ASEAN is both an asset and a drag on Indonesia s foreign policy ambitions. Jakarta has successfully used ASEAN to raise its global profile. Increasingly, however, ASEAN is also viewed as a shackle on Indonesia s regional and global aspirations, with some influential Indonesian analysts insisting that Jakarta should break free of the ASEAN embrace and forge a more open and globally-oriented foreign policy. That view is not popular in official circles in Jakarta. A new world view Looking beyond ASEAN, Indonesia is pushing for wider, inclusive integration in the Asia-Pacific region. On the trade front, this means full backing for the 16- nation regional comprehensive economic partnership (RCEP) which aims to establish one of the world s biggest economic blocs by In addition to ASEAN, RCEP will include Australia, China, India, Japan, South Korea and New Zealand, all of which have already signed separate free trade agreements (FTAs) with the Southeast Asian grouping. Jakarta is also a strong supporter of efforts to consolidate and expand the East Asia Summit (EAS) whose members now include the US and Russia seeing it as the primary vehicle for the attainment of an Asia-Pacific wide community. We are against a preponderant power in our region. We do not want to see our region dominated by any single country, whether it is China, Japan, the US or a member of ASEAN, according to Natalegawa. The focus, he says, should be on creating a new dynamic equilibrium in the region. Recently Natalegawa called for a new Asia-wide treaty to promote trust and cooperation in the Indo- Pacific region, saying that an "Indo-Pacific Treaty of Friendship and Cooperation" would address three key challenges: the trust deficit between countries, resolving territorial disputes and managing change. "Membership of ASEAN is both an asset and a drag on Indonesia s foreign policy ambitions." The new framework would allow ASEAN countries to play a more active role in the Asia-Pacific by offering solutions based on their own experiences, as the region deals with the increasing role of world powers such as the United States and China. This is our chance to extrapolate ASEAN's experience towards the wider world. It is no longer good enough for us to protect ourselves - we must take this chance to shape or mould our future, he said. Natalegawa said the new framework would be built in the spirit of ASEAN's Treaty of Amity and Cooperation (TAC), adding that a common framework would also allow countries in the Asia- Pacific to be prepared to deal with unexpected developments, citing the recent territorial dispute between Taiwan and the Philippines as an example. He also called for countries to abandon old worldviews, which treated any rising power as a potential threat, warning: Such attitudes, if allowed to fester, increase the risk of conflict. We need to work instead towards a common prosperity, security and sovereignty, which do not have to be achieved at the expense of others' (success). Using soft power Indonesia s soft power ambitions may not make the international headlines, but since 2008, the Bali Democracy Forum, convened every December on the island resort, brings together leaders and foreign ministers from the world over for discussions on democracy, human rights and the rule of law. The Forum has become a potent exercise in Indonesian public diplomacy and grown in credibility and prestige over the years, spotlighting the country s increasingly vocal and visible aspirations to become Asia s prime normative power and champion of political reform and democracy. More recently, given their country s own democratic transition, Indonesian diplomats have also been advising Egypt, Tunisia and other Arab nations on how best to tackle the challenges of moving from authoritarian rule to democracy. Defence spending on the rise For a rising power, Indonesia s military expenditure is unusually modest. Analysts in Jakarta underline that while the Indonesian armed forces appear to be on a buying spree, the purchases are part of a drive to modernise and replace ageing equipment, not to June »

4 fight wars. The defence budget is rising from $5.45 billion in 2011 to $8 billion in 2013 but still represents only about 1 per cent of GDP (compared to 20 per cent of GDP earmarked for education and public works). We need sufficient naval and military power or nobody will trust Indonesia to keep its waters safe, says an analyst, adding: a good Indonesian navy will ensure peace and stability and boost antipiracy operations. We are not interested in traditional projections of military power. Yudhoyono s mixed legacy Elected president in 2004, President Yudhoyono may not be feted as a decisive and charismatic leader but even critics recognise that the former military officer has consolidated Indonesian democracy and will leave behind a robust economic legacy. Accolades have also come from Greenpeace International which has praised Yudhoyono for supporting the nation s biodiversity. The President has pledged that Indonesia will cut its carbon emissions by at least 26% by 2020 and also renewed a two-year moratorium on forest-clearing concessions under a $1 billion agreement signed with the Norwegian government in The moratorium was extended recently for another two years. Since September 11, 2001, Indonesia has worked hard to push its credentials as a moderate Muslim nation which is committed to fighting terrorism. Human rights groups, however, point to an escalation of religious intolerance and faith-motivated violence throughout the archipelago. The US State Department s annual report on International Religious Freedom expresses deep concern over a series of violations against religious freedom in Indonesia and warns of government inaction and discriminatory laws, including the highly controversial 2008 Ahmadiyya decree which bans the minority Islamic sect from propagating their belief. Presidential hopefuls line up With national polls set for next year, there is no shortage of presidential candidates. An opinion poll by Jakarta-based think tank the Centre for Strategic and International Studies (CSIS) recently found that Jakarta Governor Joko Jokowi Widodo is the most popular candidate for the 2014 presidential election, beating even the Great Indonesia Movement (Gerindra) Party chief patron Lt. Gen. (ret) Prabowo Subianto. The survey found that if the elections were to take place today, Jokowi would get 28.6 percent of the vote, ahead of Prabowo with 15.6 percent. Golkar Party chairman Aburizal Bakrie came third with a mere 7 percent. Jokowi s popularity has been high since he was elected governor of the capital city, and it continues to grow thanks to massive media coverage of his activities. On many occasions, however, Jokowi has said that he is not interested in contesting the 2014 presidential election. Trade Minister Gita Wirjawan is reportedly also a potential candidate, with many saying he is Yudhoyono s first choice to be his successor. "Indonesia s economy has certainly come a long way since the Asian financial crisis in 1997 but there is no room for complacency." No room for complacency on the economic front Indonesia s economy has certainly come a long way since the Asian financial crisis in 1997 but there is no room for complacency. To make it to the next level, the government needs to implement structural reforms to improve the business climate and invest in key sectors like infrastructure and education. Given the country s fast-growing youthful population, health services and education are also in urgent need of improvement. The World Bank warns that although poverty rates have declined, inequality is rising and nearly half the population still lives on less than $2 a day. Youth unemployment is high. Although the government has made the creation of jobs a key priority, companies complain of a shortage of well-trained workers as an impediment to investment. Plugging a $20 billion hole in the budget is an immediate necessity. The newly-appointed reformist Finance Minister, Chatib Basri, faces the difficult task of trying to convince the Parliament to increase subsidised fuel prices (alongside a programme of cash transfers designed to ease the impact of the price increase on the poor) to curb rising energy costs. The government intends to raise subsidized gasoline prices to 6,500 rupiah ($0.67) a litre, and subsidized diesel to 5,500 rupiah per litre. Similar plans last year were abandoned amid public protests. A resource blessing Indonesia is the biggest producer of palm oil and its commodity exports including coal, natural gas, rubber, gold, wood and cocoa have long been the mainstay of the economy, attracting high levels of invest- June

5 ment over the years and generating jobs across the country. But companies are worried: Among other measures, in 2012, the government dramatically increased the divestment requirements by adopting a law that requires investors in the mining sector to divest at least 51% of their shares to Indonesian partners after 10 years of operation. While Indonesia is well placed to capitalise on the increasing demand for commodities, the country is in need of a regulatory framework that is more conducive to investment in the long term. Infrastructure gridlock The absence of sound infrastructure capacity is an important hurdle for economic development but also represents an opportunity for investment. To sustain and deepen its growth, Indonesia must focus on improving connectivity by building new roads, ports, telecommunication facilities and power plants. The government is moving in the right direction: $ 20 billion have been allocated for infrastructure projects in 2013 and the private sector is being offered the opportunity to embark on public private partnerships (PPPs) to develop infrastructure. The Indonesia Infrastructure Guarantee Fund (IIGF), developed with assistance from the World Bank, for example aims at providing guarantees to leverage private investments in infrastructure projects. A Land Acquisition Law adopted recently could unlock value and productivity by speeding up the land acquisition process and guaranteeing fairer compensation for landowners. The real challenge, however, is to translate these measures into more efficient services. Tackling corruption Indonesia still ranks 118 out of 183 in Transparency International s Corruption Perceptions Index (2012). Indonesia ratified the UN Convention Against Corruption in 2006 and various national measures, including draconian new laws, to tackle corruption and red tape have been adopted. The independent Corruption Eradication Commission (KPK) established in 2004 has been successful in investigating and prosecuting powerful public officials but the anti-graft battle remains uphill and difficult. Certainly, civil society has emerged as a powerful agent for change in the fight against corruption. EU-Indonesia relations The EU must devote more time and attention to developing a strong strategic relationship with Indonesia which recognises the country s growing regional Rising Indonesia GDP, current prices (bln US$) Developing local talent To remain competitive in a globalised world, Indonesia must focus on developing the skills of its workers. Although labour is cheap, employers complain of skills shortages, prompting the World Bank to identify the lack of human capital as a major obstacle to the development of a competitive manufacturing sector. Experts say the gap between the skills needed to improve productivity and the ability of Indonesia s education system to provide them appears to be widening. One of things we need to prepare within the next 10 years is to reduce the number of unskilled workers, according to Finance Minister Chatib Basri. We want to move up the value chain. In education rankings by the Organization for Economic Cooperation and Development (OECD) in 2009, Indonesia ranked near the bottom among 65 countries in reading ability, mathematics and science. Indonesia foreign & domestic direct investment (bln US$) Source: IMF's World Economic Outlook Database (October 2012), Association of Southeast Asian Nations June »

6 and global role and influence. Building a stronger EU Indonesia relationship should therefore move higher up the EU agenda. The Partnership and Cooperation Agreement signed by the two sides in 2009 (but yet to enter into force) and plans to negotiate a Comprehensive Economic Cooperation Agreement provide a good basis for the further development of ties. It is time, however, that the EU recognised Indonesia as a strategic partner on a par with China, India, Japan and South Korea. Regular summit level talks are required between EU and Indonesian leaders to allow for exchanges on a diverse range of issues including human rights, extremism, de-radicalisation, maritime security and democracy. The rewards of a qualitative leap forward in EU Indonesia relations are enticing for both sides. EU ambitions of becoming a more powerful and visible actor in Asia depend to a large extent on the development of stronger ties with Jakarta. A nod of approval from Indonesia is essential if the EU is to fulfill its ambitions of joining the East Asia Summit, following in the footsteps of the US and Russia. Together with India, Indonesia is seen as a powerful Asian counterweight to the rise of China. Closer relations with Indonesia, the world's most populous Muslim nation, would also give a much-needed fillip to the EU s standing in the Islamic world and help Europe to obtain information and best practice on questions such as de-radicalisation, especially of young people. For Indonesia, the rewards are just as high. Jakarta stands to gain from enhanced cooperation with the EU in areas as diverse as trade and investment, EU-Indonesia trade Indonesia, Trade with the European Union European Union, Trade with Indonesia Source: European Commission (DG Trade) transport, climate change, human rights, immigration, tackling organised crime, and combating communicable diseases. New areas of cooperation should include disaster prevention and preparedness, counter-terrorism (including stronger legislation on the financing of terrorism), the exchange of views and practices on de-radicalisation, inter-faith questions, security and defence (especially maritime security), and research and development. Indonesia is demanding a change in the Schengen visa regime to allow easier travel for business leaders and students. Stronger ties with the EU would also further consolidate Indonesia s quest for a stronger role both within the region and as a global player. Trade and investments European investments in Indonesia are booming, with EU currently ranked as the country s second largest source of FDI after Singapore. EU-Indonesia trade relations could certainly do with a boost, however. There have been some important breakthroughs: Indonesian low-cost airline Lion Air made the headlines recently with its purchase of $24 billion worth of 234 new single-aisle jets from Airbus. Indonesian timber product exports to the EU rose by 114 per cent increase in the first quarter of 2013 following the introduction of certification system known as the Timber Legality Verification System (SVLK) which is recognised by the EU. The country s exports of timber products, especially furniture, to the EU reached $416 million from January through March, up from $193.9 million in the same period of last year. Indonesia developed the SVLK as part of its commitment to curbing trade in illegally harvested wood. Overall, however, EU-Indonesia bilateral merchandise trade was worth only 25 billion euros last year, making Indonesia the EU s 29th trading partner. Indonesia exported goods worth 15.3 billion euros to the EU last year, while EU exports to Indonesia were valued at a modest 9.6 billion euros. Trade relations are also trammelled by EU complaints about a general lack of Indonesian enthusiasm for trade liberalisation reflected in unpredictable and cumbersome Indonesian restrictions in areas such as import licensing (for products like mobile phones, ceramics and horticulture), exports taxes on raw materials and local content requirements. Jakarta, meanwhile, has voiced irritation over the EU s anti-dumping duties on its biodiesel exports and says that export taxes are meant to encourage a switch from exports of raw material to value-added products. June

7 Scoping exercise Given the potential for increased trade, the EU and Indonesia are engaged in a so-called scoping exercise ahead of a scheduled launch of negotiations on a Comprehensive Economic Partnership Agreement. German Chancellor Angela Merkel has thrown her weight behind upgraded trade ties with Jakarta, saying such a deal would also be an important building block in trade relations with ASEAN. The German Chancellor warned that without such an agreement with Indonesia, the EU would "fall behind" China, which has a free trade agreement with ASEAN. A so-called Vision Group report on EU-Indonesian trade relations released in 2009 also calls for such an agreement which it says should focus on: market access, capacity building and facilitation of trade and investment. The study recommends the negotiation of a deep FTA which would include access liberalisation in goods, services and direct investment, complemented by behind-the-border commitments covering a range of sanitary and technical regulations. It also suggests new openings by both sides in key services sectors as well as discussions on public procurement, notably in public infrastructure. According to the Blue Book annual report on the EU-Indonesia development cooperation, the EU and its member states provided more than $388 million in development assistance to Indonesia in The report emphasizes the changing nature of development cooperation which now includes support for education, economic cooperation and trade and investment, as well as environment and climate change. While these and other aspects of the relationship are important, the EU and Indonesia need to become more ambitious and strategic in their bilateral dealings. This can be achieved if both sides: Change the current piecemeal approach in their relations by starting talks on a strong, comprehensive strategic partnership. To achieve this, the EU will have to give Indonesia the importance it deserves in a new overall Asian strategy and recognise Jakarta as a strategic partner on a par with China, India and Japan. Agree to hold an annual summit to review bilateral and global developments Spend more time and energy weaving stronger ties, with the EU recognising the enormous changes that have transformed Indonesia and translate these into a wide-ranging political and economic dialogue with the country. Engage with each other at the highest level. Currently contacts between EU and Indonesian ministers and senior policymakers are sporadic. The EU s Foreign and Security Policy Representative Catherine Ashton has yet to visit Jakarta and European Commission President Jose Manuel Barroso cancelled a planned visit to the Bali Democracy Forum last year because of urgent EU business. As a first step, broaden the current EU- Indonesia Partnership and Cooperation Agreement to include new areas of cooperation such as disaster-preparedness and post-disaster actions as well as anti-piracy initiatives and other joint initiatives to deal with global challenges such as terrorism, extremism and climate change. Open negotiations rapidly on a Comprehensive Economic Partnership Agreement. Encourage closer people-to-people contacts and student exchange programmes. Indonesia is a pivotal country in the region not just because of demographics and its economic weight, but also due to its vast network of friends. It leadership role in ASEAN means quite simply that the EU cannot hope to expand relations with the region and gain entry into the East Asia Summit without a go-ahead from Jakarta. As a country which has the trust of China, Indonesia has an important role to play as regional peace-maker. In addition, Jakarta s prodemocracy stance and support of human rights and the rule of law give it influence in the region, with Myanmar standing out as an example of just how Indonesia can push and prod in favour of political change. Significantly also, if the EU and Indonesia do finally recognise each other as strategic partners, it will be the first such partnership between the EU and a Muslim nation. "The EU and Indonesia need to become more ambitious and strategic in their bilateral dealings." A qualitative leap forward in EU Indonesia relations will require hard work and strategic thinking. To succeed, both sides must focus on long-term political, economic and above all, geostrategic benefits, not only on immediate gains. June »

8 Further reading Cribb, R. B. and Ford, Michele (eds.). (2009). Indonesia beyond the water s edge: managing an archipelagic state. Singapore: Institute of Southeast Asian Studies. Embassy of Indonesia. (2010). Opinion: Foreign Minister Marty M. Natalegawa on Indonesia and the world January. Islam, Shada. (2011). Asian lessons for the Middle East: after chaos, democracy. Friends of Europe. Islam, Shada; Diaz, Patricia and Laurinaitytė, Viktorija. (2012). ASEAN at 45: Regional hopes, global clout. Friends of Europe. Islam, Shada. (2013). A roadmap for strengthened EU-ASEAN ties. Friends of Europe. Laksmana, Evan A. (2010). Challenges for Indonesia s foreign policy in transition. Today, 27 February. Novotny, Daniel. (2010). Torn between America and China: elite perceptions and Indonesian foreign policy. Singapore: Institute of Southeast Asian Studies. Sukma, Rizal. (2009). Indonesia needs a post-asean foreign policy. Jakarta Post, 30 June, online edition. Wirajuda, Hadianto. (2010). Re-thinking RI s foreign policy concentric circle. Jakarta Post, 4 November, online edition. Authors Shada Islam Head of Policy at Friends of Europe shada.islam@friendsofeurope.org Tel: +32 (0) Patricia Diaz Project Manager at Friends of Europe patricia.diaz@friendsofeurope.org Tel: +32 (0) Friends of Europe is a leading European think-tank that aims to stimulate thinking on the future of the EU. For more than a decade our contribution has been the confrontation of ideas that is vital to policymaking and to encouraging wider involvement in Europe's future. Friends of Europe s Asia programme aims to analyse how Asia and Europe can work with each other in the economic, security, political, social and cultural fields, with a strong emphasis on policy recommendations, the Asia Programme contributes to a new EU strategy for Asia. Contact us: 4, Rue de la Science, B-1000 Brussels - Belgium Bibliothèque Solvay - Parc Léopold, Rue Belliard 137, 1040 Brussels - Belgium Tel.: +32 (0) Fax: +32 (0) info@friendsofeurope.org Join the / #indonesiamatters June