Indonesia: The Need For More Investment And Stronger Partnerships

I recently returned from five days in Indonesia after the terrorist attacks in Jakarta, and what struck me was how untroubled the locals were. Indonesia is home to the world’s largest Muslim population, and the overwhelming majority of Indonesians express strong disapproval of ISIS; less than 5% “agree” with the ISIS campaign. Starbucks Corporation was confident enough to reopen the 200 stores it has in Indonesia the day after the bombings and shooting on January 14.

Living in an archipelago of more than 17,000 islands, of which only 6,000 are inhabited, Indonesia wants to have equally strong relationship with both China and the United States. This sense of independence is deeply rooted in the country’s history and culture—Bahasa Indonesian is an indigenous creation, a codified form of Malay spoken by 165 million people and was a vehicle for the beginning of the independence movement in the late 1920s. Throughout history, Indonesians have experienced a history of violence: from Dutch colonizers dating back to the sixteenth century, to the Japanese invasion during World War II, and even amongst themselves in the 1960s following Suharto’s coup. Indonesia was a leader of the “non-aligned” movement during the Cold War, and the country remains hesitant to have any exclusive relationship.

Skyline View
(Photo courtesy of Flickr user Diary of a Hotel Addict under a Creative Commons Attribution 2.0 Generic License)

Indonesia now faces a more difficult balance in its relations with China and Japan—the former its largest import partner and the latter its main export location. Last October, China managed to secure the contract for constructing a $5 billion high-speed rail system, a result much to the dismay of the Japanese, who saw it as a great opportunity for greater cooperation. This balancing act is more delicate than most realize—online Japanese followers of President Joko “Jokowi” Widodo’s speech at a World Economic Forum meeting reacted negatively upon hearing China’s name mentioned before that of Japan.

 China now positions itself as an attractive investment partner for Jakarta, providing the largest source of tourists as well as growing investment; however, relations with the Chinese have a complex history. Resentment toward the minority Indonesian-Chinese grew as native Indonesians felt threatened by Chinese merchants in the 1950s, and eventually culminated in riots in May of 1998. Furthermore, there were sovereignty concerns between the two countries as China’s nine-dash line called into question Jakarta’s authority over its northwest Natuna Islands. China risks its relationship with Indonesia if it pushes too hard on the maritime front; President Jokowi, former governor of the Jakarta region, has stood firm against territorial disputes, sinking a Chinese vesselin Indonesian waters last May under violation of fishing agreements.

The U.S. Agency for International Development (USAID) has provided assistance to Indonesia since 1950 for various agriculture, health, education, infrastructure, disaster relief, and governance projects. USAID was a key player in the response to the 2004 devastating Indian Ocean tsunami that affected Indonesia, providing over $96 million in disaster response funding and significant on-the-ground support. USAID will have to repurpose its programming as the Indonesian economy grows and changes and, if the economy continues on its current trajectory, consider graduating Indonesia.

 The biggest challenge now is how Indonesia will power its future. Currently, the use of coal contributes to approximately a quarter of the country’s energy resources. President Jokowi released last year a 35-gigawatt (GW) power capacity addition plan by 2019, of which 20-GW will be provided by coal-fired power plants, and 13-GW from gas-fired projects. The program anticipates the development of around 210 power plants across the country, but this is far too ambitious in such a short timeframe.

Other economic and governance challenges affect Indonesia’s ability to live up to its potential. Although the Indonesian economy has remained strong in the past decade, growing at an average rate of 6 percent even from 2007 to 2012, GDP has started to stagnate in recent years. Indonesia remains outside the Trans-Pacific Partnership (TPP) agreement, which reflects the reality that Indonesia can be a difficult commercial partner. The country ranks a poor 109 on the World Bank’s Doing Business Indicators, reflecting the archipelago’s implicit economic nationalism. While foreign direct investment (FDI) has increased in recent years, it remains proportionally low to GDP in comparison to other Southeast Asian economies.

Despite these challenges, there are bright spots. Certainly the country has made large strides in economic development since the Asian Financial Crisis—when the term ‘crony capitalist’ was coined for Indonesia and Thailand. Indonesia’s economy is expected to rank seventh in the world by 2030, overtaking Germany and the U.K. The country already houses the world’s fourth largest middle class after the U.S., China, and India, and this status is expected to reach 20 million households by 2030. The country has generally high capacity and a large proportion of English speakers.

While corruption is still a serious issue for Indonesia, the country has made great strides in governance reform since the fall of the authoritarian leader Suharto in 1998. Now a largely decentralized democracy, Indonesia is home to citizens who expect their leaders to provide effective services delivery. Although mobile penetration stands at a mere 23 percent, Jakarta is the number one city in the world for Twitter activity. There are almost 70 million Indonesians active on Facebook every month, making it the third largest base of Facebook mobile users around the globe. Indonesian citizens are active on social media in identifying problems in their cities and expecting a rapid response from local government officials.

In short, Indonesia is well on its way to becoming a modern, transparent, and prosperous country. While leadership still have a ways to go in addressing corruption, ensuring sustainable economic growth, and relaxing trade protectionism, Indonesia is a country with great potential.

Note: This article was amended on February 22, 2016, to correct a sentence regarding the future of the USAID Jakarta Mission.

Article Published in on February 18, 2016.

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