Indonesia Matters: the Role and Ambitions of a Rising Power Policy Briefing

Indonesia matters: The role and ambitions of a rising power 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 7th-largest economy (up from 16th largest today), overtaking Germany and the United Kingdom.

Way ahead Not plain sailing It’s not plain sailing, however. rising economic nationalism and The EU and Indonesia should: Indonesian policymakers face an slowing economic reform cause  recognise each other as strategic array of challenges as they seek concern. Many also fear a rise in partners. to keep the economy on track intolerance and extremism and  organise an annual EU-Indonesia and meet ambitious national tar- demand stronger government summit gets for growth and develop- action to protect religious minori-  engage with each other at the ment. Indonesia’s GDP grew by ties. “The country may become highest level. 6.2 per cent last year, slightly tolerant to intolerance,” warns a  spend more time and energy below 6.5 per cent in 2011. The senior Indonesian journalist. weaving stronger ties to reflect country has attracted record lev- their changing political and eco- els of new foreign investment, This policy briefing seeks to spot- nomic landscapes. with domestic investment also light Indonesia’s many achieve-  start with a broadening of the reaching a record high as family- ments in consolidating democra- current EU-Indonesia Partner- owned conglomerates build new cy, improving human rights and ship and Cooperation Agree- shopping malls, housing estates managing its economic rise while ment should be broadened. and hospitals. President Susilo also illustrating the vast task  focus on encouraging people-to- Bambang Yudhoyono, now at the ahead as policymakers seek fur- people contacts and student end of his second and final term, ther economic reform, try to re- exchanges. aspires for growth rates of nearer move infrastructure bottlenecks  start negotiations on a Compre- 7 per cent a year before he steps and also work to preserve the hensive Economic Partnership down next year. However, as country’s religious and cultural Agreement. elections draw nearer, signs of diversity in the face of extremist www.friendsofeurope.org June 2013 » policy briefing forces. It highlights Indonesia’s relations with its key Indonesia - Country profile 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.

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  Land area: 1,904,569 sq km strong endorsement of Indonesia’s growing global  Population: 251,160,124 (July 2013 est.) clout. Key players within the neighbourhood are also  GDP: 634.50 Euros (2011) scrambling to forge closer ties with Jakarta: China  Main Exports: oil and gas, electrical appliances, and Indonesia say they have a relationship based on plywood, textiles, rubber. Partners: Japan 16.6%, trust, in contrast to Beijing’s difficult ties with other China 11.3%, Singapore 9.1%, US 8.1%, South ASEAN countries. As such, Jakarta is playing a leading Korea 8.1%, India 6.6%, Malaysia 5.4% (2011) role in seeking an easing of tensions in the South  Main Imports: machinery and equipment, China Sea where China and ASEAN members Vi- chemicals, fuels, foodstuffs. Partners: China etnam and the Philippines have staked out com- 14.8%, Singapore 14.6%, Japan 11%, South peting territorial claims. Indonesia is also being Korea 7.3%, US 6.1%, Thailand 5.9%, Malaysia courted by India and Australia while Japan and Tai- 5.9% (2011) wan continue to be leading investors.  Young Demographic Profile: Over 40% below 25 years  Urban Population: 44% of total population EU must catch up (2010) The EU is lagging behind. The EU has yet to fully rec-  Religions: Muslim 86.1%, Protestant 5.7%, ognise Indonesia’s changing regional and global pro- Roman Catholic 3%, Hindu 1.8%, other or unspecified 3.4% (2000 census) file in either words or deeds. A key foreign policy challenge for European governments is to inject more depth and substance into their still largely un- Source: CIA World Factbook, World Bank inspiring relationships with the country. The conclu- sion of an EU–Indonesian Partnership and Coopera- ber states to start working together on two new tion Agreement in 2009 is a step in the right direc- agendas previously considered taboo: democracy tion, as are plans to sign a Comprehensive Economic and human rights. Jakarta has also taken the lead in Partnership Agreement. However, the relationship pressing for the participation of civil society in needs to become stronger and more strategic, re- ASEAN affairs, the adoption of the ASEAN Charter, flecting the changing nature of both Indonesia and and the establishment of the ASEAN Inter- the EU. Suggestions that the EU and Indonesia hold Governmental Commission on Human Rights their first-ever summit and that Indonesia be added (AICHR). In encouraging political reform in Myan- to the list of Europe’s strategic partners should be mar, Indonesia has sought to translate its internal investigated further. Forging stronger EU–Indonesia reform experience into a strategic democratisation ties is pivotal if the EU is to hammer out a new strat- agenda for ASEAN. egy for Asia and dispel a growing perception in the region that Europe is irrelevant and insignificant. During Indonesia’s presidency of ASEAN in 2011, For- eign Minister Marty Natalegawa outlined three major Driving force within ASEAN tasks for Jakarta: to make tangible progress towards an ASEAN Community; establish a dynamic equilibri- Indonesia has long been the driving force behind um between ASEAN and the major powers; and, en- ASEAN. According to traditional government dis- sure that ASEAN can be a peacemaker in a complex course, ASEAN is the cornerstone of Indonesia’s for- world. Promoting the ASEAN Inter-Connectivity Mas- eign policy. Indonesia is working hard, both publicly ter Plan, an inventory of on-going and planned infra- and behind the scenes, to inject new vigour and dy- structure investment both within ASEAN and in the namism into ASEAN, persuading other ASEAN mem- wider region was also top of the agenda. www.friendsofeurope.org June 2013|2 policy briefing

ASEAN members are, however, watching Jakarta’s The new framework would allow ASEAN countries to changing regional and global profile with a degree of play a more active role in the Asia-Pacific by offering wariness. There is concern that as it becomes strong- solutions based on their own experiences, as the er and more ambitious, Indonesia may break away region deals with the increasing role of world powers from ASEAN, charting an independent course both such as the United States and China. “This is our within the region and on the global stage. For the chance to extrapolate ASEAN's experience towards moment, for all its focus on creating and maintaining the wider world. It is no longer good enough for us good relations with a “thousand friends”, it is the to protect ourselves - we must take this chance to region itself where Indonesia is most visible – and shape or mould our future,” he said. most influential. Natalegawa said the new framework would be built The truth is that membership of ASEAN is both an as- in the spirit of ASEAN's Treaty of Amity and Coopera- set and a drag on Indonesia’s foreign policy ambitions. tion (TAC), adding that a common framework would Jakarta has successfully used ASEAN to raise its global also allow countries in the Asia- Pacific to be pre- profile. Increasingly, however, pared to deal with unex- ASEAN is also viewed as a pected developments, citing shackle on Indonesia’s regional "Membership of ASEAN is both an asset the recent territorial dispute and global aspirations, with and a drag on Indonesia’s foreign policy between Taiwan and the some influential Indonesian ambitions." Philippines as an example. analysts insisting that Jakarta He also called for countries should break free of the ASEAN to abandon old worldviews, embrace and forge a more open and globally-oriented which treated any rising power as a potential threat, foreign policy. That view is not popular in official cir- warning: “Such attitudes, if allowed to fester, in- cles in Jakarta. crease the risk of conflict. We need to work instead towards a common prosperity, security and sover- A new world view eignty, which do not have to be achieved at the ex- pense of others' (success).” Looking beyond ASEAN, Indonesia is pushing for wider, inclusive integration in the Asia-Pacific region. On Using soft power the trade front, this means full backing for the 16- nation regional comprehensive economic partner- Indonesia’s soft power ambitions may not make the ship (RCEP) which aims to establish one of the international headlines, but since 2008, the Bali De- world’s biggest economic blocs by 2015. In addition mocracy Forum, convened every December on the to ASEAN, RCEP will include Australia, China, India, island resort, brings together leaders and foreign Japan, South Korea and New Zealand, all of which ministers from the world over for discussions on de- have already signed separate free trade agreements mocracy, human rights and the rule of law. The Fo- (FTAs) with the Southeast Asian grouping. rum has become a potent exercise in Indonesian public diplomacy and grown in credibility and pres- Jakarta is also a strong supporter of efforts to consol- tige over the years, spotlighting the country’s in- idate and expand the East Asia Summit (EAS) – creasingly vocal and visible aspirations to become whose members now include the US and Russia – Asia’s prime normative power and champion of po- seeing it as the primary vehicle for the attainment of litical reform and democracy. an Asia-Pacific wide community. “We are against a preponderant power in our region. We do not want More recently, given their country’s own democratic to see our region dominated by any single country,” transition, Indonesian diplomats have also been ad- whether it is China, Japan, the US or a member of vising Egypt, Tunisia and other Arab nations on how ASEAN, according to Natalegawa. The focus, he says, best to tackle the challenges of moving from authori- should be on “creating a new dynamic equilibrium” tarian rule to democracy. in the region. Defence spending on the rise Recently Natalegawa called for a new Asia-wide treaty to promote trust and cooperation in the Indo- For a rising power, Indonesia’s military expenditure Pacific region, saying that an "Indo-Pacific Treaty of is unusually modest. Analysts in Jakarta underline Friendship and Cooperation" would address three that while the Indonesian armed forces appear to be key challenges: the trust deficit between countries, on a buying spree, the purchases are part of a drive resolving territorial disputes and managing change. to modernise and replace ageing equipment, not to www.friendsofeurope.org June 2013|3 » policy briefing fight wars. The defence budget is rising – from $5.45 to take place today, Jokowi would get 28.6 percent billion in 2011 to $8 billion in 2013 – but still repre- of the vote, ahead of Prabowo with 15.6 percent. sents only about 1 per cent of GDP (compared to 20 Golkar Party chairman Aburizal Bakrie came third per cent of GDP earmarked for education and public with a mere 7 percent. works). “We need sufficient naval and military power or nobody will trust Indonesia to keep its waters Jokowi’s popularity has been high since he was elect- safe,” says an analyst, adding: “a good Indonesian ed governor of the capital city, and it continues to navy will ensure peace and stability and boost anti- grow thanks to massive media coverage of his activi- piracy operations. We are not interested in tradi- ties. On many occasions, however, Jokowi has said tional projections of military power.” that he is not interested in contesting the 2014 presidential election. Trade Minister Gita Wirjawan is Yudhoyono’s mixed legacy reportedly also a potential candidate, with many saying he is Yudhoyono’s first choice to be his suc- Elected president in 2004, President Yudhoyono may cessor. not be feted as a decisive and charismatic leader but even critics recognise that the former military officer No room for complacency on the economic has consolidated Indonesian democracy and will leave behind a robust economic legacy. Accolades front have also come from Greenpeace International Indonesia’s economy has certainly come a long way which has praised Yudhoyono for supporting the na- since the Asian financial crisis in 1997 – but there is tion’s biodiversity. The President has pledged that no room for complacency. To make it to the next Indonesia will cut its carbon emissions by at least level, the government needs to implement structural 26% by 2020 and also renewed a two-year moratori- reforms to improve the business climate and invest um on forest-clearing concessions under a $1 billion in key sectors like infrastructure and education. Giv- agreement signed with the Norwegian government en the country’s fast-growing youthful population, in 2011. The moratorium was extended recently for health services and education are also in urgent need another two years. of improvement. The World Bank warns that although poverty rates have Since September 11, 2001, declined, inequality is rising Indonesia has worked hard to "Indonesia’s economy has certainly come and nearly half the popula- push its credentials as a mod- a long way since the Asian financial tion still lives on less than $2 erate Muslim nation which is crisis in 1997 – but there is no room a day. Youth unemployment committed to fighting terror- for complacency." is high. Although the gov- ism. Human rights groups, ernment has made the crea- however, point to an escala- tion of jobs a key priority, tion of religious intolerance and faith-motivated vio- companies complain of a shortage of well-trained lence throughout the archipelago. The US State De- workers as an impediment to investment. partment’s annual report on International Religious Freedom expresses deep concern over a series of vio- Plugging a $20 billion hole in the budget is an imme- lations against religious freedom in Indonesia and diate necessity. The newly-appointed reformist Fi- warns of government “inaction” and discriminatory nance Minister, Chatib Basri, faces the difficult task laws, including the highly controversial 2008 Ahmadiy- of trying to convince the Parliament to increase sub- ya decree which bans the minority Islamic sect from sidised fuel prices (alongside a programme of cash propagating their belief. transfers designed to ease the impact of the price increase on the poor) to curb rising energy costs. The Presidential hopefuls line up government intends to raise subsidized gasoline prices to 6,500 rupiah ($0.67) a litre, and subsidized die- With national polls set for next year, there is no sel to 5,500 rupiah per litre. Similar plans last year shortage of presidential candidates. An opinion poll were abandoned amid public protests. by Jakarta-based think tank the Centre for Strategic and International Studies (CSIS) recently found that Jakarta Governor Joko “Jokowi” Widodo is the most A “resource blessing” popular candidate for the 2014 presidential election, Indonesia is the biggest producer of palm oil and its beating even the Great Indonesia Movement commodity exports including coal, natural gas, rub- (Gerindra) Party chief patron Lt. Gen. (ret) Prabowo ber, gold, wood and cocoa have long been the main- Subianto. The survey found that if the elections were stay of the economy, attracting high levels of invest- www.friendsofeurope.org June 2013|4 policy briefing ment over the years and generating jobs across the Tackling corruption country. But companies are worried: Among other measures, in 2012, the government dramatically in- Indonesia still ranks 118 out of 183 in Transparency creased the divestment requirements by adopting a International’s Corruption Perceptions Index (2012). law that requires investors in the mining sector to Indonesia ratified the UN Convention Against Corrup- divest at least 51% of their shares to Indonesian part- tion in 2006 and various national measures, including ners after 10 years of operation. While Indonesia is draconian new laws, to tackle corruption and red well placed to capitalise on the increasing demand tape have been adopted. The independent Corrup- for commodities, the country is in need of a regulato- tion Eradication Commission (KPK) established in ry framework that is more conducive to investment 2004 has been successful in investigating and prose- in the long term. cuting powerful public officials but the anti-graft battle remains uphill and difficult. Certainly, civil Infrastructure gridlock society has emerged as a powerful agent for change in the fight against corruption. The absence of sound infrastructure capacity is an important hurdle for economic development – but EU -Indonesia relations also represents an opportunity for investment. To sustain and deepen its growth, Indonesia must fo- The EU must devote more time and attention to de- cus on improving connectivity by building new veloping a strong strategic relationship with Indone- roads, ports, telecommunication facilities and pow- sia which recognises the country’s growing regional er 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 Rising Indonesia private partnerships (PPPs) to develop infrastructure. The Indonesia Infrastructure Guarantee Fund GDP, current prices (bln US$) (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 fair- er compensation for landowners. The real challenge, however, is to translate these measures into more efficient services.

Developing local talent To remain competitive in a globalised world, Indonesia Indonesia foreign & domestic direct investment (bln US$) must focus on developing the skills of its workers. Alt- hough 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. Ex- perts say the gap between the skills needed to improve productivity and the ability of Indonesia’s education system to provide them appears to be widen- ing. “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 Coopera- tion and Development (OECD) in 2009, Indonesia ranked near the bottom among 65 countries in read- ing ability, mathematics and science. Source: IMF's World Economic Outlook Database (October 2012), Association of Southeast Asian Nations www.friendsofeurope.org June 2013|5 » policy briefing and global role and influence. Building a stronger EU transport, climate change, human rights, immigra- –Indonesia relationship should therefore move high- tion, tackling organised crime, and combating com- er up the EU agenda. The Partnership and Coopera- municable diseases. New areas of cooperation tion Agreement signed by the two sides in 2009 (but should include disaster prevention and prepared- yet to enter into force) and plans to negotiate a Com- ness, counter-terrorism (including stronger legisla- prehensive Economic Cooperation Agreement pro- tion on the financing of terrorism), the exchange of vide a good basis for the further development of ties. views and practices on de-radicalisation, inter-faith It is time, however, that the EU recognised Indonesia questions, security and defence (especially maritime as a strategic partner on a par with China, India, Ja- security), and research and development. Indonesia pan and South Korea. Regular summit level talks are is demanding a change in the Schengen visa regime required between EU and Indonesian leaders to al- to allow easier travel for business leaders and stu- low for exchanges on a diverse range of issues includ- dents. Stronger ties with the EU would also further ing human rights, extremism, de-radicalisation, mari- consolidate Indonesia’s quest for a stronger role time security and democracy. both within the region and as a global player.

The rewards of a qualitative leap forward in EU– Trade and investments Indonesia relations are enticing—for both sides. EU ambitions of becoming a more powerful and visible European investments in Indonesia are booming, actor in Asia depend to a large extent on the devel- with EU currently ranked as the country’s second opment of stronger ties with Jakarta. A nod of ap- largest source of FDI after Singapore. proval from Indonesia is essential if the EU is to fulfill its ambitions of joining the East Asia Summit, follow- EU-Indonesia trade relations could certainly do with ing in the footsteps of the US and Russia. Together a boost, however. There have been some important with India, Indonesia is seen as a powerful Asian breakthroughs: Indonesian low-cost airline Lion Air counterweight to the rise of China. Closer relations made the headlines recently with its purchase of $24 with Indonesia, the world's most populous Muslim billion worth of 234 new single-aisle jets from Air- nation, would also give a much-needed fillip to the bus. Indonesian timber product exports to the EU EU’s standing in the Islamic world and help Europe to rose by 114 per cent increase in the first quarter of obtain information and best practice on questions 2013 following the introduction of certification sys- such as de-radicalisation, especially of young people. tem known as the Timber Legality Verification Sys- For Indonesia, the rewards are just as high. Jakarta tem (SVLK) which is recognised by the EU. The coun- stands to gain from enhanced cooperation with the try’s exports of timber products, especially furniture, EU in areas as diverse as trade and investment, 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 EU-Indonesia trade part of its commitment to curbing trade in illegally harvested wood. Indonesia, Trade with the European Union Overall, however, EU-Indonesia bilateral merchan- dise 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 gen- eral lack of Indonesian enthusiasm for trade liberali- European Union, Trade with Indonesia sation reflected in “unpredictable and cumbersome” Indonesian restrictions in areas such as import li- censing (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 Source: European Commission (DG Trade) raw material to value-added products.

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changes that have transformed Indonesia and Scoping exercise translate these into a wide-ranging political Given the potential for increased trade, the EU and and economic dialogue with the country. Indonesia are engaged in a so-called “scoping exer-  Engage with each other at the highest level. cise” ahead of a scheduled launch of negotiations on Currently contacts between EU and Indonesian a Comprehensive Economic Partnership Agreement. ministers and senior policymakers are sporadic. German Chancellor Angela Merkel has thrown her The EU’s Foreign and Security Policy Repre- sentative Catherine Ashton has yet to visit Ja- weight behind upgraded trade ties with Jakarta, say- karta and European Commission President Jose ing such a deal would also be an important building Manuel Barroso cancelled a planned visit to the block in trade relations with ASEAN. The German Bali Democracy Forum last year because of Chancellor warned that without such an agreement urgent EU business. with Indonesia, the EU would "fall behind" China,  As a first step, broaden the current EU- which has a free trade agreement with ASEAN. Indonesia Partnership and Cooperation Agree- ment to include new areas of cooperation such A so-called “Vision Group” report on EU-Indonesian as disaster-preparedness and post-disaster trade relations released in 2009 also calls for such an actions as well as anti-piracy initiatives and agreement which it says should focus on: market other joint initiatives to deal with global chal- access, capacity building and facilitation of trade and lenges such as terrorism, extremism and cli- investment. The study recommends the negotiation mate change. of a “deep FTA” which would include access liberali-  Open negotiations rapidly on a Comprehensive sation in goods, services and direct investment, com- Economic Partnership Agreement. plemented by ‘behind-the-border’ commitments  Encourage closer people-to-people contacts covering a range of sanitary and technical regula- and student exchange programmes. tions. It also suggests new openings by both sides in key services sectors as well as discussions on public Indonesia is a pivotal country in the region not just procurement, notably in public infrastructure. because of demographics and its economic weight, but also due to its vast network of friends. It leader- According to the “Blue Book” annual report on the ship role in ASEAN means quite simply that the EU EU-Indonesia development cooperation, the EU and cannot hope to expand relations with the region – its member states provided more than $388 million and gain entry into the East Asia Summit – without a in development assistance to Indonesia in 2012. The go-ahead from Jakarta. As a country which has the report emphasizes the chang- trust of China, Indonesia has ing nature of development an important role to play as cooperation which now in- regional peace-maker. In cludes support for education, "The EU and Indonesia need to become addition, Jakarta’s pro- economic cooperation and more ambitious and strategic in their democracy stance and sup- trade and investment, as well bilateral dealings." port of human rights and as environment and climate the rule of law give it influ- change. ence in the region, with Myanmar standing out as an While these and other aspects of the relationship are example of just how Indonesia can push and prod in important, the EU and Indonesia need to become favour of political change. Significantly also, if the more ambitious and strategic in their bilateral deal- EU and Indonesia do finally recognise each other as ings. This can be achieved if both sides: strategic partners, it will be the first such partnership between the EU and a Muslim nation.  Change the current piecemeal approach in their relations by starting talks on a strong, compre- A qualitative leap forward in EU–Indonesia relations hensive strategic partnership. To achieve this, will require hard work and strategic thinking. To suc- the EU will have to give Indonesia the im- ceed, both sides must focus on long-term political, portance it deserves in a new overall Asian economic and above all, geostrategic benefits, not strategy and recognise Jakarta as a strategic only on immediate gains. 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 www.friendsofeurope.org June 2013|7 » policy briefing