Connecting Australia INSIGHTS Asia Society Australia and Indonesia 25 May, 2015 Front Cover Photograph by Danumurthi Mahendra / Flickr Contents

02 About Asia Society Australia

03 Welcome

04 Australia-Indonesia: Shared Neighbourhood, Shared Future

09 Growth and Opportunity in Indonesia

INSIGHTS - 25 May 2015 01 About Asia Society Australia

Across the fields of arts, business, culture, education, and policy, Asia Society provides insight, generates ideas, and promotes collaboration to address present challenges and create a shared future.

Asia Society Australia is Australia’s leading national centre for engagement with Indo-Pacific Asia, based in Sydney. Asia Society Australia is a non-profit, non-governmental and non-political organisation empowered by the membership of leading Australian and regional business, education and cultural institutions. Asia Society Australia promotes greater connectivity and deeper understanding between Australia and the Indo-Pacific in the areas of business, policy, culture and education and provides a high-level and innovative platform for Australian and Asian leaders and champions of engagement to connect, exchange ideas and develop meaningful relationships. Asia Society Australia was launched in 1997 by then Prime Minister John Howard to broaden interest and understanding in Australia of Asian countries and their politics, business and culture.

Asia Society is a global non-profit organisation and the leading force in forging closer ties between Asia and the West through arts, education, policy and business. Founded in 1956 by John D. Rockefeller 3rd, Asia Society is a nonpartisan, nonprofit institution with headquarters in New York, centers in Hong Kong, Houston, Los Angeles, Manila, Mumbai, San Francisco, Seoul, Shanghai, Sydney, and Washington, DC.

asiasociety.org/australia

The views expressed in this publication are entirely the authors’ own and not those of the Asia Society. Copyright © Asia Society Australia 2015.

02 Asia Society Australia Welcome

Dear Asia Society Members, It is a privilege to share with you Supporters and Friends, two distinct viewpoints on the current state and prospects for the 2015 is an exciting year for Asia Australia-Indonesia relationship Society Australia. With the launch of from two of Australia’s leading our new strategic vision ‘Asia Society Indonesia observers and practitioners Australia 2020’ only a few weeks - Richard Woolcott AC and Andrew ago, we are taking the next step Parker. Despite the different prisms towards becoming Australia’s most through which our authors examine innovative centre for all-inclusive Indonesia, both come to the not engagement with the Indo-Pacific entirely unexpected conclusion that The Hon Warwick Smith AM region across business, policy, culture Chairman, Asia Society Australia Australia and Indonesia need to, and and education. Global Trustee, Asia Society have always been able to, find a path Asia Society Australia has been to engagement and mutual trust consistently recognised for the – despite temporary setbacks and quality of its insights and the ability misunderstandings – and build to connect Australian and the region’s a shared future in our region. leaders, networks and communities We are grateful for the ideas and in a dialogue on the critical issues in perspectives that helped to shape Australia-Asia engagement. this publication from across the Asia One of the most critical and complex Society Australia family, particularly issues facing Australia today is our Andrew Parker and his team at PwC relationship with Indonesia. It is and Richard Woolcott, our members, fitting that the first edition of our the Board and Advisory Council. We new thought-leadership platform – look forward to your comments and Insights – is focused on Australia’s connecting with you through our relationship with Indonesia. programs and events. Philipp Ivanov Chief Executive Officer, Asia Society Australia

The Hon Warwick Smith AM Philipp Ivanov Chairman, Asia Society Australia Chief Executive Officer, Global Trustee, Asia Society Asia Society Australia

INSIGHTS - 25 May 2015 03 Australia-Indonesia: Shared Neighbourhood, Shared Future

RICHARD WOOLCOTT AC Founding Director, Asia Society Australia Former Ambassador to Indonesia (1975-78), Former Ambassador to the United Nations (1982-88) Former Secretary of the Department of Foreign Affairs & Trade (1988-92), Chairman, Australian Indonesia Institute (1992-1998)

Australia and Indonesia in the Asian Summit process, the G20 and in particular, but also by the rise of Asia-Pacific neighbourhood the World Bank predicts it will have a India and the established economic larger economy than Australia within strengths of Japan and South Korea, For Australia no bilateral relationship the next two or three years. Australia in addition to the growing potential will be more important, complex and needs to acknowledge the reality of Indonesia itself and Vietnam. This challenging in the future than that that its relationship with Indonesia constitutes a historic global turning with Indonesia. is asymmetrical. Indonesia is more point to which Australia must respond, important to us than Australia is to if we are not to find ourselves left The relationship is, however, going it. Suggestions by critics in Australia behind. through a difficult period at present, to cut or reduce aid to Indonesia will especially due to the reactions attract the response that this does not in Australia and Indonesia to the concern Indonesia, which no longer execution of two Australian citizens We need a continuous and needs our aid. for heroin smuggling. sustained approach, rather Prime Minister Abbott has stated The necessary improvement in our than a spasmodic one, much that Australia should pursue a “More relationship, given the level to which it more focused on the countries Jakarta less Geneva” policy. This is a has sunk, could take considerable time. of Asia, especially Indonesia. sound approach implying a priority It will require sensitive management for developing the relationship. In by both Governments. Efforts of both the context of the great changes countries in improving knowledge and It follows that the Australian underway in the Asia-Pacific region, reducing suspicion of each other in Government will need to craft a more Australia needs a fundamental change wider communities will be necessary. appropriate and updated balance in our national psyche. We need in our relations with the United Globally, Indonesia is of growing to focus more on South East Asia, States and China, as the emerging importance to major powers such as especially Indonesia, North Asia and superpower, and also with Japan. We the United States, China, Japan, Russia, the South West Pacific than we do on should not take sides in territorial and India. This is because Indonesia, our long and well-established links disputes between Japan and China. with a diverse population of some with the United States, the United We should reinforce the Government’s 250 million, spread over some 7,000 Kingdom and Western Europe. We rhetoric about our role in the Asia inhabited islands, is now the fourth need a continuous and sustained Pacific region with action, balance, and most populous nation in the world. approach, rather than a spasmodic adequate funding. It is the largest Muslim country by one, much more focused on the population. Some 81% of its people countries of Asia, especially Indonesia. In what is widely referred to as the are Muslim. Asian Century, Australia should The rise of Asia is closely linked to maintain an unambiguous policy Despite a high degree of continuing the unprecedented transfer of wealth to the Australian public, as well as poverty, it is a country with 94% from the West to the East, from the to the United States and Chinese literacy, an expanding middle class Atlantic to the Pacific, which seems Governments, that, while we are in a and a rate of economic growth of likely to continue into the foreseeable long-standing alliance relationship with between 6% and 7% per annum. future. This seismic shift is driven the United States and while we have Indonesia is a member of the East by the spectacular growth of China,

04 Asia Society Australia some different values and a different New Zealand and some European political system from China, we countries on issues such as the second welcome the rise of China and oppose invasion of Iraq in 2003. policies directed at the “containment” In 1989 the Hawke Government of China. consulted Indonesia and other South A rising China could, if mismanaged, East Asian countries with Muslim lead to instability and frustrate majorities, like Malaysia, or substantial progress towards Asia-Pacific regional minorities like Singapore and the co-operation. All countries in the region Philippines on our participation in Australian Prime Minister Tony Abbott need continued peace and stability if operation “Desert Storm” in Iraq. and Indonesian Prime Minister Joko economic growth is to be maintained Since 1996, however, we may have Widodo’s first meeting in Jakarta in October 2014. Photograph by Eka and to deal with competition within the notified Indonesia of our major foreign Nickmatulhuda / AAP region for resources, including food and security policy decisions but I and water. understand that the high-level regular consultations I am recommending Dialogue with Indonesia have not taken place, as distinct from notification. Turning back to the Australia - Indonesia relationship, when the widespread reactions to the executions are behind us, we need to resume regular and improved consultations on a wide range of policy issues. Australia should consult Indonesia at Head of Government, Ministerial and Senior Official level, on all major global and regional issues, especially those involving the current complexities in the Middle East. On our continuing involvement in Afghanistan and our most recent additional involvement in Iraq we should have consulted Indonesia especially as it is by population the largest Muslim country in the world.

We have tended to consult mainly the United States, the United Kingdom and, on some occasions, Canada, Photograph by Azrul Azli / Flickr

INSIGHTS - 25 May 2015 05 Joko Widodo on the cover The fact that Australia’s Head of State of TIME Magazine in is still the Queen of England also October 2014. Photograph reinforces our association with the by Adam Ferguson / TIME United Kingdom and the “Anglosphere”, which detracts from a more distinctive international and regional Australian identity.

Many Indonesians I have encountered still express uncertainty about the depth and sincerity of our commitment to our Asian and South West Pacific neighbourhood. While Indonesia, like Australia, welcomes a constructive and continuing United States involvement in the Asia Pacific region there is some concern in both countries about what the “pivot to Asia” - now referred to as “rebalancing” - really involves. What is expected of Australia? Will Indonesia We need to resume regular and Indonesia would like to see Australia be consulted about US expectations? follow a more independent foreign improved consultations on a policy, not based on either compliance wide range of policy issues with American wishes, or a fear of Indonesia remains a moderate China. Former Prime Minister Rudd put secular state. That it is so is this well when he said that “compliance A recent example of our failure to did not equate to alliance” in respect of fundamental importance to consult Indonesia in advance on policy of the United States; similarly, Australia and other countries issues which could affect that country “understanding did not equate to in the region. was the hasty decision of the Gillard agreement” in respect of China’s Government, subsequently rescinded, policies. to ban live cattle exports to Indonesia. In the wider context of global Islam Another was - and still is - the handling It is obvious that Australians and Indonesians need to know much more and the dangerously unstable and of the refugee / asylum seekers issue deteriorating situation in the Middle in the region, an issue which is less of about each other. It is regrettable that many Australians still regard Indonesia East, Indonesia is the most tolerant a priority for Indonesia than it is for of all Islamic countries. Historically, Australia. Indonesia, which is a transit mainly as a mysterious and corrupt country in which the rule of law is it is mainly Sunni, but Islam in country rather than a destination for Indonesia has been tempered and refugees, sees Australian policy of weak. According to the Lowy Institute’s polls many Australians still see softened by Hinduism and Buddhism. turning back boat people to Indonesia Indonesia has generally dealt firmly as harsh, contrary to international Indonesia as a potential security threat. This is largely because of historical and effectively with Islamic extremists expectations and, on occasions, and domestic terrorism. It remains violating Indonesian territorial waters. fears, its size, its proximity, its assumed political instability and the situation in a moderate secular state. That it is Another decision which was not fully West Papua. so is of fundamental importance to canvassed in advance at a Head of Australia and other countries in the Government level with Indonesia was The great majority of Indonesians are region. Australia needs Indonesian the decision, announced by President largely ignorant about Australia. Those co-operation especially for its own Obama during his visit to Australia who do know Australia still tend to security. in November 2011, to rotate 2,500 see it as part of the “Anglosphere”. In US marines through Darwin. Such the context of Indonesian, especially Leadership decisions should be announced by Javanese, cultures many see Australia Joko Widodo, 53, generally known as our Prime Minister in the Australian as uncouth, sometime arrogant and still Jokowi, a Javanese businessman and Parliament. harbouring undertones of racism and religious intolerance. These suspicions former mayor of Surakarta assumed A group from the NSW branch of the go back to the days of the White the Presidency after serving 18 months Australian Institute of International Australia policy and more recently to as the Governor of Jakarta. Despite Affairs, which toured Indonesia after public statements of politicians, such as his limited political background and President Obama’s announcement, Pauline Hanson, which are considered his lack of experience in international said that one of the main impressions in Asia to be racist. affairs, his election was welcomed in the group had formed was that Indonesia and overseas. He was never

06 Asia Society Australia associated with the political elite and West Papua. He also lifted restrictions last January - too late as it turned out – his election as President was seen as on visits to Papua by foreign journalists. excessive public political pressure was an important break from Indonesia’s He has however maintained his support likely to prove counterproductive and past. He was largely seen as a man for the death penalty in respect to drug could actually reduce the prospects of the people who would govern for trafficking. On 9 May he declared that of clemency being granted by the the “orang kecil” (the poor and less the death penalty for crimes related to President. influential people). drug smuggling was still “our positive The pressures, related to widespread law” which, he, “as President would In a cover story published last October, domestic opposition to the death carry out”. Jokowi has already fulfilled TIME magazine described him as “A penalty, were also seen as inconsistent his pre-election promise of eliminating New Hope” which indicated a break (the Howard Government had fuel subsidies that were absorbing from a corrupt political elite dominated supported the death penalty for some 15-20% of revenue. These past and a fresh beginning. Initially, Saddam Hussein and the Bali savings enable him to move ahead with in Indonesian polls he enjoyed 75% bombers), “gesture” politics related to infrastructure projects which he has support. Recently, however, this Australian domestic politics, such as said he would do. has dropped to 60%. It has been a the withdrawal of our Ambassador put problem for him that Jokowi does not Australia’s relations with Indonesia, Jokowi, a new and nationalist President, lead a political party and secured the as I have noted, are complex. They into a position in which he and his Presidency in part through the support have entered a more difficult phase supporters considered he could not of a former President, Megawati since the Australian Governments’ yield to foreign, especially Australian, Sukarnoputri, and the current leader of and Parliaments’ persistent pleas pressure. We would in future be the PDI - P. for clemency for Sukurmaran and well served if we lectured less and Chan failed. There is still a perception consulted and listened more. Indonesia In fact, after seven months in office in Indonesia that Australia is still reacts negatively to what is often Jokowi, according to a number of essentially a Western country, more referred to as “megaphone diplomacy”. commentators in Jakarta and Australia, influenced by European countries, than has not so far lived up to the hopes Jokowi also has difficulties with the it is by its neighbour Indonesia. expressed after his election. Indonesian Parliament (DPR) as up Under President Jokowi Indonesia till now he and his supporters do not Megawati has used her position as remains a nationalist, sensitive, command a Parliamentary majority. party leader to play a prominent role post-Colonial society which will not This is a complicating factor which in nominating the Cabinet, some buckle under what it sees as intrusive could change depending on Indonesian members of which were not Jokowi’s Western pressure. As I warned both domestic policies as Jokowi’s term choices. For example, Budi Gunawan the Government and the Opposition unfolds. was pushed by Megawati for the role of Police Chief. Initially Jokowi did not withdraw Budi’s nomination although the Corruption Eradication Commission (KPK), one of the most respected institutions in Indonesia, had announced he was under investigation. Jokowi has since done so.

On the positive side, Jokowi is aware of the need to streamline investment procedures, including in respect of mineral developments. He has established co-operative relations with a number of prominent Indonesian business leaders. It is of interest to note that when President Jokowi ceased to be the Governor of Jakarta and became President of Indonesia, he was succeeded as Governor of Jakarta by his Deputy who is a Christian, ethnic Chinese.

Jokowi ordered on the 9th May the release of 5 Melanesian political prisoners in Jayapura, the capital of G20 Leaders’ Summit Reception, Australia’s Foreign Minister Julie Bishop with Indonesia’s President Joko Widodo. Photograph by Rob Maccoll / G20 Australia

INSIGHTS - 25 May 2015 07 AUSTRALIA-INDONESIA: SHARED NEIGHBOURHOOD, SHARED FUTURE

What’s next? Richard Woolcott AC is To conclude, the importance of our the Founding Director of future relations with Indonesia, and in the context of the Asian century, Asia Society Australia and cannot be overstated despite a member of its Advisory the present level of irritation and dissatisfaction in each country about Council. the other. It is essential that each country comes to know more about its neighbour. He is also a member of the International Council of the New York Jokowi appears to have little warmth based Asia Society. In June 2008 he was appointed the Prime Minister’s towards or interest in Australia, Special Envoy to develop an Asia Pacific Community concept. although he had a son at school in He was Secretary of the Department of Foreign Affairs and Trade from Sydney. He looks North rather than 1988 to 1992. Prior to that appointment he had served as deputy to South (as we also do). Prime Minister the High Commissioner in Malaysia, Commissioner in Singapore, High Tony Abbott should try to change this Commissioner to Ghana, Ambassador to the Philippines, Ambassador to attitude. Indonesia and Ambassador and Permanent Representative to the United It follows that we need to be genuinely Nations (1982-1988), where he also represented Australia on the Security and continuously engaged - not just in Council (1985-1986). He was Chairman of the Australia Indonesia Institute a rhetorical sense or in going through from (1992-1998) and a member of the Advisory Panel for the first the motions - with our very large Government White Paper on Foreign and Trade Policy, published in 1997. neighbour of increasing regional and Between 1992 and 2005 he was on the Boards of a number of companies global importance. Two matters should in the private sector. be addressed. Mr Woolcott was closely involved with the establishment of the Asia Pacific Firstly, it is vital that Australia does not Regional Economic Cooperation forum (APEC) and in 1989 was appointed continue to allow single issues, such as former Prime Minister Hawke’s Special Envoy charged with developing as the problems related to East Timor the APEC concept. He has also carried out Special Envoy roles for Prime in the late 1970s and again in the late Ministers Holt, Whitlam, Howard and, most recently, Rudd. 1990s, or the recent execution of the He was made an Officer in the Order of Australia in 1985 and a Companion two Australians convicted of drug in the Order in 1993. He was awarded the Bintang Mahaputra Utama smuggling, to excessively influence our by the Government of Indonesia in 2000 for his contribution to bilateral attitudes. and regional relationships. He was awarded the 2008 Sir Edward “Weary” The second issue of importance is Dunlop Asia Medal for his contribution to Australia’s relationships with that as Jokowi has only been in office Asian countries. In 2008 he was selected as one of the inaugural Fellows for seven months it would be foolish of the Australian Institute of International Affairs. He was awarded an for Australian political leaders to honorary degree of Doctor of Laws by the University of Melbourne in assume that he may not consolidate March 2012. Mr Woolcott gave the 15th Annual Hawke Lecture in Adelaide his position in the future. Australian in November 2012. In May 2013, Mr Woolcott addressed the Centre for leaders need to endeavour to establish Indonesian Law, Islam and Society (CILIS) at the University of Melbourne closer contacts with him and his on “Indonesia and Australia in the Asian Century”. The speech was then ministers. published as a CILIS Policy Paper.

The bilateral relationship will continue Mr Woolcott has contributed articles to leading Australian and overseas to be of paramount scope and newspapers and journals. He is the author of The Hot Seat: Reflections on importance. Both countries will share Diplomacy from Stalin’s Death to the Bali Bombings, which was published this neighbourhood for the rest of time. in 2003 by Harper Collins and Undiplomatic Activities, published by Scribe in 2007.

08 Asia Society Australia Growth and Opportunity in Indonesia

ANDREW PARKER Partner, Asia Practice Leader, PwC Advisory Councilor, Asia Society Australia

Indonesia is emerging as a major global economic powerhouse. But how is Australian business responding? The opportunities and implications are significant.

INDONESIA AT A GLANCE:

5th largest economy by 2030

250 million people today

141 million middle class consumers by 2020

Growth and opportunity in Indonesia © 2014 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Liability limited by a scheme approved under Professional Standards Legislation.

Photograph by Ignatius Win Tanuwinjaja / Flickr

INSIGHTS - 25 May 2015 09 GROWTH AND OPPORTUNITY IN INDONESIA

A Growing Economic Powerhouse

Indonesia has delivered strong and consistent economic growth since the difficult days of the Asian financial crises. They are now on their way to being the 4th largest economy by mid-century.

A long way in a short time return on capital – and aggregate value Indonesia is set to become one of – of the nation’s 141 SOEs. the world’s major economic powers Economically, Indonesia has come a And more recently, there has been over the next 3o years. long way in a relatively short period of time. a decisive political shift in Indonesia. We forecast Indonesia to climb The 2014 General Election in this, from its current ranking as the Under a tightly governed political and the world’s 3rd largest democracy, world’s 9th largest economy to 5th social system, the Indonesian economy witnessed a remarkably peaceful by 2030 and 4th by 2050 (GDP at grew rapidly between 1990 and 1996, transition of power to the ‘rakyat’s’ PPP rankings). By mid-century our averaging 8% GDP growth, and rightly (people’s) choice over the traditional closest neighbour will become an aspired to be one of the Asian Tigers. elite, represented by Soeharto’s son-in- even more significant player, in In 1997, the Asian economic crisis law General Prabowo. a region long overshadowed by took hold of the region and left the Business leaders we speak to who China, India and Japan. Indonesian domestic economy in have invested throughout the region Yet Australian business is woefully tatters. Inflation rates hit an average argue that despite the complexity, red under-invested and under-engaged of 58% and foreign direct investment tape, and lack of transparency, once with our largest neighbour. contracted sharply. they gain experience it is one of the most productive countries that they It’s important that companies Billions of dollars in IMF loans, work in. understand what’s driving accompanied by tough structural Indonesia’s current growth, where reforms, followed. The reforms, There is growing confidence – within their economy is heading, and what largely seen as ineffective, were widely the country, throughout our region, it all means for them. resented, and what is often described and globally – in the potential of today as Indonesian economic Indonesia as a major developing nationalism can be traced to this period. economic power. But since those difficult days, Indonesia has taken great strides to reform and Strong and consistent strengthen many of its economic and economic performance political institutions. Indonesia’s economic performance The enactment of decentralisation post the Asian financial crisis has been laws in 1999, which moved the country impressive. away from the centralised model Since 2004, annual GDP growth has of the Suharto government and been consistently over 5%, with only a allowed regional areas to grow, was a slight drop during the global financial significant reform. crisis in 2008 and 2009. Another was the launch of the State Gross national income (GNI) per capita Owned Enterprise (SOE) reform and has more than doubled from US$4,010 value creation program in 2000, which in 2000 to US$9,270 in 2013. led to dramatic improvements in the

10 Asia Society Australia And the increasingly dynamic Jokowi’s reform agenda includes Indonesian business community boosting domestic manufacturing and is thriving, with almost 50,000 new exports, reforming the bureaucracy businesses opening in 2012, more than and super-charging spending on double the number in 2004 (20,598). infrastructure by inviting foreign investment and boosting Government As incomes have risen, so has spending. consumer spending, which increased from an average 522,446 IDR billion During the election campaign Jokowi (US$40.1 billion) between 2000-2014, revealed the need for IDR 6,600 Photograph by Alviansyah to an all-time high of 1,200,000 IDR trillion (USD$554 billion) to fund its Kuswidyatama / Flickr billion (US$92.2 billion) in the fourth infrastructure plans over the next quarter of 2014. Consumer spending five years, to fast track investment now accounts for more than half of in major road, rail, port and power Indonesian GDP. projects. Significantly SOE’s have been given a central role in the national Infrastructure investment key infrastructure program. to sustained growth Achieving these ambitious targets will Like Australia, resource-rich Indonesia require a lot to go well for Jokowi. A initially rode the China-driven global strengthening US economy, a slowing commodities boom, which contributed Chinese economy and the flow on directly around one-fifth of real GDP effects on commodity prices will weigh growth between 2002 and 2012. heavily on the Indonesian economy in 2015. But falling commodity prices, combined with the withdrawal of US monetary The Government is targeting growth of stimulus, have weakened the Rupiah between 5.4% and 5.7% for 2015 and and weighed heavily on the country’s remains confident that Government terms of trade. There are signs that spending will pick up in the second half consumer spending has slowed and to fill the gap. GDP growth is trending below 5%, its The effectiveness of Government’s lowest level since 2009. spending programs, particularly the President Joko Widodo, or Jokowi as implementation of the infrastructure he is commonly referred to, came to agenda, have been areas of under power in October 2014 promising a achievement in the past and ones reform agenda and an average annual that will potentially define Jokowi’s GDP growth target of 7% over the term Presidency. of his Presidency to 2019.

INSIGHTS - 25 May 2015 11 GROWTH AND OPPORTUNITY IN INDONESIA

What’s Driving Growth?

Demographic change, increasing digital connectivity and a positive political climate are underpinning Indonesia’s current trajectory of economic growth.

Better education + a peak of 11.2% in 2005, has been And with the price of smartphones increasing urbanisation = steadily declining over the last 10 falling, we see greater numbers of growing middle class years and was 6.2% in 2013. Indonesians using mobile devices for commercial activities (e.g. Mobile These demographic factors are Indonesia is a vast archipelago of Wallet) and connecting into social combining to create an emerging more than 17,000 islands that span media networks. middle and affluent class. In 2012 it over 5,000 km from Sabang in the consisted of around 74 million people, The increased digital connectivity, west to Merauke in the east. With a but is expected to double to 141 combined with rising middle-class population of close to 250 million it is million by 2020. Middle class domestic consumption, is leading to the growth the fourth largest in the world. Nearly consumption is, and will continue to of e-commerce. Indonesians are half of the population is under the age be, a major driver of economic growth. expected to spend around USD $4.9 of 30 years old. billion in 2016 on e-commerce goods That population is projected to Digital connectivity is and services. increase to around 293 million by increasing However, one potential handbrake on 2030, and 321 million in 2050. Indonesia is more digitally connected the digital economy is the speed of Not only is the population growing, now than ever before, with huge internet in Indonesia, which is among it is becoming better educated. In implications for business, political the slowest in the world. Indonesia 2012, 82.5% of secondary school age participation, culture, and social recognises it needs to increase students were enrolled in school, interaction. investment in digital infrastructure to up from 61.7% in 2005. There is an help fuel continued growth. additional 1 million students who The country has one of the highest finished high school in 2012 compared social media usage rates globally. A political climate that is good to 1999. This growth trend is expected Indonesian citizens have taken to for business? to continue into the foreseeable future. Twitter, Facebook and LinkedIn in vast numbers: 29 million use Twitter, A month after becoming President, The population is also becoming more and there are more than 11 million Jokowi told the business world at the urban. Today over half of Indonesians Facebook users in Jakarta alone. APEC CEO summit in Beijing in 2014 now live in urban areas, including the that Indonesia was now ‘open for Corporate Indonesia is taking to social major cities of Jakarta, Surabaya and business’. Medan. This urban shift has helped media too. Medco, Telkomsel and fuel economic growth but also puts Pertamina have the most popular He has since shown that necessary enormous strain on underdeveloped accounts on LinkedIn, while top economic reform is underway, infrastructure. beverage brand Pocari Sweat is the stressing that his government will third most watched YouTube channel invest heavily in infrastructure, and Another impact of urbanisation has in Indonesia. reform business regulation – two areas been the need to provide new jobs. that are hampering Indonesia’s efforts Mobile phone subscriptions are also Between 2001 and 2011 20 million to grow. jobs were created in Indonesia, the growing rapidly: from a standing start vast majority in urban areas. As a in 1997 to 129 subscriptions per 100 For example, his government has result, unemployment, which hit people today. already taken the bold move of

12 Asia Society Australia removing expensive energy subsidies, has commitments to its fellow ASEAN – worth around US$20 billion or 15-20% and APEC - members as well as under of the budget, to free up much needed various other free trade agreements. finance for investment in infrastructure Add the impact of falling global and other sectors. commodity prices, and Indonesia, like It is also tackling the cumbersome Australia, can no longer rely on its regulatory environment for business resources industry for GDP growth. by proposing a One Stop Service (OSS) Protectionism will need to be balanced centre, which will integrate service with pragmatism. Photograph by Azlan DuPree / Flickr across key ministries and institutions. Importantly, the infrastructure needed Politically, however, it has not all been to support Indonesia’s economic smooth sailing for the new President, growth aspirations are far beyond the who has already faced challenges capacity of local institutions to fund in dealing with his own party, the or build. Foreign investment will be PDI-P. The combination of intra-Party required to help Indonesia reach its tensions and opposition strength in growth potential. the Legislature (DPR) has constrained the President’s freedom of action. This A key power in the growing has led to growing disappointment ASEAN economic community amongst voters who were expecting more decisive leadership - and faster Indonesia is situated in one of the programs of reform. fastest growing areas of the world. Together the countries that make up For some commentators there have ASEAN have a combined GDP of USD been worrying signs that economic $2.4 trillion in 2013. nationalism is not being dampened as hoped for under President Jokowi. In Expected to come into effect in fact, many worry that it may even be December this year, the ASEAN increasing. Economic Community (AEC), will bring the 10 ASEAN countries under one Whilst that analysis is true on some economic banner, with the aim of levels, it should be balanced by the facilitating the flow of goods, services complex economic and political and capital as well as human resources realities within Indonesia. within the region.

On the one hand, Jokowi faces a As both the largest economy, and with difficult domestic political climate the largest population, Indonesia is well where creating jobs for Indonesians positioned to lead and play a major and protecting local interests takes a role in shaping the success of the AEC. high priority. On the other, Indonesia

INSIGHTS - 25 May 2015 13 GROWTH AND OPPORTUNITY IN INDONESIA

What Does This Mean For Australian Business?

There is good reason to be optimistic about the future opportunities in Indonesia. But to be successful, you’ll need to think differently.

The opportunities for Australia to increase both trade with, and MAJOR IMPORTS MAJOR EXPORTS direct investment in Indonesia are considerable. But we must $2,078 $1,194 move more rapidly. crude petroleum wheat

$500 $461 Australia is way behind the game refined petroleum live animals compared to other Asian investors including China, Japan and South $391 $391 iron, steel, aluminium sugars, honey, molasses Korea, all of which have been much quicker to invest in Indonesia. $310 $298 President Jokowi is proactively heating and cooling parts crude petroleum encouraging a strong relationship Major merchandise trade ($mil) with China and has suggested that Indonesia could learn from China’s economic progress.

Historically, the Australia – Indonesia Australian direct investment in Australia will increasingly try to tap into bilateral economic relationship Indonesia remains relatively low. the fast emerging Indonesian market. has been limited to mainly trade in It’s only a fraction larger - A$10.9 billion We expect opportunities will be commodities of crude petroleum, vs A$9.5 billion - than we invest in our particularly strong in the services wheat, gold, aluminium and steel. much smaller neighbour Malaysia, and sector including infrastructure, heavily concentrated in the resource Australia’s two-way trade with higher education, financial services, and agribusiness sectors. Indonesia in 2013 was worth A$14.9 ICT and telecommunications, billion, making them our 12th largest Currently there are only about 250 healthcare services and tourism. trading partner. Of this, A$11.2 billion Australian businesses in Indonesia. Food and agriculture will also present was trade in goods, with trade in In the near future however, we believe opportunities for our primary services of almost A$3.7 billion. that big and small businesses in producers.

14 Asia Society Australia Dealing with the challenges

There are many challenges, both Indonesia is also ranked very low experienced and perceived, faced by on the World Bank’s Ease of Doing Australian businesses in entering the Business rankings, sitting at 117th Indonesian market. place in 2014 – but on a positive note rising 3 spots to 114th in 2015. A recent PwC survey indicated that some of the common barriers We believe there are 8 fundamental include corruption, cultural barriers, steps that business needs to get an uneven playing field, legal and right before entering a market like regulatory barriers, and trade barriers. Indonesia:

01 02 03 Lead with Invest in Don’t be strategy and learning fooled by take a portfolio the culture relationships approach

04 05 06 Understand Keep timelines Proceed ‘Uniquely Asian’ realistic and with market dynamics be patient caution

07 08

Triangulate Go easy on the These steps are outlined in more your information integration and detail in our recent report Passing us remember the by on the opportunities for Australian businesses in Asia (Passing us by, 80/20 rule PwC 2015).

INSIGHTS - 25 May 2015 15 GROWTH AND OPPORTUNITY IN INDONESIA

Where do we go from here? Asia Society Strong economic growth, supported recently in the wake of the Bali-9 by a robust labour supply, emerging executions, and this will probably middle class, high online and mobile be the case for some time to come. Australia - penetration and a political climate Yet despite these differences, our that’s good for business, have Get Involved overall bilateral relationship remains positioned Indonesia to become one solid. Our proximity means that of the biggest world economies in Australian business is well placed We are always looking for new the near future. to be a partner to Indonesia in its partners, collaborators, supporters and But it will not be without challenge. transformation journey to become contributors. Here are some of the ways The President faces significant an economic power in the region. to stay in touch and help our efforts hurdles in implementing his vision to build stronger and deeper relations It is now up to Australian businesses: for Indonesia over the remaining between Austalia and our region: will we rise to the challenge and 4 years of his Presidency. be part of the next economic And Australia’s political relationship superpower, or will we stay put Join Asia Society Australia with Indonesia has been punctuated and watch the wave passing by? membership by friction on a range of issues, most Feed your passion for Asia and become an Asia Society member. Get involved in our vibrant community of Asia-connected Australians. Your membership supports our vital mission of preparing Australia and Asia for Andrew Parker is a a shared future. Sydney-based Partner Contribute to our blog at PwC where he leads the Australian Firm’s We are revamping the Asia Society Australia blog to become a place Asia Practice. for sharing ideas, showcasing good stories and profiling champions of Australia-Asia relations. We would be delighted to share your opinions, ideas, stories, photos and links with the growing community of Asia Society members, supporters and Andrew joined Price Waterhouse He is a member of the Advisory friends. in 1985, became a partner in 1999 Boards of the Asia Society and spent 12 years in PwC’s London, and China Matters and a Explore our global network Moscow and Jakarta offices where non-executive director of the asiasociety.org he gained considerable experience Australia Indonesia Centre at advising companies investing in Monash University. Andrew asiasociety.org/australia foreign (and particularly developing) was the lead author of PwC’s Follow @AsiaSocietyAus on Twitter markets. Andrew has had a long landmark report on Australia’s association with Asia having lived lack of business investment in and worked in Indonesia and was Asia titled “Passing us by” and Contact us the leader of PwC’s Asian telecoms is a regular commentator in the Philipp Ivanov industry team until 2012, a role he media and presenter at forums Chief Executive Officer held for nearly 10 years. on Asian trade and investment in Australia and Australian trade and Asia Society Australia investment in Asia. Level 6, 115 Pitt Street Sydney NSW 2000

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16 Asia Society Australia

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+61 2 8199 9402

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