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GREAT insights Magazine

Indonesia as an emerging power

April 2014

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While it possesses significant material hard powers as other emerging powers do, Indonesia has some characteristics which made it distinct from the rest of them. Sometimes referred to as a “reluctant” or ”shy” emerging power, Indonesia has shown its growing global influence despite economic and political challenges.  

Scholars, policymakers and business analysts often argue that Indonesia should be included in the BRICS. Some suggested that the group could be renamed to BRICSI (Brazil, Russia, India, China, South Africa and Indonesia), while others included Indonesia in groups of catchy acronym, such
as CIVETS, MINT and N-11. As the fourth most populous nation, Indonesia is now the world’s 16th largest economy, with a GDP of US$878 billion.

Still resilience amidst global crisis

Indonesia has been able to demonstrate its inherent strength during the current global economic crisis. Its economy is expected to grow by around 5.3% this year, as predicted by the IMF, which is better than many other emerging powers in the G20, except China (7.7%) and India (5.4%). It is much higher than Brazil (2.3%), Russia (2%) or Mexico (3.7%). Net exports, especially from natural-based commodities such as palm oil, coal, natural gas and rubber, and investment are the important growth drivers in recent years. Nonetheless, in the middle of a global crisis, the country’s export volume has been vulnerable. Sluggish global demand resulted in a drastic decrease in Indonesia’s export volume by about 6% from US$190.3 billion in 2012 to US$178.63 billion in 2013. As a result, its current account deficit extended to around 3.5% in 2013.1

Worries about the Fed’s stimulus cutting had also triggered capital outflow, which put big pressure on the Indonesian currency, rupiah, which depreciated more than 20% in 2013. Concern about its economic volatility, Indonesia, together with Brazil, India, South Africa and Turkey, was included by Morgan Stanley analyst, James Lord, in the “Fragile Five”, which were defined as countries whose currencies are vulnerable to large current account deficits and uncertain capital flow.2 Fortunately, compared to the other fragile five, Indonesia seems to be progressing well. Indonesia’s central bank decisively raised its benchmark interest rate by 175 points since June last year and at the same time allowed the rupiah to float, which eventually made Indonesian exports more competitive on the international market. Consequently, the rupiah had risen 7% against the US dollar. On the other hand, the Turkish lira and South African rand have slumped 5-6% during February-March 2014.

While Indonesia is not yet free from financial crisis contagion, its economic prospect remains positive. Different from China and India whose economic growths are heavily led by export, Indonesia’s main contributor of growth will continuously come from private consumption. Although it is similar to Brazil and Russia regarding the important role of commodities boom to growth, in recent months Indonesia has banned some raw material exports in order to encourage mining companies to export higher-value products. In the short and medium term, Indonesia will remain focused on developing its domestic market given its huge and increasing number of middle-class population, which will remain a major driver of Indonesia’s economic growth. There are now about 74 million middle-class Indonesians with the number predicted to double in 2020.3

Stable, but fragmented political institution

“Emerging power” has become a recurring theme for many Indonesian leaders and politicians, especially after learning of the many predictions about its prospect to become the 7th largest economy by 2030. Their optimism does not only come from Indonesia’s stellar economic figure, but also from its achievements in democratic consolidation and political stability since the Reformasi in 1998.

While there are doubts about whether the democratic system has gone beyond procedural and formality aspects, the political system is getting more institutionalised over time and threats to democracy, such as a military coup or a call for a theocratic system have become marginal. Furthermore, horizontal social conflicts, which were commonly found in the early 2000s in Indonesia, have also decreased significantly. Non-governmental organisations have flourished and the press is undoubtedly free. Political stability and resilient democracy are strong modalities of Indonesia, especially considering the fact that many other nations, such as countries in the Middle East are still far from stable democracy despite the bloody and harsh Arab Spring.

Nevertheless, its democratic system is not always followed with more effective and efficient governance. Given the nature of the Indonesian political system, which is always based on consensus involving various political factions, the problem of factionalised policy actors within the executive power has become extensive. The current government for instance, consists of six political parties with various platforms and visions. The largest political party only has around 20% of total parliamentary seats, which is too weak to individually propose certain policy. Consequently, decision-making in some crucial policies often face either deadlock or significant delay. Before the government eventually cut fuel subsidies in order to reduce its budget deficit in the middle of last year for instance, there were months of political haggling within the government coalition parties.

Fragmentation of governance also occurs at local level. The decentralised political system, or as Indonesians called it otonomi daerah (regional autonomy), which was first implemented in 2000, has positively remapped economic distribution among various areas across Indonesia. It also provides wider opportunity for locals to deal with their problem, but at the same time it often adds complexity to the Indonesian political landscape. Local leaders in many cases assert contradictory policy to the central government’s programs. Some provincial governors for example rejected the importation of rice from Vietnam in 2010-2011 in order to protect local farmers’ welfare, although the central government had tried to ensure citizens that the importation was necessary to fulfill domestic demand.

The culture of fragmented politics is more obvious in Indonesia than in other emerging powers, such as China which continuously implements the centralised communist system or South Africa where the African National Congress (ANC) is democratically dominant. Brazil and India also have multi-party systems, but the divided line between the government and opposition is not as blurred and complex as it is in Indonesia.

Constrained, but growing global influence

The factionalised political system does not only undermine the government’s effectiveness in dealing with interminable development challenges, but also restricts the country’s ability to project its influence in global affairs. Indonesia’s foreign policy is criticised for not being firm and ambitious, especially compared to other emerging powers. In the area of development cooperation for instance, many emerging powers already have official development assistance (ODA) agencies. India inaugurated its Development Partnership Administration in 2012, while Brazil and South Africa set up similar bodies a few years ago. In contrast, Indonesia’s development aid is managed by some overlapping ministries and agencies, each of which has their own agenda and priority.4

In many of its diplomatic initiatives, Indonesia usually portrays itself through “bridge building” or “middle way” approaches. As the “bridge builder”, Indonesia is not interested very much in a confrontational stance in relation to the current global order as often pursued by BRICS on issues such as IMF quota reform, climate change and free trade. Instead, Indonesia prefers to seek common interests of various countries and regional groupings with different levels of power.

The “middle-way” foreign policy is, in fact, just a reflection of its domestic politics complexity and ambiguity. A complex domestic political map always requires Indonesian policymakers to seek consensus and to avoid confrontation. Just as in the case of domestic politics, foreign policy issues involve a broad range of domestic aspirations, from a more pro-protectionist trade policy to human rights and democracy promotion, and from a more active stance in the Association of Southeast Asian Nations (ASEAN) to one that is more Middle East-oriented. Given the nature of fragile and less-binding coalitions in some recent Indonesian governments, the leaders always choose the middle ground and prefer to safely ease demand from diverse foreign policy enthusiasts inside the country.

Despite criticism, the “middle way” has raised Indonesia’s diplomatic position in recent years. Indonesia was chosen to co-chair the UN High-Level Panel on the Post-2015 Development Agenda for its continuous commitment to encourage rich and developing countries to work closer together in addressing development challenges. In the Asia-Pacific region, through “middle way” approach, Indonesia has launched some initiatives. In its capacity as ASEAN rotating chair in 2011, Indonesia initiated the Bali Concord III, which outlined strategies to advance ASEAN integration through three pillars (security, economy and social culture), proposed the establishment of the ASEAN Institute for Peace and Reconciliation (AIPR) and tried to mediate in the Cambodia-Thailand dispute over the area around the Preah Vihear temple. Furthermore, Indonesia also initiated the Bali Democracy Forum (BDF) which aims to encourage democracy development in the participating countries.

Possible future feature

Given its economic priority and its domestically divided political orientation, Indonesia will be potentially growing, but not in the same fashion and pattern as other emerging powers. There are at least three possible features of future Indonesia’s international role as an emerging power.

First of all, Indonesia will focus on increasing its economic and political leverage with countries in Asia Pacific, rather than with geographically far countries. Indonesian government officials repeatedly advocate for expansion of trade and investment to “non-traditional markets”, but Asia is still its main arena. Although there is substantial increase in the volume of trade with Latin American nations, by 10% in 2013 from previous year and with African Unions by 50% in 2011, those numbers are still small compared to Indonesia’s trade with China, Japan and ASEAN nations.

Secondly, regarding the initiative to expand its influence outside the regions, Indonesia will likely build closer relations with a small number of key countries, from both developed nations and emerging powers. Different from China and India, which have the capacity to penetrate the market in every corner of Africa, Indonesia will selectively engage anchor states in the region such as South Africa as its 20th largest trading partner and Nigeria.

Last but not least, it is realistic to say that as an emerging power, Indonesia will not be decisive, but it will continuously explore opportunities to act as a norm-shaper. While the “middle-way” approach is sometimes associated with a weak and ambiguous position, it in fact serves Indonesia’s long-term strategic position. Having said that, in order to make its role as a bridge-builder more credible to the international community, Indonesia needs to address their own domestic issues. Indonesia’s democratic promotion through the Bali Democracy Forum (BDF) and ASEAN for example, will become less relevant if Indonesia does not reform its democratic institutions by reducing, among others, vote buying and election fraud. Its role to bridge developed and emerging powers in climate change negotiation will not be tenable if its rate of illegal logging is still high.

Awidya Santikajaya is a PhD candidate at the Asia-Pacific College of Diplomacy, Australian National University, Canberra.

This article was published in GREAT Insights Volume 3, Issue 4 (April 2014).

Footnotes

1. Melka, J. 2014. “Indonesia: watch this space”, BNP Paribas, accessed March 27 2014.
2. “Indonesia’s rising middle-class and affluent consumers”, Boston Consulting Group, March 5, 2013, accessed March 27 2014.
3. Lord, J. 2013. “EM currencies: The fragile five”, FX pulse: Preparing for volatility, Morgan Stanley Research, Pp. 15-19, accessed March 30, 2014.
4. The Indonesian government recently established the National Coordination Team for South-South and Triangular Development Cooperation, but this team is ad hoc, not permanent as other nations have.

Indonesia

External authors

Awidya Santikajaya