Indonesia

An Open Economy: Indonesia’s Latest Goal

After having successfully achieved unity and democracy, now the country strives for economic openness 

Indonesia is a country with over 14,000 islands, 700 languages, and 1,300 ethnic groups. Yet, despite its size and heterogeneity, Indonesia managed to find strength in its national motto ‘Bhineka Tunggal Ika’ that means ‘Unity in Diversity’. The country is now ranked as the world’s 16th largest economy and is predicted to rise to the 7th position by 2030, based on a report from McKinsey. However, this success didn’t come overnight. According to Kishore Mahbubani, a distinguished fellow at the Asia Research Institute and a former diplomat in the Singapore Foreign Service, one of the reasons behind Indonesia’s success is that the country had the right leader in each point of history.

Soekarno, the first president of Indonesia, created unity among the people. He was able to unite the country through Pancasila – the Indonesian state philosophy- and he also established the country’s national language: bahasa Indonesia. His successor, Suharto, with an authoritarian approach managed to deliver economic growth to the country (6.6% on average during his regime), putting it on a favorable development path. Finally, in 2014 Susilo Bambang Yudhoyono, President for two terms, delivered significant progress in democracy and international cooperation. Also thanks to Indonesia’s leadership in ASEAN, the country was admitted to the G20, obtaining a permanent and visible role in the global arena.

Today, the current administration, led by President Jokowi, is faced with one major challenge: economic openness. Indonesia is still somewhat reluctant to open its market to competitors, and the reason behind this is rooted in the country’s history. Indonesia has a legacy of economic nationalism that began in Soekarno’s era when the struggle for national liberty was also seen as an economic one. Protectionist measures and hostile policies towards foreign investors were in place, with the hope of making Indonesia a self-sufficient nation. This all changed under Suharto’s leadership when his administration proposed different policies aiming at a gradual integration into the global economy. 

The current aim is to promote and strengthen Indonesia as an open economy, with economic development at the core of the strategy. The government is focusing on the completion of various Free Trade Agreements, among which the Regional Comprehensive Economic Partnership (RCEP) and the Indonesia-EU Comprehensive Economic Partnership Agreement. The latter in particular, according to the programme of the next trio of Presidencies of the Council of European Union, will likely be concluded in 2021. Negotiations between the two sides are entering the 10th round this autumn, and looking at the previous results, several areas recorded good progress, among which the removal of technical barriers to trade, subsidies, and investments. On the other hand, negotiations on trade in goods, intellectual property rights, and sustainable development might require more time to reach an agreement.

The government’s effort is also reflected in Legatum Institute’s 2019 Global Index of Economic Openness. Indonesia ranked 68th out of 157 countries, jumping six places in the last decade. Overall, Indonesia has managed to secure numerous trade deals, mostly with its ASEAN counterparts and other Asian countries. However, some critical elements continue to persist. Tariffs and import quotas are still being applied to protect the domestic market. In addition, a World Bank report also shows Indonesia’s FDI being less than half of the global average – at 2% of its GDP. According to experts, this lack of FDI might slow down development in several sectors, especially infrastructures.

Nevertheless, in spite of Indonesia’s structural differences, and the lingering issue of economic nationalism that might hinder the country’s development, Indonesia is well on its way to becoming a major actor in the international scenario. Actions taken by the government show that President Jokowi’s administration is giving priority to the opening up of the Indonesian market, to grasp the benefits of international trade. At this moment, the real challenge for Indonesia is to balance the domestic and foreign capital in the country, in a way that can actually benefit the economic system. Once the equilibrium point is met, no doubt it will transform Indonesia, unfolding all its true potential. 

By Rizka Diandra and Tullio Ambrosone 

Italy and Indonesia: a great potential

The recent experience with Covid-19 has improved the political and economic dialogue between Italy and Indonesia 

The Italy-ASEAN Association organized a meeting on Indonesia and its response to the crisis caused by the Covid-19 pandemic. The meeting saw the participation of the Italian Ambassador in Indonesia, Benedetto Latteri, the Indonesian Ambassador in Italy, Esti Andayani, the Vice-President of Confindustria responsible for internationalization, Barbara Beltrame, the Indonesian Deputy Minister for Foreign Affairs responsible for European and American Affairs, Ngurah Swajaya, and finally the Vice-President of KADIN, Shinta Kamdani.

The experience of the pandemic has greatly affected Indonesia’s economy, weakening key sectors such as trade and tourism. To date, the virus has spread to all provinces across the country and the most affected areas are those of Jakarta, North Sumatra and East Java. This phenomenon led to a 5.3% contraction in GDP and a 30% reduction in trade volumes in the first half of 2020. However, this emergency has highlighted Indonesia’s increased degree of resilience in dealing with the crisis, laying the foundations for a renewed spirit of cooperation between Indonesia and Italy.

Indonesia exports a variety of products to Italy ranging from tropical fruits and vegetable oils to cosmetics, electrical machinery and componentry. The EU is Indonesia’s third largest trading partner, generating a total trade value of EUR 23.8 billion in 2019. The two countries appear to have complementary import and export needs and intend to seize the opportunities given by the new international context in order to develop successful trade strategies.

To ensure a more intense flow of investments between the two countries, the EU is also showing more flexibility towards its companies, supporting them in the economic recovery and relaunching the importance of foreign trade and internationalization. The European institutions recognize the strategic importance of ASEAN and they are enhancing international negotiations with the purpose of promoting intense cooperation, in contrast with the emergence of protectionist measures by other partners. Free trade will be the key to emerge from the crisis and will be the most effective tool to promote the economic growth of the two countries.

There are two international agreements, still being negotiated, which represent an interesting opportunity for Indonesia and the EU: the Regional Comprehensive Economic Partnership, a trade agreement including 15 Asian countries, and the Indonesia-EU Comprehensive Economic Partnership Agreement. The latter focuses on trade relations between Indonesia and the EU, and aims to ensure a more solid and productive relationship between Indonesia and European countries. The topics covered range from the removal of duties to the promotion of the flow of investments, from the protection of intellectual property to the strengthening of international cooperation. With the conclusion of these agreements, the value of trade between the two regions would increase significantly and ensure mutual benefits.

Therefore, it may be held that although the pandemic has generated significant consequences for the Italian and Indonesian economy, this experience has also opened the doors to new opportunities for the two countries. In fact, it has highlighted the mutual willingness to explore respective markets, adopting a renewed approach that, echoing the words of the Indonesian Ambassador in Italy Esti Andayani, aims to "transform pessimism into optimism".

Article written by Hania Hashim 

Covid-19: the challenge for Indonesia

How the world’s largest archipelago is dealing with the pandemic

On July 1st, Indonesia ranked as the country with the highest number of Covid-19 cases in ASEAN, with more than 55,000 confirmed cases. The most impacted city is the capital Jakarta, which is also one of the most populated cities in South-East Asia. Compared to its neighboring partners, the country opted for a different approach to address the pandemic. With the aim of keeping the nation’s economic activities afloat, the central government decided not to impose a lockdown policy, opting to apply a ‘large-scale social restriction’ instead.

Three months after the implementation of this plan, several provinces in Indonesia – Jakarta included – started to ease some social restriction measures. Workplaces, educational institutions, worship places, and public transportation, are gradually reopening, despite still adhering to a strict health protocol. If a new cluster of infection will break out, an ‘emergency brake’ policy will be put in place to stop the reopening of these places.

Although the government did not apply a nationwide lockdown, the country’s economy has not been immune to the economic side-effects of the pandemic. According to Statistics Indonesia (BPS), in the first quarter of 2020, Indonesia’s GDP grew only by 3%, the lowest record since 2001. However, based on the forecast conducted by the Economist Intelligence Unit, Indonesia is one of the three G20 countries – alongside China and India – that is not expected to go through an economic recession this year, with a projected GDP growth of 0.2%. 

Currently, the government has put forward a total of 677.2 trillion rupiah (equivalent to 42.7 billion euro) as part of the national economic recovery program. This program will be essential in supporting the healthcare sector, increasing the coverage of social protection schemes, expanding unemployment benefits, and providing tax incentives as well as credit for businesses. Indonesia is also maintaining strong bilateral and multilateral relations in the effort to face the ongoing crisis, not only within ASEAN countries but also with other actors such as China, Japan and South Korea. Hence, if the global markets regain momentum in 2021, Indonesia might return on its growth trajectory: a GDP increase of 5%, according to a report from the Asian Development Bank.

Despite the uncertain times that Indonesia – and the entire world – are experiencing, the government is doing its utmost to reboot the economy. The challenges the country is facing are demanding but the dynamism of the Indonesian economy could prove to be successful in overcoming these difficult times. It will be crucial for Indonesia to invest in its youth and the growing digital sector to turn the crisis into a new phase of development.

 

Article edited by Rizka Diandra 

Enrico Letta in visita a Jakarta

Enrico Letta, che ha accompagnato il Presidente della Repubblica Sergio Mattarella, ha annunciato la creazione dell’associazione Italia-ASEAN che ha come obiettivo quello rafforzare il dialogo, la conoscenza e gli scambi tra il settore privato del nostro Paese e le opportunità commerciali e di investimento nei paesi dell’Asean.