The Regional Implications of Indonesia's Rise

As it tallies votes from Wednesday’s election, Indonesia’s economic outlook is strong. What does that mean for the region?

By Abdul-Latif Halimi

Despite a mild economic slowdown amidst China’s economic rebalancing and the U.S. Federal Reserve tapering—and despite a dip in Indonesian shares following a surprisingly weak performance by the favorites in Wednesday’s parliamentary election—the general direction of Indonesia’s economy seems clear: onwards and upwards. Since the Asian Financial Crisis and the fall of Suharto, Jakarta has learned lessons, expedited political reforms, and taken economic strides that today constitute a platform from which Southeast Asia’s largest country can continue to build on what it has achieved to date. That’s not to say corruption, infrastructure deficiencies and inequality do not remain problems for whoever takes the political baton after President Susilo Bambang Yudhoyono, but Indonesia’s economic trajectory is bending sharply in the right direction.

Since the turn of the century, Indonesia’s economy has been one of the world’s best-performing and most consistent. Since 2001, the country has averaged 5.4 percent growth, far faster than the global average, despite the shocks of the global financial downturn. That growth has facilitated the fall of gross government debt from 95.1 percent of GDP in 2000 to around 26 percent today, the lowest of any ASEAN member-state except Brunei Darussalam, and enough for Fitch and Moody’s to grant Indonesia’s debt investment grade status. Indonesia has gone from being the world’s 27th largest economy in 2000 (nominal GDP) to the 16th largest today—an impressive leap in just fifteen years.

Much more is expected to come. Indonesia is forecast to have the world’s seventh largest economy by 2030, surpassing the U.K. and Germany according to a report by McKinsey Global Institute, and the fourth largest in 2040 according to a Citibank report, trailing only China, India and the United States. While such projections are often over-reliant on extrapolating current trends, there is little doubt that Indonesia stands to benefit immensely from a rebalancing of the global economy towards the Asia-Pacific and from the demographic dividend of the country’s young population. The former will ensure relatively high ubiquity of capital, technology and demand in Indonesian markets, while the latter will ensure that the workforce will be able to maintain productivity and a low dependency ratio between workers and dependents, thereby setting the foundation for decades of robust growth and healthy public finances.

The regional implications of this economic rise will be very significant, even if gradual.

A bigger and more robust economy means that defense spending will continue to rise, albeit from an extremely low base. Indonesia currently spends less than 1 percent of its GDP on defense, at around $8 billion annually. In comparison, Singapore has a military budget of $12 billion, more than 4 percent of its GDP, while Australia spends $26 billion. By any measure, Indonesia lags well behind its neighbors relative to its size; however, its rapid economic growth has facilitated sharp annual defense budget increases, such as the 9 percent increase announced in August 2013. This much-needed growth comes as Indonesia attempts to increase defense spending to 1.5 percent of GDP by 2015, or a projected $14 billion, as sought by Yudyohono. While this target will not be met by next year, it at least recognizes Indonesia’s military potential and sets a spending benchmark.

Much of this defense budget growth, particularly a $15 billion kit announced in 2010, will be allocated to equipment procurement and modernization. The country’s 2010 Strategic Defence Plan outlined a modernization vision that included 10 jet fighter squadrons, 274 ships and a dozen submarines by 2024—a significant qualitative and quantitative leap from Indonesia’s current military capabilities, even if the targets do not seem entirely realistic. Nonetheless, recent purchases are congruent with the vision, such as the purchase of six Sukhoi Su-30MK2s that were delivered last September and which completed a squadron of advanced air-superiority fighters consisting of sixteen Su-27 SKM and Su-30 MK2 jets. Similar major procurements and orders have included dozens of F-16 and Su-35 fighters, advanced air defense systems from Thales, Boeing AH-64 Apache Longbow gunship helicopters and more than hundred world-renowned German Leopard tanks.

As it bolsters its military, Indonesia’s weight and importance in the region’s balance of power will only grow, particularly with respect to the U.S. and China. As Washington and Beijing seem set for an era of strategic rivalry across the Asia-Pacific, bringing Jakarta into one or the other’s sphere of influence becomes ever more appealing. For the U.S., greater security and economic cooperation with Indonesia, at the relative expense of China, helps strengthen and coalesce a grouping of states—which includes Japan, the Philippines and India—that is wary of China’s rise and territorial claims. China’s recent claim to the Natuna waters that are part of Indonesia’s Riau Islands could convince some Indonesian policymakers to lean towards Washington and hedge against Chinese assertiveness in the South China Sea. On the other hand, the seeming inevitability of China’s rise to great-power status, amidst the uncertainty of the viability and extent of America’s Asia “pivot” and security guarantees, constitutes a good case for Indonesia to move closer to Beijing and leverage China’s unprecedented economic force and growing military heft.

However, the most likely strategic disposition, to use former Vice President Mohammad Hatta’s expression from 1948, remains having a “free and active” Indonesian foreign policy.  As opposed to relatively passive non-alignment during the Cold War, Indonesia—on the back of rapid economic growth and growing power—is increasingly likely to see itself as entitled to a prominent role in the region and the world in its own right, and in light of its own interests and potential. Jakarta is therefore likely to seek prosperity and cooperation equally with both the U.S. and China, as opposed to creating any form of dependency on one power in the face of the other. Moreover, Indonesia might be uniquely positioned in trying to arrest any escalation in the region or prevent the entrenchment of a paradigm of strategic rivalry that could harm its own interests and development priorities.

This independent streak is likely to take Indonesian foreign policy beyond the Asia-Pacific. As recent engagement with the Middle East shows, Indonesia increasingly sees itself as an important actor in the Muslim World. In late January, the country signed a defense cooperation agreement with Saudi Arabia—Jakarta’s first such agreement with an Arab state—which covered military industry cooperation, counter-terrorism and joint training. In 2012, Indonesia also co-sponsored UN General Assembly Resolution 67/19 on the statehood of Palestine, with foreign minister Marty Natalegawa delivering a strong speech in defense of the Palestinians’ choices and policies regarding Israel. This seems to be a natural extension of a more confident Indonesia more willing to articulate its population’s solidarity with Middle Eastern causes.

As for Australia, Indonesia’s economic rise will shift the power dynamic and importance of the bilateral relationship. Indonesian GDP, on the basis of purchasing power parity, overtook Australia’s in 2004 and is today thirty percent bigger, and that gap will only expand as Indonesia outgrows Australia by a ratio of 2 to 1, with the IMF predicting 6 percent growth for Indonesia to the end of this decade compared with around 3 percent for Australia. This will not only enhance Indonesia’s economic primacy over Australia and entrench Prime Minister Tony Abbott’s maxim of “less Geneva and more Jakarta,” it will also shift the balance of power within the relationship. Australia’s dominance and transactional approach to the relationship will have to give way to a more balanced and strategic one, as Canberra comes to terms with the fact that a burgeoning Asian power of more than 250 million people cradles Australia’s northern borders.

Indonesia’s economic rise will therefore pave the way for significant geopolitical change. The country’s economic growth engine is of such vigor relative to the rest of the world—perhaps surpassed only by China amongst the world’s twenty largest economies—that a military and strategic dividend for Jakarta is inevitable. Projected timeframes and Indonesian goals will shift with movements in the domestic and regional landscape, but the fact remains Indonesia will have more clout in the future than it’s ever had before.


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