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Chiangmai, Thailand Sep 8-12.

(5/3/11) Olson on Indonesia's Relevance on the Global Stage

Time for Indonesia to Step onto the Global Stage?

by Steve Olson

ESI Managing Director, Asia

A growing chorus of economists and analysts have made the case that Indonesia?s ?under the radar? economic success story makes it a legitimate, although easily overlooked, candidate for inclusion in the BRICs club of emerging economic powers. Such an analysis is largely correct, however, it fails to recognize the full extent of Indonesia?s growing strategic relevance on the global stage.

In many respects, Indonesia personifies the potential role and influence that middle powers can now aspire to wield in a post uni-polar world. In addition to its impressive economic growth, Indonesia also offers a highly relevant model on transitioning successfully from dictatorship to democracy, as well as providing a powerful rebuke to those who wonder if Islam is somehow incompatible with democracy and economic vibrancy. As an Asian nation that has learned to grow with China, rather than being trampled by it, Indonesia has become a central player in the world?s most economically dynamic region. On a social level, Indonesia has provided an admirable demonstration of religious tolerance and harmony in the midst of diversity. And as the fourth most populous nation in the world, and the largest economy in Southeast Asia, Indonesia has the size and standing to make its weight felt in both the region and the world. In short, Indonesia matters.

The basic outline of Indonesia?s economic success is however not as well known outside the region as it should be, and is worth briefly reviewing:

Propelled by strong domestic consumption and investment, and rising prices for commodity exports such as palm oil, copper, and rubber, Indonesian growth rates have been exceptionally strong -- generally in the 6 percent range, except during the global financial crisis. And even during the darkest days of the crisis, while many major economies were contracting, Indonesia managed to grow at a rate of 4.5% in 2009.

The Indonesian government has been given high marks by multilateral agencies for its management of the economy, in particular its prudent fiscal management. With debt levels exploding in many developed economies, Indonesia?s debt to GDP ratio has actually been declining, and is projected to continue to do so. FDI has been pouring into Indonesia, and has in fact tripled since 2004. The key challenge for policy makers will be to continue to effectively manage these capital inflows, and to avoid the risks associated with an influx of ?hot money?.

While the two largest economies in Asia, China and Japan, will inevitably wrestle with severe demographic challenges in the decades to come as a result of aging populations, Indonesia has a youthful population, with more than half its citizens under the age of thirty.

Not surprisingly, the World Economic Forum?s Global Competitiveness Report leap-frogged Indonesia upwards by ten places in 2010, to number forty-four, out of 139 surveyed countries.

While food inflation is a growing concern in Indonesia and indeed throughout Asia, the strength of the Indonesia rupiah helps offset the cost of imported foodstuffs, and because the economy is less dependent on exports than most of its neighbors, the downsides of strengthening currency are less pronounced than elsewhere.

Beyond Indonesia?s impressive economic statistics, something else is happening which is perhaps even more revealing. In boardrooms, factory floors, and conference halls across Asia, the conversation is turning more and more towards Indonesia as the preferred platform for servicing Southeast Asia as well as China. Yes, Singapore is a richer, more highly developed economy. But it is a city state with a tiny market of barely 5 million citizens, and a cost structure which many find prohibitively high. Thailand provides a market which is substantially larger than Singapore?s (although only about half the size of Indonesia?s), but serious questions over political stability still remain. Malaysia features a prominent government hand in the economy, racial preferences, and a sometimes ambivalent attitude towards foreign products and investors. The Philippines is a considerably smaller economy, lacking Indonesia?s rising middle class, and Vietnam is a communist country with an economy that is far from market-based.

By virtue of its extremely large domestic market, low labor costs, impressive growth, expanding middle class, and preferential access to ASEAN and China, Indonesia has become a highly significant market in its own right, a logical springboard into China, and a leader amongst it ASEAN brethren.

What then are the key economic challenges facing Indonesia? As the economy continues to grow, glaring deficiencies in the infrastructure will become even more evident, and unless addressed in a meaningful way, will create a progressively greater obstacle to continued growth. Highways, roads, ports, and airports are not uniformly adequate, and in some cases are woefully deficient. Power outages still occur with unacceptable frequency across the nation, and high-speed internet connectivity is still a dream in too many places. And although Indonesia is certainly not alone in this regard, corruption continues at unacceptably high levels, and in some respects is inter-woven into the fabric of daily life and business.

Ultimately, the longer term prospects for Indonesia?s continued high rates of growth will be closely linked to its success in turning the tide against corruption, and addressing its infrastructure deficiencies. Although the proof will be in the doing, the government has demonstrated its seriousness about tackling these problems, and there is reason for at least cautious optimism that these challenges can be adequately managed.

Indonesia has an equally compelling story to tell on social issues. Despite being an ethnically diverse and geographically far-flung archipelago, Indonesia has maintained a remarkable degree of societal cohesion, and could offer more than a few lessons to other regions in the world which are riven by religious and ethnic strife. Although a preponderantly Muslim nation, religious tolerance and pluralism is well-entrenched, and relations among Indonesia?s various religions are for the most part exemplary. Although this would be shocking in many other countries, Indonesia is a place where Balinese Hindus bring food to their Muslim neighbors to help celebrate the end of Ramadan feast, and where Muslims respectfully observe Hindu holidays such as the Balinese Day of Silence.

As with any society, there are radical fringe elements who view violence as an effective means to achieve their ends, and in the case of the Bali and Jakarta bombings, they have succeeded in carrying out deadly attacks. There are two points worth making in this regard however. Overall, these radicalized elements constitute an exceedingly small percentage of Indonesian society, and have failed to gain traction within the broader society. And secondly, the Indonesian government?s security services have proven themselves to be highly adept at disrupting the operations of violent cells, and a number of its leaders have been incarcerated or executed in recent years.

Religion plays an important role in Indonesian society, but it is by and large regarded as a private matter, and not something which should have an undue influence on political discourse. During the last presidential election, efforts by an opposition party to make a political issue out of the fact that President Yudhoyono?s wife does not wear a head scarf unequivocally failed to resonate with voters, and the President was handily re-elected. The people of Indonesia cast their votes based on governance issues ? not religious grounds. Although a relative newcomer to the club of democratic nations, Indonesia?s democratic processes and institutions are firmly grounded and functioning effectively, providing a powerful example of the compatibility of Islam and democracy.

Indonesia?s increasing economic might, and socio-political stability are occurring at an especially propitious moment. The days of a uni-polar international system led by the United States are over, and the playing field is now open for Indonesia , and other leading middle powers such as Brazil, Turkey, and South Africa, to assert themselves on the global stage in a way that would have been incomprehensible 10 years ago.

The global financial crisis not only weakened the US economically ? and by extension, strategically ? it also delivered a body-blow to the credibility and authority of the US to lead on the global stage. While China has been most effective in taking advantage of this new landscape to more forcefully assert itself, a number of middle powers are also feeling empowered to articulate and pursue economic and strategic policies which reflect their own national interests. This is essentially the dynamic which has thrust the G-20 into prominence almost overnight.

Whether it be on global economic issues being dealt with in the International Monetary Fund, strategic issues being debated at the UN, or trade issues being negotiated at the WTO, Indonesia can now assert itself, its interests, and its viewpoints more forcefully ? and can reasonably expect the rest of the world to be willing to listen.

Indonesia?s ascent is however not a forgone conclusion. A failure to head-off inflation, a successful large scale terrorist attack, or an inability to adequately upgrade infrastructure could all derail, or at least interrupt, the country?s upward trajectory. Nonetheless, if the Indonesian leadership can recognize and effectively act upon the current favorable circumstances, there is an opportunity ? and indeed, a need -- for the Indonesia to play a more formidable role on the global stage than it has at any other time in its history.

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