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Indonesia courts the Dragon

Asia Times | 6 November 2004

Indonesia courts the Dragon

By Bill Guerin

JAKARTA - While the Indonesian economy is expected to expand by 4.8% this year, the new government has targeted annual growth at an average 6.6% during the next five years. Export-oriented growth is expected to power the development. In pursuit of this, trade liberalization and a push toward enhancing trade and economic cooperation between the 10-nation Association of Southeast Asian Nations (ASEAN) and China are high on the agenda of the new administration of President Susilo Bambang Yudhoyono.

Indonesia is the largest and most important economy in ASEAN, and a top-level delegation led by Aburizal Bakrie, coordinating minister for the economy, was this week sent to fly the flag and promote Indonesian goods at the first ever China-ASEAN exhibition held in Nanning in southwest China.

When completed, a planned free-trade area (FTA) between China and ASEAN will represent a combined regional market of more than 1.7 billion people, dwarfing the trade bloc of the European Union, with barely 350 million people. In November 2001, Chinese economic and trade ministers agreed to establish the FTA by 2010 with the six founding members of ASEAN - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand - and by 2015, with the four newer members. ASEAN leaders are due to strengthen this commitment at a summit in Vientiane, Laos, this month.

Indonesian Trade Minister Mari E Pangestu was with the delegation in China. Though Pangestu, whose Chinese name is Feng Huilan, has committed to support exporters, formalize more trade regulations and raise competitiveness, she has made it clear to domestic manufacturers that improving their productivity and efficiency is a must. The country steadily lost competitiveness in labor-intensive exports under former president Megawati Sukarnoputri. Many export-oriented garment and footwear companies, which had been the lifeblood of Suharto’s industrial export success from the mid-1980s, closed down, resulting in widespread job losses and rapidly rising unemployment.

Political uncertainties, together with rising wages, massive reductions on subsidies for water, telephones, electricity and fuel, resulted in a poor investment climate. Before the regional financial crisis, investment accounted for 30% of Indonesia’s gross domestic product (GDP). Last year, it accounted for only 16%.

A dearth of investment in export manufacturing and populist labor-market policies led to intense competition from Chinese exporters, who gained market share at Indonesia’s expense. After the drop in global demand in 2001, Indonesia’s exports saw only moderate growth, failing to match the stout export recovery seen by its neighbors, particularly Malaysia, Singapore, Thailand and the Philippines. In 2003, export growth in Thailand and Malaysia were 9% and 16% respectively, while Indonesia’s exports grew by only 3.5%.

In terms of actual value, Malaysia almost tripled the value of its exports from US$5.48 billion to $14 billion over the past three years, while Singapore’s exports doubled from $5.06 billion to $10.49 billion and Thailand’s from $4.38 billion to $8.83 billion. In the same period, the Philippines boosted exports by 276% to reach $6.31 billion last year. A similar parallel can be seen in annual average GDP growth between 1999 and 2003. In Thailand, it was 4.7%, in Malaysia 4.8% and in the Philippines 4%. Indonesia’s growth of 3.4% over the same period was fueled almost exclusively by private consumption.

This year, however, the figures are more encouraging. The new government has targeted non-oil-and-gas (NOG) exports to reach about $46.37 billion for 2004, up 7% from last year. The Central Statistic Agency (BPS) reported last week that exports grew by 10.77% from January to September to reach $50.74 billion from $45.81 billion in the same period last year. Oil and gas exports rose by 10.14% to $11.45 billion.

Exports to China increased by 30.68%, from $4.40 billion in 2000 to $5.75 billion last year, though this represents only 1.39% of the total value of China’s $413.10 billion imports that year. Though trade between the two countries is expected to top $15 billion this year, Indonesia’s weakened long-term competitiveness has been exacerbated by major challenges from China for investment and trade.

China is a direct competitor with several of Indonesia’s important exports such as textiles and apparel. The Agreement on Textiles and Clothing (ATC), the so-called "quota" system signed by World Trade Organization (WTO) members to set limits on the amount of apparel and textiles developing countries export to the developed world, and all quantity restrictions on these commodities, will expire on January 1. Though some WTO countries are expected to continue imposing protectionist measures, China’s textile industry may flood world markets with cheap goods, further damaging recovery prospects for Indonesia’s textile producers.

Elsewhere in China, top officials of the Indonesian Chamber of Commerce and Industry (Kadin) were in Shanghai this week on an official visit also aimed at boosting trade and investment between the two nations. Kadin delegates also met with leaders of the China Council for Promotion of International Trade (CCPIT). Kadin chairman Mohamad S Hidayat said afterward that Kadin would encourage Shanghai investment in Indonesia’s infrastructure sector, one of the priority areas designated by President Yudhoyono and his cabinet.

The political dimensions to this week’s push by Jakarta reflect that Asia’s long-dormant giant looks set to become the dominant political force in the region. Looking north toward China gives Indonesia more independence from Western influence. Moving closer to China as a major business partner would stem the simmering resentment among many of the political elite in Indonesia who say the country has for too long been hamstrung by the dictates of the United States and the International Monetary Fund (IMF) and the major donor countries they control.

The economists among them argue that despite weak levels of investment, the IMF in the late 1990s, instead of urging Jakarta to use fiscal policy to spur investment and create the conditions for sustainable economic growth, prescribed fiscal austerity for the sake of major multinational investors, thereby undermining economic growth and laying the foundation for an economic downturn, declining foreign-exchange reserves and capital flight.

Jakarta’s foreign-policy stance in the region under the Suharto regime since 1965 was a major reason Indonesia lagged behind other ASEAN countries in building trade relationships with China. In the aftermath of what the Suharto regime said was an attempted communist coup d’état, China was accused of shipping arms to Indonesian communists plotting to take power by undermining the Indonesian military. And all diplomatic and trade relations between the two countries were severed.

The confidence of the ethnic-Chinese community in Indonesia, especially those with close business ties in China itself, was badly damaged in the violence of May 1998 when Suharto stepped down. Vast amounts of dollars were shifted to safety in Singapore. The eventual renewal of diplomatic ties under president Abdurrahman Wahid in 1990 heralded in a gradual improvement in bilateral relations between Beijing and Jakarta that continued under Megawati’s watch. Both former leaders visited Beijing, and Chinese prime minister Zhu Rongji made an official visit to Indonesia in November 2001.

The US is the largest NOG export market for Indonesia, just topping Japan in 2003. It bought $6.8 billion worth of NOG goods in 2003. But wrapped up in its fixation with the "war on terror", unlike China, the US failed to show interest in Indonesia’s importance as the largest economy in the region, preferring instead to sign trade pacts with Singapore and Australia.

China was the only major economy in Asia to avoid any serious impact from the Asian economic crisis but, after annual GDP expansion averaging more than 9% over the past 15 years, Beijing decided this year to cool its red-hot economy by tightening monetary policy and curbing domestic investment. Though strong domestic growth in China has been a boon for Southeast Asia’s export economies, the World Bank has forecast that the country’s economic growth will fall from 9.1% in 2003 to 7.7% this year, and 7.2% in 2005.

Yet, with an abundance of the raw materials that China needs to import if it is to sustain even these lower rates of growth, Indonesia could become a major supplier of China’s future raw-material needs. China is Indonesia’s fourth-largest export market, after the US, the EU and Japan. It is already one of China’s primary suppliers of oil and gas, coal, rubber, timber, pulp and paper, palm oil, organic chemicals, fish, electronics, and steel.

Trade between Indonesia and China steadily increased from 4.5% of total exports in 2001 to 7.4% last year, when total trade with China was about $10.2 billion, giving Indonesia a tidy $1.27 billion trade surplus on the year’s trading. Top five exports were oil-and-gas commodities, wood, pulp and paper, organic chemicals, and machinery. China’s top three exports to Indonesia were machinery, electronic goods and chemical goods.

Accelerating the changes for the better in the Jakarta-Beijing relationship will have positive implications for the domestic business environment in Indonesia and can help meet the country’s desperate need for foreign direct investment (FDI), especially in the oil-and-gas sector, which would, in turn, square well with China’s energy needs. China is short of energy to fuel its boom and started buying into the Indonesian oil-and-gas sector assets in 2002. With further planned investment from Chinese state-owned enterprises in the cards, the ensuing further exploration of Indonesia’s oil and gas reserves will boost national revenue and bring the two nations even closer.

 source: Asia Times