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Australia and Indonesia: investing in a more secure future

Posted By on December 8, 2015 @ 06:00

[1]The grand power shifts currently taking place in the Asia–Pacific are likely to gradually draw Indonesia and Australia closer together in order to face common strategic challenges. Elements of the bilateral relationship will probably remain prickly and contested, but the more difficult the broader region becomes—as historical disputes mix with heady power politics and posturing—the more sense it makes for Australia and Indonesia to increase bilateral collaboration.

Notwithstanding that the duo make the world’s most starkly different neighbours, a positive relationship with Indonesia has the propensity to contribute profoundly [2] to Australia’s national security. Along with the rest of the Asia–Pacific, Indonesia is undergoing a significant economic transformation—one that will potentially see the archipelagic nation become the world’s fourth largest economy by 2050 [3]. It’s important then that Australia makes the most of the goodwill generated by Prime Minister Turnbull’s recent successful visit to Jakarta [4] and that Australian policy makers explore additives that will contribute to a stronger partnership over the long term.

In order to work together to face common security challenges in an evolving Asia–Pacific, it’s important that Indonesia be prepared to increase its focus on international policy issues. Since President Joko Widodo took office in October 2014, Indonesia has focused on domestic affairs like stimulating the economy and upgrading the country’s infrastructure to meet growing demand. In the long run, a strong bilateral partnership will require a joint willingness to act in ways that further our shared objectives.

But a real opportunity also exists for the two countries to cooperate on infrastructure development in Indonesia. That possibility wasn’t lost on Turnbull in Jakarta, who identified such investment as ‘crucial’ [5] to developing a deeper and more positive relationship between the two countries.

Both foreign and domestic investment in Indonesian infrastructure have been low since the 1997 Asian Financial Crisis. As such, the country has long been hampered by a lack of adequate infrastructure: underdeveloped sea transport facilities, limited amenities to cope with the country’s frequent extreme weather conditions, and the resultant steep logistics costs. According to an Indonesian Foreign Ministry official, the country’s maritime connectivity ‘remains abysmal [6]’, an issue that will need to be addressed to enhance Indonesia’s competitiveness [7] in the ASEAN Economic Community. Those deficiencies not only reduce Indonesia’s attractiveness to investors, but also prevent Indonesian economic growth from reaching its full potential [8]. With investors wary and the largest drop in exports recorded since August 2012 [9], 2015 marked a six-year low [10] in GDP growth. With this in mind, we should expect Jokowi to continue to view his engagement with international actors squarely through the lens of domestic politics.

On his trips abroad this year, Jokowi has actively sought investment opportunities, not foreign aid. While Australia’s 2015–16 budget shows Indonesia to be our second largest foreign aid recipient after Papua New Guinea [11], the projected sum of $366.4 million will only account for 0.03% of Indonesia’s GDP [12]. If we’re looking to deepen and strengthen our relationship with Indonesia, helping Jokowi with his main priority—investment in infrastructure—would be a good start.

The Widodo Government’s five-year infrastructure plan is projected to cost a total of approximately A$22 billion per year [13], and will see the creation of 25 dams, 10 airports, and 2,000 km of roads across Indonesia, among many other projects. However, this falls far below the A$500 billion identified by Bappenas [14], Indonesia’s planning ministry, as being essential to help the country reach the World Bank’s middle-income standards [15] by 2019.

Australia’s Trade Minister Andrew Robb recently announced that he’d like to quadruple [16] the number of Australian businesses engaged with Indonesia from 250 to 1,000. Australia’s superannuation industry, predicted to reach A$7 trillion by 2035, has also been identified as a potential goldmine [17] for Indonesia thanks to companies like Industry Super Australia’s prior experience [18] in investing in infrastructure projects. That said, there’s no way that Australia can even come close to narrowing the gap between Indonesia’s actual infrastructure budget and Bappenas’ projected sum.

Still, Australia’s real value to Indonesia might lie in providing advice on skills and services as the country pursues project planning and implementation on a range of fronts. Indonesia has been hindered [19] by lack of coordination between government agencies and advice on financial services, and has faced difficulties when it comes to managing public–private partnerships, leaving infrastructure projects behind schedule, beyond budget or abandoned altogether. Each of those are areas where Australia has proven experience and expertise, as noted by a recent ANZ–PwC report [20] (PDF). The report also suggests Australia offer advice to Indonesia in specific areas of infrastructural implementation processes, such as planning for the construction of ports to help Indonesia facilitate trade with its Southeast Asian neighbours.

Even with an enhanced capacity to deliver infrastructure projects, Indonesia will continue to prioritise domestic policy over foreign policy. It’s unrealistic for Australian policymakers to expect that Jakarta will, as it grows, actively participate in the international realm (particularly in regional forums) in ways Canberra might desire. Even beyond Jokowi’s focus on domestic politics, Indonesia’s engagement with external actors will continue to be guided by its bebas-aktif foreign policy, and its strategic culture of nonalignment, both of which prevent it from entering into formal alliances and potentially stunting the level to which it can enjoy mutually beneficial relationships with other states.

In this context, Australia’s challenges are two-fold. First, it must be willing to support an Indonesia with a stronger sense of self. Second, it must encourage Indonesia to become an even more active regional player, particularly in multilateral forums such as ASEAN—where Indonesia plays a central role to Australia’s diplomacy with Southeast Asian nations—and APEC—where strong relations would be beneficial for multilateral diplomacy. Australia must also support Indonesia in forming its own foreign policy agendas, such as firming up the finer details of the Global Maritime Axis doctrine.

Indonesia is on track to become a larger, more influential and more powerful player in the Asia–Pacific over the coming decades. That shift will increase our dependence on our northern neighbour to secure our economic, political and security interests in the Asia–Pacific. Australian investment in Indonesian infrastructure, both financially and through the provision of our expert advice, looks like a good way to strengthen an important relationship for both countries well into the future.

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URLs in this post:

[1] Image: http://www.aspistrategist.org.au/wp-content/uploads/2015/12/5464658240_1fb19e69ce_z.jpg

[2] has the propensity to contribute profoundly: http://apo.org.au/files/Resource/dpmc_nationalsecuritystrategy_jan2013.pdf

[3] fourth largest economy by 2050: http://asia.nikkei.com/Politics-Economy/Economy/Indonesia-set-to-become-fourth-largest-economy

[4] recent successful visit to Jakarta: http://www.theaustralian.com.au/national-affairs/foreign-affairs/malcolm-turnbull-visits-indonesia-looking-to-boost-ties/story-fn59nm2j-1227606965341

[5] identified such investment as ‘crucial’: http://www.thejakartapost.com/news/2015/11/13/new-dawn-ri-oz-relations.html

[6] remains abysmal: http://www.thejakartapost.com/news/2014/11/12/maritime-connectivity-within-asean.html

[7] enhance Indonesia’s competitiveness: http://www.thejakartapost.com/news/2015/11/19/indonesia-fast-track-infrastructure-face-aec.html

[8] prevent Indonesian economic growth from reaching its full potential: http://www.indonesia-investments.com/business/risks/infrastructure/item381

[9] the largest drop in exports recorded since August 2012: http://www.reuters.com/article/2015/03/16/indonesia-economy-trade-idUSL4N0WF3OB20150316#73DXQlRpKd2iQm8b.97

[10] six-year low: http://www.fxstreet.com/analysis/china-emerging-markets-forecast-for-2016/2015/11/19/02/

[11] after Papua New Guinea: http://dfat.gov.au/geo/papua-new-guinea/development-assistance/Pages/papua-new-guinea.aspx

[12] only account for 0.03% of Indonesia’s GDP: https://www.aspi.org.au/publications/the-cost-of-defence-aspi-defence-budget-brief-20152016/ASPI-Cost-of-Defence-2015.pdf

[13] approximately A$22 billion per year: http://www.afr.com/news/world/asia/indonesia-streamlining-500bn-infrastructure-plan-after-delays-hit-growth-20151116-gl0hnj

[14] identified by Bappenas: http://www.eastasiaforum.org/2015/06/10/how-to-solve-indonesias-infrastructure-crisis/

[15] World Bank’s middle-income standards: http://www.worldbank.org/en/country/indonesia/overview

[16] recently announced that he’d like to quadruple: http://www.afr.com/opinion/andrew-robb-orders-up-750-australian-companies-to-invest-in-indonesia-20151117-gl1lt2

[17] identified as a potential goldmine: http://www.smh.com.au/comment/why-australia-should-be-investing-in-its-relationship-with-indonesia-20151116-gl0f57.html

[18] prior experience: http://www.industrysuperaustralia.com/campaigns/nation-building-and-infrastructure/

[19] has been hindered: http://www.eastasiaforum.org/2015/06/10/how-to-solve-indonesias-infrastructure-crisis/%20

[20] a recent ANZ–PwC report: https://www.pwc.com.au/asia-practice/assets/succeeding-together-10nov15.pdf

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