Can Indonesia play a leadership role in the Asian century?

Author: Maria Monica Wihardja, University of Indonesia

Indonesia has become an unlikely star of the international economy, with its resilient growth in the midst of the US sub-prime mortgage and European sovereign and banking crises. But political, social and environmental conditions at home are not commensurate with the quality of Indonesia’s relatively outstanding growth.

If Indonesia is to contribute to the Asian century, it must first put its own house in order. And to assume a potential leadership role in the region and globally, Indonesia needs to develop its political institutions, secure an ‘ocean-focused’ development strategy that complements its status as an archipelagic nation, become a real champion of regional and global cooperation, and create a well-educated and competitive workforce and labour market.

Indonesia is facing many political and social issues. While domestic politics is relatively stable, constant cabinet reshuffling remains a part of political struggle on the ground. The very vulnerable population – almost half of Indonesia’s total population, or almost 100 million people, are categorised as ‘poor’ or ‘near poor’ – are without a strong national social safety net. Adding to Indonesia’s domestic woes are supply-side constraints, unsustainable and poorly targeted national health-insurance subsidies (jamkesmas), and energy subsidies. Furthermore, although expenditure on education has expanded, there is no clear evidence of better-quality education, according to a recent World Bank study.

Essentially, Indonesia needs growth – but it must be quality growth. There are four main challenges Indonesia must confront if it is to achieve this.

First is building inclusive political institutions. Effective leadership matters, but civil-society organisations and other ‘agents of change (including local champions, business communities, academics, and women) can also work politically to promote pro-poor policies under both good and bad leadership if they remain neutral. This has been proven to work at the local level, where local regulations helping the poor were passed in Semarang and Pekalongan following the establishment of Pattiro offices, a national non-government organisation, in both cities, where leadership quality differs. Mobilising the demand side of better public goods and services is just as important as improving the supply side.

Second, as the world’s biggest archipelagic country, Indonesia’s development strategy must be more ‘ocean focused’ and maritime based. This is important to the region’s strategic economic development and its security and defence. Sustainable development in Indonesia means more than just ‘green growth’ or ‘blue growth’ – Indonesia needs to better know itself as ‘a continent of islands’ or an archipelagic continent. As such, its development strategy needs to include issues concerning connectivity, food security, environmental degradation and climate change. Additionally, illegal fishing is rife partly due to Indonesia’s limited patrol fleet and enforcement capacity. Indonesia is known for having a strong army but weak navy. To oversee Indonesia’s ocean, there are only five patrol ships, which operate a mere 65 days a year. Without a strong navy, Indonesia’s strategic position remains weak, a factor which may have an impact on the Asian region as a whole.

Third is capacity-building of government bodies which deal with international institutions and negotiations. Indonesia’s increasing engagement in many regional and global fora, including ASEAN, APEC and the G20, make Indonesia a potential leader to drive the regional and global agenda. But Indonesia’s domestic political interests often dominate negotiations. Trade negotiations assume mercantilist approaches and, as a country with a big market, Indonesia unfortunately often takes a rather protectionist approach.

Indonesia needs to build working units within the government to better position itself in these regional and global fora, based on input from academics and think tanks as well as public consultation. The classic divide between the advocates of protectionism and those defending open markets has often created bureaucratic infighting. Identifying and appointing low-profile ‘champions’ in the government who can work independently from domestic political interests will help.

Fourth is investment in education. By 2025 the demographic dividend, which Indonesia currently enjoys, with more than 50 per cent of the population under the age of 30, will come to an end. Indonesia will need to seriously invest in more quality education as a top priority; otherwise it will be ‘trapped’ with low-quality human capital and a working-age population with low comparative advantages to reap the benefits of globalisation. If the resource boom that Indonesia has been enjoying begins to fade, it will leave Indonesia with no choice but to move to more downstream industries that will likely need to rely on highly skilled labour and innovation.

However, education is constrained by a range of factors including significant overlaps between central and local governments’ assignments of responsibilities for pre-tertiary education, the absence of incentives for local government to align their education systems to national standards and the lack of accountability mechanisms in the education sector. Total expenditure on R&D currently amounts to 0.08 per cent of GDP, significantly less than other emerging countries such as China, Brazil, South Africa, and India, and lower than what would be expected for a country at Indonesia’s level of development.

Addressing these challenges is essential to Indonesia’s future economic prosperity, and will enable Indonesia to realise its leadership potential in the Asian century.

Maria Monica Wihardja is a lecturer at the Department of Economics, University of Indonesia, and a former researcher at the Centre for Strategic and International Studies, Jakarta. She is also Associate Editor at the East Asia Forum Indonesia desk.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Coming to terms with Asia‘.

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