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.
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