Indonesia: What Asia's Third Giant Means for Australia, and Australian Business
Presentation by Professor the Hon Gareth Evans AC QC, Former Australian Foreign Minister, to CSIRO Forum, Melbourne, 25 November 2013
It was obvious to me from the outset that Jim Grigoriou, your SME-engagement manager, and organizer of these ‘Great Ideas and Guts’ Forums, has more than a little entrepreneurial flair. But I have to say that Jim has really excelled himself in generating publicity for this meeting today. To ensure that for the whole of the last week the newspapers and airwaves would be full of nothing but references to our relationship with Indonesia was nothing less than a masterstroke!
I want to do three things in this talk. First, give you a sense of Indonesia’s general significance, geopolitically and regionally, in the region and the world – and to make the point that we in Australia still haven’t really got our heads around just how big a player Indonesia is, and will continue to become. Second, following from that, to discuss what this means in terms of opportunities for Australian business, particularly in the SME sector. And third, to discuss the current state of our bilateral relationship and the extent to which this might negate any of those business opportunities.
So as not to keep you in too much suspense about the last point, let me say that having been in Jakarta last week, and met with a wide range of senior figures there – including having a long one-on-one session with Foreign Minister Marty Natelagawa – I am in no doubt at all about the extent of the anger there following the revelations about our tapping the phones of the President, his inner circle and above all his wife. And I’m in no doubt that unless we can find a way of quickly defusing the situation – and I have conveyed my own ideas on this to the government – I fear that we will be in for another long and rocky ride at the political level. But the good news, for present purposes, is that no-one in Indonesia seems to want to allow this to impact directly on our economic and business relations, so what I have to say to you about business opportunities looks likely to remain basically unaffected, however much other problems drag on.
To begin with Indonesia’s place in the region, and the world. Its geography, for a start. Australians all know about Bali, and will certainly have heard of Java, Sumatra and Borneo. But how many other islands are there in the Indonesian archipelago? Quick quiz: in round figures, nearly 300? 700? 1200? 17,500? … 17,500 it is. By far the world’s largest archipelagic state, Indonesia stretches over 5,000 km east to west (as compared with Australia’s width of 4,000 km) and in total land area is the 15th biggest country in the world (as compared with Australia, the 6th).
Indonesia’s population is more than ten times bigger than ours, now just over 250 million, making it the 4th most populous in the world – after China, India and the US – and definitely Asia’s third giant (Australia ranks 56nd in world). It is also by far the biggest Islamic country in the world (Pakistan comes next with 193 million). But another quick quiz: what’s the second biggest religion in Indonesia? Hinduism? Buddhism? Or Christianity?... Christianity it is, as a result of early Portuguese and Dutch colonization, with 10 per cent of the population, which adds up to more people than the whole population of Australia: one point of cultural connection with the West that is often overlooked.
That geographic and population size is increasingly translating into economic size. Without many Australians really noticing it, our next door neighbor is poised to take its place over the next few decades as one of the world’s very largest economies. Indonesia’s economy has expanded six-fold since the 1970s, and it currently ranks 15th in the world in GDP size, measured by Purchasing Power Parity (with Australia 16th on that comparison, though we move ahead to 12th place on nominal GDP, and are certainly way ahead on GDP (PPP) per capita, with Australia 9th and Indonesia 116th on current World Bank figures). But the most interesting figures are the forward projections, with – on figures that Austrade and the Queensland Government have been using - Indonesia expected to move up the total GDP (PPP) chart from 15th now to 7th in 2030 and 4th in the world (after China, the US and India) in 2050.
As Prime Minister Tony Abbott put it in his speech in Jakarta in October: “At present, Indonesia’s annual GDP per person is less than $4000 – or a tenth of Australia’s – but it’s growing at about 6 per cent a year. It may be many years before individual Indonesians’ standard of living equals that of Australians, but it probably won’t be very long before Indonesia’s total GDP dwarfs ours.”
This economic transformation has been coupled by a massive social transformation, with strong growth in the proportion of the population of working age, dramatically falling national poverty rates, and an increasingly well educated population (18,000 of whom are currently studying each year in Australi). One measure of how sophisticated at least some of Indonesia’s human resources are becoming, albeit that the honour in question is a dubious one, is that last month Indonesia was reported as having become the cyberattack capital of the world – surpassing China to become the preferred launching pad for 38 per cent of the world-wide cyberattacks. (And no doubt the traffick south has increased since the spy story broke…!)
One of the most interesting single economic statistics – and I’ll come back shortly to the significance of this from an Australian business perspective – is the rapid growth of the “consuming middle class”, which the McKinsey Global Institute now measures at 45 million, and which is forecast to increase to 135 million by 2030.
For a long time Indonesia’s political system was notionally democratic, but in fact authoritarian under Sukarno’s personal presidential rule and military- dominated under Suharto after 1965. But there has been a fundamental transformation in the Indonesia political system since the departure of Suharto in 1998 following the Asian financial crisis, when it became and has since remained for all practical purposes a thriving democracy, with all the strengths and sometimes weaknesses that flow from that. There have been four peaceful transitions with the successive presidencies of Habibie, Gus Dur, Megawati and now Susilo Bambang Yudhoyono, and another is expected with the forthcoming July 2014 presidential election, following legislative elections in April. Most speculation is currently centred on Joko (‘Jokowi’) Widodo, the populist governor of Jakarta, who has risen rapidly in the polls in recent months, although his candidacy is not yet assured and his credentials to lead a national rather than local government remain very uncertain.
The political contest in Indonesia is broadly between nationalist-focused parties (PDIP, Golkar, PD and a litter of smaller ones) and Islamic-based parties (PAN, PKB, PPP, PKS and PBB), but this line has become increasingly blurred in recent years, and personalities continue to play a very important role. Although there is a growing international perception that Islamist sentiment is gaining more of a toehold – not least with increased wearing of the hijab by Indonesian women, wine harder to find in restaurants, and more talk of sharia law in various manifestations – I am told by colleagues in Indonesia that although some of these issues have become more visible at a local level with the huge decentralization program of the last decade, nothing has basically changed, and that Indonesia is and will remain very much at the moderate end of the spectrum in terms of Islamic practice.
Internationally, starting with Sukarno, Indonesia has for decades been a prominent voice in the Non-Aligned Movement of developing countries, and while it has had periods of intense and effective activism – not least when my late colleague and friend Ali Alatas was Foreign Minister, on issues like the Cambodian peace settlement when it played with Australia’s strong support a major leadership role – it is generally fair to say that it has punched below its potential weight. That seems to be gradually changing, with Indonesia playing a more visible leadership role in ASEAN in particular (as by far the largest of the ten countries in that grouping, with 250 million of its total 600 million population), and on some global issues dear to me like nuclear disarmament and an effective response to mass atrocity crimes. In terms of how far and fast this will go, much as always will depend on the country’s new leadership.
In terms of how Indonesia will position itself as between the US and the rapidly emerging new superpower, China – a crucial issue for everyone in the region, not least Australia, with mixed economic and strategic interests – it is probably best to assume that Indonesia will maintain as much of its traditional ‘non-aligned’ position as it can. It is very concerned about Chinese adventurism in the South China Sea in particular, and will find comfort in developing and sustaining good relations with US leaning ‘balancers’ like India and Japan, as well as Australia (to the extent that periodic bumps in our political relationship, like the present one, can be managed), but won’t want to be perceived as in any way anti-China.
What do all these economic and political developments mean for business opportunities in Indonesia, especially for small and medium sized Australian businesses?
Economically, the bilateral relationship between Australia and Indonesia has been very limited, and way below its potential. Less than 3% of our imports are in each case sourced from the other, with crude petroleum, wheat, steel, gold and aluminium the main traded commodities. Australian investment in Indonesia, mainly in the resource sector and agribusiness, is only around $6.75 billion, less than the $8 billion we have put into the much smaller Malaysia, and making it only our 21st largest destination abroad. (Reciprocal Indonesian investment in Australia is just over a half-billion dollars, as compared again with the $15 billion Malaysia has sent our way). There are presently some 400 Australian businesses operating in Indonesia, but on the face of it there should be many more.
Where do the opportunities for engagement realistically lie? The market analysis I have seen suggests that most of the action for the immediately foreseeable future seems to lie in meeting consumer demand, where the youth population is growing, the middle class is growing even faster, the private sector is dominant, and Australia’s current presence is very underdone.
A dominant theme in the Asian Century White Paper is the need to connect with regional value chains. We don’t have strength right across the supply chain, in the production of consumer durables, computers and mobiles, and mid-range branded products. But, as I understand it, we do have deep capability in particular segments of the supply chain, including:
- product development
- new materials
- market research and testing
- retail concepts
- online marketing and fulfillment
- applications development
- food science
- food processing
- cold chain management
- logistics management, and
- consumer finance.
With the strong anticipated growth in Indonesian consumer spending, there are going to be many more opportunities in the services sector, specifically:
- higher education
- vocational education and training
- financial services
- healthcare services
- ICT and telecommunications, and
- tourism, recreation and leisure.
There are other areas in which Australian business has a strong competitive advantage, but nonetheless in which the outlook at least for the mid-term looks rather more difficult. These are trade sectors heavily exposed to government influence and intervention, in particular agribusiness (including the live animal, meat and horticultural trades), resource development and infrastructure.
The analysis I have seen here predates the current spying controversy, but will no doubt be reinforced by that if these difficulties prove to be protracted. The concern has been that in these sectors, unlike the consumer areas not so exposed to government influence and intervention, the uncertainty and manoeuvring linked to the parliamentary and presidential elections due in 2014 will make remote the prospect of major structural reform or significant infrastructural undertakings; stoke the fires of economic nationalism already burning among a number of players in the parliament, executive, bureaucracy and judiciary; and generally make for more populist policymaking. The longer-term prospects are reasonably rosy, particularly because Australian business is so strong in these areas, but for the next couple of years the indications are that more time will be spent in trouble-shooting than making new ground.
There is one general question that always arises in the context of doing business in Indonesia and that is the prevalence of corruption. Indonesia does not do well on the most widely cited international measure of this, Transparency International’s Corruption Perceptions Index (CPI), which ranks Indonesia 118th out of 185 countries, worse than – but in the same general league as – China, India, Thailand and the Philippines. Among the G20 countries, Indonesia has the worst perceived corruption environment, except for Russia. The most that can be said is that things don't seem to have got worse, and that since the establishment of the KPC (Corruption Eradication Commission) nine years ago a major effort has been made to investigate, arrest and prosecute big fish – including ministers, parliamentarians and senior public servants – across the country.
It has been suggested [Dick & Butt, CILIS 2013] that a better strategy might be, following Singapore’s and Hong Kong’s examples, to target key state institutions and concentrate on cleaning them up top to bottom, notably the Department of Finance and the legal system. This is reinforced by the World Banks Doing Business Index (DBI) which shows that in areas like the time taken to start up a business and get credit, and paying taxes, Indonesia has been recording significant improvements over the last 6-7 years, but there has been by contrast little or no improvement in critical commercial law areas like enforcing contracts, registering property, protecting investors and resolving bankruptcy.
While all this suggests that doing business as an outsider – and for that matter, as an insider as well – is not as easy in Indonesia as it would be here, I don't believe that in itself should deter you. It’s a matter, as always, of weighing the risks against the potential rewards.
What, finally, can be said about the overall state of the Australia-Indonesia bilateral relationship, which does tend set the general framework within which any business has to operate, and will be bound to have at least some impact on the ease and confidence with which personal relationships can be developed and maintained? This is bearing in mind that the Indonesian market, as with so many others, is relationship driven, with personal interaction being essential, and investment in building rapport and trust being crucial.
The starting point is a somewhat tricky one. It simply is the case that, as I first said in writing a book about Australia’s Foreign Relations in 1991 when I was Foreign Minister, that “No two neighbours anywhere in the world are as comprehensively unalike as Australia and Indonesia. We differ in language, culture, religion, history, ethnicity, population size, and in political, legal and social systems. Usually neighbours share at least some characteristics brought about by proximity over time, but the Indonesian archipelago and the continental land mass of Australia might well have been half a world apart.”
We actually got off to a flying start with the birth of the Indonesian Republic in 1945, when the Labor government, workers and returning soldiers strongly supported the country’s independence – something fondly remembered to this day, as I was reminded in several conversations in Jakarta last week. But things subsequently drifted apart, with a number of periods of coolness or acute tension (most notably over East Timor, but with the SMH revelations in the mid-1980s of President Suharto’s financial dealings, the Bali bombing, and the more recent boat people controversies being close runners up), punctuated by other periods of real warmth (most notably, I think it fair to say, in my own relationship with Foreign Minister Alatas over Cambodia and other regional issues, and Paul Keating’s with President Suharto, which resulted in an extraordinarily far-reaching security agreement being signed between us).
A serious effort has been made by both sides over the last 25 years to put more of what Alatas and I described as ‘ballast’ into the relationship, so that we could better ride out the squalls which would no doubt erupt from time to time. There has been, ironically in the light of recent developments, a great deal of effective intelligence and security cooperation between Indonesian and Australian authorities in relation to Islamist terrorist organizations and activity. And a lot of effort has gone into building political, military, business, educational, cultural and tourist people to people contacts. But economic relationships have not developed as much as we might have hoped, the teaching and learning of Indonesian language and culture in Australia has, unhappily, gone backwards in recent years, and it is open to question how much value Bali tourism has contributed to mutual understanding on both sides.
Now relations have been plunged back into disrepair by the revelation of Australian intelligence collection activity directly against the President, his inner governing circle, and most sensitively of all – in the reactions of the many Indonesians I have talked to – the Presidents’s wife. What has happened has caused real pain – compounded by the perception in Indonesia that SBY and his senior ministers have been about as pro-Australian as any group of political leaders could possibly be.
Political leaders, by and large, are both knowledgeable and cynical about the amount of intrusive intelligence gathering that goes on in the contemporary world, and when secrecy is breached most of the time it’s just a matter of battening down the hatches, and waiting for the storm to pass, perhaps relying along the way on the Casablanca gambit (“I’m shocked – shocked – to find that gambling is going on here.”) But the present situation cannot simply be brazened out by Australia: there is simply too much sense of abused personal trust.
The least we can now do is offer a full and proper apology, and – I believe without needing to go further, or into more detail, than this – to make clear that in the light of recent events we will review our intelligence collection and priorities. The point is that any such review on any kind of rational cost-benefit basis would lead us not to engage in this kind of telephone tapping, for the risks of further revelations of such activity would far outweigh any possible rewards. Indonesia is an unthreatening, open, democratic society in which information flows freely, and for all but the most sensitive of issues is available for the asking to a friendly neighbor like Australia.
If the Australian government acts in this way, the present difficulties will blow over rather quickly. If it doesn't, then as I said at the outset, things could be quite rocky in the political relationship – and in economic areas that depend on the political relationship – for some time. But there are lots of other areas in which Australian businesses can and should be actively exploring new opportunities right now, with real confidence that Indonesia is a marvellous and exciting country that is really going places, and that you really can and should be along for that ride.