Indonesia-Australia: Challenges and Opportunities (Part II)


Christopher Findlay and David Parsons

This article is summarised from a speech presented by Professor Christopher Findlay, Executive Dean of Faculty of Professions the University of Adelaide at  AIBC SA Business Luncheon -Celebrating the anniversary of Indonesian Independence at Intercontinental Hotel Adelaide on 23 August 2012 derived from his paper co-authored with David Parsons.

This article extends discussions presented in Part I. Whilst Part I focuses on  Indonesia’s position as the world’s third largest democracy that is becoming bigger and richer, Part II explores how Australia and Indonesia, who face some similar concerns as well as some interconnected challenges, should further explore that there is much to be gained by understanding those better and then working out a better long term strategy.

Opportunities for cooperation

To review, while recent performance is good, leading to now higher expectations, Indonesia has some challenges to sustain this performance.   Some of the challenges which are becoming more important in Indonesia – such as maintaining productivity growth in a more creative environment and doing so in the context of a resources boom – are familiar to Australians.  There is much to share in that respect.  Australia also has some opportunities to engage with Indonesia in new ways that make this outcome more likely.

The first of these is cooperation in education, particularly tertiary education.  Indonesia has recently announced new legislation which will provide (once the regulations are issued) a framework in which foreign institutions can operate.  The scope of these operations are not yet clear but there is great value and opportunity for Australia to respond rapidly to clarify some scenarios around that reform in context of beating the middle income trap and managing the resource sector boom.  Australia is a natural partner in that respect and has a track record in traditional modes of delivery of education.  That can be extended to new models and to deeper research cooperation and in the translation of research into action.

Second, while education is a priority, and a gateway to other activities, services trade more generally can be developed.  Restrictions on services transactions remain relatively high in Indonesia, according to new World Bank data, especially transport and professional services.  Australia has high barriers to labour flows.  Australia and Indonesia have a mutual interest in tackling those barriers.  The various trade agreements in place provide a framework for doing so but require some substantial capacity building in good regulatory systems in the first place.

The third is around agriculture.   There is great scope for the development of two way trade in food, and including the associated investment in both economies.  Drivers include income changes in Indonesia and also climate change in both economies.  Australia ‘shot itself in the foot’ in the cattle trade, having imposed a ban which released the protectionist forces in Indonesia, but that could be recovered with a smart policy of technical cooperation in production and in the supply chain.  There is a wider range of food trades that could occur in both directions. There are also large returns to services related investments in supply chains that link farmers to the growing and modern retail system in Indonesia.  These can be handled through a combination of business investment and research cooperation.

The fourth is around infrastructure.  Barry Burgan (personal communication) points out that

The Indonesia Infrastructure Initiative estimates that Indonesia has a financing requirement of Rp 1430 trillion (US $150 billion) over the period 2010-2014.  The president has just released his budget which includes a 15% increase in spending on infrastructure – particularly roads, and ports (as congestion is seen as being a major constraint in achieving potential growth).  The budgeted public sector spend for the coming year is $20 billion (US).  The Indonesia Infrastructure Initiative focuses on infrastructure needs in transport, but in water management and sanitation – areas Australia has strengths in.  It also proposes a “new generation of public private partnerships” noting that the government only has the capacity to fund 2/3 of the underlying needs – providing opportunities for the business services sector in this regard

The fifth is around defense.  In the Hugh White scenario, Indonesia becomes a big purchaser of defense materiel as well as a key strategic partner.  Australia has an interest in how that unfolds and the extent to which it does so in a way which Indonesia procurement is linked to the management of cooperation in our defense forces and our capacity to respond to threats.

Final words

The extent of official contact with Indonesia is possibly of the order of 1-2 ministerial contacts every month, as well as regular leader level contact.   The aid funding to Indonesia is of the order of $A580m this year.

But there is also an assessment by some that the relationship is ‘in a mess’ at a political level, according to the assessment of recent decisions by Australia as well as an interpretation of reactions by Indonesia. [1]  The relationship has also been described as ‘fragile’.[2]

In fact, the relationship has never been better because it is now deep and systematic.  The key issue is to understand Indonesia’s aspirations and goals, fears and concerns.  Australia does not understand these well enough.

The relationship with Australia is important to Indonesia: Foreign Minister Dr Marty Natalegawa said it was “practically impossible for me to over-exaggerate the importance that we attach to the bilateral relationship with Australia”, adding, “if we get our bilateral relationship right, as we have been,” then it would have a positive impact on the entire region”.[3]
However, Australians spend a of lot public time at least with Indonesia talking about cattle, boat arrivals and drug offenders.   The public focus looks relatively short term.

A new dialogue with Indonesia is therefore valuable, with two features, one a focus on the big questions of the next 30-40 years and second a greater involvement of business and research communities in both countries.

This is more than just a trade agreement.  It is a public dialogue that produces some common understandings of how the two economies both might develop over that long haul, an appreciation of the ways of doing business are going to evolve, and therefore an assessment of what impediments now in place and what investments might be made to take to avoid losing the opportunities identified.

Why the private participation?  As Ian Buchanan and Findlay argued recently,

Structures (which involved these private networks) are important because they offer a place to clarify the scope of issues, as currently perceived, and then imagine and define solutions in a setting which is free of what would otherwise be the constraints of official or national positions.

They can challenge thinking about current strategy and provide new solutions, drawing on best available research in the field irrespective of national source.

Connected into the region, they reach another level of richness by collating the views across different economies, identifying paths to consensus on actionable options and constraints on implementation of what otherwise appear to be solutions.

There is value in the coalition of business and research:

Without enhanced cooperation and leverage, participants not just in business but also in research-led structures may miss a deeper and more subtle understanding of the region’s complexity.   Proposals are not ‘road tested’ by business input.  While business has its own channels of communication to government, an endorsement by a research-led partner adds to the significance of the case being made.  It lifts the business case above what might otherwise be seen as self interest.

This process would have extra benefits for business.  As reform and development in Indonesia is now a function of government plus stakeholders so there is benefit in accessing the opportunities and mitigating the risks for Australia going into Indonesia together.   The proposal here helps provide a foundation for that cooperation.   There is plenty of substance to put on this agenda, including the items listed above.


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Filed under Australia, Conference, Democracy, East Asia, Economic development, Economic Integration, Food and agriculture, Income inequality, Indonesia, Infrastructure, Investment

One response to “Indonesia-Australia: Challenges and Opportunities (Part II)

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