Indonesia: economic and political overview

Discovering Indonesia: Political and Economic Overview of one of the main ASEAN countries.

Indonesia stands today as one of the most promising countries not only from an economic growth point of view but also from a political point of view, and according to analysts it is destined to play an increasingly important role in the global scenario in the future. There are multiple factors that will make that country a major player in the international chessboard.

Indonesia is the world's leading Islamic democracy and largest Muslim country, with a population of 229 million (the fourth largest globally). The Asian country has experienced an extraordinary process of democratic transition since 1999, transitioning from the economic crisis of the late 1990s to current growth, with GDP growth in 2010 at 6% and in 2011 at +8%: a goal set by the government, to maintain a stable annual growth of 7-8% until 2013.

Indonesia is part of the G-20, and many analysts argue that it would have a greater right than Russia to be part of the BRIC: a new acronym has been coined for this very purpose, the so-called MIKT, consisting precisely of Mexico, Indonesia, South Korea and Turkey. It is an ambitious, open-minded country, leader of ASEAN (Association of Southeast Asian Nations), with a foreign policy that looks beyond Asian borders, which has good relations with the US, Russia, China (however, the competitive gap to be bridged with the two Asian biggies, China and India, is still considerable) and which maintains moderate positions on issues related to Islam. The civil society, characterized by a strong religious identity, is based on the principles of a liberal Islam in which human and women's rights are guaranteed.

The turning point for Indonesia came in 1998 with the end of the Suharto regime: the collapse of the regime was facilitated by the financial crisis that hit Asia in 1997, which triggered popular uprisings and especially the loss of support from the military apparatus that did not forcibly suppress street revolts. After a phase of instability and democratic transition, real change came in 2004 with the election of Susilo Bambang Yudhoyono, leader of the Democratic Party and the main architect of the political-economic-institutional reforms that enabled the country's development. Yudhoyono also managed to limit the impact of the 2008 financial crisis and ensure political pluralism, press freedom, and free elections. It is still a relatively poor and underdeveloped country with a high level of corruption, but the ongoing growth induces some optimism. Among the plus points is the fact that Indonesia is not an “Islamic” state (understood in its negative sense, i.e., a state governed by Sharia law).

From a politico-diplomatic perspective, Indonesia is building its own leadership role as an example of a robust democracy with a booming economy. Within ASEAN, of which it is the leading country, Indonesia is taking decisive steps toward a greater push for democratization in the area (Myanmar in particular) to ensure greater stability. Jakarta has always had complicated relations with China and a strong state presence in the economy.Today, with the end of the Cold War, relations with China are excellent (the Asian giant has helped to drive the Indonesian economy), private investment is growing sharply, and there is the emergence of a middle class that is finally moving out of poverty. Unlike other countries where economic development has not coincided with a process of democratic political evolution, Indonesia represents the case where economy and democracy have been the two main actors in development.

These are the strengths of the Indonesian economy:

– Government-mandated opening of economic sectors;
– $140 billion in investments over 5 years (36% funded by public funds);
– Strong domestic demand and rising middle class;
– Natural resources (hydrocarbons, minerals, vegetable oils);
– Integration into global production networks; regional integration; projection onto international markets.

Instead, these are the weaknesses:

– Lack of transparency in the legal system;
– High corruption in local businesses and entrepreneurship;
– Persistence of significant social inequalities;
– Risk of general price increase;
– Lack of modern infrastructure (need for 100 billion USD in the coming years).

In terms of foreign trade and its relationship with Italy, the main exporting countries in the Asian state are China, Singapore, Japan, the United States, Malaysia, and South Korea. Italy ranks only 23rd with a market share of 0.7%. Italy's exports to Indonesia increased by 25% in 2010 compared to the previous year, but the worrying fact is about the steady contraction of our market share: in 2002, made in Italy managed to export 1.3% of the total. This means that Italian exports increase because Indonesian imports increase (+40% in 2010 compared to 2009) but we continue to lose positions to other competitors. As far as Indonesian exports are concerned, the main destination countries are Japan, China, the United States, Singapore, South Korea, India and Malaysia.Italy ranks 15.place with an increase of 43% in the past year compared to 2009. Italy still ranks as the fourth largest exporting country in the European Union.

With regard to foreign direct investment, the leading investor in Indonesia is Singapore (29.5%), followed by Hong Kong (10.2%) and the United States (10.2%): the sectors attracting the most investment are transportation and logistics (32.71% of total foreign direct investment), mining (18.1% of total foreign direct investment), and utilities (gas and water – 12.41% of total foreign direct investment). Investments are concentrated 43.31% in the Jakarta metropolitan area. The main products imported into Indonesia are mineral fuels and mineral oils, as well as mechanical products, machinery, equipment for the generation, distribution, and control of electricity, products for the mining sector, industrial machinery, and construction products—including pipes, compressors, and pumps.

Italian exports are directed toward the upper-middle segment of the population and mainly concern the instrumental mechanics sector followed at a long distance by metal products, electrical and electronic products, chemicals, means of transport, leather and footwear; Italian imports, which are concentrated toward the lower segment, concern raw materials in particular (vegetable oils, hard coal, natural rubber). The most interesting opportunities for made in Italy concern the sectors of fashion, motor vehicles and motorcycles, food and beverages, consumer goods and mechanics.

There are, however, doubts regarding the possibility of actual growth and resilience of the Indonesian economy, but all analyses converge in any case toward a very positive assessment that induces optimism. In particular, the lack of infrastructure is a major obstacle that can turn into a very good chance: the government has already launched a program to expand, modernize and restructure the sector. The banking sector also looks solid and reliable (it is practically in Chinese hands) and there is no religious pressure that can limit it.

Ultimately, Italy should try not to miss out on the opportunities offered by the Indonesian market and, above all, should try to design new ways of entering the country, aimed at growth and development that are not based solely on exports. The new scenarios of internationalization, globalization and economic interdependence no longer allow this.

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