Indonesia, Southeast Asia's anchor and springboard

Underdevelopment has practically been eliminated.
Now the country’s structure must be improved.
Italy’s role in this can be effective and profitable.

Indonesia, Southeast Asia’s anchor and springboard

by Romeo Orlandi, Expert on Far East, Vice President of the Association Italy-ASEAN

The Indonesian transition period will be long, uncertain, contradictory and promising. All this represents a lucrative und unavoidable challenge for Italian companies and the nation’s economic system as a whole. Indonesia’s very size and history leave no doubt about this.

With 260 million inhabitants, it is the fourth largest country in the world by population, 16th in terms of its economy, the most populous Muslim country, and a political and military giant in the Pacific region.

Following the 1998 fall of the Suharto regime, which for 31 years had kept the country in a rigid pro-Western ideological block, reforms have been implemented only intermittently. The country needed to free its enormous potential which had been suppressed through its adhesion to a political system that allowed no exceptions. In reality, Indonesia has tremendous assets and titanic potential that are still untapped. It has abundant natural and energy resources and fertile land, in an advantageous geographical position with a young population. The political reforms—the ones most necessary to allow the country to take-off—have been made with sufficient impact. All international analysts agree that change has been slow, but also that the measures taken have been effective. The country is demolishing the mantle that both protected it and kept it from pursuing the constant growth seen in the Asian Tigers. Now, however, reforms have been implemented: a new law that is more attractive to international investors, public investment guided by purely economic motivations, and down-sizing of the bureaucracy. Also, the recent recalling of Sri Mulyani Indrawati as Minister of Finance is a strong indication of the desire to consolidate the process of change. The credentials of this ex-manager of the World Bank guarantee more radical action in reforming economic system and constitute a challenge to frameworks that are more conservative. In the country in general there is a climate more open to international business. The Chinese community (traditionally the driving force in the economy) is no longer persecuted, the role of the military has been reduced, computers and English are increasingly common, and a democratic way of life has already been established.

The most pressing need for the government is to consolidate economic growth.

Following years of an annual increase that oscillated between 6 and 7%, GDP grew only 4.9% in the first half of 2016. Naturally, this is still a respectable figure, although economic ambitions felt the effects, above all, of the downturn in China.

In fact, Beijing is an established buyer of Indonesian raw materials such as coal and palm oil. In the medium-to-long term, Jakarta’s strategic goal is to process raw materials instead of exporting them.

Economic studies attest to the greater added value created by manufacturing compared with agriculture. This is a necessary transition for all countries that have emerged from underdevelopment. In this area, Italian industrial machinery can play a crucial role. Together with more sophisticated production output, like that of Germany, it represents the most tried-and-true shortcut to the creation of value through the construction of a modern industrial fabric. In general, Italian exports to Indonesia do not correspond to the requisites of quality and reputation associated with them. Only 0.3% of Italian exports are destined for Indonesia, although this figure should actually be doubled if the brokering activity centered in Singapore is considered.

Another economic sector offering significant opportunities is that of infrastructure. The country has urgent need to develop a transport network to connect its vast territory (17,508 islands with a surface area of nearly 2 million km2), launch economies of scale, ease congestion in the major cities, and reduce evident social inequality. For Italian companies—including engineering, construction and housing companies—this means intercepting the enormous flow of investment and orders emanating from Indonesian funding, major multinationals, and multilateral finance institutions.

And finally, we should not ignore the impressive growth in the Indonesian middle class, now freed of the economic and social constraints of low income. In particular, Italian consumer goods could benefit from this. Their prestige is much higher than the value of exports that has yet to reach the levels of other Asian metropolises.

On the horizon we can expect a strengthening of two factors that companies see as fundamental: stability and growth. Over the last two decades, Indonesia has consolidated its central role within ASEAN and the Far East chessboard. Of the regional block with a population of 630 million people, it is unquestionably the linchpin for security in the vast arena of the South China Sea, where all coastal countries are attempting to maintain the difficult equilibrium between friendship with the US and being good neighbors of China that, from an economic standpoint, is essential.

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