Rabu, 12 November 2014

Brief notes on Sino-Indonesia economic relations

Brief notes on Sino-Indonesia economic relations

Makmur Keliat  ;  The writer lectures at the department of International Relations, The Faculty of Social and Political Sciences, the University of Indonesia
JAKARTA POST, 11 November 2014
                                                
                                                                                                                       


In so far as economic relations are concerned, Indonesia does not have serious problems with the People’s Republic of China. The continuous increase in bilateral trade and investments over the past decade is evidence enough.

The total value of bilateral trade has grown steadily over the years. In 2003, Indonesia’s exports to China totaled US$3.8 billion; in 2010, the number had risen to $13.6 billion and in 2013 it reached $22.60 billion.

China’s exports to Indonesia have also risen over the years. In 2010, exports from China to Indonesia rose from $2.96 billion to $20.42 billion and in 2013 exports reached a total of $29.35 billion.

Indeed China is Indonesia’s largest trading partner in Asia, surpassing Japan, Singapore and South Korea.

The investment sector also has shown impressive growth. In addition to trading and investing, China has offered foreign aid to Indonesia. The aid was offered primarily for infrastructure development and reconstruction following a natural disaster.

Why have Sino-Indonesian economic relations continued to improve? The answer, of course, could be attributed to numerous factors. One of the main factors is the regional trading network that has evolved with the ASEAN-China Free Trade Agreement. Another important factor is related to the concerted diplomatic measures taken by both countries in the last five years.

Signing the Strategic Partnership in 2005 was an important milestone in the bilateral relations between Indonesia and China.

The healthy macro economic performance achieved and maintained by both countries may also be an important factor influencing their steadily improving bilateral economic relations.

Both China and Indonesia have shown positive economic growth in the last decade. Though afflicted by financial crises in 1998, Indonesia has successfully convinced the international community that it has the internal capacity to manage the problems that arose in the wake of the crisis.

The government debt to GDP ratio in Indonesia is still manageable and remains under 60 percent.

Indonesia has also adopted and implemented policies that emphasize the importance of fiscal discipline as its budget deficit is limited by law to a maximum of 3 percent of the GDP. As productive workers and consumers, the young population in Indonesia provides an added demographic bonus.

The Indonesian economy has had an impressive growth rate over the past decade with an average annual growth rate of 6 percent. China’s economic growth is surely far higher than 10 percent annually.

Viewed from this perspective, one could suggest that positive economic growth and healthy macro economic performance have become one of the basic foundations for the improvement of economic relations between China and Indonesia.

Another reason is related to the strong tendency toward economic regionalization. The exceedingly slow World Trade Organization (WTO) negotiations seem to have driven a number of countries to strengthen regional cooperation to advance their attempts at launching further liberalization.

It seems countries in the East Asian region have had a similar response.

In fact, China, along with South Korea and Japan, has become an important country for Indonesian exports. As a part of economic regionalization, for instance, China is reported to have become the largest importer of Indonesia goods, ahead of both Japan and Singapore.

The improvement of economic relations between Indonesia and China reflects the broader picture of closer intraregional economic interactions that are taking place within the East Asian and Asia Pacific regions.

This does not necessarily mean that the future direction of the bilateral economic relationship will be entirely rosy and bright. Seen from the perspective of Indonesian economic interests, four great challenges lie ahead.

The first challenge is related to trade imbalances. Since 2008, the balance of trade has been shifting and has a strong tendency to favor China. Another imbalance concerns the composition of exports.

While the main commodities of Indonesian export to China are increasingly energy and natural resources, Chinese exports to Indonesia are typically manufacturing and capital goods. Therefore Indonesia should plan to diversify the composition of its exports to China by relying less on oil and gas.

The second challenge is related to the nature of Chinese investments in Indonesia. It seems as though the main reason China is investing in Indonesia is because of their interests in the energy sector.

This could partly explain why Indonesia’s balance of trade with China is shifting and has recently begun to favor of China. Investing in energy projects has driven Indonesia to increase capital goods imports from China in the form of machines and equipment.

In this regard, investments in the energy sector have a tendency to generate less employment opportunities in comparison with investments in the manufacturing sector.

If this pattern continues unchecked, it seems as though Indonesia will not benefit very much from China’s investments and its attempt to absorb Indonesia’s productive labor force.

The third challenge is related to foreign aid. Although China has taken over Japan’s position as the largest importer of Indonesia commodities, the amount of foreign aid that China offers is minor when compared with that of Japan. Especially for infrastructure development, Japan makes the largest donations to Indonesia.

Irrespective of these challenges, there is one great opportunity that needs to be seized by the two countries in the years to come.

The opportunity is related to Indonesia’s urgency for infrastructure development. There is a strong consensus in Indonesia under the government of President Joko “Jokowi” Widodo that one of the constraints for the country to sustain its future economic growth and improve competitiveness of its export products in global market can be attributed to the poor quality of its infrastructure facilities.

Though its economic growth is impressive compared to other countries in the Southeast Asian region, the growth of infrastructure development such as roads, airports, seaports and railways, seems to have lagged behind and stagnated in the last decade.

To address this concern, the Indonesian government has introduced a series of liberalization measures enabling the business community to take a greater role in the infrastructure development through the so-called public-private partnership.

A number of reports have projected that if the financial mobilization can be achieved as targeted, Indonesian economic growth of 8 to 9 percent for the period of 2015-2025 is not unrealistic.

Therefore, a recommendation that could be provided with regard to this target would be a new scheme through which policy design and concrete measures could be taken to encourage the greater involvement of China in the infrastructure development of Indonesia.

In this regard, Indonesia needs to see the idea on the establishment of Asian Infrastructure Development raised by Chinese President Xi Jinping during his visit to Indonesia last year as an encouraging diplomatic initiative.

Policymakers in Jakarta need to see it as a strategic moment to shift the focus of Sino-Indonesian economic relations, from the issue of trade to that of infrastructure development. Indonesia should be able to convince China that the success of the Indonesian government to sustain its economic growth is an important part of Chinese economic interests.

Both countries need to be aware that economic growth has become like a machine driving their closer economic linkage, not only today but also in the years to come.

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