Should Indonesia join the AIIB? Eko NM Saputro  ;  The writer is conducting research on Indonesia and ASEAN+3 financial cooperation for his Phd at the School of Humanities and Social Sciences, Deakin University, Melbourne

JAKARTA POST, 12 November 2014

                                                

                                                                                                                       

Under relatively little spotlight, the Asian Infrastructure Investment Bank (AIIB) was launched on Oct. 24. Initiated and led by China, the bank will operate to finance infrastructure projects in Asia with US$50 billion as its initial capital. Many view that the establishment of the AIIB has sparked another Sino-Japanese competition in regional financial architecture as the region already had the Asian Development Bank (ADB), widely known as a Japan-led regional institution. Before the establishment of the AIIB, China and Japan were in a series of competitions to show leadership in regional financial cooperation. For example, China and Japan insisted on being the largest contributors to the ASEAN+3 regional liquidity support arrangement, the Chiang Mai Initiative Multilateralisation (CMIM). Both were also competing to be the largest contributor to the Credit Guarantee and Investment Facility, an ASEAN+3 initiative on credit enhancement. Last but not least, China and Japan were in a battle to lead the first ASEAN+3 regional surveillance unit, AMRO. Among delegates who attended the signing ceremony for the AIIB, Indonesian representatives were reportedly absent, along with the US’ allies: Japan, Australia and South Korea. In this respect, there are two possible reasons behind Indonesia’s absence: first, to avoid potential adverse effects of Sino-Japanese tensions over the establishment of the AIIB; or second, to avoid taking in strategic policy, and to let the new administration decide. Apart from the reasons behind Indonesia’s absence, the current administration should view the establishment of the AIIB as a potential opportunity rather than a threat, due to several considerations. First, Indonesia needs alternative financing to deal with infrastructure projects. Over decades, infrastructure has been a major constraint for Indonesian development. A lack of electricity supplies, limited road networks and poor water quality are among a number of current infrastructure issues. In 2014, the Indonesian government required approximately Rp 1,900 trillion ($158 billion) to handle infrastructure shortcomings. Obviously, the 2014 state budget is far from sufficient to finance infrastructure projects. Therefore, any financing scheme, regardless of the amount, will be beneficial for Indonesia. Second, joining the AIIB will give Indonesia a better position in regional arrangements. The AIIB will provide room for Indonesia to maneuver in case the existing regional support arrangements are unable or reluctant to assist with Indonesia’s infrastructure projects. Put simply, as an alternative source of funds, the AIIB will put Indonesia in a position to choose. Third, joining the AIIB would also mean joining the frontline to reform current governance of international and regional financial institutions dominated by Western and Japanese interests. As Indonesia has been on the proponent side for International Monetary Fund (IMF) reforms, that position could be taken to the Asian regional arrangement as well. At least, the participation of Indonesia in the AIIB will give an impetus for the existing regional financial institutions to conduct further concrete reforms. Accordingly, the government should be more practical in dealing with regional arrangements in the financial sector. The fear of being affected by Sino-Japanese competition should not abolish any benefits that can be reaped from such regional arrangements. Reflecting on the previous Sino-Japanese rivalries on financial initiatives, none of them have evidently affected Indonesia’s political economy. In fact, all Sino-Japanese competition on regional financial initiatives ended with compromise. To sum up, as the condition of Indonesian infrastructure is alarming, the new administration should take a prompt and firm stance to join any regional or international initiatives on infrastructure financing, including the AIIB. The stance is not only for the sake of economic benefits, but also to demonstrate the Indonesian foreign policy jargon of politik bebas aktif, a free and active foreign policy, which is still emphasized by the new President Joko “Jokowi” Widodo. ●