IATH blog tile updates 02

Column: Love Thy Neighbour: Australia’s Links with Indonesia

Love Thy Neighbour: Australia’s Links with Indonesia

In the sixth installment of ‘The Economics of Contentment,’ John Treadgold considers the importance of openness and dialogue with our neighbours by looking at Australia’s relationship with Indonesia.

-

“Hey Macka, you went on a surf trip to Indo last year year didn’t ya?”

“Na mate, we just went to Bali.”

…and so goes the bizarre brand of ignorance that we Australians have for our immense neighbor to the North. We like to joke about Bali being a Northern suburb of Queensland and of the misconceptions held by Aussies that Indonesia is still run by a military dictatorship; at best it seems many of us are ambivalent about the culture and the rapid development off this country. Such disregard is nonsensical: if we can’t have good relations with our neighbors in a time of prosperity then we’ve no hope at all.

Now, I shouldn’t generalize: many Aussie surfers treat Indonesia as a second home and have a deep understanding and respect for the culture and for the people. Indo has some of the best waves in the world, and it was with a hunger for this most rare of natural resources that many parts of Indonesia were opened up to Westerners. Today, tourism is one of the country’s key exports.

Indonesia is huge: it has the world’s fourth largest population with 250 million people spread over more than 17,000 islands. For too long Australian businesses have disregarded this immense market as being too culturally divergent, ravaged by poverty and lacking effective institutions. But these assumptions are quickly unraveling as estimates suggest that the middle class of Indonesia has grown to 50 million people. After more than a decade of structural change, the government of Indonesia has shown itself to be more effective than ever before.

GDP growth is strong and is projected to stay solid at 6% out to 2025. By that stage, it is estimated that Indonesia will be the world’s 10th largest economy (it’s already bigger than Australia’s). While this strength is largely due to endowments in mineral resources, and in the general growth of Asia, the benefits of a well functioning democracy are clearly apparent. Indonesia has a strong voice in the Association of South East Asian Nations (ASEAN) and is the only member of ASEAN that is also on the G20.

Despite all of this, Australia and Indonesia still have an only meager trade relations. In 2012, two-way trade was less than $15 billion; Australia exports mainly agriculture products and education, and we import crude petroleum and tourism. There are no clear explanations for why we have such low levels of trade with an economy that is so huge and so close, but Australian government bodies including the Department of Foreign Affairs and Trade (DFAT) are well aware of the need to improve linkages; as is laid out in the Indonesia Country Strategy.

Key to this is an ongoing drive towards an Australia/Indonesia free-trade agreement (FTA). FTA’s have a huge impact on trade relations as they aim to lessen transaction costs of trade across borders by lowering tariffs and sharing information and expertise. The potential of this FTA is huge: while it focuses mainly on the trade relationship, it will expand all linkages by increasing dialogue and the sharing of cultural differences.

A precursor to this agreement is the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA), which came into force on 1 January 2010. More that 640 million peoples across 12 countries are impacted by this agreement, and it is the largest FTA that Australia has ever entered into.

From the Indonesian side, this agreement is a large leap of faith. With all FTA’s there is the danger, or at least the suspicion, that it will benefit one side more than the other. Historically it has been developed countries that have benefited at the expense of their still-developing partners. This is due to the added costs of competition that befall a less industrialised economy.

Such was the Indonesian experience when they entered into the ASEAN-China FTA in 2010. The sheen of trade with China soon wore off as it became apparent that Indonesia was importing far more manufactures from China than China was importing from Indonesia. It’s a fine-line of costs against benefits and it cannot be fully modelled prior to agreements being signed.

Indonesia has a longstanding history of nationalism; their economic policies have always been very insular and so FTA’s have never been popular. This insularity has been a clear impediment to their economic expansion, and it is a culture that will be difficult to address. The restructuring of their government has gone a long way to opening up their markets, and their willingness to negotiate in an Indonesia-Australia FTA is the most positive sign yet.

We should also note that modelling carried out by the Centre for International Economics suggests that this FTA would offer a slightly greater benefit for Indonesia than it would for Australia. They currently have higher trade barriers than Australia and, in general terms, Indonesia is more dependent on trade with Australia than we are with Indonesia. However, with most of the hard work already captured in the AANZFTA, the gains for both countries will be modest.

Indonesia is growing in ways that might surprise you. Consider, for example, that Jakarta is the most active Twitter city in the world, and that Indonesia as a whole is the world’s third biggest market for Facebook. As markets and economies everywhere are shifting towards a digital future, it seems Indonesia is leaping ahead. This take-up of social media can largely be explained by the very young population of the country where 44 per cent of their population is under the age of 25.

The key is that Indonesia is changing. Long-held stereotypes need to be abandoned and everyone from businessman to holiday-makers need to re-evaluate their views on this big and culturally diverse country. We need to integrate with Asia and find paths of similarity rather than exaggerating and inflaming our differences. The Indonesian culture is vibrant and exotic, and as a bonus; they may just end-up growing into a massive new marketplace.

-

John is a writer and an economist; in the past he’s worked for state and federal government departments, but a few years ago he fled to the beaches of Byron Bay where he now works as a policy consultant while surfing and writing fiction.

www.johntreadgold.com
www.lesunshine.com.au
@johnnytreadgold

Read other entries in the ‘The Economics of Contentment’ here.