- Hubert Walas
Indonesian surge.
In 2017, PricewaterhouseCoopers released a report which predicted that by 2050 Indonesia would be the world's fourth-largest economy, behind only China, India, and the US. Six years have passed and Jakarta appears to be on track to meet these expectations. In 2022, Indonesia achieved its highest GDP growth in the last nine years. The economy grew by 5.3%. The growing economy is being spurned by ambitious projects, such as the idea of creating a new capital city in the Bornean jungle. Stretching over 5,000 kilometres and de facto controlling the world's most important trade hub, the Strait of Malacca, Indonesia is also at the centre of the strategic US-China rivalry. The geography, but also the socio-economic potential, of Jakarta predestines the country to play an increasingly important role on the international stage. Will Indonesians choose a side? What prospects does the country have?
In Search of its Own Path
Indonesia, located in the heart of Southeast Asia, is the largest archipelagic state in the world. It comprises more than 17,000 islands. If the largest of these, Sumatra, New Guinea or Kalimantan, which is the Indonesian part of Borneo, were located in Europe, they would be among the continent's largest countries. The entire archipelago is almost 2,000 kilometres high and over 5,000 kilometres wide, effectively separating the Indian Ocean from the Pacific.
The multitude of Indonesian islets, which were only formed after the Ice Age, resulted in the development of hundreds of indigenous ethnic and linguistic groups. Over time, having mastered sea travel, the archipelago became an important trading post. This included Muslim merchants from India, China, and Persia, who brought Islam to the islands. Today Indonesia is the largest Muslim country in the world with 87% of the population, some 230 million people, declaring the Muslim faith.
With the beginning of the age of geographical discovery, the Indonesian islands also became the focus of European colonisers. The first Europeans to arrive in the archipelago were the Portuguese in 1512, but it was the Dutch arriving a century later who played a more significant role. For the next 350 years, first under the banner of the Dutch East India Company and later the Dutch East Indies, they expanded their territorial control over the archipelago. It was not until the Second World War with the Japanese occupation and then the surrender of Tokyo that hopes for independence were raised. The country united under the leadership of the duo of Sukarno - later to become the first president - and Mohammad Hatta - the first prime minister. Independence was declared on August 17, 1945. In the post-war years, the Dutch unsuccessfully tried to re-establish their influence and Indonesia, now as a unified entity, began to write its own history.
As with any young country, it was not an easy story. Internal unrest consumed the country, the dispute with Malaysia escalated, and the Dutch, Americans, and British also maintained their influence. As well as the Soviets, from whom Sukarno began to buy arms in the 1950s. This strengthened the influence of the local communists who threatened Sukarno's nationalist government and eventually led to a putsch which the Communist Party of Indonesia was accused of orchestrating. General Suharto violently suppressed it. The retaliatory action led to mass purges. Between half a million and two million people were killed. Another million people were sent to prisons and camps. Suharto thus consolidated his power, ousted Sukarno and ruled the country in an authoritarian manner for the next 30 years.
Only the Asian economic crisis of 1998 and massive social discontent led to Suharto's resignation. From then on, the proper democratisation of the country began. Today Jakarta is considered the third largest democracy in the world, after the United States and India, albeit it is a fragile one. Since 2014, the country has been led by Joko Widodo, also known as Jokowi.
Growing Ambitions
Since the crash of 1998, Jakarta has recorded steady GDP growth, 5% on average. Over the past decade, excluding China and India, Indonesia has been the fastest-growing economy among countries with a GDP of more than US$1 trillion. The results for 2022 were the best in the last nine years and confirm that the Indonesian economy is on the right track.
This makes it possible to think about ambitious projects. In 2019, news of Indonesia's desire to relocate its own capital circulated around the world. The reasons for such a drastic decision are many. Jakarta, with its population of 10 million, is sinking and according to Jeffery Winters, a professor at Northwestern University, the city will be underwater in as little as five decades. In addition, Jakarta is plagued by floods, while the residents suffer from constant congestion and pollution of water and air.
The new capital - Nusantara - is to be built from scratch on the east coast of Borneo, or Kalimantan, as Indonesians call their part of the world's third largest island, just off the Makassar Strait. Southeast Asia's largest economy envisions the new capital as a low-carbon 'super hub' that will support the pharmaceutical, health, and technology sectors and will promote growth beyond the island of Java. This last theme is especially relevant. Indonesia is Java-centric. 50% of the country's economy is in Java, and the island is home to some 160 million people. Kalimantan, despite being four times larger, is home to only 14 million people.
The Jakarta metropolitan area alone has more than 30 million people, twice as many as the whole of Kalimantan. Not surprisingly, then the project has a host of critics who point out that moving such a metropolis into the jungle, where it has to be built from scratch, is nothing but a pipe dream. Also, the project is an environmental threat to many plant and animal species. Nevertheless, it is moving forward. In January 2022, parliament passed a law to move the capital from Jakarta to Kalimantan. The inauguration is already scheduled for 2024.
Kalimantan is an important mining area and Indonesia's economy relies heavily on hydrocarbon exports. In terms of volume, Indonesia exports the most coal in the world. Natural gas deposits are also sizable, estimated at 13th in the world and, more importantly, the 2nd in Asia.
However, the jewel in Jakarta's crown is nickel. Indonesia has the largest nickel reserves in the world – 22% of global deposits. Nickel is a crucial element for, among other things, the production of batteries in the auto industry, making Indonesia a key player in the automotive revolution. Unsurprisingly, Jakarta used to be a vital exporter of the metal, but is no longer. The government sensed its strong position in the niche and banned nickel exports in 2020. The aim was clear: to force foreign companies that could not afford to give up Indonesian nickel to process the metal locally and thus invest. So far, this has succeeded in securing $20 billion of investment in the country.
Still, what works in one case is not necessarily a good solution in another. In addition to nickel, Indonesia is an essential producer of bauxite, copper, and tin. Encouraged by the success of its nickel protectionist policy, the Widodo government is planning similar measures for other raw materials. The problem is that Jakarta's global market position for bauxite, tin, and copper is much weaker than for nickel, and so an export ban could be counterproductive.
The World Bank highlights a similar problem. Indonesia is the 4th most populous country in the world, the 16th largest economy, yet only the 25th largest in terms of exports. In otherwords, Jakarta is closed to the world. Considerable barriers and trade tariffs are holding back the country's internal development. Protectionist policies have proved effective in the case of nickel, but for the rest, they are more of an obstruction than a protection.
Deep-Seated Mistrust
This peculiar distrust of Jakarta is also very evident on the international stage. The country occupies a central location in a place that is increasingly becoming the gravitational centre of the world. In its vicinity are India, China, Australia, and across the Pacific Ocean, the United States. Also substantial are a number of smaller, but important countries such as Vietnam, the Philippines, Malaysia, and Singapore. Indonesia is the web that binds the region together.
This web, or less poetically - network - has its key hubs. Jakarta has the greatest control over the most critical trading point on the world map: the Strait of Malacca. To the north, Malacca is closed by Malaysia and Singapore, but to the south, for almost 1,000 kilometres, it is in the Indonesian coastal zone. It is the shortest sea route between the Indian and Pacific Oceans and carries supplies from Africa and the Persian Gulf among others. This mainly includes oil, most of which first heads to China then to Japan. The scale of Malacca's importance to global oil supplies is illustrated by a comparison to two other vital hubs: the Suez Canal and the Panama Canal. Four times as much oil passes through Malacca as through Suez and 19 times as much as through Panama. In total, the strait is estimated to account for 60-70% of all world maritime trade and thus represents fundamental importance for the largest global exporter: China. And because of this dependence, also for Beijing's greatest rival: the USA.
Almost every war game that simulates a conflict between Beijing and Washington assumes a blockade of Malacca by the Americans. Moreover, the entire archipelago would most likely be the focus of the American Navy's attention. In addition to Malacca, the Sunda and Makassar Straits, among others, would also be blocked. Thus, whether it wants it or not, Jakarta would once again find itself in the spotlight of the great powers.
This attitude corresponds well with public sentiment. Research by Australia's Lowy Institute shows that as many as 84% of residents believe Indonesia should remain neutral in the event of any US-China conflict. Only 4% think Jakarta should support the US in a potential war, and only 1% think Indonesia should side with China.
Similar parity can be seen in concerns about dominance. 49% of respondents thought China will be a threat over the next decade, and slightly fewer - 43% - said the same about the United States. Overall, confidence in Washington is slightly higher, but distrust of both superpowers dominates.
So it seems that Widodo's Indonesia of 2023 is taking the same path as Sukarno's post-war Indonesia, but this time it seems to be even more difficult. During the Cold War between Moscow and Washington, Jakarta was on the periphery of the system. Today, at least geographically, it is at its core. And one key player, the People's Republic of China, is right next door. What does Jakarta do in such a situation?
Firstly, it seeks refuge under a larger umbrella. For Indonesia, that is ASEAN, a political and economic union of 10 Southeast Asian countries. Widodo is aware of Indonesia's importance, but that importance emanates more from geography than hard macroeconomic numbers. While Indonesia adds the 10 ASEAN economies to its weight, it remains by far the largest, but it uses the group as a kind of buffer and multiplier of strategic importance.
As Evan Laksmana of the University of Singapore writes in Foreign Policy:
“Coordination among ASEAN members has helped Indonesia deny hegemony in Southeast Asia to any great power during and after much of the Cold War. This was largely done by enmeshing the United States and China into ASEAN’s web of regional institutions”
However, according to the Lee Kuan Yew University analyst, this policy is out of step with the challenges of the modern world. Indonesia does not want big powers to decide for it. Meanwhile, Indonesian policymakers believe that their country is a 'great nation' and a 'regional leader.' Still they are unwilling, Laksmana argues, to either take on the burden of managing the regional order in a proactive manner or to support other regional powers in doing so. In other words, Indonesia wants to have a say in shaping the regional agenda without being responsible for its implementation. It uses ASEAN for precisely this purpose. Laksama believes that the bloc has become an excuse for Indonesia to shed responsibility and avoid addressing the policies of the great powers in the Indo-Pacific. Instead of finding a way to address Indonesia's strategic dependence and vulnerability, policymakers in Jakarta have settled for the old passive tactic of waiting to see what the big powers can offer.
And what do the powers offer?
Have Your Cake and Eat It too
Indonesia's perspective and choice are not one-dimensional but can be simplified and summarised as follows. One offers better prospects for economic growth, but also intimidates the region and threatens to impose its own rules in the long term. This is China. The second offers to join the global existing security architecture. The vision of imposing its own dominance is unlikely, but the economic prospects for rapid GDP growth are worse. This is the United States.
On the one hand, Indonesia is participating in military exercises with the US. The last edition of the exercise, called Garuda Shield, was record-breaking with 3,000 soldiers from 14 countries.
On the other hand, Jakarta is benefiting from China's wide investment offerings. In 2022, China was the second largest investor in the country after Singapore. However, if Hong Kong companies were included, the Chinese would be first. Indonesia is also part of the notorious Belt & Road Initiative and Beijing has also declared willingness to participate in constructing the new capital.
As Harvard's Pranay Varada acknowledges:
“Even though China and Indonesia may not be the best of friends, China has contributed to Indonesian development in a way the US has been unable to do as of yet.”
In fact, Indonesia tries to reject both visions and tries to maintain a 'pragmatic middle ground' between the two powers. Indonesia wants neither Pax Sinica nor Pax Americana. Jakarta seeks equal engagement between the great powers through cooperation in various sectors while being careful not to allow one of them to become too close at the expense of the other.
Yet, in practice, not taking sides and being open to Chinese investment tips the scales in China's favour. Beijing, like Moscow, is a supporter of a multipolar world, so Jakarta's overt declaration to take Beijing's side would be of no use. In contrast, the increase in interaction between the Chinese Communist Party and the main Indonesian political parties, as well as Indonesian oligarchs, is leading to closer cooperation with the Chinese at the highest levels of government. These interdependencies, in the event of Beijing's deep participation in the construction of Nusantara, will only grow. Whether China will use its growing economic advantage to threaten Indonesia's strategic interests remains to be seen. But, with greater dependence comes greater vulnerability. Especially given the geographical proximity.
Widodo's and the Indonesians' declared neutrality is a noble approach. However, if a kinetic Sino-US war were actually to occur, neutrality may no longer be possible. The Indonesian islands and straits are too important and Jakarta, for the time being, is not strong enough to deny the powers to interfere in its coastal waters. If Sino-US tensions continue to rise, the pressure on the Jakarta government, especially from the US, to forego neutrality will increase. Otherwise, one side of the conflict might be imposed forcefully during a war.
There is no doubt that Indonesia's importance is growing. The country is a driving force behind regional formats such as ASEAN and the RCEP. Indonesia recently hosted the G20 congress and Jokowi was the first Asian leader to appear in both Kyiv and Moscow in an attempt to mediate.
Still, Jakarta's strength continues to be measured mainly by its geography and future potential, rather than hard data in the here and now. Internal problems should not be forgotten either - fragile institutions, high levels of economic inequality and uneven democratic and economic progress provide a shaky foundation on which Indonesian ambitions rest. Nevertheless, if these problems are systematically addressed, the country remains on a more democratic path, and the region does not descend into a hot war, there is a good chance that PwC's predictions regarding Indonesia's prospects in 2050 will become a reality.
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