Indonesia, the hidden gem of Southeast Asia, shone on the global stage as the host of last year’s G20 summit. Indonesia’s economy and politics gained attention in the 1990s, during a tumultuous period when the crony-capitalist system collapsed during the Asian financial crisis, resulting at the end of Suharto’s 32-year rule.
Due to its rapidly growing economic developments, Indonesia is again asserting its presence as a key player on the global stage. As the world’s largest Muslim-majority state, the third-largest democracy, and the fourth-most populous country, Indonesia is making waves in the global economy. But is it on the brink of becoming the next economic superpower? Join us as we dive into the country’s impressive growth, challenges, and potential for future success in this article.
Indonesia: The Next Economic Superpower?
Indonesia is often touted as the next economic superpower due to its large population, growing middle class, and abundant natural resources. However, several important factors will determine whether or not the country can achieve this status.
Economic Growth and Development
The Indonesian economy is the sixth-largest emerging market by GDP. Indonesia’s growth rate in the past decade has surpassed all other economies worth over $1 trillion, with the exception of China and India. The rise of digital services is also driving this growth, connecting over 100 million consumers who collectively spend $80 billion annually on various online services and apps. The rise of digital services can also lead to increased productivity and efficiency in various industries, as businesses and individuals can access and use new technologies.
A growing economy with a large consumer base can attract foreign investment, creating new businesses and jobs and increasing economic activity. The World Bank Report states that Indonesia is the fourth most populous country globally and has the tenth largest economy measured by purchasing power parity. A strong economy can also improve trade relations with other countries, leading to a more diversified economy. As per the World Bank Report, the economy of Indonesia is expected to grow at a rate of 5.3% in 2023 due to increased demand, increased consumer confidence and better trade terms.
EV Industry Fuelling the Economic Growth
Indonesia is a crucial part of the electric vehicle supply chain, with a fifth of the world’s nickel reserves used in batteries. Indonesia is taking a different approach by banning the export of raw materials and requiring global companies to establish factories in the country.
This approach can be a major step toward Indonesia becoming an economic superpower. As more factories are established in the country, it will also lead to infrastructure and technology development. It will also create a skilled labor force, further enhancing economic growth. Indonesia has already secured over $20 billion of investment in this regard.
The electric vehicle (EV) industry can significantly impact the economy, specifically regarding decreasing the import of petroleum products. The decrease in demand for gasoline and diesel will also reduce the need for imports of petroleum products, leading to a decrease in the trade deficit and an increase in foreign exchange reserves. This will lead to the creation of a sustainable and robust economy.
Indonesia’s Abundant Natural Resources
Indonesia is home to the third largest tropical rainforest in the world, spanning an area of 94.1 million hectares. It also boasts the largest tropical peatlands, covering 14.9 million hectares, and the largest mangrove forests, spanning 3.31 million hectares. These natural resources can be used for logging, agriculture, and ecotourism industries to enhance economic growth.
Indonesia’s large tropical rainforests, peatlands, and mangrove forests can contribute to the country’s economic development through sustainable use of resources such as timber and non-timber forest products, fisheries, and ecotourism. These industries can provide jobs and income for people in Indonesia.
Strategic Position Holder in the Global Economic Struggle
Location, size, and resources make Indonesia an important player in the mounting global economic struggle. Continuing a policy of neutrality (non-alignment) that dates back to the 1950s, Indonesia aims to maintain neutrality by soliciting investment from both sides and becoming a battleground for competition between Chinese and American digital firms and investors.
For example, the Chinese company CATL is investing in a $6 billion project, while President Joko Widodo, also known as Jokowi, is courting Tesla. Regarding diplomacy, Jokowi has sought to act as a mediator and peacemaker. He is one of the few world leaders in the last year to meet with Joe Biden, Xi Jinping, Vladimir Putin, and Volodymyr Zelensky.
The country’s economy would be relatively stable in the face of economic shocks, as its currency has performed better than many developed countries this year despite worldwide financial instability. Additionally, living standards would improve, with a significant reduction in the number of people living on less than $2.15 a day, from 2012. Although it may not reach the level of Chinese manufacturing, a large middle class would emerge in Indonesia.
Challenges on the Path to Economic Superpower
Despite its potential, there are also potential risks for Indonesia’s future. One major concern is the issue of leadership succession, as President Jokowi’s term ends in 2024, and there currently needs to be a clear successor. There have been calls from some of his supporters for him to alter the constitution in order to stay in power. The succession process could also lead to competition for support among devout voters by promoting nationalist Muslim policies.
Alternatively, the business leaders and political groups that makeup Jokowi’s coalition could come to power and revert to oligarchic rule. While Jokowi has made significant infrastructure improvements, he needs to do more to ensure that the institutions that guarantee continuity will be in place after he leaves office.
Leadership succession can lead to uncertainty and instability in the country’s political and economic systems. This could lead to divisions, lack of continuity, and the stability of the institutions that guarantee economic stability and development. With a clear successor to President Jokowi and strong and stable leadership in place, it will be easier for Indonesia to sustain the economic growth necessary to become an economic superpower.
Risks of Protectionism
Another potential threat is the rise of protectionism, a double-edged sword for Indonesia’s economy. Indonesia has a long-standing tendency towards resource nationalism. Protectionism can include tariffs, import quotas, and regulations that make it difficult for foreign companies to enter the market. While the “downstream” policy may be successful in the nickel industry, where Indonesia has a significant market share, it may not be effective in other sectors. The country has yet to attract companies like Apple to establish supply chains within its borders, partly because its labor laws are too rigid. If Indonesia continues to push too hard, the consequences may be severe for overall economic growth for Indonesia.
The biggest danger facing Indonesia is the potential impact of geopolitical tensions. Even as it stands, Indonesia could become more closely aligned with China. Chinese firms have invested four times as much as American firms in Indonesia since 2020. In the event of escalating tensions, the consequences would be severe. Indonesia’s economy could be affected by the war over Taiwan and sanctions on Chinese companies. Even though the President is trying to stay neutral, Indonesia, as a non-aligned country, doesn’t have much power to change major world powers’ actions.
Indonesia is positioning itself as a major economic player in the new global economic structure. With a large population, strategic location, and abundant natural resources, Indonesia has the potential to become an economic superpower. However, the country still faces challenges such as leadership succession, protectionism, and geopolitical tensions that must be overcome.