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Business Monitor Online: Global Political Outlook for 2010-2019

(9 November 2010)
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Business Monitor Online (c)

In our Global Political Outlook for 2010-2019 published in October 2009, we identified Indonesia as one of 13 ‘pivotal states’ whose domestic or external developments could have a substantial regional or global impact. Our reasons for including Indonesia are as follows:

Large population and economy:

Indonesia is the world’s fourth most populous country (with 230mn people) after China, India, and the United States. Moreover, its population is forecast by the UN to keep rising to 288mn by 2050, and much of its population is youthful. In addition, the population is urbanizing rapidly, projected to rise from 54% at present to 79% by 2050. These conditions are generally conducive to rapid economic growth, and many investors now consider Indonesia to have the attributes of the BRIC (Brazil, Russia, India, China) group of emerging markets.

Indeed, Indonesia has seen a dramatic turnaround in its economic fortunes under President Susilo Bambang Yudhoyono (in office since 2004), having experienced respectable if unspectacular economic growth after several years of being perceived as a high-risk basket-case following the economic meltdown of 1998 and years of political instability (including several separatist wars) at the end of the 1990s and early 2000s. Indonesia’s economy weathered the global recession of 2008-2009 remarkably well, growing by 4.5% (compared to 6.1% in 2008), thanks to its high level of private consumption (65% of GDP). Although Indonesia is still a poor country with a per capita GDP of US$2,900, the prospect of decades of solid growth and a large consumer base are attracting the attention of foreign investors.

Substantial commodity resources:

Indonesia’s attraction to Great Powers past and present stems from its substantial commodity resources. It is the world’s biggest exporter of tin and second-biggest producer of the metal. It has vast coal reserves and is the world’s third-biggest exporter of liquefied natural gas (LNG) after Qatar and Malaysia, with its top LNG customers being Japan, South Korea, and Taiwan. Indonesia also ranks third globally as a producer of coffee and cocoa and is a major producer of palm oil. While Indonesia’s rising population and growing economy will gradually result in reduced exports, as supplies are diverted to domestic demand, it will remain a major commodity exporter for many years to come. This will sustain interest in Indonesia’s economy from countries such as China and India, which are in close relative proximity.

Muslim majority nation:

Indonesia is the world’s most populous Muslim-majority country, giving it a potentially powerful voice within the ‘Muslim world’ (We use the quotation marks because the world’s Muslim countries are too diverse to be lumped together in a single sphere). As a functioning democracy (albeit a relatively immature one), Indonesia’s political system demonstrates that Islam is not incompatible with democratic principles. President Obama, who spent several years living in Indonesia as a child, may thus seek to uphold Indonesia as an example of a moderate Muslim state, and may use his visit to reach out to the wider ‘Muslim world’. More broadly, the world’s major powers have a strong interest in ensuring that radical Islam does not gain momentum in Indonesia, which has its share of extremists who have been linked to regional terror plots.

Terrorism and piracy:

External powers are keeping a watchful eye on Indonesia, due to the presence of Islamist militants. The most prominent militant group is Jemaah Islamiyah (JI), which seeks to create a South East Asian Islamist super state incorporating Indonesia, Malaysia, the Southern Philippines, Brunei, and even Singapore. JI was blamed for the October 2002 Bali bombings that killed 202 people, including many foreign tourists. Western targets have come under attack in Jakarta repeatedly over the past decade (most recently in 2009), demonstrating that the terror threat lingers. Despite its respectable economic growth, Indonesia’s vast numbers of unemployed or underemployed people provide militant groups with a sizeable pool of potential recruits, and the country’s sheer size, including many uninhabited regions, means that there are many places for militants to evade capture.

Piracy is also a key concern to policymakers and investors. Indonesia bestrides some of the world’s most important shipping routes, including the Malacca Strait, which connects East Asia and the South China Sea with the Indian Ocean and global markets. While joint patrols by Malaysia, Indonesia, and Singapore have reduced the threat of piracy, shipping firms have long feared that the Malacca Strait could become blocked by a terror attack. Indonesia also controls the Sunda and Lombok straits, which are the main alternatives to Malacca.

Crucial geographic location:

Indonesia’s vast size and geographic location confer on it a great importance in regional security. For example, it could play a bigger role in patrolling the eastern part of the Indian Ocean, which is emerging as a centre of Great Power rivalry ( see our special report of March 10, 2010, Indian Ocean: The Growing Struggle For Dominance). Aside from its adjacency to crucial sea lanes, Indonesia is also close to key economies such as Malaysia and Singapore, meaning that any instability in the archipelago could affect their security. Indonesia’s stability is also of great concern to Australia, which fears an influx of refugees (a politically sensitive topic in Canberra) to its shores in the event of conflict in its neighbor. Australia’s concerns about Indonesian stability were evident when it sent troops to East Timor in 1999 following the latter’s declaration of independence from Jakarta.

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