evaluating the importance of australia– indonesia economic...

Evaluating the importance of Australia–Indonesia economic relations

Budy P. Resosudarmo, Australian National University1

Kiki Verico, University of IndonesiaDonny Pasaribu, University of Indonesia

Introduction

This chapter aims to review economic interactions and relations be-tween Australia and Indonesia. We will discuss what form they take,what challenges arise from them and what we can learn from past in-teractions. Australia and Indonesia are both land- and resource-abun-dant economies with large agricultural and mining industries. Botheconomies rely heavily on natural resources, especially on mineral re-sources. The Australian economy relies heavily on coal and ore andIndonesia has relied on oil and gas and, recently, also on coal. Botheconomies also export a variety of agricultural commodities, althoughthe relative value of these exports has tended to decline over time, withthe exception of palm oil exports from Indonesia. The specialisation inmineral and agricultural production impacts on the trade and invest-ment patterns of both countries. Furthermore, during some periods inthe1970s and before, both countries adopted similar industrialisationstrategies, with high protection levels in the manufacturing sectorsrestricting the amount of imports they both allowed (Anderson andGarnaut 1987; Basri and Hill 2004). Although these policies have beenreformed in both countries, some of their impacts persist. Finally, thegap between the levels of development in the two countries has beensignificant. Consequently, the types of commodities produced by onecountry do not match those demanded by the other. For example, thequality of food crops produced by Indonesia does not meet the stand- ards demanded by the Australian market. It is, therefore, not to be ex-pected that the two countries will have deep trade and investment re-

1 The authors would like to thank Chris Manning and Hal Hill for their valuableinput. Nevertheless, all mistakes remain the authors’ responsibility.

49

regiospectra_linking-people_proof_150331

Resosudarmo, B.P., K. Verico and D. Pasaribu. 2015. "Evaluating the importance of Australia-Indonesia economic relations". A. Missbach and J. Purdey (Eds.). Linking people: Connections and encounters between Australians and Indonesians. Berlin: Regiospectra Verlag. pp. 47-70.

lations, such as those that both countries have with Japan and China. However, it is relevant to ask whether economic relations could have been closer if better policies had been followed or if politics had not intervened as it has several times in the past.

Australia and Indonesia are very close geographically and, because there is adequate complementarity between them, Australia–Indo- nesia trade relations have been stronger in the past and could be more so in the future. The two countries should be able to produce for and demand of each other an adequate range of goods. The argument that there should be enough complementarity arises from the following dif-ferences between the two. First, Australia is a large continent that lies mostly in the temperate zone, while Indonesia is one of the world’s larg-est archipelagos and has a tropical climate. Second, Australia is only sparsely populated, while Indonesia is very densely populated. And finally, Australia is a rich country with an abundance of skilled labour, while Indonesia is a developing country with abundant unskilled la-bour. On the other hand, following the line of argument proposed by Hill (1990), Indonesia, with its labour-intensive manufacturing advan-tages, while taking into account other Southeast Asian countries and China, could dominate Australia’s imports.

This chapter provides a quick walk through the economic history of the two countries, describing their development patterns and identify-ing the trade relations between them.2 We then quantify the extent of trade in major commodities between them, and draw conclusions about whether the two countries complement each other and, consequently, whether or not their economic relations should be much stronger.

Australian and Indonesian development: Early conditions and paths

For centuries Australia was populated by relatively small and mostly dispersed tribes of aboriginal peoples who had limited trading rela-tionships with the outside world. The continent was colonised quite late (beginning in the 1770s) and, for one and a half centuries from around the mid-1850s, Australia was a settler economy driven by cap-

2 Important literature on this issue includes Crawford (1935), Arndt (1968, 1970 and 1980), Karunaratne (1982), McCawley (1986), Hill (1990), Arndt and Thee (1994).

50

Budy P. Resosudarmo, Kiki Verico and Donny Pasaribu


ital and labour inflows from Europe, especially from Great Britain; it was a new British settlement. Over time it successfully adopted high-ly proven British institutional frameworks that, once adapted to lo-cal conditions, enhanced economic growth. In its early development stage, Australia’s economy was driven by large exports of wool, gold and other agricultural and mineral products. A small population, com-bined with resource abundance and strong international demand for its products transformed Australia to a high-income country toward the end of the nineteenth century (McLean 2004).

Indonesia, on the other hand, colonised by the Dutch, was never in-tended to be a settler economy. The kind of institution developed in this region was extractive (Acemoglu, Johnson and Robinson 2001), set up for the main purpose of transferring as much of the natural resources as possible from the colony to the coloniser. Indonesia’s natural resources are diverse, but, partly because of Indonesia’s larger population, the value of its resources per capita has been lower than Australia’s. The combination of its extractive institution legacy and less-than-abundant resources resulted in a path of development in Indonesia during its colonial period that was different and less prosperous than Australia’s. The coloniser (Holland) appropriated the profits from the trade in com-modities and from exploitation of rich agricultural land in Indonesia. In contrast, in Australia the profits from agricultural products, such as wool and wheat, and from the discovery of rare metals, such as gold, flowed to immigrant workers, settlers, the six self-governing colonies, and, after 1901, to the federal government.

Records of trade between the Dutch colony and the new British set-tlement are few and far between. From well before colonisation, how-ever, there is evidence that Makassar sailors from South Sulawesi had visited northern Australia to collect and process trepang (sea cucum-ber), which was used by Chinese traders for traditional medical and culinary purposes (Schwerdtner Máñez and Ferse 2010). When Indo- nesia achieved its independence, Indonesia and Australia seemed to be perfectly matched to build a strong trade relationship. Each coun-try produced goods the other needed and that they could not produce independently (Crawford 1935). Yet, their economic relationship has not always progressed as smoothly as expected. We will review this relationship within the framework of three different Indonesian histor-ical eras: the Newly Independent Era (1945–1965), the New Order Era (1965–1998) and the Reformasi Era (1998 and after).


51


The Newly Independent Era (1945–1965)

During its independence struggle, Indonesia had a complicated rela-tionship with Australia. Australia, as part of the United States–Britain alliance during the Second World War, had to help the Dutch regain its colony in the East Indies. Nevertheless, in 1947, the Allies went on to ac-knowledge Indonesia’s independence, albeit only for Java, Sumatra and Madura. After that Australia, under the Chifley Labor government, supported the Indonesian independence struggle until the Netherlands recognised Indonesia’s sovereignty in December 1949. Australian dip-lomats capitalised on Australia’s support of Indonesia’s independence struggle to build goodwill in the Indonesia–Australia relationship dur-ing the 1950s. As part of the effort to build good diplomatic relations, Australia, a much richer country than Indonesia, began giving aid to Indonesia in 1950, including sending food and clothes, and gradually increasing it after Indonesia joined the Colombo Plan in 1953. In terms of value, its aid was modest compared to that of other donors such as the United States and, later, the Soviet Union (van der Eng 2008).

In the 1950s through to the mid-1960s, the political and economic situation in both countries reduced bilateral trade and investment re-lationships to a tiny trickle. Australia’s long-standing and conservative Prime Minister Robert Menzies (1949–1966) had little sympathy with Asia, and was deeply suspicious of the rise of the communist parties in Indonesia and Southeast Asia. Australia only began to have signifi-cant trade links with Asia in the 1960s, partly through initiatives taken by Country Party leader ‘Black Jack’ McEwen to extend trade in min-erals with Japan. Meanwhile, around the same time, Sukarno took an increasingly nationalist stance against foreign investment in Indonesia and the economy rapidly fell into disarray in Jakarta from the late 1950s.

The relationship between the two countries deteriorated in the early 1960s when Sukarno ordered military action against the newly formed Malaysian state, and it was not helped by his decision to integrate West Papua with Indonesia in 1963, which was ratified by the United Na-tions in 1969 (McGibbon 2006; Mackie 2007). Yet, Australia continued giving aid to Indonesia. Australia wanted to maintain good diplomatic relations and avoid open conflict with Indonesia for many reasons, among which was that Australia needed to complete its aid projects in Indonesia, particularly the Aeronautical Fixed Telecommunication Network which remedied deficiencies in Indonesian civil aviation

52



communications systems and benefited Qantas flights across Indone-sian airspace (van der Eng 2008). During this period, the Indonesian economy declined dramatically (Thee 2003). The political situation in both countries and economic decline in Indonesia meant that very few Indonesian or Australian companies were interested in trading or in-vesting with their close neighbour. Economic relations between Indo-nesia and Australia were very limited (Arndt 1968).

The New Order Era (1965–1998)

The Indonesian economy in 1965 was really struggling. Inflation ran at 600 per cent per annum, production and trade were stagnant, and the economic infrastructure was in disrepair. When Western-oriented Suharto gradually took over the leadership of Indonesia at the end of that year, he, backed by a group of Western-trained economists at the Faculty of Economics of the University of Indonesia, quickly saw the importance of building good diplomatic and trade relations with other countries to improve Indonesia’s economic status (Thee 2003; Resosudarmo and Kuncoro 2006). He resumed Indonesia’s member-ship of the United Nations and started developing bilateral relations with other countries, including Australia. By 1965 the development gap between Indonesia and Australia had become even wider than it was in 1945, and Suharto’s anti-communist stance provided a great oppor-tunity to build a better relationship between Indonesia and Australia.

Around the same time, there was political change in Australia too. In 1966 Menzies retired and was replaced by a series of younger, less anglophile, Liberal Party leaders, and, as the threat of having an aggres-sive, communist-leaning neighbour dissipated, Australia was ready to improve its relations with Indonesia and it was expected that better trade relations between Indonesia and Australia would commence.

Indonesia made an important series of economic policy reforms at the end of the 1960s and during the 1970s and 1980s. A balanced bud-getary policy was announced whereby the budget deficit was elimi-nated and the Central Bank was also forbidden to finance a deficit. Regarding balance of payments policy, multiple exchange rates were abolished and the currency, the rupiah, was devalued to its market val-ue. Foreign trade was liberalised and, to make Indonesia more attrac-tive to foreign investors, a new investment law containing generous tax

53



concessions was passed. The banking system was liberalised to enable capital to circulate better. Close ties with the international donor com-munity were reestablished, enabling Indonesia to raise concessionary loans to rehabilitate its previously neglected physical infrastructure. These policies, together with the petroleum export revenue boom as the price of Indonesia’s main export skyrocketed in the latter half of the 1970s, rescued the Indonesian economy from stagnation and disaster. From the 1970s to the 1990s Indonesia was one of the fastest growing developing countries (Hill 2000; Resosudarmo and Kuncoro 2006).

Australia became more embedded in Asia after the retirement of Menzies. Two important changes were the dismantling of the White Australia policy in the late 1960s and the Whitlam government’s resto-ration of diplomatic relations with China in the early 1970s. The Austra-lian economy had experienced a long resources boom with the growth in world demand for first primary products and later minerals in the post-war period. But this boom came to an end in 1973–74 with the oil price shocks and a global slump. From 1974 Australia entered a period of slow growth, high inflation and high unemployment, pushing the Hawke and Keating governments to introduce economic reforms in the early 1980s (Garnaut 2013). A series of policy reforms to open up its do-mestic market to commodities from abroad, including from Indonesia (Anderson and Garnaut 1987), included the floating of the exchange rate at the end of 1983 and the lowering of import tariffs across the board. The decline in import tariffs on textiles, clothing and footwear were of particular importance for Indonesia at that time. Furthermore, Indo-nesia’s improved economic performance attracted Australia’s attention. There was a concern that the level of trade between Australia and Indo-nesia was too low in comparison with other countries (Arndt 1970 and 1980). For instance, in 1978 Japan’s exports to Indonesia were forty times greater than Australia’s exports to Indonesia, and Japan’s imports from Indonesia were twenty times greater than Australia’s imports from In-donesia (Karunaratne 1982). To improve bilateral trade relations with Indonesia and other ASEAN countries, Australia held ASEAN trade fairs in 1978 (Sydney) and 1980 (Melbourne). After this, Australian for-eign direct investment (FDI) inflows and aid to Indonesia, as well as the amount of trade and investment between the two countries, grew, al-beit modestly (McCawley 1986). The changing composition of economic structures and the development paths of both countries in the 1980s and 1990s, in particular the faster growth of Indonesia’s manufactur-

54



ing sector and the relatively steady growth of the agricultural sector in Australia, also encouraged trade between the two countries.

The slowly improving economic and diplomatic relations between Australia and Indonesia were interrupted when Indonesia invaded East Timor in 1975. They were damaged further in 1986, when the Sydney Morning Herald revealed the nature of business affairs in Su-harto’s regime. These events exposed the vulnerability of the relation-ship between Indonesia and Australia, in spite of the numerous efforts to build stronger economic and diplomatic ties. The relationship was also undermined by the mutual ignorance between people in the two countries. When asked about national threats in opinion polls, many Australians replied that they saw Indonesia as a threat and regarded Indonesia with fear and suspicion about the possibility of Indonesian aggression (Goodfellow 1993). On the other hand, most Indonesians were hardly aware of Australia’s existence. Furthermore, to some In-donesians, particularly those involved in government policy and the armed forces, Australia seemed to be erratic and sometimes arrogant and hostile, with a tendency to lecture its neighbours without making a serious effort to understand them (Hill 1990).

It is arguable that this sometimes hostile relationship between Aus-tralian and Indonesian politicians has been an important reason for the slow progress in developing strong economic relations between the two countries. Hill (1990) and Karunaratne (1982), however, saw the prob-lem from a different angle, attributing it to the fact that the vulnerable relationship was centered on their weak economic ties and identifying stronger economic relations as essential for a strong and solid bilateral relationship between Indonesia and Australia. Unfortunately, even at the end of the New Order Era, Australia had still not become a strong economic partner for Indonesia and vice versa (Hill 1990 and 2000).

The Reformasi Era (1998 to the present)

Diplomatic relations between the two neighbours after the fall of Su-harto in 1998, though in the long term might have shown an improving trend, have fluctuated and have not been as smooth as many academ-ics predicted. A number of extraordinary events have complicated the relations between the two countries, such as Australia’s involvement in the events leading to Timor Leste’s independence in 1999, the Bali

55



bombing in 2002, the terrorist attack on the Australian embassy in 2004, the release of a documentary in 2011 on Australia’s live cattle exports to Indonesia that showed animal cruelty, and recently the leaking of documents reporting Australia’s attempt to monitor the mobile phone calls of important Indonesian political figures, including President Susilo Bambang Yudhoyono and his wife in 2013. The flow of asylum seekers to Australia via Indonesia continues to be an important issue in the relationship, particularly for Australia, from time to time. Aus-tralia’s important role in helping tsunami victims in Aceh in 2004/2005 and earthquake victims in Bantul in 2006 was an important contribu-tion to improving relations after the difficult events of the early 2000s.

In spite of the complications in their relationship, economic rela-tions, especially trade relations between Indonesia and Australia, seem to have improved during this era, particularly since 2003 with only a slight drop during the Global Financial Crisis in 2009. This improve-ment in trade relations could be the result of relatively steady economic growth in both Indonesia and Australia since the early 2000s. From 2000 till 2010, Indonesia’s annual economic growth was a bit above five per cent, while Australia’s was a bit above three per cent (World Bank 2013).

Indonesia’s manufacturing sector, although it has dipped several times and not grown as fast as it did during the New Order Era, has been growing and enabling the country to export several commodities to the rest of the world, including Australia where manufacturing has been the slowest growing sector. The relatively slow growth in Indo-nesia’s food crops and livestock sectors compared to demand for such products has provided Australia with an opportunity to export food-related items to Indonesia.

However, several factors continue to limit our expectations of how fast the economic relationship between Australia and Indonesia will grow. First, as has been mentioned several times in this chapter, mining products have been primary export commodities in both countries. Second, the development gap between the two countries is huge. In the early 2010s, Australia’s GNI per capita was approximately US$65,000, as opposed to Indonesia’s approximate US$3,400. By the early 2010s, nevertheless, it was argued that at least for several commodities Aus-tralia has been an important trade partner, though maybe not the most important for Indonesia, and vice versa. For example, some activities have grown as a result of the gap in per capita incomes, such as the flow of Indonesian students to Australia and tourists from Australia to In-

56



donesia. We will review trade data for several important commodities as well as investment trends, and education and tourist sector relations in the next section to provide some details of the economic relationship in the 2010s.

Australia–Indonesia economic relations: What the data tell us

In observing the data on Australia–Indonesia economic relations, we group our discussion into analysis of bilateral trade in commodities, bilateral flows of capital, Indonesian students in Australia, and Aus-tralian tourists in Indonesia.

Bilateral trade in commodities

During the first years of Reformasi the value of bilateral trade fell sharp-ly as a result of the 1997/98 Asian Financial Crisis. Trade quickly recov-ered in 2000, but dipped again during 2002–03, reflecting the impact of the SARS outbreak on the global economy (CIE 2009). Since 2003, as mentioned before, the two-way trade between Australia and Indonesia has grown steadily, with only a slight drop during the Global Financial Crisis in 2009.

In 2013, Australia was among Indonesia’s top eleven import origin countries, coming in at ninth (Table 1). The value of Australian prod-ucts sold in Indonesia reached approximately US$5 billion, or approxi-mately three per cent of Indonesia’s total imports. This amount was still much lower than the value of goods Indonesia imported from China, Singapore, Japan, Malaysia and South Korea.3 Furthermore, observ-ing the average annual growth of imports into Indonesia from several countries since 2000, it is possible that in the relatively near future the values from Germany and India will overtake Australia’s. And so, al-though it is correct that Australia has been an important import origin country for Indonesia, there is little chance that Australia will become more so in the future.

3 Most goods from or to Singapore are unlikely to have been produced or con-sumed in Singapore. They just pass through Singapore.

57



Table 1. Top 11 Import Origin Countries for Indonesia and Australia, 2013

For Indonesia 2013 (US$

million)

Av.Ann.Growth

2000-13 (%)

For Australia 2013 (US$

million)

Av.Ann.Growth

2000-13 (%)1 China 31,942 22.2 1 China 51,297 17.2

2 Singapore 25,582 15.8 2 United States 26,733 4.6

3 Japan 19,285 10.3 3 Japan 20,081 5.7

4 Malaysia 13,322 20.9 4 Singapore 13,907 14.6

5 South Korea 11,593 14.1 5 Germany 12,122 9.4

6 Thailand 10,703 19.1 6 Thailand 12,097 15.8

7 United States 9,082 7.9 7 South Korea 10,788 10.8

8 Saudi Arabia 6,526 11.4 8 Malaysia 10,046 10.7

9 Australia 5,038 8.7 9 New Zealand 7,826 8.1

10 Germany 4,426 10.3 10 United Kingdom 6,584 3.3

11 India 3,964 16.8 11 Indonesia 6,373 10.1Source: CIE database

Indonesia was not quite among Australia’s top ten import origin coun-tries, coming in at eleventh. The value of imports from Indonesia was approximately two per cent of Australia’s total imports. However, the average annual growth of imports to Australia from various countries indicates that it is highly likely that Indonesia will become a more im-portant import origin country for Australia. The value of imports from Indonesia to Australia will soon be higher than from the United King-dom and New Zealand (Table 1).

With respect to export destinations, Japan, China, Singapore and the United States were the main target destinations for Indonesia’s exports (Table 2). The values of exports from Indonesia to these countries are much higher than those for Australia. Nevertheless, Australia was the ninth most important destination country for Indonesia’s exports, with approxi-mately two per cent of total exports going to Australia. Observing the trend of average annual growth of product value sent by Indonesia to Australia since 2000, it is likely that the rank of Australia in Indonesia’s export destination countries will be similar for several years to come.

58



Indonesia was the tenth most important destination country for Australian exports in 2013, with almost two per cent of Australian ex-ports going to Indonesia. The growth in the value of Australian prod-ucts exported to Indonesia since 2000 indicates that it is a likely that Indonesia will rise in the ranks of target destination countries for Aus-tralian products in the near future (Table 2).

Table 2. Top 10 Export Destination Countries for Indonesia and Australia, 2013

For Indonesia 2013 (US$

million)

Av.Ann. Growth

2000-13 (%)

For Australia 2013 (US$

million)

Av.Ann.Growth

2000-13 (%)1 Japan 27,086 5.0 1 China 93,952 24.3

2 China 25,295 14.6 2 Japan 45,514 10.4

3 Singapore 16,686 7.4 3 South Korea 18,632 11.1

4 United States 15,741 4.9 4 India 9,236 18.2

5 India 13,031 20.5 5 United States 8,913 2.8

6 South Korea 11,422 7.8 6 New Zealand 7,055 5.0

7 Malaysia 10,667 13.9 7 Singapore 5,427 3.7

8 Thailand 6,062 14.6 8 Malaysia 5,061 10.7

9 Australia 4,371 8.5 9 Thailand 4,789 11.8

10 Netherlands 4,106 6.4 10 Indonesia 4,425 7.9Source: CIE database

Overall, it can be concluded from the data in Tables 1 and 2 that by the early 2010s Indonesia had become a relatively important trade part-ner for Australia and vice versa, although the value of goods traded between the two countries was relatively low compared to the value traded among the most important trade partners of each country. The importance of Indonesia as the origin country of Australia’s imports and the importance of Australia as the destination country for Indo-nesia’s exports is likely to remain similar for several years to come. The importance of Indonesia as the destination country for Australia’s ex-ports and the importance of Australia as the origin country of Indo-nesia’s imports are likely to increase. In other words, it is likely that the

59



growth in the number of goods coming to Indonesia from Australia will increase more than the growth in the number of goods coming to Australia from Indonesia, which means that, in the near future, Aus-tralia is likely to benefit more from better trade relations between the two countries than Indonesia.

Australia’s trade surplus from trading with Indonesia was mainly in cereals in 2013 (Table 3). In fact, food-related products traded with In-donesia dominated Australia’s trade surplus top ten (see Table 3). Sev-en out of the ten products have been food-related. The other three are metal-related products. For Indonesia, on the other hand, the top ten trade surplus products from trading with Australia are more diverse and include mineral, metal, pearl, wood and rubber products. Hence, the agricultural sector has been the most important sector for Australia in creating a surplus in its trade with Indonesia, whereas for Indonesia the sectors are relatively varied.

Table 3. Top 10 Trade Surplus Products in Australia–Indonesia Trade, 2013

Australia 2013 (US$ thousand)

Indonesia 2013 (US$ thousand)

Cereals 115,745 Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes

93,186

Sugar and sugar confec-tionery

28,833 Articles of iron and steel 31,127

Live animals 28,462 Natural or cultured pearls, pre-cious or semi-precious stones, precious metals, metals clad with precious metal and articles thereof; imitation, jewellery; coin

19,197

Aluminium and articles thereof

20,398 Electrical machinery and equip-ment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles

17,796

60



Australia 2013 (US$ thousand)

Indonesia 2013 (US$ thousand)

Inorganic chemicals; organic or inorganic com-pounds of precious me-tals, of rare-earth metals, of radioactive elements or of isotopes

17,968 Wood and articles of wood; wood charcoal

15,439

Cotton 15,997 Paper and paperboard; articles of paper pulp, of paper or of paperboard

9,199

Meat and edible meat offal

15,573 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof

8,803

Dairy produce; birds‘ eggs; natural honey; edible products of animal origin, not elsewhere specified or included

13,893 Rubber and articles thereof 8,249

Iron and steel 12,755 Articles of apparel and clothing accessories, not knitted or crocheted

6,911

Residues and waste from the food industries; prepa-red animal fodder

9,769 Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated signs, illuminated name plates and the like; prefab-ricated buildings

5,575

Source: CIE database. Note: Trade surplus is defined as the difference between the value of exports to and the value of imports from a particular country. The com-modity classification utilised in this table is based on HS2.

Bilateral flows of capital: Foreign direct investment

The relatively similar characteristics of Indonesian and Australian economies, such as mining products as major export commodities, the relatively large size of agricultural sectors and fast growing service sectors in both countries, could provide good opportunities for cross country investments. However, since Indonesia and Australia have both been net importers of capital (Hill 1990), it is not surprising that

61



neither country has figured prominently in the other’s capital inflow. Although Australian investment in Indonesia is still dwarfed by other major investing countries, it is growing and Australia has been among the top ten investors in Indonesia in the last decade (Table 4). As can be seen in Table 4, the cumulative amount of direct investment by Austra-lia in Indonesia from 2005 to 2014 has been relatively small compared to that of Singapore, Japan, United Kingdom, South Korea and the Neth-erlands. Australia’s direct investment is approximately one per cent of total foreign direct investment entering Indonesia during that period.

Table 4. Top Ten Countries of Origin of FDI inflows into Indonesia

Cumulative 2005–2014 (US$ million)1 Singapore 38,7962 Japan 16,5803 United Kingdom 17,5054 South Korea 8,1735 Netherlands 7,8326 United States 7,4597 Malaysia 5,3288 China 6,1039 Mauritius 2,918

10 Australia 2,270Source: CIE Database

A list of the top ten sectors to which Australia’s direct investments have been allocated can be seen in Table 5. Information from this table shows, surprisingly, that the highest proportion of Australia’s direct investment in Indonesia has been in the chemical and pharmaceutical industries. The second highest amount has been in the mining sector, which is more predictable. ‘Thirty-eight Australian-listed companies are active in more than 120 mining ventures across Indonesia, includ-ing BHP Billiton, Newcrest, Leighton and Thiess’ (DFAT 2014).

62



Table 5. Top Ten Sectors in Indonesia Receiving Australia’s Direct Investment

Sector Cumulative 2009–2013 (US$ million) 1 Chemical and Pharmaceutical Industry 8342 Mining 2043 Electricity, Gas & Water Supply 1214 Metal, Machinery & Electronic Industry 785 Other Services 276 Hotel & Restaurant 217 Trade & Repair 218 Construction 109 Non Metallic Mineral Industry 10

10 Transport, Storage & Communication 7Source: Investment Coordinating Board (BKPM) Database, 2014

It is to be expected that Indonesia’s direct investment in Australia will be relatively trivial and that Indonesia would not be one of the top ten investor-countries in Australia in the last decade. Cumulative ASEAN direct investment in Australia from 2004 to 2013 accounted for approximately nine per cent of the total of foreign direct investment entering Australia during that period, with most of it coming from Singapore, Malaysia and Thailand. Indonesian investment is probably widely disbursed and has most likely been in real estate and land, as some Indonesian citizens seek more secure and environmentally friendly locations for private residences.

63



Indonesian students in Australia

As the number of Australian students in Indonesia is small, they are not discussed in this chapter. What is more significant is the number of Indonesian students in Australia, where education has become increas-ingly important as a service export. Although many Asians, includ-ing Indonesians, have been studying at Australian universities since the 1960s as a result of the Colombo Plan,4 education has only become commercially important as an Australian export since the mid-1980s. ‘Australia’s education and training links with Indonesia are formalised under the Memorandum of Understanding (MoU) on Cooperation in Education and Training between the Australian Department of Education (then DEEWR) and the Indonesian Ministry of Education and Culture (MoEC, then Ministry of National Education) which dates back to 1992’ (DFAT 2014).

For Australia, Indonesia is the ninth largest source of internation-al students, with almost 18,000 students enrolled in 2014 (Table 6).5 In addition to privately funded Indonesian students in Australia, the Australian government through the Australia Awards program has given scholarships to thousands of Indonesian students to study in Australia. It is the largest and longest running Australian government scholarship program offered to development partner countries. A total of 2,982 long-term awards and 1,395 short-term awards were made to Indonesian students from 2007–2014 (DFAT 2014).

Table 6. International Students in Australia, November 2014 Higher

EducationVET Schools ELICOS Non-

awardTotal

1 China 90,797 13,104 8,427 32,591 8,236 153,1552 India 26,355 27,700 194 7,702 395 62,3463 Vietnam 12,033 5,938 1,737 9,481 665 29,8544 South Korea 6,613 11,537 1,479 7,507 452 27,5885 Thailand 2,932 10,247 422 11,318 129 25,048

4 Many recipients of Colombo Plan scholarships in the 1960s have occupied im-portant positions in Indonesia, among them former Vice-President Boediono (Sulistiyanto, 2010). Also see Purdey in this volume.

5 Looking only at the higher education, it is the sixth largest source of interna-tional students, with almost 8,500 students in 2014.

64



Higher Education

VET Schools ELICOS Non-award

Total

6 Malaysia 14,339 4,917 418 1,527 749 21,9507 Brazil 867 5,652 271 11,312 3,543 21,6458 Nepal 10,161 5,361 14 1,956 429 17,9219 Indonesia 8,467 6,753 221 1,671 652 17,764

10 Pakistan 7,381 5,628 27 1,487 68 14,591Source: Australian Department of Education and Training, 2014. Note: Higher Education=university education; VET=vocational education and training; ELICOS=English Language Intensive Courses for Overseas Students; Schools=primary and secondary education.

For Indonesians, Australia is a favourite destination country in which to study, together with the United States and Japan. Most Indonesian students are in New South Wales, especially in Sydney, where a major-ity are enrolled in vocational educational training (Table 7). The major- ity of Indonesian students coming to Australia enrol in higher educa-tion institutions, predominantly in Victoria, especially Melbourne.

Table 7. Distribution of Indonesian Students in Australia, November 2014

Higher Education

VET Schools ELICOS Non-award

Total

New South Wales 2,708 5,551 46 1,157 183 9,645Victoria 3,642 631 63 255 350 4,941Queensland 628 131 18 87 18 882South Australia 340 39 5 21 8 413Western Australia 896 369 50 121 45 1,481Tasmania 13 4 2 1 20Northern Territory 36 12 35 19 32 134ACT 204 15 2 9 16 246Not defined 1 1 2Total 8,467 6,753 221 1,671 652 17,764Source: Australian Department of Education and Training, 2014

65



It is a little disappointing, however, that several smaller and more dis-tant countries send more students to Australia than Indonesia does (as indicated in Table 6). Furthermore, the number of Indonesian students in Australia has been declining over the last twelve years (see Figure 1). The fastest decline was from 2003 to 2007, and, even though numbers have risen since 2007, they have not yet reached the number of stu-dents in Australia in 2002. The greatest declines were in the number of Indonesians enrolling in Australian higher education institutions and in the number studying English in Australia, most of whom plan to enrol in higher education institutions once they have mastered Eng-lish. Thus, the declining number of Indonesian students is most likely caused by declining interest among Indonesians to seek higher educa-tion in Australia, whether it is because other places are becoming more attractive or because Australian higher education is becoming less at-tractive to them. Another reason for the decline may be the continu-ously increasing tuition fees for foreign students in Australian higher education institutions. Whatever the reasons for the decline, Australia and Indonesia should work together to improve the number of Indone-sian students in Australia.

Figure 1. Number of Indonesian Students in Australia

Source: Australian Department of Education and Training, 2014.

66



Australian tourists in Indonesia

Tourists bring important international reserves into Indonesia, bring-ing approximately US$10 billion in foreign reserves in 2013 alone. Al-most a million Australian tourists visited Indonesia in 2013, comprising approximately ten per cent of total tourist numbers in that year (Table 8). The number of Australian tourists to Indonesia is the third highest after the numbers from Singapore and Malaysia, which is a little dis-appointing, given the much smaller population of Singapore and the similarity in population size of Malaysia and Australia. However, the average amount spent by Australian tourists per visit was much higher than the amount spent by tourists from Singapore and Malaysia, which means that Australian tourists generate the highest tourist revenue for Indonesia.

Table 8. Tourists in Indonesia in 2013

Visitor numbers (000)

Expenditure per visit (US$)

Revenue (US$ million)

1 Singapore 1,432 642 1,0492 Malaysia 1,381 701 1,0033 Australia 984 1,474 1,4714 China 953 1,004 9305 Japan 497 1,137 5596 South Korea 351 1,111 3827 Philippines 248 837 2068 Taiwan 247 942 2319 United Kingdom 237 1,527 349

10 United States 236 1,554 364

Source: CIE database

Australian tourism in Indonesia has been generally increasing in the last two decades, but it has not increased steadily. In the early 2000s, after the first Bali bombing in 2002 and again after the second bombing in 2005, the number of Australian tourists declined significantly, dropping from approximately 450,000 people in 2001 to about 200,000 in 2006. Since then the number has increased by approximately thirty-

67



five per cent each year up to 2011, but has been relatively flat since then, increasing by about two per cent annually. The rapid growth of Australian tourism from 2006 to 2011 can be attributed to the improvement of security conditions in Bali and to the strengthening of the Australian dollar, which made it cheaper for Australians to travel abroad. When the Australian dollar became weaker, the rate of increase in the number of Australian tourists declined as well. Another fact that was underlined by the decline in numbers after the Bali bombings is that most Australians visiting Indonesia go to Bali. The Indonesian government has for a long time talked about creating programs to encourage foreign tourists to visit other areas of Indonesia outside Bali, but efforts in this regard have not born fruit. It remains to be seen whether this could be a way of increasing the number of Australian tourists significantly.

Conclusion

This chapter has reviewed economic interactions and relations be-tween Australia and Indonesia. From the review several conclusions can be drawn, the more important of which follow. First, during the early period of Indonesia, economic relations between Australia and Indonesia was very limited, mostly because the Indonesian economy was in disarray and the country was too poor to develop its economic relations much. At the same time, Australia was still strongly oriented towards the United Kingdom, Europe and the United States.

When Suharto was able to improve the Indonesian economy, true business-to-business transactions started to develop between Aus-tralia and Indonesia. The development path of Indonesia, in particular the faster growth of its manufacturing sector, and the relatively steady growth of the agricultural sector in Australia also encouraged trade be-tween the two countries. However, the quality of diplomatic relations had more influence on the progress of trade developments between the two, as exemplified by the negative effect of Indonesia’s integration of East Timor in 1975 on trade relations.

Trade relations were cemented even more when Indonesia pursued its Reformasi policy to become more democratic, after the fall of Suharto in 1998. In this era trade and investment fluctuations seemed to be less

68



dependent on the state of diplomatic relations between the two coun-tries.

Second, by the early 2010s Australia had become one of the most important trading partners for Indonesia, and Indonesia for Australia, although there is some imbalance in the extent. Indonesia’s role in Aus-tralia’s trade has not been trivial, as Australia has become Indonesia’s ninth most important source of commodity imports, while Indonesia has become the eleventh most important for Australia. Australia has become the ninth most important destination for Indonesian exports, while Indonesia has become the tenth for Australia.

Despite Australia’s importance for Indonesia and vice versa, the value of trade between the two has been relatively small compared to their trade with their major trade partners, namely China, Japan and the United States. This situation may be due to the fact that both coun-tries have relatively similar major exports, particularly those produced by the mining sector, and to the fact that Indonesian has had only lim-ited success in developing its manufacturing sector. Thus, despite the fairly large increase in the value of Australian exports to Indonesia, Australia will probably never be Indonesia’s primary trading partner and not even in the top four, and vice versa.

Third, direct investment by Australia in Indonesia has been im-portant, but relatively small compared to that of Singapore, Japan, the United Kingdom and Russia. Direct investment by Indonesia in Aus-tralia is trivial and likely to remain so.

Fourth, while Indonesian students have been an important source of foreign reserves for Australia, Australian tourists have been the same for Indonesia. Australian tourists constitute the third largest group of tourists to Indonesia, although most of them only visit Bali.

Thus, given similarities in basic economic structure, we are some-what pessimistic about the potential for substantial growth in trade and investment between the two countries in the immediate future. However, there is plenty of room to raise the value of bilateral trade and investment, especially as a vast array of service sectors now dom-inate the economy in both countries. There is also much room for im-provement in the numbers of Australian tourists to Indonesia and of Indonesian students to Australia. Closer collaboration between the two countries in these sectors might, however, be needed.

69



ReferencesAcemoglu, D., S. Johnson and J.A. Robinson. 2001. “The Colonial Origins of

Comparative Development: an Empirical Investigation.” American Eco-nomic Review 91: 1369–1401.

Anderson, K. and R. Garnaut. 1987. Australian Protectionism: Extent, Causes and Effects. Sydney: Allen & Unwin.

Arndt, H.W. 1968. “Trade Relations between Australia and Indonesia.” The Economic Record 44: 168–193.

— 1970. “Australian Economic Aid to Indonesia.” Australian Outlook 24: 124–139.

— 1980. “Economic Relations between Australia and Indonesia.” In Indo-nesia: The Making of a Nation, edited by J.A.C. Mackie, 741–753. Canberra: Research School of Pacific Studies, Australian National University.

Arndt, H.W. and K.W. Thee. 1994. “Great Differences, Surprising Similari-ties: Australia, Indonesia and Their Economic Relation.” In Expanding Horizons: Australia and Indonesia into the 21st Century, 9–21. Canberra: Dept. of Foreign Affairs and Trade, East Asia Analytical Unit.

Australian Department of Education and Training. 2014. International Stu-dent Enrolment Data 2014. Accessed 25 February 2015. https://interna-tionaleducation.gov.au/research/International-Student-Data/Pages/InternationalStudentData2014.aspx#Pivot_Table.

Basri, M.C. and H. Hill. 2004. “Ideas, Interest and Oil Prices: the Politi-cal Economy of Trade Reform During Suharto’s Indonesia.” The World Economy 27: 633–655.

Centre for International Economics (CIE). 2009. Estimating the Impact of an Australia–Indonesia Trade and Investment Agreement. Canberra.

Crawford, J.G. 1935. “The Development of Trade with Netherlands-Indies and British Malaya.” In Australia and the Far East: Diplomatic and Trade Relations, edited by I.C. Ross, 203–241. Sydney: Angus and Robertson.

Department of Foreign Affairs and Trade (DFAT). 2014. “Indonesia Country Brief.” Accessed 12 February 2015. http://www.dfat.gov.au/geo/indo-nesia/pages/indonesia-country-brief.aspx.

Garnaut, R. 2013. Dog Days: Australia After the Boom. Melbourne: Redback.Goodfellow, R. 1993. “Ignorant and Hostile: Australian Perceptions of In-

donesia.” Inside Indonesia, September: 4–6.Hill, H. 1990. “Australia Challenges and Indonesia and Opportunities in a

“Small” Economic Relationship.” ASEAN Economic Bulletin 6: 283–306.Hill, H. 2000. The Indonesian Economy (2nd ed). Cambridge: Cambridge Uni-

versity Press.Investment Coordinating Board: http://nswi.bkpm.go.id, 2014.

70



Karunaratne, N.D. 1982. “Prospects for Stronger Australia-Indonesia Eco-nomic Ties.” Asian Survey 22: 292–303.

Mackie, J. 2007. Australia and Indonesia: Current Problems, Future Prospects (Lowy Institute Paper 19). Sydney: Lowy Institute.

McCawley, P. 1986. “Economic Relations between Australia and Indo-nesia.” Australian Outlook 40: 175–181.

McLean, I.W. 2004. “Australian Economic Growth in Historical Perspec-tive.” Economic Record 80: 330–345.

McGibbon, R., 2006. Pitfalls of Papua: Understanding the Conflict and Its Place in Australia-Indonesia Relations (Lowy Institute Paper 13). Sydney: Lowy Institute.

Resosudarmo, B.P. and A. Kuncoro. 2006. “The Political Economy of In-donesian Economic Reform: 1983-2000.” Oxford Development Studies 34: 341–355.

Schwerdtner Máñez, K.S. and S.C.A. Ferse, 2010. “The History of Makassan Trepang Fishing and Trade.” PLoS ONE, 5 (6): 1–8. Accessed 15 Feb-ruary 2015. http://www.plosone.org/article/fetchObject.action?uri= info:doi/10.1371/journal.pone.0011346&representation=PDF.

Sulistiyanto, P. 2010. “Indonesia-Australia Relations in the Era of Democ-racy: the View from the Indonesian Side.” Australian Journal of Political Science 45: 117–132.

Thee, K.W. 2003. “Introduction.” In Recollections: The Indonesian Economy, 1950s–1990s, edited by K.W. Thee, 3-43. Singapore: Institute of South-east Asian Studies.

van der Eng, P. 2008. Konfrontasi and Australia’s Aid to Indonesia during the 1960s. (Working Papers in Economic & Econometrics no. 493). Canber-ra: Australian National University.

World Bank. 2013. World Development Indicators. Accessed 21 January 2015. http://data.worldbank.org/data-catalog/world-development-indicators/wdi-2013.

71



evaluating the importance of australia– indonesia economic...

Documents