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28 3 INDONESIA’S ROLE IN THE WORLD ECONOMY: SITTING ON THE FENCE M. Chatib Basri A friend once told me that Indo­ nesia is a ‘disappointing’ country: it disappoints optimists because it never reaches its full potential, and it disappoints pessimists because they expect it to collapse at any moment.1 I think there is some truth in this joke. Indo­ nesia is indeed a country that oscillates between optimism and pessimism. It is a similar story with trade policy. As an archipelago made up of more than 17,000 islands, Indo­ nesia naturally evolved as a free trader. Indo­ nesian history is a history of trade. Yet the country’s politicians, media and even academics are reluctant to openly embrace globalization and free trade. Indo­ nesia also has a contradictory attitude towards international institutions: it deeply distrusts institutions such as the IMF and the World Bank yet is very enthusiastic about and participates actively in the G20 and the Association of Southeast Asian Nations (ASEAN). Indo­ nesia’s active participation in the G20 is seen as one of the successes of Susilo Bambang Yudhoyono’s presidency. During a meeting of G20 leaders in Pittsburgh, the president proudly shared Indo­ nesia’s experience with far-reaching policy changes in 2005 and 2008 that raised fuel prices and allocated the extra funding to the poor in the form of cash transfers and health and education programs. This policy had three main benefits: it created fiscal space, which was good for macroeconomic policy ; it allowed the government to increase spending on the poor, which was good for income distribution and poverty reduction; and it reduced demand for fossil fuels and therefore carbon emissions, which was good for the environment. The Indo­ nesian president’s remarks informed a 1 I first heard this joke from Indo­ nesia observer James Castle and economist Umar Juoro. Indonesia’s Role in the World Economy  29 Pittsburgh communiqué that recommended countries ‘phase out and rationalize … inefficient fossil fuel subsidies while providing targeted support for the poorest’ (G20 2009: 3). But strangely, Indo­ nesia itself is currently extremely hesitant about implementing another round of cuts in fuel subsidies. Trade policy has swung from one extreme to another over the past 60 years. Indo­ nesia disengaged from trade with the rest of the world in the early 1960s, then shifted to a very open regime later in the decade. The high-growth period from the 1970s to mid-1980s was accompanied by relatively high levels of protection, giving way to deregulation and other trade reforms in the late 1980s and 1990s. The Asian financial crisis of 1997–98 ushered in a new era of ‘extreme’ openness under the IMF program. How can we explain these oscillations in trade policy? Why does Indo­ nesia tend to take contradictory positions in its international economic diplomacy, and sit on the fence when it comes to trade policy? This chapter will discuss Indo­ nesia’s role in the global economy and explain the factors that have influenced its decision to engage – or not to engage – in international economic agreements. The chapter is organized as follows. In the next section, I will discuss Indo­ nesia’s history of involvement in the regional and global economies, and its potential to play a greater role. I will then provide a brief overview of trade policy developments over the past six decades. Finally, I will analyse the factors that have influenced Indo­ nesia’s contradictory positions and its tendency to sit on the fence rather than engage actively with global economics. INDONESIA’S ROLE IN THE GLOBAL ECONOMY Many recent studies have concluded that Indo­ nesia has a promising future in the global economy.2 Nouriel Roubini, known as ‘Dr Doom’ for his gloomy economic predictions, has even asserted that Indo­ nesia is better positioned than China for long-term economic growth (Deutsch 2011). Admittedly the track record on long-term projections is somewhat patchy. In the early 1990s the World Bank predicted that Indo­nesia would become one of the Asian tiger economies. Instead, the Asian financial crisis hit and the Indo­ nesian economy tanked, prompting Hill (2000) to write an article on ‘the strange and sudden death of a tiger economy’. Nevertheless, I think there are strong reasons to believe that Indo­ nesia has the potential to play an important role in the global, or at least Asia– 2 See, for example, Wilson and Purushotaman (2003), Indo­ nesia Forum (2007) and Buiter and Rahbari...

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Additional Information

ISBN
9789814380416
Related ISBN
9789814380409
MARC Record
OCLC
835776800
Pages
200
Launched on MUSE
2013-01-01
Language
English
Open Access
No
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