The Missing Strategy in Indonesia’s Economic Diplomacy

Recent Features

ASEAN Beat | Diplomacy | Economy | Southeast Asia

The Missing Strategy in Indonesia’s Economic Diplomacy

Jakarta seems to treat economic diplomacy as a silver bullet. For that to work, Indonesia needs a new strategy.

The Missing Strategy in Indonesia’s Economic Diplomacy
Credit: Pixabay

Indonesia faces no shortage of economic and geopolitical challenges. The U.S.-China trade war continues to exacerbate the slowdown in Indonesian exports from the decrease in its key export commodities. On the other side of the world, Brexit and the European Commission directive against Indonesian palm oil adds further uncertainty to Indonesia’s trade environment. On top of this, the ascendancy of China is the elephant in the room. The subsequent return of geopolitical rivalry in East Asia threatens to undermine the strategic autonomy of Indonesia and other countries in Southeast Asia.

At home, recently re-elected President Joko “Jokowi” Widodo remains focused on economic development. This is the theme of his inauguration speech, with the global maritime fulcrum noticeably absent (rest in peace). The priorities of the Ministry of Foreign Affairs mirror this. Under the reappointed Minister Retno Marsudi’s “4+1 formula,” a stronger economic diplomacy is the Ministry’s foremost priority, followed by four other policies. On this front, Indonesia would 1) search for non-traditional export markets, 2) push for partnership on infrastructure investment and goods trade with African countries, 3) back the speedy conclusion of free trade agreements, and 4) protect its strategic commodities against discrimination.

The appointment of noted economist Mahendra Siregar as deputy foreign minister signals the administration’s commitment on this. It seems that his appointment is a compromise step from the aborted attempt to merge the Ministries of Foreign Affairs and Trade. Indeed, one of Deputy Minister Mahendra’s main tasks is to coordinate cooperation between both ministries and with the Indonesia Investment Coordinating Board (BKPM).

This is in and of itself a welcome development. But we need to consider this under bigger lenses. Jakarta seems to treat economic diplomacy as the silver bullet for Indonesia in navigating a turbulent external economic environment.

First and foremost, Indonesia needs to recalibrate its conception of economic diplomacy. It currently understands the concept as using foreign policy tools to achieve economic gains. This is evident in the four policies to be pursued under economic diplomacy as a foreign policy priority. But this is merely commercial diplomacy. Economic diplomacy encompasses the use of economic tools to secure national interests, which, of course, includes foreign policy goals. This means, apart from the Foreign Ministry just being assigned mandates of economic goals, it also needs to employ economic tools in attaining its goals. Pejambon can be empowered to do this either by having its own authority in formulating economic policy or by coordinating economic policies with other ministries.

It is crucial to highlight this conceptual definition. Under commercial diplomacy, Indonesia’s diplomats need to promote exports and foreign investment for the sake of the country’s development. Under economic diplomacy, Indonesia’s diplomats also need to promote them for development purposes but they need to have the country’s geopolitical and security purposes in mind as well. If economics is too important to be left only to economists, then free trade negotiations are too important to be left only to the Trade Ministry.

Second, with that in mind, Indonesia needs to push for the decisive conclusion of free trade negotiations it is involved in while being clear about their geopolitical outlook. This is especially relevant for the Regional Comprehensive Economic Partnership (RCEP). In the context of the U.S.-China trade war still raging, the agreement’s planned signing in early 2020 shows the region’s commitment to a more open trade regime. And while some agree that India’s decision not to join can help the negotiation’s speedy conclusion, Indonesia needs to tread carefully. RCEP started as an ambitious ASEAN effort to be the economic node between its six FTA partners (China, Japan, South Korea, India, Australia, and New Zealand) in the Pacific and Indian Oceans. Indonesia and ASEAN should hold on to this goal. If there really is no path for India to rejoin RCEP, then Jakarta should lead ASEAN in thinking of other avenues of further economic engagement with New Delhi. What good is the ASEAN Outlook on the Indo-Pacific if ASEAN’s economic activity lies only in the Pacific?

The same goes for the currently stalled negotiations over the Indonesia-European Union Comprehensive Economic Partnership (Indonesia-EU CEPA). Negotiations are going nowhere because of the trade conflict over palm oil. Rather than just complaining about a black campaign against its main export commodity, Indonesia should use this opportunity to ensure the sustainability of its palm oil plantations. Residents in Sumatra, Kalimantan, Malaysia, and Singapore do not deserve to choke from regular haze for the sake of Indonesia’s export revenues. The Indonesia Sustainable Palm Oil (ISPO) certification only covers 30 percent of Indonesia’s palm plantations, as of March 2019. With small holder farms being the vast majority of the noncertified, there is room for the government to aggressively push this certification rate up. This would unlock Indonesia-EU CEPA negotiations. As Indonesia continually seeks to push for and diversify its export market, the $15 trillion European Single Market will play an important role, especially to hedge against U.S. protectionism under President Donald Trump.

Third, Indonesia must articulate a clear strategy for its international development cooperation policy. The administration is to be applauded for pushing forward with the creation of the Indonesian Agency for International Development (Indonesia Aid). The agency will chiefly manage Indonesia’s assistance to fellow developing countries in Asia, Africa, and the South Pacific, previously under the South-South Cooperation scheme. This is in line with the policy recommendation of a 2014 study by the Center for Strategic and International Studies Indonesia on the matter. Most importantly, Jakarta needs to formulate what geopolitical and economic ends the aid aims to achieve. There is also a discussion to be had as to whether these ends are best served with grants, as they are currently, or in the form of concessional loans. The new agency should also collaborate with other established donors in order to build its portfolio and aid management expertise.

Economic diplomacy might or might not be the silver bullet for Indonesia’s external challenges, both economic and geopolitical. But it certainly will not be without the correct conceptual definition and strategy.

Rocky Intan is a researcher at the Centre for Strategic and International Studies (CSIS) in Jakarta, Indonesia.