Indonesia’s ascension to the presidency of the G20 in December marked a milestone for the archipelagic nation, demonstrating its fast-growing capacity to provide leadership in Southeast Asia and the world. Indonesia’s capacity to represent the voices of developing nations and emerging economies outside of the G20 will be of particular interest throughout its presidential term, with the capstone G20 summit in Bali in November 2022 offering a benchmark for how Indonesia is currently performing.
Despite Indonesia’s demonstrated newfound leadership capabilities, significant challenges remain, the main three of which are the widening geopolitical clashes stemming from the Ukraine-Russia war, low levels of Indonesian economic engagement with other G20 countries, and renewable energy challenges.
The escalating Ukraine-Russia war has placed Indonesia’s presidency in a difficult position. Since last year, the Indonesian government has prepared an agenda focusing on fair and equitable recovery from the COVID-19 pandemic. However, this year’s G20 proceedings will most likely be convened amid boiling geopolitical tensions that involve many G20 member states.
In recent weeks, we have seen growing concerns over Russia’s participation at the summit, with demands that the forum isolate or expel President Vladimir Putin and other Russian representatives from the group’s meetings. So far, U.S. President Joe Biden, Australian Prime Minister Scott Morrison, and Canadian Prime Minister Justin Trudeau have stated that they will not sit down with Putin, who they claim is guilty of war crimes.
This remains the most pressing challenge facing Indonesia’s G20 presidency, as it will intensify the political divisions within the forum. Moreover, the Ukraine-Russia war has already impacted the global economy, touching on G20 agenda items like energy security and prices, food security and supply, and financial markets. If there is no peace deal between Ukraine and Russia sometime soon, the impact of the multidimensional sanctions on Russia could well undermine the G20’s economic goals. Indonesia is currently holding its wait-and-see approach, pushing for an immediate resolution to the conflict.
Low Economic Engagement With G20 Partners
While Indonesia’s economy is growing, its economic engagements with other G20 countries remain relatively limited, particularly when compared to the trade flows between other G20 forum members. This is problematic for Indonesia given the significant economic influence possessed by the countries whose G20 presidencies have preceded Indonesia. This presents a challenge for Indonesia to overcome in its current role as the leader of the G20.
Indonesia’s goal of growing international economic engagement with other G20 members has occurred through a variety of domestic initiatives aimed at boosting economic growth. The Indonesian aim of improving domestic economic conditions by leveraging small-medium enterprises (SMEs) and entrepreneurs can be seen through the government’s first-ever OECD SME and Entrepreneurship Policy Review of Indonesia, undertaken in 2018. Additionally, further development of critical national strategic projects and infrastructure upgrades continue to modernize various facets of Indonesia’s economy.
While COVID-19 did harm the Indonesian economy in the short-term, the government attempted to mitigate these effects through stimulus packages in mid-2020 and succeeded in softening the blow of the pandemic to its tourism-based economy, with Indonesia’s economy returning to 3.69 percent growth in 2021. Ensuring domestic growth to help drive momentum with international G20 partners must continue to be a priority for Indonesia.
Indonesia’s relatively isolated geographical position and other limiting practical capacities does pose some obstacles to its participation in cross-border trade flows, though modern transportation has removed many of these initial barriers-to-entry for trade. However, other challenges remain, including transaction settlements in currencies like the U.S. dollar, lengthy custom clearance times, and others.
To this end, Indonesia has used its G20 presidency to promote the use of local currency settlement (LCS) at the global level, with the aim of lowering transaction costs through direct currency settlements. Additionally, Indonesia’s unique position as the G20 leader could be used to reduce friction in cross-border trade, enabling the smoother flow of goods between different nations. Being able to achieve such a goal could help increase Indonesian economic flows to and from other G20 partners.
Renewable Energy Challenges
This year’s G20 presidency offers Indonesia the opportunity to lead the G20 in sustainable energy transitions. Members of the G20 are currently divided on how to manage this transition. A study by the Institute for Essential Services Reform found that the G20 is not yet aligned with a 1.5 Celsius pathway, leaving a significant emissions gap between advanced economies and the developing ones within the group itself. Indonesia must address the challenge lying in the fact that not all G20 economies possess the same economies, knowledge, and societal demands regarding the issue of energy transition.
So far this year, Indonesia has initiated a variety of projects aimed specifically at establishing renewable energy resources, including solar, wind, and hydropower. However, Indonesia’s economic dependence on coal puts it in a precarious position in balancing its renewable energy priorities with the imperative of economic growth. The amount of renewable energy generated by Indonesia, the the world’s eighth-largest carbon emitter, remains very low compared to other G20 nations, potentially affecting its credibility to lead the G20 on this issue.
This is particularly true given the significant amount of capital investment needed for Indonesia to truly develop its renewable power sector, with one January estimate placing the cost at over $50 billion. This factor presents significant challenges for Indonesia’s capability to scale economic growth while decreasing reliance on coal, thus affecting one of Indonesia’s three primary G20 initiatives. The efforts of coal-free development must be pushed further.
So far, Indonesia has consistently attempted to mitigate the issue of energy transition through regulation. In November 2021, it introduced regulation to introduce results-based payments for initiatives that result in carbon reduction as part of its carbon trading mechanism. Indonesia also passed a carbon tax in October, aiming to target its coal industry. A number of green-financing schemes designed to spur the country’s energy transition has also been released in the past few years, demonstrating Indonesia’s commitment to achieve the goal. However, balancing economic growth and increased investment in renewable energy, while still reliant on coal as an economic backbone, will present Indonesia with significant challenges moving forward.
The issue of setting up achievable priority agendas and initiatives will be a particular challenge to Indonesia’s G20 presidential legacy, owing to Indonesia’s desire for significant economic growth and to raise its international profile. Problems stemming from the Ukraine-Russia conflict, low G20 international trade, and the limitations on the nation’s energy transition will pose significant challenges for Indonesia during its leadership of the G20. However, Indonesia’s G20 presidency does offer the archipelago nation a chance for further growth, particularly if it mitigates these challenges through internal and external initiatives.