Indonesia: Growing closer to the EU

While Indonesia and the EU already enjoy strong economic and political ties, business and political leaders are working to enhance relations and improve trade and investment flows between two large trading areas.

From Indonesia’s point of view, bilateral business relations with the EU are crucial to economic growth. The 27-nation bloc is currently the South-east Asian country’s fourth largest trade partner. Accounting for around 10% of all trade, exports to the EU were worth some $14.9bn in 2009.

While Brussels has taken steps to prioritise relations with Jakarta, the country still ranks only 30th on the EU’s list of trade partners, representing just 1% of imports and 0.5% of exports. Business leaders and officials see the potential for much closer ties.

With this in mind, the EU-Indonesia Business Dialogue (EIBD), a conference backed by a number of major Indonesian and European companies, will be held in Jakarta on November 29-30. The aim of the conference is to provide a forum for business and government representatives to identify opportunities for increasing investment flows between the two regions.

“There is a huge potential for small- and medium-sized European companies to do business in Indonesia,” said Oliver Oehms, senior economic advisor on trade and investment and head of business development at the Indonesian Chamber for Commerce and Industry Business Support Desk.

“European companies tend to undervalue Indonesia. The factors contributing to low foreign direct investment (FDI) from the EU to Indonesia mostly has to do with perception. However, the perceived weaknesses of Indonesia have been exaggerated whether it is in infrastructure, investment regulations, property rights or the availability of skilled labour. The fact is when you compare these particular issues to China, India or Vietnam, Indonesia is often just as competitive,” said Oehms.

The EU and Indonesia last year signed a Partnership and Cooperation Agreement (PCA) covering trade, investment, human rights and climate change, which was seen as a precursor to a free trade agreement. The European bloc also issued its second EU-Indonesia Trade Support Programme, a $19.3m project that aims to increase the country’s integration into the global economy through enhancing the country’s “export quality infrastructure”.

Indonesia’s recent economic growth has been strong despite the global downturn. In 2009, it achieved a GDP growth rate of 4.5%, the third highest among G-20 countries. In September the government announced that it expected GDP growth to be 6.4% in 2011.

The country is rich in natural resources, including oil, coal, palm oil and rubber, and exports a wide range of value-added manufactured goods in addition to raw materials. The country has by far the largest economy and population in South-east Asia, with nominal GDP expected to reach Rp6311trn ($694.2bn) this year, according to the IMF.

Events such as EIBD, which bring together business leaders, could boost Indonesia’s image in Europe. Moreover, they provide an opportunity for a dialogue between all concerned parties to address the challenges to closer relations.

As an export-oriented economy with ambitious investment goals, Jakarta will continue to look to the EU for trade and investment. Meanwhile, as a stable democracy in a strategic location, Indonesia’s value as a diplomatic partner cannot be underestimated.

According to Oehms, Jakarta needs to act now opportunity to ensure it doesn’t lose out to regional rivals for the EU market. “The Indonesia-inter-Asia trade balance has been growing quite steadily over the past couple of years while Indonesia-EU trade has remained quite flat, and this is especially true if you exclude major commodity-based industries like mining,” he said.

“When we look at the trade of manufactured goods, which has a very important political and economic relevance to Indonesia, the EU tends to prefer importing goods from China, India and over the past four to five years. This represents a missed opportunity for Indonesia, ” he added.

 

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