Partnering for Prosperity in a World of Change

Posted on November 22, 2018 By Andrew Parker

Andrew Parker (Partner – Asia Practice Leader, PwC) delivers the keynote address at the AIBC Conference 2018 on the Gold Coast.

This is an excerpt from Andrew Parker’s keynote address at the Australia Indonesia Business Council Conference 2018 on the Gold Coast, 11 November 2018.

The theme “Partnering for prosperity in a world of change” captures the opportunity – and the risks – for Australia and Indonesia.

The task for each of us in this room is to make sure that we do not allow the risks to consume us and the opportunity lost.

Three years ago one of Australia’s foremost Indonesian analysts, Ken Ward, published an essay titled “Condemned to crisis?

There is a question mark in that title….but Ward argued that the Australia-Indonesia relationship has been, and probably will always be, punctuated by varying degrees of crisis.

In Ward’s view, governments need to better understand Indonesia’s point of view – policy settings and the political narrative can then be managed with those sensitivities in mind, rather than responding to a media and/or opposition driven narrative.

That advice is sensible enough, particularly if we are happy with the status quo and simply want to manage the current relationship more effectively.

But should we even be happy with how the relationship is today? I would argue we should not.

In fact our relationship is a long way short of where it ought to be in today’s environment, let alone where we should aspire to taking it.

The Australia-Indonesia relationship has never been more important. Our region is at the epicentre of changes that will shape the world in which we live for decades to come.

These changes are happening far quicker than most Australians appreciate or are prepared to confront.

Australia will have to change too. Our business and government leaders will need to become as comfortable operating in Jakarta as they are in London, Washington or New York today.

In times of trouble, our business interests provide a vital ballast that we do not have in Indonesia, or for that matter anywhere in Asia today.

And we should not be under any illusions, the risks for Australia were already rising no matter what the results of the 2016 US Presidential election.

Around the world nationalist narratives and the politicisation of foreign policy for domestic audiences is threatening the stability of the global trading order – an order which remains central to our prosperity and security.

Strategic stability in Asia has been accompanied by perhaps the greatest period of prosperity in human history.

This growth has brought with it shifts in relative economic and strategic power – rivalry in our region is on the rise.

Now the idea that economic power can be used in the pursuit of national interests is not a new one.

But a more confident and assertive China is articulating its interests on the international stage.

Our friends – with whom we have shared common values – have been both rich and powerful.

The UK and then the US made the rules and backed them with military power – and Australia prospered.

For the first time in our history though we do not share a security alliance with our major trading partner – and we are struggling to come to terms with this as a nation.

In September Prime Minister Scott Morrison stood beside President Joko Widodo and announced the upgrading of diplomatic relationships to a Comprehensive Strategic Partnership.

This included an announcement that the parties had reached an agreement on the Indonesia-Australia Comprehensive Economic Partnership (IA-CEPA) and would sign an agreement – nearly a decade in the making – before the year’s end.

And while domestic politics and the usual hand-wringing over who the winners and losers are will continue, we should be celebrating the symbolic significance of having any agreement at all.

We would be wise to make the most of it. Since the Asian Financial Crisis left the economy in ruins in the late 1990s, Indonesia’s economic performance has been impressive.

GDP growth is among the highest of the large emerging markets, consistently over 5 percent, with only a slight fall during the global financial crisis.

In 1998 Indonesia’s GDP was $US95 billion. Today it is around three quarters of the Australian economy.

Already the world’s 8th largest economy in purchasing power parity terms, Indonesia is expected to rise to 5th place by 2030 according to our economic modelling.

All of this happened while Australian businesses were asleep.

Not only is Indonesia’s 260 million-strong population growing, it’s becoming better educated, more urban and more employed.

With an average age of 29 years, Indonesia’s population is also young.

An emerging and affluent middle class is expected grow to 140 million by the end of the decade.

Indonesians are now more digitally connected than ever before and are among the world’s highest users of social media.

Today, Indonesia is the fastest growing internet market in the world.

Some 30 million Indonesians already shop online, three quarters using a mobile device.

Incredibly, with bilateral trade worth just A$16.5 billion in 2017, Indonesia isn’t one of Australia’s top 10 trading partners.

Australian direct investment in Indonesia stands at an embarrassing $10.7 billion, just over half the investment in PNG and not even 1 percent of the total stock of our outward direct investment.

Part of the problem may be due to some profound misunderstandings about one of our nearest neighbours.

Australia-Indonesia Perceptions Report (2016)

Research by the Australia Indonesia Centre in 2016 found that there are almost twice as many Indonesians (87%) who view Australia favourably than there are Australians who view Indonesia favourably (43%).

The word Australians most associate with Indonesia (68%) is “religious”. True enough but it is not necessarily the first thing you would think of if you were doing business with someone.

And when Australians were asked about their understanding and willingness to do business in Indonesia only 18% of Australians agreed (34% disagree) that Indonesia has a “strong economy”, 14% agreed (49% disagree) that Indonesians are “fair”, and 13% agreed (44% disagree) that Indonesians are “trustworthy”.

In this year’s Lowy Poll just 27 % of Australians agree that ‘Indonesia is a democracy’.

Worryingly, the poll results are going from bad to worse with 34 percent agreeing with the same statement three years ago.

This is not the kind of place a near neighbour should occupy in our national psyche. Even more so when you consider the economics.

To be sure, the operating environment is not straight-forward, and the opportunities are not risk-free.

But then growth is never a risk free proposition.

Indonesia has its challenges, ranking 73rd on the World Bank’s Ease of Doing Business Index but that is a significant improvement from 117th four years ago.

Building strength and capability in the Indonesian bureaucracy will take time.

Corruption issues, along with the tussle between Jakarta and provincial authorities, makes for a complex environment for business to navigate.

Of course, any projections of Indonesian economic success are also not without risk.

The reform process has not all been plain sailing. President Widodo is still pushing up against powerful protectionist and nationalist forces that come and go in Indonesian politics.

Indonesia requires immense investment in infrastructure and improvements to its political, economic, legal and social institutions.

Local institutions don’t have the capacity to deliver the infrastructure needed to support President Widodo’s growth aspirations.

So Indonesia needs foreign investment – and quite a lot of it – to reach its economic potential.

Protectionism will need to be balanced with pragmatism. A healthy and vibrant Indonesia is, most importantly, good for Indonesians.

It is also good for Australia: good in economic terms and good for our shared security interests.

As one of only a few developed economies in the region, Australia is well positioned to help Indonesia.

With one of the world’s largest pools of pension funds, our capabilities in technology, innovative ideas, and our concentration of talented people – we can contribute to all of the key drivers of economic growth for Indonesia.

Yet despite our obvious competitive advantages, there is mounting evidence to suggest that as a business community we are alarmingly under-prepared for the world that we live in.

A report from last year titled Match Fit that Asialink, PwC and the Institute of Managers and Leaders produced was the latest report card to say this.

The report found that a staggering 9 out of 10 ASX200 companies were not “Asia capable” – by any measure, an epic fail for corporate Australia.

Australians have low, and falling, Asian language capabilities.

Five times as many students studied Italian than did Indonesian in the 2018 NSW HSC (564 vs 106).

Barely 100 students studied the language of our nearest neighbour and a country expected to be the world’s fifth largest economy in PPP terms in 2030.

Language is a window to culture and we need to invest far more in developing our cultural understanding of Indonesia.

Future generations are unlikely to thank us if we choose to continue down a path punctuated by the recurring crises that Ken Ward so expertly documented.

There is plenty of room for Australia in Indonesia. Like any trade deal, governments can open the door but it is up to business to find the courage to walk through it.

And we may not get another invitation as good as this one.

Andrew Parker is the Partner – Asia Practice Leader of PwC and a board member of The Australia-Indonesia Centre.