Taking the Silk road to avoid recession

By Terry Lacey

(May 29, Jakarta, Sri Lanka Guardian) Indonesia is exploring new paths and has taken the silk road to help avoid recession, quickly expanding economic relationships with non-traditional trading partners like Azerbaijan and looking for new deals with the Central Asian Republics on oil and gas, commodities, relatively low cost manufactures from Indonesia and tourism.

Whilst Japan, Malaysia, Singapore, Thailand and now South Korea have hit recession and downturn following the October 2008 Western banking and financial collapse, Indonesia maintained growth at 6.1 percent in 2008 and at 4.5 percent in 2009.

The total value of Azerbaijan-Indonesian bilateral trade expanded from only $2.25 millions in 2007, to $396 millions in 2007 to $1,4 billion in 2008.

There are three main reasons why Indonesia has avoided recession and is now a key global economy with growth, size and confidence.

First the size of the 235 million strong Indonesian internal market with an estimated Gross Domestic Product (GDP) in terms of purchasing power of $908 billions in 2008, whilst 70 percent of GDP growth reflects internal consumer demand.

Andry Asmoro of Bahana Securities reported recently (Jakarta Post 22.05.09) that the Consumer Confidence Index (CCI) rose to 102.5 in April, its highest level since 2005. So although exports and imports dropped 19 percent and 24 percent respectively, consumer demand has remained high and people are buying more local goods.

Martin Jenkins, analyst at Danareksa Research Institute said Thursday May 28th (Jakarta Post) that the Jakarta Composite (Stock Exchange) Index rose 40 percent this year, the Business Sentiment Index (BSI) hit 117.4 and the Business Confidence in Government Index (BGGI) increased from 76.4 in May 2008 to 130.8 now.

Second the government has pursued a policy of trade and investment diversification, reflecting increased South-South co-operation partly via ASEAN and increasing economic links between member states of the Organization of Islamic Conference.

So increased trade with Azerbaijan fits in with this medium term policy framework which has been accentuated by the October 2008 Western economic collapse and global economic downturn, but the diplomatic and commercial push into non-traditional markets, both for imports and exports, was already under way.

Thirdly the Indonesian economy has been saved from the full ravages of a global crisis by somewhat selectively welcoming the benefits of free trade and globalization whilst holding onto a strongly state-backed and state-run economy, with 200 State Owned Enterprises (SOEs) with assets of $170.5 billions representing up to 40 percent of nominal GDP, backed by an annual state budget rapidly approaching $100 billions per year. This is neither a classic capitalist globalized economy nor an old-fashioned state-centralized economy, but a pragmatic compromise between the two.

For Azerbaijan and all the new Central Asian Republics the Indonesian economic model offers an understandable parallel to their own transition from a state centralized economy to a market economy.

Azerbaijan with a population of 8 million and GDP by purchasing power of $74 billion is therefore a natural trading and economic partner for Indonesia.

Ibrahim A Hajiyev, the Azerbaijan Ambassador to Indonesia interviewed recently by Veeramalla Anjaiah of the Jakarta Post (28.05.09) explained the bulk of bilateral trade reflected Azerbaijan exports of oil to Indonesia, which is now a net importer.

Indonesian exports to Azerbaijan are based on crude palm oil (CPO) and aluminium fluorides, but there is good potential to expand CPO exports, possibly to sell lower cost garments and shoes to Azerbaijan and to promote tourism to Indonesia, plus maybe a market for Indonesian skilled labor in Azerbaijan.

Indonesia has been dynamic in striking up new energy deals with Iran and Azerbaijan as well as investing in oil and gas development in Libya.

This is the right time for Indonesia to explore new directions and to travel the silk road to look for new investment and trading opportunities in partnership with Azerbaijan and the other Central Asian Republics.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.

-Sri Lanka Guardian