• Geoff Donald

Canada-Indonesia: Strengthening ties with a growing giant


As Canada looks to continue to grow its economy, raise Canadian’s incomes and improve our overall quality of life, international trade will play a key role. Currently, our trade to GDP ration is 65% which trails only Germany amongst large, advanced economies. While we have many free trade agreements, most of these agreements are with countries whose growth over the next decades is projected to be slow due to declining populations, lower income growth and other factors. This means growing our exports through those countries will be difficult.


Instead, Canada needs to build stronger relationships with countries that have actual or potential higher economic growth. And one part of the world that has high levels of growth, and will maintain them, is Southeast Asia.


Indonesia

If there is one country in Southeast Asia that has captured the imaginations of outsiders, it is Indonesia. From the Spice Islands that first attracted European traders to the region to modern day travellers looking for their Eat Pray Love moment, from businesses looking to expand into new markets to surfers looking for the perfect wave, Indonesia has always been a nation of opportunity, excitement, and mystery.


Perhaps more than most countries geography impacts Indonesia, affecting its people, its culture, and its policies. Straddling between the Indian and Pacific Ocean, Indonesia sits in a strategic position between the East and West and the North and South. This central geographic position has allowed Indonesia to be part of the international trade system for centuries.


While Indonesia’s geographic position grants it potential economic and geopolitical advantages, it is its size that make Indonesia special. Because Indonesia is huge.

With more than seventeen thousand islands, Indonesia is the world's largest island country while by land area it is the 14th largest country in the world. With more than 270 million people, Indonesia is the world's fourth-most populous country, the most populous Muslim-majority country in the world while its capital city Jakarta is the world's second-most populous urban area. Indonesia is also an amazingly culturally diverse and multicultural country that includes over 700 languages that are spoken in more than 300 ethnic groups.


With nine neighbours including both land and maritime borders, foreign policy and international engagement is important to Indonesia. It seeks active participation in on international issues especially those that are regional focused. Indonesia also strives to remain independent by not siding with any world power. In Southeast Asia, Indonesia’s is a strong supporter of ASEAN and its goals while the ASEAN Secretariat is based in Jakarta further cementing Indonesia’s commitment to the regional group.




Indonesia’s Economy

Like its geographic size, Indonesia economy is big with a total GDP of $1.119 trillion dollars and a per capita GDP of $4,135.57. Indonesia is currently the 16th largest economy in the world, but its growth rates mean that its economic potential is massive. Projections by Price Waterhouse Cooper suggest that Indonesia will be the 4th largest economy in the world in 2050 with a GDP of $10 trillion dollars or ten times its current GDP. Only China, India, and the United States would be bigger.


After averaging over 5.6% growth for the past 50 years, Indonesia is now an upper middle-income country where 1 in 5 Indonesians or 52 million people are now considered middle class. An additional 115 million Indonesians are considered aspiring middle class, free from poverty but who have yet to achieve full economic security. As Indonesia grows bigger and richer, increasing household consumption will remain a major growth driver for the country.

Furthermore, Indonesia is enjoying a demographic dividend with more than 70% of its total workforce being between the ages of 18 and 65 and is population is projected to increase to as much as 320 million people by 2045.


Like most countries, especially ones that are growing rapidly, Indonesia faces challenges such ensuring economic growth, improving infrastructure, growing energy demands, food security, maritime security, corruption, and the need to balance all these issues with the growing impact of climate change. All these issues are made increasingly more difficult due to the sheer size and complexity of Indonesia.


To tackle these challenges, President Jokowi is focusing the Indonesian government on five priorities: human resources development, infrastructure development, regulation simplification, bureaucracy simplification, and economic transformation to help tackle these challenges.




Canada-Indonesia Trade Relationship

Trade between the two countries totalled $3.7 billion CAD in 2019 while Canadian foreign direct investment in Indonesia during the year was $3 billion. Indonesia is the 2nd largest destination for Canadian investment in the ASEAN region.


Despite all the potential of trade between the two countries, overall trade has been relatively flat with Canadian exports up just 6% from 2015 to 2020. While the sheer distance between the two countries may be reason for the lack of growing exports, one factor that may be holding back increased trade between Canada and Indonesia is the lack of any form of trade or investment agreement. That is why the announcement in January 2021 that Canada and Indonesia were exploring a potential free trade agreement was important news for Canadian companies.


Opportunities for Canada

With its large population, increasing incomes and its strong projected growth, Indonesia offers many opportunities for Canadian companies and investors while Canada has the expertise in areas such as agri-foods, financial services, infrastructure, education, energy, and natural resource development that Indonesia needs to meet its five priorities to reach its full potential.


With a widely accepted estimate that Indonesia needs to invest US$500 billion in infrastructure over the next five years to support continued growth, the Indonesian government has made infrastructure development a national priority as it looks to upgrade roads, ports, electrical systems, and water system. To finance this massive infrastructure need, Indonesia is looking to work with the private sector to help offset the financial costs and risks. For Canadian companies who have experience working in Public Private Partnerships, who have specialized solutions can find incredible opportunities. A recent example of Canadian company doing business in Indonesia was the Caisse de Dépôt et Placement du Québec recent investment partnership of $1billion in an infrastructure initiative.


As Indonesia’s population and incomes grow there will be an increase in the demand for agricultural products. The agri-food and seafood sector are an area of major potential growth for Canadian companies. Canada is already Indonesia’s top supplier of wheat while Indonesia’s increasing demand for seafood, soy and pulses means that Canadian companies could be well positioned to take grow their sales and take advantage of this growing market. Companies should be aware that there are halal certifications requirements on many products in Indonesia as part of their pre-market research.


One area that Canada is well positioned to help the Indonesian meets its national priorities is the area of human resources development, specifically in the field of education. Canadian university and colleges have a strong international reputation and experience integrating international students into their schools. Canada is now the world’s third-leading destination of international students with the majority of international students coming from the Asia. Indonesia sends only 2,200 students to study in Canada, a number that could be much higher. Vocational skills are in high demand in Indonesia and Canadian companies in the vocational sector who are looking to expand their operations overseas to new markets would find Indonesia to be an excellent new market.




Conclusion

Much has been made about the rise of Asia or the shift of power from West to East with most of this focus being on China or India while Indonesia is often overlooked or forgotten. This is a mistake and one that Canada and Canadian companies must avoid making. With immense size, growing population and economy, strategic location and its regional importance, Indonesia is a country that Canada should be deepening its ties with especially as Canada continues to see exports as key to improving the quality of life for Canadians.

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