Indonesia envisions a future of high-income prosperity and competitiveness by 2045, as presented in the recently launched National Long Term Development Plan (RPJPN) 2025-2045. The country seems to stand poised to harness its potential and unlock the transformative power of global exchange.
Indonesia’s strategic location, vast resources, and dynamic economy present rich opportunities for international trade. With a population of over 270 million and a growing middle class, Indonesia offers vibrant domestic market that attracts global companies and investors. However, the country needs to grow its global trade contribution if it aims to accelerating economic growth, create jobs, and increase competitiveness.
From a trade perspective, Indonesia has been on the right track. The archipelago has seen an increase in export throughout 2022, notably the highest in the decade. According to the Indonesian Central Bureau of Statistic (BPS), the country exported USD291.97 billion in value, a 26.07% increase year-on-year. Although commodity price peak contributed significantly to the number, processing industry added the highest export value USD206.35 billion.
The growth in export of processing industry aligns with the country’s intention to move from commodity based economy to manufacturing and processing base in the region. We also have seen a lot of focus on developing a robust downstream industry, a critical aspect for Indonesia to expand and diversify its manufacturing output and increase export portfolio.
On investment, the country surprisingly has been doing exceedingly well too. According to the Indonesian Investment Coordinating Board (BKPM), total flow of foreign direct investment was USD43 billion in 2022. This was the highest in the country’s history and represents 44 percent increase from 2021. This year, the government expects USD92 billion in combined foreign and domestic investments, and 1,650 trillion rupiah (US$108 billion) in 2024.
Unfortunately, the increase in FDI was dominated by the metal mining and mining sectors, apparently pulled by the Indonesian government’s rigorous effort to bring metal and mining processing to the country. The growth of export and increase in contribution to global trade might rely on investment in other areas of manufacturing and processing.
In this context, Indonesia’s chairmanship in ASEAN for 2023 is a great momentum. Indonesia realized its participation in regional and global integration is key to become an advanced economy. It has been a strong promoter and advocate of ASEAN. It has also been actively looking and involved in both bilateral and regional economic partnership which shows it is actively looking for opportunities for trade expansion.
ASEAN has been the second-largest trading partner for Indonesia, accounting for around a quarter of its total trade. The Regional Comprehensive Economic Partnership (RCEP) Agreement entered into force for Indonesia at the beginning of the year. This is the access Indonesia expects to expand its international trade, with 15 member under RCEP provides a vast market of over 2.2 billion people and a combined GDP of $26.2 trillion.
Policy Improvement for a Competitive Trade
Despite all prospects that Indonesia has today, it still has list of home works to tackle in the domain of trade facilitation. There has been a lot of improvement on licensing and other aspect of market access, but the country still scores pretty low on business legislation based on 2023 Global Competitiveness Index.
Indonesia needs to streamline trade procedures, reducing bureaucratic hurdles, and push for efficient customs processes. It already aims to reduce logistics costs to 9% of GDP by 2024 through initiatives such as the National Single Window and the Online Single Submission system. The digital platform has reduced many bureaucratic processes, however it still need strong political will and commitment from every government agencies to create a smooth business process.
Other analysis has also pointed out to the quality of human resources and level of skills of Indonesian workforce. This is the next urgent thing to tackle if Indonesia wants to increase its role in international trade. Investing in education, vocational training, and upskilling programs will develop talented workforce that can adapt to international dynamics, embrace innovation, and capitalize on emerging opportunities.
The next aspect relates to the trade itself. It is clear that Indonesia can only continue to rely on commodities and natural resources until certain point. As the downstream industry grows, the country will need to expand its market beyond traditional partners today. Investing in market intelligence, promoting trade missions, and forging strategic partnerships will enable Indonesian businesses to explore new horizons and tap into new geographic areas.
Lastly, embracing sustainability in trade policies is essential. Encouraging sustainable production methods, responsible sourcing, and adherence to international environmental and labor standards will not only develop Indonesia’s reputation as responsible trading partner, but also open access to new markets.
With a robust trade landscape, Indonesia can flourish as a beacon of prosperity, weaving its threads of commerce and opportunity into the rich fabric of the global economy.