Indonesia and Japan: Economic and Political Relations and Implications for Southeast Asia

Moderator: Erland Heginbotham, Johns Hopkins University

Panelists: Ed Lincoln, Council on Foreign Relations, Shinji Asanuma, Hitotsubashi University, Djisman Simandjuntak, Centre for Strategic and International Studies (CSIS), Jakarta and Marvin Ott, National War College

Lunch speaker: H.E. Ambassador Soemadi D.M. Brotodiningrat, Indonesian Ambassador to the U.S.

The consensus of four expert panelists discussing Japanese relations with Indonesia and Southeast Asia was that Japan’s former dominance in SEA had declined whereas China’s had risen substantially. The United States’ role had continued to grow but was not as vigorous as previously. The full implications of these shifts remained obscure but were clearly going to be important. Stronger regional institutions and integration must play a larger role in future. But sound individual government policies would be even more important to ensure well functioning market economies. Security in the region would be important to economic growth but was a lot more problematic than in the 90s.

The Economic Dimension

First to speak, Professor Asanuma stated that the days of the East Asian economic miracle as we knew it were over. The miracle had been the result of Southeast Asia’s enlightened, outward looking approach and strong trade and investment interaction with Japan and the United States. The financial crisis of the late nineties showed the inadequacies of the international financial architecture as well as the vulnerabilities in the East Asian economies and institutional make-up.

The financial crisis led to a new environment with increased national debt in Indonesia, a dysfunctional financial sector, and regime change with substantial diffusion of power. Not only was Japan weaker as an engine of growth, thus no longer able to play its past lead goose role, but the United States’ import market was more competitive, thus harder to penetrate. China’s and to a lesser extent India’s emergence as major economic players increased bilateral trading opportunities, but they also fiercely competed with SEA in the rest of the world for markets, capital and technology. Above all the mega trend toward globalization continued.

While each East Asian country had its own goals, all shared the desire to accelerate growth and decrease unemployment and poverty. Overcoming unemployment in Indonesia was critical. As for Japan it had to climb out of its structural recession so as not to be a drag on Asia. To construct well functioning market economies, greater integration both regionally and internationally would be essential. In the new environment institutionally based multi-polar integration must replace the hub and spoke market-led integration of the past.  The current movement toward FTAs should be seen as an attempt to give an institutional base to regional integration and to reduce transaction costs as well as volatility and unpredictability.  Individual governments also needed to help build domestic infrastructure, regulatory frameworks and good institutions for governance. Indonesia in particular needed to improve its investment climate, the rule of law and its infrastructure.

Dr. Edward Lincoln agreed with Professor Asanuma’s points, then raised some caution flags. While acknowledging the desirability of a gradual rise in intra-regional trade and regional institutions, he noted the relative decline of Japan’s imports from the region and its investment into the region. Japan’s commercial loans were down 70% from 1977 and its foreign aid was falling. At the same time China was rising as a trading partner for SEA, although not as a source of capital and aid.

Indeed, there was reason for the region to be pulled together in these circumstances; but it had to be recognized that the East Asian nations were extraordinarily diverse economically and in other respects, and they could not be integrated as easily as Europe had been. Moreover, globalization was a driving force that had to be taken into account.

Dr. Lincoln then made three comments:

1)      Emphasis on working through world institutions was also needed despite past IMF mistakes. He was skeptical of the need for new institutions. He commended the Chiang Mai initiative which encouraged national banks to gear up to defend themselves. Swap arrangements should remain under the IMF umbrella.

2)      APEC was a better approach to boosting regional growth than the ASEAN Plus Three which left out Australia, New Zealand, Taiwan and the United States – all key regional financiers.

3)      Although they were the flavor of the day, it should be kept in mind that bilateral trade arrangements created new distortions. Beware, said Ed Lincoln.

Dr. Djisman Simandjuntak thought Japanese-ASEAN economic relations had greatly benefited both sides. Trade had prospered in accord with dynamic comparative advantage. Japan had provided beneficial FDI for a long time, was SEA’s largest source of capital and had proven to be a dependable partner in crisis. But recently questions had been raised about Japan’s ability to continue in its past role. The optimal situation now seemed to include a wider diversity of economic partners for SEA including, Europe, China, the United States, Australia, and New Zealand as well as Japan.

Within Indonesia there were perceptions that Japan heavily protected its agriculture, restricted tech transfer and prohibited labor movement. Moreover there was a hangover in some quarters of WW II resentment. In addition to globalization and the rise of China, Dr. Djisman noted two other complicating factors affecting Japan-ASEAN relations: 1) the perceived inertia in WTO negotiations; and 2) the proliferation of regional trade groupings.

Japan and ASEAN planned to negotiate architecture for a comprehensive economic partnership by 2005. It would cover FTAs in goods and services, investment facilitation, labor movement, human resource development and overall development cooperation. Precise goals remained to be defined. Dr. Djisman did not believe the Japan-Singapore FTA provided a good model as it did not have to overcome serious obstacles.

The immediate impact of such an arrangement was likely to be limited. It would however attract stronger interest among traders and investors and lead to further consolidation of FDI in the region, discovery of new sources of growth, and generally win-win economic interaction. Diversity among countries in Dr. Djisman’s view should be seen as an asset rather than as a problem. The impact on the rest of the world and future economic developments should be considered as well as conditions in the integrating region. He foresaw both headwinds and tailwinds for the negotiators. But anticipated success if there were good leadership, strategic planning and support from the rest of the world.

The Security Environment

Dr. Marvin Ott wound up the formal presentations with an overview of the security situation which integrated significantly with the economic picture.

Currently, in contrast to the peaceful 1990s, the security outlook was remarkably problematic and open ended.  Now it was more threatening because of the rise of militant Islam, Indonesia’s radical political change, piracy, the change in the global security environment, the PRC’s steady rise and the United States’ spasmodic attention to southeast Asia. The contrasting rise of Chinese power and influence and the relative decline of Japan’s role in SEA had been dramatic and raised unanswered questions. China had undertaken a brilliant strategic as well as economic campaign aimed at bringing Southeast Asia within its embrace. Japan’s interest in SEA was under some threat, but its response has been slow to develop.

ASEAN’s saw its task vis-à-vis China as ensuring that the SEA/PRC economic/security competition remained a positive sum game for both. Some observers voiced doubt about the outcome because of China’s continuing South China sea claims. As for the United States and Japan, ASEAN would want to keep them both in the game, but it would continue to prefer that the U.S. security support stay at arms length, over the horizon. The ASEAN nations along with others saw a need for multilateral security arrangements.

In sum, the ASEANs wished to promote a geopolitical balance among the major powers that would help the countries of the region create a secure environment for economic growth.

Questions and Answers

Thoughtful questions from the audience produced the following additional points:

• The United States role was important but unlike Japan it was not part of the region. Japan was a regional player; the United States a global one. Ed Lincoln thought the relative strength of the U.S. as an import market would inevitably decline somewhat as its negative trade balance required correction. (Dr. Djisman was less concerned about this). Lincoln agreed with Marvin Ott that as a global player the United States strategic attention toward southeast Asia was spasmodic. We focus more on the region when global issues like terrorism arise.
• Whereas Professor Asanuma emphasized the need for regional and interregional bilateral FTAs, and regional infrastructure arrangements, (i.e., a Japan, Korea, China economic corridor), Ed Lincoln said “ok” but it was also important that the world not separate into regional blocs. Ott expanded on this, cautioning that China would try to turn regional security arrangements into instruments for its own use and was very skillful. Dr, Djisman thought the United States still held great sway in the region as an economic and security partner and in education.
• Panelists agreed that the PRC worked continually to exclude Taiwan from regional and world institutions but that it was harder for it to succeed in the larger global institutions where the United States and Europe tended to call the shots. Professor Asanuma noted that Taiwan had been well integrated into the region’s markets if not its institutions.
• In response to a question about the potential significance of a European East Asian economic land bridge Lincoln express skepticism – lots of talk but little action since air and sea freight were more feasible.  But the central Asians needed such a bridge and would promote it.
• Dr. Djisman was not worried about the collapse of the United States “debt bubble.” Not quite so dismissive, Asanuma thought that good foreign exchange rate management would bring it in for a “soft landing.” Greater financial integration between the United States and East Asia over time was called for. Asanuma advocated an Asian monetary fund to complement the IMF. Regarding the ADB, Lincoln favored closer coordination with APEC. Asanuma thought it should be managed more of, by and for the region and its role should focus on late bloomers like Indochina and Burma.
• Adding a closing point to this constructive exchange, moderator Erland Heginbotham called for greater participation in developments by business and scholarly groups which had done so much to pull governments forward in the 70s and 80s.

Ambassador Soemadi

Following lunch Indonesian Ambassador Soemadi who was Ambassador in Tokyo prior to coming to Washington spoke about Indonesian-Japanese relations characterizing them as good and anticipating they would remain so because of geostrategic mutual interests, economic complimentarity and mutually mature restraint. The relationship had been multi-layered involving not only government but business, NGOs, universities and social and cultural institutions.

Japan had greatly helped with the economic crisis, governmental reform and a dignified solution to East Timor. The two had cooperated on terrorism and piracy. Both were opposed to becoming nuclear states and had cooperated on WMD issues. If anything, the Ambassador thought, cooperation would increase in future.

Ambassador Soemadi also discussed the impact of 9/11 on the region; now “Indonesia is a direct victim” of terrorism, he said.  He went on to discuss the various anti-piracy and maritime security proposals, including those of Japan, including the “complication” of the U.S. backed Proliferation Security Initiative (PSI) with maritime security proposals.  He observed that Indonesia and Japan agree on strengthening the NPT non-proliferation regime and the “fulfillment” of the Comprehensive Test Ban Treaty (CTBT).  But he also worried about the consistency of the PSI with the NPT and other international agreements.

Another area in which Japan and Indonesia agree, he continued, is the denuclearization of North Korea.  Indonesia is ready to help advance the Six Party talks and see the ASEAN Regional Forum (ARF) as a possible supplement to what can be worked out in the Six Party context.  Finally, Ambassador discussed the impact on ASEAN of membership enlargement, raising problems of cohesion and a “developmental gap,” the rise of the ASEAN Plus Three format, and Japan’s limited security role in the region.