How increased global trade has transformed Indonesia

Middle class due to grow by 90 million by 2030

Dr Mari Pangestu: “The question for a developing country is how to achieve environmental sustainability and still have development. You can’t just say stop cutting down trees, no more fishing, no more palm oil, because then how are people to live?” Photograph: Dara Mac Dónaill

Dr Mari Pangestu: “The question for a developing country is how to achieve environmental sustainability and still have development. You can’t just say stop cutting down trees, no more fishing, no more palm oil, because then how are people to live?” Photograph: Dara Mac Dónaill

Fri, Mar 22, 2013, 06:01

Over lunch in Dublin this week, Indonesia ’s minister of tourism and creative economy, Dr Mari Elka Pangestu, recalled a visit to her home some years ago by Sir Anthony O’Reilly, then chairman of Waterford Wedgwood.

Royal Doulton (part of Waterford Wedgwood group) was making a major investment in its Indonesian plant and Dr Pangestu met Dr O’Reilly because she was the minister for trade.

The ceramic and china dinnerware producer had shifted part of its production to Indonesia because its research had indicated that Indonesian labour was both efficient and competitively priced.

The shift of manufacturing from Britain to Indonesia was another instance of one of the great transformations in human history – globalisation, the rise of the developing world, and the explosion in the standard of living of the people who live there.

“Indonesia is a large developing country,” she says. “It is now becoming an emerging economy. We are a member of the G20. We are the 15th largest economy in the world, and [the consultancy firm] McKinsey has predicted we will be the seventh [largest economy in the world] by 2030.”

The impact of the changing nature of the global economy has been enormous in Indonesia. A country with a population of 240 million comprising different cultures and spread across more than 17,000 islands, it is the world’s third largest democracy and the largest predominantly Muslim nation in the world.

In describing what is happening in the Indonesian economy, Pangestu uses a phrase that was common here in the early 1990s.

As well as benefiting from increasing global trade and political and structural reforms, Indonesia is also profiting from a demographic dividend that may last to the middle of this century.

The growth in the Indonesian middle class has been phenomenal. From being in the low, single digit millions at the outset of the century, it is now estimated to number approximately 45 million.

McKinsey estimates that figure could grow by a further 90 million in the period to 2030. (Middle, or consuming class is defined as people having an annual net income of more than $3,500, measured at 2005 purchasing power parity.)

The transformation of Indonesia has involved a huge shift from the land to the cities, complete with all the difficulties that such changes can bring, as well as unwelcome growth in inequality.

But these are problems the government is working to overcome, Pangestu says. On the latter, she mentions vocational and technical training, and support for would-be entrepreneurs.


Reform movement
In a globalised, competitive world, countries have to target those areas where they can survive and prosper. In this regard, she says, Europe can still be involved in manufacturing, but at the higher and more specialised end of the spectrum.

The transition from basic manufacturing and production to value-added production and to specialised services is a progression that she gives the impression of seeing Ireland as having travelled, and Indonesia now being embarked upon.

Although she was minister for trade from 2004 to 2011, and is now minister for tourism and creative economy, she describes herself as an academic and NGO person rather than a politician.

She was part of the reform movement that spoke out against the Suharto dictatorship which ended in 1998, and was invited to join the government in 2004.

Indonesia directly elects its president, who then chooses his cabinet in much the way the president of the United States does.

Approximately one-third are, like Pangestu, professionals or technocrats rather than politicians – and that includes the minister for finance.

She studied economics at undergraduate and postgraduate level in Australia and has a PhD in economics from the University of California. Her CV covers a number of pages and includes her membership of the United Nations Conference on Trade and Development secretary general’s Panel of Eminent Persons, and of a UN group directed by economist Jeffrey Sachs called the Sustainable Development Solutions Network.

She has been nominated by her government for the position of director general of the World Trade Organisation and is one of nine candidates for the position. The other contenders come from Ghana, Costa Rica, Kenya, New Zealand, Jordan, Mexico, the Republic of Korea and Brazil.

Her campaign to win the post currently has her on an international tour and on Wednesday she visited Dublin.

While the visit coincided with the annual exodus of Government members for the St Patrick’s Day celebrations abroad, she did get to meet a number of senior politicians, as well as getting to hear about the Gathering project.

She appeared intrigued that the project does not involve government funding but rather is simply an idea people have been invited to take on board and promote.

During her time as minister for trade, Pangestu was heavily involved in international trade talks and agreements and feels she can bring this experience to the role of director general of the WTO.

“I understand the development challenges that countries feel when they are opening up to trade.”


Market access
Trade has been a key driver of economic growth over recent times and she says the WTO, and its role in creating a rules-based environment, is a key player in continuing to promote this global growth.

The decade-long Doha talks have identified what the obstacles to further progress are and she says these are best addressed now on a case-by-case basis.

“What we want is to take parts of the bigger agreement and complete them step by step,” she says.

Increased market access, and the simplification and updating of trade rules would be “good for business, good for small countries and good for trade”.

She takes a keen interest in the area of sustainable development and says that when it comes to the environment and targets, it is not feasible to say to a developing country that they must simply stop this or that activity.

“The question for a developing country is how to achieve environmental sustainability and still have development. You can’t just say stop cutting down trees, no more fishing, no more palm oil, because then how are people to live? There has to be a financial incentive involved.”

The creative economy element of her current ministry involves 15 different sectors including film, music, the performing arts, fine arts, fashion, digital content, and cuisine. “And they are all closely linked to tourism.”

She mentions that the film, Eat, Pray, Love , starring Julia Roberts, has contributed to tourism in the area of Bali in which it was shot.

Sustainability is also an issue with tourism, which must be compatible with environmental, economic, social and cultural sustainability.

“If you are developing a tourism destination, you need to ensure the community in that destination benefits, and that the culture there doesn’t die.”