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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Indonesia's Growing Global Geopolitical Significance

Politics / Emerging Markets Aug 02, 2011 - 06:59 AM GMT

By: STRATFOR

Politics Best Financial Markets Analysis ArticleI am writing this from Indonesia. Actually, that is not altogether a fair statement. I am at the moment in Bali and just came from Jakarta. The two together do not come close to being Indonesia. Jakarta, the capital, is a vast city that is striking to me for its traffic. It takes an enormous amount of time to get anywhere in Jakarta. Like most cities, it was not built to accommodate cars, and the mix of cars with motor scooters results in perpetual gridlock. It is also a city of extraordinary dynamism. There is something happening on almost every street. And in the traffic jams, you have time to contemplate those streets in detail.


Bali is an island of great beauty, complete with mountains, white beaches, blue waters and throngs of tourists. Since I am one of those tourists, I will not trouble you with the usual tourist nonsense of wanting to be in a place where there are no tourists. The hypocrisy of tourists decrying commercialization is tedious. I am here for the beaches, and they are expensive. The locals with whom tourists claim to want to mingle can’t come into the resort, and tourists leaving the resort will have trouble finding locals who are not making a living off the tourists. As always, the chance of meeting “locals” as tourists usually define them — people making little money in picturesque ways — is not easy.

What is clear in both Jakarta and Bali is that the locals are tired of picturesque poverty, however much that disappoints the tourists. They want to live better and, in particular, they want their children to live better. We were driven by a tour guide to places where we bought what my wife assures me is art (my own taste in art runs to things in museums and tigers made of velvet). We spent the requisite money on art at places our guide delivered us to, I assume for suitable compensation.

The guide was interesting. His father was a rice farmer who owned some land, and now he is a tour guide, which in Bali, I gather, is not a bad job by any means if you have deals with the hotel (which he undoubtedly has). But it was his children who fascinated me. He had three sons, two of whom were in universities. The movement from rice farmer to university student in three generations is not trivial. That it happened with the leaders Indonesia had during that time is particularly striking, since by all reasonable measures these leaders have been, until recently, either rigidly ideological (Sukarno) or breathtakingly self-serving (Sukarno’s daughter, Megawati).

When I looked at some of Indonesia’s economic statistics, the underlying reason for this emerged. Since 1998, when Indonesia had its meltdown, the country’s gross domestic product (GDP) has grown at roughly 5 percent per year, an amount substantial, consistent and above all sustainable, unlike the 8 and 9 percent growth rates before the collapse. Indonesia is now the 18th largest economy in the world, ranking just behind Turkey.

All of that is nice, but for this: Indonesia ranks 109th in per capita GDP. Indonesia’s population is about 237 million. Its fertility rate is only 2.15 births per woman, just above a stable population — though being just above stable still means substantial growth. Indonesia is a poor country, albeit not as poor as it was, and its GDP continues to rise. Given its stable government and serious efforts to control corruption, which systemically diverts wealth away from the general population, this growth can continue. But whether the stability and anti-corruption efforts of the past six years can continue is an open question, as is the prosperity in Jakarta, the tourism in Bali (recall the jihadist attacks there in 2002 and 2005) and whether our guide’s third son will receive a college education.

I saw three Indonesias (and I can assure you there are hundreds more). One was the Indonesia of Jakarta’s elite, Westernized and part of the global elite found in most capitals that is critical for managing any country’s rise to some degree of prosperity. Jakarta’s elite will do well from that prosperity, make no mistake, but they are also indispensable to it. Another Indonesia was the changing one that our upwardly mobile tour guide saw through his children’s eyes. The third was the one in which a little girl, perhaps four, begged in traffic on the road from the airport in Bali. I have seen these things in many countries and it is difficult to know what to make of them yet. For me, going to Indonesia is not the same as going to Eastern Europe. I know what is lurking under the current there. Indonesia is new for me, and I will be back. For now, let me describe to you not so much the country of Indonesia but how I try to learn about a place I know only from books (and even then relatively little).

Strategic Positions

Nietzsche once said that modern man eats knowledge without hunger. What he meant by that is that modern man learns without passion and without necessity. I didn’t go to Indonesia without either. What interests me most about Indonesia is not its economy or its people — although that might change as I learn more. What interests me now is Indonesia’s strategic position in the world at this point in time.

To determine that position, we must first look at China. China is building an aircraft carrier. Now, one aircraft carrier without cruisers, destroyers, submarines, anti-missile systems, satellite-targeting capabilities, mid-ocean refueling capabilities and a thousand other things is simply a ship waiting to be sunk. Nevertheless, it could be the nucleus of something more substantial in the coming decades (not years).

When I look at a map of China’s coast I am constantly struck by how contained China is. In the north, where the Yellow and East China seas provide access to Shanghai and Qingdao (the home of China’s northern naval fleet), access to the Pacific is blocked by the line of Japan-Okinawa-Taiwan and the islands between Okinawa and Japan. Bases there are not the important point. The important point is that the Chinese naval — or merchant — fleet must pass through choke points that can be controlled by the United States, hundreds of miles to the east. The situation is even worse for China in the South China Sea, which is completely boxed in by the line of Taiwan-Philippines-Indonesia-Singapore, and worse still when you consider the emerging naval cooperation between the United States and Vietnam, which has no love for the Chinese.

The Chinese are trying to solve this problem by building ports in Pakistan and Myanmar. They say these are for commercial use, and I believe them. Isolated ports at such a distance, with tenuous infrastructure connecting them to China and with sea-lane control not assured, are not very useful. They work in peacetime but not during war, and it is war, however far-fetched, that navies are built for.

China’s biggest problem is not that it lacks aircraft carriers; it is that it lacks an amphibious capability. Even if it could, for example, fight its way across the Formosa Strait to Taiwan (a dubious proposition), it is in no position to supply the multi-divisional force needed to conquer Taiwan. The Chinese could break the blockade by seizing Japan, Okinawa or Taiwan, but that isn’t going to happen.

What could happen is China working to gain an economic toehold in the Philippines or Indonesia, and using that economic leverage to support political change in those countries. A change in the political atmosphere would not by itself permit the Chinese navy to break into the Pacific or eliminate the American ability to blockade Chinese merchant ships. The United States doesn’t need land bases to control the passages through either of these countries from a distance.

Rather, what would change the game is if China, having reached an economic entente with either country, was granted basing privileges there. That would permit the Chinese to put aircraft and missiles on the islands, engage the U.S. Navy outside the barrier formed by the archipelagos and force the U.S. Navy back, allowing free passage.

Now, this becomes much more complicated when we consider U.S. countermeasures. China already has massive anti-ship missiles on its east coast. The weakness of these missiles is intelligence and reconnaissance. In order to use those missiles the Chinese have to have a general idea of where their targets are, and ships move around a lot. That reconnaissance must come from survivable aircraft (planes that won’t be destroyed when they approach the U.S. fleet) and space-based assets — along with the sophisticated information architecture needed to combine the sensor with the shooter.

The United States tends to exaggerate the strength of its enemies. This can be a positive trait because it means extra exertion. In the Cold War, U.S. estimates of Soviet capabilities outstripped Soviet realities. There are many nightmare scenarios about China’s capabilities circulating, but we suspect that most are overstated. China’s ambitions outstrip its capabilities. Still, you prepare for the worst and hope for the best.

In this case, the primary battlefield is not yet the passages through the archipelago. It is the future of our Indonesian driver’s third child. If he gets to go to college, the likelihood of Indonesia succumbing to Chinese deals is limited. The history of Chinese-Indonesian relations is not particularly good, and little short of desperation would force an alliance. American Pacific strategy should be based on making certain that neither Indonesia nor the Philippines is desperate.

A Focus of History

Indonesia has another dimension, of course. It is the largest Muslim country in the world, and one that has harbored and defeated a significant jihadist terrorist group. As al Qaeda crumbles, the jihadist movement may endure. The United States has an ongoing interest in this war and therefore has an interest in Indonesian stability and its ability to suppress radical Islam inside its borders and, above all, prevent the emergence of an Indonesian-based al Qaeda with an intercontinental capability.

Thus, Indonesia becomes a geopolitical focus of three forces — China, Islamists and the United States. This isn’t the first time Indonesia has been a focus of history. In 1941, Japan launched the attack on Pearl Harbor to paralyze the American fleet there and facilitate seizing what was then called the Netherlands East Indies for its supplies of oil and other raw materials. In the first real resource war — World War II — Indonesia was a pivot. Similarly, during the Cold War, the possibility of a Communist Indonesia was frightening enough to the United States that it ultimately supported the removal of Sukarno as president. Indonesia has mattered in the past, and it matters now.

The issue is how to assure a stable Indonesia. If the threat — however small — rests in China, so does the solution. Chinese wage rates are surging and Chinese products are becoming less competitive in the global marketplace. The Chinese have wanted to move up the economic scale from being an exporter of low-cost industrial products to being a producer of advanced technologies. As the recent crash of China’s high-speed train shows, China is a long way from achieving that goal.

There is no question that China is losing its export edge in low-grade industrial products. One of the reasons Western investors liked China was that a single country and a single set of relationships allowed them to develop production facilities that could supply them with products. All the other options aside from India, which has its own problems, can handle only a small fraction of China’s output. Indonesia, with nearly a quarter-billion people still in a low-wage state, can handle more.

The political risk has substantially declined in the last few years. If it continues to drop, Indonesia will become an attractive alternative to China at a time when Western companies are looking for alternatives. That would energize Indonesia’s economy and further stabilize the regime. A more stable Indonesian regime would remove any attraction for an alignment with China and any opportunities for Chinese or Islamist subversion — even if, in the latter case, prosperity is not enough to eliminate it.

When we look at a map, we see the importance of Indonesia. When we look at basic economic statistics, we see the strength and weakness of Indonesia. When we consider the role of China in the world economy and its current problems, we see Indonesia’s opportunities. But it comes down to this: If my guide’s third son can go to college, and little girls no longer have to dart into traffic and beg, Indonesia has a strong future, and that future depends on it becoming the low-cost factory to the world.

Life is more complex than that, of course, but it is the beginning of understanding the possibilities. In the end, few rational people looking at China in 1975 would have anticipated China in 2011. That unexpected leap is what Indonesia needs and what will determine its geopolitical role. But these are my first thoughts on Indonesia. I will need to come back here many times for any conclusions.

By George Friedman

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Disclaimer: The above is a matter of opinion provided for general information purposes only. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.

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