• Michael Stutchbury, Economics editor
• From: The Australian
• March 12, 2011 12:00AM

What if the recovery from the global financial crisis unexpectedly revealed one of the world's big emerging market economies on our doorstep?

Not China or India, two of the so-called BRIC economies (along with Brazil and Russia) now helping the developing world to be the global economy's growth engine for the first time since the industrial revolution. But Indonesia, the fourth most populous nation and long seen as a problem for Australia: repressive ruler of East Timor; an economic basket case disciplined by the International Monetary Fund; a breeding ground for Islamic terrorism; imprisoner of Schapelle Corby and other young Australians on drug charges; a springboard for asylum-seekers trafficked by evil people-smugglers; a poor but corrupt victim of natural disasters. Even the Australian playground in Bali is a place of mourning.

After growing solidly through the crisis Indonesia's economy is now accelerating into a new phase of globalisation dominated by the fast-growing big emerging market economies.

Economically it is on the verge of becoming another BRIC by tapping its enormous natural resource and labour reserves.

Politically it even is being touted as a democratic model for Egypt after the Arab awakening.

From a headache, Indonesia is turning into a business opportunity as a growing chunk of its 240 million people become middle-class consumers.

If it meets its growth projections, Indonesia will become one of the world's 10 biggest economies by 2015, the clear power within Southeast Asia and a significant counterweight to the China.

Unthinkable a decade ago, Indonesian President Susilo Bambang Yudhoyono took centre stage at the World Economic Forum in Davos in January.

Other rising powers are noticing the shift. Indian-Indonesia relations are "on the verge of a major transformation", says the foreign editor of New Delhi's Hindustan Times, Pramit Pal Chaudhuri.

A swarm of senior Indonesian politicians and officials, led by Vice-President Boediono, visited Australia this week to spread the message. Boediono received an honorary doctorate from the University of Western Australia, where he studied in the 1960s, and spoke at its In the Zone conference supported by The Australian.

But the message implicitly posed an awkward question. As Indonesia emerges, why is its trade and investment with Australia so underdeveloped?

Gita Wirjawan, the Harvard-educated former Goldman Sachs and JP Morgan executive Yudhoyono has put in charge of Indonesia's investment co-ordination board, calls it "minuscule".

Together the $US1.3 trillion Australian economy and the $US700 million-plus Indonesian economy are a $US2 trillion economy. Australian firms such as the Commonwealth Bank, ANZ, Macquarie Bank, Leightons, Newcrest, Linfox, Clough Engineering and Ramsay Health have a significant Indonesian presence. The CBA is about to open its 100th retail bank branch there.

Yet two-way trade flows are only $US12 billion or so a year, dominated by oil, tourism, education and live cattle. Foreign direct investment flows are embarrassingly low. Teaching of Indonesia language in Australia schools has languished.

This neglect is partly because the two economies are resource rich and so are sometimes in direct competition, as in steaming coal exports. Unlike China, Indonesia does not depend on Australian iron ore and coal. But, as the story changes, Australia needs to reassess and the Indonesians are keen.

This new story emerged when Indonesia's growth rate slowed only modestly to 4.5 per cent in 2009 after the financial crisis hit. While most rich economies plunged into deep recession, Indonesia posted the third strongest growth in the Group of 20 after China and India. Growth picked up to 6 per cent in 2010 along with foreign capital inflow and the IMF is backing the official target of 6 per cent to 7 per cent out to 2015. "Many of us young Indonesians are not happy with 6.5 to 7 [per cent]," the 45-year-old Wirjawan says. "We desire for the economy to grow at about 8 per cent or above and there's no reason for us not to be able to do that."

What a turnaround from the East Asian financial crisis in 1997, when Indonesia's economy contracted by 14 per cent and the authoritarian Suharto regime collapsed. Indonesia had become "an economic and financial basket case", Yudhoyono said in Sydney last year.

Yet the political and economic reforms, or "reformasi", being accelerated under Yudhoyono appear to echo China's market opening in 1978 and India's pro-market shift in the early 1990s.

Government debt is modest and the balance of payments is in a current account surplus, though inflation pressures are a concern. Per capita gross domestic product is approaching $US3000, well above India's. And the IMF tips it to grow to $US4400 by 2015, about midway between China and India.

Wirjawan revels in retelling a recent encounter with Jim O'Neill, the Goldman Sachs economist who coined the BRIC term a decade ago. O'Neill didn't understand the Indonesian story and hadn't been there since 1994. "I said, 'Hey dude, we've got Starbucks now,' " Wirjawan recounts.

Then, early this year, O'Neill came out trumpeting "new world" growth economies including Mexico, Turkey and Indonesia, each of which account for at least 1 per cent of the global economy.

The Indonesia development plan contrasts with the Indian IT-services based model and even more so with the Chinese manufacturing export model.

Instead, it's based on foreign investment into infrastructure and development and further processing of its natural resource base.

The Indonesians say this means they have to reduce corruption, enforce the rule of law, liberalise their domestic markets, streamline development processes and encourage foreign expertise.

Wirjawan looks to South Korea's industrialisation as "an excellent model" and a source of investment. "We are talking to the South Koreans to build as many steel mills as possible," he says.

The Indonesians plan to combine this and much higher education spending to deliver a "demographic dividend" from their BlackBerry and Facebook-mad young population. Half the population is aged less than 29.

For Australia, the opportunities lie in beef, wheat, dairy and rice exports along with tourism and education, but extend more to services areas such as engineering, legal, accounting, financial and telco.

These will be key parts of the Indonesia-Australia Comprehensive Economic Partnership Agreement, which Julia Gillard and Yudhoyono agreed to pursue in Jakarta in November. This seeks to build on the Australia-New Zealand free trade deal negotiated with the Association of South East Asian Nations, including Indonesia. It would be undercut by Tony Abbott's proposal to help pay for the Queensland flood bill by slashing Australian aid money for building Indonesian schools.

After a domestic backlash over a China free trade deal, the Indonesians are keen to tap Australian investment and expertise to help sell an Australian agreement at home. To Australia, they're stressing the strategic benefits.

Boediono says the two countries were partners in the G20 and East Asian summits; we're two of the region's leading democracies; and we have been global leaders on issues such as terrorism and security. Australia and Indonesia are "strategically bound together indefinitely".

Australia's Trade Minister Craig Emerson tells this newspaper: "The top echelon of the government of Indonesia all have close personal friendships with Australia. So here we have on our doorstep a government that is committed to liberalisation and an enormously large country with very strong growth rates; the sort of country with which we would want to negotiate an economic partnership."