Newsletter No. 181
February 2, 2006

 

Responding to the Jakarta Post article presented in Shingetsu Newsletter No. 173, Japan Focus carried an interesting article by Geoffrey C. Gunn of Nagasaki University which deserves our attention, as it provides additional background to, and analysis of, Vice-President Kalla’s comments in Tokyo.

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JAPAN-INDONESIA RELATIONS: NEW OPPORTUNITIES, NEW TENSIONS
By Geoffrey C. Gunn

The late January visit to Tokyo by Indonesian Vice President Muhammad Jusuf Kalla was full of surprises, just as the two nations announced their expectations that a Free Trade Agreement (FTA) would be signed before the end of 2006.

The last few years have witnessed a wave of bilateral Free Trade Agreements linking, respectively, the US and trade partners across the Pacific, and Japan and trade partners in the Asia-Pacific region. Countries as disparate in economic profile as Australia, Thailand and Indonesia are currently striving to reach agreement with Japan, in part driven by the free market logic symbolized by the World Trade Organization, as much as by neo-liberal economics. But there is also a sense of scramble not to be left behind by their neighbors.

Discussions on a Japan-Indonesia FTA can be traced back to the visit by Indonesian President Susilo Bambang Yudhoyono to Tokyo in June 2005. But in the official chronology, the newly elected staunchly pro-US Indonesian President first raised the issue of an Economic Partnership Agreement (EPA) with Prime Minister Koizumi Junichiro at the APEC Summit Meeting of November 2004. Following agreement in December 2004 between the respective trade ministers of the two nations a Joint Study Group for the Japan-Indonesia EPA was launched. Preliminary discussions commenced on 31 January 2005, the first of three exploratory meetings, engaging relevant ministries and representatives of academic and private sectors of the two countries.

At that time there was an overriding sense in Jakarta that Singapore, the Philippines, Thailand and Malaysia had moved faster than Indonesia in pursuing FTAs with Japan, though only Singapore -- as might be expected given its economic profile -- had actually signed an agreement.

In Tokyo, in June 2005, the Indonesian President and the Japanese Prime Minister jointly announced commencement of negotiations on the "Japan-Indonesia Economic Partnership Agreement" (JIEPA).

Certain facts stand out: namely, that Japan is Indonesia's largest trade partner in both export (19.06 percent) and import (13.07 percent) in 2004. Japan is also the largest provider of Official Development Assistance (ODA) to Indonesia, a program that reaches back to the provision of war reparations commencing in 1958.

Indonesia is an important energy supplier to Japan; although it should also be understood that Indonesia, currently a net importer of oil, remains a steady supplier of LNG to other nations. In Tokyo, Kalla made clear the obvious, that competition among international clients for Indonesia's remaining gas reserves (Natuna in the South China Sea and the Bird's Head area of Papua are promising) is already acute and that Japan must play its cards accordingly.

In the discussions, Indonesia expressed strong interest in Japan's reduction of both tariffs and non-tariff barriers for trade in goods.

Indonesia also welcomed expanded Japanese investment, while Japan sought the improvement of market access through the elimination of excessively high tariffs on industrial goods including auto, steel, textiles, electronics, etc. Reciprocally, Indonesia sought improved access for its exports to Japan of plastic goods, organic chemicals and, over Japanese objections, footwear and leather products (deemed "sensitive historically" by Japan).

Obviously, Indonesia's economic profile has changed over the decades from a primarily agricultural- and resource-based economy to an export platform of value added manufacturing goods based upon comparative advantage. Under the long years of the Suharto dictatorship Japan could count upon forms of economic plunder of resources -- as alluded by Kalla -- a competitive labor cost structure, and a docile labor force. An implicit understanding existed not to link aid with political reform, democratization or human rights.

The status quo has also changed. Indonesia's economic recovery from the devastating Asian Economic Crisis has been weak, resources depletion is evident and, in the wake of the reform movement, which led to the ouster of the Suharto dictatorship and reigned in the military, even an elected President faces a more sophisticated electorate. The rise of China and its competition with Japan for economic leadership of Southeast Asia are closely watched in Jakarta.

Kalla, the chairman of Golkar, Indonesia's largest political party, didn't arrive in Tokyo as a supplicant of the old style crony business network that marked the Suharto era, but the bearer of some blunt truths. But at the end of a long queue of potential beneficiaries of freer trade with Japan, Kalla could also observe the snail pace at which the regional FTAs were moving, especially in opening up Japan's notoriously restricted agricultural sector.

Kalla's reported concern that Japan had dispersed too many unaffordable loans to Indonesia is not without meaning. Indonesia is also a major client of the Japanese-dominated Asia Development Bank. In the wake of the Asian Economic crisis, Japanese loans to Indonesia added up to a staggering Yen 7.7 trillion, half of which is currently outstanding.

On 26 April 2001, Japan, Indonesia's largest creditor nation for the previous thirty years, made a radical break with tradition by canceling a Yen 35.9 billion loan, citing failure on the part of the Abdurrahman Wahid administration to meet aid conditions. In so doing, Japan followed a decision made earlier in the year by the World Bank to cancel a US$300 million loan, along with the IMF's decision in December 2000 to delay continuation of its US$5 billion program in Indonesia. Key Indonesian officials, seeking a rescheduling of loans, reacted with dismay at this element of "blackmail."

Undoubtedly Japan also surprised Jakarta by falling into the new Washington consensus on loans. The major victim of the loan crisis of 2001 was President Wahid, who was impeached in August of that year, ostensibly over personal scandals. Wahid, who was known for drawing the line at military interference in politics, was replaced by his vice-president Megawati Sukarnoputri, a staunch military-backed nationalist, and no economic manager. The amount of default on loans is not public knowledge, but is believed to be considerable. [1]

Not mentioned in the Jakarta Post article is the reported meeting in Tokyo between Kalla and Japanese Foreign Minister Aso Taro on human rights, unthinkable not only during the Suharto era, but virtually unprecedented in the history of relations between the two countries. Reportedly, Aso told Kalla (who agreed), that "once a country has achieved a degree of economic development, such matters as freedom of information and protecting human rights takes on importance." [2]

Times have certainly changed since the Suharto dictatorship essentially milked loans from Japan in return for virtual carte blanche in economic contracts and resources exploitation. It seemed incongruous, but was Japan in 2006 actually playing the human rights card to Jakarta just as the Indonesian vice president was displaying an uncharacteristically Javanese shoot from the mouth style of public discourse on Japan's economic legacy in the sprawling tropical archipelago nation?

 

Notes:

[1] The background to the financial scandals and international loans is discussed in Geoffrey C. Gunn, "Japan, Post-Crisis Indonesia, and the Japanese Role in East Timor Development," in Rolando B. Tolentino et.al., Transglobal Economies and Cultures: Contemporary Japan and Southeast Asia, The University of the Philippines Press, Manila, 2004, pp.35.

[2] "Japan, Indonesia Agree to Hold Talks on Human Rights." (AP, January 23 2006).

 

COMMENTARY

1) From Michael Laffan of Princeton University on February 3, 2006.

I'd like to compliment and thank Geoffrey Gunn for his analysis -- very clear and useful indeed. I just wondered a little about implied the reasons for Wahid's impeachment. The suggestion (perhaps made more by sentence order than by design) that he was impeached due to his rejection of military interference in government is not quite on the mark, I feel. Wahid may indeed have been a critic of the military, but his impact on it was, to my mind, minimal -- particularly in relation to his inability to stem the tide of violence in Poso. Indeed he was impeached over a personal scandal, but the financial mismanagement and gross incompetence was manifest in many other areas, not to mention his unilateral personal style and inability to maintain consensus within his own (Islamic) constituency.

For example, an alliance of Islamic interests (the so-called 'middle axis') had seen him propelled into the presidency, but they soon lost interest when he started to suggest (with little support or prior warning) that relations with Israel should be opened up, or when he disputed matters of Islamic law with the Council of Indonesian Ulama (a quango originally seen by Suharto as a rubber stamp for its policies).

In fact one of the disputes where Wahid visibly lost 'Islamic' credence was the Ajinomoto scandal. When it was revealed that the ingredients for the universally used Japanese MSG products had been changed to include a pork byproduct, Wahid defended the company citing national/communal interest (maslaha), but the CIU scored a rare victory -- indeed this was one the first times that the public at large paid any attention to its fatwas.

Megawati was no better, I have to say -- she was dull and colourless by comparison to Wahid -- but perhaps it was more under her 'leadership' that the army returned rather than via one of the many plot-lines traced by Wahid supporters as reasons for his downfall.

2) From Geoffrey Gunn of Nagasaki University on February 4, 2006.

Apologies to Michael Laffan if any ambiguities over Wahid's impeachment crept in. His impeachment was indeed linked with Bulog-gate and Brunei-gate scandals -- although wasn't this also the pretext to get him out?

Whether or not he was complicit in these scandals, his general ineptness and mismanagement also irritated the international financial community. And, far from hobbling the military, he infuriated military and nationalists by raising expectations in Papua and Aceh of autonomy/independence.

That is an interesting comment on the Islamic angle and, who knows what kind of damage control representations were made by the Japanese over the Ajinomoto crisis.

3) From Michael Laffan of Princeton University on February 4, 2006.

No apolgies necessary! I agree, pretext or not, many were happy to see him removed and would be very curious to learn more about what representations were made on behalf of Ajinomoto (I always wondered why I had such a dry mouth and trouble sleeping after a big meal sometimes -- MSG is an absolute killer!).

4) From Geoffrey Gunn of Nagasaki University on February 5, 2006.

The PT Ajimonoto Indonesia case might not just be academic given the current plight of some EU countries facing down the Islamic storm over the Muhammad cartoons.

I briefly discussed the Ajinomoto case in my (poorly edited) book chapter cited in my Japan Focus article. Major source is Kornelius Purba, Japan Quarterly, April-June 2001, 50-55. You undoubtedly know the story line. The Indonesia Ulema Council issued a fatwa banning the product amidst mass protests. 3,000 tons of Ajinomoto were taken off the market. Police took Japanese company executives into custody. According to Purba, out of concern at losing Japanese investments Wahid used his authority as Islamic leader to proclaim the product halal (OK). Japan dispatched Justice Minister Komura to meet Wahid to diffuse the incident. [I recall that Japanese chemists came up with the formula proving no pork enzymes.] Mindful of the fate of 900 Japanese companies doing business in Indonesia, the Indonesia lobby within the LDP slammed Ajinomoto for making an insensitive blunder. Purba made the comment that, if an Australian or American company committed this kind of cultual indiscretion, then who knows what might have happened.