Saturday, June 15, 2024 | 22:45 WIB

The repercussions of the Palestine-Israel conflict on Indonesia’s economy

Jakarta, IO – The global economy is facing unprecedented challenges, with the conflict in the Middle East between Palestine and Israel and the unceasing Russia-Ukraine war. 

Not only do these conflicts jeopardize the regions where they occur, but they could also constrict the economic connectivity between countries with the largest economies in the world. 

In the last century, the global economy has become more integrated, with expanding international supply chains and exponential technological advances. 

Globalization, which accelerated in the second half of the 20th century, has significantly transformed the flows of free trade, capital and information around the world. 

Nevertheless, since the 2008 global financial crisis, many countries have begun to implement protectionist policies to safeguard their domestic industries from foreign competition, leading to deglobalization. 

The current situation in the Middle East has also inspired an increase in deglobalization. US geopolitical relations in the Middle East are also deteriorating, after the US sent two aircraft carriers and 2000 troops to protect Israel. This could damage the Americans’ reputation in the eyes of the Islamic world, including Indonesia. 

This geopolitical rift could result in reduced trade cooperation, information and technology distribution and financial market relations between countries. 

If the situation in the Middle East escalates, more severe divisions will occur in the region and, perhaps, among the major economic players. 

The solid support for Israel by the USA could cause other countries, such as China, Russia and Iran, to take sides against Israel, which could worsen trade relations between the United States and those countries. It could also lead to global inflation and a spike in interest rates globally, ultimately causing a slump in global economic growth. 

To understand the repercussions of the conflict in the Middle East and Ukraine on the global economy, we need to scrutinize several key factors. 

Achmad Nur Hidayat
Achmad Nur Hidayat, Economist and public policy expert from UPN Veteran Jakarta

First, these conflicts have aroused grave uncertainties, slashing own investment and impeding economic growth. 

Second, the conflicts can disrupt global supply chains, resulting in increased production costs and inflation. 

Third, these conflicts may alter the flow of global trade, affecting the trade balance of the countries involved. 

Thus, countries across the globe need to strengthen their domestic economies and reduce their dependence on large countries like the United States and China. 

By doing so, they can protect themselves from the detrimental impacts of geopolitical instability and ensure their development, despite global uncertainty. 

Worst-scenario hypothesis 

If the conflict in the Middle East continues to escalate and a land war breaks out, more preposterous divisions can happen in the region and among major economic players. 

The Middle Eastern countries may be separated into two sides, some supporting Israel while others support Palestine. 

This division can lead to a regional war involving many countries and impact the global economy. Global inflation could soar wildly, resulting in increased interest rates and, eventually, crushing global economic growth. 

Solutions for Indonesia 

In facing global uncertainties caused by the Middle East conflict, Indonesia should strengthen its domestic economy by focusing on developing strategic sectors, such as infrastructure, education and technology. 

Investment in these sectors will increase the productivity and competitiveness of the Indonesian economy, enabling it to compete in the global market. 

To reduce dependence on certain countries, Indonesia should diversify its export markets so that it can protect itself from the adverse impacts of geopolitical instability in its main export destinations. 

Food security must also be improved by strengthening the agricultural sector and ensuring food sufficiency for the nation. Therefore, Indonesia can cope with the challenges that may arise due to the Middle East wars or disruptions in global food supplies. 

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As a final point, Indonesia should increase regional cooperation with countries in the Southeast Asian region to strengthen the regional economy and create a bigger and stronger market. This cooperation may include sectors such as trade, investment and technology development. 

Nonetheless, regional cooperation may not be accomplished if Southeast Asian countries do not unanimously decry Israel’s occupation of Palestine. 

The above measures will help Indonesia to face the challenges posed by geopolitical instability and ensure sustainable economic growth.