Jakarta, IO – The United States (US) is the largest economy in the world, with a GDP of US$25.46 trillion in 2022, accounting for 10.95 percent of global GDP. The size of the US economy is 19 times larger than Indonesia’s (US$1.32 trillion in 2022). No wonder it has become many countries’ strategic cooperation partner, including that of Indonesia.
Amid the current global economic slump, where the global economy is projected by the International Monetary Fund (IMF) to only grow 3 percent in 2023, and 2.9 percent in 2024, it is important for each country to sort and select the right investment and trade partners who can improve their economic performance. In Q3-2023, the US economy was able to recover and grow by 4.9 percent YoY, surpassing its growth in Q1 and Q2, at 2.2 percent and 2.1 percent YoY, respectively (Figure 1). The US respectable growth rate has injected optimism that economic recovery is currently underway. Thus, it is only appropriate that Indonesia takes advantage of the strong performance of the US economy by developing investment and trade cooperation. It is hoped that as the US economy recovers, US investors will also flock to Indonesia to expand their businesses.
With accelerated economic growth throughout January-September 2023, the US economy is still confronted with the challenge of a persistently high inflation rate, at 3.2 percent YoY (October 2023) which is still outside the Fed’s announced band of 2 percent. Therefore, inflation is still likely to become a “stumbling block”, one that continues to be a drag on the US economy. The problem is mainly caused by the US central bank’s interest rate policy which, at current 5.5 percent, is still quite high. If inflation in the US is not brought within the target, it is likely that the Fed’s benchmark interest rate may not fall in the foreseeable future. This might hamper growth of the real sector, including the rate of investment in various strategic sectors of the economy.
Even though there is a risk that the interest rates will remain high due to still “hot” inflation, the current US inflation rate is actually far below the level of 2022, which soared to 8 percent. Therefore, it is natural that the moderating inflation rate, accompanied by stronger growth, projects an optimistic outlook for investment and trade cooperation with the US in the future. As it makes up the lion’s share of the global economy, the improvement in the US economy also means good news for global economic recovery.
Jokowi-Biden meeting
The strong signal of US economic recovery has become a magnet for various countries to increase their cooperation with the world’s largest economy. In this regard, Indonesia certainly cannot miss the momentum bestowed by the US’ growing economy. President Joko “Jokowi” Widodo’s visit to the US to meet with President Joe Biden is a strategic step to strengthen economic relations between the two countries. Moreover, for Indonesia, this meeting was not only about the economy, but also a humanitarian mission aimed at defusing a conflict between Israel and Hamas, which has continued to rage on and resulted in tens of thousand of casualties. From an economic perspective, the “heat” of the Israeli-Palestinian conflict could have negative implications for the global economy, as it continues to gradually recover.
The meeting also produced several MoUs signed on November 13, which signified the increasingly close relationship between Indonesia and the US, which has spanned almost 75 years. In general, the economic agreements that have been developed focus on the importance of guiding future economic growth that aligns with environmental sustainability. This ‘pro-environment’ impression is strongly reflected in the plan to strengthen cooperation on critical minerals (Critical Mineral Agreement/CMA) and the implementation of the Just Energy Transition Partnership (JETP).
As a developed country, the US will certainly direct its future economic development towards environmental sustainability, where the use of clean energy is a prerequisite for development. Consequently, countries that seek to develop economic cooperation with the US will of course be asked to meet the ‘environmentally-conscious’ standards set by the US. Therefore, Indonesia has a strong interest in improving its environmental credentials if it wishes to be part of the supply chain for US products, including the desire to become a supplier of electric vehicle batteries in the US.
Indonesia is currently developing a mineral downstream processing program, which includes nickel, one of the key materials in the manufacturing of electric vehicle (EV) batteries. The strategy to ensure that nickel downstreaming can be sustainable is a comprehensive balanced integration of both the supply and demand sides. Therefore, even though the supply side of downstreamed nickel products has started to be produced, the policies in relation to the demand side must also be balanced. So far, the main buyer of downstream nickel products is China, accounting for more than 90 percent. From a market diversification perspective, of course this carries potential risks in terms of the sustainability of the demand. If China’s economy slows down, Indonesia will be directly impacted, so new markets for nickel derivative products will be urgently needed. It is at this point that it emerges the urgency to explore the possibility for integration into the US electric vehicle supply chain. In addition to providing certainty about the sustainability of demand for downstream nickel products in the future, the presence of new markets also minimizes the risk of over-dependence on one particular country.
On paper, efforts to diversify the market for downstreamed nickel products look easy and attractive. However, there are many challenges ahead. The US, as a developed country that has high standards in absorbing other countries’ products, will of course apply the same rules to Indonesia. The potential benefits of entering the US electric vehicle supply chain are outweighed by the need to overcome the challenge of ensuring that supply-side production meets the strict environmental standards as expected by the US market. This is why it is important to improve good governance in nickel extraction in Indonesia going forward, so that the country can give the assurance that its nickel-derived products are produced in an environmentally-sustainable manner, from upstream to downstream. By meeting the standards of the export destination country, the path of expansion into new markets will be more wide open.
Investment and job opportunities
Investment is one of the main determinants of economic growth. The quality of investment will determine how the economy will develop in the future, and whether it can produce higher economic growth rate. It is within this context that Indonesia, as a developing country that aspires to become a developed country by 2045, requires extra efforts to ensure investment in the country can be accelerated over time.
One form of investment that is very important to accelerate the economy in the future is industrial investment. Indonesia is currently focused on efforts to downstream raw commodities from natural resources extraction to create added value, apart from direct benefit in the form of higher price of processed products and higher state revenue. Another important spillover benefit from incoming investments is the job opportunities they create.
US-Indonesia investment relationship has been going on for a long time. The US is one of the main investors in Indonesia. Over the course of time, US investments in Indonesia have been on the rise. In the January-September 2023 period, the value of US investment in the country hit US$2.4 billion. The US is now among the fifth-largest investor in Indonesia (see Figure 2).
The US has expressed its commitment to increase its investment in Indonesia, especially in the clean energy sector. This is certainly good news for Indonesia. The business deal worth US$25.85 billion as a result of President Jokowi’s visit to the US will mainly go to this prioritized sector critical to to Indonesia’s endeavor to become a developed country in the future. Thus, Indonesia needs to ensure that investments in the clean energy sector be eased and expedited with the provision of various facilities and policy support.
Inbound investments from the US demonstrate that the type of investment that will be realized in Indonesia is more capital-intensive than labor-intensive. However, this does not mean that investment from the US does not absorb labor at all. It’s just that generally they are more capital- instead of labor-intensive, especially since the sector that will be developed is clean energy.
During the construction phase, a large number of workforce members will be employed, but in the operation phase the need will shift to more educated and skilled workers. This illustrates that US investments will tend to create more employment opportunities for the white-collar workforce. Quantity-wise, it may not be too large compared to investments in labor-intensive sectors as a whole, but due to the relatively high number of university graduates in Indonesia, the presence of US investments remains strategic. In other words, they will be geared more toward human resource quality rather than quantity.
A commitment worth more than US$ 25 billion from the US is very strategic in fostering economic growth in Indonesia and creating jobs. No less importantly are efforts to ensure that it will be quickly followed up and managed strategically. Moreover, the US investment can significantly reduce the relatively high unemployment rate among university graduates. Statistics show that in August, 9.97 percent of the openly unemployed are university graduates with either diploma or bachelor degrees. The unemployment rate for university graduates has also increased from 9.39 percent in 2022 (see Figure 3). Solving this requires quality investments, both in terms of sector and workforce qualifications.
Investments from developed countries in Indonesia, such as from the US, are one of the solutions to relatively high unemployment rate among the educated workforce. Nevertheless, Indonesia cannot solely depend on foreign direct investments to solve its youth unemployment problem. However, given the investment characteristics of developed countries which tend to employ more educated and skilled workers, the presence of US investments can serve as a complementary solution to Indonesia’s efforts to create quality jobs.
More job opportunities for an educated workforce will of course enable the economy to grow further, because with a high level of education and work that requires certain skill sets, real income will also increase. This way, they can carry out economic activities, spend or save more, which in turn will generate a higher economic output.
Strategies to court foreign investment
The sizeable business commitment from the US to invest in Indonesia must be immediately acted upon with clear strategies and stages. Without strategic efforts, this commitment will only stop short at a planning stage. Additionally, similar business approaches need to be carried out in other advanced economies, such as the European countries, Asian economic powerhouses, as well as Australia. It is time for Indonesia to improve the quality of inbound investments, namely those that are committed to preserve the environment, not just the pursuit of profits. Moreover, Indonesia is also trying to join the Organization for Economic Co-operation and Development (OECD) which means that the country’s investment regulations should also align with OECD’s policies.
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Amid a global economic slowdown this year, Indonesia has still been able to grow 5 percent. This offers a glimmer of hope for developed countries and a compelling reason for them to invest more in Indonesia. Indonesia’s respectable economic performance amid the glum global environment gives reassurance that investment in Indonesia is very promising compared to several other comparable countries. Moreover, when the global economy picks up steam, of course the investment outlook in Indonesia will also be brighter. Indonesia’s relatively sound macroeconomic would be appealing to potential investors, especially those from developed countries.
It is widely agreed that the prerequisites to attract investments from developed countries to developing countries like Indonesia are business certainty, an efficient licensing regimen and environmental sustainability, management from upstream to downstream. This means that Indonesia needs to continuously strive to foster an investment-friendly climate to ensure that developed countries stay interested in investing. Of course, this is easier said than done given that so far in several business competitiveness indices Indonesia is still lagging in aspects of governance and environmental sustainability. The large investment commitment from the US should be seen as a turning point to accelerate the quality of investment governance in Indonesia.