The following is an extract from the May 2009 edition of 'The Asialink Essays'.  To read the full essay please go to http://www.asialink.unimelb.edu.au/publications/the_asialink_essays 

Australia-Indonesia relations are not what they used to be.  This is both a bad thing and a good thing. Australians should regret the passing of the special affection in which their country used to be held for its strong support during the struggle for Independence. Indonesia’s sudden disillusionment with Australia during the Howard-Bush years has left scars.  Yet, despite the passing of that affection, there is now a more mature relationship with much more depth and realism. The Embassy in Jakarta is now Australia’s largest overseas post, ahead of London and Washington; Indonesia is Australia’s leading aid recipient and its eleventh biggest export market. If there is a danger, it is one of sheer complacency on the part of Australia. Despite much recent diplomatic activity, we have been slow to rise to the challenges and opportunities of a more prosperous, democratic and sophisticated neighbour and are squandering our intellectual expertise.

Trust and Betrayal

The special relationship between two very dissimilar neighbours was born of strife. From 1945 to 1949 during the long and bitter war for Indonesia’s independence, Australia’s Labor Government supported Indonesian diplomacy while the Waterside Workers’ Federation refused to load supplies onto Dutch ships. The diplomatic relationship was adeptly preserved through the stresses of Indonesia’s incorporation of what was then Dutch New Guinea, armed Confrontation between Indonesia and Malaysia (when Australian troops saw combat on the Indonesian border!), the destruction of the Communist Party and the emergence of Suharto’s military dictatorship, and the forced annexation of East Timor. Many Australians would at times have preferred a more aggressive stance towards Indonesia. Yet within Indonesia, Australians were still treated as special guests into the 1990s.

What finally shattered the special relationship was Australia’s support for the independence of East Timor. Indonesia’s repressive rule and periodic atrocities in East Timor were not known to the Indonesian public, who saw their country as generously funding the development of its latest and poorest province. After supporting incorporation for over twenty years, Australia’s sudden change of policy under the Howard Government and its military intervention, albeit under United Nations auspices, was seen as a grievous betrayal.

It did not help that at the time Indonesia was in turmoil because of the economic devastation of the Asian crisis and the transition from military dictatorship to parliamentary democracy. When Indonesia was in desperate need of understanding and massive aid, the Australian Government was seen to have turned away.

Then came 9/11. As a predominantly Muslim country, Indonesia was now portrayed by the Howard Government as the threat that many Australians had always believed it to be. The deaths of so many Australians in the Bali bombings of October 2002 and September 2005 was the ultimate confirmation. There was also the influx of ‘boat people’ and the perceived threat to Australia’s border security. Thus while Indonesians were trying to rebuild their country, Australia was seen to be pursuing a narrow and selfish security agenda by means of what President Megawati once tellingly described as ‘megaphone diplomacy’. Prime Minister John Howard’s clumsy remark about Australia’s role as Deputy-Sheriff for the United States reverberated in Indonesia and encouraged those who argued that Australia was an emerging military threat.

Reconciliation

Fortunately wiser counsel eventually prevailed. The turning points were President Bambang Susilo Yudhoyono’s election in late 2004 and the Aceh tsunami of December that year. The spontaneous response of the Australian public to the aid appeal and the Australian Government’s pledge of $1 billion in additional aid cast Australia in a generous light for the first time in several years. In Indonesian culture there is a sense that those who are better-off should show sympathy and generosity to those who are in need. This helped to pave the way for a good personal relationship between Mr Howard and the incoming President Yudhoyono. In this new context, the grieving and police cooperation after the second Bali bombing of September 2005 actually helped to bring the two countries closer together. A Trade and Investment Framework agreement was signed between trade ministers in September 2005, followed in 2006 by a comprehensive Framework of Security Cooperation (Lombok Treaty).

The Lombok Treaty is now the formal basis for the broad diplomatic relationship. A key principle is that both countries will “refrain from the threat or use of force against the territorial integrity or political independence of the other”. This restates the principle of the lapsed Security agreement negotiated between Prime Minister Keating and President Suharto in 1995. While the principle might once have been regarded as a pro forma reiteration of the United Nations charter, Australia’s military intervention in East Timor, the former Prime Minister’s assertion of a right to pre-emptive attack against terrorism, and lingering tensions over West Papua make it the essential bedrock of all other forms of cooperation.

The Lombok Treaty is broad in scope, referring to practical forms of bilateral cooperation over Defence, Law Enforcement, Counter-terrorism, Intelligence, Maritime Security, Aviation Security and Emergency relief. Not the least important in an era of globalisation is law enforcement or police cooperation against transnational crime, including people smuggling, money laundering, terrorist financing, corruption, cyber crimes, and illicit arms trafficking. Australia and Indonesia share long and porous borders and the weakness of law enforcement in Indonesia makes the country an easy transit route for all kinds of illegal activity. Such forms of cooperation not only reduce threats but also help Indonesia to build a democratic civil society.

Business as Usual?

In 2009 relations at last seem to be back on a firm footing. In Indonesian eyes, defeat of the Howard Government in November 2007 marked a firm break with the past. Notwithstanding the personal relationship with President Yudhoyono, John Howard was not seen as a friend of Indonesia. The end of the Bush-Cheney presidency in the United States and the inauguration of Barack Obama with his Indonesian background have also helped create a more relaxed diplomatic climate. Despite the recent execution of the Bali bombers, good intelligence and police cooperation has so far avoided further terrorist incidents. The free-trade agreement between Australia and ASEAN has just been ratified and an Australia-Indonesia free-trade agreement is well advanced.

Aid is perhaps the clearest Australian commitment to the long-term relationship with Indonesia now ranking ahead of Papua-New Guinea as Australia’s number one aid recipient. In 2005 as post-tsunami aid the Howard Government had pledged an additional $1 billion over five years under a new Australia Indonesia Partnership for Reconstruction and Development (AIPRD). These funds were divided equally between grants and soft loans. In June 2008 Mr Rudd and Mr Yudhoyono rolled this into a new Australia Indonesia Partnership agreement for $0.5 billion per annum in aid until 2013. Priorities are education, health and development, especially in the poor eastern provinces.

At first sight, economic relations are also steadily improving. Since the Asian crisis two-way trade has grown steadily to $10 billion in 2007, albeit much less than with Thailand ($14 billion) or Malaysia ($15 billion). Service trade is a fast-growing component. Indonesia has now overtaken Malaysia and Singapore as the main Southeast Asian source of international students with around 15,000 enrolled in Australian schools and universities. Tourism flows, however, have fluctuated wildly in response to terrorist bombings and remain below their 1997 peak.

Investment figures are less encouraging. According to the Australian Bureau of Statistics, the stock of all types of Australian investment in Indonesia had risen quite slowly from $2.9 billion in 2001 to $3.4 billion in 2007, just 0.3% of total outwards investment and about the same as Australian investment in Malaysia. Indonesians invested $0.4 million in Australia, so the net outflow was only $3 billion.

Foreign direct investment (FDI) where the parent company exercises managerial control may be a better indication of long-term commitment: this figure rose from $0.5 billion in 2001 to $1.8 billion in 2007. Yet despite a strong trend, the 2007 total was still only 0.6% of outward FDI, compared with 2.5% for China and Hong Kong and 15% for New Zealand. Nevertheless, some uncertainty surrounds these figures because an unknown amount of investment into and out of Indonesia is mediated through Singapore and various tax havens.

Why does proximity not seem to encourage Australian firms to invest in Indonesia? The standard answer is a) lack of opportunities and, b) poor investment climate. The former is unconvincing. Any developing economy of more than 200 million people growing at around 6% per annum is generating a lot of business opportunities. Indonesia’s investment climate, however, is a real problem, as recognised by the government itself. Investment and labour regulations, weak legal protection and erratic local government policies combine to deter direct investment. This is felt most by the capital-intensive mining industry, where Australian firms might be expected to have been more prominent. Leading Australian companies have actually sold off their mining interests. Nevertheless, for most Australian firms, Indonesia is simply not on the radar screen.

To read the rest of this essay please go to http://www.asialink.unimelb.edu.au/__data/assets/pdf_file/0014/21353/Howard_Dick_Indonesia_Essay.pdf.