Indonesia-China partnership

The strategic partnership between Indonesia's President Susilo Bambang Yudhoyono and Chinese President Hu Jintao declared here on Monday ushers in a new, more vigorous phase of cooperation between the two countries in politics, economics, law and security.

However, the most significant and immediate effect of the agreements will most likely be felt in the economy as each country will become more confident in tapping each other's comparative and competitive advantages.

Bilateral economic ties, which have been thriving after the resumption of diplomatic relations in the early 1990s, will expand more robustly thanks to the heightened momentum provided by the overarching political umbrella that the two leaders have established.

A stronger partnership with China, which could become the third-largest economy in the world after the U.S. and Japan within a decade, is indeed a strategic move.

Even though Indonesia and China often compete fiercely with each other in several manufactured exports, each economy actually complements the other. Take for example China's insatiable demand for natural resources. The robust pace of its economic growth during the past two decades has made China's manufacturing sector sizzle with an insatiable appetite for raw materials, which are abundantly available in Indonesia. President Susilo's estimate that bilateral trade would triple to $20 billion within three years is not too optimistic.

Analysts have estimated that China's oil demand has been increasing by more than 30 percent a year, making it the world's second-largest oil importer after the United States. Just look at how aggressive China has been in acquiring oil mining concessions around the world, including in Indonesia, to secure its energy supplies.

China also accounts for nearly 50 percent of the world's cement consumption and 35 percent of the world's coal consumption. Hence, Indonesia benefit from the booming Chinese economy and China can in turn secure the supplies of raw materials by investing directly in natural resource-based projects in Indonesia.

China can also use Indonesia as a beachhead to tap the markets in the 10 ASEAN countries through the ASEAN free-trade arrangements.

However, the partnership pact and the string of other agreements signed by Indonesian and Chinese leaders have yet to be translated into concrete trade and investment deals between the business communities of both countries and this is where the government and businesspeople still have to do a lot of homework.

Most foreign investors remain waiting on the sidelines, expecting comprehensive measures by Jakarta to improve the business climate. New foreign investors will only be willing to bring their capital into the country when the general business climate has the minimum levels of legal and institutional infrastructure that allow for reasonable risk calculations.

But it is comforting to learn that the government will not allow market forces to entirely determine the sectors in Indonesia where investors from China may go but will instead direct them to basic infrastructure, mining, agriculture and fisheries.

Focusing efforts to attract investment in selected categories of industries is likely to be more effective in view of the heightened international competition to attract foreign capital.

This investment-targeting policy is necessary to enhance development with equity to correct the disparities of development between the provinces or regencies and wide wealth gap between groups of people, which has in the past been the main cause of ethnic conflict.

A better-targeted policy is also imperative in the promotion of trade with China, whose imports have edged more than a few Indonesian manufactures out of the market.

Many local industrial companies have also been adversely affected by Chinese products, especially those smuggled into Indonesia, and letting market forces completely determine the kinds of imports coming from China would be detrimental to the country's sound economic development.