OECD: Why is Indonesia trying to join ‘the rich club’?

On 2 May 2024, the Organisation for Economic Co-operation and Development (OECD) presented Airlangga Hartarto, the Indonesian Coordinating Minister for Economic Affairs, with a roadmap to guide accession discussions with Indonesia. The roadmap sets out the terms and processes that would see Indonesia become the 39^th member of the OECD.

The OECD, often dubbed as the “rich-country club”, is renowned for promoting global economic growth, trade and social well-being through market liberalisation. It is also a platform for sharing policy and best practices. Joining the OECD is seen as a strategic move to position Indonesia on a trajectory towards economic prosperity.

The accession process includes an evaluation by 26 technical committees to determine whether Indonesia complies with the OECD’s standards, policies and practices. The scope of the technical review covers a range of areas including structural reform, open trade, investment, governance, inclusive growth, anti-corruption efforts, digitalisation, and environmental protections and climate action.

After these reviews are conducted, committees may recommend changes to Indonesian policies and legislation to bring them further into line with the OECD’s standards and best practices. Membership conditions are a prerequisite for new members before joining the OECD, just as newcomers to elite social clubs have to abide by certain rules and standards. Existing members play an important role in ensuring compliance through peer pressure and enforcement mechanisms.

Compliance with the OECD review could, therefore, have a big impact on Indonesia’s political and economic system. Understanding Indonesia’s motivations for joining the OECD are crucial.

So, what’s in it for Indonesia?

What are the benefits of OECD membership?

Harvard Professor Christina L. Davis offers two main reasons why countries might be interested in joining the OECD. The first is that it can yield tangible economic benefits. Membership can boost investor confidence and attract foreign investment, which can, in turn, create jobs and accelerate economic growth.

The second reason is that, for some countries, entry into the OECD is about more than economics – it is also about the status of the rich-country club. Membership confers a level of status and acceptance within the international community. It can strengthen perceptions of like-mindedness, mutual benefit and being seen a significant player.

Both motivations are likely at play in Indonesia as it seeks to grow its international clout and pursue development targets laid out in the Golden Indonesia 2045 Vision. This vision, part of the National Long-Term Development Plan 2025-2045, aims for Indonesia to achieve an annual economic growth rate of 6-7 percent, escape the middle-income trap, and achieve high-income status by 2045. Essentially, Indonesia hopes to become a high-income country within two decades.

But joining the rich club also comes at a cost. The Indonesian government needs to carefully weigh up the domestic and global consequences of joining the OECD.

Economic liberalisation

Indonesia’s economy is currently a mix of different economic models – it exhibits characteristics of both a free-market approach and economic nationalism.

Since democratisation began in 1998, Indonesia has demonstrated its free-market aspirations through trade liberalisation, open foreign investment, deregulation through the Omnibus Law, and ‘debureaucratisation’ efforts.

But despite these efforts, Indonesia still has a long way to go. For instance, the recent OECD Services Trade Restrictiveness Index (STRI) points out  widespread restrictions in legal services, accounting services, telecommunications and insurance. There are also new prohibitions for social media platforms regarding e-commerce transactions and personal import restrictions.

The government also plays a more interventionist role in certain areas of the economy, especially in strategic sectors. For instance, in the mining sector, the government enforces a policy of resource nationalism that restricts foreign ownership of Indonesia’s natural resources.

This policy involves banning raw material exports, tying exports to the construction of smelters, divestment obligations, domestic market obligations (DMO) and local content requirements that mandate the use of local resources in industrial production.

This strategy aims to improve Indonesia’s position in the global value chain. For instance, policies like Indonesia’s nickel export ban have helped the country significantly grow the value of nickel exports and could serve as a template for growing exports of other commodities – like copper – through incentives for downstream processing.

However, the OECD review will likely try to curtail some of Indonesia’s more protectionist industrial policies. For instance, European stainless steel producers harmed by Indonesia’s nickel export ban might try to encourage liberalisation through the OECD.

Democratic reforms

Joining the OECD will also have implications for Indonesia’s political landscape. There are clearly many areas of governance in need of improvement – Indonesia ranks 73rd out of 214 countries in the World Bank’s Worldwide Governance Indicators (WGI).

Data from Freedom House also shows a decline in Indonesia’s democracy index, from 62 points in 2019 to 53 points in 2023. Similarly, The Economist Intelligence Unit categorises Indonesia as a flawed democracy with a score of 6.71 out of 10. The Corruption Perceptions Index (CPI) in Indonesia in 2023 dropped to 34 – ranking below other ASEAN countries like Singapore (83), Malaysia (50), Timor Leste (43), Vietnam (41), and Thailand (35).

Indonesia’s flawed democracy and widespread corruption are significant challenges that Indonesia would need to make progress on to align with the OECD’s membership criteria. The OECD review will likely insist on measures to strengthen governance and democracy in Indonesia which could help arrest Indonesia’s recent democratic decline.

Strategic implications

Looking globally, reports from the World Bank, Brookings Institute, and World Economic Forum all highlight important macro trends like deglobalisation, decoupling, protectionism, a global economic slowdown, escalating conflicts and threats to multilateralism.

These trends underscore the need for Indonesia to carefully weigh up the pros and cons of OECD accession. Arguably the OECD is less relevant in an emerging multipolar global order. And some of these trends, like deglobalisation, could potentially hollow out the economic benefits of joining the OECD in the first place.

Cultivating a level of self-reliance is becoming more important as other countries – even in the OECD – take measures to onshore or ‘friendshore’ strategic capabilities, like manufacturing, food production and energy security.

Ascendency would also signal a shift in Indonesian foreign policy, which has historically emphasised non-alignment. Some international partners might interpret OECD membership as Indonesia ‘picking a side’ against the current backdrop of great power competition. In 2023, Indonesia was also invited to join BRICS, a multilateral forum comprised of key emerging economies, including China – Indonesia’s largest source of foreign investment. The geopolitical implications of Indonesia’s joining one but not the other should not be underestimated.

Whichever path Indonesia takes, it must consider domestic challenges and navigate a rapidly evolving global landscape. By doing so, Indonesia can chart a course toward sustainable development and prosperity that aligns with its own long-term aspirations and geostrategic realities. Balancing these aspirations with pragmatic consideration of the country’s current state is crucial for ensuring OECD membership does not compromise Indonesia’s integrity or sovereignty.