Indonesia, explained.
Indonesia’s desire to become an OECD member is not unexpected given the country has been involved with the organisation as one of its key partners since 2007 (Veri Sanovri/Xinhua via Getty Images)
The benefits outweigh the costs for one of Southeast Asia’s most dynamic emerging economies to join the “club”.
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Indonesia and its bid for OECD membershipIndonesia and its bid for OECD membership
In July this year, Indonesia officially announced its interest in becoming a member of the Organisation for Economic Co-operation and Development (OECD). Indonesia’s Minister of Finance reiterated the commitment last week during the OECD Council meeting in Paris.
Indonesia’s desire to become an OECD member is not unexpected given the country has been involved with the organisation as one of its key partners since 2007. Jakarta actively engages in OECD committees, OECD surveys, and is included in the organisation’s statistics databases. Indonesia joined the OECD Development Centre in 2009 and has been involved in nine of 30 OECD Committees and Working Parties.
The OECD is known as a “rich-country club” that promotes integration and development under a market-based economic platform.
Among the five key partners, only Brazil and Indonesia have recently expressed interest in joining the organisation. China and India, which have larger economies and higher GDP growth than Indonesia, have not sought to join the organisation. Meanwhile, South Africa seems comfortable with the BRICS alliance, which includes Brazil, Russia, India and China. These countries and others have their own reasons for not joining the OECD, but for Indonesia, the benefits may outweigh the costs.
The OECD is known as a “rich-country club” that promotes integration and development under a market-based economic platform. One benefit of being a member of this restricted organisation would be that Indonesia would have to adhere to the OECD’s stringent shared values and principles to ensure high economic policy standards. International cooperation and commercial agreements become more accessible when the country’s public policies align with global standards and best practices. In the eyes of many investors, an OECD membership might represent a “stamp of approval” for Indonesia as a potential investment destination.
South Africa, Indonesia, Brazil, India and China are key OECD partners (OECD/Flickr)
Membership would ensure that Indonesia’s economic and social development is consistently and rigorously tracked through periodic assessment and monitoring. This institutionalisation of independent and objective evaluation of policies and international benchmarking through cross-country data comparison would facilitate the exchange of experience needed to produce evidence-based policy.
Policymakers in Indonesia can benefit from knowledge and skills transfer from developed countries, as well as access to the OECD’s technical expertise and analytical capabilities. These processes can catalyse the Indonesian government to implement essential reforms to improve the wellbeing of its citizens, such as poverty reduction and education quality improvement. The OECD is, therefore, a critical partner and reference in addressing these concerns.
There are, however, costs connected with joining the OECD. First, there is an argument that the organisation is overly focused on the interests of developed countries and therefore does not appropriately consider the needs and perspectives of developing countries because their economic structures, demands, and interests diverge over time. Learning from the experiences of industrialised countries is essential, but so are the viewpoints of emerging economies. In this case, Indonesia needs to determine whether “best practices”, which can also mean “common practices”, are the ideal approach after considering local contexts and circumstances.
Before becoming a member, Indonesia may need to improve its evidence-based policy and identify the initiatives that must be taken to ensure efficient and effective long-term cooperation with the OECD.
Second, OECD membership may be a stamp but not a shortcut to attract foreign direct investment (FDI). Research by the Inter-American Development Bank shows that OECD membership helps increase FDI, but it’s not the sole driver. For instance, FDI surged after Mexico and Chile joined the OECD, but it also increased in Brazil, which is not a member of the organisation.
Third, OECD membership is also a political decision. For example, following Russia’s invasion of Ukraine, the OECD chose to formally cancel the accession process with Russia, close the OECD Moscow office, and suspend all relations with Russia. These decisions may go against Indonesia’s free and active foreign policy stance.
Fourth, joining the OECD means Indonesia needs to amend its national and local legislation and policies to meet the OECD criteria. For example, a more open trade and investment policy is likely required, as the 2020 OECD Investment Policy Review of Indonesia discovered that the country remains quite restrictive to international investment compared to its ASEAN peers.
There are five priority areas for OECD evaluations on accepting a new member: structural reform, an open trade and investment regime, social and equal opportunity policies, public governance and anti-corruption efforts, and environmental protection. The costs here are how prepared Indonesia is to deal with the consequences of standardising its rules and regulations. What are the short-term consequences for the locals, and what should be done to prepare the locals for the impacts of membership?
Indonesia hopes to finish the accession process in less than four years. According to a news statement from the Industrial Ministry, Indonesia has implemented 15 of the 200 OECD standards. To show a commitment, the Indonesian government will establish a National Committee tasked with identifying policy gaps, sectors, and low-hanging fruit issues across the area. The decision on Indonesia’s accession will be made at the OECD Council meeting in December 2023.
Indonesia must outline the risks, initial participation period, and long-term advantages of joining the OECD. Before becoming a member, Indonesia may need to improve its evidence-based policy and identify the initiatives that must be taken to ensure efficient and effective long-term cooperation with the OECD. Jakarta should maximise the benefits from peer review and work towards achieving the vision of Indonesia 2045. High standards of economic policy and institutional setting will be needed for Indonesia to achieve its aspiration of being a high-income country.
The views and opinions expressed are those of the authors and do not necessarily reflect those of the Indonesian Ministry of Finance.
About the authors
Retno Maruti
Retno Maruti is a senior policy analyst at Indonesia's Ministry of Finance focused on international economic issues.
Andriansyah
Dr.
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