Currently, the country is attempting to take a historic step by starting to join the Organization for Economic Co-operation and Development (OECD).
The new chapter of Indonesia’s journey aims to target global integration and economic progress. Efforts to join the organization, largely constituting developed countries, will certainly bring its own challenges and impacts on the national economy as well as Indonesia's position at the international level.
Momentum to join the OECD
Recording an economic growth at 5.17 percent (yoy) in the first semester of 2023, Indonesia managed to show solid growth performance amid global economic uncertainty. Hence, now is the best momentum for Indonesia to join the OECD.
Historically, the Organization for European Economic Cooperation (OEEC), as part of the US Marshall Plan Program, was the forerunner to the OECD establishment. This international organization was founded in 1948 to help reconstruct the countries’ economies affected by World War II (WWII).
The OECD was then established in 1961 as a complete international organization, with members from the United States, Canada, and 18 other European countries. This organization was formed to strengthen economic cooperation and development of countries in the world. Currently, the OECD comprises 38 countries.
Indonesia started its collaboration with the OECD in 2007, as an active observer, or key partner, in several OECD meetings. Due to its active involvement during this period, Indonesia became a member of the OECD Development Center (DC) to assist the government in designing appropriate economic stimulus policies.
In those years, the OECD assisted the Indonesian government to regulate and assess various policies resulting in a framework of cooperation called the Indonesia - OECD Framework Cooperation Agreement (FCA) on September 27, 2012.
When Indonesia recorded significant economic growth after the COVID-19 pandemic, Coordinating Minister for Economic Affairs Airlangga Hartarto held several intense meetings with OECD Secretary-General Mathias Cormann, and other member countries. These meetings aimed at demonstrating Indonesia’s optimistic steps towards becoming a member of the club of developed countries.
In the last meeting with ambassadors from friendly countries, Minister Hartarto conveyed Indonesia's plans and potential at the OECD. As a result, all delegations from friendly countries agreed and fully supported Indonesia's efforts to become a member.
However, apart from support from friendly countries, the Indonesian government needs to wait for a decision and submission of a roadmap from the 38 OECD members that is planned to be discussed at a meeting in September.
Generally, the OECD accession process can take from four to eight years. There are about 200 Indonesian policy standards that need to be harmonized in order to be aligned with the standards from the OECD.
However, Minister Hartarto believes that the accession process can finish faster, which is around 3.5 years. This is due to the performance of the Indonesian economy that continues to show resilience in the midst of global economic turmoil and tends to continue to grow.
In addition, Indonesia's role, as a key OECD partner since 2007, should also be considered. In fact, Indonesia is one of the countries that currently has representatives from the OECD, although it has not yet officially become a member.
One step closer
In line with President Joko Widodo's (Jokowi's) policy directions to bring Indonesia out of the middle-income trap, joining the OECD can be one of the steps to achieving this goal.
Based on a World Bank report, Indonesia is currently included in the upper middle-income country category, with a gross national income (GNI) per capita at US$4,500. This GNI is targeted to grow to US$5,500 in 2024.
If Indonesia succeeds in becoming OECD’s permanent member, the country will reap several benefits. First, Indonesia can easily attract foreign direct investment (FDI), which will later be used for the country's priority development programs.
Becoming an OECD member shows Indonesia's commitment to upholding high economic standards and complying with internationally recognized rules. This step can increase investor confidence and attract investment to the country.
Second, by aligning policies with OECD recommendations, Indonesia is able to create a conducive environment for innovation, efficiency, and sustainable economic growth that prompted policy reforms.
OECD membership often requires the adoption of best practices, standardization in taxation, labor regulation, and environmental protection. Implementing these reforms could result in improved governance and efficiency in the Indonesian economy.
Third, by becoming an OECD permanent member, policy-makers in Indonesia have the opportunity to obtain knowledge transfer from developed countries.
The OECD membership is also followed by access to broad knowledge and expertise. Thus, the Indonesian government will benefit from the results of OECD research, data, and policy insights that can play an important role in overcoming challenges to the national economy.
This access can help improve existing policies, design new strategies, and find effective solutions to issues, such as inequality, the transition to new and renewable energy (EBT), and education reform, to reach developed country targets.
Fourth, apart from the economic policy, Executive Director of the Center of Economic and Law Studies (CELIOS), Bhima Yudhistira, considers that the OECD membership will also bring opportunities for Indonesia to improve its law enforcement, especially in corruption eradication and cross-border tax avoidance due to the standards adopted by the OECD.
The OECD is a good prerequisite for a country to move towards the ideals of developed countries. Indonesia can learn a lot from the OECD to prepare for better economic and legal governance structures.
However, economists have warned that Indonesia may need to optimize its evidence-based policy before becoming an OECD permanent member. Without such a clear framework, the benefits of joining the organization are likely to be limited for Indonesia.
Bank Permata Chief Economist Josua Pardede stated that Indonesia's membership depends heavily on how the policies focus on OECD priorities, such as inclusive growth, health, and the principle of Sustainable Development Goals (SDGs).
If Indonesia's future policies are in line with these sectors, then its membership in OECD can be achieved more quickly on target.
However, Indonesia's steps to officially join the OECD have, so far, gone through positive developments.
Nevertheless, the Indonesian government still needs to carefully review the harmonized policies, as several regional regulations and laws (UU) need to be liberalized, especially regarding licensing, business competition, and trade, considering that in 2024, the country will hold its general elections with a change of leadership.
In the end, by becoming a member of the OECD, Indonesia can open a new chapter of its journey.
A chapter that brings dreams for social welfare and sustainable economic progress, one of the goals that can be achieved through the OECD membership.
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Editor: Rahmad Nasution
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