The deterioration in ties between Australia and Indonesia over phone-tapping revelations is the first major diplomatic challenge for Tony Abbott's new government. While much of the focus is on the negative impact of the spat on Australian attempts to court Indonesia, far less consideration has been given to the damage that the episode might cause Jakarta in the future.
Revelations that Australian intelligence monitored the phone calls of President Susilo Bambang Yudhoyono, his wife, the vice president and other senior ministers have led the president to demand an explanation of Australian intelligence activity, as well as a personal apology from Mr. Abbott. Jakarta has recalled its ambassador from Canberra; is reconsidering bilateral cooperation on stemming the flow of Australian-bound asylum seekers arriving on Indonesian-flagged boats; has halted plans for joint military exercises in Darwin; and threatened to delay the resumption of Australia's live cattle trade to the country.
The intelligence activity took place over a fortnight in 2009, when Labor's Kevin Rudd was still prime minister. Mr. Abbott is refusing to apologize for his country engaging in what is widely considered to be normal activity by intelligence services throughout the world. Although expressing "deep regret for embarrassment caused to the president and Indonesia," the Australian leader is adopting the ages-old principle of never commenting on allegations in relation to the intelligence activities of one's own country.
Besides, General Abdullah Mahmud Hendropriyono, former head of Indonesia's intelligence agency, admitted in 2004 that Jakarta similarly tapped into the phone calls of Australian politicians and officials during the 1999 East Timor crisis. This discredits any genuine sense of moral outrage that Jakarta might claim over this issue.
In immediate terms, this incident may do limited damage. Australia is not a major economic partner of Indonesia. Two-way trade constitutes only about 3% of Indonesia's total trade, while Australian firms are small players when it comes to foreign direct investment in the country. The two countries do need to cooperate on a range of security issues, including counterterrorism, but Jakarta has as much of a stake in that coordination as Canberra does.
But that doesn't mean the spat can't do long-term damage—to Indonesia. Jakarta is still a weak and vulnerable country in the early stages of its democratic rise after a volatile autocratic era. Public displays of government outrage and threats to wind back proposed security and maritime cooperation between the two countries on the basis that past Australian intelligence activity is a national and personal insult to the president is an immature response, and will significantly diminish Indonesia's economic and political attractiveness in the region.
Jakarta is heavily reliant on a good reputation among foreigners when it comes to FDI and purchase of government bonds. Indonesia is also attempting to lower its export reliance on commodities, and to encourage foreign firms to locate manufacturing plants in the country in order to establish itself as an important part of the regional supply chain, something it has so far largely failed to achieve.
To advance these objectives, it needs to compete with other regional developing countries such as China, Vietnam, Cambodia and more recently, Burma. Indonesia ranks poorly on all indices such as ease of doing business, corruption and transparency. But sovereign risk also comes into the equation. In the lead up to the July 2014 elections, Indonesia appears to be retreating back to bouts of economic nationalism including forcing foreign firms to divest majority stakes in mining projects after 10 years and imposing new taxes on these firms, and proposing new foreign ownership limits in key industries such as banking.
This is the backdrop for the current Australia-Indonesia dispute. There are still fears that a democratic government in Indonesia could choose to fan rather than constrain the rise of counterproductive nationalistic emotion. This is a poor foundation for sensible economic policy and diplomacy into the future.
Already Indonesia's reputation for sensibleness is in jeopardy in the region. Mr. Yudhoyono was forced to embark on a fence-mending visit to Malaysia four years ago after an innocuous Malaysian tourism advertisement containing a clip of Balinese pendet dancing caused outrage in Indonesia on the basis that this was an intolerable instance of cultural theft. The episode led to demonstrations against the Malaysian Embassy, burning of the Malaysian flag and youth groups symbolically calling for war against Malaysia.
The surveillance allegations against Australia are more serious than a Malaysian tourism ad, to be sure. But again Jakarta's petulant response raises questions about its ability to conduct itself as a mature regional power. Jakarta could have protested to Canberra robustly but privately. But rather than simply responding to populist outrage, escalation is being led by Mr. Yudhoyono and his government.
In seeking to openly punish Australia and extract a humiliating apology from Mr. Abbott, Jakarta is doing a bad job of convincing the region that a democratic and rising Indonesia will be far more predictable, stable and measured than it has been in the past.