Doctor Dino Patti Djalal
Director General Dian Triansyah Djani (Kemlu)
Mr. Kelvin Tio (Director Asian Agri)
Mr. Omar Anwar (Director PT Nomura)
Ms.Sinta Sirait, moderator
Let me first congratulate the Foreign Policy Community of Indonesia and my good friend Dr. Dino Patti Djalal for this ambitious conference, and for his efforts to start a robust conversation about the direction of Indonesia’s foreign policy. I also thank them for this valuable opportunity to speak on a subject of great importance, namely economic diplomacy and its role in Indonesia’s prosperity. In the spirit of smart internationalism, I will offer suggestions on how Indonesian can achieve this in the trade realm.
Economic diplomacy has long been a central foreign policy priority for the U.S. Earlier this year, Secretary Kerry stated that: “Our goal is to foster the sustained prosperity worldwide that will create new jobs, grow the middle class, reduce income disparities, promote gender equality, and give young people a real stake in building their societies up, not tearing them down. Every State Department officer should think like an economics officer and recognize that inclusive growth abroad is central to our security, values and economy here at home.” In other words, economic diplomacy is based on the idea of mutual benefit.
U.S. officials, through the Secretary’s Shared Prosperity Agenda, are pursuing a whole-of-government approach to try to achieve inclusive economic growth and to help end extreme poverty globally, because we strongly believe that growth and prosperity around the world is good for everyone, including the United States.
We work closely with other USG agencies and American companies to achieve these goals. Whether it is working with the Federal Aviation Administration to promote global standards for air safety, with the Department of Treasury to facilitate debt relief for the poorest countries, or within international organizations like the G7 to advocate for ambitious global targets for greenhouse gas emissions cuts, we are seeking ways to make our world safer, cleaner and more prosperous, because we understand we cannot reach our potential unless we all do.
Here in Indonesia, we want to help President Jokowi achieve his economic growth and development goals. There are a lot of different ways we are doing that. For example, in January of this year I led a trade delegation of 12 U.S. firms to Batam, a region that we identified as particularly promising for U.S. investment because of its proximity to Singapore, its Free Trade Zone, and strong growth and demographic indicators. We met with 50 potential Indonesia partner firms, as well as local leaders.
We toured Caterpillar’s new plant, where it makes heavy mining trucks and equipment for the Indonesian market and for export to the regional market. We visited Honeywell’s Bintan facility which produces advanced avionics technology such as the famous black boxes for its global customers. We explored potential new areas of cooperation, and most importantly, formed many new relationships.
More recently, I held a conference call with over 100 U.S. firms interested in bidding on 35,000 MW of power projects in Indonesia. These power plants, many in remote corners of the archipelago, will have a direct positive impact on Indonesia’s energy development, as well benefit those U.S. firms selected to participate. We’ve brought many of those companies together into what we’re calling the U.S. Power Working Group for Indonesia to help them better understand and meet the needs spelled out in Indonesia’s development plan. We’re hopeful that some of these companies will be able to deliver high quality American solutions to support Indonesia’s power needs.
So Economic Diplomacy is really about bringing nations together to work for those goals Secretary Kerry listed: global prosperity, new jobs, a stronger middle class, reduced income inequality, increased gender equality, and a greater stake for young people in their own and the global society.
For these global goals to be achieved, it takes a commitment to openness and to working together for our mutual benefit. Closing the doors to international trade or investment, establishing barriers to cooperation and partnership, or engaging in winner take all, mercantilist economic strategies – these types of protectionist policies undercut the goals of global prosperity and economic diplomacy that uses these tactics cannot be successful.
All of you are familiar with the theory of comparative advantage that says people, companies, or countries have different strengths and should focus on those strengths, producing goods or services that play to what they are good at. They can then export those products while importing other products others have a comparative advantage in.
Put another way, trade creates opportunities. For consumers, trade means lower prices and a wider choice of goods and services at a range of quality levels that suit every need. For industries, trade creates opportunities for innovation and lower cost inputs. Those opportunities also create profits and more and better jobs that make people better off. For governments, expanding trade creates opportunities to both broaden and deepen a country’s economic resiliency. And creates political stability as well, by allowing both consumers and industries to grow and prosper.
Finally, reducing barriers to trade is quite possibly the most important thing a country can do to reduce poverty. Study after study has shown how reducing barriers to trade helps the poor by lowering prices of imports and keeping prices of basic goods affordable.
Since the 1980s, all the economies that have seen trade as a percentage of GDP increase have also seen their national incomes rise the most. That includes the biggest and the smallest of these economies. Put another way, those countries that opened up most, as a rule, have seen their incomes rise and poverty fall the most. Those that have not have seen incomes grow more slowly. Trade as a percentage of GDP has not changed much since 1980, staying at a bit more than 50 percent.
So what does all this mean for Indonesia?
President Jokowi has set out an ambitious agenda to increase Indonesia’s economic growth and to reduce poverty, which the U.S. strongly supports. To reach his targets, he has rightly pointed out that Indonesia can no longer rely simply on exporting commodities and consumer spending to drive growth. Boosting investment and building up manufacturing capacity, including for export, are two other important engines of economic growth for Indonesia. And yet the percentage of GDP derived from labor intensive manufacturing has fallen from 30% to 23% in recent years, according to a recent Globe Asia report.
A more outward oriented growth strategy offers significant opportunities to reverse that trend and put Indonesia on a path to sustained higher growth. Indonesian producers can double the size of their potential market just by expanding links with ASEAN partners. And ASEAN can also be an important source for investment and needed skills that will help Indonesia to grow. RCEP, the Regional Comprehensive Economic Partnership, (ASEAN +6) expands those possibilities even further.
President Jokowi’s plan to improve infrastructure, ensure reliable energy supplies, streamline permitting processes, and reduce logistics costs all could make Indonesia a more attractive country in which to do business and produce for export.
Yet at the same time, Indonesia has introduced barriers to trade, like local content regulations, and rules to protect local companies from competition. As Indonesia seeks to change its economic growth model, policymakers should understand that global supply chains mean that production of goods is different today than in the past.
While investors may want to manufacture in Indonesia, it might not make business sense for them to make each and every component and each and every product here. Investors are like any other consumers. They shop around for the best deal. They look at which countries offer the best tax and other incentives. They look at which places are the easiest places to start a business, get land and other permits, and ensure contracts are enforced with strong rule of law.
In the latest World Bank index of Ease of Doing Business, Indonesia ranks behind Singapore, Malaysia, Thailand, Vietnam, the Philippines and Brunei. The most committed economic diplomacy in the world isn’t going to attract investors if the facts on the ground don’t suggest a welcoming business environment.
The success of countries like Singapore shows that an incentive based approach that makes it easy to do business is the most effective way to attract foreign capital. Indonesia would do well to study what incentives its ASEAN competitors are offering and do what it can to match those so that Indonesia can attract the investments of companies seeking to produce for the ASEAN market and beyond.
Ladies and gentlemen, Indonesia today is faced with a choice. It can turn inward and pursue policies designed to protect its companies and industries, accepting the inefficiencies, higher prices and less choice for consumers, inequality and lack of innovation that entails. But I hope you agree that Indonesia doesn’t need a lost decade. Economic diplomacy that seeks to create an outward looking Indonesia will be more successful in building a stronger Indonesia, one who attracts investment through incentives, and who can look to new engines of growth for its economy to grow in an inclusive manner that will reduce poverty and increase opportunity. Economic diplomacy can help shape Indonesia’s future. Your diplomats can be important bearers of this message to the world.
So in summary, there are powerful arguments to suggest Indonesia should adopt a more outward oriented free trade policy: trade is the most effective way to reduce poverty; countries that open their markets the most grow fastest; a more open system leads to more and better jobs; having a big market is not enough, with the AEC Indonesia needs to match incentives offered by other Asean countries to attract the investment it needs.