Anthony Wonsono, Founder of Think Nusantara
Mr. Shoeb Kagda, Founder and Editor in Chief of Globe Asia
Pak Farid Harianto, ladies and gentlemen,
Thanks to Think Nusantara for inviting me to speak here today. The Think Nusantara initiative is exactly the type of thing that gets me excited about Indonesia and its future. I am particularly pleased to hear this initiative was conceived over a campfire in Pennsylvania! I am happy to participate in the inauguration of this program and am inspired by this group of young, aspiring Indonesian leaders. I know you are committed to thinking critically about Indonesia’s future so let’s get the conversation started.
You’ve asked me to talk about foreign ownership. Imports in particular have been a hot button economic issue in Indonesia. I want to step back and speak more broadly on a subject of great importance, namely how trade can help Indonesia meet its economic goals. President Jokowi has set out an ambitious agenda to increase Indonesia’s economic growth and to reduce poverty.
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.
Today, I would like to discuss how trade can be a major pillar of Indonesia’s strategy to achieve the President’s goals of economic growth and poverty reduction. Indonesia can play to its strengths and prosper without closing its borders.
First of all, why is trade important? At the basic level, trade is essential because it allows countries to specialize in the goods and services they produce most efficiently, while benefitting from the production that other countries can do most efficiently and cheaply.
Most of you have heard of the theory of comparative advantage. In short, it’s a theory 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.
Let’s take the example of coffee. Indonesia grows lots of delicious coffee, arguably the world’s best. Indonesia’s rich soil and tropical climate make for great coffee growing. As a result, Indonesia exports it all over the world, including to the United States. On the other hand, most of the United States has a climate that just isn’t right for growing coffee.
But Americans love to drink coffee, so we import a lot of it. Since growing coffee isn’t our strength, it makes sense to import it rather than trying to grow it at home. By using our resources to focus on other things, American consumers get great quality coffee at a lower cost than if we only drank coffee grown in the United States.
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 an economy like Indonesia’s, in which consumer spending is an important component of economic growth, ensuring that consumers have access to a wide range of products and services at the lowest prices is a good way to ensure that growth continues and the benefits of growth can be enjoyed by more people.
For industries, trade creates opportunities for innovation or expansion into new territories. Manufacturers can expand their sources for new technology, tools and inputs and can also take advantage of new markets for their products. They can improve their efficiency and leapfrog technologies to better serve their customers, whether at home or abroad.
For governments, expanding trade creates opportunities to deepen a country’s economic resiliency. Strong trading relationships give nations the ability to smooth out economic dislocations from unexpected events – whether natural or man-made – and can also create a virtuous circle that encourages both economic growth and closer relations between nations. That’s good for economic stability.
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 keeping prices of basic goods affordable.
Moreover, a group of Nobel prize winning economists and other economic experts recently reviewed 169 proposed follow-up goals to the Millennium Development Goals to determine which new goals could most effectively reduce poverty rates world-wide.
They found that the most cost effective, by a large margin, was reducing barriers to trade. Just as importantly, those countries that opened up most to trade, like Singapore, as a rule, have seen their incomes rise and poverty fall the most.
So what does all this mean for Indonesia?
Trade offers significant opportunities for Indonesia. There has been a lot of talk about the ASEAN Economic Community or AEC. ASEAN is the second-fastest growing economy in Asia after China. Today, ASEAN countries have a combined GDP of $2.4 trillion and a consumer base of 626 million. And both of those are likely to increase substantially because of the young populations and growing middle class of ASEAN countries.
The AEC offers a significant opportunity for Indonesia to reach a much larger market than the one within its own borders. So the AEC is an opportunity, not a threat. But it also must be sure that it matches or exceeds the incentives other ASEAN countries provide to investors or those investors will go elsewhere.
Now let me talk about another opportunity – how trade benefits small and medium sized enterprises or SMEs. Interestingly, it is SMEs, not large corporations that are poised to gain the most from an open trading system. SMEs make up the majority of businesses in Indonesia and the United States, and they are a key source of innovation and job creation. In the U.S., 98% of exporters are SMEs. Trade is a source of growth for them and for the economy in general.
Another interesting fact is that the companies most active in exporting are among America’s most dynamic and productive companies. Exporters tend to be more technologically sophisticated, pay higher wages to their employees, and usually create better jobs and at a faster rate, than firms that are domestic only. The bottom line is this: trade leads to growth for SMEs and more and better jobs for domestic workers.
The fact is that reducing restrictions on trade helps domestic companies to grow through access to new markets—and often bigger markets—overseas. I’ve heard some companies say that the Indonesian market is big enough for them. And Indonesia is fortunate to have a large and growing market. But the AEC is a much bigger market with even bigger opportunities to grow.
RCEP is even bigger, and some of you may have been following the news about the TPP, which will account for over 40% of global GDP, with opportunities to match. And contrary to what some might fear, there is no reason Indonesian companies cannot compete and win in ASEAN, Asia and beyond. Competition isn’t always easy, but it encourages firms to specialize and improve their products, and also increases the potential for more innovation.
In today’s world, global supply chains dominate the production of goods. 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.
Indonesia has been very vocal in its drive to attract more investment yet at the same time, Indonesia has introduced barriers to trade, like local content regulations that make it more difficult for global supply chains to include Indonesia. As global competition for investment heats up, Indonesia needs to get in gear or risk being left behind.
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. Indonesia’s young and large labor force make this country the right place to develop manufactured goods industries.
But here is the hard fact. Investors are like any other consumers. They shop around for the best deal. They seek regulatory certainty and stakeholder consultation. 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. Indonesia must improve the business climate so that investors, foreign and Indonesian alike, choose Indonesia as the best opportunity.
Ladies and gentlemen, to conclude, let me summarize my key points:
First, free trade is one of the best and most cost-effective ways that countries like Indonesia can reduce poverty and raise incomes.
Second, those countries that opened up most to trade, as a rule, have seen their incomes rise and poverty fall the most.
Third, rather than coercive local content and other restrictions which make it harder for companies to do business, 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 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 this country is well placed to benefit from a greater openness to trade. The AEC, RCEP and someday the TPP can make Indonesia’s economy more dynamic, more creative and ultimately competitive with anyone. An outward looking Indonesia is a strong Indonesia, one who attracts investment through a predictable business environment, and looks to new engines of growth for its economy to grow in an inclusive manner that will reduce poverty and increase opportunity. We hope young leaders like all of you will embrace and lead such a strategy.
Thank you again for this valuable opportunity.