Where Are The Technocrats ?

I have been watching the rupiah flirt with 12,000, remembering 1998 time when it dropped from 2400 to 15,000, and the long period in 2010 and 2011 when it was steady at 8,800-9200. Its tough to see the currency move lower and growth rates in the 5% range when its generally known that Indonesia's population growth generates 2-3% growth automatically. I am also wistful for the time during the New Order when Indonesia's economic brain-trust (personified by the Berkeley Mafia of Widjojo, Ali Wardhana, Emil Salim, and Mohammad Sadli) would step in and handle every crisis with aplomb and a new economic deregulation package. Initially swayed by an import substitution development model they got from Japan, the technocrats convinced President Suharto to turn in the other direction, away from state-led growth, when oil prices fell precipitously in 1980. The 1980's deregulation led to massive amounts of foreign investment and 7-8% growth. I don't think the Berkeley Mafia would have been satisfied with today's 5% growth. Today, Indonesia continues to exemplify strong macro economic prudence but as I listen to the political candidates and their spokesmen and have watched the current government turn again to import substitution -dare I say protectionist- policies, I wonder: what happened to the technocrats ? 

Where are the voices that can tell Indonesia's leaders that banning exports of valuable foreign exchange earning minerals and restricting foreign investment is not a great idea when the base currency is devaluing, the price of imported oil is rising, the nation is running a chronic current account deficit, coal and palm oil exports face demand drops, oil production is falling, and the nation is still hooked on expensive energy subsidies. With logistics costs higher than any country in the region, why let badly needed power plants and toll roads flounder in a sea of overlapping regulations, jurisdictions and bureaucratic inefficiency. Is it really true that there is enough money in Indonesia to build the sorely needed infrastructure contained in the Master Plan for Accelerated Development ? Of course not; foreign investment will be key. But although the candidates pay lip service to the need for FDI you still have Presidential candidate Prabowo saying at a May rally:"Every year the wealth of Indonesia has been flowing out ...the wealth of Indonesians has been stolen, stolen, stolen from the people. . . All of us, all of the Indonesian people, do forced labor. We're the lackeys of other countries." and candidate Jokowi has said: "The authority should set up barriers to avert massive expansion of overseas business here . . . I believe Bank Indonesia has regulations that can act as barriers for foreign interests from easily coming into our country." Its true that some of this may just be campaign rhetoric and on other occasions the candidates have appeared supportive of foreign investment, but, consistent messages and policies are best when it comes to attracting and retaining investment. 

Since Indonesia does not have full food security, prices-already quite high because of unrealistic import bans designed to build local production- will only get higher the more Indonesia's current account deficit widens. With further restrictions proposed on cross border data transfers or mandates to locate data servers in the country, the new businesses that will be routed primarily through digital devices won't develop to their full potential, denying many possibilities for Indonesian entrepreneurs. Congenital worries that foreign companies are "stealing assets"or depriving Indonesians of opportunities need to be opposed by those in Indonesia who know better. The fact remains, foreign companies and banks are a relatively small part of Indonesia's economy. Indonesia's pathway to be a top ten economy is not assured. We live in a world that must be cooperative as much as it is competitive. The kinds of restrictions on foreign trade and investment that have been proposed by both campaigns are not helpful to the health and well being of most Indonesians. They won't bring the economy to the 7-8% growth that will employ people in full time wage earning jobs; millions of high school graduates will continue to eek out a living in the informal sector as day laborers, delivery workers, low skill service workers and part time employees. 

 I applaud the recent statement of Indonesia's Finance Minister, Chatib Basri, who sent an appropriate warning: "There's no way that this country can achieve 7 percent growth without being open to foreign investment, or you end up with a persistent current-account deficit...Policy would be constrained by this economic rationality." Basri is young, talented, and may stick around in the next Cabinet. I hope he has similar ideas about the uneconomical export taxes he has implemented on copper and gold concentrates. And I hope the new government and Parliament will be open to the voices of the technocrats in the government and elsewhere whose voices have been too muted. Or have they been swayed by nationalist, go-it-alone rhetoric that may already have fundamentally changed the equation for foreign investment and capital. I sincerely hope not. 

The above views do not necessarily reflect those of the American Indonesian Chamber of Commerce or its members.

Bima vs Puntadewa

Bima                                            Puntadewa Indonesia’s Presidential campaign has now kicked off in earnest and although the two candidates don't have too many differences over the substance of their economic policies, they do differ markedly in character and personality. And its character that counts for a lot in Presidential races as Indonesian voters generally do not carefully review a candidate's policy prescriptions or their stand on issues. To help them understand and frame the differences between Prabowo and Jokowi, many Indonesians (in particular the largest ethnic group, the Javanese) will turn to the thousand year old wayang (shadow  puppet theater) tradition, as it is an essential lens for understanding character (as well as statecraft).  The Javanese are also Indonesia's largest ethnic group and are essential to victory.  Certainly the devotees of wayang among them will judge the candidates in part on how they compare to their favorite characters.    One of Indonesia's most famous dalang(puppeteers), Ki Manteb, has already publicly compared the candidates to two of the most well known and beloved wayang (shadow puppet) characters: Bima and his older brother Puntadewa. The two are on the side of the just in the epic struggle of good versus evil that pervades the shadow puppet world.  How do the candidates appear in comparison to these ancient archetypes ? The current leader in a recent poll is Joko Widodo (Jokowi, 51). A former mayor and businessman from the central Javanese city of Surakarta, Jokowi projects the character of Puntadewa (also known as Yudhistira): reserved, inner-directed, humble, thoughtful, polite.  Although slight of build, Puntadewa becomes king and is known for his wisdom, piety, political sublety, self control and righteousness, which were more important to him than material pursuits. Prabowo Subianto (62), also Javanese, spent 24 years in military service (rising to the rank of general) and has been active in business since 1998. He is known for his direct communication style, forceful manner, temper, concern for security and discipline, as well as loyalty. He could be compared to Bima the strongest of the satria (knight) upon whose strength rests the fate of the world during the final battle of the Hindu epic, the Mahabarata.  Unlike Puntadewa, whose strength often lies in his cleverness, its Bima who finally overcomes all their adversaries with brute strength bordering on ferocity, saving Puntadewa's kingdom. Voters nostalgic for the stability of the Suharto era and a sense that Indonesia needs saving as well as decisive leadership might go for Prabowo. They may also appreciate his worldliness (Prabowo attended schools and military training in London and the US) and involvement with Indonesia’s farmers (he chairs the Association for Indonesian Farmers).  Prabowo favors a strong central government that can bring order to the "chaotic regions", spending on big infrastructure projects.   He aims to implement a "people's economy", and speaks of "developing an Indonesia that is united, sovereign, fair and prosperous, as well as dignified." Whereas Prabowo has appeared at rallies on horseback in paramilitary garb, the youthful Jokowi strolls neighborhoods in a modest but fashionable checkered shirt. The former Mayor of Surakarta assumes a humble, thoughtful, and polite manner, and  tries to connect to voters with an everyman vision of a future Indonesia based on reform, accountability, honesty and more responsive government.  In trying to explain how recent reforms have "been in vain" and why graft and corruption remain despite the efforts of the Anti-Corruption Commission (KPK), he said Indonesians needed to change their mindset with a "mental revolution". As mayor and now Governor of Jakarta  he has been praised for his unexpected visits to government offices, jump starting infrastructure projects, and creating universal health programs for the poor.   He is the embodiment of the reform era, the local leader who came up in a grass roots fashion.  Curiously, Prabowo and Jokowi (like Bima and Puntadewa) once were on the same side.  Prabowo ran as former President Megawati's vice president candidate in 2009 and helped bring Jokowi (who is from Mega's party, PDI-P) from Surakarta to run for Jakarta governor in 2012. No doubt there are already lively discussions within families or among neighbors over who is most needed now, Bima or Puntadewa.  We will hear more from the candidates and their running mates in the weeks ahead.

Edward Masters: (1924-2014) Built to Last

The passing of Ambassador Edward Masters in March sent a twinge of sadness through many of us.  He taught us many things by his actions as much as his words. Together with his wife Allene, he created ideas, institutions and relationships that lasted.  Beginning in the mid 1960’s he experienced Indonesia from multiple perspectives: junior diplomat, ambassador, business executive, and for the final chapter of his life, NGO leader.  He worked at all of these occupations with the knowledge that to be successful all required judgment, sensitivity, and an unusual ability to work with others. Ed had these in spades. Although I never worked for him directly we did speak often and I consider him to be one my mentors. When I least expect it, something he told me years ago will pop into my head and I say to myself, “This is how Ed would handle it”. 

While in his presence you could learn something important about the correct American approach to Indonesia and not experience that you were being taught.   It was Ed’s wonderful gift that he could put people at ease while he was being instructive.  I wonder if that is how it was with President Suharto when as Jimmy Carter’s Ambassador to Indonesia (1977-1981) he made it clear (probably in a subtle way) that the US was not tolerant of the many political prisoners (including the great novelist Pramodoeya Ananta Toer) still being held under terrible conditions since the mid-60’s on Buru Island.   With little fanfare many were released (including Toer) and the US, and certainly not Ed, did not grandstand.  In the mid 1990’s I became aware that Indonesia might be appointing a new ambassador to the US who was named as an unindicted co-conspirator in a scheme to sell false Indonesian government promissory notes.  Ed knew exactly how to handle it. 

His path-breaking quiet diplomacy and close reading of Indonesian customs heavily influenced AICC’s approach to resolving commercial disputes: behind the scenes, informal discussions were preferable to press conferences and public outcries. Its how we pushed back an attempt by an Indonesian exporter in the late 1980’s to be the sole exporter of cinnamon or other commercial hiccups better left out of the public eye.   Success came because at the heart we were lifelong friends as much as we were trading partners. 

 In a 1982 speech to an AICC conference in NY, Masters spent a good part of it quietly admonishing American businessmen to be less impatient and more observant of local customs in Indonesia: “The style adopted by a foreign businessman is frequently as important as his proposal. Choosing a business partner in Indonesia is somewhat like welcoming a son-in-law into the family. Its to be approached with perception, caution, and sensitivity.”  And perhaps more important he said, “ All too often the American businessman gives the impression that he is in a great hurry, inadvertently signaling that he has more important things to do and that the relatively easy Indonesian pace is a waste of time. ” 

Edward Masters’ way of working lives on in the institution he and his wife Allene built that recently turned 20, The US-Indonesia Society, and continues to inform how we at AICC approach contemporary issues.  Like the John Deere tractor he bought for himself at age 80 to clear land on his East Chesapeake Bay property, this son of the American heartland was built to last. 

The January Surprise

On January 12, Indonesia’s mineral export ban came into effect with an unexpected kicker: an export tax on copper concentrates.   As predicted, a last minute compromise allowed them to be exported but soon after it was revealed that the Finance Ministry contradicted the thrust of the exemptions by imposing a graduated export tax that goes from 25% to 60% within 2 years.  Ignored by the senior leaders is that these processed products retain 95% of the metal’s production value compared to the 100% of a smelter.  The US companies that produce them employ upwards of 40,000 people in the least developed regions of the country generating over 2% of GDP, paying billions in corporate taxes (at 35% not the new 25% rate) and royalties. Many other benefits could be listed.  The point is many thought cooler heads had prevailed until the surprise tax was announced.   No one had anticipated the move as it was not mandated by the law or the implementing regulations. Whatever compromise had reportedly been worked out with the President  turned out not to have been one. Finance Minister Chatib Basri said: “This is a fiscal instrument to force companies to build smelters — it isn’t a policy to increase tax revenue, not at all”.   Last week mining CEO’s scurried to Indonesia for consultations and so far have come up empty ended.  The concentrate shipments are now pretty much dead in the water along with those of raw minerals and according to the Trade Ministry the government has processed no export requests.  Existing copper concentrate shipments are going to Indonesia’s sole smelter in Gresik, East Java.

If Indonesia does not walk back some of these policies the mining industry will eventually grind to a halt and companies with early generation Contracts of Work such as Freeport and Newmont may be headed to international arbitration, something that should be in everyone’s interest to avoid at all costs.  Its been pointed out by numerous experts as well as the head of Indosmelt (a local company trying to build a new smelter) that smelters are currently operating on a thin profit margin with existing supply and bringing more on stream would be deemed financially unfeasible without government incentives. The current government obviously believes the mining industry is bluffing and somehow sees huge benefits from insisting on holding on to  the minerals ban for dear life.  But the strangled victim may turn out to be the Indonesian economy.   Bans tend to have unintended consequences.  The sawn timber and rattan export ban of the 80’s never led to the amount of furniture and plywood factories the government had anticipated.  Other possible side effects: social unrest in Papua, where a small independence movement has existed for decades; erosion of confidence in Indonesia’s business climate and in the sanctity of contracts; and $billions in loan defaults in the mining industry.  One can take heart in KADIN’s recent efforts to engage the Parliament and the Finance Ministry and get the law overturned or the tax rolled back (see story below). This is an evolving story whose ending may not come until a new government is elected later this year.  Business does not like surprises; but in Indonesia one learns to take them in stride. 

To Ban or Not To Ban

2013 ends a year in which the Indonesian economy made a strong start and sputtered mid year when rumors of an end to the US Fed’s monetary easing, and uncertainty over nationalist trade policy spooked investors.  Policymakers reacted with measures to preserve the rupiah’s value and reign in an advancing current account deficit. Come January 12, an export ban on raw minerals (mandated by a 2009 law) will only increase the deficit, depreciate the currency,  and push the economy towards recession as upwards of $7 billion of foreign exchange earnings will be lost along with 800,000 jobs.  One would think that Indonesia’s Parliamentarians and senior economic officials would be on the same page regarding the bad economics of an outright ban.  But, at the moment, that is not the case. Senior officials seeking a solution recently met with the Parliamentary Commission on Mining, which was in no mood to grant any exceptions to the law. 

Simply put: there is no market within Indonesia yet for the hundreds and thousands of tons of coal, bauxite, gold, silver, nickel, and copper that Indonesia produces.  Neither the smelting capacity, nor enough downstream off takers exists.   Even the Gresik copper smelter that Freeport(operator of the huge Grasberg Mine) and Sumitomo helped to create years ago can only absorb 40% of Grasberg’s production.  

AICC, along with mining industry associations and most of Indonesia’s main partners have been highlighting the bad economics for the past several years.   The mining law of 2009 had some laudable goals (growth of downstream processing, more local control over permitting) but an uneconomic method of achieving them.  Some leaders have gone so far as to say that the lost foreign exchange can be replaced by increasing the use of biodiesel, a pipe dream that also ignores the damage to the economy of mass unemployment of miners and small businesses that support them. The ban, others say, is helpful to control illegal mining and permits given under corrupt circumstances.   Given Indonesia’s recent failure to create a local beef industry through an import ban (resulted in skyrocketing prices) one hopes cooler heads will prevail as the deadline nears.

I use the following analogy in my discussions with Indonesian officials.  For over 70 years Indonesia has shipped a product, primarily in a raw form, to the US and the world, never once instituting an export ban.  Meanwhile, plenty of downstream business has been built in the country.  That product is natural rubber. Exports continue unimpeded and Indonesia has factories that produce latex gloves, sport shoes, tires, fan belts, grommets, paint and many other products.  When Indonesia’s infrastructure and other policies are in coordination with international supply and demand logistics, more smelters and related downstream industries will come.  The government should not be legislating these things to happen. 

A recent flurry of news reports in the Indonesian press, a petition by the Indonesian Mining Association to the Supreme Court asking for an opinion that the 2009 law does not actually mandate a ban (only mandates local processing), comments of Japan and China, are all signs that a compromise can be arrived at either at the deadline or soon after. Indonesia has done this in the past on other big issues.  The President is hosting a special Cabinet meeting next week that could yield one.  If so, it will probably utilize some of the ambiguity in the law over purity levels, allowing the export of copper concentrates, for example, from the large mines run by Newmont, Freeport that are above 90% purity already.  Stay tuned, this one will go down the wire and I predict a way will be found. Our friends in Indonesia know how to do this. 

Structural Reform Anxiety

Its amazing and somewhat anxiety producing to watch both the US and Indonesia democracies struggle over structural reforms.   An inflection point seems to have simultaneously been reached in each country, with each nation's future depending on their implementation.  In America's case its primarily the troubled rollout of a new and improved healthcare system as well as our budget reform process and in Indonesia's its primarily the ongoing crisis of upgrading the country's basic infrastructure.  The promise of ACA beyond the enrollment of the uninsured, was lower costs to employers, who are the primary providers of insurance.  That promise appears, for the moment, to be challenged.  Indonesia desperately looks for private investment in infrastructure, but after a decade of trying and an ambitious plan (Master Plan for Acceleration of Development), only 5% of the total target has been spent.  A period of strong economic growth appears to be winding down, partly due to external factors, but also due to the inability to make the hard political decisions required for structural reforms.   In each country, a divided government, is partly to blame.  In the US the division is more stark and ideological; in Indonesia, its more about protecting turf and political insiders.  There a wider coalition of parties and a host of quid pro quo loyalty mechanisms (many laced with patronage) creates a complex web of relationships that stymy an executive branch committed to reform.   Vice President Boediono, recently interviewed by the Wall Street Journal, said, "The formal system is a presidential system, and it's supposed to be that the president can appoint whomever he wishes to appoint in the cabinet. But this is not truly a presidential system like in America because our Constitution says that for quite a number of things the president needs approval from the Parliament. That means that if you are not in the majority, you have to accommodate political parties and appointees within the cabinet. You cannot get away from some kind of coalition. I foresee that in the next 10 years or so this kind of thing will still happen. That's compromise."  

Here's my anxiety, I am worried Indonesia cannot afford another 10 years of coalition governments with Ministries that cannot coordinate with each other to enact the structural reforms that will unlock Indonesia's potential and move its people out of poverty and fully integrated in the global supply chains of goods, services, and ideas. 

  

APEC and America's Image

I normally go about my business keeping my American roots a little under wraps.  AICC is after all a bi-national association.  Right before this year’s APEC meetings in Bali (October), there was the third US-Indonesia Commercial Dialog.  Seated opposite from each other around a large square table were roughly 10 CEO’s from each country.   I found a seat right in the middle.  Its a reasonable spot for someone in my position: our members import as well as export to Indonesia and our membership (although the majority are US firms) includes Indonesian companies that have invested in the US.   But, my innate patriotism surfaced when AMCHAM and the US Chamber revealed the results of a survey of 35 US companies: $65 billion has been invested in Indonesia since 2002 and another $61 billion is projected to be invested in the next 3-5 years.  35 is the number of firms that replied, so these numbers are probably a little on the low side.   The firms include companies who are in the oil/gas and financial sectors where investment is booked differently than what is normally tracked by the Investment Coordinating Board (BKPM).  Instead of a 3rd, 4th or even 7th place, the position BKPM usually shows, the US is likely the largest foreign investor in Indonesia and probably has been for quite some time.   Now, while I was in Indonesia a month ago the US was beat up in the press for our shutdown and debt payment issue. The Chinese press agency had the temerity to suggest that the world would better off without the dollar as a reserve currency.  My Indonesian friends did not seem swayed by this argument but certainly China, Japan, and Russia’s leaders received a lot of ink for announcing their intentions to invest billions, whereas the study, did not.   Perhaps its not our style, and yes, President Obama, was not there.   US companies do have significant issues related to investment that need to be worked out with Indonesia.  But, on the other hand, the study shows our intention to stay and expand and does so without even mentioning the area of capital market investment where the US is probably the biggest source.  So, America’s leaders can stand a little taller in their interactions with their Indonesian counterparts: it is vital that Indonesia policy makers listen carefully to our suggestions on improving the investment climate.  As one Indonesian CEO told me after the Commercial Dialog, “your side should have said more about the problems you experience here.  Sometimes its harder for us to express them but we have the same ones.”