Transcript of Gita Wirjawan's Stadium Generale at Yale University School of Management

Dibawah ini adalah salinan transkrip kuliah umum dari pak Gita Wirjawan. Beliau adalah mantan menteri perdagangan yang juga pernah menjabat sebagai kepala BKPM (Badan Koordinasi Penanaman Modal). Kuliah umum ini berlangsung di Yale University School of Management. Transkrip ini hanya menyuguhkan presentasi dari pak Gita Wirjawan dan tidak mengikutsertakan sesi Q&A (question and answer). Jujur ada beberapa kata yang kurang akurat, mohon maklum. Bila teman-teman membutuhkan transkripsi ini silakan di salin namun harap mencantumkan sumbernya, terima kasih.

Penulis: Indra Gunawan.

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Colloquium in Business and Society: Behavioral Economics: A Perspective from Southeast Asia

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Yale University School of Management, October 2015.

By Gita Wirjawan.

Thank you all, it’s a real honor to be here, and thank you to [..] for saying the introductory words for me. I am little bit nervous because I have never spoken in a prestigious school, like Yale University. But long time ago when people in the US tried to pronounce my name, I [..] them, [..] of guitar, without an [..], and my last [..] said “What do you want?”, and it worked, it worked. It never really helped with my salary increase, but it got me through. Anyway, I just [..] a government, I was in the government of the Republic of Indonesia for five years so as the minister of trade and before that I was running the Investment Coordinating Board which is equivalent to the Ministry of Investment. And before that I was an entrepreneur for about 60 months, I was doing quite well between 2008 until 2009 and then I got summoned by the then-president for a massive [..]. Just give you perspective, if you are working for the Indonesian government, you make about $1500 per month, plus a bag of rice. and it’s supposed to be a real honor and it was an honor for me to be of the Indonesian government for five years.

Before that I was in banking. I worked at GP Morgan for some years I was with Goldman Sachs for almost 6 years, and I was at City for five years and I worked for Hong Leong [..] Temasek in Singapore for one year. But now I am back in the private sector, running the business group that I set up. I wanna just talk little bit, you know, Southeast Asia and Indonesia. And before I do that I just wanna say that it’s unique time, as of now, having seen the world evolve. You know it took the population of the world 12 thousand years to go from 1 million to the first billion. And the first billion was hit in 1800’s to be exact around 1800 and it took a lot faster for the world population to get to the next billion; only a hundred and 30 years. Then the next billion only took 35 years. Then the next billion took only 19 years. And ever since then it’s only taken 12 to 15 years for the world population to grow by another billion and we’re at over 7 billion today, and the question is where the world economy gonna go, where is the environment gonna go, where is the politic gonna go, where is the geo-politic gonna go.

Southeast Asia is just a small piece of the equation. It is a population of little over 6 hundred million of people, made of 10 countries, and it shares a lot of similarities among its members; including Indonesia, Singapore, Malaysia, Thailand, Philippines, Vietnam, Laos, Cambodia and Myanmar, and Brunei of course. It’s only about 2,5 trillion dollars of economy in the context of over 70 trillion dollars in the whole world. You compare that with another grouping in Europe, which has little over 500 million of people. But they share I think fewer similarities in terms of culture, in terms of politics, in terms of ethnic background, in terms of few other things. The European Union has decided to unionize on a number of attributes including the immigration, labor and monetary matters, whereas, ASEAN is almost completely different. It doesn’t unionize in fiscal, nor immigration, nor monetary, nor customs, nor labor. But it sets on 3 different pillars; these pillars are socio-cultural, economic and political security. And it has been underpinning the stability of the region since the late 70’s, it was founded in 1967 and ever since then I [think] ASEAN has enjoyed tremendous stability in terms of economic robustness. Until 1998, we have an episodic stress, by way of what’s happening in some parts of Asia, and there was an effect, and Indonesia collapsed, it contracted by 13% in 1998, the economy. And it also got a new taste of democracy. That was the time when Indonesia first learnt how to democratize. Before then everything was run by just one guy, by the name of Suharto who ruled the country for 32 years as the dictator.

But ever since then I think Indonesia has learnt to democratize, and learnt to become more relevant of not only ASEAN but of the world. Just give you sense, during the regime of the first president, Soekarno, the GDP per capita was only $200. When came Habibie, who ruled for just, ruled short of 2 years, the GDP then grows much. It actually collapsed. Sorry, Soekarno went to Suharto, Soeharto took it from $200 to $1200 then the Asian financial crisis brought it down to $600. And we had president of Habibie, Megawati and Gusdur who basically was able or were able to take the GDP per capita from $600 to $1100. That was in 2004 when president SBY took over. He was a military guy and was democratically elected by little over 200 million people, and was able to [run up] GDP per capita or income per capita from $1100 to around $3500-$3600.

So it has been 3 times of growth in ten years, and we had a new president last year by the name of Joko Widodo who basically got democratically elected on a sound voting and is just in his first year of ruling, and time will tell as to whether or not Indonesia will be able to grow. Now, If we take a look at Indonesia, it is a little short of trillion dollar economy, it is the 16^th largest economy in the world on a nominal GDP basis. Where it is on PPP just [as the basis], it’s probably number 10 or number 11 in the world. But not whole lots of people know about Indonesia. Most people know more about Bali, and that’s actually in Indonesia for some of you who don’t know where Bali is. And Bali has been much more attraction to the world over than the Indonesia has been because of its unique nature of tourist destination. Taking a glance at Indonesia fundamentals, we’ve had pretty consistent GDP growth, between 5 -7 percent in the last 10 years with the exception of 2008 when we grew only 4.5 percent. And beyond the last 10 years we contracted about 13% in 1998, but relative to the other ASEAN nations; of the Philippines, Malaysia and Singapore and Thailand, which are some of the bigger neighbors of Indonesia and Southeast Asia, we had a little more stability in terms of its economic trajectory. Rapidly organizing, there is about a hundred and thirty million people that are living in the cities other [..] 2.55 million people in Indonesia.

Fast forward in 2035 people are predicting that we’re gonna have closer to a hundred million of people living in the cities, that’s gonna mean more requirements of infrastructure development; ports, airports, railroads, power generation capabilities and all that goods stuffs. The middle class is growing, there is about 60 million middle-class members in Indonesia. Income per capita is also growing, but equity may not be there as much as a growth of income in general in Indonesia. It’s not a highly-banked economy. We take a look at the equity market, the banking industry and the bond market, they only make up around a 107 percent of the GDP. We compare that with Malaysia at 450 percent, and Singapore 564 percent, it tells you of how well-capitalized Malaysia and Singapore are. Indonesia is pretty much at the same level as the Philippines, which is another robust economy in Southeast Asia, and I think this will entail questions as to how we’re gonna be able to [run up] the percentage of the degree of the banking system in the country and the equity market of the economy and also the bond market.

We’ve had some interesting phenomenon. Recently, I think what I see is an increasing divergent of monetary policy making around the world. We’ve had the QE^[1] (Quantitative Easing) here, we’ve had the Japanese version of QE, we’ve had a European version of QE and we’ve just seen the Chinese version of QE just month ago, and I don’t see central bankers around the world and policy makers around the world talking to each other and coordinating as much as we would have seen some years ago and [thus] has I [think] entail more risk for countries like Indonesia. And we’ve seen the capital moving back to the US by way of expectation of an interest rate rise here. So, I’ve been assigned to talk about the behavioral economics, economics which is really [..] the economics from the point of view of psychological, cognitive, social and emotional factors.

And lately, I think some people in Asia have gone a little more emotional than usual because money has been moving out of Asia, moving back to another place which is anticipated to increase [of] an interest rate, this is worrisome for some economies of Asia. I think the issue with Indonesia is not only monetary but it is also fiscal. Fiscal in the sense that “Are we going to be able to collect tax revenues as much as we have been?”, Mind you that this is a country that is largely commodity-driven; 70 percent of its budget has been hinging on energy and commodities and at the rate that it’s struggling to diversify way from the commodities, I think we need to find solutions on how the game change the fiscal space of this country, in addition to how we deal with some neighboring countries who might do their own version of quantitative easing which certainly has and will have an effect on economies like Indonesia.

This tells you how vulnerable we are. 50%-60% of the market is basically owned and dominated by foreign money. And foreign money, as of today is looking for the right places. And it’s a bit ironic in that capital that today is actually very cheap and we’re likely to see a sustained period of low interest rate environment but we’re not capitalizing on this, to the extent that investment realization as of 2012-2015 is only growing by 9% when the past we were able to grow at 30%-35%. And for those who know a bit about Indonesia vs. China. China runs at a fix capital formation ration 50% whereas Indonesia runs at the fix capital formation ratio of only 32%. And I think it needs to move up the needle from 32% to any way around 40% if we were to be able to or to want to improve the quality of infrastructure and the quantity of the infrastructure also. So at the rate we are not getting investments from around the world as much as we used to. I think we need to [rigid] the economic structure for formula for the country. And this will have an effect on Southeast Asia because Southeast Asia is highly influenced by the stability or the quality of economic trajectory in Indonesia which makes up about 40%-45% of Southeast Asia economy.

As you can see the bottom 5 in USD terms, the capital markets of Singapore, Thailand, Indonesia and Malaysia have been affected. You see that the Philippines stock market has corrected by almost 1% this year in dollar terms. And the STI which is the Singapore stock market has corrected 11%, Thailand stock market has corrected almost 15%, Indonesia is 18% and Malaysia by 26%. That has been largely because of just expectation of interest rate rise in the US and the recent devaluation or quantitative easing in China. So episodic stresses are more and more recurring, frequent and apparent in Asia. 

Having said that, if we take a look at the last 15, 16, 17 years it’s been a pretty good run. In 1998 a market capitalization was only $20 billion less than the wealth of Bill Gates at that time. As of today, the market cap has gone up to about $400 billion which is 40% of our GDP which is not efficient. I mean my definition of efficiency usually is at about a hundred percent of GDP. And anything about a hundred percent is good, having market capitalization and at least 200% of your GDP. So we’ve got ways to go, in terms of our growth trajectory. And by way of what we may potentially see in the next year two or three depending on how you define, how the renormalization of monetary policy in the US is gonna go. We’re talking about the potential increase of 200 to 250 basis points here that will certainly have an effect on the number of economies in Asia. Ok. This is another behavior that’s worth observing.

There is basically only 27 million people in Indonesia that are paying taxes or suppose to be paying taxes. You put that on the context of 255 million people. Right there you know there is a lot of people who are not paying taxes, right. And if you take a look at the ratio of tax, meaning the ratio of tax revenues, vis-à-vis the GDP of the country it’s only 10.8%. To give you perspective the average OECD country runs at the tax ratio of 30%, right. But here is the good part. Even worse a ridiculously low tax ratio, the corporate in Indonesia are paying 25% tax, and if you’re publicly listed, they’re actually paying 25% tax, and if you’re listed you pay only 20%. So imagine if we were to grow the tax ratio from 10.8% to let’s say 15% or even 20%, I mean we’re talking about the potential of our being able to lower the tax rates to maybe 10%, we could be highly, highly competitive, vis-à-vis the Singapore, Hongkong [or the world]. So this is I think the lingering question for policy makers, or everybody who wants to be the participatory in the economic story of Indonesia. I’ve been quite vocal in advocating for a tax amnesty. In that, I believe is when we [gain change] the fiscal space of Indonesia. I think it’s gonna be difficult, it’s gonna take a long time for us to reconfigure the structure of our fiscal space from commodity-centric to non-commodity-centric.

We can do it, but it’s gonna take time, and I am not sure if time is on our side. One way the game change the fiscal space is to just do the tax amnesty and it’s likely that the parliament is gonna be approving of the potential tax amnesty bill in the next three [to] six months. When that happens, it’s gonna provide both a fiscal solution and also a monetary solution. A fiscal solution because you have a lot more people paying taxes or at least showing up for new tax ID’s and they’ll start paying taxes, and monetary solution because we know or we speculate that there is a quite number of Indonesian that have not been reporting taxes and have been parking their money outside Indonesia. And that’s likely to return and provide some liquidity support into the system.

Less than 11%, poor tax compliant. We compare this with other countries; the Philippines runs at the tax ratio 13%, Singapore 13%, there is a lot higher percentage of the population that are paying taxes in Singapore, but they run on a more efficient tax rate, lower tax rates for the corporates and individuals. Malaysia at 16% of the GDP, Thailand at 16%, the USA [..] 24%, OECD average 33%, and France, anybody from France here? Ok, wanna think of migrating to Indonesia because we’re low, hehe, 44%. So that’s the highest tax ratio in the world. So, I think there are opportunities and there are challenges for Indonesia.

My view is that the world is changing, and I think in the near foreseeable future by way of what we might be seeing in terms of an interest rate increase in the US, the dollar is viewed to be [..] currency, that’s going to be strengthening, vis-à-vis just about any currency in the world particularly those in Asia. So it just seems that globally, economically the world is likely to be more Americanized in the near foreseeable future, but in contrast to that, geopolitically the US is playing less and less over all, and geopolitically the world is becoming less Americanized than ever by way what we’re seeing in the Middle-east, what we’re seeing in South China Sea, what we’re seeing around the US even and what we’re seeing in Europe. So I think the world is gonna be even more interesting in the next few years and I think we just need to make sure that places like South-east Asia would stay relevant.       

This is another discussion on tax which we have touched down earlier. There you go. This is where the challenges. When we talk about Indonesia’s fiscal space, the budget in terms of what tax revenues are suppose to be for 2015 is Rp.1.294 trillion, there a lot of zeros, but it’s pretty much equivalent about a hundred billion USD, almost. But look at the collection, until the end of August, only 46% of the target has been collected. So if you [strapulate] the next four months of 2015 it’s gonna be very difficult to collect the remaining 54% which I think poses the question as to whether or not we’re going to be fiscally robust. We have been fiscally robust for the last 10 years thanks to the commodity’s boom, but without that, and with what we’re seeing in the Middle-east, I think all prices likely to stay low for the near foreseeable future. So 2015 is a question mark, 2016 is again likely to be a question mark in terms of our ability to collect taxes which is why some including myself have advocated for a game changing tax amnesty. Beyond that, what would country like Indonesia do from a non-fiscal stand point? I don’t see any reason as to why Indonesia would not consider its own version of quantitative easing, at rate that everybody else is doing or contemplating doing its own version of quantitative easing. I am speculating, I think China is likely to do another round of quantitative easing in the early part of 2016, that I think will bear some challenges for neighboring countries in Asia and I think will probably make some neighboring countries do their own version of quantitative easing.

Now the challenge for Indonesia is that it’s unique and different from other countries where experiencing deflationary pressure environment, [while] Indonesia has been inflationary even this year when commodities prices are actually at the low time and time low. So the key is how do we make sure that prices are stable? 30%-40% of the consumer price index for Indonesia is actually related to food staples. And the good [change] for the food staples as a determinant of inflation is actually chili, because Indonesians love spicy food. And when we run out of chili we actually we import chili from places like India, Thailand and Vietnam. So if anybody in a policy making body were to want to do any quantitative easing, putting liquidity in the market, he or she needs to make sure that price stability is there. Better yet, there should be some deflationary tendencies. So he or she should be mindful of how to manage and control price level of the food staples.

Now here is the problem. The problem is the government has been tending to be a little bit nationalistic as of late. Protectionist policies are pervasive, so this is where I think if anybody were to consider doing some sort of quantitative easing, he or she would have to sound a lot less nationalistic. Because they need to open up the gates for importation of food staples as to help, bring about stability on prices.

The last [part] is TPP^[2]. You’ve probably heard this, there has been sound bites on Trans Pacific Partnership. I was the ministry of trade at that time, I was put on the spot when we had a meeting with the leadership of United States and I was asked as to whether or not Indonesia would be willing and ready to join. At that time opposition was; we were not able to ask [retain] as to whether or not this will be [net] beneficial for Indonesia. Nearly or mainly for the reasons that 70% of our exports are actually commodities, and these commodities are actually going to places like China and India; mainly coal, bauxite, dynamite. And here is [..] whole lot of stuffs going off to the US other than garments, shoes, and to some extents cigarette, at that time. And at the same time we were buying Boeings from the US. And all the airlines in Indonesia which have been doing well you know have been ordering hundreds of Boeing 737, and 777 and all those, all the other Boeing types. So it has to be clear for anybody to be signing on to a TPP in that he or she ought to be able to justify politically. When you run a bilateral discussion or a plurilateral or even multilateral discussion, you’ve got to be very clear you’ve got to get it passed the stakeholders. And the stakeholders in Indonesia have become little more democratic than ever, and they get unique when they get democratic. And it’s not easy lately to pass anything that doesn’t visibly get quantified in terms of benefit for the actual people in Indonesia.

So we took the view of not participating in the TPP. This is actually a beautiful concept, conceptually; 40% of the global GDP being the participatory in this partnership, they made up of 12 countries on the Pacific. But if you take a look at the ASEAN; not everybody sign up. Singapore sign up, Singapore signed up. Singapore will benefit either way because it is a hub of goods and services so anything that passes through with high tariff or low tariff or no tariff will benefit Singapore. Whereas Brunei, it’s 300 thousand people and not too significant of size economically, it also I think is taking the view that either way it will benefit. But Indonesia, being the largest component of South-east Asia didn’t sign up. The Philippines, which has been known as very friendly and close to the US, even took the view of not signing up. And I think to be fair this was an issue that was sounded off some years ago at that time it was hard to tell, and this was viewed not merely as a trade or economic platform but this viewed to some extents as a geopolitical platform as a counter to China. And at that time China was [spared] heading its owned discussion with a number of partners in Asia, we called it The Regional Comprehensive Economic Partnership, in short RCEP^[3]. In my view at that time was that RCEP was little to 18^th century, and TPP was little to 22^nd century. And it would have been easier to recalibrate up from the 18^th century, proposition, as suppose to [China] recalibrates [now on] from a 22^nd century.

Because if you take a look at the documents or the drafts of the TPP, I mean we’re talking about a lot of stuffs on intellectual property, and you know it’s you know, a foreign language to a lot of people in Indonesia when you mention the words “Intellectual Property” when everybody just [..] extract coal, bauxite and [..] shirts and shoes. So that was really the position or the situation at that time, and I think as of now with the benefit of [..] side with the benefit of this being basically signed off and likely to be executed as early as next year, hopefully, when twelve countries would have ratified the agreement in each one of the twelve countries. I think it would be easier for countries like Indonesia to further study this quickly and decide on whether or not we should sign on, and I think there is some room for us to not only study the proposal little more thoroughly but there is room to try to recalibrate to wherever we need to be.

Thank you very much.                           

 

Youtube link: https://www.youtube.com/watch?v=XZR51lnfWAQ

Other relevant link: Yale Insight's Website - What is The Way Forward for Indonesia

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