16 October 2018

Stepping up on the world stage

Indonesia’s unique flavor of intelligence is often under recognized and under appreciated. In a wide ranging interview, the Chairman of the Indonesia Investment Coordinating Board Tom Lembong discusses the challenges facing the global economy and the forces shaping Indonesia.

By Shoeb Kagda

Question: In the context of growing global economic and political uncertainty, how is Indonesia fairing?

Tom Lembong: There is definitely a lot of headline grabbing occurrences every week and every month. To me the number one issue for the world economy for the next three years is the critical importance of the major central banks in the USA, Europe and Japan allowing their economies to run a bit hot. We are finally seeing decent wage growth and household income growth in the USA, Europe and Japan and it’s feeding through into consumption and restoring household savings in the advanced economies.

It’s also sucking in imports from the developing countries, which sends hard currency to the developing countries. Socially the wage growth and household income growth is also helping reduce inequality in the developed countries which is a highly desirable phenomenon. Frankly the only ones that will be faced with slightly negative repercussions is corporate profits as companies may see heightened labor costs but from my perspective, the corporate sector in the advanced economies has been enjoying disproportionately high profits for many years now and its time for a healthy rotation in terms of the division of the pie back towards workers and households.

Personally I credit the perseverance of the major central banks in the advanced economies for getting the world this far. First they had to resist incredible political attacks that warned that the monetary stimulus would lead to hyperinflation and other problems. Secondly, they have had to be incredibly progressive in the way they modeled the likely forward path for inflation and debt levels or the impact of fairly high debt levels or the deflationary effect of technology.

Only 4-5 years ago, the world was still worrying about deflation which was a real threat at that time so we should give a lot of credit to the central banks’ success in defeating deflation and generating much needed wage inflation and income growth in the advanced economies which is especially important in a situation where debt levels were high.

So the biggest threat to the world economy I would argue is not trade wars but premature tightening by the world’s major central banks, choking off what is currently a very healthy reorientation away from corporate profits towards household income growth which is a win-win-win for just about everyone. As mentioned growing household income in the advanced economies will give us a boost to exports from the emerging economies to the advanced economies and higher inflation helps the heavily indebted advanced economies deal with their debt burdens.

Higher income, higher spending and higher nominal economic growth will make it significantly easier to repay the huge debts in the advanced economies.

Q: In the context of Southeast Asia where we stand, apart from the currency issue, how do you see the economic climate for Indonesia, which is heavily dependent on natural resources and consumption? What do you think are the critical economic priorities for the government going forward?

I would like to take us back to economics 101. Indonesia is growing between 5.1 per cent to 5.3 per cent per year and the 10-member block of ASEAN is growing at more than 6 per cent per year. What does GDP growth actually consists of? It consists of two things: first is the growth in the size of the labor force and second in the growth of productivity of that labor force. In the case of Indonesia, what that means is that our labor force is growing at 2 per cent per year and the productivity of our labor force is growing at 3 per cent per year and that is where the 5 per cent annual GDP growth comes from.

To me maintaining annual productivity growth of 3 per cent per annum is extremely viable for as far as the eye can see because there are so many inefficiencies and structural constraints that we can continually to remove to unleash further productivity growth year in and year out. Developing countries by definition suffer from many structural inefficiencies and challenges such as corruption and lack of infrastructure but as long as there is reform commitment and development commitment from the political leadership of the country, its almost very straight forward what the path to sustained growth is.

You simply keep reforming those inefficiencies and deficiencies bit-by-bit year in year out. Amidst the headline grabbing news such as currency volatility and trade war, people often lose sight of what is the secular underlying story. The real challenge for us in Indonesia, Southeast Asia and potentially for every country in the world in the era of digitalization and the migration of economic activity into the online space is that if we don’t deregulate fast enough, if we don’t modernize our regulations, our laws, our tax regime, our own people will move into the informal economy online.

That it is easier for our people to do as economic activity shifts online where it becomes harder for us to even tract it or detect it. So billions of citizens around the world have a very viable alternative to the poorly regulated, often corrupt formal sector. So for me, it’s a battle to claw back or to incentivize our people and our businesses to stay in the formal sector by making the business climate and the regulatory climate user friendly enough, consumer friendly enough and just realistic in the context of consumer demand, especially millennials and Gen Z who have almost no tolerance for nonsensical regulations and irrational policies.

So we have to be realistic and adjust our laws, rules and regulations, our way of treating consumers and businesses in accordance to what they want.

Q: You have mentioned that Indonesia has done well in improving its business climate and it’s ranking in the Ease of Doing Business Global Competitiveness Index. Have you seen that continuing going forward?

Let me address the first point in that we have in-fact achieved a lot in the last four years. The economy today is 20 per cent larger than when President Jokowi took office in late 2014 and last year we became the number 16th country in world history to cross a US$1 trillion per year in GDP. So over the last 3 years, our annual economic output has gone from US$830 billion per year to US$1 trillion per year. That is a very sizeable additional amount of annual economic output.

The second point is that President Jokowi has brought hopefully irreversible changes to our collective mindset. It’s not just style from verbose to succinct or from stiff and formal to informal and assessable.  It’s a concrete consequence of the massive change in mindset and attitude the president has brought that it is suddenly safe to criticize. It is suddenly acceptable and even desired, requested by the president himself that we speak openly and freely and transparently of the problems of corruption, our shortcomings and that is a massive change in the system.

Generations of political leaders before President Jokowi have essentially always demanded that shortcomings be covered up in the name of respectful leadership. It was considered disrespectful to speak openly of our shortcomings, our problems, and our challenges. You have suddenly gone from that to a situation where quite possibly the harshest critic of our system and our performance is President Jokowi himself. So I do believe and hope that this openness, transparency, humility is here to stay and is making an enormous difference and giving voice to a lot of people that previously did not have a voice. For example our young people are more vocal than ever before and President Jokowi often times listens to 26-year old entrepreneurs more than 50-year senior government officials when that 26-year old entrepreneur has the right answer and a better suggestion.

He will listen to a low-income housewife more than to a billionaire conglomerate owner if the low-income housewife conveys a more relevant truth and that is a welcome move towards meritocracy and away from social hierarchies. So I think a more open, a more humble, more transparent, more egalitarian, I hope that is the kind of mindset and attitude from the government, political and corporate leaderships that President Jokowi has made it normal for the public to demand.

Q: Was this is what President Jokowi was referring to when he launched “revolusi mental” or the mindset revolution?

There is an old saying that in order for us to start fixing a problem, first we have to admit it. And we cannot begin to describe the gigantic role played by denial in bad policy, in rich countries and poor countries alike. Pure and simple denial for whatever reasons and not admitting the reality. To me at least, President Jokowi’s astounding insistence on telling it as it no matter how bad or embarrassing the truth might be is incredibly refreshing and genuinely revolutionary.

I think the other thing that is important for leaders is to stick to what you are and I give the president a lot of credit for sticking to his guns as they say and just continuing to be himself. I can tell you the pressures and temptations to try and be something you are not are enormous. I feel it at my level so I can only imagine what it is like at their level.

Q: Indonesia needs infrastructure development not just to improve connectivity but it will help reduce income inequality and allow more people to be economically active. Where are we in terms of infrastructure and where do we need to be?

I will choose this opportunity to focus on the financing aspect of our infrastructure development and our infrastructure development needs. If you look at the numbers, the truth is the vast majority of our infrastructure build-out over the past few years has been funded by the state budget and from the balance sheets of the State-Owned Enterprises and this is increasingly unsustainable and frankly potentially dangerous. It is becoming more critical that we finally break through on securitizing and refinancing all these assets and liabilities that are currently on the sovereign and semi-sovereign balance sheet to the capital markets especially but also to the private sector more generally.

So more out of necessity than choice, over the next two years it will be absolutely critical that we do what needs to be done to refinance and return to the private sector and to private capital the infrastructure assets and liabilities.

Q: What is your message to the international financial and investor community who will be gathering in Indonesia for the IMF/WB Annual Meeting that will be held in Bali on what they should expect from Indonesia?

Events such as the Asian Games and the IMF/WB Annual Meeting in Bali are the ultimate expression of the full range of Indonesia’s human talents and inherent resourcefulness. Most objective international observers would be shocked if I told them how small was the budget and with such a limited budget they were able to put on the most spectacular show of sports and entertainment easily in many years. Global events like these with all the world’s eyes on Indonesia are our chance to show the world our creativity, our humour, our charisma, our gentleness, our modesty, our intelligence, our pragmatism as well as our modernity.

If I had to pick one message to the world aside from the critical need for the world’s central banks to allow the advanced economies to run a bit hot for a few years to come, it would be that it is becoming similarly critical that the world deal with its over dependence of the US dollar. This global over dependence on the dollar places an undue burden on the USA and creates dangerous concentration risks in finance all around the world.

Would you put 90 per cent of all your assets into a single investment? So gradually but energetically diversifying our currency exposures towards the Euro, the Yen, the Pound Sterling and the most dramatically the Chinese Yuan is similarly becoming critical. It will require extraordinary political leadership and visionary technocratic leadership.

There was a group of visionary technocrats 40 years ago that set in motion the creation of the Euro which all its weaknesses or flaws I believe has helped bring peace and stability as well as economic and social integration to Europe. The global situation today calls on political leaders and technocratic leaders once again to rise to the challenge and exhibit that kind of visionary leadership similar to what we saw when our predecessors moved hundreds of millions of people from the German Deutschemark, the French Franc, the Italian Lira, the Dutch Gilder and many other currencies onto the Euro.

That generation of political and technocratic leaders were able to change the habits of hundreds of millions of businesses and consumers and we need to do it again. We need to change our habit to invoice our sales, to borrow our debt, to allocate our savings into Euro, Yen, Renmimbi and even Pound Sterling and other currencies so that the world is not perched on this dangerous edge of dollar concentration risk.

The over dominance of the dollar in today’s trade, investment and finance places a huge burden on the USA. People always talk about the exhorbitant privilege enjoyed by the USA but people do not talk enough about the great burden placed on the USA from being the bearer of the world’s reserve currency. For example, for a currency to be a global preferred currency, its users demand easily traded and liquid instruments with attractive yields to park their money into. That means prodigious and constantly growing demand for dollar debt meaning ultimately huge growing pressure on USA to keep borrowing more and more and issuing more and more debt because we as dollar uses demand so that we have a place to park our money that generates an attractive yield and is convenient for us but that continues pushing the USA into greater and greater indebtedness.

People focus on the supply side of American indebtedness but they forget that there is demand for all that American debt as well. We keep demanding it and through slightly complicated technical mechanisms, it is almost impossible for the USA to resist that demand.

That is one simple example of the huge and constantly growing burden placed on the USA by the world’s lazy reliance on the convenience of the US dollar.

Q: How will all this debt hold up? Is there a danger of the US economy collapsing under such debt?

I would stay tuned to what President Jokowi has to say in the various remarks he will give during the IMF and WB meetings. So stay tuned. 

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