Event Transcript

Stavros Niarchos Foundation Lecture

Driving Sustainable Economic Growth: Trade and Innovation in the Asian Emerging Markets

Mari Elka Pangestu, Minister of Tourism and Creative Economy of

Peterson Institute for International , Washington, DC April 29, 2014 Unedited transcript

Adam Posen: Ladies and gentlemen, ladies and gentlemen, distinguished guests, ambassadors, honorable men and women, ministers, professors, scholars, aficionados of the race track, refugees from television, anyone else who doesn’t fit the above descriptions. It’s my distinct honor to request you come forward and listen to the wisdom about to be imparted.

I want to make sure everyone is seated before you speak, Pete. Sorry.

If we can ask people to please take their seats, there is no reserved seating except at the front two tables. Just grab your table and your table mates and we’ll be delighted to have you. I get to do the boring part which is introduce the introducer who’s a very exciting person. This is the 14th Annual Stavros Niarchos Foundation Lecture and dinner and signature event for us here at the Peterson Institute for International Economics. And this always takes place alongside our board meeting and we’re very grateful to have a number of our distinguished members of the board of directors here with us tonight. None of course is more important to us or more distinguished than the chairman of our board, the co- founder of this institute that bears his name, the Honorable Peter G. Peterson. And it’s my pleasure to turn you over to Petros Petropoulos.

Peter G. Peterson: He sounded like he was kidding but actually Petros Petropuolos is correct. That’s the son of Peter, Peter son of Peter. So, that’s for real. It’s my pleasure to spend just a minute introducing a much admired and valuable executive committee and board member of this institution. As I think about Andreas, it’s kind of redundant because all of our directors are much admired and credible but you have made a great contribution to this board. And it seemed to all of us that you were the ideal person to introduce the speaker. You are after all Andreas Dracopoulos, Director and Co-president of the Stavros Niarchos Foundation. So, as a benefactor of this lecture, it seemed to me that you are the obvious person to introduce this year’s leading … this year’s acceptor of the award. So, Andreas, please accept our thanks and their warm welcome to you, sir.

Andreas Dracopoulos: Distinguished guests, ladies and gentleman, welcome to the 14th Annual Stavros Niarchos Foundation Lecture at the Peterson Institute. On behalf of all of my colleagues at the Niarchos Foundation, I would like to thank you for joining us. Before I go on to speak to you about this evening’s speaker, I would like to take a minute to say thank you to Pete Peterson, a fellow Greek-American and founding chairman of this institute that carries his name.

1 Pete has led by example in all his different capacities throughout his esteemed career and we’re all very lucky and honored to work together in helping the Peterson Institute continue to offer a valuable insight about today’s global complex economic issues that confront us all as members of a global economy. All of us are also well aware of Pete’s extraordinary contribution to highlight, appreciate, and hopefully to find a permanent solution to today’s troublesome debt problems that the US economy is facing. We’re all honored to know him and to work with him.

In last October’s Stavros Niarchos Foundation Lecture held in the institute, the prime minister of Greece, Mr. Antonis Samaras, spoke about the severe socioeconomic crisis in Greece and of the first glimpses of hope that the country had slowly entered the long and painful road to recovery. He identified, among other areas, tourism and culture as two of the most critical factors in the country’s efforts towards recovery and growth.

Recently, we held an international conference in New York on youth unemployment in collaboration with the Peterson Institute. The conference was part of the foundation’s recent additional euro 100 million initiative to assist against youth unemployment in Greece. Tourism, culture and entrepreneurship were identified as the main areas with the potential to instigate growth and development and specific programs in these areas were introduced.

The Stavros Niarchos Foundation is an international foundation. Since 1996, we have committed around 1.4 billion to 110 countries worldwide through 2,676 grants. But we also have strong ties to Greece, our founder’s motherland, where we have focused our efforts over the last five years as a result of the deep socioeconomic crisis. Today’s lecture carries other significance as Dr. Mari Elka Pangestu is the Minister of Tourism and Creative Economy of Indonesia, a term that represents an innovative way to deal with culture and tourism as important assets and also provides Greece with a great example of new 21st century ways to utilize creatively and effectively the country’s rich culture in history that goes back thousands of years.

The selection of tonight’s speaker acknowledges in many ways the increasingly global and ever-changing nature of the world we live in and the emergence into the global stage of new rising regional powers in Southeast Asia such as the Republic of Indonesia.

Dr. Pangestu’s approach in Indonesia signifies a unique understanding of the great potential of ideas, culture and creative assets to instigate growth and prosperity. This is a model of development that can become predominant in the 21st century and has the potential to create high-end jobs and attract the high end of the market.

For countries with a long history and rich culture which lack the ability to utilize industrial activity and manufacturing in order to stimulate growth, creative assets, ideas and culture can be an alternative but equally important road to growth. Greece and many other countries in the world can learn a lot from Indonesia’s approach.

So, let us turn to tonight’s speaker. It is my great pleasure to introduce Dr. Mari Elka Pangestu, the Minister of Tourism and Creative Economy for the Republic of Indonesia who’s going to talk about Driving Sustainable Economic Growth: Trade and Innovation in

2 the Emerging Markets. She was appointed to the newly created position in October 2011. From 2004 to 2011, Dr. Pangestu was the Minister of Trade for Indonesia.

In that capacity, she played an active role in the representing her country as well as groups of developing countries such as the G33. Prior to becoming Minister of Trade in October 2004, Dr. Pangestu was a member of the Governing Board of the Center for Strategic International Studies in , the leading economic think tank in Jakarta where she provided outstanding leadership as Indonesia begun to liberalize its policies in the 1990s. From 2002 to 2004, she was the co-coordinator of the taskforce on poverty and development for the United Nation’s Millennium Project established by the UN Secretary General.

Dr. Pangestu is regarded as one of the foremost economic experts in Indonesia and has had vast experience over 25 years in academia, second track processes, international organizations and government working in areas related to international trade and investment in multilateral, regional and domestic settings. Dr. Pangestu inspired the study co-authored by Gary Hufbauer and Sjamsu Rahardja towards the US-Indonesia Free Trade Agreement published by the Peterson Institute in June 2007. Her service and expertise were recognized last year when she was nominated to be a candidate to head the World Trade Organization.

Please join me in welcoming Dr. Pangestu.

Mari Elka Pangestu: Thank you, Adam. Dr. Adam Posen, President of Peterson Institute for International Economics, Mr. Peter Peterson, Founding Chairman of Peterson Institute for International Economics, Mr. Andreas Dracopoulos, Director and Co-president of the Stavros Niarchos Foundation, excellencies, distinguished guests, ladies and gentleman, and friends. It is indeed a great honor and pleasure for me to be able to be here with you tonight to do deliver the 14th Niarchos Foundation Lecture of 2014. I feel a little bit daunted because of all the eminent speakers that have spoken before me. I hope that I can be able to deliver a lecture tonight that will be giving you new insights about Indonesia and about emerging economies in East Asia.

I had a long thought about what I would talk about tonight and I was a little bit confused about what I should talk about, whether I should stick to my trade issues which is where I have had such a long relationship with the Peterson Institute or should I talk about my new portfolio.

In the end, I decided to talk more about trade issues but to focus it on how we are progressing towards sustainable growth in emerging economies such as Indonesia and how in today’s situation for sustainable growth, we will need to do structural reforms to be able to go to the next stage of more innovative-based and creativity-based growth. And I thought that I would focus on Indonesia as an example because I believe these series of lecture has been created to allow persons to be able to share their insights rather than talk in a very … this very august audience knows much more about the academics of all these topics than I would, but I can share with you the insights of my experience in government for the last 10 years in terms of how can we continue to have sustainable growth, implement structural reforms in the political economy context of our own country as well as the regional and global setting that we are in.

3 There are three parts to the talk. First, I will give a brief evaluation of Indonesian sustainable growth in the short run as well as in the medium run given that last year we got this rather not very nice title of being one of the fragile five. And the end of that section, we will talk about the need for structural reforms. And then the second part of my talk, I will try to share with you the insights of the positives and the negatives and the lessons learned about the political economy of structured reforms that we will need to do to move ahead with sustainable growth given my experience in government. And finally, I will try to close with some thoughts on the way ahead for emerging economies like Indonesia and the importance of regional and multilateral frameworks that frame such national policies and structural reforms.

So first, on the sustainable growth of Indonesia. Indonesia has, I guess, by many accounts successfully achieved a soft landing post global crisis and facing the pressures from the financial market due to the tapering of quantitative easing since mid-2013. So as I said earlier, in 2013, five emerging economies, including Indonesia, were termed as the fragile five due to the fiscal or current account deficits, or both, that they faced in 2013.

We had a current account deficit of 4.4% of GDP in the middle of 2013 and our exchange rate also depreciated, we had capital outflows, so it was a rather a turbulent year. And because Indonesia’s exports in the last 10 years went from less commodity-based and more manufacture-based to now being more commodity-based because of the commodity boom. Partly because of China and India, 65% of our exports are commodity-based. So, we also had to deal with the end of the commodity prices boom and its effect on our export’s current account deficit and growth. So, this is kind of the situation of 2013.

And basically, Indonesia and a number of the fragile five at least of the most recent evaluation, we seem to be faring well in terms of navigating back to the new normal. This is kind of the language that I’ve been reading in the analysis that we are now going back to a new normal situation of end of easy money and lower commodity prices. And even the IMF recently noted that Indonesia has navigated the transition to a tapering environment well.

What did we do to do this soft landing, to achieve this soft landing? We adopted a number of coordinated policy responses, very traditional responses. Tight monetary policy, we increased interest rates by 175 basis points and we allowed greater flexibility in the exchange rate movement in line with fundamentals obviously and we had a depreciation of the rupiah of 17% that also help with our exports and improve confidence.

We also undertook fiscal consolidation, switching expenditure to infrastructure and social welfare spending, such as health, cash-for-work, scholarships, and also gave some tax incentive to certain industries. And in line with sort of good political economy of reforms kind of advice, bad times leads to good policies. I’ll give you some more examples of this example. We also were able to do some structural reforms which included the fuel price adjustment of 40%. This was in waiting for about two years. And finally, we did it in middle of last year.

We raised the price of electricity also to reduce the subsidy, enacted the land acquisition bill, streamlined the permit processes and removed the quantitative restrictions on imports

4 which had put us in a little bit of bad light previously. But it’s all basically, we took the opportunity to remove … I think all of them have now been removed and the result has been good—reduced pressures in financial market inflation down, current account deficit now 2% of GDP, and very strong rebound on capital inflows and foreign investment. And growth was 5.8% last year, the second highest growth after China in the world. And we have also strengthened slightly the exchange rate and stock market has outperformed all other countries.

So, in conclusion, we have returned to the new normal. But we are not advancing beyond it, yeah, and this is where Indonesia and other emerging economies can still be exposed to global uncertainties and challenges if they don’t do further structural reforms.

Obviously, global economic uncertainties continue to be with us whether it’s slower growth or sluggish growth in Eurozone. Imbalances remain. The slowdown of China as it undergoes its structural reforms and attempts to do a lot of reforms as well as reducing its stimulus. It will have the most impact actually on Indonesia rather than Eurozone or US because of the effect on commodities and demand from China. And of course, we will still have to deal with the continuation of the completion of the tapering of QE and continued concerns with inequality, unemployment and underemployment in most countries in the world which has an impact on the policy outlook in many countries.

On the energy front, the shale oil discovery does seem to have an effect on how we perceive relative prices and resource-rich countries like Indonesia are already … this has already been a two-year process where we have recognized that we really can no longer rely on commodities as a source of exports and we do have to make this shift and diversify our exports away from commodities or increasing value added in our commodities.

At the same time, in East Asia, there are also opportunities and dynamics that we need to respond to when we think about structural reforms. One is demographics. Asia has a very large population if you include India and China and Indonesia with 250 million. Increasing middle class, these are global growth drivers which makes Asia certainly still a center for growth. And we also have to face the rapid aging in China, which has both fiscal and growth implications; and the end of low cost of labor as a comparative advantage in China and how that impacts on the other Asian countries; and the aging in advanced economies.

At the same time, we know that emerging economies will‑‑as what happened post global crisis will continue to be an important source of growth for the world. This is kind of the fact of the world now. And it is estimated that emerging economies will contribute about 40% to global growth and the locomotive of growth will continue to be trade. And a lot of that will be in Asia because of the size of the population and the growing middle class and urbanization and so on. And this means that Asia will continue to be the focal point of growth for the evolution of production networks and the changing dynamics this global value chain that has been discussed many times in the last two years with new numbers, with new studies and new ways of doing trade that have come about in the last few years.

So, what does that mean for Indonesia? We’ve been having a lot of policy debate and post-crisis when it turned out that a lot of countries which had adopted export-oriented strategy were the ones that were most vulnerable to the crisis. They seem to be a lash back

5 on export-oriented model of development to domestic model of development and we went through this debate. And at the end, it is still more about, okay, we have a large domestic market, this is going to be our social growth, growing middle class and so on, but at the same time we do know we do have to have continued exports and diversify our exports. And we recognize that we have to diversify because of the dependents on resources as well as on a limited number of manufactured goods.

So, the right answer is that it should not be export-oriented versus domestic-oriented. It should really be that we have to be competitive. And understanding that fact that to be competitive, you need to have internationally priced and quality inputs both goods and services if you want to be competitive globally as well as in the domestic market. And these new global value chain studies when you look at the Indonesian numbers, it shows that for the manufactured goods, we are about 40% using imported inputs both for exports and domestic market which is slightly … just slightly higher than China.

But the interesting number was on services, that if you look at services as an input, Indonesia only uses 13% of services input compared to China and Korea which are going at about 30% to 40%, which indicates that the type of manufactured products that we are exporting do not have such a component of R&D or design, so it is the lower end if you like of the manufactured product. And this is where if we want to move ahead with sustainable growth and be part of the global value chain, we have to recognize this.

And while low cost of labor as a comparative advantage given what’s happening in China is still an option for us. It’s a limited option. It’s not something that would be a medium- term option. It has to be … our strategy would have to be combined with increasing productivity and quality of human capital, innovation and creativity, and recognizing that you need efficient services to be able to be efficient and be part of the global value chain. So, as an example, we should be focusing not just on low-cost, large volume garment exports but more medium higher end and including the fashion industry which will have a design component. And someday, you will work towards your own brand and all this is dependent on more innovation and greater creative economy.

Unfortunately, some of the policies at the moment are not supportive of that and that’s part of the structural reform that needs to be done. And on the low-cost labor comparative advantage that China is a little bit exiting from and being taken by Bangladesh and Cambodia, where is Indonesia in that picture? A little bit of political economy issue here where the minimum wages have been rising faster than productivity because the minimum wages are being set regionally by district. And so every time a mayor or a governor is about to run for elections, it will go up by much more than inflation, by much more than productivity. And as a result, minimum wages have been rising in an unpredictable way and because we did not succeed on labor reforms, there’s a lot of rigidity in the labor market. And as a result, some of the labor-intensive companies rather than have problems with demonstrations and having to pay a lot of money for retrenchment, they’ve switched to capital-intensive methods of production like using robots. So, this is something that, again, that’s one of the very important structural reforms that should be on our agenda which is on the labor … rigidity of the labor market.

So given that situation, we do need to continue with our openness strategy, diversification of our exports and all this is really a focus on also creating jobs.

6 And the way forward is a policy that promotes the role of imported intermediate services and investment along with related policies, such as supportive domestic regulations and effective logistics. All the studies on Indonesian competitiveness and efficiency does focus on logistics as one of the reasons why Indonesia has less competitiveness than it should be because the transportation cost are just so much higher than many other countries and the percentage of logistics cost in your production, in your cost of exports is just so much higher than other countries. So we know that’s a big challenge.

The other big debate that we’re having because of this commodity booms, the shift from commodities-based to more value-added has been about downstreaming and increasing value-added including having requirements about processing the mineral exports as well as the agriculture-based exports, both using export taxes as well as other policies. Now, this is a big debate which is still not completed yet. We don’t quite know where it will go but really it should be about getting the competitive environment right. If you do downstreaming for the sake of downstreaming, it has the risk of negative value-added and a high cost economy that will really not create jobs for us.

The final thing that is in the dynamics of the Indonesian context is the external situation that it faces especially in the ASEAN and East Asia context. Indonesia should take advantage of ASEAN growth and the global production role in ASEAN and East Asia. And so, the role of ASEAN economic community as well as the East Asia Regional Comprehensive Economic Partnership and all the agreements that are intended to integrate ASEAN and East Asia as a framework for you to move forward to have the global production and global value chains work.

So, what are the policy reforms needed in some? And if I was to advise the incoming government, we are going to have a change of government in October, this is kind of the list of reforms that will be needed.

Fuel subsidy removal is still there. We still have about 200 billion … sorry, 200 trillion which is about 20 billion worth of subsidy that could be shifted to infrastructure and social protection and increasing your human capital. Labor was reforms that we did not achieve with our government. It should be … it’s on the table still. Because of the rigidities, we cannot do outsourcing, limitations on outsourcing. Wage increases which are not based on productivity; too high of a rapid increase of minimum wages.

Infrastructure challenges because logistics means you need to build your roads, your ports, your harbors. This has been slow because of land issue problems and public-private partnerships. Logistics is not just about infrastructure, it’s about efficient services and this is the big area of deregulation and reforms that need to be done.

Human capital, budget allocation by constitution, we have to allocate 20% of our budget for education. So in terms of the budget, it’s there, but the question is more about effective spending on education for skills and training needs to increase your human capital.

On trade and investment, we are relatively open already whatever the WTO commitments or regional commitments. MFN, Indonesia has relatively low tariffs, average about 5%, 6%. But it is really the battle is on the non-tariff barriers and the behind the border issues

7 whether it’s IPR, whether it’s the domestic regulations and also investment climate and cost of doing business, we are still like 70 or 80 out of the IFC 130 countries and not so much incentives yet for R&D and innovation and creativity.

So, I hope I’ve been able to describe to you in a very brief period what is it about Indonesia that we need to move forward. So, sustainable growth means diversified export structure and production structure and we must be going in the more innovation and creative-based.

Now, we know … the second part of my talk, the structural reforms and first best solutions that we need to do are clear. On the trade policy, it is obviously keeping our markets open, have a clear strategy on the use of non-tariff barriers if you are going to use them, domestic behind the border issues whether it’s the trade facilitation, the customs, the efficient services and all the domestic regulations. And then investment climate continued … continue work to improve the cost of … to reduce the cost of doing business, and protection of IPR because you want creativity and innovation. In my new portfolio, that’s probably the number one issue, and how do you grow your skills base and invest in human capital.

That being all said, are we able to achieve these structural reforms? I don’t think anybody should underestimate the difficulties of undertaking reforms in the past and even more so in the current time. Especially in the current time, I think not just Indonesia but all countries are now even … and advanced countries included are in the process of doing structural reforms, trying to do structural reforms and governments have been changed because of trying to push on structural reforms. So, we should not underestimate the challenges that we face when we do that.

Indonesia is even more complex because we are a relatively young democracy where we are still undergoing the maturation of our institutions and processes. We have decentralization of power and authority at the district level not even at the provincial level. We have 500 districts. And we are a large country with 17,000 islands which has its own geographical and logistic challenges.

Okay. Having said that, 4.5 points on lessons learned on political economy of reform to date, some of these examples are from the past, some of them are very recent. I have five lessons. Of course this is obvious. This is true for every country. Political commitment at the top. That’s when you have a good chance for you to have your reforms work. Under the Suharto government, very easy, top-down. As soon as he decided or as soon as the technocrats convinced him, go and everything happens very easily.

In the first cabinet of our government, we came in with the reform agenda. Most of us, like myself, we came from the reform movement. So, we were able to achieve it because also the president supported all our reform agenda on tax customs, trade investment, and labor. We achieved all of them except for labor. It was not top-down; much, much, much harder. We have to deal with parliament. We have to deal with media. We have to convince the public. And this is where think tanks like Peterson Institute, like CSIS can play a very important role. And I think having coming brought from that background, I think I was helped in being able to put the case at least and be able to … but putting the case academically, it turns out is quite different from having to go out there and convince the parliament, convince your stakeholders, totally different.

8 Just as an anecdote, I had to even … I had to get somebody to teach me to speak plainly, not to speak academically or in an intellectual way. I was actually tested. No English words. No, no. You are too identified as intellectual foreign educated. You must never say an English word. That was one lesson. Second, you have to speak very plainly and you have to use examples that will resonate with them. So, I had to actually do a lot of … be coached to be able to convert my academic arguments into this kind of situation.

Lessons learned from all that reform, we came in very excited. We passed laws. Passing laws is the easiest thing. The implementing regulations took … I passed the investment law. It took about three years to get the implementing regulations there, get the institutional change, get the people change in terms of the mindset.

One of the things that myself and Sri Mulyani who was the Finance Minister at the time, we work well together because we were like-minded. We were very focused on institutionalizing and creating transparent processes for decision-making based on facts and figures. So this is the role of good policy analysis and facts, but how do you institutionalize it so that when you’re not there, it will continue.

I will just share with you one of my success stories which was on rice policy. We had a huge political fallout on importing of rice because it was seen we are self-sufficient in rice. We should not import rice. If we import rice, the farmers are going to be hurt, et cetera, et cetera. So, I faced a lot of pressure not to come up … not to issue the import license. And as a result, we were late in importing the … issuing the import license, the price of rice went up by 30% and the poverty rate went up by 1%.

So, that in itself was one of the ways we could achieve the war on allowing imports to be done. But I used my background as a policy analysis. I had a hundred years data on the import of rice of Indonesia. And in a hundred years, we only did not import rice three years. And we only ever imported like 3% of our total needs because it’s seasonal. We import when we are not harvesting, right? And I also had numbers to show that you want high prices, the farmers are not going to be helped. Sixty percent of your farmers are net consumers of rice, et cetera, et cetera.

So, we won the debate on that one and we institutionalized the decision-making when and who should import rice. The when is you base it on the increase in prices and the level of the buffer stock. Automatically, when it reaches a certain threshold, import license should be issued and it’s still working to date, so, depoliticized the decision-making.

The second lesson, bad times leads to good policies. Crisis leads to good policies. I just gave you an example of the fuel price increase because of the turbulence we had last year. Of course ‘93, 1983, ‘86 when the oil price fell. We were able to deregulate, to again, diversify exports quite similar to the situation today. ‘97–‘98 crisis even though it was IMF-induced, a lot of reforms were done then. Third, role of international commitments and conditionalities, WTO ‘95, joining WTO in ’95 … yeah, joining WTO in ‘95 we had to change a lot of our domestic content policies and the most important one … most important example is prevention of vested interest. We had this really rather strange national car policy which was benefiting really only one person, very close to the power and it violated all the principles of MFN and nondiscrimination. We were brought two dispute settlements by the US, EU and Japan, and of course we lost and that was a lesson learned in

9 terms of the interest, domestic vested interest.

APEC ‘93–‘94—Fred will know this very well. We allowed … because we were hosting Bogor Goals, we did unilateral deregulation at the time. We allowed again 100% foreign ownership which still last until today. A more recent example is the ASEAN National Single Window which is our ASEAN commitment. But we, myself and Sri Mulyani, we use this to push for more transparent procedures and coordination between all the agencies that issue whatever piece of paper you need to import or export goods and it is working very well now with one single window.

The IMF program obviously conditions on the loan. The fourth lesson, sequencing smart steps and champions. If you can’t change the whole institution, just change little bits of it. Create islands of best practices. If you can’t change the whole country, look for special economic zones or areas where in that area you can do more liberal policies and have better institutions being practiced. So, the finance ministry had large taxpayers’ office and we have a number of special economic zones.

Peer pressure, this is a very APEC kind of language but peer pressure. You have targets. We set targets and timelines such as cost of doing business. And then you figure out which institutions have to do what to be able to reduce the cost of doing business so that we can reduce our ranking from a hundred something to 70. I don’t think we are at 70. I think we’re still at 80, and so on. WEF Competitiveness Index and the last one I would mention is the G-20 self-reporting of trade and investment measures.

When I was Minister of Trade in 2009, it worked in the sense that when I was getting a lot of pressure from my some other ministries as well as stakeholders, we have to put this non- tariff barrier. We have to raise tariffs. We have to do this. We have to do that. I said, “Well, we’re going to have to put all this down and we have to all report it. And this is going to be reported to the G-20 leaders to our president in the G-20 meeting. Do you still want to do it?” At that time I was still able to win the argument but later on, I think it was maybe not as successful

The last one, industrial policy failures. In the past, we’ve had not such good experience with that. As we know, it’s hard to pick winners and losers are good at picking government, right? So, in conclusion, understanding … the experience of that is that understanding cost and benefits are very important, but you have to know how to package it. And how you package it is not as easy as it seems and a lot depends on the situation and who you are talking to you. And at the end of the day, it always … I always had to be very conscious to avoid the word free trade and liberalization. You know, when your natural reaction is to say it, believe me, it’s really difficult but after a while, it’s something that you say the opposite of what you’re really doing to in a way camouflage what you’re really doing and convince the people you have to convince. This is benefiting you. This is benefiting our country. This is going to happen. But it is not that easy. And depoliticizing the process by creating institutions and processes is also very important.

And the final lesson that I have is … unfortunately, I may have run out of time to conclude but I will just say … I think this is an important lesson and it was something that I experienced personally, which is you have to know when the political winds shift and know how to deal with it. And this is probably the hardest part of my job. I’ll give you

10 the example of the ASEAN-China free trade area debate that we had and this is probably familiar in all countries. All countries have this debate about having to compete with cheap Chinese goods.

So we have this debate in 2010. All of a sudden, people woke up one day, oh, we are, we have signed ASEAN-China Free Trade Agreement and it gets fully completed this year just like they woke up one morning and realized that in fact it’s been going on since 2005. And there was a huge reaction including from other technical ministries who actually wanted us to renegotiate the agreement to push the timeline for as far as possible.

So, again, I had to fight for it. All the academic numbers came out and that didn’t really convince them too much. So, I went to a number of regional governments and I said, “What are you doing about preparing yourself for competition?” And there were a few who came up and oh, we are doing is, we are doing that. So, we used that as examples. I had to face parliament. I had to face the cabinet meeting. And we won the debate up to 2011. But then after that, the political wind shifted. It was just not possible to … even though we never renegotiated, the appetite I suppose for openness became reduced. And that’s where you … maybe you have to be smart in how you package it and that’s probably the main lesson that I learned.

If I may just indulge just three more minutes of your time, I think I’m a little bit over time. I just wanted to conclude with a little bit about the road ahead very briefly and maybe we can pick it up in …

Adam Posen: Take as long as you want.

Mari Elka Pangestu: Okay. All right. The road ahead. So, finally, given where Indonesia has to go in structural reforms, given the difficulties of doing it in the political economy environment as well as the external situation that we all face, what’s the road ahead? And these are just my views, my personal views. I can’t say that this is the government of Indonesian, Indonesia’s views.

The road ahead. As you can see in the case of a country like Indonesia and I would say other emerging economies are probably in a similar situation, external commitments should and will remain important at the minimum to prevent reversals and to ensure some level of certainty about the policies that countries do.

And when I was running for the Director General of WTO candidacy, I would spoke to a lot of people from different countries, from different sectors including the business sector and the business sector felt that the WTO was still important because it still provided certainty and the dispute settlement resolution mechanism of the WTO was still seen as something as providing predictability. And obviously, invested dispute resolution mechanisms, arbitration mechanism, these are also very important.

So, when I came in to … as an economist, I was very much … I used to use the word monogamous in terms of being pure multilateralist and not really wanting to do bilaterals or regionals because of all the trade diversion, spaghetti bowl and whatever. When I came into government, 2004, I was still in that mindset. Within three months, I had to negotiate the bilateral EPA with Japan. So, now I’m not a pure multilateralist but I still believe

11 that multilateralism is still the best. And if we can achieve multilateralism for the trading system, it is still a global public good of a robust and fair trade regime which benefits small countries, developing countries, least developed countries the most. And you would want one set of global rules and standards especially if you’re talking about global value chains. You can ask the businesspeople, would they prefer one set of rules and standards or would they prefer different rules of origin for instance for different regional agreements. You can ask the businesspeople.

Whereas the WTO, we know that progress was made in Bali, maybe because it was in Bali. We were just talking about this. I used to … if you get locked up in Bali long enough, I think you’ll reach some agreement. And I don’t think anybody protested like we did when we were in Geneva for nine days in 2008. If they had to have an extra day in Bali, there was an outcome, there was progress, but obviously there is still challenges ahead to complete what was agreed in Bali as well as completing the negotiations.

And the world has changed since Doha. Multipolar world, greater rule for emerging nations, greater South-South trade, regional and bilateral trade agreements on the rise, and the focus of many countries in these agreements, they cover issues which are not in the Doha negotiations, whether they are investment, more comprehensive services agreement, competition policy, IPR, labor and environment and government procurement. These are all issues which are part of your structural reforms.

And the way we do trade has changed. This is the whole global value chain, a debate which I already mentioned which underscores the importance of the links between trade and investment and the role of services and actually, again, the role of one set of rules and standards. And global value chain is great for emerging nations and small companies, medium companies, because it allows an emerging nation to leapfrog. You don’t have to wait to graduate like before, step-by-step in the value chain. You can actually pick which part of the global value chain you want to be. And it allows small companies to specialize and be part of an international global value chain.

New issues such as climate change, food security and so on are also still not addressed in the WTO. So, what should we do about the multilateralism and the world trading system? We think, I think, my view is that the WTO and all of us in general, we need to articulate a vision and a strategy for a multilateral agenda that is responding to the changing global environment and all those new issues. What is this new trade architecture going to look like? And it’s not one where it’s multilateralism or nothing. It has to take into account all those regional agreements, plurilateral agreements which has been termed as variable geometry in one sense because you have countries in one agreement or countries in a services agreement or ITA agreement. And multiple pathways is the other language that’s being used.

So, whatever you call it, it does go back to Fred’s bicycle theory that you just want to keep the momentum going. You want to move forward on the process of opening up and for your structure reform agenda that’s important because it does frame what you do unilaterally and nationally.

I’ll just mention briefly all these variable geometry that’s on the books right now. TTIP, Transatlantic Trade and Investment Partnership between EU and the US; TPP,

12 comprehensive and high standard agreement, very comprehensive; RCEP, East Asia Regional Comprehensive Economic Partnership which is intending to consolidate all the FDAs, sectoral agreements such as ITA, Information Technology Agreement and environmental goods and services, some are MFN. The critical mass allow for everybody or plurilateral which is on services. You only give it to the countries who are part of it.

We don’t know where these will be ending up. Is the political will there? Are we going to face the same issues as Doha? That has always been my concern. But whatever it is, the WTO needs to accommodate or respond or compliment these developments so that you are going in the right direction. You are multilateralizing. You are going … the pathway is taking you to a global, robust trading system.

We think that G-20 can play a role. It is the legitimate and premier economic forum that has leaders there that could, if they wanted to, make the political commitment to task whatever it is. It could be the WTO with vision group or with trade ministers to come up with a vision because trade issue has been the poor cousin compared to international financial architecture and macro policy coordination in the G-20 context; whereas, as I just mentioned, trade is still going to be the locomotive of growth. There’s been a slowdown in trade. It is the … did we used to say it is the costless stimulus. You don’t have to have budgetary outlay. It’s the costless stimulus. So, we do need to address that.

I will just now finally say that with all that, I think that packaging unilateral and national policy still needs to be framed with our regional commitments. And while there is some concern because we are in campaign mode about so-called economic nationalism and this is by the way not just peculiar to Indonesia but to other countries. I believe that once you’re in office just like we discovered, it’s not a sustainable policy because of international commitments and pragmatism once you’re in the job. That whoever is in the government has to worry about jobs and keeping prices stable. And you can’t create jobs without all those structural reforms that we talked about.

So, we have to be clear on where we’re going. And I took this from Tax-News.com editorial. This is going to be my final statement because I think it actually pertains to what I said earlier and I think this is true of my country and maybe of many other countries: Generally speaking, however, there seems to be an acceptance in most countries that international trade is better free than unfree—perhaps I would modify that and say maybe not free but fair—even if it is often politically problematic for leaders and government ministers to say so.

So, I would never, even though I’m a free trader and a multilateralist, I probably … if I ever had to be in government again to talk about trade, I would avoid the word free trade and liberalization even though that is actually what you end up doing. Thank you very much. Sorry. It’s too long.

Adam Posen: Thank you so much, Mari, Minister Pangestu. That was fantastic and it hits the ideals of what we had in mind with the Stavros Niarchos Foundation Lectures here at the Peterson Institute—the practitioner with the academic training, the hard-won battles, the lessons for others, and the notable accomplishments which is so beautifully set out for us all. We were going to have a bit of a conversation between Andreas and … me and you but I think our audience deserves the chance to speak to you directly.

13 We have traveling mics up front and in the back. If you’d like to pose Professor, Minister, Doctor Pangestu a question or a comment, please identify yourself. I would as usual ask that our guests get first shot before our ever loquacious senior fellows decide to talk. That’s not meant to deter people except our senior fellows. Is there anyone who’s not a senior fellow would like to do a question? Sigh. Nick Lardy.

Nicholas Lardy: Yes, Madam Minister. I’m wondering if you might tell us a little bit more about what you called downstreaming, the restriction of exports either through taxes or bans. You mentioned this is still under debate. What is the mix? What are the possibilities of increasing value-added in these areas versus losing global market share?

Mari Elka Pangestu: Yeah. About a few years ago, about 2008, 2009, there was a new law that was passed, the minerals law. And in that law, it actually requires processing to be done by first of January 2014, probably, if you are familiar with this issue that is what the law says. And as an implementing regulation to the law, what the government has done is to try to give incentive as well as disincentive for companies, mining companies to go to the downstreaming … increase the value added by smelting or increasing processing.

And the main instrument that has been used export tax right now. We shied away from … we didn’t ban exports, okay? That is the case. And what we did was we impose export tax. And if you can show your intention that you are already investing or planning to invest in the processing of your minerals then you get a lower export tax. And so, we will probably … I believe we would probably review it by the end of this year to see whether that policy is actually working in the sense that I know there’s been a lot of debate about investments being discouraged by it.

And I would say if you were to analyze it as an economist, you should probably study which ones are the likely ones that should benefit you and the ones that you probably shouldn’t try because of market share or whatever. But if you look at something like nickel which we do have a large market share, that might be something that that could work and it should be more incentivized rather than disincentivized, if that would be the policy outcome hopefully of the evaluation this year.

Adam Posen: Terrific. Thank you. Someone else … [inaudible 0:59:55], if we can get him the mic please.

Male speaker: Thank you, madam, for allowing me to ask two specific questions. Question number one, what can Indonesia learn from China? And question number two, what is the future of your oil industry and energy sector? Thank you.

Mari Elka Pangestu: I think what Indonesia can learn from China is the way they have actually on infrastructure and services. I think China is more progressive on opening up services than Indonesia has been, say tech logistics as an example. I think China is ahead of Indonesia in terms of having more efficient logistics because they opened up and allowed foreign companies to go end-to-end. In the case of Indonesia, foreign companies are allowed at the point of entry but once you are transporting domestically or distributing domestically, then cabotage hits you. So, then you can’t have efficient end-to-end. So, that would be one lesson that I think if we want to be competitive and given we are an archipelago which really needs to be efficient domestically, that’s probably one lesson.

14 And on infrastructure, I’m not sure China would … pluses and minuses. Maybe they have government funding to be able to build a lot. But they did build the airports and the ports that were needed and the roads. And China I think was some a bit forward-looking in terms of airport management. They did allow non-government companies to manage the airport, okay, because one thing is to build the airport then you have to manage it efficiently and this would be another lesson.

I think China is moving ahead on services and recognizing the global value chain and investing a lot in developing their skills and talent and creativity and innovation just like Korea and that’s more related to my current portfolio. Korea and China have a very targeted creative economy policy backed up by government facilitation as well as policies to encourage innovation.

On oil and gas, we are … there’s been a decline in the production of oil. But on gas, it’s still increasing. So if you look at oil and gas, we’re still a net energy exporter. But on oil, we are already a net oil importer. So, unless we give more incentives, I was told it’s very difficult to see more investment in oil just because there had been no new discoveries and we are into the secondary, tertiary recovery which is getting expensive to recover, so maybe for gas it’s still very attractive. The problem about gas is we are exporting a lot but we don’t have the domestic infrastructure for domestic distribution of gas. So that will be the challenge to develop the transmission mechanism for the gas because it’s a much cleaner source of energy obviously. And then we have geothermal as well as coal.

Adam Posen: Okay. One last question. Jim? Could you wait for the mic? Could you wait for the mic, please.

James Owens: Madam Minister, thank you very much for your comments tonight. I just wonder how would Southeast Asian countries, Indonesia in particular, view a TPP that includes China. Should it include or exclude?

Adam Posen: By the way, his name is Jim Owens. He’s from our board. You can go get even with him later.

Mari Elka Pangestu: Okay. I think it should be open if China wanted to join because obviously, there is a view out there that TPP was created to shut out China. And if you are open to China joining, then it would be interesting to see what will happen and the issues that they will have to face in terms of complying to this high standard that will be required for them to join TPP because that is kind of the question … similar questions that a country like Indonesia is asking whether this is a very high standard agreement. It would require us to change laws, to change institutions. Are we ready for it? Can we actually do it? But in many instances just like I mentioned in my talk, China may use it to—just like what Japan is doing—to push their own structural reforms. So, that may be a good entry point.

Adam Posen: Fantastic. I know there are many more questions but we’re going to give the poor minister a break. We’ll ask you all to rejoin us for dinner shortly after that but first let me ask you to join me in thanking once again the academic turned policymaker, turned leader, Mari Pangestu.

15