 You're a little, yeah, I think I, there you go, okay. What's that? All right, good morning everyone. Welcome to Carnegie, I'm Vikram Nehru. I'm a senior associate here at the Carnegie Dams International Peace and I'll be your moderator this morning. It's terrific to have Jim Castle here once again. He's a perennial favorite at Carnegie. And if you haven't heard him before, you'll soon find out why. So he's going to talk about, is Indonesia changing direction? And you know, I've been studying Indonesia over a long period and one of the most fascinating things about Indonesia is this interplay between economics and politics, between the business elite, the political elite, and even the military elite. And how these three interact, varying shifts and directions and forces that take place within the country which make it a particularly fascinating country to observe. And Jim has been working on Indonesia, living in Indonesia for what, over 30 years now? Almost 40. Almost 40 years. First 10 are the hardest. So there's no better person to talk about Indonesia than Jim. You've got his bio with you, so I'm not going to go into the bio. But what we'll do is we'll have Jim talk initially. He has some slides to present to all of you and then I may ask him a few questions after that and you open it up to the audience. And let's see if he can try and wrap it up, Jim. In an hour? If he can, but it's entirely up to you. We'll see what the energy is in the room. Okay. Over to you. Thank you very much, Vikram. It's always a pleasure to be at Carnegie. And in fact, I was looking, it's been almost one year to the day. It was March 26th last year when I came here and then the Gikoya government had been in office for about 150 days, about five months. And now it's a year and a half. And looking back at my notes and some of my talks from around that time, I had two views, one on the political scene, one on the economic scene. As Vikram said, I'm a businessman and to do well in business in Indonesia, you have to understand the economy and the politics and I've tried to do that and make a business out of helping others do that. That's what my company does. And what I said then is that basically, in spite of all the words on the political front, I thought Gikoya was doing quite well. And on the economic front, I thought the country was doing quite poorly. And I was half right, but I was half right in a good way because Gikoya is doing very well and the economy now is doing better than expected. And not doing great, but better than expected. And that's what I wanna talk about today with the changing of direction. Let me just move in. This is a slide I put up in October, well, 2014. And I used it when I was here in March last year. And this is really the wall of reality that any political leader faces in Indonesia. Resistance to reform, budget deficits, trends towards isolationism, protectionism, and of course the resource trap that has hurt a lot of commodity dependent economies over the past really now almost six or seven years. The wall of reality he faced then, he faces now is the slow GDP growth relative to potential, budget issues on the revenue side, on the macroeconomy debt, inflation, the rupiah and banking sector, the real sector you have trade and investment issues, then doing business and politics. I'll just walk through these and to wrap up with the politics here. But of course the global economy is not doing any bunny, any favors now. And as the IMF pointed out in its latest article for consultation with Indonesia, the report, there's a fragile global recovery, slowing China, weak commodity prices, an asynchronous monetary policy, which is a big word for saying US is raising interest rates and everybody else wants to lower them. So that's basically a synchronic. And now we'll see what happens there, but that puts a lot of pressure on emerging market currencies. Because the US has slowed down in raising its interest rates, the rupiah has been relatively strong over the past number of months, and in fact this year it's one of the better performing currencies up about 5%. Indonesia's weathered these difficult conditions pretty well. Growth has held up relative to other emerging markets. Whoops. You can see the green here is Indonesia. This is an IMF slide. The green here is Indonesia, and you can see if the print's not too small, but doing better than Thailand, Korea, but falling behind Vietnam, the Philippines and India. GDP growth for this year should be a little bit better just over just around 5% after 4.7 last year. So one of the things that we've been hearing for a number of years, and in my view of Indonesian economic policy, in spite of the good growth figure relative to others, is it's been in decline since 2010. And we'll look at the GDP, I'll skip ahead to the GDP figures here, which I believe are coming up soon, I hope. There we go. If you look at GDP in 2010, growth peaked at 6.4%, which is very good performance in the wake of the global financial crisis. But every year since then, it had slowed. And all of this was due to domestic policy, closing the doors on trade and foreign investment, as I like to say, narrowing the space for foreign investment, based on some perceptions of the global economy, which I'll talk about more in a minute. But look at it a little more sharply. This is just the last five quarters, and you can see we may have bottomed out. I hope it's true. My pointer's not working well, but anyway, you can see the trough there. So hopefully the government has turned around, and the last quarter of last year was about 5%, and this quarter, first quarter this year, will come in at over 5%, I'm told. And that's primarily due to the government at last getting infrastructure spending going in the fourth quarter of last year. That should carry through, and they seem to have cracked the code on the problem of a backend spending. Anytime in a budget year, you spend a lot near the end of the budget to get money out the door. Indonesia has particularly a big problem with that, with about 70% of the budget being spent, discretionary budget being spent in the last four or five months of the year. They seem to have been able to smooth that out, and that should help growth quite a bit. Batteries in this, oh, there we go. Just by industrial origin, I wanted to talk about this a little bit. The red in the middle is GDP, so those bars above it are sectors that are growing faster than GDP, and those below, obviously, are growing slower than GDP. Of course, at the very bottom is mining and quarrying, both due to low commodity prices and problems with the regulatory environment. But look at the top, the faster growing sectors, information, communication, finance and insurance, other services, business services, education services. Indonesia has really moved into a more service oriented economy. Manufacturing remains weak at about 4.2% growth, and that's a perpetual problem for the country in terms of employment when things slow down, but also the policies of the government are aimed to give preference to domestic manufacturing at the expense of international manufacturing, international investment of manufacturing, and all services. The services are basically a stepchild. Many of the biggest services are still dominated by the government sector, health and education, where the private sector spending is minuscule in those areas due to regulatory policies that these services should be provided on a non-profit basis. The Rupia, as I mentioned, if you look at the very right side of your chart, it's picked up towards the end of last year early this year, but over the last several years, it's been on a slow turn down from about 9,500 to 13,200 to the US dollar, which is of course, the volatility is very difficult for business planning. It also has led the government for the first time in over 30 years to adopt modest currency controls. They're modest, but it's like being a little bit pregnant. Once you start doing it, it's hard to stop. And basically, you now have to get approval for any transfer of money overseas over $30,000 in a month. You have to have an underlying transaction. You just can't send $30,000 to pay your tuition at Harvard. Well, you can do that, but you better have something there. You can't just send it to a deposit in Singapore or somewhere. So obviously, people move their money offshore as fast as they can because they don't know when they'll be able to take it out. So after 30 years of a very successful free currency exchange, the government has started to put restrictions on currency exchange. We hope this is the last and they don't get worse, but that would be very unlikely. Usually they get worse. So we'll have to watch that. So that's a problem of concern to the business community, both foreign and domestic. Inflation has been a chronic problem in Indonesia. Historically, Indonesia's been a relatively high inflation country for a variety of reasons. So all the time I've been there, single-digit inflation has been relatively rare, but now it's down below 10%, and this year it should come in around 4% to 5%. It's high relative to other countries, but that's quite low by historical standards for Indonesia. Nevertheless, it puts pressure on the banking system because interest rates have to be higher, inflation's higher, and so on. So there are a number of negative effects, but it's one of the better profiles. The stock exchange is fun to watch. It's really more of an index of sentiment because only a small portion of Indonesia's industrial and economic strength is listed on the stock exchange. But nevertheless, it's performed reasonably well over the last number of years, and if you're in the emerging market area, it's done pretty well again this year compared to other markets. One of the things we watch all the time are foreign exchange reserves, because as we know in the Asian Financial Crisis in 1997, 1998, Indonesia basically almost ran out of reserves, 10, 20 billion. Now they've been stable at around 100 billion, and that's where they are about at 100. They've gone below a couple of times, but if you look at these figures, 100 to 110 billion, which is about six or seven months of imports, which is quite a good figure. So the country, there are some worry, probably not so much now, but a few years ago, repeated the Asian Financial Crisis. Really that was never in the cards, and while there's pressure on the system, not just Indonesia, but most of the financial systems in Asia are on much more solid footing today than they were in 1997, 1998. Banking credits, of course, if we're thinking of crisis and worry, we look at the bottom line, non-performing loans, NPLs, the total credit, they're about 2.6%. 3% is kind of a yellow, light starts to flash, at 4%, the red lights start to flash, and this is an average, some banks are well in the 4% to 5% area. There's a lot of problem with bad debts, typically in the mining sector related to coal because of low prices and so on, but still again, nothing like a systemic crisis in the offing. I think the Ministry of Finance, Bank Indonesia, as well as IMF and World Bank are pretty confident that the banking system is in good shape. So let's look at the trade and investment here. Last year, for the first time, since 2012, Indonesia had a positive trade balance. In 2012, it slipped into negativity for the first time in about 30 years, which is a real shock to the system and reinforced the protectionist trends that were dominant at the time. Now, some of this, it's good news for bad reasons. Both exports and imports are down, it's just that imports are down more. As you can see, imports are down about 21%, exports down 21, imports down 26% from 2010 levels, which all speaks to slower economic growth. Sometimes, of course, imports are not necessarily a bad thing. They're often very stimulative to the economy as they are in Indonesia. And we look at the next slide, which is equally, I think even more telling, is capital equipment imports have gone down steadily since 2012, and they were down again in January of this year. So again, this is a real time indicator of how much investment is going on in the real sector. So there's still plenty to worry about in terms of growth in the manufacturing industrial side. On the consumer side, I mentioned that Indonesia is a heavily related service sector, and the consumer economy is extremely important. But we see four wheelers, which is a good barometer of the economic health of the middle and upper class. Their sales are down 16% last year, the worst performing auto sector in ASEAN. And two wheelers, which are a very good indicator of the health of the middle to low income groups, because it's a major mode of transportation, were also down 15%. A lot of that in the outer islands due to poor commodity prices. So you can see, though, that there's a lot of strain in the economy, some strain on the consumer. Another real time indicator that we use is cement consumption. You can see it rising pretty steadily in these years, and then starting to level off, this is 2016 forecast, but it levels off these last three years from, I think that's 58 million tons to 60 million tons, hardly any growth at all. Now there was some growth in the first month of this year and through February, and this is a sign that infrastructure spending is accelerating. So another reason we think growth will be moderately higher this year than last year, and that the decline in GDP is probably over. So our own forecast for this year, not too different from others you've read, I'm sure. 5% growth this year, but the first uptick in the last five years, inflation around 4.5%, really low by Indonesian standards, and the Rupiah will probably stay around the 1300 to 13.5 area, barring a shock from the international system, if the US starts raising interest rates faster than is expected now by the market. That gets us to politics. This is much more fun, but I know there's a dry background, but we still have the resistance to reform. I think that's the biggest thing to look at, and let's just look at Jacoi's fortunes. These are some surveys. This is October, 2014, June, 2015, and you can see that the people's view of the economy has declined. In other words, only 25% thought it was worse compared to a year ago in late 2014 when Jacoi took office, but it had gotten more people thought it was worse in June, 2015, the no change went up, and the people who thought it was better dropped by almost a third. Not good for any politician when people think that their conditions are worse this year than last year. In comparing Jacoi to SBY, you can see also the red is Jacoi in June, 2015, and the other bars are Neuroyono in early in his first two terms, and you can see Jacoi's popularity, 41% very satisfied, 57% dissatisfied. So this is why I think people when I came here last year, people were worried about Jacoi's popularity. We'll talk more about the ins and outs of the political battles and why that is. And confidence in his competence, when he took office, 22% were very sure that he was competent, that dropped to 5.6%. Those that were sure also dropped a little bit, and those that not so sure increased almost double. So again, everything heading in the wrong direction. Still most people didn't regret voting for Jacoi. The red, the Jacoi voters, 88% still wanted to vote for him, but remember he only won by four or 5%, so it was pretty narrow squeak. And what were the best performing ministries? I put this up, there was general dissatisfaction. These are very low numbers, eight, one, two, all these ministries not very popular. The only one popular was maritime affairs because she was going around blowing up ships. And everybody loved blowing up the ships of illegal fisher people. And of course this became quite an incident when China used armed force to prevent Indonesia from seizing a ship just a few days ago. So it's not a trivial matter. They don't blow them up at sea, they tow them in, they get the crew off, they take the fish, and then they blow up the boat. But anyway, that's very popular with the Indonesian people. And I'm sure that their feeling about this current spat with China will also get some nationalist hackles up a little bit. Now, what's changed? Skating along, and my view is pretty pessimistic in terms of the economy, although I did think he was doing better in terms of politics. In August 2015, there was a cabinet reshuffle. Some old names, some new names, but basically it was greeted with a yawn by the local community. In retrospect, it turns out to be much more significant. And the significance became clear to me in October when President Jekowi came to the U.S. And with the American Chamber of Commerce, we had an investment summit with the U.S. Chamber and the Indonesian Investment Board. And Tom Lembong, one of the new ministers came along. Darmen Asutian was there. Infocom, Ruyantoro. And there were several, and really a breath of fresh air. And as if you recall in October, Indonesia surprised the United States, Jekowi surprised Obama by saying, we wanna join TPP. I don't think anybody outside of a very limited circle in Jekowi's side knew that was gonna happen. Could be wrong, but I don't think the U.S. had much advanced notice. Now, this is very interesting in its own right, but this is a country that for a decade had trade ministers saying no foreign trade agreement ever benefited Indonesia. But you go from no foreign trade agreement ever benefited our country to we wanna join TPP. You just cannot have a more radical policy shift than that. That is a serious turn in an opposite direction, 180 degrees. And of course, very welcome, I think, from certainly from the American point of view, welcome from the international business community point of view. So I'll explore the reasons behind it a little bit more in a few minutes, but basically the mouthpiece for that has become Tom Lembong, the new minister of trade, relatively unknown, certainly unknown political circles at the time he was appointed, somewhat known in financial circles. He was in the venture capital among other things, but he became a close friend of Jekowi's in the campaign period and finally came into government. And he has become really the mouthpiece for free trade and open markets. And he, in Indonesia, of course, if you follow Indonesian closely, neoliberal economic, you might as well say, you're a child abuser. It's really an unpopular thing to say. So he's not saying, this is not liberal economy, this is modern economy. We're not liberalizing, we're modernizing. So it's an important twist of phrase, but it also shows his sensitivity and his awareness of some of the obstacles that he has because there is a great deal of concern about Indonesia's vulnerability to international forces. The more you're involved in the global economy, the more you can be hurt by it. Well, yes, but you can't be helped by it unless you're involved in it. So it's a very important change. Now, this fast forward to January of this year and look at the blue line. How do you view economic conditions over the past four months? You can see in the middle of last year, down, down, down, it starts to pick up in December and January, it's up to 34%. So people now feel the economy is getting better. Public satisfaction with Jacoé's performance, also starting to pick up from October on. How would you vote if presidential elections were held today? Jacoé would get 30, this was an open list. You could vote for pretty much any of 30 people on the list, but the only two who get any traction are Jacoé and Prabowo Subianto. This is interesting for a number of reasons, that his lead over Prabowo is substantially larger and that there's nobody else in the picture. And this is very important when we start thinking about 2019, which is when the next election will be held, Jacoé's chances for reelection. The only other national politician of any weight at all is Prabowo. He's close to 70 years old and he said he has no interest in running again. So if someone is gonna take on Jacoé in 2019, now is the time to get busy. So the thing to watch on the political scene is the governorship for Jakarta, which is up next year. The incumbent Ahok, a Chinese Christian in a heavily Islamic, conservative Islamic city, is very popular. He's now running without a party. He couldn't make it green more than a party to run. He's running as an independent. He's very popular and a number of people who think they could be president have decided they wanna run against him. Ridwan Kamil, the very popular mayor of Bandung who's been here a number of times to Washington given the talk, he said he won't run. And he said basically, Ridwan said, I, Ridwan, went to Jacoé. Jacoé said to me, Ridwan, you're a good man. Ahok's a good man. If you run against Ahok, one of you will lose and Indonesia will only have one good man instead of two good men. Therefore please don't run. Very Japanese way of saying, stick to Bandung for a while. He's young enough. He could have time in 2024. He has a chance. I would say Trisma Rismar Harini, the mayor of Surabaya, also has a good chance. She's very popular, also so honest and so much for reform that no political party wants to support her. But that's another question. The other names are yesterday's people or some people with really no hope. So that's Basuki, that's Ahok. He's, as a Chinese Christian, people don't think he has any aspiration for a national office. It would be quite something if he were to successfully or even get nominated, let alone win. But so Jacoé really has time. He has no serious political opposition in terms of a person and the parties are all disarrayed. So he really does have time to consolidate his position and push his reforms in probably a slower way than most of us would like. But nevertheless, he is pretty powerful. This is the political landscape. If you look at the red, that's the Jacoé coalition. Coal is the Indonesia-Habat, wonderful Indonesian coalition. I need a little marketing help with that one I think, but that's what they came up with. Against the KMP, the red and white coalition, red and white, of course, being the national colors. And when the election was held, of course, there was a small majority in favor of the opposition with SBY, the outgoing president's party, the blue in the middle, being nonaligned. As things have played out, Pan in the upper right-hand corner, they've switched sides. And Golkar and Petiga, two of the larger opposition parties, have had a civil war, internal civil war, and can't decide on their leadership and basically are totally ineffective. We may be seeing the last days of Golkar, which would be very interesting development, but they're in complete disarray. And it happens when you have no ideology, you're only a patronage machine and people are only there for the patronage and somebody runs out of money and nobody else has enough money to pick it up. And therefore, who do we vote for? And nobody's giving us any money. How could we know? So it's really, you can have sympathy for some of these guys, really. They spend all this money in the campaign and then nothing comes back. It's really disappointing. So I think both of the parties, again, if you don't follow Indonesia, it's really hard to come to grips with how little policy is invested in the parties. They are all totally patronage machines. Every ideology is represented in every party. As strong Islamists are found in the secular parties and regular secularist people are found in the Islamic parties. They're all there because of other connections, primordial connections, whatever, but there is no policy content in any of the parties. And it's really hard to get around. Also, we get hung up because it's called the parliament. It's really a legislature like America because all the parliamentarians are elected for a fixed term. So you talk about a majority. It's like Republicans holding the Senate and the Democrats having the White House. You have a split government. That's what we have in Indonesia, more or less. But their terms run almost, the parliament takes office on October 1 for five years. The president takes office on October 20 for five years. So they have to live with each other or five just like in America. So it's not a parliamentary system in the normal sense where the government can fall. You can call an election and all that. They're stuck with each other for five years. So Jacoja has proved himself to be a much shrewter master of parliament than his predecessor, SBY. SBY had a conceptual majority all the time and couldn't get a single bill passed without a brawl. So far, Jacoja's pretty much gotten everything he wanted, 100 to nothing. So he just has learned how to, I think he has better political instincts than his predecessor and it's paying off for him now. But he's also extremely cautious. So let's say you supported Jacoja because you really like the reform side of what he's talking about. He will do many things that are not on the reform side and that's simply him making a judgment that today is not the right day to fight that fight. He is really outnumbered by the political elite, by the rent seekers, by the corrupt party hacks and so on. There are more of them than he has on his side. So he really has to be careful in dealing with them. So I think the reforms as they come will come much slower. There'll be plenty of room for criticism and concern but there is no doubt of his commitment to the reform. So what does that mean? What does that mean for the future? I borrowed these from my good friends at the IMF. They just gave a very nice presentation in Jakarta on their article four. And he has one of Jacoja's buzz words which is now a cheetah, which is the nine goals or nine principles. They're all about raising living standards, improving productivity, but dynamic comparative advantage, new mindset. He's the first Indonesian leader since all the time I've been there who's talked about competitiveness, saying we Indonesia must be competitive. It's a big world out there. If we're not in it, we're gonna get rolled over. And of course the biggest lesson to them has been the way Vietnam has leapfrogged them, getting investments that looked at Indonesia, billion dollar high tech investments that go to Vietnam even to India. India is now easier to invest in than Indonesia. Think about that for a minute. These are the kind of things that the corner that Indonesia has worked their way into. But so now finally, then we have the Zen slide, there it is. The idea is of course to raise growth. Now GDP has been growing three, four percent, but that's not enough to increase per capita GDP growth. You see the red line shows the decline, I'm sorry, the blue bars. This is the slowing of GDP growth. And you can see GDP per capita is lower to date than it was a few years ago. This is a recipe for political disaster. Here, there, everywhere. If per capita incomes go down, you simply cannot have a stable political system. So this is the big concern. And this is his challenge going forward. And it's so hard, we can't even get a good battery for the budget problems at Carnegie. Oops, went to, there we go. So reduce inequality, increase on employment opportunities, raise living standards, make Indonesia competitive. These are all buzz words, but they're buzz words you haven't heard in Indonesia for a long time. Yes, reduce inequality, but the other ones increase opportunities, make Indonesia competitive. That to me is the big change in attitude. And so this brings us to the policy challenges and then I'll wrap up and we can have questions and we're just gonna get this thing to go. What's been the problem? What is the problem? What'll be the challenge for Jacoby going forward? For the last decade, Indonesia economic policy has been based on two myths. Two myths that have sacred, they're held sacred in many hearts. Indonesia has too much foreign investment and Indonesia imports too much. Now, as foreign direct investment inflows, Indonesia ranks right down there with magnets for foreign capital like Argentina. They're about 2%. It's one third of Vietnam, less than half of China's, Malaysia, so Indonesia gets very little foreign investment. And yet you ask any Indonesian, not anybody who asks, most of the Indonesian elite, there's too much foreign investment here. Now, part of that is due to the fact that two very high profile sectors in the commodity area, oil and mining do have a lot of foreign investment and that's true and there are reasons for that. But overall, Indonesia has not attracted much foreign investment. Also, too much foreign trade, imports of goods and services, a percentage of GDP. Again, very low, around 22%. Vietnam, Malaysia, Thailand, all much more integrated into the global supply chain. So, they are really, because of beliefs in these myths, and I've talked to some very serious Indonesians, they're not necessarily policy people, but older generation and they really believe this and I've given this speech in Indonesia and I've had really nice people come up to me afterwards saying, but there's just too much foreign investment. I said, well, those are the numbers, but if we have more, we'll be vulnerable. There's really, you can't just discount this and say this is illogical. They really, people believe it and it's a very strong and potent political force and it's facilitated by the rent seekers who say, yes, too much foreign investment, please protect my sector, please protect my business. And as all, we know that the all protection is a tax on the many for the benefit of the few. When you talk about industrial protection, it's really a tax on millions for the benefit of usually three or four or five. So, all of these things really are political rent-seeking. Every country has issues, but it's certainly been a problem in Indonesia. So, that's the challenge for Jakowi. If you kick it, does it work? At home, I just pound the table. So, these myths also reflect the belief that the international system is inherently unfair to developing countries and that Indonesia is uniquely vulnerable. Confronting these myths will be the most serious obstacle to growth for the Jakowi administration. The confrontation with these myths began in August, 2015. And I can't overstate, I've been there 40 years and this is the first time anybody has ever said this. Tom Lembong has said our negative investment list should be called the import stimulation list because if we can't make it here, we don't have people come here to make it, we will import it. What good is that? If we don't let foreigners start schools here, people will spend money on tuition in Singapore, Australia, United States, Europe and Japan. All that money will go overseas. If we don't let foreign doctors come in here, all that money will be spent in Singapore and elsewhere. So, finally, somebody in a policy position is waking up to how Indonesia has been stimulating the economy of its neighbors by forcing all this economy offshore. Because of the tax system, for Kamatsu and Caterpillar, Indonesia is one of the biggest markets in the world. They have some of their biggest customers in the world in Indonesia. Where do they keep their warehouses? Singapore. Why? Because if they import directly from Singapore to the company, the company gets a VAT rebate. If a dealer imports it, he pays VAT. If and when he sells it to an eligible company for rebate, then he may or may not get his VAT back. So, of course, you keep everything in Singapore. So, jobs, warehousing, all these jobs, highly skilled jobs, stay offshore instead of coming on Indonesia. Why? I don't know. But that's been the policy forever. So, confronting these will be the biggest challenge and it will determine Indonesia's economic future. And for those of you who have heard me talk for the last few years, hey, I sympathize with you. But the most important thing is, I think this is the first time in a number of years I've been optimistic about Indonesia. In fact, when Jakowi came here, when I came here along with a visit in October, Vikram asked me to give a talk and I said no. And he said, why? I said, because I'm so negative, I don't wanna rain on the parade. And my view was really changed with the events that took place during that visit and then thinking backwards to things that had happened since August. From August to October, there has been a just, it's hard to overstate how important the shift is and how fundamental it is and how important it is that Jakowi succeeded with this because he's the first leader to take on these challenges explicitly, not indirectly, not this way or that way, but explicitly take on these challenges and some of the myths that are embedded in the Indonesian hardened soul, they're embedded in the Indonesian constitution. These are not simple things to challenge either at the elite level or at the street level. So he's doing some pretty interesting things. He really wants to bring Indonesian to the 21st century. He wants to bring Indonesian to the global community. And I think finally, after a slow start, he's started to do that. So thank you for your patience and I'd be happy to answer any of your questions if I can, thank you. Well, thank you very much, thank you very much, Jim. I'd like to clarify, the first is about the diagnosis that you presented and secondly about the policy intentions and objectives of the Jakowi administration. Can you, is it possible to go back to that slide on GDP growth and per capita GDP, if you can? You showed the surprising number which said that the level of per capita GDP is declining, that's it. Right, so this shows that the level, the per capita GDP is declining. Now, the reason for that is because it's in dollars. And you've had a depreciation of the Indonesian rupee, so it looks as if per capita GDP has been declining. Actually, in real terms, rupee are real terms, per capita GDP has been rising. The challenge in Indonesia is not that it has been rising which is absolutely true that it has, but it is that inequality has been rising and a large portion of the Indonesian labor force has frankly been left behind. So real wages in the informal sector, both in urban areas, in the informal services sector and in the agriculture sector have had stagnant or declining real wages now over the last several years. And this is, I think, a key challenge which the Jakowi administration is facing and I think it's one of the factors behind this new reform momentum which seems to be emerging under Jakowi. The second point that I wanted to clarify with you was that thrust, therefore, of this new reform effort is to change the structure of production towards labor-intensive manufacturing. The idea is that a lot of these labor force can be employed in manufacturing in order to raise the real wage rate, hence the effort to improve the business environment, to make sure that you have competitive advantage and this entire emphasis of competitiveness. So I wanted your reaction with these two broad points as to what is actually motivating the reforms under Jakowi. Well, I think the inequality, when you talk about inequality, it doesn't tell you anything really. The minimum wage in Indonesia has tripled in the last several years, killing a lot of the labor-intensive jobs. So you really have to look at segments of society and the real challenge for Indonesia, in my view, is to move people out of the informal sector into the formal sector and by raising minimum wage, you drive people out of the formal sector into the informal sector. So it's a difficult argument because it's the same problem with unions which are designed to protect people inside the tent and do great harm to people outside the tent. So these are very difficult issues to deal with, but the real goal is to move people into the formal sector and some of the great employers, whatever you think of, malls and shopping centers are malls and shopping centers. They're very high level of employment for people with basic skills and they're formal and they generally are well-regulated. Also, I mean, quite interestingly, you look at the security industry, one of the positive offshoots if we talk about the terrorist situation is hundreds of thousands of young Indonesian men with very little in the way of physical skills outside of being young and strong have jobs in the security business, which is great because if they didn't have those jobs, they'd be getting in trouble. So there's a lot going on. I think I'll go back to a very old World Bank comment on labor in Indonesia. They did an important study. This goes back to the 80s, but I believe it's still true. It's a nice 50 page report. So this report, we worked hard on it, all this kind of stuff, and we have to say that the data is so bad that only the importance of the subject justifies using it. So I think we're still in terms of data about the Indonesian labor situation given both the disparity, regional disparity and levels of development and the formal informal sector, the commodity sector, which of course has suffered greatly because of the employment in the commodity sector because of the collapse in commodity prices. All of these things, it's a very complex argument, but my view, and I think it's Jaco's view, is let's just open things up and get more action. I don't think it's more thoughtful than that. Just more action creates more jobs, get more money flowing through the economy, and if we don't have it locally, let's let the foreigners bring it in. So I think it's, he's not a PhD in economics. He's a small town businessman, and he's got the instincts of a small town businessman. He wants results, and if A doesn't work, he'll try B, and he's not hung up on philosophies or anything. So I think the challenge is very much that, but it's very, so many different levels in the economy that it's hard to just use the gross inequality or any gross indicator to get very far. So let's then take a look at the reform initiatives that Jacovi has introduced. You've already mentioned this U-turn on trade policy, this idea of joining the TPP. Then there have been 10 reform packages that have been introduced to try and streamline the business environment. Each particular item within those 10 reform packages may not be significant, but together I think they do represent a fairly significant body of reforms. And thirdly, something that we haven't quite mentioned or focused on, which is Jacovi's national health insurance package which provides universal health insurance for the poor at a minimal premium, and which has led to enormous access, improvements in access for the poor to health services. Now in all three of these reform areas, frankly, a large part of these reforms have been announcements rather than implementation. And so the question to you is this, how capable and effective is Jacovi going to be in moving the bureaucracy to actually implement these reforms to make sure they actually happen rather than remain the realm of just announcements? Yeah, well it's absolutely critical that it go forward and this is where you really run into the problem of institutional weakness. And talking to many businesses and every Friday I host a business round table with 25 to 30 business leaders different people every week. And they almost to a person say that once you you hear about this from the minister, you get down to the second echelon, third echelon of the people we deal with every day, every week and they haven't heard. They're not interested. So it's a big challenge. What we've observed is things that Jacovi gives his personal attention to finally move forward. Well, one man, one person. I mean, you know, he can't run everything so he really needs ministers who can push their way down through the bureaucracy and one of the things, one of the I guess the unintended consequences of the democratic reforms of the last now almost 20 years have been a weakening of the ministerial control of the bureaucracy. And if we go back to the transition from 98 to 2003, a country that had two presidents in what is that, 50 years, all of a sudden has four presidents in six years. And at the same time, they had six finance ministers, eight energy ministers for this, five that. Well, in that period, the inmates took over the asylum and the bureaucrats who'd been pushed around for years in this Harto era realized that, hey, these guys come and go, but we're here forever, bureaucratic refrain, right? And so all of a sudden they just sit tight and you have to, you take dynamite to lodge it and you know, these are battles that have to be waged every day. And so I can't overstate again how much the forces are weighted against this change. They became stronger in the last decade, not weaker. And this is a huge turnaround. So I think we're gonna have to be content ourselves with slow changes, small changes and not lose heart or lose, you know, reduce any kind of support for someone like Jacoby because they're the ones who wanna take the country in my view in the right direction. And it's gonna be a long, slow process. There's gonna be very few quick and easy victories in all this. All right. Okay, so let's now move on to your cautiously optimistic view for growth in 2016 and perhaps even 2017, which I think if I'm not mistaken, it's predicated on the view that these reforms will have a positive impact on the business environment. We need a more private investment growth, et cetera. But we haven't talked about a lot of headwinds that the economy is facing. First of all, of course, there is the infrastructure problem. So I'd like to spend a little bit of time telling us exactly how well you see this infrastructure program increasing or accelerating. Because in 2015, actually, capital expenditures in the budget were only 76% of the total allocated, which is less than the previous year. So in the last crunch in the last quarter, there was a crunch on capital expenditures. This year, there's gonna be a crunch again because the finance minister has just announced there'll be slashing public expenditures. They'll try and protect infrastructure expenditures, but there is going to be a problem of headwinds as far as fiscal policy is concerned. So that's one challenge. The other challenge is on monetary policy. Point about the possibility of rising interest rates in the United States always leads to capital stops or reversals in Indonesia, and this always has a problem. Therefore, monetary policy and interest rates in Indonesia, and that could potentially be a further headwind. And then there's, as you mentioned, the politics, the implementation capacity, so there are all these serious problems. So do you think that the positive sentiment generated by the reforms is gonna overwhelm or outweigh all these other headwinds that the economy is facing? I'm presenting to you the pessimistic view. I know that sentiment never overweighs the budget. I mean, you can be sentimental, but no, it's, I think the biggest problem, these are all problems also, the revenue side of the budget is a big issue. And that's the reason I think the finance minister scaled back expectations. I think two things. One, they only spent 75, 76% of the infrastructure budget last year, and most of that was in the last four months of the year. Now they've smoothed that out, and those projects, some of those are carried forward, so there's some benefit there. And I think there's gonna be a smoother flow, whether there's more or not. I don't know, but it'll be smoother this year than ever before, I think, in the Indonesia side. But the real question is revenue, and they're counting on this tax amnesty for extra revenue, and they're thinking of billions of dollars, and I think people familiar with tax amnesties tell me they never realize what you expect. India had one in, I think 15 years ago or something, and they also expected to raise billions, and they raised $348 million. As one pundit said, not enough for one chicken for every Indian. So, I mean, the expectations that a tax amnesty will bring in billions and help balance the budget, I think, is maybe that's myth number three. But it's not not impressive. I think the government should revise the budget, assuming that won't happen, because it's not through parliament yet, and may not get through. And they're hesitant to do that. They have oil at, I think, $50 a barrel in the budget. That's gotta be revised, and so on. So I think they have to do a lot of work, which leads to some contractionary, well, contraction of plan spending, but they only got 76% last year. They have more budget this year. If they get 76% again this year, it'll be somewhat stimulative. But it does show, again, the weakness of relying on the government to do everything. Their inability to mobilize private sector funding is a huge albatross on the economy. Right, and the point is that the number you showed in capital goods imports is a very worrying number, because that is a good indicator of what's happening in the private sector in terms of machinery and equipment imports. All right, so let's open it up to the audience. When you remember that this presentation is being live webcast, so put up your hands. I'll recognize you, but wait for the microphone. When you get the microphone, please identify yourself. Give us your institutional affiliation, and then ask a brief question. We've stunned you into silence. Yes, right at the end. Thank you so much for your time. I would like to ask a... Please identify yourself. My name is Herman Uyengai. I'm one of the indigenous people of West Papua. My country is still, yeah. As a West Papua, we consider Indonesia as our colonized government, because occupied Papua land. The internet is about the natural resources like you mentioned about the Indonesian foreign investment that's regarding mining and oil. That's true, because that's West Papuan people who contribute to Indonesian government for less than 50 years now. But as a West Papuan, we don't feel like benefit from the economic interest that Indonesian government promised for us. I spent time in jail twice, and I haven't seen that any government event today under the Indonesian current government, the COVID. I'm sad. I'm very sad. Who's your question is? What's your advice about this, like the rule of the law and human rights in West Papua is still happening? Thank you. Jim's a businessman, so I'm... I didn't hear it. What is your advice with respect to Indonesian government policy towards Papua, where there is, of course, this concern, which I think the gentleman catrises, a colonizing government, and where mining investments and other investments haven't really led to an improvement in the livelihoods of people living in West Papua? Yeah, I think the basic issue, of course, is ownership and the right to exploit natural resources. And Indonesia's constitution gives those rights to the national, to the government, defined as the national government. I think this is inherently unfair. I can only imagine what it'd be like in the U.S. if Washington told Texas all that oil belongs to Washington and we'll let you know how much you get later on. So there is a fundamental structural problem, but it's a problem in every country. Now, when you have countries that emerge from colonialism without a private sector, without any resources, I think it was natural for the government to take the lead. But it is a very difficult and thorny question as to how the rights are allocated. Property rights in Indonesia are very tricky at every level. There's customary adat law. There's old Dutch law. There's five or six different kinds of ownership rights, usage rights, all kinds of things. And it's, I don't have an answer to your question. It's an important and serious political question. And I think it's somewhat, there was an attempt to redress it in 2000 with the regional autonomy laws, redistributing more money back to the provinces or into the Kabupaten, I should say, which are the next level. And now over 40% of the discretionary funds in the budget are decided at the local level, not the national level. This still doesn't really address the problem of who has the rights over natural resources. And Indonesian constitution still gives that right to the national government with some in the 2000 law, some rules giving more control to the local government. And this is where institutional weakness and the lack of strong judicial tradition really complicates things because we know the stories where local governments have given multiple rights over the same piece of land to more than one company and all these kinds of things. So I'm sorry I don't have an answer to your question but I do think it deserves more serious attention than is given to it. And I think the local governments in general have been badly treated over the history of Indonesia by the fact that all the revenue comes into the central government and then gets redistributed through the budget rather than direct taxes and so on. So I think since 2000, Indonesia's made tremendous reforms in regional autonomy, but I think in areas where natural resources are the dominant factor rather than manufacturing and services. So you're talking about your province, West Papua, you're talking about most of Kalimantan, much of Sumatra. These areas still have a lot of issues to work out and in terms of fairness and equity and I don't think the best answer has been found yet and there's gonna be tension on these areas for a long time, that's all I can say. And this of course inhibits say from a business point of view, you're a visitor whether even if you're a private local company or a foreign company, you just have to know what the rules are. And if the rules are conflicting and there's no way to come to a conclusion, your desire to invest, the willingness to employ people of course drops very dramatically. So it's really as hindered Indonesia from getting a maximum benefit out of its natural resources. Gentlemen at the back, can you come in a second? Good morning, James, thanks for the great presentation. My name's Evan Maduros, I'm a managing director at Eurasia Group and I'm also a non-resident senior associate here at Carnegie. I've got a question for each one of you. James, in your assessment, is the parliament or the bureaucracy more of an obstacle to implementation of all of these great reforms? I very much appreciated your presentation, I completely agree Giko is more popular but translating popularity and policy initiatives into real progress in Indonesia, as you know, is sort of the long time story of Indonesia. So I'd welcome your assessment of that. And Vikram, if you have a chance, could you go a little bit deeper in your assessment of the fiscal and monetary headwinds for Indonesia and where you think growth is going to come from? Is it public, private consumption? Is it investment? What's gonna get Indonesia above the aspiration for 5% growth, thank you. Okay, wow. I think growth will primarily come from infrastructure this year. I think there will be some pickup in consumer spending if indeed the infrastructure spending goes forward and if the rupiah remains doesn't get too much weaker if it stays in this area. But your first question on the bigger obstacle to the progress of parliament or the bureaucracy, boy that's a tough one. I never thought of it quite that way. Having great respect for both institutions. I think the political opposition is easier to manage. Not that it's easy but easier. I think bureaucratic reform is really, really, really difficult because they don't respond to anybody but themselves. They don't respond to public pressure. Parties at the end of the day, even as they're non-issue-oriented as I indicated earlier in Indonesia, they will respond to public pressure. And Jakowi has been much better at calling sort of appealing over the heads of parliament to the people. Doesn't know it much but SBY didn't do it at all. And I think he just has a better feel for that. And so I believe the politics can be managed. I think bureaucratic reform that really is a major obstacle and a lot of the very good ministers that I've seen on the technical side have been very weak on the management side. This is where some like Srimoyani, Mari Pongestu and the previous government who spent a lot of time on administrative reform. I remember when Srimoyani was finance minister, we as business would go and wanna talk about the economy and she spent all her time talking about bureaucratic reform because that's where her real passion was. And that's where it should be. And so efforts to professionalize, modernize, upgrade the Indian using bureaucracy really are of critical importance. They can undermine anything. So I would say, thank you for asking the question. I never thought of it quite that way but having thought about it, it's pretty clear to me bureaucracy is more of, it's a systemic problem that is not subject to external appeals easily. So I think that'd be the bigger problem. Evan, I think Jim more or less answered the question that you posed me but I would sort of reiterate what he said. First of all, I think it's important to recognize that the headwinds are quite severe, right? There's a concern about the slowdown in China, the impact on quantity prices that's gonna have a continued negative effect. Indonesia is a commodity dependent economy and that's always something to worry about. Secondly, as I mentioned, the IMF report incidentally where I would recommend all of you to read it that the article for consultation report really is excellent. And it comes out of the analysis that the financial sector and the banking system are in relatively good nick except for certain small parts. You would expect that the banking sector would be under some stress given the decline in commodity prices. And a large amount of the borrowing actually is borrowing from abroad. And therefore there's a possibility that if you have further deterioration in commodity prices, et cetera, this would have an impact on corporate balance sheets and consequently have an indirect effect on the banking system. And there are certain tiny parts of the banking system which could be in trouble with, frankly, no real signs of a systemic problem occurring though one has to keep an eye on that. So I think, and thirdly, frankly, this year's budget was, you know, the revenues, as Jim said, were highly overestimated. Revenues are likely to be, they were 25% over revenue, active revenue last year, tax revenues and frankly they're not gonna reach that at all. And so there's this enormous pressure now to cut expenditures but to try and protect infrastructure expenditures and that's gonna have a negative effect on the impact of fiscal policy on demand, aggregate demand in the economy. And the only way that you can, you would overcome all of this is by accelerating reforms for investment, for private investment and accelerating infrastructure development. With infrastructure investment, you'll crowd in private investment and that'll be further supported with reforms in the regulatory environment for the private sector. So that's where you would wanna focus on if you wanna see where Indonesia's likely to go in the coming year, that could be my response. Just a quick point about parliament. Parliament and political parties are ranked as amongst most corrupt institutions in Indonesia, right up there with the police force. And in other words, there is very little general sort of faith in the quality of parliamentarians and in their ability to actually vote in the national interest as opposed to in the pursuit of other interests. Let's just stop there and see if there are any further questions. Yes, gentlemen in the front, please. Hi there, my name is Ben Nathan from the East-West Center and this is relevant to the question of implementation. I wanted to know your thoughts on what the Army's role is going to be or has been in the implementation of these reforms and what is Joko's ability to exert influence over the Army compared both to SBAs and to the beginning of his presidency? It's very interesting. I think by and large you have to give the Army very high marks for the way it's responded to the transition from the Suharto era to the Democratic era. There are very few militaries that have accepted such a sharp diminution of their role. And I think it's a profound change. The quid pro quo is, though you don't bother us too much either. We won't bother you, you don't bother us. And they still have a territorial structure which gives the military a sort of a domestic role. And now we haven't talked about terrorism but of course they want a bigger role in terrorism and the police are resisting that. Indonesia only has a national police force, they don't have a local police force. So there are questions there but by and large the military has kept a very low profile. And when you think of the role that military leaders have played Suharto era and government, the fact that SBY was a military leader, I doubt if your ordinary Indonesian could name 10 military figures or even five in Indonesia today. They're very low profile in terms of the public. So the chance of one of them entering the political arena is successfully I think is much diminished. And of all those figures that we put up that were just a polling agency throughout his important national figures, I don't think there was a single, other than Prabowo's retired guy, but I don't think there was another single military person on there. Duhut, Duhut Manjaita? Was he on that list though? Yeah, he was his picture. Oh, okay, that's two. So their role is much diminished and they seem to accept that and in return they're trying to modernize the armed forces to become more modern, more professional, better equipped, et cetera, et cetera. But the dilemma there, of course, is where Indonesia needs to modernize the Navy because of its maritime situation and because of the Chinese challenge in the South China Sea. And the Army is the big brother and everybody else is a stepchild and they're not so thrilled with the Navy getting all the money for all the boats and things. So that's typical inter-service rivalry and all that kind of stuff. So that certainly exists. But definitely, I think stepping back, you have to say that it's been quite a remarkable transition and the military's played a tremendously positive role in the transition. And you mentioned popularity surveys. The military is one of them is still one of the most respected institutions in the country up with the presidency. So the police is at the other end of the scale. All right, I think we should wrap it up now. So I just want to thank those who've been viewing in on the live stream. I want to thank you for coming and for asking these terrific questions. But please join me in thanking Jim Castle for an excellent presentation. Thank you.