Poised for Take-off—Unleashing Indonesia’s Economic Potential

Christine Lagarde, Managing Director, International Monetary Fund
Universitas Indonesia, Jakarta, September 1, 2015

As prepared for delivery

Introduction

Good afternoon—Selamat sore!

Professor Kuncoro, dear Mari—thank you for your generous introduction.

Distinguished guests, students, and faculty members—thank you for the opportunity to speak to you today.

It is quite a privilege to be back in Indonesia and to speak at such a prestigious academic institution. These grounds, and certainly the kampus kuning (yellow campus), have nurtured many of this country’s finest economists and policymakers—including a person I very much respect, Sri Mulyani.

This institution also forged many of the leaders that have steered Indonesia’s democratic process. Think of the young nationalists who in 1928 oversaw the Youth Pledge of “one motherland, one nation” to the “putra dan putri Indonesia”—sons and daughters of Indonesia.

It later nurtured the leaders of the Reformasi. A reform that has been remarkably successful in transforming the country, in less than a generation, into the decentralized democracy that it is today.

Indeed, I see you—the students and youth of today—as upholding this same tradition. I see you as the new generation of “change agents.” You will usher in the next phase of Indonesia’s transformation. Into an economy that is not only vibrant and inclusive, but also outward-looking and ready to take its rightful place on the global stage.

To do this, Indonesia needs to continue to broaden its growth model—to compete in manufacturing, agriculture, and other services. This means capitalizing on its vast reservoir of talent and entrepreneurship to become a global player across a much wider range of activities. It means strengthening the fundamental underpinnings of the economy – to make it more resilient. It also means tapping into the spirit of the ancient maritime kingdoms of Sri Vijaya and Majapahit that once existed here, reaching out to the world and engaging with it.

Quite frankly, the global community needs its fourth largest and most youthful population to play a lead role in the global economy.

Imagine the Garuda—the mythical bird that is your country’s emblem. Like this bird, I would encourage you to spread your wings and embrace the possibilities the world has to offer you.

Today, I would like to share a few thoughts on how to harness the virtues of the Garuda—strength, prosperity, and wisdom—to unleash the potential of your generation and of the generations that will succeed you.

(i) I will first take you on a tour of the global economy and the implications for Indonesia – the need to generate new sources of economic strength.

(ii) Then I will discuss the policies needed to reorient the economy’s sources of growth and unleash its potential – how you can generate prosperity.

(iii) And finally I will talk about the quality of growth—the importance and wisdom of inclusive growth, and how it can help Indonesia’s youth become truly global citizens.

1. Indonesia in the global economy—sustaining resilience amid challenging times

Let me start with a quick health check of the global economy.

Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July. This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America.

Asia as a region is still expected to lead global growth. But even here, the pace is turning out slower than expected—with the risk that it may slow even further given the recent spike in global risk aversion and financial market volatility.

What does this imply for Indonesia? Like several large emerging economies, the country finds itself caught on the wrong side of several important shifts.

The first relates to China, one of Indonesia’s main trading partners. As the Chinese economy is adjusting to a new growth model, growth is slowing—but not sharply, and not unexpectedly. The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy. That said, the authorities have the policy tools and financial buffers to manage this transition. Other emerging economies, including Indonesia, need to be vigilant to handle potential spillovers from China’s slowdown and tightening of global financial conditions.

At the same time, commodity prices have come off their peak, and this decline is projected to persist. Both of these factors imply that external demand for Indonesia’s goods is likely to be weaker for some time to come.

There is yet a third shift—unfolding in advanced economies. There are signs that the recovery is firming up in the United States, advancing the prospects of interest rate lift off. This could pose a risk for emerging economies, including Indonesia, in the form of weaker capital flows, higher interest rates, and financial volatility.

What do these shifts portend for Indonesia? Like many emerging market economies, Indonesia today is being buffeted by another bout of global financial turbulence. Are you worried? Of course. But Indonesia has ample experience in handling such turbulence. Look at how it weathered the global financial crisis and the “taper tantrum” in 2013! Indonesia is certainly better able to handle this kind of turbulence than in the past.

Even so, the recent turbulence highlights the need for even greater resilience. That requires rejuvenating the country’s growth momentum—for the Garuda to have strength, one of its key virtues.

As you are well aware, growth has been slowing for the past four years, and has recently fallen below 5 percent for the first time since the global financial crisis.  

Clearly, this slowdown need not be permanent. Indonesia can shift to a higher growth trajectory. But it needs to get on the right side of ongoing shifts in the global economic and financial landscape.

How? By taking full advantage of its potential. Let me now turn to my second topic—the policy priorities to unleash Indonesia’s economic prospects.

2. Rejuvenating Indonesia’s growth—the ingredients of greater prosperity

Indonesia today is the eighth largest economy in the world by some measure, and home to over half of the labor force in the ASEAN community. Creating greater investment and trade opportunities would allow your country to benefit from the momentum in the fastest growing region in the world, and it would help other countries to partake in Indonesia’s growth as well.

More importantly, and unlike other countries in the region that are seeing their workforces age or even shrink, Indonesia has a reservoir of young people that it can draw upon for many years to come. Indeed, by some estimates, more than 70 percent of the population in 2030 will be of working age—180 million young people. YOU are a huge asset!

Back in 1930 Sukarno said: “Give me a 1000 men, I will move the mountain. But give me 1 youth and I will shake the world.”

So how can your generation shake the world? For one, the scourge of unemployment, especially among youth, must be tackled. Today, youth unemployment exceeds 20 percent—this is more than four times the overall unemployment rate. Surely no economy can thrive while so much talent remains underutilized.

At the same time, even as poverty rates have been halved, income inequality has seen a rapid rise over the past decade. No growth can be sustainable if its benefits are enjoyed only by a few.

This is a unique opportunity for Indonesia to overcome these obstacles. Now is the time to embark on bold reforms that will further modernize its economy, create jobs for its youth, and make it fit for a 21st century global leader. It needs to lay the foundations for future prosperity—the Garuda’s second virtue.

How? By reviving a tradition that Indonesia has embraced for centuries—that of engaging with the world—through seas and cultures. Make the whole world your playground.

“Your” Indonesia should not be just a story about commodities exports and a large domestic market. There is a whole new class of markets to be conquered—not just in your neighborhood, but globally as well.

There are more than 1.5 billion consumers that will be entering the global middle class over the next few years. And it will be up to you to make that conquest. This is achievable. By developing the economy’s potential in manufacturing, agriculture and services. By generating opportunities for all. And by building a world class infrastructure of physical and human capital.

In other words, think of three areas: infrastructure, investment, and trade. Let me take each in turn.

First, think infrastructure. In a country that is made up of more than 17,000 islands, a modern and efficient infrastructure is vital to connect people and markets both within the country and with the world.

Yet Indonesia’s infrastructure gap remains large compared to its peers, especially in power and transport. For example, logistics costs account for 24 percent of GDP in Indonesia, compared to only 13 percent in Malaysia. Because of disparities in transport costs, the price of some basic commodities can be 20 times higher in eastern provinces than in Java.

At the same time, the electrification rate is about 80 percent, compared to universal coverage in Indonesia’s peers.

Clearly, reducing transport costs and ramping up power production can help create jobs in manufacturing and services. It also sets you up to better connect and serve a global clientele.

President Jokowi has rightly made infrastructure improvement a top policy priority. Over the coming four years, infrastructure spending will be boosted by an average of 8 percent per year. This is very encouraging.

Second, think investment climate. The experience of dynamic economies such as China over the past decade, and Japan and Korea before it, demonstrates one thing: these countries developed their potential by engaging more fully with the world. Learning from the world, internalizing new technologies, and then going out into the global market place to compete in an ever broadening range of activities and services.

Indonesia can do the same. But first it needs to remove constraints that shackle its private sector. On the investment side, this means streamlining complex regulatory requirements. It also means harmonizing overlapping and contradictory national and local regulations.

Here again, President Jokowi’s commitment to jump-start investment is very encouraging. The Land Acquisition Law is being revamped, and a one-stop services shop has been established for business licensing. These are steps in the right direction.

Still, openness to investment can only take the economy so far. A complementary trade strategy is needed so Indonesia’s entrepreneurs and businessmen can go out into the world and compete.

So third, think trade integration. A successful trade development strategy hinges on resisting the pressure to look inward and removing barriers to competition—especially when the going gets tough and there is turbulence in the seas. Trade has always been a key driver of Indonesia’s economic activity. Now is all the more important to reap the potential dividends from further trade liberalization and integration, especially within the ASEAN Economic Community.

So with stronger policy frameworks we have power; with better infrastructure and an outward oriented mindset we have growth and prosperity. We now need wisdom, the Garuda’s third virtue, to nurture this prosperity and make it last.

What do I mean by that? It means that for prosperity to last, it needs to be inclusive. Everyone must share in its fruits.

3. Inclusive growth for Indonesia’s youth—national leaders, global citizens

I have always believed that a healthy economy is an inclusive economy. One where economic and financial opportunity is provided equally to all segments of society. Yet, by some measures, youth and women remain excluded in Indonesia. Think of these three sets of numbers:

• Youth: one in every five young persons is not in education, employment or training.

• Women: at about 50 percent, women’s participation in the labor force is less than two-thirds that of their male counterparts. At the same time, close to 40 percent of young women (aged 15-24) are not in education or employment.

• Yet: by some estimates, a rise in the rate of labor force participation of women from 50 percent today to 64 percent by 2030 could potentially add 20 million more skilled workers. This is an economic game changer!

The reasons underlying these unemployment numbers may be several. But a key culprit is the labor market, which remains one of the most rigid in the region. Beyond undermining competitiveness, these rigidities deny the opportunity to more than 60 percent of workers of finding their way out of low-skilled jobs or the informal sector.

Clearly, what is needed are policies to ease labor mobility and encourage the employment of youth in higher value added activities. It also means higher investments in the skilling of Indonesia’s youth and nurturing their entrepreneurship skills. In today’s world, harnessing the power of technology and innovation is critical to get ahead.

Think of Go-Jek, Indonesia’s version of Uber taxis. Its founder is a young man who turned a challenge—that of transportation in Jakarta—into an opportunity: a thriving business that uses technology to connect people, goods, and services. This should be the creative spirit that distinguishes your generation.

Still, entrepreneurship hinges on another dimension of inclusion—financial inclusion. Access to credit is a key link between economic opportunity and economic outcome. It is essential for individual empowerment. Yet, currently almost two thirds of the population in Indonesia does not have access to any banking services, and close to half have no savings accounts.

Microcredit programs such as those implemented by Bank Rakyat Indonesia have been successful in extending coverage to remote areas. Even so, and as will be discussed at the Future of Asia’s Finance Conference tomorrow, efforts on several fronts are still needed to increase financial integration in the region.

National leaders, global citizens

So, clearly an inclusive society is an empowered society. But why is that so important? It is important because an empowered individual makes for an inspired individual. And inspiration is the virtue of great leaders. I would love nothing more than to see your generation being inspired to become the “change agents” you are destined to be.

As the leaders of tomorrow, you must recognize that the world will continue to change. For you to be part of this change—and lead this change—I encourage you to bring your country to the world. Indonesia is already the fourth largest user of Facebook globally. You could harness the power of technology to share your ideas and your skills with a much bigger universe!

As global citizens, you will also have a role in how the global community confronts common challenges. In today’s interconnected world, your fortunes are ever more linked to those of people a thousand miles away. It takes both courage and wisdom to navigate this globalized environment. Sukarno said that Indonesia’s youth can shake the world, and I am sure that he trusted you to do this in a wise and responsible manner.

Think of the sustainable development agenda that is being worked out this year and the possibility of improved lives for billions of people around the world. Think of climate change and the opportunities that “green growth” offers to your generation and those to come.

Your voice, your actions today matter. Your generation can be the “change agents” not just for a better Indonesia, but for a better world.

Of course, Indonesia is already active on the global stage. For example, at the G20, Indonesia played a key role in the global policy response to the crisis. In fact, my next trip will be to attend the G20 meetings in Turkey where growth will dominate the agenda. Emerging economies, including Indonesia, have been instrumental in shaping the dialogue and policy priorities to spur growth at the global level.

We have also witnessed Indonesia’s growing leadership role at the IMF, especially on issues that are important for emerging economies. It has actively engaged in the quota and representation reform, and in the design of appropriate policies for emerging economies.

For our part, the IMF will always be a steadfast partner in Indonesia’s growing integration in the global economy. We will continue to evolve as the world changes and with it, the needs of our membership. The IMF has become more attuned in our policy advice and technical cooperation to the challenges of emerging economies—particularly in managing a growth transition while keeping vulnerabilities in check. And we are prepared to adapt our approaches where needed. We are at the service of our member countries. We are at your service.

Conclusion

To conclude, I am sure that Indonesia’s leadership role on the global stage is set to grow.

The world needs economies like Indonesia to be engaged and active in forging a new form of global cooperation. One that reflects ongoing shifts in the global landscape, where dynamic economies such as Indonesia have their rightful place.

Your country has immense potential, and its destiny lies in your hands. You will be the leaders of the change that will enable Indonesia to soar to new heights.

Let the Garuda spread its wings!

Thank you.



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