Editions : July-September 2014

JOURNAL | COVER STORY By: Gita Wirjawan

Gita Wirjawan is fond of telling visitors that he finds great relaxation at the keys of a piano, and when he has the time he can be found playing on occasion with world-class artists who visit Indonesia. But he is also a successful businessman who, after a career as an investment banker with JP Morgan Indonesia, founded Ancora Capital, a private equity fund, in 2008. In addition to his duties as trade minister, he also found time to take over the chairmanship of the Indonesian Badminton Association in late 2012. A fierce believer in upgrading the educational infrastructure of Indonesia, Gita has spearheaded numerous efforts to build linkages with top universities overseas.

Strategic Review sat down with Gita to discuss the economic challenges that will confront the new president and asked him to suggest various policy alternatives for the new administration.

How do you see the global and regional economic situation that will confront Indonesia’s next president? If anything, I think the call option will be on the United States in the near term. You know, with their demographics and the energy revolution, I think for the US you are going to see a lot more insourcing, manufacturing and what have you in the next five to 10 years, despite the Tea Party and whatever polarization we have seen.

And then on top of that you have geopolitical tensions in Southeast Asia and Northeast Asia. Nobody is going to be able to drill anything in the South China Sea until that tension gets resolved. And it is going to take years – no Chinese company, no American company, no Southeast Asian company, no European company is going to be able to easily exploit and explore in the South China Sea. So energy is not going to be a main source of income for the usual suspects within Southeast Asia, including Indonesia.

But despite that, oil prices are not going to go up. I think it will peak at $100 a barrel and it might even come down with this shale gas phenomenon. That’s my read of the geopolitics. And the Korean Peninsula is not helping either. So I think the risk premium is going to rise on top of what's going to happen in a few months by way of the taper off in quantitative easing in the US. That's going to put a squeeze on liquidity. When liquidity gets squeezed, all over the world but in the United States especially, interest rates rise, and if interest rates rise in Indonesia, the first guy to get squeezed is the ukayan, the small and medium guy, and that's going to hit the credit cards, the motorcycles and then the house. The house gets hit, then the mortgage gets hit. So if not properly managed, we could have some serious concerns in the foreseeable future.

So whoever comes in on October 20 is going to have a lot to deal with.

How does one address this from the government’s standpoint? I think the compensation will have to be Keynesian, will have to be fiscal. I think the next president will have to think of a way to ramp up revenue generation, and that means taxes. Tax collection is not going to go up by raiding the existing tax base because a good chunk of that is coming from commodities and commodities are not going to rise up much. Manufacturing is plateauing if not rising very slowly. Agriculture and other non-commodities also are not going to help with tax revenue.

I think the game changer from a fiscal standpoint would be an increase in the number of taxpayers. We live in a population of 250 million where only 23 million people are paying taxes. Our tax ratio using the OECD methodology is just 15 percent, that's low. The tax ratio for developed countries is in the 25-35 percent range. That is the ratio of tax revenue to GDP. Ours is at about 15 percent. It is a reflection of the inefficiency of tax collection and also of the small base of taxpayers.

The game changer would be to increase that by way of giving an amnesty, a tax amnesty. By my calculation, there ought to be about 65 million people who are obligated to pay taxes and they should be paying taxes. But there are only 23 million people paying taxes. So the 40 million or so are hiding in the bushes, or maybe in some luxury apartments in Jakarta [laughs].

Now if we go out and tell them, ‘We'll forgive you for not paying taxes in the last 30-40 years, come out of hiding. As long as you have not robbed anyone, as long as you have not been involved in the liquidity support in the late 1990s under IBRA, then you’re qualified and here is your tax ID. And I've got news for you, I am going to lower the income tax rate, from the current 30 percent to 25 percent and if we get lucky in the next few years we’ll lower it to 20 percent.’

I think this will excite people to pay taxes because they are incentivized to pay less. But why would they come out and pay if they have been getting away with it for so long? Some of these guys are my friends. They don't care about just themselves. They care about their kids. They do not want their kids to be hassled years from now or decades from now by whatever government because of this issue.

This amnesty would create a lot more fiscal space. Our budget is about 1,800 trillion rupiah ($150 billion) for this year. SBY [President Susilo Bambang Yudhoyono] was successful in quadrupling the budget over 10 years. But if we stay business as usual, we are not going to be able to ramp up the budget further. But if we do this game changer we will be able to ramp up the budget – if we are lucky maybe twice or three times over in the next five years.

This will allow us to build bridges, roads, ports, airports and even consider reallocating the misallocation of resources within the budget, especially the $40 billion monkey on our backs – the fuel subsidy.

Where is the current account deficit going? I would be quite concerned. If you take a look at the trade deficit last year, it was $4 billion, which is made up of two things: a $12 billion deficit from oil and gas, and an $8 billion surplus from non-oil and gas industries. I am not worried about the non-oil and gas. I am worried about the oil and gas and that has to be taken care of. Gas is not much of an issue but oil is. We are importing 400,000 or 500,000 barrels a day. So this extra fiscal space by way of the tax amnesty can be used to incentivize the participants in the oil and gas industry.

How? Two things. First, you restructure the cost recovery system. Second, you incentivize anybody who wants to be in the oil and gas business, anybody that wants to drill, you give them tax holidays or tax allowances. Like what we have done since I pushed this as chairman of BKPM. It came to fruition two years ago. Now people are enjoying it.

One issue has been that big foreign oil companies complain of policy uncertainty and delays in approvals. Should they be worried? The tones of nationalism typically occur anywhere, especially in an election year. The companies should understand that.

Number two, the new leadership should come up with a framework that is clear in providing the fiscal incentives to do business – it shouldn't be taking three years for an oil and gas company to get a POD (Plan of Development) approved. It should be minimized to a few months at most. And the cost recovery system ought to be simplified. If these things are done, that should be enough to convince anyone to be in the oil and gas business here.

How should the fuel subsidy be handled? The subsidy has to be reduced on a gradual basis... and probably get to zero within five years. One way to start is to issue vouchers for subsidized fuel that cannot be used on weekends. That means 52 weekends in a year, 104 days, of savings. That will be a start.

On smuggling and misallocation of fuel, you have to limit the free hand and start deepening efforts to find out where the misallocation takes place. And then you must work on coastal defense to prevent further misallocation of resources and smuggling.

This has to take place alongside efforts to create a bigger taxpayer base through a tax amnesty. And also that bigger number of taxpayers means they are going to bring back money that has been parked overseas. But any president who does any of these things also has to be comfortably welcomed by the parliament. And experience dictates that ain't going to be easy.

The ASEAN Economic Community (AEC) is coming at the end of 2015. Will Indonesia be ready? We're probably going to be able to check off 90 percent of the boxes for the AEC. Other countries may be able to check off more than 90 percent so we will be relatively less ready than some other countries. But that doesn't mean it's a losing proposition for us.

If you take the long view, there is this market in ASEAN of $2.1 trillion today going up to $3.5 or $4 trillion in the next few years. There is a market of 600 million people. And you know where the buying power is. Indonesia makes up a good chunk of that 600 million and that $2.1 trillion. About 45 percent.

But we will have to be on the defensive for the first few years. I think what we have to do is make some serious investments in education and infrastructure, and anything that helps us move up the value chain. And it is also key for us to message this thesis properly so it doesn't get lost in translation. Typically when people say ‘moving up the value chain,’ that is seen as nationalism.

But this has to be cleverly crafted and done in such a way that we welcome anybody from anywhere to invest here. And not just welcome but incentivize them with the right fiscal framework. And that's serious business. We are taking about huge amounts of money here. If we invest in the right parts of the educational structure, starting with what I call the “plumbers in the polytechnic schools,” where you can become a hairdresser, an animator, a plumber.

Beyond that is the tertiary educational challenge of producing graduates who can compete anywhere – in Singapore, in Indonesia, in New York, in Hong Kong, in London.

As you talk about these economic issues, the other question that comes to mind is how would you advise the next leadership to develop a culture of discussing and debating policies in an effective manner? There ought to be a clearinghouse for ideas and that should be judiciously undertaken by the policy makers with respect to the private sector. Kadin, Hipmi, Apindo and the various industry associations should sit down on a regular basis together and act as a clearinghouse for ideas that get funneled up to the executive branch properly. That didn't happen in my time. And it is a simple thing to formalize such a structure. You know we often get too good at forming committees for the sake of forming committees. That can become a mockery.

But I think you can structure a clearinghouse for ideas and solutions for any particular concern or opportunity. You can look at solutions in a results-oriented manner, by which I mean Indonesia has got to be able to produce a Samsung, we've got to have a Hyundai. We don't have the Samsungs of this world. We need brands that symbolize industrialization and tenacity in doing just about anything. This means also producing good quality athletes, farmers, fishermen, anyone.

Think about this. The dollars that will be consumed in the next 20 years by Indonesians on a cumulative basis will be about $36 trillion. That is good, that is scary good. And wouldn't it be nice if most of that had a red and white flag on it? How do I derive that number? If you extrapolate from the $1 trillion GDP and grow that with 6 percent real growth over 20 years you end with about $60 trillion. With about 60 percent of that being cumulative domestic consumption, we have $36 trillion.

This will also mean rising government spending and given that, I don't see how we can't produce world-class industrialists and experts and thinkers. You just need the right combination of carrot and stick. Combine that with our desire to move up the value chain and I think it is beautiful. That is the endgame for Indonesia.

Please summarize your three pieces of advice for the next president. Tax amnesty, eliminate the fuel subsidies as quickly as possible and invest a heck of a lot in an educational infrastructure that will support the plumbers and, beyond that, the engineers, the accountants and others. As many as possible. And let’s also get them to speak English.

 

Gita Wirjawan served as minister of trade under President Susilo Bambang Yudhoyono from 2011 to 2014. Prior to that, he was chairman of the Indonesian Investment Coordinating Board (BKPM) for two years. In 2014, he stepped down as trade minister to compete in the Democratic Party's presidential nominating convention, his first time on the political stage

 

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