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Diplomacy in Action

Growing the U.S.-Indonesia Economic Relationship


Remarks
Robert D. Hormats
Under Secretary for Economic, Energy and Agricultural Affairs 
Udayana University
Denpasar, Bali, Indonesia
July 22, 2011

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As prepared for delivery

Thank you Rector Bakta for your kind introduction.Also to my old friend and renowned economist Chatib Basri for taking the time to moderate the questions and answers part of my talk today. I look forward to hearing his insights. And I would also like to welcome our @America audience today. I am grateful to have the opportunity to be here today at Bali’s most renowned university, to engage in a discussion with such an impressive group of students and share a few thoughts about our two countries’ economic futures.

This is a period of great growth and opportunity for Indonesia. Since its recovery from the Asian Financial Crisis, Indonesia has recorded strong growth, averaging 5.2 percent over the last decade. Indonesia managed to maintain economic growth throughout the global financial crisis, and posted 6.1 percent growth in 2010. During this time, the Indonesian economy has not only become a regional economic leader, but also the only Southeast Asian member of the G20.

The United States welcomes Indonesia’s economic growth and growing leadership role in the global economy. And we are doing what we can to enhance and expand our overall bilateral economic relationship under the U.S.-Indonesia Comprehensive Partnership, which President Obama and President Yudhoyono launched last November.

The United States and Indonesia have a fast-growing multibillion dollar trade and investment relationship: two-way goods and services trade grew in 2010 to $23.4 billion, an increase from $20 billion in 2009. In 2010, U.S. foreign direct investment (FDI) stock in Indonesia reached $16.4 billion. Indonesian investments in the United States are also growing, currently worth about $256 million.

Because of the rapid growth of the Indonesian economy and the increasing per capita income of its 237 million people, U.S. companies are taking an even greater interest in this region and in Indonesia in particular. In fact, according to the Indonesian Investment Coordinating Board, during the first quarter of 2011, the United States became Indonesia’s second largest source of foreign investment—just after Singapore.

We are doing what we can to help U.S. companies realize the opportunities that exist in Indonesia. This past May, over 300 participants from 22 countries, including more than 100 U.S. companies, participated in the Overseas Private Investment Corporation’s 2011 regional investment conference here in Jakarta. And under our National Export Initiative, the U.S. Government is helping to identify and secure export opportunities for American businesses to sell their products to Indonesia.

Entrepreneurship is one of our fastest growing areas of economic cooperation, and our cooperation on this issue significantly strengthens our economic linkages and people to people engagement. That’s why Indonesia was chosen as the second pilot program for the State Department’s Global Entrepreneurship Program. And that’s why the Global Entrepreneurship Program brought an entrepreneurship delegation to Indonesia this week.

The delegation is comprised of a high-profile group of U.S. entrepreneurs, investors and mentors and is here to provide Indonesia’s entrepreneurial startups with a unique opportunity to showcase their business ideas and receive feedback. The aim of this delegation’s visit is to catalyze entrepreneurship and connect Indonesia’s rapidly growing startup community with major investors and entrepreneurship networks worldwide.The U.S. Embassy also sponsored a business plan competition and entrepreneurship "boot camp" that was broadcast on Metro TV, and a software design competition in partnership with Microsoft.

Indonesia has shown its commitment to working on entrepreneurship and innovation. We commend the local business leaders who organized an Indonesian Entrepreneurship Board to support Indonesia’s selection as a pilot program for the U.S. Global Entrepreneurship Program.

We also applaud the Indonesian government for choosing to hold a regional entrepreneurship conference this weekend in Bali to follow on President Obama’s Summit last April. It is our hope that the government will take the sometimes difficult steps to truly create a healthy ecosystem for Indonesia’s entrepreneurs. Secretary Clinton will be speaking at the conference tomorrow.

Business leaders, entrepreneurs and innovators have the power to revolutionize industries, create jobs and grow economies. I have heard a lot in recent months about some of Indonesia’s most prominent entrepreneurs. Ananda Siregar founded Blitz Megaplex, a major movie chain in Jakarta. Wahyu Aditya is another good example. An Australian-educated animator, he returned to Indonesia and established the animation school Hello Motion Academy. He also runs a successful production house named Dapupu Productions. And Shinta Dhanuwardyo the founder of Bubu.com, Indonesia's leading digital media agency. She is not only a prominent IT entrepreneur, but she is in the process of establishing her own venture capital firm to fund future start-ups.

It is our joint ambition to foster more of these types of entrepreneurs in the future. And to help in this process, we would like Indonesia to do what it can to improve its business climate. After all, developing a thriving entrepreneurship sector means creating a business climate where:

  • entrepreneurs can thrive;
  • it is easy to start a new business and access financing;
  • legal certainty and transparency reduce risks and increase confidence;
  • where failure is a learning experience, not the end of a career.

Improving the overall business climate will have spillover effects into the entire economy. Indonesia posted solid growth throughout the global financial crisis, with GDP growth averaging at 5.7 percent from 2007 to 2010. This is reflected in many economic indicators, including record-high foreign exchange reserves, increasing foreign direct investment, and now a sovereign credit rating only one notch away from investment grade.

But I’m told by Indonesian economists and business leaders that the growth could be even more impressive if Indonesia would take small, but significant steps to improve its business climate. These steps not only include improved legal certainty, but also increased market access, and a more welcoming approach toward foreign investment.

Such changes could reap tremendous economic and social dividends. According to the World Bank’s Doing Business report, Indonesia dropped six slots from 115 in 2009 to 121 in 2010, out of 183 economies. The average time it takes to start a business is 47 days; the East Asia Pacific region average is 39 days. Indonesia ranks below Malaysia and Thailand, its major regional competitors in this ranking. And although Indonesia’s Transparency International score has improved over recent years, last year it scored 2.8 on a scale of 10—with 10 being the cleanest, 0 the most corrupt.

I say this as a friend to Indonesia, and I recognize the commitment that the Indonesian government has made to address the problem. As President Obama said last November, “through its leadership of the G20's anti-corruption group, Indonesia should lead on the world stage and by example in embracing transparency and accountability.”

Attracting foreign investment requires effort. Labor costs alone do not determine where companies invest. Other variables–including legal predictability, respect for contracts, infrastructure, education levels, and governmental regulation--can often be as- or even more- influential in the decision on where to invest.

The government’s role must be to create the right environment for businesses and entrepreneurs to grow and flourish. It must lead the way in investing in and upgrading the country’s infrastructure as well as cutting red tape so that businesses can operate with greater efficiency.

When the environment is conducive to investors, foreign companies – especially U.S. firms – will bring technological capacity and know-how. And U.S. companies need to be reassured that their intellectual property rights will be protected. Companies that invest millions of dollars to develop an innovative and new product are understandably cautious to invest in a legal environment without proper protections. As well, without sufficient legal control over their investment, U.S. companies are often reluctant to risk the potential negative consequences to the value of their international reputation or brand.

Open markets benefit small business owners and entrepreneurs trying to create and grow businesses. Protectionism restricts access to inputs and services, putting Indonesia’s entrepreneurs at a disadvantage with regional competitors that benefit from more open investment climates. And from our experience, competition is what has driven innovation and resulted in cutting edge, high-quality products and services.

Encouraging technology development and deployment will also contribute to a strong business climate. For example, the United States is working with the Indonesian government to launch a mobile banking initiative. Mobile banking can provide innovative solutions for Indonesians to increase access to financial services, increase transparency, decrease transaction costs, and provide financial services to millions of Indonesians. It also catalyzes entrepreneurs to use the technology in new and productive ways.

Indeed, the Indonesian government has taken measures to ease business start-up costs and improve its business climate. Examples include reducing the corporate income tax rate, launching a single-window service that reduced the time required for exporting, and reducing the cost of administering a new company name.

Trade and investment between the United States and Indonesia continues to grow. But the potential to have an even larger economic relationship is there and we encourage Indonesia to strive towards an economy that is open, free, fair and transparent.

Geothermal resources and clean energy are other areas where we’d like to work with Indonesia. The same goes for aviation and infrastructure. U.S. companies have a lot to offer in these areas, and regulatory fairness and legal certainty will go a long way to help build this cooperation. And as President Obama said when he was in Indonesia last year, “America has a stake in an Indonesia that plays its rightful role in shaping the global economy.”

We encourage Indonesia to assume an international and regional role that is commensurate with its size and economic influence. Indonesia has an important voice in institutions such as the G20 and WTO. And as the 2011 APEC host, the United States hopes to have Indonesia’s support to reach agreement on ambitious work on "next generation" trade and investment issues and other APEC priorities. This will help lay the groundwork for further cooperation on regional economic integration and other key issues when Indonesia hosts APEC in 2013.

The United States seeks a successful Indonesia that partners with us in a broad range of sectors. Our goal is to establish a 21st century partnership that will create new jobs and prosperity for people in both our countries. Together we can help shape the economic future of both the region and the world.

I have followed the development of the Indonesian economy for many years now, both from my previous positions in the U.S. government and the private sector. I have always been impressed by the resiliency of the Indonesian people, especially its young people.

Young people, like yourselves, live in a period where the Indonesia of the future is a global one, where Indonesia’s economic decisions and policies will not only guide the course of development here at home, but also have a major impact around the world. And my hope is that you all will shape Indonesia’s bright economic future.

Here at Udayana University, some of you are studying economic policy, some of you are studying engineering and the sciences. Some of you will go into business, and I hope become successful entrepreneurs, while others will go into engineering or government work. But no matter what path you’ve chosen, all of you will have a role to play in shaping the bright future of this country and its contribution to the world.

Thank you again for your warm welcome today. I look forward to answering your questions.



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