Transcript: Treasury Secretary Jan. 20 Remarks on Indonesia Recovery
(Indonesia faces challenge of building more equitable system)Indonesia faces the challenge of "building a system that is not only more just and evenhanded, but one that is seen to be so by Indonesians and the world at large," Treasury Secretary Lawrence Summers said in January 20 remarks in Jakarta.
"Improved governance will be fundamental to political and social stability, perhaps even to national territorial integrity over the long term and the basis for deepening democracy going forward," he said. "An Indonesia that cannot earn the confidence of its citizens that due process will be followed and laws enforced, will equally fail to earn the confidence of businesses and investors that is crucial for economic growth."
Although Indonesia's greatest challenges are "fundamentally political," Summers said, "inseparable from the challenge of political integration and effective democracy is the economic challenge of creating a stable environment for a fully integrated and vibrant national economy."
Now is the time for Indonesia to move forward aggressively with financial and corporate restructuring, Summers stressed.
"Every rupiah wasted propping up the institutions of the old Indonesia is a rupiah that could be invested in the institutions of the future," he said.
According to Summers, the Asian financial crisis highlighted the importance of four elements to successful economic recovery: the development and implementation of a sound framework for fiscal and monetary policy; rapid implementation of a credible plan for financial and corporate sector restructuring; a clear and strong commitment to national institutions that "above all create the rule of law rather than the rule of man"; and strong, economically centered and focused political leadership.
"These four lessons ... have important light to shed on recent economic developments in Indonesia," Summers said.
"While macro-economic stability has been welcome, and an impressive achievement," Indonesia's failure so far to move forward aggressively on restructuring and institutional reform is inhibiting its economic growth, Summers said.
"Inflation is down, but growth -- while positive -- is not what it can be in Indonesia," he continued. "If there is any advantage in the magnitude of the output decline that Indonesia suffered during the crisis, it is that it creates the room and the potential for especially vigorous and rapid expansion going forward."
Following is a transcript of Summers' remarks:
(begin transcript)
"Indonesia and the Challenge of Lasting Recovery"
United States Treasury Secretary Lawrence H. Summers
Jakarta, Indonesia
January 20, 2000Thank you very much for that overly kind introduction. I am very honored to be here, and particularly grateful to be with you, Minister Witoelar; with the Director of IBRA [the Indonesia Banking Restructuring Agency], who has such an important role in the months ahead; with Emil Salim, who has done so much to shape Indonesia's economy over the years; with Mr. Wanandi, who has such an important role in the Indonesian private sector; and especially with my good friend Professor Wijoyo.
This is an exciting moment for me, and I'll tell you why. One of the first jobs I had in life where I was paid to do work was as an economic advisor...that actually exaggerates my role, as a research assistant, to people who were providing economic advice to Professor Wijoyo in the summer of 1978. I cringe when I think about some of the recommendations I made at that time. Fortunately, Professor Wijoyo and then Finance Minister Ali Wardana had the good sense to indulge my advice rather than to follow it. But it was a profound learning experience for me to spend time in your country that shaped my interest in the economic issues around the developing world. For that reason it has particular meaning for me to have a chance to speak with you today.
With the newly elected government, a more stable macro-economy and rising growth across Asia, Indonesia is now opening a new chapter in its history, and I am glad the United States wants to do everything it can to be supportive as that story unfolds.
As President Clinton said to President Wahid last November, the United States and the entire Asia-Pacific Region have a major stake in your success, and we stand ready to support the government as it works to build a new Indonesia.
We have been reminded once again this week that Indonesia's greatest challenges, in many respects, are fundamentally political. But inseparable from the challenge of political integration and effective democracy is the economic challenge of creating a stable environment for a fully integrated and vibrant national economy. With that in mind, I want to focus today on the major economic, financial and institutional priorities that, it seems to us, face Indonesia at this point.
Let me touch on three topics today. First, the core lessons of the Asian financial crisis and the behavior of other emerging market economies. Second, the implications of this experience for Indonesia and for Indonesian policy. And third, the approach that the United States and the international community will take in going forward in supporting the success of Indonesian democracy.
The financial crisis that began in Thailand in the summer of 1997 brought out very clearly that in a new global economy, national weaknesses in policies and institutions will be punished more quickly and severely by international markets than was perhaps true in the past. At the same time, if the information age has speeded up the onset of crisis, I believe the new economy also provides opportunities for much more rapid response to crisis than has been the case in the past. We see this around Asia today. We see it in the fact that the Korean economy is growing at nine percent, and forecasters expect that growth to continue in the year 2000. We see it in Thailand, the first country to enter crisis, where growth is now around five percent, short-term interest rates are around four percent, and output and consumption are returning to pre-crisis levels. We see it in Brazil where following the devaluation -- with a strong response -- inflation has been controlled, interest rates are coming down, and economic output is once again growing.
What explains this rapid capacity of economies that experienced crisis to work through crisis, and what are the lessons for the Indonesian experience? Every situation is different, and has complexity, and can properly be the subject of any number of Ph.D. theses. I think most will agree there are a number of common elements. The development and implementation of a sound framework for fiscal and monetary policy that helped stabilize financial markets and support an early return to growth. In that regard, I have to say I have been greatly heartened by the evidence of inflation coming way down in Indonesia, and the progress that has meant in bringing down interest rates, the progress that has meant in restoring stability to the currency markets.
The second element of those cases, where there has been successful recovery, has been rapid implementation of a credible plan for financial and corporate sector restructuring so that the overhang of debt could be lifted and private sector lending and growth could resume. As I will discuss in a few moments, that is a lesson that I think has important implications for Indonesian economic policy going forward.
Another element of success, both in response to crisis and in those economies that have proven to be successful through this period, has been a clear and strong commitment to national institutions that above all create the rule of law rather than the rule of man. As the flow of capital has increasingly become a private sector flow rather than a public sector flow, the quality of institutions and the enforcement of law have become ever more important as a determinant of national economic success.
And the fourth requisite of almost every success has been strong, economically centered and focused political leadership. That was the case in the United States as we recovered from what was a difficult economic period for our country in the late 1980s and early 1990s with President Clinton's bold plan to respond to what was our largest problem, the problem of fiscal consolidation.
It has been particularly striking, because of the elements of transition to democracy, in South Korea, with President Kim Dae Jung's conspicuous success in establishing a mandate and driving real change in a country where traditional institutions sometimes subverted the rule of law.
These four lessons: the need for sound macro-economic policy, the need for financial restructuring, the need for the rule of law, and the need for strong political leadership, I believe, have important light to shed on recent economic developments in Indonesia. While macro-economic stability has been welcome, and an impressive achievement the failure, so far, to aggressively move forward with restructuring and institutional reform has prevented a full expansion. Inflation is down, but growth -- while positive -- is not what it can be in Indonesia. If there is any advantage in the magnitude of the output decline that Indonesia suffered during the crisis, it is that it creates the room and the potential for especially vigorous and rapid expansion going forward.
With a new government -- the first democratically elected president and vice president in Indonesia's long history -- it is perhaps inevitable that there would be uncertainty. But there must also be a real prospect that uncertainty and log-jammed reform can draw to a close. This is profoundly important for Indonesia, but as the United States looks at the Asia-Pacific region and the global economy itself, it is important for that global economy as well that Indonesia seize this special moment.
One can perhaps imagine a situation in which other economies in Asia perform better than Indonesia for some period of time, but I would suggest to you that it is inconceivable that Southeast Asia as a region can prosper and realize its full economic potential without a stable, open and prospering Indonesia.
I will talk in a few minutes about what the United States can do to contribute to this process, but let me offer some reflections from an economic perspective on some of the issues that seem most important to me for Indonesia to consider.
One way of framing the challenge -- and it was a challenge that I felt particularly acutely this morning as I visited a fishing area in Jakarta and saw a rice distribution program, and saw children working to learn in an elementary school -- is that now that Indonesia has won government by the people, the profound challenge is to establish government for the people. It means building a system that is not only more just and evenhanded, but one that is seen to be so by Indonesians and the world at large.
Listening to my Indonesian friends, and talking to others in the country today, and on my past visits, I have been struck by the degree to which the desire for a more just system of doing things permeates every aspect of national discussion. It is the hallmark of a new Indonesia. Its greatest triumph has been the successful conduct of last June's parliamentary election, which brought a new government to power through a process that was widely considered free and fair.
The question facing all Indonesians today, and Indonesia's friends in the wider world, is how to bring the national aspiration to concrete fruition. It is a question of national identity and stability, because improved governance will be fundamental to political and social stability, perhaps even to national territorial integrity over the long term and the basis for deepening democracy going forward. It is also a crucial economic question, because an Indonesia that cannot earn the confidence of its citizens that due process will be followed and laws enforced, will equally fail to earn the confidence of businesses and investors that is crucial for economic growth.
I know that, in years past, businesses would sometimes cite the stability of the Soeharto Government as an important weight in their investment calculations. The perception that you could count on commitments if he endorsed them could sometimes counterbalance the widespread conviction that the courts did not supply reliable investor protection.
In the 21st century, in the new Asia, in a world where investors have learned from experience, I can tell you that kind of stability and confidence is no longer sufficient. Indonesian and foreign investors now seek another kind of stability. One that comes with the rule of law, the certainty that market mechanisms will be allowed -- even made -- to operate, and the trust that public institutions are there to serve everyone, and not just the favored few.
Nothing in recent years has symbolized to Indonesians and the outside world the challenges that remain and have not yet been fully met, than the failure to make inroads in the huge burden of corporate and financial sector debt. The institutions to do this are now in place. What is needed is the determination and political will to let those institutions do their work despite the very deep sensitivities and entrenched interests that are involved.
The new three-year IMF program that the United States and the international community are pleased to support attests to our desire to move from the Bank Bali scandal [and] attests to the government's commitment to a new start in the financial and corporate restructuring process. But as has become very clear in the authorities' discussion with the international financial institutions, the critical signal that investors will be looking at, that Indonesia's own citizens will be looking at in this regard will not be strong words, but strong actions.
Early concrete examples have the opportunity to be defining. Notably, an early demonstration that IBRA and those involved in its work are able to pursue the full sweep of their mandate independent of outside pressure from whatever quarter. The transfer of a government-owned bank into private sector hands as part of a comprehensive and transparent plan to restructure, privatize, and recapitalize Indonesia's banks, or, where necessary, foreclose on insolvent institutions. Evidence of clear progress on the disposal of bad assets by IBRA, even when this means accepting the previously unacceptable.
Debt whose market value is not going to be realized needs to be written down. Asset disposal should proceed so as to save public resources that are urgently needed elsewhere. The fear of getting low prices in fire sales is understandable. But experience around the world speaks, I think, very clearly that those who resist the market, who resist liquidating assets, find themselves facing even lower prices in the future.
If I might, our own experience in the United States is, I think, suggestive. Our S-and-L crisis was a serious one. Our Resolution Trust Corporation absorbed large quantities of assets. There was a question as to what would be done with those assets. It was clear that they could not be sold at prices that looked very attractive. For a time they were simply warehoused, served as an overhang over the market, and we made very little progress in our financial restructuring. And then, with the courageous decision of some of those with financial responsibility, who were able to act because they had the very strong support of President Bush, a decision was made to start liquidating those assets. To do so in the recognition that some would probably buy them at prices that would turn out to be very attractive and make profits, but that in turn would be the inducement which would lead the market mechanism to function again. And our financial system was repaired, and our economy has benefited enormously over the years.
Further crucial steps include demonstration of willingness to see foreign investors as a crucial part of a solution to Indonesia's corporate and financial sector debt problems, and not a part of a problem. Experience around the world suggests that foreign banks can be an important contributor to financial reform, in part as suppliers of capital, but even more as suppliers of resilience, diversification and knowledge.
One thing I know that many foreign investors will be looking at very carefully is the decisive and evenhanded use of IBRA's extra-judicial powers to bring debtors to the table. After a long time in which these powers have largely been inoperative, it must be seen to go after uncooperative debtors regardless of their political connections.
In those cases where IBRA does not represent the major source of credits, it will be important for the Jakarta Initiative Task Force to have the resources and the mandate to bring reluctant debtors to the table.
Let me say finally that if all this is to work, it is crucial that people have confidence in the integrity of rule of law. The rule of law ultimately depends on individuals. It depends on those who are entrusted by a society with the responsibility to serve as judges. And so, investigation and prosecution of judges who have engaged in corrupt practices is essential. The word must go out that, in a new Indonesia, no one is above the law and the laws will be fairly enforced.
As I have suggested here, more effective management of financial and corporate restructuring takes on added urgency today, because every rupiah wasted propping up the institutions of the old Indonesia is a rupiah that could be invested in the institutions of the future.
You know, there was a time when economists who thought about the process of economic development thought that what it was all about was physical capital, thought it was all about having the right kind of private sector and financial institutions and banks that could support capital. And it is clear from experiences in recent years in Asia that those are a necessary condition for economic success. But we have also found, and I think we will find ever more in the global economy, that as capital is mobile across countries, as technology is mobile across countries, national economic success will depend on more than physical capital. It will indeed depend particularly crucially on a nation's human capital.
One of the great successes of Indonesia's economic development between the 1970s and the mid-1990s was that it was, in important respects, human capital-led. Education rates improved very strongly, literacy rates rose, families were strengthened, poverty rates came down. Now, in a more difficult economic environment it will be particularly important that Indonesia continue to invest effectively and strongly in its people. That means building on past successes in community-based provision of basic social services, with greater decentralization and transparency, and wider participation to command credibility and popular trust. It means maintaining and extending the impressive efforts that have been made to keep children in schools through the crisis, an investment that will pay off many times over in the years to come. It means a new focus on greater and more effective provisions of critical health services, which have perhaps been hit hardest by the crisis in recent years.
But Indonesia has an opportunity now, as a democracy, to carry on these programs in ways that can be even more effective than the way they were carried on in the past. Around the world, whether it is with welfare reform in the United States, whether it is with social policies in Europe, whether it is in Latin America or in Asia, we are finding that the strength of a society depends, beyond its human capital, on its social capital. It depends upon the strength of its organizations outside of the organization that represents government.
We have very often found that non-governmental organizations can be the most effective purveyors of social services, that they can build economic strength, not from the top down, but from the bottom up. I saw that today where I saw a group of non-governmental organizations that were effectively distributing rice building on support they received from the minister and from the government to 150,000 people. That network of support had been set up in just relatively few months.
The strength of a society will depend on its physical capital, it will depend on its human capital, and it will also depend upon its social capital: the quality of its organizations and citizens. That is why, in our own support, we are putting so much emphasis on strengthening non-governmental organizations, and it is why we applaud the Indonesian Government and the Indonesians' president who, perhaps more than any other leader in the world, can bring experience and credibility to this question, on his reliance on non-governmental organizations as a crucial part of social support.
I have stressed today that Indonesia's most crucial challenges, it seems to me -- as someone looking at this situation -- are those of institution building and political leadership. As all of those with whom I have discussed these issues in the Indonesian Government know and recognize, these are challenges that can only be met internally. Nations in this new global economy shape their own destinies by their own choices.
We in the United States and the international community more broadly, can, in the context of united and determined new leadership, provide support that can help maximize the extent and prospect of success.
Indonesia's supporters are scheduled to meet here in Jakarta at the start of next month for a historic session of the Consultative Group on Indonesia. I hope and anticipate that the broad themes of institutional reform and a just system of government that I have discussed today will feature heavily in the discussions, and I am confident that the United States and all the CGI members will be eager to support the new government's initiative in this broad and crucial area.
In the context of continued reforms, we in the United States will continue to work bilaterally on a wide range of fronts to support lasting change in Indonesia. We hope over the next several years to expand significantly our bilateral financial support from the $95 million dollars that was provided last year.
The most important component of our bilateral support, though, is not the dollars provided. It is, we hope, the quality of the technical assistance that we are able to provide, the quality of the examples we are able to suggest, the quality of the friendships that we are able to build.
I am pleased to be able to tell you that in the crucial area of financial restructuring there is right now a United States mission, including representatives from the Treasury Department -- some very able people -- who are working to determine how we can best provide technical assistance drawing on our own experiences with respect to the financial challenges you face.
We in the United States will also work with the multilateral institutions to ensure that Indonesia gets the support that it wants, and it needs. One of the things that I have been most encouraged by in the dialogue that we have had with the Indonesian Government is their recognition that what Indonesia can succeed best by doing is building economic strength from within. The international financial support can make a contribution, but that it should be a temporary contribution. A government building a new economy for the future needs to be very responsible and careful about the debts with which it shackles its successors. That recognition has been most welcome. I think the international community and Indonesia have been able to agree on an effective program that will result in the flow of more than $10 billion from the multilateral institutions to Indonesia over the next three years, but is predicated -- not at the international community's insistence, but at Indonesia's insistence -- on the recognition that debt should only be taken on to the extent that it can be used wisely and invested prudently.
One crucial part of working through a financial problem of the kind that Indonesia has faced in recent years is handling debt obligations which are coming due. At the private sector level that, of course, will be -- importantly -- the work of IBRA. That is, perhaps, the most important key to Indonesian economic recovery.
It will also be crucial to manage responsibly the public sector debts of Indonesia that are coming due, and so I am pleased to say that in the context of the new government's commitment to far- reaching economic and institutional reform, the United States is ready to work with Paris Club creditors to achieve a generous rescheduling of Indonesia's obligations. This will provide a further two years of relief to strengthen the government's capacity to carry through on an agenda that we all share. These steps underline our support for a new Indonesia and our belief that, in the right circumstances, external support can make an important difference.
Leadership from the very top has seldom been more important to a country's future, to a country's democracy, than it will be to Indonesia today. That's why I was so pleased with my discussions this morning with President Wahid, where he recognized and stressed the importance of speed, openness, transparency, and political commitment as the government works to implement its reform agenda in the months ahead.
The events of recent years have highlighted fundamental elements of the Indonesian model that needed to adapt for a new century. Equally, it has presented the people in your country with a rare opportunity to renew their nation by strengthening policies, rebuilding institutions, investing in the people and emerging with a more resilient and inclusive society than there has ever been.
This is a project in which the United States of America has a major stake, and we will stand with you as you carry it out. Thank you very much.
Q: You would like us to enforce the law, especially in fighting corruption. Could you explore a little bit, specifically, from a tax point of view, from a criminal point of view, from perhaps blocking accounts in the United States, the specific elements of law enforcement and empowering a society?
SUMMERS: I am wondering about the questions I will get from the people who were not my old friends and old classmates. I remember back in class you always used to ask the hard questions and you used to put the people who were teaching the class on the spot. This isn't a class, but you have asked a hard and a very important question.
Let me first just say that we are absolutely committed to the enforcement of the U.S. Foreign Corrupt Practices Act. This is something that Ambassador Gelbard has taken a particularly strong interest in, and if there is a perception that there are violations, I am sure there is a place to take them. I can assure you that credible allegations will be seriously pursued.
Let me say second that there are a set of techniques for addressing financial crime. I mentioned the technical assistance area where we are working to provide support. One of the areas in which support has been requested has been with respect to techniques of investigation of financial crime -- what's come to be known as financial accounting. And we will be providing, at their request, our Indonesian colleagues technical advice in this field of financial accounting.
Let me say third that one of the things I have done in my time as Secretary of the Treasury is to try and put increased emphasis in United States law enforcement on the set of issues that relate to money laundering -- the deposit of dirty money into what previously had been clean institutions. It is a very, very complex area and I don't want to exaggerate the kind of progress that can be made in the short run. But, through a combination of techniques, through some broadening of our statutes, my hope would be that we would be more effective in the future in responding to some of these concerns than we have been in the past.
But if I could say one final thing about corruption -- having studied this in some detail in our own history and to a lesser extent around the world. Law enforcement is important and something that has to be done. But sunlight is the best disinfectant. Someone said once, "conscience is the knowledge that someone is watching." And a national commitment to transparency, whether it is in judicial procedures where matters are resolved, whether it is in the reporting of corporate accounts, whether it is in the disclosure of bank financial practices, whether it is contracts and foreign firms, corruption is not going to be eradicated overnight.
But I would say to you that if much more was more visible to be observed, there would be much less corruption. That slightly indirect approach to the problem is, I suspect, the one that will over time in your country, as in other countries, prove to be most availing.
Q: By the gradual development of East Timor, it is going to become independent. What is the policy of the American government as to whether it will give East Timor any privilege on the quota or possibly, duty so that Indonesians can invest in East Timor together with the Americans, for the benefit of the world?
What is your advice for the Indonesian textile sector to prepare itself before the year 2005 so that there will be no bloodbath in Bangladesh, in Indonesia, and so on because of the difficulties in the textile sector?
SUMMERS: With respect to your first question, having to do with the allocation of textile quotas between Indonesia and East Timor, let me give you an honest answer: I do not know. I just don't know what the policy will be in that area.
With respect to China's accession to the World Trade Organization, which is something that is very important to the United States, there are in the context of the agreement that the United States negotiated with China a set of rules governing the flow of textile exports which do provide some protection against an explosive increase and I think therefore responsive to some of our domestic concerns and also responsive to the concern that you raised. I would say to you generally that, in the new global economy that we are creating, I think that countries and industries within countries will be more successful if they concentrate on producing the most cost-effective products and becoming the preferred world supplier in particular niches that are particularly important, rather than achieving arbitrarily allocated government quota shares. It is my fervent hope that in the years ahead we will see a kind of global economic evolution in which there will be fewer goods subjected to quota and quotas will restrict less, and market forces will have increasingly to do with patterns of trade, which I think is very much in the interests of all of our economies.
Q: The currency takeover by the OPIC, after that we don't know where to go to resolve my disputed bill. You know that $40 million is not paid by Cal Energy -- you know that for them $40 million is just petty cash and for Indonesia, we are a small company. Maybe I should go to the U.S. embassy. We already wrote a letter but until now there is no answer. Could you give some idea?
SUMMERS: All eyes turn to Mr. Gelbard at this moment. There are some problems that the United States Treasury does not have to address and I would request that you communicate your concern to the embassy and I would, without obviously trying to make any judgments at all about the merits of a situation that I don't understand, I would request that Mr. Gelbard do what I know he will do, and arrange to see that you receive a prompt response with respect to your expression of concern.
I think that the successful resolutions of these kinds of issues is very important to all of us. I might just mention that there is one set of very vexing issues having to do with the Independent Power Producers where, my understanding is, that some progress has been made in terms of a mutual commitment to commercial negotiation which I hope can produce an outcome that, given the realities of the situation, is satisfactory on both sides.
Thank you very much. (end transcript)
(Distributed by the Office of International Information Programs, U.S. Department of State)
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