U.S.-Indonesian Economic Relations and the Rule of Law
Remarks by Ambassador Robert S. Gelbard

November 14, 2000  

(U.S. Ambassador remarks on One Day Seminar " Law, Reforms and its Implementation in the Society", Puri Agung Sahid Jaya Hotel, Tuesday, November 14, 2000 ) 

Indonesian version

Speaker Tandjung, distinguished guests, ladies and gentlemen:

Many thanks are due to Speaker Akbar Tandjung for organizing this meeting.  There is a great deal of confusion in the public mind right now about the U.S. Government's policies toward Indonesia and the state of our bilateral relationship.  Our meeting today, I hope, will prove a productive step in the process of ensuring that both our governments and our peoples have the clearest possible understanding of these important questions and the value we place on our bilateral relationship.

U.S. Goals

The single most important fact is that the United States firmly supports the same goals as Indonesians themselves do for this vast and diverse country -- democratization, sustainable economic growth, and territorial integrity. 

·        A democratic and prosperous Indonesia that extends from Sabang to Merauke is not only in Indonesia's national interest.  It is squarely in the U.S. national interest as well.  Democratic government and economic well-being are the most effective guarantors of domestic stability anywhere.  In Indonesia's case, domestic tranquility translates into greater peace and stability in Southeast Asia and the Asia-Pacific region as a whole. 

·        Those who claim that foreign governments seek to destabilize or encourage the disintegration of Indonesia in order to promote some undefined goal of their own clearly have not thought the matter through rationally.  A moment's reflection reveals that instability in Indonesia would serve no national interest of the United States or other friends of Indonesia.  To the contrary, instability here would be an important potential regional destabilizer.  A destabilized Southeast Asia and Asia-Pacific region would undermine our own national security.

How to Achieve Shared Objectives

Realizing the broad goals that our nations share requires intensive, long-term efforts on both sides.  The first, and easiest, step is to identify the issues.  The list of issues that Indonesia is addressing with U.S. and other international support is long.

I would like to elaborate briefly on one area of cooperation -- establishing the foundations for sustainable economic growth.  The 1997 financial crisis underlined the importance of sound economic policies to domestic and global well-being -- and the cost of imprudence and poor governance.  The lesson learned is not that free-market policies are wrong.  The lesson is that strong markets require good governance, good rules, and good oversight.  Indonesia is well advanced in the process of improving existing rules, from anti-monopoly legislation to the new central bank law.  Indonesia is now building the institutions and practices that will discourage future losses of domestic and international confidence in Indonesia's economic management.

The second step to achieving shared goals is developing specific programs.  The U.S. Government has offered to support Indonesia's realization of its goals through the full range of instruments available to us.  For example,   

·        since the onset of the crisis, we have employed our voice and vote in the international financial institutions (the IMF, the World Bank, and the Asian Development Bank) to support Indonesia's economic reform agenda;

·        we have also worked in concert with the Government of Indonesia and other donors through the Consultative Group on Indonesia, recently pledging assistance that is expected to exceed $270 million in U.S. fiscal year 2001;

·        much of our support is grants to non-governmental institutions that held forward reforms from the grassroots and support a vibrant civil society;

·        we are working with the National Police to develop training programs in key areas such as community-based policing, counter-terrorism, counter-narcotics, and managing their transition from a militaristic to civilian police force;

·        over the past three years, the United States has provided more than $350 million in grant food assistance;

·        the U.S. has helped maintain critical health, HIV/AIDS, and family planning programs during extreme GOI budgetary stress;

·        we have collaborated with the GOI and civil society to devise approaches for reconciliation of troubled areas, including investigating integrated programs to address those areas' humanitarian, justice, and development needs;

·        U.S. food and humanitarian assistance programs help mitigate the effects of crises in West Timor, Papua, Aceh, and the Moluccas;

·        we have also responded to provide emergency food, health care, and other critical services to victims of natural disasters, such as the recent landslides in Central Java;

·        we have financed the services of dozens of experts to share their experience in an incredibly broad array of areas, from unleaded gas to information technology, from local taxation regimes to development of parliamentary staffs and libraries.              

U.S.-Indonesian Economic Relations 

Turning specifically to today's theme, bilateral economic relations and the rule of law, the U.S. Government deploys its resources to support Indonesia's return to prosperity.  We are working with Indonesia to achieve its objective of sustainable growth that will create employment and raise its people's incomes.  

The main vehicle will continue to be the private sector, which can mobilize the most resources and employ them most efficiently.  Thus, trade and investment ties are the heart of our bilateral economic relationship.  As both our economies become more internationally minded and as Indonesia adopted increasingly market-based economic policies, those ties have steadily strengthened.

·        Until the onset of the economic crisis, two-way trade grew at impressive rates.  In 1996, it totaled $12.2 billion -- this rose to $13.7 billion in 1997.  The crisis forced Indonesia to curtail imports drastically and U.S. exports to Indonesia dropped by almost 60 percent, from $4.5 billion in 1997 to $1.9 billion in 1999.  U.S. exports to Indonesia began to grow again this year.  This turn-around was an important sign that Indonesia's economy had stabilized and that consumer and export-industry demand had begun to recover.  When investment-related imports increase, we can start to hope that Indonesia is on the road toward fresh and sustained growth.

·        Even as Indonesia's imports from the U.S. plummeted, its exports to the U.S. continued to grow.  Where Indonesia's exports totaled $8.2 billion in 1996, they rose steadily to $9.5 billion in 1999.  They rose by a further 8 percent in the first half of 2000 compared to the first half of 1999.

·        The United States remains an important destination for Indonesia's non-oil and gas exports.  In the first half of this year, in fact, we edged out all other countries and have become the largest market for Indonesia's non-oil and gas exports.  According to BPS data, the United States bought 17 percent of Indonesia's non-oil and gas exports between January and June of this year.  These exports are particularly important for the local economy since they mean jobs. 

Promoting Private Investment

Mobilizing private sector capital to restart the engines of growth is essential to Indonesia's economic recovery. No successful economy counts on public sector funding alone to stimulate the creation of jobs that deliver the most immediate and enduring benefits to its people.  Reliance on private funds to spur economic growth permits governments to concentrate their resources in areas for which they take primary responsibility, in particular provision of social safety net programs for the poor and vulnerable.

Predictability and Investment

The nexus between growth and the rule of law is very clear.  Global competition for private investment is fierce.  Investors base their investment choices on many factors, among which predictability is paramount.  Can the potential investor predict with confidence that a particular country recognizes internationally accepted rules of behavior, such as are embodied in international contract law and practice?  Is there certainty that the investor will have sure legal recourse in the event of a dispute, and that dispute resolution decisions will be honored?  Predictability in these basic areas has an important positive weight in investment decision equations and reduces the cost of project capital.

A civil service that adheres to professional and ethical standards and a well functioning judicial system are essential building blocks of predictability.  Indonesia's new government has explicitly recognized the aspiration of all Indonesians for a more just political and economic system in which law reigns supreme.  Indonesia has taken magnificent strides in this direction -- the June 1999 free and fair parliamentary elections, the October 1999 transparent selection of the current President and Vice President by the People's Consultative Assembly in nationally televised proceedings, greater press freedom, ratification of key international labor conventions are just a few examples.

Inherited Issues

As with new governments everywhere, Indonesia must deal with inherited issues and problems, even as it seeks to introduce its own policies and programs.  Many of these problems are complex and sensitive and may take years to resolve.  On the economic side, the greatest inherited burdens are the banking sector's collapse and private corporate debt.  Issues associated with these -- most notably accountability and governance -- come to a head in the Indonesian Bank Restructuring Agency (IBRA or BPPN). 

The costs to the Indonesian people's future welfare of mishandling these issues are immense.  Every debtor who is let off the hook, every asset that is allowed to continue to deteriorate in government custody, every scandal that damages investor confidence, every manipulation of the justice system for private gain has serious consequences.  Budget revenues will cover bank recapitalization costs, not finance schools and clinics.  Investors will not come today, which means fewer jobs and lower incomes tomorrow.

The Particular Case of Contracts        

Some of the more severe inherited challenges involve contracts, treatment of which future investors regard as a bellwether of their welcome in Indonesia.  New investors will not bring their capital if they believe that existing investors are not getting a fair shake.  This is a compelling reason to exercise care in approaching contract disputes. 

The contract issues with the highest profile in Indonesia involve Independent Power Producer (IPP) projects, but dozens of other contract issues span the full spectrum of economic and commercial activity.  Contract problems came to the fore for a variety of reasons, including the devastating impact of the economic and financial crisis since mid-1997 and changes of government amid popular fury against real and perceived instances of past corruption, collusion, and nepotism.  The combination of enormous economic disruption and political change has complicated efforts both to distinguish real from imagined problems and to debate the contract cases' aspects -- commercial, legal, KKN -- on their individual merits.      

There is considerable confusion about the role of foreign governments, including the U.S. Government, in the IPP and other contract problems.  Official export credit and investment insurance agencies from many countries, including the United States, joined their private sector counterparts to provide financial support for various infrastructure IPP projects.  Such support endorsed the Indonesian Government's decision to mobilize private capital for the provision of public infrastructure. 

Since economic turmoil struck Indonesia, the United States Government has consistently supported establishment of a process through which payment and contract issues could be resolved in a transparent, objective, and constructive manner that balanced Indonesia's needs with its goal of encouraging foreign investment.  The U.S. Government's point in supporting a process for amicable resolution was not that earlier contracts should be implemented to the letter (a commercial issue), but that they should be treated honorably.  The point was -- and is -- that, if parties to the contracts are willing to sit at the table, negotiations can yield mutually acceptable outcomes.             

Establishing the Foundation for Sustainable Growth 

In the boom years, Indonesia employed its wealth of natural and human resources to create an impressive manufacturing and exporting economy supported by some of the world's most modern infrastructure.  As the economic crisis demonstrated, however, the boom was not sustainable.  The fault-line lay in the absence of arms-length regulators with convincing enforcement powers that were even-handedly and consistently exercised.

 Indonesia is now constructing the judicial and regulatory foundations to complement its resource endowment, huge talented labor pool, existing achievements in agricultural, industrial, and services development, and established market shares.  This endeavor will pay dividends in all walks of life.  For the economy, it will create a new investment climate where certainty about the rules and their enforcement will replace reliance on individuals to provide security.  This solid foundation will make sustainable economic growth possible. The United States stands ready to support Indonesia's efforts.

Indonesian version