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Leadership and Indonesia’s Future

Speech by Gita Wirjawan to managers of PricewaterhouseCoopers, Bali, August 3, 2009

Ladies and gentlemen,

I would like to thank Pak Dwi, head of PwC Human Capital, for inviting me to speak.

Seeing you all here puts a smile on my face. What I see in all of you are two things: potential and opportunity. Potential because you have been selected as the most promising future leaders by PwC, “the Olympians of the business word” as Jack Welch likes to say, and have the potential to make a lasting impact to your firm and society at large. Opportunity because producing the minds though a variety of ways such this program will build human capital so that Indonesia can play a greater leadership role in the world, commensurate with its size and history.

The theme of my talk is “grooming future leaders”. Before I start, let me blunt about one thing: leadership is hard. You can read it in a book, but it will not get you far. To truly understand the essence of leadership and how to become a leader requires ruthless optimism, risk-taking and sensitivity to stakeholders around you.

My Story

First, let me tell you a story, or two, about my own experience.

At the age of 18, I left India for America with just US$3,000 and duffel bag. It was a big decision – a pivotal one – which changed my life forever. I had traveled to Bangladesh and India with my family, and spent a number of years there where my father worked with the World Health Organization.

But the fascination with America was just too great. As a boy growing up, I had always dreamt of the American dream. I had always wondered what made America the strongest military and economic power in the world. I had always wondered about the allure of American soft power. I was intent on getting the answers.

I got my chance and freedom in 1983. Papa pulled me aside one day with these parting words: “Git, here’s 3,000 dollars. You are my boy. I know you will do us proud.” I sometimes wondered how I survived those 10 years alone in the US. I put myself through university by cleaning sewage, washing dishes, flipping burgers and playing the piano. It was a decade of survival. But those years, I will never forget because I made me strong, strong enough to realize that if you want something, you will have to fight for it even if the odds are stacked against you.

The second story builds on the first.

Armed with an MBA and a CPA, I thought I was going to conquer Wall Street and America. I was so wrong. I was brought down to earth. I joined an accounting company in Florida. And on the first day I started as a fresh accountant, my boss threw a book at me: “You think you are damn star aint you with all your flashy qualification. Think again boy, and welcome to the real world!” I won’t forget those days. I worked 18-hours daily. I probably clocked 2,200 hours a year. I was making ends meet with just US$2,000 a month. Some-times, I just cried. I cried because I didn’t know if I could cut it. But I did. The experience – however much I hated it back then – made me stronger. Once again, my survival instincts were being tested. And I got through.

The two stories are really about sheer drive, determination and leadership. My formative experiences have shaped my views on what leadership is all about. For me, to be a leader, you need three related elements:

These three elements were critical in driving me even through periods when adversity was staring in the face. They remained equally important when I worked as an investment banker and now, an entrepreneur.

As an investment banker, most of your time is spent pacifying stakeholders involved in transactions. Normally, there is a lot of misalignment of interests among management, shareholders, employees and regulatory bodies. All the big deals I did – including SingTel’s US$1 billion acquisition of Telkomsel, the US$800 million IPO of Bank Negara Indonesia, and Hutchison Port Holdings US$600 million acquisition of ICTSI – involved considerable calibration of different voices and interests. There are forces out there who will say a deal will never work – and it is your job to make sure it does if the financial bottom line makes sense. Again, I come back to this point: never back down in the face of adversity or differing views.

Risk taking is a lot greater as an entrepreneur. The downsides involve not just losing your job but capital you’ve put in and potentially other losses. When I established Ancora International, an investment firm, I knew I was taking a risk. But some of the lessons I learnt in my younger days have been instrumental in seeing the company grow. Success in business requires common sense, lobbying skills and most importantly, the balls to make tough decisions, elements which also dovetail with my view on what leadership is all about.

Indonesia’s Story

All of you here today have the potential to become Indonesia’s next generation of leaders. We have certainly come a long way since the fall of Suharto in 1998. Today, Indonesia enjoys relative peace and economic development, and is increasingly being compared to middle-income developing nations like Brazil, India and Mexico.

There is a greater sense of normalcy in Indonesia.

The country remains structurally stable, the administration is moderate, and the pro-reform leadership is likely to remain in place after the 2009 elections.

President Susilo Bambang Yudhoyono is perceived as a reformer who has put together a competent economic team that is fiscally conservative. Political institutions are still weak but a process is underway to build them.

Significantly, the genie of violence is back in the bottle. Concerns of country breaking up is a thing of the past. There is no evidence today that active centrifugal forces can bring about “balkanization”. There are simmering tensions in Aceh and Papua from separatist elements but do not seem to have the demographic weight or military force to challenge Jakarta.

Indonesia has gone past the stage where it can be held ransom to wild swings of volatility across the distended archipelago.

And Indonesia is the only country in the region that has bucked the trend of a democracy in trouble. Despite being a messy experiment at times, democracy is blossoming in a country that was once ruled with an iron hand for 30 years.

The Economist, in an recent article titled The Indonesian Surprise, maintained that “the world’s biggest Muslim country has changed from an authoritarian basket to regional role model… It has a fair claim to be Southeast Asia’s only fully functioning democracy”.

Politics cannot but help carry a weight of significance. But economic stability, the second indicator of normalcy, remains the principal driver in the grand scheme.

Against the backdrop of a global financial crisis that Alan Greenspan described as a “once-in-a-century credit tsunami”, Indonesia is fast emerging as a shining light in the region. Indonesia appears to be riding out the economic storm. Certainly, the slump in the stock market and the pronounced weakness of the rupiah shows Indonesia is not immune.

The government has said that growth might be lower in 2009, hovering between 4.5 to 5.5 percent. Bank Indonesia projects a drop in economic growth in 2009 to around 4.0 per cent with downside risk if the global economic downturn is greater than predicted. But this is still much better than most other Asian countries.

In part, relative economic success is a result of the effectiveness of the government which has focused on tight fiscal discipline and debt reduction. Today, Indonesia has a healthy balance sheet with US$58 billion in reserves and a government debt representing less than 35 per cent of GDP – compared to 77 per cent of the GDP in 2001. This is the lowest among Asean countries, aside from Singapore which has no government debt.

BI has cut its key interest rate by a total of 2.5 per cent since December last year to 6.75 percent in a bid to spur lending and investment. As such, Indonesia offers a healthy 6.75 percentage-point premium over the US fed funds rate, which should help maintain confidence in Southeast Asia’s biggest economy.

These initiatives have allowed Dr Yudhoyono and his economic team to push forward a large fiscal stimulus that would ease some of the pressure on unemployment. He has announced plans to spend more than Rp 72 trillion on infrastructure and other projects to boost growth and create jobs in a country where the unemployment rate is the highest in Asia. But government spending, along with a resilient FDI ensures that the Indonesian economy appear to be on the front foot.

Compared to other regional states, Indonesia today boasts the highest consumer confidence index in the world, according to a survey by the Nielsen Company. The recent survey showed Indonesia topped Nielsen’s global consumer confidence index with 104 points, followed by Denmark (102 points) and India (99 points).

Indonesia is still vulnerable to external finances though. Efforts to raise foreign direct investment and export competitiveness will likely remain a challenge against a backdrop of palpable weakness in resource-based activities, as well as poor investor appetite for risk. These risks, however, are offset by the strength of Jakarta’s fiscal conservativeness which has been instrumental in buffering the system from external shocks.

It is also explained by the fact that Indonesia is not export-dependent. China, Japan, South Korea, Singapore, and to a lesser extent Malaysia and Thailand, are reeling as exports evaporate. Just a small chunk of Indonesia’s GDP – 22 percent – relies on exports. As a result, Indonesia is doing much better than its neighbors.

Major challenges remain for Indonesia. The most glaring is poverty. The benefits of macroeconomic growth have not trickled down. Despite Jakarta’s economic vitality and the booming growth in other big cities, much of Indonesia remains poor.

A second problem is corruption. Endemic corruption has long dragged on Indonesia’s economic development and taken a heavy toll on foreign investor confidence. The fact remains that it is still ranked as one of the world’s most corrupt nations. Indonesia ranked 143 out of 179 countries surveyed in Transparency International’s 2007 Corruption Perception Index.

Your Story and Indonesia’s Future

I’ve outlined these obstables to highlight some of the challenges we face. It is up to all of you to take ownership of the situation, and not just be passive bystanders. How Indonesia evolves in the next several decades will depend fundamentally on your leadership. You will be scripting Indonesia’s future.

Let me say this: we need to give Indonesia its due worth by taking a long-term view.

In his new book Common Wealth, Jeffrey Sachs writes about a historic shift in the center of gravity in the world economy. Since 1800, the North Atlantic economies have been the world’s dominant economies and political powers. The cataclysms of World War I, the Great Depression, and World War II did not shake the dominance of the North Atlantic economies, although they did shift the balance of geopolitical influence away from Europe, especially the British Empire, to the United States. Now, after many centuries, the unquestioned economic and geopolitical dominance of the North Atlantic seem to be weakening.

It is natural that Asia should be the center of gravity of the world economy, since it is the center of gravity of the global population. In 1820, Asia constituted perhaps 56 percent of the world economy. With the onset of industrialization in Europe and North America, Asia’s share declined to 28 per cent by 1900. With Asia in turmoil in the first half of the 20th century, its share declined further, to reach a low point of around 18 percent of the world’s output in 1950. Then began the great convergence. Asia’s share of world income recovered to around 23 percent in 1970 and 38 percent by 2000. According to Sachs, Asia’s share of the global income would rise to around 49 percent by 2025 and to around 54 percent by 2050.

The assessment is that the global world product will rise by 6.3 percent, from around US$67 trillion in 2005 to around US$420 trillion in 2050. Asia’s share will be about US$220 trillion. China and India, given their massive population – and growth trajectory – will undoubtedly command a large share of this pie. But consider another rising regional power Indonesia. Today, it has a US$550 billion economy. If it grows at 6-7 percent in real terms, and 13-14 percent in nominal terms, then it is looking at an economy worth US$6-7 trillion in 20 years’ time — the size of the current Japanese economy. If history is a linear progression, in 2050, Indonesia might well be a US$40 trillion economy.

Certainly, fighting rampant corruption and revising labor and laws will help spur growth in Indonesia. Infrastructure development is also key. One of the reasons for China’s growth over the past 20 years has been massive spending in infrastructure. And it is not over. Over the next two years, China will spend more than US$260 billion on highways, bridges, ports and airports. In the past 20 years, China has built 60,000 km of toll roads. Indonesia has built just 800 km in the last 30 years.

Land reform, a large dedicated budget and single-minded government focus could set the stage for an unprecedented surge in infrastructure development in Indonesia. Incentivizing the private sector to participate in this revolution could attract additional capital and allow for better management. Net foreign direct investment (FDI) in Indonesia was US$1.1 billion in 2007, which stands at just 0.3 percent of GDP. This compares to US$121.4 billion in China, or 3.7 percent of GDP. In India, net FDI was 1.4 percent of GDP, Thailand 3.2 percent, Singapore 7.3 percent, and Vietnam 9.3 percent.

In all this, education will be the key. Producing the best minds and achieving universal education enrollment are imperatives. It will build human capital so that Indonesia can play a greater leadership role in the world, commensurate with its size and history. Drawing on China as an example again, Beijing has produced 240,000 PhDs over the last 30 years. By 2010, it will have more doctorates than any other country in the world. And this includes the United States. Besides PhDs, the Chinese have also been awarded 1.9 million master’s degrees, and 14.1 million bachelor’s degrees during the same period.

Indonesia has produced just a tiny fraction of these numbers. A study by McKinsey suggests that Indonesia needs 22,000 leaders to ensure prosperity for the next 20 years. We need more, about 100,000.

How do you groom future generations of leaders?

Let me start with a quote from history: “Think big, do small, and do it now.” We can apply this dictum to breeding future leaders in Indonesia.

Our strategic objective is ambitious, perhaps lofty in a country that has never established a comprehensive system to identify and develop leaders. But we need to start now, and start small in the first instance.

The first phase in this 20-year view needs to ensure that one to two per cent of our population – the creme de la creme of Indonesia – will get the best tertiary education at home and abroad so that they will become locomotives of the rest.

We need to create a highly-educated elite whose thinking and best practices in key public and private sector appointments will undoubtedly percolate downwards. This group of leaders will be Indonesia’s compass.

How do we develop this new generation? The answer is simple. We identify this one to two percent of our population, and invest heavily in them. This is what my foundation is doing. We give scholarships for Indonesians to the best universities at home and abroad.

There is a second track we should consider that runs coterminously with the first. We should also invest heavily in basic education, which is the second phase of this long-term view.

Indonesia spends up to 20 per cent of its budget on education. This level is almost on par with developing countries and the Organization for Economic Cooperation and Development nations. However, Indonesia’s spending level is still low compared to its neighbors, and since the 1980s, we have spent comparatively less in education, resulting in a deterioration of school buildings and contributing to persistently low learning outcomes by students.

True, Indonesia is close to achieving universal education enrollment. Providing access to primary school education is no longer the main development challenge, although it remains vital to target the remaining eight to 10 per cent of children not yet in primary school. The government is rightly addressing the investment gaps in primary education, but going forward, the focus should turn towards improving the quality of education and increasing enrollments in secondary schools.

Regional discrepancies in access and quality can be reduced through better targeting. Because there are significant differences in educational access and quality across the country, the government could allocate educational funds to provide these lagging districts and provinces sufficient resources to catch up with better performing regions. Poorer local governments tend to spend more than 35 per cent of their budgets on the education sector, but their absolute spending levels are low in comparison with wealthier regions.

The money should go towards increasing basic infrastructure for schools. Let’s not forget teachers. Their overall welfare is lagging – and we should make a concerted attempt to pay them better.

The bottomline is this: we need to step up investments or funding to improve infrastructure for education.

We should also give them better training. My foundation is currently working with another to train teachers across the archipelago, so that they can be deployed to any part of Indonesia to serve communities.

All these will have a cumulative effect on raising educational levels in Indonesia. It also increases our talent pool exponentially.

It will light a fire in the minds of the young. The hope ultimately is to build human capital that will give Indonesia that cutting edge in a globalized world.

Indeed, the future is bright for Indonesia. There is enough wealth creation here to ensure there will be some degree of refinement in the political process. Increasingly, the wealthy in the country are taking ownership of public services.

This is more good than bad. It fosters better policy making and implementation with respect to wealth distribution. This can only lead to better education, healthcare, and infrastructure. All this will multiply economic growth.

Singapore transformed itself from a swampy Third World seaport into a First World financial dynamo in 30 years. In 1965, the odds were stacked against it. With the passage of time, Indonesia might also well surprise the world.

Ruthless optimism will get us there.

Thank you.