IDEA Research Seminar — Muhammad Chatib Basri

0:00I think we all think it's relevant for our own work to think about, you know, the actual, actual policies that are happening around the world, what are the questions that policymakers are struggling with. And, you know, we think really hard about who's the kind of the right guest at the right moment in time to bring. And so last year, I was at a conference in Spain, and I served on a panel with Ahmad Braseri, who's You've opened up in our keynote today. And, the session was about the shifts in the global landscape that's happening at the moment, that we're all familiar with. And what Dr. Bossary was able to do in that session is to bring in the experiences from Indonesia, but also to take this longer perspective on Indonesia's experience with big shifts in industrial and trade policy. And so, I kind of made a mental note that he's kind of the perfect guest to speak to us here. And why is that? He shares our background, so he has a PhD in economics. economics from ANU and has taught at the Indonesian University. He writes academic papers on the Indonesian economy, but he has also transcended to the highest levels of policymaking in Indonesia. So he's a former Minister of Finance of Indonesia, he's served as the former chairman of the Investment Coordinating Board in Indonesia, serves on many, high-level commissions advising the president, who at the time, last year, he had, we shared offline some conversations that he had, following the U.S. Liberation Day tariffs, and he was involved on the Indonesian side.

1:41starting… jump-starting negotiations with the US government. So, I thought, you know, this is kind of the perfect guess, in some sense, to someone who has a background in economics, and is used to thinking rigorously about, the impacts of economic policy, but has also been in the trenches implementing it. So, it's our pleasure to introduce you, and I think what we'll do is we'll go for about an hour, and he's We're gonna talk maybe for 30, 40 minutes or so, and then open up to questions and answers, and… to talk to us about, Indonesia's experience with, with the trade and industrial policy. And I'll have, cards here. Well, very good afternoon to all of you. Thank you very much, I mean, for your very kind of introduction. both of us are members of the MAS, the Mutual Admiration Society, so he scratched my back, and I need to scratch his back as well. This afternoon, I would like to talk about the industrial policy in Indonesia, and the title of my presentation is

2:50tough love for industrial policy, what 50 years of Indonesian trade policy teach about making it work. All for two days. I believe that you have discussed about the empirical strategy, identification, the first-order condition. What I'm going to talk in the next 30 to 40 minutes is about What has happened after you publish your paper? What happened when your coefficients met the ministers, cronies, and also the president? So, rather than talking about the, you know, more on the theoretical framework, let me share an experience about Indonesia, because I do believe that if you are talking about the industrial policy, it's a combination of both theory and practice. And as old…

3:40jokes goes. In theory, we know everything, but nothing works. In practice, everything works, but we don't know why. Indonesia managed to combine the two. Nothing works, and we don't know. We do know why, that is why I'm trying to sharing our experience on this. So let me, rather than talking from the… political perspective, let me share with you an insight from the cabinet meeting in Indonesia was back in 2013. I was the Minister of Finance at the time. Yeah, and then some emerging markets, including Indonesia, we experience financial shocks, known as steeper Tantrum, if you are familiar with that. country with the high current Econ deficit, facing a problem, capital flow out, share price, and then the currency depreciated sharply, bond, yield rose, so we have to act quickly. Yeah, to respond to that kind of situation, and one of the policies that we introduced was cutting the fuel subsidies.

4:52Yeah, I can explain to you later on. But… This is from the macro perspective. This kind of policy is necessary. But the impact is, it puts up the food prices and also inflation. So, I came up with a proposal at the time. To ease the pressure on the food prices, and also inflation. What about if the government removed the import quota on beef?

5:21and lower the tariff on soybean to zero, because the world price of beef and soybean, much lower than Indonesia. But the problem is, there was two camps in the cabinet, so there was… the dynamic was there. The first camp argued that we need to keep the quota. Just to fix the implementation. The second cam. prefer to do to get rid of the import quota, and then move into tariffs and price triggers. So eventually, My camp was able to convince President Yutayono to end the quarter. So, import regimes, we managed to ease the pressure on the food prices, and inflation was relatively manageable.

6:12So… If you look at this episode. It sounds like a good policy, doesn't it? But the question is, if it was a good policy, why did it take crisis to remove The import quota on beef. And the answer is… political economy. as…

6:36Jean-Claude Juncker beautifully said, the former president of the European Commission, I like to quote him. We all know what to do, we just don't know how to get re-elected after 15. And this is true, because why? Because trade protection creates threats. Rex creates beneficiaries. Beneficiaries will try to do lobby to make sure their government will keep the quota. So the lesson learned from this experience, we were able to remove the import quota on beef because we had a crisis. So the lesson learned was. Giving a protection was easy. But taking away and implement policy was much harder. Of course, I do understand, that is why the title of my presentation is Tough Love for Industrial Policy.

7:26Of course, I do understand that Import code on beef is not an industrial policy. But the political economy is exactly the same. So… Let me talk now about the industrial policy. What I'm afraid is, I don't know whether this is applicable in the Global North, but most of the discussion in the Global South, including in Nsiah, we are debating whether should we do industrial policy or not.

7:55And I think, in my view, this kind of question, maybe wrong, it's a too strong word, but I think this kind of question is not very productive. Why? Because it's coming. can come up with their own, you know, evidence. So, for example, both sides tend to select the cases that prove their prior. So, if we would like to show that international policy work, then we cite that Korea Taiwan. Japan, but if we argue that the industrial policy failures, then we made a case of Malaysia, Argentina, Brazil. So rather than… so the issue is not whether should we do industrial policy or not, but the question is, what kind of industrial policy? Then let me propose a couple of questions on this. The first one is, does the intervention bring the investment?

8:49And I think this is more productive. The second one is, does the investment create capability? Yeah, and last but not least, and can the government withdraw the RAN when performance fails? And I would like to take… one of the case studies in Indonesia, which is now very popular in many countries in the world, about the export ban of nickel. So one thing that I would like to share with you, we introduced export back. Same policy instrument, industrial policy, but different result. Because it works well for nickel, but it doesn't work per balside. So the issue is not about whether should we do industrial policy or not, or should we do export ban or not, then the question is, what kind of policy? So we have to look at this issue in a more granular… yeah?

9:37Now, I have 3 claims here. The first one is… this has to do with the history. based on our experience, the protection went to whoever had the power to ask for it, and not to the industries the economy needed. If you recall, Ahmad during my talk at Spain last year, I mentioned that government is very bad in picking winners, but losers are very good in picking government. That's exactly our, you know, our experience in Nsiah, and then Simiya, and then Chad Baum put it in their trade workbooks, this statement. The second one is about the condition. nickel, in the case of nickel, made the buyer adjust. The China, you know, they come to Indonesia, they need to invest, but with Bauxite, Indonesia adjusted.

10:24Because I'll explain later on. So, same instrument, different market power. So, the second claim is about the condition, in what condition that this strategy work? The third claim is the investment came, but whether it leave anything lasting behind, we still don't know. This is an open question that I would like to share with you. So, three issues that I would like to make a claim on this. First one is history. Talking about the trade protection in Nsiah. Second one is the condition in what strategy can work, and the three is the open questions. So let me start with the history of the trade protection in Indonesia. The most interesting questions on the political economy is. Why did some industries receive more protection than others? And about 25 years ago,

11:18I tested the Grossman and Helpmann state-of-the-art protection for sale, using their formal model. And the result was striking, because I found that trade protection was concentrated in industries dominated by chronic capitalists. Yeah, Konne Capitalist is all the business people, surround the president's heart of the president at the time. I work on the sector of the industry level. But probably because the data is limited. But later on, if I'm not mistaken, Mosvik… Muvik Mubarak and Daniepur Bassari work on the firm level. And they end up with the same conclusion. Yeah, so I… so if any of you later on would like to do it, I would like to, I will encourage you to do, sort of, like, with the better identification problem, etc, strategy, probably this will be… still be a very interesting, topic.

12:13The question is, why? Why this protection was concentrated around the chronic hypothetics? Look at this. All the major business in Indonesia were owned by Suharto's family. or that commemorate, alright, with Suharta's family. So then, somehow, that's explained, yeah, why the state protection was given to the, to Konne capitalists around the Suharto family. So where they dominate the protection behaved as Grossman and Haltmann predicts. In the case of Grossman and Haltman model, they use the dummy for the Political Action Committee, but for the case of Indonesia, I replaced it with the dummy for the Konnopitas. I identified in every sector on this.

12:59And it wasn't a simply correlation. So, 25 years ago, I tried to compare the result of the crony capture pattern of protection with alternative model, what I call the national policy model, in which that effective retail protection as dependent variables, it depends on the… some conventional trade policy. objective, for example, domestic market, to protect employment, infant industry argument. The interesting thing is… The national policy model explained better in 1975. But in 1987, the Grossman and Hauptmann model in 97… 87 to 95, it worked well.

13:50So the interesting question is, how do I explain this? Because we started with the national policy model, like the infant industry argument, etc, but in the mid-'80s. Shifted into the crony model. So, I was lucky, because at the University of Indonesia, most of the economic architect of Indonesia during the Suharto era, was my professor. at the Department of Economics at the University of Indonesia, is known… as the so-called the Berkeley Mafia.

14:24Because all of them graduated from Berkeley. It's quite comparable with the Chicago boys in Chile. So, I asked them when I got this result, I talked to them and chose my econometrics result, and one of them joke said that you don't need an econometrics model to explain it, because in the 70s, Suhartos children are still teenagers. But in the 80s, they started to get involved in business. You know, I do understand, you know, they were joking, but there is some truth on it. But the other possible explanation, the second one, is maybe The trade protection began with the national policy, with the good intention of the government.

15:10But once it created threats, it captured by the Konica Vitalis. You know, to take the rent, yeah? So the problem is not about the industrial policy begins with the capture, the problem is that successful protection creates rent, and those rent can eventually capture the policy. And this is the thing that is why The time limitation, the discipline is very important in this. Yup. Now, the interesting question after this is. Despite the strong role of the Konne Capitalist. In the mid-'80s.

15:47the Indonesian government, the Tenocrat, the so-called the Berkeley Mafia, was able to liberalize the trade. Then the question is, how do we explain this? Yeah, when the chronic capitalism was relatively strong in the 80s, we were able to liberalize trades by, you know, reduce the tariff at the time. And I think the explanation is this has to do because the relative price changed the politics of reform. So what happened in the… in the, 80s. At that time, in the case of Indonesia, we depend so much on the oil. About 85% of the government revenue came from oil. And then, of course, our major export was also oil. So, in the early 1980s, in the early 80s, the oil price collapsed, if you recall, after the oil… the revolution in Iran.

16:43As a result, yeah, we had a twin-deficit problem on the fiscal and also on the balance of payment. So the rupiah, the currency depreciated sharply. And, in addition to… to that, the government, to help the balance of payment, the government also devalued the exchange rate. The combination of the depreciation of rupiah and the valuation helped the domestic producers, including the crony, from the import pressures. And that's explained why we were able to opening up the trade regime. And this is testable. Yeah, so I tried to use the time series econometrics to test whether there is a relationship between the oil price and the tariff, and the result is quite consistent. The next question is. it is true that the crony capitalists, you know, take… agree to, sort of, like, to… to… for the liberalization. The answer is, when the tariffs fell, the rents moved, they did not disappear.

17:49So they moved from the so-called tradable sector into non-tradables, and become… put it in the license. So, this is just to give a flavor about the NTB coverage, and after the trade liberalization, NTB coverage down from 46% to 30%. So, basically, their state. Yeah, they move from the, you know, the tradable into the non-treadable side. So, now, let me give another example about the opposite of the import Purenta in Port Piv in 2013, now is the 2005. The 2005 rice import ban.

18:29So the story was, in October in 2005, the oil price went up almost reached about 100 US dollars per barrel at that time. Yeah? So, since the fuel subsidy is really the big chunk of our budget, the government budget, so it raised about 30%, to adjust the… to manage the situation, we adjusted the fuel price by 126%. And to soften the impact to the poor people, we launched the cash transfer program for the 19 million household. But weeks after that, The government introduced To protect the farm, To introduce the import bet on rice. So, here is the interesting story. Logically, the impact of the fuel price hikes on all foods should be the same, right? Because there is no such thing as a gasoline specifically for ice.

19:25But look at the cumulative price increase. For a case of rice, increased by 33%. Whereas for all other food, it's 16.5%. So the fuel price hikes itself cannot explain the gap. So one of the plausible explanations is because the government introduced the import ban. And for the poor people, it's about, you know, more than three-quarters of the poor are net consumers. So the impact is… this policy actually pushed 3.1 million people into poverty. So this is the opposite of what happened. If in 2013 we tried to protect the poor by You know, by opening up the trade regime.

20:09But in 2005, what we did was the opposite. So as a result, the poverty increased. So again, this is… somehow shows who paid for the protection. Now, enough. This is my first claim on the… trade protection about the history. The first one is… Protection was given… the protection began. with the national policy, but later, at the later sets, captured by the Konne Capitolis. The second one, it was easy to give a protection, but to taking away and then implement the discipline was very hard.

20:46And people argue that let the loser… let the loser go. In reality, this is very tough. Especially someone is politically well-connected. Now, let me go to the second claim about the case of the industrial policy, about the condition. So before I move to the condition, comparing nickel and bauxite. Indonesia started to, sort of, like, to shift into the industrial policy in 2015 with a different instrument. So, we focused on the critical minerals rather than critical protection, and the key instrument, export ban, the focus on the value-added, and the observed outcomes Nickel book. And that story was praised in many countries in the world, including at The Economist magazine. Yeah? So now, let me talk about… What happened to the nickel?

21:38If the question is, did, did industrial policy using the export ban induce investment? The answer is yes. Look at the FDI. Did it, induce domestic processing? The answer is yes. So, looking from this perspective, it shows that the story of nickel is very successful. But I think it is too early to conclude By saying that, it shows that export band is very effective. Why is that?

22:10Look at this. We introduced the same policy instrument. Export bans on both on nickel and baux. In the case of nickel, it worked well, but not so much for bauxite. Why is that? Because Indonesia is the largest producers for nickel, about two-thirds of the global production. But in the case of Boxide, it was only 5%. So in the case of nickel, because China had no alternative for the feedstock, so they had to come to Indonesia to invest

22:42It didn't smell that. But as the case for Bonsai, They went to uni. to Guinea, to Australia. So the one who took the benefit of the export ban was basically Guinea and Australia. So, same instrument, different market structure. In nickel, China adjusted. In bopside, in Nsiah did. The bank did not change, the market did. So I think this is something that I would like to convey with you. Be careful when we sort of, like, making a conclusion as if that… because I know some African countries now, in many countries in the world, try to implement the export ban by looking at the success story in Indonesia. The answer is. The reserve, not because… simply because they export bank, but because the market power.

23:29So, do not copy the instrument with the market structure, and do not assume the structures are 5 being used. I will explain to you later on, because it's going to have an impact on the innovation, yeah, in other countries. Now, during that time, I was a finance minister. I was the one who, sort of, like, had to implement the policy. Of this, yeah? So the 2014 ban was a deadline set in 2009, so it wasn't a new decision. So during the cabinet meeting, we were thinking about what kind of policy should be best to be implemented. And at MOF, we prefer to introduce the export tax rather than export back, to keep the export open. So what we designed at the time, a legislated declining conditional export tax, we start with a very high export tax, like a prohibitive. Yeah, lower it as independently verified smelter milestones are met. So once they build the smelter to become 15%, we lower the export tax, and then until zero, once the smelter is complete.

24:38Yeah, and schedule legislated in advance, so default pass requires no one's permission, and relief is earned, not granted. The reason why I was thinking about this is because I do believe that Import to export ban, there will be a race about the overinvestment. yeah, induce innovation in some other countries, and also we need to work on the production network. Yeah. So we see what's the difference. And then both creates CAIC, but the issue is about the distribution of the REF. With the export men, you know, there is the… all the rent will be… will, you know, went to the Spratas owners. And then my biggest concern about this issue is, look at this.

25:23The hidden cost of forcing investment on shore. Overinvestment. Look at what happened, because after the Djokovi, the next administration, the government changed the policy from export tax into export bad. Look at what happened. Investment doesn't mean the competitive capacity. Because the export ban, the production increased, capacity expanded rapidly, but look at what the… look at the price, and also the stocks. Or the LME, and the quota. The price declined because the overinvestment, if you look at the stocks… Yeah. also declined from 379 to 270. So the band built capacity, but the question is, can it sustain it? So what I'm afraid is, this story is not going to be long-lasting. The second one about the innovation. It is true that capital and plans moved to Indonesia. And the operational learning occurred at the Indonesian company, but the core methodology in R&D remained largely with the foreign investors.

26:27So I'm not sure whether I can answer the third claim whether, you know, this industrial policy not only induces investment, but also induces capability. This is the thing that, you know. And the other thing is, because we import the export ban, the LFP, 50% of the EV batteries now using the LFP instead of nickel. Because when the relative price is very high, it will induce innovation. So using market power can change the market itself. Last but not least is Production Network. Processing doesn't mean capability. If Indonesia would like to produce lithium, we have to work with Australia, because we don't have the lithium. So that cross-border, you know, cooperation is a very important one. So the objective, I think, is not about maximum domestic processing, it's maximum domestic capability. This will be the important question about the industrial policy.

27:22Now, look at the case of discipline. Discipline is rarely self-imposed. Yeah. If we want to look at the story in some other countries, rents need a Rafi that beneficiary cannot instruct. And that's explained why those… store in Korea, Taiwan, and Chile was successful. Because, basically, the referee is external, and what mattered was the beneficiaries would lose support.

27:54But look at the story when it is not. Then you can cite Brazil, Argentina, Venezuela, Algeria, Malaysia, and the common feature about this country is nothing was withdrawn, the protection becomes a political property right. And that's exactly happened with the case of Indonesia during the Suharto era. Yeah, now? where Indonesia sits. In the case of Nico, It's been successful. There is a referee. But… Indonesia did not create it.

28:29Why? Because the Rafi came from the investor from China. They are the one who came to Indonesia, and they have to compete at the world market. In the case of Bauxite, same instrument, but no referee. Because no FDI, not many FDI, came to Indonesia, and the setups ranked. So, the discipline came with the investor, not with the instrument. And this is, you know, bring me back to the story about the 80s. we were able to do a sort of, like, implement the so-called right policy, because the discipline come from outside. The 80s was depreciation of the rupiah.

29:08But in the 2020 was because the smelters produces from China. So, the lesson learned is… Bad times makes good policy, and good times makes bad policy. So we probably, you know, somehow we need the sort of, like, a pressure from external crisis to do so. So, now let me… this will be my… Last two slides. So then, with my co-author, Jahan Retsky from the University of Indonesia, we come up with the idea, what we call the Lean in the scale policy. Yeah.

29:48Neither Rafi was built here. These tests, are how you stop waiting for one to arrive. The first one is, of course, if you would like to do the industrial policy, the question is. Is there any… Externalities, the market failure. Is there any justification for that? Yeah, what externalities or coordination? Failure justifies the intervention, not just which incumbent asks for help. I was a finance minister, you know, none the success of industry came to my office at that time. The one who came to my office is the one who lost in the competition. They asked for the tax holiday, etc, right? So, we should look at about this policy from the externality or coordination failure, rather than when the incumbent asks for help. The second one is discipline. What measurable target must be met?

30:41And who can we drop to support it? The reality is, once the policy capture. by the crony or the business people who work closely, very politically well connected, it is very difficult to withdraw. Especially if this business group somehow Help and support for the… Campaign financing. Yeah, because again, because the issue of this political economy, that's exactly what Grossman Haldman said, the protection for sale. And then random capability. Who captures the ranch? And what capability?

31:19innovation or production network position does Indonesia require in return? So, in this case, like, if we produce battery, in my view, we have to be part of the production network. The good thing is we start to create a sort of, like, ecosystem for nickel, but I don't know yet whether we do… how long does it take to induce the capability. So, industrial policy may need to create rents, but rents might buy capability and support must remain withdrawable. This is the thing that's very difficult in the real world. This will be my last slide. So, industrial policy necessarily creates rents. The question is whether those trends buy new capabilities or not. I think this is the most important question when we discuss about industrial policy. In the case of nickel, we have to wait. Whether it will be a success story or not.

32:14The second one, crisis windows open, and use them to build rules, not discretion. So, one thing that we did in Indonesia after the crisis, we introduced the fiscal rules, that the maximum budget deficit is 3%. You know, beyond that, the president, quote-unquote, could be impressed, because he's against the law. And that's the reason to become, sort of like the beauty to become finance minister in Indonesia, because politicians will come to you, and you say, I would love to support your idea, but because the, you know, because the law, I cannot support your idea, yeah? Last but not least, rent-seeking rebrands is that not disappear when the instrument changes. So… what is the lesson learned of the 50 years of the threat policy in Malaysia? 50 years of Indonesian economic policy taught me this. Creating rent is easy.

33:09Making it temporary is hard, and the test of industrial policy is not whether investment comes, it is whether the rent leaves behind the capability when the protection is gone. So I stop it here. Thank you very much. Okay, we have lots of time for questions. Can I start by asking one? Yeah, sure. So, you make this great point about the political economy, but I guess there's an opposing political economy challenge that comes to the policymakers, which is the cost of doing nothing. Right, so you have countries now, you know. limited policy, and there needs to be… likely to be a best response, and I guess there would also be a political economy about not responding. And so, I guess you might have also come witness to those issues as well. And so how do you weigh that? Weigh the costs of… the real… the political costs that you have here of doing something and it becoming entrenched against the other forms of costs of not… This is a very good question.

34:14I'm not sure I do have an answer on this, yeah, but let me take… Let me share with you one of the… The contemporary, situation now about the climate. Yeah, because, as Nixton said, the cost of inaction is much larger than something, yeah. But the problem is… so I'll share with you later on what will be the solution of it. Most of the politicians they are limit with their political cycles. The president is only 2 terms, maximum 10 years. And then the political-economic question is always, why should I spend my political capital?

35:00if my successor will take the benefit of it. So that's why they are not interested, this is a very long-term issue. But the cause of inaction It's also huge. So, what I suggest, what I propose it, and the Indonesian government's been doing it. So I try to link the priorities of the government. Yeah, with something that relates for the long term. So let me give a clear example. One of the biggest challenges for many developing countries now is job creation.

35:30Yeah, and then to pro- to give the social protection. So what we propose at that time is to do the CASPR training. cash for work. We give the money if people come to work, but the project itself is mangrove. It's green. So, sort of like a combination of this, you know? So, my answer to you is, we do understand, but we probably have to find a sort of, like, an area. That we could combine, yeah, so rather than do nothing, come up with something that could be… could be done immediately, yeah, and have an impact, and justify the political, you know, the political objective of the… the incumbent. I hope I answered the other question. Yes, please. I greatly enjoyed the talk. I have two related questions about the application of your principles to China. So the first principle from the nickel case is that these policies can be successful in domains where you have market power, potentially, and it looks like

36:29China is applying that principle very aggressively across the board, you know, for batteries, for EVs, for solar panels, etc. So I just wonder, what is the view of that from Indonesia? Do you see this as a threat that, you know, we're not going to be able to compete in these industries that are very critical for the energy transition in the future? Or do you see that as a benefit in that, okay, we'll take as many cheap panels as you would like to send us? And then second, also about China, but sort of slightly unrelated, is on the principle of rent-seeking and rent-seeking, creating an efficiency, it seems in some of these industries, at least my distant perception, China has somehow been able to avoid that, in that they're letting relatively large firms die, they're, you know, shutting down firms that seem to have captured rents. Is that just because the political system there is so, you know, unitary and unique, or is that a kind of violation of the more fundamental principle? So why are they, you know, able to get away with it? Very good. Let me… response to your question one by one, about the… I agree with you. China has been very aggressive, and sort of, like, you know, take advantage of it. And the perspective of Indonesia and the states. Let me be frank and honest with you.

37:45many people just look at the statistic of the very nickel, and if you look at the value that it jumped significantly, it shows, like, a success. So I really encourage anyone who would like to do a study on nickel, try to estimate the real domestic resource cost of this, because by imposing the export ban. is gonna hit the row or export as well, right? So what will be the net impact? Yeah, rather than… because we always claim about the value added, including the Economist magazine, that this is a success story. So as of today, the perspective is, this is a great policy. That's the first one. The second one is… this is the thing, I wrote a… I wrote a paper on this about using the critical mineral as the instrument of the middle power. In negotiating between U.S. and China. And one way to do it, because, I don't know, I'm not an expert on this, but the future will be the semiconductor. about the chip war, etc. And somehow, they need something reportable, like battery, and Nsia can play a role.

38:50So, what I have in mind is, rather than most of the Southeast Asian countries taking this position, escaping binary choices, not to take side with China, and also with the US. But I don't think This kind of policy will be sustainable. So the idea is, rather than passive alignment, it's better to become an active alignment, to do an active alignment. Otherwise, we are going to be a global spectator, just watching the, you know, the rivalry between the two. And we can use the mineral, the rare earth, or the critical mineral. Now, what is happening in Indonesia now, there are three companies work together in the case of battery, which is, well, valet, Indonesian process for the nickel. The second one is one Chinese company who provides the technology. And for the… the ups… the downstream, is fought from the US. So, in my view, that kind of, sort of, like, collaboration would be the solution. Otherwise, we stay forever, you know, by arguing that this is really the success story for, you know… And then, your second story… Yeah, about the rents. So China seems to be able to kind of kill off the large firms and not suffer for it, and the industry still grows and marches on. I don't know about… honestly, I don't know the answer for this, but I got the impression that even though many people claim that China is authoritarian resilient.

40:19the Eliot Circulars works quite well, actually. That become created, sort of, like, competition, yeah, from the local government. to reach a certain level at the Communist Party, making this process that if you fail, then the government will impose the penalty on this. Whereas in the case of Indonesia, it doesn't happen. So that is why, in my view, this same thing also happened in the case of Korea, if you look at If I'm not mistakenly, Samsung started by the Sugar Refinery, and later on. induce capability into the electronic company, because the government imposed a strict discipline. But it doesn't happen for the case of Indonesia, so it really depends on the, you know, whether the leader could really impose the discipline. Yes, please. Super interesting. I think you were coming. I was interested in this, in the, in the condition on the smelters and the original export tax. Sounded like there were some conditions that if they met, they would get some relaxation. You can talk more about that, and how do you design those? No? Because

41:28In Korea's case, a lot of things were export performance, right, would be a natural metric to use, right? That seems to be good, but when you're talking about an export tax or an export brand, you're not going to be able to use export performance. So, what were the conditions? And then, you know, how could you, in other sectors, what principles could we use in order to design such… Yeah, because I'm not an expert about, particularly on nickel. My understanding is the process is very important. from the raw materials into this process, right? The feronickel. So, we didn't have the smelter at the time. Yeah, so if we want to, sort of, like, to establish a process pro- process, export process in Nsiah, we need To ask them to build a smelter. But… Of course, they didn't want to, because it's too expensive for them.

42:19Right? So even they… Took me to the… What's the international… Wheeze… arbitrage, the one in Washington, our focus, except if I'm not mistaken. Makes it. Because we imposed this policy, and they said that, no, according to our regulation, we are allowed to do, sort of, like, to export the raw materials. But we would like to impose to make sure that the process will be in Indonesia. So the design, the mechanism at the time is we started with the Very high exported tariff, 30%. If they build the smelter, let's say, 15%, then we lower the export tax, 25%, and they will be verified by the people from the Ministry of Mining and Energy, 25%, and then 30%, continue, yeah? Once it's verified to zero, then zero time for the export tax. Yeah,

43:16I propose this idea for two reasons. This is not against the WTO. Then second one, at the end of the day, this nickel company should work at the competitive prices. Yeah, so… so that's basically, you know, the policy, and I put it as clear on schedule, so without permission, because otherwise, if you're gonna ask again, to the government, you know, we should lower the export tax, it's gonna create a sort of, like, additional bureaucratic hurdles. So, once verified by the independent auditor, then we lower the export tax. You know, for many of you who are not familiar with Indonesia. jokingly, I always said that one of the reasons of why many Indonesians become religious is because they have to deal with the government, you know? Because if you apply on something, there is nothing you can do except pray to God. So, if you rely so much on the government decision whether you are allowed to lower the export tax, it's going to create a problem. So it's better to ask to, you know, to be verified by the independent

44:24independent body. I hope I answered your question. Yes, please. Hi, Professor, I'm Jun from Yale. So, my question is, it's a following up question. So, you previously just mentioned that export text, was WPO compatible, and the ban wasn't. So, you had an external constraint back in the design. So, it still wasn't adopted while the 3% fiscal rule was. So, my question is, is the difference that a specific rent has identifiable benefits in advance, while a fiscal rule is loser on diffuse? Well, okay. Is that your question? Yeah. Well, unfortunately, This policy lasts only for… 3 years, so we haven't, sort of, like. We haven't got the real impact of this, because the… I finished my term, 2014, the next administration changed the export tax policy into ExportBed.

45:21And of course, there is a rational behind it, because they said that by export ban, China had the… no alternative, so they have to come to Indonesia. So I cannot answer your question about the fiscal impact. Yeah, so we don't know yet at that time, because the next administration changed the policy. Let me get here. I have a question about how we should think about the smelters that did enter. So, some of them were Indonesian smelters, but, like, the vast majority of the capacity are Chinese smelters operated by China, and often by Chinese companies. Like, how should we think about, like, the downstream effects of the ban? Most of the production is still owned by the same firms that had been. Producing in China before the pandemic.

46:07I think somehow, again, this is my honest opinion on this. I don't know, in the case of some other countries in Malaysia. they asked to, sort of, like, the agreement is to do the technology transfer, right? And then that's already happening on the… at the operating level, but not about the technology, because if you're talking about the HPAL, the R&D, the metallurgy. it's still with the Chinese company. And then the reason behind it is. I don't know, this is just sort of like an excuse, or maybe there is justification of that. We don't have enough talent. engineer to sort of, like, you know, to implement this transfer of technology. And now, the government asked the Chinese support to create… to establish the academy.

47:00in which that we create our talents. So, back to your question again, I couldn't agree more with you. There are a couple of issues you know, just to give a context, to me, it's rather strange. The first one is not clear agreement regarding the transfer of technology. The second one is the government gave a tax holiday for 50 years. To me, it doesn't make sense. Yeah, because this industry is lucrative. What's on earth you gave a justification for 50 years tax holiday? And all the rents went to… went to… went to China. Maybe that's also the reasons why they're being very aggressive in investing in Indonesia. I hope I had answered to your question. Okay, please.

47:46Thank you for your talk. I was very interested in your point about, the internal-external referees and its importance in regulating rent. So I was curious if you think it is possible to move from an external referee to an internal referee, and if that is something that Indonesia would want. And I'm also curious. when you have sort of a project that doesn't have a referee, do you see, like, what's, preventing them to kind of create one? I know you have the test, but I'm just curious if, in the current, environment, you see Indonesia pushing for more referees? I'm not sure I do have an answer for this, but let me… response to you using some case studies, yeah.

48:41I am a bit skeptical from the… if the referees come from internal, because there is sort of, like, possible political-economy aspect, and it's very difficult. So let me give an example about the case of Simu. You know, most of the companies in Singapore are basically still an enterprise. There's a lot of discussion saying that state and enterprise is OE not as efficient as the private sector, but look at Singapore Airlines. They're very efficient. You know why? Because there is no such thing as domestic route, right? Singapore is just too small. So that is why the Singapore Airlines has to compete with a global competitor. So, in my view is, the best way to, sort of, like, to ask for Rafi, if you are not sure about the capability for the institution, is to focus on the export-oriented. Yeah, and this is a very interesting story, because many people argue China, India, Indonesia.

49:40You know, those three countries have the huge domestic market. Which is true. But the question is, how do we explain why China began to… Accelerated the economic growth only in the late 80s. Why India in the early 90s? Why Indonesia in the mid-80s? And one common factor to explain this was because on those years, those countries started to engage with the global economy. China with the extension to the WTO, India introduced reform under Manwan Singh, Indonesia introduced liberalization at that time. So to me… so that is why I'm not…

50:26I'm not a big fan to make a dotomy between manufacturing and surfaces, because even manufacturing sector now has been surfaceified. Look at the handphone, started with the iPhone, now it's an ecosystem. So the most important thing is to make it tradable. and to be competitive in the world market. So the discipline, if the government fails to introduce the discipline, discipline comes from the competition. And that's helped many Indonesian companies now to transform themselves. So let me give an… sorry, a little bit long on this. They are… Some crony capitalists began… started with the crony capitalists, but at the later stage, they become the… Very competitive company. So they started to invest in Indonesia domestic market, but later on, they invest in Africa, in Asia Pacific, and nowadays, they are very competitive.

51:21Yeah, so I do believe that maybe the answer to your question is, if we are not sure about the domestic capability of introducing the discipline. let's, you know, put the XL out, and I do believe this is the way that Vietnam is doing it now. Yeah, they use Vietnam as a production base for the global market, and then the global, the world competitive, the export-oriented sector really introduced the discipline. I hope I respond to your question. Oh, please. You've spoken much about, like, firms and institutions. Can you say a little bit about the labor market side of it? You mentioned, like, you know, the… how you use some of these build capabilities in the long term. Can you say a little bit, some policy, tools that you've found to be interesting and effective in negotiating with bigger companies? This is a very interesting question. I'm…

52:18I hope this is not my bias. I'm rather skeptical about this ability of the government in Sort of, like, building the capability. Yeah. Many of the… we established the main, a lot of, government training centers. But most of the graduates from the government and training center need to be retrained again, because all the equipment does not sort of, like, fit with the reality. So, what I had in mind, and we proposed this idea already, why don't we ask the private sector to provide the training, because if you… this will require skill, capability, right? So, for example, if you are interested on AI, on something, why don't we ask, I don't know, Nephilia, Google? Because it imagines back in the 80s.

53:07Most of the Indonesian bankers were Citibank alumni. Because they… they… they produced… they had a very good executing development program at that time. So most Indonesian bankers were Citibank alumni. We probably could do the same. We asked the private sector to provide a training. to share the technology, but the question is, of course, from the private sector, what's in it for me, right? And this is… there is a role for the industrial policy here. We could give the double deduction for tax. If they do training. Yeah, like the internship. So this is the role of the government, because again.

53:44The problem with the… after we liberalize the economy, when the rent is down, not much incentive to do the innovation, training, etc. So we could create the rents by providing some government intervention, for example, like double deduction for tax. Yeah, maybe this is just a sort of, like, you know, to touch the issue on the… on the labor market side, because the biggest challenge for Indonesia is always about to find talent, capability. Okay? Good questions. Oh, okay. Yeah, you guys will be around for lunch and… Thank you, thank you.

54:31Okay, so we have, an hour, I believe, right? Yes, an hour for lunch. I mean, I think, I know. I know, you know what?