AsiaViews, Edition: 30/IV/August/2007
By Akmal Nasery Basral, Budi Riza, Philipus Parera, M
Tempo, No. 51/VII/21-27 August 2007
THE voice of Joseph Stiglitz sounds sonorous, and quite different from those in the West. While the Washington 10 Consensus formula conceived by John Williamson in 1987-88 has been adopted by financial institutions like the International Monetary Fund, the World Bank and the US Treasury as a recipe to rehabilitate a country’s economic paralysis, Stiglitz stands on the side of neo-Keynesian economists, who say that countries that follow that recipe will, in fact, find it difficult to rise from their economic depression. For his criticism of mistakes committed by the World Bank-where he once worked-he has been called a ‘traitor.’
Last Tuesday, Stiglitz, recipient of the 2001 Nobel Prize for Economics was the main speaker at a seminar called “Indonesia in the Face of Globalization” organized by this magazine in Jakarta. Late in the evening after the event, Stiglitz spoke to Tempo’s Akmal Nasery Basral, Budi Riza, Philipus Parera, Maria Hasugian and photographer Yosep Arkian, for a special interview. Excerpts:
What do you think about the government’s investment regulations in Indonesia?
There are some problems. The concession period given by the Indonesian government to exploit natural resources is very long. This becomes a problem because it does not take into account changes that can happen in the evolution of the market, like the concession given to oil concessions when the price of oil was US$15 per barrel. You lose money because now the price is US$75. So, you should be careful with long-term contracts, unless there are specific contingencies and provisions in the contract protecting you from unexpected changes. This is not being done by many countries.
What should be the ideal concession period?
They should be kept relatively short, depending on the classification of minerals. In some cases, it is best to do some due diligence work when the agreements don’t work but parties must live up to the agreements.
Another issue about investment regulations is international arbitration in solving business conflicts. This is very problematic in Indonesia. Take the case of Karaha Bodas. There is an investment of US$40 million, but you only got US$300. That’s one example, but it’s happening all over the world. You deal with really bad legal framework. In Indonesia, you claim to have transparency, but international arbitration is very closed.
In Indonesia, Freeport McMoran got a 20-year contract extension. The government claims not be able to do anything about it.
I’ll give another example, Russia. They cancelled the environmental license of Shell because they violated the environmental conditions. I think the new reality is that companies know there are changes, natural resources are getting more scarce, and there are new demands. Indonesia must use this to its best advantage. You no longer need to depend on Exxon, because you can do it yourself and get bigger benefits from the natural wealth, rather than from production-sharing contracts with multinational companies. The US government should also not become an agent of Exxon or Enron. That is corruption. There is one interesting example. One American ambassador [in Indonesia] after the Suharto era got a senior position in a giant mining company in the US because he urged the Indonesian government to honor its contract. While he was lecturing Indonesia on corruption, he was actually practicing it.
But renegotiation seems to give investors a bad impression?
When we talk about mining and oil companies, they will go where there are natural resources. Few of them are ideal companies. The Middle East is not stable, neither is Nigeria and Latin America. Bolivia renegotiated and got a contract that gave it 18 percent. Now that they have renegotiated further, maybe they’ll get 82 percent. The companies stayed there. They will stay there because they know that in the past they have been robbing the developing countries. But now they have to give better deals, because they’re facing more democratic governments and they can no longer be bribed, they know they have to be more fair.
Not all countries dare to impose restrictions through renegotiation, including Indonesia, because they can be described as unfriendly towards investors.
China and India imposed limitations on capital flows. They said, you cannot come into the country for short-term speculation. And they have been the most direct investments from most countries around the world. They made it very clear that “we need those which create employment, actual investment,” and no speculative purposes. Because short-term speculators will use all arguments they can find to maintain the market so it remains open to speculation.
Didn’t Thailand try to do that but failed?
That is true. There are two lessons here. First, countries should act together. If Thailand, Indonesia, Malaysia were to act jointly, maybe like start an ‘Asian Initiative,’ it would be difficult for speculators to come in. Then, how you do it will make a difference. Some countries impose it through banking regulations, called prudential regulation. You limit bank loans to speculative investors, and take away the money supply from them. That would be a prudent and market-friendly regulation. You can also do it by controlling the capital market, and the result wouldn’t be that much different.
The World Bank and the IMF asked developing countries to open their markets, but this does not seem to be beneficial.
There are two things here. First, there is the World Trade Organization agreement which you have to abide by. But the next question is how? The other is you often do more than is necessary. You must have a box of instruments that you are still not using. Globalization does not benefit developing countries and poor people, because it doesn’t work fairly. I have a proposal to change the secretiveness of banks. President Bush is one who most often criticizes corruption, but at the same time he supports policies which potentially create more corruption. One of them is support towards the secret bank accounts all over the world.
Your critics say you favor allowing governments to be involved in influencing the market.
I must stress that information asymmetries (the theory which along with George A. Ackerlof and A. Michael Spence earned Stiglitz his Nobel Prize in 2001-Ed.) was never criticized. One implication of that theory-which has been totally accepted-is that markets often cannot create efficient allocation. No one believes any longer in the invisible hand of Adam Smith. And I always say, that is an invisible hand because it is invisible. One debate is whether governments must correct the mistakes of the market, but that is the theory on government, not on economics.
What kind of government can implement such correction?
It depends on each country. In many cases, it’s been proven that the governments succeed in solving problems, even though in other cases, the government is the disaster. So, the question is whether in specific situations, governments can use this policy? It should be a policy that has been implemented 30 years ago, but a policy that is appropriate for today, a policy that can bring improvement, although it is imperfect.
Do you think the privatization program implemented by the Indonesian government is one of the imperfect policies that can bring improvement?
That depends on the kind of company and how privatization is being run. Clearly, privatization has to be implemented openly, offered to the public. If companies are sold to specific people, that would tend to go corrupt.
The subprime mortgage crisis in the US seems to be getting worse. What is the impact on the world?
There are three possibilities. First and most important is how it hits the prime markets and how it will cause the value of Indonesian loans to go down and affect the stock market here. Second is the global slowdown, all countries in the world will experience the global repercussions. Third, something which would not be as important to Indonesia, is that housing mortgages in the US are owned by the entire world. That used to be only owned by American banks, so if in the past those banks made bad mortgages, only they would feel the impact. But today, if an American lending bank makes a bad mortgage, Australia and Europe will suffer too. (In the discussion “Indonesia in the Face of Globalization,” Stiglitz said that 1.78 million Americans will lose their homes because of their inability to pay their mortgages. “Perhaps this should be more appropriately called a social disaster, rather than a financial disaster.”-Ed.).
If you were made the Indonesian government’s economic advisor, what would you advise them to do?
The growth of the Indonesian economy has not been bad. Six percent growth historically speaking is good, even compared to other countries. For 25 years, India stood at 6 percent before growing to 8 percent. At the same time, however, Indonesia needs a new agenda, like land reform and more investment tied to education. The results may not show up in five years’ time, but in the long term, for example in 25 years’ time, that will bring good productivity. You have to make long-term investment. There’s a lot you can do, be transparent about the rules of the game. You need a 10-15 year vision, to capture all opportunities.