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WENDY: Good afternoon. We're so glad to welcome all of you to this talk today. We're thrilled that you were able to make it through the cold. We assured all of our visitors that this kind of cold was unusual for Ithaca. It really is my great pleasure to welcome all of you were so pleased to have with us the Finance Minister of Indonesia, Dr. Sri Mulyani Indrawati, as this year's Distinguished Bartels World Affairs speaker.
On behalf of the president and the provost on behalf of the Office of International Affairs, and the Mario Einaudi Center for International studies, as well as our faculty and students here today, I welcome you Minister Indrawati to the university, and I welcome your distinguished delegation as well. I'd also like to recognize and to welcome Mr. Mahendra Siregar, the Indonesian ambassador to the United States.
[APPLAUSE]
We're so pleased that you all are able to join us here today. We know it's a busy week in Indonesia, and I understand that Kaushik was quite compelling in bringing you here. The Mario Einaudi Center for International Studies, which is hosting. This talk today, has been a critical hub for international studies, for research and scholarship on campus since it was founded in 1961.
Today the center is home to eight internationally famous area studies and topical programs, including the Southeast Asia Program, which has taken the lead in organizing this event today. The Southeast Asia Program, under the directorship of Abby Cohen, is perhaps the most well-known center for the study of Southeast Asia in this country. The program is greatly respected for the vibrancy of its faculty, for its students, is robust language instruction and the library collections.
So we thank the Mario Einaudi center for hosting the Bartels talk today. We'd like to particularly recognize Jason Hecht, the associate director of academic programming, and Bari Doeffinger, who surely have not sat down once today. They're somewhere in this room. Thank you so much for all the work that you've done organizing this talk.
Together, with the area studies and topical programs, the Einaudi Center organized over 380 events this past year, attended by over 16,000 participants. We hosted 59 visiting scholars from around the world and provided over $1.5 million in grant funding to faculty and students.
Among the more notable annual activities of the center is the Henry E. and Nancy Horton Bartels World Affairs Lectureship Series. It's a fellowship that was established in 1984 to foster a broadened world view, a global citizenship among Cornell students by bringing people to campus who have distinguished themselves as international public figures, which is what brings us here today. Kaushik Basu is going to introduce Minister Indrawati, so I won't go into the introduction.
But I did want to read a quote by one of our faculty members, Victoria Beard, from art, architecture, and planning, which sums up why we're so excited to host the minister. She wrote, "Sri Mulyani has been at the forefront of Indonesia's economic growth and development story, and she has been for a long time. She is revered internationally and in Indonesia for her intellect, sound economic and fiscal policies, and strong ethical leadership."
Now it is my distinct pleasure to invite up Kaushik Basu, professor of economics in Karl Marx Professor of International Studies, who will introduce our guest.
[APPLAUSE]
KAUSHIK BASU: Thank you very much, Wendy. It is a great honor and a source of joy for me to be introducing Sri Mulyani Indrawati, Minister of Finance of Indonesia and formally, before that, she was managing director of the World Bank, which is when I got to work with her. Sri Mulyani has had a remarkable career.
She began her college education at the University of Indonesia and did a PhD in economics later from the University of Illinois Urbana-Champaign. She then held positions at USAID IMF and also taught for a while at Georgia State University at the Andrew Young School of Policy Studies.
In 2005, Sri Mulyani was appointed Indonesia's Finance Minister. Her five years at that time have been celebrated as a turning point for Indonesia. There was a sharp increase in the amount of foreign direct investment coming into the country. There was a reduction in debt, and there was high growth, including a 6% growth during 2008, the year the global financial crisis hit, and all over the world growth was sinking.
These achievements were duly recognized, and she won awards from Euro Money Magazine, Forbes, and Emerging Markets. Sri Mulyani served after that as Managing Director of the World Bank Group from 2010 to 2014, where she oversaw 74 nations in Latin America, the Caribbean, East Asia, the Middle East, and North Africa.
In 2016, Sri Mulyani returned once again to her role as Minister of Finance to Indonesia. She is known for her longstanding commitment to governing with integrity and tackling corruption. Absolutely remarkable qualities today. Over the last two years, once you take account of the difficult time the world is going through, the performance of the Indonesian economy stands out as remarkable, actually absolutely remarkable.
Between the president, Joko Widodo, and the Minister of Finance, who is with us here today, Sri Mulyani, Indonesia managed to curb inflation, cut wasteful energy subsidies, which was a very difficult thing to do, because people get used to these subsidies, and put its fiscal house in order. This has helped return the country to investment grade rating by all the three top rating agencies for the first time after 20 years. So this is 1997, the [INAUDIBLE] crisis. After that, for the first time it's back again to that, which is a remarkable achievement.
Turning to some personal matters, I first met Sri Mulyani, actually before the World Bank-- she may not also remember that-- eight years ago when I was chief economic advisor to the Indian government. Sonia Gandhi had organized quite a remarkable two-day roundtable, bringing in some of the finest economists, philosophers and policymakers, including Joe Stiglitz was there for that meeting. That's when Sri Mulyani had come, and we had this two days of discussion on democracy and development.
I recall being very impressed by the quiet wisdom that Sri Mulyani brought to the table. Little did I know at that time that two years later, less than two years later, we would become colleagues at the World Bank. She was one of my favorite colleagues at the bank.
We also wrote a short commentary together in February 2015 on oil prices, called "Cheap Oil for Change." I am very proud of this paper because we made predictions, very dangerous thing to do in economics for the way oil prices would move over the next four or five years, and it's four years since then, and it's actually turned out to be remarkably good forecast range that we had met prices with a lot of analysis behind that, and there were also policy recommendations in that paper. I can show off about this paper, because the bulk of the analysis was done by Sri Mulyani.
At the World Bank, I remember meetings on divisive matters. Occasionally, you'd have these very tense meetings where people would come, ready to shout and vent their anger. But if Sri Mulyani was in the chair, her combination of quiet dignity and human warmth made it impossible for them to vent anger. In fact, I recall a colleague in the World Bank getting very angry later on, because he could not get angry at a meeting because Sri Mulyani was chairing it. That is Sri Mulyani for you, and I'm so absolutely delighted to welcome her to Cornell University.
[APPLAUSE]
SRI MULYANI INDRAWATI: Thank you so much, Kaushik, for a very generous introduction, and Wendy also for hosting this event. It's really my honor and pleasure to be here for the first time to Ithaca, Cornell University, a very famous university for many people in the world. So it's really a privilege as well as honor to be invited to give a speech in this very distinguished forum.
First, I would like to also thanks for all colleague, as well as university professor here, and of course, students from all over the world who come to Cornell to learn and study. This is a very, very best quality of university in Indonesia, and you know that many of our colleagues, including my own staff, who design fiscal policy, graduated from this university. So if you see that the fiscal policy in Indonesia and finance minister has been known as the best finance minister. This is because of the Cornell contribution.
[APPLAUSE]
[INAUDIBLE] actually graduated from Cornell, and he is my fiscal policy chief. Today, I'm going to discuss and talk about the Industrial Revolution, or evolution, you call it, and how developing country and emerging country used this opportunity to leap forward and also creating a progress in development.
So I'm going to address my speech this afternoon into four part, the first on the Industrial Revolution and countries' development, and the second is especially on the Industrial Revolution, the fourth, or we call it the fourth Industrial Revolution, digitization, that can provide an opportunity for developing countries to thrive.
And then the second, two part, or the last part of my speech is going to be about Indonesia, how we Indonesia transforming our economy, and how the human capital is the most important ingredient in strengthening our economy, and tried to capture this opportunity to become a real progress.
So if you look at the Industrial Revolution through the history, the world has experiencing four series of Industrial Revolution. Each of this revolution bring unprecedented transformation to the world, economically as well as socially. But from the first two Industrial Revolution, only a few country benefited, especially what we call it now, advanced country, such as Europe, as well as Japan, and United States.
Since the third Industrial Revolution that started in 1950, after 200 years of divergence between what you call it advanced country and emerging and developing country, we are starting to see the convergence between industrial and advanced country with emerging and developing country.
Several developing country has been riding the waves of technological change, driven by the development of computer and information technology. Its helps this country to increase their productivity and well-being of their people. They become developing to become emerging country.
Several economists argue that this convergence is, possible because of several factors, such as increase in international trade, especially with establishment of the WTO and [INAUDIBLE]. The end of colonialism, it is a thing, Indonesia and Asia in general or Africa are also, enjoying those independence around that period, technological spread, as well as increasing global value chains.
From the perspective of GDP growth, since 1960 until the 1970s, we can see that some developing country, including Indonesia and China, Singapore, is actually start to develop and catching up. And their growth rate rise and surpass the growth rate of some advanced countries. Some advanced country, their growth rates has been moderating. Several emerging countries, such as China, India, and Indonesia have the highest growth in the world during that period. Industrialization in developing country is one of the most critical drivers for this group of country.
But if you measure it in terms of income level, only a few country really can manage to reach high income country. We call it the avoiding middle income trap. This is especially true for a country like Singapore and South Korea. The success story of this country was supported by strong manufacturing sector. Both countries have also managed to continue developing high value added economy, especially manufacturing sector, driven by technology innovation and human capital enhancement.
On the other hand, many developing country still struggle to reach a high income status. We call it in the World Bank, the middle income trap, which actually suffer by many countries, including Latin America. Several challenges, including global uncertainty, financial crisis, as well as threat intensity, slower productivity growth, lack of innovation, and institutional issues are the factors behind those problem.
The momentum of convergence is also highlighted by emergence of large company from China, especially in the world media leak. Currently, there are around nine Chinese company in the list of world biggest companies, competing with various established firm from advanced economies. This is a signal that developing country are growing and becoming more competitive.
To upgrade itself, developing economy need to encourage technological advancement as a key driver of growth. If you look at China as an example, an impressive GDP growth contributed by high and increasing total factor productivity as a driver of its growth. As we know, China is one of the biggest exporter in the world, including for manufacturing goods that are supported by high technological progress.
Since 1990s, China has been able to maintain strong growth with high total factor productivity. But several other developing economies, such as Thailand, Turkey, as well as India share similar patterns where their total factor productivity have increased significantly in the last decades that brought benefit to growth. We again, see, all in all, those developing country need to gain more technology to boost their economy.
The role of technology has been widely recognized as one important factors to boost growth and creating a progress. This technological advancement act as a key driver to improve the economic performance. But to add funds, technology, and innovation, developing country can use investment, especially foreign direct investment to create a spill over effect, including through technological adaptation.
FDI, inflow in developing country has become the most important catalysts that boost productivity. If we look to country as an example, again, China and South Korea. The role of FDI in South Korea was increased remarkably from only 6.9 billion in 1997, jump into 26.9 billion in South Korea in 2018.
China even have a much bigger size and scale on FDI from only 45.3 billion in, 1997 jump into 138.3 billion in 2018. These are not only the amount of money, which is flowing to the country, but they brought technology and sometime also improving the way they design the business model in the country. So to get more investment, developing country must make significant improvement on many aspects, including the performance on trade, logistical, and global competitiveness, raise a global competitiveness index in which many country is still lag behind, in terms of how they are going to improve the environment of their economy, which is foreign direct investment friendly.
Many developing countries have been able to successfully improve their logistical performance and scale up their competitiveness through infrastructure development as well as in improving human capital, labor productivity, government institution, and other aspect, as we can observe from the improvement of global competitiveness index. Kaushik mentioned earlier that my previous job as a finance minister in the first part was actually dedicated mainly to reform of the Ministry of Finance, as well as public institution in Indonesia.
So I actually have not only witnessing, but also have an experience how really challenging in reforming the government institution, not to become a predator for the people and investment, but to become that institution which is efficient, as well as have an [INAUDIBLE] in serving the people as well as the economy. That work in Indonesia has made Indonesia increase in terms of global competitiveness, as well as logistical index.
But there are several challenges that commonly still need to be addressed by developing country to continue converging and advancing themself, avoiding middle income trap, and become high income country. In general, we can divide into two categories of problem, which is really challenging, human capital, and institutional capacity.
On institutional capacity, it's in the area of synergy and coherency. For a country like Indonesia, it's been more obvious, a big country divided into 34 provinces and more than 540 districts and municipalities. So coherency and synergy between central government and local government is become a challenge. Bureaucracy, inefficiency, ineffectiveness, regulation, that cumbersome, as well as governance issue, including corruption is the-- they are all the problem in institutional capacity.
On the human capital aspect, labor regulation, skill mismatch, low educated labor force, and low work ethics is becoming the problem for many countries to improve their global competitiveness index. So let me now move to the second part of the fourth, especially talking about the fourth Industrial Revolution and digitization that provide a great opportunity for developing country to thrive.
The world is now entering a new era of digital technology, marked by rapid growth in the internet, information, and communication technology. This technological transformation is commonly known as the fourth Industrial Revolution. The fourth Industrial Revolution, or Industry 4.0 is heavily characterized by digitization. This is a different kind of trend compared to the previous Industrial Revolution.
Unlike the previous Industrial Revolution, where big industry, mostly came from developed and advanced countries, with advanced industrial infrastructure and large capital, during this Industrial 4.0 and digitization era, this bring new hope and more equal opportunity for developing countries. With technological advancement and innovation, Industrial 4.0 and digitization open the gate for many developing countries to build their industry, particularly through start up and digital company, and they then able to catching up with the industry in developed world.
With its unique feature, including the rise of new business model, such as sharing economy and gig economy, Industry 4.0 trigger several a burning questions. If before the technology and spill over increasing productivity depend on the FDI, now the question, whether this technological adoption for developing country that used to rely on FDI channel, they can use Industry 4.0 to become a vehicle to adopt the technology.
And also another question, whether the Industry 4.0 can become a strong driver for growth in a sustainable way. But one thing, for sure, to make the best of Industry 4.0, all developing country must continue to improve the quality of human capital. Only through investment in human capital, a country can avoid digital divide and inequality, as well as anticipating change in the business model and prepare for the job for tomorrow.
I think I can give you several study that many of you maybe is already familiar from McKinsey and World Bank that assess the Industry 4.0 and digitization, that potentially bring huge benefit to the global economy. In a study by McKinsey in 2016, concluded that data flows between countries contributed to an additional $2.8 trillion to global GDP. This is surpassing trade impact.
World Bank study 2016 found that [INAUDIBLE] a firm, having website and selling or buying goods or services online, then to increase with firm productivity in all country income groups. And firm that used digital technology intensively also share other characteristic of high productivity.
I actually can also share my own experience as a finance minister on a second round. Using digital technology and social media even, is actually creating a much more intensity and productivity. I will give you an example. All my top echelon, usually, I give them a message just before midnight, because just before midnight is my most productive time. Usually before I sleep, I usually have some idea, or I should do this, or this issue needs to be addressed.
So does at 11:55 PM, I send the WhatsApp message to all of my top echelon. We have the what's you call it, WhatsApp group. So all of them actually knows, if usually the minister have a particular issue, I usually name the person. So x, there is an issue about this. Can you give me the information, or what is the status? But when the minister starting the message on the WhatsApp with the title of all, all, and then that means everybody have to be wake up.
So meaning that the office hour is no longer from 8:00 to 5:00 or 8:00 to 6:00. Basically with the technology now, my team feel that they have to work 24/7, which is good for me, bad for them, of course, meaning that all issue and the issue can be and should be responded must faster. Coordination, communication, or even exchange of idea can be very, very fast.
You really don't have to write a memo, official memo, and then you are going to then pass it through your administrator, and then it's [INAUDIBLE]. Now, you can within one second, you write message, and immediately, the whole top echelon knows exactly what is the issue. And even with that, actually, I will wait who's going to respond it first. And everybody now know at least they say that, OK, [INAUDIBLE] noted. So at least, they are still awake.
So this is all what I call it, another evidence of this World Bank report, that if we use this technology, we definitely can increase at least efficiency in information. In terms of solution, it may be another different idea, but that is something which really changed a lot. I may be a few people in the world who serve as a finance minister twice with two different precedent.
And that's why I really can compare how technology really changed a lot in terms of the way we work, including-- and maybe I will give you also an example on the social media. But I will tell you later on or maybe in a question and answer. But what I'm saying here is that Industrial 4.0 and digitization definitely have a huge benefit for individual, for company, or even for a country.
These massive advances in digital technology has distinct breakthrough that comprises of limitless data storage capacity infinite access to information and knowledge and speedy connection for people around the globe. The rapid growth of digital technology has reshaped our daily lives and how we do business globally that is moving toward digitization.
It is recorded that worldwide mobile user have reached 67% of global population, while internet penetration is at around 57%. So there are still huge upside if you talk about population of the world. An active social media user is like half of the population using social media user.
But for developing country, which is still facing a lot of challenging in harnessing technological advancement in this fourth Industrial Revolution, the challenges are triggered by digital divide, technological infrastructure gap, and lack of access to network connection. It was recorded that in emerging country, especially in rural area and remote areas, more than four billion people remain unconnected to the internet.
That's why in Indonesia, under President Jokowi, we put infrastructure as the highest priority. When we talk about infrastructure, it's not only about road to connect people, transportation, railway, or road, not only electricity, power, transmission, and distribution, port and seaport, airport and seaport. But in Indonesia we are talking about a lot of infrastructural, toll road. We said that we also built a tall through the air, because we are now also launching a satellite that is allowing Indonesia to be connected wherever you are.
If you're familiar with Indonesia as a geographic, maybe you visited Indonesia in Jakarta, it is maybe not different from many other more advanced country. But Indonesia is not only Jakarta and Java. So many remote islands, 17,000 islands, they are not yet connected until middle of this year when we finish all the satellite that is allowing all people, all school, all hospital to be connected.
And this is exactly what I'm seeing, that many developing countries may not yet have the ability to build those infrastructure, that allowing them to reap the benefit of this Industrial Revolution, the digitization. So for developing country, which is making a progress with digitization, we can hear some success story of digital company from developing countries. Everybody know in this world, I think, Alibaba, as one biggest online commerce company, e-commerce company, that disrupted the hegemony of Amazon.
Or maybe you have heard about Jumia, a unicorn, e-commerce start up from Africa that supported the growth of more than 80,000 local African company and bringing new opportunity to African talents. Another story comes from M-Pesa, a mobile phone based money transfer financing and microfinance services that has notably increased the access to finance for poor people and people living in rural area, as well as promoting gender equality by empowering woman.
The digital based industry has definitely showed that they can brought significant change to developing countries. And in Indonesia, our start up ecosystem has been growing very rapidly. E-commerce remained the biggest category and the most popular one in Indonesia, while the software as a service or SAAS category is further expanding. This is followed by financial technology or fintech, education technology or edtech, online travel agency, on demand service, and marketplace.
Among the sector, fintech is becoming a booming industry in Indonesia, followed by edtech. And this is one of the most exciting area that can also address the issue that Indonesia is facing on human capital development. You also know that seven unicorns in Southeast Asia, four of them are from Indonesia. This include Go-Jek, Tokopedia, Traveloka, and Bukalapak. This company and made a great contribution to our economic development, especially in providing more opportunity for all, especially small and medium enterprises.
Go-Jek, for example, which is now also open in other [? Asian ?] country, last time in Vietnam and Singapore, because Singapore doesn't want to be monopolized by one provider, like Grab, so they are now providing a space for Go-Jek to also enter there. Go-Jek has partner with more than 900,000 worker, as a partner drivers, and more than 125,000 merchant, mostly a small and medium enterprises.
This company, Go-Jek, has become the first decacorn, with valuation over $10 billion in a very short time. Meanwhile, Indonesia e-commerce startups, such as Tokopedia, Bukalapak, also brought a very crucial impact, especially in encouraging entrepreneurship and promoting small and medium enterprises in Indonesia.
So for Indonesia, you really don't have to convince, especially for a younger generation. If you ask many of the younger generation, mostly educated one, where do you want to go to work, what kind of job, they always associated themself or their choice is always in this digital industries, because they see themselves-- they are witnessing the successful of the digital economy not in a very long time, they become a real not only national player, but also a global player.
So given the start up ecosystem in Indonesia, the government also creating an environment, so that we will be able to create a new unicorn in the near future. Currently, we have around nine start up company that are listed as centaurs, or start up with the valuation of more than 100 million. This is including Ovo, a fintech company, Akulaku, another fintech company, Blibli, e-commerce marketplace that have a high potential to become the next Indonesia unicorn.
This phenomenon shows that through the digital economy and new business model, Indonesia and several developing countries have the opportunity to have and to create or to own high-valuation companies. Indonesia has the potential to become the biggest digital economy that can support their growth in the ecosystem.
With Indonesia, economic fundamentals, which is robust and has become one of the fastest growing economies among the G20, Indonesia economic development will translate to a better business climate and vibrant economic opportunities for all.
In terms of our demographics, with a population of 268 million, with a growing middle class, 50% internet penetration, and around a half of the adult population having access to financial services, that's crucial for supporting growth. This is an economy that provides a lot of upside opportunity.
Considering the huge potential and the robust progress, it is estimated that digital economy in Indonesia will reach around [? 1,700,000,000 ?] rupiah by 2020. This is close to 10% of our GDP. Indonesia has a vision to be a digital energy of Asia by 2020. That includes our target to support 1,000 technopreneur, 1 million farmers and fishermen, as well as around 8 million medium- and small-scale enterprises to go digital. And around 187 integrated broadband villages.
Government has launched the road map of making Industry 4.0, which consists in a strategy from human capital quality, investment climate, infrastructure readiness, as well as sustainability standard. There are five priority sectors in the development of Industry 4.0, which includes food and beverages, automotive, chemical, electronic, as well as textile and clothing.
We're also continuously adopting technology in designing and implementing government programs, including social safety net programs, or the support for the poor, which converted into non-cash transfer, using digital. And that's creating financial inclusion.
We also adopt technology in order to make us serving people and economy better and more efficient. Our Tax and Custom Department is now using more and more digital technology in better serving the people and the economy.
Indonesia commitment in supporting digital era is also reflected in the launch of the Bali Fintech Agenda. Last year, when we hosted IMF World Bank annual meeting in Bali, there is a launch of the Bali Fintech Agenda by the IMF and World Bank, which included 12 pillars that can be adopted by countries in developing its fintech industry.
So let's now move more particularly on Indonesia's own economic transformation and how we become a more prosperous country. With the vision to be an advanced economy by 2045, Indonesia will achieve this goal through consistent policy, harnessing its large demographic and economic potential. Indonesia also has to fulfill the prerequisite to reach those goals, such as infrastructure readiness, human capital, quality enhancement, as well as technological readiness.
The world recognizes Indonesia as an immense economic potential. Credible international organizations have forecasted that Indonesia is going to be one of the biggest economies in the world and the top five economy size by 2030. I believe we can achieve this goal by utilizing the boost factors such as our young demographic population, and expanding and using digital technology, and creating a role model for the Asian economy at the global level.
Indonesia's economy has demonstrated a significant improvement in the last decade. We've succeeded in maintaining a strong and sustainable growth above 5%. This is despite what Kaushik mentioned earlier-- global financial crisis or even after Asian financial crisis that hit Indonesia very hard in '97, '98.
Besides preserving this steady growth, the quality of growth is also improving. Indonesia has become more prosperous, reflected by decreasing inequality, [INAUDIBLE] vision, unemployment level at the lowest level, as well as declining poverty. The first time in the history of Indonesia we can push poverty below 10%, single-digit poverty rate.
This is going to be very hard for us to move further. Kaushik, when he was World Bank chief economist, he's the one who designed this twin goal of the World Bank that is eliminating poverty and boosting shared prosperity. And actually, Indonesia is adopting all the recipes that Kaushik was advocating when he was the chief economist in the bank, most importantly in the human capital and using more fiscal policy in creating progress explicitly in the poverty reduction and inequality.
So this encouraging result that we achieved through continuous implementation of series of reform in various aspects, not only in the economic and financial side, but we also continued reforming on a governance, administration, bureaucracy, as well as accountability and transparency.
Despite this strong fundamental and reform that has been in place, Indonesia's still facing a symptom of challenge on the industrialization. Are we even saying we suffer from premature de-industrialization? This is especially true especially after the Asian financial crisis that diverted the course of development of Indonesia, our structural transformation.
Before us in financial crisis, manufacturing growing very rapidly. After financial crisis, manufacturing has been stagnant or even slightly decline. So the economic transformation in Indonesia is from, primary, mainly agriculture, jump into services sector, which is not reflected by a good-quality, highly paid services sector. That's creating an informal economy, especially in the urban area.
These are the challenges that we are now facing in addressing not only in the form of high enough growth, reducing poverty, but how we are going to address the economic transformation that's creating a good-quality job for all people of Indonesia.
We also know that Indonesia needs to continue boosting our manufacturing sector, because this sector is important in transforming the economy in Indonesia to become an advanced country. We need a more sustainable way.
We also know that Indonesia needs to address our overly dependence on the natural resources. Diversifying economy has continued to be a challenge. Although, if you compare Indonesia with many other natural resource-rich countries, we are quite diversified, especially on the Java island. But if you look at other islands like Sumatra, Kalimantan, and Papua, they still heavily rely on natural resources. So Indonesia cannot be judged on only one sector, one region. We really have to think. And it's very diverse. And that's why we really need to design the policy tool that can attack diversity and development at different development progress across regions.
That is why Indonesia needs to continue to diversify and move away from this commodity-based economy. And in doing so, we have to invest especially more and more on infrastructure and human capital.
Let me start now on the last part of my speech. That is how Indonesia is trying to strengthen the quality of human capital as a key driver for our economy, present and in the future, and especially in reaping the benefit of digital economy.
As stated earlier, Indonesian economic transformation are being done through three main pillars-- infrastructure, human capital, and technological adoption. But in addition to that, we will also need to strengthen our institution's capacity and governance. We believe, through the improvement on those factors, we will increase our competitiveness and pave our way to become a net funds economy.
From the budget point of view, or fiscal policy point of view, the commitment to invest in infrastructure and human capital development is obvious. The highest spending in our budget is not for military, is not even for infrastructure. It's actually only for education. One single item of education is actually 20% of our budget. It's for education. This is mandated by our constitution.
So Indonesia is not about the choice or direction of policy of spending. But the challenging part is more how you are going to make sure that this 20% of budget on education is going to be well spent and creating a good quality of human capital.
Another 5% of our budget is actually for health. So if you combine both 25% of our spending is for health and education, if you act with the social safety net, this can create almost more than 35% of our budget. These are all directly benefiting human capital in Indonesia.
So for education, it's not about the amount of budget, it's about how you are going to improve access. We just saw diverse across Indonesia. How are you going to improve quality given the fact that education has been delegated in our decentralized system to the local government? How can we create synergy between national, and central, and local government? How are we going to make sure that the education system will provide the right skill? And how can we use fiscal as an incentive and other policy to incentivize private sector to participate in this education?
We are actually introducing fiscal incentives such as tax exemption for books, literature, as well as incentive for research, and development, and vocational training. We also established the Sovereign Wealth Fund for education, which has currently achieved a significant amount after accumulated in the past 10 years. We are now able to send 20,000 people in the higher education in the best university in the world, including here at Cornell. I think you can find some of your students here are actually receiving a scholarship from this Sovereign Wealth Fund for education.
Under President Jokowi, we are also thinking and establishing the new foundation-- what we call it-- Development Fund or Sovereign Wealth Fund for research. Because we also see that many of the returning students as well as private company who want to have a research development and innovation center that needs to be strengthened or enhanced in Indonesia.
On the health sector, we not only spend 5%, but we also want to achieve universal health coverage. Indonesia is still suffering from the most important and challenging aspect of the health. That is children stunting. These are all one of the biggest challenges in the human capital indicator for Indonesia to be improved.
We designed the program with the advice of the World Bank, learning from the most successful country who already succeeded in addressing the issue of stunting, like in Peru, creating a coordinated effort by across ministrial, as well as between central and local government in addressing the issue of stunting.
So these are all the efforts by the government of Indonesia in addressing the issue of human capital. What I can share with you this afternoon, for this area of issue, this is not about whether you recognize that this is critically important. This is not about whether the government is directing resources to that. Most of the challenge is about execution.
And that is exactly the most difficult area. Unlike spending for infrastructure, hard infrastructure, in which you can actually see it yourself, physical infrastructure being built-- power generator, road, toll roads, railways, port, airport-- human capital spending and program, the result takes time. And you can't immediately identify whether your program is insufficient or inadequate to addressing the human capital.
I do hope that this issue is going to be continued discussed and addressed by many institutions, including universities like Cornell, in helping many countries addressing the most important issue, but yet the most challenging one. That is human capital development.
We also hope that we can use technology in addressing this most daunting problem. And we saw some of the initiatives in which technology can help addressing the issue of quality of education. We are now one of the new startup.
We call it [NON-ENGLISH SPEECH], which tries to substitute the lack of quality of teacher by allowing students to access the best teachers in Indonesia, so that they are not going to just suffer, because they go to the bad quality of school, have a bad teacher, so they cannot learn. This is one of an example in which technology can provide an alternative or solution for people to make progress.
Indonesia continues dedicating the policy toward this human capital. And this is going to be adopted by the government both at the central level as well as local level. But this issue is expensive. So you need to mobilize revenue in order for you to be able to finance this program.
That's why for us to be able to continue sustaining human capital development, we have to collect adequate tax. Tax reform is one of the most important elements of our ability to sustain economic development. We're already adopting this reform in order for us to be able to collect more, but collect in a more efficient and better way.
But revenue, or tax, is not only functioning in the form of revenue collection. We use tax as well as fiscal policy for us to be able to create the right incentive for economy and the people, so that they are going to allocate their attention and resources in the right direction.
So let me close my speech this afternoon. As I said, the world has changed tremendously because of industrial revolution, which is creating benefits for many countries to achieve development goals, creating shared prosperity and equality.
The fourth Industrial Revolution, or digitization, created more opportunity for developing and emerging countries to continue their development and [INAUDIBLE] or to catch up further. This is what we call enabling democratization of development progress.
Indonesia has achieved a lot in transforming economy from primary and natural resource-dominated economy to become more diverse and manufacturing-based. But the challenges remain. Infrastructure, institutional reform is very critical. And the most critical, another one which we discussed today, is human capital development.
We use all instruments and policy tools to address this most important area. And this instrument will be designed in a way that we are going to be able to monitor the progress and to achieve our development goals. Thank you very much.
[APPLAUSE]
KAUSHIK BASU: Friends, this was a talk of amazing breadth and range-- from the global economy, education, health sector, Indonesia. The floor is open. We've got about 15 minutes or so. Not too much time for Q&A, but you're welcome to ask-- yes, there are lots of hands over there. Let me start there. There's a mike that's going to come your way.
AUDIENCE: Hi. Is it on? Sorry. Hi. Thank you so much for the talk. So I have a question. In this vision of Industrial Indonesia 4.0, so where does the environment stand? We're living in a period where climate change is part of our reality.
So I think with the vision of Indonesia 4.0, I think it's a good vision and I hope that we can really start to sort of repair the damage that has been done that was caused by the Industrial Revolution that happened in the '70s and '80s in Indonesia under the New Order period. So I guess my question is, how long until we can sort of kick out all of the palm oil industries in Indonesia and then start having a more really sustainable development?
And then the second question would be about the education, the development of human capital that you mentioned about. And I agree that we really need to develop our human capital. And I think one way to do it is to reform the educational system in Indonesia, because especially with the national exams and everything, I don't think it's relevant anymore to have a national exam, because it's rife with corruption. We all know about that. So I think one of the ways to develop our human capital is to just have a complete educational reform. Thank you.
KAUSHIK BASU: Thank you very much. We do like to take a couple of questions. Let's take some three questions, OK? Shall we move it to the back over there?
AUDIENCE: Thank you very much. My name is [INAUDIBLE]. I'm from Binghamton University. My question is connected with the balance itself, because you mentioned about [NON-ENGLISH SPEECH], on which, in my personal opinion, it's almost like a skill share.
You share the skill, but if we try to highlight the terms in our education is [NON-ENGLISH SPEECH], skill is related with [NON-ENGLISH SPEECH] rather than [NON-ENGLISH SPEECH], which is essentially related with the-- let's say up to certain degree moral or ethics. So I'm just kind of wondering, how can you balance this Industry 4.0 things so that we do not lose the touch of [NON-ENGLISH SPEECH]? Thank you very much.
KAUSHIK BASU: Thank you. [INAUDIBLE] OK, so let's take one more with us. Then we'll move up.
AUDIENCE: Thank you. My name is Nagesh Gavirneni. I teach in the business school here. I wanted to ask you about the current state of the world affairs. For about 100 years, the world came together economically, and politically, and ideologically. And just as the developing countries have figured out the game-- just like Indonesia, I'm originally from India-- and we have figured out how to play on the world stage.
Currently, suddenly, the world seems to fall apart again. All the developed countries [? and ?] big economies are distancing themselves from the rest of the world. And now what should the developing economies do? Do you see this as a short-term blip, or do you see this as a long-term trend we should all be prepared for?
And then more importantly, being in the higher education, as you see around the room, the education seems to be the one place where the world is still together. And so what can universities do to buck this trend of fragmentation and make sure the world stays together? Thank you.
KAUSHIK BASU: OK, shall we take two more or do-- OK, let's take a few more then. Let's move up. Sorry, I should probably stick to one side to make it easier, but we've already moved here. A second row. Yeah. Just right here. Thank you very much.
AUDIENCE: So you spoke a lot about digitization, and the fourth Industrial Revolution, and particularly its benefits for emerging economies. But yet for all the good the fourth Industrial Revolution represents, there is also the potential for unwanted or even harmful consequences like the spread of misinformation or like the repressing of citizens, like we're seeing in China.
So how can countries with developing economies with the most potential for growth regulate their digitization without significantly impeding their growth? Thank you.
KAUSHIK BASU: Why don't you just pass it-- he has another question, so we can take one more. There. Yeah.
AUDIENCE: Thank you so much. My name's Dalton. I'm a student here. And I'm really interested in the institutional capacity you talked about. I think it's an issue of particularly looking at kind of the synergization between kind of the central and local governments.
We not only see that with government as an issue, but even with large intergovernmental organizations, between country offices, regional offices, and headquarters. So what strategies could we kind of take to increase that synergization, make sure the changes that happen at the top are pushed down into the grassroots level? Thank you.
KAUSHIK BASU: This will be testing your memory. Do you want to continue with more questions or--
SRI MULYANI INDRAWATI: No, I have this. No. [INAUDIBLE].
KAUSHIK BASU: Yeah, so why don't you take these and then-- yeah.
SRI MULYANI INDRAWATI: Yeah, OK. Thank you very much. I think many of you raise a lot of important issues, which may be not covered in my speech. And I'm not pretending to cover all important issues for Indonesia as well as the world.
One that you mentioned about the climate change and environment, Indonesia as a country also committed and fully aware that the climate change can change not only Indonesia, but globally. Within the global stage, you all see the setback especially because of the US role on that issue. But it doesn't prevent many countries to continue believing that climate change is an important issue.
As you mentioned about how we are going to use technology, especially in creating a more sustainable path of growth, you also mentioned about the palm oil. I think what Indonesia has done in using technology-- first, this is also linked to the institutional and governance. In the past, we don't even have one single map. So you have a map by the Ministry of Forestry, which is different from Ministry of Agriculture.
The map which belongs to the local government is not exactly the same with the national government. And that creates sometimes overlapping. In fact, actually, one case that we just actually faced in which one company in the mining area gets those permits, and then this company knows or found out that the same area has been claimed by seven other companies. Luckily, we won in the national arbitrage.
But this is one of the examples that, for Indonesia, when you talk about the issue of governance, the legacy of lack of governance, or bad governance, or even corruption, it's still lingering. And technology and as a transparency with the technology, we will be able to then continue creating a more transparent system.
And as I mentioned earlier, technology can create the ability for governments to respond if your intention is to try to respond in the right way, of course. If you want to just shut down, you can also shut down.
So with the technology, we were able to create one map in Indonesia now. The same map that will be used by the Ministry of Mining, Ministry of Forestry, Ministry of Agriculture, local government. But this single map as necessary condition is not sufficient. The next step is going to be then if you have a lot of overlapping claim for one single map, how we are going to settle those issue? Or even if you have a competing demand for the same location, how we are going to reconcile?
I'll give you an example, because you seem very concerned about climate change. One of the most important for the climate change is you are going to be able to produce energy sector, electricity, using geothermal. That's a clean one. Renewable, clean, comparing to coal.
But most of our geothermal location is actually overlapping with pristine and preserved tropical forests. So the question about whether you are going to be able to reconcile which one is important-- preserving your forest or you are going to allow geothermal to be done, explored. That will affect. This kind of thing which I mentioned about necessary but not sufficient. There are a lot of institutional complexities that still need to be addressed, including the legal reform.
So in my presentation today, I'm not pretending to address all issues about Indonesia or the world, of course, but I'm focusing more on Industry 4.0. But your point about the climate change is very much important.
And the country like us is committed. I mean, again, I can tell that Indonesia is still continuing committing to this national, determined intention to reduce carbon. We have our own contribution, 29%. We will reduce even further to up to 42% if it is supported by international.
We also participated in what you call it new economic, in which [INAUDIBLE], our previous chief economist in the bank before, who initiated this new economics in which you can grow, by taking into consideration climate change, better if we are going to get the financing. And the financing can come when our commitment on the financial sector is going to also support this.
I think your second question, or suggestion, in this case, about eliminating national exam, this is not about whether you eliminate national exam because they are creating distorted behavior, like corruption. In order for you to get the good score, you bribe people. Or for the school to be able that you are being seen successful in educating your students, then the teacher even coaching or giving the leak to the student. So it's about the question about morality, ethics, integrity is there.
But there is also a dilemma in here. The discussion in the cabinet is like this. If you're not giving an exam, how are you going to measure the progress? If you are not measuring, you cannot know whether you are making progress in education. Culturally, if you understand Indonesia, sometime you can-- I don't know. I'm also not pretending that I understand behavior and psychology as well as the whole culture of Indonesia.
But Indonesia has been known that if you not measure, then there is no accountability. But if you start to introduce measurement, there may be a downside to this. So maybe it's not the problem of measurement. It's about other problems. So the issue about this is actually about first designing the education system that's allowing students to learn.
You talk about [NON-ENGLISH SPEECH] and [NON-ENGLISH SPEECH]. It's not just teaching, but also educating, giving a lesson. Not only just the book lesson, but life lesson, values. And I agree with you, but this is not one single responsibility of school. Parents, society is also important. Media, including entertainment. So we cannot just pointing into one aspect or one group of stakeholder who is responsible for everything.
What I'm going to say-- and I haven't mentioned to you that in Indonesia education system is even more complex, because our education is divided between those who actually oversight or manage and control by the Minister of Education with those who actually oversight, and manage, and design by Minister of Religious Affairs. One third of our education system is under the responsibility of Minister of Education.
And that creates another complication about how you are going to design. So a lot of things that I haven't presented in here, but I can speak in here or I can give you a lecture for one year about the education systems.
[LAUGHTER]
But what I'm trying to say-- that we see that technology, digitization can possibly provide an additional or alternative solution. It's not solving all the problem, but it could provide a solution or improving the quality of education or result.
Because now, with the technology, with the Industrial 4.0, you actually can have an exam which is cheaper, a feedback which is faster. As I had said earlier, if you are going to make a questionnaire, you can really do the [INAUDIBLE] survey, which is very quick.
In the past, when I was a researcher, you really have to design questionnaire, you have to go, you have to find the respondants. Now you are just doing it, and we saw many students in Indonesia now doing their theses, just telling to their family WhatsApp group, I'm doing this thesis, can you participate in this questionnaire? Amazing.
So what I'm saying this afternoon is actually look at the technology and the digitization as one additional option, alternative for us to address the issue of human capital. But certainly, they are not solving all the problems. So I hope this is also addressing the second question about this education.
I mentioned [NON-ENGLISH SPEECH]. And you're just saying that this is skill skill. Skill sale.
AUDIENCE: Share.
SRI MULYANI INDRAWATI: Skill sale. Yeah.
AUDIENCE: Share.
SRI MULYANI INDRAWATI: Sale.
AUDIENCE: [INAUDIBLE] share.
SRI MULYANI INDRAWATI: Yeah, you are selling, right? Or scaling?
AUDIENCE: [INAUDIBLE].
SRI MULYANI INDRAWATI: Sharing.
AUDIENCE: Sharing.
AUDIENCE: Sharing.
SRI MULYANI INDRAWATI: Sharing skill.
AUDIENCE: Right. [INAUDIBLE].
SRI MULYANI INDRAWATI: Yeah. That's exactly what I'm explaining. So I hope that my explanation is addressing your concern or your question. And I'm not disagreeing, and I totally agree that this is not covering technology or even digital economy, a digital technology. It's not addressing all issues or even creating, as this third question-- or the fourth question, that it can create also misinformation.
So just like any tools, if you use it right, it can solve a certain problem. If you use it wrong, it can create another problem. I think we all recognize that technology, Industry 4.0, digitization can create an upside. I mentioned about unicorn in Indonesia in which, before it is almost impossible that you can think of shared economy in such a way.
It created huge value add. But it also creates a new problem-- privacy, data protection, consumer protection, abuse, criminal through this. What do you call it? A digital economy. Terrorism, even in this case. Hacker. So you have quite a lot of cybersecurity.
In fact, just a week ago, we had a meeting among Asian finance minister in Thailand. And the focus of our discussion is about digital economy, [? imposing ?] the financial sector development, but also focus on cybersecurity.
So what I'm saying in this case-- for a country, on the one hand, this is exactly the fourth question, how do we, developing country, have to design a regulatory framework that's allowing this technology to transform the economy to create more productivity, to boost more innovation, to create an environment of exchange of idea and knowledge much faster and more efficient? But how are we going to be able also protecting from the criminal, from abuse?
We now, in almost all country maybe-- like, in Indonesia, we established the Badan Cyber that is this institution who dedicated for the cyber crime. We didn't have those kind of institutions five years ago. We are now talking about consumer protection on the digital economy.
Our financial sector authority, as well as central bank, creating regulatory sandbox. So for financial technology, or fintech, who want to introduce new instruments, new products, they actually can do it within the sandbox, so that they will be seen what is the implication and their ability to comply with prudential regulation, including, what do you call it, compliance regulation within the financial sector.
These are the mechanisms in which many developing countries can actually still creating an ecosystem, an environment for digital economy to thrive while, at the same time, trying to learn about what is going to be the downside and implication of that. As a finance minister, my finance ministry colleague, we are not also pretending that we understand everything.
So what we are doing is, actually, we continue to engage with the industry. We establish regular communication. In fact, when I'm actually trying to design what is going to be the taxation for this digital economy, which has actually become one of the most important topics that we discuss in the G20, in OECD, we consult a lot.
We want to know about the business model. We want to know about what kind of environment that is allowing them to continue to thrive and how we can collect tax in the most efficient, without creating further distortion.
So a lot of things that you actually can still do in order for you to be able to provide an opportunity for this industry to thrive while, at the same time, you really have to watch and learn and willing to adapt your regulation when you see a new race coming.
So my short answer-- be very pragmatic. Continue learning. Continue adapting. And exchange with many regulators and policymakers, and engage with the industry.
On the last question about how we are going to make sure, within the context of government, in which you have a central and local government, and complexity of synergy, that a policy which is adopted at the top level is going to be translated into a consistent at the local level. Well, for the democracy and decentralized system like Indonesia, my short answer is, it's complex.
How we are doing it in Indonesia? If the previous government system under new order under President Suharto, which is top-down, you don't have those kinds of problems, meaning that, should you exchange this decentralized and democracy into authoritarian government? I don't think so.
But how we are going to do it? I think a couple of things that we tried to do. First, central government, especially president and the coordinating minister, establishing a common understanding with local governments. According to our constitution, local government is the arm length of the central government.
But they are not different entities, although they are locally elected. So these are the principles that is now trying to be re-established or, in this case, enforced. The legal framework and political power framework is actually-- it's not like you are having a different entity. But this is one system in which local government is the arm length of the central government.
Second, especially the central governments actually still have quite a powerful influence through the local government through what? Through two ministry-- Ministry of Home Affairs and Ministry of Finance.
Local governments, depending on the fiscal transfer, is still very, very high, from the general transfer to the specific transfer to the [INAUDIBLE] fund and all those things. So if we and the Ministry of Finance can design transfer to the local government, which is based on performance, based on objective, providing reward and punishment, I think we still can also creating a certain discipline or behavior according to the direction that we want. And that's exactly what we are trying to do.
So we diversify the instrument. And of course, Minister of Home Affairs, we can always creating a certain regulation that's disciplining the local government. I think that's all the answer of all these questions. I hope I'm addressing it.
Oh, the third question about-- this is like a global, big issue. Should we address this in a different session?
[LAUGHTER]
But I sympathize with your curiosity. I think the world now is being seen as a very, what do you call it, unprecedented or historical change.
AUDIENCE: New normal.
SRI MULYANI INDRAWATI: Or new normal. Yeah, the new normal in this case. So what I'm always telling myself-- because when we were in World Bank, the main shareholder, the biggest shareholder is the United States. And then all the advanced countries. And then now started with-- and multilateral institutes like World Bank was established in order for us to be able to achieve development globally through multilateral mechanism or cooperation. And then suddenly, our biggest shareholder doesn't believe in this multilateralism. So what should we do? Well, you have to accept the reality. That is the consequence of democracy, that they also try to export to many other countries.
So I think the world has to learn how-- each country has to be a responsible member of the global community. And developing country, emerging country after global financial crisis actually played a very important role in terms of the share of GDP globally, in terms of the issue, whether you're talking about climate change, you're talking about pandemic, you are talking about global public goods. I think these are all the area in which many emerging and developing country should be able to play your role regardless.
You don't need any patron anymore. You are an independent country. Indonesia independent since 73 years ago. So be an independent. So you have to play your global role. You have to advocate. You have to share policy. You do your influence.
And in fact, in this case, Indonesia, just starting last year, we established one dedicated division jointly between Ministry of Foreign Affairs and Ministry of Finance in order for Indonesia to be able to play a role at the global issue. What is the name of the issue, [INAUDIBLE]?
AUDIENCE: [INAUDIBLE] .
SRI MULYANI INDRAWATI: Indonesian [INAUDIBLE] Fund. So like USAID, you have Sida, we have the Indonesian Fund.
And this is one of the evolution in which Indonesia tries to play a responsible role at the global level. But without money, you're not going to play anything. So you have to make your house in order. You have to be prosperous enough. And then you are going to be able to also continue playing a role. I think this is what the new normal means for all of us. Thank you.
[APPLAUSE]
KAUSHIK BASU: There were actually lots of hands, but we've run out of time. We are going to confer a certificate of fellowship from the [? Bottles ?] Foundation. That's coming to Sri Mulyani now. And yeah, let's do that.
SRI MULYANI INDRAWATI: Thank you. Thank you so much. It's really my honor.
[APPLAUSE]
Thank you so much. Thank you.
KAUSHIK BASU: And there is another gift. Yeah.
SRI MULYANI INDRAWATI: Oh, OK.
KAUSHIK BASU: OK.
SRI MULYANI INDRAWATI: Does it mean now I belong to the family of Cornell?
KAUSHIK BASU: Yes, you do. Yes. Yeah.
SRI MULYANI INDRAWATI: Oh. OK.
[APPLAUSE]
Thank you. I hope I'm become a good member of family here. Thank you.
KAUSHIK BASU: Yeah.
Sri Mulyani Indrawati, known as an adroit economic reformer, delivered this year’s Bartels World Affairs Lecture April 10 in the Biotechnology Building, hosted by the Mario Einaudi Center for International Studies and Southeast Asia Program.
The Henry E. and Nancy Horton Bartels World Affairs Fellowship brings distinguished leaders in the international community to Cornell.
