Indonesia – Asia’s Stumbling Giant

20.09.2019 in Economics Essays
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The provided case is focused on the economic problems of Indonesia – one of the less developed countries of Southeast Asia, explaining their reasons and sources. In particular, it provides an insight into the economic situation in the country during the last decades as well as the factors and events that had the most significant impact on it. The primary problem of the case is the effect of the factors such as corruption and bureaucracy on the attractiveness of the country for the foreign partners and investors as well as on its economic performance as a whole. Another important problem mentioned in the case is the activity of the Indonesian government in the current situation (the choice between the development of the country and the own well-being). Finally, the case explores the problem of the foreign partnership significance for the economic performance of the country.

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Application of the Key Themes to the Case

The key theme that can be applied to the provided case is the national differences in political economy. It is clear that in each country, there are different ways of conducting economic policy and doing business. In this regard, the case of Indonesia is especially interesting since the country’s population is not only ethnically diverse (namely, more than 500 languages are spoken in Indonesia), but also experiences the lack of cohesion. In turn, this leads to the emergence of separatism in society. Therefore, the economic conditions, as well as the ways of doing business, may differ depending on the particular region of the country. As a result, the foreign companies that seek to open their branches in Indonesia or are already doing business there have to take into account all the above mentioned factors in order to avoid financial losses.

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  1. The poor economic performance of Indonesia can be explained by a variety of factors. First of all, they include the politic factors, namely the heritage of the dictatorial regime of Suharto, during which the overall economic policy of the country was heavily controlled by the government and the levels of corruption and bureaucracy were remarkably high. The economic factors that can explain the downfall of Indonesia include the significant debts accumulated by the country during the 1990s, high level of unemployment, and the low interest of the foreign investors in the country. Moreover, these factors are directly connected with the political ones. As was mentioned before, the country still experiences the impact of the inefficient economic policy conducted by corrupted Suharto’s government, which kept all the spheres of the Indonesian economy under strict control. This fact as well as the excessive red tape have damaged the reputation of the country in the eyes of the global economic community, making it a rather unfavorable and unreliable economic partner.

  2. One of the primary reasons for the foreign firms leaving Indonesia in the early 2000s is the high level of corruption in the country’s legal system. The situation is also worsened by the low labor productivity in comparison to the other countries of the Southeast Asia and the poorly developed infrastructure (roads, power lines, and supply channels). The abovementioned events have negative implications for Indonesia. First of all, the abandonment of the country by large corporations like Sony have resulted in a significant decrease in the foreign investments, which play a major role in the overall economic performance of the country. The shutting down of the factories belonging to foreign companies has also reduced the number of employed people in the country. Moreover, since the cases of corruption and judicial tyranny usually get much publicity, the reputation of Indonesia as a free and democratic state, which offers favorable working conditions for the foreign partners, has become questionable. In turn, many international companies will consider opening their branches in the different countries, which, again, results in a decrease in the overall economic performance of Indonesia and leaves no options for lowering the unemployment rate.

In order to change the situation, the Indonesian government must create an attractive investment climate in the country by conducting both political (the launching of anti-corruption and anti-bureaucracy drive) and economic (the development of the country’s infrastructure as well as conducting the measures for increasing the interest of the local population in the work) reforms.

  1. The high level of corruption in Indonesia mostly takes its roots from the 30-year dictatorial rule of Suharto. Despite the achievement of a steady economic growth, the favoring of the business enterprises of the dictator’s supporters and family has created the atmosphere of unfair competition, slowing down the development of the country’s economy. Moreover, the military backup of the government combined with the brutal repressions of the internal dissent has created the atmosphere of permissiveness without any responsibility for the one’s actions among the political elite of the country. As a result, the levels of bureaucracy and corruption have grown significantly (namely, the most part of the rescue package provided by the International Monetary Fund has been misused) and the impact of Suharto’s policy is felt even today.

The consequences of such corruption are dreadful for the country’s economy. As was mentioned before, it worsens the investment climate in the country, making it much less attractive for the foreign partners. Given the fact that Indonesia heavily depends on such relationships, being a source of cheap labor for the industrial giants like Sony, the high level of corruption has a direct effect on the country’s economic performance.

  1. The foreign companies that seek to open their branches in Indonesia or are already doing business there are subject to a number of risks of political, economic, and social nature. First of all, the high levels of corruption and bureaucracy create artificial barriers for the expansion as well as make running the business much more difficult. As a result, there is a risk that the real expenditures of the company will be much higher than the forecasted ones due to the delays in the process of obtaining the license and the existence of bribing as a common practice in the country. Moreover, the poorly developed infrastructure, as well as the unfavorable climate conditions in certain regions of the country, may hinder the logistics of the company, increasing storage and transportation costs and causing delays in the supply of the raw materials and finished products. Finally, the rather tense social situation (the ethnical diversities in the country’s population together with the lack of cohesion and the presence of separatism) can lead to revolts and terrorist acts, which may harm the company in direct (the damage of the factory) or indirect (the disruption in the work of the supply chain) way.

In order to decrease the possibility of the abovementioned risks, one must carefully select the location of the company, judging on a variety of social and economic factors (the demography of the region, the state of the infrastructure, and the types of resources present in the area). Moreover, it is imperative to thoroughly study the country’s legislation, namely the points that regulate the activity of the foreign entities. Finally, it is advisable to keep in touch with the local labor agencies as well as public organizations.

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