Indonesia Case Study free essay sample

What political factors explain Indonesia’s poor economic performance? What economic factors? Are the two related? The impeachment of the Indonesian dictator Suharto is widely considered one of the most exciting political happenings of recent years. After dealing with inflation and a bad economic depression during the final year of President Sukarno in the early 1960s, Indonesia experienced rapid and lasting economic growth for three decades under the New Order government of President Suharto. The economic growth was followed by a severe decline in poverty, as it went from 40% of the population in 1976 to 11% in 1996. However, looking only at the New Order’s economic accomplishment and ignoring its downfalls give us an unfair view of that time era. The general view in Indonesia is that after the Asian economic crisis, the New Order brought economic ruin to the country. For thirty years, Indonesia’s economy grew steadily under the ironclad rule of President Suharto – but at the heavy cost of internal suppression of dissent. We will write a custom essay sample on Indonesia Case Study or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page This suppression of dissent robbed Indonesia’s economy of the vitality and incentives associated with a free-market economy in which individual property owners, who in the process of seeking to accumulate wealth enrich the entire economy and create economic growth. While Indonesia has since overthrown the dictatorial government, corruption and red tape remain rife at almost all levels of government in Indonesia. A World Bank study revealed how excessive red tape in Indonesia hurts business activities: An entrepreneur in Indonesia must wait an average of 151 days to complete the necessary paperwork to start a business, compared to 30 days in Malaysia and a mere 8 days in Singapore, severely hampering the Indonesian entrepreneur’s speed and desire to participate in the economy. In turn, the excessive red tape translates into long lines of government bureaucrats, whose low salaries make it attractive for them to seek a bribe at every step of the business transaction, further distracting and detracting the entrepreneur from legitimate business pursuits. In addition to these political factors, Indonesia also suffers from economics factors that hinder growth. Indonesia’s poor infrastructure makes it difficult to conduct business: A poor infrastructure in roads signifies that it is difficult to transport goods and services to the consumers, and may even hinder export-related businesses if companies cannot ship the finished intermediary or final products to their intended customers abroad. The unreliability of the electric grid means that production and even administrative activities can be interrupted at any moment. Together, these inhospitable business climates decrease business confidence in Indonesia, leading to capital flight and a decrease in investments, shaking the very foundation of economic growth. The political and economic factors that hinder growth in Indonesia are indeed intertwined. The unfriendly political environment makes it less likely that foreign or domestic capital would be interested in investing in Indonesia because of the business costs associated with red tape and corruption. In turn, the lack in investment feeds the desire of government officials to continue to seek bribes and create red tape in order to supplement their low income due to a stagnant or slow-growing economy. Why do you think foreign firms have been exiting Indonesia in recent years? What are the implications for the country? What is required to reverse this trend? After Suharto, Indonesia moved rapidly toward a vigorous democracy, culminating in October 2004 with the inauguration of Susilo Bambang Yudhoyono, the country’s first directly elected president. The economic front has also seen progress. Public debt as a percentage of GDP fell from close to 100 percent in 2000 to less than 60 percent by 2004. Inflation declined from 12 percent annually in 2001 to 6 percent in 2004, and the economy grew by around 4 percent per annum during 2001 to 2005. During 2006–07 Indonesia was struck by a series of natural disasters, including an earthquake and tsunami in Java in May and July 2006 and earthquakes in Sumatra in March and September 2007. Inflation started to reaccelerate in 2005, hitting 14 percent by year end. Growth in labor productivity has been nonexistent for a decade. Some observers feel that Indonesia is hobbled by its poor infrastructure. Public infrastructure investment has been declining for years. It was about $3 billion in 2003, down from $16 billion in 1996. The road system is a mess, half the country’s population has no access to electricity, the number of brownouts is on the rise as the electricity grid ages, and nearly 99 percent of the population lacks access to modern sewerage facilities. The tsunami that ravaged the coast of Sumatra in late 2004 only made matters worse. Mirroring the decline in public investment has been a slump in private investment. Investment in the country’s all-important oil industry fell from $3. 8 billion in 1996 to just $187 million in 2002. Oil production has declined even though oil prices are at record highs. Investment in mining has also fallen from $2. 6 billion in 1997 to $177 million in 2003. Implications: Indonesias recent economic and political collapse is a stark example of the outright failure of a development paradigm promoting large-scale economic growth without political, social, legal, and environmental safeguards. It is facing a humanitarian and environmental crisis that current domestic and international efforts do not adequately address. After the Suharto’s fall, Indonesia became more democratic and decentralized which were likely to confront corruption. However, corruption has gotten worse as institutions of democracy were still unstable during the critical transition (Smith, 2003). A widely agreed structural factor underlying corruption in Indonesia is a political system which vests an inordinate amount of power in the hands of the executive, and the president in particular. There is no balance between the executive, legislative and judicial arms of power. Commentators differ in the emphasis they give to other factors which characterize the environment of corruption. Lopa (1998) highlights the greed of those in positions of power, who are often already wealthy individuals, combined with a weak system of law enforcement where investigations are poorly carried out and few prosecutions are made. Rose-Ackerman (1997:19–20) argues that incentives for corruption are provided by the high level of funds and resources under the discretionary control of officials, combined with poor formal laws on corruption, the lack of credibility of law enforcers, and the poor conditions of civil service employment. Other contributing factors include the limited extent of auditing and monitoring within government, the lack of public awareness of government activities and a tendency not to file complaints, the low level of press freedom and the controls preventing individuals from forming non-government organizations, and the poor level of active political opposition. Consequences: First, corruption imposed a high burden in business transactions, since virtually all transactions with government bureaucrats require huge illicit payments. It is good to assume that many businesses who could not afford the high cost of bribing government officials either move to the underground economy, which ofter requires less â€Å"corruption – tax† or go out of business together. Second the corruption is also has a huge impact on the culture of Indonesians. It becomes a norm right now that any dealings between citizens and government officials have to be sealed with payment of bribes. Many social commentators have concluded that Indonesia has a culture that tolerates corruptions, in which social behaviors and cultural norms have become so ingrained and so tolerating of corrupt behavior that it is virtually impossible to fight it. Third, corruption has destroyed confidence among citizens toward government officials and bureaucrats, which has reduced their authority among citizens, leading to the significant increase in the level of social anomie and powerlessness among the least well – off members of the society and higher crime rates, violence abuse, decline in social solidarity, etc. Finally, corruption has been blamed as one of the cause of social grievances that are widespread in many parts of Indonesia that if not being addressed immediately, could bring the Indonesian state to the brink of collapse. What is required to reduce these risks? 1. Dollar yields highest risk. The study found that many Asia-Pacific firms showed significant exposure to fluctuations in one or more of the world’s four major currencies: the U. S. ollar, the euro (deutschmark prior to 1999), the Japanese yen and the British pound. Some of the greatest vulnerabilities resulted from fluctuations in the dollar which, over the study period, impacted 54 percent in Indonesia. The researchers pointed out that â€Å"a potentially wide range of firms were exposed to rate movements regardless of their direct financial exposure. † As might be expected, currency fluctuations affected the profitability of companies whose financial assets and liabilities (most notably debt) were held in f oreign currencies and that had foreign-based operations. However, possibly less obvious was the significant impact that exchange rates had on companies with no foreign currency exposures but who competed with companies that did. Such companies could increase their market share as a result of a favorable exchange rate movement to the detriment of the firm with no apparent foreign currency exposure. Not surprisingly, the greatest period of vulnerability was the Asian financial crisis, which occurred during the third study segment (1996-1998). More than half of the studied companies in Indonesia were exposed to the dollar, and about a quarter of the firms in Singapore were exposed to the yen. 2. Risk in insurance rush Increased insurance investment in Indonesia also means heightened exposure to the risks associated with insuring countries that are vulnerable to natural catastrophes. Home to 17,000 islands that straddle the Pacific Ocean’s volcanic â€Å"ring of fire,† the vast archipelago sits on fault lines that make it more susceptible to seismic activity. In October 2010 alone, the country endured an earthquake, tsunami and volcano in two locations. â€Å"A lack of detailed historical claims data [following catastrophes] makes it very difficult for insurers to model, and therefore appropriately price the risks,† Dean Carrigan, a partner at Australia-based law firm Clyde Co, told Insurance Insight. â€Å"If there is sufficient data it can be priced, but with the current low levels of insurance penetration, the question is would anyone buy it? While foreign insurers may see a possible gap in the market as new minimum capital requirements squeeze smaller domestic insurers out of business, optimism should be tempered by the government’s propensity to protect Indonesian business interests.