QUESTION 1: 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. 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. 1
[INTERNATIONAL BUSINESS CASE STUDY]
K49CLC3 – FTU HCMC
QUESTION 2: 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...