Indonesia Asia Stumbling Giant

Indonesia - Asia’s Stumbling Giant

1. What Political factors explain Indonesia’s poor economic performance? What economic factors?
Are these two related? Political factors are corruption and red tape, absolutism and crony capitalism. Economic factors are poor infrastructure and fleeing of foreign companies from the country decreasing the foreign investments in the country and increasing the unemployment rate in the country.
The political and economic factors that hinder growth in Indonesia are entangled.

2. Why do you think foreign firms exited Indonesia in the early 2000’s? What are the implications for the country? What is required to reverse this trend?

I think the foreign firms started exiting Indonesia due to corruption, business costs, poor infrastructure, unreliable legal system, stagnating economy, uncontrolled crime. Some foreign firms did invest, but eventually they left as all their profits were evaporated by giving bribes to the officials. Even though there was an anti-corruption drive, it had no power and even the political leaders didn’t care as they themselves were so corrupt. Also Indonesia lagged behind its neighboring countries like China, India, Malaysia and Thailand which encouraged the foreign firms migrating to these countries.
All these resulted in an economic stagnation increasing the unemployment rate, fall in GDP.

This can be reversed by curbing the corruption, reducing the paperwork associated and speeding up the processes, investing in domestic infrastructure by improving roads and electricity. People should elect good leaders who could bring free market trade and avoid favoritism. Privatizing business processes. Increasing the officials salaries which would make them not to expect corruption. 3. Why is corruption so endemic in Indonesia? What are its consequences? The reason of endemically high level of corruption in Indonesia is due to a. Very low salaries of Government bureaucrats. b. High Government intervention in the country’s economy. c. Public officials have a lot of discretion in implementation of rules. d. The political elite themselves being corrupt. e. Inclination for bureaucratic red tape. The consequences are: a. Country’s economic stagnation. b. Barrier for newly started business. c. No confidence on government officials by its own citizens which reduces the official’s authority on the citizens. d. Increase in crime rate.

4. What are the risks facing foreign firms that do business in Indonesia? What is required to reduce these risks?

There are political and economic risks facing foreign firms to do business in Indonesia. 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, time (151 days to start a business) associated with red tape and corruption.

A poor infrastructure in roads and the unreliability of the electric grid together creates unwelcoming business climates decreasing business confidence in Indonesia, leading to capital flight and a decrease in investments, shaking the very foundation of economic growth which is leading to the economic stagnation.

These risks can be reduced by curbing the corruption, reducing the paperwork associated, investing in domestic infrastructure by improving roads, electricity…etc