Indonesia-Asia's Stumbling Giant 111

Case: Indonesia - Asia’s
Stumbling Giant
Case: Indonesia - Asia’s Stumbling Giant
1. What political factors explain Indonesia’s poor economic performance? What economic
factors? Are these two related?
The dictatorial rule of President Suharto was the main political factor that led to the economic
decline in Indonesia. His practices of repressing internal dissent and “crony capitalism” brought the
country into massive amounts of debt. Even with the rescue package from the IMF, the corrupt
government prevented the money from saving the failing economy. Economic factors that
contributed to the poor economic performance were foreign investors leaving, factories shutting
down and the fall of stock of foreign direct investment. Alongside the foreign investors, private
investors began pulling out of the all-important oil industry, decreasing one of Indonesia’s main
sources of income. The transitioning government mixed with the corruption and debt from Suharto
is definitely a motive for investors to discontinue business in Indonesia. The risks are greatly
increased for the businesses with such unstable conditions in the country.
Indonesia is an example of how political and economical factors are closely related and how they
impact the international business. The challenge for the Indonesian government is to keep the
economy certain while attracting foreign investments.
2. Why do you think foreign firms exited Indonesia in the early 2000s? What are the implications
for the country? What is required to reverse this trend?
Lack of infrastructure repairs placed 90% of the population without modern sewerage facilities, and
half of the populace had no electricity because of aging electrical grids.
Foreign investors would have been losing money because of time dealing with inadequate
infrastructure including roads that were also in need of repair, further hindering companies'
abilities to transport their products.
Once the foreign investors started leaving, Indonesia was forced to start selling off its natural
resources. They sold their mining products, oil and gas productions, and forestry to stay afloat. This
has kept Indonesia moving in the right direction as far as the public debt of the gross domestic
product (GDP) per capita or value of all goods and services produced in the country during the past
ten years. This has also lowered inflation from12 percent annual to just 5 percent in 2010, and
increasing the economic annum by 4 to 6 percent during 2001 to 2010.
Bringing foreign investors back is one way to bring money back into the country without strip-
mining all of its natural resources. In order for this to happen, the infrastructure needs to be
repaired.
3. Why is corruption so endemic in Indonesia? What are its consequences?
Transparency International, which studies corruption around the world, ranks Indonesia among the
most corrupt, listing it 137 out of the 158 countries it tracked in2005. Government bureaucrats,
whose salaries are very low, predictably demand bribes from any company that crosses their path-
and Indonesia's weakness for bureaucratic red tape means a long line of officials might require
bribes. This turns many people away from trying to start their own business as it takes on average
151 days to do so. It also turns away many foreign investors as they do not want to partake in such
as long and costly process to enter a new market. Also the police have been known to throw the
executives of foreign enterprises into jail on the flimsiest of pretexts, although some well-placed
bribes can secure their release.
One reason is that government bureaucrats' income is extremely low. They result to bribes to make
more money. Also the police are throwing foreign business owners in jail for the littlest things to
make a profit off of bribes. This is driving businesses away.
4. What are the risks facing foreign firms that do business in Indonesia? What is required to
reduce these risks?
Jail time, loss of income to bribes, and long waits to establish a business are the risks that foreign
firms are facing. A radical change is required to reduce these risks. Indonesia has an anticorruption
drive which may or may not work Indonesia, like many other developing countries, aside from
presenting attractive opportunities also presents a variety of potential risks to which investors may
be showing and exposed. These risks range from six years of political and economic turmoil, a
history of civil unrest, religious conflict and the threat posed by Islamic extremist groups, socio-
economic issues and the resulting effect of increased unemployment, which is estimated now to be
as high as 40% of a population of 220 million and as a result rising crime.
The road system is a mess, half the country's population has no access to electricity, and 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 This is in addition to having to work within an
environment which for the unprepared can not only is costly, but also challenging in terms of:
• A poor regulatory environment and lack of transparency;
• An ineffective and corrupt legal system; and
• An increasingly militant labor force, with manpower laws heavily in favor of the workforce.
Indonesia remains an attractive country in which to do business in for many. In order to reduce
weakness to the numerous of risks it presents; companies must take a pro-active approach to
security and risk management. Doing so naturally reduces the chances of a company becoming a
victim, but also minimizes the likely argue in the event an incident was to occur.

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Case: Indonesia - Asia’s

3. Why is corruption so endemic in Indonesia? What are its consequences?

• A poor regulatory environment and lack of transparency;

• An ineffective and corrupt legal system; and

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