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INDONESIA'S ECONOMICS.   Term Paper ID:22777 Click to get this paper

Essay Subject: Regional development, financial markets, regulation, foreign investment, banking, currency, inflation, debt.... More...

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Paper Abstract: Regional development, financial markets, regulation, foreign investment, banking, currency, inflation, debt. Paper Introduction: INDONESIA: THE PARADOX OF GROWTH AND CONTINUING ECONOMIC MISERY Introduction Forbes magazine, the American-based cheerleader for unregulated and unrepentant capitalism, enthused in the summer of 1995 over the “world’s best kept secret”—the Indonesian economy which has produced steady growth and, most endearing to Forbes, “six new billionaires” (Tanzer & Mao, 1995, p. 112). Forbes managed to remain oblivious to a life expectancy (at birth) rate of 58 years, a literacy rate of 77 percent, and one of the lower levels of socioeconomic well-being for the average person in Asia (Hunter, 1995, pp. 763-769; World Bank, 1995, pp. 256-274). Forbes, however, unwittingly identified one of the causes of these anomalies—corrupt interconnections between government and i Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The ASEAN member states as a group constitute a major market in Asia(Fitzgerald, 1994, pp. 112). International Factors Affecting Indonesia's Economy International considerations related to Indonesia's financial sectorare reviewed in this section. Journal ofCommerce, 5A. New York: St. New Statesman &Society, 7(318), S6-S9. ASEANEconomic Bulletin, 9, 323-337. W. The remaining 15 percent of thecountry's external represents loans to private sector entities that is notguaranteed by the Indonesian government. The proposal for investment must demonstrate that a transferof technology will occur. New York:Oxford University Press. (132nded.). 57). Striking contrasts. 82-83). (1995). (1995). 72-73). (1994, May). Financial liberalization in Indonesia. 247). World development report, 1995. 114). (1995, September). In the mid-198 s, there were wellover 2 such government protected monopolies. (Ed.). This model assumes further that exchange rates will fluctuate withrespect to relative rates of price inflation between countries. 3. Economist, 81-82. As a consequence, the Indonesian governmentdevalued the rupiah in October 1978 from Rp415:US$1 to Rp625:US$1. Inflation was a factor in the Indonesian economy during the 1971-1978period, and vigorous intervention on the part of the Bank of Indonesia wasrequired to support the fixed exchange rate established for the rupiah(Bunge, 1994, p. Over the years, the Indonesiangovernment under Suharto has exterminated approximately one millionIndonesians (Pilger, 1995, p. A failure to resolve this dispute and afailure by the Indonesian government to cease its violent politicalrepression in the East Timor area could compromise Indonesia's economicfuture. (1995). 134). ASEAN is a regional economic developmentorganization that is composed of five members: Indonesia, Malaysia, thePhilippines, Singapore, and Thailand. In this model, it isassumed that exchange rates adjust in a way which insures that, subsequentto conversion into another currency, a currency in question will purchasegoods and services in a foreign country equivalent to that which it couldpurchase in the domestic economy. With respect tothe United States dollar, Indonesia's currency is permitted to float--within limits. Washington: United States Government Printing Office. United Nations International Development Organization. Commercial banking in Indonesia is dominated by seven largegovernment-owned institutions. These considerations are addressed withinthe contexts of the access to Indonesia's financial market and institutionsby foreign entities, foreign currency exchange, and Indonesia's externaldebt.Foreign Access Foreign entities may participate in the Indonesian financial sectorthrough the foreign-owned commercial banks that operate within the country(Hunter, 1995, p. 2. These discussions cover the financial marketin Indonesia, the institutional structure of the Indonesian financialsector, and governmental regulation of the financial sector.The Financial Market The financial markets in Indonesia in the 199 s are experiencingincreasing activity levels in the 199 s (Roll, 1992, pp. AsianBusiness-Hong Kong, 44-46. Strikes are prohibited, and all unions mustaffiliate to the government-controlled All Indonesian Workers' Union.Should a strike break out, employers may call in the army. Critics of the monopoly regulationcontend that it is stifling economic growth, causing increases in inflationand unemployment, and jeopardizing the country's massive foreign debtposition. An important aspect of financial regulation in Indonesia involves thepermission of monopolistic enterprise (Asia, 1995, p. Indonesia's oil export earnings,together with the government's ability to control the use of thoseearnings, had enabled the Bank of Indonesia to successfully intervene ininternational currency markets to maintain the exchange rate of the rupiaharound target values under the floating exchange rate protocol (Wickman,1994, pp. (1995, 17 July). 323-337). Of Indonesia's total external debt, 85 percent represents either loansto the Indonesian government entities, or is debt that is guaranteed by thegovernment (World Bank, 1995, p. Important Economic Developments Affecting Indonesia One of the more significant historic events influencing country riskin Indonesia was the creation of the Association of Southeastern AsianNations (ASEAN) of which Indonesia was a charter member and is a currentmember (Hunter, 1995, p. ASEAN common tariffs. (Ed.). The proposal for investment must demonstrate that theinvestment will lead to increased employment for Indonesian citizens. 766). Other requirements for direct foreigninvestment in Indonesia include the following: 1. 33 ). These collusive ties have enriched the fewand deprived the many. 763). A more orderly andpredictable currency regulation regime was introduced in Indonesia in theearly-197 s. Asia 1995 Yearbook. (1995). Each of the five ASEAN countries also has its own industrialpolicy organization. (1992, 23 May). 1 ). The emergence of derivatives--options, futures, warrants, swaps,swaptions, collars, caps, floors, circuses, and so on and so forth--hasswept the international stock markets including the Jakarta exchange(Taming, 1992, pp. 1). Pilger, J. (1994). From the time of political independence subsequentto the end of the Second World War through the 196 s, currency regulationin Indonesia was chaotic (Bunge, 1994, p. 766). 256-274). As a consequence, the government isbeing forced to implement some reform in order to regain the confidence ofboth the Indonesian people and foreign investors. S9). Introduction. Indonesian bankers have made a mess ofthings. Participation in the Jakarta Stock Exchange,however, must be accomplished through an Indonesian broker. 119-174). TheJakarta Stock Exchange, Indonesia's only such institution, has suffered atotal share value loss in 1994 (Lindorff, 1994, pp. HongKong: Dow Jones Publishing Co. The 165monopolies being terminated, however, account for less than two-percent ofthe countries total imports, while those permitted to remain account for63.3 percent. "The world's best kept secret."Forbes, 156(2), 112-119. The removal of tariffs for interregionalmanufactured products within the ASEAN free trade area became effective in1994 (Gazard, 1994, p. (1994).Regional industrial co-operation. The problem has beenthat Indonesian bankers have always been eager to help people withpolitical connections, by many of these people fail to repay their loans. A class act to follow. 5 ). The explosion of derivatives is a cause ofincreasing concern for stock trading regulators. (Vol. The ASEAN report, 1995. 81-82). 766). Indonesia's Financial Sector The domestic financial sector of Indonesia is reviewed in thediscussions in this section. Under pressure from TheWorld Bank, the government agreed to end 165 of these monopolies. The Indonesian governmenthas tightened regulation of the financial markets.Institutional Structure The Bank of Indonesia is the central bank in Indonesia (Hunter, 1995,p. 1 ). S9). Until this processis much farther advanced, however, foreign access to Indonesia's financialsector will remain limited.Foreign Currency Exchange The basic monetary unit in Indonesia is the rupiah (Rp), and currencyregulation policy is developed by the Ministry of Finance and administeredby the Bank of Indonesia, the country's central bank since 1 July 1953(Hunter, 1995, p. 766). 134). A 1993 law setthe minimum membership for a union at 1 , , making organizing independentunions even more difficult (Webb, 1994, p. Monopolies arepermitted (created) by government regulation in Indonesia in a wide varietyof industries and economic activities. Webb, B. The external debt situation inIndonesia remains critical in 1994. Additionally, the government owns and operates one major savings bankand 1, post office savings banks (Hunter, 1995, p. (1994, 29 April). The industry clubs provide input to the industrial policyorganizations--both regional and national. Roll, R. The foreign-owned banks specialize in foreignexchange transactions and in direct lending operations to joint ventureinvolving foreign participation. Far Eastern Economic Review, 157, 72-73. Juoro, U. There are morethan 3,5 rural and village savings banks and credit co-operatives inIndonesia.Financial Regulation The emphasis in development in Indonesia is toward state participationin enterprise (Allen, 1995, p. The statesman's year-book, 1995-1996. Gazard, D. The network of trade regulations appear to critics to beintended to promote the economic interests of a highly selective segment ofthe Indonesian population, as opposed to the promotion of the economicinterests of all Indonesians. Indonesia: Acountry study. Forbes,however, unwittingly identified one of the causes of these anomalies-corrupt interconnections between government and industry, and preferentialeconomic and financial rewards for the family of President Suharto and thepresident's associates. (1994, 24 July). Forbes managed to remain oblivious to a life expectancy (atbirth) rate of 58 years, a literacy rate of 77 percent, and one of thelower levels of socioeconomic well-being for the average person in Asia(Hunter, 1995, pp. INDONESIA: THE PARADOX OF GROWTH AND CONTINUING ECONOMIC MISERY Introduction Forbes magazine, the American-based cheerleader for unregulated andunrepentant capitalism, enthused in the summer of 1995 over the "world'sbest kept secret"-the Indonesian economy which has produced steady growthand, most endearing to Forbes, "six new billionaires" (Tanzer & Mao, 1995,p. (1994, 2 September). S1 ). The Indonesian state-owned banks are caught in a cycle of politicalcorruption (Sender, 1994, pp. Indonesia.International Financial Statistics, 47, 234-237. Don't knock Oz's moves toward Asia. With the 51 percent indigenous equity requirement,however, a maximum of 49 percent only of profits is permitted to berepatriated. Industrial structure and the comparativebehavior of international stock market indices. Indonesia:A country study. Thesefive areas are industry, minerals, and energy, food, agriculture, andforestry, finance and banking, transportation and communications, and tradeand tourism. The PPP model is based on a contention that relative rates ofinflation determine long-range exchange rate changes. The monopoly creating regulations in Indonesia are called network oftrade regulation (Asia, 1995, p. Target values are established on the basisof the relationship between the rupiah and a basket of the currencies ofthe country's major trading partners. S. Tanzer, A., & Mao, P. Taming the derivatives beast. These industry clubs areassociations of industry participants in the various industries in theASEAN countries. Journal of Finance, 47, 3-41. Bunge, F M. (1995, 3 June). (Ed.). Hong Kong: Far Eastern Economic Review. A fixed-rate exchange systemis one in which different countries have agreed upon the rates at whichtheir various currencies will be exchanged in international trading, or onein which one country has a fixed-exchange rate for its own currency whichit is prepared to defend. International Monetary Fund. The country's external debtis the equivalent of 45.3 percent of gross national product and 5 .6percent of gross domestic product. In Bunge, F. Indonesia's Labor Sector In Indonesia, "exceptionalism" has been codified as pancasila, asystem meant to promote industrial peace and economic success (Webb, 1994,p. Lindorff, D. East Asia's sudden slide. 242). (1993, March). Profits are permitted to be repatriated at the prevailinginternational currency exchange rate which is applicable. 3-41). New Statesman &Society, 8(359), 22-23. 44-46). The most significant of the monopolies remaining are inbanking and finance, steel, plastics, oil trading, insurance, foodstuffs,tourism, and telecommunications (Asia, 1995, p. It alsoassumes that shifts in trading patterns will cause changes in the relativerates of inflation between countries, which will, in turn, maintain a long-term equilibrium in currency values.External Debt Indonesia has a total external debt approximating US$38 billion(International Monetary fund, 1995, p. Sender, H. In Bunge, F. 33 ). Indonesia also maintains a requirementfor domestic participation in any enterprise involving foreign investment.Specifically, a 51 percent indigenous equity position is required in anyenterprise involving foreign investment, and Indonesian nationals must beaccorded meaningful managerial responsibilities in the operation of theenterprise (Asia, 1995, p. Subsequent to the fourth calendar quarter of 1978, the government ofIndonesia has allowed the rupiah to float, with interventions by the Bankof Indonesia to prevent the currency from straying too far from targetvalues (Bunge, 1994, p. (Ed.). Martin's Press. The Economic Bureau functionsthrough five separate committees, each of which exercises associationindustrial policy development responsibilities in a separate area. This research examines the economic, financial,and political environments in Indonesia as a means of casting anexplanatory light on the paradox of growth and continuing economic miseryin Indonesia. Hunter, B. Conclusion The anomaly between economic growth and continuing social and economicmisery in Indonesia for the average person appears to be explained best bycorruption involving collusion between members of the Suharto governmentand private sector entities. The proposal for investment must demonstrate that productsand services required for the functioning of the proposed venture will beacquired from Indonesian sources to the extent that such products andservices are available in Indonesia. 763-769; World Bank, 1995, pp. Reference Allen, T. A similaroutcome has occurred in other Asian markets. A threat to the country risk of Indonesia is the long simmeringdispute involving East Timor. The Indonesian government has been moving slowly through the processof financial liberalization (Juoro, 1993, pp. There are 11 foreign-owned commercialbanks in the country. Profit repatriation is permitted on foreign investments in Indonesia(Allen, 1995, p. 5A). The economy. A more recent event that will affect the country risk of Indonesia inthe future is the formation of the Asian-Pacific Economic Council (APEC).If the promise of APEC is fulfilled, economic growth and development withinIndonesia will soar. Further, the external debt of Indonesiais the equivalent of 192.7 percent of the country's exports and 43 .1percent of Indonesia's net exports. The latter case applied to the Indonesian Rp. Following the chaotic post-independence period, the Indonesiangovernment established a fixed exchange rate for the Rp of Rp415:US$1 atthe beginning of 1971 (Bunge, 1994, p. 45). Washington: United States Government Printing Office. New York: United Nations. Fitzgerald, S. The World Bank. In addition to the ASEAN Secretariat and the national industrialpolicy organizations, the Economic Council of the ASEAN Secretariat hasformed what are called industry clubs (United Nations InternationalDevelopment Organization, 1994, p. B. A total of 7 of Indonesia's commercial banks are privately owned byIndonesians (Hunter, 1995, p. 766). (1994). Indonesia's monetary authorities manage the nation's currency througha combination of procedures which are related to the PPPM and the PFBM.The Bank of Indonesia actively intervenes in the foreign currency exchangemarkets in attempts to maintain targeted values for the rupiah. East Timor is not the first time in which the Suharto governmenthas resorted to mass extermination. The industrial policy organization for the ASEAN nations as a group isthe Economic Bureau of the ASEAN Secretariat (United Nations InternationalDevelopment Organization, 1994, p. 134). M. (1992, March). M. 22). (1994, 1 September). There are 117 commercial banks, 28 development banks, eightdevelopment finance companies, and nine joint-venture merchant banks inIndonesia. Wickman. Business Week,82-83. The Manpower Ministry sets wage levels based on "minimum physicalneeds" (Webb, 1994, p. 33 ). 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