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Case Study of Globalisation in Indonesia

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Published: Fri, 13 Oct 2017

Globalisation

Globalisation encompasses increased international economic integration, evidenced by growing global markets, global resource flows, transnational corporations, global consumption patterns and intergovernmental agreements, resulting in economies becoming more interconnected through:

  • Increased trade of G&S globally
  • Increased global flows of production factors or resources (foreign capital, labour, and technology)
  • Increased foreign investments, resulting in technological transfers
  • Increased private savings or finance globally
  • Harmonisation of the business cycle for globalised economies
  • Increased economic interdependencies
  • Increased growth of size and quantity of TNCs with global operations
  • Increased global consumer trends
  • Increased inter-government consultations/agreements to manage economic contacts and disputes

Globalisation has allowed the Indonesian economy to reform to be in accordance with competitive economic growth rates. Globalisation represented the catalyst for Indonesia’s sustained growth once the oil boom of the 1970s subsided, as it allowed international exporting of manufacturing goods, made possible by uniform technological advancement with strong economies, leading to a GDP drop of only 2.6%.

Influence of Globalisation on the World

Globalisation has had lasting impacts on the globally integrated economy regarding trade, global financial and investment flows, and transnational corporations. Global market growth is initially evident through growing trade links of G&S between countries (incorporating consumer G&S, capital goods and intermediate G&S); as validated by increased global GDP from 12% in 1964 to 48% in 2010 for trading.

Figure 1 – The Economy and Global Markets

% of World Exports of Goods

Trade Dependency in Goods (X+M as a % of GDP 2011)

Rank

2011

%

Rank

High

%

Rank

Low

%

1.

China

11.6

1.

Singapore

341

1.

Cent. African Rep

15

3.

USA

8.2

2.

Hong Kong

211

2.

Brazil

20

4.

Japan

5.6

3.

Zimbabwe

184

3.

USA

22

17.

India

1.6

5.

Malaysia

169

20.

India

37

18.

Australia

1.5

6.

Vietnam

155

21.

Australia

38

23.

Indonesia

1.2

12.

Thailand

129

54.

China

54

The table exposes globalisation through countries’ high trade dependencies (the importance of exports/imports compared to a nation’s GDP); with scattered countries withholding high trade dependencies, validating the presence of increasingly necessary global trade-flows (outliers affected by externalities including war/civil strife, increasing trade dependency). Globalisation is highlighted by the GFC affecting trade dependencies systematically, where all high dependency nations had lowered percentages, losing 20% a year following the GFC, but in 2011 all these nations’ trade dependencies began to harmonise again. Similarly, low trade dependency nations reduced in trade dependency in 2009, but re-harmonised in 2010.

  • By the circular flow model, exports are injections into the flow, whilst imports are leakages. Thus, increased exports increases the total sales of firms, which motivates increased output and increased GDP. Increased GDP yields increased factors of production, which raises household income, further encouraging more consumption spending, and savings, with taxation revenue obtained by the government sector.
  • Imports, contrastingly, increase access to more G&S, and puts pressure on local firms to be more efficient as a means of competing with imports (a lack of competition will void efficiency and resources, leading to ceilings placed on the economy’s total supply). This is shown especially with technology, as a means to keep on par with high-income economies.

Global financial flows undertook exponential increase from 1975 to the GFC due to globalisation, inducing:

  • Expanding international trade equivalent twice real GDP growth
  • Expanding international direct investments thrice real GDP growth (before 2001)
  • Expanding international equity investment is ten times real GDP growth
  • Increased global private capital-flows grew from 10% of GDP in 1990, to 32% of GDP in 2005 Figure 2 ­– Global Capital Inflows – $US billion

INVESTMENT

1993

1996

1997

Direct

219

334

418

Portfolio

754

919

1002

TOTAL

973

1253

1420

Furthermore, the growth of private savings flows inter-economically is emphasised by:

  • Direct Investments: A purchase allowing foreign investors to exercise control of foreign assets for future decisions.
  • Portfolio Investments: A purchase of equity of foreign assets, but unlike direct investments, there is little control, growing more than direct investments, seen in Figure By the circular flow model, the inflow of these foreign savings increases local savings for financing investment expenditures. FDI promotes technological imports, increasing productive efficiency

Due to globalisation, TNCs are able to create subsidiaries internationally to expand global production facilities.

Figure 3 – Geographic Distribution of Foreign Subsidiaries of US-based TNCs

Location of Subsidiary

Pre 1914 %

In 1968 %

Canada

27.0

15.5

Mexico

2.5

6.8

South America

5.7

19.1

UK

19.7

10.2

Europe

41.8

29.4

South Africa, Australia, NZ

2.5

8.9

Asia

0.8

7.5

Africa, Middle East

0.0

2.6

  • Figure 3 highlights that coherent national links allows scattering of foreign subsidiaries, increasing high-income nations, increasing confidence of cultural integration of foreign subsidiaries, resulting in increased amount of financial resources due to increase in world GDP. Anti-trust legislations provide lesser ability to expand domestically, but provide incentives to grow via international expansion. Finally, globalisation pressures transnational management to achieve growth due to vast amounts of competition, by entering new markets.

Economic Strategies Being Utilised

Indonesia’s emerging economy is subject to economic strategies used as part of the globalisation process to promote economic growth and development, including exploitation of oil prices, forced structural change, export-oriented development strategy for non-oil sectors and IMF appeals. Suharto’s government (1967-1998) yielded abrupt changes in Indonesian economic development strategies to surmount government indebtedness, in attempts to increase investment levels for public and private economic sectors to achieve economic growth and development by expansion of heavy industries.

In the 1970s, FDIs and foreign loans provided savings, with 50% of funds used for investments in the Indonesian non-oil sector. Suharto’s strategy, centric on labour intensive consumer goods manufactures (including textiles and clothing) instead of heavy industry, had been an import-substitution behind a protective tariff. Indonesia’s prevalent state-owned oil company: ‘Pertamina’ provided ~70% of total exports, with government-independent strategies to spend on steel mills and increase its foreign loans. The 2000% rise in oil prices from 1973 to mid-1980s resulted in exponential increase of oil and LNG export earnings from US$641m to US$10,600m. With vast funds, the Indonesian government realised many domestic private firm conglomerates expanded exponentially (aided by military, contracts, credit and restrictions on competition), leading to structural change with greater investments in heavy industries such as steel, petrochemicals, oil-refining, and plywood industries possible by export restrictions of logs (validated by a $3899m increase in plywood exports from 1981 to 1996).

Due to a subsiding oil boom, the Indonesian government prioritised non-oil exports, so foreign exchange earnings increased to sustain payments and government-sector debt pressures. This shifted focus of manufacturing sectors from domestic markets to export markets to satisfy this instability, aiming to:

  • Increased rupiah devaluation to increase international competitiveness, resulting in decreased wage costs compared to nations including Thailand and Malaysia. Although, the devaluated rupiah results in more expensive imports and cheaper exports, motivating greater export quantities in labour intensive industries, predominantly clothing and textiles.
  • Improved foreign savings access, leading to individuals in the 1990s with foreign investments exceeding US$50m was permitted complete foreign-ownership. Despite this, many foreign-restrictions remained including compulsory local partners, and lowered ownership shares for foreign firms within the joint venture as time progresses. Similarly, the strategy aims to decrease regulatory controls within private firms, motivating greater foreign savings access without government-control (unaffordable governmental trade obligations).
  • Increased tariff reduction on goods to motivate cheaper inputs, increasing economic-efficiency, and motivating international negotiations so export markets are more accessible internationally.
  • Deregulated financial sector to increase competition between dominant state-owned banks and newer domestic/foreign banks, to create private sector independence, achieving greater private investment expenditure than investment spending in the public sector by the 1990s.

Due to financial institution debt issues and collapsing property booms within Indonesia, there was capital flight (when assets, money or resources quickly flow out of a country) and collapsed exchange rates with 14000 rupiah to each US$, developing into lacking foreign reserves and desperate appeals to the IMF. These pleas led to an IMF rehabilitation program:

  • Rising interest rates to support the rupiah and to remain stable in the vastly expanding inflation rates (58.5$ in1998)
  • Financial reforms, with dominant banks closing, others nationalised so the government was able to support it, to avoid medium-term collapse in credit availability, but exponential debt issues made this is a difficult issue to mitigate in the short term
  • Rising unemployment due to collapsing credit, with real GDP falling 13.2% from 1998-99
  • Lowered government spending to alleviate pressures to remain dominant in food subsidies

The Impacts of Globalisation on Indonesia

Globalisation has impacted Indonesia’s emerging economy in its placement in the globalisation process, primarily inadvertently led by proposed economic strategies relating to primary export sectors, structural economic change and IMF rehabilitation.

Figure 4: PERCENTAGE INDUSTRY CONTRIBUTIONS TO GDP OF INDONESIA

Industry

1976

1979

1982

Agriculture

31.1

28.1

26.3

Mining/oil

18.9

21.8

19.6

Manufacturing

9.4

10.3

12.9

Electricity, gas, water

0.6

0.5

0.6

Construction

5.3

5.6

5.9

Transport/communication

4.3

4.4

4.7

Banking

1.4

2.1

2.7

Other

29.0

27.2

27.3

TOTAL

100.0

100.0

100.0

Figure 4 highlights globalisation triggering increased oil prices and motivating a structural change, emphasised by a predominant mining sector growing until the early 1980s, with successful oil exporters hindered when world recession and inflation in stronger high income economies reduced oil demands during low 1980s. Lowered demand motivated replacements to oil and developing oil-saving technologies, shifting world-energy usages for the following two decades: increasing exports for alternative energy including coal for electricity and heating.

Integrated global markets, for primarily fuels, yielded:

  • Lowered export earnings due to lowering oil prices, which decreased by half in the low 1980s to 1986 (dropping to US$12/barrel)
  • Lowered account balance from US$2.2b surplus to US$7.0b deficit from 1980 to 1983, increasing pressure on Indonesian currency (rupiah) and stability of foreign reserves, further disadvantaged by economic nationalism movements deterring FDIs. Government debt repayments grew US$933m from 1975 to 1985, increasing dependence on foreign aid and loans, diminishing effects of their financial export predicament.
  • The predicament shone imperfections to Indonesia’s economic development strategies – unable to produce positive outcomes elsewhere within Eastern Asia, demonstrating that oil exports were unreliable for economic development and nationalism in being globally integrated. These unreliable economic-development-strategies were:
    • Import-substitution strategy allowing public and private firms to develop coherent links with law-makers in low competition and high-protection business environments
    • Military involvement within Parliament, granting specific business operations
    • Attempted sustained economic growth up to the late 1990s and early 2000s from oil lacked cash inflow, leading to increased bureaucrats supporting economic reform, coming with greater influence as the Indonesian government pursued reliable economic strategies focusing on non-oil exports

Figure 5: ECONOMIC GROWTH: ANNUAL CHANGE IN REAL GDP

 

1997

1998

1999

2000-07

2008

2009

2010-11

2012

Indonesia

5.0

-13.2

0.9

5.1

6.1

4.5

6.3

6.0

Thailand

-1.4

-10.8

4.2

5.3

2.5

-2.3

4.9

19.5

Malaysia

7.3

-7.4

5.8

5.4

4.6

-1.7

6.0

6.4

Indonesian growth 1991 onwards validates a link between oil’s global demand, and sustained economic growth correlating closely to Malaysia and Thailand, despite weak oil prices.

Figure 6: GROWTH IN PRODUCTION, BY SECTOR, IN INDONESIA

 

Average Annual Growth Rate (%)

Sector

1965-80

1980-90

1990-2002

2000-2010

Agriculture

4.3

3.4

1.9

3.5

Industry

11.9

6.9

4.5

4.1

Manufacturing

12.0

12.8

5.9

4.6

Services

7.3

7.0

3.4

7.3

Figure 6 correlates to slower growth rates with the uprising mining sector from 1980 until early 2000s, accommodated by the AFC in 1997-1999 resulting in lowered GDP, but nonetheless, manufacturing reigned as the leading emerging economic sector from 1990-2002.

This Indonesian financial crisis was motivated by centralisation of power within the Suharto government, leading to an undesirable focus of power on those within personal favour of his regime including the president and close family, leading to increased consumption of wasted funds and greater earnings from external, mostly illegal sources of activity. However, reforms in the financial sector during the mid-late 1990s (highly demanded by foreign aid donors), lead to unsustainable increases in deregulation, and increased avoidance to prudential regulation and build-up of private foreign sector debt, correlating to ‘boom-like property developments’, and hence a worsened financial problem for Indonesia on the basis of its coherence within the global market and its highly demanded exports.

Due to globalisation, and other nations building upon Indonesia’s oil/non-oil exports, the outcomes of reforms were that private banks and governments responded more to induced pressure from lending negotiations, with the Central Bank/Bank of Indonesia supporting these lending banks through liquidity, with 60-70% liquidity credit siphoned off upon reaching these banks.

Resultant of Thailand’s financial institution failure (sporadic lending on property development), and Indonesia’s cash demand, an increased flow of money from Thailand into Indonesia (due to close economic exporting ties), resulted in bank collapse and lowered exchange-rates, developing into business closures and lowered credit availability, meaning extreme unemployment within Indonesia, to which the IMF provided rehabilitation. The influx and dependence of currency from Thailand forced an increase in closure of small banks in early 1998, resultant from lending to their respective shareholders at unsustainable rates, forming non-performing loans unable to be repaid. Alongside foreign aid and loans, recapitalisation of banks costed 50% of Indonesia’s GDP in early 2000s.

AVOIDING THE GFC – ECONOMIC STRATEGIES AND RESULTANT IMPACTS

Increased resource demand from Indonesia to China, lead to an influx of funds promoting Indonesia’s economic growth, producing greater diversification of oil/gas exports, with 2008 bringing exports of 190m tonnes of coal, rivalled by Australia’s 126m tonnes.

One of the leading environmental controversies arisen through Indonesian exports is palm oil (alongside China makes up a third of global imports), involving deforestation and peat burning, which forms greenhouse gases and has become Indonesia’s leading source of air pollution. With forest-derived products being a competitive industry due to its significance on Indonesia’s cash influx, illegal logging provided an unexpected ‘edge’ within competing businesses – with up to 73% of forestry products being manufactured from illegal manufacturing methods.

Following economic recession of the AFC, Indonesia’s success during the GFC (shown in Figure 5) was due to:

  • Less reliance on trade (exports pertaining to 30% of nominal GDP) especially between high income markets such as Singapore, Malaysia and Thailand
  • Declining inflation motivated private consumption, accounting for ~60% of GDP
  • Healthy harvests maintained higher income for farming jobs, increasing consumption
  • Increased provision of economic stimuli motivated by political favour of the Democratic Party during 2009 elections, providing grants to 18.5m poor households with tax-cuts part of the fiscal stimulus package with lowered exports during the GFC. Since imports declined more than exports, net exports are the contributors to GDP growth. The government introduced pay-rises for civil servants to quicken budget expenditure to reduce risk in sudden investment declines in manufacturing industries. The resultant budget deficit in 2009 was ~2.6% of GDP
  • Emphasis on exports in Indonesia meant that stimulus distributed within China temporarily recovered the flow of resource income as prices and quantity of exports recovered
  • Indonesian banks were motivated by the 3.0% lowered interest rates, meaning increased repaid loans, reduced lending availability and decreased credit demand. Negotiating with China, loan/swaps were achieved (exchanging cash flows) such that Indonesia was protected from sudden outflows of savings or lacking borrowing ability of banks

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