Economic Stability in Indonesia and Singapore - Case Study Example

International Business Student Number: Course Code: Instructor: 10th April, 2013. (2030 words) Table of Contents 1 Introduction…………………………………………………………………..…..3 1.1 Definition of Economic Stability………………………………………3 1.2 Description of Economic Stability…………………………………….4 2 Economic Stability in Indonesia and Singapore……………………..………5 2.1 Comparisons between Indonesia and Singapore………………….…6 3 Conclusion………………………………………………………………………..8 4 References……………………………………………………………………….9 Introduction The economic performance of a country is pegged on many factors that affect its macroeconomic, and to a lesser extent, microeconomic conditions. Many a country have found themselves on the right footing on matters economy just by ensuring that the factors that affect both the aforementioned conditions are controlled well enough to ensure that the long term outlook is predictable. This may be done through stochastic processes or through other means that may render a stable environment for business. Factors that are likely to influence the long-term wellbeing of an economy range from inflation and political stability to output in terms of productivity. The aforementioned factors come together to enhance the economic stability of a country. In lieu of this, we can safely define the economic stability of a country as a set of financial factors that work together as a system to enhance a safe financial standing. Further, factors that favour a good financial standing include low inflation and fluctuation rates that ensure that trade is not greatly interfered with to the point of leading to losses and high unemployment rates. Other closely related factors include low unemployment rates, influenced by policies that are created by relevant bodies. In most cases, the central bank of a country is an example of a body responsible for such. A country that is economically stable is one with low inflation rates, coupled with low fluctuation rates in their productivity. Productivity, in more ways than one, needs to be kept either constant or higher than it was before. Any reduction in rates of production is a clear indication that the factors contributing to instability are at play and therefore, a country is not economically stable. Rates of inflation are needed at very low levels if not zero. This is a way of ensuring that cost of production is kept at a healthy low for higher profits. A country with high rates of inflation experiences a fluctuation of costs of production as the much needed foreign exchange becomes hard to come by due to lower investor activity with high inflation costs. Economic stability is a very influential factor that affects international business. First off, for any country to attract any meaningful investment from foreign companies, its economy has to mirror that of a healthy one that any investor would not have any qualms when wanting to invest in it. Geiersbach (2010) says that political environment is a key factor considered by foreign investors when they would like to venture into business in any country. Political stability creates favourable conditions for business as war does not provide a healthy environment for business. In addition to this, political goodwill is likely to lead to creation of policies that form the best framework for foreign direct investment. Policies created to better international trade will also likely be responsible for the lifting of various trade barriers that affect the flow of goods and services between economies in what is referred to as globalisation. The more goods are allowed to cross from one border to the other, the better the economic prospects of both countries. Advantages of globalization due to reduction or total breaking of barriers and tariffs include the availability of cheaper goods of higher quality as standards are set for this kind of cross-border trade. Globalization also makes it easier to start business as cheaper goods may be acquired easily in bulk. It goes without saying that more variety is offered through international trade. Economic stability is also responsible for the general development of specific regions. For instance, regions that have integrated unions like the European Union that serve to protect their business interests create a standard practise utilized over the region to protect all the member states. In doing so, economic stability is fostered throughout the whole region. Rugman (2009) relates the steady development of an economy with policies created within to provide favourable environment for businesses run both in and out of a country. He goes ahead to point out that economic stability gets stronger with the decrease in unemployment rates. When investor confidence rises, a likelihood of more jobs being created is high as they avail more jobs for locals. Economic Stability in Indonesia and Singapore The Association of South-East Asian Nations (ASEAN) is one of the many organizations formed by countries in a region to help induce economic stability. Its member states include Laos, Cambodia, Malaysia, Vietnam, Philippines, Singapore, Indonesia, Thailand, Burma and Brunei. Its core goal includes the creation of economic stability through fostering of fair trade practises between members through political negotiations and peace agreements. Indonesia and Singapore are examples of countries that have shown more political maturity in recent times coupled with ever-growing economies. This has led to a constant growth in economic stability, and along with it, the prospects for more foreign direct investment. First off, Indonesia has not always enjoyed the growth it currently does. In the 1997 economic crisis experienced in most of Asia, its economy was hit the hardest, reducing by up to 14 percentage points. The Embassy of Republic of Indonesia (2013) cites that its economy grew by 3.8% in 2001 through to 5.8% in 2007(est.), making gradual improvements throughout the period. This indicates that it has since managed to create a better business environment for both the internal and external investors. The year 2005 may have held a high percentage of uncertainty that could have led to a lowering of the then rising economic stability after the volatility of oil prices threatened to reduce prospection of more oil wells. Arnold (2005) places the blame squarely on President Yudhoyono’s lack of decisive action in stemming the political situation that may have been responsible for the uncertainty. Finally, the most challenging part in the economy of Indonesia involves politics. In as much as policy formulation favouring foreign companies is getting better every waking day, the rate at which it takes place may be a hindrance for speedy growth. The benefits of political goodwill for better FDI prospects cannot be gainsaid as it forms the framework for clearer operations between the countries involved. In most countries, political activity and influence is directly married to rates of economic prosperity. This is majorly due to lack of independent bodies to steer economic growth. On the other hand, Indonesia’s economy received a shot in the arm after Moody’s Investor’s Services rated its credit higher and included it as an investment grade for FDI. Husna & Ismar (2012) believe that this signifies Indonesia’s appealing nature as an investment destination despite its low political goodwill. As a country that exports more than it imports in comparison to its ASEAN compatriots, we are bound to conclude that more investors have set camp within as compared to operating from without. This may also be due to the growth of the middle class market segment, which consumes more and more of luxury goods than before. In the year 2011, FDI to Indonesia grew to an all-time high of 20%. Singapore is one of the countries described as a tiger economy. This basically insinuates rapid economic growth that can be related to the adoption of aggressive measures to enable business between these economies and foreign investors. In addition, the production of goods in such economies provides for a high percentage of their GDP than the service industry. Singapore, for instance, earns up to 30% from its manufacturing industry annually. Locknie (2012) attributes the great flow of FDI towards Singapore in particular as a result of policy stipulation by ASEAN than the political goodwill. Singapore has been known to have issues with its democracy, but this has never hindered its trade with other countries. Unlike Indonesia, its politics may not fully influence policies that favour international trade. Singapore’s balance of trade is so to say, balanced, implying that it exports nearly as much as it imports. This is not totally dangerous for its economy as more countries actually have skewed balances of trade where they import more than they export. Park (2013) affirms that Singapore heavily relies on FDI, but this is a guarantee that its economic stability is higher than most of its ASEAN counterparts. Bertelsmann Stiftung (2012) reiterates that as opposed to Indonesia, whose political atmosphere directly influences its economic stability, Singapore enjoys a very stable economy, thanks to policies fronted in the formative post World War II period. Singapore lacks a stable source of experts from within, and as a result employs more people from foreign countries. This is not an insinuation that its unemployment rates are high, but a confirmation that indeed, the foreign direct investment it receives results in need for specifically-trained recruits. Such advanced industries run within Singapore are common-place to an extent the government has implemented corporate tax measures to favour most of them. Both Singapore and Indonesia enjoy a relatively high FDI from within the ASEAN region. China and Japan account for some of the biggest foreign economies that invest in both the countries. Whereas Indonesia’s economy is bigger and much robust in comparison to Singapore, its economic stability does not compare as much. The main reason for this is the country’s inability to totally delink policy creating bodies from politics like Singapore did years ago. In line with this, Singapore performs better as its currency has always remained fairly strong when pegged against its trading partners. More often than not, a strong currency creates jitters amongst foreign investors as production costs are likely to be high under such situations. Singapore provides more economic stability for a country with little to show for in terms of natural resources. It has manufacturing industries that produce electronics in addition to investing in other fields like research, biomedical sciences and development. As a country that was hard hit by Asia’s economic crisis of 1997, Indonesia has so far bounced back and performed far much better than most countries in the ASEAN. Hopkins (2006) relates this mostly to unemployment rates going up at that particular point in time and austerity measures taken to curb the crisis. However, the inflation rates may also have played a significant role in worsening the situation. Currently, the employment rates in Indonesia vary between 5 – 7%, coupled with inflation rates of between 3 – 5%. This is a sure source for economic stability, which places it as a favourable investment destination. On the other hand, the unemployment rates in Singapore are mostly placed at 0 – 0.1% while its inflation matches that of Indonesia. Comparing the two figures for both countries would go against facts shown above as while Singapore sources for experts from foreign economies; its unemployment rate is 0%. Indonesia with its entire workforce comes short in the unemployment rates. This implies that the Indonesian economy has a surplus of workers who are not placed in employment. Lastly, the monetary policy in Indonesia is not as regulated as that of Singapore. As said before, Singapore employs apt policies that check its inflation rates when they seem to falter. The current framework employed in Indonesia provides for little other than a reactionary approach to dealing with runaway inflation. The government needs to come up with policies that check both internal and external systems that are likely to impact negatively on the currency. With this in mind, it is easier to trace why Indonesia has always been hard hit by both Asia’s financial crisis of 1997 and the financial crisis of 2007 that mostly affected the West and USA. Conclusion In conclusion, economic stability is the consistency in financial systems of a country that make it better for both internal and external trade. It is largely influenced by inflation, unemployment rates and to a large extent, productivity. The political environment in a country is usually responsible for a good measure of the above-named factors. For instance, with civil strife, none of the above factors may be realized. Similarly, political goodwill is necessary for trade between different economies to be realized. Indonesia and Singapore are two ASEAN economies which display great economic stability. They are favourite destinations for FDI. Indonesia may not heavily rely on FDI as compared to Singapore, but the latter shows a stronger spirit when it comes to providing a better environment for foreign investors. References Arnold, W 2005, “Oil Worries Challenge Indonesia’s Economic Stability”, The New York Times, viewed 12th April, 2013, Bertelsmann Stiftung, BTI 2012, Singapore Country Report, Gütersloh: Bertelsmann Stiftung. Geiersbach, N 2010, “The Impact of International Business on the Global Economy”, Business Intelligence Journal, Vol. 3, No. 2, pp 119 – 129. Hopkins, S 2006, Economic Stability and Health Status: Evidence from East Asia before and After the 1990s Economic Crisis, Health Policy, Vol. 75, Issue 3, pp 347 – 357, Elsevier Ireland Ltd. Husna, F & Ismar, A 2012, “Indonesia Economy Grows at Top Clip Since ‘90s”, The Wall Street Journal, viewed 12th April, 2013, Locknie, HSU 2012, "Inward FDI in Singapore and its Policy Context", Research Collection School of Law (Open Access), Paper 1113, viewed 12th April, 2013, Rugman, AM 2009, The Oxford Handbook of International Business, Second Edition, Oxford University Press. Rumbaugh, T & Lipscomb, L 2010, Indonesia’s Economy: Strong with Room for Improvements, International Monetary Fund, viewed 12th April, 2013, Park, D 2012, Foreign Direct Investment & Corporate Taxation: Overview of the Singaporean Experience, Nanyang Technical University, Singapore. The Embassy of Republic of Indonesia 2013, “Basic Facts about Indonesia – Economy”, Washington DC, viewed 12th April, 2013, Read More