Chapter 3

1. Under the leadership of Suharto, the Indonesian economy grew at a steady pace. Why was this ultimately not sustainable?
The Indonesian economy was able to grow under the regime of Suharto but only under the condition that businesses favoured by
Suharto were growing. He gave the governmental funds to members of his family or kept it to himself. This he also did with the
money of the rescue package from the International Monetary Fund which was supposed to safe the nation from bankruptcy. He
was forced to resign due to this personal greed and misuse of power. Suharto subsidised these companies in order to keep the
economy growing but eventually the cost of the subsidizing destroyed the economy and led the nation in massive debts. The
property rights were not protected from the government and therefore the citizens did not have strong incentives to work hard in
order to earn some things. This unproductiveness also led to the cost of subsidizing and a decline and collapse of the economy.
2. Since Suharto was removed, Indonesia has grown its economy at a slower pace than two other large developing nations, India
and China. Why do you think this has been the case?
I think that Indonesia's economy grew at a slower pace because the liberty of the citizens and the press were oppressed. This was
also the case in China, but they were more open to foreign investments and were able to build a functioning infrastructure. Also,
the economic liberalism was not given in Indonesia and the protectionist policies hindered the foreign investors to make business in
Indonesia. The Indonesian government believed that the foreign companies and investors would take the resources from the
country and leave the country impoverished. Because of the protectionist policies, the market was not liberalised which led to a
decline in innovation and entrepreneurship.
When being liberalised from the leadership of Suharto, important sectors like the agriculture and infrastructure like transportation
and telecommunication in the hand of inefficient state-owned companies. The missing privatization was one of the biggest mistakes
the Indonesian government could make after the resign of Suharto. Also, the property rights of the citizens were not as protected
as in other countries. To strengthen the economy, the property rights need to be protected.
Resulting from the corruption in Indonesia, the economic growth is also at a slower pace than in India or China. They tax and profits
that get lost with black market activities and corruption have a big impact on the growth rates.
Another important aspect to note is, that high logistic costs make it even harder to develop economic activities as well as the

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missing participation in globalization. They could get an advantage by using the technologies that are already developed.

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3. What actions could Indonesia take to improve its economic performance? What impediments might make it difficult for the

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government to take these actions?

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The government should increase and promote the privatization of the state-owned companies in sectors that are important for the
infrastructure. The approach of the new president Widodo to boost public infrastructure is good and should be followed. Also, the
reduction of the subsidizing cost is to be reduced, which also can be achieved with the privatization. The corruption still is a big

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problem in Indonesia. The government should increase the punishments for those who are corrupt.
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The government should put in place some methods to search systematically for corrupt members in the government to be able to
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eliminate them. But also, this corruption makes it difficult for the government to eliminate it because within the government the
members do not know who is corrupt and who not. If these corrupt members work together with others outside the government,
they can warn them about the upcoming searching.
To improve the economic situation, Indonesia should open itself to the global market and start trading with other countries. This all
needs time because it is not easy to change a whole country rapidly.
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Critical thinking and discussion question

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1. what is the relationship between property rights, corruption and economic progress? How important are anticorruption efforts in
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the efforts to improve a country's level of economic development?

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2. You are a senior manager in a U.S. automobile company considering whether to invest in production facilities in China, Russia, or
Germany. These facilities will serve local market demand. Evaluate the benefits, costs, and risks associated with doing business in each
nation. Which country seems the most attractive target for foreign direct investment?

In general, China, Russia and Germany are three big countries; the automobile company will get benefits if it chooses any of the three
countries, but it also faces some challenges. It is well known in Germany that the automobile industry is very powerful. If the company
chooses to invest in Germany, it will face numerous competitors. Also, in Russia, the trade barriers will be obstacles for the entry of the
automobile company. However, with China's low cost labour and large potential domestic market make it an attractive destination for the
direct foreign investment.

3. Country Focus on India

a. What kind of economic system did India operate under during 1947-1990? What kind of system is it moving toward today? What are
the impediments to completing this transformation?

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 The economic system that developed in India after 1947 was a mixed economy characterized by a large number of state-owned enterprises,
centralized planning, and subsidies. In 1991, India's government embarked on an ambitious economic reform program. Much of the
industrial licensing system was dismantled, and several areas once closed to the private sector were opened. In addition, investment by
foreign companies was welcomed, and plans to start privatizing state-owned businesses were announced. India has posted impressive gains
since 1991, however there are still impediments to further transformation. Attempts to reduce import tariffs have been stalled by political
opposition from employers, employees, and politicians. Moreover, the privatization program has been slowed thanks to actions taken by
the Supreme Court. Finally, extreme poverty continues to plague the country.

b. How might widespread public ownership of businesses and extensive government regulations have affected (i) the efficiency of state
and private businesses and (ii) the rate of new business formation in India during the 1947-1990-time frame? How do you think these
factors affected the rate of economic growth in India during this time frame?

The mixed economy that developed in India after 1947 was characterized by a large number of state-owned enterprises, centralized
planning, and subsidies. This system not only constrained the growth of the private sector, but it also consequently limited the effects of
competition that typically promote efficiency and productivity in a free market system. The system even limited the actions of private
companies, requiring them to get government approval for routine business activities. Production quotas and high import tariffs also
stunted the development of a healthy private sector, as did restrictive labour laws that made it difficult to fire employees. Foreign exchange
restrictions, limitations on foreign investment, controls on land use, and managed prices further exacerbated the situation. It would appear
that India's rate of economic growth was negatively affected during this time frame. By 1994, India's economy was still smaller than
Belgium's despite having a large population. Both GDP and literacy rates were very low, and some 40 percent of the population lived in
poverty.

c. How would privatization, deregulation, and the removal of barriers to foreign direct investment affect the efficiency of business, new

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business formation, and the rate of economic growth in India during the post-1990 time period?

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In 1991, India's government embarked on an ambitious economic reform program. So far, the response to the program has been

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impressive. The economy expanded at an annual rate of about 6.3 percent from 1994 to 2004. Foreign investment is up from $150 million
in 1990 to $6 billion in 2005. Certain sectors of the economy including information technology and pharmaceuticals have done particularly

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well. Still, problems persist. Actions taken by the government continue to limit efficiency gains for private companies and the country's high
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rate of poverty is still a major problem.
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d. India now has pockets of strengths in key high-technology industries such as software and pharmaceuticals. Why do you think India is
developing strength in these areas? How might success in these industries help generate growth in the other sectors of the Indian
economy?
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India's gains in information technology and pharmaceuticals are impressive. The country has emerged as a vibrant global centre for
software development, and India's pharmaceutical companies have taken a strong global position by selling low cost generic versions of
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drugs that have come of patent in the developed world. As these industries continue to prosper, other sectors of the economy should also
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see the benefit of spill over effects.

e. Given what is now occurring in the Indian economy, do you think the country represents an attractive target for inward investment by
foreign multinationals selling consumer products? Why?

Foreign investment is up in India. In fact, foreign investment rose from $150 million in 1990 to $6 billion in 2005. However, whether India is
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an attractive destination for foreign multinationals selling consumer products remains to be seen. Certainly, the large population will serve
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to attract some companies, but the fact that some 40 percent of the population is living in abject poverty will scare other companies away.
Moreover, it is still not easy to run a company in India thanks to laws limiting everything from who can be fired to who can which products.
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