Shaun McManus

Indonesia and Globalisation

2015

Indonesia, in recent decades has been significantly influenced by

globalisation through increased international trade, foreign
investment, exposure to the international economic cycle and rapid
industrialization. Through strong economic development and growth
over decades, Indonesia has established itself as the largest
economy of the South East Asian economic region. Globalisation is
the integration between different countries and economies and the
increased impact of international influences on all aspects of life and
economic activity. Through factors of globalisation has seen
economic growth has increased at a steady rate of 5-6% for GDP in
the last decade. International trade in Indonesia has grown
considerably as of recent, with expected growth in imports and
exports in its economy. Indonesia has become increasingly
integrated with the global economy through participation in global,
regional and bilateral trade agreements, elevating its role in the
global centre. Despite globalisation presenting many positive
impacts on Indonesia, its exposure to the international economic
cycle presents negative impacts of globalisation such as the Asian
Financial Crisis (1998-1999). In response to the effects of
globalisation, the Indonesian government has implemented
strategies in the form of economic policy to control factors of
globalisation on its own economy. Globalisation has had a highly
significant impact on its economy, from opening up its global doors
to the global economy has achieved progressive trade outcomes,
global, regional and bilateral agreement and combating its exposure
to the economic cycle.
Increased international trading activity in Indonesia as a result of
globalisation has had a major impact on the exporting industry of
Indonesia. Over the last half century, Indonesia has become
increasingly integrated in international trade, with its ratio of trade
to GDP rising from 30% in 1970 to 60% in the early 2000s.
International trade, through globalisation has influenced the
Indonesian economy since becoming more open in the global
economy in the 1980s, it has lowered protectionist trade barriers,
resulting in competitive pressures and encouraging businesses to be
more export focused. Prior to the 1980s however, Indonesia was a
heavily protected economy. Its oil boom in the 1970s resulted in the
implementation of harsh trade barriers in order to protect
government owned businesses. Large Indonesian government
expenditure has been set on fuel subsidies, which are recorded to
be larger than all central government social and capital spending
combined. Oil exports continue to be a significant source of revenue
for the Indonesian economy. The fuel subsidy, worth $US20 billion
and accounting for 13% of government revenue was cut in 2013.
This subsidy cut resulted in petrol prices to rise from 44%-66% per
litre. In response to this rise, the government implemented
compensation handouts to the population to attempt to promote the

Shaun McManus

Indonesia and Globalisation

2015

subsidy cut facing a massive amount of backlash. Indonesias large

oil and gas membership, also being Asias only member of the
Organisation for Petroleum Exporting Countries (OPEC) are a
significant contribution to its economy where petroleum and
liquefied gas are Indonesias single largest exports, accounting for
over a quarter of total exports.
The Indonesian government
developed a 15-year master plan to achieve a targeted annual
economic growth 7.5-9% to move Indonesias economy into the
worlds top ten by 2025. One of the strategies in this plan was to
promote economic growth in the oil and gas industry. The
manufacturing sector of the Indonesian economy is a relatively
weak sector compared to other economies. However, Indonesia
does have opportunity to revitalize this. The manufacturing industry
confronts issues of poor infrastructure, limited financial access, as
well as government regulations and increased barriers, raising the
costs of capital goods. Its opportunity however, is to take advantage
of its cheap labour force and huge domestic market. After
Indonesias shift towards trade liberalization in the 1980s, the
average level of tariffs was reduced by almost one third. The
manufacturing sector rate of tariff protection fell from 86% to 24%
between 1987-1995. For many key industry sectors in the
Indonesian economy, the government relaxed its network of import
licensing restrictions to reduce barriers to foreign trade. Increased
trading activity in Indonesia as a result of globalisation has
significantly impacted the exporting industry of Indonesia through
its industry sectors. Through recent developments, its government
has sought to reduce barriers restricting trade and hopes to
continue to reduce barriers in the future.

Shaun McManus

Indonesia and Globalisation

2015

Indonesias participation in trade agreements has heavily impacted

its economy as a result of globalisation. Over recent years,
Indonesia has had a more elevated role on the global centre,
through its membership of the Group of 20 (G20) major world
economies. Being active members of prominent trade agreements
such as: The World Trade Organisation (WTO), The ASEAN Free Trade
Agreement (1992) and the Asia-Pacific Economic Cooperation
(APEC) forum, as well as bilateral trade agreements such as the
Japan-Indonesia Economic Partnership (2008). Indonesia supported
the Doha Round, with its hope for reductions in agricultural
protection by advanced economies. Indonesias involvement in
these trade agreements have aided in reducing trade protection
methods such as tariffs and other non-tariff barriers. After opening
its economy to the global economy, trade agreements began to
thrive. Joining these organisations has allowed Indonesia to gain
many trading opportunities with many neighboring economies and
in the process, break down trade barriers between nations.
Indonesias membership with the ASEAN Free Trade Agreement
(1992) covering emerging economies in South East Asia with the
goal of lowering and eliminating tariffs, reducing tariffs for the
Indonesian economy. The policy implemented by ASEAN is the
Common Effective Preferential Tariff Scheme, where tariffs are less
than 5% for goods originating from economies within ASEAN. In
2007, the plan for the creation of the ASEAN Economic Community
in 2015, where the market of the South East Asian community would
be allowed freer flow of goods, services, capital and labour in the
hopes of promoting economies in South East Asia as an investment
destination and improve Indonesias level of regional integration.
Indonesia is also a prominent member of the Asia-Pacific Economic
Cooperation forum (APEC), which is dominated by numerous
advanced economies, was introduced in response to the formation
of trading blocs by groups such as the EU and NAFTA. It aims to
promote and advance regional and global trade and investment
liberalization. With these strategies to promote imports and exports
of goods and services and reducing barriers such as tariffs in
economies to allow easier trade between nations under APEC.
Indonesia also participates in bilateral trade agreements; a notable
agreement is the Japan-Indonesia Economic Partnership (2008).
Japan accounts for 15.9% of Indonesias exports and is also
Indonesias largest export destination. The agreement between the
two nations sought to reduce tariffs. Both countries reduced their
tariffs on each other (Japan reduced tariffs 80% and Indonesia by
58%) and annually hope to reduce tariffs further by 10%.
Indonesias integration with other nations and its involvement in
international organisations have been a clear impact of globalisation
as it has the objective of trade liberalization to reduce protection
barriers and increase exports and imports for Indonesia at an
increasing rate.

Shaun McManus

Indonesia and Globalisation

2015

Despite the positive impact of globalisation being highly positive for

the Indonesian economy, the Asian Financial Crisis of 1997 and 1998
affected Indonesia incredibly. As a country that can be severely
impacted by these crisis, Indonesias experiences notes how the
volatility of global financial markets, fused with economic
mismanagement, can have crippling effect for Indonesias economic
growth and development. The growth of economies in South East
Asia resulted in short-term financial inflows that overflowed into
stock markets and consumer finance. As investors realized what was
occurring they withdrew their funds resulting in the currencies of the
Economies of South East Asia to depreciate in rapid succession,
affecting Indonesia significantly. The Rupiah was severely affected
after Thailand floated their Baht. In order to combat this crisis, the
Indonesian government obtained an emergency financial assistance
loan of $US18 billion from the International Monetary Fund.
However, the Indonesian government was required to undertake
readjusted economic policy measures such as spending cuts, budget
surpluses, significantly raising interests rates (highest at 80%),
closing a number of banks, fuel subsidies cut, as well as long term
structural reforms. Although the implementation strategies were
designed for long-term development of the Indonesian economy,
they immediately furthered the downturn effect on the economy,
minimizing economic activity. The initial action of these strategies
resulted in the Indonesian Rupiah dropping over 85% value
compared to the US dollar. The Asian Financial Crisis had a
devastating effect on the economy of Indonesia. Unemployment had
increased and poverty leveled was estimated to have almost
doubled (11-19%). The country experienced trade deficits, resulting
in prices of imported goods to skyrocket and foreign debt reached
$US148 billion. The Asian Financial Crisis resulted in new policies
introduced by the Indonesian government, such as the
establishment of an independent central bank, being Bank
Indonesia. Its purpose was to act as a new bankruptcy law,
measuring to promote competitiveness between domestic and
international businesses, and improve social safety. The Indonesian
Bank Restructuring Agency (IBRA) was established in 1998 to
oversee reforms to the Indonesian financial sector with the aim to
correct any weakness in financial and regulatory environments, as
well as inadequate governance. After the Asian Financial Crisis, the
IMF changed its advise to Indonesia and recommended to pursue
financial stimuli, interest rate cuts in support of high economic
activity and liquidity for creditors. The Asian Financial Crisis is one of
the most significant examples of globalisation for Indonesia through
its exposure to the economic cycle, as it shows how a combination
of open financial markets with fixed exchange rates and excessive
financial speculation can affect an economy severely.

Shaun McManus

Indonesia and Globalisation

2015

Indonesia has been significantly impacted by the effects of

globalisation on its economy and experienced the challenges of
sustaining economic growth and development. Through factors of
globalisation such as increased international trade, global, regional
and bilateral trade agreements and exposure to the economic cycle,
the Indonesian government has succeeded in reducing trade
barriers such as tariffs to increase its imports and exports for its
nation, increasing national GDP. Indonesias trade agreements and
involvement in organisations such as ASEAN and APEC have allowed
for easier trade and FDI flows, reducing protectionist policy between
neighboring countries and the effects of the Asian Financial Crisis
allowed Indonesia to develop new economic policy to strengthen its
economy. Indonesia are a country that has developed through
globalisation.

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Shaun McManus

Indonesia and Globalisation

2015

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Australia and the Global Economy Economics Textbook