Indonesia - an Emerging Market in Southeast Asia - Case Study Example

Indonesia: An Emerging Market in Southeast Asia I. Global overview and introduction to Indonesia  The Association of Southeast Asian Nations or ASEANis a regional grouping of ten countries in Southeast Asia including Singapore, Malaysia, Thailand, Indonesia, and the Philippines. This regional group, founded in 1967, has a combined population of about 583 million in 2008, spread across a geographical land area of 4.4 million square kilometers, with a population density of about 132 persons per square kilometer (Basic ASEAN Indicators). Annual population growth rate is pegged at 1.5 percent while its per capita gross domestic product is around US$2500. Year Indonesia’s GDP in billions of US$ PPP % GDP Growth 2004 644.19 3.67 2005 705.16 4.36 2006 768.19 4.17 2007 839.79 4.98 2008 909.73 Source: EIU Country Data Indonesia, an archipelagic country consisting of about 17,000 islands and having the largest Moslem population in the world, is strategically located at the center of the region, and has the potential to become a fast rising economy. A former Dutch colony in the early part of the 20th century, Indonesia has risen to become a vibrant economy with a populous urban cities and rural towns. II. Characteristics and challenges of Indonesia as an emerging market Coined by a World Bank economist in the 1980s, the term emerging market often refers to or loosely describes a country in a transitional phase from developing to a developed status. An American political scientist, Ian Bremmer, even characterized emerging markets as “countr(ies) where politics matters at least as much as economics to the markets”. According to Chuan Li, in a poster presentation aimed to dissect the effects of global financial crisis, further described emerging markets as those “countries that are restructuring their economies along market-oriented lines and offer a wealth of opportunities in trade, technology transfers, and foreign direct investment”. Indonesia, after being under an authoritarian regime until 1998, has conducted a free election for its president in 2004. Along with a semblance of political reforms, it has adopted economic reforms that tend to open up its market into a freer enterprise, contrasting from the many state monopolies or crony controlled businesses that characterized the Indonesian economy. The country, according to Li, is carefully transitioning from a “developing country to an emerging market”. Li further noted that emerging markets can be characterized as follows: 1. They are regional economic powerhouses with large populations, large resource bases, and large markets. Indonesia has around 270 million people, almost half of Southeast Asia’s population, and the world’s biggest Moslem country. It is archipelagic, endowed with natural resources and biodiversity. 2. They are transitional societies that are undertaking domestic economic and political reforms. The Indonesian government is replacing old policies with a more aggressive and outward looking economic policies, and has taken a more liberal view on civil liberties of its population. 3. They are the worlds fastest growing economies, contributing to a great deal of the worlds explosive growth of trade. Indonesia has continued to perform well in the economic arena, as proven by its strong GDP growth, and the resiliency of the economy during the global financial crisis. 4. They are critical participants in the worlds major political, economic, and social affairs. Even the United States has recognized the role of Indonesia of late in the region’s political and economic security affairs. However, being recognized as an emerging market is not without its downside. For one, an emerging market still has the vestiges of wrong policies and inherent weaknesses of institutions that are yet to be reformed. Hence, while emerging markets offer some good returns on potential investments, they are not without risks. “The lands of opportunity”, this was how emerging markets were once described by two marketing experts, Ms. Kamini Banga and Mr. Vijay Mahajan, who co-authored a book in 2005 for Wharton School Publishing. Based on their professional experiences working in Southeast Asia, and from their own scholarly studies, they have put forward conditions existing in countries that can be considered as emerging markets, suggesting windows of opportunities for global companies and investors to consider. But at the same time, there are warning signs where the authors offered caution in order not to lose the investments in what are still considered risky businesses in emerging markets. Among the market characteristics mentioned by the authors, several are worth mentioning, with comparison how opportunities can be created in the Indonesian economy: Market Characteristic Strategy for Realizing Market Opportunities Markets, culture, and environments are demanding. Geographically, Indonesia presents challenges to marketers given the archipelagic nature of the country, with more than 300 regional tribes and corresponding ethnic background, spread in 17,000 islands. While the country presents a large market, it is not without logistical nightmares. There are high rates of emigration to the developed world. A brain drain phenomenon exists where the educated members of the population choose a high paying job outside the country, causing highly skilled professionals to be scarce in the home country. Markets are fragmented. This is true for Indonesia being an archipelago. Markets are not homogenous. Populations are youthful and growing. This is one good opportunity for global brand marketers to establish brand loyalty. They can work on the huge market potential presented by the young and growing market. There is limited income and space. Consumers will tend to demand more in exchange for their hard-earned cash. Marketers will be up on their toes to cater to the whims of a demanding market. Infrastructure is weak. Marketers will have to be innovative in delivering the products to customers in the absence of infrastructure they are used to have in the west. Technology is underdeveloped. Bring in new technology. Distribution channels are weak. Innovate and be creative to reach target markets. Markets are changing rapidly. Marketers have to develop a keen sense of changing taste and preferences of the market in order to adapt to the market’s rapidly changing needs. III. Indonesian trade, investments and migration markets  Due to Indonesia’s large domestic economy, about 60 percent of its Gross Domestic Product (GDP) is contributed by domestic consumption, and only about 30 percent makes up for external trade in the first half of 2009, judging from the statistics collated by the Manila-based Asian Development Bank (ADB). Due to its large population, it is no wonder why the country has a consumer-led economy. As a matter of fact, the ADB has attributed to the country’s domestic consumption in 2009, which is also an election year where the government has done a lot of spending, to the improving performance of the economy and the shielding from the pernicious effects of the global financial crisis. Region-wide, it was only Indonesia which has outperformed other major Southeast Asian economies in terms of economic performance during the first half of 2009. The increase in consumer spending was brought about by a tapering of the inflation and a good agricultural year that produced surplus and increased income to farm workers. Indonesian agriculture is still the major source of livelihood in the countryside. Many also took advantage of the financial stimulus package introduced by the government to stimulate production in a sagging economy as a result of the recent financial crisis. Indonesian Trade Japan is Indonesia’s major trading partner, followed by the United States, China, and Singapore. Japan takes about 45 percent of Indonesian exports, while the same country supplies about 25 percent of the country’s importation. Among its major exports, gas ranks ahead, followed by crude petroleum (9.8%). Other major exports include apparel (7.7%), textiles (5.7%), paper products (3.7%), plywood (3.2%), footwear (2.6%), and copper ore (2.6%). In 1992, trade with the ASEAN economies has started to increase (Indonesia Foreign Trade). It used to be that Indonesia’s main export commodity was oil. But starting in 1982 when the country tried import liberalization strategies, export of non-oil commodities was increased. Five years later, revenues from non-oil exports matched that coming from oil and petroleum. Indonesia is also a major importer of rice in the early 1990s even if it has large tracts of land for rice cultivation, due to frequent occurrence of droughts during those years. In 2000 Indonesias imports were distributed among the following categories: Industrial supplies 43.1% Machinery 19.4% Fuels 18.2% Transportation 9.1% Food 7.5% Consumer goods 2.7% Total 100% Source: Indonesia Foreign Trade Principal trading partners in 2000 (in millions of US dollars) were as follows: COUNTRY EXPORTS IMPORTS BALANCE Japan 14,415 5,397 9,018 United States 8,489 3,393 5,096 Singapore 6,562 3,789 2,773 China (inc. Hong Kong) 4,322 2,364 1,958 Korea 4,318 2,083 2,235 Malaysia 1,972 1,129 843 Netherlands 1,837 434 1,403 Australia 1,519 1,694 -175 United Kingdom 1,507 557 950 Germany 1,443 1,245 198 Source: Indonesia Foreign Trade However, in the first half of 2009, there was a notable decrease in export merchandise, due mainly to the general slump in world trade brought about by the lingering effects of the financial crisis and the lower than expected prices for Indonesia’s export commodities. Imports also fell steeply. But there was a net trade surplus even if there was a decline in exports, a pattern of trade surpluses from the last three consecutive periods. Indonesian Foreign Direct Investments Investments in oil and gas exploration, and in telecommunications, were the main drivers of foreign direct investments (FDIs) in Indonesia. Portfolio investments, on the other hand, are quite erratic, depending largely on overall confidence of foreign investors in the global economy. In 2008, there was a net outflow of portfolio investments in Indonesia, only to be reversed in the first half of 2009. According to ADB, it was a sign of improved investor confidence which turned in a net surplus of about US$5billion. For several years it was the telecommunications and the transportation sectors which received a hefty amount of foreign investments into the Indonesian economy. The International Monetary Fund (IMF) has likewise allotted special drawing rights, a loan facility that could finance further infrastructure development projects in the country. Such is the confidence being shown by the international community to the economic and business potential of an emerging market such as Indonesia. Migration Market Indonesia, owing to its huge population, has labor surplus. In 2006, it was estimated that about 11 million people were unemployed, and three times of that were the number of underemployed people, or those who were not gainfully employed for a day’s worth of work. As in other Asian countries with similar large unemployment problem, the alternative is migration to another country with labor deficit problems. According to Hugo of the University of Adelaide, there are two streams of labor migration going out of Indonesia. The first is those of the skilled labor or those professionals destined to work in richer countries on a more permanent basis. And the second one refers to those semi-skilled or unskilled laborers, half of which are largely undocumented, and are destined to work in the Middle East and other Asian countries on contractual basis. Aside from being undocumented with illegal travel papers, Hugo added that most of these laborers are women working as domestics, and are therefore more vulnerable to exploitation. The largest group of illegal migrants, however, can be found in neighboring Malaysia, where the proximity not only in location, but also in religion and culture, has made it become more accessible to Indonesians. The labor surplus in the Indonesian economy has made labor wage at a relatively low cost to would be investors. As an emerging market, its low labor cost can become an attractive proposition to global factories for skilled or semi-skilled labor force. However, an open global labor market will still attract millions of Indonesian workers for offshore jobs, leaving the country with a workforce that may need additional skills or training to become marketable to the domestic labor market. What do global companies relocating in emerging markets and finding the local labor force wanting in desired qualifications do? They may opt to bring their own personnel, or hire other foreigners from neighboring countries. This was reported by Hugo in his paper, where he noted that, “In contrast with outflows, one characteristic of recent international migration into Indonesia was an influx of skilled expatriates due to the inability of Indonesian training institutions to supply enough professionals (especially engineers, scientists, managers, accountants, etc.) to cope with the structural change and economic growth of the early 1990s. As a result, experts came from Australia and other more developed countries, as well as the Philippines and India.”  In other words, while migration may not be immediately halted by domestic prospects of an emerging market, a reverse migration may actually happen, though not in the same magnitude and scale as it were from Indonesians seeking greener pasture abroad. Indonesia: Number of Foreigners, 1995 Region of Origin Permanent Residents Temporary Residents Total Jakarta Total Jakarta Total Asia 23,329 217,595 34,779 58,185 275,780 Africa 28 33 194 321 354 Europe 436 1073 11,787 18,090 19,163 Australia 54 141 3731 5984 6,125 North America 137 309 7,579 13,060 13,369 Total 27,984 219,151 58,070 95,640 314,791 Source: Indonesian Yearbook 1995, 45-46. IV. Social factors  Indonesia is the world’s most populous Moslem country. As such, majority of the population practices Islam, although other religions are being practiced in the country, such as Christianity, Hinduism, Buddhism, and other variants of religious faith. While the government has put a semblance of secularism in its governance, it is still largely ruled by a conservative majority that imposes strict religious standards according to Islam. Censorship is still practiced purportedly to safeguard the morality of the Indonesian society. Western influences are still being carefully watched and restricted in order to preserve Indonesian values and social norms. V. Ideological factors  Indonesia’s democratic regime after the authoritarian rule ended in 1997 makes it the largest democracy in Southeast Asia, which also proves to be a boon in its economy given the economic prospects brought about by the sweeping changes in the Indonesian political and economic landscape. The democratic ideals are being held up by the current regime, giving fresh election mandates to its current leaders, who in return have become accountable to the people of Indonesia. And as a consequence, an open market philosophy has become a guiding principle in leading the economy, opening up to foreign investors and thus inviting fresh money from external sources to reinvigorate the economy. One thing though that could hold sway to the reforms being implemented is the growing influence of conservative members of the Indonesian clerics, who are still apt to bring back the old ways of doing things, especially when it comes to opening the economy to external influences, particularly those coming from the west. VI. Economical factors  The forward-looking and outward oriented, free market enterprise philosophy of the current regime has led to various reforms in the Indonesian economy, thereby increasing its chances for a vibrant economy fully integrated with the rest of the world. According to Li, emerging markets could have been caused by two factors: the failure of state-led economic development and the need for capital investment. For quite some time, the Indonesian economy largely controlled by the government failed to produce the development it needed to improve the living standards in the country. By opening the economy, reforms were introduced and market forces were allowed to shape the opportunities for better living conditions brought about by economic prosperity. Development which needs to be financed by external sources, has proved to be costly if government will rely alone on loans from commercial banks, hence a better alternative is to invite investors to come in to provide the much needed liquidity in the emerging market economy. VII. Political factors and their impact on the relationship between Indonesia and the global environment  The current Indonesian President, Susilo Bambang Yudyohono, is on its second 5-year term to rule Indonesia. Having a popular mandate, President Susilo has been quite successful in introducing reforms not only politically but also in the economic forefront. His management and leadership style has quite earned the approval not only of the governed but also of the international community, particularly investors who would like to see fiscal reforms implemented alongside political reforms that will curb the previous issues of corruption and inefficiencies in the bureaucracy. Mr. Susilo has also earned the reputation of bringing political and financial stability in the country, and being able to balance “strength and compassion” in his rule over the populous country of Indonesia. VIII. The relationship between Indonesia and the international environment  Emerging markets such as Indonesia have a big stake in the future of world economic development. If successful in their economic and political structural reforms, their potential to quickly attain developed country status will be realized. Such economic success will then bring a bigger responsibility in global politics, where countries with economic power are most often the big players. Indonesia, given its huge market potential, will certainly be a leader and a force to reckon with within the ASEAN region, for a start. Certainly its success or failure will have a direct impact in its neighboring countries, especially among its trading partners. For sure it will play a big role in ensuring economic stability and security within the region itself. References A special report on Indonesia. September 2009. The Economist. As seen on the web. 30 November 2009. Al Ahzari, M. Indonesia an-May foreign direct investment rises. June 16, 2008. Reuters India. As seen on the web. 30 November 2009. Banga, K. and Vijay Mahajan. The 86 percent solution: How to succeed in the biggest market opportunity of the next 50 years. July 18 2005. Wharton School Publishing. As seen on the web. 30 November 2009. Country Profile: Indonesia. August 2009. BBC News. As seen on the web. 30 November 2009. Economist Intelligence Unit. Indonesia country snapshot. The Alacra Store. As seen on the web. 30 November 2009. Hugo, G. Indonesia’s labor looks abroad. April 2007. Migration Information Souce. University of Adelaide. As seen on the web. 30 November 2009. Indonesia Country Profile. 2009. Asian Development Bank. As seen on the web. 30 November 2009. Indonesia Foreign Trade. 2009. Encyclopedia of Nations. As seen on the web. 30 November 2009. Li, Chuan. What are emerging markets? University of Iowa Center for International Finance and Development. As seen on the web. 30 November 2009. Selected basic Asean indicators. October 2009. Association of Southeast Asian Nations. As seen on the web. 30 November 2009. Read More