Economic Stability - Assignment Example

Define and explain what economic stability is and how economic stability affects international businesses. Compare two ASEAN countries in terms of their economic stability as a preferred location for FDI?” Economic Stability Name Course Institution Instructor’s name Date Introduction Economic stability is the absence of extreme fluctuations in the macro-economy. A stable economy experiences constant growth and reduced inflation. Having an economically stable economy entails improved efficiencies, increased productivity, as well as low unemployment. An unstable economy on the other hand entails long period of crisis or recession, rising inflation, and instability in currency exchange rates. An unstable economy leads to a decrease in the confidence of consumers, diminutive economic growth and declined international investments. This essay focuses on the ways in which economic stability influences global or international trade and compares two ASEAN countries economic stability and how they affect foreign direct investment. Economic stability is not only an issue of national interest, but also a global concern. As depicted in the recent occurrences in the globe’s financial markets, countries have become more interlinked. Issues in one apparently independent sector can cause problems in other areas, besides causing spillovers across borders. Thus, when it comes to economic or financial stability, no country is an ‘island’. Development of commerce and international growth has allowed one country’s economic stability to influence the stability of other economies. When the economy of a country becomes unstable, the country experiences a huge reduction in global investment and spending. Foreign investors also lose their money if they have investments in an unstable economy. For instance, if an investor in Indonesia developed real estate business in Greece before credit crunch of 2008, the value of the investment may have fallen to unrecoverable lows even after recovery of Greece economy. How economic stability affects international trade Economic stability has great influence on international trade in a number of ways. When countries have a stable economy, they are more likely to have more foreign investment than countries experiencing instability in their economies. Economic instability may influence investors to withdraw their investments from the unstable economy as they are afraid of suffering loss or crumbling. In the 2008 global economic crisis, the United States was large hit. This resulted to several multinational companies operating there such as General Motors and a number of banks such as the Imperial Bank closing out their business. Consequently, if a country has economic stability, the business environment is therefore viable and investors are likely to flock for opportunities in such a country. Economic stability creates the necessary frameworks and infrastructure that makes businesses a success. Therefore, economic stability influences whether a country does business with others. A stable economy boosts consumer confidence. When a country has a stable economy, more consumers from the international market are more likely to purchase products or securities in such a country. This is attributed to the stability of the currency that maintains prices at a competitive range as compared to countries with same products but with an unstable economy. When the economy becomes unstable, products becomes extremely expensive due to high and unstable exchange rates of the currency of the effected country. This discourages investors from trading on securities or products in such countries. Thus a country with an unstable economy is likely to experience decreased exports to other countries as their goods become expensive due to shilling volatility. For instance, during the economic crisis of 2008, several countries in Europe experienced a significant drop in tourists’ volume. Global financial institution such as the International Monetary Fund, (IMF) has the mandate of scrutinizing the financial situations of the member countries. Consequently they have the obligation of providing comprehensive reports to the international community regarding the economic viability of a country. Thus, maintaining economic stability ensures that a country is safe for doing business as the IMF fully supports business in such a stable economy. If an economy becomes unstable, the IMF releases the necessary reports to other nations which make countries withdraw their business and new investors shy away from investing in such a country. The IMF also advices countries in formulating policies that will help overcome possible crisis (Joseph, 2003). In collaboration with other global financial institutions such as the World Bank, IMF provides solutions proposals for the affected countries and vulnerable economies. Economic stability also affects international trade in a direct manner. When nations have stable economies, it means that its people are economically empowered and are able to conduct business with each other. In the instance of a global crisis, such as the 1930 economic depression and the 2008 global economic crisis, several nations are affected. The effect is contagious and many countries become victims of such an event with or without caution. This in turn affects business across the affected nations (Hill, Cronk, & Wickramasekera, 2011). For instance, the credit crunch of 2008 saw many people become homeless not only in the United States, but also in Europe due to the effects of the global crisis. This on the other hand affected business among these two economic giants as it was not business as usual. The US dollar and the sterling pound dropped against the Euro which affected other nations across the globe as they largely rely on these currencies for business. Indonesia and Malaysia as preferred FDI countries ASEAN countries have recovered significantly from the global economic crisis of 2008 with an average growth views rebounding to pre crisis levels as stipulated by ‘2010 Southeast Asian Economic Outlook OECD Center’. Over the 2011 to 2015 period, the average Gross Domestic Product is estimated at 6 percent (which is almost same as the 203-2007 period) across the main six ASEAN nations including Malaysia, Indonesia, Singapore, Thailand, Vietnam and the Philippines. The table below summarizes the results for growth rates of ASEAN main countries.    2010  2015  Average for 2003-07  Average for 2011-15 Indonesia   6.1  7.1  5.5  6.6 Malaysia  6.5  5.3  6.0  5.5 Philippines  6.0  4.4  5.7  4.6 Singapore  14.0  4.5  7.5  4.7 Thailand  7.0  5.1  5.6  5.2 Viet Nam  6.8  7.2  8.1  7.1 6 countries average  7.3  6.0  6.1  6.0 Source: ‘OECD Development Centre (MPF-SAEO 2010)’ Looking at two ASEAN countries at the top of the list above, Indonesia and Malaysia, it is evident that the two countries have a big disparity in their GDP growth. Indonesia had a lower GDP index in 2010 but is projected to increase by 2015. In addition, its average GDP in 2003-2007 period was lower than that of Malaysia which shows a great progress. Hence it is clear that Indonesia is more economically stable than Malaysia in terms of economic growth. High economic growth sends a signal to investors that the country is doing well economically and is offering great opportunities for business. Malaysia’s declined economic growth is a bad indicator for foreign investors. The large population of Indonesia which about 248,216,193 million people (ranked as the fourth populous country in the world) offers a potential market for foreign direct investment. Malaysia’s population is small standing at approximately 29,179,952 million people. This population is not promising for FDI (World factbook, 2012). Consequently, the largest population in Indonesia is middle and low income earners as portrayed by the GDP per capita which stands at $4700 as per 2011 estimates (World factbook 2012). This shows that Indonesia has a huge supply for affordable labor in the production and manufacturing industry which is a consideration for foreign investors. Malaysia being a high income earner population with per capital income of $15600 according to 2011 estimates, cannot offer affordable labor for foreign investors (World factbook 2012). Indonesia is also large geographically and has a unique archipelago, in fact the largest in the world with over 17,000 islands 6000 of which are inhabited. In addition, these islands are rich in minerals such as copper, natural gas, coal, petroleum, gold, silver, nickel, tin, timber as well as rich soils (Ramburuth and Welch, 2005). These natural resources offer a great opportunity for foreign direct investment in various sectors including mining, production, and manufacturing. The presence of precious stones such as gold and silver are key to attracting investors and improving the economic stability of Indonesia even further. Malaysia has little natural resources as compared to Indonesia, especially lacks fertile agriculture soils, silver and gold. Similarly, Indonesia’s unique archipelago with great features and a diverse population has a great potential for attracting tourists and other investors. Tourism helps in bringing in other forms of foreign investments such as production, service and manufacturing. Malaysia’s population is not largely diverse and may not be a good place for business that encourages diversity. Indonesia therefore has a greater advantage for FDI as compared to Malaysia. Most of ASEAN countries are vulnerable to natural disasters. Thus foreign investors must consider the risks that they may face when setting up their investments. Indonesia is among the most affected countries of ASEAN members (Ramburuth and Welch, 2005). Malaysia also has a few natural hazards. However, the Indonesia has tried to develop proper response measures to avert dangers that are caused by such hazards and hence investors should not be scared away. Besides, both countries suffer similar environmental problems from sewage waste to vehicular pollution, to deforestation among other issues. With the size of Indonesia, FDI can take advantage of investing in areas that help address such issues such as environmental management. The introduction of proper waste management such as recycling can form great business. Indonesia has a low urban population as compared to Malaysia. This is offers a potential market for foreign investors as there is a large population to mobilize or to target with various products or services introduced from the foreign market. Infrastructure in Indonesia is developing at a very high rate even though not as developed as in Malaysia. Ultimately, Indonesia was able to smoothly beat the financial crisis of 2008 unlike most of ASEAN countries. This recovery is compared to the ‘BRIC’ (Brazil, Russia, India and China) group of nations by experts (Mike, 2012). This is because; Indonesia relies on domestic consumption to drive its economy as well as increasing both foreign and local investments which has supported solid growth. Malaysia on the other hand relies on export especially of oil which makes up to 40 percent of the government revenue. Malaysia is subjected to experience a fall in prices of products or a general decline in economic activity since exports are a main component for GDP (Hill, Cronk, & Wickramasekera, 2011). This is the reason why its recovery from the global crisis has been so difficult. Thus, Indonesia is safe to invest as there is guarantee of the local market consumption that may be a great investment as producing products and services for the population is relatively cheap. Indonesia has minimum regulations for foreign investment which makes it suitable for foreign direct investment as compared to Malaysia. In Malaysia any FDI that seeks to control assets in the country including possessing a business without providing clear benefits to Malaysia are discouraged and any industrial project must be given approval by MIDA (Malaysia industrial Development Agency) which has of late ceased granting consent in what it terms as low productivity industries (Joseph, 2003). Foreign direct investment in Indonesia rose by 20 percent in 2011 and its GDP is projected at 6 percent this year as compared to the average 2.5 percent global growth stipulated by the World Bank. This also shows the potential that lies for FDI in Indonesia as compared to the less vibrant Malaysian economy. Conclusion Economic stability is the state where a country’s economy is characterized by low fluctuations. Economic stability is a global concern as an unstable economy not only affects domestic trade, but also the international market at large. This is attributed to the process of rapid globalization. An unstable economy causes instability in the currency of the affected country, high prices of goods, and declined foreign and local investments. International Monetary Fund is the institution mandated by member countries to help in monitoring and documenting the progress of countries’ economic progress and advice them accordingly. Economic stability affects international trade as it influences consumer confidence and investment. Investors are likely to invest in an economically stable economy as their investments are secure and safe from economic ripples. The 2008 global economic crisis is a good indication of how instability influences international trade. Indonesia and Malaysia are members of ASEAN countries that had the effects of the 2008 credit crunch. However, Indonesia smoothly recovered from the crisis than Malaysia hence regaining stability. Indonesia remains the preferred country for FDI for various reasons including prospect market, high economic growth rate, large resource base, diversity in population, large population, trade trends as well as huge local market for products. References Hill, C.W.L., Cronk, T., Wickramasekera, R. 2011, Global Business Today: An Asia - Pacific Perspective, McGraw Hill/Irwin, Australia. Joseph E. S. 2003, Capital Market Liberalization, Economic Growth, and Instability, Journal of Policy Modeling, Vol. 25, No. 5, pp. 505-524. Mike K. 2012. Indonesia Boosts Exports, Taps Manufacturing Shift. The Journal of Commerce accessed April 5, 2012 http://www.joc.com/importexport/indonesia-boosts-exports-taps-manufacturing-shift?page=2 OECD Development Centre (MPF-SAEO) 2010, http://dx.doi.org/10.1787/888932344957 Ramburuth, P., and Welch, C. 2005, Casebook in International Business: Australian and Asia Pacific Perspectives, Person Education Australia. The world fact book 2012, Indonesia, Retrieved April 4, 2012 from https://www.cia.gov/library/publications/the-world-factbook/geos/id.html The world fact book 2012, Malaysia, Retrieved April 4, 2012 from https://www.cia.gov/library/publications/the-world-factbook/geos/my.html Read More