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| Economic System: Foreign Investment |
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There is considerable disagreement about the importance of foreign direct investment (FDI) in the continuing economic development of Indonesia. Some analysts
believe that FDI is not a significant driving force in the economy and that international financial markets are feverish and unreliable sources of economic guidance.
These analysts argue that FDI contributes only 3-6% of total investment, employs only a small proportion of the labor force, and contributes little to technological
improvements in the manufacturing sector. However, other analysts dispute the figures on which this argument relies, citing the fact that oil, gas, financial concerns
and equipment loans are not accounted for in such calculations.
This latter opposing view notes that the countries that have done best in the world, in terms of human development indices as well as economic growth,
are all major recipients of FDI. Simplified images of an Indonesia that would be happy if mischievous markets and intervening outsiders would just go away will not
help to secure the safety and livelihood of local people or to resolve the existing conflicts.
While increases in FDI are not potentially destabilizing, indirect investments in shares and loans may be destabilizing if the demand for foreign exchange
increases and a run on the banks ensues.
Many observers criticize the performance of the International Monetary Fund (IMF) in Indonesian economic affairs, pointing out that the IMF has been unrealistic in its demands. Indonesia has met demands to reduce subsidies on many goods but there may still be a negative response from those adversely affected. In the future, the Indonesian government may encounter problems agreeing to IMF terms; for example, disposing of state assets is likely to trigger opposition from the parliament. Despite the imperfect performance of the IMF, Indonesia needs to improve relations with the Fund in order to avoid souring the attitudes of foreign investors, bilateral donors and other international foreign institutions.
Recommendations:
- The Indonesian business sector should continue to seek FDI. Efforts should be made to strengthen the capacity of Indonesian banks to withstand the vagaries
of the international financial system.
- The Indonesian government should attempt to improve its relationship with the IMF, meeting the Fund’s demands wherever possible, while implementing
policies to mitigate any harsh effects on the Indonesian population.
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