Question

Under a totalitarian government, the Indonesian economy grew strongly for 30 years. Meanwhile, the economy of the largest functioning democracy, India, performed poorly for decades until recently. Do you think the Indonesian economy grew despite or because of a totalitarian regime? What might explain India’s relatively poor performance under a democratic political system? What do you think you need to know about doing business in either of these 2 regions?

Answer 1

While deciding on how to manage an economy, there are 3 primary approaches which governments can take to help its economy in growing and ensuring availability of resources for one and all at large. These are namely, capitalist economy in which the forces of demand and supply help in deciding the prices of goods and services, mixed economies in which both private as well as government players are allowed to operate in the market place and socialist or totalitarian governments in which all major decisions are taken by only the government.

When we compare the growth of two major Asian countries that is Indonesia as well as India, we see some major differences in the approach which each one followed towards a totalitarian government which both of them had but saw different results.

In a totalitarian government it is not necessary to close and shut your economy from the outside world. While Indonesia allowed for free flow of capital without major restrictions and the control over natural resources did not mean that the country was not exporting or importing goods and services, India had strong protectionism measures whereby, most foreign players were discouraged from providing anything to the economy.

As a result, as tariffs or taxes were lower in Indonesia as compared to the Indian economy, it saw faster growth rates over the years. It is important to remember that high protectionism often leads to instability and lack of productivity in a nation which India observed during the time period in which it chose to be a totalitarian government.

In general, totalitarian governments see less development compared to capitalist or mixed economies, however if free markets are allowed and tariffs are reduced, with the government still being in the driver’s seat, countries can experience moderate to higher growth rates as in case of Indonesia. The reason therefore for a higher growth rate was not that the government was totalitarian in approach, but rather that protectionism measures were not applied as in case of India which had high tariffs and therefore was unable to export into other countries as well.

Thus, we can conclude by saying that even though both economies had a totalitarian government, Indonesia chose to have lower tariffs and easier access in the market which allowed them to grow much better than India which had a closed economy approach and was subject to higher taxes in return from other countries as well which did not allow it to have equal productivity.

Please feel free to ask your doubts in the comments section.