INDONESIA: PROSPECTS FOR ECONOMIC STABILITY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010031-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 34
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 31
• Publication Date: July 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Indonesia: Prospects for Economic Stability
Secret
ER IM 68-81
July 1968
Copy N2
71
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
July 1968
INTELLIGENCE MEMORANDUM
Indonesia:
Prospects for Economic Stability
Summary
The economy of Indonesia is slowly recovering
from the severe damage wrought by more than a decade
of mismanagement under Sukarno. The Suharto regime
is attempting to control runaway inflation and to
stabilize the economy by tighter fiscal control,
deferment of foreign debts, and large imports of
consumer and industrial goods under new foreign
aid. If the government could continue the progress
made in 1967, when the rate of inflation was reduced
from 600 to 100 percent, there would be good pros-
pects for economic recovery and growth over the
long run.
Progress is not assured, however, and the next
few years will be crucial. The level of foreign
aid that has been promised thus far by major donors
will be minimal for stabilization purposes, and
Suharto has no powerful new fiscal and monetary
weapons to continue the fight on inflation. While
over the next year or two there could be slow and
uneven progress, the possibility of increasing frus-
tration and political disaffection in the cities also
exists.
Political stability and economic progress would
have been extremely difficult after independence
even under the best of circumstances, but President-for-
life Sukarno amassed a foreign debt of more than $2
Note: This memorandum was produced solely by CIA. It
was prepared by the Office of Economic Research and was
coordinated with the Office of Current Intelligence and
the Office of National Estimates.
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billion and left the country in ruinous inflation by
his years of adventurism in foreign policy and politi-
cal activism. In 1966 the Suharto government invited
the International Monetary Fund to help develop
policies and marshal funds to bring the economy under
control. A two-fold program was formulated by the
Fund and a consortium of Western aid donors: to
stabilize and then to rehabilitate the economy. There
has been slow progress toward the first goal but
relatively little toward the second. All Western
creditors and the USSR have granted moratoria on debt
repayments, and the consortium is providing new
economic aid of about $300 million this year. This
aid is used primarily to finance imports of consumer
goods or of materials for consumer goods industries
in order to stem inflation; relatively small amounts
remain to provide equipment needed for rehabilitation.
One of Indonesia's fundamental economic problems
is a slower growth of food production than of the
population. The government plans to import 600,000
tons of rice in 1968, about 6 percent of domestic
production. Yields in Indonesia can be greatly
increased by stepping up irrigation and the use
of more fertilizer, pesticides, and modern seeds.
2.ltaough the government is encouraging greater
production of rice, many years will be required
to eliminate rice impor:s.
Indonesia's annual exports have declined since
1960 by more than $150 million, or nearly 20 percent,
partly because of adverse terms of trade but also
because investment in export industries fell. The
Suharto regime is now restoring to their foreign
owners some plantations and mines taken over by
Sukarno. This move and the provision of attractive
terms for foreign investors have already brought some
new investment in oil, tin, copper, and rubber and
copra plantations. 16 time, if Indonesia adheres to
its present economic policies, foreign investment can
contribute substantially to development, particularly
in the export sector.
The Indonesian transport system, essential to
maintain control and promote development among the
several thousand islands of the archipelago, is in
poor condition (see the map). New equipment and
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improved administration are needed. Almost one-
half of the $75 million in project aid requested
for 1968 will go to transportation, but at this
rate three to five years will be required merely
to rehabilitate existing trai.sport facilities.
Even if economic progress under Suharto is
slow, the consequences for domestic welfare would
not be serious. Most of the approximately 112
million Indonesians live in a non-monetary, sub-
sistence environment and do not expect radical
improvements in their living standards. Famine
is not likely to become a problem. As a result,
the population probably will weather the path to-
ward slow progress expected under Suharto just as
they did the years of deterioration under Sukarno.
If progress is halted and uncertain over the next
few years, however, dissatisfaction in the cities
would be widespread and could lead to increasing
political difficulties for the Suharto regime.
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The Setting
1. Indonesia's legacy from more than 300 years
of Dutch colonial rule was an extremely weak base for
political and economic development. The Dutch long
viewed Indonesia primarily as a source of raw
materials -- rubber, copra, and tin. They estab-
lished some consumer goods industries on Java, the
main island, primarily to reduce the colony's demands
for imports, but at the beginning of World War II
four-fifths of the population was still engaged in
traditional agriculture while a mere 3 percent,
primarily Dutch and Chinese, received most of
the money income. Administrative responsibility was
denied to all but a few Indonesians, and after
independence the country was ill-equipped to providA
administration for either economic or political
affairs. This has been the root cause of many of
Indonesia's current problems.
2. The indonesi.an economy incurred little
physical war damage when the Japanese arrived in
March 1942, but it was severely weakened by the
Japanese occupation. Foreign trade was restricted
to Japan, interisland trade was halted, plantations
were converted to food production, and facilities
for processing exports were left idle or converted
to other uses. Transport and distributive facilities
were eroded, and the productive apparatus in the
small, modern sector deteriorated.
3. During the years immediately following the
Japanese occupation, the Indonesian fight for inde-
pendence not only prevented reconstruction of the
economy but also resulted in direct losses of prod-
uctive capacity. Under a "scorched earth" policy the
Indonesian nationalists destroyed a large number of
foreign-owned sugar mills and damaged foreign-owned
estates. Recovery did not begin until 1949, but it
then proceeded rapidly during 1950 and 1951 under
the stimulus of the Korean War boom. Most industrial
plants were reconstructed, export agriculture and
mining were expanded, and there was some rehabilitation
of the transport system. Increased production of
such strategic raw materials as rubber and petroleum
provided Indonesia with a large surplus in the balance
of payments during most of the early 1950's.
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4. The majority of the Indonesian people now
live on the small but fertile island of Java, supported
primarily from intensive cultivation of irrigated
food crops for ha:We consumption and from small,
cottage industry (see Figure 1). But population
pressure on Java has long been excessive, and nearly
all cultivable land is under crops. As a result,
expansion of agricultural production in Java can
be attained only by raising yields. In marked contrast
to Java, the outer islands have only one-third of
the population of 112 million but account for about
rive-tenths of the total land area. These islands,
primarily Sumatra, contain the plantations, mines,
oilfields, and refineries that produce for export,
but there are also large areas where primitive shifting
agriculture still prevails. The differences in
economic orientation between Java and the outer
islands have bred differences in political and social
outlook and have led to occasional outbreaks of
violence and lingering animosity and distrust.
The Time of Troubles
5. Indonesia's current problems reflect the
troubles of the Sukarno era, which was marked by
a steady economic deterioration. Although most
Indonesian statistics are hardly better than con-
jecture, they imply that per capita income fell
during the period 1950-65 and that standards of
living were lower when Sukarno was ousted in 1965
than they were in 1939. The level of production
in most sectors of the economy was little higher
than that of the prewar period; and agricultural
production, the mainstay of the great majority of
Indonesians, was actually lower. The petroleum
industry, largely dominated by Western-owned oil
companies, showed the only significant growth during
the period, but Sukarno's policies kept its growth
substantially below what it could have been. The
general stagnation in domestic production, however,
does not adequately reflect the economic disorder
wrought during Sukarno's administration. Inflation,
endemic in the early independence years, got out of
control towards the end of Sukarno's rule and the
rupiah became virtually worthless. Government
borrowing to finance recurring budget deficits was
the most important factor contributing to the
declining value of the rupiah.
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Figure 1
INDONESIA
ESTIMATED COMPOSITION OF NATIONAL INCOME
1967
General Government
Mining and Quarrying
10%
// I
Construction \/ Manufacturing I 16%
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6. Indonesia's dismal economic performance
reflects government policies which could hardly have
been better planned to impede development. Adventurism
in foreign policy and political activism preempted
nearly all of the government's energies and resources.
Sukarno took over foreign-owned plants and plantations
without compensation and squelched private initiative.
After paying for the large, modernized armed forces
and the bloated bureaucracy, there were practically
no state funds for investment, except on a few pres-
tige projects.
7. During the late 1950's, one of the most
serious deterrents to economic development was the
failure of the governmant to unify the country. The
population of the outlying islands, always latently
hostile, became increasingly estranged from the
Javanese government. These islands prod'iced most
of the country's exports and tax revenues and
received relatively little in return. Most government
spending was on Java. In reaction, the outlying
islands set up semi-autonomous governments in 1957.
Military rebellion broke out a year later. These
events seriously disrupted production,. and the con-
sequent '.oss of exports reduced goverrunent revenues.
At the same time, government expenditures rose in the
process of quelling the rebellion and restoring a
measure of security to the archipelago.
8. Also during the late 1?50's, the government
was attempting to wrest West Irian from the Dutch.
When the Hague refused in 1957 to cede the territory,
Djakarta seized all Dutch business interests and
ousted most Dutch technicians, thus losing an important
source of entrepreneurial talent and capita]. invest-
ment. Indonesia also began to build up its armed
forces in anticipation of military action against the
Dutch. With Soviet credits, the Indonesians acquired
vast amounts of military materiel, a major source of
their tremendous foreign debt. By mid-1962 the dis-
pute had been settled largely in Indonesia's favor
with intervention by the United Nations and assist-
ance from the United States. Economically, however,
the campaign was very costly. In addition to the
loss of Dutch investment and the potential burden
of repaying military credits, the Indonesians
incurred the cost of administering the territory.
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9. The successful if costly acquisition of West
Irian complete, Sukarno precipated a confrontation
with Malaya in 1963 to stop the formation of Malaysia,
which Indonesia claimed to be a neo-colonialist plot.
Here he was unsuccessful. Malaysia was officially
formed on 16 September 1963. There followed a "Crush
Malaysia" campaign which included an embargo on all
trade with Malaysia. This ill-conceived move dealt
a serious blow to the Indonesian economy, however,
because about 30 percent of the country's exports had
been channelled through Malaysian ports. Still more
important was the loss of $35U million in economic
credits, which Western countries had pledged to
support a proposed economic stabilization program
but which they withdrew as a result of the confron-
tation. In addition, the military costs of confron-
tation represented a drain on the economy. Once
again, the Sukarno government had chosen to pursue
political adventures rather than rational economic
programs.
The Suharto Era
10. The army under Suharto assumed a degree of
political power in October 1965 and established a
cabinet in March 1966. It publicly acknowledged the
country's severe economic problems. Nevertheless,
its initial attempts to undo the damage wrought
by years of mismanagment under Sukarno were largely
unsuccessful, in part because the economic problems
were so formidable but primarily because the regime
lacked effective political power. Numerous economic
directives were issued during late 1965 and early
1966 -- including those designed to raise new taxes,
reduce subsidies, and depreciate the rupiah exchange
rate -- but not all were implemented because of
political repercussions. For example, the reduction
in subsidies and subsequent increase in public utility
rates were retracted following widespread public
demonstrations in early 1966. The hyperinflation
begun under Sukarno gathered speed. Output remained
stagnant, government services continued to be virtually
paralyzed, and the disorder in urban areas, if anything,
increased. A disaster of major proportions was
averted only because the Indonesian economy is pre-
dominantly rural and much of it is relatively unaffected
by what occurs in the modern, urban sector. The
situation began to improve slowly in 1967 as a com-
bination of foreign aid receipts and a smaller budget
deficit reduced the rate of inflation.
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11. Despite the ineffectiveness of its domestic
policies, the Suharto regime made major progress
in restoring Indonesia to the world economy. The
new government persuaded creditor countries to ease
debt repayments and provide additional economic
assistance, and rejoined the United Nations, the
International Monetary Fund (IMF), and the world
Bank. Suharto officially ended Sukarno's confrontation
with Malaysia and resumed trade with Singapore.
The government also created a more favorable atmosphere
for private foreign investment, partly by returning
some nationalized properties to Western owners.
The fruits of these efforts have been substantial.
Estimates by the IMF and the World Bank of the re-
quirements for stabilization and recovery were used
by major Western countries as the basis for extending
economic assistance. The receipt of foreign aid
during 1967 and a tightening of government expenditures
per::iitted a substantial reduction in the rate of
inflation, although it remains high.
Inflation
12. One of the most pressing of all the economic
problems inherited by Suharto is runaway inflation.
Indonesian price indexes, which are far from adequate,
indicate that during the 18-month period ending in
June 1966, prices increased by more than 2,500 percent.
Inflation was caused primarily by large-scale govern-
ment bt.dget Oefic.i.ts and subsequent rapid increases
in the money supp.' Government expenditures under
Sukarno grew much more rapidly than revenues and
were used primarily to finance military adventures,
to build unproductive prestige projects, end to main-
tain the excessively large government bureaucracy.
13. Most Indonesians live in the rural sector
and are therefore not greatly affected by inflation
primarily because they consume most of what they
produce and make minimum use of money. The greatest
adverse effects are in urban areas where the real
wages of industrial workers have declined substantially
while food prices in real terms have been fairly
stable. Some of the sting of inflation has been
removed for urban workers through price controls
and through payment of part of their wages in rice.
inflation has substantially reduced the incentives
to save and invest. Rupiah notes are quickly exchanged
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for goods when people see that the currency is fast
depreciating. Moreover, much private investment
has been diverted to building up inventories for
speculation. At the same time, Sukarno let govern-
ment investment in real terms fall substantially,
particularly in infrastructure, as government revenues
failed to keep pace with price increases.
14. Although the national budget under Sukarno was
in deficit continually from 1952, the largest deficits
were incurred during 1963-66 when deficits actually
exceeded revenues in each year. In 1965, Sukarno's
last year of rule, the budgetary deficit reached
its peak, exceeding revenues by nearly four-fifths.
The budgetary imbalance was less severe in 1966, but
the deficit still exceeded revenues by more than one-
fourth. These huge budgetary deficits resulted primarily
from the massive military expenditures incurred
under Sukarno's "Crush Malaysia" campaign and the
failure of government revenues, derived primarily
from custom duties, to increase as rapidly as expendi-
tures under inflationary conditions. Most of these
budgetary deficits were financed by borrowing from
the central bank. As a result, the money supply in-
creased more than 150 times between December 1962 and
December 1966, from 136 million rupiahs to 21,000
million rupiahs. During the same period, the general
price level increased nearly 260 times, reflecting
not only the increase in the supply of money but also
an acceleration in the speed at which money changes
hands. (See Figure 2).
Fiscal Policy Under Suharto
15. A team of Western-trained economists working
with Suharto's blessing has succeeded in bringing
the government budget under control. A tighter
administrative procedure has been installed,
particularly for expenditures. Subsidies to
nationalized enterprises have been reduced, and
subsidies have been cut on some consumer items
such as kerosine. The proportion of total
expenditures allocated to the military has been
gradually reduced from 50 percent in 1965 to 33
percent in 1967 and to a planned 28 percent in 1968.
There has also been some reduction in government
civilian employment. In 1967, tax collections
increased moderately because of higher customs
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Figure 2
INDONESIA
CONSUMER PRICE INDEX FOR DJAKARTA
1961-68
Year ending February 1958=100
267,276
r1
5,234 36,347
1,037 2,275 r!1 m
567,088
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receipts, and foreign aid support to the budget
amounted to one-fifth of total revenuez. As a
result of this improved fiscal performance and a
substantial inflow of new foreign aid, there was a
sharp reduction in inflation from 635 percent in
1966 to 112 percent in ?1967. The rate of inflation
accelerated during the last quarter of 1967 and the
first two months of 1968, largely because of rice
shortages. During the first quarter of 1968, prices
increased by more than 50 percent, clearly indicating
Indonesia is far from solving its severe problem of
inflation. (See Figure 3).
16. The government is expected to continue its
present fiscal policy, but probably cannot eliminate
budget deficits entirely over the next few years.
Some of the reduction in budget subsidies to
nationalized enterprises in 1967 were offset by bank
loans to these enterprises, and it may be many years
before most of them can operate free of government
assistance. Military expenditures might be reduced
in time. But Suharto's political base is the army,
and military cuts may not be possible for several
years. Civilian government employment in Indonesia
is not excessive by comparison with other Asian
countries. Government investment expenditures need
to be increased rather than cut if rehabilitation is
to get under way. On the revenue side, import and
export duties will grow slowly as trade recovers.
Large new taxes cannot be imposed for political
reasons, however, or even administered adequately in
the short run. Tax holidays have been promised new
investors, and thus new revenue cannot be expected
from these investments for several years.
The Foreign Debt Problem
17. A relatively massive foreign debt with a
repayment schedule clearly beyond Indonesia's capa-
bility is one of the most obvious marks of Sukarno's
years of mismanagement. In June 1967, this debt
totaled about $2.3 billion, or three times Indonesia's
annual export earnings (see Figure 4). The debt
to Western countries, $1.3 billion, was incurred
almost wholly for such items as transportation
equipment, power and irrigation projects, foodstuffs,
and textiles imported under long-term credit
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agreements; whereas almost 80 percent of the Com-
munist deb, of $1.0 billion represented military
equipment, and much of the remainder was spent on
grandiose prestige projects.
18. When the new regime took over in the fall of
1965, Indonesia was already in default on some of
its debt and during 1966 was unable to make any
further debt service payments. To forestall further
defaults, Western creditors agreed, in December 1966,
to reschedule the payment of all medium-term and
long-term debts due before the and of 1967. Under
the agreement, payments totaling some $330 million
were rescheduled and were to be repaid in eight
years, with an initial three-year moratorium. Actual
payments would begin on 1 January 1971.
19. in October 1967, Indonesia's major Western
creditors met again and agreed to reschedule the $130
million due in 1968 in the same manner as the previous
debts. They also agreed to recommend that creditor
countries reschedule debts due in 1969 and 1970 on
terms no less favorable than those granted for 1967
and 1968.
20. While the Coomu,nist countries were not
parties to these agreements, the USSR and the East
European countries, except Poland and Rumania,
agreed in bilateral negotiations to reschedule
Indonesia's debt due them. The terms reached, how-
ever, are less favorable than those granted by
Western creditors.
The Indonesians can expect little
additional assistance from the Communist countries
and, therefore, probably will not feel compelled to
meet even this repayment plan. Since the 1965 coup,
Soviet military assistance has been limited to cash
sales of $10 million of spare parts and technical
help to rehabilitate some of the Soviet equi.pment.
The Indonesians need Soviet spare parts to keep
most of their air force and navy operating. But the
army, which uses mainly Western weapons and equipment,
is the important service to maintain internal order.
Moreover, the Soviet government probably would not
wish to burn its remaining bridges to Indonesia.
Consequently, substantial Indonesian repayments of
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Figure 3
INDONESIA: GOVERNMENT BUDGET RECEIPTS AND
EXPENDITURES, 1967
A'
69%
OJOG C)\TURES 3t1
..'so
Debt
Service
2% Repionol
Projects N
G1
S"EC"' ACCOUNTS*
?lnclud.r spacial allocation of N.? 6ilkoe rupiahs for purchase of rice In fourth quarter.
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Figure 4
INDONESIA: MEDIUM-AND LONG-TERM INTERNATIONAL DEBT
As of 30 June 1967*
Non Communist Countries
57.9%
West
Germany
once
(In gcl
1,
3X
us
13.9%
4.8%
4.5%
8.7%
10.3%
Non-Communist Netherlands
Countries**
Other Communist
Countries
Communist Countries
42.1%
ECONOMIC
$217.7 Million
'Net of Interest owing to arrears.
"Austria, Belgium, Denmark, Sweden, Switzerland, Panama, United Arab Republic,
Tanzania, Hong Kong, India, Pakistan, and Yugoslavia.
MILITARY
$737.0 Million
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the Soviet military debt -- which in effect would
represent diversion of Western aid for that purpose --
are highly unlikely.
21. No agreement has been reached on Indonesia's
debts to Communist China, estimated to total $60 mil-
lion, but it seems unlikely that any payments will
be made in the next few years. Relations between the
two countries have been sharply curtailed since the
1965 coup attempt. Diplomatic relations have been
suspenued and the Chinese aid program in Indonesia
has been halted.
Economic Aid
22. The foreign debt problem is closely inter-
woven with the issue of new foreign aid. Repayments
on the current debt of $1.3 billion to Western
countries are particularly a large burden on the
balance of payments and greatly increase Indonesia's
requirements for new aid. While debt rescheduling
has substantially reduced payments to be made in
the period through 1969, payments in 1970 are to
amount to about $70 million and in 1971 to more than
$200 million. (For further figures on the debt re-
payment, see the Appendix.)
23. In 1966, the first full year of the Suharto
regime, the need for foreign assistance was obvious.
The economy was in shambles; inflation was completely
out of control and there was probably a decline in
output. In an effort to stabilize the economy, the
IMF and an aid consortium of Western countries mounted
an emergency program which provided Indonesia about
$130 million in 1966. The consortium agreed on
a stabilization program to provide enough foreign
exchange or its equivalent (for example, PL 480)
to achieve a level of imports which will stem in-
flation. The IMF calculated the 1967 foreign ex-
change gap at $200 million, and the Western countries
agreed to extend $160 million in new aid and to con-
tinue about $40 million in aid pledged in 1966 but
not utilized (see Table 1). The stabilization program
has helped to reduce the annual price increase from
635 percent in 1966 to only 112 percent in 1967.
24. Indonesia's aid requirements for 1968 were
estimated by the IMF to total $325 million -- $250
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million for general-purpose imports and $75 million
for rehabilitation programs. Even this figure is
far below Indonesia's actual requirements, but it
reflects basic political judgments as to how much
aid can reasonably be expected from Western countries.
The United States is committed to provide one-third
of the $325 million if other countries provide the
remainder. Thus far, however, the amount offered
by other countries is far below the amount requested,
and Indonesia may actually receive no more than $300
million.
Table 1
Foreign Aid Available in 1967
Million US $
Unutilized
Balance from 1966
New
Offer
Total
West Germany
4.0
25.0
29.0
India
8.0
8.0
Netherlands
18.3
15.0
33.3
United States
8.0
57.0
65.0
United Kingdom
1.4
1.4
Japan
60.0
60.0
Others
3.6
3.0
The Problem of Transportation
25. Even without the economic disruptions of the
Sukarno years, transportation would present formidable
problems in developing Indonesia. There are several
thousand islands in the Indonesian archipelago, rang-
ing from tiny, uninhabited islets to some of the
world's largest islands. The archipelago extends
about 3,000 miles from east to west, roughly the dis-
tance across the continental United States, and is
about 1,000 miles from north to south. The major
islands are extremely mountainous, and more than 60
percent of the land area is covered with tropical
forests while swamps cover much of the coastal area.
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26. The transport system was developed by the
Dutch to link producing areas with population centers
and ports and to facilitate political and military
control. Most transportation facilities were con-
fined to the main island of Java, where improved
highways, railroads, and deep water ports were con-
structed. To a lesser extent, transport facilities
were constructed in Sumatra to service the export-
oriented plantation and mining economy. The other
islands were almost completely neglected, although
they were linked to Java by shipping and air service
which the Dutch needed to maintain essential com-
munications and control.
27. The transportation system suffered extensive
damage during World War II and the immediate post-
war conflicts preceding Indonesian independence.
Although Indonesia greatly increased its inventories
of transportation equipment, especially of trucks,
in the years following independence, the actual
performance fell below the prewar level because of
the failure to provide facilities for serviciny and
maintaining the equipment. In fact, much of the
new equipment fell out of service because of poor
maintenance or was used far below capacity because
of poor management.
28. At present, about 30 percent of the inter-
island shipping network is awaiting repair, and part
of it should be scrapped. There is a large backlog
of maintenance dredging for the ports and their
access channels, and most port equipment needs re-
pair or replacement. Railroad tracks and bridges
suffer from deferred maintenance and need strengthen-
ing. Many of the locomotives and most of the rolling
stock are overage and the rest need rehabilitation.
About 50 percent of the motor vehicles are over 10
years old. Nearly all roads are in poor condition
with some sections completely impassable. Most of
the domestic aircraft need to be replaced. In addition,
there is even more need for improvement in adminis-
traLion, organization, operation, and financial
arrangements. For example, there is overstaffing
in nearly all transport agencies -- the railroads
appear to be overstaffed by at least 50 percent.
29. Although transportation facilities are
generally adequate for the present low level of
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economic activity, it will be essential to restore
most of the capacity before rehabilitation and
economic expansion place new burdens on the system.
Almost one-half of the $75 million in project aid
requested for 1968 has been earmarked for transport
and communications projects. At the rate of progress
planned for 1968, it will take three to five years
to rehabilitate completely the existing transport
facilities.
Stabilization and Th. Rice Problem
30. The need to reduce rice imports by increasing
local production is another pressing problem facing
the Suharto regime. Although rice is the basic
foodgrain of most Indonesians, domestic production
has failed to keep pace with population growth, as
indicated below:
1960
1961
1962
196
Increase
3
1964
1965
1966
1967
1960-67
Rice production
(thousand
metric tons)
8,767
7,263
8,898
7,933
8,419
8,830
9,140
9,300
Percent increase
in rice
production
-17
22
-11
6
5
4
2 6
Percent increase
in population
2.6
2.6
2.6
2.6
2.6
2.6
2.6
2.6 20.8
As a result the government imported 350,000 tons
of rice in 1967 and plans to import 600,000 tons
in 1968. Although imports are small in terms of
total supply, rice imports are a major drain on the
country's foreign exchange resources. Rice imports
in 1968 would represent about 15 percent of total
planned imports, which is the equivalent of nearly
one-half of the economic aid expected for stabi-
lization purposes. With In3onesian population
growth averaging 1'.6 percent per annum, the need
to expand domestic production is -.ritical.
31. Indonesia could increase rice production
substantially, but not quickly. Yields in Indonesia
can be increased greatly with large inputs of water,
fertilizer, pesticides, and new seed strains.
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Inputs such as fertilizer and pesticides could be
provided through foreign aid, but time and technicians
are needed to teach the peasants how to use them
properly. Moreover, domestic distribution facilities
need to be improved substantially, to facilitate both
the movement of inputs to the farm and the flow of
production from the rural areas. The prospects at
best are for slow but steady increases in rice prod-
uction, and the subsequent benefits of reduced rice
imports will be realized only over a number of
years.
The Performance of the Export Sector
32. The poor performance of Indonesia's export
sector also reflects the adverse effects of govern-
ment policies. Indonesian exports, after increasing
substantially during the Korean War and then falling
sharply in 1953, generally stagnated during the mid
and late 1950's. While the stagnation partly
reflected lagging world demand, an overvalued rupiah
exchange rate which reduced export incentives was
the primary cause. A sharp decline in the prices
of Indonesia exports between 1960 and 1966 further
aggravated this underlying problem, and exports fell
from $840 million to about $680 million. Much of
the decline was accounted for by the fall in the
world price for rubber, Indonesia's most important
export (see Figure 5). The world price of natural
rubber has fallen by about 50 percent since 1960;
and although the volume of Indonesian rubber exports
increased from 578,000 metric tons in 1960 to
664,000 metric tons in 1966, the value of these
exports declined from $377 million to $217 million.
Petroleum and petroleum products, nearly as important
as rubber, also have increasec'. in volume but declined
in value since 1960, reflecting the increasing pro- -
portion of lower priced crude oil that has been exported
because of Sukarno's insistence that greater amounts
of refined products be channeled into the domestic
economy. Other exports, including copra, tea, tobacco,
and tin, have declined in both volume and value since
1960.
33. While Djakarta can do nothing about the
fall in world market prices, the problem has been
made worse by the lack o:` investment in export
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industries during the past decade. Since 1957,
when the government began nationalizing foreign-
owned plantations and mines, investment in such
industries as rubber, copra,, and tin has been minimal,
and in some. cases even maintenance has been neglected.
As a result, a substantial part of Indonesia's
rubber trees and coconut palms are well beyond
their prime productive age and many mining facilities
have deteriorated badly.
34. Under the Suharto government, many of the
previously nationalized foreign investments have
been returned to their former owners. Both Good-
year and Uniroyal have returned to their rubber
plantations and are making new investments. Inter-
national Nickel, Kaiser, and. Freeport Sulphur are
making new investments in the country's mineral
resources. While many of these investments will
involve considerable time before actual production
takes place, some investment in rehabilitation will
soon result in increased production. Moreover,
the investment brings an inflow of foreign exchange.
Implications for the Future
35. Indonesia needs large-scale foreign aid to
complete its stabilization program and set the
stage for economic development. Failure by Suharto
to stabilize prices quickly may increase public
resistance to those measures needed for lasting
stabilization, such as elimination of subsidies
and a consequent rise in public utility prices.
Some relief from inflation may come this year through
a further reduction in the budget.deficit, but in
the short run there is little more the goveriment
can do to increase revenues or to reduce expenditures.
An expected rise in export earnings in 1968 would
contribute to stabilization by financing more
imports, but the impact would be small in relation
to needs. Thus foreign aid is a key element in
stabilization, but adequate aid may not be forth-
coming. The goal of $325 milli:,n in 1968, which the
IMF estimated as a minimum requ',6rement, probably
will not be reached. The shortfall, amounting to
perhaps $25 million, will only make more difficult
the government's job of increasing the supply of
goods in order to hold down prices.
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Figure 5
INDONESIAN IMPORTS AND EXPORTS, 1966
MOTOR VEHICLE
S
2%
CHEMICALS 1%
YARN 2%
IMPORTS
OTHER*
23%
ENGINES 4X
OTHER'
21%
BLEACHED CAMBRIC AND SHIRTING 3%
OTHER'
32%
FABRICS 4X
RICE 8%
EXPORTS
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