IMPACT OF INDONESIA'S ECONOMIC CONFRONTATION OF MALAYSIA
Document Type:
Collection:
Document Number (FOIA) /ESDN (CREST):
CIA-RDP79T01003A001800070004-1
Release Decision:
RIPPUB
Original Classification:
S
Document Page Count:
10
Document Creation Date:
December 12, 2016
Document Release Date:
May 21, 2002
Sequence Number:
4
Case Number:
Publication Date:
October 25, 1963
Content Type:
BRIEF
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CIA-RDP79T01003A001800070004-1.pdf | 344.17 KB |
Body:
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Current Support Brief
IMPACT OF INDONESIA'S ECONOMIC CONFRONTATION
OF MALAYSIA
CIA/RR CB 63-89
25 October 1963
CENTRAL INTELLIGENCE AGENCY
Office of Research and Reports
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GROUP 1
Excluded from automatic
downgrading and
declassification
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This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
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IMPACT OF INDONESIA'S ECONOMIC CONFRONTATION
OF MALAYSIA
Indonesia's decision to break trade relations and to undertake a
serious campaign of economic confrontation against Malaysia not only
will have most serious effects on the already depressed economy of
Indonesia but also will have adverse effects on the economy of Malaysia.
For Indonesia the break in trade relations will have its most serious
impact in the rubber and petroleum markets, which constitute its most
significant foreign exchange sources. The recently announced economic
stabilization program, which was linked to continued economic support
from Western nations, will be seriously endangered if not altogether
cast aside. The most serious effect on the economy of Malaysia will
be felt in Singapore, where the cut in entrepot trade will reduce em-
ployment and revenue from port activities.
1. Loss of Exports
During 1962, about 30 percent of Indonesia's total export trade of
$674 million was shipped to Malaysia, primarily for reexport. If
smuggling and false documentation are taken into account, however, ex-
ports to Malaysia may have been as high as 50 percent. 1/ Crude rubber,
petroleum, and tin are the most significant commodities in this trade.
Whereas Indonesia could carry on some limited trade on a government-
to-government basis, Indonesia does not have the marketing facilities
to maintain exports at their present level. Trade channels and financial
arrangements have been seriously disrupted and will need to be newly
established.
Rubber, Indonesia's most important export, accounts for about
44 percent of total exports. In the past, Malaysia has been the primary
outlet for Indonesian rubber, taking about 60 percent of Indonesia's total
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rubber production. Much of the Indonesian rubber is sent to Singapore
and immediately transshipped to other countries; the remainder is re-
milled, processed, and graded in Singapore before shipment to con-
sumers. The economic consequences of suspended trade in natural
rubber will depend largely on Indonesia's ability to develop alternate
processing and marketing facilities for its rubber. Indonesia's ability
to perform the remilling and other processing operations, formerly
handled by Singapore, is problematical. In the opinion of trade experts,
however, the most serious problem facing Indonesia is the marketing
of the additional unprocessed rubber that formerly was transshipped from
Singapore. In apparent substantiation of the difficulties forecast by trade
experts, Indonesia's First Minister Djuanda stated that at least 6 months
would be required to readjust the processing and marketing of Indonesian
rubber. 2/ Although the considerable smuggling between Indonesia and
Singapore is likely to increase, an outlet would not be provided for a sig-
nificant portion of Indonesian rubber.
Petroleum has been the most reliable support for the Indonesian
economy, accounting for about 31 percent of Indonesia's total exports by
value. The severance of trade relations between Indonesia and Malaysia
could have a drastic effect on the operation of Indonesia's petroleum re-
fineries, for the limited availability of storage facilities and the inability'
to dispose of petroleum products would soon force a shutdown. The clos-
ing of refineries not only would seriously reduce Indonesia's foreign ex-
change earnings but also would deprive Indonesia of its domestic supply
of products including kerosine, which is in chronic short supply, and of
the earnings from such exports in non-Malaysian markets. Exports of
crude oil, which account for about two-thirds of total POL exports but
only one-third of the earnings of foreign exchange from POL,will be vir-
tually unaffected.
Approximately 50 percent of Indonesia's tin ores are shipped to
Malaysia for smelting and reexport. Markets for Indonesia's tin exports,
valued at $32 million in 1.962, 3/ are largely in Western Europe. Loss of
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smelting facilities at Penang may be overcome by use of excess smelting
capacity in the Netherlands. Although this shift might involve higher
freight and smelting costs, it could be accomplished fairly promptly and
without too much difficulty.
2. Loss of Imports
Indonesia receives only 15 percent of its imports from Malaysia. 4/
These imports consist of textiles, rice, spare parts for automobiles and
machinery, and various raw materials. The goods are largely of non-
Malaysian origin and could be imported direct at somewhat greater ex-
pense.
Indonesia hopes to solve the trade problems that it has created by
finding marketing facilities that can be adequate substitutes for Singapore
and Penang. The desire to carry on entrepot activities in Indonesia can-
not be realized immediately, because of the lack of warehouses and port
facilities necessary for this trade. Approaches have been made to the
governments of the Philippines and Japan to use their facilities for fi-
nancing, marketing, and storage. The success of these proposed diver-
sions of trade will not be known immediately, but it is apparent that de-
lays in establishing new trade channels will be considerable and could
be a damaging blow to the Indonesian economy.
3. Loss of Foreign Assistance
The actions of the past month have dimmed Indonesia's hopes for
Western economic assistance. The US has withheld all new economic
aid, and, without US support, there probably will be no convening of
the meeting of the Development Assistance Committee scheduled to con-
sider economic aid from other Western nations. The $50 million of
standby aid from the International Monetary Fund, contingent on Indo.-
nesian. economic reforms, was suspended after $20 million had been
drawn. It is possible that Indonesia will lose up to $300 million in eco-
nomic aid 5/ from the West as a result of its action against Malaysia.
The Soviet Bloc and Communist China as a political gesture could
offer some economic assistance to Indonesia in its confrontation of
Malaysia, but for the present it is unlikely that significant economic
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assistance will be forthcoming or that the Soviet Bloc or China can
solve the long-term problems that are apt to arise from Djakarta's
action in cutting off economic relations with Malaysia. The USSR may
offer to shift some of its purchases of rubber from Malaya to Indo-
nesia. Such purchases, however, would benefit the Indonesians only
if they were exchanged for hard currency or goods normally purchased
with foreign exchange. The possibility of the Soviet Bloc extending
outright gifts or hard currency also appears dim. The Chinese are
not likely to offer significant economic assistance. They already pur.-
chase more than 50 percent of their total rubber imports from Indo-
nesia and are not likely to increase this amount with a consequent dis-
ruption of their traditional rubber trade with Ceylon. The Chinese
also cannot afford to make large purchases of rubber for stockpiling.
The Chinese do not import significant quantities of crude petroleum,
and the government of Indonesia does not have the refining capacity
to supply products to China.
4. Long-Term Losses
Although the immediate effect of the trade break on the economy
of Malaysia probably is not so severe as it is on Indonesia, the break,
if protracted, would have a serious effect on the economy of Singapore
and to a lesser extent on that of Malaya. Singapore receives about
20 percent of its GNP from entrepot trade, 6/ and Indonesia provided
a significant share of this trade. Penang, the entrepot port of Malaya,
also carried on a large trade with Indonesia. Penang's total trade is
not so great as that of Singapore, however, and the effect on the Malayan
economy is proportionately less. In addition, the loss to Malaya may
be partly offset by gains from increased prices in rubber and other
Indonesian commodities temporarily denied to world markets. The
effect of the trade break on the economies of the Borneo states will be
insignificant because Indonesia is not an important trading partner.
Sarawak, however, stands to suffer some economic setback because
military activity along the border between Sarawak and Kalimantan will
disrupt the subsistance economy in the border area.
Singapore accounted for about 80 percent of the trade of Pan-Malaya
(Malaya and Singapore taken together) with Indonesia in 1962. Moreover,
Indonesia was Singapore's second most important trading partner after
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Malaya, providing about 20 percent of Singapore's imports and taking
about 8 percent of its exports. 7/ Principal imports from Indonesia
were rubber, petroleum, copra, and food products, and exports were
textiles and other manufactured goods. A total break in trade with
Indonesia could cause a loss in national income of from 6 to 8 percent
and could result in unemployment and underemployment possibly af-
fecting 10, 000 additional workers. 8/ The high unemployment already
existing in Singapore, coupled with an annual rate of growth in popu-
lation of about 4 percent, emphasizes the significance to the economy
of Singapore of such a drop in national income.
Indonesia has been supplying about one-half of Singapore's rubber,
which makes up about one-third of its exports and reexports. The
sorting, processing, and grading of rubber in Singapore before re-
export provide an important source of employment and profits for
Singapore traders. In addition, significant amounts of Chinese cap-
ital fleeing Indonesia go to Singapore through devious trading mani-
pulations, largely in the rubber trade, providing an uncounted but
important source of capital for industrial development.
Petroleum plays a smaller role in Singapore's entrepot trade,
and the loss to Singapore from withholding Indonesian petroleum will
be limited to the loss of charges from storage and the servicing of
reexport transactions. Malaysian refineries, with a capacity of about
100, 000 barrels per day, operate almost entirely on crude oil from
Brunei and the Middle East. Malayan requirements of fuel oil and
other petroleum products, which are supplied in part from Indonesian
refineries, can be met from other sources.
The volume of the entrepot trade of Penang is about one-fourth
of that of Singapore, and there are no statistics to indicate how much
of this trade is with Indonesia. Products in Penang's entrepot trade
are the same as in Singapore except that tin ore from Thailand and
Indonesia makes up about one-third of the imports from neighboring
countries. 9/ The denial of Indonesian tin ore, therefore, could cut
significantly the Penang entrepot trade, cause unemployment, and
deprive Malaya of tin for export. It has been estimated that the na-
tional product of Penang may be cut by 5 percent as a result of the
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break in trade and that up to 1, 000 may be unemployed. 10/ It should
be noted, however, that Penang was eventually to lose the tin ores
imported from Indonesia and Thailand, for both are building their own
tin smelters.
In both Penang and Singapore, there has always been a large un-
recorded trade with Indonesia. Such smuggling probably will increase
during the break in trade. The real danger to Singapore as the em-
bargo continues and as Indonesia finds new trade channels is that a
certain part of this lost trade never will return to former patterns.
An additional danger to Malaysia is that increased patrolling ac-
tivities to curb smuggling may result in incidents that could escalate
into an all-out military conflict between Malaysia, supported by the
British, and Indonesia.
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