INDONESIA UNDER SUHARTO: ECONOMIC PROGRESS AND PROBLEMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030071-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: October 14, 2011
• Sequence Number: 71
• Publication Date: May 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence memorandum
Indonesia Under Subarto:
Economic Progress And Problems
ER IM 70-71
May 1970
Copy N2 64
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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.
GROUP I
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CONFI DENTIAi-,
CONTENTS
Egle
Introduction . . . . . . ? . . . . . . . . 1
Economic Performance Under Suharto . . . . 1
Prospects for Accelerated Growth . . . . 5
Indonesia's Foreign Exchange Requirements
in the Coming Years . . . . . . . . . . . 9
Conclusions . . . . . . . . . . . . . 12
Tables
1. Indonesia: Foreign Aid Commitments
and Disbursements . . . . . . . . 3
2. Indonesia: Estimated Foreign
Exchange Gap . . . . . . . . 11
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CONFIDE: NTT A T
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May '1970
INTELTIGENCE MEMORANDUM
Indonesia Under Suharto:
Economic Progress And Problems
_Introduction
Indonesian President Suharto has devoted much
of his time and energy in an effort to surmount the
economic chaos inherited from President Sukarno.
Progress has been noteworthy, considering the
deteriorated state of the economy. Price stability
has been restored and an improved investment climate
has renewed interest in exploring Indonesia's
mineral potential. But there are still serious
obstacles to overcoming the country's present economic
stagnation. This memorandum reviews Indonesia's
economic progress under S,uharto and evaluates the
prospects for accelerated economic growth. It also
assesses Indonesia's foreign aid needs during the
early 1970s.
Economic Performance Under Suharto
1. When the Sukarno era came to an end in
early 1966, the Indon-syan economy was a shambles.
Per capita agricultural production was lower than
before World War II. Inflation was out of control,
the rupiah was virtually worthless, and the foreign
debt repayment schedule was clearly beyond Indonesia's
capability. Almost all foreign-owned plants and
plantations had earlier been taken over without
compensation. Consequently, practically all new
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.
CONFTT)FNTr A Y
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foreign private investment had come to a halt and
foreign skilled manpower had departed the scene.
Moreover, much of the country's infrastructure --
including transport facilities* -- was in serious
disrepair after years of neglect.
2. Soon after assuming power in early 1966 the
new leadership under then general and now President
Suharto reversed Sukarno's policies and formulated
a program aimed first at stabilizing and then --e-
habilitating the economy. The country's isolation
from the West was ended, new laws were passed to
insure favorable treatment for foreign investors,
and numerous nationalized properties were returned
to their former foreign owners. In 1966 the Inter-
national Monetary Fund (IMF) was asked to help
develop policies and marshal funds to bring the
economy under control. As part of the stabiliza-
tion process, inflation was to be stopped, govern-
ment expenditures were to be brought into balance
with revenues, and the balance-of-payments deficit
was to be reduced to manageable proportions. To
help achieve these objectives, a consortium of West-
ern aid donors agreed to provide large doses of
foreign aid. In addition, repayments on Indonesia's
massive medium-term and long-term external debt to
both Western and Communist creditors were postponed.
3. Since 1966, substantial progress has been
made in stabilizing the economy. Spiraling infla-
tion is now under control -- during 1969 prices
rose by only about 10% compared with about 650% in
1966, 120% in 1967, and 85% in 1968. The improved
monetary performance was largely a result of massive
aid inflows -- more than $900 million during
1966-69 -- mainly in the form of consumer goods
(see Table 1). Nearly 40% of the aid came from the
United States and about one-fourth from Japan.
Chiefly because of a better tax collection effort,
budgetary performance has improved markedly. The
budget was about balanced in 1968 in contrast to a
deficit amounting to about four-fifths of total
revenues in 1965.
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Indonesia: Foreign Aid Commitments and Disbursements
Commitments
Disbursements
Jun-Dec
Jun-Dec
1966
1967
1968
1969
1966
196-7
1968
1969
United States
45.8
57.5
131.5
221.8
37.7
50.1
113.2
145.0
Japan
40.0
60.0
110.0
120.0
40.0
50.0
61.1
62.7
Holland
17.3
33.3
26.2
44:1
--
25.0
17.1
34.8
West Germany
7.5
31.6
19.5
31.8
4.0
32.4
14.9
15.6
France
--
1.0
13.2
14.2
--
1.7
1.4
11.7
Other
17.0
15.3
62.3
130.8
3.0
84.6
57.4
45.6
Total
127.6
198.7
362.7
562.7
84.7
243.8
265.1
315.4
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4. Although stabilization has been successful,
little progress has been made in getting the economy
moving. During 1966-69 the gross national product
in real terms probably increased at only about the
same rate as population -- 2.5% to 3% annually --
and per capita income is still less than $100.
5. The continuing slow pace of economic expan-
sion largely reflects the inability to increase
output in agriculture, which accounts for roughly
50% of the gross national product. The only signif-
icant gain was a 10% increase in 1968 in production
of rice, the major food crop, and this primarily
reflected increased acreage and favorable weather
conditions. The rice crop rose only slightly in
1969, and output of other food crops was below 1966
levels, apparently because of reduced acreage. Out-
put of export crops, especially rubber and copra',
also has been largely stagnant. Manufacturing pro-
duction has risen in recent years, but it still
accounts for too small a share of the national
product to have much effect on overall economic
activity.
6. Although the Suharto government has had
considerable success in attracting new foreign in-
vestors to develop the country's mineral and other
resources, most of the new projects are still in
the exploratory stage and so have not yet had any
significant impact on the economy. About 180
foreign firms, excluding oil companies, have signed
preliminary agreements which, if carried to fruition,
would amount to a total investment of more than $1
billion. Over 80% of the intended investment is in
mining and forestry operations. The problem is that
extensive surveying and exploration remains to be
done before large-scale, operations are undertaken.
In the case of crude petroleum, substantial benefits
have begun to be obtained, partly because the indus-
try was not nationalized by President Sukarno. Out-
put reached 750,000 barrels per day in 1969 -- about
50% higher than in 1967 -- and investment in the
industry is now amounting to about $100 million
annually. Agreements with some 30 foreign companies
to explore the country's oil resources have already
been reached and expectations are high that impor-
tant new oilfields will be found. Rising petroleum
production, however, has had little impact on the
economy. As elsewhere, oil exploration is essen-
tially an enclave activity, and most equipment is
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obtained from abroad. The rise in exchange earn-
ings from oil exports has served to reduce somewhat
Indonesia's foreign aid needs.
Prospects for Accelerated Growth
7. With stabilization goals mainly-achieved,
Djakarta expects during the next few years to shift
its priority to promoting economic development. A
five-year development program (1969-73),* begun in
April 1969, sets goals that imply an overall economic
growth rate of about 5% annually. The development
program places chief emphasis on agriculture and calls
for self-sufficiency in food production by the end of
the five-year period.
118 million
,Population _ .
. (Persons per square mile)
... 1,500
20
Sulawesi: 1
s 105
n
d
Sumatra and adjacent isla
Kalimantan (Borneo) 20
en
ret wp,w ,,,~~.. . .
$97S million
:Exports $961 mil
lion
Imports
ForcignAAld,.
Commitments . . . . ? $563 million
$315 million
nleS,nrmmnnf. ..
8. The obstacles to rapid agricultural expan-
sion are many, however. More than two-thirds of the
population live on Java and Madura where all culti-
vable land is tilled. It is almost impossible to
increase the area devoted to rice there without other
crops suffering. Although production on other islands
could probably be increased, resettlement is expensive
and efforts have thus far failed. Therefore, in-
creased output will largely depend on increased yields
which in turn necessitate application of modern tech-
niques and inputs. Efforts are being made to use the
new high-yielding variety of rice seeds, but these of
require a controlled water supply, year
neglect, most of the irrigation system is in serious
Fiscal years beginning in April.
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CONFI DENTIAL
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disrepair. On Java and Madura, which account for
more than half of total rice production, an esti-
mated 60% to 70% of the irrigated land is served
by systems requiring fundamental overhaul. Indonesia
also greatly lacks the trained personnel and institu-
tions to manage any major agricultural improvement
program.
9. Production of export crops also suffers
from past neglect and is unlikely to increase much
over the next several years. After 1957, when the
government began nationalizing foreign-owned planta-
tions, investment in such industries as rubber, the
leading agricultural export, was minimal. As a
result, a substantial part of Indonesia's rubber
trees are well beyond their prime productive age.
Copra production suffers from the same problem.
Most coconut palms were planted 60 to 80 years ago.
Although some new trees have been planted in recent
years, at least five years are required before coco-
nut palms begin to bear, and five to seven years
for rubber trees.
timber, will be. the most rapidly growing areas and
will provide most of the stimulus for growth in the
years immediately ahead. Mineral output, which
accounts for about 5% of GNP, is likely to double
during the period through 1973, and this would in-
crease the annual growth rate by about one-third
above the present rate.
10. Conditions are also poor in the manufactur-
ing sector. Most plants are still operating well
below their former capacity because much equipment
and machinery must be replaced. For example, an
estimated 20% of the textile industry's machinery
is inoperative. Shortages of imported spare parts
as a result of bureaucratic red tape also hamper
production. Meanwhile, new investment in manufac-
turing is very small. Past repression of the
Chinese minority has discouraged this most likely
source of capital from investing in manufacturing,
and new foreign investment in this sector remains
minimal. Extractive industries, especially oil and
11. Given the formidable obstacles to increas-
estimate that during the 1969-73 plan period the
ing production, especially in the critical agricul-
tural sector, Indonesia's rate of economic growth
is likely to fall short of hoped-for goals. Never-
theless, because of increasing mineral output, we
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economic growth will accelerate somewhat, reaching
perhaps 4% annually by 1973. This will hardly
change per capita incomes. Developments during
this period, however, especially the attraction of
private foreign investment, could lay the founda-
tion for more rapid economic growth during the mid
and late 1970s. The extensive oil exploration now
under way, for example, could produce further sharp
increases in production in the period beyond the
early 1970s.
Indonesia's Foreign Exchange Requirements
in the Coming Years
12. An annual increase of 3% to 4% in economic
activity in the next few years will increase
Indonesia's import requirements, but probably less
rapidly than in the recent past. We estimate a 7%
average annual growth of imports during 1970-73,
while the 1969 increase was 15%. Imports of food,
consumer products, and materials for consumer indus-
tries were raised rapidly in recent years to absorb
purchasing power and thus stabilize prices. With
inflation under control, imports will probably
increase roughly in line with domestic demand --
perhaps 3% annually. Imports of capital goods will
increase much faster than in recent years -- perhaps
15% annually -- as foreign investment increases.
13. Net service payments are also expected to
rise substantially -- from $370 million in 1969 to
about $550 million in 1973. Much of the increase
will result from higher profit repatriation by
foreign oil companies, which will grow along with
Indonesia's foreign exchange earnings from oil. In
addition, repayments on the foreign debt will amount
to about $70 million in 1973. Only about $28 mil-
lion annually for the next few years has to be paid
on the massive Sukarno debt thanks to the general
agreement recently reached with Indonesia's western
creditors calling for a long-term rescheduling of
that debt.* Servicing debts incurred since mid-1966
will account for the balance.
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14. Indonesia will be unable to meet these ris-
ing foreign exchange needs from its own earnings.
We estimate exports will grow fairly rapidly --
about 8% annually. More taan half of the increase
will likely result from higher exports of crude
petroleum, which were valued at $360 million last
year or about 35% of total foreign sales. Because
of the large-scale investment now under way in
developing petroleum resources, production is
expected to rise sharply and exports wil"O. probably
amount to about $580 million in 1973.
15. Exports other than oil will grow only
modestly through at least 1973. In the 1967-69
period these exports -- mostly agricultural prod-
ucts -- rose by 8% annually, mainly because of
higher prices and the shifting of previously smug-
gled goods into official channels. Now prices are
expected to at least level off, and smuggling has
probably been reduced about as far as possible.
Moreover, the sharp rise in earnings from coffee
exports during the past few years is not likely to
be repeated, because Indonesia has already reached
its quota under the International Coffee Agreement.
Thus, we estimate that these traditional exports
will probably grow by about 3% annually over the
next several years in line with likely increases in
output. New export commodities, such as timber and
copper, however, will probably increase much faster
and boost the growth of total non-oil exports to
about 5% annually during the period 1969-73.
16. Under these conditions, exports would earn
more than $1.3 billion in 1973, about $500 million
to $600-million less than foreign exchange needs.
Private capital inflows probably will provide some
$200 million, double the 1969 amount, primarily
because of investment by oil companies. Investment
in developing copper and timber resources will in-
crease, but most other spending by foreigners will
consist of exploratory work involving relatively
small sums. This leaves an annual foreign exchange
gap of $300 million to $400 million during the 1970-73
period as indicated in Table 2. As in the past, the
only means to close the foreign exchange gap will be
through official foreign aid. Djakarta should have
little difficulty in obtaining the required aid.
Aid committed, but not yet delivered, already is
sufficient to fill a large portion of Indonesia's
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Table 2
Indonesia: Estimated Foreign Exchange Gap
Million US $
Actual
Projection
1969
1970
1971
1972
1973
Foreign exchange needs
1,390
1,520
1,625
1,745
1,895
Imports
960
1,045
1,115
1,190
1,275
Services (net)
370
400
440
485
550
Debt servicing
60
75
70
70
70
1,075
1,180
1,275
1,375
1,540
Exports
975
1,060
1,135
1,200
1,340
Private capital
100
120
140
175
200
Foreign exchange gap
315
340
350
370
355
a. A figures rounded to the nearest $5 million.
b. IncZud-ng repayments on the Sukarno debt.
basic foreign exchange gap through 1973, and addi-
tional aid pledges will surely be forthcoming.
17. Djakarta will probably seek substantially
more than the $300 million to $400 million in annual
aid during the next several years in the hope of
speeding up the development process. The five-year
plan, for example, calls for aid requirements in-
creasing to about $700 million in 1973. It is un-
likely that Indonesia can absorb the amounts desired,
however, because of the inadequate administrative
machinery and the lack of skilled manpower needed
to implement aid programs. These problems account
in part for the large backlog of economic assistance
committed since 1965 but not yet disbursed -- about
$400 million at the end of 1969.* Some additional
In addition, an estimated $540 million in new
aid commitments were announced in April 1970.
Further aid commitments are expected which would
bring total new aid pledges to an estimated $600
million for the period January 1970 through March
1971.
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 12 1
It 11 1111 111 NEEMOM
EMBEENRINNEM
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(;ONFl DEN'I'lAL
aid beyond $300 million to $400 million a year
could probably be absorbed -- perhaps another $100
million annually. The increased aid receipts, how-
ever, will have little impact on increasing the
rate of economic growth during the next several
years. Much of the aid is necessary to improve
infrastructure, especially transport, communication,
and power facilities, but the benefits will be felt
only gradually over the long run.
Conclusions
18. The Suharto government has made impressive
progress since 1966 in stabilizing the Indonesian
economy and overcoming the economic chaos inherited
from the Sukarno period. Inflation has been brought
under control, and the Suharto government has suc-
ceeded in attracting foreign investors. Neverthe-
less, the disarray inherited from the Sukarno era
has made economic recovery a slow process.
19. During the early 197Us, Indonesia's economic
growth rate most likely will range betweci 3% and 4%,
which would barely exceed population growth. The
5% hoped for in the current development plan appears
too optimistic. A basic reason for limited growth
is the poor condition of the agricultural sector.
The irrigation system is in serious disrepair,
greatly limiting the usefulness of new seed varie-
ties. Another major reason is the extreme scarcity
of skilled manpower and the inadequacy of institu-
tions to oversee development efforts.
20. To achieve even modest economic growth,
Djakarta will need substantial amounts of foreign
aid -- $300 million to $400 million annually -- to
help finance imports. Given the large pipeline of
already committed but undisbursed aid, the country
should have little difficulty in meeting these
requirements. Indonesia will almost certainly seek
larger amounts of economic assistance but it is
doubtful whether very much more could be effectively
absorbed by the economy.
21. In the longer term -- beyond the early
1970s -- Indonesia's economic outlook is brighter.
Barring major changes in Djakarta's economic and
political policies, foreign investments in the
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extractive industries are certain to increase. In
time this would contribute substantially to foreign
exchange earnings and make the country less depend-
ant on foreign aid. The petroleum industry in
already expanding rapidly, and if planned invest-
mente in copper, nickel, bauxite, and timber are
undertaken, export earnings in the mid and late
1970e would rise rapidly. Any measurable improve-
ment in the well-being of the population will still
require rehabilitation and modernisation of agri-
culture,
CON F! DIN'I'IA I.
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