JPRS-SEA-84-020 1 Fepruary 1984

Southeast Asia Report



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JPRS-SEA- 84-020

1 February 1984


CONTENTS AUS TRALIA Former Envoy to UNESCO Defends U.S. Move (Owen Harries; THE AGE, 30 Dec 83) .....cecccccccccccccees 1 Japanese Replace UK as Biggest local Investors (Ian Perkin; THE AUSTRALIAN, 30 Dec 83)......cceceecccecs 3 Briefs Unemployment Expected To Rise 5 INDONESIA

Overview: Indonesia's Economy--Next Five Years (Ali Wardhana; THE INDONESIAN QUARTERLY, No 4,

Dec 83).. eee eeeeeeeae eeeeeeeeeeee eee eee eeeeeeeeeeeeeeeeees 6 Repelita IV: Political Economy of Five Percent Growth Target (Hadi Soesastro; THE INDONESIAN QUARTERLY, No 4, Dec 83) *eeeeee eee @eeeeeeeeeeeee eee eeeeeeee eee heeeeeeeeenee 20

Regional Development, Employment in Eastern Indonesia: Archipelagic Concept (Kustiah Kristanto, Willem H. Makaliwe; THE INDONESIAN QUARTERLY, No 4, Dec 83)...... ccccccccccccece 32

Indonesia's Mining Production, 1983 (Achmad Prijono; THE INDONESIAN QUARTERLY, No 4, Dec 83) “ene e4w#e #eeee *enereeeneeeeeees se ereeee#erte eee eeeeeeeeee#ee ee ev 51

Balance of Payments Deficit Estimated at $12.4 Million (KOMPAS, 23 Nov 83) eeeeeeeeeee eee eeeeeeeeeeeeeeeeeeeeeee 62

= ae [III - ASIA - 107]

Government Pay Raise Proposed During Budget Hearings (SINAR HARAPAN, 23 Nov 83; SURABAYA POST, 25 Nov 83)........ 66

Minimum Physical Needs Employee Welfare Aiways Considered

Foreign Capital Investments in East Java Decline

(SINAR HARAPAN, 19 Nov 83) ........eeee0. occcccccee eocccces . 69 Foreign Companies Required To Sell Stock on Local Market

(KOMPAS, 22 Nov 83) .....ccccecescseces oc eccccccccccccccece - (dl ASEAN Joint Ventures Agreement Signed

(BUSINESS NEWS, 25 Nov 83) ....cccccccccccccccccccccccces oes «74 Technical Cooperation Agreement With UNDP Signed

(BUSINESS NEWS, 23 Nov 83) ...cscercecccccccccccveccees cccce 76 Reason for Decline in Sugar Output Per Hectare Described

(KOMPAS, 19 Nov 83) eccccccccccceccccccccccceecee 78 Editorial Discusses 'Smallholder Sugarcane Intensification’

System (BUSINESS NEWS, 23 Nov 83) ....ccecesescceees eccccccccccccce 82

Editorial Discusses New Agreement With Caltex (Editorial; BUSINESS NEWS, 30 Nov 83)........ eccccccccccces§ 6D

GMNI Congress Opens in Bandung (SINAR HARAPAN, 18, 19 Nov 83)......... ccccccccccccccccccese) 6S

Eighth GMNI Congress Opens GMNI Accepts Pancasila as Single Principle

Production of Airbus Components by PT Nurtanio Considered

(SINAR HARAPAN, 19 Nov 83) ..ccececcccccscccccecescseseesess YI] New Directive on Organization of Armed Forces (SINAR HARAPAN, 23 Nov 83) ...ccccseeveecceccceeecees occcece ~- 92 Briefs Fuel Oil Subsidy Projection 96 Thermal Power Station in Probolinggo 96 KAMP UCHEA

Swedish Aid Agency Foresees ‘Famine Catastrophe’ for Country (Peter Bratt; DAGENS NYHETER, 17 Dec 83) .....scseceeeseeees 97

Houa Phan Population, Food Surplus, Roads, Hospital (Savang; PASASON, 4 Nov 83) .....ceccecsceees

SRV-Aided Cement, Clinker Plant Under Construction (Kongmali; PASASON, 9 Nov 83)........ ieueeee

GDR-Assisted Law Seminar Ends, Supreme Court Participates

(PASASON, 9 Nov 83).....ccececcesees eccccces

Regulations on Consumer Cooperatives Published (VIENTIANE MAI, 5, 7 Nov 83).....eeeceeeeees

Art Troupes Restricted Further To Frustrate Psywar (VIENTIANE MAT, 10 Nov 83)......ccccecceces °

Briefs October Bank Deposits


Soviet Union Proposes Joint Fishing Research

(THE PRESS, 7 Jan 84; THE EVENING POST, 11 Jan 84)..........

Joint Venture Offer Research Offer Questioned, Editorial

World Surpluses May Affect Cas Exports (THE NEW ZEALAND HERALD, 7 Jan 84)....... eee

Airships for Exclusive Economic Zone Patrol Suggested (Dave King; THE NEW ZEALAND HERALD, 7 Jan 84)........065. oe

Labor Accuses Government of Co-opting Policies (THE EVENING POST, 7 Jan 84)....... 600660600

Energy-Based Growth Strategy in Doubt (Brian Woodley; THE EVENING POST, 7 Jan 84).

New Zealand Party Charges SIS Infiltration (THE PRESS, 31 Dec 83) ...cccsecceees eccccces

New Zealand Butter Exports Examined (Peter Bale; THE EVENING POST, 5 Jan 84)....

Negotiations on Skyhawk Fighter-Bomber Purchase Continue

(THE EVENING POST, 30 Dec 83)...... ccccccces

- =















Violence Predicted Following Voluntary Unionism


Employment of Military Strikeforce Outlined


Briefs Lamb Sales for Japan Eyed


Provincial Government System Termed Failure (PAPUA NEW GUINEA POST COURIER, 2 Jan 84)...........

Government Sex Scandal Developments


Somare Declares Case Closed

Ombudsman Commission Refuses To Investigate, by Asora

Paul, Babani Maraga


Columnist Views Chinese Assistance to Nation

(Apolonio Batalla; BULLETIN TODAY, 8 Jan 84)....... oon

Exile Says Marcos Losing AFP Support (THE COURIER MAIL, 21 Dec 83)

Laguna Economic Woes Exemplify Nation, May Dominate Election (Jesus Bigornia; BULLETIN TODAY, 10 Jan 84).........

Payments Begin on $157 Miilion Loan Interest (George T. Nervez; PHILIPPINES DAILY EXPRESS,

SS WRG Oi) 654046030440600084666

Central Bank To Discontinue Dollar Surrender Scheme (Loreto Cabanes; BULLETIN TODAY, 31 Dec 83).........

Economic Situation, Loan Status Reported

(BUSINESS TIMES, 7 Dec 83)...

Central Bank Places Investment Firm Under Conservator


Farm Groups Address Economic Issues (BULLETIN TODAY, 8, 9 Jan 84)

Denounce Monopoly Support Idle Lands Proposal

eo @-

Jan 84) ...ccees peeeues

*“e eweeeeeeeeeereeeeeneeeee

*e @eeee














Guagua Police Force ‘Temporarily’ Relieved (Jerry Lacuarta; BULLETIN TODAY, 10 Jan 84)

NPA Base Raided; Seven Captured

(Jen L. Jorvina; BULLETIN TODAY, 3} Dec 83)

Further Details on Retirement Status of Generals (Jose De Vera; BULLETIN TODAY, 8 Jan 84).

Bigornia on Expatriate Support for Opposition (Jesus Bigornia; BULLETIN TODAY, 8 Jan 84)

Further Details on Marine Seizure of Illegal PC Logs

“ee eeeeeeeeneeneeee


(BULLETIN TODAY, 9 Jan 84) .. cc. cecccccccccccecees eeccccccs

Controversial Marine Raid Under Investigation

CRURAREL Del c 9 SOM BG) 6066 06 6665064056666 005 68660808 “ss

Briefs Foreign Equity Limits Ople on High Mobility

Labor Unity Congress Formed

Three Rebel Groups Allied in South

Barter With Eastern Europe

Japanese Firm Offers Export Credit Essential Import List Expanded


No Change in New Zealand Aid for 1984

(SOLOMON STAR, 6 Jan 84) ......000:. TU TITTITIT TTT TTT rT Fisheries Agreement Signed With Japanese Firm (SOLOMON STAR, 6 Jan 84)......... ccccce ecccccee cccccccccce VIETNAM


Nguyen Co Thach on Kampuchea

(Jacques Bekaert; BANGKOK POST, 24 Dec 83).....eseeeeeees


Japanese Gifts to SRV Children


Vietnam's Assets: Its Workers

(Jose Katigbak; THE NATION REVIEW, 28 Dec 83)







149 149 149 150 150 150 151






Enticing People Back to Land (Bruao Franceschi; BANGKOK POST, 28 Dec 83)..............- 160


Hydro Scheme on Schedule (Jose Katigbak; BUSINESS TIMES, 16 Dec 83)..........eeeees 162


Standard of Living and Living Conditions (Alain Jacob; LE MONDE, 25-26 Dec 83)......cccccccescseces 164


Melbourne THE AGE in English 30 Dec 83 p 9


[Article by Owen Harries, Australian Ambassador to UNESCO 1982-1983]

[Text ]


review of America’s re- lations with UNESCO the United Nations Educational, Scientific and Cultural Organ- isation has firmly recom- mended that the United States withdraw from that


f the United States withdraws, there will be important implica- tions for UNESCO, good ones, in my opinion and for American relations with the rest of the Unit- ed Nations system.

If it does not withdraw after such @ recommendation, the view widely prevalent in UNESCO that the United States is a paper tiger will be greatly strength- ened and the United States’ credi- bility there will be extremely low.

UNESCO is in a bad state much worse than the rest of the United Nations or any other spe- clalised agency associated with it.

UNESCO is a thoroughly politi- cised institution dedicated to at- tacking fundamental Western values, interests and institutions.

I) attacks and seeks to circum- scribe the free Western Press; it characterises Western culture as an “imperialist” threat to the iden- tity of other peoples; it attacks the free-market economy and multi- national corporations, it seeks to downgrade individual human rights in favor of nebulous and pro- liferating “rights of peoples,” thus helping tyrannical States to im- pose their orthodoxies on their subjects.

Its pronouncements on the com- plex and delicate issues of peace and disarmament subjects on which it is incompetent are bi- ased and hostile to the Western case; it is consistently hostile to Israel and provides political and financial support to the Palestine Liberation Organisation.

It is not merely the Third World majority and the Soviet-bioc mem- ber countries that engage in these attacks. The UNESCO secretariat up to and most definitely includ- ing the Director-General, Amadou Mahtar M'Bow of Senegal is thoroughly politicised and anti- American. On toe other hand, the

conveys something of the at- mosphere of the organisation, that when President Francois Mitter- rand of France expelled 49 Soviet spies earlier this year, a quarter of them were connected with UNESCO.)

UNESCO is also appallingly managed and administered. A re- cent poll of members of the secra- tariat showed that only 3 per cent

the budget, the efficient allocation of resources and adherence to proper procedures in meetings are conspicuous by their absence.



Unlike other United Nations

near zero growth, as requested by the major contributors. (It initially asked for a 9.6 per cent increase for 1984-85 and has finally got a 3.5 to 5 per cent increase.)

million @ year, or 25 per cent of UNESCO's budget to such an

ting the UNESCO house in order. It

{Tet THLE tint teeteiezs fs


Canberra THE AUSTRALIAN in English 30 Dec 83 p 10

[Article by Ian Perkin]

[Text ]

JAPANESE investors are overtake the British as the biggest annual investors in the local economy, further adding to Japan's position as Australia’s most vital eco- nomic partner.

The Australian Bureau of Statistics figures, available in Canberra, showed Japanese in- vestment up 71 per cent to $2.66 billion in 1982-85, out of a total

tal inflow of $9.19 billion. inflow for the finan- clal year was duwn $540 million on the previous year's record level of $10.03 billion, but still

h by histor!cal standards.

huge influx of funds from Japan during the year almost toppled the British from their historic place as the biggest annual investors.

Britain last year invested a record §2.78 biljion in the coun- try, compared with §2.69 billion the previous year.

Japan's investapent was up

from $1.55 billion to $2.66 bil- lion.

The US was the third biggest investor with $962 million (down 39 per cent from $1.57 billion) ASEAN $829 million idown 46 per cent from $1.73 billion) and the EEC (exctud- ing the UK) with $900 million.

The big increase in Japanese investment in the country ts part a result of its increased interest in local resource tn- dustries and manufacturing, and partly the attractiveness of high local interest rates.


It seems likely the Japanese presence in the market will

continue, particularly if inter- est rates, although falling,

lish trading banks. Asian investment is also ex- pected to be by insta-

ment and institutional loans by foreigners up $170 million to a record level of $7.43 billion.

and interest on government securities. Private interest



payments overseas were up $690 millon and interest pay- ments on government securi- tees up $155 million.

The major factor contribut- ing to the overall fall in foreygn investment was « big fall in direct investment in local industry.

There was an actual dminv- estspent (or withdrawal of in- vesiment) from industry of $525 million compared with an inflow of investment of $271 million the previous year.

According to the bureau, this disinvestment reflected some significant losses made by some direct investment en- terprises during the year.


There was also a sizeabic drop (down $548 million to $1.39 billion) in the inflow of other direct investment.

Portiolio investment and in- stitational loans inflow in- creased by 2 per cent Ww a record $7.43 billion in 1982-83.

Foreign investment in Ausi- tralian corporate equilics remained high with a net in-


flow of $805 million, the second highest on record.

Net inflow of berrowings from unrelated = cnterprieecs tuse marginally to $6. billion.

As with direct investment borrowings, drawdowns were significantly higher (by about 3S per cent), bul repayments virtualiy doubied.

monetary enterprises § on- tinued to rise strongly (up 37 per cent) during 1962-63, while borrowings by other enter- prises fell by 7 per cent on the record annua! 196)-82 figure.

Net investment in govern- ment securities rose @ per cent to $891 million in 1962-83.

Foreign currency borrowings by the government, «i $582 mil- lion, were the highest since 1978-79.

There was aho significant foreign interest particularly from Japan, in government securities.

The net flow of funds inte such securities totalled $309 million for 1982-83, a rise of 63 per cent on the previous record of $190 million in 1931-82.



UNEMPLOYMENT EXPECTED TO RISE--CANBERRA--Australia's unemployment is forecast to rise steadily in the next 18 months while other parts of the economy re- cover slowly. Unemployment is likely to increase from 715,000 people in Feb- ruary to 781,000 in May, 1985, going from 10.1 per cent of the labor force to 10.8 per cent, according to the Melbourne-based Institute of Applied Economic and Social Research. The institute gives forecasts for the economy this fi- nancial year and next in its latest issue of the Australian Economic Review, released yesterday. It says the outlook is for sustained but slow recovery in output, continued wage moderation, some slowing of inflation but unaccept- ably high unemployment in 1983-84 and 1984-85. On inflation, the institute said the 6.5 percent rise in the CPI predicted for 1984-85 would be the low- est rise since 1972-73. The quarterly rate of inflation is predicted to fall from the 12.3 percent peak in September this year to about 5.5 percent in the last three quarters of 1984 before rising again to 7.9 percent by the June quarter of 1985. [Text] [Brisbane THE COURIER MAIL in English 30 Dec 83 p 1]

CSO: 4200/404



Jakarta THE INDONESIAN QUARTERLY in English Vol XI, No 4, Dec 83 pp 10-25

[Article by Ali Wardhana]

[Text ]

1 was originally asked to speak to this conference about the economic policy stance you could expect to see the Indonesian government follow over the next few years. On reflection, the specifics of such a topic are difficult, as they will depend greatly on the type of world environment we find ourselves in. Moreover, I believe that the degree of success our policies have enjoyed thus far stems from 3 underlying factors -- continuity over time in our basic development philosophy, the consistency among the policies being followed at any point in time, and flexibility in dealing with major external shocks. There- fore, although mindful of Buckminister Fuller’s warning that we all tend to walk backwards into the future, nevertheless in addressing the topic of ‘‘where we're going,’’ | am going to tell you something about ‘‘where we've been."’ In doing so, | am going to be somewhat selective -- this will not only spare you from listening to a detailed history of the 16 years of our economic policies, it will also allow me not to make mention of everything that went wrong as well as everything that went right.

If during the course of my intervention I try to emphasize the essential con- tinuity in our basic objectives and directions, it is not because there is any in- herent virtue in stubborn adherence to a major line of action, whatever it may be. | emphasize it because we believe the goals we have chosen to strive for are the right ones for Indonesia and that therefore we will not abandon them in panic simply because external circumstances have changed in ways which make their achievement more difficult. We are at the same time prepared to alter the specifics and the details of policies and programs when changed circumstances

Background paper for a Conference on Indonesia, Medford, Massachusetts, 6-8 October 1983, sponsored by The Fletcher School of Law and Diplomacy of Tufts University, Medford, MA; CSIS, Jakarta; The Asia Society, New York. Prof. Ali Wardhana is Coordinating Minister for the Economy, Finance, Industry and Development Supervision.

and what we have learned from experience suggest the desirability of such alteration.

1 would like to focus now on six major policy areas.

1. Development of an industrial base built on our comparative advantage in natural resources and abundant labour;

2. Equal priority to development of the rural sector with emphasis on food production and rural employment and income;

3. Attention to the role of relative prices in allocating resources within the economy and gradual elimination of most subsidies;

4. Financial stability and general price stability. 5. Maintenance of an open economy and a free foreign exchange system;

6. External debt management.

Before I begin, a brief overview of our policy goals may be useful. Throughout our three Five-Year Development Plans, or Repelitas since 1969, the government has had the same three development objectives, although the order of priority has changed as the problems and circumstances of the coun- try have evolved. In Repelita I and II the objectives, in order of priority, were national stability, economic growth, and equitable distribution. In Repelita III the order of the objectives became equitable distribution, economic growth, and national stability.


Indonesia is a country richly endowed with natural resources -- agricul- tural, forestry, marine, hydrocarbon and other minerals. In addition we have a large labour force, and although much of it is unskilled, nevertheless it offers the basis for development of large-scale, cost-competitive manufacturing. Our resource endowment has presented us with a particular challenge and has re- quired a careful mix and balancing of policies. The development of our natural resource base beyond the primary-exporting stage in many instances requires large-scale capital-intensive investment, yet the size and growth rate of the population necessitates investment that can absorb large numbers of new labour force participants each year. Striking the right balance in investment and industrial policy has, in the end, depended on the availability of capital. But it is this latter point that has been particularly hard to predict. The large discrete movements in the international price of oil during the history of our government have resulted in the availability of capital to Indonesia oscillating unpredictably from scarcity to abundance and back to scarcity -- not once but twice over the past 16 years. Moreover, the scale required for resource invest- ment to be efficient usually necessitates a long lead-time between the time when the project is begun and when it becomes productive, thus redoubling the difficulties inherent in economic planning. If I hesitate to try to be specific in

telling you where our policies are going in the coming years, it is with the history of these planning difficulties in mind.

Our First Five-Year Development Plan (1969/70-1973/74) aimed at and achieved a considerable stabilization and rehabilitation of the economy, and in so doing, laid the foundation for further development. The main areas of growth were in those sectors accorded priority and official encouragement, in- cluding rice, textiles, oil and timber.

With the second plan (1974/75-1978/79), although our financial and ad- ministrative resources at the beginning of the period were still limited, the Government sought to accelerate the momentum of growth but also to ensure, through employment and allocation policies, a broad sharing of the benefits of growth across society. With a view to expanding employment, the promo- tion of labour-intensive industries, including small-scale industries, received special attention. Industrial policies were aimed specifically at promotion of industries that process raw materials. A notable example was the manufacture of plywood which was further supported by a tightening of controls on forest management and expanding forestation and rehabilitation programs. De- velopment efforts in the mining sector aimed at expanding oil production and exploiting natural gas resources; investment in the original Arun and Badak LNG facilities was completed during this period. There was also substantial in- vestment in petro-chemical fertilizer plants and in cement plants. Efforts were begun to process domestically other mineral products such as bauxite. The rehabilitation and expansion of infrastructure was continued during the plan period; in particular the expansion of communication facilities in isolated regions.

With the second major increase in oil export prices in 1979 and 1980, the prospect of the reemergence of a serious capital constraint again became more remote. The increase in our international reserves, which the oil price rise allowed, and the perception that the high level of oil earnings would continue indefinitely, suggested that a bolder industrial strategy was possible. Therefore we embarked on what, in retrospect, was a somewhat ambitious public invest- ment program, although it was a sensible strategy given the prognosis at the time for the world economy. The program included major investment in petroleum refining and petrochemicals, and in production of LNG, coal and aluminum. It also included substantial additions to the economy’s infrastruc- ture, notably in transport and electric power, as well as agricultural develop- ment projects, and in social infrastructure. Backed with this infrastructural in- vestment, as well as the November 1978 devaluation, development of more labour-intensive lighter manufacturing industry was largely left to the private sector.

The impact of three years of global recession on Indonesia’s non-oil ex- ports and finally on our oil exporis has been well documented in the back- ground paper prepared for this conference by David Dapice.' As a result of the reduced export earnings, by early 1983 the capital and foreign exchange con- straints we faced were such that it was necessary to rethink our immediate in- vestment priorities.

'See below, pp. 39- $3

The Government therefore undertook a comprehensive reassessment of the public investment program in April of this year. Under the revised pro- gram, high priority continues to be attached to projects that create employ- ment, support agricultural development, especially for food production and promote human resource development through the expansion of social ser- vices. The expansion of the infrastructural base, especially in support of the above objectives and for export development, is also accorded continued high priority. Within this overall framework, however, it was necessary to reduce capital goods imports by postponing a number of major industrial and other projects that have a high foreign exchange content. The impact of this re- phasing on import expenditure over the next few years will be substantial. At the same time, it is planned that rupiah savings will be switched to activities with a high impact on domestic employment.

Over time, our industrial policy has taken on an increasingly complex set of social and economic objectives, including regional dispersion, promotion of industries which support or complement the agricultural sector, utilization of domestic raw materials, ‘‘orderly’’ industrialization, the prevention of excess capacity, and the stimulation of indigenous entrepreneurship. This has, perhaps inevitably, resulted in an equally complex set of public sector actions and regulations. It has been apparent for some time, that in order for the private sector to play its assigned role in Indonesia's future development, a substantial simplification of government regulations is required. Therefore, this past summer the government launched a major attempt at streamlining bureaucrative procedures and minimizing redtape. To be honest, this is not an easy task. But we are committed to making substantial progress, as we view progress in this area to be essential in creating the kind of environment neces- sary to support the expanded role we sec for the private sector in the coming years.


With the sharp increase in the petroleum sector's terms of trade and the strong real growth in other industry and in the construction, transportation and other services, the share of agriculture in GDP (measured at current market prices) has declined from about $0 per cent of total output in 1966 to 25 per cent in 1982.

Nevertheless, the rural sector has continued to be accorded high priority in our development strategy, reflecting two overwhelming economic realities: the need to feed a population of 150 million that is still expanding at over 2 per cent per year; and the fact that, as of 1979, an estimated 60 per cent of the labour force was engaged in agriculture while some 75 per cent of the popula- tion was directly dependent on the agricultural sector. These realities have meant that neither growth, nor equity, nor stability would be possible in the long-run if the development effort turned its back on the rural sector. The ex- periences of other countries, with resource endowments similar to our own, have borne this out.

Over the period from 1971 to 1982, Indonesian agricultural output grew at an average annual rate of 3.7 per cent. Excluding forestry and fisheries, where output in recent years has been constrained by the government's policies to prevent excessive exploitation and to encourage domestic processing, agri- cultural output grew at an average rate of 4.3 per cent. This growth has been largely made possible by the tremendous success of our rice intensification program. The program has been based on dissemination of high-yielding varieties of rice, a comprehensive package of fertilizer and insecticide inputs, and access to credit and extension services. Were it not for the poor rains during the last growing season, our goal of self sufficiency in rice output would have been approximately met. I think that the role of relative price policy in this success deserves particular attention and I would like to return to this point iater.

Continued strong growth of the agricultural sector, even at 4 per cent which is somewhat above the rate foreseen in Repelita IV, clearly is not going to solve the rural sector's employment problems. The unemployment and underemployment in the rural sector are such that it will require labour- intensive industrial growth to make substantial inroads. Nevertheless, suffi- ciently strong growth in agricultural output and incomes, so as to allow a reduction in rural poverty and not encourage migration to urban areas, has been, and will continue to be, a crucial factor in the success of Indonesia's development.

I should add that investment and current production in this sector has the added advantage that it is labour rather than import intensive, a characteristic important in a period when foreign exchange resources are likely to be less abundant than in some recent years.


The avoidance of major price distortions, and the waste of resources that usually accompanies them, has been an important, and underappreciated element facilitating growth in Indonesia over the past decade. The govern- ment is involved in establishing the usual range of public utility fares and it does intervene in the pricing of some commodities, notably domestic petro- leum products and, the domestic food grain prices. (The latter is done by Bulog, a government agency responsible for food price stabilization.) The government also has at times issued price guidelines for certain strategic pro- ducts such as cement and steel. However, especially in recent years, this in- tervention has generally been aimed at short-run stabilization and has not for the most part resulted in prices deviating substantially or for long-time periods from world market prices.

Food subsidies have emerged at times over the years, as the government has covered periodic deficits in Bulog’s operations resulting from rising food grain import prices and a lag in adjusting the domestic retail prices. But the general policy has been gradually to increase domestic prices to reflect the


world market cost. Thus by °° 18 the food subsidy was reduced to 7ero and although there were again. __., food subsidies from 1978/79 to 1981/82, these subsidies were eliminated in 1982/83, and are expected to remain neg- ligible this year.

Containing petroleum subsidies has been a more difficult and protracted process. Throughout the 1970s, it had generally been the government's policy to keep petroleum prices at affordable levels, particularly for kerosene, which is used extensively by households, and diesel fuel and heavy fuel oil because of their importance as industrial inputs.

Reflecting this pricing policy and the strong growth in the ecoromy, domestic consumption of petroleum grew at an average annual rate of 14 per cent during 1974-1978. With the second major rise in oil export prices in 1979, a substantial subsidy on domestic petroleum products emerged. In spite of a 40 per cent rise in domestic petroleum prices in March 1979, the combination

of the rise in oil export prices and the 1978 devaluation resulted in an increase of petroleum subsidies in the budget from 3 per cent of routine expenditures in 1977/78 to 13 per cent in 1979/80. The growth of domestic consumption slowed somewhat to 11 per cent during 1979-1981, but domestic consumption in 1981, at 186 million barrels, still accounted for 27 per cent of total domestic crude oil production.

With the sharp rise in budgetary revenues which accompanied the second oil boom, this magnitude of subsidy was, at least in the short-run, affordable, even if it was not desirable in terms of resource allocation. It was not, how- ever, a sustainable medium-term situation even from a budgetary point of view, as became clear with the further doubling in the absolute amount of the subsidy in 1980/81 to a level equivalent to 18 per cent of routine expenditure. Moreover this occurred in spite of a further $0 per cent rise in domestic petro- leum prices in May of 1980. The original 1981/82 budget saw a further rise in the subsidy to 20 per cent of routine expenditure.

In order both to reduce the budgetary subsidy and to curtail growth of con- sumption so as to increase the exportable oi! surplus, the government an- nounced further upward adjustments in petroleum prices in January of 1982 (by 60 per cent) and again in January of 1983 (by an additional S50 per cent). The most recent increases already appear to have had a substantial effect on slowing growth in domestic petroleum consumption even with due allowance for the slower overall growth in the economy. Petroleum consumption rose by only 6 per cent in 1982 and declined by 2 per cent during the first half of 1983. With the augmenting impact of the March 30 devaluation, the petroleum sub- sidy is estimated still to amount 14 per cent of routine expenditure this year. However, the government has made public its intention to gradually reduce the subsidy over the next few years.

1 promised earlier that | would come back to the question of the subsidies on fertilizer and insecticides and the role we believe they have played in the growth of food crop production. While it is generally true that subsidies cause distortions in resource allocation and social efficiency losses, there are special


instances where judicious use of subsidics through administered relative prices may actually result in a reduction of distortions in the ecomomy and thus vield net economic benefits to society as a whole. | believe this has been the case with the whole package of inputs that underlies our rice intensification effort, and it is most readily measurable in the fertilizer subsidy.

Governments expenditure on fertilizer subsidies has increased substan- tially over the past few years to the equivalent of 6 per cent of routine expen- ditures in 1982/83, as the domestic price has been increased substantially less

than the rise in import prices. At the same time, rice prices generally have been increased in line with world market prices, with the result that the domestic relative rice/fertilizer price ratio mere than tripled between 1968 and 1982. Even with the 29 per cent increase in the price of fertilizer effective in January of this year, the relative rice/fertilizer price 1s still 2.8 times higher than in 1968.

Recent work by Peter Timmer to analyze the factors responsible for the § per cent annual increase in Indonesian rice production from 1968 to 1982 suggest that this improved relative price incentive was responsible for roughly 2 percentage points of the increase in output, while factors such as the trend increase in fertilizer use, new high-yiclding seed varicties, improved irrigation, and improved farmer knowledge contributed the other 3 percentage points. Moreover, his findings suggest that even at today’s increased levels of fer- tilizer input, the social benefit/cost ratio to the fertilizer subsidy is 2.8 to 1. That is, for every rupiah spent on fertilizer subsidies, the return in terms of the value of increased rice output is Rp 2.8. The reasons why farmers do not in their own self interest use these levels of fertilizer even without a subsidy are believed to be duc to the inherent problems involved in introducing a new technology combined with a natural tendency toward risk aversion.


Restoration of financial stability was a primary goal of the New Order when it took over in 1966 and maintenance of that stability has been a con- tinuing priority. Stability is a necessary base; without it, the country’s guals of growth and equity would not have been achievable.

Moreover, I believe the government has repeatedly demonstrated its ability to control inflation in difficult circumstances, beginning with the reduction in inflation from 640 per cent in 1966 to 10 per cent in 196° and 3 per cent in 1971.” The disruptive influence of two oil booms can be seen in the rise of in- flation to 30 per cent in 1973 and 40 per cent in 1974. However, the rate was brought back to 20 per cent in 1975 and 1976 and to an average of 10 per cent in 1977 and 1978. Then with the 1978 devaluation followed by the second oil boom, inflation jumped to around 20 per cent in 1979 and 1980, but was again brought back to 12 per cent in 1981 and 10 per cent in 1982. Inflation will be higher in 1983 because of the devaluation but even so, probably will not exceed 15 per cent.

*Based on Jakarta CPI

The success in controlling inflation has been the result of generally conser- vative fiscal and monetary policy (although these have been aided during cer- tain periods by a relatively fixed exchange rate and the openness of our foreign exchange system).

Our dDudgetary policy has been ‘‘dynamically balanced,’’ meaning bal- anced over the medium-term. While policy doesn't allow the budget to be a major anticyclical instrument, in practice there is some flexibility. Expenditure policy has been ased flexibly so as to dampen the large swings in the coun- try’s and the government's external carnings. Thus while the administrative budget must be balanced each year, actual cash expenditures have, during periods of rapidly rising oil revenues, been somewhat less than budgeted, allowing the government to run an overall surplus on a cash basis. This was particularly true in 1976/77 and 1977/78, and again in 1979/80 and 1980/81.

In addition to its role in stabilization policy, budgetary expenditure has also played an important role in policies for growth and equity. Examples in- clude the Inpres program, which channels funds to local governments, and the entire development portion of the budgct, where expenditures range from sub- sidies on fertilizer to major public sector investment projects.

For much of the past decade, Indonesia has been able to utilize fiscal re- sources generated by our oil sector to finance much of the growth in public sec- tor spending for development. But given the inevitable uncertainties in the world oil market, it has been clear that we cannot continue to rely nearly so heavily upon growth in oil sector revenues. Non-oil taxes will have to provide a growing share of public sector revenues required for finance of public sector activities planned for Repelita IV. In recent years, non-oil taxes have amounted to little more than 6 per cent of GDP, or just about 8 per cent of GDP outside of the oil sector. Our non-oil tax effort has been well below that for other, middle-income developing countries in general, including all other middle-income oil exporters except Nigeria. Indeed, the share of government revenues in GDP in thirty-four low-income oil-importing economics in 1980 was almost 17 per cent, or about twice as high as for Indonesia, while in nine- teen developed countries central government revenues averaged about 35 per cent of GDP. While there is no reason why Indonesia should attempt to match the tax effort of any other developing or developed country, it is clear that non-inflationary finance of Repelita 1V may well require the level of non-oil taxes to rise to at least 12 per cent of non-oil GDP, or perhaps 10 per cent of total GDP, before the end of the plan. With non-oil taxes at 12 per cent of GDP by 1989-1990, Indonesia's tax effort would be close to that of Thailand, Pakistan and India in 1979 but still well below low-income developing coun- tries in general.

Therefore two years ago we began a comprehensive tax reform study, and recommendations for a major reform of the tax system will be presented to Parliament this autumn. The reform not only aims at changing the structure of non-oil taxes and increasing revenue. Equally important are its goals of simplicity and certainty and equity in taxation. To achieve these goals, tax collection procedures will be greatly simplified, including realistic provisions ©


for fling returns, for levyi.g fines and penalties, and for taxpayer redress of grievances.

The primary