CiRCULATING COP"'IMVr%rri r- nnnis

TU BE KLIURNED TOU LruEPRISL uLn rILr bU r InnrTTm.NT OF INTFRNATIONAT RANK FOR RFCONqTRTTrTTON AND DEVFT.OPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

Not For Public Use

I4i p7'~? § 1 jInepofri No. 25ILUV

jv r h- @, :.

I ) N

DEVELOPMENT ISSUES FOR INDONESIA

I 2 .4

Volume III

ANNEX 3: THE AGRICULTURE SECTOR

ANNEX 4: THE INDUSTRIAL OUTLOOK

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|-) X ( II

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nAAmA 1 1Oa75 r)1

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Asia Program Department I

IThis report was prepared for official use only by the Bank Group. It may not be published, quoted or cited wtithout Bank Group authorization. The Bank Group does not accept responsibility for the

*accu:.,.,acy o: c.nhtOOlC.@ n (- of .theepot.

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This rnport. wns nrenared in coonprat.ion wit.h t.ho TIRD ;)Staff, Jakarta, by an economic mission which visited Indonesia in May-June,and Octobeh-rnovember 1972. Th.e participants were:

Graeme Th.ompson .>sin heBahman K. Abadian Chief &bonomistMark w. Tliserson Bnployment Specia ';st (ILO)Helen Hughes Industrial Advisor

John Foster Petroleum Economist, ech M. Schebeck n->ri-cia Eono.-,st12WI11 ±.LU1 ~I& * I 1@ L .AU .d ..L £L IV LL~ L

Townsend S. Swayze Fiscal EconomistVLJnod 11 Ckbll ±iMuubltrial zconofl01t,

Rogelio G. David conomistKevin Young Economist

Miss Julia Nasaire and Mrs. Placida Espina were mission secretaries.

Annex 3 of the report, on agriculture, is based on the findings of anagriculture sector mission led by Mr. S. Takahashi which was in Indonesia inFebruary-March, 1972.

ANNEX 3

TH4E AGRTCULTURAI. SECTOR

Table of Contents

Page No.

OVERVIEW 1

Recent Developments 2The Present Pattern 3The Natural Resource Base 3Structure of the Agriculture Sector 6Organization of Government Services 11Taxation of Agriculture 15

PRODUCTION PERFORMANCE AND TARGETS 18

A DEVELOPMENT STRATEGY 23

The Central Core: Java and Bali 25The Outer Islands 27Forestry 30Fis,herv 30

Livestock 31FinAnc1ng Agricu]ture 32Marketing and Prices 35

ANNEX 3Page 1

THE ACRTCIMTTRAT. SqGTOA?

I. OVERVIEW

~ r~'i"-'~ '~ ~ ~ 1. .LPj'. 0IL. au U~aL. LL~ It !. ~The- purp-ose of this annex is to presen.t an overall -view of the

agricultural sector - to evaluate its recent performance in the light oflonge>r LeL.m trendAs, Indor,esia's resource endo-m,ents, market prspct a.

development goals; to identify key constraints and issues; and to suggestways oL acceLerat'Lng agrcuLturaL output anu improving the incomes o' ruralpeople. A large part of the material is drawn from the work of a Bank Agri-culturaL Sector Survey Mission w'flicII visited Indonesia in February and Marcn1972.

2. The annex is selective and focuses on new directions and futureproject possibilities. These should be considered together witn on goingprojects and the project pipeline for the next several years which have beendescribed in the IGG; lists of projects for external financing and specificBank appraisal reports. Problems associated with projects already financedand under way, such as those for the rehabilitation of irrigation facilitiesand estates, the IDA seeds project, the agricultural education project, thefisheries project, smallholder rubber and livestock projects have not beengiven much emphasis in the annex since these should be ironed out in thecourse of project implementation. However, problems of organization andmanagement will continue to be a major constraint on rapid project implemen-tation and government will have to continue to give high priority to measuresto improve the institutional capabilities of the project entities.

3. In terms of output growth during the second plan the rehabilitationefforts initiated during the first plan should provide a substantial portionof the growth during the second plan. For example, although the annex doesnot stress irrigation, on going irrigation projects and new irrigation invest-ments coming out of studies currently underway, will probably continue toclaim a prominent share of total agricultural investment resources and con-tribute materially to output growth at the intensive margin. On the otherhand, new land development can be expected to accelerate more slowly in theinitial phases while basic land use and feasibility studies are being preparedand institutional capabilities are being developed. Nevertheless, the time hascome to change directions and to initiate action to shift the emphasis towardthe development of the vast land resources in the Outer Islands in order tomake way for accelerated growth in the period beyond the second plan.

4. With regard to fertilizers, continuing efforts will be needed toexpand and improve the supply for both field and tree crops. However,Indonesian farmers as well as Government are generally familiar with thebenefits of fertilizer use and fertilizer is generally available in con-venient packages at reasonable prices at least for rice producers. A newfertilizer plant now under construction will greatly augment the domesticsupply of nitrogenous fertilizer and Dlans for a further expansion are well

ANNEX 3Page 2

undeŽr way. To tile extent necessary, the tertilizer subsidy for rice shotuldprobahly now be broadened to make fertilizer available for all crops at thesamic price. With recent increases in the rice floor price for producersand as new and more efficient fertilizer capacity comes into operation thesubsidy can be reduced and ultimately eliminated.

Recent Developments

5. Agriculture has played an important role in the remarkablerecovery of the Indonesian economy during the past five years. Rice pro-duction has increased significantly; forestry production and exportshave expanded rapidly; and output of rubber and other estate crops havemanaged to show some growth despite deterioration in export prices.Fish and shrimp exports have expanded rapidly in response to strong ex-port demand and poultry output is beginning to respond to a rapidlyincreasing demand reflecting improvements in per capita income. However.progress has been uneven and the poorest farmers in crowded areas suchas parts of Central and East Java have not been significantly affected.

6. Oespite these achievements, agriculture has not been a leading_growth sector. In recent years it has managed to more or less keep pacewith population and food recuirements but ita share of national outpuitand exports appears to be declining due to the growing importance ofminine (particularly npetroleuim) industry, powner, conntr-rtion, transportand trade sectors. Yet agriculture still provides roughly half of thenational nrnducrtj two-thirds of theo mployuent and about half of thenation's exports.

7. The performance of the agricultural sector during the firstt!hree years of the current plan is A4dffi4cl to evaluate. At least partof the reported increases in rice output appear to have been statisticaland there 4s no question th1at weather cor.ditior.s have been .'avorabl.1 ThelI~ *C. ~ J.J I.&& L 1M %_LPULA.L-J%LL 0LL f &iV= = & U ~L 41 LL A= L1LM

availability of fertilizer and new high-yielding varieties, together withspecial incentives provLidYLedU -uiuler thle riLce 'LnteriZLf'Lcat'Lou progrm, havehad a significant impact, but do not account for output increases of thesize reported . On^ly a s.uall part o' -le inves-,uent8 'or rehe"'lita"ion -If~ L~~~JL ~ W&AX. a LU..jJL L J LIAA ~L V L.U1L. LU 14Iaw L.L.L. LJ.LUL UJ.

irrigation has actually matured. Similarly, in the area of estate rehabi-litation, sufficient time has not elapsed to see results. Mworeover, pro-gress has been slower than anticipated. The growth to date, appearsLL UC: Ldrgely a recovery Irom Lne cnaoLIc sILuatlon oX ;7ov-o oLao±zation and the restoration of minimum levels of transport, supply, credit

diiu m-arketing services 'have been importanr racors. At te same time,however, considerable progress has been made in financing a substantialnumber of projects which will ensure a continuation of growth into theSecond Plan. Basic studies completed or initiatrr' during the period canbe expected to provide a growing pipeline of projects going into the nextT'lan. Hiowever, new directions will be needed to develop a strategy forlooking beyond the fertile paddy fields of Java and Bali and the estatesof Sumatra to encompass the total agricultural resources of Indonesia andto achieve a better balance of people, land and capital. This will requirea muchi closer Integration of economic activities among the various regionsas well as between the small farmer, the estates and other productive sectors.

ANNEX 3Page 3

Trhe Present Pattern

8. With 3,000 islands stretched out for some 5,000 km along theeqnuator, Indomnesi-a hasa n twide variety nf cl4imntPQ nnd aniln - Mountainous

Lerrain, extensive coastal swamp areas and intermediate zones provide thebasis for a broad range of tropical, sub-tropial anr en pat rpHIistorically, developments have taken the form of an intensive wet riceculture to supply food to support an 4nnc:e4 asia nfn.1 pn anA an estate

agriculture based on export crops. External trade which started with.hi-e early spi.e ltraAe m.oveA to sugar, rubber, coffee, copra, tobacco anda variety of tropical export crops. Smallholder agricultural developmentEtas been largely concentrated ±in the hea-v.ilJ.y popu'AlatUed regiosL coLLW f Java,

Bali, Madura, Lombok, and small pockets in Sumatra and Sulawesi andestate development iLn Northern Sumatra and Java.CS -dL UVc Aj Ue1L .1 III i1L1 .LUILL LI

9 Uut ofJ a tot!a'l 'landU area o0f J200 million hI'a, aboutL UV m.L..L.Lon Ilaseem to be potentially suitable for agricultural development. Of this,potential, only 18 million 'a are presently culti-vated and 12 million haare under forestry concessions. A further 12 million ha are classifiedais productive forest reserve leaving about 18 million ha of land available forn'ear-term agricultural development. Most of this is located in SouthernSumaLra, Soutn Eastern Kalimantan and Sulawesi.

10. Smallholder production accounts for practically all food pro-duction and a major part of the estate crop production. Although foreignestates totalled some 1.2 million ha and produced 60 percent of the exportsbefore the second world war, the importance of estate production has declinedsharply in the post-war period. Area, yields and output of the estatesector have dropped substantially as a result of the depressed 1930's,World War II, the revolutionary post war years and the nationalization ofestates. During this period, there has been a steady encroachment ofsmallholders onto abandoned or undeveloped estate lands, explaining inpart the rapid rise in smallholder Perennial crop area as well as the rapidexpansion of food crop output in traditional estate areas such as NorthSumatra.

11. Agricultural holdings are very small with 70% of the farms lessthan one hectare. Average farm size of 1.1 ha for Indonesia as a wholeand 0.6 to 0.7 ha for Java-Madura and Bali are hardly sufficient toprovide an adequate living for the farm family and make off farm employ-ment a necessity for most farm families despite the highly intensivenature of the agriculture.

The Natural Resource Base

12. The archipelago of Indonesia extends over 17° of latitude and47° of longitude, and is entirely situated within the tropic zone. In-herent differences in climate, topography and soil composition, however,provide a diverse environment where a great variety of crops can be grown.Indonesia is well endowed with land resources, and abundant opportunitiesexist for more extensive or intensive use of the land. In addition, the

AN'LoEX 3Page 4

seas around the country have a considerable fisheries potential whichis not at present adequately exploited.

Land Resources

13. For this discussion of agricultural land resource potentials,agricultural regions are considered in terms of island groupings that donot split administrative boundaries. The areas, populations, and populationdensities of the regions are summarized in Table 1.

Table 1: AREA AND DEMOGRAPHIC DATA

Area Population 1970 (est.) Population Density(sq. km.) ('000) (Persons/sq. km.)

Java, Madura andBali 139,667 79,861 571

Sumatra 524,097 19,385 36Kalimantan 550,203 5,051 9Sulawesi 229,108 8,719 38Nusa Tenggara and

Maluku 154,304 5,623 36

Indonesia (withoutWest Irian) 1.597.379 118.639 74

The tremenduis diifferenrs in nnnulatinn densit4i among the tifferentregions is shown clearly in the table.

14. Topographic map cover, land use and soil surveys are at presentgrossly inadenuate to -ermit a precise annva4anl o%f aw4a#it.o v- vurfaa

The mosC useful indication of agricultural potential of the differentregions is probabl- -iven by the ---opo:tion 4n e-ah of fthe ehre mgbin

j 5 j r-.. -J ~ .. ,.. -. 0%.-* -. _ -.. - -

terrain groups, namely mountainous, almost flat or gently undulating tohilly, and swamp land. Each of these terrain. grnupps 1n in. tUl rcharacter-

ized pedologically by a wide variety of soil types, the full range of whichis yet to be dete-ined. On. the b.asis of this information, Statinetea havebeen made of the area with agricultural potential in the different regions.1'h's. - 4 ..,, F 1 ^n ..1 1 4 .e >., .

4s

4,,h .1.OA F_AA 4vsfia'4^ aU 1 ,.aev.v4na{

vary considerably among the main island regions. A large amount of landis in G-r.ou n I ( -..u n. t.a 4 n u .Sulanwesi is t*he msat -Oul.ttai n.ue (69X.), an d

Sumatra is at the other extreme (32%). For planning purposes, it wouldbe unwise to assu..e that more thaan 1f0-1S.% of the. fgg:fegate m.ontaiwnus

area can be brought into sustained yield agricult'tre.

15. Swampy land covers a relatively small proportion of Sulawesi( OA) andILUU' ofL the N'4usa TLenggara ar.d LLa.luku 's.laJU regL'oU %ft)j W-ll.e. about

a tlhird of Sumatra, Kalimantan and Java fall into this category. A parti-cularly significant feature of the soils in these -awfpy- areas is Limvory high proportion of organic and acid sulphate soils in the largelyundeveloped swamps of Sumatra and Kalimantan, as compared with the rela-tive absence of these problem soils in Java. The land in Java, which for

ANNEX 3Page 5

the most part has already been developed to agriculture, contains mostlyalluvial and low humid gley soils. These pedological differences aresuggestive of a very wide range of crop suitabilities and they give aninkling of the problems, some of which may be insoluble. inherent to thedevelopment of many of the swamp lands in the Outer Island. Without moreaccurate data concerning the patterns and qualities of these swamp soils,it is impossible to estimate even approximately the areas which could bedeveloped oroductivelv for agriculture. but the fieure iR unlikelv toexceed 10% in Sumatra and 20% in Kalimantan.

16. The remaining terrain/soil group is intermediate land, describedhere as almnot leve1 or gentlv uniuiAting to hilly; whieh rovers Rlightlymore than 30% of the country. It affords by far the greatest area forfu,t-iirep ariult,iranl dvlonment. The rango o%f anil; whirh fs prohably

greater than in either of the other two groups, includes a large numberwhich are well suited to r1ltatHAten wt-h a wielua variety of tropicalcrops, and it is felt that for long-range planning purposes, 80% of theland in this category should be assumed to be suitable for agricultureon the basis of existing evidence.

17. A comparison of the estimates of area with agricultural potentialandu UL Lof the area presentL.y cu.LL.LVated 5 LL LILALLr. i.dLcatio. ofL the differences

in potential among the various regions. In Java, cultivation has alreadypruoceu'eu beyondu tLile: ecUulogically 5udLLUt CVC, aLL UtCLJLUMLC WKLAAL1 Lb

widely corroborated by the observed degradation of land in many parts ofthe Islanas. ILt is apparent tehat some lana snou±a be taken Out oL cuiltiva-tion, in line with fundamental soil conservation principles.

18. In the Outer Islands, however, a vast unexploited land resourcepotential exists. The figures overstate the magnitude of the potential intwo important respects. Firstly, a large land area of some 12 million hais in forest concessions already given to lumber companies, mostly inKalimantan. Secondly, the development opportunities in some of the regions,particularly Nusa Tenggara and Maluku, appear largely limited to extensivecattle ranching owing to extremely low rainfall, shallow soils or steeplysloping lands. Even with these qualifications, however, it can be con-servatively estimated that there are 15-20 million ha with good potentialfor agricultural development in the regions of Sumatra, Kalimantan andSouth Sulawesi.

Forest Resources

19. Indonesia's forest resources are the largest in Asia. About 120million ha are classified as forest land, and rough estimates indicatethe existence of 45 million ha of production forest, of which 24 millionha would be suitable for permanent forest exploitation, 18 million ha forconversion to agriculture, and 3 million ha are managed forests in Javanot currently considered eligible for conversion to agriculture. Both.Java and the Outer Islands contain high export potential forests, teakand dipterocarpus respectively. There are in addition large areas ofconifers that can form the basis of important new industries.

ANNEX 3

Fisheries Resources

L). Marine Resources. Tne evidence suggests that the seas surroundingIndonesia, while not as rich in marine resources as the North Pacific andNorth Atlantic Oceans, are better off than most other tropical areas. Thetotal area of the areas around Indonesia is about 5.0 million sq km withestimated resources which could yield an annual catch of about 5.8 milliontons of fish. The so-called Upwelling Area - the prime fishery -- coversroughly 750,000 sq km anid includes an estimated 4.2 million tons, or asubstantial majority of the total resources. Compared to this potential,present annual production of marine fisheries is just over 800,000 tons.

21. As one would expect in a tropical fishery, as many as 200 varietiesof fish are found in Indonesia's waters. The principal varieties beingfished at present are sardine spp., mackerel, tuna, jack mackerel, coralfislh, sea bream, hark and ray (among the pelagic fish) and crustacea.Many tuna species are migrating in the Maluku and Banda Seas in Indonesianwaters, especially the wide upwelling areas; the Indian Ocean near JavaIsland is becoming famous worldwide as a spawning ground for south bluefin tuna. Shrimp resources with a high export potential also appearextremely attractive in the Java Sea.

22. Inland Resources. The total area of brackish and fresh waters,with which inland fisheries are concerned, is 9.4 million ha with a potentialoutput of 1.4 million tons annually. The fish production is only about430,000 tons or almost 400 kg per ha. Yields are somewhat hiRher than in1hailand, but well below yield reached on more intensive fish farms in Taiwanand the Philippines. Pollution from crop insecticides and industrial wasteappears to be affecting output in some areas, particularly around Surabaya.

Structure of the Agriculture Sector

23. Indonesia has a dual agricultural structure consisting of probably15-18 million smallholders and iust over one thousand large estates.

rhe Smallholder Sector

24. Smallho1ders dnminate TndnnpeiAn agr1tultire in nuimbhr nf farmsand farmers and, with the exception of palm oil and kernels, in the pro-(ilirrion nf all subhqisrtenrc- nncd cah ecropes qmVn11hn1efr xnnorts 4n 1971were estimated at $270 million, compared with an estimated $183 millionexp)frtd hvby the Pet,ate se'trn dasnite the fact that enxprts are tfhe mnior

object of the estate sector.

25. In 1963, 12.3 million smallholders were farming 12.9 million hawhereas 1,120 estates had 1 A6 millon ha. Sa-11holAr fn-sm averaged

1.1 ha while estates averaged 1,420 ha. With about 18 million ha infarms now, the proportion of smallholders is presumably larger, and theiraverage size smaller.

ANNEX 3Page 7

26. Sma0llholders are con.entrated on J,avau=aM0MU", Bzli anAd thloseportions of the Outer Islands which have lent themselves to close settle-r,en"". T h e prlmr role of1 the s.alhode secto has bee toprvieh* ~ F'- L 7C &W..J4. UD LLi= C1IUt.LA.LLUA.LUC 0C%.WLUL LL0 UCCLR L.U kJ.LtJV.LUC -LILC

food supply of the smallholder's family, but it is evident that it hasaLso prouucedu a considerable surpLus. Ull Java-Madura aUiu DaZ..J whierepopulation pressure is especially intense and irrigation most extensive,the efforts of smallholders are heavily concentrated on the production offood crops, especially rice and other field crops. In the outer islands,especially Sumatra and Sulawesi, more of the efforts of smailhoiders aredevoted to export crops, especially rubber and coconuts.

Farm Size, Land Ownership and Tenure

27. Intensive population pressure on Java-Madura and Bali - whereroughly 80 to 85 million of the present i20 million Indoensians live -and good soils combined with extensive irrigation, have produced incrediblysmall farm units averaging 0.6 to 0.7 ha. Although the "small farmproblem" in Indonesia is similar to that in other Southeast Asian countriesits magnitude (in terms of the numbers of people involved) and its severityis vastly greater. Average farm size of 1.1 ha for Indonesia as a wholeand 0.6 to 0.7 ha for Java-Madura and Bali can be compared with almost6 ha in Malaysia, 3.5 ha in the Philippines and Thailand, 2 to 3 ha inLaos and Cambodia, and 1.5 ha in the Republic of Vietnam. Populationpressures on the land in Java, Madura and Bali are much greater than inthe heavily populated areas of Central Luzon, the Delta of Vietnam, orthe Central Plain of Thailand.

28. The sizes of farm holdings are not uniform in Indonesia, even inthe most densely populated areas. A wide range of farm holdings can befound in most villages. In heavily populated area, this range is fromless than 0.1 ha to possibly 2 to 3 ha, whereas in less densely settledareas it may range from 0.5 ha to 10 or more.

29. The 1963 census indicated that of the 12.3 million smallholders,7.8 million were "fully owned" farms, 3.6 million "partly owned", and lessthan 1 million "fully non-owned". Of the farms reporting tenure relation-ships (4.4 million), 1.5 were "share croppers", and 1.2 million operatedon "fixed Cash" or "Fixed produce" relationships. A variety of otherarrangements made up the remainder, including "rent-free" use of villageor other lands. Widely varying views are expressed by Indonesian officialsabout the extent of share cropping but the data are quite inadequate foran accurate determination, and the condition is further complicated by anintricate set of rental arrangements in which landless and very smallland holders rent land from larger land owners, who in turn rent from stilllarger land holders.

30. Roughly 80% of the smallholder farms were fragmented accordingto thle 19f, renqmq Farms nf O=1 to 0.25 ha were on the averagp fragmented

I~LN1NA J_:

Page 8

into 2.4 piots. The extent of fragmentation declines to about 1.7 plotsfor farms from 0.25 to 0.75 ha, but it rises for farms of larger size.

Part-Timp Farm1inc

31. Small units, over-population, low productivity and seasonalitymake it inevitable that many "farmers" find off-farm employment. TheAgro-Economic Survey of 11,000 farms in different provinces, the mostaccurate recent sample survey, indicated that 32% of the farmers in thesurvey had "off-farm" work. The extent of off-farm work varied from 72%of the surveyed farmers in one Kabupaten in West Sumatra to practicallynone in some areas of Bali and Sulawesi. Farms in the sample averagedsliglitly more than 1 ha and were thus relatively large farmers by Javanesestandards. Other studies have indicated a high degree of off-farm employ-ment among the farms with less than half a hectare.

32. The extent to which this "otf-farm" work is "non-farm" work isnot clear, and in Indoensia it is difficult to dra'- a clear distinctionbetween aRricultural and service work. The concentration of Deonle inmany areas of Java and Bali is such that settlements extend for many miles.The marketing and distribution of goods. both agricultural and others-in the small quantities appropriate to such conditions involve a greatproportion of all the npennlp

Village Structure

33. Farm production, and a great part of the marketing and distributionservices associated with t hese 'Lar-w operate within andU bLeWWL LLtuAL.itI.L

villages which involve a complex network of social, political and economicinter-rela tG ionships. Many o'J thte traditJ.LoLi-a.L uaLJ relaitioWhlips whichigovern interaction in these village units are not evident to the outsider,but that thley stron.gly in.fluer.ce .LiAe AU &Ib -vi LnCl.uU-.Lg .CJILU.LC

relationships is beyond doubt.

34. The dominant influence in the village is the village headman(Lurah) and the otner village leaders. Tnese orficials are usually personsof relative wealth and this advantage is augmented by village lands grantedto the Lurali and othe leaders for their own use, and to support the villageadministration. Developing an effective program to stimulate smallholderproducLion must either lean heavily upon those village leaaers or proviaeviable substitute institutions.

Tecliniques

35. Production and markering techniqnut within the mmallhnlder se.torare both primitive and complex. Farm skills, at least for traditional

A).ThYt'V IMNIN L-A 3

Page 9

crops. are hi2hlv developed. Evidence of a hi8h level of ability indesigning irrigation systems and cultivating crops is visible everywhere.Zand sCarCity and lahnr ahtindAnrP have left littlP land u1ntende*Ad and

resulted in extremely intensive farming practices, symbolized by harvestingril-P with " qni-Ani" L-n4fp - nne hanti nta t4me. 'v%-r tBhI l 1rov t f

very small farms little else than labor combined with a hoe is evident.Draft power, where it can be used orafforded is perfo-med by cattle orbuffalo. Only in a very few cases has machinery invaded the smallholder

36. ~Despite the qualitfy oIf agricultural work-, traditlonal varieties11 .... J... J.iIL LJ 6LL~ %LLL.L U6L LaJ VGA . A-L~

are not, in many cases, capable of sizable yield increases, and access tonew va rieies, f erti. Lzer andU a IsLs a t ed t e chAltnliquesI in recent rAce

intensification programs produced a sharp increase in production anddem.onstrated Ihlow .lmJportant thLLese are to raising output ofL even thLe most

well understood crop in Indonesia.

Smallholders on the Outer Islands

37. Smallholder agriculture outside of Java and Bali differs primarilyin that it has generally larger amounts of land per farm, irrigation is lesswell developed, and greater emphasis is placed on non-food export crops.Productivity is low, however, and smallholders suffer from an absence ofmarketin8 and distribution services and institutiona. As a result. theirproducts are of low quality when they leave the farm, and their share ofthe total exDort value of these crons is corrennondineIv lnw.

The Estate Sector

38. Before World War II the European-managed estate industry inIndonesia was the largest and most technically advanced in the tropics.About 60% of Indonesia's exports were produced in those estates.

39. Depressed conditions in the 1930's, World War II and its after-math, and the expulsion of foreign estate owners and managers - between1957 and 1965 - crippled the estate industry, especially divesting itof its managerial and technically trained personnel.

40. Throughout the past four decades. smallholders settled on estatelands, physical facilities have deteriorated, the advanced techniquesand planting material and cultivation research dwindled away, and finallythe skills to farm and manage the estates were lost.

41. These developments produced a massive decline in estate pro-duction. The area in estates declined from its neak of 3.4 million hain 1927 to 2.4 million in 1937, and to 1.6 million ha by 1963. Comparedwith 1938; sugar nrndtirtion in 1963 had fAllPn hv 53X; tea 55% eoffee 52Z,

ANNEX 3Page 10

tobacco 86%, cocoa 64% and cinchona 78%. Only rubber production matched thepre-war level, due in part to the substantial increase in amallholder areaand output.

42. These declines in area and production were accompanied by de-clining yields on estates and corresponding higher unit costs. Thosecosts are further aggravated, according to the Indonesian government by"hcavy taxes, an unbalanced cost structure, and illegal levies".

43. Since 1968 a number of estate rehabilitation projects have beenfinanced by IBRD and the Asian Development Bank, especially in palm oiland rubber. A major program for reestablishing the sugar industry, whichis an estate industry relying upon special lease agreement with Javanesevillages for the use of land, is now under consideration. Between 1969 and1971, however the production results from these efforts were modest, whichis not unexpected given the long gestation period of most of theseprograms.

44. Inadequate management and trained personnel remain a criticalbottleneck to the improvement of these large and once highly productiveenterprises. An organizational mechanism to link the state-owned andoperated estates (PNP's) into effective nroduction and processine grounsis lacking. The key constraint continues to be a top heavy bureaucraticstructure which results in exceaaive Interferenee and abuse of authorityin day to day management decisions. A comprehensive study of the managementof PNP's hap been reerntly cemnleted and n f the arstuy arenlow being actively considered by government.

Interrelationships

45. Interrelationships between the estate and smallholder sector areweak. For the most part they operate as two separate groups. Partly thisis a function of the great disparity in size of farm operations betweensma.ll.olders and estates. The links beeen the estates and the marketingand distribution system are direct, their combinations of labor, land andcapital are different, and so are produ.tion techniques. Provision ofthese services which are an integral part of each estate would requireseparate 4nsti4tutlons in the smial'holder section or develop.ment. of closerrelationships between estates and smallholder in providin,' technical guidance,.mrrketi4ng and processing services.

,n,^ Uc~J~I.C JOJ. I.v C A CI. A. C. .L A _L _ LLL. A _ 1_.X

with larger farm units is illustrated by better vields and performance of3,Ma I " l ers near estates, th-e adoption of -_l-hn.qus deelpe or.-th~ 0 AC(IA.CO i.1LCO 6L.L ,A LjL. J.UL Ut L.C .LA L4UA=O UCVCJUpFCU UAL L1.1

Westenberg farm in North Sumatra by surrounding smallholders, and theadoption by s,,allholders of the better varieties used Li eLhe Mtitsugoro jointventuru in South Sumatra. It is also evident in the willngness of small-holLers to take a-vantage at marketing opportunities opened by these andother similar ventures.

ANNEX 3Page 1 1

47. Far more stress needs to be placed in government and assistanceprograms on activities which will link larger operations to the small-holder sector, and link economic activities in different parts of thecountry.

Organization of Government Services

48. Despite the progress recently made toward elimination of thecompartmentalization in government services for agriculture, far moreneeds to be done. The incredibly poor quality of agricultural statistics,which is a far more serious handicap to sound economic planning and projectidentification than is generally admitted, results in part from half adozen different agencies inadequately gathering or reporting statistics onthe same crop.

49. Similar overlaDpine pervades the entire eovernment administrationand services provided agriculture. A multiplicity of extension servicesresults in such anomalies as one farmer being visited by nix differentextension agents each with a different program while thousands of otherfarmerR never mee an agent,

50. Thi6 compartrmentrliAt4nn in mnthehd hb Inw qualityof servicedue to lack of specialization or concentration on a given task, which inturn results …frm …s too low to support a npeson with only one Job.

51. The problemJo^f the .multipliclt of Goveren aS r.ie concerne- dwith agriculture and -the large number of Ministries involved, is notunique in InAonesia. Considerable efforts lave been sper.t In developing~~ J... A.~~~~~~~~~*'.~~~~~'*Z~~~~Q~~~G ~ ~ ~ ~ ~~4 A. I.JL L~~~~~~~~~~~~ iiav~~~~~~ U~~~~~~LL UjJ~~~~~~~LIL LIZ UvV~~~~~~~~~~~~J.Up.LIL& 6 L J

various ad hoc inter-ministerial review and coordinating bodies. Thesehave Aealt with problem,s concerr.ing specifcpo94s rnulpora,,n

and budgeting and broader policy issues. With the-Government activelyengaged iLn developing tLhe secondu plan, eimphasis ls niW turnL'nLLUg to the deVel-

opment of mechanisms to define on the direction and content of nationalplanning .

52). Tn. e present difficult.es within the "'n'stry ofL tgri;u.lLUre* ~ A.1L pLU.L L LUJLA. A W.LA&AJL L&L rLI .LLLLy Li ~ .U.U

arise in part from the historical power and independence of the Directorates-General each of which -was formerly an independent ministry. Although theDirectorates-General are now under the Minister of Agriculture, there isno effective uoudy to coouifate policies ana programs on a broad sectoralbasis. Individual Directorates-General report directly to the Ministerand in practice appear to conduct negotiations on such matters as projectimplementation, annual budgets and planning directly with the AgriculturalBureau or BAPPENAS. In an effort to strengthen planning within the Ministry,the FAO has provided a team of experts to work with the ?lanning Unit underthe Secretary General of Agriculture. Arter one year, inaividual membersof the team of experts are now being assigned to specific Directorates-General in an attempt to generate the basic data needed for sectoral planningwhich has so far been unavailable. In the meantime, the BAPPENAS Agricul-tural Bureau has started work on establishing sectoral targets basedlargely on macro-economic considerations.

ANNEX 3Page 12

53. A number of encouraging developments have been observed withreference to regional planning. Provincial governors have begun to esta-blish small planning units; BAPPENAS has established an inter-ministerialsteering committee to deal with regional planning stuaies; UNDP technicalassistance is providing finance for a number of basic resource and landuse capability surveys; a West German Government-aided regional studyof West Sumatra is nearing completion; IDA funds under a Highway Develop-ment Credit are to be used in conjunction with a West German researchgrant to conduct a regional study of the Southern half of Sumatra; theMinistry of Transmigration and Cooperation is reorienting its activitieswith a view toward concentrating its program on several substantial andwell-defined growth areas -- Southern Sumatra, South Sulawesi and theSouth Eastern parts of Kalimantan; the Directorate General of Agraria ofthe Ministry of Home Affairs has initiated a project to develop land usemaps for all of Indonesia.

54. There is obviously an urgent need and a good opportunity to takeadvantage of these various efforts so as to assure a coordinated programfor the rapid development of several high potential areas. The large num-ber of agencies already involved make it apparent that a strong agencywith full-time, well qualified staff should be planning and coordinatingthe various regional development efforts. In the case of Southern Sumatra,the region to be developed extends beyond an individual province and couldnot be handled at the provincial level. Even in South Sulawesi, althoughmost of the agricultural development would probably lie within the province,mining developments would extend into East Sulawesi and require a regionalrather than a provincial approach. In addition. of course the substantialamount of financing and external technical assistance required make itessential to have active Central Government nartiination. It would there-fore appear desirable that some form of independent regional organizationbe establinhed to plan and mnlpement the develnnipenr nf eaeh nf the reonns,

which would be directly funded by the Central Government and have closelinks with both Provlnrial and Centryal (nernment Aaenries.

Extension

55. Tn additinn tn the weak organiati4nn for plAnning And fnrregional development, the most serious problem has been the weak extensionand research orgnn47Atj^n, Am in the fields of plann.ing and regionaldevelopment compartmentalization has resulted in duplication and overlappingnf staff fiunctinn at the amma t4me that certain essential services are

completely absent.

56. A clear-cut extension service as such 1oes not exist. In prac-tice there are techn.lcal agricultaural services supplied by the variousDirectorates within the Ministry of Agriculture, and these are collectivelyreferred t1o as tlhge "extens-ion service''. About 29,500J ofL theC Ministry'sstaff are classified as technicians. The present allocation of technicalstaffr among the variLous D.lrectorates auversely afLLects the aUminlstrationof the extension service and the performance of the technical staff inthe field. Each directorate general has itS own office down to the Kabupatenlevel. These are often scattered on opposite sides of the small town.

ANNEX 3Page 13

Integrating of these offices could result in substantial cost savings andpermit some upgrading of services. Possibilities for pooling availabletransport, administrative services and data collection and reporting couldenable extension workers to spend much more time on advising farmers.

57. A phased strategy has been recently formulated by Government tomeet its training needs which should go far to surmount these problems,provided it is pursued with tenacity and vigor. The first phase, coveringup-grading of the Ministry's staff and the development of selected traininginstitutions should make a major contribution. In particular, the NationalOffice of Agricultural Education and Training promises to make a major impacton the rationalization of education and training. The IDA credit of $6.3million for this first phase will materially help with its financing, whichhas in the past been one of the major factors limiting improvement of education.

58. The second phase, covering measures to reorganize and integratethe extension service and to improve technical instruction at farm level,is of equal importance to the first. Implementation of this phase willbe possible only after further study.

59. Major problems which the proposed second phase study will haveto consider include the following:

(a) ways and means of organizing a better integratedextension service within the Ministry;

(b) means of increasing the contacts and impact of thetechnical Rtaff at village level:

(c) requirementR fnr greater mnhilitv nf staff at middlelevels;

(d) the temporary need for expatriate reinforcement of higherQnnd n4ddil1p-1euel staff intil the Ministry's in-servicetraining program produces sufficient up-graded existingstaff;

(e) the provisi. of r fu.ds for upgadinrg sal'aries eandexpanding staff, and less for buildings than is presentlyapproti.oSt oned;

(^F' motlAe 4-n are_nr *I,or ro rne..l 4e nf errtt4oA .. oenarn_hffl, methods t- .-.sue f,h._ th- results -f areach village and farm levels;

(g) the possible organization of more intensive and higherq u ali ty extension. ser'Vices i.L a li,. m, ted n.u.-,.ber ofselected districts to measure the impact of such improvedservjLces undUer alterative mehods.

ANNEX 3Page 14

Researcih

60. Research suffers from a fragmented overstudy of its problems.In the past five years or so, there have been numerous studies of researchon specific crops, but each study has suggested certain organizationaland administrative structures for the particular research in question withoutregard to how such structures would fit into the overall organization ofresearch. These studies have included the following:

(a) Plantation Crop Research

(b) National Fertilizer Study

(c) Indonesian Sugar Study

(d) Tea Research Recommendations

(e) Sugar Research Recommendations

(f) Coconut Research Recommendations

(g) Rubber Breeding Recommendations

(h) Oil Palm Breeding Recommendations

(i) National Rice Study

There has also been a study on the "Organization, Systems and Requirementsfor Resaarch in Aaritillture and Related Tnduser4ien" by A Joint AO'rArPiltflralResearch Survey Team which provides an excellent framework for furtherApvelnnrmnt of the Awrieu,ltivral rsarch system

61. Eacmh diretorate of the M4ifatvu of Ahew4emIculturew 4i rsnAsib,,'hlefor the research institutes dealing with subjects within its responsibili-ties. Mnnv nf the nrnhlbma of tha ro*n,in"nn palre Av nnpnA11l*A 4n

research, in particular, the lack of coordination between the directorates-ngeneral, which leads to much Adu.p-licat.tio of rk, .overlap of ob4ectiveswaste of manpower and poor efficiency. Also the low levels of training ofstaft is as m.uch a hnA4cap 4i rese^-^.h as it ls in exte.nsion. A lar-eproportion of research staff spends much time in meetings and conferences,and on administrative procedures, leaving relatively 14-tle tle forresearch.

62. The general weakness of the research institutions i8 reflected inthe lack of systemat-.Lc app3jLi.ed researc.lb resu'lts Iwh1LU.ciLL eouldA be used .. theextension service to improve the efficiency and productivity of the farmers.

63. Further comprehensive studies are probably not required at thepresent stage. le i.,,mediLate need is for a smWaL but highly experienceul

AVqVY 3Page 15

team of research scientists with administrative experience:_ (a) torecomm,,en.d a suitable o-veralIl organ,Azational. an.d administrstv stucurfor agricultural research; (b) to consider all the proposals whichhave beea maude to date in the numerous reports covering research anathereafter draw up a phased Five-Year Plan, which would be the firststage or a long-term researcn program; and (c) to ensure that tne foreignaid presently being used and in prospect is effectively fitted into theproposed research framework.

Taxatiinn nf Agricuiture

64. There are four major types of levies on agricultural products orincomes: excise, land and export taxes, and cesses. They currently yieldabout Rp 85 billion, or roughly 20% of total government tax revenues.

65. Excise Taxes are the largest revenue producers--about Rp 40 billion--and are heavily concentrated on tobacco and cigarettes, which account forabout 90% of receipts. Sugar and other minor products account for theremainder.

66. Land taxes (the Iuran Pembangunan Daerah or IPEDA) currently yieldabout Rp 12 billion, most of which accrues to the local governments for usein development projects. Administration of the tax is being increasinglytaken over by the Central Government, and receipts have risen considerablysince 1969.

oI. mTLe irnuA may oe assessea at a maximum rate or j/ or the estimatednet annual yield of the land. In the case of plantation crops, largely inthe Outer Islands, the tax is usually assessed at a fixed amount per ha whichcurrently ranges from Rp 500-850/ha. By contrast, the tax for good qualityirrigated rice land (sawah) in Java, may be as much as Rp 3,500/ha.

68. Enforcement and collection of the IPEDA has been weak. Effortsare now underway to motivate local authorities to enforce collections tothe level of targets mutually agreed with the Central Government. CentralGovernment transfers to the regencies (Kabupaten) for local infrastructureand development works (the so-called INPRES program) have been set for1972/73 at Rp 100 per inhabitant, but actual disbursement may be more ifthe Kabupaten's performance in IPEDA collections exceed targets. Further-more, provinces may now apply at the beginning of the fiscal year for creditsfrom the Central Government to be used for development purposes for up to 40%of the previous year's IPEDA collections.

69. Present IPEDA assessments are still quite low in the maiority ofcases, and studies are underway to set them at levels more closely corres-nonding to actual values. The tax recnrds are kpnt At the Dirert-orAte of

A^NNE>X 3Page 16

lPEDA on the basis of land owners rather than on plots of land. - Accordin,to these, there are at present 20.7 million taxpayers (i.e. farmers) inIndonesia. IPEDA collections in Java amount to about 80% of the total.

70. In the determination of the individual assessements as well as inactual collections, local authorities play a crucial role. This is partic-ularly true at the village level, where the headman (lurah) is closelyinvolved in both operations. The costs of administration of the tax arecovered by an allocation of 10% of the proceeds, distributed among thelurah (6%), the sub-district (2%) and the IPEDA Office (2%). The Kabupatenreceives the balance for distribution among sub-districts and villages fordevelopment purposes.

71. The IPEDA is a broadly based levy, conceptually equivalent to apronortional tax on agricultural Income. Provisions are made for rpdtuetinnof tax liability in case of crop failure, according to a schedule workedotit iointly hv centrAl and local authoriries. Tr shnould b ponsible, oncethe structure and administration of the tax have been consolidated andstrenathened, to int r,oduce r s a. aome me s-sures s a lm4itnr expins,

which would result in some progressivity and improved equity of the tax.The IPEDA clearly represents an. appropriate vehftle fo: capturing additionalresources from the agricultural sectors with probably the least injuriouseffects on proAucer incentives.c2. E ~t TL,Jxpo.&t taxes current.ly yie abot 0ili

~4S.'LJL L~AC LLLCLbJ.y7± aLU l'uUq Vk JiJ U.L.LJ.LI.JLo. j'iiey are

presently levied at a uniform rate of 10% and accrue to the Central Govern-.ment, replacin6g txeS on exports levied by xhe provinces until 1969--70.As compensation, the Central Government makes transfer payments to theproviices equa'L to eU_J o± t Lileir respective export taxc receiptB in l969-7/tJ.The tax applies on prices determined by the Ministry of Trade (check prices),which are supposed to correspond to actual world market prices and areadjusted quarterly.

73. Since Indonesian exports do not play a dominant role in worldmarkets, export taxes are clearly passed on down to producers and mustconsequently have an adverse effect on production incentives. In somecases, particularly when a considerable amount of processing of the rawfarm product takes place prior to export, and when production is carried outby large numbers of smaliholders facing inadequate marketing systems, thetax actually passed on to the producer may represent considerably morethan 10% of the producer price.

74. Unlike the IPEDA, export taxes represent an inefficient means ofcollecting revenues, with pronounced disincentivu effects on production.It would be desirable to greatly reduce or phase them out altogether.

i Thist TeofrFinant f unde: the Directorate Geeneral of Finance of theMinistry of Finance.

ANNEX 3Page 17

75. Cesses are nominal taxes levied on 17 export commodities, yieldingabout Rp 3-4 billion annually. It is a tax on marketed producton ratherthan export, since it applies not only to exports but to domestic sales aswell, particularly those subject to inter-insular shipments. In fact, dutieson domestic use are in some cases (copra, coffee) double those on exports.

76. Cesses are collected and administered by a Cess Board in which theMinistries of Home Affairs. Aericulture. Trade. Finance, Industry, Trans-migration and Cooperatives, as well as the Research Institutes and privateexporters are represented. Receipts are distributed between the Central (15%)and the Provincial Cess Organizations (85%). Revenues accruing to the CentralOrganization ara deAtined to finance adminiatrative exnsnes, trade promotion;the Central Research station and international obligations and the formationof a snecial account, Provineial organizatinn are aupnnsed to saennd 10Oof their revenues on running expenses, 45% on infrastructure works (roads,brtdcPa_ nanaln_ et.^ ) and 45% on deve1lnnmetr of the tAiwrl rcnmmndit1ie

themselves (local research, replanting campaigns, etc.).

77. The present cess system was introduced in March, 1969. Copra,rubhhe nAnd cnffee provlded tha hbule of 1otl 1tl4 .a Trn August, 1971, the

cess on rubber (Rp 1/kg) was abolished, and those on copra and coffee exportshalved. They are now Rp 2.95/k for e "I- an.d Rp 5/kg for domestic con-sumption of copra, and Rp 5/kg for export to quota markets, Rp 3.25/kg forexport to nor.n-nuota no Ikets, anA Oft A qn/U fo: dA-eo s consum..ption ofcoffee.

78. The rationale for creating a separate authority to engage in

existing elsewhere is not entirely clear. Furthermore, the type of taxLtself appears even 'Less meriLtoriLous an Llle export Laxes discussedearlier. There appears to be little justification for maintaining thisk.LLnd ofL tax.

ANNEX 3

Page 18

II. PRODUCTION PERFORMANCE AND TARGETS

79. Compared with 1961-65, agricultural production was only 4% higherand food production 1% higher in 1967, although better performance wasregistered in 1966. Because of continued population growth at around 2%,per capita agricultural and food production was lower in 1967 than during1961-65. Thus, during the early 1960's, agricultural production was barelyable to hold its own with the growth of population, and Indonesia fellprogressively behind its neighboring Southeast Asian countries. In 1968this trend was dramatically altered upward due in large part to a strongGovernment program to intensify rice production. Agricultural output rosein 1968 14% above the 1961-65 average and by 1971 waS preliminarily estimatedto be 26% above that level. Per capita production was about 5% above the1961-65 average In 1970 and 1971.

Ricp

AO. RprAtwRp rirp Arrnzinta for rnughly half thp value of acyrircu1turalproduction, its average reported increase of 8% during 1968-71 was theMain fsacto-r niushIng upn previm-t1inn ModeAt girewth wAc Alanl rennrrpd insugarcane, rubber and palm oil but the growth in rice had to offset declinesory satdgnation, in, rther cr-ps-,,o

81. Revissions in. rice tat--isticS in 1970 partly inl-t this grm-rth,and they suggest an underestimation of rice production and consumption inearlier years. But t-h4S does not alter the fact Phat at le-t In the ricesector there have been significant improvements. Over the past 21 years

More than half of the growth in output has been due to area expansion(l.8%

years rice output has also increased at a rate of 3.4% per year but thereia Ueen a d'rop fLn th'e rate ol' area exans[ionI (1.4% per yealJ nuasbtn

tial acceleration in yield increases (2% per year). Since rice'acreage inuava ILaJno iLncreasebul over thepat Jl~l' years~ a1.LII. ofL the W new r'Lce .LanSl

development has occurred outside of Java (100,000 ha per year). All of the

gro-wt'l in rice output 'In java hUab bCCLZ Ude LV iL1L.=LZLi.LiUULL1 &LIAU LIi*L8:

yields.

Other Field Crops

82. The plentifulness of rice has apprently resulted in a substitutionof rice for both maize and cassava - the other staples - and th'ey have bothnsuffered declines in output with only modest pri.-e increases. The other foodcrops, however, especially livestock products, coconuts and oil, soybeansand peanuts, have experienced dramatic increases in prices in rural markets,indicating the failure of production to keep pace with demand. it is verylikely a function of two things: (a) the concentration of resources andsubsidized credit and fertilizer on rice; and (b) greater difficulties inexpanding the output of these smallholder cash crops because of weak organizationmechanisms, serious marketing bottlenecks in the smailhlolder sector, and the

ANNEX 3Page 19

need for at least minimal assistance in moving to improved varieties andmethods. Yet area expansion of field crops other than rice has amounte(d to2.5% per year over the past 21 years, most of it presumably in the OuterIslands.

Tree Crops

83. The slow progress in most tree crops is to be expected. Thegestation period for improved production methods is such that recovery fromdecades of neglect will take at least five to ten years. Some benefits arealready materializing in estate rubber and palm oil, due partly to pickingup slack in these sectors, associated with generally improved economic con-ditions and higher palm oil prices. A rapid increase in clove plantings,stimulated by extremely high prices and facilitated by Government disseminationof planting materials, will also produce significant results in the next fiveyears. Serious problems exist in the smallholder rubber. coconut and pepper.Production in the massive smallholder rubber and coconut industries has

stagnated for a long time, and recent efforts at replanting are extremelymodest. Pepper production has declined sharply in the past three years. Allin all, however, total acreage under tree crops has been expanding over thepast 21 years at an annual rate of 2.3% most of it representing smallholderproduction in the Outer Islands.

84. Detailed data on area. production and yielda of the nrincipal cronsare presented in Table 2. From this data, it is clear that with the exceptionof rice; where vipld inereasqe are beginning t-o nlav an increraingly importqnt

role, the main part of the output increases have come from acreage expansion.The overtl1 rate of increasp in nareage hA been 2-.1% per year desApir thefact that there has been no significant increase in cropped acreage in Javaduring the past 10 -ears. Spontaneous de-elopment of -. land has accountedfor the major part of this expansion of cropped area. In absolute terms

.th *as averaged abut. 30. 0,00 ha pe year. Tn thep Ins 10 years the

average annual area developed has been planted to the following crops:

Paddy (wet) 100,000 ha

Rubber 40,000 ha

Maize 40,000 ha

Coconuts 30,000 ha

Cassava 20,000 ha

Sweet potato, soybean, groundnuts 30,000 ha

Others 40,000 ha

300,000 ha

- Area, ?ror%ln+ 5on zn6 Yidr~~~~~~~~~~~~~~~~~~~ of Selceted AzIQuf or:odi.ties, 1921-1971

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6 T 6!i 70 72 -1-~7. -n 1 4 7 CI 6 92 70 ~~~., ... 6 2.7 3.1 ~~~~~~~~~~~~~~~~~~~~~~~6.~ - *7 7,4, 6 .31 . 3.

2; 7122.2 7 135 176 ;.': 26l . :3 1 203) 1'1 42. 171 1f:l 13.7 1'73 57 `7 541) 452L 711 6 .6. 6 n 77 .3

Sal2-C e: za45ed. oni cd7lt-a ~ idcd a:

ANNEX 3Page 21

Livestock

85. Data on livestock and livestock production are not sufficientlycomprehensive or accurate to detect significant trends in output or numbers.Reported cattle and buffalo slaughterings would indicate that the total for1969 was below the 1962 level and considerably below 1964 and 1965. Slaughterof pigs, goats and sheep in 1968 and 1969 was 30% or more below the levelof 1962-65. On the other hand. exports of animals, mostly cattle and buffalo,to Singapore and Hong Kong are reportedly two to three times the level of theearly 1960's. and extremely large increases in exports of hides and skinsare reported.

86. Ministry of Agriculture statistics on milk, meat and egg productionfor 1969-71 indicate very modest increases and the-se appear to be proiertinnsrather than actual recorded production. The Ministry of Agriculture reportedin January 1972 that ner canita consumption of "livestock nroducts such asmeat, eggs and milk has been barely unchanged since 1969, i.e. 3.5 kg ofmeat. 11 nieres of eggs and O=S liters of milk".

87= Over uto-thirds of the livestock -_pulation is located on Java,Madura and Bali, about the same proportion as the population. An obviousand often repeated explanation for the low Cornsumption of livestock productsin Indonesia is the low level of income, the use of large animals primarilyfor power, ad the limited f.eed supply. However, draft catitle provide meatas well as power. Cattle density in Java is still well below that of BaliandA there appear to be substantlal unused feed resources iLn the form Oflill . & .JJ~ LIJ Uv OUUL. -AL.L A. UAU~ ~U I UU L1 .I A.L ULI U.

roughages and crop residues.

88. All studies of consumption patterns in Indonesia indicate, however,that the eLatLcity ouf demand ior meat is as hign as elsewhere. mne extreme-ly rapid increase in meat and egg prices in rural markets since 1968, whiler'ce, ma'ize and cassava prices remained essentially uncnanged, indicates thatthere is a serious bottleneck on the supply side, and that there is a strongrura'l as well as urbuan UuemanLU for these prouucLs. This reinforces the needfor smallholder livestock programs.

Fisheries

89. The Government has reported that inland fisheries have grown 2.1%per year since 1969, and sea fishing increased by 2.6%. Per capita con-sumption was reportedly 10 kg in 1970. Fish prices in Java are high.Traditional catching techniques, very weak marketing and handling facilities,and high costs of ocean shipping and port operations contribute to the highcost of this important element in the Indonesian diet. Exports of fish,mainly skipjack and shrimps, were reported to be US$1.5 million in 1969,US$5.9 million in 1970 and US$9.2 million in 1971.

ANNFX 3Page 22

For esF r

Irk D_ .... PA..."n and evxprts -fe^ timkAr hnavn 4-nnra-o" ror4i1 1'y xv-r'i I

targets in the Five-Year Plan, due largely to foreign development of thetiMIUer ,L-ULLus-Lry Ln the Outer IJslanuds and' favorable world prices. Ti..berproduction in 1969 was 6.2 million cu m, 10.1 million in 1970 and 13 miii.'Un

in 171. eakproduction on Java, about 45000 cu- e ea,wsucangedJAL III*1d .LL±Iea'idae,auJL. -tJIJ ww u m er year, wsue.

from 1965. Timber exports are reported to have jumped from US$3.5 millionIi, I UOO mU Uay IV M.L.L..L'on Jln 1, 71U U US$150 I inJ ULL.LJ.LVLA L1A 5 71 i

frospects and Targets

91. Rapid agricultural gruwth in IndorLesiL ±Lnc 1967, after mLore thar,a decade of stagnation, has produced a great deal of optimism about futureagricultural growth. Ongoing irrigation rehabilitation and improvermentprojects together with new projects currently under study should help maint. ,ireinforce recent patterns of output growth. In aadition continuing progressshould be made in the spread of high yielding varieties and increased inp'>iuse. rnese efforts combined with accelerated land development in the UuetIIslands should be capable of sustaining a rice output growth of about 4% peryear through the Second Five Year Plan.

92. Two major contraints exist to expanded output of crops other thanrice - elimination of the bottlenecks impeding the expansion of productionon the Outer Islands and development of a strong production thrust in thesmallholder sector, which accounts for most of agricultural production andis heavily concentrated in Java. Government programs and recent studies placeheavy emphasis on increasing the area under crops on Java. However, areaexpansion on Java has been minimal since 1968, and for both rice and corn ithas halted or declined. Additional area increases on Java can be expected,but far more emphasis needs to be placed on increasing yields there, and onincreasing yields and especially area on the Outer Islands. For this to besuccessful, better transport and marketing facilities between the islandsis imperative. A better effective method of stimulating smallholder productionis necessary if this sector is to contribute substantially to the needed increasein production. At the very least, the credit and input constraints for cropsother than rice should be lifted and at least minimal smallholder programsshould be pushed. The optimistic assumptions about agricultural growth inthis framework hinge on many of these changes taking place. Possibilitiesfor an even more dynamic smallholder thrust exist if village unit organiza-tions can be developed.

93. The world market for all of the crops that Indonesia exports ishighly competitive. There is no share or quantitative amount that Indonesiacan be expected to capture automatically. Indonesia has an apparent naturaladvantage in a number of important crops - rubber, oil palm and coconuts -and possibilities for expanding corn, soybeans and some other crops are good.'rhe amounts that will actually be exported, however, will be determinedlargely by improving the domestic and export marketing of these crops, andinsuring competitive prices and quality. Given such a policy, growth rates ofabout 5% per year for all sectors other than rice - field crops, tree crops,forestryv fisheries and livestock - should be feasible.

Page 23

94. The 1971 Indonesian census, for which preliminary information wasreleased in June, indicated a population of only 119.2 million, and a rateof growth of population between 1961 and 1971 of 2.0%. Tnis is a consider-ably lower population and growth rate than had been assumed.

III. A DEVELOPMENT STRATEGY

95. A large part of the govermnent's conscious development efforts inagriculture during the current plan has been geared to rehabilitation ofexisting infrastructure and productive facilities and intensification ofproduction through a massive injection of fertilizer, improved seed andpesticides. Yet a considerable part of the output increases in agriculturecan be attributed to the spontaneous efforts of many smallholders who havecontinued to transform their labor into capital in the form of newly clearedland, terraced paddy fields and new plantings of rubber, cloves, coffee, etc.These smallholders have generally received very little help from governmentin the form of either financial support or technical guidance. At most, thegovernment has provided access in the form of roads or port facilities,often built for a completely different purpose but nevertheless serving thepurpose of opening up new areas for spontaneous settlement.

96. This is not particularly surprising. since farm land in mostof the world has been developed in this way. Active government effortsto promote land development and settlement are a relatively recent phenomenon.In the last century, the jungles of lower Burma were rapidly transformedinto productive paddy lands by small neasant farmers encouraged by the openingof the Suez Canal and the strong European market demand for rice. Morerecently the onenlng un of the interinr of Brazil - resulting from the coffeeboom in the past and recent spurts in rice, maize, soybean, peanut andlivestnek produrtion and exnnrrt - hea hben baged pnrttv mu-h on land and

labor combined with access to markets. Government can play a role in easingsome of the hardshina by facilitating acess an-dti rnvidinc somp rcanital butthe basic ingredients are the availability of land and labor and a marketdemAnd-

97 Rrazil 'a rewt1h -record of 4-1!2Z per yeanr 4nc-rasea In fa-rnm noutnput

over the past 20 years was largely due to the opening up of 1 million hectaresof nw fam land per year. At the m ime, agricultureln l. I oalr areacontinued to become more intensive with shifts to higher value crops and useof modern innut a"nd hetter varieti4 e4 a Brazil is continuin to follow this

strategy with its new Plan for National Integration. The new trans Amazoniahighway 4s linking up the vt land and water. resources of the Amazon withthe heavily populated and depressed Northeast area. The spontaneous movementof people from the droug_h a:ss in. the Northeast to t.h , wetter -aeasa o

Maranhao to the North can now move inward onto the better soils along thehigher edges of the A,.azon Basin where the new4 road3 is being built..

* ALLt ~~~1LUdL.LU -L .I "CL1UJL1 Wit LA L1 IUIL 4J,U .. L Wi.L L II L .L.tJLtLi

8. AThLe s'ltuatiLon i'n 'Indor.esia Lhas rm-ar.y parallels w1ith the BraziianLCL

situation. The country is large enough and has sufficient population toprovide the labor and the markets to develop the vast land areas of Sumatra

ANNEX I

Page 24

and Kalimantan. Development in the past was largely confined to a centralcore which now has exhausted its supply of new land and must turn tofurther intensification and -.oderni4tio.f of agicltr and, A4irersi4f- t inn… -.-- , ~ ~ ~ ~ r iz ti r. ofa.---s… n

into other sectors. However, the missing link is access. Where Brazilhas built roads, In-don.esla will1 .hav 4rove lts lnter-island Ci.'k4-4nand communications to provide a cheaper and faster link between the developingareas and the cer.tral core.

99. With~ past developments an' invest,men-s so leavily concentrated*~. "A VY.L .Li ~ LUjIU L.L a U .L L .~ Li 6IL Al IA .aA..L I.UL V L .G La

in the central core (Java, Madura and Bali) there has been a strong naturaltendUency Lto contiLnue to concenr^ate new UVVC.UVPICLLLU .LIL L1n b ths ra WLhLer

infra-structure markets and labor force are readily available. GrowthoLf estate agriLcuLure, ulLUning Ud Lorestry act'ivLie-S ha-vee LtLIUdU LU ub

relatively self-contained enclaves with only a limited effect on the localpopulation. urganized efforts at tranamigration have tended to set uplittle Javas and little Balis in the outer islands - again without heavilyinvolving the local populations. Yet, they have provided a forward baseto which friends and relatives could be called from Java and Bali and fromwhich tney could spontaneously develop new lands furtner in the interior.The sum total of these efforts has produced a number of growth points whichliave served as centers for further growth in the outer islands. Roads andports for exploiting timber and mineral resources or for shipping outestate crops can be and are being used to enable spontaneous settlement intothe hinterlands around these enclaves. The food requirements for theseenclaves create new demands for local suppliers of agricultural products.

100. A major objective of the government should be to take advantageof these growth points and to focus land development and settlement onthose areas where enclave developments are underway or where particularlyfavorable resource situations can attract substantial infrastructure invest-ments. Agricultural developments should be closely related to the ecologicalconditions of the area. Initial crops after clearing should not departradically from the proven traditional mixes of upland rice, maize, cassavaand beans with gradual introduction of perennial tree crops and wet paddywhen conditions are suitable. The new element in the situation should beto provide each settler with sufficient land to allow him to continue theprocess of cultivation on newly cleared land to provide for his basic foodneeds while the older land is put into perennial crops. The use of draftanimals and some power equipment, such as chain saws for felling trees andbulldozers to assist in stacking and removal of marketable timber, couldgreatly accelerate the process of land clearing, leaving the settler moretime for tending his crops and improving his land. Provision of good qualityseed and planting materials, together with some technical advice is also anessential element.

101. The important thing is that conditions in the outer islands arequite different from those in the central core. Land is plentiful. Laboris scarce. Marketing is likely to be a serious constraint. However,continuing rapid agricultural growth in Indonesia will depend as much on animaginative approach to outer develonment as on continuing to focus onintensification of production in the central core.

ANNEX 3Page 25

The Central Core: Java and Bali

102. Population and infrastructure are still heavily concentrated onJava and Bali. Prospects for further agricultural development, however, aregood inspite of the scarcity of land. The IDA credits for irrigationrehabilitation can be expected to increase yields by improving the controland distribution of water supplies for both the wet and dry season rice cropsand opening the way for increased use of fertilizers, high-yieldingvarieties and pesticides. In some instances, however, dry season watersupplies will not be sufficient for successful rice growing, and a policyof crop diversification should be pursued in order to maximize returns fromavailable water. Prospects for surface water storage for dry season useare currently under study, but appear to be limited in the sense thatsubstantial low-cost reservoir and dam possibilities have not been identified.Ground water may be a possible alternative, but information on its avail-ability has not been developed to the stage where any significant develop-ments can be planned. The strategy for Java and Bali will, therefore, haveto aim primarily at improving the efficiency and productivity of agricultureby:

(a) further intensification of the existing mix of cropsby more efficient use of fertilizer, improved varieties,pesticides, and water;

(b) more attention to dry season crops other than naddv topermit use of scarce dry season irrigation water overa larger area;

(c) rationalization of sugar; tea. coffee- rubber; andcoconut production;

(d) introduction of new crops such as cotton and sorghum;

(e) introduction of additional agriculture related enterpriseswhich can tAke advantaae of available labor And feedresources (e.g. cotton ginning, dairy plants, feedindtsii?t-ria. nrnv-^eeaing, etnrA&_ A1_t-ribtit-4ni of inputs) ;

103= Such eatrAtegy will inunlve a contnutat4 ^n of the re-entpolicies which have tried to maintain a balance between the relative price.f rrirp And the npr4-P nf fvtt414,ier A Nv^n an4,J" nA rA4rc*4no A;C.r -~~~~ r~~~~~ .. e ._ c.~.avn JU t.Ua CU

marketing and extention services to promote a broader range of agriculturalproductior. appear r.ecessar., to achivew a -ore rapidA g5rwth of ou:pu: -ccrp...iJ S*. Up..l WA.1J %ALJFUJL Lu. I.L UVO

other than rice. Although until recently rice prices had declined relativeto pri4cs of other crops, rc- the * o..l cl -vir.g i…r. --- - ,-.-v &i *l.45.I *J1.LJ .&=J1L%.=.LVA.A15 UFC%L.Lft.L aUVULU.LzeUinputs, credit and extension services. Recent increases in rice pricesshould pemit 80m reduction in the subsiy- for fertillzer fOr rice with aview toward eventual elimination.

ANNEX 3Page 26

104. There are a number of alternative approaches to motivating changeat the village level. Smallholders in Indonesia are extremely hardworkingand market responsive. The strategy should be to provide incentives andto introduce some outside resources -- capital, technology and/or management.Such efforts will be heavily dependent on obtaining the full understandingand cooperation of the "lurah" and should build to the extent possible onexisting agencies and organization. For example the role of the "ulu ulu"or local water master is extremely important in obtaining more efficientwater use and in mobilizing resources for maintenance and improvement oflocal irrigation systems. The villa2e units or mobile units of the BankRakiat should play an important role in providing financing not only forshort-term nroduetion needs. but ala0 medium- and long-term on-farm needsas well as small processing, storage and marketing facilities at the villageat the villase level. The "Tnnres" program ttider which the CentralGovernment provides local government's grants of Rs 100 per capita for localnpubli. workc shnould in AAditinn to providing AAAitinanl emnlnvmenrt open thpway for improving the basic village infrastructure.

105. In emewcases the initial impact of modernization and change maybe ton benefit th more well-I to- Ao% farmers ho tr te the rlsks and haveeasier access to credit and inputs, but the important thing is to getdevelopment started. nce devAelopment g-ets go4ig -A re emphea4 wll-IIhave to be given to obtaining a wider sharing of the benefits. These cantake the for-a of betlter agricultural services to tUe f --arm -- ---dit

input supplies, marketing and extension services, but eventually a muchbroaduer range of health, educational andu soc,La,L er-v',es.

1V%_~~~

1u6. Indoneeia has considerable unused land resources in tne Outer Islands.Bringing this land into development should be one of the prime objectives ofeconomic policy, as soon as the current rehabilitation efforts have reachedtheir goal. For a variety of reasons, related to the country's history overthe last several decades, ethnological differences and inaccessibility, onlya modest beginning has so far been made in combining Java's labor resourceswith the unused land in tne Ouster Islands.

107. Official efforts to move people from Java, Madura and Baii tosettlement schemes in the Outer Islands, in particular South Sumatra, startedbefore World War I1 and were resumed in the early 1950;s; recruitment ofJavanese labor for the North Sumatra estates and for various mining activitiesthroughout the archipelago has not been a significant factor since independence,but, lately, lumbering enterprises have attracted a considerable number ofworkers, mainly to Kalimantan. The total number of officially sponsored"tranamigrants" of all categories has never exceeded 60,000 persons in anyone year and has dropped to some 20,000 in the last few years.

108. To this modest officially sponsored outflow must be added animportant number of unassisted migrants, most of them settlers joiningpreviously migrated relatives. Uncomplete shipping data suggest that over

ANNEX 3Page 27

the past decade assisted and unassisted Javanese migrants must have totalledan annual 50,000-70,000; this outflow was partlly offset by m4gration to

Java (mainly to the urban centers) of some 10-20,000 people of the OuterIslands.

109. Tne principal problems involved iLr th1e past tranmigration efforts

appear to be:

(a) selection of transmigration sites appear to havebeen based more on accessibility and tne availabilityof rights to land than on suitability for specificagricultural purposes;

(b) settlement was based on cropping systems suitable forJava rather than in the outer islands making success orfailure heavily dependent on providing irrigationfor wet rice;

(c) lack of funds delayed infrastructural developments;

(d) the programs made no provisions for the activeparticipation of the local people.

110. The total number of families resettled under all organizedschemes over the past twenty years appears to have been of the order of150,000 families. Reorientation and expansion of the program can beexpected to increase these numbers in the future, but the bulk of themigrants to the outer islands will have to be spontaneous migrantsattracted to the outer islands by increased economic opportunities createdby a wide range of developmental activities.

111. The pattern of ownership of the vast unitilized land potential ofthe Outer Islands is not precisely known, although it seems that large tracts,

especially in Sumatra, are owned or claimed by clans (margas). The exact

status of ownership of land in areas selected as priority settlement zones

(Southern Sumatra, Southeast Kalimantan and South Sulawesi) should beimmediately ascertained by the Government and, where necessary, appropriatemeasures taken (e.g. purchase, exchange or incorporation of native populationinto development schemes) that will permit new settlers to move smoothly ontothese lands.

112. The emphasis in transmigration programs must be changed from themouement of nenple out of depressed areas in Java and Bali to the developmentof the new areas. Thy people already on the ground should be brought activelyinto the new develonments rather than being displaced as squatters on govern-ment land. The shape of development should not be the re-creation of little

Javas in the tuter islands,. but the development of new farmin2 syvtems suit-able for them. Official transmigration schemes should provide each settlersufficient land to bring in. addition-l relatives and to take care of the

future needs of growing children. Income targets should be sufficiently highto attract a wide range of people ircludina those with resourc-s and manage-ment talent. Introduction of some mechanization, both animal and tractor

AWn1,. -,

Page 28

power, will probably be necessary to cope with larger-sized farms needed toprovide such incentives. Possibilities of developing mixed farming systemscombining perennial crops with annual crops rotated with a pasture/legumephase should be tried on a sufficient scale to permit early application ofresults. Meanwhile, projects for smallholder settlements based on tree crop,combined with traditional food crops should be developed for early implemen-tation. The heavy emphasis on providing irrigation for wet rice productionshould be changed to give more emphasis to development of rainfed crops.

113. Larger farms without irrigation will require additional power and

arrangements for an increased supply of draft animals will be needed. Thesort of project currently under consideration for South Sulawesi and Sumbato expand cattle production, both for draft purpose and beef production,should be developed for Southern Sumatra and Southeast Kalimantan at anearly date. Such a project could become the center for practical field triaisto develop techniques for establishing improved pasture and legume croppingsystems in areas now infested with "alang alang" (Imperata cylindrica).

114. Finally every effort should be made to strengthen extensionservices throughout the area. A first step should be to unifv services atthe local level. At present each Directorate General in the Ministry ofAericulture has its own field staff, and there is little or no coordinationamong them.

115. IDA involvement in the agricultural development of the outer-

islands has so far been confined tn rehabilitatlon of e8tate8 (mainly rubber,and oil palms) and a fisheries project in North Sulawesi. Recent roadprojects i-n Sumatra and Sulaw-eei and their a-sociated studies can also makp

a significant contribution to the development of these regions. A mostsignificant project will be the recently concluded credit for the rehabili-tation of inter-island shipping.

116. A project currently under consideration by IDA for assistingsmallholder rubber producers in. 4n^a4g, tbe effl4c4ncy of production

and marketing of rubber and diversifying into oil palms is expected toproduce results which can c r provide the a --sis for upgradingl p.roductivity,

and incomes of large numbers of farmers at the margins of subsistence.However, so 'long as proJets are cor,fined to im.prove.en.t of estate productionand to closely supervised smallholder replanting schemes, the impact on totalrub,ber output sr.d sm,allhlolder incom.,es wilil not 'we sigr,ificantC. 1`.hr.x

stage must be the development of a multi-pronged program which will draw onall' available resources, public ard l prlvate anu proviLd' e a mini.L.um package ofcredit, planting materials, inputs, technical advice, and processing andmarketiing facilities designed to reach a much larger n-m,ber of producers.This will involve development of much closer ties between the PNP's andprivate estates with tlhle smlIaLlholder sector to make the m.inmuw packageavailable on a much larger scale. The sort of arrangement proposed will insome respects resemble tne BIMAS programs ror rice -- where the most efficientuse of inputs was sacrificed to a considerable extent in the effort to reacha larger number of farmers. T-ne relative success of smaihnolders in expanding

ANNEX 3Page 29

clove production and the spontaneous tree crop development iTI the new areasin West Sumatra and Lampung show the responsiveness of smaliholders to suchprograms .

117. A major element in the costs of replanting or planting of treecrops consists nf subaRistente navments to nrodutern durlni the narind haforetrees come into bearing. To the extent that smallholders can obtain sub-sistenee frnm 1ntrrrnppnina nr frnm nther ernnIAnA nnn thpvr wnholdings,or depend on nearby relatives or other jobs for this subsis'tence costs ofplanti.ng and rep~lar.tla can be kept to a m4nwu,m.. Tt ham been fnv thisreason that s-ibstantial amounts of new plantings have been carried out bysmallhonlAdea ovr the past decade Adaes4it th -lack APi.1e o rar. Governmentprograms. The provisions of improved planting materials and mijimum levelsof technical advice vo,suldA haive raised t.h level of product1v3 ty oE nwplanted areas substantially without signficant increases in costs. PNP'san p:iat esO.-tates cou' be e-r.cuaged to suppl, such pyanta.l.nt er4.-at commercial prices with credit coming from the Bank Rakjat.

118. A further possibility which should be explored-is the use ofst4ulants_4-- in -o.,cir -it .--be prpatrg - 8 a hs 2;--dU44UU.&MAAF-0 &44 W&W&A. VALUF .F& kJL j.L@LA L. LAZa$ * J-A5."5 4a L LAU U4GU

considerable success with a fertilizer cum etherel program in stimulatingLhAC L arJJ.;,AnJgLIL of11 WU.J.IAW.LUL Luuo-"er. DepLlAu.LiA. oIr LJiUe clones (-UA LIth

condition of the tree, yield increases of 40 to over 100% have been achieved.T.hi has made it possible in many case to replant a portion of Lae area ofrubber without reducing production. Although systematlic trials onunselectea seedlings under smal'tnoider conditions have not been carried outin Indonesia, higher immediate yields and earlier replanting may outweigha longer productive life at lower yields, particularly if ruture benefitsare discounted at a realistic interest rate. Field trials should be startedimmediately and results analyzed in economic terms to determine the,scopefor use of stimulants.

119. Processing and marketing margins for exported rubber are excessivein Indonesia particularly in the smaimholder sector. Recent studies underthe Agro-Economic Survey of Indonesia show that high transport costs, poorquality latex or slabs, heavy unofficial charges, and excess processingcapacity are the principal factors explaining th-e low percdefitage_of the f,.o.b.price received by producers. The basic problem is one of preventing spoilageof the latex after it is taken from the tree. The poor-quWlity of small-holder rubber'is the result of primitiverand improper coagu'Lating.procedureswhich produce a slab with a dry rubber content of only 40% to 50X usuallycontaminated with dirt, sticks, stones and other materials. The solution tothis problem lies essentially in organizing latex collection or groupcoagulating centers which can deliver better quality'r;ubber to the crumbrubber factories for processing directly into quality'block rubber withoutthe need for smoking or remilling. An encouraging recent development hasbeen the establishment of a number of -block rubber processing plants inconnection with private estate operations with sufficient capacity to processsubstantial amounts of smallholder rubber as well as their own rubber output.

120. With 10 to 15 million hectares of potential agricultural landawaiting development in Southern Sumatra, Southeast Kalimantan, and Southern

ANNEX 3Page 30

Sulawesi, all possible methods should be used to expedite the process ofopening up new land. Unlike the situation in the heavily populated coreareas of Java. Madura; Bali. and Lombok. availability of land is not likel-to be a constraint for the next several decades in the three priority areasselected for early develonment. Management- canital and labor are likely tobe the key constraints.

Forestry

121. Forest policy should aim at a major expansion of the wood process-lnc' induistry, first, to Aihieve self-sufficier.c, in paper productio-t by 1985and wood based panel products by 1975, and second, to increase sawnwoodand plr,-ood exports to soma 0 m4114,n cubi4c metersn vro oe equltalaer.t hb,

1985. This will have to be accompanied by a steady reduction in log exportsto a.bout 10 64L114o -ukic -ters of ro-Mdwo^w by '985. LPJ *o*,c; - d.tA

result in substantial import savings and increase export earnings.

122. Other important objectives are to rehabilitate water catchmenta prcI.LLularly.8 [V== Lai tJava LLa4L arLi Lci condiLt.o.L;U.L oLU VLpreseV

the remaining protection forests and nature reserved; to manage productiveforests in order to Increase yields on a sustained basis; to expand the areaof pulpwood plantations; and, to release forest lands that are better suitedto agriLculure.

123. -Tne implementation of this policy will require: vastly improvededucational, research and trFining facilities; radical changes in theadministration and organization of the forest service; a better knowledgeof the location; quantity and quality of the timber resource; improvementsin concession allocation and control; external financing and technicalassistance.

124. Immediate steps could be taken to encourage local production byintroducing appropriate tax measures including an increase in the export taxon logs.

Fishery

125. Indonesia has considerable fish resources both marine and inlandwhich could be much more intensively exploitad. Consumption of fish isvery low in the heavily populated regions such as Java- and Bali, becauseof short supplies and high prices. The basic cause is the inefficiency ofmethods used to catch fish.

126. A strategy for fisheries development s tbuld aim at utiliinsi theexport potential for products like shrimp and tuna to permit ailzeableincrease in domestic fish supplies at much reduced prices. In line withthis overall strategy, four projects appear promising. Three of them,centered on Java and formulated as complementar:y'projects, consist of

ANNFY 3

Page 31

increasing the marine catch by the use of trawlers and motorized small boats,and of increasing the yield of inland fisheries by upgrading existing ex-ploitations and opening new areas. The value of shrimp exports would byitself make the proposed investments attractive. The addition to domesticfish supply is estimated at nearly 200,000 tons annually. The fourth invest-ment project would be centered in the Outer Islands particularly aroundMaluku and Nusa Tenggara. It consists of the development of skipjack polefishing with an eventual production target of some 70,000-80,000 tons an-annually, most of which would be destined for export.

Livestock

127. The livestock industry's contribution to the economy has beenprimarily to provide draft power, with livestock products accounting onlyfor some 3% of GNP and less than 2% of all exports. Production is mainly bysmallholders. Cattle and buffaloes are kept as draft animals for cropcultivation and transport with meat and hides as a by-product except inNusa Tenggara and Sulawesi provinces where cattle are also kept to producebeef from natural grassland. Poultry, pigs, and small ruminants are raisedas part-time family enterprises to supplement subsistence with marketing ofsmall surpluses. There is some specialized dairying for urban markets, butthe bulk of milk consumption is in the form of imported dry milk poweder,part of which is being recombined into condensed milk and recombined milk.LarRe-scale. modern Doultrv and eaz oroduction has started around Diakarta.but village production is still important.

128. It is suggested that livestock development be looked at primarilyas a tool for raising the aQregoate ineoma nf existing samallhnldAr com-

munities. Specific objectives, such as increasing the availability ofanimal prnrtin at reduiceA nrices, woutlA bea van4v as ano integral part of

the gains from agricultural intensification and diversification. A largepronnrtionn of increased meat supplies should come from an urgently requiredincrease in the number of draft animals. Quickly realizable improvementsin nmiltT-, And amAll vriY4na"nt productlor-4. culA na4aft 4in ,hn r4v.& meatprices thus leading to a more rapid increase in the number of draftanni-mals by encouraging wners to keep Vhei lar r g 4nint- for power

rather than selling them for slaughter. At the same time, export opportun-ities could be -et.

129. n7r.derutil4zed _rnAd resource development offers a complemuentaryopportunity to take advantage of "packageable" project possibilities. Theaim would be to deveAlop .4xdA 4a.u4ng or r.ocul4'ture pastoralisu. in order

-- -- '.~~ SY.. Dp Uf- .u.u.. 5 . w _aa.t.u 0 vac L'JL.A0U LA1 ..n.Ac

to establish new, or support existing nuclei of economic growth in areaswith lvw popullation pressure. T.w,-ese ac:i-1viti64-es voul lead to--------O

availability of draught cattle in the Outer Islands and to the productionof bef suia Aeor 10aJl. WtLDUU1W1VJI VL LUL RAjJUL W^L% W.LLL1ALL L4: QUULLl-QW L

Asian region. The major considerations in resource development would be:

ANNEY 3Page 32

- To Petahlish a land use pnattrn whi1h rAn hp astitafned nvera long period of time, considering the general difficultiesencountered in maintainino. soil fertilit- and structure underwet humid tropical conditions.

- To create income conditions which are adequate to attractn.w fn.ers to aasr w.i4th,n rel4ativel.y proor in"frast:fauctureand living conditions.

Financing Agriculture

130. Five state banks operate in the agricultural sector, withfily we,l_l-efired but vverlapping respons""'lties. .,e tl.ree maostJUSL Ly ~±LJ~.L .L aU LiUL. IJ~J.1IJLL L A.L~U ".L LJ * 1EI A&L~IUJ

important ones are Bank Rakyat Indonesia (BRI), specializing in ruralcredit Bn iday LfLnanigl esLates, and Bauk Pe-mangunan Indonesian

(BAPINDO), the industrial development bank, financing commercial production.including estates and agro-inrdustries. Local and foreign private commercialbanks are not active in the sector. Interest rates have been progressivelyreduced, tending to follow, somewnat tardily, the decrease in the inflationrate. The last reduction was in June, 1972. Except for some foreign loansfor private estaLes, almosr all development loans tror agro-inauscries anastate-owned estates) and seasonal loans for rural credits have been at 12%annual interest for the past three years, while all the rest (includingmarketing loans) are now at 24% or above. Institutional rates for loansoutside agriculture go up to 36%.

131. Production credit for small farmers is obtainable from avariety of sources, but both the supply, and farmers' access to it, arelimited. Apart from BRI, sources include fertilizer distributors, tobaccoand sugar estates, village and paddy banks, cooperatives, pawnshops, andprovincial development banks. Although private moneylending is illegal,it remains an important source of rural credit, albeit at very highinterest rates. By far the largest institutional source is BRI, whichoperates profitably as a commercial bank with full banking services.About one-third of its operations in 1970 was in agricultural production,for which it disbursed about Rp. 36 billion. It is at present operation-ally inefficient, and ADB is lending it US$3.4 million, being the foreignexchange cost of a US$4.4 million project, lasting about 3 years, formodernization. The project includes some organizational and operationalmodifications, the adoption of improved accounting and reporting procedures,and the mechanization of 126 of its 218 branch offices, affecting overfour-fifths of its business transactions.

132. The rice intensification programs have flad an important impacton rural credit. The original BIMAS program (1966-1970) used speciallyformed cooperatives as the medium through which farmers obtained credit.These failed because of management inadequacies, the lack of loan security,and non-evaluation of farmers' loan repayment ability. Over the 5 yearsRp 7.7 billion was advanced, but around one-half remains outstanding. Under

ANN EX 3Page 33

the BIMAS Gotong Rojong program (1969 and 1970) about Rp 22 billion wasadvanced, but about three-fourths is still outstanding. Credit was suppliedand charged as a fixed package per ha to every farmer in the selected area,whether or not he wanted, needed, or could efficiently use it; a methodcontrary to basic credit and extension principles. The village headmenreceived the total allocation for their villages for distribution, but asno records were kept, farmers easily evaded repayment. In 1970/71 it wasreplaced by the Improved BIMAS program, which is continuing. Under thisprogram, credit is supplied in cash and kind to approved farmers throughabout 1,600 specially created village and mobile units of BRI. These unitsshow promise of becoming the most satisfactory of all methods tried so farto bring credit within reach of small farmers. The most important andimpressive effect of these intensification programs has been that currentlyover 10% of the estimated 12 million rice farmers are receiving someinstitutional credit, compared with a negligible number five years ago.This has been achieved by familiarizing farmers with improved planting tech-niques, and inducing them to adopt the techniques through much improvedcredit availability.

133. Although records are incomplete, it is estimated that in 1970,loans for rural credit reached about Rp 22 billion, compared with lessthan Rp 1 billion in 1966, largely as a result of the rice intensifica-tion programs. However, less than one-tenth of this was medium term. 1970loans were about 1.4% of the estimated value of rural production in thatyear. While this figure is small, it is a considerable advance on 1967, andcompares with 1.4% in Malawi (1967). 1.3% in Thailand (1967), and 1.5% inZaire (1970). Both Malawi and Thailand were able to double their percentagesover the followine 3 vears, and this suggests a further imnrovement of thismagnitude is possible in Indonesia. Probably between 1.5 and 1.8 millionIndonesian farmern rer-peved Rome institut1nnal rredit in 1970. 8nm-e 7 tn9% of the 20 million farmers in the country.

134. The major shortcomings of the current rural credit programs arethp lack of lnng-term, and thp nmall Amniintt nf mp-tiim-tprm rerp-dit. Fnr t-hpnext few years at least, the rural sector could absorb a minimum of 25%nf annual loans nc mpeitim andt lng-term: medium-term for small pumps,draft animals and fishery equipment, in addition to the rice processing andirrigation works currently receiving it; and long-term for smallholderreplanting, on farm improvements and fisheries equipment. Over the nextdecade, consideraby more fuinda t-han have bean flct forn ra eA4t-

in the past will be required if the sector is to retain its currentmoment,m. and meet the above expanr,ion. M,,st fmu:ds will have to-,b e supplithrough BRI, as the only practical channel. However, it is doubtful ifBRI's current ...odernization proJect, -a10bl l t s, WA1 go f-a enough

and have sufficient impact on BRI's overall efficiency to enable it tomeet the count-r.'s rural credit requirem.ents over the nextt decadne. Tn

addition to the modernization project, BRI requires an intensive stafftI'ra4n4ng programl, a study to Ae-e-u,ilne hvow village anA mnzobile units canIU C.4J.A y~ A n. lu~ L.J %A L ~L a~I aZ~ L.L4u ULtJUL.L UL LJ. abest serve farmers' financial needs, and consideration of a long-termdevelopLment strategy, WLhLch would include an overall frinancL.ing program.

ANNEX 3Page 34

135. Financial data on the commercial sector (government and privateenterpr1ses, and aDror-induhtrPi) is fragmgentary Shnrr-term funds areavailable from the commercial banks. Limited longer-term developmentlf, ,n,i h..n,a o',,m r,rn. o,n~nvr,i.re.yt D n.mA -yt4X,e 'y.. - flc 1., . .r t-4 1 vr>.- cn lt-

state bank loans of more than 5 years for private development have beenprolhib4teA by gove..mment. Th-e 1i.4iteA funds- co- .ei.^tr, agriculturalpI .ii SL) . ~ hf 6- Vh.,*iMflC,I. 4. &S I I i fto A. iiituiiiwa- i. L .i a ,*.AI.. iJ.A 04.

development in this sector have come from the 5 state banks, and morerecently from, BVATDYA and the 1968 Jit F'acn Tch.,. ( S) .Unde

JFS, borrowers contribute 25% of the project cost and the rest comes fromBiank- Indonesia (one-thitrd') of Je the participating state bUankr- (two-thiruds)through a loan over 5 years maximum at 12% annual interest. Of the Rp 71b'liA..-Lon outstandULng at thle end of 197/ 1 , ULIC-quaLLter was fUL 4agriculture.

1J3. Following a 179770 reorgrLi'LzationL sch1emie fLor LUL .rJANIJ, 4.1it liasrecently (May 1972) agreed a Credit of US$10 million, which' would finance0 It wr I 's 'ore'gn exchange requiremnents for two years, for loans to smalland medium-sized manufacturing enterprises, including agro-industries.SinCe 1968, BAPINDO has lent Rp 12 billion, of which about one half was foragricultural processing (textiles, rubber processing, pulp, paper andprinting).

137. Bank Indonesia credits advanced co banks for agriculture(production and marketing) have averaged about one quarter of total creditsover the past four years, and were Rp 42 billion at the end of 1971. Ofthe total of almost US$2 billion of foreign investments approved byGovernment since 19b67, about one-quarter was for agriculture (includingforestry and fisheries), the major investors being the Philippines, S.Korea, Japan, U. S. A. and Malaysia, with Indonesian participation about7%. Complete and systematic data on foreign investments Is unavailable,but of the approved investments above, only 20 to 25% had been invested bythe end of 1971. Approved domestic investment (1967 through 1971) was,about Rp 0.14 billion, of which only a small part was for agro-industries.However, from the published data, it would seem the commercial agriculturalsector is obtaining a reasonable share of the available development,funds.

138. The main deterrents to increased private investment are the5-year maximum term for loans, the interest rate structure, the compulsory25% contribution by the borrower, and the non-availability of loans forpermanent working capital. In spite of these restrictions, state banks havea large backlog of loan applications, mainly because of the subsidized 12%annual interest rate. Under a new scheme, loans using government-to-government and IDA foreign aid funds may be made up to 15 years.

139. The 12% annual interest rates for development loans compares withthe current minimum 24% for all other agricultural loans for productionand marketing, and with rates which go up to 36% from state banks for otherpurposes. The 12% rate involves a subsidy element since this is only twothirds of the rate paid by state banks on time-deposits of more than oneyear. If the strong and growing demand for development funds is to bematched by the supply on a self-supporting basis, it will be necessary toadjust interest rates generally to bring them more into line with theopportunity costs of capital and incentives needed for resource rmtobilization

.LirA J

Page 35

under conditions with relatively stable price expectations. Current interestlevels appear to still reflect maintenance of value consideratiors whichwere real five years ago.

Marketing and Prices

140. Stabilization of rice prices has been the major concern of theIndonesian government in the agricultural marketing area for decades. Thepresent government has carried out an especially strong policy to stimulaterice production and stabilize producer and retail prices since 1968. Thegovernment has attempted to maintain a fixed farm price for rice of 13.2Rp/kg of dry stalk padi and a retail ceiling price 50 Rp/kg for milled ricein all parts of the country. The government logistic agency BULOG hasimplemented the rice policy by buying and selling in the market to supportthese price levels.

141. Considering the large number of very small farms and the greatseasonality of rice production, rice price stability was achieved in 1970and 1971 with remarkably smaU transactions by BULOG in the domesticmarket. The reasons for this are probably: (a) that only a small fraction(20 to 30%) of the total rice harvest is marketed; (b) despite restrictionson their activities, the private trade must have accomplished most of thetask; (c) larger production allowed a large degree of local or provincialself-sufficienev: and (d) BULOG continued to relv heavilv on imnorted rice.

14?2 Mn8t of the r1re. isiri hv TITfl( In8 lmnnrtfdti and i8 uiset fnr paving

wages in kind to government and institutional employees, and for deliveriesto militar, personnel, It would appesr that t-he aounts of rice needed tostabilize prices are relatively small, and that the demand for importedrice is fo -I - ------- -a - -ret. The toh.o-nrMena , much Bk-TGf-,

had apparently not found it necessary to develop the movement of domestic8uppl4es 4.t-o these markets.

143. Earl- in 1979, with domestic rice prices -aare.ntly sto le and.7 - -_ r -~~a -rr. *J--

substantial surplus stocks in Japan continuing, to hold world rice pricesat their lowest Stt.nr le, Is, the gnovehrent lo,wered i4t rc productln

0 ..*.t.. at r- --- -y----.YO aW a th g verrunef xt I_ e - - - - n - -- -

targets and reduced planned imports from recent levels.V, Statistical.J 8tArs in*_ bn U-.d A-I.- 6 .-A y-fi S *A4.1 -A ..pi -A.e-AL r.e -ed for

rice and government officials indicated'that con tinued,,toncessional importswere AeSl.r-ble to help brid8e n.. . yaoora o.,a .d n r.ot affect incentives

W " .L =&UL~ L.J LL& J UL u 58~ % A . Y '5aj CLiau 44J_WU %IJ. && L AL ...

for domestic production. Recent sharp increases in rice output in SouthSulawesi andu Nortah S-,.iatra had 'leA to mrka.eting problems ar,t unsold,stocks

in early 1972 and were expected to dampen'farmer incentives for further riceexpansiLon. TL,LL.8 was iLn pa.rt due to a va.rlety o' ofc al uAIrL.L.Loffla.l

restrictions on goods movements and a quite inadequate and expensive transportsystemi, especially inter-island shIpping aun roau transpUr-.

144. At the same time, however, BIURLU'G, in an effort to improve thequality of its domestically procured rice, raised quality standards and alsoreduced advance payments against contracts from 50% to 25%. The net result

ANNEX 3Page 36

has been a shortfall in BULOG's domestic procurements of about 250,000 tons.Unusually dry weather during the current dry season has also given rise tolower crop acreage and yields both for rice and other dry season food crops.In addition, it now appears that the main 1971/72 crop may also have beenoverestimated. As a result of this situation government is actively tryingto increase rice imports to dampen the rise in domestic rice prices.

145. The present sharp increase in international rice prices is not anunusual phenomenon. With the bulk of world's rice production coming fromrainfed land, rice output is subject to substantial fluctuations dependingon weather conditions in the maJor rice producing areas. Since only about4% of the world's output enters international trade relatively small changesin output can cause significant swings in international rice prices. Sharpincreases in cereal prices in the mid-60's were followed by a steady declineuntil early stummer in 1972 when the CurrFnt increases beean.

1466 Taking a longer vi-w, it ic clesr rhat ri-e prires ,.ill cnntntinuto fluctuate with weather and short-term supply rigidities. lHowever, since

mostof te wrld' ouput s poducd b 5-1-1--ldr a-.-d cormumed on ornear the farm, most production is not affected by short-term price fluctua-titons. Th.e relevant consideratior^ are the lon.ge: te-r.. fact^-s suich acost trends, population and income growth and changes in tastes. Promthis point- of viewV thae rice picture in 'Indlonesia duoes not app"eat tor present,insurmountable problems. Productivity increases already in progre8s are

control and distribution mature and lead to cost reductions. Populationgro-wi'h h'as bUeen 'less th'an prev'o-us'ly est.rXmated' and pos'Li'Lve mueasures f'orpopulation control are being initiated on a substantial scale. Rise inper capi'ta iLnoumes canr be expected to increase rice consumption among thepoorest groups but already there is evidence that shifts away,from cassavaand corn to rice have been taking place and wneat flour consumpntion hasbeen rising. With per capita rice consumption already at a level of over100 kg, substantially higher than pre-war, and prospects of further. increasesin availability of rice, significant increases in the relative price of riceare probably not needed. Government should try to dampen current snort-rermincreases of rice price through expanded import but should aim at maintainingits present balance between fertilizer and rice prices.

147. The marketing situation for other crops suffer from many of theproblems associated with rice. Very little success has been achieved inintegrating the market to reflect differences in-costs of production andtransport.

148. Since 1968 the nominal price of rice wa& stablized and the realprice has declined sharply. Other prices, as well as many agriculturalproduct prices had risen sharply. Especially rapid increases in soybean,peanut and coconut prices developed, with livestock prices rising especiallysharply. This reflected the lack of progress in agriculture outside of rice,and the constraints on production of other crops while credit, fertilizerand extension services were being channeled to rice at subsidized prices.

ANNEX 3Page 37

149. Despite the current recovery of rice prices Government policyshould be based on the continuation of progressively falling real pricesof rice while production increases. The success of such policy will requirea much more positive effort to reduce transportation bottlenecks, increasethe availability of credit and inputs, and to improve marketing efficiencyto provide incentives to the large portion of small rice growers who are notreceiving the full benefits of prevailing market prices.

150. The marketing of smallholder crops, the predominant form ofproduction, is impeded by the complexities of marketing the output of mil-lions of small producers, and moving these goods to market or export througha maze of official and unofficial charges and impediments. At presentprivate traders are impeded from efficient action in these areas by highcredit costs and other impediments. and alternative marketing institutions(cooperatives or government agencies) are not well developed.

151. The high costs of marketing (both real and contrived) and the lowlevel of smallholder nroductivity limit the ineantlva ton mallhnldarR.Major impediments to expanding exports of agricultural commodities arisefrom tha hiah nnAtn of dnPRtie Annd ennrt marketing, AnA frnm An ahbsnceof quality control in the marketing process.

152. Sustained output increases in agriculture depend upon eliminatingsome of the mrost immmed4iate cps s fs, lfo ack of inaegraon^. of the agri.cu-1.

tural market--allowing greater freedom for trade in the private sector,elim4r.ating thke excesie ha4e -A Auti-es fofficis'" ad unofficiallevied on goods movements, and reducing the costs of inter-island shippinga.dA roaA transport 4hog ----. d -a 1--le and ----------een;%. W8LJA5&WU4 &ajLLF&VV=U XCLJ.LA4UXJO aLIU UCLLCL WLLGtC&4=UWL1L.

153. Thle system or ur.iform riLce prices in all mark-ets andu provinces 's~La LA L AIIA. ~JL.LLW L. LU .LJ UAL..L LUjUVLI ±

a major impediment to market integration and regional specialization. Itshould bue modified tuo permift a more flex,bl 4-;e ofprce which er,-courages rather than inhibits movement of goods.

154. Accurate information on the actual costs of marketing of specificcrops and the actualU. markFeting processes are so 1lackrig a;L prebsL&. LthLa

major surveys of these costs and processes are needed before large expendi-.-res .o1 physical ,L±ac'A.Lt'ies are undertaken.

ANNEX 4

THE INDUSTRIAL OUTLOOK

Table of Contents

Page No.

I. INTRODUCTION 1

II. THE STRUCTURE OF MANUFACTURING INDUSTRY 2

III. THE OUTLOOK FOR TNDUSTRTAT. nVFLThOPMFNT TN THE 1970S 5

TV. A RFVTIW OF THE PRTNCTPAT. PnT.TrTIE AF^ECTTWIr MANTMFACTRTING

INDUSTRIES 7

The Import Duty Structure, Import Duty Exemptions,an-d Import RPstricti-o4 n- 7

Taxation and Investment Incentives 10Tnd4rect- T Pa10Direct Taxes and Investment Incentives 12

Credit 15T -. -J J I"Labor Legislation. IVPublic Ownership of Manufacturing Enterprises 16.nasturLLucture, Industrial sLate anV u LLU LatiLLUoI I I

The Data Base 18

V. SOME INSTITUTIONAL MECHANISMS 18

Tariff Policy Implementation 18inu'wtr'La'J rruomot'Lon Board 1I

Small Scale Industries and the IndigenousEntrepreneurs 19

Vi. PRIORITIES IN INDuSTRIAL DEVELOPMENT 20

Statistical Appendix

ANNEX 4Page 1

r %I IN^ LEI A -A;ITLJt TTlHE Y?Cqln TAT OU' rT AL'

I. INTRODUCTION

1. With the formulation of the 1974-8 Plan, the Government ofIndonesia is embarking on a new stage of industriai development. wnilethe rural sector must continue to bear the brunt of the country's overalleconomic health, there has been sufficient recovery and growth in the indus-trial sector to provide a base for a strong movement forward, and a majorcontribution to growth during the next plan period. 1/ The government,moreover, clearly desires to evolve a policy framework which will ensurethat further industrial development leads to a better personal and regionaldistribution of income, as well as, to rapid and sustained economic growth.

2. At present there is an acute paucity of data on all aspects of thestructure of the existing manufacturing sector, and o; the effects of fiscal,monetary and other policies affecting manufacturing. In a country of Indo-nesia's size and complexity this would make detailed, physical planningimpossible even if it were thought desirable. Planning for industry in Indo-nesia at this stage essentially requires a system of price signals which willencourage enterprises, whether public or private to maximize their productiveefficiency and penalize them for inefficiency. In the absence of adequateIndonesian data, such policy formulation can only be based on the economicprinciples other developing countries have tested and the practical experiencethey have accumulated in the course of their industrialization programs of thelast 20 years or so. In the first instance this means an emphasis on fiscaland monetary policies which set general, as far as possible uniform pricesignals to encourage industries which have a comparative advantage and whichare internationally competitive. By the end of the 1974-8 Plan period agreatly improved information base would, together with the experience acquired,make improved industrial planning possible.'

3. The policy measures which require the Indonesian Government's at-tention, and which are hence highlighted in this section of the Report, havebeen analyzed in the light of the Government's stress on social justice aswell as on economic growth. The Report therefore focusses on the role ofsmall and medium scale industries, loosely defined here as those having lessthan 20 and 100 workers respectively. Their encourag'ement is particularlyimportant in the present stage of industrial development to stimulate thegrowth of indigenous entrepreneurs and managers for future industrial growth,and to improve the national and regional-distribution-of income.

4. The rapid creation of productive employment is also a very importantobjective for the 1970s. While industry can not be expected to make a majorcontribution to the reduction of unemployment and underemplovment in the nearfuture, a number of new jobs can be created if appropriate policies areadopted. Thus an emohasis on light rAther than heav- w anital intensive and

1/ For an account of the recovery of Indonesian manufacturing in thelate 1960's, see IBRD, The Indonesian Economy: Development Trendsand Foreign Aid Requirements, 1970-72, Vol. III, Chapter I.

ANNEX 4Pave 2

technologically complex industries, can stretch investment resources byreducing the average c08t of adding a *rker to the l-aor force from s0..Rp 8,000,000 to Rp 20,000,000 to Rp 800,000 to Rp 3,200,000. Light industriesAlso ovae a a shorter -Capia ge rs LtUation p erio, allowing- UJJ 4 mvre -expansioa

to take place provided they are low cost and competitive so that they enjoyexpandin rrkets L-48ht i, _- -utls 4 uevr geealy thug r,o -always, _-t~AhJaIu4 SUM JIL L% -'L.ML . A,LA. AIL. LLUAL AM 9-5 LUJAJL=LFV=L ,15-MAIML42.Ly , L&LU,LA&1 &LU L 42AW"O.3

also give more scope to small and medium firms, than heavy industries. Thesecond way fn wbich employment -… … - reducing

u J WLA%_A W-L9kP.%JYL1 UF6 YJUL L.U4"LLCCP L;tU UC WJA&LUL.L4CU ALb U)' C U.;Ar

subsidies to capital and high labor costs, so that the introduction of less,rather than more, capital intensive methods of product'on may be encouraged.This is as important for large as for small and medium scale enterprises.Labor intenLsive export oriented industries require particular attention be-cause they are both employment creating and foreign exchange earning. AnXncrease in employment, particularly at the expense of capital, of course,induces a better distribution of income.

5. The emphasis on small, medium and light industries does not meanthat heavy, technically complex industries should be ignored, or that for-eign investment which at this stage is generally required for their-estab-lishment, should no longer be encouraged. As industry develops, backwardlinkages will lead to a growth in the demand for heavy industry goods, sothat their production will become economic. Foreign investfent may, more-over, be beneficial provided that it is not unduly protected in the domesticmarket either directly or through excessive investment incentives,''and pro-vided there is a simultaneous growth of local-enterprise. E

6. The foregoing issues deal with the conditions of supply. A moreeconomically efficient and socially just industrial strategy however alsorequires some steps on the demand side to ensure.that -the' demauid- for luxuriessuch as motor cars and other consumer durables is curtailed'while that formass consumption goods is stimulated. This means luxury consumption taxesand an emphasis on policies which stimulate higher rural productivity, andattention to public utilities and public transport.

7. This section of the Report seeks to evaluate -the out-look for indus-try in the light of these objectives by assessing its current position, andfuture prospects, reviewing the principal policies and institutions ''affectingindustrial development, and discussing industrial priorities-'in'this frame-work. '

ILX. *1nz OLu)LL'c Ur &WUrULucL% % L1UU LL1.L

8. Reliable estimates of the national income accounts of Indonesiaare not yet ready, but the figures available indicate that the contributionof manufacturing industry to gross domestic product was of the -order of10 percent in 1970 at current market prices. 11 The manufacturing'sector was

1/ See Volume I, Statistical Appendix, Table 2.1.

ANNEX 4Page 3

also estimated to have contributed 11 per cent of the increase in grossdomestic product during 1968-1970, suggesting that manufacturing activitygrew somewhat faster than the rest of the economy, and this appears to beborne out by the signs of increasing activity observable in the sector.hiowever, in comparison with other countries, the share of industrial to totalcommodity production is still small. 1/ Indonesia is still at the very thres-hold of industrial development.

9. A survey of large and medium scale manufacturing industry conductedby the Central Bureau of Statistics - the first since 1963 - indicated thatthere were 17,900 establishments in Indonesia in 1970; 1,975 or 11 per centof these were large and the rest were medium. 2/ On the average a large es-tablishment employed more than 300 persons whereas a medium establishmentemployed only 16 persons (Table 1); and all the large scale and medium manu-facturing establislhments employed 850,000 persons. According to the 1971census of population, however, 2.9 million persons, or 7.5 per cent of the

total work force, were engaged in some sort of manufacturing activity,including manufacturing for their own consumption. 3/ Thus, some two

million persons who reported themselves as being engaged in "manufacturing"were working in small establishments or for their own consumption. Againobservation supports the data, for it is apparent that-there are severalhundred thousand small establishments of the;cottage and backyard typescattered throughout the countryside. These are engaged in very;smallscale manufacturing activities. or. more,-freauentlv in repair and servicefacilities, and a large proportion of suchsac'tivitie8ia,ispart time. Theirpresent contribuition to family incomes is sinidficant;` but'mdnv face ableak future with the rise of modern industry, for i:t'is " inlikely that arsignif4rant niumher nf a,ieh Anternrinee wnuld be able to adant to the Dressuresof subcontracting, and other support functions for large firms withinthe present institutio.na and nnpllu framework. Thus in mAny industries

the small workshops are being replaced by-large ones, and some traditionalac-tivltles ae being repla-ed by moderr. ±uisvtlnl te'bhnmiPqes While thelack of comparability of the 1963 census and 1970 survey of manufacturingmake estimate of chagnnge diffirUlt, there Anppibara tn be<a strong indication

1/ IBRD, World Bank Operations, Sectoral Programs and Policies, "Industry",A.^,nex1, 19I72.

2/ Large establishments are defined as having 100 or more gorkers without

power equipment or 50 or more workers with power equipment; mediumestablishments are defined as having 10 to 99 workers without power

equipment or 5 to 49 workers with power equipment.. The survey figuresare based on a census of the large establishments and a 10 per centrandom sample of the medium ones. As a reliable frame was not availablefor the medium establishment, too much reliance cannot be placed on this

part of the survey.

3/ Note that this is a preliminary figure, andU can oaly be regarded asindicative of an order of magnitude. See Volume I, Statistical Appendix,Table i.8.

ANNEX 4

Page 4

thlat the number tof enterprises inbo th the larI e z miinum.i ctenorlv4 hasfallen substantially, 1/ even though it is estimated that the contributionof large anA mpA4i,m t ot,o vallue adeAdA ir. nanuf- tring 4rising. 2/

10. The Indonesian manufacturing sector continues to be dominated bya few industri e. T.n termL of employm,.ent 'oodU JL and t ipredominate, rubber processing remains the only other major industry, whileindustries such as metal wourking con,tinue to make a negliglble contribution(Table 2). 3/

11. Not surprisingly, in view of population concentration, large anumeuium establishments are concentrated in tne Java administrative region(including Madura), which has more than 75 per cent of the large and mediumscale establishments, and more than 85 per cent ot manufacturing employment.The regional concentration in large establishments is even heavier than inmedium establishments. Of the 26 provinces of Indonesia, Last Java,Central Java, West Java, and D. C. Djakarta are the most important fourprovinces both in the number of manufacturing establishments and in employment.South Sulawasi has only 1-1/2 per cent of the large and medium manufacturingwork force. The average establishment size in terms of persons employedshows a similar distribution. For instance, South Sulawasi' iaverage employ-ment per establishment is 11 persons, whereas in West Java establishmentsemploy on average 75 persons (Tables 3 and 4). External economies areclearly important in industrial location, but within Java industry isdistributed relatively well in proportion to population. Djakarta with itsadvantage of proximity to the central government is a significant exception.

12. Industrial output, value added, investment and similar data arenot yet available. The Foreign and Domestic Investment Boards have'compiled some investment statistics, although these are neither comprehen-sive nor systematic. The approved foreign investment'in manufacturingindustry has been increasing continuously since 1967 and now totals $600million, out of a total foreign investment of $2,300 million.4/1 Disburse-ments have lagged behind approvals, though manufacturing with smallerprojects than the extractive industries has a higher disbursement ratiothan other foreign investment. The Domestic'Investment'Board between

1/ IBRD, The Indonesian Economy, op. cit. Table 1.12. and Table 1 of thisChapter.

2/ National Income Accounts worksheets, Central 'ureau of Statistics,Djakarta.

3/ Value added estimated by industry group show a similar concentrationbut they must be viewed with caution because of their tentativenature; a reliable breakdown by industry is not available.

4/ Exluding oil.

ANNF.Y L

Page 5

**,.~~iU~L I .UU A :. £~UL I J%A@JJLJ~ J I 4 L4 A.LDA. J.LL ULL I Nove,m.ber 19168 ar.d February 1972 approveA 9 plcto-i,ovn proposed investment of about Rp. 220 billion (equivalent to $530 million)in manufacturing against a total proposed investment of about Rpbillion (equivalent to $690 million). These investments in manufacturingare expected to require $400 million in foreign exchange and to create110,000 jobs at full capacity production.

13. A Domestic Investment Board survey of its approved projects 1/suggests that about 80 per cent were in production, thougn tne implementedprojects had reached only half of the approved investment and employmentlevels. About half of the investment was made by indigenous and abouthalf by non-indigenous Indonesian entrepreneurs. Almost half of thedomestic investment took place in relatively large projects involving morethan Rp 100 million each. The projects employing less than 50 persons onlycontributed an insignificant proportion of the total investment and employ-ment. In other words, relatively few small establishments took advantageof the incentives given by the Domestic Investment Board. Neither thetype of ownership nor the size of investment in a project appeared to havea significant influence on its capital-labor intensity. In general adirect investment of about one million rupiahs ($2,500) was needed in theseprojects to create one job in manufacturing industry.

III. THE OUTLOOK FOR INDUSTRIAL DEVELOPMENT IN THE 1970S

14. It is true that Indonesia has inherited a low level of industrialdevelopment on whlich the very considerable government efforts of recent yearshave not yet been able to have a very marked effect. There has undoubtedlybeen progress, but there are also signs of danger in the displacement oftraditional industries by modern enterprises, whose rate of growth is notyet fast enough to make up for their relatively high capital intensity. Onthe positive side, however, an industrial momentum has been created, andIndonesia has its advantages of a rich natural endowment in mineral andagricultural products for exports directly and as processed products, itssize as a nation which allows much more room for economic manoeuver thansmall countries enjoy (particularly in terms of a domestic market ofeconomic size), its hardworking and innovative peoples, and its social ob1ec-tives which recognize that targets of growtli must be accompanied by improvedsocial and regional income distribution obiectives if they are to be Dersua-sive.

15. A basis for confidence that the social objectives being outlinedby the government can be achieved lies moreover in the considerable notentialof small and medium scale industries for economic, competitive production tosatisfy the needs of the mann of the npeole hbth forn i4n,ito inton Irnvedn~,nA

agricultural and service activities, and rising standards of consumption.An emphasis on the nntentiAl of nmnai1 an rmediu.m induiat-r4ia cnnot, of rse,

1/ As the rate of response in this Survey was very low, and the datacompilation poor, the observations can only be tentative.

ANNEX 4Pa'.- f,

ignore the role of large scale industry and foreign investment. In some areas,for example 'n fertllizer productlon, in heavy transport a8d communicationsequipment, and in some resource-based export industries such enterpriseshave a very important role to play. Overall, however, an appropriatelybalanced mix of policies would seek to establish a balance in the industrialstructure wnich would enable the indigenous small and medium size firms cocompete and grow with the economy.

16. Policies designed to exploit the small and medium industrypotential would emphasize consumer goods, light producer goods for agricultureand service industries, and the development of further proc'essitg in resourcebased industries. Such a "light industry"' approach would be relativelyeconomical in terms of capital resources. Capital invested wouid have arelatively quick pay back period so that new resources would be generatedwithout undue delay. The demand basis for-the introduction of intermediateand capital goods industries would be laid so that when they were introducedthey could operate on a fully economic scale. There would be relativelygreater opportunities for labor intensive technology, and hence foremployment, than in a "heavy industry" oriented outlook. Initially laborcost would mean a comparative advantage for the light industries, thoughwith time skills would be expected to rise and so would productivity andremuneration.

17. Industrial policies would be outward rather than inward looking.This would not mean that where appropriate protective measures would notbe used to assist infant industries or even, for a time, to fence off thelocal market for local producers to enable them to produce-,at economiclevels. There would, however, be an emphasis on making such protectivemeasures temporary, and putting manufacturers on notice thatt they would beexpected, as the problems of infancy were overcome, to produce at pricesgenerally competitive with those in international marketsi-to e'nsure thatthe mass of the people could enjoy a variety of low pricedq.consumer goodsof international quality, and that producers, particularly-'in agriculture,would not be penalized by high priced or shoddy inputs.'I Sound monetarypolicy would continue to stress internal and external .stabi'litv1Iand theprice mechanism would be allowed to operate unimpeded in m6ist-instancesto enable industries and products in which Indonesia can evolve a comparativeadvantage to develop. Particular attention would -be paidto; exports ofmanufactured Droducts to ensure that the nroaress of indusitrializati6nwould not be impeded by balance of payments problems.

18. It is not likely that the policy changes required to implementsuch an industrial outlook nan be achievedonvernight. Nor is it likelythat an impetus in the directions outlined will immediately be able tomAke industry a "loading" sector next to ol<; solvne Indonela'sl-balanceof payments, unemployment, underemployment problems , and-impdrove' the- distri-bution of inroma b among al groups a A 4 e inal' terms On thecontrary any acceleration of industry is likely to lead to a further declineof small enterprises. It is hoped, , that thez s outlin.ed

ANNEX 4Page 7'

here (more than policies now current, or the "basic industry" strategieswhi.rh have been nrnnnoped in the pna-r) will IImOn thAn nffset such' a declinein employment by the vigorous growth of other enterprises.

IT. A RPTVIEW OF TfE PPTNrIPA.l PAT TrITQ AVrETING Y-l M JFAATIP Mr- TInDTTRIES

The Import Duty Structure, Import Duty Exem2tions, and Imj,ort Restrictions

19. Indonesian industrial policy has its origins in highly protectionistpolicies of the 1950s andJ early 19v60. The tarff- iteldf nowever has beenmore an instrument of fiscal than of protective policy. Unfortunately, asthe relative level of industrial activiy in- the economy induicates, protectiondid not lead either to the stimulation of industrial activity as such, or tothe stimulus or those industries, like.metal worKing, wnicn enjoy particularlyhigh tariff levels (Table 7). Part of the explanation of the failure of-'highimport duties to lead to a high level of industrial activity, lies in theirvery height, for this, together with the very complicated tariff nomenclature,has led to and even encouraged smuggling to the point where the protectiveeffects of import duties have been practically negated. Two other factorsare, however, also relevant. Firstly, tariffs cannot, on their own, beeffectual in stimulating industry; they require the 'support of"the otherinstruments of industrial policy outlined-belo*wC Secondly, the experiencein the 1950s and early 1960s, in Indonesia,itielf as well a8 in otherdeveloping countries, indicates that a highly protectionist, inward orientedindustrialization policy is costly in terms.'of the mliallocation of scarceresources, leads to an accentuation of balance 6f paymiets difficulties andthe maldistribution of income, and tends, after a relatively short periodof some 6 to 8 years to lose momentum because high domest-iciprices limitthe domestic market and make exports difficult; if not-imposaible, whilebalance of payments difficulties limit the supply of raw''materials andcomponents. It is, moreover, evident that moving from'a highly protectionist,inward oriented industrial path is much more difficult than adopting amore moderately protective approach to iiidustrialization;from the start.

20. Considerations such as these.no douibt have led *to'the sigrifi-cant reductions of customs duty levels in Indonesia'in the past year. Itis not yet possible to determine their.effect 1/. In aiy-case, it is theeffective protection, represented by the margin of-protection affordedto the value added in production in-Indonesia, rather'tkainflominal protection

1/ Initially, import duty reductions were apparently ,accompanied by a fallin the expected rate of increase of total imnort.duty.collectionM.. Asimport duty exemptions and import bans,.-discussed below, were howeverincreasing simultaneously, it seems' likely that the latter- rather thanimport duty cuts, may have been responsible for the decline. A changein the comnosition of imnorts was nrnhahlv alan A fActor. RStudiles nowin progress at the Central Bank and in the Ministry of Finance, areexpected tn elarifv the Artual causs of Adeline in the expected revenueincrease.

AINNWLY 4

Page 8

-which reprresents thee price d-4-fferentiall betswieen t-hte Idn'ipro AuceA

price and the imported price plus import duty, which determines the manufac-Lurers' reactio.I. A% LIaJJL Lac-LL rA i LLCLL.LeVti ve LULJUU AZc LIIi UtLLerULnLaAl

between duties on finished products and those on raw material and componentirLputs, auu hZere thilere Wsubstnti-v ev i'de w e u gges- hUat $ne xeIctece].veprotection on products now being manufactured by large enterprises isincreasing becausse such enterprises benefie from duty exemptions andreductions on imported capital goods under the investment- ftcentive laws,and because tney frequently also succeed in obtaining import duty exemptionson raw material and component inputs (Table 8). 1/ -Small enterprisesgenerally make their purchases of capital equipment and otner importedinputs indirectly, through general importers, and so do notVas a.rulebenefit from such exemptions; they therefore do not.benefit' from as higha margin of effective protection as large entrepreneurs.- By-reducing oreliminating duties on inputs, iocal production.of intermediate goods.is,moreover, discouraged.

21. In some cases manufacturers enjoy the protection -of lkport bans.These are in certain cases more easily policed than- high import;.duties.When this is the case local manufacturers are doubly protected-:,- firstlyagainst imports by the effectiveness of the measure; secondly because ofthe nature of the goods which can be banned effectively, .2/.' the localmanufacturers are usually monopolists or oligopolists, (frequent'lywith foreign investment interest) so that there is.-no effective-competitionin terms of price, quality or delivery times, and.government staff is inpractice not available to police the domesticalLy produced goods. With theexception of a few traditional items such as batiks and mosquito coilsfor which bans are in any case hard to police (Table 9) bans also tendto favor large manufacturers, and in some cases.technologically-sophisticatedproducts which are, however, not necessarily of better value to:Indonesiathan traditional products, thus again skewing the incentive"structure towardsrelatively large enterprises and capital intensive.forms of-production.

22. An important side effect of the present system is a strong biasagainst manufactured exports which are burdened by import duties on compo-nents and the high cost of locally produced -inputs where these eniovprotection. Thus although most manufactured texports are exempt fromthe 10 per cent export sales tax (Table 10)'.'evntin resourc,e based andlabor intensive manufacturers where Indonesiah-would appear to.have a-strong potential advantage, there has been"-little'-proeresd to--date.

1/ A systematic study of (a) the range of such exemptions and (b) theireffectiveness in practice is yet to b'e-tindertaken. The evidence ofexemption lists, and interviews withm-nuufacturers, is stronglysupportive of the conclusions expressed-fhere.

2/ Import bans are generally effective only if the goods concerned arerelatively bulky, easily identifiable' and if the importing interestsfor competing goods are relatively-weak.

ANN-RX 4

Page 9

23.* There is thus doubt that the structure of protetion thepresent government has inherited is far from rational. Effective protection'Ls olften far removed fLrom, the nom4r; l protect.ion inie yi..^tdtlevels; it varies greatly from product to product so that industries whichare liKely to Wave a com arative dUvaUL4ta dar nUo eId UULnr dU. A&1= ua>Dstep towards a more orderly approach has been taken in the work, alreadywell under way, toward the adoptLon of the BTN-SITC nomenclature for Lmportsand exports which is expected to come into operation in January 1973. Thiswili provide the basis for a rational import duty sysrem, and provides anopportunity for import duty exemptions, import bans and any export incentivemeasures deemed necessary, to be brought together systematically to providea sound basis for an acceleration in industrial growth.

24. The following guidelines for a reform of the tariff system maybe considered:

(i) a uniform tariff of 30 per cent on all finished consumergoods, defined as those for which less than one-third ofthe wholesale value at international prices is added inIndonesia. Such a duty would provide a significant marginof protection against dumping and still be moderate enoughto discourage smuggling;

(ii) a uniform tariff of 15 per cent on most other goods, includingcapital goods, which provides modest encouragement tothe production of intermediate and capital goods in Indonesia,and also serves the purpose of stimulating labor-using produc-tion techniques.

25. A single import duty at the level of-perhaps 20 per cent wouldultimately be more desirable since it would provide a more modest anduniform incentive to all types of production and at the same time yieldrevenues. The sudden reduction of existing higher duties to this level,and an increase of duty free or lower duty items to this level might.however, involve too drastic an adjustment initially.

26. Measures would need to be taken to phase out specific tariffsgranted to industries which could not operate immediately without someshelter. Import duty exemptions would also be phased out, maybe over aneriod of 3 - 5 vears. In the future sunnlementarv "infant industry"tariffs would only be granted in special cases; industries which showedclear indiratinn of heina able to nverrnme the nrnblems of infancy withina reasonable time thus would be given the opportunity to become established.Manufarturers would clearly be nut on notice- that suth nrnteetion wastemporary by making such duties of predetermined, limited duration and ona downwardlu sli(AnR 8c8n1e.

ANNEX 4Page 10

27. The use of import prohibitions remains an open question, par-ticularly in the immediate future, because in certain cases they are theonly form of protection which is operative. This instrument of policy istherefore regarded as being appropriate to Indonesia's present situation;it would be advisable to make bans subject to regular and open review, and toensure that staff is available so that the domestically produced goods areindeed reasonably competitively priced, of good quality and that deliverytimes are met. If these conditions are not met, the import bans would belifted.

28. As it must be assumed that any reformed import duty systemlikely to emerge in the near future is still likely to be protective to asignificant degree, offsetting measures to prevent a bias against exportswould be required. A bonded warehouse - free trade port system may be themost practicable in the short run. However, such a program is likely tobe of assistance only to specifically export oriented, generally foreigncompanies, and would not meet the needs of resource based exporters,particularly small and medium scale ones, and those manufac'turers who mightstart exporting in addition to producing for the local market. Suchexporters should not be ignored in favor of enclave, footloose, exportoriented multinational operations. In view of the competition for thelatter tvne of firm by developing countries in the Southeast Asia regionand elsewhere, it should be noted that the contribution they are likely tomake to emplovment is not likely to be very significant in absolute numbers;they generally contribute little value added (equivalent largely to the lowwagea whieh atrraet them); and, theFir total e'ntrrihtirfon to the balance of

payments may also not be very significant. This is not to say that theyshould not be encouraged, but a balanced approach free nf evcessiveincentives to such exporters, and giving appropriate incentives to thedevelopment of the comparativ.e anvant oe oo f lncl indr4eisa fotr internationaltrade as well, would be much wider. Such an approach would require anefficient Qdrsback or temporary4 sA-.8sion s,hste.;m incentives, sch o c-redt

discounting at the point of sale system, which are attractive to localprodluce.-s; ar.d add-itional incentiw such do ub' "e ta -deduction. for op--ortF

promotion. It should be noted on the other hand that direct subsidies aredIfficult to a..inister if 4Whey. are or ,al.- AAd , arA havFe ave-2 Angeira

of leading to the export of foreign exchange if they are on value of output.In sensiL:tive pro(ductssucha as textilea, direct Ch subsies are like!" tolead to import bans in increasingly saturated developed country markets.

Taxation and Investment Incentives

Indirect Taxes

29. Indirect domestic taxes are linked not only with import and exportduties in their revenue implications, but also in their relationship to,incentives to manufacturers. The present government is again hampered by theinheritance of a complex excise and sales tax structure which is uneven in its

Ai'NEX 4Page I I

incidence and heavily cumulative, thus frequently offsetting the protectiveadvantages intended by the import structure. The recent reduction of the50 per cent sales tax is highly commendable; the remaining 5, 10 and 20 percent rates still however have cascading effects with a concomitant pres-sure for reductions. An ad hoc approach to easing the cumulative incidence hasbeen inevitable; it has tenaed to help mostly the large, frequently foreignfirms, which have been most able to document the disabilities imposed byinternal taxes, to encourage vertical integration of protection throughwhich such taxes may be avoided. The incidence of sales taxes is unevenand uncertain for small supplier and user firms. Such vertical integrationmay be seen in state owned metal enterprises as well as in the largerprivate enterprises. In some cases the actual incidence of sales taxeson domestic products is higher than duties on imports. The use of domesticinputs is thus sometimes discouraged, and this too has frequently harmedthe small potential sub-contractor to large enterprises.

30. An equally important relationship between import and productiontaxes lies in luxury type excise or sales taxes. The level of luxurytaxes can have an important bearing on the structure of consumption bymaking luxury goods such as motor cars, electric stoves and airconditionersvery expensive in relation to buses and bicycles, rice cookers and fans, andhence influence the structure of production away from middle and upper classluxury goods and toward mass production goods. If such restraints onconsumption are imposed only on imported goods through import duties, asthey have been traditionally in Indonesia, they tend to encourage large firmswith strong foreign interests to enter such luxury production at high cost,and with high profits. If the import duties on such products are. however.kept moderate, and luxury taxes are imposed on the goods in the form of anexcise tax applicable whether a product ia imnorted or locally produced. anexcessive stimulus is removed, and the manufacturers' interests are turnedtowards more socially useful nrodurtas

31. Thus, while the rAfnrm of the indirert productinn taxes is

perhaps of lesser urgency than some other policy reforms, the cascadingPfferts of thp present Rvstpm are likelv to inrranne in In cde.np andunpredictability with an increase in manufacturing activity, and the present5vstAm of ad hoc adjuatments Is therefnra 1ikelv ton hernA -incrpsaingly

difficult to operate. Preparatory studies for a system either of a lowtnifnorm san1Pes t-ax nOr a limitped eruad eu vauiei Addod jit nsVatem TnwitIh pnftnl

incidence on local and imported products may therefore be foreseen asdenlrnMel wt1-h4in the durnatlnn nf ther FIve Year plan. More important, toensure that industrialization takes the direction desired, would be thelmirn^ait-inn n-f liswwurv awri'.tsnir a nft annw.nl di4,ln' i t,i1~ ,i,eim.psiton.of uxuy ecis Fabesof eqlincidenc." on --loc-anly producedgoods and imports of goods such as motor cars, cycles, motor scooters andother conswmer d,urahles. On vrehiclesa su..h l..Yt.r y, trnuld perhaps be mostconveniently collected on licenses, and in this particular instance they wouldnot only have a desirable effect on conwumption patterns in ter.ms of incomedistribution, but they would also serve to establish more rational patternsof tansaport.

AMUEX 4

Page 12

Direct Taxes and Investment Incentives

32. One of the areas in which the Government nas already achieved asubstantial measure of reform is in corporation income taxes, which wererationalized with a maximum 45 per cent tax rate, in 1970. Collectionshave been improving steadily since. The cumulation of stamp and similartaxes from colonial times, however, remains. It can be a burden on smalland medium entrepreneurs, and remains of nuisance value, sometimes expensiveand sometimes not, in many transactions. As the collection of such taxesis neither automatic nor cheap, an analysis of their costs and benefitswould be timely. The 20 per cent tax on revalued assets remains anotherproblem area. 1/ It has discouraged local enterprises from revaluationand unduly low book values of assets and liabilities make participationin joint enterprises with foreign investors difficult and hinder the potentialcapability of making an enterprise a joint stock, widely held company.

33. The growth of private enterprise must inevitably lead to theaccumulation of private wealth. The incidence and collection of corporationand personal income taxes will have a strong bearing on how such wealth willbe used. A number of countries which rely on private enterprise in productionhave achieved a high degree of social justice through redistributive taxationsystems. Incentives for re-investment, for joint stock companies and otherobjectives of industrial policy can be built into the taxation system.

34. With the introduction of a moderate corporation income tax, thevalue of income tax holidays has come into question. While exemptions ofstamp tax duties, and the attendant certifications, are stili of 'considerablebenefit, particularly to domestic investors, whether the benefits accruingfrom income tax exemptions exceed the costs, particularly for foreign invest-ments, is becoming a serious issue. Studies in many countries have indicatedthat income tax exemptions do not usually lead to investments, particularlyby foreign investors, which would otherwise not have taken place. 2/ Firmsmaking substantial investments rarely make profits during the tax holidayneriod. and the carrv fnorwrd of l9RaQs provision tends to stretch theincome tax holiday indefinitely. Yor those which do not make substantialinvestments. tax holidays are seldom'worthwhile. The revenue foregone intax holidays has an opportunity cost in terms of expenditures on infrastructureimprovements. The tax holiday in the case of foreitn iivestment frequentlyresults in a benefit not to the investing firm, but to the firm's homecountry. Most double tax aareements' (with the notable exception of thatwith Japan) leave tax "sparing", that is passing on the benefits of atax holiday; to the discretion of the investing firm's government! and thelatter does not in genetal make the allowance. The tax holiday offered byTndnnesin does nst then result in'a transfer of funds from the Indonesian

1/ P. N. becoming P. T. obtain some benefit in revaluation of assets.

2/ United Nations, Foreign Investment in Developing Countries, NewYork, 1968.

ANNEX 4'Lag 1 3

Government to the investing company, but rather to the revenues of its homecountrv Stu-dJie under wAv in rhe Gentral Rank ndA the ?4nimtrv nf PfnnAnn

(which has only recently made the returns on taxes mandatory whether taxesarh 14nlal or not-I eon ni,wo, m-s4kng Jit ..os.aa4.l*l to entiFm,4 the extean.U.. .. -- - ... , . J an a _ *- * Wa-^ *' - - w* a - w- b Sf. -

of revenue foregone through income (and other) tax holidays, the amount of.raevn.ue i tanraferre toua, dth*et,ru tax holiday me-hani.4m to the reaven.ues of

the lending countries. While a unilateral elimination of such privilegesULA. &ht Ub t.hought4 to60 mske. Lfor C-L-L favorCsaLbeIs cli..mte foJr f0r .JL i..LV estmen t, it

should be noted that several neighboring countries are considering the sameproblem, partllculUarly iL theI UUXILrLo. -L LL .e UeaLLVC aspctLs Uof cV.UWJ.LL6

against each other by such incentives when an agreement to phase out incentivescou I -.... 11 A. &__... £ - _-.. ~ aaa...1 Aint'kMkcoulL serve as we'L.L. An ini;L,aLL.A.Ve LfL 8UCal t plhaD&JLu oUt thrLough75 Ad E:,ZlX

might now be rewarding to all the countries concerned, particularly in prevent-ing reven"ue trana'ers to de-veiloped' countriles. TLax- exemptions wvould be l'm;edCto corporation tax re-investment allowances. In the meantime the IndonesianGovernment may consider the limitation of the carry forward of losses for taxholiday purposes to, say, 2 years.

Licensing

35. Protection against excessive internal competition has been asstrong a tendency in Indonesian thinking as protection against imports, andalthough Indonesia does not have a formal licensing system, in practicelicensing plays a critical role in the structure of industry. Policymakersmoreover face what is perhaps the most difficult set of problems (not uniquelyin Indonesia) in this area, for they are expected to adjudicate betweenthe trade offs of technical economies of scale, which, broadly interpreted,include not only production but also marketing, and a degree of economiccompetition which ensures competitiveness in prices, quality and deliverytimes. Industries can be broadly grouped into three types.

(i) Industries in which economies of scale are not significant, andin which there is no foreign investment involvement. For suchindustries licensing and all other restrictions on entry, exceptthose genuinely related to zoning issues, may well be abandonedboth on a national and regional scale in order to end existingmonopoly and oligopoly arrangements, improve the competitivenessof industry and give small scale entrepreneurs a better oppor-tunity for easy entry. A cut off point of say Rp 400 millionbelow which licenses would not be necessary could be established.

(ii) Industries in which economies of scale are significant, sothat there are dangers of fragmentation of production unlessentry is limited to a small number of firms, or, indeed, toone firm. The selection of an appropriate number of entrantsis extremely difficult, particularly when foreign investorscombine with strong local interests to press the government to

ANNEX 4Page 14

allow excessive entry into a highly protected, high costoligopoly grouping now familiar through the experience ofmany developing countries. Such a fragmentation of productionin the final, assembly stage. leads to limitations to economicbackward integration, to high prices, a consequent curtailmentof domestic markets. and makea exnorts imoossible. For suchindustries, even assuming that import duties can be pitched ata level which will leavp a comneritive thrpat if nnt immediatelyat least in the long run, control over entry, with concomitantcontreln nver rondftinonn of entry, prires and qiAlity nf nitputtis likely to be essential until market forces either throughimorts or internal cometition take ov,er « total marketsize increases. It is true that the costs of monopoly may bediffic at.A to- - 4elb 4. t., but1 U....ey -&aJ almost cert O4.1y be- loer

than the 0ost8 of fragmented production and oligopolisticc-.pe*t4tio1n such, as current ~LciW.16.-oorcrazel

envisages. In such cases, the prevention of market fragmenta-tlior. t1hrough. lieUgA e ofC co.-drbei otre u

as in the case of quantitative import restrictions, time limitsan-.d thle enforcement of priLce aanud q-uality s aiiuarus are o' thle

utmost importance. Indonesia's motor vehicle assembly industrys8 typical of this situation.

(ili) InUonesia obviously wishes to control the enery of loreigninvestment, and for this some form of licensing is a necessarytool. Tne Hinistry of industry exercises such control atpresent (Table 11) but control by broad industry classifica-tions rather than by products does not appear to have led todecisions in keeping with those which would result from a cost-benefit, project approach to such investment.

36. Restrictions on entry tend to be of particular concern to smallfirms and those outside the principal cities (when they are discovered)because for small enterprises the approval of the necessary paper work maybe an insuperable obstacle. Some of these difficulties are eased for;priority" industries which are eligible for:investment Incentives, but"priority" itself is ill-defined and thus requires a great:many ad hocdecisions by the appropriate authorities. The costs of the various approvalsnecessary for new investment or expansion of medium and larger establishmentstend not to vary directly with the scale of:a proposal, but rather to be muchthe same regardless of the investment involved. Such difficulties, togetherwith those related to the structure of imports and taxation, no doubt con-tribute to the relative importance of larger units in the contribution tovalue added, and in the bringing of new investment to fruition.

ANEX 4Page 15

Credit

37. A separate annex of this Report deals with the overall aspectsof credit problems and policies, and only those questions dealing withmanufacturing are discussed here. The shortage of credit at all levels -short term, intermediate and long term - has clearly been one of theimportant bottlenecks in the development of manufacturing. It arises fromthe lack, of an effective banking system and not so much the lack of savings,and in broader terms; of a money market Which could gather savings throughinstitutions such as insurance and mortgage companies and turn them into longterm Inane. The meditm credit nroaram wag intrnAdiUed in thin critiralsituation as a stop-gap system, and it must be judged in this light. Thusit Is not surprising that it now appears that many Of the meduim creditprogram loans granted lacked appropriate feasibility studies so that manyof the bOrrowing firms are likely to be unable to- repay the princi-al of the

loan though they may be able to maintain interest payments, and that theat^pae ral!-aver nCtro of the systemn ia naot

4lkl., to evmen..t.eas

envisaged. 1/ The program has, it appears, also benefited the larger andpe:has a fmedium scale enterprises, lev Ug the 1 bu'k ofm Aum az, sr.iallU L~W LU .&.'AVI W"LAL.4&ki.M2= , .A.1--V .LL4L6 6LLA MUUJAf Jt . £~%J.UI GL4u AU~.A.

indigenous entrepreneurs to the exigencies of the street market where they*> *tJo pay LraCD uUUuble and eVer, LLtUrel t etAUbe L he meUu tm cUA-L

program if they were able to borrow at all. Perhaps the most serious aspectof the problemr is that the bankS concerneud failed to develop institutionallythrough the program beyond being passing-out windows for government funds.The absence of a vigorous banking system continues to be a brake on indusLrlaldevelopment, bearing down particularly hard on the smaller entrepreneurs whousually find it difficult to borrow witnout speciai government programs,which are at present entirely absent in Indonesia.

38. It may be noted that in manufacturing there is no evidence thatlong term official interest rates are high as a proportion of total costs,in relation to other countries. It also appears that the volume of long termcredit is not adequate for medium and large scale firms for which it caters.As a rationing system is therefore necessary, higher long term officialinterest rates would favor the more efficient against the less efficientfirms, and would at the same time be likely to encourage higher savingsrates. As far as small firms are concerned it is the access to capitalthat is important. At present if medium and small firms are able to obtaincapital at all, they pay higher rates than the official ones. A more rationalshort term interest rate structure, as well as a better relationship betweenshort and long term rates, would encourage an improved financing packagefor industry as well as being conducive to the evolution of sound developmentbanking. 2/ Finally, providing the disabilities under which medium and small

S/grom lag 4 ir.-b"mwfl,r%#- howve i8 o the ticme taker. to g:a-. 1-ars

firms prefer to pay penalties rather than repay loans and go throughanother lengthy period of wa4ting for a new loan.

2/ See Anex 1 for 8 deta`ile d,scusslon ol credit prollems.

.__D IALnLdF.A -#

Page 16

scale enterprises operate can be eliminated or at least significantly eased,it seems likely that special credit programs aimed at them would go a longway toward assisting the more efficient and enterprising among such firms tomove ahesd. Such programs would have to be organized on a regional basisto reach out to the countryside and would have to cover the higher risks andhigher administrative costs of small loans to small scale enterprises.

Labor Le.islation

39. While current labor laws only affect large, mainly foreign firmsand state enterprises (and even those can frequently circumvent them bystrategies such as "temporary" hirings), they affect industrial developmentby creating a dual labor system, and by raising the cost, particularlyindirect cost, of labor to large scale enterprises above the- subsistence or"shadow" wages which are paid to labor in many medium and small enterprises.Such relatively high costs have two undesirable effects. They tend toincrease the already strong trend to capital rather than labor intnsivenessin the new, large enterprises, and they could be a critical obstacle to thedevelopment of export oriented industries whether these are based 6n rawmaterial resources, like plywood, or whether thev are intended to restlargely on Indonesia's low wage advantage.

40. The present legislation favors a minority of the manufacturingworkforce. and ulves little or no supnort to tha bulk of industrial workers:and it could be harmful to labor as a whole by sacrificing considerableitnOrrana^ in tftAtl amnlvmant. Wh1 le Px mnt-innn fnr aYmnrt or4inted 4ndtmtriesmay be the most practicable way of dealing with the problems in the short run,more far roan-hina refnrm mWaurT shnioiud hp envi. nagti ton hanf4t the maini-itv

of industrial workers. Some reform proposals have already been made, 1/ andfurthar mtudies AA A bhAin fnr Atoinn A poceedng.

Pulic 4 vaesnnh4i of ManrnE4,actw4-io E,tlw.ii

41. Polic4iel toward gov.ernment o"ne enterprisesn~ sexarnj4ned in greaterdetail elsewhere in this Report. The following observations are confined toareas where sch .policies e groat7,w 4vf1 c 4-ha A,l n.wmwt of mufngtgv4 na

industries.

42. There is no doubt that the change in the form of management -actu"l and propos4ed --- f.w 6 It D.N.".1 to- 0e 'onT." ofr- Pe.. o .--b^~ ~&A~S - J.b&&5LU I.A5 Li #L. WL %, LV A. W. JL W&OW&WL W AL/ LAMO

had an important role in clarifying the government's intention of allowingJ6v: %.r r's to fLobrah ou ad UI-is has bleen reir.forced fy U&U'.e.

steps being taken to make goverament enterprises more efficient andpublicly acco-unta.ble, OUU UV o J.L suUV th o .he 5aWU txes as other

businesses.

1/ IBRD, The Indonesian Economv, op. cit., pp. 20-21.

ANNEX 4Page 17

43. Nevertheless, some state enterprises still appear to be in apriv.leged posiliorn. Many are still marginal; and still requ"dre protectionfrom competition. Many are adept at obtaining the protection they requireincluding varlous forms of subsidy. Tne overall effect is that in thoseindustries in which government enterprises form a significant share of totaloutput, private entrepreneurs, particularly small ones, covertly or overtlyare discouraged from entry, with a resulting lack of competitive pressuretoward efficiency and low prices. A continuation of tne present governmenteffort to put state owned enterprises on a "PT" basis, to eliminate subsidies,(particularly those originating in foreign aid) and generally to treat themon the same basis as private enterprise, can be expected to reduce theproblems they at present create: it cannot be expected to solve them.

Infrastructure, Industrial Estates and Location

44. The lack of a well developed infrastructure - power, transportand communications, water supply and sewerage - continues to handicap allmanufacturers in comparison not only with developed countries but also withmany developing countries. It especially burdens the smaller producer,particularly outside the principal cities. Large producers have alwaysfound it possible to finance their own power and water supply if necessary.Improvements in power supply are reaching urban areas first, and are likelyto continue to do so for some time to come. In the past the lack of transportand other communications protected small scale activities in the countrysideto some extent by imposing high transport costs on city made goods. Astransport has been Improving, this small measure of protection has been lost,while opportunities for expanding a market correspondlnelv have been blockedby the great difficulty small producers experience in obtaining governmentincentives, particularly credit.

45. The oroblems of the service sectors have received frecuent attentionin past IBRD reports, and other sections of this Report emphasize the impor-tance of various asnects of public investment in rural arean The buildineup of an adequate infrastructure requires time. The construction of industrialestates has therefore been stressed. nartlv to offset the difficulties ofacquiring land for industrial purposes, but principally to take advantage ofacnnomaes in the nrovialon of infrastructure facilitie s e Snme of the nroblemsof industrial estates may, however, be noted. The pri-ces chlarged for landAnti f.4 14 tia ntioht tin ha en& IOtiael Iii tarma af tha 1I.o run, an thnt thpv

CI_ - _- , -_ _ J-_

are reasonable. Where private investors, local or foreign, undertake thedevelopmnt of such esates th- IndoneA i avn.udwrities itflht to receive anequitable share in the benefits of the "rent" created by the development.Estatea should not become enclaves for foreign enterprise, And they shokuld -lobe limited to large firms. To enable medium and small firms to act assub-cor.:ac,to., provisi. ' ou".t to bke made for th r. t. o..e -* of m,al Iplots, flatted factories, and possibly, on the outskirts of estates, dwelling-

o:kahopz.SuCh facill-i ties may 1ir. some cases b0e approJLitely s sidizedparticularly in the initial stages of an estate's development. While atpreae nt IC.hLAe opportuni LtLi esAlra noLrUL e MuEbr ofL 8UC.. alstat s e m tLo ex iLs; I , ea chAdevelopment should be examined on its merits, and they should only be built

ANNEX 4Page a:8

where alternative means of acquiring land and providing infrastructure arenot. vi^4lle or eMM tPh.aC 4a, c * t ahould beavoided. Experience indicates that the location of estates is extremelyJJMjJJL "A . ALJ._ do0 *q c e C- 8 coc:rati 4.'e %.y ea a le

either to heavy or perishable raw materials, or to markets. The establishmentofA il-udS-L.,L ettes fLor L.1-e purpoe of decentralization in. sreL -W iGh

industry is not already growing has in most circumstances been unsuccessfulin developQd as well aS deva,lopiug coVUtrie.

46. The muvsuement of medium aind large scaLe i=iidustr-y to location Out-side present areas of concentration, however desirable, is likely to be along, siow development. Tne advantages of location in large cities generally,and in Java in particular, are likely to persist as long as transport costsare high, the rural and outer island infrastructure is poor and dependenceon government incentives is great. Thus transport and infrastructural im-provement, as well as better access to credit and a lessening of administrativecontrols, will be necessary before other, more positive measures are likelyto be able to make an impact on industrial location.

The Data Base

47. The absence of reliable data, particularly in the form of timeseries, makes conclusions about the effects of current policies necessarilytentative. The extension of the 1970 survey to an annual basis with coverageof value added in production and investment is essential to improved policyevaluation and planning. Additional fiscal and investment studies now beingundertaken by the Central Bank, the Ministry of Finance and the InvestmentBoards are also urgently required to enable the effects of policies to beassessed, and to assist in the planning process. Without a greatly improveddata base planning can only take a very general form.

V. SOME INSTITUTIONAL MECHANISMS

48. To be effective in changing current trends and acceleratingindustrial growth, policy changes would require some-significant institu-tional changes. The difficulties which still beset the planning and imple-menting agencies are also discussed elsewhere in this Report, and onlythose specifically related to the implementation of an effective industrial-ization proRram will be discussed here.

Tariff Policy Implementation

49. A review of the lesal framework for tariff formulation and varia-tion which at present appears to give excessive weight to Ministerial res-ponsibility might usefully accompanv the reform of the protective system.It would appear that the establishment of a more public forum - a tariffreview board or ccmmission - in which the connum er an wveil ae producerscould be heard with some public exposure, and which would be served by an

ANNEX 4Page 19

economic secretariat skilled in such techniques as the calculation ofeffective protectioz rates, could be a useful instrument for a continuingreview and updating of protective policies.

Industrial Promotion Board

50. The policy changes suggested would largely eliminate investmentincentives, except to exporters, and this would largely eliminate the func-tions of the present Foreign and Domestic Investment Boards. However, toenable large scale, and foreign ir.vestment, to continue to play a signifi-cant role in industries in whici large scale operations are essential toefficiency and to ensure that local and foreign investors receive equaltreatment, it is suggested that: (1) the domestic and foreign investmentlaws be unified, and (2), an Industrial Promotion Board take over the manage-ment of benefits, including the licensing of foreign investment, under anew investment law, and more importantly, engage in the"active promotionof large scale investment both for national and export markets.

51. The pace at which major projects come to fruition is still extreme-ly slow. The process could be greatly simplified and accelerated by makingthe new Board's decisions definitive and binding, instead of requiring, asat present, prior or further endorsement by various Ministries. The recom-mendation that benefits be greatly reduced would facilitate such a reform.To make an incentlive syatem for large scale enterprises both effective andappropriate, the Board would have to develon a staff to handle:

(a) proicct promotion and implementation to coordinate thepreeant complaxities of Ministries and other agencieswhoae various nermissions are reniu red by in-ve-stonrs! And

(b! nroiQet evaluation, negotiation and follnw-un to ensurethat the economic co0ts and benefits of projects, partic-iuierlv foreign ir a vi9s locanl, nre evaluated, an.d thatappropriate terms are negotiated in extractive industries,and in these Industries where a total or -artial monopolyis desirable to avoid production fragmentation. 1/

"1Small Scale" Industries and the Indigenous Entre2reneurs

52. The "small scale" industry sector includes the bottom section ofthe mediu. s wst ati4sticl classsiflcation as well Oa BaEl scale proper.Separate programs for these groups are likely to be necessary, particularly

aa grth 4.n t-1he "o8r16 me%fUM iL J.4.L8.l LU to affect emp.LoyMCLr.J. Li Lth 18..

units. It has beon suggested that there is a great deal of evidence thattie present 1nacentive and regulatory system in most of its auspects - import

1/ See IBRD, The Zndonesian EconopM, op. cit., pp. 18-20 for more detailedproposz'Is .

ANNEX 4Page 20

duty exemptiow and reductions IJmpoxt ratrictions, sales tax variation s,the investment incentIve 1 . cost e t Il-

criminate dbeit often inadvaLtently, against most medium and the smallentrepreneurs who ~'- w F - "A -q ^T-: '"% *. " TJ ~ s * r-

would seem that even if muh of thiz bias were corrected by appropriate

nurture the Indigemou and local atrepreneurs would be required to minimizesoeo h dsoaluucrety vdiZ -A .A4-.. -A ...-. 11WA. C~~~~~~~~~~~~~~~~~&%.A MGLU.~ UA.JA.Ilh a.&L.L% &A~ J

industries to contiaue to c wpete and eveu to grow. The detailed dimensionsOL LUf e LUd-w K.LT& fW UMU Lyget e..aar &UU i.Le.LU WULW. Wi..L.L be

neocUeary to evolve progrems of real effectiveness in stimulating mediumand Mall busineae witbdn a Sm,oi e overall framewurk. Soae issues are,however, already sevident;

(i) The credit ssi;i i*e biased agaixnt most medium and smallscale entrepre.ieurs; U-iis requires remedies iu the snape ofspecial "'sasll seale" credit programs.

(ii) Liceesm , import, and oi.hex regalations bear more he,svilyon the medxum rind semal than on the large firm and make manymedium and small firmai incapable of benefiting from irLcen-tives. 'hitie lI.e likaly to require institutional remedy.

(iii) The admil1straiJ.cn vf prograws dealing with "smuall scale"'industry prob.ems aust he decentralized.

(iv) The ex6etit and nacure of techinological, managerial, marketingand accounting asaistarxe required is less clear.

53. As the problems associated with '"small scale" enterprise are ofthe utmost urgency, two or thiree initial programs in regional centers wherethis is a particularly l.ve Issue might usefully be started even before anational approach to posBGile.i and Couli be used as an input into such anapproach.

VI. P[RIRITTES IN INDUSTRIAL DEVELOPMENT

54. It follous fram the stress on policies and institutions thatplanning for industrial development is envisaed to be more appropriatein these terms than in term of physical targets for specific inadustries.Some identification of industrial priorities, both for facreasingefficiency in existing Industries to make them more competitiva andlower priced, and ini terms of Stimulatin.g new investment are, however.also a necessary pert of the policy and Implementation process. Here,unfortunatelvy the oreaeat list of "urioritv" industries. (Table 12) istoo general in character to provide a serious promotional impetus. Withthe moderate nrotoetion and. invsstmarnt incentives nroposed a list wouldbecome redundant; the emphasis Instead would be shifted to project indenti-fieatfon by th.e- nduqtria1 Prctmot-inn BnArd.

ANNEX 4Page 21

55. Indonesia might reasonably adapt an industrial development programthat has two complementArv elements. First; an emphasis on the develenmentof light consumer goods industries, such as textiles, clothing food products

n- d s n dm urablea nd semit-A,,vhln ,rn d ,- at u .nu1A *- ve theoe tcn o alnm market and offer increased opportunities for employment of labor in industry.Seond, ther:e are a nuber of ind-tries that are resource-b%aed in 4- ,ch

Indonesia may have an advantage (e.g. wood and paper products, petrochemicals),but thatC require a .- elbativel'y lar6ge scale of LVCtmCent and -a long geststion

period. In addition to the examples cited this group includes basic metalsa L.eel) an d th ,e englreeriug 3irM,ULt-&rLie . Be ofUU ,hL L ait r L LLVest*LWLLLL. sizeC,

and the market uncertainties the risks are high. Further, technical andmarket analyses are required to reauce uncertainties so as to have a betterbasis for decision in the future.

56. Both types of development could be pursued simultaneously sincethey are not competitive for resources. Tne first type requires the stimu-lation of indigenous investment in small and medium scale industries. Forthis type of development, the provision of information, incentives, finance,promotion, and technical assistance already outlined is required. The secondgroup, for the present, requires further analytical studies and eftorts toattract private investment (foreign and domestic) that will help assuremarkets for the products, bring the necessary technical skills to bear on theproblems, and eventually undertake a full scale program.

57. In addition to the stimulation of light consumer goods industries,there are a number of industries - and specific projects within them - thatnow require some initial steps leading to a final definition of the invest-ment program, the time when it would best be undertaken, and the participa-tion in it. The industries and projects specifically identified included steelproduction, with consideration of a direct reduction steel mill; projects todevelop the engineering industries (that is, electrical and mechanicalmachinery and related parts and components); a petrochemical complex; a wood-products complex to produce plywood, pulp and paper; and several projectsin minerals industries.

58. These are typically large-scale projects involving large amountsof investment. They should add significantly to Indonesia's industrialbase, provide linkages to encourage development of other industries, andexpand the capacity for industrial exports. The initial steps now required -

and recommended - are essentially to provide detailed analyses of markets,costs and the other information necessary on which to make a firm decision.The pre-feasibility studies provide a point of departure. It would bepremature to undertake investment on the present base of information, butit is important to emphasize that unless the initial analytic steps aretaken soon, specific pro1ects will not be ready for implementation in thenext three years or so.

59. At this stage, no direct Government investment or involvement ona large scale is reauired. What is needed iR the nromntion and analysis ofalternatives and attempts to interest private companies in undertaking someof the atudies that lead to a decision on the best tvnpe of nroiet.

APPENDIX TABLES

1. Employment in Large and Medium Scale Manufacturing Industries, 1970

2. The Structure of Employment in Medium and Large Scale ManufacturingIndustrias. 1970

3. Large and Medium Scale Manufacturing Industries, 1970 by Province/Region

.: PDgon4 ,,l N a+,. bun+io a,t IP T ge o, lAA ar. %A,,,.Po Sc'e ,.4 ,aceu ing Indust].e

1970

L T n _.-A -n AbUA4t Q _ Mn,,n -nJ.- T-A-+ - _-n 1 07f 'k-. M-4 A-. fD, A,,* J.~ 15

LI WASA 4A.JAJ. 11 L*.& I Aau. % Vb&.A. 5 A.SAA%A. 4 UJ.WOU) J. / LJ- W 1. ALJW LAS SJ±

6. Employment in Large and Medium Scale Manufacturing Industries, 1970

1* +.P..ju.- IUbUL vii ouvi rim&.± DU.ou rrxuuUUO

8. Import Duty and Sales Tax Ecemptions

9. List of Banned import Commodities

10. List of Finished Products EKempted from Ecport Tax

11. List of Light Industries Closed to Foreign Capital Investment

12. Priority Sectors for Private Capital Investment

Table

EiA1loy-ent in j r,j- ard Mec."l-o Scale Manuactar-:ngT,dustris_. .r Z- - fflJ' i, V

Nu.'ibŽr ozf PercsNunber cf Nuqber ol' Eployed Per

Est.ablishrents Persons Erw!- yed E5tablisb ,ent-- ~ ~ INtO1 . r:1sTRY -r _ _Lrg e i am Tote-l Lar Me d>: rota i t-;311,'? Food Products 6,01:8 500 5,5146 285,05l 215,?65 67,7c, 0 j1 430. 12.6313 Beverage 178 16 162 5,298 3,,050 2,?L8 25.8 190.6 13.93141 Tobacco 1,175 304 871 131t,6o0 10?,,129 27,1:71 1i1i.6 352.14 31.5321 Textiles 4, 906 437 L4,L69 165,560 91:,363 74,,'17 34-3 21r.5 16.6322 WeariLng Apparel, except footwear 11:1 114 130 5,879 3,713 2,166 o d 8 265.2 16.?323 Leather & Leather & Fur Products 77 11 66 2,2k? 1,115 1,132 25.2 101.L 17.?321: Footwear 66 1? 5L 3,729 2,91 ) 81 56.5 ?142.5 15.2331 Wood ProductS, except furniture- 766 25 741 13,1L77 3,091 iO, o6 17.6 123.6 14.'332 Furniture & Fixtures, except netal 2'6 7 229 4,376 go0 3,78 17.3 128.6 13.9341 Paper & Paper Froducts 95 22 73 6,755 5,217 1,538 71.1 237.1 21.1342 Printing & Publishing 533 52 481 13,975 6,656 7,31;. 26.2 128.0 15.2351 Industrial Chemicals 8c 11 69 L, ?69 2,70? 1,567 53.1: 2L5.6 22.735? Other Chemieal Products 1433 59 374 21,581 15,28M 6,255 49.5 25;. 1 16.8353 Petroleum Refineries 3 1 2 54 7 532 15 1.1?.3 532.C 7.5354 Misc. Products of Petroleur± & Coal I - 1 10 10 1I.G 10.0355 Rubber Products 711 273 1438 108,605 98,29? 1f,_13 15?.? 36C.!. 23.5356 Plastic Products 198 22 176 5,950 3,031 2,919 30.0 137.o 16.6361 Pottery, China and Earthenware 10 2 8 1,14L 956 188 111:.4 478.0 23.5362 Glass & Glass Products 49 23' 25 3,803 3,C060 7L3 77.7 127.5 29.7369 Other Non-Metallic Mineral Prodacts 783 29 '754 18,281 6,274 12,L07 23.3 216.3 15.9371 Iron & Steel Basic Industries 5? 5 47 1,1:52 772 680 27.9 154.4 14.5372 Non-Ferrous Metal Basic Industries 33 5 28 1,181 739 1145 35.9 147.8 15.9381 Metal Products, except machinery 530 49 4a8 12,566 6,190 6,376 23.7 126.3 13.3382 MAchinery, except electrical 123 16 I07 4,1 329 3,350 1 ,1±7 39.3 209.1: 13.8383 Electrical Machinery, apparatus, etc. 67 15 52 2,923 2,191 732 43.6 1i:6.1 14.1384 Transport Equipient 407 34 373 10,253 5,290 4,963 25.2 155.6 13.3385 Professional Pbotographic Goeds, etc. 6 1 5 589 538 51 98.2 538.0 10.2390 Other Manufacturing Industry 190 29 161 7,305 3,913 3,362 38.4 136.0 20.9

T 0 T A L 1 7 ,900 j:75 5§25 848.911 9555 252L38Q 47-42 302.1 15.8

Source: Suirvev -f anufacturing Industries, 1970, Central Burea, r_ S titzt c,tcs, Djakarta.

Table 2

-he Structur of' jl oyment in Mediuq and Ba 3 Scalhe ManUfactU fn Induastries in Indonesia,1 yIn,dustiPercent Distribution)

NuMber of Number ofEstablistunents Persons EmlT2yed

cor,-. _I N D U S T R Y Total I Med:Lu.M Total Large Medium

3'1/. Food Products 33.79 25 .32 34.8h 33.58 36.08 27.65313 Beverage 0.:99 o.81 1r.02 0.62 0.51 0.89,31 L Tobacco 6.56 15.39 5 47 1 5. 86 17.96 10.88321 Textiles 27.41 22.13 28.06 19.85 15.82 29.40322 Wearing Apparal, except footwear 0.80 0.71 0.,82 0.69 0.62 o.86,323 Leather & Leather & Fur Products 0c143 0. 56 0..41 0.26 0.1'9 0.4532)1 Footwear 0.37 0.61 0.314 0. 144 0.349 0.32331 Wood Products, except furniture 14.28 1.27 1 4.65 11.59 0.527 4.12332 Furniture & Fixtures, except metal 1.32 0.315 1.44 0.48 0.1!5 1.26341 Paper & Paper Products C0.53 1.11 0.,46 0.80 0.87 0.61342 Printing & Publishin, 2.98 2.63 3.02 l.65 1.12 2.90351 1ndustrial Chemicals 0.45 0.56, 0.43 0.50 0.445 0.62352 Other Chiemical Products 2.42 2.95' 2.35 2.54 2.561 2.49353 Petroleun Refineries 0.02 0.05 0.01 0.06 0. 09 0.01,354 Misc. Products of Petroleum & Coal 0.01 - 0.01 ().00 - 0.00355 Rubber Products 3.97 13.82 2.15 12.79 i6.413 4.09356 Plastic Produicts 1.11 1.11 1.11 0.70 0.5'1 1.16361 Pottery, China & Earthenware o.o6 0.10 0.05 0.13 0.16 0.07362 Glass & Glass Products 0.27 1.22 0.16 0.45 0.51 0.29369 Other Non-Metallic Tineral Products 4.37 1.47 4.73 2 .15 1.05 4.76371 Iron & Steel Bas:ic industries 0.29 0.25 0.30 0.17 0.1.3 0.27372 Non-Ferrous Meta:l Basic Industries 0.18 0.25 0.18 0.114 0.12 0.18,,f1 lMetal Products, except machinery 2.96 2.148 3.02 i.148 1.014 2.53382 Mach inery, exeept electrilcal 0.69 0.81 0.67 (.57 0. 56 0.59383 Electrical Machinery, apparatus, et,c. 0.37 0.76 0.33 0.34 0.37 0.2938L4 Transport Equipent 2.27 1.72 2.314 1.21 0.89 1.973185 Professional Photographic anods, ctc. 0.03 0.05 0.03 0.07 0.09 0.023$5(~ C'ther Manufacturi-ne :nd1- tr4;s 1.06 _14 1.01 0.86 o0.66 1

T C) T A L 99.99 100.00 100.01 9 '.08 100.00 100.01

Source: Tabae 1.

TARC.1E A1Nnfl .tnT1TTM SAT ,MAAI T?J. T5.'I'RTK£ T

INDONESIA, 1970 BY PROVICE/REGION

Numbehr of' Estabi4 v.ts Nhumbe %f PAronr ipnl no.niProvince/Region Total Iarge Medium Total Large Medium

l...D.I. Atjeh 95 10 85 5,380 4,317 1,0632* Jo'Y,--.LI. 0a7 96An 6,7 ',0o0 nA, 7 Ak 1

3. West Sumatra 153 20 133 12,503 10,402 2,101R "au 3'3 9 Aoi , 6 3 4

5. Djambi 92 1T 78 3,923 2,852 1,071

7. South Sumatra 399 28 371 10,277 6,270 4,017

0 . .egK I" L _ n41 , ,> m rI" ~~~-0 Th130-1/ I 5~

Sumatra 1,972 198 1.774 ' 58;,30 CCIU,)L4

i D.C. Djakarta i,549 222 1,327 53,793 31,267 22,5262.. lest Java 2,504 498 2,006 185,521 152,588 32,9333. Jogjakarta 644 31 6i3 i8,867 9,431 9,436I4., Central Java 4,732 362 4,370 201,963 127,224 74,7395. East Java 4,450 562 3O 270,193 2z 0 ,49u O'9t04

Java and Madura 13,879 1,675 1,24 73,337 520,919 209,2118

1.. Iist Kalimantan 269 14 255 5,229 1,882 3,3472. Central Kalimantan 114 2 12 b92 318 1743.. South Kalimantan 159 9 150 5,868 3,398 2,4704. East Kalimantan 19 19 237 - 237

Kalimantan 461 25 436 11.826 5,598 6,228

1. North Sulawesi 106 9 97 2,282 1,079 1,2032. Central Sulawesi 36 - 36 288 - 2883. South Sulawesi 1,131 23 1,108 12,389 3,394 8,9954 * Southeast Sulawesi 10 1 9 164 54 110

Sulawesi 1.283 . 33 1,250 15,123 4,527 10,596

1. Bali 107 24 83 5,884 4,775 1,1092. West Nusa Tenggara 132 14 118 3,896 1,749 2,11473. East Nusa Tenggara 17 3 14 295 169 1264. South Maluku 10 1 9 200 80 1205. lWest Irian 39 2 37 826 218 608

Other Islands 305 44 261 11.101 6,991 4,110

Total 17,900 1,975 15,925 848,951 596L565W 252,386

a/ The reported all-Indonesia total in Table 1 is 596,555.

Source: Surve of Manufacturin Industries Indonesia 190, Central Bureau ofSt+atIstics, D1n~,.-a+^.

Table 4

tegional Distribution of Large anH Medium Scale Manu.Vactawig Imnusiries in lmonegna, 1970

h.n.ar nof i2mbar of Numbkhr (f Persons

E,tablishments Persona Eplqd E_)loyed PlerTotal large Medlum Total .re HbAlum Establishment

Prrvinre/Kepgion Percentage DistribUtiO-i Total Large HediiL-i

1. D.!. Atjoh 0.-3 0.50 0=53 o.6-6 0.72 o,L2 c6A6 U31.7 K C

2. North Sumatra 3.89 4.89 3.77 4.45 5.05 3.04 54-.1 313.? 1.3. West Sumatra 0.85 1.02 0.83 1.47 1.75 0.83 81.7 52G.1 r4. Riau 1.92 0.46 2.10 0.55 0.12 1.57 13.6 76.8 15. Djambi 0.51 0.71 0.49 0.46 0.48 0.42 ih?.6 203.7 1

6. 1.00 1.07 0.99 0.70 0.66 0.80 3-.3 187-3 I27. South Sumatra 2.23 1.43 2.33 1 .21 1.05 1.59 25.8 223.9 18. Bengkulu 0.08 - 0.09 0.02 - 0.05 9.)4 -

Sumatra 11.02 10.88 11.13 9.50 9.83 8.73 295.( 1-~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ -4 -

1. D.C. Djakasrta u.657 11.30 U.') 1.JU2, B9 3- i.8 '72. West Java 13.99 25.36 12.59 21.88 25.63 13.05 7h.1 306.L 1013. j1ogakarta 3.58 1.48 3.84 2.09 1.40 3.72 29.3 304.24. Central Java 26.44 18.48 27.43 23.82 21.37 29.62 4?.1 7 350.5 17..5. East Java 24.86 28.62 24.40 31.87 33.66 27.65 6u). j,1.f, f.;

Java and Madura 77-53 85.23 76.5 86.01 87.30 82.97 ;j 313.5 17.2

1 West Xalf-I m Ant 1 50 0.71 1.60 0.62 0.32 1.33 197 1 . i?. Central Kalimantan 0.08 0.10 0.08 0.06 0.05 0.07 j51 159.;3. South Kalimantan 0.89 o.46 0.94 o.69 0.57 0.98 36.9 377.6 i6.",4. East Kallmantan 0.11 - 0.12 0.03 - 0.09 12.5 -

KalJmantan 2.58 1.27 2.74 1.39 0.94 2.47 25.7 ,2239 1l,.

1. North Sulawesi 0.59 o.46 0.61 0.27 0.18 0.48 21.5 11;.9 l2. 2. Central Sulawesi 0.20 - 0.23 0.03 - 0.11 8.0 -

3. South Sulawesi 6.32 1.17 6.95 1.46 0.57 3.56 11.0 1W7.64. Southeast Sulawesi o.06 0.05 0.06 0.02 0.01 0.04 16.4 514.0 K.

S., - -w 7-17 1 .68 7.ARi 1.78 n 74 _ I I--JLM 471 - -1.

1. Bai 0.60 1.22 0.52 0.69 0.80 0.44 9.c ,2. West Nusa Tenggara 0.74 0.20 0.80 0.46 0.29 0.85 29.5 7j-3 7l.'3. East Nusa Tenggara 0.09 0.15 0.09 0.03 0.03 0.05 17A4 56.3- c4. Soath 1ia&uku 0.VW W,r'J 0.0.6 0.02 V.V- OV..J 20.0 ISU.2 1 .5. West Irian 0.22 0.10 0.23 0.10 0.04 0.02 21.2 109.0

Other Islands 1.70 1.73 1.70 1.31 1.17 1.63 3 1

Total Lo0.00 ,9 100.00 100.00 47.4 303.2 1

Source: Table 3.

Table 5

Large and Medium-Scale ManulfacturingIndustries 1970 by Major Regions

No. ofPercent- No. ot Estab- Percent- Persons Percent-

Region Pouulation ae lishments age Eployed age(!Owlus)

LI Java and Madara, 76,100 63.8 13,879 77.5 730.337 86.0of which

1. Djakarta 4,576 3.8 1,549 8.7 53,793 6.32. West Java 21,631 18.1 2,504 14.0 185,521 21.83. Central Java 1/ 24,366 20.4 59376 30.0 220,830 26.04. East Java 25,527 21.4 4,450 24.8 270,193 31.8

II. Sumatra 20,820 17.5 1,972 11.0 80,554 9.5III. Kalimantan 5,107 4.3 461 2.6 11,826 1.4IV., Sulawesi 8,535 7.2 1,283 7.2 15,123 1.8V. Other islands 8,620 7.2 305 1.7 11,101 1.3

Total 119,182 100.0 17,900 100.0 848,941 100.0

1/ Includes Jogjakarta.

SouLrce 1970 Survey of Manufacturing Industries.

Table 6

Emplovment in Large and Medium-ScaleManufacturing Industries, 1970

AverageNo no of vh1 iRhU&tQ _ _ F i V lAU Pa-

Industry Large Siium- Total Employed Establishment

Food and beverages 516 5,710 6,226 290,352 46.6

Tobacco 3O4 871 1,175 1341,6000 114.6

Textiles 437 4,469 4,906 168,560 34.3

Rubber Products 273 438 711 108,605 152.7

Other 445 4,437 4,882 146,824 30.1

Total 1,975 15,925 17,900 848,941 47.4

Sourcee Compi xled from the Survey of ManufacturingIndustries 1970, Central Bureau of Statistics, Djakarta.

TA-ATY. 7

Tmpot -Thities pn Some Metal 3ased Producits

Chassism doors, stepsj framAs And similart nrtAr- nim nf' irnn fnr ct:fiir-ctmr 120

4-a m'-4 1c'a forv .mth.g&eass ~i Thirnv tere IL}

0t , b La * .- 7 - -. -4-

flonrekeosrewn6 a../ppr.,u &1&8threof 70l.%led O che arA tal ute.sls 7

t's ;_._ ,__ ,_:..a...n ia -+ n .A .~~a ., ..- 1....

Chests ~~~~~~~~~~~~~~~~~70

Safety ra-or blade8 70

Table spoons and forks 70

Articies for fixed lavatories, for dressing and bathrooms 70

Sewing macninies, in furniture form, e.g. piaced inside, attached to or puton a drawing room cabinet. 100

Gardening apparatus, e.g. grass cutting machines, garden rollers, water pumps. 100

Lamp holders and lamp shade holders. 70

Cars in c.k.d. condition. 50

Cars not in c.k.d. condition 140

Motorcycles, even if not complete 100

Source: Tariff of Customs Duty, "'Economic"1 Djakarta, March 1972.

Table B

Vm)ort Duty aA Salees T ax beotions

The import duty exemption under the Foreign Investment Law is

reflected in the import regulations, and applies to the various items

detailed under the Foreign Investment Law. Generally, investors making

use of the exemption are expected to compile a master list, 1/ which

when approved by the relevant ministry and the customs department, is

then furnished to the customs officials at the point of entry as the

document governing the availability of the customs exemption.

The Decisions of April 30 and September 14, 1971 of the

Minister of Finance stipulate that Import Daty and (Import) Sales Tax

exemptions or reliefs may be granted on:

a. Machines and machine units, tools or appliances which

are needed up to the moment that the company starts

producing

b. SDare parts in an amount not exceeding 5% of the prices

of the machines. machine units. tools or apnliances as

referred to under (a) abova.

c. Basic materials and accessories which actually wi2l be

processed or worked in the comnanv for the neriod of not

more than 2 vears from the data the nomanv 1 i_ or is

almOn.t raadv to prAdure quantjties Whiht are in prin?ot.iAn

to the canacitv Of prndunti±n.

1/ Certain goods are not allowed to be imported, reflected by a listpublished with the new regulations. The list includes textiles ofthe batik type, certain sizes of motorcar tires, certain books,magazines and other printed material in the Indonesian language, andcommercial vehicles in built-up condition. The documentation forimports is drastically reduced, so at the present time the only formsrequired to be used are the KPP and the PLC forms.

Table 8

(Continued)

d. HMans for transportation of goods Which are used in the

company.

e. Office equipment, furniture and motor vehicles (except

sedans and stationwagons).

f. Construction materials and other materials for the construc-

tion of factory buildings. offices. housine for foreign

personnel. school buildines. hoseitals and places for

religious services of the companv.

These stiDulations are valid for comanies which have obtained

the nermit for an undertaking from the Governmant vithin the framework of

foreign canital investments and of domestir eanitAl inv5stmintS;. to rr-

out new develoment. axpansion and or rehabilitationm of nriu-dtive facilitiesv

Sourcez invest in indonesia, Goverruint O0 Indonesia, IJakart-a, .JanLrU-y IY97.

TABLE ')

LIST OF BANNED IMPORT COI-ahODITIES

Decree of theMinisti7 Date

Ccnmodity Tariff Itemn No. of Trade Year

1. Textile batik motif 356-Ilb No.69/KP/IV/70 17-L-70

2. Car tire, size:600 - 16 235-IV No.69/KP/IV/70 174--70670 - 15650 - 16750 - 20

750 - 16 No.181AP/VIII/ 20-8-70750 - 17 17750 - 34

500A52n - 10520 - 13560 - 135-90- - 1-3(0r° - 13725 - 13

50o/520- 1)[590/6ho - 14-On/[60n - 1I

6OO - 15

3. Books, periodicals 334-I,II No.69/AP/IV/70 17-4-704d all typ-es

printed matters inT -.d. .e -i. org4v nali

J~A.4IA~~ .J W& J6, 'Jj.6

language dialect 4/ y/4. Cannnercial cars in 834-Ib, 1, 2, No.69/KP/IV/70 17-4-70

e j L~~~~~~~~~~ei-r, , T r AnIM rrTI.-,7n 197 c. cond-Jand --- '91-IN47J. 1o U.V76F/LK V / (V Lf -70V

bottle, size 350-650ocs.

to !-ast, sarong 356-vLNo.o-v/u i-4L- 70(fabric)

7. Dry battery cells of 787-Ia No.180/KP/VIII/ 20-8-70specia'L'-y high size,height 60 mms diameter

--q _ _ /, rr T r v% 1 r Y? \)MM;S kL)..~ V.Lt-UlI-.LJ

TABLE 9

LIST OF BANNED IMPORT CG4MODITIES(Continued)

Decree of theMinistry Date

Commodity Tariff Item No. of Trade Year

8. "LuArik" fabric, cambric 356-IIb.l No.182A/P/VIII/ 20-8-70fabric of (20/S x 20/S) 356-IIb.2 70cotton yarn construction,maximum width 36

9. Radio and Television re- 792-Ilb.1 No.187/KP/VIII/ 20-8-70ceiving sets in built-up 70conditions

10. Galvanized iron sheet 525-IIa No.188/KP/VIII/ 2L-8-7070

11. Motor cvcles in built- 838-IT Nn 121AKPAVT/ 12-6-70up conditions d/ 1970

12. Lamp bulbs (incan- 790-IIa,IIb No.220/KP/IX/ 22-9-70descent lanmn up to 200 1970Watts, 100-130 Volts

13. T.L.lamp (flourescent 790-IIa,ITb - do - - do -lamn). dinmeter 20-hOmms, length 460-1520mm8; straight. 16-anWatts, 100-130 Volts

14. Mosquito sticky/coil 169-Ib. No.320/KP/XII/ L-12-70(wtr^w I 11 t) 70

a/ Customary diplomatic relations.

§/, Required of higher institution of learning.

2/ Subject to Import only in CKD conditions by importer sole agent/factoryb. r .A "A h,- 4I- .+6 4--A- Exception - r-.-s outside Itavaand Sumatra.

#/ Subject to import only in CKD conditians by importer sole agent/factoryoc arffof C m Dy.- c c Daarta M 9

A' I9VES W %W% LF WA^= UAIA s-JAWk9EL=L

Source: Tariff of Customs Duty, "Economic". Djakarta March 1972.

TAtBE 1'

LIST OF' FINISHED PRODUCTS E'.04PTED FROMXEN PER CENI EXPORI 'lAX

Food and beverage

Textiles

Household appliances

P1rinting

Leather and leather wear

Chemicals

Ceramics

Metal products

Machine products

Electric and electronic products

Forestry products

Cigarettes

Construction materials

Rubber products

Sport products

And other assembled products

Quurvet 'a>-Vst in .idonesiao , uovWrziment of .LInonDjakarta, January 1972.

Table a1

LIST 0' LFiHT TNIY)2",rZTRI CTE 2Jl TO_FOP';':

No. Field of industry Remarks

1. 1Ild and othor dairy produr.Ls Quota fulfilled2. Battceries3. Vetsin 1-bnosodiium glutamate4. Cigalrettes I

5 MotcolheS H

6. Paint H

7 PIati rnd1 leather cshoes,

slippers, etc.

9. Nail/wooden screws ,10. j.iLa41wjy sVoaps z)p Lor. soapF Vtr

gents..11. L,OCOIIUb Oil £4.UEv u wiw. vGQug u±

oils/edible oils butnot from copra/coconut.

12. Flour milling Quota fulfilled13. Too-th paste :lb. Biscuit & confectionary15. Bicycle tire & Tubes16. Boot po-i; ;h17. Plastic products (including

formica slheets but excludingdecorastive plywood) U

18. Printing Except LithographicPrinting

19. Bicycle Assemblinng Plant Except Bicycle Partsmanufacturing.

20. Printincr Ink Quota fulfilled21. Enamol 'orkcs t22. Alunminu- household ware23. Candies2V4 So,ft drinks/beve?rages25. Concrete tiles/porcelain tiles i

0t v~ R L>we X. + ; 1 re% l;mvo rInn+ F>nft_o.+^r RPvi lr0r

27. Sewing maclancs asserabling Except Sewing machine

28. Icc Cubes Except as a supplementarypartu of a nonimpw r-t ed.

29. Can making Food stuff canning plant30. Watch a-sembling Quota fulfiIled31. Tooth brush32. iibsquito coil incense33. Corrugated card board II

31. Instan-t noodLe/sparrhetti etc. *i35. Zip f asteners U

3(. Tannery H

37. Hair Wligs It

Source: lQni.try of Inidustry, Directorate General of Light Industryandl Mlan(iicraft, May, 1971

iTRTk 1'9

Priority Sectors for Privat e Capital Investment

].A. Ilrn1urt:. . . in ;t;sricilture, entates and cattle breeding.

. i. ul. rt J i-.pt: ti ii d ;iitly-1 ±p: tiort tht agricaltural, estate and

I lv'. :tcwl zv . c u: ,1

-- - .---A -.---- Ja- ---- --*-*1--,

L). I i .' -1 ItIll L i lI);; triLO, for agricGUltual.i es-tut d c.ttl b

din: :icilatic.

c. lndu-t.sic proc.:z ing agricultural, estate and livestock products.

d. Tndustries prncessing forestry products.

e f'ishery undertakings integrated with onshore processing facili-

ties.

.II. liCiustries proccs3in-xmore dow&stic than inported raw materials

to be proces.e' by other industries.

IV. Basic industries, in the sense that their products will be a

ba-As "or other industrial development.

V. Undorttkingo iil infrastructure such as road building, harbors,

bridl,:u, tcleevor.rnunication,irrigation, electric power station,

etc., which are financed by the invnstorsconcerned. Not include-J

axe the contractor and consultant business.

VI. Fully intenrated textile industries.

VII. ulinp (5) "essential goods," Lanufacturing industries, except

keroseone

VTII. Synthetic fibre manufacturing industries.

1X. .rifr.'tutin- indostries erac'rting the main part of their pro-

ducts.

X. Chemical industries

XI. Industries or rhi£-teu.Uticax 's bflJmen4.

XII. Tourist industry, hotel development (particularly with a capacity-

of 50 rooms and more).

XIII. Transport industries (land, sea and air) with a substantial shars

to -conortic development.

XwV. Oilher undertaki;ns, necessarily being classified as having prio-

r i ty

Source: Investment in Indonesia, Guide to Laws and Procedures for ForeignInvestors, Governm.ent of Indonesia, Djakarta, January 1912.