The Indonesian Economy after the Transfer of Sovereignty

In 1949, after a four-year long armed struggle, Indonesia finally achieved effective control over its entire territory, with the exception of West Irian (now Papua). Nevertheless, the young nation faced serious political and economic problems. The Japanese occupation and the long fight against the Dutch had seriously impoverished the Indonesian people. The new government also faced armed insurrections and secessionist movements in various regions such as Aceh, West Java, South Sulawesi, and the Moluccas, which threatened the country's territorial integrity. In late January 1950, scarcely one month after the transfer of sovereignty, Raymond Westerling (a rogue member of the Dutch army) along with a few hundred troops under his command, carried out an audacious but quixotic plan to occupy Bandung and Jakarta. Although this plan immediately failed, it increased the sense of vulnerability of the Indonesian government.

The economic problems facing Indonesia in the early 1950s were no less urgent. The Indonesian people had suffered greatly during the Japanese occupation and the armed revolution against the returning Dutch. Basic goods and services — food, clothing, dwellings, health and education services — were all in short supply. Therefore, the Natsir cabinet, which replaced the Hatta cabinet in late August 1950, focused its efforts on raising the welfare of the people. This focus was crucial since standards of living, as expressed by real per capita GDP, had declined by roughly one-third from what was already a low level before the Pacific War, from $1,252 (at 1990 prices) in 1941 to $840 in 1950.

The profitable agricultural estates, industrial plants, and much of the physical infrastructure (including irrigation networks and power stations), had been badly damaged during the Japanese occupation and subsequent Indonesian Revolution. Food crop production was estimated at merely 70–75 per cent of pre-war output, whereas smallholder tree crop production was down to 30–35 per cent and estate production even lower at 20–25 per cent of pre-war levels. The output of the sugar factories had declined from more than 1.5 million tons in 1939 to 261,000 tons in 1950, which was barely enough to meet domestic demand. Sugar exports had fallen from 1.2 million tons in 1939 to only 1,000 tons in 1950. Exports rose to 7,000 tons in 1951 but dropped again to 1,000 tons in 1952.