Foreign Relations of the United States, 1961–1963, Volume XXIII, Southeast Asia

296. Memorandum From Michael V. Forrestal of the National Security Council Staff to President Kennedy⁰

Washington, November 23, 1962.

Indonesia

During the past ten days, the Department of State and AID have been developing a series of steps for dealing with the Indonesian problem about which you should be informed.¹ As these steps are taken the U.S. will obviously find itself more and more drawn into the stabilization and development of the Indonesian economy, and you may wish to lay down some guiding principles before things get too far along.

1. Under the authority you have already given, we are in the process of providing Indonesia with 150,000 tons of rice for delivery to Indonesia by late February or early March of 1963.

2. We have asked the Indonesians to prepare a list of emergency spare parts and raw materials needed to get some of their basic industry back into operation at full capacity. It is now working at about 50% capacity and the two rubber plants in the country will soon close down completely for want of carbon black. The Indonesians are preparing such a list, and once we have gotten it and assured ourselves that the spare parts and commodities will in fact reach the industries, AID will ask you for authority to make a loan to finance at least the American component, and perhaps a small portion of the foreign component.

3. The Ex-Im Bank has two outstanding loan applications from Indonesia; one for $4 million for an addition to a cement plant, and one for $17 million for a thermal power plant. State plans to ask the Ex-Im Bank to go ahead with the $4 million loan and defer the $17 million loan until we can assess the results of Indonesia’s stabilization and development efforts referred to below.

The above steps are being taken as quickly as possible and are intended to demonstrate to the Indonesians that we can respond quickly in an emergency, but cannot consider any assistance of a large or longterm nature until they have undertaken basic reforms on their own. The following longer range actions are getting under way.

4. An informal advisory group is being set up here, made up of people from Walt Rostow’s office, Budget, AID, and one or possibly two outside economists. This group will supervise and review the preparation of a U.S. policy toward Indonesian stabilization and development.

5. An IMF team is already on its way to Djakarta, and we are sending an AID man over with them in an effort to exercise some influence on the IMF stabilization program. We are trying to avoid what Rostow describes as the typical “one shot” IMF stabilization program which tends to ignore development and is quickly abandoned as soon as the going gets rough. The philosophy is to develop a program which provides stabilization in a series of steps and a concurrent program of development of those industries which would accelerate further development and produce, or conserve, foreign exchange.

6. There is a Development Assistance Committee (DAC) meeting in Paris on December 11th at which the U.S. will stimulate discussion of Indonesian stabilization and development problems and the possibility of rescheduling debt from participating countries. We will also discuss with the DAC countries the possibility of their providing a portion of the spare parts and raw materials referred to in paragraph 2.

7. We will urge the Indonesians to send their people out to visit DAC countries to try to get foreign assistance for their development projects and support for their stabilization program, and also to drum up business interest in the production-sharing schemes which have already been developed by the Indonesians.

8. When an acceptable IMF stabilization agreement has been concluded (possibly next spring), and when the Indonesians have convinced us by their performance during the related negotiations that they are willing and able to implement a stabilization program and a development plan, we would present them with the U.S. proposal for economic assistance which will by then have been developed here in Washington. A part of that program would include the $17 million Ex-Im Bank loan for the power project. The U.S. program would not attempt to finance all external resources needed for Indonesian stabilization and development. We would assume that other countries would participate and we would only support development efforts in those areas where we were convinced that the Indonesians had adequate managerial skills.

9. Finally, we will consider whether we can influence the Dutch to get together with the Indonesians to settle their differences. Some compromise of Dutch debt is necessary in order to get World Bank loans for Indonesia.

These steps will, if the Indonesians perform, place us in the position of having eventually to consider an aid program for Indonesia. At the moment it is impossible to guess what the size of such a program might be; but it is clear that it will be sufficiently large to require a strong political and economic justification before Congress.

I should imagine that there are at least three major principles which we should keep firmly before the Indonesians as they walk through the steps outlined above. The first is that it will be essential for them to maintain a careful, friendly neutrality on international issues. The second is that they demonstrate that they have the will and the political ability to put their economic house in order before we can approach Congress with a request for significant aid. Third, we must satisfy ourselves that the stabilization program is rationally and practically conceived so that we do not repeat the unfortunate experience of Argentina.

So far the Indonesians have performed very well on the first of these criteria. Their behavior during the Cuban crisis was unusually restrained. It remains to be seen whether this behavior continues and whether they are willing to undertake the political burden of stabilization and development.

MVForrestal²

0. Source: Kennedy Library, National Security Files, Countries Series, Indonesia, Vol. III, 11/62–12/62. Secret.
1. A paper entitled “Indonesian Stabilization and Development, an Outline of Major Topics,” November 11, was submitted by Forrestal to Kaysen on November 16, as a possible outline for an interagency group from the Department of State, AID, and the White House. On November 16, Janow suggested to Harriman a step-by-step plan that he outlined in a November 16 paper. (Both ibid.)
2. Printed from a copy that bears this typed signature.