756D.00/4–2250: Telegram

The Head of the United States Technical Assistance Mission to Southeast Asia (Griffin) to the Secretary of State

secret

544. After extensive discussions American Embassy, American businessmen, Indonesian officials, and Dutch advisers and technicians, following conclusions reached:1

(1) Political.

(a)
Indonesians new to world situation and their thinking deeply colored by reaction to colonialism. Top leaders aware threat communism but averse to aligning themselves in world ideological struggle since not yet fully alive new form Russian imperialism. Hope to gain time by pursuit political neutrality based on best feasible relations world powers and adjacent areas. Do not consider Communist China can become military threat for several years. In meantime, they hope for progressive internal consolidation and development some kind solidarity and political defense arrangements between SEA countries. Indonesians so confused by suspicion Bao Dai2 dependence on Colonial French that reaction to possible Communist victory Indochina difficult assess. View preoccupation pressing internal problems [Page 1012] RUSI aiming at relatively static foreign policy and proceeding utmost caution but in direction middle position.
(b)
Principal political problems include national constitutional reorganization, demobilization guerrilla elements present army and disposition Netherland-Indonesian forces. Second level independence leaders and politicians Jogja Republic pressing for nationalistic unitary state with fairly radical socialistic economic program. Resistance has been met East Sumatra and East Indonesia but trend toward centralization inevitable. Labor situation confused owing price dislocations and lack responsible labor organizations. Widespread wildcat strikes sometimes at critical period in crop cycle. Chinese minority so far inert but some attraction toward Communist China and susceptibility to underground activity expected. Leaders have shown determination suppress militant Communism when identified as such, but Communism making some headway in central labor organization, parliamentary groups and through naive hope some Republic politicians establish good relations with Russia. Except for areas involving possible conflict between Netherlands-Indonesian forces and National Army, prospect maintenance internal order generally good. Responsible RUSI leaders likely continue command government and public support in proportion ability settle actual problems.

(2) Administrative.

(a)
Top RUSI leaders who participated RTC appreciate advantages Netherlands assistance. Realize inadequacy Indonesian administrative and technological competence. Great lack Indonesian civil servants middle and lower levels reflects failure Dutch train needed personnel. Although forced waste much time in political maneuvering maintain their position, top RUSI leaders energetic and determined resolve difficulties their own way. Resentful of Dutch duplicity since sovereignty transfer in Westerling and Makassar affairs and suspect many Dutch advisers chiefly interested protecting Dutch interests. While not purpose of new exchange regulations, latter will result in departure many Netherlands civil servants. Radical Republic politicians pressing for elimination Netherlands influences, including cultural, such as abolition Dutch language in schools. Indonesians, however, conditioned and receptive to Western administrative and technological procedures provided these are disassociated from any aspect colonial tutelage and overt proselytization. For foreseeable future best that can be expected will be relatively moderate and stable government with somewhat less than Western efficiency but bound to West by economic interest and gradually developing mutual understanding.
(b)
Continued exodus trained Dutch civil servants and technicians further complicates already harassed position of Indonesians who unable replace Dutch or even get good cooperation from many those remaining. Many Dutch who remain complain advice often not asked or taken. Undoubtedly partly true and partly result difficulty adapt selves new relationship. Present prospects unpromising RUSI get new Dutch from Netherlands as must buck strong flow embittered returnees.

(3) Economic.

(a)
Despite country’s vast potential wealth, prewar level production many world’s most needed products gravely lowered by eight years war and revolution. At transfer sovereignty country was left with huge internal and external debt, although RTC agreement reduced latter by 2 billion guilders. Final 40 million ECA dollars and ExImBank credit 100 million dollars assist greatly but temporarily balance payments deficit may oblige seek utilize portion ExImBank loan for consumer goods despite great desirability use entire amount for capital projects.
(b)
Short-term problems are (1) export of present large commodity hoardings; (2) reduction swollen smuggling trade; (3) removal apprehensions currency’s future; (4) rehabilitation nation’s productive plant and transport system; and (5) provision normal supply consumer goods to meet crying demand, particularly textiles, small tools. While still too early judge efficacy month-old drastic monetary measures, there will likely remain problem preventing further rise internal price level which could nullify export inducement features of these measures and contribute to political instability.
(c)
For new government to establish itself and gain confidence ability Indonesians govern selves, there must be real progress towards solution these short-term problems. There must also be visible start on long-range development projects giving hope for future amelioration living conditions.
US aid toward solution both problems can have great economic leverage view inherent richness country and great export potential. In addition big economic impact, disinterested aid by Western country will make favorable political impression on government and people still suspicious Western motives and will increase popular support government friendly US.

(4) Financial.

Indonesia’s financial situation in coming months heavily dependent upon deflationary result of reduction of money supply in March from guilders 3.8 billion to guilders 2.3 billion. Following factors combine to lessen effects of reduction of money supply accomplished by freezing half of all currency in denominations 5 guilders or more [Page 1014]and by compulsory loan of 50 percent of bank balances above certain maxima.

(a)
Ten percent of currency in circulation in denominations of 2½ guilders and less, and this portion was not subject to monetary regulations of March 19.
(b)
In anticipation of regulations, and with some foreknowledge thereof, deposit balances widely distributed among banks prior March 19 and “cloaks” were used, in order come under certain exemptions given bank balances. Also, banks were drained of currency holdings in denominations of 2½ guilders and less prior March 19.
(c)
To be expected that measures will be taken by entrepreneurs to maintain scale their activities by borrowing where possible. Ability of banks to extend credit temporarily impaired, owing to loss of assets (50 percent reduction in deposits), and to banks need for more guilder funds to finance foreign payments, owing to higher exchange rates. This offset some degree by nonbank borrowing and by sale of assets. Also, economy in use of funds practiced, and existing money supply called upon to do more work than would otherwise be the case.
(d)
Money supply reduction program has not removed distrust of currency which has existed for some time. Hoarding continues and in particular exporters persuaded to accumulate stocks, notwithstanding higher guilder prices for exports, and importers similarly desire hold stocks.

New exchange system inflationary in character and may counteract such deflationary effects as are caused by reducing money supply. Prices of imports have already risen. Price Control Office effective April 1 advised importers they could triple price their floor stocks excluding certain major essential commodities, a measure which offsets money stringency importers otherwise subject to.

Basic to all problems besetting new government is difficult budgetary situation. Expenditures in 1950 estimated at guilders 4.5 billion with one-third devoted to army. Government wants to demobilize army but at same time acutely aware of need for providing employment for guerrilla veterans, and of danger involved in not doing so. New government lacks experience and to be expected that waste and inefficiency public outlays will result.

Tax and other revenues prior March 19 estimated at guilders 1.5 billion. To these revenues government now adds guilders 800 million on basis of higher guilder values for both exports and imports, and guilders 500 million from differential between “export” and “import” rates. Although certain quarters government advocate liquidation debt to Bank of Java with “proceeds” of compulsory loan, repayment may need to be deferred in order finance budgetary deficit. Over first three months of 1950 government debt to Bank of Java increased by third, from guilders 1.2 billion to guilders 1.6 billion.

[Page 1015]

In view strength of inflationary pressures, would be advisable acquire local currency needed for aid program by selling aid supplies. Release ECA counterpart fund now available, amounting to some guilders 350 million, should be scheduled to minimize inflationary pressures and to projects which promptly increase availability consumer goods.

(5) Program Summary.

Total dollar cost $14.5 million plus unestimated cotton processing cost; 63 experts; both figures exclusive administration; 80 trainees. Costs are for 15 months ending June 30, 1951 except two-year contract item 9. Estimated nearly $7 million counterpart generated. Detailed recommendations follow.

[Here follow specific recommendations for emergency aid to agriculture, forestry, fisheries, health, medicine, education, industrial communications, and commodities.]

(12) Problems Confronting Program.

1.
Chief difficulty expected is probably lack cooperation Dutch officials different levels civil service and advisory capacities. Mission arrived Djakarta imbued with necessity doing all possible retain Dutch administrative and technical personnel Indonesian service. Efforts to work with Dutch and with Indonesians relying on Dutch, however, revealed in many instances recalcitrance, defeatism, indifference, “unconscious sabotage”. It is obvious that many Dutch desire failure and collapse this country some perhaps expecting be called back to run it. Many are marking time until departure Holland, abilities some overrated. Dutch in government circles expected to “drag feet” more than a little and cause frustration.
2.
Indonesian officials have made favorable impression, have energy, good will, high intentions, integrity but are handicapped by almost complete dependence upon Dutch advisers because of lack of experience in posts of great responsibility and because of almost complete lack of Indonesian deputies or staffs capable of sharing load of responsibility and carrying through sound technical and administrative operations.
3.
Despite faults many Dutch, some cooperative and valuable, exodus of Dutch officials and technicians will leave great gaps which Indonesians not for many years equipped fill with properly trained personnel. These gaps largely outside US scope as they pertain civil servants working for pay unacceptable to Americans approximately equal training and ability. Ardent Republicans seeking jobs for guerrilla heroes may oppose replacements by other Europeans. Quality of administration within next 18 months may be expected, therefore, to deteriorate no matter how desperately Indonesians strive.
4.
Indonesia so vast in extent Java so heavy in population that small scale program American aid may get lost in shuffle unless utmost value is wrung from all expenditures. Nevertheless, even limited American personnel participation must be guarded and tactful lest Indonesians feel pressures reminiscent colonial period or Dutch feel outraged at presumption inexperienced [Americans?].
5.
Exaggerated hopes that independence would bring quick increase living standards were built-up during struggle and will plague government and any aid program. They should not, however, be allowed divert emphasis from aiding self-help activities to supporting any specified living standard by balance of payments aid. Shift of responsibility to US implied by latter not sought by present leaders but always tempting and could become morass.

(13)

(a)
Field organization recommended Section 5 mission cable April 11 from Bangkok3 is likewise recommended Indonesia.
(b)
End-use ECA controllers now Djakarta should be retained administer end-use control ECA.

(14) Conclusion.

Immediate start implementing above recommendations imperative despite or because of problems and difficulties foreseen. Interest in participation highly trained American technicians has grown day by day in conference with individual Indonesian Ministers who aware handicaps their present technical environment. Most vigorous and prompt action all phases proposed program needed to mark decisive steps in preventing further deterioration economy and services to people to attempt forestall crisis. This country promising example SEA of effort introduce Western type democracy. Failure here would spread confusion and defeatism elsewhere. Successful leadership Indonesia would favorably affect Western orientation other SEA governments. Personnel capable high level detailed planning and negotiation project agreements should be sent here least possible delay and should be prepared remain on job.

(15) Representatives American Embassy have participated many joint meetings with Indonesian and Dutch officials and advisers and in drafting this cable. Ambassador Cochran concurs above analyses and recommendations.4

Griffin
  1. The conclusions which follow comprise the Griffin Mission recommendations for United States assistance to Indonesia.
  2. Chief of State of Viet-Nam.
  3. Section V of telegram 319 from Bangkok provided that the Chief of Mission would be responsible for the operation of the program and would be assisted by a single coordinator of economic cooperation activities. Joint commissions would be set up and United States technicians would be responsible to the local government or the joint commissions.
  4. In Ecato 34, May 25, to Djakarta, not printed, Cochran was informed that Mr. Griffin’s recommendations had been approved on the staff level and, subject to review and modifications based On field experience, would serve as a basis for the “initial action and development of aid plan for the next year.” (ECA files: Mutual Security Administration: Lot W–131: Box 59: Djakarta 8–100)