756D.5–MSP/12–1751

The Acting Assistant Secretary of State for Far Eastern Affairs (Allison) to Mr. Robert Blum, Special Assistant to the Assistant Administrator for Program, Economic Cooperation Administration (Cleveland)1

confidential

Dear Mr. Blum: I wish to thank you for the lucid exposition in your letter of December 17, 1951 of the reasons for ECA’s recommendations regarding the continuance of the technical and economic program for Indonesia.

The Department’s position is at variance with that of ECA. I believe this variance is due chiefly to a difference not in the diagnosis of the problem but rather in the prescription of the remedy.

The objective of U.S. policy toward Indonesia is the maintenance and strengthening of a politically stable, economically healthy, non-Communist State under a government friendly to the U.S. This policy is based upon the realization of Indonesia’s importance to the U.S. deriving from its strategic position athwart the lines of communication between Asia and Australia and the Pacific and Indian Oceans, and its important raw materials including about 20% of the world mine output of tin (in ore), 38% of the world production of natural rubber, and the only important source of crude petroleum in the Western Pacific.

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I concur in ECA’s presentation of the serious problems which Indonesia is facing, including the resurgence of organized Communist activity. I share your belief that the time element is important in this connection and the U.S. should “do everything in its power to speed the consolidation” of Indonesia.

As pointed out both in your letter and in the ECA FY 1953 Budget Presentation justification, Indonesia is a wealthy country. It will have a large favorable balance of payments in 1951. Total exports, conservatively estimated, will amount to $1,200,000,000. The Indonesian Government’s budget will be approximately balanced in 1951. Indonesia’s gold and dollar holdings have increased from $194,000,000 when Indonesia acquired sovereignty in December 1949, to $402,000,000 on October 31, 1951. U.S. financial and economic assistance to Indonesia, apart from the ECA program, includes a $100,000,000 line of credit extended by the Export–Import Bank. In these circumstances, I fully agree with the following ECA statement regarding its FY 1953 grant program of $11,500,000:

“Expressed in figures alone, its prospective impact on the Indonesian economy as a whole may seem very small indeed. It should therefore be clearly understood and realistically admitted that the significance of this program lies chiefly in its political and psychological effects and in its catalytic nature.”

For the reasons outlined below, however, I believe that the FY 1953 Program which ECA proposes for Indonesia would at best be an ineffective method of “speeding the consolidation” of Indonesia and of implementing U.S. policy toward that country.

Indonesia has a non-Communist government which has demonstrated, by its mass arrests of subversives in August 1951, and by its severe suppression of the armed Communist uprising at Madiun in 1948, that it is both sincere and effective in suppressing Communism when the danger becomes acute. The Indonesian Government has also by its recent actions demonstrated its basic friendliness to the U.S. It shut the door in the faces of a group of Chinese Communist diplomats who were attempting to increase Chinese representation in Indonesia. It included rubber on the list of goods subject to the United Nations embargo against Communist China. It attended the San Francisco Conference and signed the Japanese Peace Treaty in the face of Indian and Burmese abstention and Russian opposition.

This non-Communist and basically friendly Government is under severe popular pressure, however, to pursue a vigorous policy of “independence” in its foreign relations. It therefore resents and may be seriously embarrassed by any American activities which lend plausibility to the picture of Indonesia as an arena and its Government as an American mercenary in the U.S. battle against Communism.

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Although the projects for the ECA FY 1953 program have been worked out by ECA/Djakarta in collaboration with the Indonesian Coordinating Committee and have been formally requested by the latter, it would be unrealistic to accept these requests as proof that the total effect of the grant program will be a net political asset to American foreign policy in Indonesia. On the liability side looms Indonesia’s recognized reluctance to accept foreign aid.

Indonesia’s reluctance to accept foreign aid, pointed out both in your letter and the ECA FY 53 Budget Presentation, is caused chiefly by the suspicion that the Indonesian Government in accepting American aid has “sold out” to the U.S. and thereby prejudiced Indonesian “independence”.

In my opinion, this reluctance applies primarily to grant aid which brings with it the foreign grantor government’s participation in Indonesian matters within Indonesia. Indonesian apprehensions on this account have been so strong as to deter the government from seeking Parliamentary ratification either of the Fulbright agreement or of the ECA bilateral signed in October 1950.

This reluctance is further explained by paragraph 19 of Toeca A–37 submitted by ECA/Djakarta in October 1951,2 quoted in part below:

“To summarize, the reluctance of the government to request technical assistance personnel is based upon a combination of personal prestige, a desire to run their own affairs and to prove to people that Indonesians themselves can run their own affairs; some suspicion of American intentions; Dutch resistance; some fear of too prominent identification of Indonesia with the U.S.; unsatisfactory experience with touring and/or short-visit experts; a feeling that the government already knows what needs to be done in major fields such as agriculture and public health and simply lacks the middle and lower-level technicians (or funds) to carry out technical experts; the relatively short periods Americans will agree to stay in Indonesia; what the Indonesians regard as the fantastically high pay scales (both in dollars and in rupiah allowances) for American experts; the shortage of housing, even for Indonesian officials; and widespread insecurity.”

As contrasted with its reluctance to accept foreign aid, the Indonesian Government has shown enthusiasm and initiative in purchasing foreign aid on the government’s own terms. There is an active Indonesian Supply Mission in New York making purchases through normal business channels. The Indonesian Government has, on its own initiative, provided for the training of 60 Indonesian air cadets, on a private contract basis, by an American company in California. It has hired economists and technicians from Switzerland, Germany, and Australia; and has opened a recruiting office at The Hague which reportedly has the objective of hiring 2,000 technicians to work in [Page 774]Indonesia and has already let 50 individual contracts. The Indonesian Air Force is employing American flying instructors on a private contract basis at Bandung. I believe that the most successful and most appreciated of the projects which ECA has sponsored in Indonesia is the project which makes available the skills of the J. G. White Engineering Company as consulting engineers directly responsible not to an agency of the American Government but to the Indonesian Government itself.

In similar contrast to its attitude toward foreign aid in the form of grants, the Indonesian Government looks with comparative favor on aid in the form of foreign loans. It has successfully defended before Parliament the acceptance of the $100 million of Ex–Import Bank line of credit as a good business loan in return for a fair rate of interest. The Indonesian Parliament has ratified loans amounting to $52 million under this line of credit.

I believe that your letter implies the opinion that the reduction of the ECA grant aid program at this time would strengthen the hand of Communism. With this opinion I cannot agree. The Communists in Indonesia are indeed a threat, and if they play their usual game they may be counted on to try to make political capital out of whatever decision the U.S. Government reaches with regard to continuance, discontinuance, or modification of the ECA Program. If we continue the program, the Communists will probably point to it as another tentacle of U.S. imperialism entwined around a subservient Indonesian Government. If we discontinue or diminish the program, the Communists will probably cite this action as proof of American perfidy. As between the two alternatives, I believe the latter offers the Communists the least fruitful material for propaganda, especially if substantial U.S. financial aid continues to be extended in a form more acceptable to the spirit of Indonesian nationalism. In this connection, I am pleased to note that the ECA FY 1953 Budget presentation states that the Export–Import Bank believes that new loan commitments, substantially larger than the amounts proposed for grant aid, may be made in Indonesia during FY 1953.

I recognize the possibility that reduction of the ECA FY 1953 Program below $8 million might cause some disappointment and criticism, but I do not share your opinion that it would “embitter the Indonesians.” On the contrary, and apart from the fact that American-Indonesian relations are strongly affected by many factors other than the size of the ECA Program, I believe that a reduction if tactfully handled and judiciously presented by the ECA and the Department might improve our relations with Indonesia.

The presentation I envisage would emphasize that large amounts of American aid in the form of grants, originally proposed to assist [Page 775]Indonesia’s economic recovery, have been rendered unnecessary by the economic progress which Indonesia has achieved in the short period which has elapsed since she acquired sovereignty. It would simultaneously be pointed out that although aid in the form of outright grants has been discontinued, America is still extending financial cooperation under the Export–Import Bank line of credit, and stands ready to consider increasing this loan.

You propose that the Indonesian Government participate in the decision as to the magnitude of the ECA FY 1953 Program if under $8 million. This procedure would, I believe, be inadvisable. Although the Indonesian Government has amply demonstrated its reluctance to accept grant aid accompanied by foreign advisers responsible to a foreign government, we cannot expect officials of the Indonesian Government formally to reject a gift when offered by a friendly country. The proposed procedure, moreover, would probably be embarrassing to both Governments in view of the tacit recognition by the Indonesian Government that the amount of the grant aid will be determined not only by the availability of funds from the American Congress, but also by the United States Government’s shrewd estimate of the extent to which these funds will promote American foreign policy in Indonesia. I therefore consider that the magnitude of the Program is a matter which must be decided solely by the United States Government. If this decision results in a reduction, I believe, as indicated above, that it can be presented in a manner acceptable to the Indonesian Government.

It is certainly true, as you state, that the saving of a few million dollars on the Indonesian program will be insignificant compared to the total U.S. expenditure on foreign aid. I do believe, however, that such a saving is warranted and therefore would be appreciated both by the Bureau of the Budget and by the Congress.

The Department considers that this ECA Program, on the scale contemplated, would be a net political liability in that it would risk undermining the popular and parliamentary support of Indonesia’s non-Communist and friendly Government which, partly as the result of our total diplomatic effort, is leading Indonesia to closer affiliation with the United States.

While the Department has concurred with ECA in the appeal to the Bureau of the Budget for the restoration of $17 million to the SEA programs as a whole, it does not support restoration of all requested funds for the Indonesian program. The Department does heartily approve of the continuation of the White Engineering Project and believes that the remaining projects should be limited to those already actually in progress, particularly those which have reached such a stage that sudden elimination would be extremely difficult or embarrassing [Page 776]and that the total amount of the Indonesian program should therefore not be more than $5 or $6 million. It is also our strong belief that, barring unforeseen developments, the grant program should be so carried out that it can be brought to a complete close by the end of FY 1953, and in no event with anything more than purely liquidation activities extending into FY 1954.

If ECA is unable to agree to the program envisioned above, it is suggested that the question be submitted to the Director of the MSA for adjudication.

Sincerely yours,

John M. Allison
  1. According to a covering memorandum from Mr. Allison to Mr. Cleveland, dated January 7, 1952, Mr. Blum had left Washington, so Mr. Allison decided to send this reply to Mr. Cleveland instead.
  2. Not here printed.