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

186. Memorandum From Robert H. Johnson of the National Security Council Staff to the President’s Deputy Special Assistant for National Security Affairs (Rostow)⁰

Washington, September 8, 1961.

SUBJECT

• Indonesian Economic Development

I understand that you are to see Don Humphrey, head of the economic team to Indonesia,¹ Saturday morning.² In preparation for this meeting you may be interested in the following brief account of the briefing by the team which I heard this morning at the State Department.³

Some Aspects of the Current Indonesian Economic Situation

1. Indonesia has been having some trouble with its exports partly because of inflation. A state trading corporation has been created to subsidize exports. It may also be used to drive the private traders out of business, although it is conceivable that the difficulties inherent in running such a state-run operation will force the Indonesians into some continued reliance upon private traders.

2. In general, the atmosphere for private enterprise is poor in Indonesia. In view of the uncertainties in the economic situation and with respect to government policy, Chinese entrepreneurs prefer to put their earnings into trading enterprises, where large profits can be made, rather than to reinvest them in manufacturing. There does seem to be some recognition of the need for foreign private enterprise to exploit Indonesian petroleum resources although the Indonesians are being very tough in current negotiations with the oil companies.

3. In general, Indonesian absorptive capability (admittedly a vague concept) has to be created in connection with any capital projects that we may support. There is increasing recognition by the government of Indonesia of the need to emphasize “turnkey” projects. It is the economic team’s view that what is generally needed is turnkey plus outside management for an initial period.

4. Most of the financing of Indonesian economic development has been accomplished by a combination of inflation and letting the economy run down through failure to maintain existing capital. Indonesia is some distance yet from the take off stage.

Tentative Recommendations of the Economic Team

1. Skills. The lack of technical skills is one of the greatest deficiencies of Indonesia. Training in vocational skills and in management is needed. The U.S. should give high priority in its aid programs to general education, vocational training and management training.

2. Spare parts and maintenance. There is much unused plant capacity in Indonesia. This is partly attributable to a lack of raw materials, but it is also due to the fact that equipment is not well maintained. U.S. aid to provide spare parts would produce more output for a given amount of input than any other kind of assistance. However, we also need to do some institution building in the form of training in preventive maintenance, spare parts inventory control, and planning and procurement of spare parts.

3. Export Commodities. The present Indonesian rubber replanting program is quite inadequate and needs to be considerably accelerated. Indonesia will need assistance to tide it over the 5–8 year period that it takes for rubber trees to come into production. Without such assistance, the replanting will not be undertaken.

4. Infrastructure. Lack of transportation has kept some exportable commodities from being moved to ports. Road and railway rehabilitation and harbor facilities are needed.

5. Electric power. It is not clear what stage Indonesia is in so far as its electric power program is concerned. Probably the primary need is for a preparatory stage of determining exactly what is required.

6. Mineral and forestry resources. Additional surveys would be desirable.

7. Light industry. There has been some screening of projects by the government and there is a Development Bank which is designed to finance such projects. This Bank has one of the most capable staffs that the team ran into in Indonesia. In part because of the favorable impression that that staff made, the team is inclined to believe that a loan to the Development Bank would be desirable.

8. A regional research center. There is a need for a center some place in Asia which could study the problems of adapting Western technology to societies which have a manpower surplus and capital shortages. There are good political reasons for establishing it in Indonesia and Indonesia would also offer good examples of this problem in many conspicuous forms. Such a research organization should probably have an international staff. (I would have some doubts as to whether location of such a center in Indonesia would make for receptivity to its activities elsewhere in Asia.)

Other areas that need attention and which might get or are getting some attention either from the U.S. or otherwise are tourism, improvement of statistical services and help to the Council of Sciences.

The team thought, when it left for Indonesia, that it would be very useful to find at least one capital project in Indonesia that we might finance which has political appeal and at the same time makes economic sense. The team had greater difficulty in finding such a project than it had anticipated. One possibility would be help to the rayon production complexes which Indonesia plans to build. However, the team has the gravest doubts as to the capabilities of Indonesia to manage such a complex operation. For example, what is likely to happen is that the plant will be built before local timber is available for use in it. Indonesia will be forced to import the required pulp wood and the net result will be an increase in import demand rather than a reduction as hoped by the Indonesians. Furthermore, the demand for rayon is partly due to its status value which might be destroyed if it were produced cheaply. These rayon complexes will cost $87 million each. The team is doubtful whether we should become involved even though this is a project within Saleh’s responsibility and would, therefore, produce some political credit for him if it is successful.

There was some discussion of what, it seems to me, is going to be a key issue if we get into significant economic assistance for Indonesia. That is the question of the extent to which we can get our aid program on a sound economic basis and get away from projects based primarily on Sukarno’s desires. Mr. Burgess, the ICA representative on the team,⁴ observed that we have taken a too defeatist attitude toward the possibility of serious work on economic problems and toward elimination of aid given for political reasons. Someone else from ICA who was present observed that the analysis that this team had made of Indonesia’s economic problems was exactly the kind of analysis we had made ten years ago but our aid continued to be dominated by political considerations.

Bob

0. Source: Kennedy Library, National Security Files, Countries Series, Indonesia, Vol. I, 8/61–9/61. Secret.
1. Professor Don D. Humphrey of the Fletcher School of Law and Diplomacy, Georgetown University, headed a team of academic and government officials who went to Indonesia in August 1961 to study the Indonesian economic situation, the proposed 8-year (1961–1968) economic plan, and what the United States could or should do in relation to the plan. The team was proposed by President Kennedy to President Sukarno during his visit to Washington in April 1961. An interim report of the team was submitted to McGeorge Bundy on November 3. (Ibid., 10/61–12/61)
2. September 9. No other record of the Rostow–Humphrey discussion has been found.
3. No other record of the briefing has been found.
4. David S. Burgess, Acting Chief, Burma–Indonesia Division, Office of Far East Operations, ICA.