Attached is to bring you abreast of our proposed Indonesian aid policy. The
Indos have complied sufficiently with
our pressure for stabilization and Bloc debt rollover that we ought to go
ahead on getting Europeans to chip in. We must chip in too, but at this
point only $25–35 million in new money.
Attachment1
Memorandum From Secretary of State Rusk
to President Kennedy
SUBJECT
- Indonesian Stabilization Program
On July 26 an AID-State delegation will
meet with members of the Development Assistance Committee of the OECD to discuss contributions to the
Indonesian stabilization program. At that time participants in the
meeting will have received what we expect to be favorable action by the
IMF Board on its management’s
recommendation that there be a $50 million standby arrangement to
support what it has judged to be an acceptable program for the
stabilization of the Indonesian economy.
The Indonesian economy has suffered steady deterioration since the end of
the war. There has been steadily increasing awareness, in Indonesia,
particularly over the past eight months, that political and economic
stability were related to each other and that without a major effort at
economic stabilization its present equilibrium of forces could not be
preserved. Against this background and with full knowledge that the PKI
(the Indonesian Communists) opposed it, Sukarno decided on May 26 to launch an economic regime
of severe fiscal discipline, austere import licensing, and incentive for
exports. It has already achieved some success. However, if there are not
considerable contributions of external financing to maintain the
momentum now achieved, Indonesia faces an exhaustion of foreign exchange
and certain bankruptcy. To forestall PKI exploitation of economic chaos
and the possibility of Indonesia’s dependence, at a moment of extreme
vulnerability, upon Bloc countries, State and AID have held out to Djakarta the hope of a considerable
expansion of Free World assistance. IMF
approval of their program was based on the same expectation.
Meanwhile Indonesia has been passing through a period of disturbing
instability in its attitude toward Malaysia. Sukarno has retreated abruptly from the good feeling
established in Tokyo and Manila among the Malayans, the Indonesians and
the Filipinos. His recent attacks on the Tunku have been violent, although to some extent
[Page 679]
understandable in view of the
Tunku’s inept handling of the
UK Singapore-Malaya agreement reached
in London. We hope that Sukarno’s
reactions will remain at the verbal level, but if the violence of his
oratory is accompanied by military operations, we would be precluded
from extending to Indonesia our contemplated assistance.
The U.S. delegation is going to the DAC
meeting to argue for generous multilateral support to the Indonesian
stabilization program, making it a matter of record, however, that if
Sukarno engages in aggression
against his neighbors, we on our part would be unable to extend the aid
which we could give.
There have been other difficulties in preparing to adopt this
position:
- (1) The Indonesians are heavily in debt to the Bloc and we could
not have considered extending aid to them had they not succeeded in
obtaining from the USSR agreement
to reschedule annual payments on Indonesia’s military and economic
debt. The Indonesians have assured us that the level of net payments
will not exceed $20 million a year when drawings on Soviet economic
credits are deducted.
- (2) We have not been entirely satisfied with what we know about
Indonesian intentions toward foreign investment. However, Mr.
Wyatt’s participation in
negotiations between Indonesian Government and oil companies
resulted in acceptance of a “Heads of Agreement” which offers
promise of a satisfactory basis for operations of Caltex and Stanvac.
U.S. anxieties about Indonesia’s attitude toward Malaysia have been
brought to the attention of President Sukarno, his cabinet ministers, and the Indonesian
negotiating team here in Washington. The most explicit warnings have
been given that continued opposition to Malaysia would reduce the
prospect of a sympathetic attitude toward Indonesia’s needs by certain
of our DAC partners and thereby render
U.S. aid more difficult. The Indonesians are also fully aware that overt
military activity against Malaysia would entirely foreclose all
prospects of U.S. aid.
There have been over the past three or four years periods when Indonesian
actions made it extremely difficult for us to preserve a useful presence
in Djakarta, much less bend the Indonesians to a Western orientation.
Throughout this period our combination of military assistance (about $31
million in FY 1961–63), plus grant aid
(about $55 million), AID loans (about
$20 million), and PL 480 deliveries, have
placed us in a situation where Indonesia has become accustomed to
significant economic dependence upon the United States and where our aid
has demonstrably affected the orientation of many individual
Indonesians, whose concern about Sukarno’s recklessness may be as great as ours.
[Page 680]
The proposed U.S. contribution falls within an estimated range of $110
million to $135 million, constituted as follows (attributed to the
standby year):
| PL 480 |
$78 million |
| March 1963 loan for imports |
$10 million (out of 17 total) |
| Subtotal |
$88 million |
| Rescheduling of debt payments due U.S. Govt
agencies |
$ 13 million (minimum) |
| Subtotal |
$100 million (rounded) |
| New AID stabilization
loan |
$25–35 million |
| Total |
$125–135 million |
We believe that it is essential that we continue to take calculated risks
in forestalling developments which could cause Indonesia’s dependence
upon the Bloc to increase. To forestall this, our planned economic
assistance is negligible when compared with the strategic consequences
of a failure of our present effort.
Attached are Circular telegrams 99 and X–83, which constitute the
position we have asked be put to our allies.2
