Foreign Relations of the United States, 1964–1968, Volume XXVI, Indonesia; Malaysia-Singapore; Philippines

210. Memorandum From the President’s Special Assistant (Rostow) to President Johnson¹

Washington, June 8, 1966, 2:35 p.m.

Mr. President:

State is anxious that you read the attached paper on Indonesia.

It’s an excellent summary of the evolution of Indonesia and our policy since October 1 of last year.

The operational point is this (see pp. 4–6): if they get Sukarno out soon, we may well face the following aid issues:

• —Further emergency aid (P.L. 480).
• —Multilateral debt rescheduling.
• —Basic long term assistance (mainly European, Japanese, multilateral, but perhaps some U.S. bilateral).
• —Conceivably, some very small military assistance for training and civic action.

Forward planning on this has been remarkably good, even to keeping key Congressional leaders informed. Thus far, they have been sympathetic.

The town wished you to be informed.

No decision required, unless you wish to give guidance.

Walt

Attachment

Paper Prepared in the Department of State

INDONESIA

Background

1. Last October 1 the Indonesian Communist Party associated itself with elements of the armed forces to stage a take-over of the Indonesian Government which was promptly suppressed by the Army. Between October 1 and the middle of March of this year the Communist Party was virtually eliminated as an effective political organization, perhaps as many as 300,000 Indonesians were killed—the great bulk of whom we believe were in fact associated with the Communist apparatus. Political power gradually shifted from President Sukarno and his Palace clique toward the Army, the Muslim political parties, and anti-Communist students.

2. In February and March Sukarno attempted to seize full power again, was unable to do so, and was forced to accept a new cabinet which was controlled by the Army and by political moderates. By the end of March there was a new government dedicated to economic and social reform, most of Sukarno’s foreign policy had been publicly challenged or was being ignored, and the triumvirate of General Suharto, the Sultan of Jogjakarta and Adam Malik took effective, though not yet complete, power.

Present Situation—Domestic

3. In the past two months the new leaders have moved with surprising speed to consolidate their power and to start on the long process of putting together the almost totally shattered Indonesian economy. The Communists seem to be effectively out of power, but Sukarno remains as a President still having the capacity to limit and interfere with the activities of government. The government has, despite this, instituted new export incentive programs, started to funnel Indonesia’s export earnings through the Central Bank, and succeeded in at least slowing down price inflation of rice and certain other basic commodities. The economy is still in a chaotic condition, and the leadership feel that unless they can succeed in providing adequate food and clothing to the population their efforts to develop a rational political system cannot succeed.

Present Situation—Foreign

4. Although still limited by the continued presence of Sukarno, the new government has made very substantial changes in foreign policy. It has announced to its own people that it intends to re-join the United Nations and other international organizations at some time in the fairly near future. It has entered into a preliminary agreement seriously intended to end confrontation with Malaysia and Singapore.² It has attempted to restore normal working relations with all western countries and with Japan, has started to close out its mischief-making presence in Africa, and has virtually broken relations with Communist China. In Bangkok last week, Indonesian representatives joined in expressions of interest in a loose-jointed grouping of Southeast Asian states to include initially Malaysia, the Philippines, Thailand, and Indonesia.

5. The new regime has completely put an end to anti-American expressions in Indonesia. Although it continues publicly critical of our Viet-Nam policy, Malik has privately expressed some understanding of our position, and there have been some reciprocal propaganda attacks between North Viet-Nam and Indonesia. In another aspect significant to the U.S., the regime has decided against further efforts to take over American petroleum company facilities which produce and export crude oil, and seems to be negotiating in good faith for the purchase of the one remaining American refinery (STANVAC).

Probable Future Developments

6. The leaders’ intentions are to continue to whittle away at Sukarno, using as a next step the mechanism of the “People’s Parliament,” which is due to meet for about three weeks starting in mid-June. The leaders intend to use this session to remove Sukarno’s life-time tenure on the presidency, to remove his special powers so that he will become the figurehead, to secure formal approval of a settlement with Malaysia, and in general to put the country’s up to now rather nominal legislative process firmly behind the new leadership. Having accomplished these things, hopefully by mid-July, the intention is to install a new working cabinet free of the last of Sukarno’s henchmen, and then to move full scale into economic rehabilitation. Other basic decisions such as the dates for re-joining international organizations will probably be deferred until this time.

7. Despite its apparent willingness to cease its aggressive policies in the area—which the new regime recognizes as essential to external assistance among other factors—we should not expect the new leaders to be anything but intensely nationalistic, non-aligned, and “Afro-Asian” in their orientation. Nonetheless, the contrast between these policies and those of Sukarno, or those that would have been pursued by the totally Communist-oriented regime that appeared to be in prospect, is dramatic. All in all, the change in Indonesia’s policies has been a major “break” in the Southeast Asian situation, and a vivid example to many other nations of nationalist forces rising to beat back a Communist threat.

U.S. Interest and Objectives

8. Our traditional interest in Indonesia has been to keep the country out of the hands of Communists and out of the potential control of Communist China. As the Sukarno regime moved more and more under Communist and Chinese influence prior to October 1965, the United States inevitably became the number one officially pronounced enemy of the Sukarno regime, and was billed as the only threat to Indonesia’s national security because of the presence of American forces in the Philippines, the South China Sea, Viet-Nam, and Thailand. The marked pro-Communist trend in Indonesia—accelerated in mid-1963—undoubtedly rested in part on the conclusion that the U.S. was losing ground in Southeast Asia. Conversely, although the U.S. had no direct part whatever in the anti-Communist takeover that began in October, unquestionably the fact that we were standing firm in Viet-Nam reinforced the courage of the anti-Communist leaders; to put it differently, without our evident determination, they would have been very much less likely to have acted.

9. Our basic interest in Indonesia still derives from its tremendous size, its population of more than 100,000,000, its location between the Pacific and the Indian Ocean, and between Australia and the mainland, as well as from its potential usefulness as a productive and influential state which could serve as a unifying and constructive force in the area. Our objective should be to help as we can in the development of a responsible, moderate and economic-minded regime. Only such a regime can prevent the resurgence of some form of extremism and, over time, play a useful part in the area.

U.S. Actions to Date

10. Until late March, our major policy on developments in Indonesia was silence. The anti-Communist leaders wanted no cheers from us. This policy remains generally sound, particularly in the light of the wholesale killings that have accompanied the transition (even though it is perfectly clear that a Communist takeover would have been at least as bloody). Nonetheless, we have recently been quietly pointing out that we take a favorable view of the new regime and have also been noting that its succession would have been less likely without our continued firmness in Viet-Nam and in the area. We should continue to applaud and claim credit only to this extremely limited extent.

11. While continuing this public position, we have throughout made it privately clear that we are ready at the right time to begin making limited material contributions to help the new leaders get established. Our AID programs had been entirely terminated in Indonesia, but we have (in mid-April) agreed to sell them 50,000 tons of rice under PL 480 Title IV (dollar repayment) on terms of 4–7/8 per cent interest with five years repayment. We are now beginning action on a Title IV sale of 75,000 bales of cotton on more generous terms, 3–1/2 per cent interest with 15 years repayment. We have quietly made it known we will support their efforts to reenter international organizations, and that we will participate in multilateral efforts to reschedule their debt at an appropriate time. We have encouraged other free world countries to extend emergency assistance to Indonesia in order to help the new regime establish itself in the period before the questions of debt rescheduling, stabilization and development can be dealt with.

Future U.S. Actions

12. If the new leadership succeeds in effectively removing power from Sukarno during the next month, it will then turn its efforts toward the economy. There are a number of points at which U.S. assistance will be needed.

a. Further Emergency Aid. There will be a probable need for further short-term assistance to keep the economy going prior to multilateral decisions on long-term problems. Our role in this can be played by further transactions under Public Law 480. While we have been providing assistance under Title IV on concessional terms, we should plan to switch to Title I (local currency repayment) if the political situation stabilizes, in order not to add further to Indonesia’s already overwhelming foreign exchange debt.

b. Multilateral Debt Rescheduling. Indonesia has a foreign debt of more than $2.5 billion. Approximately $170 million of this is owed to us, and about $1 billion to the Soviet Union, mostly military. Debt servicing requirements this year may amount to about $450 million, which is more than probable gross foreign exchange earnings for the same period. Since Indonesia is already in default on both private and government accounts, rescheduling is obviously necessary. We have been in close touch with Indonesia’s free world creditors, have made it clear that we regard it as essential that rescheduling be multilateral, and that we would like to see some other country, such as Japan, or an international organization, play the leading role in organizing the rescheduling exercise. The Sultan of Jogjakarta and various of his and Malik’s representatives have recently visited Japan and obtained a commitment for credits of $30 million as emergency aid. The Sultan plans to visit Western European countries in July. Other representatives plan to visit the USSR and EE countries. It now seems probable that the Indonesians will be ready for formal multilateral consideration of the debt in late July or August. The probable Indonesian proposal will be along the lines of a five-year moratorium—which among other things defers such knotty issues as the priority status of military as compared to economic debts. We should be prepared to participate, and to agree to rather generous terms provided we do so in a framework taking account of interests of all creditors.

c. Basic long-term assistance. Beyond emergency aid and debt rescheduling, Indonesia is going to need both technical assistance and further credits if the country is going to get back on its feet. However successful their performance in restoring integrity to the Central Bank, cutting government deficit financing and promoting production and exports, it is quite likely that by the fall of this year the ability of the new government to preserve its authority will depend upon access to substantial foreign credits to rehabilitate both industry and agriculture, as well as to restore the badly damaged communications and transportation systems. Much of this needed credit can be obtained from Japan, from Western Europe, and very probably from such international organizations as the IMF, the IBRD, and (later) the Asian Development Bank. We have already made it clear that we expect long-term assistance to be on a multilateral basis, and the willingness of other sources to contribute substantially will be affected by the U.S. contribution. Hence, we believe we should be prepared to pledge significant amounts, and the need for such pledges may arise sometime in the fall if the constructive trend in Indonesia continues at its present pace. Hence, it is conceivable that we will need substantial 1967 AID funds, both for direct assistance and for channeling through the Asian Development Bank. The debt situation will foreclose the Export-Import Bank as a source of additional assistance, and our only other channel would appear to be additional PL–480 commodities on concessional terms amounting to assistance.

d. With respect to military assistance, the Indonesian Army is excessively large and amply equipped for internal security. We should not consider resuming any military assistance programs except for a possible small-scale training effort largely for the sake of personal ties with key military figures of the future. There is the additional possibility of civic action projects, on which the Indonesians are already tentatively approaching us for technical help in the development of the resources of the underpopulated outer islands. This kind of project might make sense in the total picture, for limited MAP and AID funding.

U.S. Government Organization With Respect to Indonesia

13. Up to this point, the Indonesian problem has been effectively handled on a normal inter-agency basis. Moreover, we have kept in touch with key leaders of Congress, who appear to understand the situation and its possible implications. The fact that any major assistance would be on a multilateral basis would have particular appeal in many Congressional quarters.

14. Nonetheless, in view of the impending dimensions of the problem in the next six months, it now appears wise to initiate more extensive consultations with the Congress, and it may be wise to designate a specific group within the Executive Branch—perhaps as a subcommittee of the Senior Interdepartmental Group—to keep the problem under very close review.

1. Source: Johnson Library, National Security File, Country File, Indonesia, Vol. VII, 5/66–6/67, [1 of 2]. Secret. The memorandum indicates the President saw it.
2. Telegram 2645 from Bangkok, June 3, contains a summary account of the talks between Indonesian and Malaysian Delegations headed by Malik and Razak, which resulted in the draft agreement to end confrontation. (National Archives and Records Administration, RG 59, Central Files 1964–66, POL 32–1 INDON–MALAYSIA)