241. Paper Prepared in the Department of State for the National Security Council1

INDONESIA

I. Background

Introduction

1. On August 4, 1966, the National Security Council considered a paper on Indonesia which made cautiously hopeful forecasts for the coming year.2 These forecasts have proved realistic. Economic and political progress was perhaps slightly better than expected a year ago, and the contributions made by the United States and other major Free World countries to economic stabilization followed the predicted pattern.

2. This paper reviews the current situation, projects a program of action, and looks ahead to the prospects for the coming year.

Political

3. Sukarno has been eliminated as a political force. The “New Order” led by General Suharto is well established in power, and is neutralizing gradually “Old Order” hold-outs in the police, marine corps, and parts of Central and East Java. Suharto and his associates showed sophistication and a fine sense of timing in managing the transition. The thread of legitimacy was never broken. Sukarno was [Page 516]denied martyrdom. Instead, the pernicious irrelevance of his leadership was gradually exposed, and the hollow shell of rhetoric and revolutionary romanticism allowed to crumble of its own weight. “Engineer” Sukarno now lives in internal exile in Bogor, a pathetic old man transformed in eighteen months from the incarnation of the Indonesian State into a historical relic.

4. This process of political transition was completed only in March of this year, and a post-Sukarno political structure has not yet emerged. Suharto keeps his own counsel, and is inclined to caution and gradualism. He is feeling his way among the conflicting pressures of New Order activists advocating rapid, wholesale change, and entrenched traditional political leaders defending the status quo. Military-civilian distrust and suspicions add another element of stress. There is some public criticism of the slow pace of change, but Suharto has shown in the past a good sense of timing and an ability to recognize and exploit a developing national consensus. The new election law is not yet passed and, with a minimum of eighteen months lead time between passage and elections, it is unlikely that the Indonesians will go to the polls before late 1969 or 1970.

5. The past year has been one of solid accomplishment in the international field. Indonesia settled its quarrel with Malaysia and rejoined the United Nations and its associated organizations and agencies. It has supported the concept of regional cooperation, and will be meeting with its neighbors in the coming weeks to create a new Southeast Asian regional organization. It has continued to adhere to a non-aligned policy, and has maintained correct relations with the Soviet Union and the States of Eastern Europe. Its relations with Peking, however, are under severe strain, but both the Chinese and Indonesian Governments appear desirous of avoiding a complete break.

Economic

6. Progress in domestic economic reform has been considerably greater than was anticipated in August of last year. An ambitious and reasonably effective stabilization program was put into effect. The pace of wild inflation has been checked. Prices on major consumer items leveled off. A stultifying jungle of licenses and controls was swept away and replaced by a system that relies in large measure on free market forces to determine import priorities. Government corporations were cut off the dole and told to produce effectively or perish. Budgetary stringency was introduced, and the military share of the budget cut in half. Political risks were faced and highly subsidized prices for gasoline, electricity and rail travel were raised to meet the costs of production. The Central Bank, which under Sukarno was a fiscal mockery of that term, is now beginning to exercise control of foreign exchange [Page 517]earnings and domestic credit. A new investment law designed to attract foreign capital was passed.

7. These accomplishments are largely the results of the leadership of a group of young economists from the University of Indonesia trained at the University of California at Berkeley, MIT and Harvard. These men have not only been responsible for determining economic policy and overseeing its execution, they have also participated in the international negotiations leading to debt rescheduling and new aid. Most important of all, these economists have won the unqualified support of General Suharto who has backed them without reservation in the politically painful belt tightening of the stabilization program.

8. These gains were achieved from a degree of economic collapse unparalleled for a major nation in modern times, and much still remains to be done. A substantial volume of trade still moves in irregular channels. Government revenue is overly dependent on taxation of foreign trade, and tax collection as a percentage of gross national product is the smallest in Southeast Asia. Corruption and influence peddling continue at all levels of government. The Suharto regime, however, acknowledges the seriousness of these problems, and spurred by strong pressures inside and outside the government, is moving to deal with them.

Psychological

9. With these political and economic changes have also come important changes in attitudes and values. The baby boom of the 1950’s has produced a new post-revolutionary generation, a stranger to both the heroics of the independence struggle and the spiritual indignities of colonialism. This generation has taken the lead in a general rejection of the slogans and ideology of the Sukarno period, and pragmatism, rationalism, and performance have become the new watchwords. A sober, objective judgment of national self-interest is now more often the basis for decisions, and Indonesian actions, if not always satisfactory, have at least become more predictable.

International Response

10. Moving in response to the steps taken by Indonesia to put its house in order, the United States and other friendly countries of the non-Communist world cooperated in a joint effort to help Indonesia. They agreed in Paris in December to reschedule somewhat over $300 million in debts in arrears and falling due in the 18-month period ending December 31, 1967. They later agreed in Amsterdam to provide $200 million of new assistance in CY 1967 to meet the foreign exchange gap estimated by the IMF staff. The United States committed itself to provide one-third of the total requirement if Indonesia continued to make reasonable progress in its stabilization performance and if the other donor countries made up the remaining two-thirds. The meeting [Page 518]in The Hague in June announced the successful pledging of the full amount (attached table sets forth the specific contributions).3 The Japanese contribution of approximately one-third is noteworthy.

11. The Soviet Union refused to participate in these conferences, but Indonesia reached, through bilateral negotiations, a preliminary understanding that would lead to rescheduling, under approximately the same terms, the debt due the USSR and other Communist states. However, the Soviet Union and the countries of Eastern Europe have thus far made no contribution of new aid.

12. The International Monetary Fund has played a central role in advising the Indonesian Government on its stabilization program. It maintains a representative in Djakarta, and has taken part in all of the international meetings on debts and new aid. The International Bank for Reconstruction and Development made a preliminary survey of Indonesian priority import requirements for CY 1967 and, at the Indonesian Government’s request, has a mission now in Indonesia studying the question of transition from stabilization to the development phase. Both the United Nations Development Program and the newly formed Asian Development Bank have dispatched missions of experts to advise the Indonesian Government on critical development efforts.

II. Action Program

U.S. Objectives

13. We seek the development of a politically stable Indonesia, responsive to the needs of its citizens, and playing a responsible and constructive role in Southeast Asia and the world. This objective coincides with the goal of the present Government of Indonesia.

U.S. Strategy for the Future

14. Our strategy contains the following major elements:

A. Central Role of the International Agencies

The international agencies must continue to play a central role in Indonesia’s economic recovery. The IMF has made an invaluable contribution in the areas of stabilization planning, debt rescheduling, and mobilization of new aid. The IBRD is now moving in to advise Indonesia on reconstruction and development planning. The Asian Development Bank appears certain to become an important contributor to the development effort. These organizations provide Indonesia with sound professional advice, act as a clearing house of economic information, [Page 519]and serve both as impartial judges of achievement and as politically insulated forces for encouraging minimum standards of performance.

B. Maximum International Participation

Indonesia’s needs for foreign assistance are so great that only the pooled resources of many nations can provide the necessary help. Indonesia’s continuing debt problem can be dealt with only on an international basis. A multi-national approach is therefore both desirable and necessary. All the major trading nations of the world have a stake in the economic recovery of a nation with abundant natural resources and a political economy of over 100 million people. We should ensure that they bear their fair share of the burden, and avoid a division of labor in which, in effect, we feed the cow and they milk it.

C. Maximum Role for Private Investment

Private investment from all of the developed countries must play an important role in Indonesia’s transition from the stabilization to the phase of rehabilitation and development. We should continue to encourage Indonesia to maintain a favorable environment for foreign investment.

D. Support of “Modernizers”

One of Indonesia’s greatest assets is the cadre of young men trained in American and Western European universities. These are the people that form the cutting edge of Indonesia’s drive to develop its economy and its political institutions. They are our allies and our actions should support them.

E. “Low Profile”

The United States must make a major contribution to Indonesian recovery. The principal elements of our strategy—international agency involvement and multi-national participation—require, however, that we play a supporting rather than a central role.

F. Bilateral Program

While making our major contribution in the multi-national context, we should also continue small, intensive bilateral programs.

III. U.S. Actions

15. A. Debt Rescheduling

The United States will join other creditor countries in Paris in October to deal with the problem of Indonesia’s debts falling due after January 1, 1968. We should build upon understandings already established in past reschedulings and, in determining changes, take [Page 520]due account of Indonesia’s capacity to service its debts. Whatever the outcome, the fact will remain that Indonesia in the near term will have no resources to devote to the reduction of a growing external debt of over $21/2 billion.

B. New Aid

The donor countries will meet in Amsterdam in November to consider the IMF’s estimate of Indonesia’s requirements for new assistance during CY 1968, and to discuss the IBRD report on development planning. We can reasonably expect to be called on to contribute at least the $65 million pledged for CY 1967 and possibly one-half again that amount.

C. Bilateral Programs

We plan to continue to provide non-combat equipment under MAP for the civic mission program of the Indonesian armed forces. This assistance permits the Army to strengthen its ties with the civilian sector, and at the same time provides high priority services in the field of road construction, flood control and irrigation system maintenance. The training of Indonesian officers in our Service schools in economically beneficial management and technical skills will continue. On the civilian side, we intend to support under PL–480, Title II, food for work programs which increase agricultural production. We intend also to provide technical assistance, and a program of educational exchange has been resumed and will be expanded.

IV. Anticipated Problems

Unreasonable Requests for Aid

16. While the Indonesian Government accepts and supports the concept of a multi-national approach to Indonesia’s economic problems, there has been in the past a tendency, particularly on the military side, to look for easy solutions in an outpouring of large quantities of American assistance. The new Indonesian leaders have gained, during the past year, a more realistic understanding of U.S. capabilities and aid procedures. We must anticipate, nevertheless, some further random, uncoordinated requests for substantial bilateral assistance.

Population Control

17. Two-thirds of the population of Indonesia live on one-fourteenth of its land area. Economic recovery and political stability cannot in the long run be achieved without population control and family planning on the central island of Java. The Indonesian leaders are beginning to turn in a tentative fashion to face this problem. This is a sensitive issue on which heavy-handed pressure would be self- defeating, but we should be quietly persistent in encouraging a vigorous program of family planning.

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Volume and Nature of Our Assistance

18. The most difficult problem confronting the United States during the coming year will be providing the volume and type of assistance to meet our fair share of Indonesia’s needs. The principal elements of this problem are:

A. Meshing Capacity With Needs

If major cuts in the AID appropriation are made this year, the amount which we can lend to Indonesia will be reduced. Indonesia needs rice, but must compete with the preemptive requirements of Viet-Nam. Cotton, through PL–480, could be a major element in our aid, but Indonesia’s broken down textile industry has not been able to compete with cheap Hong Kong imports. When idle capacity is restored, Indonesia can absorb increasing amounts of our raw cotton.

B. Multilateralism

As a member of a group working on a common problem, we are under special obligation not only to carry our share of the burden, but also to make our assistance available on terms no less generous than those offered by other countries. In addition, as Indonesia moves from the stabilization to the development phase its needs will increase. Japan and Western Europe may find it difficult to increase significantly their current levels of assistance to Indonesia, and we may be unable to limit our share to one-third or to achieve a rigid matching formula.

C. Inadequate Resources

Even assuming the best possible AID-PL–480 mix, it is almost certain that we will not be able to meet from anticipated resources one-third of Indonesia’s 1968 requirements. It may therefore be necessary to go to Congress early next year for supplementary funds. We have been in close touch with key members of Congress on the Indonesian situation, and have found them favorably disposed both towards assistance to the Suharto government and to our multi-national method of approach.

19. Indonesia has been led to believe that if it faced up to its economic problems, took the politically difficult steps to stabilize its economy, and adopted sensible policies of self-help, it could expect support from the world community. Indonesia’s leaders have started down this difficult road, and for them there is no turning back. The pace of change must be maintained. We have seen at home and abroad how improving conditions create expectations which become explosive if not fulfilled. The Indonesians are performing on their side of the bargain, and the United States and other countries of the Free World are confronted with the challenge of dealing not with a failure, but with a prospective success. We should not fail them.

  1. Source: National Archives and Records Administration, RG 59, Central Files 1967–69, POL 1 INDON. Secret. A covering memorandum from Deputy Executive Secretary of State John P. Walsh to Bromley Smith indicates that the paper was prepared for the NSC meeting on Indonesia on August 9 and had “the working level concurrence of the Treasury, CIA, DOD, and JCS and was approved by Katzenbach and the Under Secretary of State for Political Affairs, Eugene V. Rostow.
  2. See Document 215; for an account of the meeting, see Document 217.
  3. The table indicates the following breakdown for $197 million pledged or furnished: United States—$65 million; Japan—$60 million; Netherlands—$28 million; Germany—$29 million; India—$13 million; others (Australia, Canada, UK)—$2 million.