242. Memorandum From the Administrator, Agency for International Development (Gaud) and Secretary of Agriculture Freeman to President Johnson 1

SUBJECT

  • Economic Assistance to Indonesia

Helping the Suharto Government get its economic house in order involves two separable problems:

(1)
How to fulfill the U.S. share of the Inter-Governmental Group support of the Indonesia stabilization program for Calendar Year 1967, on which we are still $27 million short of the $65 million U.S. commitment; and
(2)
How to help stimulate rapid enough developmental progress in Indonesia to sustain public and army support of the promising new trend in Indonesian political orientation and leadership without loosening the economic stabilization discipline which is essential to long run solution of Indonesia’s problems. The second of these two matters will be the subject of studies being undertaken by the World Bank and Asian Development Bank, which will not be available even in preliminary outline until about the end of this year.

This memorandum deals with the first item. A.I.D., with the concurrence of State,2 proposes to meet the U.S. commitment this year in the following way:

Actions already taken:

  • A.I.D. loans—$30 million
  • P.L. 480 cotton credit—$8 million

Actions proposed:

  • P.L. 480 rice credit—$20 million
  • P.L. 480 tobacco credit up to $2 million
  • (P.L. 480 terms to be dollar-repayable loans—40-year maturity

interest during 10-year grace period, 2–1/2% thereafter).

The balance of $5–$7 million, to be covered in November by either P.L. 480 cotton credit (if demand for raw cotton has by then revived) or by an A.I.D. loan.

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Agriculture concurs in the rice component of this package if it is decided as a matter of policy that Indonesia is of sufficiently high priority to risk diversion of rice from cash exports. Whether such diversion will actually be necessary depends on the size of this Fall’s U.S. rice harvest, the trend in Vietnam rice requirements and the behavior of the world rice market. With a bumper U.S. crop, we might get by without any visible diversion at all. But if we didn’t—and if the diversion were fairly obvious—we could expect criticism on the Hill. Secretary Freeman is prepared to take the risk if you concur with the State/A.I.D. proposition that Indonesia is important enough to be worth it.

Specifically, this package requires your approval to commit 100,000 tons of P.L. 480 rice to Indonesia, as a priority claim on a supply which otherwise could be fully absorbed in Vietnam, Africa, and in commercial exports. This would not mean a rice shortage in Vietnam. It would still permit providing Vietnam 550,000 tons under P.L. 480 from the current U.S. crop. In addition, we would still be able in the Spring to provide an additional 100,000 to 200,000 tons to Vietnam from the current crop (to be divided between P.L. 480 and cash sales, depending on the Vietnamese foreign exchange situation), plus small amounts to fulfill outstanding commitments to the Congo, Ghana and Liberia.

However, the above allocation totals more than the minimum of 670,000 tons Agriculture now expects to be available for P.L. 480 from this year’s crop. Although our crop may turn out to be large enough to cover it, we won’t know until October. But it makes very good foreign policy sense to let the Indonesians know now. The price of telling them now is that if our crop is not any larger than the low end of Agriculture’s range, we will have to choose between lowering P.L. 480 rice shipments to Vietnam and cutting into U.S. commercial rice exports.

Even with a very large U.S. crop, this rice commitment to Indonesia would probably foreclose the possibility of meeting 100,000 tons of Vietnam rice requirements from the United States, and cause Vietnam to turn to Thailand or Taiwan for purchases with Vietnamese-owned foreign exchange for that amount. We believe this will cause minimum domestic political difficulty here if the commitment to Indonesia is made at the beginning of the U.S. crop, i.e., this month, and any further Vietnamese purchases are made from Thailand/Taiwan next spring when the U.S. exportable surplus of rice is fully committed elsewhere.

The extreme tightness of U.S. rice availabilities, despite a record crop, and the growing shortage of rice in Southeast Asia to meet the world demand indicate need for reconsideration of existing restraints on U.S. rice acreage allocations for the future. This question will be addressed by the Department of Agriculture, State, Budget Bureau and A.I.D. in the near future looking toward budget decisions affecting the 1968–69 crop year.

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We may need to return to you later concerning the $7 million of our 1967 commitment which will remain to be met beyond this 100,000 tons of rice. This will have to be put together through some combination of non-grain P.L. 480 and A.I.D. loans. But you need not make that decision now.

Recommendation 3

That you approve a priority claim of Indonesia for 100,000 tons of the P.L. 480 rice program, on the terms proposed above, subject to the development of an agricultural self-help commitment by the Indonesians satisfactory to Secretary Freeman and Administrator Gaud.

William S. Gaud

Orville H. Freeman
  1. Source: Johnson Library, Meeting Notes Files, Briefing Papers for NSC Meeting, 8/9/97. Confidential.
  2. On July 26 officials at the Under Secretary/Assistant Administrator level from State, Agriculture, and AID met to discuss aid to Indonesia. The issues to be discussed at the meeting were previewed in a memorandum from Wright to Rostow, July 27. (Ibid., National Security File, Country File, Indonesia, Vol. VIII, Memos, 6/67–8/68, [2 of 2])
  3. There is no indication of Presidential approval on the memorandum.