267. Memorandum From Secretary of State Rogers to President Nixon 1

SUBJECT

  • U.S. Position at April 14 Inter-Governmental Group (IGGI) Meeting on Indonesia

Last year, the Government of Indonesia, with the support of the World Bank and International Monetary Fund, requested $500 million of aid for calendar 1969. This request was addressed to the Inter-Governmental Group on Indonesia (IGGI), composed of the Bank, the Fund, the United States, Japan, Netherlands, France, Australia, Belgium, Germany, Italy, and the United Kingdom.

At the October 21, 1968 meeting of the IGGI, the United States pledged to meet one-third of the non-food aid portion ($365 million) of this request, plus an undefined “fair share” of the food aid needs then estimated at $135 million.

This memorandum requests your authority to reaffirm that pledge at the April 14 IGGI meeting and approval of the program to carry it out.

Progress of the Soeharto Government

President Soeharto gained effective control of the Government of Indonesia almost two years ago, following the bloody aftermath of the Communist coup attempt of October, 1965. His performance during this period has exceeded what most observers thought possible.

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In the economic field, Soeharto and his American-trained advisers have, with the help of foreign aid and the advice of the Bank and Fund, sharply reduced the inflation rate from 635% in 1966 to about 26% for the twelve months ending March 1, 1969. Budgetary stringency and expanded tax collection have led to a balanced 1968 budget. Foreign private investment has been welcomed, although bureaucratic barriers continue to hinder the flow. Free market forces are now the prime determinants of import priorities; government corporations are no longer heavily subsidized; the private trade sector has been revitalized by ending a corrupt system of licenses and controls, and by enabling private enterprise to obtain needed spare parts, new equipment, and raw materials. Exports for 1968 reached the highest level for seven years; they were about 10% above 1967. But stabilization austerity has understandably restricted growth and Indonesia is only beginning the long climb back to pre-1941 levels of productivity.

In the political field, the Soeharto Government ended Sukarno’s career and confrontation with Malaysia, re-instituted freedom of the press, brought the legislature into the political process for the first time in many years, and suppressed a communist attempt in mid-1968 to establish a guerrilla base in eastern Java. Very serious problems, going to the heart of Indonesia’s future, remain: the vitality of political parties is limited and Soeharto has not yet attempted to mobilize effectively the goodwill toward him that exists throughout the country, thus leaving him excessively dependent on the armed forces for political support and administrative action; corruption and smuggling are still widespread and may become a serious political issue; and the nation’s archaic administrative apparatus is burdened by an inflated civil service.

Despite these and other problems, Soeharto has succeeded in taking many of the politically tough decisions needed to stop economic decline and to move towards stability. The Government is now preparing to give highest priority to economic reconstruction and development. The aid extended by the IGGI has been critical to economic progress thus far, and Soeharto’s ability to persist in sensible economic and political reforms depends heavily on continued international support.

The Multilateral Approach

In 1966 the United States decided that our interests called for a wholly new approach to our aid strategy in Indonesia which would maximize aid from other nations, deeply involve international agencies, and minimize direct U.S. Government involvement in Indonesian initiative and decision-making.

The United States took the lead in calling together in 1966 a group of Indonesia’s western creditors (the communist states, though invited, refused to participate), to consider Indonesia’s unmanageable debt [Page 569]problem, a $2.2 billion burden inherited from the Sukarno era. The main western creditors reached agreement in 1966, and again in 1967 and 1968, to reschedule current or overdue principal and interest payments on this debt. Communist countries have separately made comparable debt rescheduling arrangements with Indonesia. But, as Indonesia’s servicing of “Sukarno” and new aid indebtedness for the next decade far exceeds its capacity to repay without great harm to its development, western creditors are now sponsoring a study to find a long-term solution to this problem.

The IGGI, formed subsequent to the first creditors’ meeting, has met about every six months since early 1967 to consider Indonesia’s economic performance and its need for foreign assistance.

The International Monetary Fund has taken the lead in advising the Indonesians on their stabilization program and in evaluating their economic performance for the benefit of aid donors. The Fund has taken the unusual step of establishing a resident mission in Djakarta, including a group providing much needed technical assistance in fiscal affairs. In addition, the Fund entered into a $51 million standby arrangement with Indonesia in 1968 and the Fund staff has just demonstrated further support for the Soeharto Government’s economic program by recommending a $70 million standby for 1969.

The World Bank has also assumed a major and unprecedented role in Indonesia’s development. In October, 1968 the Bank opened an office in Djakarta with a ten-man professional staff to assist Indonesia in planning development programs, preparing capital projects, and coordinating foreign assistance. Thus far, the International Development Association has authorized $7 million in credits to Indonesia, with $20–$40 million more expected in 1969.

The Asian Development Bank, United Nations Development Program, Harvard Development Advisory Service, and other agencies are also providing skilled personnel and financial resources.

United States Aid

In 1967, the IGGI countries provided $210 million in general stabilization support to Indonesia. Of this, the United States provided about a third, or $65.2 million ($37.5 million in A.I.D. commodity loans and $27.7 million in P.L. 480 rice and cotton). Japan also contributed about a third, with other donors providing the remainder.

For 1968, the United States again provided about one-third ($110 million) of a $325 million Indonesian requirement ($25 million of this was an A.I.D. commodity loan and the remainder P.L. 480 rice and cotton). We responded to an unexpected emergency by offering an additional $50 million in P.L. 480 wheat products to help prevent a recurrence of the serious food shortages which had caused a quadrupling of [Page 570]the basic rice price at the end of 1967. About $30 million of this has been shipped. Japan agreed to commit $110 million, and about $85 million came from others.

In October, 1968, the Fund and Bank endorsed Indonesia’s $500 million foreign aid request for calendar 1969 ($365 million for projects and basic imports, including cotton, and $135 million for food). The increase over 1968 is largely accounted for by including total costs of multi-year projects, instead of only actual disbursements as was done in 1968; 1969 disbursements are estimated to be only slightly higher than in 1968.

The U.S. had pledged to meet one third (about $123 million) of this non-food aid requirement plus a “fair share” of the food aid requirement. Separating food aid from non-food aid took account of the facts that food aid requirements are highly uncertain from year to year, and that the U.S. is in a special position to respond quickly and flexibly to such needs. While we do not want to define “fair share” precisely, in order to keep some pressure on Indonesia to obtain food from other donors, we must realistically expect to provide the great bulk of wheat and rice needed. This formula also left an amount for non-food aid that represented a practical target for burden sharing.

The U.S. pledge was subject to several conditions:

1. That other donors make commitments satisfactory both as to amounts and terms.

The budgetary cycle of most donor nations usually does not permit pledges to be made before the mid-April IGGI meeting and often not before mid-year. The Dutch and several small donors have made known their pledges but a decision from the Japanese is not expected for several months.

We propose to offer Indonesia about two-thirds ($81 million) of our non-food aid and $50 million of food aid prior to the April IGGI meeting, leaving a decision as to the balance for later in the year when we know other countries’ plans.

2. Continued satisfactory reports from the Fund and Bank on Indonesian performance in its stabilization program and in using aid effectively.

Due to slack demand for more expensive American goods and high freight costs from the U.S., use of A.I.D. loans has been slow in the past. However, with Fund approval, the Indonesian Government recently made special arrangements for A.I.D. loans which have speeded use.

3. The availability of sufficient quantities of rice after the priority needs of Viet-Nam are considered.

This is no longer a problem; Viet-Nam’s rice requirements are far lower than projected last October.

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4. Availability of Congressional appropriations.

A.I.D. is giving Indonesia very high priority on limited funds, at the expense of development programs in other important countries of Asia and Africa.

We are presently planning to meet our calendar 1969 non-food aid pledge as follows:

($ million)
Total Source of Financing
CY 1969 FY 1969 FY 1970
A.I.D. Development Loans $70 $50 $20
P.L. 480
a) Cotton (raw and yarn) 50 30 20
b) Tobacco 3 1 2
$123 $81 $42

The $50 million for FY 1969 A.I.D. loans is already available from current appropriations, as is the P.L. 480. The A.I.D. loans would finance a Stabilization and Food Production Loan of $44 million and a $6 million expansion of Indonesia’s major cement plant. The remaining $20 million of A.I.D. loans in this calendar year’s pledge would come from FY ’70 loan funds still to be appropriated. The funds provided will finance U.S. exports only and commodities will be selected to minimize impact on our balance of payments.

It is now uncertain whether Indonesia will require delivery during 1969 of the full $135 million in food aid (principally rice and wheat) requested in October 1968. Extraordinary rice harvests due to favorable weather, combined with our rice and wheat commitments (including 100,000 metric tons (MT) of rice already shipped and charged to our 1969 pledge) of last year, produced for the first time in memory a stable rice price during the normal December–March scarcity season. In addition, approximately $20 million of wheat is still available from our $50 million commitment of last year. However, in order to assure price stability during the 1969–1970 scarcity season, the Indonesians will have to line up sufficient rice and wheat imports within the next few months. With this in mind, they have recently requested under P.L. 480, for delivery by early 1970, 350,000 MT of rice (about $70 million), and 300,000 MT of wheat flour (about $30 million).

We would instead propose to offer now only 250,000 MT of rice ($50 million) in addition to the wheat still available under last year’s commitment. The balance of the rice and wheat request could be provided in a subsequent PL 480 agreement later in the year when food needs are better known and the contributions of other countries announced. The rice agreement would be a convertible local currency [Page 572]credit; the wheat may be on the same terms, or be a grant under the Kennedy Round Food Aid Convention, depending on the outcome of negotiations with the Indonesian Government now underway.

Recommendation: That you authorize us to reaffirm our October 1968 pledge to Indonesia and approve the CY 1969 A.I.D./P.L. 480 program as set forth above.2

The Secretaries of Treasury and Agriculture concur.3

WPR
  1. Source: National Archives, RG 59, Central Files 1967–69, FN 1–1 INDON. Confidential. A typed notation at the top of the memorandum reads: “Approved. Mr. Sneider to D Gleysteen 4/11/69.” A handwritten notation underneath the date reads: “Called AID (Menlinberg) 4/14. M. says he saw a 4/13 State cable notifying our delegation of Pres. decision.”
  2. A copy of Rogers’ memorandum was attached to an April 10 memorandum from Kissinger to Nixon in which the President approved the Indonesian aid program. (Ibid., Nixon Presidential Materials, NSC Files, Box 531, Country Files, Far East, Indonesia, Vol. I)
  3. Memoranda from the Secretaries of Agriculture and Treasury are also attached to the Kissinger memorandum of April 10 but not printed.