278. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1

SUBJECT

  • U.S. Aid to Indonesia in 1970

The Inter-Governmental Group of donors to Indonesia (IGGI) last week accepted Indonesia’s request for $600 million of aid in 1970. At Tab A are recommendations from Secretaries Richardson, Kennedy and Hardin, concurred in by Director Mayo (Tab B),2 on the U.S. share in that total.

The Indonesian economy has achieved stabilization and must now move on to development. The Suharto Government has held inflation to 7 percent in 1969 compared with 85 percent in 1968 through a policy of strict budget balancing and liberal foreign assistance in financing food and commodity imports. Both foreign and domestic investment are increasing, with emphasis on the manufacturing sector. Free market forces have been given the major role in economic decisions.

Indonesia’s greatest problems are its slowness in developing capital projects and in making credits available for needed local investment, [Page 604]inadequate price incentives for farmers to grow more rice, an inefficient administrative apparatus, and a shortage of private sector entrepreneurs and managers. U.S. assistance has focused on these points. The World Bank is expanding its advisory and project coordinating efforts to help as well.

Donors in the IGGI currently supply all of Indonesia’s foreign assistance. Indonesia’s present request of $600 million includes $140 million for food aid and $460 million for non-food aid. The request would actually cover a 15-month period from January 1970 to March 1971. AID, the IBRD, and the IMF agree that this is an appropriate aid level. In addition, Indonesia is benefiting from a major rescheduling of debts by most of the IGGI countries.

In the IGGI, the U.S. has adhered to a “one-third” formula. We have agreed to pledge one-third of total non-food aid with the hope of pressuring Japan to do the same and the other donors—the Europeans and Australians—to supply the remaining third.

This year, the agencies propose that the U.S. pledge one-third ($125 million) of bilateral non-food aid ($375 million) and a “fair share” (approximately $105 million) of non-[sic] food aid ($140 million). Including our share of the money which will be provided to Indonesia by the Asian Development Bank and the World Bank, this would be slightly more than we contributed last year.

We would pressure Japan to match our $125 million and the Europeans and Australians together to provide the same. This proposal ensures proper burden-sharing and represents a level which is consistent with our budgetary constraints. It risks a small shortfall in meeting Indonesia’s request if Japan and other donors prove niggardly, although we could probably make it up late in the year if necessary.

Recommendations

1.
That you authorize the U.S. to provide $105 million of Indonesia’s food aid requirements which total $140 million.3
2.
That you authorize the U.S. to provide one-third ($125 million) 4

Additional Point

Program loans are extended to Indonesia to finance general commodity imports important to her development effort. The U.S. is not competitive in most of these, however. Indonesia therefore must subsidize imports from the U.S. to use our money. The loans thus cause an inefficient allocation of aid money and a waste of Indonesia’s local [Page 605]currency. Budget recommends that we carefully study the possibility of liberalizing the procurement restrictions attached to our program loans to Indonesia.5

Recommendation

That you authorize me to direct AID to study methods of liberalizing the procurement restrictions attached to our program loans to Indonesia.6

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 531, Country Files, Far East, Indonesia, Vol. I. Confidential. Sent for action. A notation on the memorandum indicates that the President saw it.
  2. Tab A, a December 5 memorandum from Richardson to Nixon, and Tab B, a December 6 memorandum from Budget Director Robert Mayo to Nixon, are attached but not printed.
  3. Nixon initialed his approval.
  4. Nixon initialed his approval.
  5. A memorandum from Kissinger to the Secretaries of State and Treasury, and to the Administrator of the Agency for International Development, January 16, is attached but not printed. Kissinger stated in the memorandum that the President had directed that they “undertake a study of the difficulties involved in the use of U.S. program loans to Indonesia, particularly as these difficulties relate to our present tying practices.” They were asked for recommendations “on any measures needed to deal with the problem, such as the possibility of partially untying such loans to permit Indonesian procurement from other less developed countries in the region.”
  6. Nixon initialed his approval.