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

SUBJECT

  • Aid to Indonesia

State (Tab A)2 requests your approval for a U.S. endorsement of (a) a World Bank recommendation that Indonesia receive $640 million in aid from all sources in 1971/72 and (b) a pledge of $215 million as the U.S. share of the total.

The proposed package would support your general aid strategy of shifting U.S. assistance increasingly into a multilateral framework, and the high priority you place on Indonesia. The FY 71 allocation necessary to support this U.S. pledge would be within expected appropriations [Page 686]and the approved budgetary outlay ceilings. Treasury, Agriculture, and OMB (Tab B) concur.3

The $640 million Indonesian aid requirement was calculated by the World Bank, which coordinates the major non-Communist aid donors through the Inter-Governmental Group on Indonesia (IGGI).

The U.S. pledge of $215 million will consist of $90 million in food aid and $125 million of non-food aid. Both pledges are consistent with the formula used last year, that the United States provide a “fair share” of food and one-third of bilateral non-food aid. It would, however, represent a slight decline from our $230 million contribution this year.

Foreign aid has played a key role in stabilizing the Indonesian economy following the disastrous policies of Sukarno. The rate of inflation in 1970 has been less than 7 percent, compared with 600 percent in 1966. An increase in food availability, particularly rice, is the key to the success of the stabilization program. A sound rice policy has been instituted under which domestic procurement of rice by the Government has more than doubled over last year, helping assure an incentive price for farmers while eliminating seasonal fluctuations in urban rice prices.

In April 1970, basic reforms were introduced to simplify the foreign exchange system; exports thereby increased in the first ten months of 1970 by about 15 percent, despite falling prices for rubber and tin. Imports are being focused on high priority sectors. Indonesia’s net foreign exchange position has improved, and foreign investment continues to be attracted to priority sectors. An international formula for rescheduling Indonesian debt has been worked out, and we expect to sign a bilateral agreement which will allow Indonesia to reschedule its debts to the U.S.

The problems facing Indonesia are still severe: generating long-term economic growth is difficult in view of the weak economic base; corruption continues to be a major problem; and the country’s lack of a strong administrative capacity impairs even the most carefully conceived development plans.

However, President Suharto, with the assistance of the World Bank and the U.S., is sincerely trying to correct these problems and is showing encouraging success.

[Page 687]

Recommendation

That you approve State’s recommendation that the U.S. endorse (a) the $640 million 1971/72 aid requirement for Indonesia from all sources and (b) pledge $215 million as the U.S. contribution to meeting that total.4

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 531, Country Files, Far East, Indonesia, Vol. II. Confidential. Sent for action. An attached December 15 memorandum from C. Fred Bergsten of the National Security Council staff to Kissinger indicates that the memorandum was drafted by the former and sent to the latter on that date. An attached routing slip indicates it was approved by Kissinger on December 16.
  2. A December 5 memorandum from Acting Secretary of State Irwin to President Nixon is attached but not printed.
  3. A December 14 memorandum from the Director of the Office of Management and Budget, George P. Shultz, to President Nixon is attached but not printed.
  4. Kissinger initialed the approve option for the President on December 16.