Foreign Relations of the United States, 1977–1980, Volume XXII, Southeast Asia and the Pacific

220. Briefing Memorandum From the Assistant Secretary of State for East Asian and Pacific Affairs (Holbrooke) to the Under Secretary of State for Economic Affairs (Cooper)¹

Washington, June 14, 1980

SUBJECT

• Briefing Paper on U.S. Foreign Assistance to Indonesia

REF

• E—Barney Rush Memo of May 28, 1980²

Our aid to Indonesia reflects the effort to rebuild our Southeast Asian policy (in the wake of Vietnam) around strong support for ASEAN and its five member states and to assist Indonesia with its serious and potentially destabilizing long-term economic development problems. Current aid levels stem from Vice President Mondale’s visit to Jakarta in May, 1978,³ when he offered President Suharto increased PL–480 Title I in FY 78, said the U.S. would be prepared to consider increased aid in the context of the World Bank Study on Indonesia’s rural sector, and pointed out the advantages of PL–480 Title III as a further source of support. Consequently, U.S. assistance increased by 46% in FY 78, to a total of $196.6 million and remained at about that level in FY 79 and FY 80 (see attachment 1),⁴ although the Title III program never materialized.

Because of Indonesia’s improved balance of payments situation in IFY 79/80 ($2 billion current account surplus and $2.4 billion BOP surplus overall), and our own budget constraints, IDCA proposed several reductions in our assistance:

—Elimination of PL–480 Title I in FY 81. An inter-agency compromise eventually was reached on $50 million in Title I, which will still result in a 17% reduction in overall assistance for FY 81.

—For FY 82 elimination of PL–480 Title I, reducing development assistance to $50 million, and the phase out of aid completely in subsequent years. Deputy Secretary Christopher and Tom Ehrlich subsequently agreed on two development assistance planning levels for FY 82—$50 million and $100 million—and that the proposed phase out plans would be dropped.

The basic options that we see are:

1. Continue the level of PL–480 and development assistance at about the $175–200 million level. I favor this for the reasons stated below;

2. Phase out PL–480 Title I completely, but continue development assistance at about the $100 million level now planned for FY 81;

3. Phase out PL–480 Title I completely and gradually reduce development assistance. If this must be done, the AID Mission in Jakarta has proposed a $100 million program in FY 82 to allow orderly phase down of ongoing programs in which AID and the GOI have invested much time and effort.

4. Phase out PL–480 Title I and reduce development assistance by half to $50 million in FY 82, composed entirely of technical assistance. IDCA has made such a proposal. A sub-alternative would be to shift gradually to an RDP-type technical assistance program.⁵

I believe there are strong reasons for continuing the current level of our aid based on Indonesia’s development needs, the unique contribution of our AID program, and broad U.S. political/strategic and economic interests.

Need

Indonesia is one of the world’s poorest nations, with a per capita GNP of $385, and about ten percent of the world’s poorest people. Despite a successful family planning program, population growth is 2% adding to one of the world’s highest population densities. Land pressures are described in a recent CIA study as a “political time bomb”.⁶ The GOI will clearly have to make a major effort to stay ahead of these rural problems if it is to avoid political instability.

Most observers also see serious macro-economic problems on the horizon, despite the current BOP surplus. The World Bank anticipates that current account deficits will reappear in 1982 and exceed $6 billion annually by 1990. Increasing domestic energy consumption and stagnating petroleum production will result in Indonesia becoming a net oil importer in the 1990’s. Scarcity of technical and administrative personnel, and weak or nonexistent institutions remain the major development bottlenecks. The May, 1980, IGGI meeting therefore endorsed the IBRD’s recommendation that foreign assistance levels be maintained and increased gradually throughout the remainder of Repelita III (1979–1983)⁷ to maintain the continuity of the development effort. Every IGGI donor increased its assistance pledge for 1981 except the U.S. and the U.K.

AID’s Unique Contribution

The AID program has innovative aspects and influence on Indonesian rural development policies which cannot be replaced due to close and long-standing relationships with senior Indonesian policy-makers. AID’s technical and financial participation has allowed it to influence broader rural development policies through demonstration-type projects which can be adopted nationwide with Indonesian financing.

The AID-initiated family planning program is a spectacular example; population growth on Java/Bali declined from 2.4 percent in 1974 to 2.0 percent in 1979. A more recent example is the GOI’s agreement to an AID-financed Provincial Area Development program, which bypasses much of the central government bureaucracy. Under the program, AID is providing, on a pilot basis, credit and marketing mechanisms through local governments with the goal of establishing new institutional channels for assisting rural development. It was difficult to work out the arrangements for this; we doubt any other donor could accomplish it, and premature phase-out or conversion to a purely technical assistance program would probably result in GOI failure to adopt this concept nationwide.

These types of programs are not provided by other donors, which do not have influence with GOI policy-makers, nor sufficient numbers of language qualified personnel. Theoretically, they could be funded under a reimbursable development program concept, as I understand AID is doing with Saudi Arabia. Practically speaking, this would be unacceptable to senior Indonesian officials, who view Indonesia as a very poor country.

We also believe that a financial component in our aid program is essential to getting new innovative programs started, so that the GOI can see that they will work. Consequently, we do not favor a technical assistance-only program.

U.S. Interests

A decline in U.S. assistance will seriously damage U.S. interests in Indonesia and Southeast Asia. Indonesia has the world’s fifth largest population, the largest Muslim population, a strategic location, a wealth of resources and it plays a key role in ASEAN. It has supported our efforts to free the hostages in Iran, supports the Moscow Olympics boycott, and we have compatible objectives regarding Afghanistan and Indochina. The GOI takes moderate positions in the NAM, the Islamic Conference, and OPEC. I personally believe that Indonesia will become more important to future U.S. interests, not less, and maintaining the real level of our assistance programs will be a crucial symbol of U.S. interest in and support for Indonesia.

The aid reductions proposed by IDCA, if accepted, would also undermine the credibility of the Vice President’s statements to President Suharto just two years ago and would contribute to further questioning of the role the U.S. intends to play in Southeast Asia.

To plan major reductions in aid to the largest member of ASEAN is at cross purposes with our goal of supporting ASEAN’s progress and stability.

I am attaching for your information several recent cables from Ambassador Masters regarding the deterioration in US-Indonesian relations threatened by our recent actions, including the reduction in PL–480 Title I, the Japanese rice agreement and enforcement of our policy of U.S. warship transit through the Indonesian archipelago.⁸ All of these issues are expected to be raised by Indonesia’s Foreign Minister with Secretary Muskie at Kuala Lumpur.⁹ A cable just received from CINCPAC testifies to his concern, also, about our relationship with Indonesia.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, General Odom File, Box 26, Indonesia, 1978–8/1980. Confidential. Drafted by James S. Landberg (EA/TIMBS) on June 12; cleared by Anthony Albrecht (EA). A note at the end of the memorandum reads, “S/P has declined to clear this memo and will submit separate comments to you.” The comments have not been found.
2. Not found.
3. See Documents 129 and 206–207.
4. Not attached.
5. Technically, IDCA has not formally proposed elimination of PL–480 Title I for FY 82, but it did for FY 81 and we assume this will be its position for FY 82. [Footnote in the original.]
6. See Document 219.
7. The third Indonesian 5-year plan.
8. Not attached.
9. See Document 221.