Foreign Relations of the United States, 1961–1963, Volume XXIII, Southeast Asia

291. Memorandum From the Under Secretary of State (Ball) to President Kennedy⁰

Washington, October 10, 1962.

SUBJECT

• Plan of Action for Indonesia

Pursuant to National Security Action Memorandum 179 of August 16, 1962, the Department of State coordinated the efforts of the agencies having a special interest in the programs for Indonesia and now submits a Plan of Action for Indonesia. This report and the appended background statement are concurred in by recipients of NSAM No. 179.

It is proposed that many of the most significant programs be considered on a contingent basis. Although the West Irian settlement may mark a turning point in U.S.-Indonesian relations, positions have not yet been taken by the Government of Indonesia on crucial issues which will determine the effectiveness of outside aid, such as economic stabilization, military demobilization, and Indonesian leaders’ attitude toward Western economic influence.

It would be a mistake to press the Indonesians too hard on these crucial issues as they are likely to misinterpret our interest as a form of interference. They must show an awareness of their economic needs and express a desire to receive Free World assistance. Only they can take the initiative in dealing with the problems of inflation, inadequate foreign exchange and shortages of food and critical materials. Until they take effective measures in their own behalf, Free World assistance of major proportions would be wasted. Our assistance should be related to their actions. If and when Indonesians do demonstrate an awareness of needs and a desire for support, there should be a generous response not only by the United States but cooperatively by other interested nations of the Free World. U.S. actions other than in the initial phase should be in, response to varying degrees of Indonesian initiative.

In the meantime, there are several things that can be done:

• First, substantial augmentations should be made to the existing PL 480 program to provide food and fiber to Indonesia, some $60–70 million of which are needed immediately.
• Second, existing U.S. programs, including technical assistance of some $17 ‘million and a relatively modest military assistance program, should be adapted to the new situation in Indonesia, examples being increased emphasis on civic action and improved internal security.
• Third, action should be taken to implement the Peace Corps program now in an advanced stage of planning.
• Fourth, upon request and subject to adequate control, assistance up to $15-$20 million should be extended, prior to basic reforms, to supply urgently-needed spare parts and raw materials, thus to prevent further slackening of industrial production.
• Fifth, Indonesia should be persuaded to adopt an IMF-approved stabilization program. In this there needs to be balance to see that the necessarily harsh and negative stabilization measures are combined with a positive developmental approach.
• Sixth, other Free World nations should be persuaded to join in a major stabilization and development program after Indonesia has fulfilled the necessary conditions. The United States will attempt to create a multilateral effort, from the outset, in any stabilization program.
• Seventh, Free World creditors should be persuaded to relieve Indonesia’s onerous debt burden which accounts for over half of the estimated balance of payments deficits in 1962 and 1963.

And finally, as a politically essential concomitant to anything beyond the emergency assistance described in the first through fourth paragraphs above, Indonesia should be persuaded to obtain relief in debt payments to the Soviet Bloc which represent about 40% of the debt servicing requirements.

On the first three action steps, the United States can and should continue the initiative. Indonesia clearly needs the food and fiber, our assistance in the extensive demobilization program represents a political and economic opportunity of the first order of importance, and initiation of a Peace Corps program will have an immediate impact.

The crucial step for both Indonesian interests and our own objectives is the stabilization program. Early and well-supported stabilization measures are the only means by which Indonesian economic recovery can get significantly underway, and stabilization activities will probably have to continue for a protracted period before an adequate base is established for planned development. Prospects of satisfactory Indonesian initiative and performance are highly uncertain and the next several months will require a careful blending of direct U.S. diplomatic moves and active pursuit of cooperative actions by other Free World countries and institutions such as the IMF if the forces in Indonesia capable of mobilizing and administering this effort are to have an opportunity to undertake this task.

Initial moves are underway.¹ And as the Indonesian situation comes into focus, further measures and changes in this program will be proposed.

NSAM No. 179 requested suggestions in several fields, including diplomatic initiatives. Other than the effort to induce a conviction on the part of President Sukarno of his responsibilities and opportunities in the economic field and the approach to Development Assistance Committee countries and Australia (reinforced by recent talks which the Secretary and Governor Harriman had with Foreign Minister Subandrio), this memorandum does not deal in depth with the wide range of diplomatic openings which may be available. The Department of State and other agencies are, however, continuing to review what further measures might be useful in improving U.S.-Indonesian relations. A report will be made on these measures to the extent they seem feasible and desirable.

George W. Ball

Enclosure²

Washington, October 2, 1962.

MEMORANDUM

SUBJECT

• Background to Plan of Action for Indonesia

REFERENCE

• NSAM No. 179 of August 16, 1962

I. Problem

The West Irian settlement may present a major opportunity both to increase U.S. influence and to assist Indonesia to meet a heavy drain on its financial and managerial resources. The dimensions of the opening which may be available to the Free World are, however, still unknown and there are obstacles and uncertainties confronting U.S. action programs other than in the emergency phase:

• (1) There are differences of view about the seriousness of the current economic situation. The Indonesians appear to regard the situation as less serious than does the United States. The Indonesian economy has inherent resiliency
• (2) The Indonesians have not yet requested major Free World assistance.
• (3) Unless the Indonesians make basic managerial, fiscal and foreign exchange reforms, large-scale external assistance would have no lasting effect.

Therefore, the action recommendations in V below fall into these three categories: (1) programs that can be implemented immediately, notwithstanding the above factors; (2) contingency plans for possible future actions, subject to specific conditions being met; and (3) long-term development.

II. Background

A. Economic—Indonesia is faced with a severe inflation and adverse balance of payments. An increasingly unfavorable trade balance has resulted from a decline in earnings from rubber and petroleum. Foreign exchange reserves have fallen to the working balances of the commercial banks (estimated as $80 million). The government has drastically restricted imports, resulting in substantial cutbacks in production because of shortages or maldistribution of imported raw materials and spare parts. Industry is operating at only 30–40 per cent of capacity. Urban food supplies are inadequate.

Inflation has been severe. The money supply doubled in the year ending July 1962, largely because of a government deficit nearly as large as revenues. The Djakarta consumer price index rose by 67% during the last half of 1961, and another 85% in the first five months of 1962, although recently it has held fairly steady.

The payments problem is aggravated by the heavy foreign debt burden. Foreign debt (excluding short-term supplier credits) amounts to over $1 billion, largely to the Soviet Union, the Netherlands, and the United States. The current annual debt servicing requirement is estimated to cause more than half of the estimated 1962 and 1963 balance of payments deficits. Before additional assistance is given, every effort should be made to relieve the debt burden by refunding and moratoria on repayments, at least for military goods, both by Free World and the Soviet Bloc.

Unless Indonesia deals effectively with its own economic problems, Free World assistance will be of little value. Though not specific as to dimensions or time-phasing, the International Monetary Fund (IMF) staff report in July proposed that the Indonesian Government raise prices of state-produced goods and services, stabilize money supply, simplify the exchange system, devalue the rupiah, increase taxes, cut government expenditures, reduce smuggling, and centralize the control of foreign exchange. These elements seem essential to stabilization but need follow-through in a recovery and development program designed to restore existing productive capacity and create infrastructure required for further economic development.

B. Soviet Bloc Economic Penetration—The Bloc has given more aid to Indonesia than to any other non-Communist country, approximately $1 billion military and $650 million economic credits. By attempting to tie up future Indonesian exports through trade agreements and acceptance of economic and military credits, the Bloc is seeking to shift the Indonesian trade pattern from the West to the Bloc. If adequate assistance is not available from the Free World, Indonesia will be forced to lean more heavily on the Bloc.

C. Domestic Political Pressures—General Nasution, keenly aware that the army is a drain on the overburdened economy, desires an orderly demobilization. Against the army stands the Indonesian Communist Party (PKI)—the largest Communist party outside of the Bloc. Between these forces is Sukarno. Unless he exercises positive economic leadership or delegates power on economic matters to competent ministers, the Bloc may eventually gain control of Indonesia’s resources and the PKI may seize power.

III. U.S. Objectives in Indonesia

Indonesia’s geo-political position and magnitudes make it important to the United States. Our commitments on the Indo-China peninsula could be lost if the bottom of Southeast Asia fell out to Communism. It therefore remains our objective (1) to keep Indonesia independent and out of the Sino-Soviet camp, (2) to help Indonesia become a politically and economically viable nation, and (3) to help solve Indonesia’s stabilization and recovery problems and eventually launch a national development plan. The last was implicit when President Kennedy in 1961 sent a group to examine Indonesia’s economic plan, thus to determine sectors in which we could help.

The United States cannot obtain these objectives alone. It will be necessary to get the assistance of other Free World countries through the Development Assistance Committee (DAC), the International Monetary Fund, and the World Bank.

IV. Political Strategy of Indonesia

The reason for a vigorous U.S. effort to achieve settlement of the West Irian issue was that it would have an impact on the internal balance of political power. Settlement would serve our interests because it would strengthen two groups in Indonesia, namely the army and a small but important group of non-leftist officials seriously interested in economic development.

The West Irian issue had dominated Indonesian politics, kept the army preoccupied with military preparations and dependent on the Communist Bloc for support. Large military expenditures and exclusive political concentration on West Irian also ruled out a serious development effort. Meanwhile, Communists exploited the West Irian issue and Soviet support to strengthen their political position. A military attack would have accentuated all of these trends and seriously endangered the position of those who want to cooperate with us.

Now that a settlement has been achieved, it should be put to constructive use (1) by turning the attention of Indonesians away from militant nationalism and toward development and (2) by strengthening the army in the countryside. These are the two major elements of a longrun strategy to keep Indonesia non-Communist and to begin to give that country some forward momentum. More specifically:

a. We should seek to convince Sukarno that (1) his position in Indonesian history as a revolutionary leader can best be reinforced through actions which will further economic development, (2) he should delegate major authority in economic matters to competent subordinates, and (3) he should add to the government individuals with knowledge and ability needed to formulate and administer development programs.

b. We should collaborate with those civilian Indonesian leaders who are interested in the modernization and development of Indonesia.

c. We should strengthen the army’s role in economic and social development activities.

V. Action Recommendations

A. Subject to Immediate Implementation³

(1) PL480—$32 million of rice, $3.7 million of wheat flour and $23.1 million of cotton have already been approved under an existing agreement and will be shipped promptly. The rice supply is four times larger than our annual commitment. $13 million of vegetable oil is under consideration.

(2) Civic Action—Following the return of a Civic Action Survey Team now in Indonesia, the United States will be prepared to launch a civic action program aimed at (a) vocational training and (b) rural reconstruction and development. These programs reflect General Nasution’s desire that demobilization of older members of the forces proceed as rapidly as possible under the conditions that dischargees have civilian jobs waiting for them, and that while still in uniform, army personnel will be utilized effectively in rural development.

(3) Military and Police Assistance—The Army will receive the bulk of the present Military Assistance Program (MAP) which will stress civic action, communications, arms standardization, and equipment for construction and work battalions. It will be necessary to retain in the MAP for the other armed services some carefully screened status items desired by the Indonesians (such as a new patrol gunboat for the Navy and T-37 jet trainers for the Air Force).

Assistance to the Indonesian police will be concentrated upon the 23,000 man Mobile Brigade. Nasution has previously requested an estimated additional $11.5 million for the internal security functions of the Mobile Brigade. These requirements are being updated.

(4) Peace Corps—President Sukarno and the Peace Corps Director met in September to discuss a Peace Corps program for Indonesia. A tentative plan for immediate implementation is being drawn up.

(5) A.I.D.—The Development Grant program will be continued at about $17 million. Emphasis will be placed on public administration and technical education in an attempt to alleviate some of the critical managerial weaknesses. Loan applications will also be considered; however, until stabilization measures are taken (see contingency planning below), development loans should be extended only on a selective basis.

(6) EX-IM Bank—Export-Import Bank expects to make loans in FY 1963 of $3.95 million for a cement kiln and $17.6 million for a thermal power plant. The Bank will also extend usual U.S. supplier credits.

(7) Emergency Assistance for Industry—To forestall further slowdown of production activities, the United States, upon request, should consider a loan or grant of $15-$20 million for urgently needed spare parts and raw materials. There are indications that the Indonesians are beginning to recognize the importance of such imports and desire outside assistance in making a preliminary survey of requirements and planning the proper administration and distribution of spares and industrial commodities. Such assistance could be given prior to adoption of a comprehensive stabilization program, provided there were adequate control of the funds.

A. [B] Contingency Planning

(1) Stabilization—The United States should itself do nothing further until the first step in a program of stabilization is taken by the Indonesians, e.g., to develop and agree to give effect to a far-reaching program of stabilization along the lines of the IMF Staff Report. This would qualify Indonesia to draw as much as an additional $82.5 million from the IMF. The likelihood that Indonesia will be willing to undertake a stabilization program will be greatly increased if the United States and other Free World countries are prepared conditionally to offer substantial financial assistance. Furthermore, since Indonesia’s maximum borrowing potential from the IMF is far short of its prospective needs, concurrent offers of aid from other sources may be necessary in order to obtain IMF assistance.

The balance of payments deficit for FY 1963 is estimated at $200-$300 million, including $170 million debt servicing. This estimate assumes Indonesian acceptance of an IMF-approved stabilization program; an austere import level; and recovery of export earnings. Conjecture regarding methods of meeting the gap includes refunding or moratorium on $60 million military debt repayment to the Bloc, $20 million reparations from Japan, $35 million in credits or refunding by other Free World nations and—from the United States—deliveries of some $40-$60 million in food and fiber, $15 million refunding and $15 million for emergency imports. This would project a need for new loans in the range of $15 to $115 million with the United States as a major source, the amount depending on whether the payments deficit is $200 or $300 million. The controlling principle in any stabilization program will be an attempt to involve as many nations as possible from the beginning of such assistance.

While the Indonesians are negotiating with the IMF, and as the magnitude of requirements comes into focus, the United States should: (a) request Indonesia to obtain a moratorium on repayment of Soviet credits; (b) continue diplomatic efforts to convince Free World creditors to refund outstanding debts or to extend additional aid; (c) seek to induce the EX-IM Bank to make refunding concessions; (d) seek resolution of the long-standing debt question between the Dutch and Indonesian Government (at present the World Bank will not participate in Indonesia because of the issue); and (e) be prepared to contribute to the remaining deficit on request.

(2) Long-term Development Assistance—The deflationary stabilization measures recommended by the IMF must be accompanied by simultaneous positive action to correct the structural defects which inhibit recovery of productive capacity.

The direction of this effort can be gained from the report of the U.S. Economic Survey Team which visited Indonesia in August 1961. This set forth a program of recovery and development which laid special emphasis upon strengthening the nation’s infrastructure and making full utilization of existing industrial capacity. The Team recommended that much of the existing U.S. aid program be kept intact and made the following additional aid recommendations to be given effect mainly over a 3–5 year period:

Proposed Program	Grants $ million	Loans $ million
Education	30–40	40
Transportation	7
Resource Survevs	2–3
Food Distribution	3
Spare Parts and Maintenance		25–30
Inventory Replenishment		20
Tin Rehabilitation		12
Electric Power and Coal		18
Regional Research Center	10
Total	152–62	105-110

In addition, the Team proposed that other free nations and international organizations provide loans amounting to $165 million for the rehabilitation of the rubber industry and for spare parts and inventory replenishment.

The Team recommended that major expansion of productive facilities be considered only after the Indonesian Government had demonstrated its ability to improve the country’s infrastructure, to utilize existing industrial capacity and to finance new light industry.

0. Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSC, NSAM 195. Secret. The Department of State copy of this memorandum indicates that it was drafted by Peterson, cleared by Frank K. Sloan for DOD, Janow for AID, FitzGerald for CIA, Dan Moore for USIA, Kenneth R. Hansen and Robert Amory for BOB, and Dillon and W.W. Diehl for Treasury. (Department of State, Central Files, 611.98/10–1062)
1. Harriman and Jones met with Subandrio at the United Nations to discuss prospective U.S. assistance to Indonesia. The report of their discussion is in Secto 2 from USUN, September 24. (Ibid., 798.56/9–2462) In addition, General Maxwell Taylor, designated to be Chairman of the JCS, was in Indonesia on September 19. He held talks with Indonesian defense and military leaders about U.S. military assistance. Reports are in telegrams 547 from Djakarta and 418 from Manila, both September 19. (Ibid., 798.00/9–1962 and 798.5/9–1962)
2. Secret: There were 18 attachments to this memorandum, which were apparently not submitted to the President. They were: 1) Economic Background, 2) Balance of Payments Analysis and Stabilization Requirements, 3) Outstanding External Debt and Estimated Schedule of Repayments, 4) Summary of Indonesia’s Debt to Holland, 5) Sino-Soviet Bloc Aid to Indonesia, 6) Political Assessment, 7) The Potential for Insurgency in Indonesia, 8) Summary of IMF Staff Report on Indonesia Consultation, 9) PL 480 Program, 10) Civic Action Program, 11) U.S. Military Assistance Program, 12) Peace Corps, 13) Summary of Foreign Aid Obligations to Indonesia, 14) Non-U.S. Free World Aid, 15) Aid Program—Indonesia, 16) Summary of Export-Import Loans to Indonesia, 17) Summary of Free World Governments’ Responses to U.S. Inquiry regarding Aid to Indonesia, and 18) U.S. Economic Survey Team Report (summary). (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSC, NSAM 195)
3. Next to Actions A, 1–4 is a handwritten “O.K.”