PROPOSAL FOR AN EIC STUDY OF INDONESIAN ECONOMIC DEVELOPMENTS AND PROBLEMS, IN THE LIGHT OF FREE WORLD AND COMMUNIST ECONOMIC INTERESTS AND INFLUENCES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79S01057A000500040025-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 12, 2016
• Document Release Date: June 21, 2002
• Sequence Number: 25
• Publication Date: October 27, 1954
• Content Type: STUDY

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27 October 1954
PROPOSAL FOR AN EIC STUDY OF
INDONFSIAN ECONO iIC DEVELOPIENTS An PROLES IN THE LIGHT OF
sasson soossassonsasoonws was's,
yrj.EE WORLD AND Cal.IUNIST ECONONIC INTERESTS AND INFLUENCES
I. There is serious concern at policy levels in the U.S. Government
32 to the implications for the U.S. and the Free World generally of
emerging developments in Indonesia. As one expression of this concern,
for example, the Operations Coordination Board has recently established
a working group to watch developments in the Indonesian situation. This
;roup has already requested material from the intelligence community to
-47upport an over-all study of the political situation in Indonesia, due
, in. December.
2. In developing an over-all picture of the Indonesian economic
sitv tion, the most important aspects seem to be the following:----""'
a. 'A careful survey of the economic importance of
Indonesia to the Free World and the Soviet Bloc,
respectively - as a supplied of important raw materials
and as a consumption market for other products.
b. As full as possible a picture of developing internal
and external economic pressures within the area. This
is needed to guide U.S. and other Free World government
policy decisions affecting Indonesia's foreign trade
opportunities, and the financial and technical assistance
available to her from the Free World - in time to
influence effectively her orientation as between the
Free and Communist Worlds.
FT. Need for a Co_EollatildrIty.____Sz
1. Several summaries and a number of sector studies on particular
aspects of the Indonesian economy are available; but most of these are
srcer several years out of date. The statistical data presented are
kT;e17,:c..ally even less recent - being based largely on 1949 to 1951. There
recent comprehensive study covering the Indonesian econork. as a
Document No. a
Review of this document by CIA has
determined that
CONFIDENTIAL 0 CIA has no objection to declass
It contains information of CIA
State Dept. review completed. On file USDA release Interest that must remain
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instructions apply. classified at TS S
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Dale Reviewer
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2. Within the IAC intelligence community only the Department of
State has undertaken specific analysis of major aspects of the Indonesian
economy within the past 18 months. (A single study completed in September
1954 reflects data later than 1952.) Of UIS-.100 on Indonesia, only the
supplement on petroleum has been completed. none of Chapter VI -
Economic" - has even been scheduled, and Chapter III - *Transportation
and Telecommunications' - is sehodinlnd trorilv frn 1Q nndi 14KA I
3. On the other hand, there is a great deal of material awaiting
exploitation - in the form of detailed data, brief reports on specialised
items (i.e., petroleum, rubber, land reform, etc.), and background infor-
mation in the heads of a number of knowledgeable individuals on which
a comprehensive study might be based. Such a project will require
drawing on documents and knowledge available throughout the EIC community,
particularly in the Department of State, in FOA? in the Department of
Agriculture, and in CIA. Important specialized material on transportation
and communications aspects could also be contributed by G-2, OBI, and
AFOIN. .
III. Recommendation
It is proposed that a comprehensive study of Indonesian economic
developments and problems be initiated by the EIC and assigned to a
special working group, chaired bv the Department of StAta
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CONFIDENTIAL
27 October 3.954
(HIGHLY TENTATIVE)
POSSIBLE OUTLINE FOR sruor
OF INDONESIAN ECONOMIC DEVE1OPMErS AND PROBLEMS
I. General Description of Area, with Principal Regional Distinctions
(i.e*, between Java/Bali and the various Outer Islands)
A. Ovar.all economic pattern for entire area (including trans.
portation and communications systems)
B. Specialized economic situations, by regions (Java/Ball? and
other principal island groups, separately)
II. Analysis of Principal Products of International Importance
A. Yresent over.all foreign trade picture
B. Analysis of principal individual products involved (e.g.,
petroleum, rubber, tin, rice, etc.)
C. Significance of above items in trade patterns of Free World
and of Soviet Bloc
III. Principal Indonesian Economic Problems
A. In internal economy
2, Over-population and its results
a. Per capita income and saving
b. Per capita availability of food and other supplies
co Overcrowding of villages and land (distribution
inequities)
d. Under-employment, and pressure for transmigration
2. Shortages of trained administrators, entrepreneurs (special
position of Chinese), teachers, and technicians
3. Limited industrial development (small-industry opportunities)
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CONFIDENTIAL
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COUTDEZITIAL
I. Internal transport and communications difficulties
5. Budgetary deficits, and inadequacy of governmental
services in education, pdblic health, agricultural
production and marketing, etc.
6. Institutional factors and administrative attitudes
impeding economic development
B. In international balance of payments
10 Trade deficits, and recent depletion of reserves of
exthange
2. Shortage of international capital for investment
3. Special international marketing problems for Indonesian
surpluses (e.g., sugar quotas, GOCOH regulations, copra
and tin prices, etc.)
C. Arising out of popular and official attitudes toward economic
ties with the Free World end/or the Soviet Bloc
1. Historical ties and strains sinceWorldWar I
(anti.colonialism)
2, Recent and present U.S., and other non.Bloc countries'
economic policies toward Indonesia (e.g., relatively
small aid compared to grants to other countries,
artificial barriers to disposal of Indonesian products,
etc.)
3. Soviet economic relations and proffers of assistance
Economic influences of the internal Columnist movement
IV, Analysis of Available Measures which might be Appropriate for
Improving Indonesian Economic Conditions, including:
A, A consideration of the extent to which remedial measures lie
within the power of the Indonesian Government, or would appear
to depend materially On foreign assistance Of various types
B. A preblem.by.preblem discussion of the specific remedial
measures necessary, and the specific assistance measures
which might be effective economically . provided such aid
were considered politically justified
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PROPOSED sac STUD! ON INDONESIAN ECONOMIC DEVELOPMENTS AND PRORLEMS
3, Action: A smell working group was establiehed by the EIC
to examine arproposed study at Indonesia in order to:
se Compare the toren of reference proposed by the DDI/CIA,
for an E10 stu4y:Iv:1th planned outlines of studies being undertaken by
the State Department as a contribution to the next NIE on Indonesia and
for the Hoover Committee on Asian problems of the NSC.
b, Pecide whether any additional work would be required to
meet the needs of the requestor and it further irkneeds to be done@
make appropriate recommendations to the E/0 as to how additional con.
tributicanlalght be arranged,
Mt. Edward Pried of State was designated an chairman of the group and
Mr, Fred Ritchie and Mr, Clarence Purves were nominated as represente-
tives of FOA and Agriculture respectively, The service agencies mey
wish to designate members at a later date, The Executive SecretarYs
EIC@ vas slaked to provide secretariat services for the group and ely
necessary liaison with the principal rogue:nor.
ESTABLISHMENT OF AN ZIO WORKING GROUP TO FACILITATE COMM
9L2
I e, Action: Approval was given to establishment of an "ad hoc"
working group to aid in the implementation of Step Three in the Procedure"
of the Terms of Reference for NIF.a1.9.54, Members designated were as
fellows:
CIA, Chairman
We Daniel Ho Usgo04 AFOIN
Colonel Lamm BotbweLl with Mr. Duncan Holmes
as alternate@ 0.2
Commander Burns Spore@ OBI (as ONI participation is
required)
Mr, Jcihn Easteme JCS
Mk..? Lawrence 3. Orel:Deno SIC, Executive Secretary for group.
Mr, Drell:on proposed that, the first meeting be held early The following
week,
PROPOSAL FOR WORKING GROUP ON PRODUCTION ASPECTS OF SOVIET GUIDED
50 Discussions The neebere generall,y were reluctant to approve
the CIA establishment of a special working group at this
tine, The Air Force representative suggested that the economic aspects
mi t be covered on a "stopgap" basis by arranging for ORA participa-
tion-in the present AFOIN interdepartmental working group already
responsible for scientific and technical aspects of Soviet guided miesiles
produotdaee
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17954
was still premature, Copies of a descriptive note on the EIG - which
had been prepared by the ORB representative - were
distributed for general information.
NIE POST MORTEMS
3. Discussion: Dr. Outhe called the attention of the members to
the postmortems (TS) of NIE production which appear semiannually and
which bring out the principal deficiencies in present research and col-
lection efforts. He suggested that members not already familiar there-
with might refer to IAC-D47/20 16 November 1954.
STATUS OF INDONESIAN STUDY
4. Discussion: The Chairman reported that the Department of
State had submitted an excellent draft outline for the economic section
of the new NIE on Indonesia, and that this appeared to be also a most
appropriate outline for the study which had been requested by the
DDI/CIA. State was proceeding with the preparation of this report as
outlined, with 0.2 and ONI submitting formal contributions to State on
special aspects. It was understood that the finished contribution by
State will be circulated to the members of the working group established
2 December 1954 for comments and consideration of the extent to which
it meets the requirements of the DUMA.' On the basis of ceaments of
tie members of the working group the EIC will decide at that time-ihiither
or not any revisions of the State Department contribution are needed to
incorporate additional material from other members of the EIC community.
The State Department member stressed that OIR would maintain close
sontact with both FOA and OPAS/Agriculture during the preparation of
States contribution.
SERVICES OFFERED BY THE EXTERNAL RESEARCH STAFF OF STATE DEPARTMENT
5. Discussion: Mr. Howard Penniman, Chief of the External
il..esearch Taff-a-grate Department, briefly outlined the facilities
vlad services which MRS generally offers to members of the economic
Noir 2 ?
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IN TinNATIONAL COOPERATION ADMINISTRATION
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September 14, 1955
Mr. Joseph Yager, OIR
Department of State
Frank M. ?barrette, MASR
OIR Report "The Status of the Indonesian Economy" (IR 6865)
As a member of the EIC, ICA submits herewith its canments on the subject
report.
The report presents an extremely useful picutre of the Indonesian econ-
omy Which will be valuable for reference, briefing sad program plaaning purposes.
The generalizations appear to be drawn from a careful weighing of thenelevant
factors.
The most significant comment to be made relates to (:developments which
presumably could not have been foreseen with assurance when the document was in
preparation. Nevertheless, in light of the recent turn in political events in
Indonesia,and the changed balance of power which might result from the election
this month, the report will be more useful if it is updated and revised accprd-
ingly.
The following comments are offered for inclusion in the recommended
updated report:
1. It should be made clear that U.S. economic aid to Indonesia was
held to smallamounts in the last several years because of unpropitious
political conditions and questionable receptivity; not because there was
no need for more economic assistance.
2. ,4Hvg:144.belkSertilt9j,nA9a-,49_,If..,fliq_ser,t,,q,JJA,S.
Ell_programthat_wouWadvance_ourintvrestUajndme,sla_U,ppliteical,d07
velopments take a favorable turn, This _ should bg tt9 all-UP*7t5).71date
statement_of.VAS._egMnig_OlectiYg4_111JAkaggigot This part of the pic-
ture might be completed by a projection of the progress which the Indonesian
economy could be expected to make in about 5 years with this aid and with
such other assistance (loans from IBRD, Export-Import Bank, etc.) as might
reasonably be anticipated.
3. Although the impact of past U.S. economic assistance to Indonesia
can hardly be distinguished from the effects of Indonesia's own efforts, the
uses to whichJJ&.has_been_put_couldbe elaborated to sone advantage.
4. The abstract of the report does not seem to reflect the possible
long-term epapabilities indicated on page 45.
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5. The status of the cottage industries might well be discussed
briefly, especially inasmuch as they are so highly organized in Indonesia.
6. It would be helpful if the amounts of foreign aid, discussed on
page 35, were integrated briefly in the treatment of government finance on
page 15.
7. The section on does doesinot reflect that
Indonesia recent] has shown interest in U.S. economic_aid_pmaatilsi_i.e..j
L. 80 and develwellt assistance
8. The U.S. technical assistance discussed on page 35 could be stated
with more precision. It amounted to $4 million in FY 1953 ad FY 1954. In
FY 1955, it was $7.5 million, Which included $1.8 million for a special ma-
laria control program.
9. With reference to the role of the J.G. White Co., indicated on
page 33, it would be more accurate to state merely that J. G. White, a firm
of U.S. contruction engineers, has been under contract with the Indonesian
Government since 1951 through ICA financing. Inasmuch as J. G. White re-
ports are not made available to the U.S., it is impossible to evaluate their
effectiveness.
10. An error appears in table 7 on page 56. The estimated total current
account for FY 1954 should be $-47.8 million, resulting from the trade
balance of $160.0 million and the deficit of $207.8 million in total invisi-
bles.
CC: Mr. Clarence Purvis (Agriculture)
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Mr. Martin Mulholland (ICA)
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0
Members of the Economic Intelligence
Committee on Indonesia
13 September 1955
Clarence M. Purves, Deptty Director,
Foreign Agricultural analysis Division, FAS,
U.S. Department of Agriculture
IR-6865: The Status of the Indonesian Economy
As a member of the EIC working group on Indonesia established last December, I
have reviewed the Intelligence Report on the status of the Indonesian economy
and have discussed it with other interested members of the Department. In
general we feel that it is undoubtedly the most thorough report available on
Indonesia and that the State Department did an excellent job in bringing to-
gether the material on the Indonesian economy, particularly in view of the
short time available.
The factual information on agriculture was essentially in agreement with such
data as we have in our files, There are slight differences in a few cases but
they are not enough to make any difference in the conclusions reached.
I should like to point out, however, that we had relativel little o ortunit
to contribute_ to the_preparation of this report. Ir. ?erson, r. oe g an
I had one meeting with Mr. Smuckler, at which time they discussed the general outline
of the report on agriculture and provided him with such information as we had in
our files. Because of the short time for preparing the report, Mr. Smuckler
was unable to let us review it before it was published. If we had had a chance
for such a review, we would have liked to have made the following suggestions:
1, There are some assumptions as to the importance of world trade
of Indonesia with which we do not agree. Indonesia is an
....itmagnImmsg_g_t_runAr4AairagAm., tin, bauxiteam oil
diol.:ftruggA__Fam-manvla thegA Pr011gtg4
it has comparaIlmmadvantage_over anz other area in the world.
These are all products of considerable value to both the free
world and the Communist world. We feel the report underesti-
mates the value of the products to both areas. To say that
these products are of no immediate importance to the United
States and perhaps not even too important to the Sino-Soviet
Bloc is a y2Ez.Ah2rtnsighted_viewand_pne_that needs,urther
caaderatis.n, While there are surpluses of many of these
products at the present time, the situation could change
quickly and because of the strategic location of these sup-
plies in Indonesia, they could be extremely valuable to either
side.
!I ? s
s. 11
2. Since Indonesia is primarily an agricultural country and one
of the principal problems is developing an expanding agriculture
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to provide an adequate diet for the people and also to provide
some exports in order to obtain foreign exchange, we feel that
thelgriculturalsectio11.C21114,44Y9-4PPaMILAmoreAlossmh
artilyzig_ ?AM- nO.
3. It is also our feeling that the report did not adequately ap-
praise the significance of the technical development programs
being conducted in Indonesia by ICA and FAO and the problems
which these development programs are designed to meet.
4. A report of this type should give more attention to the longer
term aspects of economic development and to the problems TAhich
may arise in Indonesia as a result of population growth and
efforts to redistribute the population among the less densely
settled islands.
S. The analysis in the report indicates pretty clearly that the
economy of Indonesia is in a stagnant condition and that pro-
ductivity and capital formation are inadequate to assure a
tempo of economic development that will bring Indonesia "off
the fence" and into the community of free nations, yet there
is noranalysis of s ecific measures for accelerating economic
development, athough severe such programs have been dis-
cussed between the United States and Indonesian officials in
recent months.
6. The report does not bring out how programs under P. L. 480 might
further market development in Indonesia and might also, at the
same time, be of great assistance to the Government of Indonesia
in replanting her rubber acreage with high yielding clones, thus
greatly enhancing productivity among rubber workers.
7. The analysis_in_the_report might have indicated more cleaKlz:the
necessitY,torT40,94Q44t0Ain1QVIIVr34Aff-POPALXVAQUITCA___,
so as to permit her to earn enough additional foreign exchange
significantly to foster productivity. This means procuring the
facilities and power and knowhow for processing primary products
such as bauxite and tin ores. The report might well have indi-
cated the immense potential demand among 1.5 billion Asiatics for
aluminum and tin products.
?
In view of the above-mentioned limitations to the report and the rather sig-
nificant changes in recent months, we would ,like.to.matst that the reaW
is now outdated and that more attention should be given to the above points
and to the potential significance of the increased interest Indonesia is
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showing in certain aid programs and in P. L. 480, which, at the time this
paper was written, seemed unimportant to Indonesia.
If the EIC is in a reement with ou/Lsumsstionsj,oreyiew and expand the
19P9r a C-Cga?alt1 ie Wad: 1ilia6.4iiie-if 'tat "iiie
BIC workin r?11E whicll-noT c9PaiP4, of rpjorssqntati7sp oiStEq94,,ICA0
C and cultura'aUTEorid, tprocped with ths_pmaration_cf
such a report.
CC: Mr. Joseph Yeager, State
Ar. Mulholland, ICA
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FAS
CIA
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Attachment 2
(Based on comments of as a
member of the E1EC Working Group on
Indonesia.)
STATE DEPARIMENT INTELLIGENCE REPORT No. 6865
"THE STATUS OF THE INDONESIAN ECONOMY"
This report impresses me as a very comprehensive and well-written
summary of OIR materials an the Indonesian economy. It is the most exten-
sive paper an any of the key peripheral non-Bloc economies which has come
to my attention in several years. It illustrates admirably the value of
having (in the Office of Intelligence Research, State Department) a compe-
tent professional staff with the necessary background and available files
of material to turn out occasional studies of this type -- on short notice.
On the other hand, the paper shows internal indications of having been
essentially the product of a single agency, and somewhat limited in outlook.
Although the State Department representative in the EIC Meeting on 17 December
emphasized OIRIS intent "to maintain close contact" with the other members
of the Working Group during the preparation of this paper, it is my under-
standing that the only "coordination" which was felt feasible consisted of
brief contacts between the author of the paper and individual analysts of
Agriculture and FOA (assigned to their Indonesian desks) to obtain certain
data from the files of these other offices. I personally urged that the
other members of the Working Group be shown this report in earlier draft --
after the MIS rush "deadline" had been met (in February) but prior to its
final publication over 90 days later. Had this been done, some rather
Important ideas of other members of the Working Group might have been easily
taken into account by the author -- and the final OIR paper been significantly
improved as a result.
At this late date' critical evaluation tends to reflect a markedly
improved climate of opinion for external aid to Indonesian economic develop-
mentvas a result of important political changes in Indonesia since last
winter. Nevertheless, the following criticisms remain essentially those
indicated to our working group Chairman when I first read this paper (as a
contribution to a National Intelligence Estimate) some six months ago. In
summary -- thg_p_a_p_e_rj:a_qaAoc_oac_to_gaps with practical_problems of
Indonesian economicAugloment and with the relatiouhip,of_Dt
and other
external aid pr_ograma to such development. Specifically:
1. The analysis includes no adequate discussion of the specific aims,
operations, accomplishments, and future possibilities of the Foreign
Operations Administration (now ICA), Export-Import Bank and other U.S.,
U.N. or Netherlands programs for assisting Indonesian economic develop-
ment. Yet grants and loans under these programs are stated to have
1. The non-IAC members of the Working Group were sent the report only in
late June, by which time most of those involved had left town or were tied up
for the summer.
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totalled nearly $300,000,000 since World War II. And more than 100
American technicians have been assisting the Indonesians (on the FOA
or engineering-contract staffs) for the past several years.
a. Even where U.S. aid has direct contributed to such solution!
9f problems as are dia9ussed in, the reurtl_the author.,faile to
laal2att_lny_292pection. For example, a paragraph an page It
spells out at length the improved supply of protein which
resulted from a sharp increase in the fishing catch -- based on
expansion and motorization of the Indonesian fishing fleet and
a government distribution program for fingerlings -- yet there is
no indication that the U.S. Technical Assistance Program was
directly responsible for these developments and actually paid for
the motorized trawlersl
b.The discussion of_ "foralz_ladge_s_25.:,3A)mgivea nor apecifdas
a?.1,12,..gay_sujaalatty,i,tiea undertaken under any of the FDA,
Export-Import, Netherlands or UNTA Programs operating in Indonesia;
but merely reports the total expenditures involved since World War
II. ffhe one substantive indication at the bottom of page 35 is
in wholly general terms, except for the reference to the intro-
duction of improved "rice and corn seed" (which is understood to
be 50% inaccurate, since work on rice has not been included in the
agricultural aid program).7
c. The explanation foreign aid has been relatively limited in
Indonesia is well stated. Since, however, a major change in
Indonesian attitudes is reported to have taken place in the last
six months (accelerated since the recent change in the Indonesian
cabinet) this should substantially increase the whole relative
importance of foreign aid possibilities.
2. The paper is to be commended for its excellent detailed statements of
many of the particular economic problems in the way of Indonesian economic
development. Yet, its very emphasis on the difficulties Indonesia has been
encountering tends to minimize Indonesia's "potential" from the point of
view of basic-materials resources. The whole
L12122a4112:212E-ILIA2Wia's resonrceR/,aPY91,1,as the s:nPhasia on Past and
present difficulties throughout the paper, -definitely Plays down thp
significance of Indonesia's economio_potential This is in sharp contrast
with the views of a large number of qualified experts on the Indonesian
economy with whom I have discussed this question at length in recent years
both at the time of Indonesia's liberation from Japanese occupation, and
later when the U.S. aid program there was being administered by the Tech-
nical Cooperation Administration (then under State Department). It is
understood furthermore that both Agriculture and ICA members of our Working
Group also believe that the strategic potential of Indonesian resources is
considerably greater than here indicated. This illustrates the importance
of having more than a single agency's viewpoint reflected in such back-
ground papers if they are to serve as adequate guidance of policy-level
officials.
3. Perhaps because the importance of the Indonesian potential is so
heavily discounted, there is essenIL921_21.mlalderation of the types of
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develoment required to expand the Indonesian ecoacm., Jimany
oftQifq diffigaties which -Mch 11?r91.1:e411. s_W9A-0-11avg to
g_v_eizsm. Yet, it is understood that a number of specific programs for
development, not yet undertaken, have been at least considered in recent
years -- and that several of these may soon be brought up again in a
reconsideration of the total magnitude of foreign aid to Indonesia. Thus
proposals for Indonesia's participating in surplus food disposal under
P.L. 408 have been under discussion for more than a year -- quite actively
since last March -- yet the possibilities for this rather specialized type
of aid program are not even discussed. As another example, the possibil-
ities for using Indonesian hydroelectric power in conjunction with her
large (though low-grade) bauxite deposits are barely mentioned in passing.
Even if OIR is correct in assigning a low strategic value to the potential
importance of Indonesian resources to the Free or Soviet Worlds, neverthe-
less an trasta2a4L.V.2.2-1510 c)
2141n ec-n9BLis a desirable U.S. 0,b_active
in itself --Sla9,1?,t.b,L,MMEhie caonof these islands Pleac,g-e
adherence to the Free World a. aslor,poiltical and rnilitaryinperative.
Much fuller consideration should therefore be iven to the extent to which --
and the means ic ?01L.0 -1.1:176/7?DIoaities as---
LAB=0er other agricultural raw materials., and foods
dLh-t-1,2Z-Rtkialg-taaA-_
an .9q0T1.91141-DAUY,a4PPOrted by_.internationa,Dr internal
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It is my understanding that the author of this report, Mr. Sthmucker? is
scheduled to visit Indonesia this fall in preparation for certain NIS chapters
on which he is to work following his return. He will undoubtedly be briefed,
while there, on recently increased Indonesian interest in various foreign aid
programs; and it should be easy to arrange through ICA offices here that he be
assisted in getting the fullest possible picture of this situation. It would
seem logical to me that 1:22...12...wiag2IL.. Sc uchm ker's return the technical knowl-
edge of Mr. Mulholland and of Wilhelm Anderson'Tthe kez technicians on Indonesia
e,"..grnnr.ppy
on the staffs of the ICA and Agriculture members of our working grow should
be drawn on to assist OIR in revising and Tru_pa- datinerbai?iser -- so that it
mi ht rovide a more agsquate Icsokground for future 11;5. 2913.7cy ijrffbnal
ecisions.
4/7
25X1A
Secretary, EIC Working Group on Indonesia
3
Approved For Release 2002/9c/21,:i. A-IRDP79S01057A000500040025-7