THE SITUATION IN INDONESIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00826A001100010028-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 15
• Document Creation Date: December 19, 2016
• Document Release Date: January 26, 2006
• Sequence Number: 28
• Publication Date: January 1, 1966
• Content Type: REPORT

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THE SITUATION IN INDONESIA
The Indonesian army, under its able leader
General Suharto, is the dominant power factor in
Indonesia today. A year ago it was on the politi-
cal defensive, its influence circumscribed, its
leadership and ranks infiltrated, virtually for-
bidden. to oppose the steady drift of the nation.
toward Communism.
The abortive Communist-oriented coup last
October, which infuriated army leaders and gal-
vanized them into action, turned into an historic
watershed in the evolution of Indonesia's post-
independence. The reaction swept the generals into
power and, for the time being at least, shattered
the Communists as an effective political force.
The generals, however, were left with a coun-
try reeling from years of misrule under Sukarno's
"Guided Democracy." At the same time that they
have been maneuvering against President Sukarno's
determined efforts to regain control, they have
had to set to work methodically to stabilize the
national economy and the body politic.
Today, the political scene is developing quite
satisfactorily from the army's viewpoint, but the
economic situation is critical and could undo the
progress made in the political arena if the drift
continues. The chaos of the past can be blamed on
Sukarno; the continuing failure to remedy the situ-
ation could be brought home to the new leaders.
The Indonesian domestic political situation
continues along lines favorable to the army and to
General Suharto. In contrast, President Sukarno's
position. and'prestige are declining progressively.
The most dramatic recent manifestation of the
erosion of Sukarno's power was the ratification on
11 August of an agreement formally ending Indonesia's
three-year undeclared war against Malaysia. Only
two weeks earlier, Sukarno had publicly called for
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a continuation of his "confrontation" policy against
Malaysia. The occasion for this outburst, however,
was the installation of a new cabinet which reflected
the new order in. Indonesia and further registered
Sukarno's declining power. The speech merely spurred
General Suharto's efforts to finalize the agreement
with Malaysia, which had been delayed since June
largely by Sukarno's footdragging.
The agreement itself leaves much to be desired.
The published text calls for an. immediate end of
hostilities, the immediate establishment of diplo-
matic relations, and an early opportunity for the
people in the Borneo territories of Sarawak and Sabah
to restate their willingness to remain in the Malay-
with Malaysia marks yet another milestone in Djakarta's
slow progress back to a saner and more manageable
domestic and international posture. The end of con-
frontation will certainly reduce the budgetary burden,
and could make Western powers more receptive to Indo-
nesian requests for new aid and leniency on existing
debts.
Elsewhere in the international sphere, Indonesia
is firmly embarked on a course of friendly relations
with the West. Foreign Minister Malik has stated that
Indonesia hopes to be back in the United Nations as
an active member by late September. Indonesia has
sharply disengaged from Sukarno's pro-Peking policy
and has curtailed its diplomatic efforts in. the Afro-
Asian world considerably.
The new cabinet formed late last month repre-
sented another victory for Suharto at Sukarno's ex-
pense. Especially hard for Sukarno to swallow was
retention in the new cabinet of the triumvirate--
Suharto, Foreign Minister Adam Malik, and the Sultan
of Jogjakarta--which had been effectively running the
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country ever since Sukarno reluctantly gave Suharto
special executive powers last March.
The major concession to Sukarno was a post of
little real power for a badly shopworn Moslem poli-
tician whose position is shaky even within. his own.
party, the Nahdatul Ulama (NU). The balance of the
29-member cabinet is made up of army officers, repre-
sentatives of political parties, and a sprinkling of
technicians. The cabinet leaves something to be de-
sired, particularly in ministries dealing with the
economy, but it is probably the best Indonesia has
had in a number of years. In. addition., Suharto's
office has a "kitchen cabinet," composed of army
officers assisted by university specialists in the
economic sphere, which is expected to have a substan-
tial role in formulating policy for the new govern-
ment.
Suharto received his mandate to form a new
cabinet from the Indonesian Congress, which met in.
late June and early July. In a series of wide-
ranging decrees the congress also: (1) reaffirmed
Suharto's special executive powers granted by
Sukarno last March; (2) revoked Sukarno's life presi-
dency but provided that he remain in office until
an elected congress chooses a president--some two
years hence; (3) reaffirmed Suharto's earlier ban
on the Indonesian Communist Party and in addition
proscribed the propagation of Marxism-Leninism "in
any form"; and (4) decreed that elections be held
within. two years and that an election law be written
within. six months.
In. addition to preventing a revival of the badly
hurt Communist Party of Indonesia (PKI), Suharto has
two major domestic political tasks: the control of
Indonesia's opportunistic political factions, and the
continued downgrading of Sukarno and Sukarnoism. The
latter is still a delicate task in. view of Sukarno 's
significance in emotional terms to the average Indo-
nesian., particularly in densely populated Java. Minor
incidents provoked by pro-Sukarno elements are still
occurring in East and Central Java.
Nevertheless, Suharto, supported by the able,
dynamic and intelligent Malik on the one hand, and
profiting from the Sultan of Jogjakarta's symbolic
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and traditional ties with the masses on the other,
has made remarkable strides in. embarking Indonesia
on its new path. In effect, political progress
has cleared the decks for more intensive concentra-
tion. on Indonesia's major problem: halting its eco-
nomic decline and beginning the long up-hill struggle
toward development and modernity.
The Indonesian economy is in. chaos, and only
the fact that most Indonesians live outside of the
modern economy has prevented a disaster. The coun.-
try's most urgent problem is how to get the bankrupt
economy back on a sound basis. The nation's economic
plight may become the country's principal political
issue.
So far, Sukarno and those who advised him in
the pre-October period are still being blamed for
the galloping inflation, declining production, and
tremendous foreign. debt. Unless effective remedial
action can be developed, however, an. antiregime at-
mosphere could easily develop which could be ex-
ploited by the political parties, coup-minded army
officers, extreme nationalists, and Communist ele-
ments. The result could be political chaos, or a
complete army take-over; a return to authoritarian.
government could occur.
Suharto and those around him are aware of these
possibilities. They base their hopes for economic
stabilization and progress largely on foreign aid.
The Indonesian Government faces short- and
long-term foreign obligations far beyond its ability
to pay--more than $2-1/2 billion. The USSR is Indo-
nesia's largest creditor, mainly for military assist-
ance. There are no foreign exchange reserves, and
$160 million. in foreign obligations are in default.
Debt servicing requirements for 1966 are estimated
at $550 million, a sum exceeding Indonesia's current
annual export income.
Indonesia wants to reschedule payments on its
international debt and wants help in. working out a
domestic program of economic stabilization.
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Free world creditor nations have ostensibly
agreed that debt rescheduling should be approached
on a multilateral basis. Representatives of n.ine
creditor nations who met in Tokyo on 19 July recog-
nized the urgency of Indonesia's economic problem,
but did not go beyond a decision to convene another
formal multilateral conference in mid-September.
The nine nations were the United States, Japan, United
Kingdom, Netherlands, West Germany, Italy, France,
Australia, and New Zealand, with Canada as an ob-
server.
Indonesian industries are operating at less
than. 30 percent of capacity, mainly because of a
lack of spare parts and raw materials. Even agri-
cultural production--normally 60 percent of the
national income--has declined. Only petroleum,
which remains under foreign management, has pros-
pered.
A basic problem of the Indonesian economy is
the lack of managers, skilled labor, and entrepre-
neurial talent. The Dutch provided little training
for the Indonesians, and the Indonesians have ag-
gravated the shortage by ousting foreigners with
managerial and technical skills. Repressive actions
against overseas Chinese since the October 1 coup
have further reduced the ranks of traders and entre-
preneurs.
The Indonesian transport system has deteriorated
rapidly during recent years. It could barely meet
the rock-bottom service requirements of the military
and the civilian economy. Now the situation. has be-
come critical, and even essential movements cannot
be assured. During the first half of 1966, up to
80 percent of the ships in. inter-island service were
idle for lack of spare parts and lubricating oils.
The government was able to maintain only 25 percent
of the surfaced roads. More than 50 percent of the
trucks and buses were incapacitated for lack of spare
parts and maintenance. Imports of new vehicles have
been held up because of the lack of foreign exchange.
Railroad service also has been hampered by the lack
of spare parts and adequate maintenance. Even the civil
airline, Garuda, has run into an acute shortage of spare
parts, and will need emergency assistance to maintain
domestic schedules.
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The major items in the Indonesian budget have
been grandiose and unproductive public works proj-
ects of the Sukarno era, and expenditures asso-
ciated with the military. Progress on Sukarno's
pet projects has been stopped, and expenditures for
sophisticated military hardware may be curtailed.
With the military leaders in control of the gov-
ernment, however, there is little prospect that
expenditures for the maintenance of armed forces
personnel can. be reduced. It may be possible to
use military personnel in civil action programs to
help economic recovery.
Government expenditures are often two to three
times revenues. There is no adequate system of
revenue collection.. The central bank finances the
difference by simply printing more banknotes. The
recent currency reform has only reduced the number
of digits. These persistent budget deficits have
been the main. cause of an inflation. which has raised
prices 500 percent over the past six months.
No quick, easy solution is available for the
Indonesian economy. Multilateral action by Indo-
nesia's creditors to ease its debt servicing bur-
den is an indispensable step. A multilateral frame-
work may also be feasible for the granting of some
new aid, but most of Indonesia's creditors are con-
cerned mainly with safeguarding their own interests.
As a result, there may be an urgent need for aid,
particularly from the United States.
Before Indonesia can begin to think of the long
pull toward stabilization and development, a sub-
stantial salvage operation. will be necessary. Indo-
nesia has an immediate urgent need for cotton and
other materials to rekindle lagging industry, and
for spare parts for the variegated inventory of
transport and industrial equipment. There is no
immediate danger of a food shortage, but rice may
be short this winter. Indonesia may need to import
500,000 tons this year to meet food requirements.
Some progress has been. made. Trade with Singa-
pore is to be resumed. Trade regulations have been
altered to encourage exports. The government has
reapplied for membership in. the International Mone-
tary Fund, but faces a major obstacle in. the $47.4
million. required for readmission. The Fund has
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suggested that some of the creditors might provide
this as part of their aid program, but leading
creditors have not been responsive. In any event,
the Fund will provide experts to help draft a finan-
cial program to restore international credit and
domestic financial responsibility on readmission.
Recovery will require years of effort even
with the best domestic talent and liberal foreign
economic assistance. Indonesia has the climate,
land and people to build a comfortable if not a
flourishing economy, but organization. and motiva-
tion of the population. will be difficult.
Foreign aid can give
the
country hope and
tools. It cannot provide
will
and dedication. The
most encouraging sign is
that
the present Indonesian
leaders seem inclined to
face
reality. They recog-
nize the sources of the present economic chaos, if
not its full magnitude. They also realize the politi-
cal cost, both to them and to the nation, if they are
unable to achieve some economic progress.
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INDONESIA'S COTTON REQUIREMENTS
Indonesian. economic statistics are slow and in-
adequate, but various figures are available concern-
ing In.donesia's textile spinning capacity and its
requirements for raw cotton. Estimates of the total
number of spindles available in Indonesia's 14 spin-
ning mills range between. 320,000 and 384,000. Many
of these spindles are inoperable because of defective
maintenance and the lack of spare parts so that these
figures overstate Indonesia's actual capacity. Pro-
duction. is also hampered by inadequate supplies of raw
cotton and electric power. It is estimated that mills
now are operating at only 10 to 15 percent of capacity.
According to figures provided by Indonesian govern-
ment officials, 42,240 metric tons of raw cotton would
be needed to keep all spindles (384,000) operating on
three shifts. The textile ministry, however, antici-
pates that only 71 percent of the spindles will be
operable in the coming year. On that basis, total re-
quirements for raw cotton will be 30,000 metric tons--
of which 27,000 (or 150,000 bales) must be imported.
Of this import requirement,. 75,000 bales are to be
provided under a United States PL-480 agreement. No
other contracts to import raw cotton. are known to have
been signed.
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In late 1964 and early 1965, the Indonesians
took over the control and management of all United
States investments except for the oil companies. At
that time the Indonesians announced that the take-
overs did not constitute expropriation, as no attempt
was being made to take over ownership rights. As a
consequence, no payment to United States interests
would be required. It was generally assumed, however,
that ownership of the seized assets would eventually
be officially transferred to the Indonesian Government,
with some compensation paid.
In April and May 1966, the Indonesian. Government
signed agreements with U.S. Rubber and Goodyear, pro-
viding for the payment of $4.1 million to U.S. Rubber
and $4.5 million to Goodyear over a period of seven
years. Payment will probably be made in the products
of their former estates, although under the terms of
the agreement it could also be made in U.S. dollars.
The role of the rubber companies in Indonesia now is
limited to the marketing of rubber produced on. the gov-
ernment-owned estates.
No provision, has yet been made to compensate
other U.S. firms, but arrangements are being made be-
tween the Indonesian Government and the U.S. Embassy
in Djakarta for the orderly processing of claims.
Both Caltex and Stanvac, the two major U.S. oil
companies operating in Indonesia, retain their assets,
but Stanvac is currently negotiating for the sale of
its South Sumatran assets. Caltex operations in. Indo-
nesia have continued to be profitable. Stanvac's re-
finery operations, however, have been unprofitable
for some time, and the company apparently hopes that
a sales agreement can be concluded. There now appears
to be some question whether the Indonesians actually
want to go through with the purchase. Agreement has
already been. reached on a purchase price of $27.75
million., but a major sticking point remains. The
company wants the government to guarantee the refinery
sales agreement, so that the guarantee will remain.
valid even. if Permina, the government-owned oil com-
pan.y conducting the negotiations, is abolished.
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THE DUTCH-INDONESIAN CLAIMS DISPUTE
The Dutch-Indonesian claims dispute has been by
far the most important issue hampering an increased
Dutch presence in Indonesia.
Dutch claims against Indonesia fall into two
major categories. The first consists of the debt
initially transferred to Indonesia at the Round Table
Conference of 1949 which granted independence to the
republic.
The second part of the Dutch claim results from
the 1958 Indonesian decision to nationalize Dutch
enterprises which had been. taken over in. 1957 and
1958 in. the campaign, to annex Dutch New Guinea (now
called West Irian). Although Indonesia had admitted
the validity of at least some of the Dutch claims,
there has been no agreement as to the amount.
Since the resumption of diplomatic relations be-
tween Indonesia and the Dutch in 1963, three meetings
have been. held concerning the claims dispute. During
the first meeting in. November 1964 at the Hague, little
progress was made; most of the discussion. concerned the
implementation. of a Dutch 100 million guilder credit
issued in August 1964. The second series of talks in
August and September 1965 also failed to reach specific
agreements on the claims issue. In May 1966, an. Indo-
nesian economic delegation. led by Umarjadi, the Deputy
Foreign Minister, arrived in the Hague to discuss the
possibility of additional economic assistance. The
Dutch apparently hoped that some settlement could
finally be reached on the claims issue, but again no
final agreement was reached although the Dutch were
reported to have offered substantial concessions.
These concessions included the scaling down, of claims
from 4 billion. guilders ($1,105 million) to approxi-
mately 1.2 billion guilders ($332 million); a grace
period for as much as four or five years; and 25 to 30
years for repayment.
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Medium-Term and Long-Term Debts of
as of December 1965
Million
US $
Million
US $
International Monetary Fund
102.4 a/
Free World
Communist Countries
Japan.
203.8
USSR
992.8
United States
166.3
Yugoslavia
97.8
West Germany
142.6
Poland
94.6
France
107.2
East Germany
61.4
Italy
98.6
Czechoslovakia
57.9
United Kingdom
36.9
Hungary
17.4
Netherlands b/
25.4
Rumania
15.0
India
8.5
Communist China
13.9
Austria
6.9
Bulgaria
Sweden
United Arab Republic
3.0
Switzerland
a/
b/
2,276.7
Est drawings. Indonesia's original gold contribution offsets part
of this sum, making actual payment obligations $63.5 million.
Figures do not include Dutch claims for seized property and debts
transferred at the 1949 Round Table Conference.
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Short-Term Debts of Indonesia
as of November 1965
Million
US $
Million
US $
Free World
Free World (Continued)
Japan
119.0
Sweden.
United States
47.2
United Arab Republic
Netherlands
26.4
Australia
Pakistan
21.6
Mexico
West Germany
14.0
Canada
Negl.
Italy
20.1
Communist Countries
Switzerland
Czechoslovakia
15.2
France
USSR
17.5
Hong Kong
India
Zanzibar
Philippines
Belgium
Norway
Yugoslavia
Poland
East Germany
Hungary
Bulgaria
Rumania
10.2
Austria
Finland
Denmark
Iraq
Other
Negl.
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10 August 1966
SUfJfCTt lndoreA?a
I UCST'1D By: GOT
PURPOSE2 Paper for rep. r nhon
DCl today to oast! d That a gaper on Indonesia be
furnished h1a 'trot o.) a crash asis but to roaso
nably good tic a't fox Cnn o i ta}"i t: hon, D/.Tox. ? who
has exhibited ca asjd, ra?) .n interest in, the subject,
Halms wants the ; ;rto"i it xC D*icfing paper and
the July bricfirl for V1 co P: esldent Humphrey
updated and n7?' 1M tacath:ar with whatever
statistics CSR h53 teat nra pertinent,- 1 ahon
is specifically Later need in Indonesia's cotton
r ulre antz tin{ `Dori'" st,3 ct To,id. DCI a1VO epoci+
flt d f, asr s on tho It,. 4-. Indonesian. transpor-
tation cnpabilitios. Pr,. :r r?hould also certainly
show tho etQtu3 of U. u. bu.*tess. ute9rests In
Indonesia
P'trot should nat'md:i3r prtsOnb facts which
underlay our r =-;')r at-"Cr)O% on Ch r State paper
discuss a by ,P Cog 1-4-t ncc!m tr - .rot to bo presented
as diii'orancos wlt li V., Iar"', : t a1` tat*'"*Just the
facts, mans.
a1 sn
13 ~,Y? 't9t't ?,e? 'e~ ,. , a Paper can be
~. rte-t anti riven to DCx
c 4b 1,,% ar. 3 this will. meet his
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Paper requested by DCi for Congressman
Mahon.
b Mat by OOB 13 August
by A/DOCI. - hold for approval
Print 20.
Saturday, to DCI before he leaves
13 August
OOB , if Possible; otherwise
Monday, 15 August.
, otherwise
Proposed Dissem:
DCI - 3
O/DCI
25X1
DD
iiq
I _
O/D
DOC
O/L
Dl
I
eg. Coun
. (Warner)
25X1 SEAI
1
-
3
CS/Preys - Balance
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