(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00827A000400010002-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 11
• Document Creation Date: December 9, 2016
• Document Release Date: July 21, 2000
• Sequence Number: 2
• Content Type: REPORT

Approved For Release 2000/08/29 : CIA-RDP79.T00827A000400010002-1
This package contains background cables and memos
which you may wish to give to the Vice President.
#1 is a precis of cable #144 from Ambassador Green.
The contents of this cable may have prompted this
visit by Vice President Humphrey.
#2 is the full text of the above cable.
#3 is an earlier cable from Djakarta giving the em-
bassy's estimate of major political and economic de-
velopments to be expected in Indonesia during the next
three months.
#4 is a State cable in reply to Ambassador Green's
cable #144.
A. Indonesian Requirements for Short-Term Economic
Assis ance, October 1965. (S) It is an earlier CIA
statement which is comparable to cable #144 from
Ambassador Green.
B. Indonesia's Foreign Debt Crisis, May 1966 (S/NFD)
C. The Dutch-Indonesian Claims Dispute (informal)
(S/
State Dept. declassification & release instructions on file
Approved For Release 2000/08/29 : CIA-RDP79T00827A000400010002-1
 Approved ForBelease 2000/08/29 : CIA-RDP79?0827A000400010002-1
precis of Djakarta 144 from Ambassador Green
A proposal for US short-term (3-4 months) aid to Indo-
nesia.
Indonesia is in confusion, but we cannot hold back as-
sistance until the situation is resolved.
We must neither be too soon with too much nor too late
with too little. This government is better than anything
for ten years. We must
help to meet critical
assure continuation of our aid.
Long-term aid program should await outcome of multi-
lateral debt rescheduling and evaluation of short-run prog-
ress.
The objectives of such an aid program are: .(1) to meet
critical present needs, (2) to prepare for economic recon-
struction, (3) to cut away some of the despair, (4) to en-
courage other countries to help also, and (5) to strengthen
the leadership and maintain US influence with them.
The immediate aid recommendations are: (1) a series of
education programs aimed at civic action, (2) rice and cotton
exports to assure supplies of food and clothing, (3) military
assistance for civic action. and for spare parts to restore
US equipment to operation, (4) a small food-for-work program
to initiate agricultural reconstruction in the critical rice
region (Central Java), and (5) spare parts for American manu-
facturing and transport equipment to restore most urgent op-
erations.
The first recommendation is to be initiated immediately
and it will require a presidential determination.
The Indonesian Government will understand our reserved'
response in this program despite their wish for more.
Comment: We concur in the basic judgments as well as
the urgency and scope of this proposal. The economic recom-
mendations are generally consistent with those in our Indone-
sian Requirements for Short-Term Economic Assistance, CiA/
M 65-69 of October .
Approved For Release 2000/08/29 : CIA-RDP79T00827A000400010002-1
 Approved For Reteasse 2000/08/291: CIA-RD;P79TOQ827A000400010002-1
C t des
E.. 8
13.9
6.9
3.1
3.0
20.2
,rY
Approved For Release 2000/08/29 : CIA-RDP7.9T00827A000400010002-1
 Approved For Release 2000/08/29 : CIA-RDP79T00827A000400010002-1
.6
3.7
C
Tk%BM"VU
1:x.2
17.
10.2
6.2
009
2.0
0r3
0.9
Approved For Release 2000/08/29 CIA-RDP79T00827A000400010002-1
 Approved For,,Release 2000/08/29 -C"t -RDP7W00827A000400010002-1
20 July 1966
S-1957
The Indonesian Economy
Summary
The Indonesian economy is in chaos. Production has declined
in all major sectors of the economy except petroleum. Prices have
increased. six-fold in the last six months. The country has no
foreign exchange reserves, and $160 million in foreign obligations
are in default. Much of the Indonesian population, however, is
immune to the chaos in the money economy. Almost 80 percent of
the population live in rural areas, producing a bare subsistence
from the land and bartering for their other needs.
The prospects for economic stabilization and development are
bleak. The greatest hope for some movement toward stability rests
on the present regime's recognition of the magnitude of its problems.
Current Situation
The Indonesian economy continues to be characterized by
declining production, galloping inflation, a complete absence of
foreign exchange reserves, and a tremendous foreign debt. The new
Ind.onesian government has taken some initial steps to reduce
economic distress in the country, but the situation continues to
worsen. Industries are operating at less than 30 percent of
p
Approved For Release 2000/08/29 JJ~ ty'I t P79T00827A00044Ct0 =0002-1
 Approved For4elease 2000/0i/29' dIA-RDP79dO0827A000400010002-1
capacity. Even agricultural production, which dominates the economy
(60 percent of the national income), has declined in recent years.
It is now lower than in the period prior to World War II. Only
petroleum which remains largely under foreign management has
prospered.
Runaway inflation is the most pervasive characteristic of the
Indonesian economy. The Djakarta cost of living index increased
six-fold in the last six months, and there is little prospecty that
this rate will decline. Despite periodic wage increases urban
4
workers can only purchase daily necessities by moonlighting and
petty thievery in off hours. Inflation also discourages exports
and reduces the hard currency earnings needed to buy food, raw
materials and machinery abroad.
The government and central bank are unable to meet all obli-
4
gations on foreign loans.IbIndustry is seldom able to secure the
,An effort to renegotiate Indonesian debts to the Free World -- now
in progress in Tokyo -- will produce little more than the framework
for more extensive negotiations in the fall.
Most of the population, however, remains largely untouched by
the chaos in the money economy. Indonesian society is essentially
peasant, with about 80 percent of the population living in rural
areas, producing a bare subsistence from the land, and bartering
2
Approved For Release 2000/0f~' !IA-RDP79T00827A000400010002-1
 Approved Fo lease 2000 Q8 ; : CIA-RDP7900827A000400010002-1
for their other needs. They will survive so long as there is law
Principal Problems
The most important economic problem facing the Indonesian
government is the lack of managers, skilled, labor, and. entrepreneurial
talent. The Dutch provided little training for the Indonesians, and
the Indonesians have aggravated the shortage by ousting foreigners
with managerial and technical skills. Repressive actions against
the Chinese since the coup have further reduced the ranks of traders
and entrepreneurs.
The nation needs widespread restoration of roads and railroads
to carry rice into the cities, move export commodities to seaports
and supply villages with consumer goods. Almost 55 percent of all
Indonesia's motor vehicles are broken down because of the lack of
spare parts. Many roads have reverted to jungles, and less than
5 percent of the railroad track is considered safe.
Inflation originates in persistent government budget deficits.
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.
Approved For Release-2.00.0/08/29 :
]A= QP79T00827A000400010002-1
 `
Approved FoKSel9 se 0/0 g ? - DP7 0827A000400010002-1
Y y@.~ 81 ?m m ,.d ~ ~e'v4. uiY&nfn'Y
Grandiose (and unproductive) public works projects of the
Sukarno era and expenditures associated with the Indonesian military
have been the most important items in the government budget. With
military leaders in control of the government, there is little
prospect that expenditures for the maintenance of armed forces
personnel can be reduced. Expenditures for sophisticated military
hardware may be curtailed.. In addition, it may be possible to use
military personnel in civic action programs to aid economic recovery.
The Indonesian government faces foreign payment obligations
far beyond its ability to pay. Outstanding obligations for long
and medium term loans (repayments spread beyond one year) totalled
(Of this by far the largest share
$2.3 billion at the end of 1965.
was owed to the USSR for military assistance credits.) Short-term
obligations total about $350 million. 1966 debt servicing require-
ments are estimated at about $550 million, more than Indonesia's
current export income.
Prospects
No quick, easy solution is available for the Indonesian economy.
Recovery will require years of effort if the best domestic talent
and liberal foreign economic assistance are made available.
Some progress has been made, however. An end to the confrontation
against Malaysia is in sight. Trade with Singapore is to be resumed.
- 4 -
ItTrnry
Approved For Release 2000/08/293",.CIA RDP79T00827A000400010002-1
 SECRET
Approved FoIeI sl 2e1 jRDP7W0827A000400010002-1
Iff
Trade regulations have been altered to encourage exports. The
government has reapplied for membership in the International Monetary
Fund. The Fund will send. an expert team to help mold a financial
program to restore international credit and domestic financial
responsibility on readmission.
Indonesia has fled from crisis to crisis for years. The
country can do so again. The most encouraging sign is that the
present leadership seems inclined. to t ee- o reality. They
recognize the sources of the present economic chaos if not its
full magnitude.
Indonesia has the climate, land and people to build a comfortable
if not a flourishing economy. Organization and motivation of the
population will be difficult. Foreign aid can give the country hope
and tools. It cannot give them will and dedication.
Given short-run foreign economic assistance, the government can
restart its factories, increase its control over the banking system,
and try to strengthen agriculture. This much achievement would
represent an unqualified success. Government credit would be re-
stored. The long climb toward restoration and modernization could begin.
Assume the government fails in these efforts. It is not lost. Most
of the people live outside modern economic institutions. They will go
on as before. The central government might well survive. It authority
will then turn on its ability to administer a tax and police system.
Approved For Release 20 : CIA-RDP79T00827A000400010002-1
H FOREIGN DISSOM
 P79T,pr0827A000400010002-1
Ilt iAll into two
Increased Dutch presence in I
of the debt Initially transferred to I
ace o:f.' 1944g grantlag independence to
19,;T and 19".3 In retaliatic
LMS, tUerO
1936
terprieel that bad
int
eon he
Nagueo little
Beim concerned the laWlemmtstion
a Leh 100 rd=m gui] r credit Issued in August 196 - The See
eerie or talk# In A.t
_ ei ie agreomut can the c
Y Foreign Wnister
v.d truly
Approved For Release 200008/29 :[P79TGG082TA0400010002-1
 Approved For geleaae,2000/08/,2 .IA- DP79 Q0827A000400010002-1
f'our or five aura, aad 2 to 30 yea
01x10:'
I biUi
apprwi ta1y 1.2 billion 0339
, vbic the tcsay i
waist that thia be w oad
iders (09 Holton) - a figure ch
acid is both iigt it?abie d tt aU. y
i asibie f the Dut
ever,'
ilium text'! I
eta,. the
obi
thout a aattie t of the i
ard to its
ations for io
tan
kb deuline to stic'i to in
even without L' ;ttc participation, a meenii
A be reached because debts to the t z , other than
'art of Dials
e!040001
Approved For. Release..2Q00/08/29 L`(:iii--RDP79T90827 100002-1