CIA COMMENT ON STATE DEPARTMENT PAPER ON INDONESIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00827A000400020003-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 9, 2016
• Document Release Date: May 23, 2000
• Sequence Number: 3
• Publication Date: August 3, 1966
• Content Type: STATEMENT

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3 August 1966
CIA Comment on
State Department Paper on Indonesia
(For NSC Action 4 August 1966)
Summary: The State Department paper is a well-
argued statement of problems and policy recommen-
dations on which CIA has two major reservations:
we consider the paper overoptimistic both in
(1) addressing itself to long-range economic
recovery, as opposed to the short-range maintenance
of a rock-bottom viability; and (2) placing reliance
on concerted multilateral action.
Economic Assessment: Our principal difficulty lies
with the final three sentences of the State paper:
"We are dealing not with an economic infant
but a sick giant with historically proven
capacity for quick economic recuperation. We
are dealing with a talented and resourceful
population, proud, self-confident, and deter-
mined to stand on its own feet. We are deal-
ing with an island nation where the circum-
stances of geography and the incredible pro-
ductivity of its soil tend to break problems
into manageable units."
Indonesia definitely has no historically proven ca-
pacity for quick economic recuperation. Its economic
problems may be susceptible to palliatives, but they
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are not the kind that can be solved quickly, even
with the best domestic talent and liberal foreign
assistance. Indonesia has a resourceful capacity,
not for economic recuperation, but for economic
survival, based on a subsistence economy for 75
to 80fpercent of the population. Even the sub-
sistence level has fallen consistently during the
Sukarno era because of government mismanagement.
We believe that significantly greater emergency
aid than is envisaged in the State paper may be
needed to fend off collapse before Indonesia can
even begin the long climb toward stability and
development.
Also, it is very questionable that Indonesia's prob-
lems can be broken down into manageable units. The
major problem, in fact, is the tight interlocking of
foreign debt obligations, budget deficits, inflation,
and the need for more foreign aid.
Political Assessment: We believe that the State paper
places unwarranted reliance on the likelihood and
efficacy of a multilateral approach to foreign aid
for Indonesia. The paper mentions the international
meetings held to negotiate the rescheduling of foreign
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debts and extension of new aid, but fails to note
that nothing has been accomplished so far. Some
of the European creditors have already demonstrated
an inclination to go it alone. All of them show
a tendency to view Indonesia's economic problems
from a narrowly commercial viewpoint.
Progress will be slow, with creditor nations divided
into those who take a hard line and those who are
sympathetic to Djakarta's problems. Ultimate ex-
tension of significant US aid on a bilateral basis
may be inevitable, if indeed not imperative, if we
are to achieve the objectives so well stated in the
Department of State paper.
We also believe that the paper discounts too quickly
the political risks involved in letting the Indo-
nesians Suharto's new
cabinet, to a far greater extent than previous re-
gimes, will be under strong pressure to produce
results in the economic sphere. An uncritically
favorable US response to all Indonesian requests for
aid would of course have the undesirable effect
of encouraging the irresponsible elements in Indo-
nesia while undercutting those saner voices
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which counsel moderation and sound economic manage-
ment. Nevertheless, we recommend avoidance of a
generally negative attitude toward Indonesian re-
quests for longer-term aid; each request should be
viewed on its own merits and in relation to the
degree of economic stabilization the US considers
necessary to achieve its political objectives in
Indonesia.
We,fear the Department may be overly sanguine in
stating, in Paragraph 19, that continuing economic
deterioration would promote internal reforms. It
would be more likely to generate political confusion
and contribute to a critical public attitude toward
the present army-controlled regime. Rightly or
wrongly, the Indonesians could also blame the de-
terioration on US rejection of aid requests.
Specific Comments: Paragraph 5 notes that Indonesia
has applied to rejoin the International Monetary
Fund, but fails to mention a major obstacle to re-
admission, a $47.5 million "entrance fee." The Fund
has suggested that some of the creditors might pro-
vide this as part of their aid program; leading
creditors have not been responsive.
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Paragraph 6: We would agree that there is
no immediate danger of a food shortage. The comment
that rice may be short in winter months without im-
ports appears to be a considerable understatement,
in the light of State reporting that Indonesia may
need to import 500,000 tons of rice this year to
avoid a shortfall.
Paragraph 15 et sequi: No mention is made of
the requirements of the Indonesian transport system.
This is probably the most important sector of the
economy to be rehabilitated, and one where the pro-
vision of US equipment and spare parts would be most
helpful.
Paragraph 16: Military consumption of 60 to 70
percent of the budget is an overstatement; about 50
percent would be more likely, and even this might be
on the high side.
Paragraph 18: We question whether "Indonesia's
capable trading community and its cadre of Western-
trained performance-oriented economists" really know
what is required. We suspect that their "preaching
the need for forceful domestic efforts to cope with
the economic situation" reflects more a desire to
get the Americans in a receptive mood than a knowl-
edge of the precise reform steps they would take.
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Paragraph 21: Djakarta now seems very close
to ratifying the Bangkok agreement, although reports
conflict as to whether it will be signed with or with-
out change. Even after a formal end of confrontation,
we expect the Indonesians to support subversion in
the Malaysian Borneo territories.
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