NATIONAL SECURITY COUNCIL MEETING NO. 572 AUGUST 9 , 1967, 12:00 P.M

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R002900100010-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: December 22, 2016
• Document Release Date: August 20, 2009
• Sequence Number: 10
• Publication Date: August 7, 1967
• Content Type: AG

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August 9, 1967, 12:00 P. M.
. For discussion of paper on above subject circulated
August 7.
NSC, JCS, DOS review
completed.
NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
August 7, 1967
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NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
August 7, 1967
MEMORANDUM FOR THE NATIONAL SECURITY COUNCIL
The attached paper on Indonesia is circula~ed for discussion
by the National Security Council at its next meeting scheduled
for Wednesday, August 9, 1967.
Bromley Smith
Executive Secretary
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Introduction
1. On August 4, 1966, the National Security Council con-
sidered a paper on Indonesia which made cautiously hopeful
forecasts for the coming year. These forecasts have proved
realistic. Economic and political ro ress was perhaps
s~htly better than expected a yearn and t_he contri-
butions made by the United States and other ma or Free
World countries to economic stabilization followed the
predicted pattern.
2. This paper reviews the current situation, projects a
program of action, and looks ahead to the prospects for
the coming year.
Political
3. Sukarno has been eliminated as a political force. The
"New Order" led by General Suharto is well established in
power, and is neutralizing gradually "Old Order" hold-outs
in the police, marine corps, and parts of Central and East
Java. Suharto and his associates showed sophistication
and a fine sense of ti minc- in rnanag ng the transition.
The thread of lezitimac, was never broken`. Sukarno was
denied rnartyrdom. Instead, the pernicious irrelevance of
his leadership was gradually exposed, and the hollow shell
of rhetoric and revolutionary romanticism allowed to crumble
of its own weight. "Engineer" Sukarno now lives in internal
exile in Bogor, a pathetic old man transformed in eighteen
months from the incarnation of the Indonesian State into a
historical relic.
4. This process of political transition was completed only
in March of this year, and a post-Sukarno political structure
has not yet emerged. Suharto keeps his own counsel, and is
inclinea to caution and gradualism. He is feeling his way
among the conflicting pressures of New Order activists
advocating rapid, wholesale change, and entrenched tradi-
tional political leaders defending the status quo. Military-
civilian distrust and suspicions add another element of stress.
There is some public criticism of the slow pace of change, but
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Suharto has shown in the past a good sense of timing and an
ability to recognize and exploit a developing national con-
sensus. The new election law is not yet passed and, with
a minimum of eighteen months lead time between passage and
elections, it is unlikely that the Indonesians will go to
the polls before late 1969 or 1970.
5. The past year has been one of solid accomplishment in
the international field. Indonesia settled- __its quarrel
with Malaysia and rejoined the United Nations and its
associated organizations and agencies. It has supported
the concept of regional cooperation, and will be meeting
with its neighbors in the coming weeks to create a new
Southeast Asian regional organization. It has continued
to adhere to a non-aligned policy, and has maintained
correct relations with the Soviet Union and the States of
Eastern Europe. Its relations with Peking, however, are
under severe strain, but both the Chinese and Indonesian
Governments appear desirous of avoiding a complete break.
Economic
6. Progress in domestic economic reform has been con-
as %zc- area InAuu of lsides y greater an T,: last
year. An ambitious and 7asonabiy effective stabilization
program was put into effect. The pace of wild inflation
has been checked. Prices on major consumer items leveled
off. A stultifyingjungle of licenses and controls was
swept away and replaced by a system that relies in large
measure on free market forces to determine import priorities.
Government corporations were cut off the dole and told to
produce effectively or perish. Budgetary stringency was
introduced, and the military share of the budget cut in
half. Political risks were faced and highly subsidized
prices for gasoline, electricity and rail travel were raised
to meet the costs of production. The Central Bank, which
under Sukarno was a fiscal. mockery of that term, is now
beginning to exercise control of foreign exchange earnings
and domestic credit. A new investment law designed to
attract foreign capital was passed.
7. These accomplishments are largely the results of the
leadership of a group of young economists from the University
of Indonesia trained at the University of California at
Berkeley, MIT and Harvard. These men have not only been
responsible for determining economic policy and overseeing
its execution, they have also participated in the inter-
national negotiations leading to debt rescheduling and
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new aid. Most important of all, these economists have won
the unqualified support of General Suharto who has backed
them without reservation in the politically painful belt
tightening of the stabilization program.
8. These gains were achieved from a degree of economic
collapse unparalleled for a major nation in modern times,
and much still remains to be.done. A substantial volume
of trade still moves in irregular channels. Government
revenue is overly dependent on taxation of foreign trade,
and tax collection as a percentage of gross national product
is the smallest in Southeast Asia. Corruption and influence
peddling continue at all levels of government. The Su E_ __U__
regime, however, acknowledges the seriousness of these
problems, and spurred by strong pressures inside and out-
side the government, is moving; to deal with them.
Psychological
9. With these political and economic _char,res have also come
important changes in attitudes and_vaj.. es. The baby boom of
the 1950's has produced a new post-revolutionary generation,
a stranger to both the heroics of the independence struggle
and the spiritual indignities of colonialism. This gener-
ation has taken the lead in a general rejection of the slogans
and ideology of the Sukarno period, and pragmatism, rationalism,
and performance have become the new watchwords. a. sober.
objective Judgment of national self-interest is noTa._more often
the basis for decisions, and Indonesian act, ons,f not a1T-rays
satisfactory , ave at least become more predictable .
International Response
10. Moving in response to the steps taken by Indonesia to
put its house in order, the United States and other friendly
countries of the non-Communist world cooperated in a joint
of orc o~e'Cindonsa . They agreed in Paris in December
to---re-schedule somewhat over .,$~00 million in debts in arrears
and a_l~.ng due in the 18 month period ending December 31,
1967. They later agreed in Amsterdam to provide __a200 million
of new assistance in CY 1967 to meet the foreign exchange gap
estimated by the IMF staff. The United States committed itself
to provide one-third of the total requirement if Indonesia
continued to make reasonable progress in its stabilization
performance and if the other donor countries made up the
remaining two-thirds. The meeting in The Hague in June an-
nounced the. successful pledging of the full amount (attached
table sets forth the specific contributions). The Jabanese
contribution of-approximately one-third is noteworthy,.
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11. The Soviet Union refused to participate in these
conferences, That Indonesia `r'eached, through bilateral
ne . ot~_ations a prelim~.snarj ~~ unders ~ I:* an din
_.. __Ya, . g that would lead
to rescheduling, under approximately the same terms, the
deft due the USSR and other Communist states. However,
the Soviet Union and the countries of Eastern Europe have
thus far made no contribution of new aid.
12. The International Monetary Fund has played a central
role in advising the Indonesian Government on its stabi-
lization program. It maintains a representative in
Djakarta, and has taken part in all of the international
meetings on debts and new aid. The International Bank for
Reconstruction and Development made a preliminary survey
of Indonesian priority import requirements for CY 1967 and,
at the Indonesian Government's request, has a mission now
in Indonesia studying the question of transition from
stabilization to the development phase. Both the United
Nations Development Program and the newly formed Asian
Development Bank have dispatched missions of experts to
advise the Indonesian Government on critical development
efforts.
II. ACTION PROGRAM
U.S. Objectives
13. We seek the development of a Political stable
Indonesia res ons1 ye# e ne l.. Lta,-and
play in- a r es onsibl'6-'a'-n--,d- c .z east
Asia and the world. This objective coincides with the
goal of the present Government of Indonesia.
U.S. Strategy for the Future
14. Our strategy contains the following major elements:
A. Central Role of the International Agencies
The international agencies must continue to play
a central role in Indonesia's economic recovery.
The IMF has made an invaluable contribution in
the areas of s -a izatfon p'~C"arin3ng 'debt re-
scheduling, and mobilization of new aid. The
IBRD is now moving in to advise Indonesia on
reconstruction and development planning. The
Asian Development Bank appears certain to become
an important contributor to the development
effort. These organizations provide Indonesia
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with sound professional advice, act as a clearing
house of economic information, and serve both as
impartial judges of achievement and as politically
insulated forces for encouraging minimum standards
of performance.
B. Maximum International Participation
Indonesia's needs for foreign assistance are so
great that only the pooled resources of many nations
can provide the necessary help. Indonesia's-. con-
tinuing debt problem can be dealt with only on an
international basis. A multi-national approach is
therefore both desirable an necessary. the
major trading nations of the world have a stake in
the economic recovery of a nation with abundant
natural resources and a political economy of over
100 million people. We should ensure that they
bear their fair share of the burden, and avoid a
division of labor in which, in effect, we feed the
cow and they milk it.
C. Maximum Role for Private Investment
Private investment from all of the developed countries
must play an important role in Indonesia's transition
from the stabilization to the phase of rehabilitation
and development. We should continue to encourage
Indonesia to maintain a favorable environment for
foreign investment.
D. Support of "Modernizers"
One of Indonesia's greatest assets is the cadre of
young nien trained iiYAmerican and Western European
universities These are the people that form the
cutting edge of Indonesia's drive to develop its
economy and its political institutions. They are
our allies and our actions should support them.
E. "Low Profile"
The United States must make a major contribution to
Indonesian recovery. The principal elements of our
strategy -- international agency involvement and
multi-national participation -- require, however,
that we play a supporting rather than a central role.
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F. Bilateral Program
While making our major contribution in the multi-
national context, we should also continue small,
intensive bilateral programs.
15. A. Debt Rescheduling
The United States will join other creditor countries
in Paris in October to deal with the problem of
Indonesia's debts falling due after January 1, 1968.
We should build upon understandings already established
in past reschedulings and, in determining changes,
take due account of Indonesia's capacity to service
its debts. Whatever the outcome, the fact will remain
that Indonesia in the near term will have no resources
to devote to the reduction of a growing external debt
of over $2-1/2 billion.
B. New Aid
The donor countries will meet in Amsterdam in November
to consider the !14F' s estimate of Indonesia's re-
quirements for new assistance during CY 1968, and
to discuss the IBRD report on development planning.
We can reasonably expect to be called on to contribute
at least the M65 million pledged for CY 1967 and
possibly one-half again that amount.
C. Bilateral-Programs
We plan to continue to provide non-combat equipment
under MAP for the civic mission program of the
Indonesian armed forces. This assistance permits
the Army to strengthen its ties with the civilian
sector, and at the same time provides high priority
services in the field of road construction, flood
control and irrigation system maintenance. The
training of Indonesian officers in our Service schools
in economically beneficial management and technical
skills will continue. On the civilian side, we intend
to support under PL-480, Title II, food for work
programs which increase agricultural production.
We intend also to provide technical assistance, and
a program of educational exchange has been resumed
and will be expanded.
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IV. ANTICIPATED PROBLEMS
Unreasonable Requests for Aid
16. While the Indonesian Government accepts and supports
the concept of a multi-national approach to Indonesia's
economic problems, there has been in the past a tendency,
particularly on the military side, to look for easy
solutions in an outpouring of large quantities of American
assistance. The new Indonesian leaders have gained, during
the past year, a more realistic understanding of U.S. capa-
bilities and aid procedures. We-must anticipate, nevertheless,
some further random, uncoordinated requests for substantial
bilateral assistance.
Population Control
17. Two-thirds of the population of Indonesia live on one-
fourteenth of its land area. Economic recovery and political
stability cannot in the long run be achieved without popu-
lation control and family planning on the central island of
Java. The Indonesian leaders are beginning to turn in a
tentative fashion to face this problem. This is a sensi-
tive issue on which heavy-handed pressure would be self-
defeating, but we should be quietly persistent in encouraging
a vigorous program of family planning.
Volume and Nature of Our Assistance
18. The most difficult problem confronting the United States
durin_the coming year will be ~g ~'v I1 e aid type
of assistance to meet our fair share of _ Indonesia,' s needs.
The principal elements-of this problem are:
A. Meshing Capacity With Needs
If major cuts in the A.I.D. appropriation are made
this year, the amount which we can lend to Indonesia
will be reduced. Indonesia needs rice, but must
compete with the preemptive requirements of Viet-Nam.
Cotton, through PL-480, could be a major element in
our aid, but Indonesia's broken down textile industry
has not been able to compete with cheap Hong Kong
imports. When idle capacity is restored, Indonesia
can absorb increasing amounts of our raw cotton.
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As a member of a group working on a common problem,-
we are under special obligation not only to carry
our share of the burden, but also to make our
assistance available on terms no less generous than
those.offered by other countries. In addition, as
Indonesia moves from the stabilization to the de-
velopment phase its needs will increase. Japan and
Western Europe may find it difficult to increase
significantly their current levels of assistance to
Indonesia, and we may be unable to limit our share
to one-third or to achieve a rigid matching formula.
B. Multilateralism
C. Inadequate Resources
Even assuming the best possible AID-PL480 mix, it is
almost certain that we will not be able to meet from
anticipated resources one-third of Indonesia's 1968
requirements. It may therefore be necessary to go to
Congress early next year for supplementary funds. We
have been in close touch with key members of Congress
on the Indonesian situation, and have found them
favorably disposed both towards assistance to the
Suharto government and to our multi-national method
of approach.
19. Indonesia has been led to believe that if it faced up
to its economic problems, took the politically difficult
steps to stabilize its economy, and adopted sensible policies
of self-help, it could expect support from the world com-
munity. Indonesia's leaders have started down this diffi-
cult road, and for them there is no turning back. The pace
of change must be maintained. We have seen at home and
abroad how improving conditions create expectations which
become explosive if not fulfilled. The Indonesians are
performing on their side of the bargain, and the United
States and other countries of the Free World are confronted
with the challenge of dealing not with a failure, but with
a prospective success. We should not fail them.
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INDONESIA'S CY 1967 ASSISTANCE REQUIREMENTS
Pledged or Furnished
in Millions U.S. Dollars
United States
$65
Japan
$60
Netherlands
$28
Germany
$29
India
$13
Others (Australia, Canada,
UK)
$ 2
$197
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8 August 1967
MEMORANDUM FOR: Director of Central Intelligence
SUBJECT Comment. on NSC Paper on Indonesia
1. The attached paper, circulated for discus-
sion at the National Security Council meeting sched-
uled for 9 August, has been reviewed in the Direc-
torate of Intelligence, the Directorate for Plans
and the Office of National Estimates. It is a fair,
though somewhat superficial, presentation of Indo-
nesia's. complexities and progress.
:2. The paper contains nothing specific that
I would contradict, but it does give a rosy impres-
sion of quiet, almost unimpeded, political and eco-
nomic progress during the past year which does not
reflect the ups and downs of the actual performance
or the existence of abiding problems endemic in this
diversified nation.
3. Aside from this mild quibble, I concur in
the judgment that Indonesia is in better shape than
it was' a year ago. We know of nothing that would
argue against the policy recommendations the paper
contains.
EDWARD W. PROCTOR
Acting Deputy Director for Intelligence
Attachment:
NSC Paper on Indonesia,
.dated '7 August 1967
~ Y 'L :/ 3 E ..r
riI:r
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NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20508
May 23, 1967
NATIONAL SECURITY COUNCIL MEETING No. 570
May 24, 1967, 12:00 P. M.
AGENDA
Future of South Arabia
For discussion of paper on above subject circulated
May 23.
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NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
SECRET
May 23, 1967
MEMORANDUM FOR THE NATIONAL SECURITY COUNCIL
The attached State Department paper, "Future of South
Arabia, " is circulated for discussion by the National
Security Council at its next meeting scheduled for
Wednesday, May 24, 1967.
Bromley Smith
Executive Secretary
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EM U_R3 OF SOU M ,_TN3IA
Paper Prepared by State - NFA/A?P
(For NSC P?Seoting of 1 ay 24, 1967)
(NGFE; The follcF,4ing paragraphs were prep erred independent of the
current Arab-Israel crisis, resolution of which will no
doubt shod considerable light on, among other things,
Egyptian and Soviet intentions.)
The current contest for South Arabia has caning far beyond its size
err irrportance. For. 20 years the US has managed to maintain in the Near
East its major interests of access to oil, freedom of air and sea transit
and prevention of the dominance of the area by any one paver. Ho:vover,
our significant political influence in the Arab Near Last is now confined
to the Arabian Peninsula and Jordann. There it already is underr'ined by
the running sore of the Egyptian presence in Yemen. US acrruiescence in
trAR domination of South Arab ia would be interpreted in the Peninsula, and
elsewhere, as a decision by Washington to play a diminishing role in the
Near East.
II. Surrmarv Outlook
The British will grant indecendence to South Arabia in the first half
of January 1968. They are willing to leave a military presence in the
area for six months thereafter as an assurance against external aggression.
The corplexion of the successor goverrz nt is unclear. We share the
British hope that the United Nations Special i`ission will be instrt ntal
in setting up a broadly-based regir-e. If this happens, the South Arabian
problem will be much reduced. At present, there is no confidence i:;etvmen
conservative and radical elements in South Arabia and the two radical
groups, FLOS`i and the NSF, have been at each other's throats. FM,v
operates fma a heaccuarters in Yemen and may set up a government-in-exile.
It is backed by the Eq-yptians and includes some Soviet-oriented co-munists.
The NLF has a trade union basein Aden, suspected ties with the British and
represents the leftist, 1~ -grist wing of the Arab National rvbvernt.
The UAR has put its money on FLOSY. Cairo is helping to train a FLOSY
"Liberation Ar- r" and will probably eo everything it can, short of military
invasion by Eq;mtian units from, Yci^en, to assure FLOSY domination of the
newly independent state,
SE
GFDU'.' 3
Low regraded at 12 year intervals;
not automatically declassified.
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The evolution to independence in South Arabia will probably develop
along one of the following lines:
A broadly-based coalition worked out under UN aegis which might
be quite radical (even with substantial initial FLOSY partici-
pation) but would not be under the Egyptian, or any other, thtunb.
-- A British-sponsored coalition which might, or might not, include
FLJJSY. 1'bre li].e]y it will not. In that case, the government
might have to fic;ht for survival ac ai.nst a FLOSY goverment-in-
exile backed by UAR2 and probably the USSR. Its military strength,
coupled with UK military sup ort, might be successful in prevent-
ing a major invasion, but terrorism and subversion would be dif-
ficult problems.
-- A FLOSY-dominated radical. got er,^- ent which had fought its way to
power with major Egyptian supnart, thus rml:ing its leaders Tore
beholden to Cairo than othcrvaise.
tbmination of South Arabia by unfriendly powers would not cut off
oil movements fran_ the Persian Gulf to Western Europe. It would never-
theless represent a threat to the more economic oil lifelines and would
have implications for the longterm future of the T,;estern (predominantly
British) position in the Persian Gulf. That area contains more-than 60
percent of the free world's petroleum reserves. It currently supplies
55 percent of t,,estern Europe's oil needs. This percentage will decline
slightly in the next five years, but the absolute amount supplied will
increase by 1/3 to 330 million metric tons a year, by 1972. According
to a 1967 OECD study, Western Europe could withstand loss of up to 60
percent of oil."Fast of Suez" in a peacetime situation and by drawing on
other world sources. A period of up to six- months of dislocation would
be undergone, and s oil from the Near East would still be required.
The extrere situation of a cut-off of all Persian Gulf oil would clearly
be more damaging but is also a much remoter contingency.
V. US Interests
Our most it ortant concern is not with respect to South Arabia itself
but with the implications of the transition for neighboring regimes
friendly to us, notably SaLvdi. Arabia, Iran and Ethiopia. These implica-
tions will be less disturbing if the transition is relatively peaceful
and takes place with a minimum of outside intervention, since the re-
sultant South Arabian regime is more likely to be able to reflect the
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strong impulses of independence `ancl nationalism which exist. Our primary
interest is hu.d the transfer. of power occurs rather than to whom arcing
internal elements the transfer is made.
We do not want to become involved in internal squabbles in South
Arabia but we do want to disoouracTe adventures by external powers, notably
the UAR and the USSR. ?e do not want to get overly involved but we must
make clear that we have a legitimate and continuing interest in South
Arabia if we are to have any influence in what happens there.
VI. US Military Considerations
The JCS have concluded that South Arabia (particularly Aden) is of
sor. military significance to us but is not critical to US security.
Its port and airfield, if available to us, would be valuable for various
contingency operations but they are not essential.
VII. The British Tole
The British are willing to provide insurance against a UA.R attack
for six months after South Arabian indecend`nce. They should be urged
to extend this period if this seems necessary. It is in our view essen-
tial for the British to give enough support to the new South Arabian
govern-rent to get it on its feet, as well as to remain in the Persian
Gulf. t'1e believe the British can remain in the Persian Gulf for an in-
definite period provided the government at home does not yield to do estic
pressure. We are for our part continuing our strong support to Saudi
Arabia and would want to take other steps to oppose further extension of
UAR influence by subversive or other military means.
VIII. The Iranian Position
The Shah regards Aden as the backdoor to the Gulf. He exaggerates but
is cruite right in regarding South Arabia as a major test of strengh be-
tween Arab radicals and Arab moderates. Because the Iranians are not
Arabs and come from a different Moslem sect from most South Arabian 14oslems,
it would be counterproductive for Tehran to seek to exert certain types of
influence on the situation. Iranian clandestine involvement with particu-
lar groups should be avoided, since this would proant a higher level of
activity by the UAR, and the UAR has more going for it to win such a con-
test. Iranian support, including econc is assistance, should be actively
solicited for any independent South Arabian government that seems likely
to be able to maintain itself.
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S - ~:_.,`I 4
IX. The Israeli Position
Israel is concerned at FIJY3Y assertions that it would close the
southern straits of the Red Sea to Israeli shipping if it came to prier
in South Arabia. This is largely a propaganda ploy designed to help
FLOSY in its bid for power. The South Arabian government will have no
significant military capability in that region, and the straits are
clearly international waters. Israel should encourage its Lthiopian
and Iranian friends to give strong support to the new South Arabian
government regardless of its coloration. In this way they will have
influence on that regime which otherwise will be abdicated to radical
powers, notably the UAR.
Efforts to.achieve a peaceful transition through creation of a
broadly-based governrent are in our interest. We should do what we can
to foster these efforts, making clear to South Arabian radicals, and to
the UAR, the risks of opting out, proclaiming a government-in-exile, and
-seeking to take over the area by force. she following moves illustrate
what might be done to encourage our friends and increase our own influ-
ence:
A greater. US military presence in the Red Sea-Arabian Sea area,
particularly in support of our existing assurances to Saudi
Arabia.
--- USG willingness to undertake a full range of normal USG contacts
with the new South Arabian state provided it is able to maintain
itself (any economic aid would require a high-level political
determination).
-- Adoption of a blunter line in Ciro, and development of interna-
tional support for the position, to emphasize concern that any
new South Arabian regime not be threatened with aggression from
outside its.frontiers and that the internal political situation
be permitted to evolve without outside interference.
-- Consideration of the utility of discussing South Arabia with the
USSR to signal our concern lest outside forces seek to exploit
internal stresses there that seem inevitable.
--.Continued efforts with the British to assure: (a) that everything
feasible be done to create a broadly-based coalition, including
UK willingness to extend its six-month security assurance as may
be necessary; and (b) that the current British military build-up
in the Persian Gulf is sustained.
Approved For Release 2009/08/20: CIA-RDP80B01676R002900100010-1
 Approved For Release 2009/08/20: CIA-RDP80B01676R002900100010-1
-- Discussion with the Saudis to focus their attention on this nroblcm
and develop additional tangible Saudi sup,-port for a moderate solu-
tion, if possible, or for more conservative elem^onts if a civil war-
type Situation occurs.
---- Continued support for a Uv' role in the situation, including speci-
fically encourager ent to th UN Special Mission to hold a round-
table conference and develop a coalition of all major South Arabian
political elencnts.
XI. Some Frey 'vstions
-- Is US military strength sufficient to assu~e additional tasks in
the. Red Sea-Arabian Sea region?
-- Is it realistic t6conte