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Document Number (FOIA) /ESDN (CREST): 
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Document Creation Date: 
December 19, 2016
Document Release Date: 
January 26, 2006
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Publication Date: 
January 1, 1966
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PDF icon CIA-RDP79T00826A001100010028-3.pdf680.95 KB
Approved Fgr?telease 20S6OT4PP79T00800110001002 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 Approved For Release 2 ffjMP79T00826A001100010028-3 Approved Forlease C;RLPYY0082WO YY0082fl01100010028-3 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 Approved For Release 2006/02M: l P19T00826A001100010028-3 Approved F Release RDP79TOOfttA001100010028-3 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 Approved For Release 20{ 1Ef REFTP79T00826A001100010028-3 Approved For IWease 2006&X7GR#D179T00826101100010028-3 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. Approved For Release 200AWC79T00826A001100010028-3 Approved Fd elease 200270T1'C:TA=RDP79T00001100010028-3 rpR 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. SECRET Approved For Release 2006/02/07 : CIA-RDP79T00826A001100010028-3 Approved Fof.Release 2001,7 :R lP79T00 4001100010028-3 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 Approved For Release 2006/~~'f97 '. tR DP79T00826A001100010028-3 Approved Fttelease 20V/p/"P79T0084001100010028-3 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. Approved For Release 2002YECR!EPVP79T00826A001100010028-3 Approved FRelease 2n4DP79T008A001100010028-3 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. Approved For Release 200LT!'Rf P79T00826A001100010028-3 Approved Fo'cblease 200TL -tR 79T0081fait001100010028-3 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. Approved For Release 2006 ?9T00826AO01100010028-3 Approved Felease 2Q6(if,0ek~DP79T0074001100010028-3 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. Approved For Release 20JqLPC7RCE-TP79T00826A001100010028-3 Approved Fa elease 200_6=/QZ Clb P79T008 001100010028-3 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. Approved For Release 2006-1021 ,A9779T00826AO01100010028-3 sEt Approved Fo'lease 27DQDP79T0082p01100010028-3 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. Approved For Release 8L .Eg14DP79T00826A001100010028-3 Approved For Rase 2006/02/07 : CIA-RDP79T00826AQ 111,00010 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 Approve orielease" 2006102107--CIA-RDP?79T008 6rA001100010028-3 2511 25X1 Approved For Release 2006/02/07 : CIA-RDP79T00826AO01100010028-3 Approved For Release 2006/02/07 : CIA-RDP79T00826AO01100010028-3 Approved For Releffse 2006/02/07 : CIA-RDP79T00826AO01100010028-3 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 Approved For Release 2006/02/07 : CIA-RDP79T00826AO01100010028-3