Jakarta, 30 May 1953

SECRET

The Colombo Plan and Australian-Indonesian Relations

I have the honour to submit the following report on the Colombo Plan and its effect on Australian relations with Indonesia.

2. Although the Colombo Plan has been in operation for almost two years, it was only five months ago that the Indonesian Government decided to join as a full member. Before that time there had been an informal arrangement between Australia and Indonesia under which Indonesians nominated by their Government were granted scholarships and fellowships to go to Australia for varying periods of training and study. The cost of these facilities was charged to Colombo Plan funds although acceptance of them by Indonesia was outside the formal scope of the Plan and did not entail any obligations with respect to membership or otherwise.

3. The Indonesian decision formally to enter the Colombo Plan was made only after considerable heart-searching as to whether membership was compatible with the country's 'independent' foreign policy. Any form of association with the Colombo Plan which might have suggested that Indonesia was leaning too far towards the West would have encountered formidable political opposition, but the Indonesian Government eventually found reassurance in the predominantly Asian membership of the Plan and the absence of any political strings to such membership.

4. There can be little doubt that the flexible Australian attitude reflected in the grant of training facilities to Indonesia before her formal entry into the Colombo Plan, together with the favourable impressions gained by Indonesian officials and students in Australia, contributed towards the Indonesian decision to join. One particularly useful result of this early association was the lessening of suspicions (which nevertheless linger on in some quarters) that there were hidden and questionable motives behind offers of aid by other countries. In this regard, however, the Colombo Plan is generally better regarded by Indonesians, than United States aid which suffers in the popular mind from its earlier link with the American security programme, from ungenerous suspicions of American foreign policy as a whole, and from what is regarded as an inconsistency between United States foreign aid policy and alleged attempts to keep down the prices of raw materials (e.g. rubber), on which the Republic's export trade depends.

5. The prompt and sympathetic response in Australia to the announcement of Indonesia's intention to join the Colombo Plan created an excellent impression here, and your statement of 6th January, in which you said that you hoped soon to be able to discuss with the Indonesian authorities the part which Australia mould play in promoting Indonesians economic and technical development, aroused favourable comment in official and press circles. Public references by Indonesian leaders included a statement made by the Minister for Communications, Dr. Djuanda, on 24th February, in which he said that, although aid under the Colombo Plan was on a smaller scale than that which had hitherto been offered by the United States,*¹ Colombo Plan assistance was 'of still more use' to Indonesia. (Dr. Djuanda was presumably thinking primarily of the opportunities for co-operation among countries in the Asian area which the Colombo Plan encourages.)

6. Two press comments may be quoted:

Firstly, the non-party Times of Indonesia, commenting soon after your statement, referred to the 'enormous reservoir' of goodwill (towards Australia) built up before the transfer of sovereignty, but recently 'drained by tragic misunderstandings'. There were now, however, 'hopeful signs that Australian official thinking has begun to appreciate the new realities in Asia'.

Secondly, there is the comment of the daily newspaper Abadi, reflecting the views of the Masjumi (Muslim) Party, the largest in this overwhelmingly Islamic country. Abadi in an editorial commenting on your statement of 6th January stated:

'Mr. Casey's voice of goodwill must get [an] immediate response from Indonesia... Better a good neighbour than a friend far away'.

This sentiment has since been repeated by the same journal on a number of occasions. As recently as 20th May Abadi stated:

'Except for the West Irian (New Guinea) question, regarding which we still cannot convince the Australians of the rightness and sincerity of the Indonesian claim, relations between Indonesia and Australia are in general good. With the participation of Indonesia in the Colombo Plan, relations between the two countries have been improving in recent months. We still remember official Australian statements, spontaneously stating that Australia will be glad to give aid now that Indonesia had joined the Plan'.

7. Experienced observers in Djakarta generally agree that there has been an improved attitude in recent months towards Australia and that much of the improvement may be attributed to our quick response to Indonesia's decision to join the Colombo Plan. Some reflection of this could be discerned during the last fortnight in the reaction of the Indonesian press to the recent comment in the Sydney Truth on the Dutch report regarding an armed Indonesian landing in New Guinea. Even though the language used by Truth (e.g. 'hordes of resurgent Asiatics') and the newspaper's introduction of the racial issue touched the Indonesians on a sore point, the article did not provoke the strong anti-Australian comment which similar incidents have done in this past. In fact, a number of Indonesian journals took the unexpected view that the incident was manufactured by the Dutch with a view inter alia to hampering relations between Australia and Indonesia.

8. Perhaps the best indication of the improved state of our relations with Indonesia is the fact that Indonesia should lately have considered Australia as one possible quarter from which a military mission might come to replace the Dutch Military Mission, most of whose work is being terminated at the end of this year. Irrespective of whether or not such Australian help is feasible, some encouragement may be drawn from the fact that Australia was thought of at all by the Indonesian authorities; it seems open to considerable doubt whether the climate of opinion here on Australia, say twelve months earlier, would at that time have permitted any mention of us.

9. At this stage it would nevertheless be unwise to exaggerate the recent improvement in Australian–Indonesian relations; and it is too early yet to say whether it is likely to be maintained. Although since the war there has been a basic fund of goodwill towards Australia in this country, arising initially from the good impressions left by our troops in various areas now forming part of the Republic, and, later, from Australia's part in the settlement of the Dutch–Indonesian dispute, much of this latent goodwill has been, and in future is capable of being, dissipated by the West New Guinea question and, to a lesser degree, by misunderstandings in regard to our immigration policy. Not the least important aspect of the Colombo Plan is that it provides an antidote to unfavourable publicity on these matters, which are certain to be brought forward from time to time, in the case of West New Guinea probably with increasing emphasis.

10. In the context of our immigration policy particular mention might be made of Indonesia's transmigration programme which aims at settling Javanese in less populated parts of the Republic, initially in Sumatra. If Australian aid should be made available under the Colombo Plan for the Sumatran project the money spent will help in two ways: it will assist in relieving Java's population pressure and thus help neutralise any loose demands that might be made in the future for migration outlets, and at the same time it will provide a practical demonstration to Asian countries that Australian policy towards migration has a positive side in that we are prepared to to assist neighbouring peoples to settle and develop their own countries.

11. The Indonesian authorities, aware of our experience in land settlement and migration, are already looking to Australia as the main source of foreign aid for transmigration. It is in fact somewhat doubtful whether the equipment and technical help needed would be forthcoming from any other Colombo Plan donor. Canada, the only alternative, seems more likely to help in relation to hydroelectric development while, outside the Colombo Plan, United States assistance is taken up with existing projects in other fields. The grant of Australian aid would give immediate impetus to the transmigration programme and in the longer term should help in the solution of some of the economic and political problems confronting Java.

12. Special mention is made of transmigration also because it is integrated developmental schemes of this type, involving the supply of capital equipment and some technical assistance, which are likely to attract the greatest public attention in Indonesia and should, from both the practical and publicity viewpoint, yield reasonably quick returns for capital invested. Some confidence may be derived too from the fact that Sumatra, a tranquil and relatively well ordered area when compared with Java, is the field for the initial project.

13. This usefulness of Australian help under the Colombo Plan is enhanced by the economic difficulties in which the Republic now finds itself and which we, both as a near neighbour and for reasons of self-interest, cannot afford to ignore. An analysis of these difficulties and their relevance to Colombo Plan aid is attached as an annexure to this despatch, but it may be said here that, as a result of the post-Korea slump in raw material prices, Indonesia's export earnings have been reduced by more than a half in the last eighteen months, and capital expenditure by the Government has had to be out by 45 per cent. Although foreign aid can only go part of the way towards bridging the gap, the provision by Australia and other donor countries of capital equipment and expert assistance for key projects can help materially towards preventing the economic decline which it seems to be the aim of current Communist tactics, behind an ostensibly moderate front, to bring about in the Republic.

14. To sum up, it may be said that among the Colombo Plan donors Australia has got away to a flying start in Indonesia; Canada has only just opened an Embassy here; New Zealand's capacity to help is limited; and the United Kingdom has little beyond technical assistance to give. Outside the Colombo Plan, the only substantial foreign aid received by Indonesia is that given under the American 'Point Four' Programme which will, however, amount to only $3 million in the current American fiscal year–a fraction of what the United States is paying in countries closer to the centre of the cold war. Although we do not have any figures regarding the likely extent of Australian aid to Indonesia in the coming financial year we would imagine that it might be comparable to that granted in the past to India and Pakistan in which event it would compare with the American figure for Indonesian aid. One would suppose that there are few countries in Asia where the volume of Australian aid has a prospect of approximating that currently granted by the United States; and it is the more valuable from our viewpoint that the exception should be Indonesia, where we have so important a political, economic and strategic interest and where the injection of Australian help comes at so opportune a time. Given a continuance of the good beginning which has been made in the last few months, one may feel cautiously hopeful regarding the long-term effect of the Colombo Plan on Australian relations with Indonesia.

Attachment

THE ECONOMIC SIGNIFICANCE OF COLOMBO PLAN AID TO INDONESIA

Indonesia's export earnings during the last eighteen months have been reduced by over half, from a level of Rp.12.7 billion in 1951 and Rp.9.8 billion in 1952, to an expected Rp.6 billion in 1953, as a consequence of the world recession in raw materials prices. Indonesia is highly dependent on imports of all types of essential manufactured consumer goods from textiles to pots, pans and bicycles, and will have to import 490,000 tons of rice this year at a cost of Rp.l � billion in foreign exchange. As a result there is little foreign exchange left over for imports of capital goods, despite very severe import restrictions and import taxes on (very widely interpreted) non-essentials.

2. To ease the drain on foreign exchange reserves, and as part of budgetary entrenchment² to avert domestic inflation, government capital expenditure has been cut by 45 per cent on last year. This year's capital budget represents a bare minimum for maintaining essential public works, enterprises, and services, and allows little room for expansion.

3. With a population of about 80 million, the present rate of government expenditure averages out at Rp.20.6 (about fifteen shillings) per head of population. Investment from private sources will amount to an additional Rp.500 million only, at Rp.6.25 per head of population. Total capital expenditure from both public and private sources will represent about 4.5 per cent, of gross national product. After deducting defence and replacement costs, total net investment will be much less than this figure.

4. While in a peasant agricultural economy the major source of increased productivity rests with the as yet unestimated manual efforts of the peasant farmer, with the present rate of population increase, which is estimated at % million a year in densely settled Java, the role of Government investment is particularly important. A tremendous task lies ahead in the development of less closely settled parts of the archipelago (e.g. Sumatra, Borneo, the Celebes, etc.).

5. At the present time assistance to Indonesia under the Colombo Plan from Australia and other countries can make a significant contribution by providing capital equipment for key projects, for which Indonesia has not the foreign exchange to afford. With Indonesia's present balance of payments and budgetary difficulties economic assistance in almost any field will help to 'hold the line' in the face of Indonesia's present critical economic position.

6. With their present policy of retrenchment the Indonesian Government is rapidly developing its budgetary and economic planning machinery, and is having to make a very close assessment of priorities. Hence there is a reasonable chance that any economic assistance provided under the Colombo Plan will be used where it is needed most.

7. American T.C.A.³ assistance is only U.S.$3 million for the current year, and Indonesia remains in serious need of supplementary foreign assistance. Any assistance from Australia under the Colombo Plan will not only be very useful, but will also measure very favourably with the present level of American aid.

[NAA:A11604, 704/1]

1 A footnote here reads: 'This is no longer the case, American aid having been cut substantially this year. It is expected that before long the total volume of Colombo Plan aid (i.e. from all Colombo Plan donors) will considerably exceed the United States figure'.

2 The word 'entrenchment' should presumably read 'retrenchment'

3 Technical Cooperation Administration.