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INFID © November 2011 Marut, Don K. Can Indonesia Exit from Aid? Don K. Marut, INFID, Jakarta, November 2011. INFID (International NGO Forum on Indonesian Development) Jl. Jatipadang Raya Kav 3 No 105 Pasar Minggu Jakarta Selatan 12540 Indonesia T. +62217819734 F. +622178844703 E. Info@infid.org W. www.infid.org

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TABLE OF CONTENT

AID AND POWER: 4

DEVELOPMENT FINANCE AND AID EFFECTIVENESS: 11

DOES FOREIGN AID HELP? 25

FOREIGN DEBT MAFIA? 34

FOREIGN AID AND POVERTY ERADICATION: 36

NORTH SOUTH CSOs COOPERATION: 54

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AID AND POWER:

Don K. Marut Introduction The closing ceremony of the East Indonesia Forum in 2005 was featured by a unique atmosphere. The governors, the mayors, professors from all universities in Eastern parts of Indonesia, development practitioners,

NGOs were sitting still trying to listen carefully to the closing speech by a senior World Bank official. While all the people attending the ceremony wore their best clothes: official suits of modern fabric and of the traditional weaving clothes, the Senior World Bank Official who gave the speech was just wearing lousy white T-shirt and hotel bathroom slippers. The dancers of youth groups were practicing in the rooms nearby making the room so noisy that the speech was hardly heard by the participants, but the participants consisting of senior officials of the government, universities, donors and international NGOs tried to pretend that they listened to the speech. The

Aid relationships are also relationships of power. In such power relations, inequality and to a certain extent injustice can become principal characteristics. Who gives aid holds power, at least over what aid is used for. Additionally, various conditionalities linked to other policy areas that favour donors are imposed on aid recipients, who, in many cases, are then trapped in a situation where they have to accept further conditions, even where these are harmful for their citizens. Aid relations have become an issue of global power politics. It has been revealed by various sets of research and the testimonies of key actors over the years that injustice has been systematically and structurally created and maintained in development policies by certain world political and economic powers. Indonesia has historically been a clear live case.1 The mainstream development philosophy since the late 1960s was dominated by the technocratic and top-down approaches implemented by the repressive military power. Growth-oriented economic policies were introduced, mainly representing the interests of the donors. The technocrats in the Indonesian administration were trained to serve the interests of the donor countries and the international financial institutions. The military and the technocrats were the two sides of the same coin in the state-led economic development projects and programs.

1 John Pilger, The New Rulers of the World. London & New York: Verso, 2002.

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The occupation of East Timor by the Indonesian military was also a consequence of the policies of world political and economic powers. It was not a coincidence that the occupation of East Timor took place just after the US left Vietnam. Despite pressure from global citizens and the United Nations against the violation of human rights in East Timor - and several regions in Indonesia during the military repressive regime - the donors continued to support the repressive regime. Despite the poverty, violence and denial of the rights of the people, the donors were well coordinated in supporting the military dictatorship of General Suharto.2 It is clear from the data that foreign aid has impacted upon the citizens of recipient countries. Some have received positive impacts or benefits from the aid, but the majority of citizens are affected in more negative ways. Citizens have to bear the burdens of debt repayments, whilst the benefits are mostly felt by the repressive and irresponsible regimes supported by technocrats in the country that act as the prolongation of the hands of the international donors. In many cases, people have had to accept that they must concede all their ancestrally inherited property rights on natural resources to transnational corporations and that they must pay for expensive public services. Even when democracy is established, the government cannot easily get rid of the power attached to past foreign aid. Injustice continues and the people continue to have to pay the high rates of tax necessary to repay the foreign debts that were not even beneficial to them but were taken by the repressive regime for the benefit of the regime and the donors. If aid impacts on all citizens and aid relations imply power relations, how should the aid mechanism be managed? Democratic Ownership

should aid mechanisms be managed? It may seem to make sense to look at achieving equal relations between the aid providers and the aid recipients. However, in reality, such a goal seems implausible; how can aid be determined by the recipient while the aid belongs to the provider or donor? Aid has become a commodity exchanged in a market. For that market to work effectively, buyers and sellers (recipients and donors) need to have equal positions. Notably, recipients should have the freedom to make choices based on their own utility preferences. However, since the (repressive and technocratic) regimes in developing countries have been puppets of the donors, it has been impossible to have equal positions in the transactions. This has been particularly true where economic policies were designed such that the economy became dependent on foreign debts.

2 To coordinate and strengthen the cooperation between the donor countries and institutions in supporting the government of Indonesia, the donors established the IGGI (Inter-Governmental Group on Indonesia) chaired by the Netherlands. The orientation and directions of development and

approved the annual budget, the development plan had to be submitted to IGGI Meeting for approval. IGGI was replaced by CGI (Consultative Group on Indonesia) chaired by the World Bank in 1992, when Indonesia cut the official relations with the Netherlands. The function of CGI was to orchestrate the conditionalities to be implemented by the government of Indonesia. CGI was terminated in early 2007 by President SusiloBambangYudoyono.

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Since both providers and recipients are public institutions that represent their countries, their freedoms in the aid market transactions should be limited only by the mandates of their citizens. Where the citizens have little or no control over the actions of their government the democratic ownership breaks down. In the Indonesian case, the senior bureaucrats who are the main actors in the aid negotiations are still from the previous regime and were recruited not based on merit but on collusion and nepotism. These technocrats are the prolongation of the interests of the multilateral financial institutions and transnational corporations rather than the citizens. In such cases, it is clear that it is against the spirit of democracy when ownership of aid is limited to government ownership. The Paris Declaration (PD) has provided fresh momentum for changing aid mechanisms to

implying that the partner country should have the ownership of the aid and the aid-supported projects and programs. What is key here is that this means country ownership and not government ownership. This implies that all sectors of the country should be involved in determining whether the aid is needed or not, how it is used and in monitoring the implementation of the projects and programs supported by the aid (grants or loans). Although governments represent partner countries, they can no longer act independently, but have to be accountable to the country as a whole, comprising the citizens, parliament, business sectors and civil society. Democratic ownership also implies the participation of the people from the very first design stages of any project or program to be funded by foreign aid. The project and program implementation should similarly be transparent and directly or indirectly accountable to the people through democratic procedures at national and sub-national levels. The Lords of Donors: Against the Spirit of Democratic Ownership?

If democratic ownership can change aid mechanisms at the conceptual level, can it be implemented in practice at partner country level? The realization of ownership at country level is not as easy as it might be hoped. There is a push-and-pull between the partner country and the donors and among the donors based in the country. It seems it is not easy for the donors, particularly the multilateral institutions such as the World Bank and Asian Development Bank, to just allow country ownership to function. Whilst ownership is respected more in theory, there is a tendency for the donors to try to manipulate this ownership. The World Bank in Indonesia has established several agencies that

the Decentralization Support Facility (DSF), Multi-Donors Trust Fund (MDTF), SOfEI (Decentralization Support Facility for Eastern Indonesia) and SPADA (Support for Poor and Disadvantaged Areas). The rationale given for the establishment of these agencies is to facilitate harmonization among the donors, but in practice it seems to be more about manipulating the country ownership. Concerns have been increasing about the presence of these agencies. The donors pool their funds in the agencies, which either implement their own projects or distribute funds to other agents whether international or local NGOs, national ministries or local governments. Given

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this more centralized control of the aid flow, it is then of major concern that these agencies are independent of government and other democratic institutions, but are designed, managed and controlled by the World Bank. Some Indonesian academics and politicians sit on the Boards of the Agencies, but these only have ceremonial functions in practice. Since these agencies act as the new donors in the country with their own program priorities, the NGOs and sub-national authorities who need funds have to reorient their activities to be in line with these. These agencies are small in number but, given their control of the aid flow, they are able to determine the agenda for development projects of the sub-national governments and NGOs that receive funds from them. The agencies can thus be seen as the conductor for the orchestra of the NGOs and local governments. This impedes the genuine initiatives of the local NGOs, local communities and sub-national governments. Furthermore, in certain provinces in the East of Indonesia, the staff members of SOfEI are integrated within the structure of the government.3 Nevertheless, they remain free from its procedures and obligations. The staff are given special authority to advise the governors directly on policy choices and in many cases the SOfEI staff have made the policies issued by the governors. These World-Bank-controlled agencies representing the donors thus intrude into the government system at sub-national level from where they risk deviating discussions on bottom-up development planning. The development plans seem to be people-oriented through bottom-up procedures and processes, but in fact they are made and designed by the consultants of these World Bank agencies. The available data reveals that the sub-national governments where these World Bank agencies are working submit proposals for loans from the World Bank. The question then arises as to whether these loans are really taken in the interests of the people in the region or for securing the job of the World Bank staff (through on-lending loans)? Does their presence and intervention not manipulate the democratic ownership of the aid and betray the basic spirit of democracy that is emerging in the country? The newly claimed as the biggest donor for Indonesia, namely AUSAID, is to certain extent working through the agencies established by the World Bank, which means that it is under the

the aid only for the bIndonesia if it relates to aid business. The Role of CSOs in the Democratization of Aid

Development programs and economic policies were mainly characterized by the facts that the interests of the donors were secured and the repressive military power were the effective devices for suppressing democratic movements that tried to protect the interests of the citizens in Indonesia. Civil society organizations, particularly NGOs, emerged to challenge these mainstream development policies and the repressive measures of the regime. The national and local NGOs, supported by their counter-parts in the North, developed alternative development policies and practices through participatory and bottom-up

3Information from the staff of the World Bank in Jakarta during the consultation meeting between World Bank and CSOs on 19th March, 2008.

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approaches. The results of this work are obvious from the fact that although the foreign aid-funded projects displaced people and took their property without compensation, local communities were able to survive and sustain their livelihood. With small support from the NGOs, the social solidarity that has become the main capital of the local communities has kept them going. The presence of the NGOs close to the local communities rural communities and urban poor communities provides special advantages for the implementation of bottom-up and participatory approaches. The local communities have easy access to information and consultation with the NGOs and the NGOs are able to receive first-hand information right on-site. This enables both the NGOs and the local communities to develop democratic processes in designing community development projects and action plans for advocacy to protect their rights, particularly in the face of the top-down projects of the government and donors. The support of Northern CSOs has been crucial practically and strategically at the time when

various ways from the support of Northern CSOs. Firstly, without the funding support of Northern NGOs, many Indonesian NGOs would have found it impossible to survive. Secondly, the northern NGOs were the only source of information and knowledge for Indonesian NGOs. During the military regime, there was strong control over the flow of information, including about development. All correspondence was controlled and checked by the military; even post offices were controlled. Visits from Northern CSOs were used to bring in new books and materials to be distributed among NGOs in Indonesia. Trainings, conferences, workshops held outside the country and supported by Northern CSO provided substantial support for the capacity building of Indonesian CSOs. This helped develop the ability of the NGOs to deal directly in development debates with government officials at all levels, contributing alternative technical solutions in development activities. The possibilities for the participation of CSOs in development planning were improved when the government of Indonesia issued regulation No. 39/2006. The Regulation outlines the procedures and processes of participatory and bottom-up control and monitoring of development planning and implementation through annual district, provincial and national development plans. CSOs have more spaces and opportunities to participate in the processes starting from the village level up to national level, allowing them to monitor whether the interests of the people are accommodated in the district, provincial and national development plans. To a certain extent this participation is substantially meaningful for communities; however, in other cases the processes are unfortunately intercepted by the rent-seeking groups, including the World Bank agencies. Another case where CSOs and community groups participated and showed their strong ownership was actually the Poverty Reduction Strategy Paper (PRSP) that was made in multi-stakeholders processes in 2003 and has been taken as the National Poverty Reduction Strategy Document (NPRSD, or better known as SNPK StrategiNasionalPenanggulanganKemiskinan). The SNPK was integrated in the Medium Term Development Plan 2004 2009 that was made into Law No. 25/2004. The SNPK was made in participatory ways and included a rights-based

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approach and had clear gender perspectives. For the implementation of the SNPK, the

that sets out the details of operational plans for poverty reduction through promoting capacities of the local communities and providing funds for development. The participation of CSOs in providing capacity building support for local communities to be able to identify and formulate their interests in the participatory planning with the government and other stakeholders is strategic for ensuring the democratic ownership of the district, provincial and national development plans. Importantly, the process will determine whether the development projects and programs should be funded by foreign aid, by the government budget or by the self-sufficiency of the local communities. Challenges to CSOs

The poverty reduction program brings opportunities, but also certain challenges for the NGOs. The main challenges for the Indonesian NGOs relate to the funding sources, which, as we have seen, become source of power. The official donors prefer to channel their funds to the World-Bank-managed agencies rather than to UN agencies or International NGOs. This means that the International NGOs have to bid to the World Bank agencies, or at least cooperate with them to obtain funds. Although the agencies are challenged by Indonesian NGOs, some international NGOs based in the country keep continuing working with the World Bank agencies just because of desperate need of funding supports without being aware of the risks of working with the World Bank agencies. A first risk is the uniformization of the development agenda with communities and local governments becoming convinced of the same perception that the international market, particularly the presence of transnational corporations, is the best institution for the economy and for the people. Already, transnational corporations (TNCs) have been integrated and accepted as part of Indonesian development. The people are proud of having investment from these corporations in their regions although the TNCs do not respect the rights of the local communities and ignore the participation in local development. Secondly, projects supported directly by loans and grants from the World Bank-managed agencies risk undermining the processes that have been developed by the NGOs over the past three decades, as was the case with the PNPM. Whilst there is the regular bottom-up process of the national development planning, the planning for poverty alleviation program is conducted in separate procedures. A third risk is duplication of effort and consequent inefficient use of resources. Several big NGOs have established training centers with national and local coverage and have trained thousands of community animators, facilitators and development managers. At present the government and the World Bank agencies conduct the same trainings; this can be a waste of resources for both the government and the donors. A further risk is that the flow of funds to the communities can break up the social capital that has been strengthened by the community organizing processes developed by the community groups and the NGOs. Conclusions

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It would be against the spirit of democratic ownership if aid was aimed at undermining the interests of the people, causing evictions, displacements, the loss of property and the loss of access to better lives for people. Yet, these have been the characteristics of aid and aid-funded projects and programs in the past. The government of Indonesia has been under strong pressure from donor conditionalities on market liberalization and legal reform that favor the transnational corporations. Official funding and the development agenda is dominated by the World Bank agencies. In the face of this, northern NGOs and Indonesian NGOs could respond by strengthening their cooperation again as they did when they jointly faced the dictatorship regime in the past. Unfortunately, it seems this will not happen since International NGOs also join the donors club established and coordinated by the World Bank agencies and which practices collusion and nepotism which have long been the enemies of civil society.4 Certain international NGOs prefer to promote the agenda of their own governments rather than the agenda of the poor people in the developing country. There are still opportunities for Indonesian CSOs and community groups since the local movements spread throughout the country and the awareness of being self-sufficient and self-reliant is growing. These community and social movements have also started engaging with political parties that will raise and promote their interests at policy levels. Even if the local and national NGOs are no longer supported by their counterparts in the North, these movements will continue their agenda of democratizing development and democratizing aid.

4 Corruption in Indonesia is an integral part of what is called KKN (Korupsi, Kolusi and Nepotisme Corruption, Collusion and Nepotism).The government officials and CSOs in Jakarta have complained that the World Bank campaigns for good governance while the institution is itself practicing collusion and nepotism: supporting organizations where the wives or the friends of the people in the World Bank

development practitioners who fainamely individuals who have power to direct donors and international private foundations to support

with cynicism in Indonesia, it is because the donors also sustain bad governance, and only to support the pleasure of

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DEVELOPMENT FINANCE AND AID EFFECTIVENESS:

Targeting the Poor to Repay the Debts?5

Don K. Marut6 Introduction

In 2006 the World Bank announced that Indonesia was no longer eligible for IDA loans since it has been included as a middle income country. In early 2007 Indonesia also terminated the

government has also set maximum amount of foreign loans that should be below 3% of the total annual budget, and should be reduced by years. This last policy was perceived as unfriendly to the creditors that have been long recognized foreign loans as the tools for appropriating economic benefits from the natural resources exploitation and from the domestic market in the country. The current oil crisis and hence increasing prices of consumption goods and basic services that put pressure on the poor who are just adjusting themselves to the increased prices because of increased oil price the year before, has become the new entry for the creditors, particularly the IFIs, to raise the schemes for new loans. It is controversial that the country that produces oil, gas and coal faces the problem of the increasing global oil prices. But looking at the liberalization and privatization policies that were prioritized for the exploitation of natural resources (particularly oil, gas and other minerals), that were the main conditionalities of the foreign loans, the situation has been taken as the logical consequence of the policies that were dictated by the global powers behind the foreign aid. Instead of developing appropriate schemes for saving the poor against the oil price shock, the IFIs and major creditors even pushed the government of Indonesia to be more progressive in privatization and liberalization of the exploitation of natural resources. The privatization of basic social services, such as water, health and education (particularly higher education) continues and spread throughout the country. The IFIs agencies are proactive in promoting the privatization and providing loans to the private counterparts in the processes. The results are so far not promising at all, such as the case of water privatization in almost all districts in Papua provinces and other districts in eastern parts of Indonesia.

5 Paper for the Asia Strategy Meeting of Reality of Aid, Manila, 14 15 July, 2008. 6 Executive Director of International NGO Forum for Indonesian Development (INFID), Jakarta.

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While the poor have to try hard to face the crises, the International Financial Institutions (IFIs) see the crises as opportunities for putting more pressure on the government to be more progressive and tougher in making policies that are in line with the neoliberal or the so called

U

the other hand are the developed countries really committed to the implementation of Monterrey Consensus where the developed countries promised to increase overseas development assistance (ODA) up to 0.7% of their GNP. How can aid effectiveness be measured when all the developing and poor countries adopt the uniform system dictated by the donors?

Different Concepts, Different Strategies, Different Results It has been general assumption that MDGs, particularly poverty eradication, can be achieved mainly through the support of the developed countries through foreign aid. Foreign aid is instrumental and even substantial in eradicating poverty in the developing or poor countries. The proponents and opponents of foreign aid (foreign loans) have different rationale. Jeffrey Sachs, the proponent of the foreign aid, argued that the foreign aid did not touch the real cause of the problem of poverty in the poor countries and that the aid is not enough for eradicating the poverty. The bottom line is both the concept of poverty eradication that did not solve the real cause of the problem and the volume of aid provided that was not enough to promote capacities of the poor to invest for better future.7 Sachs argued that the developed countries could do better with the aid if the strategy and the targets are appropriate. Sachs took the initiative of a global campaign to ask $160 billion a year for ten years, primarily as gifts from rich countries to poor countries to build the missing infrastructures that will allow economic growth to take off in poor rural areas, which in turn will end a-dollar-a-day poverty. The neo-darwinian practice, general principles and specific contexts. He believes that the developed countries could play as the doctors for the patients in the pooclinician needs to understand both the general principles of physiology and disease control and the unique circumstances of the patient, including her symptoms, lab tests, medical history, and family circumstance 8 Will this flow of funds help the poor? The problem is that Sachs believes that poverty alleviation program would be able to promote the capacities of the poor to be involved in the market, and he forgets the reality of aid itself. From the past experiences, the funds went back to the developed countries since some of the

the rural areas, have little knowledge about the causes of the poverty and hence did not know what to do except receiving their monthly payrolls and benefits. Some of the funds were also used for purchasing goods from the developed countries that to some extent could not be used for the development projects in the poor countries. On the other hand the funds went to the pockets of the rich in the poor countries. Paul Polak describes it very clearly that once the news about the flow of funds from the developed

7 Jeffrey D. Sachs, The End of Poverty: Economic Possibilities of Our Time. New York: Penguin Books, 2005. 8 Jeffrey D. Sachs, Common Wealth: Economics for a Crowded Planet (London: Penguin Books, 2008), p. 15.

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countries get out, the rich in the poor countries will gather like moths around a flame.9 For the first year or two the projects funded by these funds might produce excellent yields, but when the project money runs out the yields drop back to the condition before the aid came. This happened to projects supported by foreign aid both from bilateral and multilateral agencies. The foreign aid in many cases is not for the development purposes of the poor countries, but for the interests of the people in the aid agencies and for the interests of the self-seeking bureaucrats and politicians in the poor countries. A study by the Ministry of Planning of Indonesia (BAPPENAS) in 2004 revealed this fact. The study found that there were indications of project seeking activities both by the lenders and the government executing agencies in Indonesia for their own benefits.10 Despite partial successes of the programs and projects funded by foreign aid, the study found that the absorption rate of foreign aid was low and the benefits did not achieve the maximum as planned. There were many reasons for these, but there are two main reasons that should be pointed out explicitly. First is that the ownership level of the executing agency was low, which means that the implementing agency of the foreign-aid funded programs and projects did not feel responsible for the achievements and success of the programs and projects.11 The second is that there was mutual interest between the government staff of the executing agency and the staff of the donor agencies. The government staff from the executing agency (ministries) needed foreign aid for projects in their respective agencies in order to receive higher allocation of matching funds from the state budget. Higher budget allocation means higher income for the staff in the executing agency. On the other hand the donor staff members need more loans for the country. More loans means more overhead costs for the donor, which in turns means job security for the staff members of the donor agencies. The higher income of the government staff and job security for the staff members of the donor agencies to certain extent became more as the objectives of the foreign aid rather than for promoting economic growth and poverty alleviation in the country. As a result the country is burdened by the increasing debts and the people have to pay for the benefits they did not receive. The poverty was not solved, but is still maintained even increased because of the burdens to repay the foreign debts. William Easterly, while praising the commitment of the leaders of the developed countries and the efforts of the individuals and international agencies to fight against poverty, is skeptical whether the goals set in the luxurious buildings and in sophisticated labs with sophisticated

9 Paul Polak, Out of Poverty: What Works when Traditional Approaches Fail (San Francisco: Berrett-Koehler Publishers, 2008), p. 34. When the climate change was raised as an issue in Indonesia and the money is also following the issue, certain family group in Jakarta started establishing their company and reorienting the focus of their organizations to tap funds from the multilateral financial institutions and

- official delegation of the government of Indonesia in the UN Conference on Climate Change in Bali in December 2007. 10

Strategy for Promoting the Performance of For 11

28 September, 2007.

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economic modeling would be achieved. He questioned about the fact that the West has spent $ 2.3 trillion on foreign aid in the last five decades and still is not able to solve the problem of increasing the income of the poor up to $ 1 per day, to provide cheap medicines and free schools for poor children, to prevent the five million child death and so on in the poor countries.12 Easterly expressed that the problem with the Western aid is in the assumption that the Western can fix all things in the poor or developing world. He emphasized that the aid cannot achieve the end of pove

Easterly does not agree that the aid agencies try to fix the governments and societies in the poor countries as what they have been doing. In details he expresses:

wasting our time with summits and frameworks. Give up on sweeping and naïve institutional reform schemes. The aim should b 13 Easterly once worked as economist in the World Bank, but he did not agree with certain policies and strategies of the World Bank regarding the poverty eradication strategies and some

the pathetic spectacle of the IMF, World Bank and other aid agencies coddling the warlords 14. Easterly suggests that the West should end the paternalism and hypocrisy of

conditions from Washington. This is the main issue in the aid arena: the northern aid agencies and the governments do not learn from the past, do not comprehend well the main issue and experiment too much with their own thoughts and theories while neglecting, undermining and even eliminating the local capabilities in the developing countries. Ha-Joon Chang describes the policies and aid c

15. The aid agencies pretend to help the developing countries as generous person, but because of wrong assumptions, false theories and false policies, what happened is that instead of helping the countries out of crisis and poverty, they create more crises and bring the poor into deepened deprivation. The aid agencies and the donor countries assume that the miracle of the East Asian countries was triggered by the liberalization of the economy in the countries. This assumption is then taken as a generalization that if the poor countries open up their economies to global market through liberalization and privatization, the poor countries will be able to catch up with higher

12 William Easterly, So Little Good (New York: Penguin Books, 2006). 13Ibid., pg. 368. 14Ibid. 15 Ha-Joon Chang, Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (London: Random House Business Books, 2007). Ha-Joon Chang argued the high economic growth of the East Asian countries were not triggered by the liberalization, but more because of protection of the strategic and infant industries and the high intervention of the government in industrial and trade policies, as well as controlled monetary and fiscal policies.

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economic growth as have been achieved by the East Asian countries. The aid provided to the developing countries are disbursed in the conditions that the countries have to install reform policies to liberalize the economy in order that the global market actors are able to involve in the domestic market and to privatize the state-owned companies that monopolize the market of strategic goods and services in the domestic markets. Instead of providing aid directly to the poor, as suggested by Easterly, the aid agencies are putting pressure on the governments in the developing countries to reform all policies as prescribed in the so-

-term pain because of the policy reforms can be tolerable for the sake of the long-terms gains. In fact the short-term pains accumulate and become long-term deprivation that cannot be turned back. As consequence, the little success of the foreign aid in eradicating poverty and promoting economic growth is covered up by the deluge of crisis caused by the inappropriate policies, wrong targets of aid and above all by the liberalization and privatization as the main conditionalities of the aid agencies. The foreign aid then did not contribute to the eradication of poverty; even it becomes the main cause of the deepening of poverty and deprivation of the poor in the developing countries. How can it happen?

Aid Relations: Unequal Power Relations

In 1967 the World Bank (under President MacNamara) requested a commission chaired by the former Canadian Prime Minister, Lester B. Pearson to conduct a study on the development aid: the results achieved and the failures that could become inputs for policies in the World Bank. In 1968 the Commission finished the study and then published is as a book Partners in Development, which becomes a classic book in Development Studies. Indonesia was one of the countries in the study of the Commission. One of the main points found in the study about Indonesia in the Old Order period (under President Soekarno) was that Indonesia was suffering of what is called aid pathology. The foreign aid was used without clear objectives and goals or in other words foreign aid was dissipated and wasted for the

Almost 40 years after the study, if the same Commission is asked to conduct the same study, what would be the conclusion about the present Indonesia? I would say that the conclusion

62.7 billion. Do the poverty conditions decline? What happen with the aid? Why does Indonesia become dependent to foreign aid? Aid relationships are also relationships of power. In such power relations, inequality and to a certain extent injustice can become principal characteristics. Who gives aid holds power, at least over what aid is used for. Additionally, various conditionalities linked to other policy areas that favour donors are imposed on aid recipients, who, in many cases, are then trapped in a situation where they have to accept further conditions, even when these conditions are harmful for their citizens. Aid relations have become an issue of global power politics. It has been revealed by various sets of research and the testimonies of key actors over the years that injustice has been

16

systematically and structurally created and maintained in development policies by certain world political and economic powers. Indonesia has historically been a clear live case.16 The mainstream development philosophy since the late 1960s was dominated by the technocratic and top-down approaches implemented by the repressive military power. Growth-oriented economic policies were introduced, mainly representing the interests of the donors. The technocrats in the Indonesian administration were trained to serve the interests of the donor countries and the international financial institutions. The military and the technocrats were the two sides of the same coin in the state-led economic development projects and programs. Despite pressure from global citizens and the United Nations against the violation of human rights in East Timor - and several regions in Indonesia during the military repressive regime - the donors continued to support the repressive regime. Despite the poverty, violence and denial of the rights of the people, the donors were well coordinated in supporting the military dictatorship of General Suharto.17 It is clear from the data that foreign aid has impacted upon the citizens of recipient countries. Some have received positive impacts or benefits from the aid, but the majority of citizens are affected in more negative ways. Citizens have to bear the burdens of debt repayments, whilst the benefits are mostly felt by the repressive and irresponsible regimes supported by technocrats in the country that act as the prolongation of the hands of the international donors. In many cases, people have had to accept that they must concede all their ancestrally inherited property rights on natural resources to transnational corporations and that they must pay for expensive public services. Even when democracy is established, the government cannot easily get rid of the power attached to past foreign aid. Injustice continues and the people continue to have to pay the high rates of tax necessary to repay the foreign debts that were not even beneficial to them but were taken by the repressive regime for the benefit of the regime and the donors. What is really happening behind the aid and the dependency of Indonesia to foreign aid? Since 1966/1967 Indonesia has received foreign aid (loans and grants) from twenty countries and thirteen multilateral agencies. Most of these countries and multilateral agencies were engaged in one group called Inter-Governmental Group on Indonesia (IGGI) from 1967 to 1991, and then replaced by Consultative Group on Indonesia (CGI) from 1992 to 2007. IGGI

16 John Pilger, The New Rulers of the World. London & New York: Verso, 2002. 17 To coordinate and strengthen the cooperation between the donor countries and institutions in supporting the government of Indonesia, the donors established the IGGI (Inter-Governmental Group on Indonesia) chaired by the Netherlands. The orientation and directions of development and

ors through IGGI. Every year, before the government approved the annual budget, the development plan had to be submitted to IGGI Meeting for approval. IGGI was replaced by CGI (Consultative Group on Indonesia) chaired by the World Bank in 1992, when Indonesia cut the official relations with the Netherlands. The function of CGI was to orchestrate the conditionalities to be implemented by the government of Indonesia. CGI was terminated in early 2007 by President SusiloBambangYudoyono.

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was chaired by the Netherlands, and CGI was chaired by the World Bank. Since 2005 CGI was officially chaired by Indonesia but in practice it was chaired and directed by the World Bank.18 Among the multilateral agencies, World Bank and Asian Development Bank (ADB) are the two major donors/creditors, and among the bilateral donors, Japan is the biggest accounting for about 70% of the total bilateral aid. IMF was not a member of IGGI or CGI, but it was always represented in the meetings of IGGI/CGI. It is interesting that although IMF is not included as donor; its presence in Indonesia has brought strong implications for the country and for the donors. The bilateral donors and the multilateral donors refer to IMF before making loans agreements with Indonesia.19

Foreign aid supports both project and program. Project aid is used to support physical and institutional infrastructure. Bilateral aid mainly supports the projects, while multilateral aid is more focused on program, with smaller portion on project. Though the program aid is relatively smaller than the project aid in numbers, the impacts of program aid to Indonesian economic and political system are significant.20

Bilateral Aid

The biggest bilateral donor for Indonesia is Japan, followed by US, France, Germany, Austria and Netherlands. In the last two years Australia has by-passed the position of Japan as the biggest donor to Indonesia. The loans from the six previous countries are mainly for project loans. There are four countries (Germany, Austria, Netherlands and Japan) that have quite big number of tied loans. The tied loans are spent for capital goods, military and other security equipment and consultancy. The table 2 below shows that between 80% and 92% of the funds of the tied loans are spent in the creditor countries. The tied loans raise its own problem of who is responsible for its quality, benefits and the sustainability. The tied loans from the World Bank and ADB have raised particular questions of for whom the loans are, for the interest of the World Bank and the ADB and their staff members, or for the interests of Indonesia. Foreign aid is not only to fulfill the needs of the recipient country (the debtor, i.e. Indonesia), but also mainly for the interests of the creditors. This is indicated from the utilization of the foreign aid. BAPPENAS (the Ministry of National Planning) estimates that almost 75% of aid goes back to the donors in various forms such as the purchases of goods and services. Certain creditors require the purchases of goods from the countries, and the use of skilled labor or consultants from the donors. The following table shows that more than 80% of the aid from bilateral donors goes back to the countries, while 60% of the loans from ADB are absorbed by ADB itself. This indicates that the loans are more for the benefits of the donors rather than for

18 In 2004 KwikKianGie, the then Minister of National Planning, complained that CGI was too dominated by the donors. A paper prepared by KwikKianGie to be presented in the CGI Meeting in

d

19Bappenas study, 2004. 20 - INFID Working Paper No. 7, 2007, Jakarta.

18

the recipients. Regarding the multilateral donors, the BAPPENAS other study21 seems to be proved, that the loans are more for project-seeking of the staff of the donor institutions for their own job security while victimizing the poor Indonesians. The more the loans approved for Indonesia by the multilateral donors, the more secured the job of the staff of the agencies, since more loans means more overhead costs. Tables 1. Tied loans

Creditors Foreign Utilization (%) Local Utilization (%)

Germany Austria Denmark Netherlands South Korea JBIC ADB World Bank

97.31 92.81 90.55 87.42 82.88 80.45 61.93 35.04

2.69 7.19 9.45 12.58 17.12 19.55 38.07 64.96

Regarding the project loans, where the main contractors, consultants and the supplies are from the creditor countries, the question is who is responsible if the project fails or if the project brings harms to the local communities and environment? This is related to the unfairness in the foreign loans businesses in terms that recipient countries pay the contractors, the consultants and purchase the supplies from the creditor countries using the loans from the creditor countries. The real case is that whether the project is successful and useful or not for the people in the recipient countries, it is not the responsibility of the creditors. In the case of projects funded by loans from Japan, the new debts are always booked for repairing the faulty works of the Japanese contractors and consultants, or in overcoming the problems coming out as the effects of the works of the Japanese contractors and consultants. In many cases it is dilemmatic for the recipient country, i.e. Indonesia. If Indonesia rejects the new loans, the project cannot be continued or the project will not operate and Indonesia would pay the previous debts without any result for the country.

21 BAPPENAS, op.cit., 2004.

19

Impact of World Bank loans22

Though programme aid is less than project aid and not very visible, its influence on the Indonesian economic and political systems has been significant. Programme loans were meant to rescue the country from crisis, particularly related to balance of payments and the state budget. However, through programme aid, World Bank staff have worked as if they are part of the Indonesian bureaucracy, freely influencing the policies of the national government. Indonesian bureaucracy has become so open to the World Bank that none of its policies are immune to influence.23 Aid from the World Bank group started in 1968, through IDA soft loans. The first IBRD loan to Indonesia was made in 1974 when the country had started to catch up with development momentum. The World Bank provided Trade Adjustment Loans in 1987. When Indonesia was hit by the 1998 economic crisis, the World Bank provided USD 26.5m of International Development Association (IDA) aid and tied it to the privatisation and liberalisation of public services, including the cut of subsidies in social sectors. It is interesting to observe that whilst the IFC (a family member of the World Bank) has been making a fortune purchasing the cheap shares of the public services and privatised companies, poor Indonesians have paid a high price for the soft IDA loans. Table 2: The World Bank Adjustment Loans to Indonesia

Type Date of Approval Amount Approved

Trade Policy Adjustment 1987 US$ 300 million Policy Reform Support 1999 US$ 1.5 billion Social Safety Net Adjustment 1999 US$ 600 million Water Resources Sector Adjustment

1999 US$ 300 million

Source: BAPPENAS, 2001 After increasing critiques of the relevance of the World Bank in Indonesia, the Bank is now enthusiastically promoting its new Community Driven Development project. This consists of two project components: Kecamatan Development Project (KDP) for rural areas and Urban Empowerment Project for urban areas and is seen, by World Bank staff, as a bait for new loans for Indonesia to meet the main mission of alleviating poverty.24

22 The following part of the paper is tto be published as a chapter in the Reality of Aid 2007 (Manila: Reality of Aid Network, 2008). 23 A documentary video presented during the farewell party of the Country Director of the World Bank, Andrew Steer, in March 2007, described clearly how the World Bank has been integrated in the Indonesian Economic Team (the Coordinating Ministry of Economic Affairs, Ministry of Finance, Ministry of Trade and the Ministry of National Planning). The documentary video could trigger the question of the independence of the Indonesian economic team, and to certain extent, the question whether Indonesia is still sovereign in making its economic policies. 24 These projects are now integrated in the Program NasionalPemberdayaanMasyarakat PNPM (National

20

main reference on the success of the project25. In fact, the project has made poor people responsible for poverty alleviation in terms that the poor themselves will repay the debts in the future. A 2004 BAPPENAS study26 raises the question of whether the loans being attracted are really for the benefit of the recipient country. The suggestion is made that, since more loans mean more overhead costs and project work for the donor agencies, the staff of these agencies are keen to encourage more loans to increase their job security rather than in the interests of the recipient country.

Impact of IFIs on other donors The programme loans during the crisis period - including the conditionalities detailed in the Letters of Intent of the IMF - were used as references by both the multilateral donors and the bilateral donors.27 prescriptions and conditions by making the disbursement of both programme and project loans dependent on whether the government of Indonesia had implemented the conditions. The unity of the donors was made possible because of the presence of regular meetings of the CGI, where the government of Indonesia had to provide reports to the donors, in addition to the regular monitoring from the IMF. Programme aid reached its peak during the crisis period, when the multilateral donors came

by commitments from the World Bank and the ADB and the Government of Indonesia itself. This first line totalled USD 23 billion. It was followed by a second line totalling USD 20 billion from bilateral donors (see table below). Loans from the World Bank, Asian Development Bank and other donors do not need to be tied to IMF conditionality. Nevertheless, when Indonesia decided to end the IMF programme in 2003, the donors decided that Indonesia was no longer eligible for debt rescheduling through the Paris Club.28 reign creditors, such as the World Bank, to smooth their business in taking advantage from the crisis in Indonesia. The data and facts of multilateral aid show that most of them have been wasteful, with no clear advantage for Indonesia. Furthermore, they have been used by creditors and donors to dictate

25

www.worldbank.org. The Project was started with a local-level institutions study (LLI), which came out with rhetorical conclusions that re- as the study from BAPPENAS revealed is only to secure the jobs of the World Bank staff in Indonesia. (Scott

26 BAPPENAS, op.cit.,2004. 27 In 1998, the Fund postponed loan disbursement three times: March, May and November. This automatically affected the disbursement of loans from the WB, ADB and some bilateral lenders. 28 Summary, p. 9.

21

policies that should be left to the national government. Programme loans from multilateral agencies were used to justify the presence of the agencies and their staff in Indonesia rather than for promoting capacities of the government staff. The good governance that is promoted now in Indonesia is a result of the democratisation processes rather than the results of the works of the consultants paid by the programme loans. Foreign debt amounts to less than 3% of the annual state budget, meaning its overall contribution to Indonesian economic development is limited. The major determinant is, in fact, domestic financial capacity. Nevertheless, the foreign debt becomes problematic and burdensome when the maturity of the debts is accumulated, putting pressure on the state budget in later years. Most importantly, however, the relatively small amount of foreign aid caused heavy foreign

res from the donors/creditors through IGGI/CGI tied Indonesia to conditions imposed by the IMF and made it difficult for Indonesia to get rid of the debt trap. Furthermore, the fact that the staff members of the donor agencies are driven by self-seeking behaviour, while they are working together with Indonesian officials in the offices of the Central Government of Indonesia, explains why the policy measures from Indonesian government are not more pro-poor, pro-job and pro welfare of Indonesians. The programme loan from the IMF was the most striking example of wasteful and harmful loans in Indonesian history, and can become a case study of how an International Organisation undermine state sovereignty and ignore democratic processes in a country. The IMF policies created a debt trap from which there was little chance of escape. The IMF forced Indonesia to accept its misdiagnosis and failed prescriptions, including the conversion of private debt to the public debts, or the transfer of the debts of the private corporations to the debts of the poor Indonesians.29 The World Bank has been rather successful at maintaining its image as a donor institution in Indonesia. When the country was burdened with structural adjustment programmes in the 1980s and the implementation of the policy conditionalities (privatisation and liberalisation) after the 1997/98 crisis, the World Bank could deny responsibility for the failure of the policy reforms. However, whilst the IMF was the only institution to be publicly blamed, it was the World Bank that orchestrated the implementation of the IMF policy conditionalities through its leadership of the CGI. Foreign Aid and Poverty The 2007 data showed that more than one million children under five or 26% of the total children under five are living with malnutrition. 64% of the total population in Indonesia consumes insufficient calorie. Only 18% of the total populations of Indonesia have access to clean water and 48% of the populations have no access to clean water at all. The World Bank reports that 110 million of the populations (about 50%) have income below US $ 2 per day. The unemployment rate reaches up to 10.9 million people or 10.3% of the total labour force.

29Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further

22

Table 3. The Real Problems faced by the people of Indonesia, 2007

No Problems % of the total

population

Remarks

1 Malnutrition 26% From the total population; majority is from the Eastern parts of Indonesia.

2 Insufficiency in calorie intake

64%

From the total population of Indonesia.

3 Access to clean water in urban areas

52% Only 18% of the total population of Indonesia who have access to clean water.

4. Without appropriate sanitation facilities

44%

Source: National Planning Ministry, May 30th, 2007. During the last 10 years (1997 2007) the economic development and the poverty alleviation

worsened. One of the low performances of economic development in Indonesia is the decision of the government to receive loans of US$ 7.3 billion from IMF together with its strong and burdensome conditionalities. Since the signing of the Letter of Intent (LoI) and the Memorandum of Economic and Financial Policies (MEFP) with the IMF, Indonesia has hardly picked up back its economic growth. For 7 years (1997 2004) Indonesia signed 20 LoIs with all heavy conditionalities for Indonesia. The result is obvious: the increased poverty, the death toll caused by malnutrition and hunger, and conflicts for appropriating resources. The LoI and MEFP pushed the government of Indonesia to implement the policy

livelihood. The conditionalities include, among others: 1. The government is not allowed to control the price and distribution of rice. 2. The government has to cut subsidy to rice price up to zero. 3. The elimination of the prohibition and limitation on the import of rice. 4. The cut of subsidy to agricultural sector up to zero. 5. The privatization of the Logistics Bureau. 6. The elimination of the credit for farmers; the credit should become the business of

the commercial banks. These conditionalities attacked directly to the heart of the livelihood of the majority of the people of Indonesia, namely the farmers.

Indonesia has been trapped in policy frameworks that result in the impoverishment of the people. The policies include the tight fiscal policies, tight monetary policies, the dependency to external debts, the re-structurization of financial sectors, structural adjustment programs, liberalization of investment and trade, and the privatization of the public services that are substantially fundamental for supporting the fulfillment of the rights of the citizens to food.

23

The privatization of health services such as the elimination of the cheap services in the Public Health Centers, the increase in the prices of medicines, the elimination of the budget for village midwives result in difficulties for women and children to access to health services. The health of women and children degraded; the mortality rate at birth and children under five increases. This is worsened by the shortages of appropriate and nutritious food for women and children. IMF also pushed the policy on food. The government of Indonesia was pushed to increase the prices of rice, soy beans, sugar and flour and adjust them to the competitive global market prices, and open the domestic market to free import of all agricultural products. The control of prices and distribution of agricultural products had to be lifted, and the limitation of import had to be eliminated. The monopoly of import by BULOG (the national logistics bureau) has to be eliminated and the Bureau has to be privatized to become a private company that has to compete with other companies in importing, distributing and collecting agricultural products. While the needs for improving education and health sector are demanding, the budget allocated for these two sectors is still below the budget allocated for the debts repayment. The following table shows the comparison. Table 4. Budget Allocation for Debts Payment compared to the Budget allocated to Health and Education Sectors, 2004 - 2007

Year Debts Health Sector Education Sector

2004 IDR 64,136 trillion (interest) IDR 46,836 trillion (principal installment) - Total: IDR 110,972 trillion

IDR 7,038 trillion IDR 25,987 trillion

2005 IDR 58,393 trillion (interest) IDR 35,561 trillion (principal installments) - Total: IDR 93,954 trillion

IDR 9,913 trillion IDR 30,785 trillion

2006 IDR 73,471 trillion (interest) IDR 60,382 trillion (principal installment) Total: IDR 113,853 trillion

IDR 10,849 trillion IDR 37,830 trillion

2007 IDR 85.086 trillion (interest) IDR 54.830 trillion (principal installment) Total: IDR 139,916 trillion

IDR 17.467 trillion IDR 44.058 trillion

The government of Indonesia has to sacrifice the needs and rights of the people to health and education for the sake of repayment of the foreign debts. These basic services on the other hand have been subject to privatization, which means that the poor have to pay for the fulfillment of their rights that should be the obligation of the government. The conditionalities for liberalization and privatization have pushed the poor people to pay the whole foreign debts that they do not benefit from.

24

Conclusion

foreign debts have pushed the government of Indonesia to follow the rules and prescriptions of the creditors/donors whatever the risks for the livelihood of the people of Indonesia. The dependence on foreign debts has pushed the government to serve more the interests of the creditors rather than the interests of the citizens. The conditionalities imposed by the creditors, particularly by IMF, World Bank and Asian Development have pushed the government to implement policies that make the poor poorer. Although the facts, data and incidences have been publicly exposed, the government has not been moved from its orientation to the policy prescriptions of the multilateral donors. The needs for more budgets allocated for health and education have been obvious, but the government still prioritized paying foreign debts rather than promoting education and health. Although the incidences of poverty as indicated by malnutrition, starvation and death because of starvation have been publicly exposed, the priority of the government in allocating state budget is still on the implementation of the policies imposed by the creditors. Foreign debts have made the government as the instrument for the creditors to serve their interests, and not

research and studies that justify the needs of the government for new loans and more policy reforms. Foreign aid can contribute much to the poverty eradication if the targets of the projects and programs are right to the poor and without conditionalities that contravene with the political and economic choices and preferences of the people in the developing countries. On the other hand the government act more as facilitating agency that provide capacity development and empowerment for the poor communities and groups rather than directing them towards the aims that are not in line with what they perceive the best for them at present and in the future. Most of all transparency and the accountability in the aid agreements and aid utilization are the necessary requirements for more effective use of aid for poverty eradication.

==*** ==

25

DOES FOREIGN AID HELP?

The Case of Multilateral Donors in Indonesia

Don K. Marut

Introduction

The Website of IMF in 1999 announced that:

ional lending were broadened to include an explicit focus on poverty reduction in the context of a growth oriented strategy. The IMF will support, along with the World Bank, strategies elaborated by the borrowing country in a Poverty Reduction Strategy Paper (PRSP).30

built into its lobby wall. What happens in reality to the countries supported by the structural adjustment programs of the IMF and the World Bank? Few global economic actors get richer, while the poor get poorer. The development practitioners and advocates sharing the concerns with the developing countries exposed the contradictory facts about the aid from the IMF and the World Bank. When the International Monetary Fund (IMF) and World Bank arrive in southern countries, corporate profits go up, but so do poverty and suffering. Decades of promises that just a little more "short-term" pain will bring long-term gain have exposed the IMF and World Bank as false prophets whose mission is to protect those who already control too much wealth and power.31 Many developing countries suffered ... sustained increases in prosperity, accompanied by dramatic increases in inequality and child poverty ... under the auspices of IMF and World Bank adjustment programmes.32 In country after country, structural adjustment programs (SAPs) have reversed the development successes of the 1960s and 1970s, with ... millions sliding into poverty every year. Even the World Bank has had to accept that SAPs have failed the poor, with a special burden falling on women and children. Yet together with the IMF it still demands that developing countries persist with SAPs.33

30http://www.imf.org/external/np/exr/facts/prgf.htm 31http://www.oneworld.net/campaigns/imf&wb/index.html 32http://www.oneworld.net/anydoc2.cgi?url=http://www.oxfam.org.uk 33http://www.oneworld.org/guides/sap/index.html

26

The programs supported by IMF and the World Bank to push economic growth have in fact negative effects on poverty reduction. The countries supported by the structural adjustment programs of the IMF and World Bank have been sunk deeply in poverty and indebtedness.34 Aid Relations: Unequal Power Relations

Aid relationships are also relationships of power. In such power relations, inequality and to a certain extent injustice can become principal characteristics. Who gives aid holds power, at least over what aid is used for. Additionally, various conditionalities linked to other policy areas that favour donors are imposed on aid recipients, who, in many cases, are then trapped in a situation where they have to accept further conditions, even where these are harmful for their citizens. Aid relations have become an issue of global power politics. It has been revealed by various sets of research and the testimonies of key actors over the years that injustice has been systematically and structurally created and maintained in development policies by certain world political and economic powers. Indonesia has historically been a clear live case.35 The mainstream development philosophy since the late 1960s was dominated by the technocratic and top-down approaches implemented by the repressive military power. Growth-oriented economic policies were introduced, mainly representing the interests of the donors. The technocrats in the Indonesian administration were trained to serve the interests of the donor countries and the international financial institutions. The military and the technocrats were the two sides of the same coin in the state-led economic development projects and programs. The occupation of East Timor by the Indonesian military was also a consequence of the policies of world political and economic powers. It was not a coincidence that the occupation of East Timor took place just after the US left Vietnam. Despite pressure from global citizens and the United Nations against the violation of human rights in East Timor - and several regions in Indonesia during the military repressive regime - the donors continued to support the repressive regime. Despite the poverty, violence and denial of the rights of the people, the donors were well coordinated in supporting the military dictatorship of General Suharto.36 It is clear from several sources of data that foreign aid has impacted upon the citizens of recipient countries. Some have received positive impacts or benefits from the aid, but the

34 The effect of IMF and World Bank programs on poverty October 2000. William Easterly was an economist at the World Bank and this paper was not published as the World Bank Working Paper. 35 John Pilger, The New Rulers of the World. London & New York: Verso, 2002. 36 To coordinate and strengthen the cooperation between the donor countries and institutions in supporting the government of Indonesia, the donors established the IGGI (Inter-Governmental Group on Indonesia) chaired by the Netherlands. The orientation and directions of development and

donors through IGGI. Every year, before the government approved the annual budget, the development plan had to be submitted to IGGI Meeting for approval. IGGI was replaced by CGI (Consultative Group on Indonesia) chaired by the World Bank in 1992, when Indonesia cut the official relations with the Netherlands. The function of CGI was to orchestrate the conditionalities to be implemented by the government of Indonesia. CGI was terminated in early 2007 by President SusiloBambangYudoyono.

27

majority of citizens are affected in more negative ways. Citizens have to bear the burdens of debt repayments, whilst the benefits are mostly felt by the repressive and irresponsible regimes supported by technocrats in the country that act as the prolongation of the hands of the international donors. In many cases, people have had to accept that they must concede all their ancestrally inherited property rights on natural resources to transnational corporations and that they must pay for expensive public services. Even when democracy is established, the government cannot easily get rid of the power attached to past foreign aid. Injustice continues and the people continue to have to pay the high rates of tax necessary to repay the foreign debts that were not even beneficial to them but were taken by the repressive regime for the benefit of the regime and the donors. If aid impacts on all citizens and aid relations imply power relations, how should the aid mechanism be managed? Impacts of World Bank loans

Though programme aid is less than project aid and not very visible, its influence on the Indonesian economic and political systems has been significant. Programme loans were meant to rescue the country from crisis, particularly related to balance of payments and the state budget. However, through programme aid, World Bank staff have worked as if they are part of the Indonesian bureaucracy, freely influencing the policies of the national government. Indonesian bureaucracy has become so open to the World Bank that none of its policies are immune to influence.37 Aid from the World Bank group started in 1968, through IDA soft loans. The first IBRD loan to Indonesia was made in 1974 when the country had started to catch up with development momentum. The World Bank provided Trade Adjustment Loans in 1987. When Indonesia was hit by the 1998 economic crisis, the World Bank provided USD 26.5m of International Development Association (IDA) aid and tied it to the privatisation and liberalisation of public services, including the cut of subsidies in social sectors. It is interesting to observe that whilst the IFC (a family member of the World Bank) has been making a fortune purchasing the cheap shares of the public services and privatised companies, poor Indonesians have paid a high price for the soft IDA loans.

37 A documentary video presented during the farewell party of the Country Director of the World Bank, Andrew Steer, in March 2007, described clearly how the World Bank has been integrated in the Indonesian Economic Team (the Coordinating Ministry of Economic Affairs, Ministry of Finance, Ministry of Trade and the Ministry of National Planning). The documentary video could trigger the question of the independence of the Indonesian economic team, and to certain extent, the question whether Indonesia is still sovereign in making its economic policies.

28

Table 1: The World Bank Adjustment Loans to Indonesia

Type Date of Approval Amount Approved

Trade Policy Adjustment 1987 US$ 300 million Policy Reform Support 1999 US$ 1.5 billion Social Safety Net Adjustment 1999 US$ 600 million Water Resources Sector Adjustment

1999 US$ 300 million

Source: BAPPENAS, 2001 After increasing critiques of the relevance of the World Bank in Indonesia, the Bank is now enthusiastically promoting its new Community Driven Development project. This consists of two project components: Kecamatan Development Project (KDP) for rural areas and Urban Empowerment Project for urban areas and is seen, by World Bank staff, as a bait for new loans for Indonesia to meet the main mission of alleviating poverty.

onesia as the main reference on the success of the project38. In fact, the project has made poor people responsible for poverty alleviation in terms that mean the poor themselves will repay the debts in the future. A 2004 BAPPENAS study39 raises the question of whether the loans being attracted are really for the benefit of the recipient country. The suggestion is made that, since more loans mean more overhead costs and project work for the donor agencies, the staff of these agencies are keen to encourage more loans to increase their job security rather than in the interests of the recipient country. Impact of IMF loans

The most controversial loan in the history of Indonesia, however, was the specific funds deposited by the IMF in the Indonesian Central Bank to secure its foreign exchange reserve. These funds were of no use to Indonesia, since they were deposited when the Central Bank had enough reserves already. Nevertheless, the country not only had to repay the funds with interest, but also had to observe the long list of conditions stipulated in the signed Letter of Intent and Memoranda of Economic Policy Monitoring. In this sense, the IMF deposits can be

-liberal lines preferred by the developed countries and multinational corporations whose interests are represented in the IMF.

38

www.worldbank.org. The Project was started with a local-level institutions study (LLI), which came out with rhetorical conclusions that re- as the study from BAPPENAS revealed is only to secure the jobs of the World Bank staff in Indonesia. (Scott

39 BAPPENAS, op.cit.,2004.

29

Table 2. The IMF Stabilisation Loans to Indonesia

Programme Type

Date of Approval

Expiry Amount Approved

Amount Drawn

(Disbursement ratio - %)

Stand-by March 1972 1973 US$ 14 million CFF August 1983 SDR 360

million

CFF May 7, 1987 SDR 463 million

Stand-by November 5, 1997

August 25, 1998 SDR 34 billion SDR 3.67 billion (44.0%)

EFF August 25, 1998 February 4, 2000

SDR 5.38 billion SDR 3.79 billion (70.6%)

EFF February 4, 2000

December 31, 2003

SDR 3.64 billion SDR 1.99 billion (54.6%)

Source: IMF website (www.imf.org).

the IMF in Indone40. Nevertheless, from 1997 to 2005, the IMF and Indonesia signed 20 Letters

of Intent (LoI) and Memoranda of Economic and Financial Policies (MEFP) on policy measureAssembly Council (MajelisPermusyawaratan Rakyat MPR)41 decided the general guidelines to solve the crisis without dependence on foreign creditors, the government was not able to resist

On 5 November 1997, Indonesia and the IMF signed a three-year stand-by arrangement (SBA) aimed at restoring market confidence. However, the fiscal austerity, tight monetary policy, floating exchange rate regime and bank closures prescribed by the IMF brought a banking crisis, which caused social unrests and uncertainty in the whole economy, deepening the crisis. Following the Stand-by Arrangement (SBA), the inter-bank interest rate sky-rocketed from 20 to 300 percent, causing a banking crisis. The closure of 16 banks, as recommended by the IMF in November 1997, caused capital outflow of USD 5 billion. This put further pressure on the Indonesian Rupiah provoking corporate bankruptcy and the loss of thousands of jobs. To solve these problems, the IMF and Indonesian authorities signed the first Extended Fund Facility (EFF) of SDR 5.3 billion, imposing stricter structural measures on fiscal and monetary policies as well as banking and corporate restructuring. In February 2000, when the first EFF expired, the government signed the second EFF involving a commitment of SDR 3.6 billion

40 41 MPR is like a Congress in US democratic system, consisting of the House of Representatives and the Senate.

30

from IMF. The second EFF was accompanied by a long list of conditionalities, including stricter measures on privatisation and legal reforms.

debts increased from US$ 54 billion to US$ 74 billion, and the international private debts decreased from US$ 82 billion to US$ 67 billion, some of which had been converted into foreign public debts. debt doubled over a period of just four years. Each semester IMF staff monitored the implementation of the structural reforms required by the conditions of the LoI and the MEFP. The surprising thing is that reports from the IMF did not influence the market at all; rather the reaction went contrary to the reports. When the IMF reported that the Indonesian macroeconomy was becoming more stable, the exchange rate of the Rupiah weakened; and when the IMF reported that there should be stricter measures for reform, the capital inflow from foreign investors tended to increase. What is more, the IMF funds that provoked these conditions were not even used. The net foreign reserves of Indonesia, which were about US$ 24 billion at the time when IMF and Indonesia signed the first EFF, were at a very healthy level, and there was no need for additional reserves to secure the balance of payments. Since Indonesia took the floating exchange rate regime, the Central Bank did not need to intervene in the exchange market on regular basis and therefore additional reserves were not necessary.42 Whilst Indonesia did not need to use the IMF money, it still ended up bearing the interest costs. In 2002 Indonesia paid US$ 2.3 billion to the IMF, consisting of US$ 1.8 billion in principal and US$ 500 million in interest payment43. On average the cost of this idle fund (fees and interest) was about 3.5 percent. IMF policies put unsustainable pressure on the government budget. For the 2002 fiscal year, debt servicing was estimated to total USD13 billion (IDR 130 trillion) including domestic and international payments. These payments amount to more than three times the total public sector wage bill including the military, and eight times the education budget. Table 3: Disbursement and Repayment of IMF Loans (SDR)

Year Disbursements Repayments Interests

2002 825,720,000 1,375,920,000 153,322,440 2001 309,650,000 1,375,920,000 369,498,855 2000 851,150,000 0 398,846,600 1999 1,011,000,000 0 267,539,445 1998 4,254,348,000 0 133,963,634 1997 2,201,472,000 0 0

Impact of IFIs on other donors

42 Ibid. 43 Rizal Ramli, 2002, pg. 13.

31

The programme loans during the crisis period - including the conditionalities detailed in the Letters of Intent - were used as references by both the multilateral donors and the bilateral donors.44 Donors united in putting pressurprescriptions and conditions by making the disbursement of both programme and project loans dependent on whether the government of Indonesia had implemented the conditions. The unity of the donors was made possible because of the presence of regular meetings of the CGI, where the government of Indonesia had to provide reports to the donors, in addition to the regular monitoring from the IMF. Programme aid reached its peak during the crisis period, when the multilateral donors came

by commitments from the World Bank and the ADB and the Government of Indonesia itself. This first line totalled USD 23 billion. It was followed by a second line totalling USD 20 billion from bilateral donors (see table below). Table 4: International Financial Rescue Package for Indonesia

Contributors Amount (US$ Billions)

First Line 23.0

IMF 10.0 World Bank 4.5 Asian Development Bank 3.5 Government of Indonesia 5.0 Second Line 20.0

Singapore 5.0 United States of America 3.0 Japan 5.0 Australia 2.0 China 3.0 Malaysia 1.0 Hong Kong 1.0 The main reason for involving other donors in the rescue package was to maintain and prop up market confidence by showing that the donors collectively were ready to help Indonesia financially with a large amount of money (US$ 43 billion).The second line was only to be issued after the first line was fully exhausted. In reality, the second line was never utilised.45 The rescue package itself did not rescue the economy of Indonesia, but it was used as an instrument to impose the policy prescriptions of the Loans from the World Bank, Asian Development Bank and other donors do not need to be tied to IMF conditionality. Nevertheless, when Indonesia decided to end the IMF programme in 2003, the donors decided that Indonesia was no longer eligible for debt rescheduling

44 In 1998, the Fund postponed loan disbursement three times: March, May and November. This automatically affected the disbursement of loans from the WB, ADB and some bilateral lenders. 45AnisChowdhury and ImanSugema (2005), loc.cit.

32

through the Paris Club.46 creditors, such as the World Bank, to smooth their business in taking advantage from the crisis in Indonesia. Conclusions

The data and facts of multilateral aid show that most of them have been wasteful, with no clear advantage for Indonesia. Furthermore, they have been used by creditors and donors to dictate policies that should be left to the national government. Programme loans from multilateral agencies were used to justify the presence of the agencies and their staff in Indonesia rather than for promoting capacities of the government staff. The good governance that is promoted now in Indonesia is a result of the democratisation processes rather than the results of the works of the consultants paid by the programme loans. Foreign debt amounts to less than 3% of the annual state budget, meaning its overall contribution to Indonesian economic development is limited. The major determinant is, in fact, domestic financial capacity. Nevertheless, the foreign debt becomes problematic and burdensome when the maturity of the debts is accumulated, putting pressure on the state budget in later years. Most importantly, however, the relatively small amount of foreign aid caused heavy foreign

donors/creditors through IGGI/CGI tied Indonesia to conditions imposed by the IMF and made it difficult for Indonesia to get rid of the debt trap. Furthermore, the fact that the staff members of the donor agencies are driven by self-seeking behaviour, while they are working together with Indonesian officials in the offices of the Central Government of Indonesia, explains why the policy measures from Indonesian government are not more pro-poor, pro-job and pro welfare of Indonesians. The programme loan from the IMF was the most striking example of wasteful and harmful loans in Indonesian history, and can become a case study of how an International Organisation undermine state sovereignty and ignore democratic processes in a country. The IMF policies created a debt trap from which there was little chance of escape. The IMF forced Indonesia to accept its misdiagnosis and failed prescriptions, including the conversion of private debt to the public debts, or the transfer of the debts of the private corporations to the debts of the poor Indonesians.47 The World Bank has been rather successful at maintaining its image as a donor institution in Indonesia. When the country was burdened with structural adjustment programmes in the 1980s and the implementation of the policy conditionalities (privatisation and liberalisation) after the 1997/98 crisis, the World Bank could deny responsibility for the failure of the policy reforms. However, whilst the IMF was the only institution to be publicly blamed, it was the

46 Summary, p. 9. 47Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further

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World Bank that orchestrated the implementation of the IMF policy conditionalities through its leadership of the CGI.

34

FOREIGN DEBT MAFIA?

Don K. Marut

President Susilo Bambang Yudoyono in 2009 assigned the Judicial Mafia Taskforce to pay attention to certain areas susceptible to judicial mafia such as police, court, attorney general, illegal logging, tax and land. Observers said that there should be also special attention to mafia of foreign debts. Is there really mafia of foreign debts?

und indications of project-seeking activities both by the donor agencies and the government agencies implementing the loans-funded projects. The study revealed that although there are some successful projects, the absorption level is still low and many of the projects did not achieve the maximum benefits as planned. There are two main causes why the loan-funded projects could not achieve the maximum benefits. First, the ownership of the implementing agency is low or they have no sense of responsibility for the success of the project. Second, there is mutual interest between the staff of the implementing government agencies and the staff working in the donor agencies. The staffs in the government agencies need foreign debts for projects in their ministries in order to get more budget allocated as matching funds from the annual state budget. The bigger the budget allocation means more income for the staff in the ministries. On the other hand the staffs in the creditor agencies need more loans for Indonesia. The more the loans the more the overhead costs for the creditor agencies would be, which means a job security for the staff in the creditor agencies. The additional or higher income for the government staff and the job security for the staffs in the creditor agencies to some extent become the major purpose of the contract for new loans, rather than for promoting economic growth and poverty reduction in Indonesia. Foreign debts also involve brokers that are suspected to involve in illegal actions, and companies that did not perform the contracts. The following cases are two of many cases that

German Warship Debts In 1992 Indonesia purchased 39 ex-East Germany warships from Germany. The warships were old and were designed for cold water and short-range operations. To purchase and repair (total overhaul) these old and almost wreck ships Indonesia signed several contracts of loans with Germany. The reparation and overhaul of most parts of the ships were done in Germany

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using German labor who were in the problem of unemployment, and also in Indonesia using other loans from Germany. In the contract process Indonesia and Germany used third parties. The broker from Germany finally was found to be involved in various illegal actions related to fraud of public funds and trade of illegal weapons. Various researches and public media investigations, both in Germany and in Indonesia, proved that these ships were not needed by the Indonesian Navy as a modern Navy. The case had taken victims of the ban of three national news weeklies in Indonesia in 1994 (Tempo, Editor and Detik), who exposed the unusual transactions. Up to now Indonesia still pays the debts to Germany, while only few of the ships are still used by Indonesian Navy, though with low operational capacity. Indonesian people have to give up the opportunities to enjoy better life since the government has to repay the debts that were made by the irresponsible actors from both countries. Norwegian Sea-wave Power Plant in Baron Beach In 1994 Indonesia and Norwegian governments signed a loan contract for developing sea wave power plant in Baron Beach, Yogyakarta. The implementer of the project was a Norwegian company, called Indonor. The government of Indonesia borrowed money from Norwegian government to pay the Norwegian company to implement the project. The implementing agency from Indonesian side was BPPT. BPPT had paid the total amount to Indonor, but in fact there was no project at all implemented in the field. Until now there is no single indication of any activity of the development of sea wave power plant in Baron Beach, although the project has counted as finished. Now the Indonesian government pays the debts with interests to Norway, for a project that never exists. There are many other cases that indicate the fraud and the involvement of mafia in foreign debts, both from Indonesian side and the creditor agencies side. As a result the poor people of Indonesia have to sacrifice their opportunities to get rid of poverty, misery and destitution, since the government budgets that are expected to support their efforts to be free from poverty and misery are used to repay the foreign debts that have no relations at all with the national development agenda. These cases showed that there are foreign debts that are made not to support development programs but to fulfill the business interests of the mafias, both from creditors side and the Indonesian government side. The actors from creditors side do not care whether the debts could violate the rights of the people in the debtor countries; they care only the job security of

it would mean that the governments protect the mafias.

36

FOREIGN AID AND POVERTY ERADICATION:

A Reality Check48

Don K. Marut

Introduction The Website of IMF in 1999 announced that:

o include an explicit focus on poverty reduction in the context of a growth oriented strategy. The IMF will support, along with the World Bank, strategies elaborated by the borrowing country in a Poverty Reduction Strategy Paper (PRSP).49 At the World Banbuilt into its lobby wall. What happen in reality to the countries supported by the structural adjustment programs of the IMF and the World Bank? Few global economic actors get richer, while the poor get poorer. The development practitioners and advocates sharing the concerns with the developing countries exposed the contradictory facts about the aid from the IMF and the World Bank. When the International Monetary Fund (IMF) and World Bank arrive in southern countries, corporate profits go up, but so do poverty and suffering. Decades of promises that just a little more "short-term" pain will bring long-term gain have exposed the IMF and World Bank as false prophets whose mission is to protect those who already control too much wealth and power.50 Many developing countries suffered ... sustained increases in prosperity, accompanied by dramatic increases in inequality and child poverty ... under the auspices of IMF and World Bank adjustment programmes.51 In country after country, structural adjustment programs (SAPs) have reversed the development successes of the 1960s and 1970s, with ... millions sliding into poverty every year. Even the World Bank has had to accept that SAPs have failed the poor, with a special burden falling on women and children. Yet together with the IMF it still demands that developing countries persist with SAPs.52

48 The Third World Poverty: Irony of the World: The Poor Are

, UniversitasKatolikParahiyangan, Bandung, 26 April 2008. 49http://www.imf.org/external/np/exr/facts/prgf.htm 50http://www.oneworld.net/campaigns/imf&wb/index.html 51http://www.oneworld.net/anydoc2.cgi?url=http://www.oxfam.org.uk 52http://www.oneworld.org/guides/sap/index.html

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The programs supported by IMF and the World Bank in fact did not have less positive effects on economic growth and even have more negative effects on poverty reduction. The countries supported by the structural adjustment programs of the IMF and World Bank have been sunk deeply in poverty and indebtedness53, and they end up with a condition of being trapped in heavy indebtedness that continue putting pressure on the poor for its repayment.54 IMF and World Bank, and the Regional Banks that are altogether called as International Financial Institutions (IFIs) can represent the whole landscape of global aid architecture. Why the aid does not help? Different Concepts, Different Strategies, Different Results

In 2000 the United Nations, at the start of the new millennium, convened the largest-ever cate poverty, promote human

leaders agreed on the same global platform for the joint effort to achieve the Millennium Development Goals (MDGs). There are eight goals that were set to be achieved in 2015 namely: (1) eradicate extreme poverty and hunger, (2) achieve universal primary-school enrollment, (3) promote gender equality and empower women, (4) reduce child mortality, (5) improve maternal health, (6) combat HIV/AIDS, malaria and other diseases, (7) ensure environmental sustainability, and (8) develop a global partnership for development. There have been global meetings and consensus made to ensure that the achievement of MDGs in 2015. Some of the important meetings and commitments need to be exposed here to look at the whole context of the global efforts of the foreign aid and MDGs achievement, particularly the poverty eradication. In March 18-22, the UN held a conference on financing for development in Monterrey, Mexico and agreed to increase the volumes of aid and other development resources to achieve the goals. This agreement is well known as Monterrey Consensus for financing for development, where the developed countries promised to increase overseas development assistance (ODA) up to 0.7% of their GNP. OECD countries and the partner countries also held meetings and forums to discuss about aid for the developing and poor countries. In February 2003 OECD held a High Level Forum in Rome on the harmonization of aid among the donors (countries and the international financial institutions), and in February 2004 a Roundtable meeting in Marrakech to discuss about the Managing for Development Results. The core principles of Rome High Level Forum and Marrakech Roundtable were adopted then in Paris Declaration on Aid Effectiveness in the High Level Forum on Aid Effectiveness in Paris on 28 February 5 March, 2005. The Paris Declaration (with its main commitments to ownership, alignment, harmonization, managing for results and mutual accountability) was a resolve committed by the ministers of developed and developing countries and the heads of the international financial institutions to take far-reaching and monitorable actions to reform the ways the aid is delivered and managed aid

53 The effect of IMF and World Bank programs on povertyOctober 2000. William Easterly was an economist at the World Bank and this paper was not published as the World Bank Working Paper. 54 This is exposed in details by Noreen Hertz in her book, The Debt Threat: How the Debt is destroying the Developing World and Threatening Us All. (New York: HarperCollin Publisher, 2004).

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while looking ahead to the UN five-year review of the Millennium Declaration and the Millennium Development Goals (MDGs) at the end of 2005.55 In July 2005 in Gleneagles, Scotland, during the G8 Summit, the leaders of the G8 (US, UK, France, Germany, Italy, Canada, Japan and Russia) agreed to increase the aid to Africa. During this meeting the civil society from around the world pushed the G8 leaders to adopt a

commitment. It has been general assumption that MDGs, particularly poverty eradication, can be achieved mainly through the support of the developed countries through foreign aid. Foreign aid is instrumental and even substantial in eradicating poverty in the developing or poor countries. The proponents and opponents of foreign aid (foreign loans) have different rationale. Jeffrey Sachs, the proponent of the foreign aid, argued that the foreign aid did not touch the real cause of the problem of poverty in the poor countries and that the aid is not enough for eradicating the poverty. The bottom line is both the concept of poverty eradication that did not solve the real cause of the problem and the volume of aid provided that was not enough to promote capacities of the poor to invest for better future.56 Sachs argued that the developed countries could do better with the aid if the strategy and the targets are appropriate. Sachs took the initiative of a global campaign to ask $160 billion a year for ten years, primarily as gifts from rich countries to poor countries to build the missing infrastructures that will allow economic growth to take off in poor rural areas, which in turn will end a-dollar-a-day poverty. The neo-darwinian Jeffrey Sachs called his approach apractice, general principles and specific contexts. He believes that the developed countries

clinician needs to understand both the general principles of physiology and disease control and the unique circumstances of the patient, including her symptoms, lab tests, medical history,

57 Will this flow of funds help the poor? The problem is that Sachs believes that poverty alleviation programs would be able to promote the capacities of the poor to be involved in the market, and he forgets the reality of aid itself. From the past experiences, the funds went back to the developed countries since some of the

the rural areas, have little knowledge about the causes of the poverty and hence did not know what to do except receiving their monthly payrolls and benefits. Some of the funds were also used for purchasing goods from the developed countries that to some extent could not be used for the development projects in the poor countries. On the other hand the funds went to the pockets of the rich in the poor countries. Paul Polak describes it very clearly that once the news about the flow of funds from the developed

55 Since 2006 OECD started to monitor the aid effectiveness and review the principles in the Paris Declaration. The review of the Paris Declaration will be held in the High Level Forum in Accra in September 2008. 56 Jeffrey D. Sachs, The End of Poverty: Economic Possibilities of Our Time. New York: Penguin Books, 2005. 57 Jeffrey D. Sachs, Common Wealth: Economics for a Crowded Planet (London: Penguin Books, 2008), p. 15.

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countries get out, the rich in the poor countries will gather like moths around a flame.58 For the first year or two the projects funded by these funds might produce excellent yields, but when the project money runs out the yields drop back to the condition before the aid came. This happened to projects supported by foreign aid both from bilateral and multilateral agencies. The foreign aid in many cases is not for the development purposes of the poor countries, but for the interests of the people in the aid agencies and for the interests of the self-seeking bureaucrats and politicians in the poor countries. A study by the Ministry of Planning of Indonesia (BAPPENAS) in 2004 revealed this fact. The study found that there were indications of project seeking activities both by the lenders and the government executing agencies in Indonesia for their own benefits.59 Despite partial successes of the programs and projects funded by foreign aid, the study found that the absorption rate of foreign aid was low and the benefits did not achieve the maximum as planned. There were many reasons for these, but there are two main reasons that should be pointed out explicitly. First is that the ownership level of the executing agency was low, which means that the implementing agency of the foreign-aid funded programs and projects did not feel responsible for the achievements and success of the programs and projects.60 The second is that there was mutual interest between the government staff of the executing agency and the staff of the donor agencies. The government staff from the executing agency (ministries) needed foreign aid for projects in their respective agencies in order to receive higher allocation of matching funds from the state budget. Higher budget allocation means higher income for the staff in the executing agency. On the other hand the donor staff members need more loans for the country. More loans means more overhead costs for the donor, which in turns means job security for the staff members of the donor agencies. The higher income of the government staff and job security for the staff members of the donor agencies to certain extent became more as the objectives of the foreign aid rather than for promoting economic growth and poverty alleviation in the country. As a result the country is burdened by the increasing debts and the people have to pay for the benefits they did not receive. The poverty was not solved, but is still maintained even increased because of the burdens to repay the foreign debts. William Easterly, while praising the commitment of the leaders of the developed countries and the efforts of the individuals and international agencies to fight against poverty, is skeptical whether the goals set in the luxurious buildings and in sophisticated labs with sophisticated

58 Paul Polak, Out of Poverty: What Works when Traditional Approaches Fail (San Francisco: Berrett-Koehler Publishers, 2008), p. 34. When the climate change was raised as an issue in Indonesia and the money is also following the issue, certain family group in Jakarta started establishing their company and reorienting the focus of their organizations to tap funds from the multilateral financial institutions and the developed coun -the government of Indonesia in the UN Conference on Climate Change in Bali in December 2007. 59Directorate of Monitoring and Evaluation of Development Funding, BAPPENAS,

60

in Practice, Paris, 27 28 September, 2007.

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economic modeling would be achieved. He questioned about the fact that the West has spent $ 2.3 trillion on foreign aid in the last five decades and still is not able to solve the problem of increasing the income of the poor up to $ 1 per day, to provide cheap medicines and free schools for poor children, to prevent the five million child death and so on in the poor countries.61 Easterly expressed that the problem with the Western aid is in the assumption that the Western can fix all things in the poor or developing world. He emphasized that the aid

ind Easterly does not agree that the aid agencies try to fix the governments and societies in the poor countries as what they have been doing. In details he expresses:

ms to one of the brutal armies in a civil war. End conditionality. Stop wasting our time with summits and frameworks. Give up on sweeping and naïve institutional reform schemes. The aim should be to make individuals better off, not to transform governments 62 Easterly once worked as economist in the World Bank, but he did not agree with certain policies and strategies of the World Bank regarding the poverty eradication strategies and some of its policies. Reflecting from the policies of the IFthe pathetic spectacle of the IMF, World Bank and other aid agencies coddling the warlords

63. Easterly suggests that the West should end the paternalism and hypocrisy of conditionality and the inherenconditions from Washington. This is the main issue in the aid arena: the northern aid agencies and the government do not learn from the past, do not comprehend well the main issue and experiment too much with their own thoughts and theories while neglecting, undermining and even eliminating the local capabilities in the developing countries. Ha-Joon Chang describes the policies and aid conditionalities of the donor countries and international financ

64. The aid agencies pretend to help the developing countries as generous person, but because of wrong assumptions, false theories and false policies, what happened is that instead of helping the countries out of crisis and poverty, they create more crises and bring the poor into deepened deprivation. The aid agencies and the donor countries assume that the miracle of the East Asian countries was triggered by the liberalization of the economy in the countries. This assumption is then taken as a generalization that if the poor countries open up their economies to global market through liberalization and privatization, the poor countries will be able to catch up with higher

61 William Easterly, So Little Good (New York: Penguin Books, 2006). 62Ibid., pg. 368. 63Ibid. 64 Ha-Joon Chang, Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World (London: Random House Business Books, 2007). Ha-Joon Chang argued the high economic growth of the East Asian countries were not triggered by the liberalization, but more because of protection of the strategic and infant industries and the high intervention of the government in industrial and trade policies, as well as controlled monetary and fiscal policies.

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economic growth as have been achieved by the East Asian countries. The aid provided to the developing countries are disbursed in the conditions that the countries have to install reform policies to liberalize the economy in order that the global market actors are able to involve in the domestic market and to privatize the state-owned companies that monopolize the market of strategic goods and services in the domestic markets. Instead of providing aid directly to the poor, as suggested by Easterly, the aid agencies are putting pressure on the governments in the developing countries to reform all policies as prescribed in the so-

-term pain because of the policy reforms can be tolerable for the sake of the long-terms gains. In fact the short-term pains accumulate and become long-term deprivation that cannot be turned back. As consequence, the little success of the foreign aid in eradicating poverty and promoting economic growth is covered by the deluge of crisis caused by the inappropriate policies, wrong targets of aid and above all by the liberalization and privatization as the main conditionalities of the aid agencies. The foreign aid then did not contribute to the eradication of poverty; even it becomes the main cause of the deepening of poverty and deprivation of the poor in the developing countries. How can it happen?

Aid Relations: Unequal Power Relations

In 1967 the World Bank (under President MacNamara) requested a commission chaired by the former Canadian Prime Minister, Lester B. Pearson to conduct a study on the development aid: the results achieved and the failures that could become inputs for policies in the World Bank. In 1968 the Commission finished the study and then published is as a book Partners in Development, which becomes a classic book in Development Studies. Indonesia was one of the countries in the study of the Commission. One of the main points found in the study about Indonesia in the Old Order period (under President Soekarno) was that Indonesia was suffering of what is called aid pathology. The foreign aid was used without clear objectives and goals or in other words foreign aid was dissipated and wasted for the aimless po Almost 40 years after the study, if the same Commission is asked to conduct the same study, what would be the conclusion about the present Indonesia? I would say that the conclusion

62.7 billion. Do the poverty conditions decline? What happen with the aid? Why does Indonesia become dependent to foreign aid? Aid relationships are also relationships of power. In such power relations, inequality and to a certain extent injustice can become principal characteristics. Who gives aid holds power, at least over what aid is used for. Additionally, various conditionalities linked to other policy areas that favour donors are imposed on aid recipients, who, in many cases, are then trapped in a situation where they have to accept further conditions, even where these are harmful for their citizens. Aid relations have become an issue of global power politics. It has been revealed by various sets of research and the testimonies of key actors over the years that injustice has been

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systematically and structurally created and maintained in development policies by certain world political and economic powers. Indonesia has historically been a clear live case.65 The mainstream development philosophy since the late 1960s was dominated by the technocratic and top-down approaches implemented by the repressive military power. Growth-oriented economic policies were introduced, mainly representing the interests of the donors. The technocrats in the Indonesian administration were trained to serve the interests of the donor countries and the international financial institutions. The military and the technocrats were the two sides of the same coin in the state-led economic development projects and programs. Despite pressure from global citizens and the United Nations against the violation of human rights in East Timor - and several regions in Indonesia during the military repressive regime - the donors continued to support the repressive regime. Despite the poverty, violence and denial of the rights of the people, the donors were well coordinated in supporting the military dictatorship of General Suharto.66 It is clear from the data that foreign aid has impacted upon the citizens of recipient countries. Some have received positive impacts or benefits from the aid, but the majority of citizens are affected in more negative ways. Citizens have to bear the burdens of debt repayments, whilst the benefits are mostly felt by the repressive and irresponsible regimes supported by technocrats in the country that act as the prolongation of the hands of the international donors. In many cases, people have had to accept that they must concede all their ancestrally inherited property rights on natural resources to transnational corporations and that they must pay for expensive public services. Even when democracy is established, the government cannot easily get rid of the power attached to past foreign aid. Injustice continues and the people continue to have to pay the high rates of tax necessary to repay the foreign debts that were not even beneficial to them but were taken by the repressive regime for the benefit of the regime and the donors. What is really happening behind the aid and the dependency of Indonesia to foreign aid?

Since 1966/1967 Indonesia has received foreign aid (loans and grants) from twenty countries and thirteen multilateral agencies. Most of these countries and multilateral agencies were engaged in one group called Inter-Governmental Group on Indonesia (IGGI) from 1967 to 1991, and then replaced by Consultative Group on Indonesia (CGI) from 1992 to 2007. IGGI

65 John Pilger, The New Rulers of the World. London & New York: Verso, 2002. 66 To coordinate and strengthen the cooperation between the donor countries and institutions in supporting the government of Indonesia, the donors established the IGGI (Inter-Governmental Group on Indonesia) chaired by the Netherlands. The orientation and directions of development and

approved the annual budget, the development plan had to be submitted to IGGI Meeting for approval. IGGI was replaced by CGI (Consultative Group on Indonesia) chaired by the World Bank in 1992, when Indonesia cut the official relations with the Netherlands. The function of CGI was to orchestrate the conditionalities to be implemented by the government of Indonesia. CGI was terminated in early 2007 by President SusiloBambangYudoyono.

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was chaired by the Netherlands, and CGI was chaired by the World Bank. Since 2005 CGI was officially chaired by Indonesia but in practice it was chaired and directed by the World Bank.67 Among the multilateral agencies, World Bank and Asian Development Bank (ADB) are the two major donors/creditors, and among the bilateral donors, Japan is the biggest accounting for about 70% of the total bilateral aid. IMF was not a member of IGGI or CGI, but it was always represented in the meetings of IGGI/CGI. It is interesting that although IMF is not included as donor; its presence in Indonesia has brought strong implications for the country and for the donors. The bilateral donors and the multilateral donors refer to IMF before making loans agreements with Indonesia.68

Foreign aid supports both project and program. Project aid is used to support physical and institutional infrastructure. Bilateral aid mainly supports the projects, while multilateral aid is more focused on program, with smaller portion on project. Though the program aid is relatively smaller than the project aid in numbers, the impacts of program aid to Indonesian economic and political system are significant.69

Bilateral Aid The biggest bilateral donor for Indonesia is Japan, followed by US, France, Germany, Austria and Netherlands. The position of Japan has been by-passed by Australia since 2010. The loans from these seven countries are mainly for project loans. There are four countries (Germany, Austria, Netherlands and Japan) that have quite big number of tied loans. The tied loans are spent for capital goods, military and other security equipment and consultancy. The table 1 below shows that between 80% and 92% of the funds of the tied loans are spent in the creditor countries. The tied loans raise its own problem of who is responsible for its quality, benefits and the sustainability. The tied loans from the World Bank and ADB have raised particular questions of for whom the loans are, for the interest of the World Bank and the ADB and their staff members, or for the interests of Indonesia. Foreign aid is not only to fulfill the needs of the recipient country (the debtor, i.e. Indonesia), but also for the interests of the creditors. This is indicated from the utilization of the foreign aid. BAPPENAS estimates that almost 75% of aid goes back to the donors in various forms such as the purchases of goods and services. Certain creditors require the purchases of goods from the countries, and the use of skilled labor or consultants from the donors. The following table shows that more than 80% of the aid from bilateral donors goes back to the countries, while 60% of the loans from ADB are absorbed by ADB itself. This indicates that the loans are more for the benefits of the donors rather than for the recipients. Regarding the multilateral donors, the BAPPENAS other study70 seems to be proved, that the loans are more

67 In 2004 KwikKianGie, the then Minister of National Planning, complained that CGI was too dominated by the donors. A paper prepared by KwikKianGie to be presented in the CGI Meeting in

Bank. Kwik complained that the contents of the paper was changed

68Bappenas study, 2004. 69 - INFID Working Paper No. 7, 2007, Jakarta. 70 BAPPENAS, op.cit., 2004.

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for project-seeking of the staff of the donor institutions for their own job security while victimizing the poor Indonesians. The more the loans approved for Indonesia by the multilateral donors, the more secured the job of the staff of the agencies, since more loans means more overhead costs. Table 1. Tied loans

Creditors Foreign Utilization (%) Local Utilization (%)

Germany Austria Denmark Netherlands South Korea JBIC ADB World Bank

97.31 92.81 90.55 87.42 82.88 80.45 61.93 35.04

2.69 7.19 9.45 12.58 17.12 19.55 38.07 64.96

Regarding the project loans, where the main contractors, consultants and the supplies are from the creditor countries, the question is who is responsible if the project fails or if the project brings harms to the local communities and environment? This is related to the unfairness in the foreign loans businesses in terms that recipient countries pay the contractors, the consultants and purchase the supplies from the creditor countries using the loans from the creditor countries. The real case is that whether the project is successful and useful or not for the people in the recipient countries, it is not the responsibility of the creditors. In the case of projects funded by loans from Japan, the new debts are always booked for repairing the faulty works of the Japanese contractors and consultants, or in overcoming the problems coming out as the effects of the works of the Japanese contractors and consultants. In many cases it is dilemmatic for the recipient country, i.e. Indonesia. If Indonesia rejects the new loans, the project cannot be continued or the project will not operate and Indonesia would pay the previous debts without any result for the country.

Impact of World Bank loans71 Though programme aid is less than project aid and not very visible, its influence on the Indonesian economic and political systems has been significant. Programme loans were meant to rescue the country from crisis, particularly related to balance of payments and the state budget. However, through programme aid, World Bank staff have worked as if they are part of the Indonesian bureaucracy, freely influencing the policies of the national government. Indonesian bureaucracy has become so open to the World Bank that none of its policies are immune to influence.72

71 to be published as a chapter in the Reality of Aid 2007 (Manila: Reality of Aid Network, 2008). 72 A documentary video presented during the farewell party of the Country Director of the World Bank, Andrew Steer, in March 2007, described clearly how the World Bank has been integrated in the Indonesian Economic Team (the Coordinating Ministry of Economic Affairs, Ministry of Finance, Ministry of Trade and the Ministry of National Planning). The documentary video could trigger the

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Aid from the World Bank group started in 1968, through IDA soft loans. The first IBRD loan to Indonesia was made in 1974 when the country had started to catch up with development momentum. The World Bank provided Trade Adjustment Loans in 1987. When Indonesia was hit by the 1998 economic crisis, the World Bank provided USD 26.5m of International Development Association (IDA) aid and tied it to the privatisation and liberalisation of public services, including the cut of subsidies in social sectors. It is interesting to observe that whilst the IFC (a family member of the World Bank) has been making a fortune purchasing the cheap shares of the public services and privatised companies, poor Indonesians have paid a high price for the soft IDA loans. Table 2: The World Bank Adjustment Loans to Indonesia

Type Date of Approval Amount Approved

Trade Policy Adjustment 1987 US$ 300 million Policy Reform Support 1999 US$ 1.5 billion Social Safety Net Adjustment 1999 US$ 600 million Water Resources Sector Adjustment

1999 US$ 300 million

Source: BAPPENAS, 2001 After increasing critiques of the relevance of the World Bank in Indonesia, the Bank is now enthusiastically promoting its new Community Driven Development project. This consists of two project components: Kecamatan Development Project (KDP) for rural areas and Urban Empowerment Project for urban areas and is seen, by World Bank staff, as a bait for new loans for Indonesia to meet the main mission of alleviating poverty.73

main reference on the success of the project74. In fact, the project has made poor people responsible for poverty alleviation in terms that mean the poor themselves will repay the debts in the future. A 2004 BAPPENAS study75 raises the question of whether the loans being attracted are really for the benefit of the recipient country. The suggestion is made that, since more loans mean more overhead costs and project work for the donor agencies, the staff of these agencies are

question of the independence of the Indonesian economic team, and to certain extent, the question whether Indonesia is still sovereign in making its economic policies. 73 These projects are now integrated in the Program NasionalPemberdayaanMasyarakat PNPM (National

74 Development Project in I www.worldbank.org. The Project was started with a local-level institutions study (LLI), which came out with rhetorical conclusions that re-justify the intervention of the World Ba as the study from BAPPENAS revealed is only to secure the jobs of the World Bank staff in Indonesia. (Scott

75 BAPPENAS, op.cit.,2004.

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keen to encourage more loans to increase their job security rather than in the interests of the recipient country. Impact of IMF loans The most controversial loan in the history of Indonesia, however, was the specific funds deposited by the IMF in the Indonesian Central Bank to secure its foreign exchange reserve. These funds were of no use to Indonesia, since they were deposited when the Central Bank had enough reserves already. Nevertheless, the country not only had to repay the funds with interest, but also had to observe the long list of conditions stipulated in the signed Letter of Intent and Memoranda of Economic Policy Monitoring. In this sense, the IMF deposits can be

-liberal lines preferred by the developed countries and multinational corporations whose interests are represented in the IMF. Table 3. The IMF Stabilisation Loans to Indonesia

Programme Type

Date of Approval

Expiry Amount Approved

Amount Drawn

(Disbursement ratio - %)

Stand-by March 1972 1973 US$ 14 million CFF August 1983 SDR 360

million

CFF May 7, 1987 SDR 463 million

Stand-by November 5, 1997

August 25, 1998 SDR 34 billion SDR 3.67 billion (44.0%)

EFF August 25, 1998 February 4, 2000

SDR 5.38 billion SDR 3.79 billion (70.6%)

EFF February 4, 2000

December 31, 2003

SDR 3.64 billion SDR 1.99 billion (54.6%)

Source: IMF website (www.imf.org). Riza

76. Nevertheless, from 1997 to 2005, the IMF and Indonesia signed 20 Letters of Intent (LoI) and Memoranda of Economic and Financial Policies (MEFP) on policy

Assembly Council (MajelisPermusyawaratan Rakyat MPR)77 decided the general guidelines to solve the crisis without dependence on foreign creditors, the government was not able to resist

76 77 MPR is like a Congress in US democratic system, consisting of the House of Representatives and the Senate.

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On 5 November 1997, Indonesia and the IMF signed a three-year stand-by arrangement (SBA) aimed at restoring market confidence. However, the fiscal austerity, tight monetary policy, floating exchange rate regime and bank closures prescribed by the IMF brought a banking crisis, which caused social unrests and uncertainty in the whole economy, deepening the crisis. Following the Stand-by Arrangement (SBA), the inter-bank interest rate sky-rocketed from 20 to 300 percent, causing a banking crisis. The closure of 16 banks, as recommended by the IMF in November 1997, caused capital outflow of USD 5 billion. This put further pressure on the Indonesian Rupiah provoking corporate bankruptcy and the loss of thousands of jobs. To solve these problems, the IMF and Indonesian authorities signed the first Extended Fund Facility (EFF) of SDR 5.3 billion, imposing stricter structural measures on fiscal and monetary policies as well as banking and corporate restructuring. In February 2000, when the first EFF expired, the government signed the second EFF involving a commitment of SDR 3.6 billion from IMF. The second EFF was accompanied by a long list of conditionalities, including stricter measures on privatisation and legal reforms.

domestic debts increased up to US$ 65 bdebts increased from US$ 54 billion to US$ 74 billion, and the international private debts decreased from US$ 82 billion to US$ 67 billion, some of which had been converted into foreign public debts. As a debt doubled over a period of just four years. Each semester IMF staff monitored the implementation of the structural reforms required by the conditions of the LoI and the MEFP. The surprising thing is that reports from the IMF did not influence the market at all; rather the reaction went contrary to the reports. When the IMF reported that the Indonesian macroeconomy was becoming more stable, the exchange rate of the Rupiah weakened; and when the IMF reported that there should be stricter measures for reform, the capital inflow from foreign investors tended to increase. What is more, the IMF funds that provoked these conditions were not even used. The net foreign reserves of Indonesia, which were about US$ 24 billion at the time when IMF and Indonesia signed the first EFF, were at a very healthy level, and there was no need for additional reserves to secure the balance of payments. Since Indonesia took the floating exchange rate regime, the Central Bank did not need to intervene in the exchange market on regular basis and therefore additional reserves were not necessary.78 Whilst Indonesia did not need to use the IMF money, it still ended up bearing the interest costs. In 2002 Indonesia paid US$ 2.3 billion to the IMF, consisting of US$ 1.8 billion in principal and US$ 500 million in interest payment79. On average the cost of this idle fund (fees and interest) was about 3.5 percent. IMF policies put unsustainable pressure on the government budget. For the 2002 fiscal year, debt servicing was estimated to total USD13 billion (IDR 130 trillion) including domestic and international payments. These payments

78 Ibid. 79 Rizal Ramli, 2002, pg. 13.

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amount to more than three times the total public sector wage bill including the military, and eight times the education budget. Table 4: Disbursement and Repayment of IMF Loans (SDR)

Year Disbursements Repayments Interests

2002 825,720,000 1,375,920,000 153,322,440 2001 309,650,000 1,375,920,000 369,498,855 2000 851,150,000 0 398,846,600 1999 1,011,000,000 0 267,539,445 1998 4,254,348,000 0 133,963,634 1997 2,201,472,000 0 0

Impact of IFIs on other donors The programme loans during the crisis period - including the conditionalities detailed in the Letters of Intent - were used as references by both the multilateral donors and the bilateral donors.80 prescriptions and conditions by making the disbursement of both programme and project loans dependent on whether the government of Indonesia had implemented the conditions. The unity of the donors was made possible because of the presence of regular meetings of the CGI, where the government of Indonesia had to provide reports to the donors, in addition to the regular monitoring from the IMF. Programme aid reached its peak during the crisis period, when the multilateral donors came

by commitments from the World Bank and the ADB and the Government of Indonesia itself. This first line totalled USD 23 billion. It was followed by a second line totalling USD 20 billion from bilateral donors (see table below).

80 In 1998, the Fund postponed loan disbursement three times: March, May and November. This automatically affected the disbursement of loans from the WB, ADB and some bilateral lenders.

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Table 5: International Financial Rescue Package for Indonesia

Contributors Amount (US$ Billions)

First Line 23.0

IMF 10.0 World Bank 4.5 Asian Development Bank 3.5 Government of Indonesia 5.0 Second Line 20.0

Singapore 5.0 United States of America 3.0 Japan 5.0 Australia 2.0 China 3.0 Malaysia 1.0 Hong Kong 1.0 The main reason for involving other donors in the rescue package was to maintain and prop up market confidence by showing that the donors collectively were ready to help Indonesia financially with a large amount of money (US$ 43 billion).The second line was only to be issued after the first line was fully exhausted. In reality, the second line was never utilised.81 The rescue package itself did not rescue the economy of Indonesia, but it was used as an

Loans from the World Bank, Asian Development Bank and other donors do not need to be tied to IMF conditionality. Nevertheless, when Indonesia decided to end the IMF programme in 2003, the donors decided that Indonesia was no longer eligible for debt rescheduling through the Paris Club.82 creditors, such as the World Bank, to smooth their business in taking advantage from the crisis in Indonesia. The data and facts of multilateral aid show that most of them have been wasteful, with no clear advantage for Indonesia. Furthermore, they have been used by creditors and donors to dictate policies that should be left to the national government. Programme loans from multilateral agencies were used to justify the presence of the agencies and their staff in Indonesia rather than for promoting capacities of the government staff. The good governance that is promoted now in Indonesia is a result of the democratisation processes rather than the results of the works of the consultants paid by the programme loans. Foreign debt amounts to less than 3% of the annual state budget, meaning its overall contribution to Indonesian economic development is limited. The major determinant is, in fact, domestic financial capacity. Nevertheless, the foreign debt becomes problematic and burdensome when the maturity of the debts is accumulated, putting pressure on the state budget in later years.

81AnisChowdhury and ImanSugema (2005), loc.cit. 82 Summary, p. 9.

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Most importantly, however, the relatively small amount of foreign aid caused heavy foreign

donors/creditors through IGGI/CGI tied Indonesia to conditions imposed by the IMF and made it difficult for Indonesia to get rid of the debt trap. Furthermore, the fact that the staff members of the donor agencies are driven by self-seeking behaviour, while they are working together with Indonesian officials in the offices of the Central Government of Indonesia, explains why the policy measures from Indonesian government are not more pro-poor, pro-job and pro welfare of Indonesians. The programme loan from the IMF was the most striking example of wasteful and harmful loans in Indonesian history, and can become a case study of how an International Organisation undermine state sovereignty and ignore democratic processes in a country. The IMF policies created a debt trap from which there was little chance of escape. The IMF forced Indonesia to accept its misdiagnosis and failed prescriptions, including the conversion of private debt to the public debts, or the transfer of the debts of the private corporations to the debts of the poor Indonesians.83 The World Bank has been rather successful at maintaining its image as a donor institution in Indonesia. When the country was burdened with structural adjustment programmes in the 1980s and the implementation of the policy conditionalities (privatisation and liberalisation) after the 1997/98 crisis, the World Bank could deny responsibility for the failure of the policy reforms. However, whilst the IMF was the only institution to be publicly blamed, it was the World Bank that orchestrated the implementation of the IMF policy conditionalities through its leadership of the CGI. Foreign Aid and Poverty

The 2007 data showed that more than one million children under five or 26% of the total children under five are living with malnutrition. 64% of the total population in Indonesia consumes insufficient calorie. Only 18% of the total populations of Indonesia have access to clean water and 48% of the populations have no access to clean water at all. The World Bank reports that 110 million of the populations (about 50%) have income below US $ 2 per day. The unemployment rate reaches up to 10.9 million people or 10.3% of the total labour force.

83Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further

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Table 6. The Real Problems faced by the people of Indonesia, 2007

No Problems % of the total population

Remarks

1 Malnutrition 26% From the total population; majority is from the Eastern parts of Indonesia.

2 Insufficiency in calorie intake

64%

From the total population of Indonesia.

3 Access to clean water in urban areas

52% Only 18% of the total population of Indonesia who have access to clean water.

4. Without appropriate sanitation facilities

44%

Source: National Planning Ministry, May 30th, 2007. During the last 10 years (1997 2007) the economic development and the poverty alleviation

worsened. One of the low performances of economic development in Indonesia is the decision of the government to receive loans of US$ 7.3 billion from IMF together with its strong and burdensome conditionalities. Since the signing of the Letter of Intent (LoI) and the Memorandum of Economic and Financial Policies (MEFP) with the IMF, Indonesia has hardly picked up back its economic growth. For 7 years (1997 2004) Indonesia signed 20 LoIs with all heavy conditionalities for Indonesia. The result is obvious: the increased poverty, the death toll caused by malnutrition and hunger, and conflicts for appropriating resources. The LoI and MEFP pushed the government of Indonesia to implement the policy

livelihood. The conditionalities include, among others: 1. The government is not allowed to control the price and distribution of rice. 2. The government has to cut subsidy to rice price up to zero. 3. The elimination of the prohibition and limitation on the import of rice. 4. The cut of subsidy to agricultural sector up to zero. 5. The privatization of the Logistics Bureau. 6. The elimination of the credit for farmers; the credit should become the business of

the commercial banks. These conditionalities attacked directly to the heart of the livelihood of the majority of the people of Indonesia, namely the farmers. Indonesia has been trapped in policy frameworks that result in the impoverishment of the people. The policies include the tight fiscal policies, tight monetary policies, the dependency to external debts, the re-structurization of financial sectors, structural adjustment programs, liberalization of investment and trade, and the privatization of the public services that are substantially fundamental for supporting the fulfillment of the rights of the citizens to food. The closure of 16 Banks, the conditionalities for increasing the prices of 9 basic consumption

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goods, the massive lay-off of labour in industries have systematically put pressure on the livelihood of the people in rural and urban areas. The privatization of health services such as the elimination of the cheap services in the Public Health Centers, the increase in the prices of medicines, the elimination of the budget for village midwives result in difficulties for women to and children to access to health services. The health of women and children degraded; the mortality rate at birth and children under five increases. This is worsened by the shortages of appropriate and nutritious food for women and children. IMF also pushed the policy on food. The government of Indonesia was pushed to increase the prices of rice, soy beans, sugar and flour and adjust them to the competitive global market prices, and open the domestic market to free import of all agricultural products. The control of prices and distribution of agricultural products had to be lifted, and the limitation of import had to be eliminated. The monopoly of import by BULOG (the national logistics bureau) has to be eliminated and the Bureau has to be privatized to become a private company that has to compete with other companies in importing, distributing and collecting agricultural products. While the needs for improving education and health sector are demanding, the budget allocated for these two sectors is still below the budget allocated for the debts repayment. The following table shows the comparison. Table 8. Budget Allocation for Debts Payment compared to the Budget allocated to

Health and Education Sectors, 2004 - 2007

Year Debts Health Sector Education Sector

2004 IDR 64,136 trillion (interest) IDR 46,836 trillion (principal installment) - Total: IDR 110,972 trillion

IDR 7,038 trillion IDR 25,987 trillion

2005 IDR 58,393 trillion (interest) IDR 35,561 trillion (principal installments) - Total: IDR 93,954 trillion

IDR 9,913 trillion IDR 30,785 trillion

2006 IDR 73,471 trillion (interest) IDR 60,382 trillion (principal installment) Total: IDR 113,853 trillion

IDR 10,849 trillion IDR 37,830 trillion

2007 IDR 85.086 trillion (interest) IDR 54.830 trillion (principal installment) Total: IDR 139,916 trillion

IDR 17.467 trillion IDR 44.058 trillion

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Conclusion

foreign debts have pushed the government of Indonesia to follow the rules and prescriptions of the creditors/donors whatever the risks for the livelihood of the people of Indonesia. The dependence on foreign debts has pushed the government to serve more the interests of the creditors rather than the interests of the citizens. The conditionalities imposed by the creditors, particularly by IMF, World Bank and Asian Development have pushed the government to implement policies that make the poor people poorer. The policies imposed by IMF, World Bank and ADB as detailed in the letter of intents between the government and the IMF, have been proved to make the crises deepened. In turn

implementation of the policies that favor only the global capital actors rather than the people of Indonesia. Although the facts, data and incidences have been publicly exposed, the government has not been moved from its orientation to the policy prescriptions of the multilateral donors. The needs for more budgets allocated for health and education have been obvious, but the government still prioritized paying foreign debts rather than promoting education and health. Although the incidences of poverty as indicated by malnutrition, starvation and death because of starvation have been publicly exposed, the priority of the government in allocating state budget is still on the implementation of the policies imposed by the creditors. Foreign debts have made the government as the instrument for the creditors to serve their interests, and not

erests; while at the same time the World Bank and ADB continuously publish research and studies that justify the needs of the government for new loans and more policy reforms. Foreign aid can contribute much to the poverty eradication if the targets of the projects and programs are right to the poor and without conditionalities that contravene with the political and economic choices and preferences of the people in the developing countries. On the other hand the government act more as facilitating agency that provide capacity development and empowerment for the poor communities and groups rather than directing them towards the aims that are not in line with what they perceive the best for them at present and in the future. Most of all transparency and the accountability in the aid agreements and aid utilization are the necessary requirements for more effective use of aid for poverty eradication.

==*** ==

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NORTH SOUTH CSOs COOPERATION:

Indonesian Context84

Don K. Marut Introduction The social and political changes in Indonesia in the last four decades have been also influenced by the cooperation between North CSOs (International NGOs in particular) with the Indonesian CSOs. The mechanisms of cooperation change over time depending on the political and issues focused on The emergence of CSOs in Indonesia has been integrated with the spirit and struggle against the colonizers (the Netherlands and Japan). The formation of students study club both in Indonesia and Netherlands debating about political and social issues in the colonial period became the impetus of the formation of political parties before and after the independence in

Nationalist, communist, socialist and the religious organizations. The ideological orientations of these organizations were then transformed into the ideological basis and orientations of the political parties after the independence. During the democratic period of 1945 1965, almost all the movement organizations were transformed into political parties, except two religious organizations namely NahdatulUlama and Muhamadyah representing the traditional and modernist Muslims. While these two organizations maintained its social missions, the members of the organizations also established various political parties. The two organizations also established non-governmental organizations working on development activities. The emergence of NGOs working on development and advocacy started during late 1960s when the military took over the power supported by western educated technocrats and donor countries and institutions. While the donor countries and institutions officially supported the repressive government, the Northern NGOs started cooperating with their newly emerging NGOs in Indonesia. International NGOs and Indonesian NGOs during Dictatorship period The main rationale of the emergence of the NGOs in Indonesia was to promote alternative development thoughts and practices. The military and technocratic regime since the beginning

priority and democracy would come when the people are economically better-off. The design

84For the Global Consultation of Reality of Aid, Nairobi, Kenya, 17 18 November, 2007.

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of development was the monopoly of the technocrats supported fully by the International Financial Institutions and the donor countries, while the implementation of the development programs were controlled by the military. To coordinate and strengthen the cooperation between the donor countries and institutions in supporting the government of Indonesia, the donors established the IGGI (Inter-Governmental Group on Indonesia) chaired by the Netherlands. The orientation and

ough IGGI. Every year, before the government approved the annual budget, the development plan had to be submitted to IGGI Meeting for approval. IGGI was replaced by CGI (Consultative Group on Indonesia) chaired by the World Bank in 1992, when Indonesia cut the official relations with the Netherlands. The function of CGI was to orchestrate the conditionalities to be implemented by the government of Indonesia. The development was mainly targeted to supporting the development of infrastructures in order that the transnational corporations were easily able to invest and exploit the natural resources in Indonesia. The donor countries also supported special programs that later on created social problems in the country such as forced transmigration and forced family planning. The most controversial supports of the donor countries and institutions included the occupation of East Timor, the support of repression in Aceh and in West Papua. The development was top-down and controlled repressively by the military. It was at this time certain young intellectuals established NGOs to promote alternative development thoughts

-local NGOs could not be separated from the support of the Northern NGOs, particularly from Netherlands, Germany, UK, Switzerland, Canada, US and Australia. Later on NGOs from Norway, Finland, French, Japan and Belgium also came in with several activities. There were three types of NGOs in Indonesia: (1) those working on charity-based programs; (2) those working on development and social changes; and (3) working on advocacy (democracy, development discourse debates and human rights). Faith-based NGOs and Foundations from the North mainly focused on supporting charity and social organizations such as disability, orphanage, leprosy, and other disadvantaged groups in Indonesia. There were NGOs working on community development (microfinance, rural development, drinking water projects and income generating activities), and involved in development debates with the government. These second category of NGOs succeeded in promoting bottom-up planning by endorsing the establishment of district and provincial planning agencies to accommodate bottom-up development planning. The inclusion of microfinance in the government policies for farmers and fisherfolk originated from the demands from the NGOs. There was an institutionalization of development thoughts from the NGOs in the government agencies. The third category NGOs worked mainly on human rights advocacy, democracy and advocacy vis-à-vis the international financial institutions and the donor grouping. There were legal aid foundations and institutes conducting researches and publications on the critiques of the

ent paradigm and policies. This categorization is only simplification, since there was no organization that purely focused only on one of the categories. The northern CSOs also supported one or two groups or all groups at the same time. For security purposes northern CSOs did not openly expose their

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support to the advocacy NGOs, particularly those supporting legal aid foundations in Indonesia. Each group of NGOs also contributed to the development in the country in its capacities. The charity organizations saved the orphanage and the ex-communist families (survivors), the developmental NGOs supported rural and urban development (almost all rural drinking water were constructed by NGOs), and the advocacy NGOs helped create young generations with open and critical understanding of human rights and democracy. The supports of the Northern CSOs were substantially significant and instrumentally strategic at the time where everything was made uniform by the regime. First, the Northern CSOs supported funding of the NGOs in Indonesia. Without the funding from the Northern NGOs, it was impossible for the NGOs in Indonesia to survive. Second, the northern NGOs were the only source of information and knowledge for Indonesian NGOs. During the military regime, there was strong control in the flow of information, including information and knowledge about development. All correspondences were controlled and checked by the military, even post offices were controlled. The visits of the Northern CSOs were also used to bring in new books and materials to be distributed among the NGOs in Indonesia. Trainings, conferences, workshops held outside the country and supported by Northern CSO provided substantial supports for the capacity building of the Indonesian CSOs. Third, the northern CSOs provided and supported capacity building for the Indonesian NGOs so that the NGOs are able to deal directly in the debates on development with the government officials at all levels, and have technical capacities that promote alternative technical solutions in development activities. The Northern NGOs also introduce directly the participatory approaches in development and practice the participatory development. There was strong alignment between the issues faced by the communities as expressed by the Indonesian NGOs and the policies of the Northern CSOs. Some examples can be mentioned here. Novib, Oxfam GB and Oxfam Australia (at the time Community Aid Abroad CAA) developed three years program policy with long consultations and based on joint planning with their partners in Indonesia. Other Northern NGOs took the same methods later on in the period, such as HIVOS from Netherlands, CCODP from Canada and IWGIA from Norway (IWGIA started facilitating the establishment of the National Coalition of Indigenous Peoples that have been locally strengthened by partners of NOVIB, HIVOS, Oxfam GB, Oxfam Australia and CCODP, and to some extent by JANNI in Central Maluku).

NGOs. There were regular meetings among the Northern CSOs to share information, knowledge and partnerships mechanisms. The strong harmonization was among the Netherland NGOs working in Indonesia. The sustainable harmonization efforts were among Oxfam GB, NOVIB and CAA (which then become Oxfam family). There were annual meetings with Indonesian partners. The German Foundations (Konrad Adenauer Stiftung, Friedrich Neumann Stiftung, Friedrich Ebert Stiftung) separately or collectively supported the research centres, training centres and think tanks in Indonesia that contributed to the development of NGOs as development think tanks. There are some examples of harmonization and alignment practiced by the Northern CSOs working on Indonesia issues such as the independent CSOs forum to be parallel forum vis-à-vis the IGGI/CGI. There were also coalitions of Northern CSOs and Indonesian CSOs

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focusing on human rights issues in Indonesia, such as regarding East Timor issue where the global CSOs established ETAN (East Timor Action Network), which was instrumental in the advocacy of East Timor at global level. Another example of the good practices is the support of CIDA to Indonesian NGOs in early 1990s to facilitate the coordination among local NGOs in Indonesia in order to be able to monitor the development projects of the government from national to local levels and to facilitate advocacy activities of the NGOs at provincial level and national level. The establishment of forums of NGOs at provincial levels was the result of the support and the advocacy actions by the NGOs became more coordinated and stronger. The support and processes continues until now and it contributes to the strengthening of CSOs and good governance at CSOs level. The roles of international organizations that were characterized as charity organizations, such as World Vision International (WVI), Plan International, Terre des Hommes, Save the Children, etc. were very instrumental in supporting community-based development programs targeted directly to their focused beneficiaries. These organizations were also involved in capacity building for local NGOs and local governments, particularly in nutrition, child health, sanitation, child rights and life skills for families. North-South CSO cooperation in Post-Suharto Era

After the economic crises in Indonesia and the political changes, the NGOs become freer. International NGOs were also free operating in the country. The Northern NGOs that were not openly supporting advocacy in the past now openly support advocacy activities and openly

statements in public media. The faith-based NGOs that were only focusing on charity and development activities are now supporting advocacy for policy changes and democratization at local and national level. Almost all Northern NGOs working in Indonesia are involved in democratization programs, trainings for legal drafting, publication of advocacy case studies, supporting projects that directly challenge the military domination, and supporting trainings for political parties regarding poverty issues. Northern NGOs were also involved in the multi-stakeholder process for Poverty Reduction Strategy Paper (PRSP), based on the sectors they are focusing on. There are NGOs focusing on agriculture and farmers; on child rights, gender mainstreaming, right-based approach, indigenous peoples, etc. The political changes in Indonesia came along with several conflicts in several regions in Indonesia, t - -cooperation between Northern NGOs (which have experiences in other parts of the world in peace building) and the Indonesian NGOs contribute significant efforts in peace building processes. It was during this political changes and conflicts in Indonesia, many Northern NGOs started opening offices or establishing consultancy organizations in Indonesia. When the situation is stable, the organizations still maintain their offices, which raise another issue of sustainability of these Northern NGOs.

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There have been significant changes in the approaches of the Northern NGOs. In the past, in-depth assessment, consultation and coordination with Indonesian NGOS were strong. There was also strong solidarity between Indonesian NGOs and Northern NGOs. At present, the Northern NGOs become more pragmatic. Since these NGOs have established offices with several branches in the regions, the priority is how to get funding and how to disburse the funds, rather than the substance of the support to the communities. Many Northern NGOs become implementing agencies, and compete with local NGOs in bidding funds from donors. The interesting phenomenon is that some of the Northern NGOs that in the past provided information about the International Financial Institutions (IFIs) and supported Indonesian NGOs to challenge the policies of these Institutions now become close to and even cooperate with these Institutions particularly with the World Bank. Together with the presence of World Bank sponsored agencies (DSF, MDTF, SoFEI, SPADA85), which appear to be like NGOs, some Northern NGOs preferring to refer to these agencies as the source of development thoughts rather than to their own alternative development thoughts from their local partners. This will bring backlash to the cooperation between Northern NGOs and Indonesian NGOs, because when the Indonesian NGOs keep distance from the World Bank agencies, the Northern NGOs even cooperate with these agencies.86 There are also NGOs that are related to certain political parties in their country of origin that start playing the roles as lobby organizations and at the same time capacity building organizations for bureaucracy, parliaments and political parties in Indonesia. The National Democratic Institute (NDI) from the USA supports trainings for bureaucrats at all levels and the parliamentarians at all level of the government (district, province and national levels) using the funds from their own sources and from the WorlRepublican Institute (IRI) even opens an office in the national Parliament Building to open easy access to the parliament, which might use collusion relationships with the Secretariat of the Parliament. There are still, of course, Northern NGOs that are consistent with the mission of poverty

practices introduced by AUSAID-funded project through an organization called ACCESS based in Bali. This organization studied all the best practices of the NGOs in the past, and formulated them in several packages of programs to support community-based poverty alleviation projects involving all members in the communities, local government, local parliaments, local NGOs, national NGOs and universities. The communities supported by this program, which are the poorest in the poorest regions, have shown significant progresses: economic progress, community participation, gender awareness and equality, academic

85 DSF (Decentralization Support Facilities), MDTF (Multi Donors Trust Fund), SoFEI (Decentralization Support Facility for Eastern Indonesia) and SPADA (Support Program for Disadvantaged Areas) are supported by DFID, USAID, Japan Government, Netherland Government, Sweden government, Canadian Government, Australian Government (except MDTF) and German government. 86 The Indonesian NGOs keep distance from the World Bank sponsored Agencies since these agencies use grants from the donor countries to prepare new loans from the World Bank to Indonesia. The grants are used to prepare new projects to be supported by new loans from the World Bank.

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researches that can become references for policy making at district levels, and democratic governance. Donors Club: Harmonization or Orchestration? There is a tendency now that the donors are competing with each other to take the lead in the harmonization. The World Bank in Indonesia has established several agencies that act as

-Donors Trust Fund (MDTF), SOfEI (Decentralization Support Facility for Eastern Indonesia) and SPADA (Support for Poor and Disadvantaged Areas). Each agency has its own scope of works and area of coverage. Some donors joined in these agencies, but some are not, and it seems there are some planning to withdraw from supporting these agencies. There have been increasing questions about the presence of these agencies. The first concern is about the efficiency of the flow of aid. The donors pool the funds in the Agencies and the Agencies distribute the funds to other agencies whether international or local NGOs, national ministries and local governments, or the Agencies implement their own projects. The second concern is about the domination of this agencies vis-à-vis the NGOs and the local governments. Since these agencies act as the new donors in the country with their own program priorities, the NGOs who need funds have to reorient their activities to be in line with the priorities of these Agencies, which to certain extent are wasteful. For example, the training of community facilitators projects which become redundant. The third concern about these World Bank managed Agencies is related to the ownership as indicated by the leadership in the agencies and projects. The Agencies are designed, managed and controlled by the World Bank. They are independent from the control of the government and of the democratic institutions. There are Indonesian academes and politicians sitting in the Board of the Agencies, but only for ceremonial functions. These agencies are small in number but determine the agenda for development projects by NGOs. The agencies seem to become the conductor for the orchestra of the NGOs and local

communities. Alignment The Poverty Reduction Strategy Paper (PRSP) made in multi-stakeholders processes in 2003 has been taken as the National Poverty Reduction Strategy Document (NPRSD, or better known as SNPK StrategiNasionalPenanggunaganKemiskinan). The SNPK has been integrated in the Medium Term Development Plan 2004 2009 that has been made as Law No. 25/2004. The SNPK was made in participatory ways and included rights-based approach and with clear gender perspectives. For the implementation of the SNPK, the government has developed a National operational plans for poverty reduction through promoting capacities of the local communities and providing funds for development. PNPM to certain extent is the extension of the World Bank supported project called Kecamatan Development Program (KDP Sub-District Development Program), or also known as the community-driven development concept of the World Bank. This raises the question of ownership of the poverty alleviation program. While the national planning procedures and systems have been

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bottom-up, the PNPM (or KDP) is in fact a top-down project in terms that the funds have been available and the local communities are encouraged to discuss participatively about how and what they want to use the funds for. Participation becomes vague since people have to involve because the funds have been there for them to use.

that have been spread around the country such as SOFEI, DSF, and MDTF etc. also conduct the same training project for community facilitators. PNPM itself was formulated based on multi-stakeholders process where NGOs participate. The poverty reduction program brings certain challenges for the NGOs, both from the government and the donors. First, the flow of funds to the communities can break up the social capital that has been strengthened by the community organizing processes by the community groups and the NGOs. Second, while on one hand there is the regular bottom-up process of the national development planning, on the other hand the planning for poverty alleviation program is conducted in separate procedures. Third, the PNPM and the projects supported directly by grants from the World Bank- managed agencies ignored the processes that have been conducted by NGOs for three decades, namely the training of local facilitators for community development. Several big NGOs have established training centres with national and local coverage and have trained thousands of community animators, community facilitators and community development managers. At present the government and the World Bank agencies conduct the same trainings. This can become waste of resources for both the government and the donors. One of the major concerns about the alignment is related to the policies of the regional governments. In a decentralized Indonesia, although the regional policies are harmonized at national level, there are still certain characteristics of the regional policies as responses to the regional contexts. While donors are mainly aligned with the national policies, projects supported could be irrelevant to the regional development plans. While the regional development plans are intended to solve problems faced by the regional governments and the people, the national development plans where the donors are aligned are dealing with the macro-policies that might not relevant for the local context. This become obvious when the donors put conditionalities to the central government, where the policies also implicate to the local governments and local communities. The increase of oil price as one of the conditionalities imposed by IMF and the World Bank, has been proved to impact most to the local communities and regional governments that are located faraway from the central government and the offices of the donors. The Challenges and Opportunities The main challenge of the Northern NGOs working in Indonesia is mainly related to funding. Funding source becomes source of power. The official donors prefer channelling their funds to the World Bank managed agencies rather than to UN agencies and International NGOs. The International NGOs have to bid for the funds to the World Bank agencies, or have to cooperate with the World Bank agencies, although the agencies are challenged by the Indonesian NGOs. The risk of working with the World Bank agencies is the uniformization of the development agenda: the communities are prepared to become friendly with market and market mechanisms (market is referred to the presence of transnational corporations, not the

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market institutions). The society and the local governments are brought to the same perception that market is the best institution for the economy and for the people. At the time when the government of Indonesia is under the pressure of the donors with strong conditionalities on market liberalizations and legal reforms that favour the transnational corporations, and when the official funding and the development agenda is dominated by the World Bank agencies, the northern NGOs and Indonesian NGOs can in fact strengthen the cooperation again the same way when they jointly faced the dictatorship regime in the past. It seems this will not happen since the International NGOs also join the donors club established and coordinated by the World Bank agencies, although to certain extent the World Bank agencies also practice collusion and nepotism which have been long the enemies of the civil society.87

87 Corruption in Indonesia is integrated part of what is called KKN (Korupsi, Kolusi and Nepotisme Corruption, Collusion and Nepotism).The government officials in Jakarta complained that the World Bank campaigns for good governance while the institution is practicing collusion and nepotism.