improving aid effectiveness in indonesia

8/3/2019 Improving Aid Effectiveness in Indonesia

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Improving Aid EffectivenessIn

I Gede Edy Purwaka MDM 2011


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Contents

LIST OF TABLES ............................................................................................................................................. 3

LIST OF FIGURES ........................................................................................................................................... 3

LIST OF ABREVIATION .................................................................................................................................. 3

History of Development Assistance in Indonesia ........................................................................................ 4

a. Newly Independence country (1945 1966) ................................................................................... 4

b. New Order (1966 1998) ................................................................................................................ 5

c. Reformation (1998 2010) .............................................................................................................. 5

Current development assistance in Indonesia ............................................................................................. 5

a. Government Priorities (2010 2014) ............................................................................................ 5

b. National Medium Term Development Plan ..................................................................................... 6

c. The donor agencies providing assistance ........................................................................................ 7

Impact of Aid on Development Assistance .................................................................................................. 9

a. Economic Condition ......................................................................................................................... 9

b. Social ..............................................................................................................................................10

Challenges ..................................................................................................................................................10

a. Policy and political risk ...................................................................................................................10

b. Economic and social sector ............................................................................................................10

c. Health and Education Sector .........................................................................................................11

Overcome Challenges, make aid effective .................................................................................................13

BIBLIOGRAPHY ...........................................................................................................................................15


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LIST OF TABLES

Table 1 Macro Indicators Indonesia during SBY Administration ................................................................. 6

Table 2 Net official development assistance received (current US$) .......................................................... 6

Table 3 Donor by Sector ............................................................................................................................... 7

LIST OF FIGURES

Figure 1 Net ODA received (% of GNI) ......................................................................................................... 9

Figure 2 Public Spending on education ......................................................................................................10

Figure 3 Inflation in Indonesia 1970 2000...............................................................................................11

Figure 4 Morality rate, neo natal 1990 - 2010 ...........................................................................................12

Figure 5 Health expenditure, public ..........................................................................................................12

LIST OF ABREVIATION

APBN : State Budget of Revenue and ExpenditureBAPPEDA : Local government development planning departmentCGI : Consultative Group on IndonesiaCSIS : Centre for Strategic and International StudiesCSO : Civil Society OrganizationFDI ; Foreign Direct InvestmentGNI : Gross National IncomeHDI : Human Development IndexIDA : International Development Association

IFI : International Finance InstitutionKPK : Corruption Eradication CommitteeMP3EI : Master plan for the Acceleration and Expansion of Economic Development

of IndonesiaODA : Official Development AssistancePMU : Project Management UnitRPJMN : Medium Term National Development PlanRPJPN : Long Term National Development PlanUN : United NationUS : United State


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History of Development Assistance in Indonesia

To discuss about aid assistance in Indonesia, in my point of view, it cannot separate from

political aspect, especially in relation to political policy that had been made by those who

were in power. Research had proved that political dynamic in Indonesia had influencedforeign aid policies. For example, one of Indonesian president was seriously reject foreign

aid due to hidden agenda behind it, on the other hand, there were some presidents who

in favors foreign aid without consider hidden agenda on it. Although foreign aid itself is

neutral with respect to development, in fact political issue had influences foreign aid policy

in Indonesia.

This paper will focus the discussion on aid assistance derived multilateral agencies like

World Bank, ADB and IMF, also bilateral cooperation with Japan, which is known for its

important role providing various technical assistances. Japan has important role in the

development process in Indonesia. The discussion will identify history of ODA flows toIndonesia from political point of view. The major political milestones in Indonesia

categorized into three important phase, the period after independence, New Order Era

and Reformation Era.

a. Newly Independence country (1945 1966)

Indonesias got its independence in August, 17th 1945. The first Indonesia president was

Soekarno. As newly independent country, Political, Social and Economic was not stable.

Foreign aid flow to Indonesia with the motive of humanitarian assistance and develop

infrastructure.

In 1950, US government give aid amounted US$100 million at that time US pushed

Indonesia government to declare Bao Dai administration in Vietnam. Since Indonesia did

not fulfill that requirement, the aid was postponed. In 1952 after US government agree to

give aid to Indonesia, they insist UN to make embargo synthetic raw material to China,

Indonesia as rubber producer follow that policy. (Ransom, 2006)

At that time President Soekarno was aware about hidden agenda of politic behind the

financial assistance to influence his political decision. He criticizes foreign aid from

developing country by said, go to hell with your aid. However economic situation in

Soekarno administration was not far from ideal Indonesia's inflation rate touched a fourdigit number and in 1959 money supply has rise tremendously, to reduce the spread of

money and recover financial and economic condition government diminish value of

money by 10 percent from its intrinsic value. 500 rupiah become only 50 rupiah.

From this example we conclude, foreign aid to Indonesia post World War II has twin

objectives, first was promote economic growth and poverty reduction in developing


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countries, second objective was to promote the short term political and strategic interest

of donors.

b. New Order (1966 1998)

In Soeharto administration the amount of ODA came to Indonesia increased amazingly,

especially from US. In 1966-1976 the total amount of commitment from U.S reached USD1,608 million, compare with ADB/IBRD only amounted USD 1,464 million and Japan USD1,325 million. No wonder many parties suspect there was a tradeoff behind this hugecommitment (Annex 2). Japanese assistance has contributed a great deal to thedevelopment of Indonesia through human capacity development, improvement ofeconomic and social infrastructures. (The History of ODA)

In 1988 for example, bilateral amounted USD 1,308 million and multilateral amountedUSD 2,805 million or total USD 4,113 million, accounted for 4,6 % of GDP (Annex 1)The remarkable milestone at that time was, Indonesias ability in self sufficient riceproduction from previously being an importer.

Many Indonesia citizens admitted during Soehartos administration economic and securitystability was guaranteed, however economic growth which was built on basis of debtmade its stability was risky. It had proven when financial crisis hit Indonesia in 1997, itsocial and economy and political which had sent out Soeharto from presidency after 32years in power.

c. Reformation (1998 2010)

The periods of after 1998 show strong and peaceful transition from authoritarian regime todemocracy. During 1998 2011, Indonesia had been led by 4 presidents. BJ Habibie1998-1999, He prioritized reformation as work objective. Abdurrahman Wahid (Gus Dur)1999-2001, He focus on national unity, however due to his radical movement, his political

enemies had sent him out from presidency in 2001. Megawati Soekarno Putri, the firstwomen president who prioritized mutual development and Soesilo Bambang Yudhonowho promoted unity of Indonesia.

From the history of development assistance above, we can conclude that the threelargest multilateral finance institutions gave finance assistance to Indonesia are IMF,World Bank, and ADB. Others bilateral sources like Australia, Germany, Japan, and theUnited States also help Indonesia government to pursue macroeconomic stability,deepening structural reforms, a sound antipoverty strategy, improving governance, andsmoothly implementing the decentralization agenda.

Current development assistance in Indonesia

a. Government Priorities (2010 2014)

President Soesilo Bambang Yudhoyono (SBY) has been in power since 2004. During hisadministration Indonesia shows progress in democratization and decentralization.Economic indicator also shows progress as compare to previous period. Poverty head


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count ratio for example, decreased from 16 percent in 2005 down to 13, 3 percent in2010, along with the increase of GDP 4,9 percent in 2000 to 6,1 percent in 2010. (Seetable 1)

Table 1 Macro Indicators Indonesia during SBY Administration

Data Profile 2000 2005 2008 2009 2010

Poverty headcount ratio at national poverty line

(% of population)

16 15.4 14.2 13.3

GNI, Atlas method (current US$) (billions) 119.46 276.76 457.05 512.67 599.15

GNI per capita, Atlas method (current US$) 560 1220 1950 2160 2500

GDP (current US$) (billions) 165.02 285.87 510.23 539.35 706.56

GDP growth (annual %) 4.9 5.7 6 4.6 6.1

Source: ddpext.worldbank.org

Net Official Development Assistance (ODA) from World Bank show decreasing trend from

USD 2,5 Billion in 2005 to USD 0,9 Billion in 2007, but again the amount of ODA had

increased during global financial crisis in 2007-2008 ( see table 2)

Table 2 Net official development assistance received (current US$)

Year 2005 2006 2007 2008 2009

Indonesia 2,508,630,000.00 1,311,140,000.00 895,680,000.00 1,225,210,000.00 1,047,640,000.00

Source: worldbank.org

SBYs Cabinet, in 2009-2014 prioritized 14 sectors: Bureaucratic Reform andGovernance, education, health, Poverty Reduction, Food Security, infrastructure,Investment Climate and Business Climate, Energy, Environment and DisasterManagement, Culture , Creativity and Technological Innovation, Disadvantaged Areas,Outermost, Post- conflict.

b. National Medium Term Development Plan

Government of Indonesia will prioritize its economic development base of The Master

plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI).

Implementation of MP3EI is expected to fully support and complement existing

development planning documents produced by the government, including Long Term

National Development Plan (RPJPN) and Medium Term National Development Plan

(RPJMN) which focused on

Higher economic growth

Decrease unemployment by creating jobs better Poverty decline


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Increasing per capita income Increasing economic stability maintained Stronger domestic financing and increased Increasing food security Increased energy security

Competitiveness of national economy strengthened and improved Development efforts that are environmentally friendly with green economy

approach stronger

For some reasons, Civil Society Organization (CSO) critics the budget allocation ofGovernment revenue and expenditure, Regional economic and social disparities persist,poverty rates remain high the program and budget allocation did not fully address povertyproblem. Allocation of budget only benefit for sector owned by rich people.

c. The donor agencies providing assistance

International Financial Institutions like ADB and World Bank have very strong knowledgesharing culture, its technical assistance had contribute strong institution building, theborrower country prefer access loan from this institution because they offer value addedin term of knowledge. Since the accuracy of data and information in the bank is verygood, the team of economic and development should declare salient plan when they aregoing to deal with the bank, the coordination among units and department are importantto make use of fund maximal. A well trained economist and civil servants are crucial andGovernment needs to retain qualified staffs.

Table 3 Donor by Sector

Sector WorldBank ADB IMF Japan Others

Democratic andAccountableGovernment

x x x x

Human Right x x

Social and Justice x

Economic Fairness x x x

Education x x x

SustainableDevelopment

x x x

Urban RuralDevelopment

x x x x

Health x x

Environment x x

Women x x

Agriculture x

Finance x x x


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World Bank

For more than three decades World Bank has been working in Indonesia. It providesgrant and loan for various sectors. In year 2001 for example, WB assistance went to (a)Second Kecamatan Development Project (KDP 2) which support bottom-up participatory

planning and grassroots democratization in more than 15,000 poor villages acrossIndonesia,(b) Second Provincial Health Project (PHP 2) aims to bring about effectivehealth sector decentralization in the provinces of North Sumatera, West Java, andBanten, (c) Western Java Environmental Management Projecthelp the region to preparean environmental management strategy for the provinces and each participating localgovernments (d) Library Development Projectaims to develop innovative approaches toincrease the use of reading materials in community and primary school libraries. US$4.2million had been allocated from IDA fund (e) Institutional Capacity Strengthening toSupport Indonesia Women Migrant Workers Project. The project aims to assist theMinistry of Women's Empowerment in improving the regulatory environment for overseaswomen workers. (http://web.worldbank.org)

ADB (Asian Development Bank) since 1966 Indonesia become founding member ofADB, during the period of 1995- 2011 ADB had been assist 920 projects in varioussectors in Indonesia. In December 2010, Indonesia has received 298 sovereign loansamounting to $25.6 billion including co financing and 512 technical assistance (TA)projects amounting to $341.8 million, and 23 grants amounting to $415.0 million. Thesectors with the largest shares in cumulative lending are: (a) Public Sector Management(17.2%), (b) Agriculture (15.3%), (c) Energy (14.5%), and (d) Finance (14.4%)(http://beta.adb.org/countries/indonesia/main)

IMF (International Monetary Fund) The role of IMF in Indonesia was obvious seen when

Asian financial crisis hit Indonesia in 1997 at that time Government of Indonesia approachIMF for financial assistance, On 31 October the IMF announced a $US23 billion rescuepackage (with contributions from the World Bank and the Asian Development Bank)designed to stabilize Indonesia's currency and restore confidence in its financial markets(Sherlock, 1998).

IMF working in macro economy level, suggesting formula to monitor government sexpenditure and revenue also maintain stability on banking sector, in other wordIndonesia should agree to reform its financial sector, reduce fiscal expenditure and askgovernment to reduce some subsidies.(http://en.wikipedia.org/wiki/Foreign_aid_to_Indonesia)

Japan The history of Japan assistance had started in 1954 with the acceptance oftrainees in the areas of industry, transportation, communication, agriculture and healthcare. Japanese assistance has contributed a great deal to the development of Indonesiathrough human capacity development, improvement of economic and socialinfrastructures and so on. This indicates that Indonesia and Japan are mutually importantpartners, having maintained friendly relations extending half a century.(http://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htm)
http://beta.adb.org/countries/indonesia/mainhttp://en.wikipedia.org/wiki/Foreign_aid_to_Indonesiahttp://en.wikipedia.org/wiki/Foreign_aid_to_Indonesiahttp://beta.adb.org/countries/indonesia/main


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Impact of Aid on Development Assistance

Figure 1 Net ODA received (% of GNI)

Source: World Bank, 2011

The percentage of Net ODA % of GNI as reported by World Bank on the table above

show decreasing trend 2006(0.4%) 2007(0.2%) 2008 (0.2%) 2009 (0.2%). The situation

is very different with the period of 1973 when about 6 percent of development fund

receive from foreign assistance through loan. Although in during that period most of

government revenue came from oil export (oil boom) when the economic growth was

slower in non- oil period started in 1982, 1987 1995, foreign assistance had helped thegovernment to face difficulties after the collapse of oil prices.

a. Economic Condition

In 2010 Indonesias GDP (current US$) amounted USD $706,558,240,892. Totalpopulation is 239,870,937. For aid assistance, number of population in a country isimportant; countries with small populations get more assistance per capita or morerelative to GDP. For multilateral aid, lower middle income countries with goodmanagement received 30 percent more than the typical poor management country withthe same income and population (Assessing Aid p.43)

Development assistance should concentrate on where it can be most effective in reducingpoverty. Poverty headcount ratio at national poverty line (% of population)2010 (13.3%), 2009 (14.2%), 2008 (15.4%), 2007 (16.6%), 2006 (17.8%). Mass poverty

is usually linked with poor policies and weak institution, base on the data, poverty show

increasing trend, impact of aid assistance on economic had not meet expectation.

0

1

2

3

4

5

6

7

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

%o

fGNI

Year

Indonesia IDN


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b. Social

Figure 2 Public Spending on education

Asian Development Banks (ADB) Basic Statistic 2010, shows literacy rate at age 15-24

years old in Indonesia was 96, 3%, which is in term of ability to read and write categorized

as high. This open bigger chance to achieve better socio-economic status, better health

and employment prospects, also increase job opportunities and ability to access higher

education. Human Development Index (HDI) in 2007 0.743 and it is categorized as

medium human development (hdr.undp.org). This data is match with increasing trend of

percentage in public spending on education.

Challenges

a. Policy and political risk

Like in others countries, corruption also major problem in Indonesia, corruption

eradication in Indonesia is still far below the ideal situation. As reported by

jakartaglobe.com In 2009, Indonesia scored 2.8 on the grading scale, with 10 being the

cleanest. Foreign aid had support good governance practice in Indonesia, however

community has not yet experience positive effect from the effort One possibility is that,

the easy access to foreign assistance made the regime that was in power for decades

lazy and it was lax in its revenue efforts (Sugema, 2007)

b. Economic and social sector

Economy grew by 5.7 percent in first quarter of 2010, against the first quarter 2009.

Indonesias economy ranks 16th and its GDP ranks 155th in the world with nominal per

capita GDP of $2590 however limited job opportunities and low income and some

government policies were not pro poor and cannot overcome the problem of inequality

0

5

10

15

20

2001 2002 2003 2004 2005 2006 2007 2008

Public spending on education

(% of government expenditure)

Public spending on

education, total (% of

government

expenditure)


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external factor such as inadequate jobs in formal sector for citizen had contributes to this

situation led to migration. The figure below shows the inflation in Indonesia before

financial crisis and after recovery from the financial crisis of the 1997. High inflation rate is

threat for assistance.

Figure 3 Inflation in Indonesia 1970 2000

Source : Sugema (2007)

The main aim of aid is to reduce poverty, every country with increasing per capita

household income saw poverty decline. Poverty is social problems in each province inIndonesia. 2009 data shows a slight decreasing of poverty trend, however due to lack of

access to education, natural resource, safe water and high unemployment rate, poor

people are in risk of poverty level. Poor people in Indonesia March 2010 amounted

31.02 million (13.33%), compared with March 2009 data, amounted 32.53 million (

14.15%) or decreased by 1.51 million. (Annex 1). Prioritizing aid in sector such as

education and water will reduce the risk of poor people drop below the poverty line.

.

c. Health and Education Sector

Indonesia has made remarkable progress in improving health outcomes. Dramatic

reductions have been achieved in child mortality and increases in schooling since

independence. In 1990 neonatal mortality rate was more than 30 per 1,000but ten

years afterward, in 2010 neonatal mortality was less than 20 per 1.000 births, neo natal

per 1.000 birth show decreasing trend (Table 4) along with increasing in government

health expenditure ( Table 5 ). Aside from government effort, aid assistance in health and

education sector through WHO and UNICEF also play important role.


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Figure 4 Morality rate, neo natal 1990 - 2010

Figure 5 Health expenditure, public

The question are can government institution sustain this achievement without aid and

technical assistance from international organization like WHO and UNICEF? Doesgovernment able to channeling and mobilize its resources with current institution? These

are several challenges for Indonesia in health and education sector. In term of Education,

fact shows that teachers low productivity is exemplified by their high rate of absenteeism

(19 percent) and lack of teachers in remote areas despite figure 4 shows public spending

on education reach 18% of total government expenditure in 2008.

0

5

10

15

20

25

30

35

Mortality rate, neonatal

(per 1,000 live births)

Mortality rate,

neonatal (per 1,000

live births)

0

1

2

3

4

5

6

7

8

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Health expenditure, public

(% of government expenditure)

Health expenditure,public (% of

government

expenditure)


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Overcome Challenges, make aid effective

From the discussion above, governments institutions have important role to plan,monitoring and evaluate the effectiveness of aid. Correct prioritization, in which sector aid

assistance should be allocated, will reduce the risk of poor people to drop below thepoverty line. Coordination among institution to maintain inflation rate is also importantbecause high inflation rate might threat development assistance in Indonesia.

Cooperation multi party and policy reformThe 21st century indicated by chaotic situation. It require government officers and othersagencies to be proactive in building networking and cooperation with many parties tosustain the development effort. Cooperation among institutions will make aid moreeffective in reducing poverty. However policy reforms should be tailored to country andsector condition. Coordination among agencies and government should be prioritized toensure the donor priority match with the government long term planning.

Active control from Civil Society to improve public servicesIn case of Indonesia, the critic on official development assistance in relation with technicalassistance given during the new order era is, although IFIs understand that the goodgovernance practice in Indonesia did not perform well, but IFIs keep giving hard term loanfor develop country. As a result of that loan decision, the current governmentadministration should responsible for the debt, while some development program whichactually should be funded by that loan, had failed to address the necessity of currentgeneration. This is why a hard line CSOs in Indonesia gave criticism to the loanassistance from the bank.

Developing institutional capacity.BAPPENAS is the institution where the master plans are drafted, coordinated, anddiscussed. To be able to plan BAPPENAS institution should have capable person, whichwill enable robust quality of planning. Project need to focus on creating and transmittingknowledge and Capacity. The financial aid works in a good policy and goodenvironment, financial assistance leads to faster growth, poverty reduction and gains insocial indicators in developing countries with sound economic management (AssessingAid p.2) In Indonesia case, political and institutional reform is important to make aideffective.


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ANNEX 1 Indonesia Official Development Assistance (ODA) in Million of USD


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ANNEX 2 Commitments since 1966

BIBLIOGRAPHY

BOOKS AND JOURNAL1. Assessing Aid (1998) What works , what doesnt and why, World Bank, Oxford

University Press2. Ransom, David (2006) MAFIA BERKELEY DAN PEMBUNUHAN MASSAL DI

INDONESIA, Koalisi Anti Utang, Jakarta3. Sugema, Imam and Chowdhury,Anis (2007) HAS AID MADE THE GOVERNMENT OF

INDONESIA LAZY? Asia-Pacific Development Journal Vol. 14, No. 1, June 20074. Weinstein, Franklin B (2007) Indonesia Foreign Policy and the Dilleman of Dependence :

From Sukarno to Soeharto, First Equinox Edition

INTERNET SOURCES5. Country Operational Strategy Studies - Indonesia : III. Strategies and Programs of Other

International Funding Agencies(http://www.adb.org/documents/cosss/INO/ino301.asp?p=doccosss)

6. http://data.worldbank.org/indicator/DT.ODA.ODAT.GN.ZS7. Sherlock, Stephen Dr. Crisis in Indonesia: Economy, Society and Politics,8 April 1998,

http://www.aph.gov.au/library/pubs/cib/1997-98/98cib13.htmretrieved on November 20118. The History of Official Development Assistance (ODA) from Japan to Indonesia,

http://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htmretrieved on Nov, 18 20119. www.imf.org10.www.oecd.org
http://www.adb.org/documents/cosss/INO/ino301.asp?p=doccossshttp://www.adb.org/documents/cosss/INO/ino301.asp?p=doccossshttp://www.adb.org/documents/cosss/INO/ino301.asp?p=doccossshttp://data.worldbank.org/indicator/DT.ODA.ODAT.GN.ZShttp://data.worldbank.org/indicator/DT.ODA.ODAT.GN.ZShttp://www.aph.gov.au/library/pubs/cib/1997-98/98cib13.htmhttp://www.aph.gov.au/library/pubs/cib/1997-98/98cib13.htmhttp://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htmhttp://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htmhttp://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htmhttp://www.aph.gov.au/library/pubs/cib/1997-98/98cib13.htmhttp://data.worldbank.org/indicator/DT.ODA.ODAT.GN.ZShttp://www.adb.org/documents/cosss/INO/ino301.asp?p=doccosss

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