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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:
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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,
ivaigevov. ¡eo¡íe.` íeaaer., tbe bigb caíiber ivteííectvaí. ava .evior officiaí. frov aovor. ava ivtervatiovaí
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
´evior !oría ßaví Officiaí i. bigbí, re.¡ectea b, tbe aovor.` covvvvit, a. tbe íora or tbe big bo...

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.
5

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
Gi·en the importance oí aid relations to people`s li·es and their links to power relations, how
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
in·estments were dictated` by the donors through IGGI. L·ery year, beíore the go·ernment
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.
6


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
allow recipient countries to ha·e a more equal position with donors. Use oí the term partner`
in the PD instead oí recipient` is promising. 1he PD puts ownership` as the íirst principle,
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
act as donors` consortia, each with its own scope oí work and area oí co·erage. 1hese include
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
7

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
tutelage oí the lords oí donors`. \ill the aid be used íor the beneíits oí the people· Or will
the aid only for the beneíits oí the lords`· Ionest answer seems to be scarce goods íor
Indonesia 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

3
Information from the staff of the World Bank in Jakarta during the consultation meeting between
World Bank and CSOs on 19
th
March, 2008.
8

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
e·erything was made uniíorm and controlled by the regime. Indonesia`s NGOs beneíited in
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
9

approach and had clear gender perspectives. For the implementation of the SNPK, the
go·ernment has de·eloped a National Program on People`s Lmpowerment ,known as PNPM,
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
10

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
are working. Ií at international le·el there are critiques oí the lords oí po·erty` reíerring to
development practitioners who fail to eradicate po·erty, in Indonesia there is the lords oí donors`
namely individuals who have power to direct donors and international private foundations to support
projects and organizations ía·ored by the lords oí donors`. Ií aid is always percei·ed with cynicism in
Indonesia, it is because the donors also sustain bad governance, and only to support the pleasure of
the lords oí donors`.
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DEVELOPMENT FINANCE AND AID EFFECTIVENESS:
Targeting the Poor to Repay the Debts?
5



Don K. Marut
6










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
creditors` coordination íorum called the Consultati·e Group on Indonesia ,CGI, that had been
long orchestrated the international pressures on Indonesia`s economic policies. Indonesian
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.
12

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
\ashington Consensus` policies. In this situation, will the global commitments such as the
UN Millennium Declaration to eradicate po·erty, promote human dignity and equality and
achie·e peace, democracy and en·ironmental sustainability` be able to be implemented· On
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 Jeíírey Sachs called his approach as clinical economics` that combines theory and
practice, general principles and specific contexts. He believes that the developed countries
could play as the doctors for the patients in the poor countries. Ie belie·es that a successíul
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,
and family circumstances`.
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
íunds were used to pay the \estern experts` who actually had questionable knowledge about
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.
13

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
the de·eloped countries, and mobilize team írom the in-group` circle to join the official delegation of
the government of Indonesia in the UN Conference on Climate Change in Bali in December 2007.
10
Directorate oí Monitoring and L·aluation oí De·elopment lunding, BAPPLNAS, 1he Study on the
Strategy for Promoting the Performance of Foreign Borrowing`, Jakarta, 2004.
11
Don K. Marut, Go·ernment, Local NGOs and the Institutions oí Democratic Ownership in
Indonesia`, a paper presented in the OLCD Lxperts` \orkshop on Ownership in Practice, Paris, 2¯ -
28 September, 2007.
14

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 poverty. Only homegrown de·elopment based on the dynamism oí
indi·iduals and íirms in íree markets can do that`.

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:

Dov`t ivraae otber covvtrie., or .eva arv. to ove of tbe brvtaí arvie. iv a cirií rar. íva covaitiovaíit,. ´to¡
wasting our time with summits and frameworks. Give up on sweeping and naïve institutional reform schemes.
The aim should be to vaíe ivairiavaí. better off, vot to trav.forv gorervvevt. or .ocietie..
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
oí its policies. Reílecting írom the policies oí the IlIs he emphasized that the \est can end
the pathetic spectacle of the IMF, World Bank and other aid agencies coddling the warlords
and kleptocrats`
14
. Easterly suggests that the West should end the paternalism and hypocrisy of
conditionality and the inherent contradiction between country ownership` and dictating
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
conditionalities oí the donor countries and international íinancial institutions as the Bad
Samaritans`
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, 1be !bite Mav`. ßvraev: !b, tbe !e.t`. íffort. to .ia tbe Re.t íare Dove ´o Mvcb ííí ava
So Little Good (New York: Penguin Books, 2006).
13
Ibid., pg. 368.
14
Ibid.
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.
15

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-called \ashington
Consensus`. IMl and the \orld Bank argued that short-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?

lollowing is the case oí íoreign aid and Indonesia`s de·elopment.

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 political projects. Until 196¯ Indonesia`s íoreign aid reached up to > 2.6 billion.

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
would be probably the same. Until the end oí 200¯ Indonesia`s íoreign aid reached up to >
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
in·estments were dictated` by the 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.
17

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
2002 was edited` by the \orld Bank. Kwik complained that the contents oí the paper was changed
and did not reílect his ·iew and the GOI`s but the \orld Bank`s.
19
Bappenas study, 2004.
20
Socio-Lconomic Impacts oí loreign Debts in Indonesia`, INFID Working Paper No. 7, 2007,
Jakarta.
18

the recipients. Regarding the multilateral donors, the BAPPENAS other study
21
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 loans
22

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 taken írom Don K. Marut, Multilateral Aid and Conditionalities`
to 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
Program íor People`s Lmpowerment,.
20

Scott Guggenheim`s paper on KDP has been treated by \orld Bank staíí in Indonesia as the
main reference on the success of the project
25
. 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 study
26
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
Donors united in putting pressure on Indonesia to implement IMl`s policy
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
with a rescue package.1he commitments oí this bail out` package írom IMl were matched
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
So IMl`s programme package was needed and used by the íoreign
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
Scott Guggenheim, Crises and Contradictions: Understanding the Origins oí a Community
De·elopment Project in Indonesia`, paper 2003 downloaded írom www.worldbank.org. The Project
was started with a local-level institutions study (LLI), which came out with rhetorical conclusions that
re-justiíy the inter·ention oí the \orld Bank in Indonesia`s de·elopment which in íact - as the study
from BAPPENAS revealed - is only to secure the jobs of the World Bank staff in Indonesia. (Scott
Guggenheim is the Director oí the \orld Bank`s Decentralization Support lacility ,DSl,,.
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
BAPPLNAS ,2004,, 1he Lxistence and Roles oí the Consultati·e Group íor Indonesia ,CGI,`,
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
inter·ention in Indonesia`s economic and political system. 1he coordinated pressures 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.

29
Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further
errors, IMl and the donors kept pushing the implementation oí IMl`s conditionalities.

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 30
th
, 2007.

During the last 10 years (1997 - 2007) the economic development and the poverty alleviation
programs do not show positi·e support íor the people`s li·elihood, the po·erty situation is
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
prescriptions írom IMl and \orld Bank that directly aííect the condition oí the people`s
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
loreign aid ,loans, has clearly put pressure on Indonesia`s economy. 1he dependence to
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
the people`s interests, while at the same time the \orld 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.


==*** ==

25

DOES FOREIGN AID HELP?
The Case of Multilateral Donors in Indonesia

Don K. Marut










Introduction
The Website of IMF in 1999 announced that:

ív ´e¡tevber 1···, tbe ob;ectire. of tbe íMí´. covce..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


At the \orld Bank headquarters the slogan our dream is a world íree oí po·erty` has been
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



30
http://www.imf.org/external/np/exr/facts/prgf.htm
31
http://www.oneworld.net/campaigns/imf&wb/index.html
32
http://www.oneworld.net/anydoc2.cgi?url=http://www.oxfam.org.uk
33
http://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
\illiam Lasterly, The effect of IMF and World Bank programs on poverty, !oría ßaví, 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
in·estments were dictated` by the 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.

Scott Guggenheim`s paper on KDP has been treated by \orld Bank staíí in Indonesia as the
main reference on the success of the project
38
. 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 study
39
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
seen as a 1rojan horse` used by the IMl to control the policies oí Indonesia along the neo-
liberal lines preferred by the developed countries and multinational corporations whose
interests are represented in the IMF.



38
Scott Guggenheim, Crises and Contradictions: Understanding the Origins oí a Community
De·elopment Project in Indonesia`, paper 2003 downloaded írom www.worldbank.org. The Project
was started with a local-level institutions study (LLI), which came out with rhetorical conclusions that
re-justiíy the inter·ention oí the \orld Bank in Indonesia`s de·elopment which in íact - as the study
from BAPPENAS revealed - is only to secure the jobs of the World Bank staff in Indonesia. (Scott
Guggenheim is the Director oí the \orld Bank`s Decentralisation Support lacility ,DSl,,.
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).


Rizal Ramli, the Coordinating Minister oí Lconomic Aííairs in 199¯, warned that in·ol·ing
the IMF in Indonesia`s reco·ery programme would ine·itably plunge the country into a deeper
economic crisis`
40
. 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
measures and other conditionalities to be implemented by Indonesia. \hile the People`s
Assembly 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
the pressures írom the IMl and the donors` community.

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
Dr. Rizal Ramli, 1he IMl`s Indonesian Myths`, mimeo, 2004.
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.

1he IMl recommended the con·ersion oí pri·ate debts into public debts. 1he go·ernment`s
domestic debts increased up to US> 65 billion. At the same time Indonesia`s public íoreign
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. As a consequence oí the íinancial crisis and IMl policies, Indonesia`s
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 payment
43
. 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 pressure on Indonesia to implement IMl`s policy
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
with a rescue package.1he commitments oí this bail out` package írom IMl were matched
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 \ashington Consensus` on Indonesia.

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.
45
AnisChowdhury and ImanSugema (2005), loc.cit.
32

through the Paris Club.
46
So IMl`s programme package was needed and used by the íoreign
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
inter·ention in Indonesia`s economic and political system. 1he coordinated pressures írom 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.
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
BAPPLNAS ,2004,, 1he Lxistence and Roles oí the Consultati·e Group íor Indonesia ,CGI,`,
Summary, p. 9.
47
Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further
errors, IMl and the donors kept pushing the implementation oí IMl`s conditionalities.

33

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?

A study by the Ministry oí National Planning ,BAPPLNAS, on the Strategy to Promote the
Períormance oí loreign Aid` ,2004, íound 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
are suspected as in·ol·ing maíia` in the contracts and the implementation.

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
35

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
the agency`s staíís and the proíits íor the maíias. Ií the go·ernments do not cancel these debts,
it would mean that the governments protect the mafias.




36

FOREIGN AID AND POVERTY ERADICATION:
A Reality Check
48


Don K. Marut









Introduction
The Website of IMF in 1999 announced that:

ív ´e¡tevber 1···, tbe ob;ectire. of tbe íMí´. covce..iovaí íevaivg rere broaaevea 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).
49


At the World Bank headquarters the slogan our dream is a world íree oí po·erty` has been
built 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
Paper prepared íor the Seminar oí The Third World Poverty: Irony of the World: The Poor Are
Subsidizing the Rich`, UniversitasKatolikParahiyangan, Bandung, 26 April 2008.
49
http://www.imf.org/external/np/exr/facts/prgf.htm
50
http://www.oneworld.net/campaigns/imf&wb/index.html
51
http://www.oneworld.net/anydoc2.cgi?url=http://www.oxfam.org.uk
52
http://www.oneworld.org/guides/sap/index.html
37

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 indebtedness
53
, 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
gathering oí the heads oí the state to plea and promise to eradicate poverty, promote human
dignity and equality and achie·e peace, democracy and en·ironmental sustainability`. 1hese
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
\illiam Lasterly, The effect of IMF and World Bank programs on poverty, !oría ßaví Pa¡er,
October 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).
38

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 oí Make Po·erty Iistory`. 1he Gleneagles commitment in íact is still 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 as clinical economics` that combines theory and
practice, general principles and specific contexts. He believes that the developed countries
could play as the doctors íor the patients in the poor countries. Ie belie·es that a successíul
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,
and íamily circumstances`.
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
íunds were used to pay the \estern experts` who actually had questionable knowledge about
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.
39

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 countries, and mobilize team írom the in-group` circle to join the oííicial delegation oí
the government of Indonesia in the UN Conference on Climate Change in Bali in December 2007.
59
Directorate of Monitoring and Evaluation of Development Funding, BAPPENAS, 1he Study on the
Strategy íor Promoting the Períormance oí loreign Borrowing`, Jakarta, 2004.
60
Don K. Marut, Go·ernment, Local NGOs and the Institutions oí Democratic Ownership in
Indonesia`, a paper presented in the OLCD Lxperts` \orkshop on Ownership in Practice, Paris, 27 -
28 September, 2007.
40

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
cannot achie·e the end oí po·erty. Only homegrown de·elopment based on the dynamism oí
indi·iduals and íirms in íree markets can do that`.

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:

Dov`t ivraae otber covvtrie., or .eva arms 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 or .ocietie..
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 IFIs he emphasized that the \est can end
the pathetic spectacle of the IMF, World Bank and other aid agencies coddling the warlords
and kleptocrats`
63
. Easterly suggests that the West should end the paternalism and hypocrisy of
conditionality and the inherent contradiction between country ownership` and dictating
conditions 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 financial institutions as the Bad
Samaritans`
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, 1be !bite Mav`. ßvraev: !b, tbe !e.t`. íffort. to .ia tbe Re.t íare Dove ´o Mvcb ííí ava
So Little Good (New York: Penguin Books, 2006).
62
Ibid., pg. 368.
63
Ibid.
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.
41

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-called \ashington
Consensus`. IMl and the \orld Bank argued that short-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?

lollowing I want to expose the example oí íoreign aid and Indonesia`s de·elopment.

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 political projects. Until 196¯ Indonesia`s íoreign aid reached up to > 2.6 billion.

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
would be probably the same. Until the end oí 200¯ Indonesia`s íoreign aid reached up to >
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
42

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
in·estments were dictated` by the donors through IGGI. L·ery year, beíore the go·ernment
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.
43

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 study
70
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
2002 was edited` by the \orld Bank. Kwik complained that the contents of the paper was changed
and did not reílect his ·iew and the GOI`s but the \orld Bank`s.
68
Bappenas study, 2004.
69
Socio-Lconomic Impacts oí loreign Debts in Indonesia`, INFID Working Paper No. 7, 2007,
Jakarta.
70
BAPPENAS, op.cit., 2004.
44

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 loans
71

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
1he íollowing part oí the paper is taken írom Don K. Marut, Multilateral Aid and Conditionalities`
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
45


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


Scott Guggenheim`s paper on KDP has been treated by \orld Bank staíí in Indonesia as the
main reference on the success of the project
74
. 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 study
75
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
Program íor People`s Lmpowerment,.
74
Scott Guggenheim, Crises and Contradictions: Understanding the Origins oí a Community
Development Project in Indonesia`, paper 2003 downloaded írom 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 Bank in Indonesia`s de·elopment which in íact - as the study
from BAPPENAS revealed - is only to secure the jobs of the World Bank staff in Indonesia. (Scott
Guggenheim is the Director oí the \orld Bank`s Decentralization Support lacility ,DSl,,.
75
BAPPENAS, op.cit.,2004.
46

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
seen as a 1rojan horse` used by the IMl to control the policies oí Indonesia along the neo-
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).

Rizal Ramli, the Coordinating Minister oí Lconomic Aííairs in 199¯, warned that in·ol·ing
the IMl in Indonesia`s reco·ery programme would ine·itably plunge the country into a deeper
economic crisis`
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
measures and other conditionalities to be implemented by Indonesia. \hile the People`s
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
the pressures írom the IMl and the donors` community.


76
Dr. Rizal Ramli, 1he IMl`s Indonesuan Myths`, mimeo, 2004.
77
MPR is like a Congress in US democratic system, consisting of the House of Representatives and the
Senate.
47

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.

1he IMl recommended the con·ersion oí pri·ate debts into public debts. 1he go·ernment`s
domestic debts increased up to US$ 65 billion. At the same time Indonesia`s public íoreign
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. As a consequence oí the íinancial crisis and IMl policies, Indonesia`s
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 payment
79
. 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.
48

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
Donors united in putting pressure on Indonesia to implement IMl`s policy
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
with a rescue package.1he commitments oí this bail out` package írom IMl were matched
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.
49

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
instrument to impose the policy prescriptions oí the \ashington Consensus` on Indonesia.

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
So IMl`s programme package was needed and used by the íoreign
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.

81
AnisChowdhury and ImanSugema (2005), loc.cit.
82
BAPPLNAS ,2004,, 1he Lxistence and Roles oí the Consultati·e Group íor Indonesia ,CGI,`,
Summary, p. 9.
50


Most importantly, however, the relatively small amount of foreign aid caused heavy foreign
inter·ention in Indonesia`s economic and political system. 1he coordinated pressures írom 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.
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.



83
Ibid. In 1999 The IMF admitted its errors in Indonesia in its internal reports. Despite stopping further
errors, IMl and the donors kept pushing the implementation oí IMl`s conditionalities.

51

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 30
th
, 2007.

During the last 10 years (1997 - 2007) the economic development and the poverty alleviation
programs do not show positi·e support íor the people`s li·elihood, the po·erty situation is
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
prescriptions írom IMl and \orld Bank that directly aííect the condition oí the people`s
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
52

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




53

Conclusion
loreign aid ,loans, has clearly put pressure on Indonesia`s economy. 1he dependence to
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
the people`s economy that was hit by the crises in 199¯,1998 became worse because oí the
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
the people`s interests; 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.


==*** ==

54

NORTH ² SOUTH CSOs COOPERATION:
Indonesian Context
84


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
1945. 1here were íour groupings oí the students groups and young people`s organizations:
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
put economic de·elopment` as the command meaning that economic de·elopment is the
priority and democracy would come when the people are economically better-off. The design

84
For the Global Consultation of Reality of Aid, Nairobi, Kenya, 17 - 18 November, 2007.
55

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
directions oí de·elopment and in·estments were dictated` by the 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. 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
and bottom-up` and participati·e de·elopment methods. 1he presence oí the national and
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
go·ernment`s de·elopment 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
56

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).

1here was initiati·e oí harmonization among the Northern NGOs in supporting Indonesia`s
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
57

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
hold public meetings in·ol·ing Indonesian NGOs and people`s organizations, and making
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, that publicly known as inter-religious` and inter-ethnic` conílicts. 1he
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.

58

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, SPADA
85
), 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 World Bank`s agencies. 1he International
Republican 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
alle·iation, people`s empowerment, democratization and human rights. 1here is a new good
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.
59

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` consortia, such as Decentralization Support lacility ,DSl,, Multi-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
go·ernment`s projects. 1his will ruin the genuine initiati·es oí the local NGOs and the 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 Program on People`s Lmpowerment ,known as PNPM, that sets out the details oí
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
60

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.

\hile PNPM launch a training program íor community íacilitators, the \orld Bank`s agencies
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
61

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.