Improving Aid Effectiveness In

I Gede Edy Purwaka MDM 2011

Contents
LIST OF TABLES .............................................................................................................................................3 LIST OF FIGURES ...........................................................................................................................................3 LIST OF ABREVIATION ..................................................................................................................................3 History of Development Assistance in Indonesia ........................................................................................4 a. b. c. Newly Independence country (1945 1966)...................................................................................4 New Order (1966 1998) ................................................................................................................5 Reformation (1998 2010) ..............................................................................................................5

Current development assistance in Indonesia.............................................................................................5 a. b. c. Government Priorities (2010 2014) ............................................................................................5 National Medium Term Development Plan .....................................................................................6 The donor agencies providing assistance ........................................................................................7

Impact of Aid on Development Assistance ..................................................................................................9 a. b. Economic Condition .........................................................................................................................9 Social ..............................................................................................................................................10

Challenges ..................................................................................................................................................10 a. b. c. Policy and political risk ...................................................................................................................10 Economic and social sector ............................................................................................................10 Health and Education Sector .........................................................................................................11

Overcome Challenges, make aid effective .................................................................................................13 BIBLIOGRAPHY ...........................................................................................................................................15

LIST OF TABLES
Table 1 Macro Indicators Indonesia during SBY Administration .................................................................6 Table 2 Net official development assistance received (current US$) ..........................................................6 Table 3 Donor by Sector...............................................................................................................................7

LIST OF FIGURES
Figure 1 Net ODA received (% of GNI) .........................................................................................................9 Figure 2 Public Spending on education......................................................................................................10 Figure 3 Inflation in Indonesia 1970 2000...............................................................................................11 Figure 4 Morality rate, neo natal 1990 - 2010 ...........................................................................................12 Figure 5 Health expenditure, public ..........................................................................................................12

LIST OF ABREVIATION APBN BAPPEDA CGI CSIS CSO FDI GNI HDI IDA IFI KPK MP3EI ODA PMU RPJMN RPJPN UN US : State Budget of Revenue and Expenditure : Local government development planning department : Consultative Group on Indonesia : Centre for Strategic and International Studies : Civil Society Organization ; Foreign Direct Investment : Gross National Income : Human Development Index : International Development Association : International Finance Institution : Corruption Eradication Committee : Master plan for the Acceleration and Expansion of Economic Development of Indonesia : Official Development Assistance : Project Management Unit : Medium Term National Development Plan : Long Term National Development Plan : United Nation : United State

History of Development Assistance in Indonesia

To discuss about aid assistance in Indonesia, in my point of view, it cannot separate from political aspect, especially in relation to political policy that had been made by those who were in power. Research had proved that political dynamic in Indonesia had influenced foreign aid policies. For example, one of Indonesian president was seriously reject foreign aid due to hidden agenda behind it, on the other hand, there were some presidents who in favors foreign aid without consider hidden agenda on it. Although foreign aid itself is neutral with respect to development, in fact political issue had influences foreign aid policy in Indonesia. This paper will focus the discussion on aid assistance derived multilateral agencies like World Bank, ADB and IMF, also bilateral cooperation with Japan, which is known for its important role providing various technical assistances. Japan has important role in the development process in Indonesia. The discussion will identify history of ODA flows to Indonesia from political point of view. The major political milestones in Indonesia categorized into three important phase, the period after independence, New Order Era and Reformation Era. a. Newly Independence country (1945 1966) Indonesias got its independence in August, 17th 1945. The first Indonesia president was Soekarno. As newly independent country, Political, Social and Economic was not stable. Foreign aid flow to Indonesia with the motive of humanitarian assistance and develop infrastructure. In 1950, US government give aid amounted US$100 million at that time US pushed Indonesia government to declare Bao Dai administration in Vietnam. Since Indonesia did not fulfill that requirement, the aid was postponed. In 1952 after US government agree to give aid to Indonesia, they insist UN to make embargo synthetic raw material to China, Indonesia as rubber producer follow that policy. (Ransom, 2006) At that time President Soekarno was aware about hidden agenda of politic behind the financial assistance to influence his political decision. He criticizes foreign aid from developing country by said, go to hell with your aid. However economic situation in Soekarno administration was not far from ideal Indonesia's inflation rate touched a four digit number and in 1959 money supply has rise tremendously, to reduce the spread of money and recover financial and economic condition government diminish value of money by 10 percent from its intrinsic value. 500 rupiah become only 50 rupiah. From this example we conclude, foreign aid to Indonesia post World War II has twin objectives, first was promote economic growth and poverty reduction in developing

countries, second objective was to promote the short term political and strategic interest of donors. b. New Order (1966 1998) In Soeharto administration the amount of ODA came to Indonesia increased amazingly, especially from US. In 1966-1976 the total amount of commitment from U.S reached USD 1,608 million, compare with ADB/IBRD only amounted USD 1,464 million and Japan USD 1,325 million. No wonder many parties suspect there was a tradeoff behind this huge commitment (Annex 2). Japanese assistance has contributed a great deal to the development of Indonesia through human capacity development, improvement of economic and social infrastructures. (The History of ODA) In 1988 for example, bilateral amounted USD 1,308 million and multilateral amounted USD 2,805 million or total USD 4,113 million, accounted for 4,6 % of GDP (Annex 1) The remarkable milestone at that time was, Indonesias ability in self sufficient rice production from previously being an importer. Many Indonesia citizens admitted during Soehartos administration economic and security stability was guaranteed, however economic growth which was built on basis of debt made its stability was risky. It had proven when financial crisis hit Indonesia in 1997, it social and economy and political which had sent out Soeharto from presidency after 32 years in power. c. Reformation (1998 2010) The periods of after 1998 show strong and peaceful transition from authoritarian regime to democracy. During 1998 2011, Indonesia had been led by 4 presidents. BJ Habibie 1998-1999, He prioritized reformation as work objective. Abdurrahman Wahid (Gus Dur) 1999-2001, He focus on national unity, however due to his radical movement, his political enemies had sent him out from presidency in 2001. Megawati Soekarno Putri, the first women president who prioritized mutual development and Soesilo Bambang Yudhono who promoted unity of Indonesia. From the history of development assistance above, we can conclude that the three largest multilateral finance institutions gave finance assistance to Indonesia are IMF, World Bank, and ADB. Others bilateral sources like Australia, Germany, Japan, and the United States also help Indonesia government to pursue macroeconomic stability, deepening structural reforms, a sound antipoverty strategy, improving governance, and smoothly implementing the decentralization agenda. Current development assistance in Indonesia a. Government Priorities (2010 2014) President Soesilo Bambang Yudhoyono (SBY) has been in power since 2004. During his administration Indonesia shows progress in democratization and decentralization. Economic indicator also shows progress as compare to previous period. Poverty head
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count ratio for example, decreased from 16 percent in 2005 down to 13, 3 percent in 2010, along with the increase of GDP 4,9 percent in 2000 to 6,1 percent in 2010. (See table 1)

Table 1 Macro Indicators Indonesia during SBY Administration

Data Profile Poverty headcount ratio at national poverty line (% of population) GNI, Atlas method (current US$) (billions) GNI per capita, Atlas method (current US$) GDP (current US$) (billions) GDP growth (annual %) Source: ddpext.worldbank.org

2000

2005 16 276.76 1220 285.87 5.7

2008 15.4 457.05 1950 510.23 6

2009 14.2 512.67 2160 539.35 4.6

2010 13.3 599.15 2500 706.56 6.1

119.46 560 165.02 4.9

Net Official Development Assistance (ODA) from World Bank show decreasing trend from USD 2,5 Billion in 2005 to USD 0,9 Billion in 2007, but again the amount of ODA had increased during global financial crisis in 2007-2008 ( see table 2)
Table 2 Net official development assistance received (current US$)
Year Indonesia 2005 2,508,630,000.00 2006 1,311,140,000.00 2007 895,680,000.00 2008 1,225,210,000.00 2009 1,047,640,000.00

Source: worldbank.org SBYs Cabinet, in 2009-2014 prioritized 14 sectors: Bureaucratic Reform and Governance, education, health, Poverty Reduction, Food Security, infrastructure, Investment Climate and Business Climate, Energy, Environment and Disaster Management, Culture , Creativity and Technological Innovation, Disadvantaged Areas, Outermost, Post- conflict. b. National Medium Term Development Plan Government of Indonesia will prioritize its economic development base of The Master plan for the Acceleration and Expansion of Economic Development of Indonesia (MP3EI). Implementation of MP3EI is expected to fully support and complement existing development planning documents produced by the government, including Long Term National Development Plan (RPJPN) and Medium Term National Development Plan (RPJMN) which focused on Higher economic growth Decrease unemployment by creating jobs better Poverty decline
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Increasing per capita income Increasing economic stability maintained Stronger domestic financing and increased Increasing food security Increased energy security Competitiveness of national economy strengthened and improved Development efforts that are environmentally friendly with green economy approach stronger

For some reasons, Civil Society Organization (CSO) critics the budget allocation of Government revenue and expenditure, Regional economic and social disparities persist, poverty rates remain high the program and budget allocation did not fully address poverty problem. Allocation of budget only benefit for sector owned by rich people. c. The donor agencies providing assistance International Financial Institutions like ADB and World Bank have very strong knowledge sharing culture, its technical assistance had contribute strong institution building, the borrower country prefer access loan from this institution because they offer value added in term of knowledge. Since the accuracy of data and information in the bank is very good, the team of economic and development should declare salient plan when they are going to deal with the bank, the coordination among units and department are important to make use of fund maximal. A well trained economist and civil servants are crucial and Government needs to retain qualified staffs.
Table 3 Donor by Sector Sector Democratic and Accountable Government Human Right Social and Justice Economic Fairness Education Sustainable Development Urban Rural Development Health Environment Women Agriculture Finance World Bank x ADB x IMF Japan x Others x

x x x x x x x x x x x x

x x x x x x

x x x x x x x

World Bank For more than three decades World Bank has been working in Indonesia. It provides grant and loan for various sectors. In year 2001 for example, WB assistance went to (a) Second Kecamatan Development Project (KDP 2) which support bottom-up participatory planning and grassroots democratization in more than 15,000 poor villages across Indonesia,(b) Second Provincial Health Project (PHP 2) aims to bring about effective health sector decentralization in the provinces of North Sumatera, West Java, and Banten, (c) Western Java Environmental Management Project help the region to prepare an environmental management strategy for the provinces and each participating local governments (d) Library Development Project aims to develop innovative approaches to increase the use of reading materials in community and primary school libraries. US$4.2 million had been allocated from IDA fund (e) Institutional Capacity Strengthening to Support Indonesia Women Migrant Workers Project. The project aims to assist the Ministry of Women's Empowerment in improving the regulatory environment for overseas women workers. (http://web.worldbank.org) ADB (Asian Development Bank) since 1966 Indonesia become founding member of ADB, during the period of 1995- 2011 ADB had been assist 920 projects in various sectors in Indonesia. In December 2010, Indonesia has received 298 sovereign loans amounting to $25.6 billion including co financing and 512 technical assistance (TA) projects amounting to $341.8 million, and 23 grants amounting to $415.0 million. The sectors with the largest shares in cumulative lending are: (a) Public Sector Management (17.2%), (b) Agriculture (15.3%), (c) Energy (14.5%), and (d) Finance (14.4%) (http://beta.adb.org/countries/indonesia/main) IMF (International Monetary Fund) The role of IMF in Indonesia was obvious seen when Asian financial crisis hit Indonesia in 1997 at that time Government of Indonesia approach IMF for financial assistance, On 31 October the IMF announced a $US23 billion rescue package (with contributions from the World Bank and the Asian Development Bank) designed to stabilize Indonesia's currency and restore confidence in its financial markets (Sherlock, 1998). IMF working in macro economy level, suggesting formula to monitor governments expenditure and revenue also maintain stability on banking sector, in other word Indonesia should agree to reform its financial sector, reduce fiscal expenditure and ask government to reduce some subsidies. (http://en.wikipedia.org/wiki/Foreign_aid_to_Indonesia) Japan The history of Japan assistance had started in 1954 with the acceptance of trainees in the areas of industry, transportation, communication, agriculture and health care. Japanese assistance has contributed a great deal to the development of Indonesia through human capacity development, improvement of economic and social infrastructures and so on. This indicates that Indonesia and Japan are mutually important partners, having maintained friendly relations extending half a century. (http://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htm)
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Impact of Aid on Development Assistance

7 6 5 % of GNI 4 3 2 1 0 Indonesia IDN

1981

2005

1960

1963

1966

1969

1972

1975

1978

1984

1987

1990

1993

1996

1999

2002

Year

Figure 1 Net ODA received (% of GNI) Source: World Bank, 2011

The percentage of Net ODA % of GNI as reported by World Bank on the table above show decreasing trend 2006(0.4%) 2007(0.2%) 2008 (0.2%) 2009 (0.2%). The situation is very different with the period of 1973 when about 6 percent of development fund receive from foreign assistance through loan. Although in during that period most of government revenue came from oil export (oil boom) when the economic growth was slower in non- oil period started in 1982, 1987 1995, foreign assistance had helped the government to face difficulties after the collapse of oil prices. a. Economic Condition In 2010 Indonesias GDP (current US$) amounted USD $706,558,240,892. Total population is 239,870,937. For aid assistance, number of population in a country is important; countries with small populations get more assistance per capita or more relative to GDP. For multilateral aid, lower middle income countries with good management received 30 percent more than the typical poor management country with the same income and population (Assessing Aid p.43) Development assistance should concentrate on where it can be most effective in reducing poverty. Poverty headcount ratio at national poverty line (% of population) 2010 (13.3%), 2009 (14.2%), 2008 (15.4%), 2007 (16.6%), 2006 (17.8%). Mass poverty is usually linked with poor policies and weak institution, base on the data, poverty show increasing trend, impact of aid assistance on economic had not meet expectation.

2008

b. Social

Public spending on education (% of government expenditure)

20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 Figure 2 Public Spending on education Public spending on education, total (% of government expenditure)

Asian Development Banks (ADB) Basic Statistic 2010, shows literacy rate at age 15-24 years old in Indonesia was 96, 3%, which is in term of ability to read and write categorized as high. This open bigger chance to achieve better socio-economic status, better health and employment prospects, also increase job opportunities and ability to access higher education. Human Development Index (HDI) in 2007 0.743 and it is categorized as medium human development (hdr.undp.org). This data is match with increasing trend of percentage in public spending on education. Challenges a. Policy and political risk Like in others countries, corruption also major problem in Indonesia, corruption eradication in Indonesia is still far below the ideal situation. As reported by jakartaglobe.com In 2009, Indonesia scored 2.8 on the grading scale, with 10 being the cleanest. Foreign aid had support good governance practice in Indonesia, however community has not yet experience positive effect from the effort One possibility is that, the easy access to foreign assistance made the regime that was in power for decades lazy and it was lax in its revenue efforts (Sugema, 2007) b. Economic and social sector Economy grew by 5.7 percent in first quarter of 2010, against the first quarter 2009. Indonesias economy ranks 16th and its GDP ranks 155th in the world with nominal per capita GDP of $2590 however limited job opportunities and low income and some government policies were not pro poor and cannot overcome the problem of inequality
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external factor such as inadequate jobs in formal sector for citizen had contributes to this situation led to migration. The figure below shows the inflation in Indonesia before financial crisis and after recovery from the financial crisis of the 1997. High inflation rate is threat for assistance.

Figure 3 Inflation in Indonesia 1970 2000

Source : Sugema (2007)

The main aim of aid is to reduce poverty, every country with increasing per capita household income saw poverty decline. Poverty is social problems in each province in Indonesia. 2009 data shows a slight decreasing of poverty trend, however due to lack of access to education, natural resource, safe water and high unemployment rate, poor people are in risk of poverty level. Poor people in Indonesia March 2010 amounted 31.02 million (13.33%), compared with March 2009 data, amounted 32.53 million ( 14.15%) or decreased by 1.51 million. (Annex 1). Prioritizing aid in sector such as education and water will reduce the risk of poor people drop below the poverty line. . c. Health and Education Sector Indonesia has made remarkable progress in improving health outcomes. Dramatic reductions have been achieved in child mortality and increases in schooling since independence. In 1990 neonatal mortality rate was more than 30 per 1,000but ten years afterward, in 2010 neonatal mortality was less than 20 per 1.000 births, neo natal per 1.000 birth show decreasing trend (Table 4) along with increasing in government health expenditure ( Table 5 ). Aside from government effort, aid assistance in health and education sector through WHO and UNICEF also play important role.
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Mortality rate, neonatal (per 1,000 live births)

35 30 25 20 15 10 5 0 Mortality rate, neonatal (per 1,000 live births)

Figure 4 Morality rate, neo natal 1990 - 2010

Health expenditure, public (% of government expenditure)

8 7 6 5 4 3 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Health expenditure, public (% of government expenditure)

Figure 5 Health expenditure, public

The question are can government institution sustain this achievement without aid and technical assistance from international organization like WHO and UNICEF? Does government able to channeling and mobilize its resources with current institution? These are several challenges for Indonesia in health and education sector. In term of Education, fact shows that teachers low productivity is exemplified by their high rate of absenteeism (19 percent) and lack of teachers in remote areas despite figure 4 shows public spending on education reach 18% of total government expenditure in 2008.

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Overcome Challenges, make aid effective

From the discussion above, governments institutions have important role to plan, monitoring and evaluate the effectiveness of aid. Correct prioritization, in which sector aid assistance should be allocated, will reduce the risk of poor people to drop below the poverty line. Coordination among institution to maintain inflation rate is also important because high inflation rate might threat development assistance in Indonesia. Cooperation multi party and policy reform The 21st century indicated by chaotic situation. It require government officers and others agencies to be proactive in building networking and cooperation with many parties to sustain the development effort. Cooperation among institutions will make aid more effective in reducing poverty. However policy reforms should be tailored to country and sector condition. Coordination among agencies and government should be prioritized to ensure the donor priority match with the government long term planning. Active control from Civil Society to improve public services In case of Indonesia, the critic on official development assistance in relation with technical assistance given during the new order era is, although IFIs understand that the good governance practice in Indonesia did not perform well, but IFIs keep giving hard term loan for develop country. As a result of that loan decision, the current government administration should responsible for the debt, while some development program which actually should be funded by that loan, had failed to address the necessity of current generation. This is why a hard line CSOs in Indonesia gave criticism to the loan assistance from the bank. Developing institutional capacity. BAPPENAS is the institution where the master plans are drafted, coordinated, and discussed. To be able to plan BAPPENAS institution should have capable person, which will enable robust quality of planning. Project need to focus on creating and transmitting knowledge and Capacity. The financial aid works in a good policy and good environment, financial assistance leads to faster growth, poverty reduction and gains in social indicators in developing countries with sound economic management (Assessing Aid p.2) In Indonesia case, political and institutional reform is important to make aid effective.

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

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ANNEX 2 Commitments since 1966

BIBLIOGRAPHY
BOOKS AND JOURNAL 1. Assessing Aid (1998) What works , what doesnt and why, World Bank, Oxford University Press 2. Ransom, David (2006) MAFIA BERKELEY DAN PEMBUNUHAN MASSAL DI INDONESIA, Koalisi Anti Utang, Jakarta 3. Sugema, Imam and Chowdhury,Anis (2007) HAS AID MADE THE GOVERNMENT OF INDONESIA LAZY? Asia-Pacific Development Journal Vol. 14, No. 1, June 2007 4. Weinstein, Franklin B (2007) Indonesia Foreign Policy and the Dilleman of Dependence : From Sukarno to Soeharto, First Equinox Edition INTERNET SOURCES 5. Country Operational Strategy Studies - Indonesia : III. Strategies and Programs of Other International Funding Agencies (http://www.adb.org/documents/cosss/INO/ino301.asp?p=doccosss ) 6. http://data.worldbank.org/indicator/DT.ODA.ODAT.GN.ZS 7. Sherlock, Stephen Dr. Crisis in Indonesia: Economy, Society and Politics,8 April 1998, http://www.aph.gov.au/library/pubs/cib/1997-98/98cib13.htm retrieved on November 2011 8. The History of Official Development Assistance (ODA) from Japan to Indonesia, http://www.id.emb-japan.go.jp/oda/en/whatisoda_02.htm retrieved on Nov, 18 2011 9. www.imf.org 10. www.oecd.org

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