Indonesia: More foreign debt not the answer
International donors pledged $7.9 billion in aid to Indonesia at the annual Consultative Group on Indonesia (CGI) meeting in July, 50% more than last year. But the package will not provide long-term relief to the stricken economy unless the World Bank and International Monetary Fund (IMF) relinquish their control over economic policy, and President Habibie fulfils his commitment to political and institutional reforms.
This year's CGI was dominated by the economic crisis and its social effects, described by the World Bank as the most dramatic reversal in fortune of any country in recent history.
The donors' top priority — to cover the 1998/99 budget deficit, estimated at 8.5% of gross domestic product — was met by a $7.9 billion package of quick-disbursing loans and a similar short-term fund of $6 billion, agreed by the IMF in mid-July. Britain's contribution to the CGI commitment increased to $46 million from $16 million in 1997.
During the 1990s, the CGI, chaired by the World Bank, bankrolled the Suharto regime with more than $5 billion in financial assistance each year. Massive loans were granted with total disregard for the regime's contempt for democracy and human rights, and its lack of transparency and accountability.
This year's 49% increase from $5.3 billion in 1997 signifies the west's determination to maintain its malign influence over economic policy without confronting the issue of political reform.
Budget aid
In the past, the CGI's aid commitments were largely concerned with project aid, but this year's total consists almost entirely of program aid to help balance the state budget. Most of the funding is, therefore, short term and will not create a significant increase in desperately needed income-generating capacity.
Indonesia's House of Representatives had already expressed concern at the unprecedented amount of foreign aid financing, which accounted for 43% of the state budget approved on July 23.
The neo-liberal economic recovery program for Indonesia devised by the IMF and World Bank, based on the deregulation of capital flows, simply duplicates the volatile conditions which contributed to the original economic collapse. The long-term cutbacks in public spending will have a devastating impact on those hardest hit by the crisis.
The right of the World Bank and IMF to lead the rescue attempts must now be vigorously challenged.
Indonesia's indebtedness will be increased substantially by the CGI package and the earlier IMF bail-outs. It is already one of the world's most heavily indebted countries. In March, public sector debt amounted to $65.6 billion.
A significant proportion of the aid being disbursed this year is being used to service loans from earlier years (total repayments due in 1998 were estimated at $6.4 billion). Debt servicing will be an increasing problem in future years and will impact primarily on the poor, especially when subsidies on basic commodities are eventually withdrawn according to IMF/World Bank dictates.
If the CGI donors had been concerned with the plight of ordinary Indonesians as much as their own economic agendas, they would have included an element of debt forgiveness in their package. The funds saved on debt servicing could have been used to improve the social safety-net. A limited agreement on debt re-scheduling was reached, but that is not enough.
The CGI should also have pressed the Indonesian government to pursue the wealth of the Suharto family, which could have covered the budget deficit several times over. Some estimates have put Suharto's at $40 billion — the original IMF bail-out loan was $43 billion.
Political reform
The fundamental reason for the continuing economic crisis is the failure of the Habibie government to implement the political reforms it promised.
On the eve of the CGI, Habibie made announcements on the release of political prisoners and the withdrawal of troops from East Timor in an attempt to persuade the international donors to back him.
Significantly, he succeeded in bringing the Dutch back on board. In 1992, Suharto rejected further aid from the Dutch because of their criticism of Indonesia's human rights record. The Dutch stated that they are now satisfied that Indonesia is moving towards democratisation and better human rights.
In fact, there has been a lack of progress on a number of issues, notably: the release of political prisoners; the withdrawal of troops from East Timor; the pursuit of the Suharto wealth and the overhaul of the corrupt system of governance; the lifting of restrictions on the right to free expression, the right to freedom of association and the right to organise; the pursuit of those responsible for abductions, killings, disappearances, torture and violence against women under Suharto; the reform of the military; the creation of an independent judiciary; and the repeal of repressive legislation aimed at government opponents.
After the CGI package was announced, the International NGO Forum on Indonesian Development (INFID), a coalition of more than 100 national and international NGOs, denounced the pledges as an attempt by donor nations "to revive government credibility in the eyes of the international community without taking into account the reality of the situation in Indonesia".
"A loan of this magnitude will in no way help Indonesia to resolve this crisis, since the public continues to express considerable doubt as to the legitimacy of the Habibie government, due to its incapability in implementing transparent and good government", INFID added.
The economy will not recover until far-reaching reforms of Indonesia's constitution, laws and policies are implemented with the object of establishing a political economy based on democracy, human rights and the right of everyone to share in the fruits of development.
Business interests
Such political reform is not a concern of the World Bank and its fellow donors, whose primary goal is to foster conditions favourable to western business interests.
This explains the bank's refusal to become involved in the issues of democracy and human rights. It is not, as it claims, an apolitical institution, but its political agenda is very different from that of the majority of people in the developing countries it is supposed to be assisting.
This also explains why the World Bank has shown no remorse for helping to keep Suharto in power for so long, and for ignoring the corrupt foundations on which economic growth was built.
In its annual report for the CGI, Indonesia in Crisis: A Macroeconomic Update, the World Bank states, without apology: "Long-standing defects in governance, earlier camouflaged by rapid growth, have now been exposed as fatal flaws." The bank's own role in covering up those flaws has long been apparent.
A devastating critique of World Bank policies in the Wall Street Journal on July 14 suggested there was a deliberate cover-up of Indonesia's plight. Annual reports on Indonesia "highlighted its achievements but danced a semantic jig around such problems as nepotism and collusion", the article stated.
Former consultants to the World Bank accused it of sanitising reports to remove critical references to the government or its officials. The soft approach was demanded by government officials who, under World Bank practice, got to alter reports before publication so that conditions seemed "feasible for donor countries to lend", said former finance minister Frank Seda.
This led to public and private capital flooding into the country, a major contributing factor in the 1997 economic collapse. Seda pointed out: "Until October 1997, when the crisis was under way, the World Bank was telling the world the fundamentals were sound."
Even now, the World Bank's Country Brief on Indonesia, updated in June, stubbornly proclaims Indonesia's "remarkable economic development success over the past decade" and repeats the controversial mantra about a decline in poverty from 60% to 11% between 1970 and 1996.
Although the bank acknowledges that poverty may now double, Indonesia's Central Bureau of Statistics estimates that 95.8 million people, about 48% of the population, will be living below the poverty line by the end of the year. This represents a regression to the poverty levels of 1976.
In a frank admission of the World Bank's failings, and the seriousness of Indonesia's current plight, Dennis de Tray, the bank's country director for Indonesia, said: "I will admit to have a very strong sense of not understanding fully why things are so bad." Such an admission of failure should mean the end, once and for all, of the World Bank's supervision of the Indonesian economy.
[Abridged from Tapol Bulletin 148, September. Tapol is a British-based Indonesian human rights campaigning organisation.]