Indonesia and the Asian Development Bank: Fifty Years of Development in Indonesia

By Peter McCawley

This publication is a history of the partnership between Indonesia and the Asian Development Bank (ADB). When Indonesia became a founding member of the bank in 1966, the country faced daunting challenges. In the five decades that passed, both Indonesia and ADB have evolved in remarkable ways. Indonesia developed rapidly through the late 1990s yet faced a difficult time of adjustment after the Asian financial crisis of 1997–1998. The country has since resumed growth in the last decade. For its part, ADB has widened its activities in Indonesia, transforming from a project-oriented bank into a broad-based development institution. This effective partnership reflects Indonesia’s success in working with the international community in the past 50 years.

• Language: English
• Publisher: Asian Development Bank
• Release date: Jun 1, 2020
• ISBN: 9789292622039

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INDONESIA AND THE ASIAN DEVELOPMENT BANK

FIFTY YEARS OF PARTNERSHIP

Peter McCawley

Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)

© 2020 Asian Development Bank

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Some rights reserved. Published in 2020.

ISBN 978-92-9262-202-2 (print), 978-92-9262-203-9 (electronic), 978-92-9262-204-6 (ebook)

Publication Stock No. SGP200146-2

DOI: http://dx.doi.org/10.22617/SGP200146-2

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Notes:

In this publication, $ refers to United States dollars and Rp refers to Indonesia rupiah, unless otherwise stated.

ADB recognizes China as the People’s Republic of China, Holland as the Netherlands, Korea as the Republic of Korea, and Vietnam as Viet Nam.

On the front cover, from top left, clockwise: Lady farmers transporting crops beside an irrigation canal in Yogyakarta (Photo by Ariel Javellana for ADB); Neighbors helping each other pull a fishing net in Gorontalo (Photo by Ariel Javellana for ADB); A student at Batam State Polytechnic’s teaching factory work to mass-produce microchips (Photo by Lester Ledesma for ADB); Aerial view of Hotel Indonesia roundabout in Jakarta with the background of the Plaza Office Tower, in which the ADB Indonesia Resident Mission is located (Photo by ximagination © 123RF.com); Electricity grid in Sumba (Photo by Sean Crowley for ADB); Batam State Polytechnic students learn work with metal at the welding and plasma cutting lab (Photo by Lester Ledesma for ADB). Cover design by Edith Creus.

All photos are by ADB, unless otherwise stated.

ABOUT THE AUTHOR

Peter McCawley is an economist from the Arndt-Corden Department of Economics at the Australian National University (ANU) in Canberra, who has worked on development issues in Asia and the Pacific for many years.

He has a PhD in economics (1972) from the ANU. He later taught at Gadjah Mada University in Yogyakarta in the early 1970s before becoming head, Indonesia Project, at the ANU. In 1986, he joined Australian Aid as a deputy director general.

Much of his work in Asia has been with the Asian Development Bank (ADB). Between 1992 and 1996, he was a member of the ADB Board of Directors. Later, in 2003–2007, he became dean of the ADB Institute in Tokyo.

He was also cochair and chair of Asian Development Fund negotiations between 1999 and 2008.

He has numerous publications about development issues in Asia and the Pacific.

CONTENTS

TABLES, FIGURES, AND BOXES

FOREWORD

In 1966, when Indonesia became one of the founding members of the Asian Development Bank (ADB), the country faced daunting socioeconomic challenges. Production was stagnating, inflation was skyrocketing, and there was an urgent need to rebuild relations with the international community. At the time, ADB had just been established and was beginning to prepare its first programs in developing countries in Asia, including in Indonesia.

In the five decades since then, both Indonesia and ADB have evolved in remarkable ways. Indonesia, having experienced rapid development that spanned three decades, faced a difficult adjustment after the 1997–1998 Asian financial crisis, before resuming another long period of sustained growth until today. With this growth, Indonesia has made significant development strides, including the reduction of the poverty rate to single digits, expansion of public services, improvements to the investment climate, and increased investments in infrastructure. ADB, for its part, has widened its operations from a project-oriented development bank into a broad-based development institution. ADB currently offers tailor-made financial, policy, and knowledge solutions to help its developing country members, including Indonesia, address a multitude of development challenges.

In 2016, ADB celebrated its 50th anniversary. This book has been prepared to mark 50 years of partnership between Indonesia and ADB. It reviews the way that the relationship between Indonesia, ADB, and the international community has evolved during these five decades.

Looking back over the past 50 years, the partnership between Indonesia and ADB, and the international development partner community more broadly, has been one of the most substantial—and successful—longer-term development cooperation efforts in post-war history. It is a striking example of effective cooperation between one of the largest developing countries in the world and the international community.

One of the keys to this successful development cooperation has been a will on both sides to work well together. On the Government of Indonesia’s side, senior officials work effectively with the international community, both responding to concerns from development partners and taking care to clearly communicate Indonesia’s development priorities. On the ADB side, there is a well-judged and long-term relationship with policymakers and demonstrated responsiveness to the needs and priorities of the government.

A second central element in the partnership between Indonesia and ADB has been the country’s strong ownership of the development cooperation program. The government determines the broad directions of national development policy and sets out sector strategies. It allocates projects and programs for international cooperation and monitors the implementation of related activities.

A third key to success has been the flexibility of the cooperation. As the situation changed in Indonesia, international partners also changed the way they worked to respond to the country’s evolving needs. During the 1970s, ADB mainly provided support for investment projects in Indonesia. Later, during the 1980s, the government began to give increasing attention to the need for economic reforms, so the international community supported activities to promote reform programs. In 1997–1998, large-scale fast-disbursing financial support was provided to help Indonesia adjust during the Asian financial crisis. More recently, the bank introduced flexible forms of financing, such as the results-based lending modality, which has been responsive to Indonesia’s evolving development priorities especially in infrastructure sectors.

There was much flexibility, too, in the priority that Indonesia and the international community gave to activities in different sectors at different times. In the 1970s, the need to strengthen food security was a central goal of development policy in Indonesia. ADB supported many agricultural projects and activities to promote the Green Revolution in the rice sector. Later, there was an increased focus on bank programs in sectors such as health and education, and for new social protection policies. There has been growing awareness, too, of the need to strengthen the capacity to deal with natural disasters and other risks that local communities encounter across Indonesia. In 2005, one of the world’s largest international emergency response efforts was organized when the Asian tsunami struck Aceh and Nias, and spread outward across the Indian Ocean, with a death toll amounting to nearly 230,000 people across the region. The challenges of environmental sustainability and climate change are now recognized as key issues that need to be addressed across all development sectors in Indonesia.

Today, Indonesia is an emerging upper-middle income country that aspires to achieve high-income status by 2045. Toward this end, Indonesia faces a complex set of development challenges: advancing productivity and competitiveness, developing a sophisticated workforce to support the future economy, and addressing increasing climate costs. At the same time, Indonesia must successfully navigate emerging megatrends including rapid urbanization, climate change, demographic changes, technological disruptions, and shifting economic powers.

The government recognizes these challenges. The policy priorities set out by President Joko Widodo at the beginning of his second term in 2019 address these most pressing issues. Specifically, policy priorities include a continued focus on infrastructure development and improving connectivity, human capital development, investment and job creation, structural and regulatory reform, and the improvement of public service delivery.

Looking to the future, Indonesia and ADB will continue to be steadfast partners, as they have been over the past 50 years, in advancing inclusive and sustainable development. ADB is well-positioned and remains committed to supporting Indonesia in delivering its development priorities and achieving its vision of becoming a high-income economy by 2045.

Sri Mulyani Indrawati

Minister of Finance, Republic of Indonesia and Governor for Indonesia, Asian Development Bank

Masatsugu Asakawa

President and Chair of the Board of Directors, Asian Development Bank

ACKNOWLEDGMENTS

I have been generously assisted by many people in Indonesia, the Philippines, Australia, and elsewhere in writing this book. Indonesian colleagues include one of Indonesia’s most senior policymakers Anwar Nasution, former Minister of Finance M. Chatib Basri, ADB Vice-President for Knowledge Management and Sustainable Development Bambang Susantono, Edimon Ginting and Ari Perdana from ADB headquarters in Manila, and Arianto Patunru, former head of the Institute for Economic and Social Research at the University of Indonesia and now a colleague at the Australian National University (ANU).

I have drawn extensively on published materials from the Indonesian National Development Planning Agency (Bappenas) in drafting the text. I learned much about Bappenas policies and relations with international donor agencies while working with the agency in Jakarta for over two years between 2011 and 2013. I would like to make special mention of help from Pungky Sumadi and Wismana Adi Surya, both senior officials in Bappenas, as well as generous assistance from staff of the Bappenas library.

Numerous current and former ADB colleagues also provided help in numerous ways. These include Jade Tolentino, who worked with me on our earlier book Banking on the Future of Asia and the Pacific, as well as ADB Secretary Eugenue Zhukov, and staff of his office, Walter Kolkma and Kori Emzita. The range of former ADB staff who offered advice and pointed to useful sources of information includes Robert Boumphrey, Paul Dickie, John Eyers, David Green, Chris MacCormac, Khaja Moinuddin, Pieter Smidt, and Robert Wihtol.

From ADB’s Indonesia Resident Mission in Jakarta, Country Director Winfried Wicklein, and my former bank colleague in Jakarta, Sona Shrestha, encouraged me to begin to work on this study. Emma Allen, Meity Tanujaya, and Cahyadi Indrananto provided ongoing support while the text was being prepared. Amr Qari, David Dovan, and Juliette Leusink supplied up-to-date information about ADB’s private sector operations in Indonesia.

A number of academic colleagues who have worked on Indonesian economic affairs for many years also provided comments and advice. These include Anne Booth, Chris Manning, Stephen Grenville, Hal Hill, and Pierre van der Eng.

The book was produced to a very tight deadline. Hannah Maddison-Harris provided excellent editorial support. The ADB Department of Communications in Manila helped ensure that the production process was completed on time.

Finally, I should mention that the views set out here are my own. They are not the official views of ADB. Mistakes and errors of judgment that readers may identify are mine.

Peter McCawley

ABBREVIATIONS

EXECUTIVE SUMMARY

In the late 1960s, the international community began to support a new and rapidly expanding program of assistance to Indonesia. The aim was to promote economic recovery in Southeast Asia’s largest country after a long period of political and economic difficulties since independence in 1945.

Over the next five decades to 2016, the flow of assistance to Indonesia became one of the largest sustained programs of foreign aid supported by the international donor community in the post-World War II period (Table 1.1). The total amount of support reached around $340 billion (2016 constant prices), made up of around $130 billion of official aid—gross official development assistance (ODA)—and almost $210 billion of other flows, mainly provided as loans—gross other official flows (OOF).¹ Much of the assistance was provided as grants. Many loans were also approved, both by bilateral national agencies and by international organizations such as the World Bank, the International Monetary Fund (IMF), and ADB.

This book outlines the experiences of ADB in Indonesia since the late 1960s. During these five decades, ADB worked closely with partners in Indonesia including the rest of the donor community and the Government of Indonesia (Table ES 1). The account of ADB’s activities is set within the broader context of the programs of the international donor community and of the development effort led by the government.

Table ES 1: Summary of Notable Events, 1966–2018a

ADB = Asian Development Bank, CGI = Consultative Group on Indonesia, IGGI = Inter-Governmental Group on Indonesia, TA = technical assistance.

a For additional details, see Notable Events tables in the chapters below.

Early Years (1967–1976)

When the new Soeharto government began the task of economic rehabilitation in 1967, the first priority was to restore economic stability. A looming debt crisis needed urgent attention. To discuss debt rescheduling, meetings of creditor countries were convened in late 1966 and 1967. A range of meetings was held including with Eastern Bloc countries and with other debtors under the auspices of the Paris Club. One outcome of the meetings was that a new aid group—the Inter-Governmental Group on Indonesia (IGGI)—was established. Meetings of the IGGI, chaired by the Government of the Netherlands, were held annually, and sometimes more frequently, throughout the 1970s and 1980s. Later, in 1992, a new aid consortium, the CGI chaired by the World Bank, was formed to continue the aid coordination activities of the IGGI.

In 1969, Indonesia’s First Five-Year Development Plan (Repelita I), for 1969–1974, was adopted. Early concerns about food policy came to the fore in 1972 when a severe drought led to fears of rice shortages and to sharp increases in rice prices. No sooner had rice prices been stabilized than other inflationary pressures emerged: In late 1973, there was a sharp rise in the world price of oil following instability in the Middle East. Indonesia, as an oil-exporting country at that time, benefited from a huge windfall following the oil boom. But the rapid expansion in the oil sector brought troubles as well: In 1975, a financial crisis in the state-owned oil company Pertamina, caused by ambitious foreign borrowings, attracted widespread publicity and was of major concern both to the Government of Indonesia and the international donor community.

ADB: Early Work

When ADB began work in Indonesia in 1967, stabilization of domestic food markets was one of the government’s top priorities. The bank’s first technical assistance (TA) activity in Indonesia, which was the first TA grant approved by ADB for an individual member country, was for a study of ways to improve food supplies. The bank also aimed to expand its investment activities so that a pipeline of project lending would build up. The first ADB loan, agreed to in 1969 on concessional low-interest terms, was to support the Tajum Irrigation Project in Central Java. During the next few years, the international assistance program to Indonesia expanded and ADB, too, broadened the range of activities it supported.

In 1971, ADB began what was to become a large bank program in the power sector in Indonesia. Loans were approved for projects in Pontianak in Kalimantan and in West Sumatra. During the next few years, more loans for the power sector were approved. ADB provided support for other sectors as well. Finance was agreed to for improvements at several of Indonesia’s main ports and for loans in the sugar industry and for the fisheries sector in the province of Irian Jaya (later Papua). In the mid-1970s, ADB’s loan pipeline broadened to include activities in the manufacturing sector.

In 1976, Indonesia hosted the Ninth Annual Meeting of the bank in Jakarta. The event signaled Indonesia’s growing national confidence as a member of the international community. In his speech to the conference, President Soeharto outlined Indonesia’s views on a range of key aspects of international relations at the time.

At the end of the first decade of ADB’s work in Indonesia, from one point of view the activities of the bank were still largely responsive to requests from Indonesia and lacked strategic direction. But already, and less noticeably, the bank was beginning to strengthen a long-term program focused on the provision of basic infrastructure across the country.

A Widening Role (1977–1986)

As the second decade of ADB’s work in Indonesia began, the immediate prospects for the country’s economy were somewhat uncertain. On one hand, the worst of the difficulties posed by the Pertamina crisis had largely been overcome, improvements in the international economy were encouraging, and the major investment surge in Indonesia made possible by the 1973–1974 boom was fueling growth. On the other hand, it was unclear how long the revenues from the oil windfall would continue to hold up.