Catalog

	Table of Contents
p. 1 of 27 BACK | NEXT Executive Summary I. Background II. The Government's Development Priorities and Outlook III. Strategies and Programs of Other International Funding Agencies IV. ADB's Development Experience V. ADB's Strategy VI. Risks, Performance, and Monitoring

Country Operational Strategy Studies - Indonesia

---

Executive Summary

Indonesia has experienced extraordinary upheavals in recent years, and the processes of political and economic transformation are still ongoing. Indonesia is ethnically diverse, and the distribution of poverty is uneven. The country’s natural resources, climate, and local cultures vary widely among regions, as does the potential for economic growth and poverty reduction.

In the years preceding the economic crisis, overall gross domestic product growth exceeded 7 percent a year for over two decades, transforming the country from one with widespread poverty into one with middle income. Indonesia made substantial progress in human development as the Government expanded and improved basic social services and infrastructure; education, health, family planning, and nutrition indicators improved, as did access to water and sanitation services. Severe problems remained, particularly with the quality of public service. Large blocks of the population were still without access to essential services, and little progress had been made on environmental management. Regional variations in the proportion and absolute numbers of the poor are enormous. The incidence of poverty in Nusa Tenggara Timor and Irian Jaya, for example, is more than 10 times that in Jakarta.

The economic crisis of 1997 jeopardized past success and engendered a political transformation that offers new opportunities. It also illuminated and placed in sharp relief basic systematic, institutional and policy issues of fundamental importance to successfully meeting the challenge of equitable development. Indonesia is undergoing a fundamental political transition from centralized rule to a decentralized multi-party democracy, and an independent civil society is rapidly gaining strength. But the difficult task of developing strong institutions is just beginning. Conflict has plagued parts of the country and threats to public security in several regions are significant. Under an ambitious decentralization process, major administrative and fiscal responsibilities are being transferred to local governments. While decentralization gives rise to new opportunities for grassroots participation in public decision making, it may also create difficulties; local government capacity is weak and transferring revenues to it without well-defined expenditure obligations or adequate supervision is clearly risky.

Key Points Emerging from ADB’s Poverty Assessment. The Asian Development Bank’s October 2000 Poverty Assessment in Indonesia clarified the structure of poverty in Indonesia and offered lessons for policy making. The financial crisis, in particular, called for a reassessment of the development strategy. At the peak of the crisis, perhaps an additional 15 million people fell below the poverty line, showing the vulnerability of the poor to economic shocks. The recent shock had an external origin—steep exchange rate depreciation causing inflation and a decline in real income. Subsequently, domestic factors limited the capacity to absorb and respond to the crisis, deepening the impact and increasing the vulnerability to future crises. Sound macroeconomic management and financial sector reforms are thus important, not just for stabilization but also for poverty reduction. In addition, the poverty assessment emphasized the need for good governance and for sustainable management of natural resources and the environment.

In 2000 the Government adopted PROPENAS, its medium-term development strategy. PROPENAS sets out five broad national objectives: (i) ensure national cohesion and social stability; (ii) achieve good governance and rule of law; (iii) accelerate economic recovery and strengthen the foundations for sustained growth; (iv) develop the social sectors and human welfare; and (v) strengthen regional autonomy, rural and urban development, and structural poverty programs.

ADB’s Strategy in Indonesia. During the crisis, ADB relied on an interim operational strategy (IOS), in close cooperation with other international funding agencies. The IOS was intended to support the Government's recovery program, to provide concrete protection to the poor, and to arrest environmental deterioration at a time of fiscal distress. In view of the structural causes of the crisis, the financial sector was given priority, complemented by reforms to support restructuring in trade, industry, and energy. The new Country Operational Strategy (COS) reflects consultation with the Government, other development and funding agencies, and civil society. Like ADB, many aid agencies have been revising their operational strategies. There is increasing convergence among them, especially the three largest: Japan Bank for International Cooperation (JBIC), World Bank, and ADB. In what can be called a “Jakarta consensus”, nearly all programs of international assistance are increasing the emphasis on poverty and good governance; encouraging regional autonomy and environmental protection; and supporting human development through social sector, social infrastructure and social protection efforts. This similarity requires a heightened aid coordination to avoid duplication of efforts.

The five focal points of ADB’s COS follow closely the lessons of poverty assessment, the Government’s development priorities, and the emerging programs of other international funding agencies:

1. Creating and strengthening basic institutions through improving the many relevant dimensions of governance. ADB will continue to support anticorruption efforts, assist in reviewing and revising laws to promote legal and judicial reform, and widen the involvement of stakeholders. ADB operations in various sectors provide considerable scope for activities in this area. The ADB’s efforts as a founding member of the Governance Partnership along with the United Nations Development Programme (UNDP) and World Bank provide for aid coordination to ensure that resources are effectively applied in a politically and culturally sensitive fashion.

2. Supporting sustainable recovery and pro-poor growth by enabling and encouraging private sector development. The COS for Indonesia is in many respects a private sector strategy, as it recognizes the need to develop a private sector that can support sustainable poverty-reducing growth. Enabling private sector-led growth entails multifaceted tasks and tools. In addition to enhancing the still tentative recovery and investing in the potential for long-term growth, this will demand focusing support for infrastructure, continuing ADB’s lead efforts in strengthening the nonbank financial sector, supporting competition through privatization of State-owned enterprises (SOEs) and support of small- and medium-size enterprises (SMEs), promoting good corporate governance, and strengthening the economy to benefit from changing information technology.

3. Improving regional equity through balanced regional development, especially targeting the rural areas and less developed islands. This will demand (a) supporting decentralization; (b) enhancing rural and urban sector development; and (c) expanding transport systems, particularly to link isolated areas to markets. Pro-poor investments contributing to economic growth are essential to bring about social stability. Infrastructure programs will emphasize providing essential services, utilizing the opportunities to revitalize local labor markets, offsetting the hardships faced by poor households, and expanding the potential for less developed regions. Regional programs that reflect the specific needs and opportunities of the different localities will be developed.

4. Investing in human and social development and enhancing the role of women. Effective poverty reduction includes improved access to basic social services such as education, health and nutrition, safe drinking water, and sanitation. Activities must specifically address access to and quality of public services available to the poor. One lesson of the recent crisis is that social protection mechanisms providing concrete support to the most vulnerable in an efficient and fiscally sustainable fashion must be developed. In addition, conscious action to establish institutions and processes that genuinely mainstream women is required.

5. Strengthening environment management to ensure sustainable use of natural resources and prevent adverse environmental impacts associated with development. ADB operations in Indonesia will focus on improved governance in managing natural resources, particularly with decentralization of responsibility. ADB’s efforts should focus on (a) sustainable management of coastal and marine resources, biodiversity conservation, and inland water resources; and (b) reducing urban and industrial pollution.

To ensure appropriate aid coordination, the COS promotes division of labor along both functional and geographic lines. Governance, environment, and finance show clear divisions of labor, facilitated partly by the Governance Partnership. This is particularly apt where national, not regional, policy reform is a priority. In other areas, such as rural and urban development, ADB’s operations need a geographic focus. To ensure effective and equitable resource utilization such a focus will be determined in a participatory fashion with other aid agencies and extensive stakeholder consultation in next year’s country programming exercise.

ADB’s Poverty Assessment provides the starting point for the COS. The High-Level Poverty Agreement between ADB and the Government is expected in early 2001 and should provide a concise set of performance and monitoring indicators for ADB’s assistance in Indonesia.

Back Country Operational Strategy Studies - Indonesia	Next I. Background