Catalog

	Table of Contents
p. 17 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 A. Summary of ADB Assistance B. Portfolio Status C. Evaluation of the Previous Country Strategy and Program D. Implications for the COS V. ADB's Strategy VI. Risks, Performance, and Monitoring

Country Operational Strategy Studies - Indonesia : IV. ADB's Development Experience

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C. Evaluation of the Previous Country Strategy and Program

110. ADB's operations in Indonesia began with a sharp focus on economic growth in the 1970s, gradually shifted to a balance between growth and social development (1980s), and finally tilted more toward social development. In the years leading to the crisis, ADB's operations were guided by the COS prepared in 1994 to coincide with REPELITA VI. The 1994 COS focused on (i) supporting growth, (ii) human resource development (HRD), and (iii) sustainable utilization of natural resources. The emphasis on supporting growth reflected the perceived need to hasten Indonesia’s transformation from a predominantly agriculture-based to an industrialized economy through infrastructure and HRD investment, and improvements in resource management. The 1994 COS noted many weaknesses in the financial sector that were highlighted by the financial crisis, but there was no suggestion that sectoral weaknesses could put the country’s development at risk. The programs outlined by the 1994 COS were, in any case, overtaken by events in 1997.

111. During the crisis ADB relied on an interim operational strategy (IOS), in close cooperation with World Bank and IMF. Work on a new COS was postponed until recovery was under way and ADB could take a medium-term view of development issues. The IOS was initially envisaged to cover 1998-1999, but the period was extended to 2000 due to the prolongation of the crisis. The IOS was intended to support the Government's recovery program, to provide concrete protection to the poor, and to arrest environmental deterioration. In view of the structural causes of the crisis, the financial sector was given priority. Reforms in financial sector governance were supported in close coordination with other aid agencies, and complemented by reforms to restructure key real sectors, including trade, industry, and energy, particularly the SOEs. The reforms were intended to address the most critical constraints and to help restore investor confidence. The IOS also supported environment operations to enable the Government to continue to support the sector at a time of fiscal distress.

112. To address the surge in poverty, ADB provided substantial support to social safety nets in health, nutrition, and education. ADB's assistance allowed the Government to expand the social safety net at a time of serious fiscal stress. Innovative channeling mechanisms enabled assistance to reach local levels quickly and efficiently. In the health sector, ADB supported strengthening of services to the poor, especially women and children. ADB assistance to education helped to keep children in school. Surveys by ADB and other groups indicate that assistance was effective in improving access of the poor to basic services. Without assistance from ADB, World Bank, and JBIC, the social impact of the crisis might have been significantly more serious.

113. ADB’s IOS also supported anticorruption initiatives. ADB adopted an Anti-Corruption Action Plan for Indonesia in 1999. Its broad conceptual framework includes:

1. encouraging and sustaining market competition to correct the market distortions that provide opportunities for corrupt practices;
2. promoting an efficient, transparent, and accountable public administration through civil service reform, improvements in the system of public expenditures management (PEM), and strengthening oversight agencies;
3. supporting citizen participation in public decision making, partly through the greater involvement of NGOs in watchdog activities;
4. legal and judicial reform; and
5. an intense effort to ensure that ADB projects are models of best practices.

114. The IOS was a useful transitional strategy;²⁷ it was relevant because it addressed the two most critical issues of the crisis: stabilizing the economy and initiating recovery, and mitigating the adverse social impacts of the crisis. Many of the critical postcrisis development issues, including governance reform, decentralization, social protection, poverty reduction, and sustainable resource management were identified and considered. Serious weaknesses in the governance structures of the corporate and banking sector and capital market that lay at the root of the crisis were addressed. These reforms have increased transparency and accountability, and provided the basis for restructuring private banks. The shift in lending modality to program assistance helped the Government to meet the costs of adjustment.

115. More broadly, despite the qualifications noted below, the strategic orientation of ADB programs, and the IOS specifically, were generally appropriate. ADB's assistance directly and indirectly contributed to Indonesia's record of poverty reduction. The improvement of social indicators, the reduction in poverty, and the expansion of infrastructure services were associated with external assistance, including ADB’s efforts. However, there were notable shortcomings. In this ADB’s experience was not unique; other aid agencies had similar experiences.

1. Across sectors there has often been a perception of weak Government agency capacity.²⁸ Weak monitoring and evaluation mechanisms have hampered project performance.
2. A top-down approach and the blueprint nature of the project process left little flexibility to meet regional needs. Little real input from stakeholders resulted in lack of a sense of local ownership in projects.
3. In some areas—corporate governance, forestry, and mining—until recently the Government did not encourage policy dialogue. Where dialogue did occur, it highlighted an inability to integrate cost recovery into policies. This could be seen in energy, health, irrigation, transportation, and urban services such as water supply and sanitation.
4. Sector strategies and similar economic and sector work (ESW) can be very useful in focusing public reform actions. The Agriculture Sector Strategy Study prepared in 1997 proved effective in developing a consensus on policies such as irrigation user fees and in decentralizing irrigation support. Conversely, lack of a solid sector strategy during some periods weakened ADB’s assistance efforts in some areas.
5. The extent of corruption and other problems of malfeasance by public officials in the country pose severe challenges to international agencies. ADB’s efforts since the adoption of an anticorruption policy and specific action plan in Indonesia have resulted in identifying individuals and firms that have conducted themselves in an improper manner—an indication of problems that must have reduced aid effectiveness. Issues affecting ADB operations surface particularly in procurement and financial management of projects.
6. Widespread problems have resulted in generalized lack of success in certain subsectors such as traditional livestock and fishery projects.
7. Private sector operations have been hampered by failure to address reforms in finance and corporate governance, to properly delineate the scope for the public sector, and to provide equal opportunities for new entrants in many sectors.

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