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Country Strategy and Program Update 2002-2005: Indonesia

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II. The Government's Development Strategy

A. Development Goals and Strategy

1. The Central Government

26. The Guidelines for State Policy 1999-2004 (GBHN) are the official expression of Indonesia’s development strategy. Drafted amid extreme economic difficulties and concurrent political restructuring, GBHN have been further delineated in the medium-term development strategy, the National Development Plan (PROPENAS). Presented in October 2000, it stands on five 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.

27. GBHN give high priority to improved governance, which involves anticorruption activities, decentralization, improved public sector administration, and financial sector reform. PROPENAS addresses a range of other crosscutting issues, including environmental sustainability, gender, and poverty. These programs emphasize improving the government process, stressing the need for transparent, broad-based, participatory decision making. With respect to traditional development concerns, responsibility for social sector services has shifted to local governments in line with decentralization. For infrastructure, the priority is rehabilitation of existing systems; where possible, the private sector will be encouraged to invest in new facilities.

2. Local Governments

28. Local governments are now in charge of health, education, rural roads, and important aspects of environmental resource management. Decentralization can allow broad participation to ensure local solutions to local problems, but a wide range of problems must be solved first. Mechanisms to encourage good governance at the local level must be introduced, including wider participation and transparency in decision making. The central Government also needs to ensure that national standards are accepted. If these measures are accomplished, practical steps can then be taken to identify and meet capacity needs.

B. Public Resource Mobilization

29. Public development efforts must be backed by real fiscal resources and more efficient spending. Little significant impact on the poor can be expected without substantial improvements in quality, targeting, and amount of public sector spending in key areas such as health and education. An improvement in outcomes—the ultimate objective—must be produced at the local level and will require considerable change in the nature not only of local government but also of the central Government, which has a new role under decentralization.

C. Role of External Assistance

30. The principal coordination body for external assistance is CGI, which meets annually and reviews progress quarterly. The 11th CGI Meeting held in November 2001 identified new commitments of $3.1 billion in official development assistance (ODA) in 2002. Approximately $1.3 billion of this was in quick-disbursing funds to support reforms. More pledges were also made for technical assistance (TA) and direct support to civil society. As the statement of the international community made clear, the commitments were necessarily contingent upon a wide range of central Government actions: (i) develop through participatory practices a national strategy to reduce poverty; (ii) adopt structural reforms, including those to strengthen the financial and legal systems; (iii) continue to focus on macroeconomic stability; and (iv) make significant progress on the range of important governance and judicial reform priorities. The CGI Midterm Review, held on 12 June 2002, welcomed the progress in achieving macroeconomic stability and urged continued structural and governance reforms, particularly in the legal and judicial sector.

31. Figure 5 indicates the decline in pledges at successive CGI meetings since the crisis. The decline is due in part not only to economic recovery, which reduces the need for balance-of- payments support, but also to changing structural conditions. The large public sector debt burden inhibits further borrowings except for urgent activities. The shifting of some public sector responsibilities to local governments has also discouraged borrowing in some sectors, as the central Government is operating without institutional mechanisms to channel ODA loan funds to local governments. As the private sector becomes more involved in infrastructure financing, public sector demand for loan funds diminishes. A strong political current also argues that development expenditures are subject to massive corruption and that the benefits of loan-based assistance are not sufficient to warrant additional borrowing. ⁴

32. The decline in new commitments for ODA-funded projects has a number of implications. The most important one results from the reliance of the Government on ODA for development investment. As noted in para. 10, development expenditures are likely to shrink in relative terms in 2003, exacerbating the difficulties of raising growth rates and dimming prospects for widespread poverty reduction.

D. ADB’s Assessment of the Government’s Development Agenda

33. PROPENAS provides a strong conceptual structure for medium-term development issues. It addresses issues such as corruption, which has long been an intractable problem, was prepared in a participatory manner with support from civil society and local governments, and was debated in Parliament—a significant change from the past. However, the constraints on implementation are many: (i) restricted public sector budgets impede flexible implementation; (ii) decentralization puts much of the activity needed for development in the untried hands of local governments; and (iii) the capacity of the central Government to supervise programs in a financially constrained, decentralized environment is limited. The Poverty Reduction Partnership Agreement (PRPA) between the Government and ADB provides a framework for tracking progress toward shared development goals. Table 2 shows progress as identified in the joint review in April 2002.

34. The Interim Poverty Reduction Strategy Paper (IPRSP) exercise and the PRPA reviews are being coordinated. Drafts of the IPRSP suggest that the CSP is in line with the IPRSP focus and priorities.

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