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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2002-2005: Indonesia
IV. ADB’s StrategyA. Summary of Key Development Challenges41. The core development challenges today are very similar to those in early 2001, when the COS was prepared. However, experience suggests that economic growth, which remains weak mainly due to stagnating investments, must be increased. The Government's structural reform program must be deepened. Poverty may increase, which will require local governments to continue to provide basic services. Finally, increasing the effectiveness of aid has emerged as a major issue and is an important element of the CSP. 1. The Nature of Poverty in Indonesia42. The dramatic surge in the incidence of poverty in the wake of the crisis demonstrates three important lessons. First, sound macroeconomic management and financial sector reform are important not just for economic stability but also for poverty reduction. Second, inflation, particularly the price of basic food commodities, has a dramatic impact on household welfare and the number of poor. Third, the steep rise in transient poverty confirms the vulnerability of a large number of people just above the poverty line, pointing to the need for social protection as well as more dynamic and widely available jobs. 2. Need for Sound Investment in Human Development43. More effective investment in human capital, through health and education, will be crucial to long-term poverty reduction. Redressing past problems will take focused efforts, particularly at the local level, in an untried institutional environment. Not all have benefited equally from past trends, especially women and those on the less developed islands. A number of nationwide concerns remain, including low-quality education, poor maternal health, and deficient diet of the poor and near-poor. Diseases such as malaria and tuberculosis are a serious threat to the population in general, and HIV/AIDS to some vulnerable groups. Although women have benefited from some targeted programs, including family planning, maternal mortality remains high. The incidence of poverty varies enormously by region, and broader indicators of human development vary considerably, exacerbating political and sectarian tension, which, in turn, hinders development. 3. Need for Good Governance44. The policies needed to protect and realize Indonesia’s potential depend upon improved governance. The perception of pervasive corruption inhibits investment by foreign and domestic entrepreneurs. Corruption particularly burdens the poor. The 2001 COS noted: “Nontransparent and arbitrary government practices, protection for established businesses, and a judicial system that caters to the rich will defeat the most ardent efforts of the poor to improve their situation.” Efforts to reduce corruption will require strenuous institutional development of the public sector: legal and judicial reform, improved financial management (especially with respect to activities such as procurement), greater transparency at all levels of government, civil service reform, and a host of actions to reduce the role of Government in the productive sector. 4. Protection of the Environment and Natural Resources45. Management of environmental and natural resources in a sustainable fashion can help reduce poverty immediately and contribute to long-term growth potential. The poor do not have the resources to protect themselves from pollution, often live in areas prone to flooding or landslides, and lack adequate sanitation and clean water. Policies should focus on coastal, fishery, and marine resources to support institutional development, and on improving governance for institutional development. 5. Promotion of a Dynamic Economy46. The long, slow recovery from the crisis has highlighted economic weaknesses and public policy priorities. Lack of public and private investment slow economic activity and weaken the potential for future growth. Private sector development can be enhanced by political stability and forceful implementation of reforms. Accelerated economic reforms, properly implemented, will stimulate private investment, encouraging a "virtuous cycle" of higher incomes, larger public revenues, and a stronger consensus in favor of further reforms. The central Government needs to focus on strengthening the financial sector, meeting infrastructure needs, and encouraging more competitive markets, especially through legal and judicial reform. Specific policies to accelerate restructuring of SOEs and encourage SME development are needed. B. Main Features of Poverty Partnership Agreement47. The PRPA, signed on 5 April 2001 (para. 33), was reviewed in April 2002. It endorsed the analysis and focus of the government vision and the ADB 2001 COS. Based on the inputs of Government, civil society, and other external funding agencies, the agreement set out a long-term vision and agreed-upon targets for poverty reduction. The PRPA called for (i) inclusive growth and regional equity, (ii) human resource development, (iii) a system of transparent and accountable governance, and (iv) poverty reduction. The first annual review confirmed the overall thrust and recommendations of the PRPA. Decentralization was recognized as posing challenges, requiring harmonized procedures for projects implemented by local governments, and requiring district-level poverty indicators. The rapidly changing institutional structure requires continual review of the economic context of poverty and program of assistance. C. CSP Strategic Focus48. Hewing closely to the 2001 COS, the proposed strategic focus is somewhat simplified and gives greater emphasis to reducing poverty and regional inequalities. Five focal areas provide a structure for project assistance and policy dialogue (Figure 1):
49. The future lending pattern under the new CSP (as also envisaged in the COS) departs significantly from the crisis-related program lending under the IOS. With an improvement in the Government's fiscal position, a drop is expected in the share of program lending, although flexibility will be retained in the program to respond to possible needs for larger quick-disbursing assistance, should the economic situation so require. Structural reforms will continue to be pursued using program instruments focusing on corporate and nonbank financial governance, privatization of public services, and policy reforms of the rural economy. D. Improving Effectiveness of ADB Assistance—a Geographic Focus50. A vital element of the CSP is devising new ways to increase the impact of ADB's assistance. As noted, a large number of ongoing projects appear at risk of failing to meet their goals. One avenue for improving the effectivity of ADB's work is through joint review missions with partners such as the World Bank and Japan Bank for International Cooperation (JBIC) to solve common problems. Some of those identified reflect pervasive weaknesses in governance and underscore the need for unified programs by the international community to support reforms. Other problems have also been noted in project evaluation work, including the need for expanded dialogue with local stakeholders to ensure ownership and viable project implementation, which, given the new distribution of responsibility under decentralization, will be demanding of staff and TA resources. 51. Having a geographic focus in country operations is one way to appropriately "decentralize" ADB’s program. ADB’s operations were often dispersed across the archipelago, based on sector-specific needs as identified by government ministries, which did not allow projects to be grouped in similar locations across sectors. As a result, ADB’s program has missed opportunities to gain in-depth regional knowledge, find and encourage local development partners, and build a critical mass of projects. A sharper geographic focus can correct this, enabling a higher overall impact from closely coordinated activities. 52. In developing a geographic focus for operations, the spatial location of the poor and the nature of regional poverty are critical factors. The likely resources and other programs of development and assistance must also be taken into account. In the analysis, each province was mapped against three criteria: (i) extent and intensity of poverty, (ii) financial resources of local governments, and (iii) level of human capital development. The following classification of provinces resulted (see map):
53. ADB will seek to work in the poorest districts and municipalities of these provinces. As no operations can succeed without good governance, work centers should be selected by identifying local development partners committed to good governance and poverty reduction after establishing indicators and a review process. This work has commenced and ADB staff have held discussions with the governments of West Nusa Tenggara, West Java, and North Sumatra as part of the CSP process. The consultations have involved key officials at the provincial, district, and municipality levels as well as representatives from regional legislative bodies. Consultations have also been held with local civil society organizations (CSOs). The concept of a sharper geographical focus for ADB appears to be generally accepted. The regions have endorsed the principles of good governance and are prepared to enter into performance agreements focusing on poverty reduction and good governance that can be monitored. ADB will continue work in this area. 54. This focused approach is not meant to be a “straitjacket” preventing ADB from fulfilling commitments or meeting special needs in different areas. Flexibility will, therefore, be retained. About half of ADB's project investment will be targeted in 2003-2005 in the multisector and human development focus areas. Experience gained in targeting will be used to further refine the concept and its applicability as an instrument to improve aid effectiveness. 55. To reap the benefits of a geographic focus, different tactics have to be adopted, including establishing local project implementation and liaison offices in areas where multiple projects are ongoing or planned. Cross-sectoral missions will also be desirable. A cluster approach to TA or loan projects will be encouraged. Regionally specific sectoral strategies are needed, especially in agriculture, to tailor development plans to local needs. Finally, comprehensive information sharing with development partners is essential, especially with bilateral assistance programs and international NGOs that have large field staffs.
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