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Down to Earth IFIs Factsheet Series

No 5, June 2000

IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.

A Brief History of the IFIs in Indonesia

This article has been drawn and extended from Green Left Weekly, May 31, 2000 -'The legacy of IMF and World Bank rule' Max Lane and 'How the IMF feeds graft and corruption', Pip Hinman. See


The role of the International Monetary Fund in determining economic policy in Indonesia came under the spotlight after the 1997 economic crisis. In the wake of the crisis, the Suharto, Habibie and then the Wahid regimes surrendered much sovereignty over government economic policy to the IMF. However, the Washington-based international financial institutions dominated by the US and other western governments have exercised great control over the Indonesian state's economic policies since 1966.

IFIs and Sukarno

Throughout the 1950s and early 1960s, the Indonesian economy faced a crisis caused by the sudden drop in the world market price for natural rubber, at that time the country's main export. The US and the World Bank seized on this "opportunity" and lobbied the left-wing Sukarno government to receive a delegation from the World Bank. The delegation offered substantial loans to Indonesia conditional upon the implementation of severe austerity measures and the denationalisation of the previously foreign-owned sector the economy.

The World Bank package was rejected and President Sukarno confronted the US ambassador before a mass rally in Jakarta with the cry: "Go to hell with your aid!".

IFIs and Suharto

However the IFIs were back as soon Suharto came to power. In October 1966, Suharto adopted a "stabilisation plan" formulated with the "assistance" of the IMF and reversed all the nationalisation measures of the Sukarno government. The IMF insisted on the abolition of all discrimination against foreign investment and all preferential treatment for the public sector. It also demanded the abolition of the system of controls on foreign exchange that had existed under Sukarno, as well as a limit on government expenditure of no more than 10% of national income. As part of gaining the IMF's "assistance", Suharto introduced the Foreign Investment Law in 1967. This gave foreign investors a five-year tax holiday and an additional five years of tax discounts.

Control over the Suharto regime's economic policies was exercised by the IMF and the World Bank through the Inter-Governmental Group on Indonesia (IGGI and later re-named CGI). This body emerged out of discussions in 1966 among Indonesia's creditors. By 1967 it included the United States, Japan, West Germany, Britain, the Netherlands, Italy, France, Canada, and Australia, as well as the IMF and the World Bank. Each year, the World Bank prepared a "Report on Indonesia's Recent Performance" which was discussed at an IGGI meeting where representatives of the Indonesian government were also present. A few months after that examination, a second IGGI meeting would be held to assess how much "aid" (i.e. loans) would be provided to Indonesia.

Between 1967 and 1997, all the governments and institutions involved in the IGGI declared that Suharto had created a "miracle economy". This illusion was shattered by the massive economic crisis of 1997. The horrible vulnerability of the Indonesian economy to this crisis was a direct result of 30 years of IMF and World Bank control. During this whole period, the IMF and World Bank ensured that the Indonesian economy was as open as possible to the dictates of the Western and domestic financiers, with more and more deregulation and privatisation. The only "market distortion" that the IMF and World Bank weren't able to vanquish was the Suharto regime's enrichment of the "first family" and its cronies. At the same time, the whole economy was built up as fundamentally export-oriented with little investment in developing production to meet the needs of the Indonesian people.

Of all the region's countries, Indonesia was hardest hit by the crisis, and tens of millions of people were thrown below the poverty line. But what policy solution has been imposed on Indonesia by its economic masters in Washington? Cutbacks in government social spending, deregulation of economic activity and privatisation of the public sector. That is, more of the same "remedies" that helped lead to the economy's collapse in 1997-98 which led to an IFI bailout package of US$45bn all of which is now spent.

What is the current impact of the IMF and WB in Indonesia?

In return for relatively low-interest, long-term IFI loans, the Indonesian government has pledged to slash the social budget, privatise state assets, recapitalise insolvent banks, reduce trade tariffs, maintain low wages and continue the export-oriented character of the Indonesian economy. Contrary to the "growth miracles" and "export booms" that are supposed to have happened in Latin America and elsewhere, such austerity programs have brought greater poverty, more disease and less development.

As one senior IMF bureaucrat put it: "The grim reality of zero growth and the fact that fuel subsidies are going to be removed will be hard for local people to swallow. But the foreign investors will be relieved." As it turned out, the Indonesian people did not swallow it. The fuel price rise, the result of a subsidy cut, sparked mass demonstrations as it did across Indonesia previously when Suharto was forced to step down.

Cronyism Reports from the independent Indonesia Corruption Watch (ICW) group, which is investigating the extent of Suharto's corruption and cronyism, and the WB and IMF's complicity, indicate that some 20-30% of all development aid was siphoned off by Suharto and his cronies. The fact that loans for specific projects were given directly to the central government, which doled out contracts on the basis of political connections, facilitated the corruption.

The IMF announced in January 2000 another US$5 billion "rescue package". The first tranche (US$349 million) was delivered in February. The second tranche (US$400 million) was delayed from April to early June as concerns mount about the ability of the government to restructure corporate debt and clean up the banking sector and court system. The delay itself drove the Rupiah to its lowest level since Gus Dur became President. The IFI 'medicine' in 1999/2000 means privatization of many state enterprises, deregulation and opening to foreign investors of all sectors and reduction of subsidies on essentials including rice, electricity, fertiliser and cigarettes. Phone and postal rates will rise in June 2000, to be followed by two fuel price hikes (October and April 2001). Education fees have risen by 300%.

The IMF money is unlikely to do much to help most Indonesians, despite the fact that they will repay the loan. Each Indonesian will repay US$250 per person plus interest to the IFIs for the crisis loan.

Where does the IFI money go?

The lion's share of funds of the IMF crisis bailout and current loan is being spent on propping up insolvent banks. However once IMF money has entered Indonesia it is not traced.

World Bank and ADB money go to specific projects. The current World Bank Director in Jakarta said earlier this year corruption in these projects is 'endemic'.

Technically, it might not matter to the IFIs if the money is stolen because the number one aim is to 'balance the books'. That means to ensure a balanced budget and current account surplus.

Some say Indonesia has more pressing issues. The World Bank noted in May that half of all Indonesian people have a 50:50 chance of falling into poverty this year. A third of Indonesians have no access to clean water or health services or don't complete primary school.

The conditions IFI place on loans further exacerbate these issues by cutting public spending and reducing the rate of job growth as the economy becomes 'more efficient'.

Indonesia in 2000: Social Issues - a better use of IFI money?

1 in 2 Indonesians have an even chance of falling into poverty this year (World Bank 2000)
1 in 3 Indonesian children under five years old are malnourished (UNICEF 2000)
1 in 3 Indonesians have not completed primary school (BPS 1999)
1 in 3 Indonesians have no access to safe sanitation (BPS 1999)
1 in 3 Indonesians have no access to health services (BPS 1999)
1 in 4 Indonesians have no access to safe drinking water (BPS 1999)
1 in 5 Indonesians are unemployed or work less than 7 hours/week (Denpaker 2000)
1 in 10 Indonesians are not expected to live to 40 years old (BPS 1999)

This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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