'WB should manage by example in Indonesia'

'WB should manage by example in Indonesia'

The following is a statement made by 17 prominent NGO leaders,
government critics and public figures present in a meeting with
World Bank president James D. Wolfensohn in Jakarta Wednesday.

JAKARTA: World Bank President James D. Wolfensohn's visit to
East Asia provides the Bank with an excellent opportunity to move
beyond rhetoric and lead by example in helping the countries of
the region to overcome the financial crisis.

The World Bank has called for wide ranging reforms covering
the region's financial and industrial sectors, trade regimes,
external debt and government institutions. These reforms should
encourage greater openness, transparency and accountability. The
Bank has also called for increased support for the poor through
grassroots efforts to create jobs, and safeguard health and
education.

These are laudable goals. However, World Bank lobbying in
Indonesia is unlikely to succeed by word alone. Like Southeast
Asia's governments, the World Bank's credibility has been
seriously damaged. Wolfensohn's message is unlikely to find a
receptive audience until he is ready to acknowledge the Bank's
role in perpetuating policies that contributed to the crisis, and
to take steps to initiate reforms in his own organization to
prevent similar occurrences in the future.

Until very recently, the Bank has assumed a largely uncritical
stand with regards to Indonesian government policy, and backed
its continuous praises with an annual infusion of financial
support. In the context of the current crisis, independent
Indonesian economists have long warned of the dangers of huge
current account deficits supported by over valued rupiah, poor
enforcement of prudential regulations in the banking sector, and
heavy reliance on short-term foreign loans. Yet the World Bank,
in its 1997 policy review released just a month before the Thai
devaluation, and even until the end of July 1997, still took an
overoptimistic view of Indonesia's economic prospects.

The Bank's substantial influence in financial circles
encouraged overconfidence among domestic and foreign investors.
The World Bank's assessment of Indonesian economic prospects in
the 1990s provides disincentives for reform and reinforced a
tending towards higher foreign debt holdings. By suggesting all
is well, the Bank has misled both domestic and foreign investors.
The Bank also failed to link financial sector loans to enhanced
supervision and oversight in the bloated banking sector.

The World Bank's reluctance to criticize the Indonesian
government reflects the cozy, mutually beneficial relationship
that has developed over the years between officials of the Bank
and the government of Indonesia. For the World Bank, Indonesia
has consistently been the most co-operative of the Asian
"miracle" economies.

Task managers at the bank, whose performance is judged on the
basis of the volume of new loans generated, found ministers
anxious to develop new projects and accept new loan obligations.
Although project implementation was often poor and
misappropriation of funds routine, there was never a shortage of
projects in the pipeline. Despite an increasing debt burden,
Indonesia always paid on time.

The Indonesian government also found the relationship
attractive. Not only did the Bank inject new funds to support the
bureaucracy, but it also agreed to withhold details of project
implementation from the public. Moreover, the Bank was willing to
suppress information and analyses that presented Indonesian
development efforts in an unfavorable light. A particularly
egregious example of this was the World Bank's Indonesia Poverty
Study of 1990. When the government rejected the initial analysis
the Bank agreed to revise the figures, and with the stroke of a
pen, lowered the incidence of poverty by 60 percent (Pincus 1996,
15). It is worth noting that the Bank carried out similar
manipulations of baseline socio-economic data in the Philippines
under President Ferdinand Marcos (Boyce 1993, 47).

A lack of Indonesian government and World Bank transparency,
has excluded the Indonesian public from information on project
selection, formulation, supervision and evaluation. Reports that
a significant percentage of World Bank funds in Indonesia went
missing each year were met with flat denials from both the
government of Indonesia and the bank. No promises were made by
either party, however, to improve public access to internal
supervision and evaluation reports, or to conduct independent
audits in order to demonstrate the fallacy of these claims.

Meanwhile, the bank has capitalized on public ignorance by
proclaiming projects such as the transmigration program and the
various kampong improvement projects as models of equitable
development (World Bank Report, 1997). Yet independent observers
have raised questions concerning the financial accountability of
these projects, and in the case of transmigration, the impact of
the project on the environment and the rights of the indigenous
peoples.

If Wolfensohn is sincere in his efforts to promote reform in
East Asia, he should demonstrate that the World Bank has no
intention of shirking its responsibilities to the Indonesian
people. In order to achieve this, urgent policy changes are
required on three fronts: transparency, public accountability and
redistribution of the burden of public sector debt.

Transparency: The World Bank's call for Indonesian public
institutions to adopt a policy of greater transparency is long
overdue. Yet the bank's hesitation to urge greater openness
cannot be separated from the bank's own secretive behavior with
respect to its operations in Indonesia. Wolfensohn should
demonstrate the importance of transparency by immediately
releasing to the public complete information on the World Bank's
Indonesian portfolio, including supervision and evaluation
reports and financial details.

Accountability: The World Bank should demonstrate the
importance of accountability by acknowledging its own role in
Indonesian policy formulation prior to the financial crisis. The
bank should also accept full responsibility for financial
irregularities relating to World Bank projects and carry out
detailed, independent audits of all existing and past bank
projects. If it is found that supervision of bank-funded projects
has been insufficient, the bank should accept a reduction of
Indonesia's debt obligations. It is unreasonable to expect that
future generations of Indonesian taxpayers must carry the entire
burden of corrupt practices that were not addressed by the bank's
monitoring systems.

Restructuring public sector debt: The World Bank should take
the lead in restructuring Indonesia's oppressive debt burden, by
renegotiating payments to the bank over the coming five years.
Wolfensohn proposes new lending to Indonesia at a rate of US$4.5
billion over three years. Yet this figure still implies net
negative transfers to Indonesia from the bank over the same
period. According to the most recent budget estimates, debt
servicing will absorb 27 percent of Indonesian central government
expenditures this fiscal year. Yet even this figure is an
underestimate since it assumes that the exchange rate for rupiah
is Rp 5,000 per U.S. dollar. If instead the rupiah depreciates to
lower than Rp 7,000 per U.S. dollar, then more than 40 percent of
central government spending will be allocated for debt servicing.

The bank can immediately support programs to protect the
Indonesian poor by rescheduling debt payments and reducing the
size of Indonesian's debt payments to a level commensurate with
Indonesia's capacity to pay. Although this would impose a
financial burden on the World Bank, it would demonstrate to the
people of Indonesia that the bank is ready to take the strong
measures required to reestablish the organization as a credible,
professional agency.