'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.