Indonesia and the Asian Development Bank Fifty Years of Partnership Partnership of Years BANK: Fifty DEVELOPMENT INDONESIA AND THE ASIAN This book is a history of the partnership between Indonesia and the Asian Development Bank (ADB). When Indonesia became a founding member of the bank in 1966, the country faced daunting challenges. In the five decades that passed, both Indonesia and ADB have evolved in remarkable ways. Indonesia developed rapidly through the late 1990s yet faced a dicult time of adjustment after the Asian financial crisis of 1997–1998. The country has since resumed growth in the last decade. For its INDONESIA AND THE part, ADB has widened its activities in Indonesia, transforming from a project-oriented bank into a broad-based development institution. This eective partnership reflects Indonesia’s success in working with the international community in the past 50 years. ASIAN DEVELOPMENT BANK FIFTY YEARS OF PARTNERSHIP About the Asian Development Bank Peter McCawley ADB is committed to achieving a prosperous inclusive resilient and sustainable Asia and the Pacific while sustaining its eorts to eradicate extreme poverty Established in it is owned by members— from the region Its main instruments for helping its developing member countries are policy dialogue loans equity investments guarantees grants and technical assistance ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org INDONESIA AND THE ASIAN DEVELOPMENT BANK FIFTY YEARS OF PARTNERSHIP Peter McCawley Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2020 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org Some rights reserved. Published in 2020. ISBN 978-92-9262-202-2 (print), 978-92-9262-203-9 (electronic), 978-92-9262-204-6 (ebook) Publication Stock No. SGP200146-2 DOI: http://dx.doi.org/10.22617/SGP200146-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. 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Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. Notes: In this publication, “$” refers to United States dollars and “Rp” refers to Indonesia rupiah, unless otherwise stated. ADB recognizes “China” as the People’s Republic of China, “Holland” as the Netherlands, “Korea” as the Republic of Korea, and “Vietnam” as Viet Nam. On the front cover, from top left, clockwise: Lady farmers transporting crops beside an irrigation canal in Yogyakarta (Photo by Ariel Javellana for ADB); Neighbors helping each other pull a fishing net in Gorontalo (Photo by Ariel Javellana for ADB); A student at Batam State Polytechnic’s teaching factory work to mass-produce microchips (Photo by Lester Ledesma for ADB); Aerial view of Hotel Indonesia roundabout in Jakarta with the background of the Plaza Office Tower, in which the ADB Indonesia Resident Mission is located (Photo by ximagination © 123RF.com); Electricity grid in Sumba (Photo by Sean Crowley for ADB); Batam State Polytechnic students learn work with metal at the welding and plasma cutting lab (Photo by Lester Ledesma for ADB). Cover design by Edith Creus. All photos are by ADB, unless otherwise stated. ABOUT THE AUTHOR Peter McCawley is an economist from the Arndt- Corden Department of Economics at the Australian National University (ANU) in Canberra, who has worked on development issues in Asia and the Pacific for many years. He has a PhD in economics (1972) from the ANU. He later taught at Gadjah Mada University in Yogyakarta in the early 1970s before becoming head, Indonesia Project, at the ANU. In 1986, he joined Australian Aid as a deputy director general. Much of his work in Asia has been with the Asian Development Bank (ADB). Between 1992 and 1996, he was a member of the ADB Board of Directors. Later, in 2003–2007, he became dean of the ADB Institute in Tokyo. He was also cochair and chair of Asian Development Fund negotiations between 1999 and 2008. He has numerous publications about development issues in Asia and the Pacific. CONTENTS About the Author iii Tables, Figures, and Boxes vii Foreword x Acknowledgments xiii Abbreviations xv Executive Summary xviii Chapter 1—Introduction 1 A Multilateral Agency 2 Development Activities 3 Finance 5 ADB in Indonesia 7 Overall Assistance to Indonesia 9 Chapter 2—Indonesia in the Region 15 Chapter 3—Early Years (1967–1976) 21 The Inter-Governmental Group on Indonesia 23 Next Steps for Indonesia 24 Growing International Support 26 ADB Begins Work 29 Changes in Indonesia 37 Delivery of Aid 38 Next Steps for the Bank 42 Annual Meeting in Indonesia 44 Ten Years Old 45 Chapter 4—A Widening Role (1977–1986) 51 New Challenges 52 External Shocks 53 Donor Programs 1977–1980 55 ADB Programs 56 Changes in Approach 62 Economic Changes 64 Donor Activities in the Early 1980s 68 ADB in the Early 1980s 71 Into a Third Decade 76 Contents v Chapter 5—Adjustment in Indonesia (1987–1996) 81 Adjustment 81 The October 1988 Package 84 Changes for Donors 88 ADB in the Third Decade 91 Adjustment Continues 102 Donor Activities in the 1990s 108 ADB Programs 112 Calm Before the Storm 122 Chapter 6—Asian Financial Crisis (1997–1998) 127 Before the Crisis 128 The Crisis Erupts 130 Donors and the Crisis 136 ADB Response 139 Issues from the Crisis 142 Causes of the Crisis 142 Policy Responses 144 Mitigating the Social Impact 145 Views in the Region 146 Lessons for ADB 148 Chapter 7—Recovery (1999–2006) 151 Aftermath of the Crisis 151 Difficulties of Recovery 152 Strengthening Economy 153 The Donor Community 155 Differences with the Donor Community 156 A Changing Mood 160 ADB’s Role 164 ADB Programs 168 New Strategy 174 Tumult Through the Decade 184 Chapter 8—Middle-Income Country Issues (2007–2019) 191 Strengthening Recovery 191 New Era for Donors 199 Place of ADB 209 vi Contents ADB Activities 215 Beyond 50 Years: 2017–2019 229 Relations with Donors 231 ADB Looking Ahead 232 Reviewing the Decade 239 Chapter 9—Lessons and Challenges 245 Indonesia and the International Community 245 Asian Development Bank 246 Four Efforts 251 Challenges Ahead 257 Bibliography 258 Appendixes 275 1 Indonesia: Overview Charts and Tables 276 2 Asian Development Bank and Indonesia: Charts and Tables 278 Index of Names 288 TABLES, FIGURES, AND BOXES Tables ES 1 Summary of Notable Events, 1966–2018 xix ES 2 Main Phases in ADB Assistance to Indonesia xlvii 1.1 Total International Official Flows to Indonesia, 1967–2016 10 1.2 Total Official Gross Flows to Indonesia, 1967–2016 13 2.1 Selected Regional Institutions and Indonesia 18 3.1 Notable Events, 1966–1976 33 3.2 ADB Early Lending to Indonesia, 1969–1973 35 3.3 ADB Lending to Indonesia, 1974–1976 43 4.1 ADB Lending to Indonesia, 1977–1981 60 4.2 Notable Events, 1977–1986 63 4.3 Planning Investment and Government Receipts 67 and Spending as a Share of GDP, Various Years 4.4 IGGI Commitments and Disbursements, 1974–1981 69 4.5 ADB Lending to Indonesia, 1982–1986 72 5.1 Chronology of Adjustment Programs in Indonesia, 86 1983–1990 5.2 Notable Events, 1987–1996 91 5.3 ADB Lending to Indonesia, 1987–1991 93 5.4 ADB Cofinancing in 1989 and 1990 101 5.5 ADB Lending to Indonesia, 1992–1996 113 5.6 ADB Approved Lending to Indonesia by Sector, 117 1969–1994 5.7 ADB Approved Lending and Technical Assistance 118 to Indonesia, 1969–1994 5.8 ADB Approved Lending to Indonesia by Mode, 118 1969–1994 5.9 Advisory Technical Assistance for the Financial Sector, 120 1990–1996 6.1 Main Crisis-Related Loans provided by ADB to 149 Indonesia during the Asian Financial Crisis 7.1 Total Pledges at IGGI and CGI Meetings, 1967–2003 163 7.2 Pledges at IGGI and CGI Meetings by Share, 1967–2003 164 7.3 Notable Events, 1997–2006 165 7.4 ADB Lending to Indonesia, 2000–2006 169 7.5 Decentralization Support Loans to Indonesia, 179 1998–2009 viii Tables, Figures, and Boxes 8.1 Notable Events, 2007–2018 210 8.2 Disbursements