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Social services

Commentary

The role of World Bank and IMF post-tsunami in Indonesia

26 January 2005

The Paris Club communiqué released on 12 January stated that creditors would wait on the assessment from the World Bank and IMF on the reconstruction and financing needs in tsunami-affected countries before they deal with the repayment of the debts that these countries owe to creditors. This of course includes Indonesia, the worst-hit country.

The tidal wave and earthquake in Aceh and North Sumatra has killed at least 140,000 people, destroyed most of the infrastucture and made 500,000 people homeless. In the recent Consultative Group on Indonesia (CGI) meeting- a consortium of donors and creditors- reconstruction costs for Aceh and North Sumatra were estimated at $ 2 billion. Indonesia received $ 1.7 billion from the CGI, in the form of a $ 1.2 billion grant and concessional loans amounting to $ 500 million.

The multilaterals, including the World Bank and the Asian Development Bank (ADB), were pretty quick in responding to reconstruction needs. They have both given soft loans to Indonesia. The World Bank, the IMF and the ADB have played a bigger role in Indonesia’s economy ever since the financial crisis that hit the country in 1997. With project loans worth $ 1.1 billion, and the policy reform support loan, the Bank pushed for privatisation and other new regulations that would support economic liberalisation. From this loan, came Indonesia’s new law on oil, gas and electricity that allows for the privatisation of respective state-enterprises. Like any other country that has received an IMF programme, Indonesia has had to liberalise its trade, allowing giant retailers like Carrefour and Circle K to operate in Indonesia. Privatisation of education and health services are soon to follow. Even after Indonesia terminated its programme with the IMF at the end of 2003, the programme of liberalisation and privatisation continues. Taking the option of post-programme monitoring, Indonesia continuously holds consultations with the IMF in which the progress of the adjustment programme is regularly assessed. The Indonesian economic white paper, dubbed the ‘post-IMF programme is merely a continuation of the IMF Programme.

The second biggest issue in Indonesia where the Bank plays an important role is the financing of infrastructure. While it is true that Indonesia’s infrastructure needs boosting, the Bank is directing infrastructure development towards energy and transportation mega- projects that would require huge capital.

The recent infrastructure summit reveals the plan of both the government and the creditors to open investment, in other words, privatise power, water and sanitation, telecommunication and roads. The Bank’s role in Indonesia has been that of promoting investment and inclusion of big companies rather than poverty eradication and ensuring equity.

The Paris Club press release that gave a huge role for the Bank and the Fund in the assessment of reconstruction financing is therefore a major concern. One of the concerns is of course in whose interest would the assessment be based on? What guarantee do we have that these institutions will not put the mega-projects as the priority of infrastructure reconstruction in Aceh and North Sumatra?

It is intriguing that the IMF is invited to calculate the financing needs for reconstruction in tsunami-affected areas. Isn’t this institution supposed to specialise in monetary and fiscal policy? While Indonesia is engaging this insitution on adjustment policies that have impoverished the people by its austere fiscal policy and tight budget, we should never involve them further in programmes that are not their main mandate.

If multilateral institutions are to be involved in the reconstruction of Aceh and North Sumatra, they should clearly follow the agenda of poverty reduction and the promotion of equity. In the case of Indonesia, where the most urgent need is finance without conditionality, the Bank would be helpful if it supported the efforts of the Indonesian people to seek comprehensive relief through the provision of grant financing.

If the World Bank’s involvement in reconstruction would mean further mega projects, it should clearly be avoided.

Jakarta, January 26, 2005