by Piyaporn Hawiset
16 November 1999
Japan, Indonesia's biggest aid donor, decided to shift the focus of its financial aid to Jakarta away from pumping money into the bust economy and towards providing technical expertise, government sources say. This has become apparent to Japan because of the huge levels of corruption, mismanagement and lack of transparency in Indonesia.
The change in approach is based on Tokyo's view that the effectiveness of the multi-billion dollar loans it has committed to Indonesia have been blunted by a lack of legal know-how and the country's shattered banking system, as well as corruption siphoning off as much as 65 percent of the funds applied to development and construction of infrastructure. It views Indonesia's Ministry of Public Works extremely corrupt with venal officers stealing vast amounts of development funds aimed at improving society through infrastructural development.
"We need to offer a type of assistance that would help Indonesia develop sound clearing banks that would allow aid loans to flow smoothly to industries and commiunities needing money," said an official at the Japan International Cooperation Agency (JICA).
Japan start talks on economic cooperation with the new government of President Abdurrahman Wahid at the end of November.
Japanese Aid Seen Ineffective Without Reform
Tokyo has committed $2.78 billion to Indonesia as part of its $30 billion "New Miyazawa Initiative" financial aid package for troubled Asian nations announced in October 1999. But Indonesia's paralysed and corrupt banking system has prevented the money from filtering through to industries that desperately need it, sources in Tokyo involved in development assistance said.
"Indonesian banks are so burdened by bad debts that they have literally lost credit-extending functions," said one source. Indonesian banks' non-performing loans were estimated by analysts to exceed 60 percent of their total loans. Most of these loans were extended with considerable winking to members of the economic and political elite, Soeharto family members and friends, and associated cronies. It was pseudo-legal theft of the deposits held by the banks. Most depositors have yet to see the money in their deposits despite all osrts of promises made by the banks. Vast numbers of ordinary Indonesians saw their life savings wiped out.
A major obstacle to the revitalisation of Indonesia's banking system was a lack of people with required skills in financial and legal professions, analysts said. This was a polite way of saying that Indonesia's banking system lacks the requiste number of people who are not venal or associated with the corrupt economic and political elite, or were willing to work in an honest and transparent manner.
Keishi Sugiura, senior economist at Fujitsu Research Institute, said that while South Korea's bankruptcy law had been highly effective in speeding up bad loan settlements, Indonesia had suffered from a lack of "expertise".
"Indonesia also has a bankruptcy law. But the problem is, there aren't enough legal experts such as receivers to run the system. As a result, the whole process of cleaning up bad loans has stalled," Sugiura said. "Furthermore, the judiciary is corrupt and part and parcel of the same rackets that have led to the economic collapse."
Transparent Banking Know-How Needed
To help Japan's aid loans perform their intended role, Tokyo would focus its efforts on providing Indonesia with financial know-how, officials at the Ministry of Finance and the Foreign Minstry said.
JICA, a government-affiliated agency which conducts technical cooperation in Japan's overseas aid programs, plans to send about 50 Japanese financial experts from the private sector to Southeast Asian nations, including Indonesia, before the end of March 2000. To help Indonesia boost its exports, which account for about 40 percent of the nation's gross domestic product, JICA is also conducting a joint study with Indonesia on export promotion. The sectors being studied are food and beverage, wood products, textile, electronic parts, machinery parts and auto parts.
"If Indonesian exporters succeed in taking advantage of the rupiah's weakness, that could considerably contribute to an improvement in its balance of payments," the JICA official said. JICA plans to complete the export study and produce a set of proposals by February 2000.
Restraining Foreign Borrowing Seen Key
Analysts said Japan's plan to focus its aid on technical assistance could help ease Indonesia's heavy foreign debt burden, which stood at nearly $70 billion by the end of November 1999. Fujitsu Research' Sugiura said: "I wouldn't say that infrastructure projects are useless, but efforts to hold down external debts are more important for Indonesia at this moment. Because of the massive corruption in Indonesia, it is fair to say that for the most part infrastructure projects have been ineffective, particularly with providing basic needs at the grass-roots level."
Since 1968, about three-quarters of Japan's bilateral development aid loans to Indonesia have been in the form of project loans, used to improve social and economic infrastructure.