Media Wahyudi Askar / JIAP Vol. 1 No.

2 (2015) 14-18

JIAP Vol. 1, No. 2, pp 14-18, 2015

© 2015 FIA UB. All right reserved
ISSN 1979-7243

Jurnal Ilmiah Administrasi Publik (JIAP)

U R L : h t t p : / / e j o u r n a l f i a . u b . a c . i d / i n d e x. p h p / j i a p

Foreign aid and economic development in Indonesia

Media Wahyudi Askar a

a
University of Manchester, United Kingdom

I N F O R M A S I A R T IK E L ABSTRACT

Article history: It has been suggested that foreign aid can bring positive impact on economic
Dikirim tanggal: 01 Januari 2015 development. However, in developing countries, such as Indonesia, the impacts of
Revisi pertama tanggal: 15 Januari 2015 foreign aid program are mainly seen temporary. Instead, foreign aid has
Diterima tanggal: 25 Oktober 2015 contributed to the growing of the real debt burdens. The lack of capital, however,
Tersedia online tanggal 10 November 2015
should not be a reason for taking foreign aid in Indonesia. This problem is
actually because the Indonesian Government is corrupt, inefficient and poorly
managed.
Keywords: foreign aid,economic
development, Indonesia
INTISARI
Hutan luar negeri sering dianggap berdampak baik terhadap pembangunan
ekonomi. Namun demikian di Indonesia sepertinya dampak tersebut hanya terlihat
temporal. Beban hutang yang semakin berat justru terlihat dalam kasus utang luar
negeri di Indonesia. Karena itulah kekurangan modal semestinya tidak menjadi
alasan utama pemerintah memutuskan utang. Perbaikian tata pemerintahan yang
bersih dari korupsi dan efisien adalah akar masalahnya.

2015 FIA UB. All rights reserved.

1. Introduction term outcomes such as, self-reliance and improvement

LQ FLWL]HQV¶ LQFRPH KDYH QRW EHHQ DFKLHYHG ,QVWHDG RI
There are a number of apparent relationships between reducing poverty, foreign aid has contributed to the
foreign aid and economic development in Indonesia. increasing of the real debt burdens which potentially
Many economic development programs in reducing cause a greater dependency on the international aid. The
poverty were supported by foreign aid. The most Indonesian government would then have to pay back
REYLRXV H[DPSOH LQ UHFHQW \HDUV LV WKH ,QGRQHVLD¶V external debt maturing every year and has required the
National Program for Community Empowerment country to reduce the funding for social welfare.
(PNPM). This four-year program helped to overcome on
the lack of infrastructure, and improving local This paper argues that, the shortage of capital and the
governance performance (Worldbank, 2013). Given problem of poverty should not be considered as the main
that, it was assumed that the Indonesian government has catalyst behind the move toward foreign aid. Instead, in
achieved some of its economic development goals in developing countries, like Indonesia, these two
short term mission. problems are actually driven by poor and corrupt
government. The government has failed to raise
However, if we try to look at this from a critical point substantial revenues and to formulate appropriate
of view, the overall consequences of this program are poverty reduction policies. Therefore, to overcome the
mainly seen to ossify temporary. Meanwhile, the long external debt problems, debt relief is a necessity.
²²²
Corresponding author. Tel.: +44-775-9326266; e-mail: [email protected]

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 Media Wahyudi Askar / JIAP Vol. 1 No. 2 (2015) 14-18

Although there is a risk in implementing debt relief, it (Marjit and Mukherjee, 2000), and composition of aid
seems like the best solution to reduce the burden of debt matters (Alvi and Senbeta, 2011). However, the relevant
payment. question in this context is that whether the widespread
poverty should be the main factor for lending. In this
Based on the discussion above, the purpose of this
FDVH 7HPSOH¶V DUJXPHQW LV DJDLQ UHOHYDQW LQ H[SODLQLQJ
paper is to discuss the impact of foreign aid on
behind the unrealistic reasons of foreign aid in
developing countries and the reason why debt relief
developing countries. He (2011) suggests that the
should be pursued. The paper consists of two main
existence of poverty should not be the reason for foreign
sections. The first section outlines the theoretical
aid because poverty in these countries is associated with
approaches to explain the main argument of this paper.
poor governance performance and rent seeking
The next section outlines a case study to elaborate the
problems.
main argument which in this paper is Indonesia.
Turning now to the debt relief scheme, many scholars
2. Theory hold the view that it should be carried out by developing
The issue of foreign aid effects on economic countries. According to Krugman (1988), the increase of
development has long been a subject of the debate. debt would hinder economic growth due to overhang
Chenery and Carter (1973) define the implementation of problems. This condition is described by Krugman in
foreign aid into four assumptions. Firstly, foreign aid WKH µ¶'HEW /DIIHU &XUYH¶¶ 2YHUKDQJ RFFXUV ZKHQ WKH
can be used to encourage investments and economic countries are not able to repay the debt because the total
growth. Secondly, the amount of foreign aid will debts earning the maximum points. In this situation,
decrease as a consequence of economic growth countries have experienced a decline in efficiency.
achievement. Thirdly, foreign aid plays an important Krugman assumed that debt relief will push back
role in improving resource mobilization and structural efficiency and lead to reduce the risk of economic
change to reduce poverty rates. Lastly, in order to uncertainty.
generate economic growth within foreign aid scheme, a Another positive impact is suggested by Cohen
strong foundation of production and trade are needed. (1993) who argues that debt relief can enhance
In contrast to Chenery and Carter, Temple (2011) economic growth through encouraging the use of
argues that assessing the effect of foreign aid which resources for productive investment. Then, the
based on economic growth has to be rather subjective government will have the flexibility to manage their
because basically in developing countries, humanitarian investment and public expenditure. In the same vein,
aid achievements such as education and health sector are Temple (2011) also points out that debt relief is the best
far more urgent priorities than economic growth. method to increase the rate of investment. Debt relief
Moreover, Temple proposes that the idea of foreign aid will create economic stability, which ultimately can
to stimulate economic growth through investment due to stimulate investment trusts.
limited domestic savings is completely misinterpreted. However, there are some critics among scholars about
Although greater investments that are driven by foreign the conditionality of debt relief. According to Serven
aid are useful to initiate growth, this scheme is not (1997), debt relief will force the government to meet
sufficient to produce the economic transformation certain covenants. As a consequence, there is a future
needed. uncertainty that is resulting in lower local investment
On the other hand, there is also inconsistent with and failed to enhance economic growth. More broadly,
&KHQHU\ DQG &KDUWHU¶V argument which claims that the Arslanalp and Henry (2004) claim that debt relief in the
amount of foreign aid would decrease automatically context of developing countries would not have a
after economic growth has been reached. As we know, significant impact because economic institutions in
the number of foreign aid has been increasing from time these countries are very poor and unable to support
to time in developing countries. The politics of foreign domestic investments. In this case, debt relief would
aid, uncertainty of economic stability, and the slow likely result in the uncontrolled entry of the external
increase in revenues force these countries to choose investment which can guide to the weakening in their
foreign debt as the main source of funding (Basri, 2004). economy.
The controversy also occurs when it comes to poverty Lesson learned from these literatures is that although
reduction. A number of researchers have reported that debt relief has a certain benefit, there is also the risk.
foreign aid has given significant impact on poverty Hence, careful consideration about the capacity of
reduction under any of the following circumstances, macroeconomic performance and capability of
such as good policies and institutional environments economic institutions might be needed to avoid the
(Collier and Dollar, 1999), the level of corruption failure of debt relief.

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 Media Wahyudi Askar / JIAP Vol. 1 No. 2 (2015) 14-18

3. Research Method of debt makes the government not only bear the burden
of repayments but also requires them to cover a deficit
This paper used descriptive qualitative analysis to by getting new loans. What is worse is that this new
elaborate how and why foreign aid policy in Indonesia debts are still not enough to cover all the interest of the
taken place. In doing so, content analysis is used to previous debts (figure 5).
understand the reasons and consequences of foreign aid
policy in the country. The main data of this paper were If foreign aid increases continually, the government
come from official statistics and literatures. would stay forever in debt, and would have only limited
options to manage macroeconomic performances. Then,
4. Findings and Discussion the possible impact that occurs is a reduction in the total
4.1. The impact of foreign aid in Indonesia amount of outflow. This means that the Indonesian
government has very limited options to finance their
It cannot be denied that foreign aid is still a FRXQWU\¶V GHYHORSPHQW ,Q WKLV FDVH WKH FLWL]HQV DUH
predominantly capital source in many developing affected by the decline in expenditures for poverty
countries. This method is often seen as an easy way to eradication policies.
get funding in relatively short term. The latest data
The impact of poor macroeconomic performance is
shows that the trend of foreign aid in developing
extremely devastating, especially for the poor people.
countries continues to increase in recent years. The total
For example, due to potential deficit, the IMF has
external debt outstanding increased from $4.4 trillion in
pushed the Indonesian government to reduce the fuel
2010 to 4.8 trillion in 2011 (Figure 1).
subsidies (World Bank, 2014). Afterwards, in November
This trend is also happening in Indonesia where this year, the Indonesian president decided to cut the oil
external aid has increased continuously in recent years subsidies. As a consequence of the petroleum prices,
(Figure 2). This has made Indonesia as the top 5 there is a surge in food and transportation costs, as well
recipient of the International Bank for Reconstruction as a higher inflation which causes negative impact on
and Development and International Development the poor. Based on this case, Krauss (1983) is probably
Association (Figure 3). Unfortunately, after being correct because foreign aid is more likely to be a
dependent on foreign aid, their external debt has not boomerang for developing countries. This is because the
resulted in a substantial result in economic development. government deficit spending is always covered by
According to Chowdury and Sugema (2001), there is no foreign aid which led to the inefficient macroeconomic
strong relationship between external debt and economic performance. Therefore, as far as Indonesia is heavily
growth in Indonesia (Figure 4). Instead of improving reliant on foreign aid, this state is likely to face a
economic growth, the reliance on foreign debt has problem to enter the takeoff phase (Rostow, 1985)
resulted in poor government. The government has no
Turning now the impact of foreign aid program, there
incentive to improve the country's revenue because they
is an indication that the foreign aid program has not
acknowledge their government would obtain sufficient
contributed positively. PNPM program is the relevant
revenue from foreign aid (Chowdury and Sugema,
example. In spite of the satisfactory result in the World
2001).
Bank report, there are massive critics which argue that
Basically, in short term, foreign aid is actually an this program has not been able to address the real issue
effective way to overcome the lack of capital rather than of poverty in Indonesia. The general critic and evidences
producing new money which result in the fear of are explained in the following details.
inflationary. Government can also provide foreign aid to
Firstly, the large amount of foreign debt leads to state
maintain the exchange rate to stay close to the target, in
budget constraints, which eventually become the
order to achieve higher investments and to get huge
responsibility of the entire society to repay through the
capital inflows. However, it is important to note that, as
tax scheme. Secondly, the PNPM program has not been
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able to reduce poverty significantly, the PNPM program
of foreign aid would create some problems if its
is most likely a short term because the program is
grounded in the limited domestic savings. This problem
predominantly dominated by physical construction and
is exactly what happens in Indonesia. Low domestic
as soon as the program is completed, the entire related
savings has eventually caused heavy dependence on
scheme is closed immediately (Rosyadi et al, 2009).
foreign aid, increasing debt repayment cost and
Instead of reducing poverty, the PNPM programs have
disturbing macroeconomic performance in general.
caused financial losses. As reported by the Ministry of
It is reported that Indonesian public debt as a Co-ordination People Welfares (2011) between 2008
percentage of Gross Domestic Product (GDP) has and 2010, there were approximately 4000 cases of
reached 110 percent (Mulyani, 2001). The large amount corruption in implementing the PNPM programs with

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the total of financial loss around 8,790,947 US dollars. Another challenge that should be observed is
Thirdly, the PNPM program has lack of knowledge corruption. It will be difficult to get debt relief, if
concerning the real poverty situation in Indonesia. It Indonesia fails to make significant progress in the fight
might because, as noted by Fisher (1998), the donor against corruption. Even, when the debt relief has been
institution has tackled social issue through received, the government should be able to ensure that
generalization without paying attention to the fact that debt relief funds are not misappropriated. Maintaining
the condition in developing countries is much more the trust of donors, however, is a crucial thing in the
complicated. debt relief process. After all, it is important to bear in
mind that the debt relief is not without risk. If it is not
Another research conducted by Arif (1998) which
followed by careful consideration, there is a possibility
focus on foreign aid programs in general also shows that
that Indonesia likely to have disadvantage, such as a
the penetration of foreign aid programs in Indonesia has
problem in a political world or, in different case, the
not enhanced the citizens' own capabilities by hindering
government required to sign the debt relief under certain
the growth of small businesses, upsetting the fishing
conditions which are less beneficial for economic
industry, livestock and household handicraft industry.
development.
Similarly, a research from the Indonesia Corruption
Watch (2009) also suggests that the contribution of Lastly, in spite of promoting debt relief, I also suggest
foreign aid on poverty reduction is very poor. World that the government should pay more attention in
%DQN SURJUDPV DUH RIWHQ ´VHGDWLYH´ WR RVVLI\ WHPSRUDU\ generating income by increasing revenues from taxation.
for example, a Social Safety Net program which in As Temple says (2011), the capital shortage in
reality has the potential to reduce social solidarity and developing countries is mainly driven by poor and
self-reliance. corrupt governments. This is precisely what has
occurred in Indonesia, where the potential loss of tax
4.2. Debt relief: a necessity
reached 50 percent of the total target while among the
According to the discussion above, I came to the final main factor is actually a corrupt tax system
conclusion that foreign debt has not contributed (Perkumpulan Prakarsa, 2012).
considerably to poverty reduction and instead place
5. Conclusion
more economic and political burdens to the government.
Hence, encouraging debt relief program is imperative. Empirical evidence shows that external debts do not
As mentioned in the theoretical approach, debt relief is create positive impacts on the Indonesian economy,
an effective way to overcome overhang problems and to mainly because it leads to the increasing dependency of
stimulate investment. However, there is no doubt that a country's revenue that causes the government to lose
the discourse of debt relief is still being debated. How to the opportunity for investments, as well as minimize the
get a debt relief and what are the consequences if the implementation of poverty alleviation program which is
government getting debt relief. Whether debt relief funded by donors. In the Indonesia context, the
would be an alternative solution or creating new existences of poverty and capital shortage are in reality
problems? caused by poor government and widespread corruption.
To answer this question, if we look at the debt relief Therefore, a debt relief is a step that needs to be taken
record ever obtained by the African countries, Indonesia by the government to overcome overhang problems.
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