Six Decades of Partnership and Progress: Indonesia and the World Bank

April 7, 2013

Axel van Trotsenburg, Vice-President for East Asia and Pacific, World Bank Kompas Newspaper

Indonesia is emerging to take its place in the world as a rising middle-income country, confident in its destiny. The road to increasing prosperity and democracy has been as remarkable as it has been difficult. Throughout major social and political upheavals Indonesia has remained resilient.

Millions of people have journeyed through poverty to opportunity. In the 1960s, some 60 percent of the population lived in poverty, and GDP per capita was less than US$60.  Today, the poverty rate has been knocked down to some 12 percent. 

A spirit of growing entrepreneurship is energizing business.  And the growing middle-class is a well of creativity, its innovations feeding the vast and buoyant consumer market.  A member of the G-20 and APEC, and active in international debates and the South-South dialogue, Indonesia is becoming a leader in knowledge exchange.

The World Bank has been at Indonesia’s side for almost 60 years in a partnership that has proven as resilient as the country.  In 1968, World Bank President Robert McNamara announced the Bank was opening its first office in a developing country and the Bank’s support focused on the agricultural sector with a US$4 million credit to improve irrigation and boost rice production. McNamara was convinced at that time of Indonesia’s commitment to developing its vast potential: “… it is clear that Indonesia is, because of its size, its potential wealth, and its human resources, a very important area of the world and one which because of past neglect is in very great need of assistance for its development. "

Indonesians experienced strong economic growth and steady progress until they were rocked by the Asian financial crisis of 1997-98. Overnight, millions of people fell back into poverty. But Indonesian resilience proved stronger, and recovery ensued following political and economic reforms, supported by the World Bank.  The lessons from the crisis prompted the country to build greater resilience into its institutions systematically.

The partnership between Indonesia and the World Bank is based on mutual understanding, dialog, trust and two-way learning.

One of the pillars of the Bank’s work in developing countries, community-driven development (CDD), was born in Indonesia. Communities themselves decide whether to invest in schools, clinics, roads or bridges, based on their own needs and aspirations. This participatory approach to development has spread to hundreds of communities across the archipelago and to countries around the world.

Indonesia’s remarkable resilience rose again in the face of natural disaster when a tsunami devastated Aceh and Nias in 2004.  Partly aided by an outpouring of global support, including a multi-donor fund managed by the World Bank, Indonesians responded with a massive reconstruction effort building back their communities better and stronger.

Yet the world’s third largest democracy views economic progress as only one measure of success.  Renewed freedoms -- of speech, or organization -- has improved the overall quality of life.

These factors, and a large domestic market and a wealth of natural resources are attracting an influx of foreign investment which is driving growth.

Indeed, the potential for growth is enormous.  A recent study by the Organization for Economic Cooperation and Development (OECD), projects that by 2030 Indonesia’s GDP per person will be US$9,400 and by 2060 it will be almost tripled, at US$25,000.

For this to happen, growth and inclusive development need to be maintained and intensified.

Apart from good macroeconomic management, the challenge is to tackle those reforms that could have a major impact on development and welfare in Indonesia.

First, future generations must have access to improved education.  Indonesia’s large pool of young workers, the so called ‘demographic dividend’ will disappear in 10 to 15 years.  Large investments in improving skills and higher education are the only way to prepare.  Currently Indonesia spends a majority of its considerable education budget – 20 percent of the total national budget – on nine years of compulsory education, a share higher than its neighbors Thailand or Malaysia.  However, poor students often do not complete senior secondary education, and even fewer graduate to higher education, reflecting the intensifying rate of inequality.  All in all, education outcomes need to be improved with better quality of education and reducing the drop out rates at all levels.

Second, climate change concerns must be integral to the development agenda.  Indonesia’s abundant natural resources are finite and greater investments in renewable energy and sustainable forests are needed.  The two-year moratorium on new concessions in primary forests and peat-lands, and the government’s pledge to cut emissions by at least 26 percent are clear signals of the country's commitment to climate change.  All these will require the firm commitment and concrete undertakings by all Indonesians; the communities, the private sector, the public sector, civil society working together to preserve the country's natural resources and benefit future generations.

Third, sustaining foundations for growth will require substantial investments in infrastructure. One way of financing part of the higher levels of investment needed in these areas could be by redirecting potential savings generated by reduced fuel subsidy spending. Only 2 percent of Indonesia’s urban population, for example, has access to a centralized sanitation system. Currently, the government and private sector combined spend the equivalent of only 4 percent of GDP on infrastructure which is below the levels recorded before the Asia crisis and also substantially lower than the 10 percent a year levels in China and Vietnam.  The current levels do not meet the needs in providing adequate access and services for water, electricity, waste management, and transport, among others.

The last decades are testimony of Indonesia's ability to reduce poverty and create greater welfare for the whole country.  Keeping that momentum and increasing prosperity for all Indonesians require maintaining a long term view and a sustained pattern of reform. The World Bank believes that Indonesia has enormous potential to further transform the country to a higher middle-income country in the future. To achieve this important objective, Indonesia can count on a solid, dynamic and long term partnership with the World Bank.