World Bank Beats Breast for Failures in Indonesia (fwd)

[Robert Weissman <rob@essential.org>]

http://www.nytimes.com/yr/mo/day/news/world/indonesia-worldbank.html

          February 11, 1999


          World Bank Beats Breast for Failures in Indonesia

          By DAVID E. SANGER

                 WASHINGTON -- In a blistering evaluation of its own
operations
                 in Indonesia, the World Bank concludes that its officials
ignored
          corruption, growing repression and a collapsing financial system
in the
          final years of President Suharto's 33-year rule.

          The internal report, completed last week and made available to
The New
          York Times, says that the bank knew of many problems but did not
want
          to offend Suharto's government or threaten the image the World
Bank
          had promoted of Indonesia as one of its great success stories.

          The nation is one of the leading recipients of bank lending. Over
 three
          decades, the World Bank spent more than $25 billion in
development
          projects in the vast nation, and watched with pride as the share
of the
          population living beneath the poverty line shrank from 60 percent
 in 1970
          to less than 11 percent in 1996.

          But the report concludes that Indonesia's rapid growth created a
"halo
          effect" in its relations with Suharto that made the World Bank's
top
          managers unwilling to deliver tough messages to the aging leader.
 It
          documents how country specialists continued to issue rosy reports
 to the
          headquarters in Washington even after a financial crisis spread
through
          Southeast Asia in the fall of 1997.

          And it recounts how its sister institution, the International
Monetary Fund,
          "reached a stage of open confrontation" with Suharto a year ago,
as he
          attempted to save his family and friends from financial ruin at
the expense
          of the country's economic future. Suharto resigned under pressure
 last
          May.

          Indonesian officials who saw an earlier version of the report
objected to
          many of its findings.

          The report was written by a unit that is supposed to provide an
          independent assessment of the World Bank's performance in
developing
          nations. It reports directly to the World Bank's board, and has
been
          given greater powers since James Wolfensohn, the World Bank's
          president, began an overhaul four years ago.

          The assessment comes at a time of enormous debate about how the
          World Bank and IMF should have responded to the upheavals that
          began in Thailand in July 1997 and have spread across three
continents.

          The World Bank once offered glowing reports of its successes in
          Indonesia, where it has helped build electric power systems,
ports and
          highways, and lent billions for primary education.

          But now the report concludes that the World Bank's overall
success was
          only "marginally satisfactory," largely because it paid too
little attention to
          a sick banking system and Suharto's refusal to reform the legal
system
          and open up the political system.

          "Issues of poor governance, social stress and a weak financial
sector
          were not addressed," the report found. It suggests that part of
the
          problem was the World Bank's "special relationship" with Suharto
          himself.

          The implicit message of the findings is one the World Bank and
the IMF
          are struggling with in Indonesia and elsewhere around the world:
Should
          aid be withheld from countries that are refusing to follow the
institutions'
          advice, either on governance or financial management?

          The IMF has periodically withheld small amounts of money from
Russia
          and other nations that have refused to live up to their financial
          agreements, and the World Bank has sometimes ended aid to
countries
          for projects that were considered a threat to the environment.

          But both the World Bank and the IMF are loathe to criticize their
          "clients" in public, for fear of poisoning their relationship
with the nations'
          leaders or triggering a sell-off by investors.

          "This is the great conundrum," said Julian Schweitzer, the World
Bank's
          director for strategy and operations in East Asia. "That we
didn't get it
          right in Indonesia is obvious, but understanding how to get it
right is
          difficult. Issues of governance of a nation have not in the past
been part
          of our agenda."

          In a response to the report, Indonesia's minister of state for
national
          development planning, Boediono, wrote to the World Bank that "we
do
          not accept some of the analysis in the report," including its
message "that
          the World Bank did not push hard enough for fundamental reform in
          Indonesia, including the establishment of a democratic political
system,
          free and open elections, a free press, respect for human rights
and
          broad-based participation of the civil society."

          He wrote, "Open confrontation between the World Bank and the
          government of Indonesia would have been very damaging to investor
          confidence in Indonesia and would have undermined economic
growth,
          causing poverty to rise."

          The report's conclusion that the World Bank's success was only
          "marginally satisfactory," he wrote, is a "particularly harsh
judgment, and
          one that reflects an abrupt turnaround from literally decades of
          consistently positive assessments."