New York Times
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."