Much aid comes with strings attached – crippling loan repayments, exploitation of resources and vulnerability to unfriendly international markets

Hira Jhamtani

At the peak of the economic crisis in January 1998, I attended a dialogue at the Canadian Embassy in Jakarta. The Canadian government was offering to provide Indonesia with aid and wanted to get input from civil society groups about the problems we envisaged in terms of democracy, human rights and the proper use of aid. But I wondered about the objective of the dialogue, as an agreement to provide the aid had already been signed the previous day. I wanted to raise a different set of questions.

I queried whether the aid was a loan or a grant, its purpose, and the conditionalities associated with it. These were uncomfortable questions for the Canadians. They had to admit that a substantial part of the aid was actually a ‘line of credit’ to buy Canadian wheat, so that instant noodle manufacturers would have a stable market price during the crisis. We realised that the Canadian government feared that Indonesia might reduce wheat imports due to the crisis, endangering Canadian wheat exports. And that the ‘line of credit’ would benefit the instant noodle industry, rather than the poorest, hungriest Indonesians, who eat rice, corn and tuber.

Hidden costs

The words ‘aid’ and ‘help’ can be misleading. They may mean grants, loans, lines of credit or technical assistance. Almost all these forms of aid have conditionalities attached. Indeed, it is only in the past ten years that the Indonesian media has differentiated these terms when reporting on international aid and debt. For me, aid refers to all these forms of foreign support for development.

Of course, Canada is not the only country involved in the aid business. In the mid 1980s, I worked on a campaign against transmigration – the mega-project of shifting people from the populated islands of Java, Madura and Bali to more sparsely populated islands such as Kalimantan, Sulawesi, and Papua. The World Bank provided most of the funding. Most of the funds were used to pay foreign consultants and contractors to build roads and other infrastructure, and of course to buy equipment from the donor countries.

Similarly, when Japan provided aid to Indonesia during the 1970s, it was on the unspoken condition that the Indonesian government grant concessions to Japanese logging companies. For the US, the compensation was oil concessions and the copper and gold mine concession to the Freeport McMoran company, which is still creating serious environmental and social damage in Papua.

International aid is essentially a business. It may appear to provide a free lunch, but it demands triple payment for dinner. The first cost is repayment of the free lunch (the loan). Then there is the interest on the loan. The final payment is the requirement to open up natural resources for exploitation, or to open markets to international competition. All this for projects the benefits of which may well not go to the poor, and may not be sustainable in the long term.

The politics of aid

But surely the Indonesian host government is equally to blame. In the late 1960s and early 1970s the government decided to seek loans for national development, and acquired easy money in large amounts without ever considering the need for a strategy to pay it back. Most seriously, there was no accountability regarding how the loans were used, for what purpose, or by whom.

However, the main issue was the developmentalism agenda. Loans were used for infrastructure development rather than holistic human development based on ecological sustainability. The developmentalism paradigm was of course taught and favoured by donor countries and multilateral agencies. Little has changed today.

In the late 1980s, I met with several bilateral and multilateral agencies to discuss the development projects they were funding. In many cases I raised the issue of the lack of access to public information or the coercion of local communities to accept certain projects. Their standard answer would be, ‘We do not interfere with internal government policies; we merely provide funding.’ The World Bank, especially, insisted: ‘We are an economic agency, not a political institution.’ This is utter hypocrisy.

At that time, despite blatant coercion of local communities and the arrest of social activists, the World Bank continued to fund the Kedung Ombo multipurpose dam in Central Java. The project forcibly displaced 30,000 families from 20 villages. The bank even ignored the reports of its own internal fact-finding team about human rights violations and corruption. After the fall of Suharto, the bank eventually raised the issue of corruption, saying it had caused the loss of 30 per cent of the bank’s development loans and grants for Indonesia. But why did the bank not raise this issue during the Suharto era?

It is also not true that the bank does not interfere with national policies. In 1999 it provided a quick disbursment fund under its Structural Adjustment Loan to supplement the national budget during the economic crisis. As the name suggests, the loan was provided on the condition that public sector policies be ‘adjusted’. For a loan of US$ 300 million, the bank and the government conceived the Water Resources Sectoral Adjustment Loan. This project was intended to reform the regulation and management of Indonesian water resources. This was a difficult task; with many controversies and conflicts of interest, even among government agencies. The new law was seen as an effort to privatise water services for the public. During the four years it took for the law to be enacted, the bank delayed the second and third tranche of loan disbursement because the proper policies had not yet been adjusted. But why did it not delay the disbursement for the Kedung Ombo dam when both local and international groups reported atrocities, corruption and irregularities in the implementation of the project?

Are there alternatives?

So what can we do about international aid? There is no easy answer. First, we must recognise the unequal power relationships among nations, as well as between a country and a multilateral agency dominated by powerful nations. We need to be realistic and not consider international aid to be motivated purely by altruism. Even food aid helps the grain producers of the donor countries as much as it helps the population in need of food.

The relationship between trade and aid is also an important one. For every dollar that developed countries give in the form of aid, they take away two dollars in the form of unfair and distorted trade practices. Dumping cheap imports into developing countries merely increases the poverty that aid is supposed to address. Similarly, for many years developing countries have tried hard to urge developed countries to solve the problem of unfair commodity pricing, but a solution has yet to be found. If trade is made fair, there might be less need for aid. Of course other factors, such as corruption, also need to be addressed.

Indonesia must also ask itself whether such large foreign loans are really necessary. During the past few years, illegal exploitation and trade in sea sand, oil fuel, timber, marine biota and wildlife has cost the nation about US$ 30.6 billion (Rp 288 trillion). This represented 78 per cent of the national budget for 2003. Ironically, in the same year Indonesia had a budget deficit of Rp 27 trillion, and had to borrow US$ 2.71 billion from its foreign donors. If Indonesia could curb these illegal activities, the nation would be far less dependent on foreign loans.

There is also an ‘aid mafia’ operating in both donor and recipient countries. For example, in 1999 when the country was still in economic crisis, the Minister for Environment issued an informal policy that no project in his ministry was to be funded through loans. Consultants and go-betweens tried to dissuade him, but to no avail. But the ‘aid mafia’ simply went to other ministries, and a few months later similar loan-funded environmental projects were featuring in the plans of those ministries.

Finally, it is important to look at the purpose for which loans are sought. As they must be repaid with interest, only those projects that directly boost economic production should be funded in this way. It does not make sense to accept a loan to implement primary health care projects for poor communities, for example. Such projects should only be funded by grants which require no repayment.

Should we do away with international aid altogether? There is no easy answer. Many countries have fewer resources than Indonesia and so may require more international aid. International aid is also a necessity in the aftermath of a major disaster such as the recent tsunami and earthquakes in Sumatra. But the political and economic interests behind aid, both in donor and recipient countries, need to be carefully scrutinised, reformed and restructured. When you are given a free lunch, but must make pay triple for dinner, it is not aid; but merely business disguised as development and humanitarian aid.

Hira Jhamtani (semestha@yahoo.com) is an analyst on environmental and globalisation issues in Denpasar, and a board member of the Indonesian Society for Social Transformation (INSIST) in Yogyakarta (www.insist.or.id).