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The dark side of prosperity: World Bank critic alleges waste and graft

Asiaweek - August 12, 1997

Keith Loveard, Jakarta – Cafe Galeri in Jakarta's upmarket suburb of Menteng is a trendy testament to the success of Indonesia's economy. On its walls hang abstract oil paintings that sell for $4,000 each. The Cafe is one of a growing number of galleries in Jakarta and Bali that appeal to Indonesia's nouveau middle class, and it reflects in part the happy consequence of economic growth averaging around 6.5% over the last 30 years. The beneficiaries of that sustained boom find it easy to splash out not only for art but pricey imported cars, crystal chandeliers, marble foyers and other trappings of the good life.

But there may be a darker side to at least a portion of the material success. Many analysts believe some newfound wealth among Indonesians comes courtesy of under-the-table deals with government bureaucrats, connections to influential political leaders, or simple theft and extortion. The fact is, fancy cars and chic works of art represent convenient ways of laundering and hiding ill-gotten cash.

It was at Cafe Galeri last month that a U.S. academic named Jeffrey Winters launched a fusillade of criticism at the World Bank over what he claims are billions of rupiah wasted and stolen in Indonesia. Winters, an associate professor in the department of politics at Northwestern University, has long complained of shoddy account-management practices by the World Bank, which is a major source of development funds to emerging economies worldwide. This year, he has targeted Indonesia as a place where the bank faces particular problems.

Such allegations are not new to Jakarta. The Hong Kong-based Political and Economic Risk Consultancy said in March that Indonesia rated as one of six Asian nations where corruption has become a "serious" problem. And at the end of July, Transparency International, based in Germany, said its survey of business executives and public opinion found that Indonesia is among the world's 10 most corrupt places in which to do business – and Asia's second most corrupt after Pakistan.

Although some people argue that corruption is both victimless and an expected cost of doing business in Asia, Winters disputes both claims. He says Indonesian taxpayers wind up footing the bill for about one-third of World Bank loans that never reach their targets. "It is unfair that Indonesian society, especially the poor, should be responsible to pay these funds back with interest," he says.

Winters alleges that as much as $8 billion of World Bank money has gone missing since President Suharto and his New Order government came to power in 1967. The academic says one of the most popular methods of stealing from the World Bank has been to overcharge for capital goods. "The ways of skimming have been raised to a high art at which bureaucrats are quite adept," he says.

The allegations have elicited angry responses from both the World Bank and the Indonesian government. "We know exactly where our money is going," says Jean-Michel Severino, the bank's vice president for East Asia and the Pacific. "We do not tolerate corruption."

Indonesian National Development Planning Minister Ginandjar Kartasasmita, whose agency disburses aid funds, questions the reliability of Winters's sources – bank officials who spoke with the academic. Says Ginandjar: "Given [the World Bank's] tight and elaborate [accounting] procedures, it would be impossible to have such a high level of wastage."

Winters's allegation that 30% of World Bank loans are lost dovetails with independent research by Prof. Sumitro Djojohadikusumo, a former finance minister, into government spending. His study of the matter last year concluded that the same portion of Indonesia's federal budget – about one-third – vanishes. Finance Ministry sources agree that huge sums are swallowed by the nation's extensive black market. One former Finance Ministry auditor adds that when he attempted to bring a case of clear corruption to the attention of his superiors, he was shunted aside to audit accounts on which he couldn't cause trouble.

Winters does not argue that all World Bank-funded programs are flawed. But successful ones, he says, are invariably those that work directly with low-level officials at the grassroots level. In fact, World Bank officials say they are already moving in that direction. "We are continuing the power projects and other large investments," says Stephen Dice, a World Bank staffer in Jakarta. But the organization is focusing increased attention on "more decentralized projects," he says. Nevertheless, if Winters's allegations are correct, some of the art hanging on the walls of Cafe Galeri will be purchased with money that was supposed to spread the benefits of economic growth to the poorest villages. Such a reverse redistribution of wealth is not likely to go down well for those far removed from stylish galleries or high-priced oils.

The World Bank in Indonesia

Funding since 1967:

$24.7 billion. This makes it the government's largest single creditor. Loan commitments this year: $1.5 billion. 250 projects have been supported with World Bank loans, including electricity production, irrigation and flood control, and conservation. To date, the biggest projects include:

$423.6 million Suralaya thermal power project in Java $398 million national rural electricity program $375 million national telecommunications project