Inter CAFE

International Centre for Applied Finance and Economics

Authors : Iman Sugema and Anis Chowdhury
Publisher : Asia-Pacific Development Journal

This paper is aimed at assessing the effects of aid on fiscal behaviour in Indonesia. There are four main findings. First, the inflow of aid is driven primarily by the need to fill the fiscal gap; that is, aid is demand driven. Second, although project aid is by definition intended for development expenditures, it results in an increase in routine expenditure
as well. This suggests that project aid is fungible: it creates extra resources available to increase non-discretionary spending. Third, programme aid tends to increase routine expenditure but not development expenditure; thus, it mainly serves as budgetary support. Fourth, aid flows make the Government of Indonesia fiscally “lazy”. The availability of aid is a disincentive to mobilize domestic revenue through a more efficient and effective taxation system.


Title : How Significant and Effective Has Foreign Aid to Indonesia Been?
Authors : Anis Chowdhury and Iman Sugema
Publisher : ASEAN Economic Bulletin Vol. 22, No. 2 (2005), pp. 186–216

With the improvement of relationship with the Western countries after the demise of the Old Order regime of President Soekarno, Indonesia received a large volume of foreign aid that played a crucial role in the recovery of the economy. Indonesia remained a significant recipient of foreign aid throughout the 1970s and 1980s. However, no systematic study has been done so far on the effectiveness of foreign aid in Indonesia. This paper, thus, attempts to examine the historical significance and effectiveness of aid flows to Indonesia. The correlation between aid and economic growth was found to be positive, but low. However, aid flows were crucial for maintaining development and social expenditure, especially at times of crises. In addition, aid flows smoothed out balance of payments problems and played an important catalyst for policy reforms; but there were also evidence of reversing reforms. The certainty of aid flows helped the government to follow the balanced budget principle, but made the government lazy in terms of domestic resource mobilization. As a result, despite significant progress, Indonesia’s external debt burden remains high, and it has little ability to handle crisis without substantial foreign aid. Because of a weak domestic revenue base, the uncertainty regarding fiscal sustainability remains unresolved.