How Significant and Effective has Foreign Aid to Indonesia been?

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 through out the 1970s and 1980s, especially during the balance of payments crises. In addition to smoothing out balance of payments problems and providing budgetary supports, aid played an important catalyst for policy reforms that are believed to have contributed to the spectacular success of the Indonesian economy. However, no systematic study has been done so far on the effectiveness of foreign aid in Indonesia. This issue has become critical in the wake of the financial crisis of the late 1990s which turned Indonesia a heavily aid-dependent country as well as the renewed world wide debate on aid effectiveness. This paper, thus, attempts to examine the historical significance and effectiveness of aid flows to Indonesia. It finds that aid did contribute positively to economic growth, but made the government lazy in terms of domestic resource mobilisation. As a result, despite significance progress, Indonesia remained aid-dependent.