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 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.