Olu Ajakaiye and Afeikhena Jerome

African Economic ConferenceAddis Ababa, Ethiopia

25th – 28th October, 2011

• Introduction: Institutions and Development• Indonesia and Nigerian Development

PerformanceEconomic GrowthStructural Change• The Role of Institutions Indonesia Nigeria

• Concluding Remarks

Interest in study of Institutions by Economist Rekindled by◦ Nobel Prize of Douglas North in 1993,; JEL Review by Hodgson, 1998

◦IMF Economic Outlook, 2003 ; WDR, 2004 UNU-WIDER, 2006

There is general agreement that institutions matter for economic devt but differences prevail in respect of conceptualization of the term itself, its theoretical formulations and policy prescriptions. North (1990) Acemoglu et. al (2003); Rodrick, (2004); Chang (2006)

 

Broadly, the view is that institutions shape policies. They establish clear and enforceable property rights, keep the costs of transacting business to a minimum, and reduce the threat of coercion.

Precisely, institutional quality directly affect income levels through three channels: (i) reduced information asymmetries, as institutions channel information about market conditions, goods, and participants; (ii) reduced risk, as institutions define and enforce property rights; and (iii) greater restrictions on the actions of politicians and interest groups, as institutions make them (more) accountable to citizens.

Positive association between quality of institutions and per capita income (IMF Economic Outlook, 2003,

Income per Capita and Selected Institutions (Logarithm of GDP per capita on y-axis; x-axis as stated)

Source: IMF World Economic Outlook, April 2003 -- Chapter 3: Growth and Institutions. IMF, Washington, D.C.

But these studies are cross sectional and plagued by conceptual, and methodological weaknesses related to the availability and quality of data, measurement errors, possible omission of variables and reverse causality problems between regressors. See Chang, 2007, Rodrik (2009)

In this study, we adopt a comparative analysis of two countries with similar initial conditions and endowments but with very different outcomes – Indonesia and Nigeria - hoping to draw lessons at least for resource rich African countries that are generally lagging behind in terms of using a large part of their transitory incomes to transform their economies and secure sustainable long-term inclusive development

 

Nigeria and Indonesia have similar initial conditions and endowments but different econ. devt outcome as at 2010.

Initial Conditions: ◦ Population size and composition: Indonesia 230m in

2009 (4th in the world); Nigeria 155m (7th in World); multi-ethnic, multilingual countries,

◦ Civil wars and political instability: vicious civil wars in the 1960s, followed by authoritarian military leaders. First coups launched few months apart - September 1965 in Indonesia and January 1966 in Nigeria;

 

◦ Their Military regimes truncated - May 1998 in Indonesia and May 1999 in Nigeria

◦ Both countries have a large natural resource base, the benefits of which do not always reach the citizens proximate to these resources.

◦ Both countries are buffeted by endemic corruption and cronyism. The 2010 Corruption Perception Index of TI ranked Indonesia at 110 and Nigeria at 134 out of the 178 countries covered.

In 1965, Nigeria’s initial conditions were more propitious than those of Indonesia. Per capita income stood at $624 (slightly above that of Indonesia), and inflation was negligible at 4.1 per cent (Lewis, 2007).

Economic Growth performance (1960-2010) different.

Figure 1: Nigeria: Annual GDP Growth Rate, 1961-2010

Source: World Development Indicators, 2011

Figure 2: Indonesia: Annual GDP Growth Rate, 1961-2010

Source: World Development Report, 2011

 The two economies have, no doubt, exhibited differing degrees of structural change with Indonesia much more diversified.

The oil boom of the 1970s transformed the foundation of both economies. Thereafter, diversification varied considerably as Indonesia achieved industrial growth while Nigeria is still overtly dependent on oil exports, which accounted for 90 per cent of merchandise exports in 2009.

Agriculture, manufacturing and ores play a more dynamic role in Indonesia while Nigeria has been plagued by a deindustrialisation process.

 

Figure 3: Nigeria: composition of GDP, 1970-2009

Source; Underlying Data from UN GDP Statistics.

Figure 4: Indonesia: Composition of GDP, 1970-2009

Source: Underlying Data from UN GDP Statistics.

By 2009, Indonesian GNI was $471 billion 20th in the world and 2.6 times the Nigerian GNI of $184 billion ranked 42nd in the world.

Per capita income in Indonesia was $2050, about 1.7 times that of Nigeria at 1190.

Life expectancy in Indonesia is 71 years compared to only 48 years in Nigeria.

Indonesia is one of Southeast Asia's successful highly performing and newly industrializing economies, in the mould of the Asian tigers.

The country declared its independence in August 1945 and it took almost four years of fighting before the Dutch recognized it on 27th December 1949.

Sukarno was the first President. After independence, the hesitant start of democracy was characterized by a power struggle between the presidency, the army, the communist party and other political groups.

 

On 30th September 1965, there was a bloody coup in which six “rightist” army generals were killed.

Suharto slowly rose to power following the failed coup attempt. In March 1967, he was formally appointed as the President and he reigned for 32years.

Suharto restored the inflow of western capital, brought back political stability with a strong role for the army, and led Indonesia into a period of economic expansion under his authoritarian New Order (Orde Baru) regime which lasted until 1997.

From the 1970s onward, the increased oil price in the world market provided Indonesia with massive revenues from oil and gas exports.

Suharto managed to apply part of these revenues to the development of technologically advanced manufacturing industries.

Result is a robust growth experience and considerable structural transformation Fig 2 and 4.

While Indonesia has enjoyed growth spillovers as a result of its Asian location (neighbourhood effect), its success since the early 1970s could be attributed to the following main pillars.

 

Prudent and pragmatic macroeconomic and sectoral policy articulation and efficient implementation by a capable state including investment in human resource development (health and education) and infrastructure - the government budget basically balanced, inflation low, and healthy bop and external reserves.

Second, the government supported agricultural development, (esp. rice production); introduced new “green revolution” technologies, built transport infrastructure esp. roads and irrigation infrastructure; and helped to develop markets that offered remunerative prices for farm output.

Third, trade and industrial policies introduced in mid-1980s allowed a wide range of firms to compete on world markets in production of labour-intensive manufactured products. They expanded rapidly, creating millions of jobs in the late 1980s and early 1990s and lifting many Indonesians out of poverty.

Suharto regimes had poor records on corruption, transparency, voice, accountability, human rights rule of law and abuse of executive power but he managed to deliver on economic growth, structural transformation and poverty reduction

 

Although the details are yet to be examined, likelihood is that the Suharto seemed to have been a leader who had invested in investing (Collier, 2011) even if not quite transparently and efficiently.

These policies and programmes were articulated pragmatically and effectively implemented by a crop of competent and well resourced bureaucrats– Reasonably Weberian and embedded bureaucracy under the leadership of Suharto

Since gaining independence in 1960, the economic and political transformation process in Nigeria has been characterized by a few steps forward and many steps backwards

The litany of political succession ― six successful coups, numerous failed revolts, two abortive democratic regimes and three inconclusive democratization programmes illustrates essential problems of leadership and institutional development in Nigeria.

 

The stability in Indonesia especially during Suharto regime which lasted for 32 years and his relative commitment to development was in marked contrast to the sporadic tenure of Nigerian leaders and their strategies of distributional politics and economic predation.

The armed forces that had been in power for most of the post- independence period was fractured not only by ethno-regional identities but also by personal alliances, greed, impunity, misuse and abuse of power.

The excellent Weberian insulated bureaucracy that held sway between 1960 and 1975 , degenerated considerably thereafter with the meritocracy, professionalism, decent remuneration and security of tenure replaced by cronysm, predatory application of distributive politics, over-centralisation, frequent transfers, resulting in low staff morale and corruption,. It is thus unable to cope effectively with the challenges of modernization.

 

Public institutions have been prey to widespread corruption and misallocation of resources.

Predatory rule fomented the degeneration of state capabilities and essential institutions.

Political decay was bound up with economic decline during most of the 1966-99 period.

Outcome: Between 1966-99, the Nigerian economy and society suffered from imprudent and poor development policies, outlandish corruption, illicit capital flight and widening criminality, declining investment and production, and growing marginality in the international system.

The return to formal democracy in 1999 has not yet put the democratic institutions on a solid footing.

Most institutions of the federal system continue to suffer from low political skills and corruption,.

Local governments and state assemblies particularly suffer from insufficient funding yet they all exhibit limited desire to raise internal revenue thus avoiding concomitant accountability.

 

Despite the half-hearted efforts to review the 1999 constitution, the country is still not a federal system as it professes rather, it own version of federalism is a system which has an omnipotent centre with very weak units at the States and Local Government levels.

The bureaucracy remains degenerate as meritocracy, professionalism, decent remuneration and security of tenure are yet to be restored such that low morale and corruption remain a challenge,

Evidently, several of the traits and tendencies of the military regime, especially rulership as opposed to leadership are still prevalent in the country

Indonesia and Nigeria had a lot in common during the first decade of independence

Subsequently, Indonesia had a leader who was committed to development – economic growth and structural change; who maintained an effective and capable state bureaucracy that articulated and effectively implemented pragmatic and sound policies and programmes, as well as invested in investing even if not quite efficiently

The outcome is high growth, structural transformation and high quality employment

.

 

In contrast, Nigeria under the prolonged military suffered from serious instability associated with frequent coups and countercoups, generally predatory rulership that seriously degraded state capacity and failed to use a reasonable portion of the massive oil revenue to invest in investing no matter how inefficient

The 12 year old democratic system is yet to effectively redress the situation but there are indications of actions consistent with the logic of investing in investing, especially in a few states implying that it is doable and there is hope!!

Tentative inference is that institutions do matter but better insights can be gained from detailed country case studies and exclusive reliance on cross-national analysis may provide inadequate guidance

 Thank you for your attention.