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10 years of democracy: A tale of two giants

November 2, 2009

Nigeria and Indonesia make an interesting comparison. Both countries have large populations; regional and ethnic tensions; are resource-rich and have a military past. Both also feature prominently in Goldman Sachs Next Eleven (N-11) dream team. Thanks to their large population, fast growing markets, rising income and economic activity. Though both have weak institutions, they have experienced 10 years of uninterrupted democracy. Beyond these similarities, Nigeria, on many counts, pales beside Indonesia.

Indonesia has since moved on, in relatively gigantic strides. Its economy is diversified and forecasted to rebound, from the global downturn, within the year. To boot, Indonesia made the G20 club of nations; along with some other N-11 countries: South Korea, Mexico and Turkey. (By the way, South Africa, which isn’t on the dream team, is a member of the group of 20 countries that generate 85 percent of the world’s output).  Oddly enough, Indonesia made the G20 list way ahead of Goldman Sachs’ projections.

Three booms…

Nigeria, to make top 20 by 2020, needs to look east, to Indonesia. We could do with some classes on sustained growth. Considering that both Nigeria and Indonesia started off from the same point.

Both countries have witnessed oil booms with different outcomes. Nigeria’s experience during the 1973-74, 1975-1980 and the 1990 oil booms were marked, initially, by saving excess income before cowing to political pressures to spend. Indonesia, on the other hand, spent prudently. It focused on infrastructure, education, capital-intensive industry and agriculture in particular.

Nigeria did plan to spend, except that the projects were few, of high cost and steeped in squandermania. With little, if any, spent on infrastructure (transport and communications); mining and manufacturing; agriculture and water supply; health, education, and housing.

During the first oil boom Indonesia turned the spigot of investment on agriculture: 20 percent compared to Nigeria’s 2 percent. Yes, the money was used to subsidise fertilizers and pesticides, but also for irrigation, roads and schools in rural areas. Oil revenue-funded fertilizers, coupled with the high-yield rice variants, pared down Indonesia’s dependence on imported rice.

By 1985 Indonesia had attained food self-sufficiency. Meanwhile Nigeria’s sputtering investment in agriculture dwindled, such that subsistence rather self-sufficiency, the desired goal, was attained.

…And then bursts

For Nigeria, each boom has been tailed by a bust and then a crisis. In 1983, Nigeria’s total external debt outstanding and disbursed was $12 billion. A conservative estimate of proven oil reserves was $75 billion. Yet by 1985-86 Nigeria could not reschedule a mere $2 billion in insured trade credits. Why?

Nigeria’s external borrowings were collateralised by oil. Its oil dominated economy plus serious policy and institutional failures made creditors nervous and unwilling to reschedule Nigeria’s debt. A credibility gap made attraction of Foreign Direct Investment (FDI) difficult; even for investments with a high rate of return. Nigeria had developed a classic “debt overhang”.

Indonesia, in contrast, edged itself out of poverty, hyper-inflation (almost 1,500 percent a year) in the 1960s. Macroeconomic stability, control of inflation and budget deficits was entrusted to a quintuplet of technocrats. These ensured that economic growth, greater domestic participation – in oil and non-oil sectors – and equitable distribution of income across ethnic groups and regions.

Active private sector participation and export-led growth, based on its large labour force complemented Indonesia’s prudent fiscal measures. Not all of its policies were sound. Large fuel subsidies were maintained totalling an estimated $7 billion in 2007; with similar negative effects to those Nigeria.

Nonetheless, “Indonesia has managed to achieve a four-fold increase in GDP per person through political stability, good economic policy, rapid productivity improvement in agriculture, poverty-focused policies, and an effective response to large oil revenue volatility” according to a 2007 oil and gas briefing note:  Avoiding the Resource Curse, by the World Bank.

By 2007, Indonesia’s GDP was thrice that of Nigeria’s. So also was Gross National Income per head (GNI) on a purchasing power parity basis. A considerable difference since Nigeria’s population is less than that of Indonesia by 7.8 million people.

Growing ahead

Goldman Sachs reckons that after the BRICs ie, Brazil, Russia, India and China, the N-11 countries are the next set of large-population countries “that could potentially have a BRIC-like impact in rivalling the G7.” As the global downturn slows and green shoots sprout – especially in Asian countries. East Asia is been touted to be the epicentre of the next wave of economic growth.

Five broad areas – macroeconomic stability, macroeconomic conditions, human capital, political conditions and technology, compose Goldman Sachs Growth Environment Scores (GES). These are further broken into 13 components to assess the growth environment of the N-11. On this path to sustained growth, Nigeria, ironically, compares well with Indonesia eg, in terms of investment and openness. Still in several areas and overall, Indonesia ranks higher than Nigeria.

For instance, based on the World Bank’s 2009 Doing Business rankings, it takes less time to enforce a contract, start a business and deal with construction permits in Indonesia. Nigeria does slightly better than Indonesia in the four other areas: paying taxes, trading across borders (import and export) and registering property.

GES components such as rule of law, schooling and life expectancy matter. Pay offs from improving such conditions can be large. “Even without such dramatic progress, a move halfway in that direction could be what turns the growth story of Nigeria or Bangladesh into something like Vietnam.”

Vietnam is considered the closest to ‘Best in Class’ ie, of the N-11 it has managed growth comparable to the BRICs. Nigeria is the furthest away. That was March 2007. Obviously, and as rightly noted by the N-11 report, some progress eg, Nigeria’s fiscal position, hasn’t been captured in the latest scores.

A more recent scorecard: Business Environment Rankings (BER), by Economist Intelligence Unit, a sister company of The Economist, gives an up-to-date picture. The business rankings model, examining ten separate criteria, measures the quality or attractiveness of business environment in 82 countries. The rankings show each country’s performance for the last five years and the next five years. The BER uses a 1-10 scale; the higher score the higher the quality of attractiveness.

In the last five years (2004-08) Nigeria’s total score was 4.41 and ranked 78th. During the same period Indonesia was ranked 61st with a total score of 5.46. For the next five years (2009-13), both countries’ position on global ranks drops by one. However, Indonesia’s total score increases by 0.14 points to 5.59 while Nigeria’s declines by minus 0.11 points to 4.30.

On a regional basis, Indonesia can be considered well placed. Asia retains its number three position in the business environment rankings. “Ahead of the Middle East and North Africa, Latin America, eastern Europe and Sub-Saharan Africa, but behind both North America and western Europe.” Asia has managed to sustain its business attractiveness because some Asian governments have allowed the outbreak of a virus: entrepreneurial capitalism. Is Nigeria allergic to this virus?

What’s politics got to do with it?

Like it or not Nigeria’s economic future has a political twist. Power generation, catching and pinning down corruption, security of life and property are public goods essential for sustainable economic development. For a thousand entrepreneurs to bloom, government must play a forbearing, not intervening, role.

In the words of Vice President Jonathan Goodluck “where the market is basically competitive or when a modicum of regulatory capacity is present, private ownership yields substantial benefits and accelerates the prospects of economic prosperity, job creation and increased tax revenues for government”

A thought that can be rephrased in the words of  Carl Schramm, president of the Ewing Marion Kaufman Foundation and co-author of Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity, “Governments do not, indeed cannot, make wealth—only their citizens can. And when government protects their freedom, the world’s growing population of entrepreneurs, in the bargain, expands human dignity and establishes the foundation of ongoing growth on which civil society ultimately depends.”

2 Comments leave one →
  1. October 4, 2010 1:57 pm

    economy this, economy that…. well, I do believe I’ve discovered the solution (the problem).


  1. Our Nigeria « Trading places

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