Explaining Divergent Economic Trajectories in Resource Rich Countries: Indonesia and Nigeria Compared

Introduction Although the evidence suggests that resource rich countries have in general performed less well than resource poor countries in development terms, not all resource rich countries have performed poorly. How can we explain this? This lecture examines this question, focusing on: –the issue of economic development –the cases of Nigeria and Indonesia

Indonesia and Nigeria provide good cases for examining this question. First, the two countries have many similarities: –post-colonial states –large populations –heavily oil dependent –ethnically diverse, many languages –experience of authoritarian/military government

Fuel Exports (% of Merchandise Exports) Selected Years NigeriaIndonesia

Second, they have had very different economic records: –Indonesia grew very strongly between late 1960s and late 1990s while Nigerian economy grew very slowly (see diagram). –Indonesia made enormous in-roads into poverty while Nigeria made very few (see diagram).

Economic Growth Source: World Bank's World Development Indicators

Human Development Index Source: UN Human Development Report, various years

Explaining Nigeria’s and Indonesia’s Divergent Economic Trajectories The proximate cause of Indonesia’s relative economic success vis-à-vis Nigeria is fairly clear. –Indonesia avoided the Dutch disease while Nigeria did not –More specifically, Indonesia managed to diversify away from oil and gas to manufacturing and agriculture while Nigeria did not

Source: World Bank's World Development Indicators

The key question, then, is: why did Indonesia manage to avoid the Dutch disease and Nigeria not do so? Eifert et al (2002): –Indonesia and Nigeria had different political regimes: reformist autocracy vs. predatory autocracy. –But this approach begs the question of why these different regimes emerged in the first place.

Bevan et al (1999) have emphasised differences in ‘initial conditions’ and the ‘happenstance of events’ –Initial conditions: Indonesia more vulnerable to fluctuations in world food prices  lead to greater concern with agricultural development Indonesian military’s ‘dual function’  greater government concern with reducing poverty Indonesia’s commercial elite vulnerable politically, while Nigeria’s not  greater willingness to liberalise

–happenstance of events: President Sukarno’s vision for social cohesion  greater expectations vis-à-vis poverty reduction in Indonesia than Nigeria hyperinflation in Indonesia in the mid-1960s  greater concern to reduce inflation in Indonesia than Nigeria rapid economic growth in East Asia  greater trade and investment opportunities for Indonesia than Nigeria

–On the whole, a good approach because it recognises the role of social and historical factors in shaping economic outcomes in resource rich countries. –But some misinterpretations of specifics of the Indonesian case  limits the value of their conclusions.

My View Indonesia’s and Nigeria’s differential economic performance reflects three factors: –First, the different social bases of the Indonesian and Nigerian states The Indonesian state has been defined more in class terms, the Nigerian state more in ethnic terms, reflecting: (i) different colonial administrative histories; (ii) differences in promoting a national language.

–These differences have translated into different levels of responsiveness to the interests/demands of local and foreign capitalists In Indonesia, because the political elite have had a capitalist class identity, they have had an interest in ensuring an environment conducive to the continued reproduction of capital –They have even been willing to sacrifice the interests of local cronies to attract mobile investment

In Nigeria, by contrast, the political elite has been driven by an ethnic rather than a class agenda, making it difficult for them to reward local capital for the reasons pointed to by Bevan et al (1999). –Second, the fact that communism was a very powerful political force at one point in Indonesia’s history  Greater state attention to agricultural development

Third, the different positions of the two countries in the global political economy –Indonesia has been more important in geo-political terms than Nigeria (see figure on aid flows) –Indonesia has been more favourably located in geo- economic terms

Source: World Bank's World Development Indicators

Conclusion Overcoming the resource curse requires: –fundamental political and social change, specifically the emergence of pro-capitalist political elites –the emergence of a favourable geo-political and geo- economic environment Overcoming the resource curse is thus very difficult –no easy technocratic fix –need to focus on promoting long-term processes of change

References Bevan D. et al (1999) Political Economy of Poverty, Equity, and Growth: Nigeria and Indonesia, Oxford: Oxford University Press. Eifert B. et al (2003) ‘The Political Economy of Fiscal Policy and Economic Management in Oil Exporting Countries’ in J. Davis et al (eds.) Fiscal Policy Formulation and Implementation in Oil-Producing Countries, Washington DC: International Monetary Fund, pp