Download The Role of Institutions in the Transformation of the Nigerian Economy

Olu Ajakaiye and Afeikhena Jerome
African Economic Conference
Addis Ababa, Ethiopia
25th – 28th October, 2011
•
•
•
•
Introduction: Institutions and Development
Indonesia and Nigerian Development Performance
Economic Growth
Structural 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
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
Figure 2: Indonesia: Annual GDP Growth Rate, 1961-2010
Source: World Development Indicators, 2011
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
Figure 4: Indonesia: Composition of GDP, 1970-2009
Source; Underlying Data from UN GDP Statistics.
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 labourintensive 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, overcentralisation, 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 crossnational analysis may provide inadequate guidance
Thank you for your attention.