Nigeria is no Indonesia, but the world’s fourth most populous country does have a lesson for Africa’s most populous nation on how to diversify its economy, boost growth rates and reduce poverty.
Even with a much higher population than Nigeria, Indonesia has been able to attain lower poverty rates which declined to the lowest level ever in 2018 to 9.82 percent (based on latest data from Indonesia’s Central Statistics Agency) and a more diversified economy, with more sectors contributing to its growth.
The expansion of Indonesia’s industrial sector did not happen by coincidence as deliberate and concise actions were taken by the government in line with the provisions of national and sectoral plans to create a friendly business environment and attract investments into priority sectors of the economy.
For Indonesia’s President Joko Widodo who is seeking re-election in 2019, boosting economic growth has been a central policy priority.
On taking office in late 2014, he inherited an economy under pressure. Growth was slowing, a large current account deficit had opened up, and the fiscal deficit was rapidly approaching the legal limit.
Decisive early action by President Widodo to cut wasteful fuel subsidies successfully arrested the situation. He further launched an ambitious pro-growth agenda focused on large-scale infrastructure development, fiscal reform, and dramatically improving the business climate.
To deliver his infrastructure drive, President Widodo’s strategy entailed increasing budgetary allocations (particularly by cutting energy subsidies), a heavy reliance on state-owned enterprises (including through capital injections and directly allocating major projects), and progressing previously stalled projects (in particular by expediting land acquisition).
President Widodo also dramatically improved Indonesia’s difficult business climate to improve its pro-growth agenda which was achieved through series of reform packages aimed principally at cutting red tape and attracting FDI.
Subsidy reform and more credible budgeting have seen Indonesia’s sovereign credit rating lifted to investment grade, or higher, by all of the major credit rating agencies, a status last enjoyed before the Asian financial crisis.
Indonesia adopts long- and medium-term development planning at both national and regional levels, which started with a long-term 20-year national development plan and subsequently aligned with other 5-year medium-term plans, detailing sectoral and regional plans.
The current 20-year national plan covers the period 2005 to 2025 and within this period, aligned with 3 five-year medium-term plans (2005 to 2009 and 2009 to 2014), with the latest covering 2015 to 2019.
According to Indonesia’s National Graduate Institute for Policy Studies (GRIPS), the medium-term plan must be enacted by a Presidential Regulation no later than three months after the inauguration of a President which reduces, to a large extent, economic uncertainties and provides a sense of direction for the country, investors and policymakers.
In addition to long-term planning, Indonesia recently concluded the development of a 20-year National Industrial Plan (2015-2035), which articulates visions, strategies and priorities for industrial development in the next 20 years. Ten priority sectors were identified and stakeholder consultations were held to drive the implementation of the plan.
For Indonesia, its Law on National Development Planning System clearly stipulates the purpose, processes, scope and types of development plans that must be put in place by the government of the country which is to ensure stability of such long-term plans irrespective of political affiliations.
“Nigeria is about two-thirds of Indonesia’s population and we have an economy that is about one-third of theirs, which means that in terms of per capita income, Nigeria’s about $2,000 income per head is only half their per capita income at about $4,000. So they produce more than we do despite our population being nearly the same,” Ayo Teriba, CEO of Economic Associates (EA), said.
Over the past decade, Indonesia has been a consistent performer in an otherwise weak and volatile global economy. Growth has averaged 5.5 percent a year since 2003 and the economy has proved remarkably resilient, withstanding numerous shocks including the global financial crisis of 2008-2009, the end of the China-fuelled commodity boom around late 2011, and acute market pressures during the ‘taper tantrum’ of May 2013.
Speaking on why both countries are moving in opposite directions, Teriba said, “We shouldn’t have been poorer than them as we have become in recent years, but this happened because we have been too dependent on oil export, whereas they reduced their dependence on oil export.”
He added that as a matter of fact, Indonesia’s “oil production has been declining and they will soon exhaust their oil reserves but they have learnt over the years to process their own oil and Nigeria on the other hand exports crude oil and imports petroleum products”.
Whilst the service sector contributes the most to GDP in both Nigeria and Indonesia, particularly from the early 2000s, the industrial sector in Indonesia, led by non-oil and processing subsectors, increased its share of GDP showing vividly the transition from agriculture to industry-led growth.
However, in the case of Nigeria, the industrial sector’s contribution to GDP (which is led by crude oil) contracted over time, a sign of high economic vulnerability.
“Indonesia improved their agricultural sector more than we did, so they have diversified export revenue, and so the fall in price of oil brought Nigeria’s economy to its knees unlike them,” Teriba explained.
“The most devastating impact on Nigeria’s economy was the naira devaluation in which the naira lost more than half of its value. That would erode the real income of Nigerians by nearly the same proportion in comparison to Indonesia’s, because you compare per capita GDP in dollars,” he said.
Ayodeji Ebo, managing director, Afrinvest Securities Limited, said Indonesia has been able to keep million of its population from below poverty line because Indonesia’s GDP growth rate is higher than the rate at which its population is growing, unlike Nigeria operating the reverse.
“The number of Nigerians falling below the poverty line will continue to increase. This means that the government needs to think of a strategy that can jump-start the economy to grow at a rate that is almost twice our GDP growth rate,” Ebo said.
According to the Nigerian Economic Summit Group (NESG) macroeconomic outlook 2019, Nigeria’s current economic growth is exhibiting the same pattern as in the pre-recession era, where growth was driven by few sectors.
“Nigeria’s post-recession growth pattern is still skewed towards few sectors, showing the limited capacity of the economy to create jobs and reduce poverty,” the NESG report said.
According to NESG, in the first three quarters of 2018, 13 out of the 19 major sectors contributed positively to GDP growth. Out of these 13 sectors, only six sectors accounted for 90 percent of the GDP growth in the period.
NESG noted that comparable data from Indonesia showed that the top six sectors contributed 72 percent to the country’s GDP growth in H1 2018, leaving room for the remaining 11 sectors.
Although Indonesia lags Malaysia, Thailand and other countries in terms of social and economic inclusion, its economic progress exemplified by the massive reduction of poverty rates, stable and broad-based GDP growth and the economy’s ability to withstand external shocks is not coincidental.
On the way forward for Nigeria gaining back its growth, Ebo said, “At least protect the country from oil shocks; have plan B, that if the price of oil falls, it doesn’t make the large number of the population poor overnight.”
ENDURANCE OKAFOR & DIPO OLADEHINDE
