Economics and Finance in Indonesia Vol. 61 No. 1, 2015 : 21-40 p-ISSN 0126-155X; e-ISSN 2442-9260 21 Pragmatism and Nationalism: Industrialization Policy in Indonesia and Nigeria I Ahmad Helmy Fuadya,∗ aResearch Center for Regional Resources, Indonesian Institute of Sciences (LIPI) Abstract This paper examines industrialization policy in two oil giant economies, Indonesia and Nigeria. What are the key features of continued economic divergence in these two countries since the 1980s? It shows that Indonesia’s policy-makers adopted a series of liberalization measures and switched to an export-oriented strategy to develop manufacturing industries from the mid-1980s, while Nigeria’s policy-makers was reluctant to do so. This paper also seeks to understand the rationale behind the different policy choices. This paper argues that policy-makers’ experience and educational background are possible explanation to the different industrialization policies in these two countries. Keywords: Industrialization; Indonesia; Nigeria; Policy-Maker Abstrak Tulisan ini mengamati kebijakan industrialisasi di dua perekonomian raksasa berbasis minyak, yaitu In- donesia dan Nigeria. Apa fitur kunci dari divergensi ekonomi berkelanjutan di kedua negara sejak 1980an? Perumus kebijakan Indonesia menerapkan upaya liberalisasi dan berubah ke strategi orientasi ekspor untuk mengembangkan industri pengolahan sejak pertengahan 1980an, sedangkan perumus kebijakan Nigeria enggan menerapkan langkah serupa. Tulisan ini berusaha memahami alasan dibalik pilihan kebijakan yang berlainan. Tulisan ini berpendapat bahwa pengalaman dan latar belakang pendidikan perumus kebijakan merupakan salah satu alternatif penjelasan atas perbedaan kebijakan industrialisasi di kedua negara. Kata kunci: Industrialisasi; Indonesia; Nigeria; Pengambil Kebijakan JEL classifications: B310, O250, O570 1. Introduction In the wake of independence, in the 1960s, Nigeria was full of optimism about the future of the econ- omy. However, like a tragedy, up to the end of the Indonesia and Nigeria are two oil rich countries, 1990s the economy grew very slow and often grew which share similarities in many respects. Both are at a negative rate, while two thirds of the popula- located in a tropical area, have very large and eth- tion lived below the poverty line and inequality in- nically diverse population, experienced a long his- creased considerably. By contrast, after years of tory of colonial rule, and are notorious for their pessimism and chaos in the early 1960s, like a mir- high level of corruption. Both countries were ruled acle, Indonesia’s economy grew continuously at an by military leaders from 1966 to 1998 (with two average annual rate of 7 per cent and experienced brief civilian administrations in Nigeria in 1979– rapid poverty reduction. 1983 and 1993). Despite these similarities, they show a stark contrast in economic performance. Industrialization has been regarded as a major factor contributing to divergent economic develop- ments in Asia and Africa. This has also been a fea- IThis paper is developed from my Ph.D. thesis, Elites and ture of Indonesia–Nigeria comparisons since the Economic Policies in Indonesia and Nigeria, 1966–1998, at the 1980s1. Since the mid-1980s, the manufacturing Universiteit van Amsterdam. ∗Corresponding Address: Jend. Gatot Subroto Street No. 10, Jakarta 12710 Indonesia E-mail: [email protected]. 1In 1970s and the beginning of the 1980s, the key to rapid Economics and Finance in Indonesia Vol. 61 No. 1, 2015 22 Fuady, A. H./Pragmatism and Nationalism: ... sector has been an engine of growth in Indone- industrialization since the 1980s, while Nigerian sia.The ccontribution of the sector to the coun- policy-makers were reluctant to do so. There are try’s GDP increased significantly, from 8 percent in several studies attempt to explain the economic 1965 to 29 percent in 2003 (World Bank 2007b). divergence by examining the historical and insti- The value added of manufacturing in Indonesia tutional contexts in the two countries (see for in- surpassed that of the agricultural sector in 1989, stance Bevan et al. 1999; Kohli 2004; Eifert et al. and the gap between the two has grown consider- 2002; Lewis 2007; and Thorbecke 1998). Accord- ably since then. In Nigeria, however, the manufac- ing to Bevan, Indonesia historically had a greater turing sector has not grown rapidly, with the value export orientation and there was more smuggling added of this sector averaging only around 5 per- between the islands outside Java and neighbour- cent of GDP from 1965 to 2003, while agriculture’s ing countries (Bevan et al. 1999, p. 419). These value added reached 34 percent of GDP during the conditions made an outward orientation in Indone- same period (World Bank 2007b). Moreover, In- sian economic policies more acceptable to policy- donesia experienced a substantial transformation makers. Kohli (2004, p. 327) argues that failure in into an industrial economy by weaning itself away Nigeria’s industrialization can be traced back to the from oil dependence, while Nigeria’s economy ’per- colonial period, in which ’British "effortless" colo- sisted as an oil monoculture’ (Lewis 2007, p. 187). nialism laid the foundation of a distorted state and a commodity-dependent economy’. In the post- In Indonesia and Nigeria, manufacturing perfor- colonial period, Nigeria has indeed been an inef- mance diverged significantly starting from the early fective state, characterized by a personalistic and 1980s, when oil prices began to drop. Even though ethnically fragmented political elite, combined with both countries changed their industrialization strat- an army and bureaucrats that are not competent, egy during this period from an import-substitution and lack of long-term vision (Kohli 2004, pp. 363– strategy to an export-promotion strategy, there 4). The state’s ineffectiveness, lacking the vision were significant differences between these two and organizational capacity to promote industri- countries. In the early 1980s, Indonesia’s policy- alization, is thus argued to have contributed to makers implemented a series of economic liber- Nigeria’s development failures. Meanwhile, Eiffert alization measures. This liberalization was sus- et al. (2002), Thorbecke (1998) and Lewis (2007) tained and even increased gross capital forma- emphasize how policy-makers in Nigeria were di- tion in Indonesia, when the state could no longer vided along communal and factional lines, and rely on oil revenues. Nigeria’s policy-makers, in concludes that this made a problem of collective contrast, failed to improve gross capital forma- action. Moreover, patronage, clientelism, ethnic di- tion in the economy with their half-hearted eco- vision, rent seeking, and conflict over welfare distri- nomic reform measures. In fact, investment poli- bution led the country astray (Lewis 2007, pp. 77– cies in these two economies also differed signifi- 8). Different to the previous studies, in this study cantly during this period. During the oil boom pe- shows the importance of personal background and riod in the 1970s, the governments in both coun- life experience of policy-makers in shaping devel- tries adopted nationalistic inward-looking policies, opment in Indonesia and Nigeria, which has re- and an import-substitution strategy. After the end ceived very little attention in the existing literature. of the oil boom in the early 1980s, Indonesia’s It argues that policy-makers’ experience and ed- policy-makers clearly wanted to stimulate more do- ucational background are possible explanation to mestic private investment as well as FDI. In con- the different industrialization policies in these two trast, Nigerian policy-makers were still reluctant to countries. provide more room for private and foreign partici- pation. This paper first briefly presents the importance of This paper aims to understand why Indonesian policy-makers’ backgrounds to shape their policies. policy-makers opted for a switch to export-oriented It then provides an overview of industrialization policies in Indonesia and Nigeria. This paper then presents short biographies of the policy-makers re- economic development and poverty alleviation in Indonesia was sponsible for the industrialization policies in the two attributed to a pronounced rural-agricultural bias in develop- ment spending. Meanwhile, the poor economic result in Nigeria countries, to assess the relevance of their personal was due to neglect of the rural-agricultural sector. background to the policies they espoused. Economics and Finance in Indonesia Vol. 61 No. 1, 2015 Fuady, A. H./Pragmatism and Nationalism: ... 23 2. Analysis rather than a regulatory economy or state interven- tions. 2.1. The Importance Personal Back- It should be realized, however, that having a cer- ground and Life Experience tain social background is not a guarantee that an elite will act according to the interests predicted by that background. For instance, a policy-maker Personal background (family, regional origins, eth- of rural origins will not automatically prefer rural- nicity, religion, education, as well as political and biased policies. It depends on how the person per- professional affiliation) of policy-makers is impor- ceives being of rural origin. It is possible that hav- tant for understanding how their opinions are ing childhood memories of growing up in rural ar- formed and what kinds of policies they are likely eas will lead the policy-maker to prioritize develop- to support. There are at least two reasons.