Aid and policy preferences in oil-rich countries: comparing Indonesia and Nigeria

Abstract

This paper analyses the role of foreign aid in assisting development in two oil-rich countries: Indonesia and Nigeria. It seeks to understand the way foreign aid provided assistance to transform Indonesia from a ‘fragile’ state in the 1960s into one of the ‘Asian Tigers’ in the mid-1990s, and why it did not prevent Nigeria from falling into ‘African Tragedy’. The paper argues that foreign aid may help not only to finance development, but also to navigate policy makers’ policy choices. It shows how foreign aid may or may not help policy makers turn their policy preferences into action.

Keywords:

• aid
• policy
• oil
• Indonesia
• Nigeria

Indonesia and Nigeria have had contrasting experiences with foreign aid. Since the end of the 1960s Indonesia has received substantial foreign aid to finance its development programmes and projects. Meanwhile Nigeria received only limited foreign aid and therefore had to borrow short-term and high-interest-rate loans in the 1970s and 1980s. This paper analyses the role of foreign aid in assisting development in these two oil-rich countries. The two countries are similar in many respects, ranging from geography to economic, social and political challenges, but Indonesia has developed ‘better’ than Nigeria since the end of the 1960s. The paper seeks to understand if and how foreign aid provided assistance to transform Indonesia from a ‘fragile’ state into one of the so-called ‘Asian Miracles’ in the mid-1990s, and why foreign assistance could not prevent Nigeria during the same period from falling into what some term ‘African Tragedy’.¹

The important role of oil in Indonesia and Nigeria has invited frequent comparisons between these two countries.² Most such comparisons further highlight their comparative experiences after the skyrocketing of oil prices in 1973 and 1979, linked to the Arab oil embargo and the Iranian Revolution, respectively. Structural and institutional factors are frequently cited in explaining why Nigeria in particular has failed to achieve sustainable and equitable economic growth, despite its abundant natural resources. In particular, the literature highlights Nigeria’s fragmented society based on ethnicity, religion and factions within the military and the government.³ Lewis, for instance, notes that Nigeria’s economic tragedy is linked to the ‘central problem of collective action’. In his view, ‘in a setting of weak formal institutions and myriad conflicts over distribution, the Nigerian state has succumbed to a social dilemma: individuals and groups focus on particular gains at the expense of collective goods and general welfare’.⁴ Similarly Bevan et al argue that, unlike in Indonesian politics, which is dominated by Javanese, there is no dominant ethnic group in Nigeria able to provide political stability and consensus,⁵ which are important for the formulation and implementation of development policies and economic performance.

Such structural and institutional factors certainly help to explain divergence between the two countries. However, this article argues, such factors alone are not sufficient, and the role of agency (domestic policy preference), as well as of external factors such as foreign aid, should not be ignored. The article thus focuses on the role of foreign aid and policy preference in understanding the divergent development experiences of Indonesia and Nigeria. There were periods, particularly during crises, when the two countries needed foreign aid to finance development. The article argues that, in such critical periods, foreign aid was able not only to help finance development, but also to assist policy makers in manoeuvring in order to turn their policy preferences into action.

The paper is focused on the 1970s and 1980s for two reasons. First, it was in this period that the two countries experienced economic crises and a need for foreign aid because of decreasing oil prices. Second, it was in this period that the economic performance of the two countries started to diverge sharply. It is well worth noting that, since this period, during the 2000s, there has been significant improvement in Nigeria’s growth performance and debt management. This possible growing convergence in the latter period is worthy of future focused study but our focus here is on understanding the divergence that characterised the earlier period.

The following section presents rationales for the comparative analysis of Indonesia and Nigeria. Then a brief narrative of how the two countries transformed their economy and politics is presented. Finally, the relative importance of foreign assistance and domestic policy preference for positive transformation is explored, with particular attention to the Indonesian case.

Rationales for comparison

The fact that a contrast in economic performance arose under comparable institutional arrangements is the rationale for this paired comparison. Indonesia and Nigeria are rich in natural resources, particularly oil. Nigeria is one of the largest producers and exporters of petroleum, and the largest oil exporter in Africa.⁶ Since the 1973 oil boom, oil has played an increasingly major role in Nigeria. Rising oil prices had increased export revenue from the oil sector by almost 300% in 1974 compared to the previous year; in 1974 oil contributed 30% of GDP, 80% of government revenue,⁷ and 93% of total merchandise exports.⁸ On average crude oil contributed more than 95% of Nigerian merchandise exports from 1974 to 2009 annually, and never fell below 90% within that period.⁹ Oil contributed more than 70% of the national government’s revenue. Similarly Indonesia was a major oil exporter, even though, as of 2009, it is no longer a member of the Organization of Petroleum Exporting Countries (OPEC). Like Nigeria, Indonesia enjoyed increased revenue from the oil boom in 1973. In 1974 the oil sector’s contribution to GDP doubled to 22% compared to the previous year, and provided 37% of government revenue.¹⁰ On average oil contributed more than 70% of Indonesian merchandise exports between 1973 and 1985, reaching a high of 82% in 1982.¹¹

The two countries also show similarities in many other respects, ranging from geographical features to social and political challenges. Both have the largest population in their respective region, have a highly ethnically diverse population, have experienced a long history of colonialism, and were ruled by military leaders from 1966 to 1998 (with two brief civilian administrations in Nigeria). It is hard to deny that Indonesia enjoyed relatively greater political stability during the Suharto period (1966–98) compared to Nigeria, which experienced a series of chaotic political takeovers during the same period. Notwithstanding the frequent changes of regime in Nigeria, there was considerable continuity of political elite and continuity of ideas among Nigerian technocrats.¹² General Ibrahim Babangida, for instance, was influential even before his coup in 1983, and remained a central and influential ‘godfather’ when he had stepped down from the presidency; his close friends, General Sani Abacha and General Abdulsalami Abubakar, led the country from 1993 to 1999.¹³

Both countries are also well-known for their high levels of corruption. Terms like corruption, prebendalism, predation, clientelism and kleptocracy have been widely used to describe the misuse of public power for the private gain of Nigeria’s elites.¹⁴ Similarly Indonesia under Suharto acquired a reputation as one of the most corrupt countries on earth.¹⁵ Suharto’s regime was associated with Korupsi, Kolusi, Nepotisme (KKN) – corruption, collusion and nepotism.¹⁶

Yet their economic performance shows a stark contrast. In the wake of independence in the 1960s, Nigeria was full of optimism about the future of the economy. Tragically, however, up to the end of the 1990s the economy grew very slowly and often contracted. Two-thirds of the population remained below the poverty line and inequality increased considerably. By contrast, after years of pessimism and chaos in the 1960s, Indonesia’s economy not only grew continuously at a high rate, but the proportion of the population living below the poverty line was also substantially reduced.

After emerging from the political turbulence and economic chaos of the mid-1960s, Indonesia embarked on a period of seemingly miraculous economic growth. In the period 1970–90, Indonesia’s GDP grew robustly at 7% annually on average. In contrast, Nigerian GDP in that period grew at only about 3% annually.¹⁷ Moreover, average growth of GDP per capita in Nigeria in the 1980s was -1.5% annually. The proportion of the population living below the poverty line in Indonesia decreased from 60% in 1970 to 28% in 1986.¹⁸ In Nigeria the poverty headcount ratio increased from an estimated 40% or 50% in 1973–85 to 65% in 1986.¹⁹ Life expectancy also reveals a contrast between the two countries. Life expectancy in Indonesia continuously increased from less than 43 years in 1962 to more than 66 years in 2002. In Nigeria average life expectancy in 2002 was still less than 47 years, up from 39 years in 1962.²⁰

It is still debatable whether the Indonesian development trajectory in the mid-1990s was as good as has been portrayed by the World Bank. Certainly the Asian economic crisis, which hit the Indonesian economy in 1997, showed the vulnerability of the Indonesian economy. Likewise improvements in Nigeria’s economic performance since the 2000s are worthy of note. However, much can be learned about the role of aid and domestic policy preferences through focused attention to the divergent experiences of the two countries in the periods following the oil crises of the 1970s.

Political and economic changes

In the wake of independence in 1945, the first Indonesian president, Sukarno, had to build a strong basis for a stable national government. Whereas Indonesia had earlier had to struggle for recognition of independence, Sukarno now had to keep the country together. Separatist movements, such as Permesta (Perjuangan Semesta) in 1957 and the Negara Islam Indonesia (Indonesian Islamic State) declared in 1949 had shown how fragile the country’s unity was. Sukarno was successful in bringing national solidarity to the new-born country and kept the country together during the critical period.

However, the economy was not moving. Between 1959 and 1965, GDP grew on average by only 1.8% annually (this is lower than the population growth, which was 2.2% annually), exports dropped by 24%, and foreign exchange reserves dropped from US$267 million to only $17 million, which was not enough to finance even one month of imports.²¹ The cost of living also increased substantially, with an often cited inflation rate of 650% for 1965. In short, the situation in the mid-1960s shows how fragile Indonesia was. The very poor economic conditions were the result of an economic regime that concentrated economic activities in the hands of the state (etatism), with a high frequency of interventions, bureaucratic procedures and controls on prices, production and distribution.²² The economy was isolated from the rest of the world by Sukarno’s ‘go to hell with your aid’ proclamation and the takeover of foreign companies, as well as by limitations on investment by foreign and private sectors.²³

At the end of September 1965, the Indonesian Communist Party (PKI) allegedly attempted a coupd’état. In the worsening political and economic conditions Suharto took power from Sukarno in March 1966. The Cold War against communism was an important factor behind the rise and development of the ‘New Order’, the term used to characterise Suharto’s presidential period. The threat of communism was used not only to gain support from Western powers, particularly from the USA, but also to ‘unite’ and often to suppress political opposition groups in the country. Mass killings were reported in Central Java, East Java and Bali during the 1965–66 transition period.²⁴

Faced with the chaotic political and economic situation, Suharto relied on a team from the Faculty of Economics, University of Indonesia (FEUI) to manage economic affairs. Widjojo Nitisastro, Emil Salim, Subroto, Ali Wardhana and Mohammad Sadli formed the team of experts for economics and finance coordinated by Colonel Sudjono Humardani.²⁵ As personal staff (staf pribadi, or spri) of the chairman of the presidium,²⁶ they were very powerful in economic policy making, since any economic decisions had to follow their instructions. The role of this group became stronger when group members gained full control over the economy after they were all formally appointed to ministerial positions.²⁷

The technocrats designed stabilisation and rehabilitation programmes, which were particularly aimed at controlling hyperinflation, securing food provision and rescheduling foreign debt.²⁸ The government also opened the country to foreign investment, implemented balanced-budget principles, and introduced a simplified exchange rate regime, including making the rupiah freely convertible. It successfully managed stabilisation and rehabilitation during a critical period, giving legitimacy to the New Order. Inflation dropped to a more moderate level of 15% in 1969 and the economy grew promisingly from 1968; in that year GDP, total exports and manufacturing value added grew by 12%, 10% and 8.5%, respectively.²⁹ Following that period the Indonesian economy grew miraculously by about 7% annually for more than 25 years. However, the Asian crisis in mid-1990s marked the end of Suharto’s presidency and brought Indonesia into a new democratic era.

Nigeria also experienced military domination during 1966–98. After a failed attempted coup in January 1966 Major General Ironsi took over the leadership. From then on Nigeria was dominated by military regimes until 1999. In succession military officers claimed the Nigerian presidency in coup after coup. They were Yakubu Gowon, Murtala Muhammad, Olusegun Obasanjo, Muhammadu Buhari, Ibrahim Babangida and Sani Abacha, proclaimed as head of state in that order. After the death of Abacha in July 1998 Major General Abdulsalami Abubakar led the transition to a civilian government, and a new president was elected in 1999. Before that the only civilian administrations were those headed by Shehu Shagari during the Second Republic (1979–83) and Ernest Shonekan in 1993.

During the Gowon period, the policy arena was dominated by three political groups: the military, bureaucrats and politicians.³⁰ However, policy was made by a small circle of bureaucrats known as ‘super-permanent secretaries’, including Allison Ayida, Philip Asiodu and Ahmad Joda.³¹ The direction of economic policy during this period reflects the widespread criticism of the policies of the First Republic, which was regarded as much too dependent on foreign ownership, did not produce enough value added, and discouraged indigenous business.³² Therefore sovereignty over the national economy was the main agenda of the regime after the civil war. The Indigenization Decree was announced in 1972 to create an economically independent country with increased opportunities for indigenous businessmen.³³ The increased oil revenue in the 1970s provided fuel for further shifting the economy toward nationalism and etatism; the government expanded protection for import-substituting industries, enlarged the role of state-owned enterprises and increased protectionist measures, as well as maintaining an overvalued currency.³⁴

In July 1975, General Murtala Muhammad, who had been a central figure in the July 1966 coup, took power and became the fourth Nigerian head of state.³⁵ Murtala pledged to fix a state that had been ‘characterised by lack of consultation, indecision, indiscipline and even neglect’.³⁶ However, just nine months later he was killed in a failed coup. General Obasanjo, the second in command, replaced him as head of state and continued the Murtala–Obasanjo administration. Murtala had not only dismissed the Gowon military regime but also sacked a substantial tier of the upper bureaucracy. More than 10,000 civil servants were ousted from the government;³⁷ this marked the decline of the power of the bureaucracy in Nigeria. The economy, however, performed badly during the period. Foreign debt increased significantly, the currency was overvalued and investment was low as a result of monetary restraint and the indigenisation programme. GDP dropped by 5.8% from US$119 billion in 1977 to $112 billion in 1978.³⁸

In 1979, Shehu Shagari, the National Party of Nigeria (NPN) presidential candidate, was inaugurated as president of the Second Republic. The second oil windfall in 1979 increased government revenue significantly, and led to a large surplus on the balance of payments and growing foreign reserves. This all stimulated higher spending and consumption. However, with the decrease in oil prices from 1981, the balance of payments started to deteriorate and foreign debt increased. This was made worse by chaotic competition among political parties, which led to corruption and economic mismanagement.³⁹ As Ihonvbere describes it, ‘Three years of civilian rule in the Second Republic had bled the nation dry, mismanaged huge oil “rent”, more than doubled the foreign debt profile, destroyed the manufacturing and productive base, and accentuated social tensions and conflicts to unprecedented proportions’.⁴⁰ The aggregate index for the manufacturing sector, for instance, fell by 20.7% in 1983, while employment in the construction industry fell by more than 62% from 1980 to 1983.⁴¹

After a controversial victory by the NPN in the elections of 1983, Shehu Shagari was inaugurated for a second term. However, on the last evening of 1983, Major General Muhammadu Buhari was installed as the new head of state after another coup d’état. The government ‘arrested hundreds of politicians, fired hundreds of public officials, and seized huge sums of cash from politicians’ homes’.⁴² Nevertheless, there was not much improvement in economic management. Exacerbated by further reductions in oil prices, the economic situation was no better than it had been under the previous administration. Moreover, Buhari’s anti-democratic behaviour, such as enacting the ‘draconian’ Decree Number 2/1984, allowing detention of any citizen and providing carte blanche to arrest and intimidate critics, contributed to his downfall.⁴³

On 27 August 1985, Major General Ibrahim Badamasi Babangida took over from Buhari. He declared an emergency in economic affairs and promised drastic measures to overcome the problems. He brought in high-profile academics and technocrats, and introduced a structural adjustment programme to achieve budget restraint, exchange rate reform, trade and financial liberalisation, as well as privatisation of state-owned enterprises. Before the enactment of these measures Babangida opened a wide public debate on the need for the IMF to support the Nigerian economy. However, implementation of the structural adjustment programme did not make much improvement to the Nigerian economy and may have made it worse.⁴⁴ GDP grew by 6% to 9% per year from 1998 to 1990,⁴⁵ but unemployment and inflation rose sharply.⁴⁶

The political stalemate in the 1993 general elections worsened the situation. Chief MKO Abiola, a prominent Yoruba Muslim, won the election. However, Babangida declared the polls invalid and installed Chief Shonekan as caretaker of an interim national government. The annulment of the election results created dissatisfaction.⁴⁷ Major General Sani Abacha, former chief of staff and defence minister at the time, then took power, dissolved the elected national and state legislatures, and fired the state and local governors,⁴⁸ thus ending the dream of a democratic transition. Abacha’s period is considered to have been more predatory than those of previous military regimes. It is estimated that over one billion dollars were stolen from state funds by Abacha, and that hundreds of millions were looted by his cabinet members.⁴⁹

Characteristics of foreign aid

Indonesia and Nigeria had episodes of imprudent foreign debt management. Figure 1 shows the increase in Indonesia’s external debt since the beginning of the 1980s to the mid-1990s, when crisis hit Indonesia’s economy badly. In the 1970s the average ratio of foreign debt to gross national income (GNI) was about 35%. The ratio of debt to GNI could be maintained at around 35% because the Indonesian government realised that anything above that point could hamper the economy, as happened in the 1960s. When the world oil price started to drop at the beginning of the 1980s, however, the ratio of foreign debt increased to around 60% of GNI. It was then stabilised around that point, thanks to increasing exports after the mid-1980s. Total external debt grew from $22.8 billion in 1981 to $79 billion in 1991.

Figure 1. External debt stocks (% of GNI).

Source: World Bank, World Development Indicators.

Figure 2 shows the net official development assistance (ODA) received by the two countries from 1960 to 2011. Indonesia received much higher net ODA compared to that received by Nigeria. From 1960 to 2000, on average, Indonesia received more than $2 billion in net ODA annually. Meanwhile, in the same period, Nigeria received net ODA of less than $0.5 billion annually on average. This limited access to foreign aid, which usually had a larger grant component and a lower interest rate, meant that Nigerian policy makers had to take out loans, which were more expensive.

Figure 2. Net official development assistance received (constant 2011 US$).

Source: World Bank, World Development Indicators.

Nigeria did not borrow from external sources in huge amounts (relative to its GNI) until the late 1970s, when the world oil price started to decrease. Up to 1976 the Nigerian external debt was only $1.3 billion (Table 1). A huge increase in oil revenue meant the Nigerian government had enough money to finance its programmes. During that period the ratio of foreign debt to GNI was less than 20% (Figure 1), and the country was considered to be under-borrowing. When the world oil price declined, Nigerian external debt increased significantly and the ratio of foreign debt to GNI reached more than 130% in 1987. The increasing foreign debt was particularly triggered by the need to finance government expenditure and also to finance the structural adjustment programmes adopted by the country in the mid-1980s. Unfortunately, unlike Indonesia, which was fully backed by the World Bank and IMF and so was able to access concessional loans, Nigeria turned to the petrodollar market to borrow. Until the mid-1980s Nigerian foreign debt mainly consisted of short-term debt with high interest rates. The tactic of borrowing short-term loans changed after the mid-1980s, however, with less and less share of short-term debt to total external debt. The chaotic political situation following the general election in 1992 led to another increase in the ratio of foreign debt to GDI; it reached more than 160% in 1993. However, the ratio of debt to GNI decreased soon after General Sani Abacha took over the Nigerian presidency in a military coup, mainly because an international embargo prevented him from accessing international capital.

Table 1. External debt stock (US$ billion).

Indicator name	1971	1976	1981	1986	1991	1996	2001	2006	2011
Indonesia
External debt stocks (total)	5.0	14.0	22.8	42.9	79.5	129.0	132.3	136.0	213.5
External debt stocks (short-term)	0.5	1.4	3.3	6.5	14.3	32.2	20.0	12.2	38.2
External debt stocks (long-term)	4.4	12.6	19.5	36.4	65.0	96.8	102.9	123.4	172.3
Nigeria
External debt stocks (total)	1.0	1.3	11.4	22.2	33.5	31.4	30.0	4.0	9.0
External debt stocks (short-term)	0.3	0.4	4.4	3.7	0.9	5.7	29.4	3.7	6.4
External debt stocks (long-term)	0.7	0.9	7.0	18.5	32.7	25.7	0.4	0.0	0.0

Source: World Bank, World Development Indicators.

There was also a problem with conditionality, required by donor agencies, which did not fit with government's programmes. Further, there was a strong negative sentiment towards the World Bank and IMF in Nigeria. Onaolapo Soleye, commissioner of finance 1983–85, recalled in an interview (May 12, 2009) that when he went to the US Department of State asking for economic help, he was blamed for not cooperating with the IMF. There were always two requirements: to devalue the naira and to get out of OPEC. Soleye recalled that Donald T Regan, White House chief of staff, said: ‘No IMF no credit, no IMF no aid’. James Johnson Oluleye, Nigerian commissioner of finance 1976–79, also notes that policy guidance by international actors had neo-colonial overtones, which would prevent the country from being an independent economy. According to him, ‘resorting to the IMF could have meant walking into an economic ambush out of which we could not get out for some years to come’.⁵⁰ This contrasts with the relationship between donor representatives and Indonesian technocrats, who shared the language of economics, making it easier to build a partnership.⁵¹

Selected indicators in Table 2 show why the debt service ratio to GNI in Indonesia was relatively moderate. First, the average interest rate was very low. In the 1970s it was around 4.5%, more than 2% lower than that for Nigeria. Moreover, if we look in more detail, before the Pertamina scandal in 1975 the average interest rate for new public external debt in Indonesia was less than 3%. Because of their experience with debt problems in the 1960s, the Indonesian policy elites decided only to accept new foreign debt with an interest rate at a concessional discount of around 3%. At a time of decreasing oil prices in the 1980s, even though the average interest rate for new public external debt in Indonesia was more than 6%, it was still lower than that of Nigeria, which had reached more than 8%. The heavy burden on Nigeria to meet annual repayments also resulted from the fact that the grant element in new debt commitment was very low in the 1970s and 1980s (see Table 2). Moreover, maturity and periods of grace for external debt commitment in Nigeria were much shorter than those for Indonesia and required Nigeria to repay principal debt at a higher rate annually.

Table 2. Selected debt indicators.

Indicator	Country	1971–80	1981–90	1991–2000	2001–10	1971–2010
Average interest on new external debt commitments, official (%)	Indonesia	4.48	6.89	4.79	2.56	4.68
	Nigeria	6.71	8.34	4.43	1.18	5.17
Average maturity on new external debt commitments, official (years)	Indonesia	28.24	22.46	21.80	23.98	24.12
	Nigeria	20.70	17.32	25.39	33.88	24.32
Average grant element on new external debt commitments, official (%)	Indonesia	43.64	22.83	35.92	51.76	38.54
	Nigeria	21.88	10.34	43.34	72.14	36.92
Average grace period on new external debt commitments, official (years)	Indonesia	7.48	6.50	6.03	5.75	6.44
	Nigeria	5.54	4.86	7.27	9.17	6.71

Source: World Bank, World Development Indicators.

The motives of lenders behind external debt are often related to success and how the debt is likely to be used. It is therefore important to understand the sources of external debt. The currency composition of Public and Publicly Guaranteed (PPG) debt is a good indicator of the sources. This composition could also help to predict debt vulnerability because of currency fluctuation. According to the World Bank, before 1978 external debt in Nigeria took the form of multilateral currencies, because it mainly came from multilateral donors.⁵² The US dollar only came to dominate the structure of Nigerian foreign debt after 1978. This not only demonstrated growing relations with the USA, but also the availability of the petrodollar in the market. Meanwhile, external debt from multilateral sources and the UK was declining.

For Indonesia about 40% of external debt was denominated in US dollars. However, unlike Nigeria, alongside US domination of the Indonesian debt structure, the Japanese yen and multiple currencies were also prominent.⁵³ Since the beginning of the 1970s the role of the Japanese yen in Indonesian debt had been increasing; since the beginning of the 1980s, at least 30% of Indonesian external debt was in Japanese yen. Similarly external debt from multilateral countries had also been increasing since the 1970s, with a peak in the early 1990s.⁵⁴ The increasing role of multilateral countries was related to the role of the Inter-Governmental Group on Indonesia (IGGI). As part of debt negotiation at the end of the 1960s, there was an agreement that IGGI should be consulted on any foreign debt to Indonesia. About 25% of Indonesian external debt between 1980 and 1997 came from members of IGGI (excluding the USA and Japan).

The role and management of foreign aid

The domestic management of foreign aid is particularly relevant in understanding the Indonesian experience. Foreign aid has played an important role since the beginning of the Indonesian New Order regime. To confront the economic crisis, the Indonesian technocrats realised the need for debt relief and new foreign aid. Postponing debt repayment and making new capital available were important to support Indonesia’s new economic policies.⁵⁵ The new government quickly established a close and supportive relationship with international donors, eg by re-joining the IMF and the World Bank to obtain support from these institutions. It also visited donor countries to negotiate debt relief.

During the mid-1960s crisis period, postponing debt repayments was crucial to ease the government’s burden of financing the country. Moreover, with limited foreign reserves, it was basically impossible for the government to pay its debts. By 1966 besides debt for nationalisation compensation to The Netherlands, Indonesia owed about $2.1 billion to more than 30 countries. Export revenue in 1966 was only $679 million, which was inadequate for debt repayment for that year, let alone to pay for imports that reached $527 million.⁵⁶

The Indonesian technocrats then started negotiations with Eastern European countries (such as the USSR, Czechoslovakia, Hungary and Poland) and with Western European countries, the USA and Japan.⁵⁷ Negotiations with the Eastern European countries resulted in postponing debt repayment to those countries until 1969. After negotiations in Tokyo in September 1966, and in Paris in December 1966, Western European countries, the USA and Japan gave a three-year grace period. Debt repayment to countries in the group could be started in 1971, and it could be paid in eight years. There was also a moratorium on interest payments with low interest rates (of 3% to 3.5%).⁵⁸

In February 1967 IGGI was established as a consultative forum on Indonesian development. The first members of IGGI were Australia, Belgium, France, West Germany, Italy, Japan, The Netherlands, the UK and the USA. The forum also had representatives from the World Bank, the IMF, the United Nations Development Programme (UNDP), the Organisation for Economic Cooperation and Development (OECD), the Asian Development Bank (ADB), New Zealand, Canada, Austria, Norway and Switzerland. The forum calculated that, to finance the budget deficit in 1967, the Indonesian government needed $200 million; one-third would be provided by the USA, one-third by Japan and the other third by the rest of the IGGI members.⁵⁹ This ‘one third’ formula, according to Prawiro, was important in shaping Indonesia’s new debt structure for a few years.

These negotiations not only helped to ease the burden of repayment, they also helped the technocrats to realise the importance of designing a new structure for Indonesia’s debt scheme. According to Nitisastro, there were then three rules for Indonesia to borrow: 3%, 25 years and a seven-year grace period. Interest rates for new debts should only be around 3% annually so that repayment rates for the debt were not too high.⁶⁰ The debt should not last longer than 25 years and should have a seven-year grace period, so that it would not be a heavy burden for the Indonesian budget.⁶¹

Having learned from the chaotic economic situation and very bad debt management in the 1960s, Indonesian policy makers did not want to repeat the mistake. To guarantee prudent debt management, the external debt was channelled through the Bappenas agency. Since the beginning of New Order, Bappenas was responsible not only for development planning, but also for allocating money for development projects in every department. During the New Order period, Bappenas was a ‘super’ body that coordinated fiscal policy, macroeconomics, as well as budget allocation in Indonesia. It was led by Widjojo Nitisastro, chief of the Indonesian New Order technocrats, who was also Coordinating Minister for Economy, Finance and Monitoring Development.

There was criticism that Bappenas was too powerful and centralised, because every project was designed by the agency. In general there were two types of foreign debt classification in the government budget arranged by Bappenas, namely programme aid and project aid.⁶² Programme aid was not related to specific projects; it was designed by the creditor to help Indonesia maintain its foreign reserves. Meanwhile project aid was designed for specific projects. All foreign aid was required to be administered via Bappenas.

Channelling the foreign debt through Bappenas at that time had at least two advantages. First, it guaranteed that the programme and project aid fitted with Indonesia’s development plan and macroeconomic management, because Bappenas was responsible for designing these. It could minimise coordination problems that might lead to inefficiency, for example because of project redundancy. The World Bank, for instance, allocated more than 30% of its projects to agriculture, which was also the priority of the Indonesian government. As Posthumus noted, such design of integrating the development budget, project aid list and technical assistance would provide an opportunity ‘for guiding both national development funds and foreign (project and technical) assistance funds to nationally designated social and economic development objectives’.⁶³ Second, Bappenas had the best economic technocrats available in the country during that period. These capable technocrats would help allocate foreign aid to projects that were really needed by the people, based on their urgency.

Indonesia also benefited from the establishment of IGGI not only because it eased debt negotiation but also because it provided expertise to discuss problems in the Indonesian economy. With the support of such external expertise Indonesian technocrats could sometimes use it to push necessary reforms. Such a situation was not a preference in Nigeria. External expertise, such as from the World Bank or IMF, had been considered more as foreign domination than as development support. Thus the World Bank’s programmes did not always match the government’s programme. In the 1970s, for instance, the World Bank’s projects in Nigeria were mainly in agriculture, but Nigerian policy makers did not seriously develop that sector. Nigeria provided a much lower development budget to agriculture than Indonesia did.⁶⁴ As a result, Nigerian agricultural development was very poor in the 1970s.

In Nigeria in the 1970s and 1980s there was no agency with the same authority as the Indonesian Bappenas in managing foreign aid so that it could fit properly with Nigerian development objectives. There was no such ‘island of efficiency’ protected from rent seekers in the country.⁶⁵ The Nigerian National Planning Commission was responsible during the military period for designing development plans, but it did not control development budget allocation, which came under the commissioner of finance. It was, therefore, proposed to establish a ministry to be responsible for managing foreign aid and technical assistance.⁶⁶ Recent developments in Nigeria show a number of promising ‘islands of efficiency’, such as the Debt Management Office established in 2000 and a more efficient Central Bank and Ministry of Finance. However, it is still unclear whether such organisations have had the same ability to manage foreign aid in concert with the Nigerian national agenda as those in Indonesia.

Foreign aid management under the Bappenas also shows how foreign aid helped Indonesian New Order technocrats to turn their development vision into reality. Without money from foreign aid in the 1960s it was impossible to finance the plan. During that period the Indonesian development budget came mainly from foreign debt. Chowdhury and Sugema note that foreign aid financed nearly 80% of the development budget in 1969 and about 70% in 1971.⁶⁷ With the foreign aid centralised in Bappenas, controlled by the economist technocrats, prioritising agriculture in the government budget became much easier for the technocrats. Doing so, in turn, was important for Indonesia to escape economic chaos in the mid-1960s and became a foundation for further development.

Conclusion

The difference in access to foreign aid as inexpensive capital to finance development is a possible explanation for the diverging economic trajectories of Indonesia and Nigeria. The two countries have had different experiences with foreign aid. After the economic and political chaos of the mid-1960s Indonesia not only rescheduled its old foreign debt but also received long-term new loans with concessional rates, particularly from Japan and the USA. With very limited foreign reserves the Indonesian government could rely on foreign aid to finance development. The availability of foreign aid provided capital for Indonesian policy makers to finance development programmes and projects. Similarly, when the oil price declined in the mid-1980s and economic crisis hit the country in the mid-1990s, Indonesia’s development budget also relied on the availability of foreign aid.

In contrast, Nigeria received only limited foreign aid from donor countries. Particularly at times of economic crisis, such as when oil prices declined in the 1980s, limited access to foreign aid meant that Nigerian policy makers had to borrow short-term loans at market interest rates, believing that the loans could be paid when oil prices increased. Therefore, Nigeria’s debt service ratio increased dramatically in the 1980s, which further worsened its budget deficit. This supports Pinto’s argument that the borrowing strategies of the two countries were important for their economic trajectories.⁶⁸

The relationship between policy maker and international donor, such as the IMF and the World Bank, was important for access to foreign aid. The shared language of economics made it easier for Indonesia’s policy makers to build a partnership with IMF and World Bank officers. In contrast, many of Nigeria’s policy makers saw these international organisations as external powers representing a new form of colonialism. There was a common perception among Nigerians that policy guidance by international actors had neo-colonial overtones, which would prevent the country from being an independent economy.

Finally, this paper has also shown that foreign aid helped Indonesian policy makers to manoeuvre in order to turn their policy preferences into action. In the New Order period (1966–98) foreign aid management was centralised in Bappenas, headed by Widjojo Nitisastro, the chief of Suharto’s technocrats. With the centralisation of loan management, the technocrats had leverage to decide on the programmes and projects necessary for development and also to minimise rent-seeking activities by other actors.

Notes on contributor

Ahmad Helmy Fuady is a researcher at the Research Center for Regional Resources, Indonesian Institute of Sciences (PSDR-LIPI). He was trained in economics and development at the Gadjah Mada University, Yogyakarta and the Australian National University, Canberra, from where he got his bachelor’s and master’s degrees, respectively. In 2012 he obtained his doctorate degree from the University of Amsterdam, with a dissertation comparing development in sub-Saharan Africa and Southeast Asia, entitled “Elites and Economic Policies in Indonesia and Nigeria, 1966–1998”. He has worked on a wide range of economic development issues, such as poverty alleviation, regionalism, industrialisation, international trade and foreign investment.

Acknowledgements

This paper was partly developed from the author’s PhD thesis, entitled “Elites and Economic Policies in Indonesia and Nigeria, 1966–1998”, at the University of Amsterdam. A previous version of the paper has been published as WIDER Working Paper 2014/023, prepared within the UNU-WIDER project, ‘ReCom-Foregin Aid: Reasearch and Communication’. The author would like to thank Rachel Gisselquist, David Henley, Ikrar Nusa Bhakti and the anonymous reviewers for valuable comments to improve the paper.

Notes

1. World Bank, The East Asian Miracle, highlights rapid economic growth and impressive poverty reduction in Asian countries. Meanwhile, Easterly and Levine, “Africa’s Growth Tragedy,” shows how Africa has ‘potential unfulfilled, with disastrous consequences’. Predicted to grow ahead of East Asia, Africa’s economy experienced stagnating per capita income from the 1960s.

2. See Pinto, “Nigeria”; Scherr, “Agriculture in an Export Boom Economy”; Chowdhury, Resource Booms and Macroeconomic Adjustments; Bevan et al., The Political Economy of Poverty; and Lewis, Growing Apart.

3. See Daloz, “Nigeria”; Iyoha and Oriakhi, “Explaining African Economic Growth Performance”; Lewis, Growing Apart; Osaghae and Suberu, A History of Identities; and Thorbecke, “The Institutional Foundations.”

4. Lewis, Growing Apart, 78.

5. Bevan et al., The Political Economy of Poverty.

6. World Bank, Nigeria: Country Brief.

7. Lewis, Growing Apart, 136.

8. World Bank, World Development Indicators.

9. Ibid.

10. Lewis, Growing Apart, 102.

11. World Bank, World Development Indicators.

12. Henley et al., “Flawed Vision,” S50–S52.

13. Ibid.

14. Akindele, “A Critical Analysis of Corruption”; Joseph, Democracy and Prebendal Politics; Lewis, “From Prebendalism to Predation”; and Nnamuchi, “Kleptocracy and its Many Faces.”

15. King, “Corruption in Indonesia”; and McLeod, “Soeharto’s Indonesia.”

16. Robertson-Snape, “Corruption, Collusion and Nepotism.”

17. World Bank, World Development Indicators.

18. Data for 1986 are based on the percentage of the population living on less than one dollar a day (PPP), while data for 1970 are based on national poverty lines, which are lower than one dollar a day. With a one dollar a day poverty line the percentage of the population living in poverty in 1970 would be even higher than the figure presented. World Bank, Indonesia, xv; and World Bank, World Development Indicators.

19. Data for 1986 are based on the percentage of the population living on less than one dollar a day (PPP). There is no reliable data available for the 1970s; the 1973–85 figures are based on national measurements. World Bank, Nigeria: Poverty, iv; and World Bank, World Development Indicators.

20. World Bank, World Development Indicators.

21. Wing et al., Macroeconomic Policies, 24.

22. Seda, “Kebijaksanaan Ekonomi.”

23. Ibid.

24. Vatikiotis, Indonesian Politics under Suharto, 33; and Wertheim, “Indonesia,” 122.

25. Republik Indonesia, Keputusan Presidium Kabinet, Nomor 30/U/Kep/9/1966.

26. Following the arrest of Sukarno’s cabinet ministers, the presidium cabinet, called Ampera Cabinet, was established and led by the triumvirate of Suharto, Adam Malik and Sri Sultan Hamengkubuwono IX. Suharto, the chairman, was responsible for security affairs, Adam Malik for international affairs, and Sultan for economic affairs. Bresnan, Managing Indonesia, 51.

27. In the 1971 cabinet reshuffle Widjojo, chairman of the National Development Planning Board (Badan Perencanaan Pembangunan Nasional, Bappenas), was given ministerial rank, Sadli became minister of manpower, Subroto became minister of transmigration and cooperatives, and Emil Salim became minister of administrative reform.

28. Hong, “Indonesia’s Economic Stabilization,” 135; and Seda, “Kebijaksanaan Ekonomi.”

29. World Bank, World Development Indicators.

30. Elaigwu, “The Political Trio.”

31. Lewis, Growing Apart, 134–135.

32. Anyanwu et al., The Structure of The Nigerian Economy, 95.

33. Ogbuabu, “The Nigerian Indigenization Policy,” 250.

34. Lewis, Growing Apart, 137.

35. Turner, “Commercial Capitalism,” 190.

36. Ibid.

37. Lewis, Growing Apart, 145.

38. World Bank, World Development Indicators.

39. Diamond, “Nigeria Update,” 327.

40. Ihonvbere, “Are Things Falling Apart?”, 196.

41. Forrest, “The Political Economy,” 18.

42. Diamond, “Nigeria Update,” 327.

43. Ibid., 327–328.

44. Ihonvbere, “Are Things Falling Apart?,” 196.

45. World Bank, World Development Indicators.

46. Lewis, Growing Apart, 165.

47. Ihonvbere, “Are Things Falling Apart?,” 197.

48. Lewis, “Endgame in Nigeria?,” 323.

49. Kraus, “Capital, Power and Business Associations,” 424.

50. Oluleye, Military Leadership in Nigeria, 210.

51. Ricklefs, A History of Modern Indonesia, 335.

52. World Bank, World Development Indicators.

53. Ibid.

54. Ibid.

55. Posthumus, “The Inter-Governmental Group,” 57.

56. Prawiro, “Berutang Melampaui Ambang Kemiskinan,” 315.

57. Prawiro notes that the negotiations with the East and West not only reflected the situation during the Cold War, but also the structure of Indonesia’s debt. Ibid., 317.

58. Nitisastro, Pengalaman Pembangunan Indonesia.

59. Prawiro, “Berutang Melampaui Ambang Kemiskinan,” 323.

60. Nitisastro, Pengalaman Pembangunan Indonesia, 409.

61. Ibid.

62. Prawiro, “Berutang Melampaui Ambang Kemiskinan,” 334.

63. Posthumus, “The Inter-Governmental Group on Indonesia,” 65.

64. See Henley et al., “Flawed Vision.”

65. van Donge, “Governance and Access to Finance.”

66. Olaniyan, “Foreign Aid,” 121.

67. Chowdhury and Sugema, How Significant and Effective?

68. Pinto, “Nigeria.”