Can Kenya replicate Indonesia’s turnaround?

Recently, a friend from Indonesia visited me in Nairobi. He is one of the world’s leading experts on social development and a long-term Jakarta resident. One of his observations stuck in my mind: “Kenya is just like Indonesia ten years ago”, he said. 

Comparing Kenya with Indonesia is counterintuitive—except perhaps when it comes to traffic jams—because of the many differences between the two countries. Indonesia is the world largest island state with more than 17.000 islands and a demographic heavyweight with 240 million people (six times more than Kenya). It is also 85 percent Muslim, while Kenya is about 85 percent Christian. Indonesia has massive natural resources – coal and gas (and some oil) – that it exports to other Asian countries, especially China, while Kenya’s economy is fuelled by a strong service sector.

There are many more reasons to challenge a comparison between these two countries but when one digs below the surface, there are also some similarities. Economically my friend was spot on: in GDP per capita terms, Kenya is roughly at the level of Indonesia a decade ago (about US$800 per capita). Today Indonesia is far ahead, but I don’t see any reason why Kenya couldn’t follow suit. Indeed, Indonesia is a good benchmark case for Kenya because it was never a “star reformer”, but instead a consistently strong performer.

Both countries experienced major social, political and economic upheavals, which were also historical turning points. Indonesia’s defining moment was the massive East Asian crisis in 1997/1998, followed by the transition to a new government. In Kenya, the shock came in 2007/2008 in the wake of disputed elections. In response to social and political grievances, Indonesia introduced radical decentralization of government in 2001, ten years or so before Kenya also opted to embrace devolution. 

Indonesia saw improvements in governance, but not at once and not across the board. Doing business there remains difficult and reforms have been progressing unevenly. Yet it kept on growing substantially in a short period of time. It is now an emerging Middle-Income economy with an average per-capita income of US$ 3,500 (see figure). True, this is partly reflecting an exchange rate effect (a stronger Rupiah translating into a higher GDP in dollar terms), but once Kenya starts its export engine the same would apply.

Figure – Learning from Indonesia: What a decade of strong growth can achieve

Source: World Bank estimates

Even if Indonesia is not “best practice” according to textbook economics—and in fact precisely because it isn’t—it strikes me as a very good fit for thinking about Kenya’s prospects. Over the last decade, Indonesia has been dealing with many institutional challenges, some of them similar to Kenya’s today. Like Kenya, it had a critical mass of reformers eager to advance the country but challenged by supporters of the status quo. Like in Kenya a vibrant and innovative private sector emerged and with it, a middle class which increasingly used the democratic space provided by new technologies and an open media. 

How did Indonesia engineer a successful decade of economic development despite average performance on the reform front? It did three essential things which Kenya should consider to embark on the emerging economy path:

1. Stability. After the fall of Suharto in 1998 and the turbulence that followed, Indonesia entered a phase of socio-political and economic instability; yet it emerged as a relatively stable democracy. It has held three elections (1999, 2004, 2009) which were all peaceful and where the losers accepted defeat (even though in 1999 complex coalition politics in parliament led to the emergence of a surprise President, Abdulrahman Wahid).
2. Strategic reforms in public financial management, including customs. When Sri Mulyani Indrawati took over as Minister of Finance in 2005, she was determined to reduce corruption and improve the Public Financial Management system, including customs. With sound macroeconomic management and determined action to reduce fuel subsidies, she gained the space to advance more ambitious reforms to help spend the people’s money well.
3. Successful crisis management. Like Kenya, Indonesia has been hit by a number of domestic and external shocks. But it leveraged these crises to put in place one of the Asia’s most ambitious social protection programs and coupled it with the world’s largest village empowerment initiative (covering more than 70,000 villages). These programs provided an important buffer for the poor during economic crises. They also opened new avenues to tackle corruption, as the funds were directly transferred to local communities and individuals, and short-circuited the chain of officials through which funds were channeled in the past.

The story of Indonesia’s development over the last decade is a positive one. Per-capita incomes increased and millions of Indonesians were lifted out of poverty. The country’s reform track-record was mixed: it was not a great success but neither was it a spectacular failure. Indonesia is now one of the world’s main emerging economies because it managed to get a few ‘basic’ things right: it remained politically stable, made progress in some strategic governance areas, and leveraged integration with Asia’s growth engines, riding on the wave of globalization. Can Kenya replicate the Indonesian experience? It has all the assets to do so.  

This article is also been published by Kenya’s “Saturday NATION” in the column “Economics for Everyone” 

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