Kenya has all the financial assets to replicate the Indonesian experience

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 to my mind: “Kenya is just like Indonesia 10 years ago”, he said. Comparing Kenya with Indonesia is counter-intuitive — except perhaps when it comes to traffic jams — because of the many differences between the two countries.

Indonesia is the world’s largest island state with more than 17,000 islands and a demographic heavyweight with 240 million people. It is also 85 per cent Muslim, while Kenya is 85 per cent Christian.

Indonesia has massive natural resources, especially 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.

But there are also striking similarities. In GDP per capita terms, Kenya is roughly at the level of Indonesia a decade ago (about US$800 per capita).

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 a momentous political transition.

In Kenya, the shock came in 2007/2008 in the wake of disputed elections. In response, Indonesia introduced radical decentralisation of government in 2001, 10 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 $3,500 (Sh298,000).

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 an average performance on the reform front? It did three essential things which Kenya should consider to embark on:

Stability. After the fall of Suharto in 1998 and the turbulence that followed, Indonesia entered a phase of socio-political and economic instability; yet after that, it emerged as a relatively stable democracy. Since then, it has held three elections (1999, 2004, 2009) which were all peaceful and where the losers accepted defeat.

Strategic reforms in public financial management, including customs. When Sri Mulyani Indrawati (now a World Bank’s managing director) 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.

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 region’s most ambitious social protection programmes and coupled it with the world’s largest village empowerment initiative.

These programmes provided an important buffer for the poor during economic crises. Incidentally they also opened new avenues to tackle corruption, as the funds were directly transferred to local communities, and short-circuited the chain of officials through which funds were channelled in the past.