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This paper examines economic growth and structural change in Indonesia during the period 1975–2000 using an input–output-based structural change decomposition method. The analysis focuses on the sources and pattern of growth during three phases of economic development: the inward-oriented phase from 1975 to 1985; the outward-oriented phase from 1985 to 1995; and the recent phase of crisis and recovery from 1995 to 2000. Growth during the first phase, although impressive, was moderate in comparison with the export-led manufacturing-driven growth during the second phase. During both these phases, the Indonesian economy witnessed significant structural changes, especially within manufacturing. However, the dynamics underlying growth and structural change showed important differences. Although growth under the first two policy regimes was assisted by favourable economic circumstances, selective industrial policies may also have played a significant role. The results suggest that the long neglect of the technological foundations and human capital base of the economy could be holding back recovery and sustained growth in the present phase.
Notes
1 The Indonesian statistical office (BPS) in private communication with the author confirmed the superior coverage of the IO data vis-à-vis the national accounts data.
2 Although this analysis is limited to quantifying theoretically relevant partial effects on growth, an attempt is made to relate some of the results to the underlying forces that drive them. This is of course a complicated task in the Indonesian context, where industries enjoyed different degrees of protection, which has implications for their technological effort, export orientation, factor intensity, vertical integration and so forth.
3 For a compelling discussion of the role of industrial policy in Indonesian economic growth, see Rock (1999).
4 We draw heavily on Hill (1996, 1999), who has provided comprehensive accounts of many dimensions of the Indonesian economic growth over the last 30 years.
5 The terms sector and industry are used interchangeably.
6 It is interesting to note the emergence of petroleum refinery as an important source of export revenue—in 2000, the combined share of oil and gas and petroleum refinery was 29.5% of total exports. Petroleum refinery consists of all petroleum refinery products as well as liquefied natural gas.
7 Unless mentioned otherwise, by manufacturing we refer to manufacturing excluding petroleum refinery, i.e. non-oil manufacturing.
8 For example, see Wolff (1994).
9 See, for a discussion, Perry (1989).
10 This point is illustrated with respect to a few industries when the results are discussed.
11 The GGDC database provides value-added data in current and constant prices, from which the implicit price indices for services were derived (see http://www.eco.rug.nl/ggdc/index-dseries.html#top).
12 For sectors for which price indices were not directly available, the indices of the nearest three-digit sectors, and in some cases, two-digit sectors were used.
13 It needs to be emphasized that the choice of the time intervals for the inward-oriented (1975–85), outward-oriented (1985–95) and crisis and recovery (1995–2000) phases were determined by the availability of IO tables. However, it appears fair to assume that these intervals capture the key features of the regimes they purport to represent.
14 The average of the 5-yearly results is reported with the view to even out the effect of short-term fluctuations.
15 Note that, for ease of understanding, the results of the decomposition of the growth in value added are presented, instead of the change in value added as represented in the decomposition equation.
16 These two components are combined, because they have made only very small contributions.
17 For a recent discussion on the importance of building up technological capabilities, see Lall (2001).
18 It should be remembered that pulp and paper are treated as one industry in our classification. As a result, backward integration of the paper industry to the pulp industry shows up as an increase in the vertical integration in the pulp and paper industry.
19 Although results are reported only for the combined contributions of government consumption demand and inventory changes (to keep the size of the tables within a reasonable limit), this discussion is based on their separate results.
20 Suggestions from one of the referees helped me improve this section substantially.
21 Liberalization of the foreign investment regime in the late 1980s has been a timely measure in this respect.