LONG TERM TRENDS IN THE INDUSTRIAL AND ECONOMIC GROWTH IN INDONESIA
Tulus Tambunan
Kadin Indonesia & Center for Industry and SME Studies, University of Trisakti Indonesia1
ABSTRACT
Before the 1997/98 economic crisis, Indonesia was included as a new Asian Tiger together with Malaysia and Thailand Tiger and was a model to other developing countries for her achievements in rapid and sustained economic growth and rapid structural change. This study is an analysis of the long terms trends in Indonesian economic growth during the period 1970-2000. It is concerned with the growth of the different sectors of the economy, especially manufacturing industry, and the sources of growth. What is observed is that during that period, the Indonesian economy has undergone the massive structural transformation from an economy where the agricultural sector played a dominant role in the country’s GDP to an economy where the sector’s contribution becomes much less important, replaced by secondary and tertiary sectors with manufacturing industry as the leading sector. In conclusion, manufacturing industry has played an important role for the rapid economic growth during that period. In other words, this analysis of structural transformation in the Indonesian economy suggests that structural change with the increasing role of manufacturing industry has been strong enough to bring about a major change either in terms of the growth centre of the economy or the main contributor to the growth of the country’s economy.
Key words: economic growth rates, the New Order era, sectoral shares, manufacturing industry, agriculture, structural transformation
1
Background
Economic development in Indonesia before the 1997/98 economic crisis has been considered successful by any macroeconomic indicator. Until that crisis, the country experienced almost three decades of continuously rapid economic growth, the first such period in its history. For that reason, Indonesia has been grouped as one of the miracle economies in East Asia as it had a high growth rate at an average 7 per cent from 1967 to 1997 (just before the crisis emerged) with a low inflation rate. This rapid economic growth of Indonesia has been subject of heated debate and scrutiny in both academic and policy society.
From theoretical perspective, there are two groups of theory that generally used to explain economic growth. The first group emphasizes the importance of growth in Total Factor Productivity (TFP). Economic growth is contributed by the use of more inputs, such as labour, increases in the skill of workers and in the stock of physical capitals (land, building, machines, roads, and so on), or by increases in outputs per unit input. Both sources will produce more output. However, the second source of growth may result from better management or better economic policy. But in the long run it is primarily due to the advancement in knowledge and/or technology. The basic idea of separating the two sources of growth is to discover how much of the growth is due to inputs and how much is due to increased efficiency.
The second group of theory is about the relationship between economic growth and structural change. The basic idea is that the prospect for long term economic growth as well as its sustainability depends significantly on the changes in the structure of an economy and its evolution over time- economic structure defined as the sectoral composition of output, employment and labour productivity.
While there had been many studies conducted in examining the sources of Indonesian economic growth. there are not many studies which have specifically examined the relationship between the changes in the sectoral composition of output and the long-term trends in the growth of the Indonesia economy. This study tries to fill this gap. It is an attempt to study the growth of the Indonesian economy over the period 1960-2000. More specifically it is an analysis of the growth of output in manufacturing industry and the economic growth in Indonesia
The organization of this paper is as follows. Section 2 presents an overview of Indonesian economic growth and
structural change. Section 3 deals with development and growth of manufacturing industry. Section 4 then estimate the
effect of output growth in manufacturing industry on economic growth. Finally, summary and conclusions are
provided in section 5.
Overview of Indonesian Economic Growth and Structural Change
As a result of regional insurgence and President Sukarno’s inept economic management, the first two decades of
production and investment had been stagnant, or even fallen, and real per capita income in 1966 was probably below that of 1938 (Booth and McCawley, 1981). In the beginning of the New Order (NO) era in 1966 led by President Soeharto, the average Indonesian earned only roughly US$50 a year; about 60 per cent of adult Indonesian could not read or write; and close to 65% of the country’s population lived in absolute poverty.2
Facing this condition, the NO government launched five-year economic development plans, with the first plan started in 1969, and made several crucial economic reform policies in the 1970s and 1980s, including liberalization in investment, capital account, banking and external trade. During that era, industry was the most priority sector. To support development of national industry, the government adopted two subsequent industrialization strategies. Started first with an import-substitution strategy in the 1970s up to early 1980s, focusing on labor-intensive industries such as textile and garments, footwear, wood products, and food and beverages, followed latter by development of assembling industries of automotive. Then the strategy gradually shifted to an export promotion strategy by reducing some import tariffs and export restrictions, also focusing on labor-intensive industries.
The industrialization strategies supported by the economic reform policies produced dramatic results beyond the most optimistic expectations: a rapid and sustained economic growth especially in the 1980s up to 1997, just
before the economic crisis occurred in 1997/98. This raised per capita income more than ten-fold from $70 in 1969 to $1100 in 1997 (current prices) (Figure 1). The growth success was matched by similar success on the distribution
side. The percentage of people living below the poverty line was reduced from about 40 per cent in 1976 to about 11.3
per cent in 1996 (Figure 2).
From mid 1997 up to 1998, the Indonesian economy came to an abrupt halt with the advent of the economic crisis. This crisis began with the collapse of the Thai baht and ultimately impacted several other countries in the region including Indonesia, the Philippines and the Republic of Korea. From mid 1997 when the Indonesian currency, rupiah, started to depreciate, to mid 1998 the value of rupiah fell to more than 500 per cent. Consequently, many companies, especially large-scale enterprises/conglomerates, which heavily depended on imported materials and components and foreign loans stopped their production, and as a result, the Indonesian economy grew at minus 13 per cent in 1998.
In 1999 the country’s economy started to recover, and in recent years, Indonesia has reached a healthy degree of macroeconomic stability; although in 2005 the growth rate was about 5.5 per cent, which is lower than the expected of 6.5 per cent. The reduction in government fuel subsidies in October 2005 as a logical consequence of the rapid increase of oil in the world market up to more than US$ 50 per barrel led to a fuel price increase of more than 100 per cent, sparking a huge spike in the inflation rate. Also because of this subsidy cut in fuel, it is expected that the growth rate in 2006 will be less than 6 per cent.
Figure 1. GDP PER CAPITA AND GDP GROWTH RATE IN INDONESIA: 1970-2002
Source: BPS
Figure 2. Poverty (Headcount), Inequality (Gini) and Income (GDP/capita), 1975-2004
Source: BPS (SI; various issues)
[image:4.612.54.563.393.627.2]magnitude and direction of the growth of a country, its sectoral composition throws light on the relative position of the different sectors in the economy. An analysis of the changes in the growth and contribution of the sectors over time provides a measure of structural changes in the pattern of production and services
[image:5.612.117.511.264.526.2]Remarkably, during the NO era, Indonesian economy has been undergone a massive structural change from an economy where the agricultural sector played a dominant role in the country’s GDP to an economy where the sector’s contribution becomes much less important. The agricultural sector, which once dominated the economy, declined from 56 per cent in 1965 to 16 per cent in 1997, a third of its 1965 share (Figure 3). Meanwhile, the manufacturing industry has grown tremendously at around 13 per cent per annum over the 1975-97 period. As a result, the manufacturing share, which was a mere 8 per cent in 1965, surpassed the agricultural sector in 1991, and in 1995 manufacturing value-added contributed 24 per cent of GDP, three times its 1965 level.
Figure 3: Structural Change (% of GDP)
Source: Carunia, et al. (2000).
Figure 4: Composition of Indonesian Exports, 1965-1999
Source: Carunia, et al. (2000).
As a comparison, Table 1 gives the basic data on growth rates of real GDP of Indonesia and other three big developing countries, i.e. India, Brazil, and China, and developing countries as a whole for the period 1970-2000. Taking the 30 year period as a whole, Indonesia’s average annual growth at 5.7 per cent is a much higher than for all developing countries, but significantly slower than China. India grew slower for the first 10 years, when Brazil’s average growth rate was very high and Indonesia’s growth rate accelerated significantly. The situation reversed in the 1990s, when India’s growth rate increased and that of Indonesia declined.
Table 1. Growth rate of real GDP in Selected Big Developing Countries, 1970-2000 (average annual growth rates in per cent)
1970-1980 1980-1990 1990-2000 1970-2000 Indonesia
India Brazil China
Developing countries
7.9 3.2 8.5 5.4 5.5
6.4 5.6 1.6 9.2 3.2
4.3 5.8 2.5 10.4
3.2
5.7 4.6 4.8 7.1 4.4 Source: World Bank (World Development Indicators CD-ROM 2001) and BPS
Development and Growth of Industry
[image:6.612.114.492.49.302.2]particularly impressive for its achievement in development of industry. Also, Indonesia was different among oil-producing countries for its strong manufacturing sector. During the 1980s and 1990s, the country became a leading player in a wide variety of industries, from palm oil to apparel to electronics (USAID & SENADA, 2006). Thus, it can be said that rapid development and growth in manufacturing industry has been the landmark of Indonesia’s NO era.
Industrial growth became and remained dynamic throughout the New Order period up to 1997, just before the 1997/98 economic crisis. Prior to the New Order era (1966) the Indonesian economy had entered a period of standstill with virtually no GDP or industrial growth, skyrocketing inflation and declining per capita income. Thereafter GDP growth took off with rates of at least 5 per cent until the oil price fall of 1982 (Figure 5). Slow GDP growth until 1986 (except for a jump in 1984 due to oil and gas investments coming on line) was followed by growth returning to nearly 6 per cent by 1988 onwards. It subsequently never fell below 7 per cent until the 1997/98 economic crisis. Industrial contribution as seen through manufacturing growth consistently averaged at least 9 per cent in all but three years from 1969 to 1992, these years being the oil price induced recession in the first half of the 1980s (Banerjee, 2002).
A generalization in such manufacturing data is due to its inclusion of oil and gas processing. A consideration of non-oil and gas manufacturing is only possible after 1978. It is seen to exhibit growth higher than 10 per cent consistently since 1984. In this period its rate of growth is also greater than the oil related manufacturing sector. Non-oil industry thus had a disproportionate influence on economic growth certainly since the mid-1980s. It has allowed the economy to move away from its dependence on oil and gas and permitted the high GDP growth observed in the presence of the slower agriculture sector. Agriculture has displayed growth rate of greater than 5 per cent only a few times in the past few decades (Banerjee, 2002; Hill, 1997).
Figure 5. Growth of GDP, Manufacturing and Agriculture, 1970-2000 (%)
-15 -10 -5 0 5 10 15 20 25
1970 197 2 197 4 197 6 197 8
1980 198 2 198 4 198 6 198 8
1990 199 2
1994 199 6 199 8 200 0 GDP Manufacturing Agriculture
Source: BPS and Banerjee (2002)
No doubt, the remarkable development and growth in Indonesian manufacturing industry has been the results of
not only the adopted industrialization policies started with import substitution and gradually shifted to export
to reasonably open trade and investment policies. However, by the late 1970s, the government had embarked on a
more interventionist path, especially in the area of industrial policy. There were at least four major channels through
which government intervened during this period: first, through domination of state owned banks, which provided
subsidised credit to favored clients; second, the direct involvement in production through state own enterprises, mainly
in heavy industry; third through rising barriers to imports; and, finally, through a complex set of regulation aimed at
promoting various industrial policy objectives, such as, spatial dispersion, small industry development and
indigenous business development (Carunia, at al., 2000).
As a comparison, Table 2 gives the basic data on growth rates of output of industry (non-manufacturing (oil and gas) and manufacturing) in Indonesia and other three big developing countries, i.e. India, Brazil, and China, and developing countries as a whole for the period 1970-2000. It is striking how much faster is the growth of the industrial sector in Indonesia compared to other countries, except China for the last three decades. During the first decade of the period, the growth in Indonesia was slightly more than 10 per cent compared to 6.3 per cent for the whole developing countries or China at around 9 per cent. But, after that that period, the growth of Indonesian industrial sector declined while that of China accelerated, especially during the 1990s.
Table 2: Growth rate of Industrial Sector in Selected Big Developing Countries, 1970-2000 (average annual growth rates in per cent)
1970-1980 1980-1990 1990-2000 Indonesia
India Brazil China
Developing countries
10.4 4.1 9.9 9.2 6.3
7.1 7.1 0.5 9.6 3.3
6.0 5.6 2.0 14.1
3.8
Source: World Bank (World Development Indicators CD-ROM 2001) and BPS
sectoral shares evolve in a manner similar to all developing countries, i.e. a modest increase in the GDP share of industry, a substantial drop in agriculture and a sizable increase in services.
Table 3. Sectoral Shares in GDP, 1970-2000 (%) Period
Country Sector
1970 1980 1990 2000 Indonesia India Brazil China Developing countries Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services Agriculture Industry Services 44.9 18.7 36.4 46.3 21.7 32.2 12.3 38.3 49.4 35.2 40.5 24.3 23.8 33.7 42.5 24.0 41.7 34.3 39.7 23.7 36.6 11.0 43.8 45.2 30.1 48.5 21.4 18.4 40.1 41.5 19.4 39.1 41.5 32.2 27.2 40.6 8.1 38.7 53.2 27.0 41.6 31.3 15.8 38.1 46.1 19.5 43.3 37.3 25.2 26.7 48.1 8.6 30.6 60.8 17.6 49.3 33.0 12.4 35.0 52.6 Source: World Bank (World Development Indicators CD-ROM 2001) and BPS
Previously, Hayahi (2005?) has made a study on the development of industry in Indonesia during. The findings are shown in Tables 4, 5 and 6. Table 4 shows the Indonesian experience in structural transformation during the three decades before the onset of the 1997-98 economic crisis. The role of agriculture in terms of output decreased, while that of industry increased. In terms of exports, Table 5 shows that the share of primary products decreased from nearly 100 per cent in the 1960s and 1970s to roughly 50 per cent in the 1990s, while that of manufactured exports. Table 6 shows the growth pattern of real value added in the non-oil/gas manufacturing industry since 1971. Before the economic crisis in 1997/98, the manufacturing industry as a whole was expanding at an annual average growth rate of 14.1 per cent during 1976-96.
Table 4: Growth and Sectoral Share of GDP in Indonesia, 1966-2000
Notes: 1) Industry includes manufacturing, mining, utilities and construction; 2) The growth of GDP represents average annual growth rates based on 1983 constant prices in each period; 3) The sectoral share is calculated as an average for respective years in each period; 4) The contribution of each sector group to GDP growth is weighted by respective sectoral GDP shares.
Source: Table 1 in Hayashi (2005?)(Calculated using van der Eng (2002: 172-3), updated for 1999 and 2000 with data from BPS’s
Table 5: Sectoral Share of Export and Import Commodities in Indonesia, 1966-19991)
--- Notes: 1) The sectoral share of commodities in merchandise exports (at current US$ prices) is calculated as an average of
respective years in each period; 2) Agriculture includes food and agricultural raw materials; 3) Mining includes fuels (oil/gas), ores and metals.
Source: Table 2 in Hayashi (2005?) (calculated from World Bank, World Development Indicators 2001)
Table 6: Growth of and Sectoral Share in Real Value Added in Indonesia's Non-Oil/Gas Manufacturing Industry, 1971-19991)
Notes: 1) This table uses the data for manufacturing firms with 20 or more employees, except for those between 1971 and 1973, where firms with 5 or more workers with use of power equipment or firms with 10 or more workers without use of power equipment are included. Oil and gas subsectors (ISIC 353 and 354) are excluded; 2) The numbers in parentheses indicate ISIC (International Standard Industrial Classification) code; 3) The growth indicates average annual growth rates in each period. Value added data in this table are deflated by the implicit GDP deflator for manufacturing (1993=100) from BPS's National Income of Indonesia, due to a lack of adequate and long-term sectoral and subsectoral deflators; 4) Other includes miscellaneous (ISIC 39) and non-metal/mineral (ISIC 36) products; 5) The (sub)sectoral share of value added is calculated as an average for respective years in each period. The observed periods for this share are: 1971-75, 1976-80, 1981-85, 1986-90, 1991-96, and 1997-99.
The History of Indonesia’s Industrial Policies
Indonesia, under Soekarno, had pursued inward-oriented industrialization with strong State ownership of manufacturing enterprises from 1945 to the mid-1960s. State-owned manufacturing enterprises had enjoyed favorable access to subsidies, credit and foreign exchange. Thus, as in many other new born (developing) countries, early industrialization in Indonesia was State-led and blocked foreign ownership. Strong anti-foreign sentiments, including anti-local Chinese feelings, played a major role in the exclusion of private business from State support. Indigenization efforts translated into the State bypassing the evolving small-scale business, which were dominated by ethnic Chinese control. The lack of local indigenous capabilities led to direct State participation in manufacturing industry. Serious government failure, however, during this period debilitated manufacturing development and growth in the country. Soeharto’s succession in 1965, marking the New Order era, was followed by immediate stabilization programs that helped economic order. The government allowed private ownership in manufacturing and liberalized foreign investment and foreign exchange control. The cumbersome multiple foreign exchange mechanisms were streamlined (Palmer, 1978). The government began abolishing subsidies to State-owned enterprises and promoting the private sector, which grew following the introduction of incentives. Indonesia has, however, continued to retain State control of strategic mainly heavy industries. The lowering of captive rents in the domestic economy obviously undermined some enterprises, so that the share of manufacturing in GDP fell from 12% in 1960 to 10% in 1970 (Rasiah, 1998).3
Following the industrial policy assessment approach by such as Hill (1996, 1997), Banerjee (2002), and UNSFIR (2004), from the New Order era until know Indonesia has followed four broad approaches to industrial development: the first three phases were during the New Order era up to the economic crisis in 1997/98, and the fourth phase after the crisis. The first three phases have been an element of the country’s three waves of distinct economic policy-making: 1966-1974, 1975-1981, and 1982-1997. These can be characterized as the oil boom and the years before and after it. The first period was the period of the first five-year plan (Repelita I). During this period, the government stimulated resource-based, large-scale but labor-intensive industries. This phase involved a primary preoccupation with controlling inflation through responsible fiscal policies, and it was considered to be one of the most open periods in Indonesia’s economy with the government trying to attract foreign direct investment (FDI) to rebuild the economy. This was also the period when loans from the international private and public sectors started to flow into the country to finance together with foreign investment import, infrastructures, and natural resources projects. However, FDI was dominated by a number of large natural resource projects and remained low in aggregate throughout this period, never exceeding 2% of the country’s GDP.
The second policy period evolved due to the high oil prices beginning in the late 1973. This was also the period of the Repelita II during which the government imposed a system of protection and local content rules in a 3
umber of industries not only upstream industries but also downstream industries such as machinery, electronics and the automotive industry as part of import substitution policy. The government was also involved in heavy industries such as steel, natural gas, oil refineries, petrochemicals, fertilizers, cement, basic chemicals, capital goods, shipbuilding, and aluminium. Habibie’s grandiose projects expanded the state’s involvement in heavy industries, including aircraft-making. These industries were heavily protected and provided with subsidized credits through state banks. The main aim of this policy was to encourage industrialization in the country and also to encourage a pattern of industrial development that followed the industrial pyramid model from Japanese. However, industrial development in Indonesia did not follow the same pattern as in Japan. On the contrary, the local content policy resulted in a vertically integrated production system within large scale and capital intensive industries.
The economic rationale behind the local content policy was to create a captive market for domestic products in order to increase the economic scale of production and thereby to increase efficiency. However, government interference went too far. The government decided which products were to get priority in this policy, and introduced fiscal incentives in line with the type of priority recipient products.
The government utilized the oil export revenues to pursue its import substitution policy. This strategy prevented the so-called ‘Dutch Disease’ effect of a decline in the manufacturing sector due to lower external demand from appreciation of the rupiah against the US dollar. Non-tariff barriers (NTBs) and the channeling of oil revenues into state-owned companies ensured that much of the large increases in domestic incomes over this period fed directly into demand for domestic manufacturing industry (Banerjee, 2002).4
The declines in oil prices in 1982 and 1986 led to a deteriorating fiscal situation, and this accompanied by the fall of the dollar following the 1985 Plaza Accord, necessitated the third phase of industrial policy. This phase marked by a dramatic change in the industrial approach with a liberalizing of the trade regime for tariffs and NTBs and investment regime. This was also the period when the government shifted its strategy from import substitution into export-oriented industrial policy. This was enacted through a series of deregulation packages from 1985 onwards. However, the trade and investment regime was not completely open during this phase. A large list of industries especially heavy industries remained closed to FDI. Although these industries failed to contribute much to industrial growth during this phase, they were remained heavily protected and managed by state-owned enterprises and conglomerates. These included the automotive, cement, steel and heavy engineering, metal fabrication and pharmaceutical industries (UNIDO, 2000).
The trade reform package of 1988 allowed steel and plastic raw material imports, which had previously been produced and supplied by state monopolies. The government, however, left control of steel imports of the state-owned steel industry and that of polystyrene and polyethylene to a state state-owned trading company, so that only demand in excess of production was allowed to be imported. Hence in the 1980s the Indonesian manufacturing 4
industry has remained highly concentrated (Hill, 1996). Tariff ceilings on most products were reduced to 40% in 1990. Opposition from the politically connected have, however, stifled some of the reforms. For instance, the automotive industry, which enjoys ownership control by even the President’s family, experienced a reversal in tariff cuts n 1990 (Rasiah, 1998).
Gradual ownership liberalization from the early 1980s led to a fall in the share of state-owned enterprises in total manufacturing enterprises from 28% in 1975 to 20% in 1983 (Balassa, 1991).
During the 1990s before the economic crisis, the government again introduced various trade and investment reform policies included in June 1991 deregulation package. In this package, NTBs were further reduced and replaced them with tariff and export taxes, reduced general tariff levels, and reopened several business areas, which are previously included in the negative lists (lists of industries closed to foreign investments), to new domestic and foreign investment. The removal of NTBs included the abolition of import bans on cold-rolled steel and sheets and tin plates. The reforms also abolished export bans on copra and palm oil as well as the exclusive rights of several companies to export palm-oil based products.
The above package was followed by a series of trade and investment reforms in July 1992, June and October 1993, June 1994, May 1995, and June 1996. The main elements of these packages were a range of tariff reductions, changes in trading arrangements for certain commodities (the removal of NTBs), improvement in trade facilitation measures such as duty draw back scheme and procedures on bonded zones, and shortening of the lists of activities closed to domestic and/or foreign investment (Carunia, at al., 2000).
In this period, the emphasis of national industry policy was on development of a number of high-technology industries through government interventions. Ten ‘strategic’ state-owned industries were emphasized, particularly the aircraft industry. It was felt that Indonesia could not rely on its then labor-intensive production in the longer run. It therefore attempted to break into higher value added production beyond its existing resource base, particularly in human resources (Banerjee, 2002). World Bank (1992) mentions the weaknesses in higher level technical education and the quality of training at that time as well as skill shortages across Indonesian industry.
In the fourth phase, after the 1997/98 economic crisis, the government passed several policy documents on national industrial development strategy. The Ministry of Industry and Trade released the Industrial Revitalisation Program by the end of 2001 to take effect up until 2004. This document espoused an employment-focused sectoral approach, identifying key sectors with high employment impact in the short run. The document identified industries for exports such as textile and garment, electronics, footwear, wood, pulp and paper products to be revitalized. Industries to be further developed include leather and its products, fisheries, palm oil, fertilizer, agricultural machineries, software, and jewellery. Key supporting industries include engineering components, accessories, and leather processing (UNSFIR, 2004).
In both the Medium-term and Long-term Plans, the approach on industry is through the development of industrial clusters using non-distortionary policy measures.
With respect to export promotion policy, export orientation in Indonesia involved heavy state promotion and subsidies. Selective promotion influenced by resource endowments helped Indonesia to achieve substantial exports of, respectively, plywood and timber products, palm oil and timber products, and food and jewellery. Apart from these resource-based industries, whose value-added chains were not technology-intensive, foreign capital generally dominated most other manufactured exports. Participation by local enterprises in non-resource-based products was generally restricted to low value-added assembly and processing activities whose designs and markets were controlled by foreign companies. Substantial export promotion with credit and tax subsidies assisted local firms to operate as subcontractors (Rasiah, 1998).
Textiles, garments and footwear and wood-based products were the first policy priority products for export and so these items among the early export-oriented activities to have grown a lot in Indonesia from the late 1970s. The share of export of these products in overall manufactured exports rose from 22.7% in 1980 to 27.3% in 1986 and 38.6% in 1991. The export growth of Indonesian textile and garments to a larger extent has to do with Japanese and Asian NIE companies relocated production in Indonesia to access the county’s quotas allocated under the MFAs. Much of Indonesian export of textile and garment was dominated by foreign capital operating in joint ventures and local subcontractors performing low value-added activities. The labor intensity and low technical content of production of textile and garment favored relocation to Indonesia because of its abundant labor supply and low wages. In the case of wood-based products (especially plywood), besides also the labor intensity and low technical content, a ban on log exports in the 1980s was the prime push that forced downstream low value-added activities in the timber value-added chain. Also Indonesia’s control of over 50% of the world’s plywood market has ensured some leverage in sustaining external demand. The share of plywood exports in overall manufactured exports grew from almost 11% in 1980 to more than 37% by the end of the 1980s (Rasiah, 1998).
However, foreign equity ownership in Indonesia has been relatively low due to the uncertain ownership regulation in that time (that were improved in the second half of the 1980s), and the preference of foreign capital for using Indonesian firms as putting-out subcontractors (Rasiah, 1998).
The Effect of Growth in Manufacturing Industry on Long-Term Economic Growth
production function (or, alternatively, the cost function), and growth accounting approach. Their study used the second approach. It simplifies the tedious estimation procedures required in the econometric approach. This approach begins with a set of assumptions. It assumes output and inputs markets are competitive and that firms maximise profits subject to constant-returns-to-scale production function and market prices that are taken as parameters. The assumptions led to an important result that in equilibrium output elasticity of inputs are equivalent to the observed cost share of factor inputs. TFP growth can be calculated using discrete time series data of prices and quantities of output and inputs; it equals the difference between output growth rates and cost-share-weighted input growth rates.
[image:17.612.62.562.315.474.2]The results are presented in Table 7 which provides a summary of several episodes and for sectors. Comparing real GDP growth and TFP growth by sector in this table, a positive correlation between the growth of manufacturing TFP and GDP growth is immediately observable, especially during the crisis period of 1997-2000. In other words, output growth in manufacturing industry has been the most important engine for economic growth in Indonesia.
Table 7. GDP Growth, Capital Growth, and TFP growth by sector, 1971-1996
Source: Carunia, et al. (2000).
To estimate the importance of growth of manufacturing industry for GDP growth, this study uses a simple equation, i.e. a decomposition of GDP growth to three main sectors, i.e. industry manufacturing, agriculture and service, for the period 1970-2000 as follows:
%ΔGDP = a0 + a1xM %ΔYM + a2xA %ΔYA + a3xS %ΔYS + a4%ΔGDP lag (one period) + σ
Where %ΔGDP, %ΔGDP lag, %ΔYM, %ΔYA, and %ΔYS are percentage changes in real GDP (current and lag),
and value added in the manufacturing, agriculture, and service sectors, respectively; and xM, xA and xS are value
added shares in GDP of the three sectors, respectively.
that among the three sectors, output growth in industry manufacturing appears to have the strongest and significant relationship between sectoral growth rates and GDP growth. The null hypothesis that the sectoral composition of growth does not influence the rate of GDP growth was rejected by t statistic and F-test at the 95 per cent confidence level. All regression coefficients are positive, as generally expected, but, for service and GDP lag, the coefficients, statistically, are not significant from zero (α = 5%). The proportion of the total variation of GDP accounted for by the explanatory variables in the model, as illustrated by the value of adjusted R2 is not so high, suggesting that there are other variables that may have important influences on GDP growth which are not included in the model. The values of F-statistic suggest that all the independent variables together influence the dependent variable.
Table 8: Descriptive Statistics (n=31)
Variables Mean Std. Deviation
%ΔGDP, %ΔGDP lag %ΔYM %ΔYA %ΔYS
[image:18.612.61.544.291.631.2]5.5613 5.6419 183.0439 99.3342 278.7300 4.2362 4.2469 117.6502 63.2658 161.9524
Table 9: Regression Coefficients
Unstandardized coefficients Standardized Coefficients
Model
B Std. Error Beta
T Sig.
Constant %ΔYM %ΔYA %ΔYS %ΔGDP lag
-1.750 2.737E-02 1.445E-02 1.152E-03 9.662E-02 .796 .004 .006 .003 .092 .760 .216 .044 .097 -2.200 7.654 2.534 .397 1.054 .037 .000 .018 .695 .302
Table 10: Model Summary
R R2 Adjusted R2 Std. Error of Estimate Durbin-Watson
.915 .837 .812 1.8365 2.099
Table 11: ANOVA
Model Sum of Squares Df Mean Square F Sig
Regression Residual Total 450.663 87.690 538.354 4 26 30 112.666 3.373
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