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Structural transformation and growth in Indonesia

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Grace Hadiwidjaja, Sam Moreley and Angga Pradesha
Presented at the ReSAKSS-Asia conference “Agriculture and Rural Transformation in Asia: Past Experiences and Future Opportunities”. An international conference jointly organized by ReSAKSS-Asia, IFPRI, TDRI, and TVSEP project of Leibniz Universit Hannover with support from USAID and Deutsche Forschungsgemeinschaft (DFG) at the Dusit Thani Hotel, Bangkok, Thailand December 12–14, 2017.

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Structural transformation and growth in Indonesia

  1. 1. STRUCTURAL TRANSFORMATION AND GROWTH IN INDONESIA Gracia Hadiwidjaja, Samuel Morley and Angga Pradesha
  2. 2. An Impressive Recovery From The Financial Crisis (Real GDP indicator) 0 10000 20000 30000 40000 50000 60000 70000 80000 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 BillionLCU(BasePrice=1973) Agriculture Secondary Tertiary Total Period Primary (annual growth) Secondary (annual growth) Tertiary (annual growth) All Sector (annual growth) 1971 - 1997 3.3 9.1 7.6 6.8 2002 - 2016 3.7 4.9 7.4 5.8 1971 - 2016 3.3 6.8 6.6 5.7
  3. 3. Persistent High Growth Before And After The Crisis 4.6 4.4 - 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 1971 - 1997 2002 - 2016 Annualgrowthrate(%) Real per capita GDP
  4. 4. High Growth In Investment And Net Trade - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 C G I Net_X GDP Component Annual growth rate (%) Private Expenditure (C) 4.62 Public Expenditure (G) 6.02 Investment (I) 6.47 Net Trade (Net-X) 5.48
  5. 5. Reduction in agricultural employment share is followed by increase of employment share in industry and services 0% 10% 20% 30% 40% 50% 60% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Shareoftotalemployemt Primary Secondary Tertiary
  6. 6. Workers did not move to the highest productivity sectors. Finance and mining are small sectors and did not absorb much labor. Construction and government were main absorbers of labor. [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] [CELLRANGE] -0.05 -0.04 -0.03 -0.02 -0.01 0 0.01 0.02 0.03 0.04 0.05 0 2 4 6 8 10 12 ChangeinLaborShare Relative Productivity Change In Labor Share And Relative Productivity
  7. 7. Agriculture Productivity In Recent Period Leads The Other Two Sectors Primary Secondary Teritary - 50 100 150 200 250 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Productivity index (1971=100 & 2002=100) Primary Secondary Teritary
  8. 8. The Productivity Gap Is Decreasing As Agriculture Sector Performs Agriculture Non-agriculture Productivity gap - 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 - 50 100 150 200 250 Productivitygap(Non-ag./Ag.) Productivity(in1973realprice) Agriculture Non-agriculture Productivity gap
  9. 9. Agricultural Sector Shows More Ability To Meet Domestic Demand After The Crisis 0 2000 4000 6000 8000 10000 12000 0% 5% 10% 15% 20% 25% 30% 35% Rupiah/US$ AgriculturalImportshare Agricultural import share to total agricultural production Exchange rate
  10. 10. Positive Trend On Food Supply Per Capita 0 50 100 150 200 250 300 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Cereal_PC (Kg/person) Vegetables_PC (Kg/person) Fruits_PC (Kg/person)
  11. 11. Increasing Yield Trend Across Commodity Groups 0 1 2 3 4 5 6 0 5 10 15 20 25 30 35 40 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Cereal(Ton/Ha) Fruit&Vegetable(Ton/Ha) Vegetable (Ton/Ha) Fruit (Ton/Ha) Cereal (Ton/Ha)
  12. 12. Rural Wages And Food Price Index 0 20 40 60 80 100 120 140 160 180 - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FoodPriceIndex(2010=100) Monthlyruralwages Rural (total) Agricultural wage Food price index
  13. 13. Growth Decomposition Framework (Macmillan Rodrik, 2011) Labor productivity growth – or growth in output per worker – can be decomposed into two distinct components: • Within sector labor productivity growth: is the growth in output per worker that comes from investment in inputs such as land and capital or from innovations within sectors – think improved seeds in agriculture or worker training in manufacturing/services. • Labor productivity growth from structural change: is the labor productivity growth that comes about when labor moves sectors with low productivity to sectors higher productivity – e.g., agricultural farming workers become workers in the manufacturing sector.
  14. 14. Decomposition Results • Ag contributes only 6% of overall productivity growth because most of its contribution is negated by the falling share of labor in ag. Sector Labor Productivity- Annual Growth Rate Fraction of Total Productivity Growth Within Structural-Between 1971-1997 2002-2016 1971-1997 2002-2016 1971-1997 2002-2016 primary 2.2% 3.9% 0.25 0.18 -0.23 -0.12 secondary 1.8% 1.6% 0.11 0.16 0.34 0.12 tertiary 2.4% 3.5% 0.22 0.39 0.32 0.27 total 3.3% 3.6% 0.57 0.73 0.43 0.27
  15. 15. A Hypothetical Exercise • If we credit to ag the observed productivity in ag and to the receiving sectors only the gain achieved from moving workers from ag to non-g sector we raise the contribution of ag from 6-18% of the total rise in productivity. • Point is that agriculture’s contribution and performance improved in the most recent period. That is partially hidden because much of it resulted from big transfer of labor out of the sector. Research questions for further work • Government policies in support of agriculture • Rural farm and non farm activities. • Role of agriculture in poverty reduction

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