Accounting for Indonesia’s economic growth: Recent past and near future

This paper revisits the discussion about the contribution of Total Factor Productivity (TFP) growth to Indonesia’s economic growth during 1971-2005. It re-estimates the contribution of TFP to economic growth during this period on the basis of new estimates of GDP, capital stock, education-adjusted employment, and factor income shares. After accounting for the growth of capital stock and education-adjusted employment, the residual TFP growth found to have been on average -0.1% per year, contributing -2% to 1971-2005 GDP growth. Capital stock growth and employment growth explained around 75% and 25%, respectively. Using the results of this estimation and assumptions about the expected growth of capital stock, labour force and education, the paper notes that Indonesia’s economy may potentially grow at a rate between 5.3 and 7.8% per year up to 2030. The growth rate will depend crucially on an increase of investment.