Technical Efficiency and Productivity Analysis in Indonesian Provincial Economies

By using the stochastic frontier methodology, this study investigates the technical efficiency and total factor productivity (TFP) growth in Indonesian provincial economies during the period from 1993 to 2000. In addition to the estimation of provincial technical efficiency, factors that contribute to technical inefficiency are also examined and the TFP growth is decomposed into technological progress, the scale component and the change in technical efficiency. The results reveal that average technical efficiency is only around 50%. Our results reveal that the mean years of schooling and sectoral differences affected technical efficiency. The TFP grew, on average, in the range from 1.65% to 5.43% with an average growth of 3.59%. In twenty out of twenty six provinces the TFP growth was driven by efficiency changes while in four provinces the TFP growth was driven by technological progress. Further, we no te that the Asian crisis affected the TFP growth and the western provinces suffered from the crisis more than the eastern provinces.