Growth and Change in the Indonesian Economy: The Role of the Agricultural Sector

Abstract

The objectives of this research are threefold. The first objective is to analyse the patterns of output and employment change in Indonesian agriculture compared to other sectors. The second is to utilise a CGE model of the Indonesian economy to analyse macroeconomic agricultural linkages and evaluate sectoral effects of changes in the external shocks and changes in domestic policies on agricultural development performance in Indonesia. The third is to analyse existing agricultural development policies in response to the external shocks with a view to finding policies that generate the highest rates of economic growth and equal income distribution. By using the input-output framework this study analyses growth and structural change in the Indonesian economy with special reference to the agricultural sector. Growth and structural changes are examined in terms of how changes in a sector's output and employment can be apportioned between changes in (1) domestic final demand, (2) export demand, (3) import substitution, and (4) technological change. Results indicate that the growth and structural change in output and employment of agricultural sectors and other sectors in the Indonesian economy during the periods of 1971-1985 and 1985-1995 are heavily dependent on domestic demand. It is found that the contribution of exports to output growth became relatively stronger in the process of economic development, especially in the manufacturing sectors. The agriculture sector always records positive net effects due to trade. It is also found that the most important sources of growth in employment in agriculture are changes in domestic final demand and labour productivity. Changes in technology have significant impact on structural change in agriculture.