Total factor productivity and economic growth in Indonesia

Much of the recent literature on macroeconomic growth in Asia continues to be dominated by discussion of the degree to which Total Factor Productivity (TFP) growth explains the ‘Asian economic miracle’ of high economic growth. However, Young (1994) argued, on the basis of a four-country study, that the ‘miracle’ was more the result of the mobilisation of factors of production (labour and capital) than productivity growth, i.e. ‘perspiration’ rather than ‘inspiration’, as Krugman (1994) summarised his findings. This incited a series of studies that often used readily available multi-country data sets in order to estimate TFP growth in different parts of the world, on the assumption that the growth accounting residual represents TFP growth.2 The multi-country studies that estimated TFP growth all yielded different results. One of the reasons was that authors were forced to make very rough estimates of capital input on the basis of available national accounts data. In the case of Indonesia, close scrutiny of the data reveals inexplicable discrepancies in the original national accounts data produced at the central statistical agency (Badan Pusat Statistik, BPS) in Indonesia. Moreover, studies using multi-country data sets take national accounts data for granted.