Determinants of Indonesian Economic Growth, 1965-1992

The disparities between growth rates of different countries are only in part explainable by different rates of increase in the employment of the basic factors of production, i.e. capital and labor. The new growth theory positively links economic growth to increasing returns to scale, to human capital development, to dynamic spillover effects of the export sector and stresses the important role of institutions. The aim of our paper is to determine the growth factors for Indonesia through a time-series analysis based on cointegration and error-correction. The results show that human capital, investment, government consumption, imports and inflation enhance economic development in the long-run, while exports exert a strong positive influence on Indonesian growth in the short-term. Additionally, the trade and financial liberalization since the early eighties as well as exogenous technological change contribute positively to economic growth.