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Is Indonesia's growth rate balance-ofpayments-constrained? A time-varying estimation approach

Author

Listed:
  • Jesus Felipe

    (Economic Research and Regional Cooperation Department, Asian Development Bank, Mandaluyong, Philippines)

  • Matteo Lanzafame

    (Economic Research and Regional Cooperation Department, Asian Development Bank, Mandaluyong, Philippines)

  • Gemma Estrada

    (Economic Research and Regional Cooperation Department, Asian Development Bank, Mandaluyong, Philippines)

Abstract

This paper analyses the performance of Indonesia's economy since the early 1980s using Thirlwall's balance-of-payments-constrained (BoPC) growth model, estimated in statespace form to take account of the varying nature of the income elasticities of demand for exports and imports. Results indicate that after peaking in the mid 1980s at above 10 percent, Indonesia's BoPC growth rate has declined significantly, to about 3 percent in recent years. This is the result of changes in the three components of this growth rate: the income elasticities of demand for exports and imports, and the growth rate of world income, all three significantly lower. Especially worrisome for Indonesia's future is the decline in the income elasticity of demand for exports, a variable that summarizes the non-price competitiveness of its exports. This is the consequence of the lack of progress in upgrading the export basket and increasing its sophistication, with natural resources and low value-added manufacturing still dominating the country's exports. Focusing on the two income elasticities, the analysis shows that their determinants are variables that proxy the economy's structural changes (for example, the manufacturing employment share) and within-sector productivity growth (for example, complexity of the economy, gross fixed capital formation as a share of GDP).

Suggested Citation

  • Jesus Felipe & Matteo Lanzafame & Gemma Estrada, 2019. "Is Indonesia's growth rate balance-ofpayments-constrained? A time-varying estimation approach," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(4), pages 537-553, October.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:4:p537-553
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    Citations

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    Cited by:

    1. Marwil J. Dávila-Fernández & Serena Sordi, 2021. "Thirlwall's law: Binding-constraint or centre-of-gravity? A possible Kaleckian solution," Department of Economics University of Siena 853, Department of Economics, University of Siena.
    2. Srdelic, Leonarda & Davila-Fernandez, Marwil J., 2022. "Demographic transition and economic growth in 6-EU member states," MPRA Paper 112188, University Library of Munich, Germany.
    3. Robert A. Blecker, 2022. "New advances and controversies in the framework of balance‐of‐payments‐constrained growth," Journal of Economic Surveys, Wiley Blackwell, vol. 36(2), pages 429-467, April.

    More about this item

    Keywords

    balance-of-payments-constrained growth rate; Indonesia; Kalman filter; Thirlwall's law;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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