The Pattern of Growth in Indonesia after the Economic Crisis 1997/1998: Does the Primary Sector Still Need to Support Economic Growth?

CSIS WORKING PAPER SERIES
WPE 104








The Pattern of Growth in Indonesia after the Economic Crisis 1997/1998:
Does the Primary Sector Still Need to Support Economic Growth?

Fajar Bambang Hirawan

December 2008

Economics Working Paper Series
http://www.csis.or.id/papers/wpe104




Please do not cite without permission from the author. The paper was presented at
The Emerging Process: from Trajectories to Conceptsܢ International Conference in
Bordeaux, France (November 27-28, 2008). All errors are the authors’ responsibility.






The CSIS Working Paper Series is a means by which members of the Centre for Strategic and
International Studies (CSIS) research community can quickly disseminate their research findings and
encourage exchanges of ideas. The author(s) welcome comments on the present form of this Working
Paper. The views expressed here are those of the author(s) and should not be attributed to CSIS Jakarta.
© 2008 Centre for Strategic and International Studies, Jakarta

1

---

The Pattern of Growth in Indonesia after the Economic Crisis 1997/1998:
Does the Primary Sector Still Need to Support Economic Growth?
Fajar Bambang Hirawan
CSIS Working Paper Series
WPE104
December 2008


ABSTRACT
This paper aims to examine the pattern of growth in Indonesia, especially after the
economic crisis 1997/1998. Indonesia suffered a catastrophic economic crisis from the
year 1997 until 1999 and the economy improved from the year 2000 even though it was
still dependant on the non-economic fundamental factor. This paper represents the
progress of each of the main sectors in the economy, such as primary, secondary, and
tertiary sectors, from the year 2001 until 2007, particularly focusing on its role to support
economic growth. The primary sector, which consists mostly of agriculture and mining,
is always excluded by policy makers because of its decreasing contribution to the Gross
Domestic Product (GDP). The interesting phenomenon that we can learn from this paper
is the two-way correlation, which happens between primary sector growth and GDP
growth, it also happens to the secondary sector. On the other hand, tertiary sector growth
has only one-way correlation with GDP growth.


Keywords: Primary Sector, Secondary Sector, Tertiary Sector, Economic Growth,
Correlation


Fajar Bambang Hirawan

fajar_hirawan@csis.or.id
Department of Economics
CSIS, Jakarta

---

The Pattern of Growth in Indonesia after the Economic Crisis 1997/1998:
Does the Primary Sector Still Need to Support Economic Growth?
Fajar B. Hirawan*

1. INTRODUCTION
1.1. Background
Many development theories have been introduced by brilliant economists, looking in
depth into development theory many economists also explained the growth theory as a
part of development theory, from Harrod-Domar to Chenery-Syrquin. There are still
many economists who have concerns about the development and growth theory, such as
Rosenstein-Rodan, Hirschman, Rostow, and many others.

Development is a process of change, not only implying growth or even decline, that
entails the possibility of having changes in the social structure, technology, power
relations, and distribution of interests (Grando, 2008). Harrod-Domar with their long run
development formula also defined the development as an addition between growth and
change (Kuntjoro-Jakti, 2007). Development can be political, economic, socio-cultural,
or technological. Meanwhile, change can be defined as a vertical, horizontal, or lateral
mobility. Nevertheless, this paper only looks in depth at the matter of growth.

Chenery and Syrquin (1975) introduced their invention, which was called “Chenery-
Syrquin Growth Pattern.” It focuses on three main sectors that have influenced the
economy: agriculture, industry, and services. They observed and measured the value
added of each sector to GDP in three different periods: pre-industrialization,
industrialization, and post-industrialization (see Figure 1).





* I would like to express my appreciation for Prof. Sergio Cesaratto, University of Siena, for his valuable
comments.

3

---

Figure 1. Chenery-Syrquin Growth Pattern

VA/G
Services
DP

Industry




Agriculture
Pre-

Post-
Time
Industrializati
Industrialization
Industrialization

on
Source: Chenery and Syrquin, 1975

Based on the figure above, we can make a hypothesis for doing research in the pattern of
growth field, specifically in one country without considering the economic system
applied in the country. The primary sector can be used to present agriculture because it is
derived from the primary sector. Meanwhile, industry and services sectors can be
presented by the secondary and tertiary sectors.

1.2. Indonesia’s Economic Condition: Overview
In the second half of 1997, Indonesia was suffering the East Asian Financial Crisis. The
crisis that began from the high depreciation of Thailand’s currency (Baht) to USD which
then contaminated Indonesia and some other East Asian countries (Hirawan, 2007b).
Beginning in August 1997, Indonesia experienced a huge depreciation in its currency
(Rupiah), from Rp 2,300 to Rp 15,000 / USD by mid 1998 (see Figure 2). The stock
market also suffered high pressure. It was expressed by the decline of the Jakarta
Composite Index (JSX) at the end of 1998. This condition happened because of a massive
capital outflow from Indonesia to other convincing countries.






4

---

Figure 2. The Exchange Rate (Rp / USD) and JSX Index 1997-2000
Rp/USD
JSX Index
16,000
800
15,000
750
14,000
700
13,000
650
12,000
600
11,000
550
10,000
9,000
500
8,000
450
7,000
400
6,000
350
5,000
300
4,000
250
3,000
2,000
200
1/1997
7/1997
1/1998
7/1998
1/1999
7/1999
1/2000
7/2000
Rp/USD
JSX Index

Source: CEIC Asia database

Furthermore, the inflation rate was so high in mid 1997. It was about 82 percent (year on
year (y-o-y)). In order to respond to the uncontrolled inflation, Bank Indonesia (BI),
Indonesia’s Central Bank, increased the interest rate (SBI rate). In mid 1997, the interest
rate rose significantly to around 60-70 percent (see Figure 3). Consequently, the high
interest rate was attracting people to invest their money in the form of bank's high interest
fixed short term deposits (1-3 months) rather than to keep their money in hand.

Figure 3. The Inflation Rate (y-o-y) and SBI rate 1997-2000 (in percent)
86
78
70
62
54
46
38
30
22
14
6
-2
1/1997
7/1997
1/1998
7/1998
1/1999
7/1999
1/2000
7/2000
Inflation
SBI rate

Source: Bank Indonesia (BI)


5

---

The most eye-catching indicator to give evidence of Indonesia’s economy falling is GDP.
Indonesia’s GDP has gradually declined from Rp 392.65 trillion in September 1997 to the
lowest level Rp 315 trillion in December 1998. It was automatically followed by all the
main sectors. The unique condition happened in the range between December 1997 and
March 1998. The secondary and tertiary sectors were declining, but in contrast, the
primary sector was increasing (see Figure 4).

Figure 4. GDP and the Main Sectors in the Economy 1997-2007 (in billions Rupiah)
550,000
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
7
7
7
7
8
8
8
8
9
9
9
9
0
0
0
0
1
1
1
1
2
2
2
2
3
3
3
3
4
4
4
4
5
5
5
5
6
6
6
6
7
7
7
7
9
9
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
9
9
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

1
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
,

2
r
c
r
c
r
c
r
c
r
c
r
c
r
c
r
c
r
c
r
c
r
c
a
n
p
n
p
n
p
n
p
n
p
n
p
n
p
n
p
n
p
n
p
n
p
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
GDP
Primary Sector
Secondary Sector
Tertiary Sector

Source: CEIC Asia database

Economic growth, as a conventional indicator, is still used significantly by policy makers
to indicate economic performance. Economic growth, which is depicted by GDP, can
give us a preview of macroeconomic conditions as a whole. In Figure 5, we can see the
contribution of the main sectors to GDP. The patterns of the contribution of each sector
are relatively the same from Q1 2001 until Q4 2007. It was the tertiary sector that gave a
big contribution to GDP (more than 35 percent). Meanwhile, the secondary and primary
sectors were placed in second and the third position (see Figure 5).



6

---

Figure 5. Contribution of Main Sectors to GDP 2001-2007 (in percent)
45
40
35
30
25
20
15
10
5
0
1
1
1
1
2
2
2
2
3
3
3
3
4
4
4
4
5
5
5
5
6
6
6
6
7
7
7
7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
,

2
,

2
,

2
,

2
,

2
,

2
,

2
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
r
,

2
,

2
,

2
c
a
n
p
n
p
n
p
n
p
n
p
n
p
n
p
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
a
e
e
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
M
J
u
S
D
Primary Sector
Secondary Sector
Tertiary Sector

Source: CEIC Asia database

Based on most of the literature about the economic crisis in Indonesia, it is stated that
Indonesia suffered an economic crisis from the year 1997 until mid 1999. In the year
2000, Indonesia’s macroeconomic indicators became better, but there were still problems
because of the reliance on macroeconomic indicators and non-economic fundamental
factors, such as the political and security condition. Based on these conditions, the time
frame of this paper will be set from the year 2001 until 2007.

1.3. Objectives
Based on the background knowledge above, this paper attempts to answer the following
questions:
1. How is the contribution of the three main sectors in the economy to GDP in
Indonesia after the economic crisis 1997/1998?
2. How is the relationship of each sector to the GDP in Indonesia after the
economic crisis 1997/1998, especially in order to support economic growth?
3. Which sector has an important role to enhance the economic growth in
Indonesia after the economic crisis 1997/1998?



7

---

1.4. Research Methods
In this paper, I would like to apply both qualitative and quantitative methods. Many
studies have been done on the subject of development and economic growth. A literature
survey will be undertaken to enrich the study. Meanwhile, for quantitative, secondary
data will be used. This paper uses Indonesia’s GDP data, constant price 2000, from the
year 2001 until 2007. The data will be quarterly. Since the study will be quantitative,
basic statistics and econometrics analysis will be added using EViews software.

1.4.1. Correlation Coefficient
Many researchers in social subjects are often interested in how one variable relates to
other variables, relationships can be quantified by a single number called the correlation
coefficient (r). The number of the correlation coefficient that is always used to measure
the relationship between two variables is zero (0) until one (1). If the correlation
coefficient is more than 0.8, this shows that there is a strong relationship between two
variables and vice versa (Hirawan, 2007a). The formula of Correlation Coefficient as the
following:




(1.1)

The correlation coefficient is an efficient way to communicate the relationship between
two variables. Nevertheless, it doesn’t communicate information about whether one
variable moves in response to another. The correlation coefficient is only used to identify
associations, not causal relationships.

1.4.2. Granger Causality Test
Correlation does not necessarily mean causation. Even regression analysis, which always
deals with the dependence of one variable on other variables, also does not imply
causation. The econometric output is full of magnificent correlations, which are
sometimes spurious. The correlation coefficient does not show a causal relationship, only
an association, no further than that.

8

---

The Granger (1969) approach to the question of whether X causes Y is to see how much
of the current Y can be explained by past values of Y and then to see whether adding
lagged values of X can improve the explanation. Y is said to be Granger-caused by X if X
helps in the prediction of Y, or equivalently if the coefficients on the lagged X’s are
statistically significant. Note that two-way causation is frequently the case; X Granger
causes Y and Y Granger causes X†.

It is important to note that the statement “X Granger causes Y” does not imply that Y is
the effect or the result of X. Granger causality measures precedence and information
content but does not by itself indicate causality in the more common use of the term‡.

To explain Granger test, let’s we consider the relationship between X and Y. The Granger
causality test assumes that the information relevant to the prediction of the respective
variables, X and Y, is contained solely in the time series data on these variables. The
formulation of Granger causality is as the following.

(1.2)

(1.3)

Xt-1 and Yt-1 are the lag of variable X and Y. t represents time, meanwhile,
and

illustrates disturbances which are not correlated.

From the equations above, we can distinguish four cases of Granger causality as the
following (Gujarati, 2003):
1. Unidirectional causality from X to Y exists if the set of lagged Y coefficients in
(1.2) is not statistically different from zero (i.e.,
= 0) and the set of the
lagged X coefficients in (1.3) is statistically different from zero (i.e.,
≠ 0).

† Eviews 4 User’s Guide, Quantitative Micro Software, LLC, Irvine CA, 2002, p. 222.
‡ Ibid.

9

---

2. Unidirectional causality from Y to X is indicated if the estimated coefficients on
the lagged Y in (1.2) are statistically different from zero as a group (i.e.,
≠
0) and the set of estimated coefficients on the lagged X in (1.3) is not statistically
different from zero (i.e., i.e.,
= 0).
3. Feedback, or bilateral causality, is suggested when the sets of Y and X
coefficients are statistically significantly different from zero in both regressions
4. Finally, independence is suggested when the sets of Y and X coefficients are not
statistically significant in both the regressions.

2. THE CONDITION OF THE MAIN SECTORS AFTER THE ECONOMIC
CRISIS 1997/1998
2.1. Primary Sector
The primary sector, commonly called the natural or resource based sector, is the sector
that leads an economy in the period of pre-industrialization. In this period, the primary
sector had given a big contribution to the world economy. Based on the Chenery-Syrquin
growth pattern, the primary sector tends to decrease in line with the massive growth from
the other main sectors, secondary and tertiary, in the industrialization and post-
industrialization period.

The classification of the primary sector can be divided into two big sub-sectors. Firstly
agriculture, livestock, forestry, and fisheries (ALFF) and the second is mining and
quarrying. Agriculture consists of two sub-sectors, farm food crops and non-food crops.
Mining is divided into two sub-sectors, which are crude petroleum and natural gas and
mining, excluding petroleum and gas.

Figure 6 shows the contribution of the big main sub-sectors, which form the primary
sector. As we can see the value of ALFF in GDP from the year 2001-2007 is very
dynamic. The value of this subsector is always higher than Rp 45 trillion. Meanwhile, the
value of mining and quarrying is more than Rp 35 trillion. The total value of GDP,
specifically in the primary sector, is worth more than Rp 85 trillion from the year 2001-
2007.

10

---