Empirical analysis of structural

transformation and inequality in

Indonesia 1992-2017

Arief Anshory Yusuf, Reza Anglingkusumo & Andy Sumner (2021) A direct
test of Kuznets in a developing economy: a cross-district analysis of
structural transformation and inequality in Indonesia, Regional Studies,
Regional Science, 8:1, 184-206, DOI: 10.1080/21681376.2021.1924850
 The developer’s dilemma

Two goals of Is that tension

development - different under
Economic Is there a tension? different varieties of
development & structural
inclusive growth transformation?
 Alisjahbana, Sen, Sumner &
The Kuznets process Yusuf (forthcoming)
Alisjahbana, Sen,
Sumner & Yusuf
(forthcoming)

Varieties of
Structural
Transformation
 Historical patterns Alisjahbana, Sen, Sumner
& Yusuf (forthcoming)

II. PRIMARY INDUSTRIALISATION I. UPGRADING INDUSTRIALISATION Kuznetian tension: Kuznetian tension:

CHINA SOUTH AFRICA Weak (‘adverse’) Strong
1978-1991 1960-1980
CHINA BANGLADESH
BANGLADESH 2001 - 2010
2002-2011 2011-2018 BANGLADESH SOUTH AFRICA
THAILAND 1991 - 2000 1981 - 1993 BANGLADESH
INCREASING

INCREASING
1988-1996 2011 - 2016
BRAZIL INDONESIA SOUTH AFRICA
1950-1964 CHINA 1994 - present
INDONESIA 1986-2001 1964 – 1974 CHILE BRAZIL
INDIA 1985-1996 1973 – 1989 1964 - 1972
CHINA
MANUFACTURING EMPLOYMENT SHARE

1980-2010 BANGLADESH INDONESIA

INDIA 2002-2011
2001-2010 1999 - 2012 CHILE
GHANA 1990 – 1999 1980 - 2010 THAILAND
THAILAND 1960 - 1983 1981-1987
2000-2017 GHANA
INDONESIA GHANA 2011 - 2016
STALLED INDUSTRIALISATION 1975-1985 1984 - 2010
GHANA THAILAND

INEQUALITY
2011-2016 1981-1987
GHANA
1984-2010 GHANA CHILE
1960-1983 1960-1973
INDONESIA CHINA Kuznetian tension: Kuznetian tension:
1999-2012 INDIA 1992-2001 Ambiguous Weak (‘benign’)
BRAZIL
1960 - 1980
CHILE
1964-1994 1990-1999
THAILAND
SOUTH AFRICA THAILAND 1988-1996

STABLE OR DECLINING
BRAZIL
1981-1993 INDIA 2000-2017 CHILE
SOUTH AFRICA
1994-2011 1994-2011 1960 - 1980 1960 - 1973
DECLININING

SOUTH AFRICA
CHILE 1960 – 1980
2000 - present
INDONESIA
CHINA 1975– 1996
BRAZIL
1994 - 2011 1978 – 1985
CHILE
2000-2011

CHILE BANGLADESH
1974-1989 1991-2000
III. SECULAR DEINDUSTRIALISATION IV. ADVANCED INDUSTRIALISATION

MANUFACTURING VALUE ADDED SHARE (IN CONSTANT PRICE)

WEAK GROWTH-ENHANCING STRUCTURAL TRANSFORMATION STRONG
WEAK STRONG
Contemporary
trends UNIDO INDSTAT2 database [Formal]
Sumner (2021)

GGDC 10-Sector database GGDC 10-Sector database & UNU-WIDER WIID

Indonesia
 7275 district year
observations of inequality
and sectoral employment
share constructed from 25
years of household survey
Data and data (SUSENAS 1992-2017)

Methods
Descriptive analysis.
Distribution of consumption
per person by sectors,
Atkinson index of inequality,
regression analysis.
Between 1992-2017,
increase in inequality
happen in all sectors of the
economy (except finance).

Density curve of consumption per capita by

sector of the economy.

Note: The horizontal axis is the log of

expenditure per capita per month: (a)
agriculture; (b) non-manufacturing industry;
(c) manufacturing; (d) trade and
transportation; (e) finance; and (f) non-
market services.

Source: SUSENAS 1992-2017

Within sector inequality dominates.
Between sector inequality barely changed.
Atkinson index of inequality in various sectors, and within- and between-sector components, 1992–2017.
Cross-district correlation between non-agriculture employment share
and inequality depends on specific sector and when.
Relationship between sectoral employment share and inequality, 1992–97, 2000–17 and 1992–2017.
  Effect on inequality Turning point

  1992–1997 1998–2000 2001–2017

1992– 1998–
2001–2017
Summary of
Sector Pre-AFC AFC Post-AFC
1997

Pre-AFC
2000

AFC Post-AFC
regression
Non-manufacturing
analysis
None None None None None None
industry

Manufacturing
Negative Positive Positive Yes None Yes
industry
Most of the turning
Market service:
Negative None None Yes None None points of are
trade/transport
considerably above
Market service:
Positive Positive Positive None None Yes the current district
finance
means and only a
Non-market services Positive Negative Positive Yes Yes Yes
few districts have
labour shares above
the turning points.
Tertiarization is strong, so does the
tension between ST and inquality
 Macroeconomic
Capital utilization
adjustment from
Why and changing
AFC (exchange
industrial relation
differential rate)

impact of Technological
China accession to
ST? the WTO
change
(automation)
What policy strategy for future?
• Should Indonesia pursue the strategic promotion of higher-value-added services that are
tradeable internationally?
• This could generate much value-added if successful, though it has weak employment
growth potential for low-skilled workers given the nature of these services.
• Or should Indonesia seek to boost industrialisation through more SOEs entering global
value chains and/or subsidies to encourage more private exporting companies to join GVCs?
• The challenge with this state-led re-industrialisation is that it is predicated on
participation in the very part of the global economy, global value chains, that has
engendered stalled industrialisation in many developing countries in recent years as
manufacturing has become spread thinner and thinner across more and more developing
countries.
 How to weaken the tension?

Reindustrialisation. Active industrial policies

where manufacturing will continue to play a
role, but it must take into account the rapid
Tertiarization complemented with skill
changes in technology that is globally affecting
upgrading policy, future of works and social
manufacturing processes and supply /
protection.
distribution chain management. New kind of
manufacturing, information, digital
technology, high value added.