Graduate School of Development Studies

The Impact of Dependency on Primary Commodity

on Indonesia Economic Growth

A Research Paper presented by:

Wendy Chandra
(Indonesia)

In partial fulfillment of the requirements for obtaining the degree of

MASTERS OF ARTS IN DEVELOPMENT STUDIES

Specialisation:
Economics of Development
(ECD)

Members of the examining committee:

Dr. Howard Nicholas (Supervisor)
Dr. Susan Newman (Second Reader)

The Hague, The Netherlands

December, 2012
Disclaimer:
This document represents part of the author’s study programme while at the
Institute of Social Studies. The views stated therein are those of the author and
not necessarily those of the Institute.
Research papers are not made available for circulation outside of the Institute.

Inquiries:
Postal address: Institute of Social Studies
P.O. Box 29776
2502 LT The Hague
The Netherlands

Location: Kortenaerkade 12
2518 AX The Hague
The Netherlands

Telephone: +31 70 426 0460

Fax: +31 70 426 07

ii
Acknowledgement
This work has been completed successfully with the diligent support of family
and friends. I sincerely thank you to the following:

My family particularly my mother who has been there for me all the time
during my study and great support as she has pull out all her capacity to
successfully make my dream come true to study abroad and keep supporting
me all the year I have been through.

To my supervisor Dr. Howard Nicholas who has been such an inspirational

figure for me during my study in ISS. He has been a great lecture and mentor. I
wish that there would be more time for me to study under his supervision.
Likewise, to Dr. Susan Newman who has gave me inputs during my research.
She has been a young and full of passion lecturer that gave me such an
inspiration.

To all my friends in ISS, Cynthia, Sara, Mas Bayu, Riya and Jayadi and many
other friends that has been a great support to me.

To my friends in Indonesia, Andy, Yogie and Tommy Yotes who have been a
great friends and support during my hardest time.

Last but not least to all ISS staffs who have been a great help.

Regards,
Wendy Chandra

1
List of Tables
Table 2-1 Indonesia Exports Composition and Annual GDP Growth...20
Table 2-2 Policy and Plans Summary…………………………………..24
Table 4-1 Exports Composition in 2000 – 2010……………………….30
Table 4-2 Ten Years Average Share of Commodity Imports Value of
Total Merchandise Imports in 1970 – 2010…………………30
Table 4-3 Imports Composition in 1990 to 1997……………………....31
Table 4-4 Imports Composition in 2000 to 2010……………………....31
Table 4-5 Annual GDP Growths and Exports Share………………….36
Table 4-6 Commodity and Manufacture Sectors Share of GDP……….39

List of Figures
Figure 1-1 Indonesia Export Share, 1970 to 2010………………………5
Figure 4-1 Global Commodity Prices and Share of Exports (Percentage
Change)……………………………………………………..26
Figure 4.2 Food Commodity Volume Exports and Prices (Percentage
Change)……………………………………………………....26
Figure 4.3 Tropical Beverages Volume Exports and Prices (Percentage
Change)....……………………………………………………27
Figure 4.4 Vegetables Oils and Oilseeds Volume Exports and Prices
(Percentage Change)………………………………………...27
Figure 4.5 Agriculture Raw Materials Volume Exports and Prices
(Percentage Change)…………………………………...……27
Figure 4.6 Minerals, Ores and Metal Exports Volume Exports and Prices
(Percentage Change)………………………………...………28
Figure 4.7 Food commodity import volume (% Change)………………32
Figure 4.8 Agriculture raw materials imports volume (% Change)…...…32
Figure 4.9 Fuel imports volume (% Change)……………………...……32
Figure 4.10 Net Barter TOT Index % Change and Annual GDP Growth
%........................................................................................................34
Figure 4.11 Exports Growth and GDP Growth……………….………..36
Figure 4.12 GDP Annual Growth and Global Commodity Price………..37
Figure 4.13 Sectors % growth contribution to GDP……...……………..38

List of Acronyms
ASEAN Association of South East Asian Nations
BPS Badan Pusat Statistics (Statistics Indonesia)
BULOG Badan Urusan Logistik (National Logistic Agency)
EDA Exploratory Data Analysis
GDP Gross Domestic Product
IMF International Monetary Fund
OPEC Organization of the Petroleum Exporting Countries
Repelita Rencana Pembangunan Lima Tahun (Five Years
Development Plans)
TOT Terms of Trade
UNCTAD United Nations Conference on Trade and Development
WB World Bank
2
Contents
List of Tables............................................................................................. 2
List of Figures ........................................................................................... 2
List of Acronyms ....................................................................................... 2
Abstract ..................................................................................................... 4
Chapter 1.................................................................................................... 5
Introduction .............................................................................................. 5
1.1. Background .......................................................................................... 5
1.2 Justification ........................................................................................... 6
1.3 Research objectives, questions and arguments ....................................... 6
1.4 Methodology and limitations of the research ......................................... 7
Chapter 2 ................................................................................................... 9
Literature Review and Empirical Evidence .............................................. 9
2.1 Introduction .......................................................................................... 9
2.2 Literature Review................................................................................... 9
2.2.1 Structuralist view of commodity dependency .................................. 9
2.2.2 The new institution view of commodity dependence .................... 10
2.2.3 Criticism ....................................................................................... 12
2.3 Empirical findings ............................................................................... 13
2.4 Indonesian Case Study ......................................................................... 16
Chapter 3 ................................................................................................. 19
Indonesia Economy Background ........................................................... 19
3.1 Introduction ........................................................................................ 19
3.2 Structure of economy, changes in structure and economic growth....... 19
3.3 Policy toward Primary Commodity ...................................................... 21
Chapter 4 ................................................................................................. 25
Analysis ................................................................................................... 25
4.1 Introduction ........................................................................................ 25
4.2 Indonesia dependency on primary commodity exports and imports .... 25
4.2.1 Dependence on commodity exports ............................................. 25
4.2.2 Dependence on commodity imports ............................................. 30
4.3 Impact of commodity dependency on economic growth ..................... 33
4.3.1 GDP growth and terms of trade ................................................... 33
4.3.3 GDP growth and exports growth.................................................. 35
4.3.3 GDP growth by Sector ................................................................. 37
Chapter 5 ................................................................................................. 41
Conclusion and Policy Implications ....................................................... 41
References ............................................................................................... 44

3
Abstract
This paper analyze on Indonesia economic growth as one of commodity
dependence countries to see to what extent does Indonesia dependence on
commodity production and what is the significant of the dependency.

The research uses exploratory data analysis method to analyze the data and
extract important information regarding Indonesia dependency on commodity.
In this paper the writer found that the dependency on commodity doesn’t have
strong evidence of resource curse adverse impact presence on Indonesia
economic growth. Dutch disease and terms of trade deterioration does have
correlation on its dependency but it is not causal relationships which hamper
its growth.

Indonesia in the early stage of development in 1970s rely heavily on

commodity exports revenue but Indonesia dependency tend to decline as they
have move forward to industry oriented development by using its commodity
windfall revenue.

Keywords
Indonesia economic growth, Commodity dependency, Resource curse

4
Chapter 1
Introduction
1.1. Background
Most developing countries were and remain heavily dependent on commodity
export for earnings of foreign exchange that are required to purchase capital
goods, intermediate products, and other imports essential to their economic
development (Maizels 1994). Indonesia in particularly rich of natural resources
has been one of the major producers and exporters in primary commodity,
such as rubber, palm oil, forestry products, shrimps, cocoa, and coffee
(Ministry of Trade of Republic of Indonesia. ).

International organizations, such as World Bank, UNCTAD, and ASEAN,

consider that developing countries, such as Indonesia, are commodity-
dependent, that they tend to undermine manufacturing sectors. Such countries
are also believed to be prone to Paradox of Plenty, or known as the Resource
Curse, and to Dutch Disease, which according to popular belief could lead
them to slower economic growth than the countries with a less-dependent
commodity status.

Indonesia in the early development stage relied heavily on the commodity

sector for its exports revenue as shown in Figure 1, and the economic growth
was still very low in which the average income of the Indonesian people were
merely around US$ 50 per year (Tambunan 2006). Hence, the government set
three significant steps to solve the problem, focusing on stability,
rehabilitation, and economic reconstruction (Chalmers 1997). The steps set by
the government were laid out in the “Five Years Development Plan” (Repelita)
that started in 1969. The priority of such a plan was to support the national
industry and the industrialization strategies, thefirst focus of which was on
import substitution and on promoting exports (Tambunan 2006).Hence,
Indonesia recent rapid growth from 1999 to 2010 contributed not only by
commodity sector export but also by its manufacturing export in which
dominated most of its export starting in the late 1980s

Figure 1-1
Indonesia Export Share, 1970 to 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010

Primary Commodity Exports Manufacturing Exports

Source: Author’s own illustration based on World Bank data (World Development Indicators &
Global Development Finance)

5
1.2 Justification
The rise of global primary commodity prices between 2005 and 2008 in general
had given a positive effect on Indonesian economy growth (Warr and Aldaz-
Carroll 2010). However, as reported by the Association of Southeast Asian
Nations (2011) and the World Bank (2010), Indonesia’s GDP in 2009
experienced a contraction due to the global financial crisis that caused the fall
of both commodity prices and demands; thus, the volume of goods exported
by Indonesia and its values fell by 19.1% and 29%, respectively, that year.
However, the contraction in Indonesia’s exports began to unwind in the
following quarters. Compared to Indonesia’s GDP in 1997/1998, which
plunged by 13% due to the Asian financial crisis, the country’s GDP in 2009
remained positive, despite slow economic growth (Purnamasari et al. 2011,
Warr and Aldaz-Carroll 2010).

Ample evidence showed that Indonesia’s economic growth in the past

depended heavily on commodity exports. Thus, one could come to a
conclusion that such growth would be vulnerable to the rise and fall of global
commodity prices.

At the helm of its second president, Suharto, Indonesia began industrializing

in 1970, so as to boost its stagnant economy, by emphasizing on the
development of its manufacture sectors and by diversifying its economic
dependency on primary commodity exports.

As shown in Figure 1, Indonesia’s manufacturing exports production has

increased and has dominated its exports since the late 1980s, particularly in the
1990s, its exports accounted for half of the total merchandise exports.

1.3 Research objectives, questions and arguments

The objectives of the research are to analyze to what extent does Indonesia
economic growth is still dependent on the commodity exports and to what
extent its recent growth owes to the rise in primary commodity export prices.

In view of these objectives, this research will focus on following two questions:
 To what extent does Indonesia economic growth depend on primary
commodity production?
 What is the significance of this dependency for its growth?

The research paper intends to argue that:

 Indonesia’s economic growth still continues to depend for the most
part on the world market prices of the primary commodities that the
country exports (rubber, palm oil, cocoa, forest products, coffee and
shrimps), but such reliance is declining, as the country has shifted its
focus from being commodity dependent to being industry-oriented.
 Changes in global commodity prices continue to have an impact on
Indonesia’s economic growth, but this has declined over time because
the industry-oriented exports have increased and substituted the
decline in commodity exports

6
  The recent rise in Indonesia’s economic growth rate can be attributed
to the rise in the prices of its primary commodity exports which cause
the value of primary commodity exports to rise significantly.

1.4 Methodology and limitations of the research

The research will use a quantitative secondary data collection that will be
analyzed using exploratory data analysis (EDA) with no econometric methods.

Exploratory data analysis (EDA) is a methodology rather than a set of

techniques. The EDA methodology is flexible and data-driven rather than
hypothesis-driven, and researchers may carry out EDA in different ways,
despite the fact that the information extracted from this methodology would
likely to be the same (Unwin 2010).

EDA is appropriate for both qualitative and quantitative data that will be used
in bi-variate and multivariate analysis in social sciences and it is mainly useful
for economists to analyze data before testing it with econometric models, and
also helps researchers learn and understand more about the variables before
using them to test the theories of social sciences; hence, it could lead the
subsequent data analysis to be sounder. This methodology emphasizes on the
use of visual displays to reveal vital information about the data examined.
Another advantage of this technique is that it allows readers with little or no
formal preparations in math of statistics to understand the data explained,
while regression is proven to be useful only for those with knowledge of
statistics (Hartwig and Dearing 1979).

Another reason to use EDA instead of econometrics is that EDA is not about
fitting models, parameter estimation, or testing hypothesis, but it is about
finding information in the data and generating ideas (Unwin 2010).

Hence, this paper will use EDA, as the writer believes that the methodology is
suitable to address the research questions and allows us to look at the data in
many different ways in order to gain new insights (Unwin 2010) and extract
important information.

Meanwhile, the quantitative secondary data will be collected from both

international and national data sources:
 World Bank data (World Development Indicators & Global
Development Finance)
 UN Comtrade Statistic
 Badan Pusat Statistik (Indonesia Statistic Institution)
 UNCTAD

Indonesia economic growth was hampered during the Asian financial crisis in
1997 and 1998, where the annual GDP growth fell to 13% base on the World
Bank data, but it recovered quite well within few years.

Hence, in order to support the presented arguments, this research will analyze
specifically on the recent Indonesia economic growth starting from 1999 after
the Asian financial crisis to 2010 to see to what extent does Indonesia

7
economic recent growth depend on primary commodity production and what
is the significance of this dependency for its growth. The period of Asian crisis
in 1997/8 will not much discussed because during this period both exports and
growth performance was sluggish in all crisis affected countries which was also
propelled by the sluggish adjustment such as massive exchange rate
depreciation which translated into low economic growth and exports growth
(Athukorala, 2006).

Due to the time limited, this research will only generate information from the
data analyses and hypothesis in the hope that they will be valuable for further
research.

Also, this paper will examine only Indonesian commodity exports and terms of
trade starting from the year 1980, as the comprehensive information on such
variables in previous decades is not available from both international and
national data sources. However, such limitation doesn’t hinder this research
because the data trend from 1970 to 1980 tends to be the same.

8
Chapter 2
Literature Review and Empirical Evidence
2.1 Introduction
In this chapter the theoretical perspectives of the dependency on primary
commodity will be divided in two views, structuralist economists and new
institution economists. The structuralist economists oppose the idea that
dependency on commodity could hamper economic growth while the new
institutions economists argue differently.

The first part of the this chapter will discuss the view of the structuralist
economists such as Prebisch (1950), Corden and Neary (1982), Baldwin (1956)
, Sindzingre (2009) and Auty (2001) argue that countries with abundant natural
resources tend to have lower economy growth rather than resources poor
countries. The second part, on the other hand, new institution economists
such as Mehlum (2006), Alexeev and Conrad (2009) and Gylfason (2001) argue
that dependency upon natural resources for growth doesn’t necessarily harmful
but it could be beneficial depending on how the policies and institutions
manage the natural resources. The third part argues about the benefit of
primary commodity dependency to the economic growth. Then in the fourth
part will elaborate the empirical findings that has been done by researchers and
the fourth part will discuss exclusively on Indonesia commodity exports.

2.2 Literature Review

2.2.1 Structuralist view of commodity dependency
The Structuralist economists’ theoretical perspectives regarding the adverse
impact of commodity dependency are divided into two main focus notably
adverse impact of commodity sector specialization and the adverse impact
price volatility of primary commodity on growth.

The adverse impacts of commodity sector specialization are the long term
declining terms of trade, staple trap and Dutch disease. The Dutch disease
emphasize on the adverse impact of natural resources dependency focus on
the movement of inputs from lagging manufacturing sector to booming
natural resources sector (resource movement effect), where booming sector
tend to have revenue increment and increase the price of non-tradable goods
(spending effect) that cause the real appreciation of domestic currency which
cause the export to become more expensive, government spending and
undermine the manufacture sector hence become less competitive (Acosta et
al. 2009, Corden and Neary 1982, Frankel 2010) . The next arguments
regarding commodity dependency that hinder or have negative impact on
economic growth is the long run deterioration in terms of trade of developing
countries (Prebisch 1950, Singer 1950) as manufactures value tend to rise over
time as they have higher value added than primary commodity (Blattman et al.
2007). Prebisch (1950) focuses on the terms of trade of developing countries
as primary commodity supplier and advanced countries as supplier of
manufacture products as manufacture products has higher value added and
long term declining primary commodity prices cause by the use of synthetic
9
inputs. Another adverse impact is the staple trap where resource abundant
countries tend to rely on commodity exports longer than resource poor
countries hence postpones the industrialization development as consequences
retards urbanization that favorable for the process of human capital
accumulation and postponed labor market turning point hence the number of
rural labor overwhelm and raise income inequality as they keep rely on
producing raw materials (Auty 2001) as a result resource abundant countries
could only specialize in producing raw materials and further as the production
of staples became more capital intensive where it is imported hence labor
become less use in the production and the processing for the raw materials are
done out of the country (Baldwin 1956).

The second focus is the adverse impact of price volatility of primary

commodity on commodity dependence economy. The economy that heavily
dependent to primary commodity exports are prone to the changes of global
commodity prices which tend to fluctuates every periods and cause income
instability hence resulting internal instability, reduce investment and diminish
economic growth (Blattman et al. 2007) . The next argument brought by
Sindzingre (2009) is the poverty trap, where the price changes in primary
commodity make commodity dependence countries difficult to reach the
tipping point above which can enhance long run growth, and hamper
industrialization where it is viewed as the solution for commodity dependence
countries to get out of the poverty trap since manufacture product is less
subject to the price volatility. The other argument is that sharp fluctuation of
commodity prices cause the commodity dependence countries tend to have
increasing external debt and difficulty in servicing their debt where commodity
dependency countries increase external loan to finance the booming
commodity sector hence when the prices fall, they fail to service their debt
(Swaray 2005) and instability in terms of trade decrease exports revenue hence
capital inflows shrank as price shocks reduce the effectiveness of investment
resulting capital account shocks hence vulnerable to financial crisis and poor
growth (Eichengreen 1996).

In sum, the structuralist economists view that the dependency on primary

commodity hampers economic growth and the reliance on this sector would
lead to slower economic growth rather than the countries which is not. The
adverse impact channels through the price volatility and commodity sector
specialization.

2.2.2 The new institution view of commodity dependence

As the commodity prices tend to be fluctuating over periods hence the growth
of developing countries which are dependent on commodity exports for its
growth would likely to fluctuate and cause instability in their economy. New
institutional economists partly advocates the idea of specialization in primary
commodity but with the presence of good institutions as they argue that
countries such as Norway, Botswana, Australia and Canada gain and enhance
its economy growth from commodity exports without prices volatility
negatively affecting their economic performance (Mehlum et al. 2006) and they
argue that in resource abundant economy, the government behavior consider
to be essential in researching the adverse impact of natural resources
dependency (Newberry 1986).
10
The new institution economists don’t entirely oppose to the idea of natural
resources as unbeneficial. Dependency on natural resources as the source of
economic growth doesn’t always lead to resource curse instead countries could
both be growth losers (e.g. Saudi Arabia, Nigeria, Zambia, Angola and
Venezuala) and growth winners (e.g. Botswana, Australia, Canada and
Norway). The different results of commodity dependency on countries’
economic growth due to the quality of their institutions which measured from
the corruption perception index and the institutions’ quality determine if
resource abundant country could avoid the resource curse or not (Mehlum et
al. 2006). Hence, the deterioration on economy growth that cause by
dependency on natural resources is due to the poor institutional development
that leads to rent-seeking behavior and corruptive government (Mehlum et al.
2006, Gylfason 2001). Different from structuralist economists, new institution
economist emphasize on the government role in resource abundant economy
which government behaviors consider being essential in determining resource
abundance could be a curse or blessing.

Lane and Tornell (1996, 1999) argue that countries with weak government and
strong rent-seeking groups, natural resources windfall revenue stimulate
voracity effect. Voracity effect is where the competition among rent-seeking
groups caused a condition in which public subsidies and other forms of
transfer overwhelm the windfall revenue hence this higher redistribution lower
the effective rate of return to investment and cause the economy growth to
deteriorates.

Robinson et al (2002) argue that with the presence of institutions that promote
the accountability and competence of the state will tend to benefit the
economy from resource boom and deter the politician incentives. Otherwise,
the resource booms will cause the politician to over-extract the natural
resources more than the efficient extraction to discount the future hence
provide those politicians with resources that give them power to influence the
elections’ outcome. Hence, the impact of resource booms on the economy
depends heavily on the quality of the institutions. In countries without the
accountable and competence institutions may lead to resource curse while in
countries with the presence of institutions that limit the ability of politicians to
use clientelism to control the elections results, the resource booms tend to
enhance the economy growth (Robinson et al. 2002). Collier and Hoeffler
(2004) make an argument that is in line with Robinson et al (2002) where the
absence of the institutions will cause the politicians to stay in power by using
the over-extracted natural resources earnings hence it causes the citizen to have
inequality in political rights and economic inequality which later translates into
conflict and civil war and some opposition politicians use the primary
commodity revenue to finance the conflict and the other argument is rent-
seeking where government tempted to offer tariff protection to domestic
producers which later breed corruption (Gylfason 2001, Krueger 1974).

In sum, the theories brought by both struturalists and new institutions quite
different regarding the benefit and cost of commodity dependency or
dependency on natural resources for economic growth. Structuralists in on one
hand focus on the long run declining global commodity prices, currency real
11
appreciation and resource movement to the booming sector while new
institutions economists partly opposing the dependency on commodity for
economic growth which they argue that the absence of good institutions and
good governance that cause the curse of natural resources but with the
presence of good institutions to manage the use of the windfall revenue and
the extraction of the natural resources, the resource curse could be avoided.
Hence, with the presence of good institutions, natural resources could enhance
economic growth (i.e. Botswana and Norway).

2.2.3 Criticism
The dependency on commodity can’t be generalized to have negative impact
on all economies. This section will criticize on those arguments put forth by
both structuralist and new institutions economist. The structuralist criticism
brought by Fardmanesh (1991), Mickesell (1997), Stevens (2003) on Dutch
disease and Bleaney and Greenaway (1993) on long term deterioration of terms
of trade. While the new institutions criticism brought by Stevens (2003)

The Dutch disease that bring forth by the structuralist hamper the economic
growth channels through resource movement to booming sector that cause
underdevelopment of manufacture sector and real currency appreciation.
Criticism on the Dutch disease brought by Fardmanesh (1991) where the
empirical evidence shows that the oil booms in 1970s expands the manufacture
sector in oil exporting countries such as Algeria, Indonesia, Ecuador, Nigeria
and Venezuela. Another feature of Dutch disease is the relatively permanent
overvaluation of the exchange rate in resource abundant countries (Bresser-
Pereira 2008) while Mickesell (1997) found that resource abundant country
such as Indonesia devalued its currency substantially when there was a windfall
revenue from the oil booms which means there was no strong evidence of
Ducth disease hence he conclude that there is no strong evidence that explain
resource curse cause by mineral exports but it is more about the incorrect
government policies or exogenous conditions and also found. Moreover,
Stevens (2003) says that Dutch disease in economies in transition tend to be
too theoretical with the analysis using econometric models rather than
empirical evidence. While Bleaney and Greenaway (1993) criticize on the long
term deterioration of terms of trade where they argue that different commodity
may have different impact hence it cast a doubt on any conclusions that state
dependency on commodity exports cause long term deterioration terms of
trade because most resource abundant countries does not solely dependent on
single commodity but several hence they advise that the deterioration could
happen on certain commodity instead of generalize on all commodities.

The new institutions propose that without the presence of good institutions
and governance which is essential for resource abundant countries would
hamper economic growth which channels through corruption, rent seeking
behavior and over extraction. This negative impact completely questioned by
Stevens (2003). The argument by new institutions is that government in
resource abundant countries should intervene in the economy while good
governance which to be believed as what the Washington consensus suggest
the otherwise. Hence, the good governance here is not what describes in the
Washington consensus but it is about good decision making by the
government on natural resources windfall revenue management where the
12
macro policy failure could damage the micro policy in the business level (Auty
2003). The corruption and rent seeking that occur might have different impact
on each economies where it depends on where they allocate those rewards
from their actions. It might enhance economic performance if they invest it in
productive sector while it might says differently if they use it for consumption
activity or another corruptive activity (Stevens 2003). Hence, the point of the
criticism is the management of the windfall revenue from the commodity
sector and sound macroeconomic policy that might limit the mismanagement
not merely the presence of good institutions and governance that obliterate the
corruptive activity.

On the other side, mainstream economists advocate the reliance on natural

resources where they argue that exports of primary commodity is the only way
for countries in the early stage of development to generate foreign exchange
that is needed to pay for imports and service external debt (Auty 2001) and
also points out by H-O model that one should exports and specialize in their
factor endowments which exhibit their comparative advantage. The theory of
comparative advantage that advocate by David Ricardo and H-O model
suggest that specialization on the several commodity that a country richly
endowed with will benefit its economic growth (Dong and Yan 2009) as
witnessed in Africa that the booming prices of commodity increases the level
and growth rate of per capita income (Deaton and Miller 1995) and increase of
terms of trade in developing countries which rises its GDP (Basu and McLeod
1991). Hence, this suggests that economies in transition particularly the one
that rich of natural resources should specialize in primary commodity export
and production to earn foreign exchange to further diversify their economy.

2.3 Empirical findings

This section will discuss the empirical findings relating to the above theories.
Most of the findings below show that dependency on commodity sector would
likely to have negative impact on economic growth. The empirical evidences
show that in the short run commodity booms do bring positive impact on
their economy. However, in the long run the commodity booms tend to have
adverse impact on the economy in particular commodity dependence countries
as their economy vulnerable to price instability where global commodity prices
tend to change over time and has long run downward trend (Singer 1950,
Prebisch 1950).

Blattman et al (2007)used the data from 1870 to 1939 of 35 countries and

divide them into two groups notably core and periphery and estimated how
terms of trade volatility as cause by commodity prices instability and secular
change on countries performance from 1870 to 1939 using regression analysis.
They found that in long-run growth, commodity prices instability cause both
poor economic performances in the periphery compared to the core and poor
relative performance within the commodity specialized periphery. However,
there are some commodity producers countries did quite well by specializing in
particular commodity and diversify their economy towards industrialization.
They conclude that terms of trade should be the central thinking in those
commodity producers where commodity choice, dependent and the price
trend were crucial determinant of growth in peripheries countries up to 1940.
They suggest that countries should diversify their economy towards
13
industrialization instead of merely dependent on commodity production to
avert the adverse effect of commodity price instability which also in line with
the finding by Hausmann et al (2007) and Cavalcanti et al (2012) where they
found that those countries with more diversified export composition more
likely to avert the adverse impact of dependency on commodity export and
enhance economic growth.

The next empirical evidences pay particular attention from the year of 1970 to
2007 when the second and the third booms happened in 1970s and 2000s.
Cavalcanti et al (2012)used the annual data from 1970 to 2007 on 118
countries and 32 commodities; Bleaney and Greenaway (2001) used the data
from 1980 to 1995 on 14 sub-Saharan Africa countries; and Collier and
Goderis (2007) used the data from 1963 to 2003 on 130 countries and 58
commodities.

Cavalcanti et al (2012) used the GMM and Cross-sectionally augmented

version of the Pooled Mean Group (CPMG) method. They divided those 118
countries to two groups notably 62 commodity dependent countries with 50%
exports in primary commodity and 56 countries with more diversified export
structure. They found that in commodity dependent countries lower volatility
in commodity prices could enhance growth but commodity terms of trade
(CTOT) volatility have significant negative impact on economic growth which
channels through lower physical and human capital accumulation. However, in
the 56 countries with more diversified export structure, they found no
significant impact of CTOT instability on per capita growth.

Bleaney and Greenaway (2001) used the coefficient correlation to analyze the
impact of terms of trade and real exchange on investment and growth in sub-
Saharan Africa. Their finding is quite different from the others where the
volatility in terms of trade as cause by the primary commodity prices change
doesn’t directly affect growth. It affect growth through real exchange rate
where boom in prices tend to cause the exchange rate to rise and bust of prices
cause the exchange rate to fall. This instability discourages and has negative
impact on investment growth. They suggest that investment could be higher
when terms of trade favor commodity producer and real exchange rate is less
overvalued.

From the findings above, in general they imply that dependency on commodity
would likely to have adverse impact on economy growth. Both Blattman et al
(2007) and Calvacanti et al (2012) used different methods but come with the
same findings where they found that country that specialized in commodity
sector would likely to suffer from the long term deterioration of terms of trade
while Bleaney and Greenaway (2001) imply that the price changes doesn’t
directly affect the growth but it channels through the exchange rate the rise
during the booms and fall during busts hence it cause instability in investment.
Overall, the dependency on commodity tends to cause instability in economic
growth which hampers the economic growth. In sum, those findings imply
that commodity boom does have short-term positive impact on growth but
adverse long-run impact. During the commodity boom, those primary
commodity producer countries accumulate revenue hence their currency
appreciated and they move most of the productive input to booming sector
14
and abandoning lagging sector and non-tradable sectors. While in the long
term, commodity prices tend to have downward trend (Singer 1950, Prebisch
1950) hence those commodity dependent economies economic growth
hampered as they rely on commodity for growth and they suggest that
countries should diversify their economy towards manufacturing to avert
negative long-term impact of global commodity prices trend where it needs the
presence of right institutions and government to avoid the resource curse.

On the other hand, Collier and Goderis (2007) used the panel co integration
methodology to analyze what is the impact of commodity prices change on
economic growth. They found that commodity boom has short run impact on
growth through the improvement of terms of trade as shown in the current
African growth cause by the rise of global commodity prices that begun in
2000 but it has adverse long run impact. However, this short term positive
effect cause the commodity producer countries overvalued exchange rate, high
public and private consumption, low and inefficient investment and in the long
run cause the countries to focus and promote incentives on non productive
activities such as rent seeking behavior, lobbying or public sector employment
which is also in line with the findings of Baland and Francois (2000) and
Torvik (2002) which they found that without the presence of good institutions,
natural resources lead to rent seeking behavior.

In sum, those findings imply that commodity boom does have short-term
positive impact on growth but adverse long-run impact. During the
commodity boom, those primary commodity producer countries accumulate
revenue hence their currency appreciated and they move most of the
productive input to booming sector and abandoning lagging sector and non-
tradable sectors. While in the long term, commodity prices tend to have
downward trend (Singer 1950, Prebisch 1950) hence those commodity
dependent economies economic growth hampered as they rely on commodity
for growth and they suggest that countries should diversify their economy
towards manufacturing to avert negative long-term impact of global
commodity prices trend where it needs the presence of right institutions and
government to avoid the resource curse.

Criticism
Research on commodity dependency impact on growth that used the oldest
data set was Blattman et al. their findings seems to be less plausible because the
years of data used in the research was when many countries were still not yet
independent hence those countries didn’t have the capability to set any
economic development plan and the price of commodity was not yet decided
by the market where the periphery or commodity dependent countries were
only price taker.

Cavalcanti et al (2012) and Bleaney and Greenaway (2001) use both the data
years when all countries already independent which data years started in the
year of 1970. Cavalcanti et al (2012) findings was one of the most complete
because they take into account resource curse literature both from the view of
structuralist and new institution but the categorization of countries groups
have weak reference and argument because they only explain that commodity
dependence country is the one with more than 50% commodity export is
15
commodity dependent and they were trapped in the same method of using
only GDP share as sole measurements of such dependency. They need more
validated measurement and data to support their categorization. In order to
generate comprehensive results in determining a country is commodity
dependence by measuring the share of export earnings of the top single
commodity or top three export commodities in GDP in total merchandise
exports, percentage of total employment in commodity production and share
of government revenue (South Center 2005). While Bleaney and Greenaway
(2001) findings only shows the correlations between specialization in
commodity exports impact on growth and only used two variables that is the
exchange rate and terms of trade volatility without deeply analyzing the
resource curse literature and the political issues.

On the other hand, Collier research was also a comprehensive one where they
investigate the effects of different type of commodity on growth and they also
analyze on the resource curse literature but the conclusions were weak when
they conclude that recent post 2000 commodity booms would likely to have
long term adverse impact on commodity dependent countries by analogous the
historical trend while it is not proven yet.

Moreover, all of the above findings use the econometrics models that only
explain the correlations and they tend to present correlations as causal relations
where more experiments and better data analysis could be used to address
issues in a research (Black 1982). Those methods didn’t really explain the
resource curse impact on growth where the resource curse explains that it’s a
causal relationship between commodity dependency and economic growth.

2.4 Indonesian Case Study

Indonesia has been one of the largest economies that export primary
commodity. Hence, its economy has been vulnerable to global commodity
prices change even though that Indonesia today has decreasing rate as its
manufacture sector has well developed; it is still remain dependent on primary
commodity exports in particular mining and agricultural production
(Tambunan 2010). Both IMF and World Bank used different data set and
method and they found that recent boom in primary commodity prices give
significant positive impact on its economic growth and less evidence of Dutch
Disease and resource curse occurrence on its economy (Lipscomb et al. 2010,
Warr and Aldaz-Carroll 2010). On contrary, when global demand fall during
the global financial crisis 2008 and 2009 Indonesia exports of primary
commodity still in modest stage where the volume of the exports didn’t fall
significantly following the financial crisis and didn’t have any significant
negative impact on its growth (Lipscomb et al. 2010, Warr and Aldaz-Carroll
2010) and Indonesia even showed that its growth higher than its neighbor
countries such as Singapore, Malaysia, Philippines and Thailand during the
crisis in 2008 and 2009 (Tambunan 2010).

Both IMF and World Bank analyze on Indonesia recent growth during the
commodity boom that started in 2000s. IMF used both exploratory data
analysis to analyze the data from the year of 1990 to 2009 and VAR to analyze
the data from 1993 to 2008 to estimate the commodity boom effect on
manufacturing sector and explain the growth during this period. IMF found
16
that (i) there was no strong evidence of Dutch Disease during the commodity
boom and the Dutch disease often associated with the currency real
appreciation where the currency did appreciate by about 14% during the
booms in the late 2003 to mid-2008 but there is no evidence of overvaluation ;
(ii) they did find that other sectors was weaken during the boom such as
manufacturing sector in textiles, wood manufactures and paper producers was
poor and stagnant but it wasn’t cause by the booms but due to the
infrastructure bottlenecks and labor market frictions however, the
manufacturing sector in chemical, machinery and apparatus show a positive
growth as the demand for those products from the booming commodity
sector while some other sectors was in sluggish growth as it has been like that
even before the commodity boom; (iii) the reliance of Indonesia on
commodity sector for its growth does increase Indonesia’s vulnerability to
export price volatility but the terms of trade have been quite stable and its
export increase to 120% in 2003 to 2008 and its growth was stronger compare
to the growth in 1990s with the fact that in 1990s its export boom was driven
by manufacture sector while in 2003 to 2008 was driven by commodity exports
(Lipscomb et al. 2010).

World Bank on the other hand narrowed their analysis both short-term impact
on the year 2005 to 2008 on actual data where the global commodity prices rise
at its peak and long-term impact on year of 2005 to 2020 on projected data
using the Wayang 2005 general equilibrium model but the focus is to be the
short-term impact of commodity booms during 2005 to 2008. They found that
in the short run, the impact of global commodity price increases gives positive
impact on Indonesia economy where the evidence shows that there was a
decline in rural poverty of 4.7% and urban poverty of 2.7% also accentuated
by government cash transfer system to compensate the poor consumers from
international petroleum price rise hence the overall rate of poverty decline for
4.1% and increasing terms of trade. To be more specific, World Bank divided
the analysis on each commodity sector notably energy sector, agricultural
sector and mining sector. In the energy sector, the price rise has adverse
impact on government spending, as Indonesia is net importer of petroleum
products. Indonesia government responded to this condition by increase the
subsidy on this product and cash transfer to the poor consumers to decrease
the adverse impact. In general, the rise in agriculture products benefits the
producer but it harms the consumer of rural and urban areas where the price
rise increases their expenditure on food items but the rural poor income
increase and as the demand for unskilled labor rise. While in the price rise in
the mining sector benefits the most on Indonesia economy. It shows that in
the short run mining sector enhance robust economic growth, which induces
investment in this sector (Warr and Aldaz-Carroll 2010).

In sum, both World Bank and IMF analysis in line with the other research on
other commodity dependent economy show that in the short run, commodity
booms does benefit Indonesia in a way of boosting economic growth,
enhancing exports and increase investment in commodity sector as it is one of
the largest commodity exporter. From the IMF (2010) they found that there is
no resource curse occur in Indonesia as commodity dependence country
instead the commodity prices booms enhance its economic growth so does the
findings of the World Bank (2010) where they argue that the rise in prices of
17
commodity in commodity sector such as Energy does have adverse impact on
its economy and agriculture sector does have adverse impact too but not
significantly hamper its economic growth, on the other hand, the mining sector
gives significant positive impact.

Criticism
The findings of World Bank (2010) didn’t go deeper to the literature debate
regarding the adverse impact of commodity dependency during the booms and
busts. It only shows the magnitude of the impact of commodity booms on
Indonesia economy without related it to the resource curse literature and didn’t
explain what kind of adverse impact that causes by the dependency on
commodity. Moreover, the length of the current data they used was too short
and they try to explain long term impact using projected data until 2020 which
the data accuracy are still to be questioned. Also it doesn’t make any sense
where they didn’t use historical data to explain the trend and make their
arguments on the findings strong enough.

On the other hand, IMF (2010) research methods could be accounted as the
most complete one where they use both exploratory data analysis and VAR.
However, the data used in their research started from 1990 which they didn’t
use any historical data as comparison to the current one and there was no
strong arguments why they start from the year of 1990. Moreover, the resource
curse literature they use to analyze the dependency on commodity only limited
to the Dutch disease and terms of trade issues while there are more than those
two impacts on economic growth. The other weakness of this research is that
they didn’t take into account the government macroeconomic policy which is
also crucial in determining the impact of dependency on commodity on
economic growth.

18
Chapter 3
Indonesia Economy Background
3.1 Introduction
Indonesian economy for the past three decades since 1970 to 1996 has been a
rapid growth economy where as one of the resource abundant countries and
colonized compare to the other same features countries shouldn’t be able to
reach such a tremendous achievement. In 1970 to 1996 Indonesia was one of
the fastest economic growth country in the world that recorded 7.2% annual
growth and the real annual income per capita in 1996 reach nearly four times
than it was in 1970 followed by the high poverty reduction from more than
60% in 1970 to 11% in 1996(Radelet 1999, Temple 2001). While the literatures
in chapter 2 suggest that resource abundant countries tend to have slow
economic growth rather than those with less resources and natural resources
could only bring blessing to those countries with the presence of good
institutions.

This chapter gives brief overview of Indonesia economy. This chapter will be
organize as follow; the 2nd section gives the overview of the structure of the
Indonesia economy and the changed over time to lesser the magnitude of the
resource curse and the 3rd section gives overview of the policy reform during
the booms and bust of primary commodity prices; and the last part draws
conclusions on Indonesia economy background.

3.2 Structure of economy, changes in structure and

economic growth
Indonesia economy structure has been changing from the heavily dependent
on commodity sector to manufactures sector. The structure of Indonesia
economy changing overtime adapting to the condition on the current time
particularly during the commodity prices booms and busts as it main objectives
of the structure reform was to enhance better economic growth and to lesser
the magnitude of Resource curse where Indonesia is one of the resource
abundant and commodity dependence country.

In the aftermath of the independent from Dutch government colonialism, for

the first 20 years since 1945 there wasn’t much room for Indonesia to
implement any set of economic development policy (Kuncoro and
Resosudarmo 2003). Indonesia was still going through a series of political
instability, lack of coherent economic policy and large adverse shock to the
terms of trade which led to the collapse in the early 1960 hence Indonesia was
among the poorest economies in the world in the mid-1960 where inflation
almost 600% and in the end of 1965 it could no longer service its debt service
obligations then later in 1966, the second president, general Soeharto assume
the presidency and instituting the new order which have power for more than
30 years which under his regime, Indonesia achieved remarkable economic
growth as the GDP per capita grew rapidly in most years, incidence of poverty
decline, food self-sufficiency by development in agriculture sector in early
development programs, rapid urbanization, growing literacy rate and declining
infant mortality rate (Temple 2001).

19
After four years Soeharto assuming presidency in 1970 Indonesia economy
performance was very impressive where the annual GDP annual growth rate
was 7.4% until 1981 (Kuncoro and Resosudarmo 2003). Indonesia moved
from net rice importer as rice is the staple food to self-sufficiency in 1985(Hill
2000, Kuncoro and Resosudarmo 2003). However, the opportunity cost was
high in subsidized for the inputs such as fertilizers and the strategy wasn’t
homogeneously successful in all regions worsened by the policy failure in
promoting other cash crops such as palm oil and natural rubber (Muller 1998).

In table 3-1 we see that in the beginning stage of development of Indonesia

economy in 1970, its economy relies heavily on commodity exports where the
primary commodity exports account for 99% of its total exports share base on
the World Bank data (World Development Indicators & Global Development
Finance). Indonesia principal commodity that it exports are fisheries
commodities, coffee, cocoa beans, tea, natural rubber, vegetables oilseeds and
oils, bauxite, copper, tin and nickel (Common Fund for Commodities et al.
2003). Started in 1990s Indonesia export structure changed as the development
plans successfully lifted its dependency on commodity exports to manufacture
exports.

Table 3-1
Indonesia Exports Composition and Annual GDP Growth
Agricultural Ores and
raw materials Food exports Fuel exports metals exports Manufactures
exports (% of (% of (% of (% of exports (% of
merchandise merchandise merchandise merchandise merchandise Annual GDP
Year exports) exports) exports) exports) exports) Growth %
1970 35% 20% 33% 11% 1% 7%
1980 14% 8% 72% 4% 2% 9%
1990 5% 11% 44% 4% 35% 9%
2000 4% 9% 25% 5% 57% 5%
2010 7% 16% 30% 10% 37% 6%
Source: World Bank data (World Development Indicators & Global Development Finance)

In sum, as Indonesia earned foreign exchange from its commodity exports,

they start to develop the manufacturing industries hence in 1980s the
manufactures exports started to grow rapidly where in 1990 the manufacture
exports reach 35% of total exports as shown in table 3-1 until 1996 its exports
reached above 50% and they already reached food self sufficiency in food and
cash crops in the mid-1980s (Hill 2000). In table 1 we also see that the
dependency of Indonesia on primary commodity exports tend to decline since
the rapid development of the manufacturing sector that took significant effect
in the late 1980s and the share of Indonesia exports of primary commodity
keep declining even when the commodity prices booms. Indonesia remarkable
achievement in diversifying exports from primary commodity to manufacture
sector was due to its export oriented industrialization in the aftermath of the
fall in oil prices in the mid-1980s (Aswicahyono and Pangestu 2000).Therefore,
we see how Indonesia economy structure moved from heavily dependent on
primary commodity exports in 1970s to manufacture exports in the late 1980s
by using the windfall revenue of primary commodity exports to enhance the
development of manufacture sector.
20
3.3 Policy toward Primary Commodity
In the early 1960s Indonesia was hostile towards foreign investment hence
many foreign enterprises were taken over by the government and it was also
acknowledged as closed economy. Until 1966, as Soeharto took over the
presidency, he started to liberalize its economy (open economy) and welcome
foreign aid and investment as he realized that Indonesia immense natural
resources cultivation and development on manufacturing sector would have to
depend on foreign investment as they have the technology advantage (Sadli
1972).

The development plans chartered in the four stage five years plans which was
also included the policy needed was outlined in the name of Repelita (Rencana
Pembangunan Lima Tahun) started from 1969 to 1989. In the early stage of
development in 1970 Indonesia manufacture sector was still underdeveloped
hence as a country that rich of natural resources but late industrialized
Indonesia used its factor endowments to achieve better economic growth by
using the commodity windfall revenue to develop its manufacture sector. In
the government development plans stated that one of the objectives of long-
term development was to achieve balanced economic structure in which a
resilient manufacturing sector that would be supported by strong agriculture
sectors (Wie 1987). Agriculture is one of the most important sector for
Indonesia where it is one of the sector that absorb most of the unskilled labor
and sector that earns most of the foreign exchange by raising country’s
earnings from exports and agriculture import substitutions (Daryanto 1999).
Rice supply and price for example is Indonesia national staple food needed to
be secured hence Indonesia built an institution named BULOG to maintain
the price and reserves (Scherr 1989).

The policy toward the primary commodity encompasses controls of the

exchange rate, domestic prices, tariffs barrier and tax. Indonesia succeeded in
achieving rapid economic growth and lessened the adverse impact of Resource
curse during the commodity booms were due to its sound policies. This part
explains the plans and policy stipulated by Indonesia government that
chartered in the four stages five year development plans from 1969 to 1989
during booms and the bust of commodity prices in order to controls the
adverse effect of Dutch disease and gains to support the manufacture sector as
the backbone to boost economic growth. Indonesia policy has been heavily
focused on the agriculture sector as it serves to accommodate its dense
population needs and its contribution towards GDP. Further we will discuss
the government plans and policies towards the agriculture sectors in three
periods.

Period of 1969 to 1979

In 1967 the main policy objective focus on the agriculture sector to attain
agriculture self-sufficiency in rice where in 1970, Indonesia focus more on the
earning of non-oil exports which is the agriculture. Even though the price of
agriculture commodity was unstable and unfavorable, Indonesia promote its
main agriculture crops exports such as rubber, palm oil, coffee, tea, pepper and
tobacco with the hope that the successful strategy used in attain rice self-
sufficiency would also worked in the other agriculture commodity (Barbier
1989). The first and second Repelita was in 1969 to 1979 which was
21
concurrence with first commodity prices boom started in 1970s precisely in
1973 where all the prices of all primary commodity rose. Both of the policy
and plans were almost the same which prioritize the development of
manufacturing sector that support the agriculture sector namely the industries
that produce agriculture equipment, industries that process more domestic raw
materials that foreign and produce import-substituting products (Wie 1987).
Hence, during the decade, huge amount of foreign exchange flow into
Indonesia which comes from foreign investments and revenues of both oil
exports and agriculture which caused Indonesia currency to be overvalued as
Indonesia exports was dominated by the primary commodity. Also, many
traditional export taxes that removed and reduced in 1976 and 1978 and the
policy towards the exchange rate was managed hence the government kept the
nominal exchange rate constant from 1971 to 1978 and use most of the
foreign revenues to pay foreign loan of Pertamina (Indonesia state own oil and
gas company) in 1970s to sterilize and in 1978 an extensive protective
devaluation was carried out to prevent both tradable and non-tradable sector
prices from falling hence it has positive impact on tradable sector particularly
in manufacturing sector (Usui 1996, Scherr 1989).

In the early of 1970s food security was major concern of Indonesia

government as the world food crisis encourage Indonesia to pursue self-
sufficiency in rice hence the second Repelita was to promote the agriculture
sector particularly rice by giving subsidy for the fertilizers and price
stabilization through Bulog (Françoise 2010, Bautista 1990, Bautista and San
1998). The trade policy during this period until the mid-1980s was more
inward looking, government taxed or banned some traditional exports in order
to protect its domestic prices and used part of the windfall revenue from the
oil price hikes to pursue self-sufficiency in rice and investment in state own
enterprises in the import substitution manufacturing industries where it
responded to the improvements in the TOT with a series of trade restricting
importing substitution policies to protect those traded goods that harmed by
the Dutch disease effects of the oil booms (Fane and Warr 2008).

Period of 1979 to 1989

Under the first Repelita that boost the development of agriculture supporter
sector which increase the productivity of the agriculture sector, Indonesia rice
production exceed its domestic consumption in 1984 (Barbier 1989). The third
and the fourth Repelita that focus towards the development of manufacture
sector was started in the end of 1979 to 1989. The third Repelita was designed
to boost the industries that process domestic raw materials into manufacture
products with the hope that these local products could decrease the needs of
import products. It also set up to support the fourth Repelita which focus on
the objective of the whole development plans which was to move into
industrialization to expand its manufacture sector as to reduce the dependency
on commodity driven growth (Wie 1987). In instance, the trade policy was
reformed as the oil price fall in 1982 and international recession which caused
Indonesia economy to slow down hence Indonesia started to liberalized its
economy and opening up the economy aimed to promote the manufacturing
sector (Wie 1987, Jacob 2005) followed by the second devaluation carried out
in March 1983 after high inflation in 1978 to 1983 and declining terms of trade

22
for commodity sector after the global commodity prices declined (Warr 1986,
Gelb 1986).

When the oil price fall in the mid-1980 some oil exporting countries abandon
the attempt to open its economy, Indonesia in contrast kept opening its
economy but raise its trade barriers by imposing exchange controls and
tightening import licensing, it also cut public spending and devaluate its
currency to protect the non-oil exports sector (Fane and Warr 2008). During
this period the fiscal revenue was declining hence the irrigation development
expenditure was reduced together with the subsidies for fertilizers and in May
1986 the government introduced the duty drawbacks and exemption on
imports for exports products with the intention to boost the manufacture
sector (Bautista 1990, Wie 2006).

Period of 1989 to 1999

In this period, Indonesia policy towards commodity focus more on the palm
oil where Indonesia is the second largest palm oil producer after Malaysia
(Piermartini 2004) and it is one of Indonesia staple food. Following the trade
liberalization policies, Indonesia lifted up all palm oil trade restrictions,
including domestic prices and the quantity for exports hence Indonesia exports
in the world market for CPO increased significantly which cause the domestic
price to rise. As the exports overwhelm, the government concerned with the
rising price of palm oil products hence the government set a new policy that
imposed export taxes on palm oil products in 1994 to 1997 (Hasan et al. 2001).
The tax policy on palm oil export was to tax windfall exports during booming
periods. However, this tax policy also has negative impact on the other sector
notably the coconut oil sector. The taxation cause the palm oil producer to
divert their focus from exports to domestic market with lower price where it
competed with the coconut oil hence the coconut oil producers move more
towards exports market as they didn’t taxed since 1991 and also the
profitability in exporting crude coconut oil was more than domestic market
(Marks et al. 1998).

The tax policy imposed by the government on the commodity exports

particularly in the agriculture sector was to protect the domestic prices as
agriculture sector plays main role in Indonesia dense population. Taxes on the
booming sector has two implications where first it was to protect the domestic
prices from rising too much and the second was to increase government
revenue that would allow the government to allocate the revenue to productive
sector.

Period of 2000 – 2010

Before going further discussing the commodity export policy of Indonesia in
2000, it is wise to convey that the Asian crisis brought a huge change to
Indonesia economy. In April 1998 as agreement with the IMF, Indonesia cut
the exports tariff of 34 commodities and cut the complex process related to
the exports tax payments. As the objectives was to recover its economic
growth and increase the foreign reserves, Indonesia boost its exports by reduce
the taxes of forestry commodities of 20% at the end of 1998 and another 25%
at the end of 2000 but on the on the other hand, Indonesia imposes taxes on
cocoa and palm oil products to ensure an adequate supply and domestic price
23
stability. Then in 2005 Indonesia imposed export tariffs on raw skins for 25%,
white tanned hides (20%) and coal (5%) and in 2008 exports ban was imposed
on unprocessed rattan then lifted in 2009 (The Economist Intelligence Unit.
2012).

Table 3-2
Policy and Plans Summary
Years Policy and Plans
1969 – 1979  First and second development plans (Repelita)
 Focus on agriculture sector and manufacturing sector
that produce input for agriculture sector
 Attain food self-sufficiency
 Protect domestic market by taxed or banned some
commodity exports
1979 – 1989  Third and fourth development plans
 Development of manufacture sector to reduce the
dependency on commodity sector
 Raising trade barriers by imposing exchange controls and
tightening import licensing
 Duty drawback for imports of manufacturing capital
goods
1989 – 1999  Focus on palm oil exports
 Imposed tax on palm oil exports
 Tax on other agriculture exports to protect domestic
market and earnings to fund other productive sector
2000 – 2010  Tax on agriculture raw materials to protect domestic
market and ensure adequate supply to meet domestic
demand

24
Chapter 4
Analysis
4.1 Introduction
This chapter analyzes the data of global primary commodity prices, Indonesia
GDP growth and GDP by sector, export and import structure and principal
primary commodity export by categories. The first section analyzes to what
extent does Indonesia economy growth depend on primary commodity
production and the second section analyzes on what is the impact of this
dependency for its growth. The last section is the conclusion of the two
findings. The data analyzed in this paper are the data from 1980 to 2010 which
specifically discuss Indonesia economy growth in details from 1990 to 1996
before the Asian crisis and 2000 after the Asian crisis to 2010 to 2010 to look
at impact of commodity dependency on the recent growth after the Asian
crisis that severely damaged its growth during the crisis. When the crisis in
1997/8 that hit Indonesia economy was a sudden collapse in their economy
which it hurts the economy domestically where it raised the issues of political
instability regarding Soeharto regime, evident of corruption and repression of
all political opposition and internationally where the trade facility such as short
and medium term capital and loan was rejected and fled away from many trade
partners (Sadli 1998). Hence, the period during the crisis will be excluded as it
takes more than this research to specifically focus on the impact of the crisis
on its economy.

The data used in this paper was collected from both national and international
sources. National source is the Indonesia statistic center institution
(BadanPusatStatistik) and international sources are the World Bank database,
UNCTAD statistics and UNComtrade.

4.2 Indonesia dependency on primary commodity

exports and imports
4.2.1 Dependence on commodity exports
Base on the data of UNCTAD commodity year book, Indonesia principal
commodity that it exports are fisheries commodities, coffee, cocoa beans, tea,
natural rubber, vegetables oils and oilseeds, bauxite, copper, tin and nickel. In
the early 1970s Indonesia exports were entirely dominated by the primary
commodity because of its early development stage, the manufactures sector
was still underdeveloped. However, as Indonesia earned foreign exchange
from its commodity exports, they start to develop the manufacturing industries
hence in the late 1980s the manufactures exports started to grow rapidly until
today.

Indonesia in the early development stage in 1970s was heavily dependent on

the commodity sector for its exports earnings where as shown in table 2 that
the share of total merchandise exports was primary commodity exports which
was 98% from total merchandise exports. Even though in 1969 Indonesia
government had set development plans which focus on manufacture
development, the growth of manufacturing sector was still in its early stage of
25
development in the early 1980s hence its exports earning was still depending
on primary commodity where the share of primary commodity exports still
hold 86% in average in 1980s of total merchandise exports. Indonesia exports
composition started to change from heavily dependent on commodity sector
to manufactures exports in the late 1980s. Started in 1990 to 2010, Indonesia
exports share didn’t dominated by commodity sector as much as it was in the
1970s and 1980s where more than 50% of total merchandise exports were
manufactures exports.

Figure 4-1 Global Commodity Prices and Share of Exports (Percentage Change)
120% 80%

100% 60%

80% 40%

60% 20%

40% 0%

20% -20%

0% -40%
1970 1975 1980 1985 1990 1995 2000 2005 2010

Manufacture Exports (% of merchandise exports)

Primary Commodity Exports (% of merchandise exports)
Price index - All groups (in terms of current dollars)

Source: Author’s own illustration base on World Bank data (World Development Indicators &
Global Development Finance) and UNCTAD Statistics

Figure 4-2 Food Commodity Volume Exports and Prices (Percentage Change)
100%

80%

60%

40%

20%

0%
1980 1985 1990 1995 2000 2005 2010
-20%

-40%

Food Commodity Exports Food Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on World Bank data (World Development Indicators &
Global Development Finance) and UNCTAD Statistics

26
 Figure 4-3 Tropical Beverages Volume Exports and Prices (Percentage Change)
80%

60%

40%

20%

0%
1980 1985 1990 1995 2000 2005 2010
-20%

-40%

Tropical Baverages Exports

Tropical Baverages Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on World Bank data (World Development Indicators & Global
Development Finance) and UNCTAD Statistics

Figure 4-4 Vegetables Oils and Oilseeds Volume Exports and Prices (Percentage
Change)
250%

200%

150%

100%

50%

0%
1980 1985 1990 1995 2000 2005 2010
-50%

-100%

Vegetables Oils and Oilseeds Exports

Vegetables Oils and Oilseeds Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on World Bank data (World Development Indicators & Global
Development Finance) and UNCTAD Statistics

Figure 4-5 Agriculture Raw Materials Volume Exports and Prices (Percentage Change)
60%

40%

20%

0%
1980 1985 1990 1995 2000 2005 2010
-20%

-40%

-60%

Agriculture Raw Materials Exports

Agriculture Raw Materials Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on World Bank data (World Development Indicators & Global
Development Finance) and UNCTAD Statistics

27
 Figure 4-6 Minerals, Ores and Metal Exports Volume Exports and Prices (Percentage
Change)
100%
80%
60%
40%
20%
0%
1980 1985 1990 1995 2000 2005 2010
-20%
-40%
-60%

Minerals, Ores and Metals Exports

Minerals, Ores and Metals Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on World Bank data (World Development Indicators & Global
Development Finance) and UNCTAD Statistics

Prior to 1999
In the early 1970s Indonesia exports were entirely dominated by the primary
commodity as shown in figure 4-1 that Indonesia exports were mainly
commodity exports and explained in table 1 that its exports mostly was the
agriculture raw materials and fuel where fuel exports accounted for two-third
of total exports earnings in 1982 when the manufactures sector was still
underdeveloped and it was only accounted for 1% of total merchandise
exports. As oil price fall rapidly in the late 1982, Indonesia government
responded to the price fall by introducing stabilization program to reduce
vulnerability to the external shocks but even before the adjustment program.
Indonesia has gone through a series of structural change where the share of
agriculture in GDP declined from 40.7% in the early 1970s to 29.8% in the
early 1980s as also the mining sector fell from 11.4% to 8% while the
manufacturing sector increased from 9.6% to 15.4% (Thorbecke 1991).

Indonesia begun to move its development strategy from focusing on the

commodity sector to the manufacture sector to reduce the magnitude of
Dutch disease by expanded the non-oil sectors and devaluation (real
appreciation caused by the booming oil prices) hence, the reform shifted
Indonesia from import substitution in agriculture particularly rice to export
promotion for its manufacture products supported by currency devaluation in
March 1983 and September 1986 thus during this decade, Indonesia showed
improvement in the total factor production performance of manufacture
sector and exports started to be dominated by manufacturing exports (Temple
2001) where in 1975 to 1985 TFP growth of manufacturing was only 0.3% and
in 1986 to 1995 was 4.8% (Timmer 1999).

Hence, the share of manufactures in total merchandise export rose from 7% in

1983 to almost 50% in 1992 where the extreme shift was caused by both policy
reform (internal) notably currency depreciation and the fall of global
commodity prices (external) that Indonesia exported (Crude Oil and Natural
Rubber) and in Indonesia 1980 banned exports on unprocessed logs, which
raised exports of plywood (manufactured logs) (Temple 2001). The other

28
positive impact was reducing the dependency of Indonesia economy growth in
primary commodity sector notably oil and gas taxes revenue (Kuncoro and
Resosudarmo 2003).

Therefore, in the late 1980s until the onset of Asian crisis in mid 1997 the
boom in Indonesia economic growth was mainly caused by the rapid growth
of its export from crude oil exports to non-oil primary commodity exports and
particularly manufacturing that was the most influential factor that boosts its
growth (Athukorala 2006).

From the figure 4-2 to 4-6 we see that Indonesia principal commodity exports
volume started to rise in the mid-1985 to 1990. The exports were also
supported by the rise of the prices except for the tropical beverages
commodity. Started in 1990 until 1997 most of those commodity exports
volume were declining as they focus more on the manufacturing sector exports
which also confirmed by figure 2 that the share of total merchandise exports
value was dominated by the manufacturing sector exports. Manufacture sectors
started to soar in the share of exports started in the 1990 where it had more
than 50% of total merchandise exports in the mid-1990s. Base on the data we
see that Indonesia reliance on commodity exports decrease over years which it
was due to the development plan (Repelita) that it objective was to develop its
manufacture sectors.

After 1999
In the aftermath of Asian crisis, Indonesia exports recovery was still sluggish
for the next 5 years. The average annual growth of non-oil commodity exports
from 2000 to 2004 was only 8.7% compared to the pre-crisis period in 1990 to
1996 while the manufacture exports average growth rate decline from 19.6% in
pre-crisis period to 7.5% in the aftermath of the crisis(Athukorala 2006). As
confirm in table 5 data shows that total merchandise exports value didn’t rise
significantly and fall in 2001. In figure 4-2 to 4-6 they show that in the early
2000 the commodity prices has small contraction so even Indonesia
commodity exports did increase but the value didn’t support by the rise of
prices hence Indonesia exports during the early 2000s was disappointing.
Moreover, when prices started to rise again in the late 2002 Indonesia failed to
boost its commodity exports to earn the windfall revenue from the price rise.

Started in 2005 onwards, the data in figure 4-1 shows that the share of
merchandise exports value of commodity rise gradually until 2010 but the data
in figure 4-2 to 4-6 on the other hand shows that the growth of volume of
commodity exports didn’t rise significantly as much as the value growth except
in the Minerals, Ores and Metal Exports which rise in 2006 but fall after
several years. This suggests that the share of commodity exports value that
exceed the manufacture sector wasn’t due to the rise in volume exports but the
incident of price rises.

The data from the figures and tables shows that there was no strong evidence
of Dutch disease that channels through resource movement from lagging
manufacture sector to booming commodity sector that argues commodity
dependency tend cause a country to undermine manufacture sectors and the
staple trap concept that argues commodity dependent countries would likely to
29
 keep producing raw materials and hinder industrialization process. From figure
4-1 we see how the share of manufacture exports started to rise gradually
started in 1985. Supported also by the data in table 4-1 that shows the share of
manufacture exports were high in the early 2000s but the contraction of the
share in the late 2000s was due to the rise in commodity prices that raise the
percentage value of commodity exports while figure 4-2 to 4-6 shows that the
volume exports of commodity declining.
Table 4-1
Exports Composition in 2000 – 2010
Fuel Ores and
Agricultural Food exports metals Merchan Commodi Manufactu
raw materials exports (% (% of exports (% Manufactures dise ty res
exports (% of of merchan of exports (% of exports Exports Exports
merchandise merchandi dise merchandis merchandise (current Value (% Value (%
Year exports) se exports) exports) e exports) exports) US$) Change) Change)
1999 4% 12% 23% 5% 54% 51,243 15% 2%
2000 4% 9% 25% 5% 57% 65,403 25% 28%
2001 4% 9% 26% 5% 56% 57,361 -10% -12%
2002 4% 12% 24% 5% 54% 59,166 5% 3%
2003 5% 11% 26% 6% 52% 64,108 16% 8%
2004 5% 12% 26% 6% 50% 70,767 13% 10%
2005 5% 12% 28% 8% 47% 86,996 33% 23%
2006 6% 12% 27% 10% 45% 103,527 23% 19%
2007 6% 15% 25% 11% 43% 118,013 18% 14%
2008 6% 18% 29% 8% 39% 139,606 27% 18%
2009 5% 17% 28% 9% 41% 119,646 -17% -14%
2010 7% 16% 30% 10% 37% 158,074 41% 32%
Source: World Bank data (World Development Indicators & Global Development Finance)

4.2.2 Dependence on commodity imports

Indonesia as natural resource abundant county rarely imports primary
commodity. Base on the data in UNCTAD commodity yearbook, Indonesia
only imported a few primary commodities such as raw cotton, and sugar and
honey. However, started in 2004 Indonesia became net importer of oil and
effectively in January 2009 suspended its membership in OPEC as its import
of oil exceeds its exports (Energy Information Administration 2011)

Table 4-2
Ten Years Average Share of Commodity Imports Value of Total Merchandise Imports
in 1970 - 2010
Total Merchandise Commodity Imports % of Commodity
Imports Value (in Millions Value (in Current Millions Imports of Total
Year US$) US$) Merchandise Imports

1970 - 1979 4,080 1,127 28%

1980 - 1989 13,476 4,019 30%

1990 - 1997 33,770 8,628 26%

2000 - 2005 48,711 20,733 43%

2006 - 2010 106,080 42,245 40%

Source: World Bank data (World Development Indicators & Global Development Finance)

30
 Table 4-3
Imports Composition in 1990 to 1997
Agricultural Ores and
raw materials Food imports Fuel imports metals Manufactures
imports (% of (% of (% of imports (% of imports (% of
merchandise merchandise merchandise merchandise merchandise
Year imports) imports) imports) imports) imports)
1970 - 1979 2% 14% 6% 2% 76%
1980 - 1989 4% 8% 14% 3% 70%
1990 4.7% 5% 9% 4% 77%
1991 4.7% 6% 9% 4% 76%
1992 5.6% 6% 8% 4% 76%
1993 5.2% 7% 8% 4% 76%
1994 5.6% 8% 8% 4% 75%
1995 6.2% 9% 8% 4% 73%
1996 5.5% 11% 9% 4% 71%
1997 4.7% 9% 10% 3% 73%
Source: World Bank data (World Development Indicators & Global Development Finance)

In table 4-2 and 4-3, it shows that Indonesia only imports small amounts of
commodity in the early 1970s until the late 1990s. Indonesia imports mostly
in food and Fuel where in the 1970s the government import quite large
amount of rice before they achieve food self sufficiency to meet the demand of
domestic market as rice is Indonesia staple food and the import keep continue
until 2004 but later the rice import banned by the government (Warr, 2005).

Table 4-4
Imports Composition in 2000 to 2010

Agricultural Food Fuel Ores and Manufactur Merchand

raw materials imports (% imports (% metals es imports ise
imports (% of of of imports (% of (% of imports
merchandise merchandis merchandi merchandise merchandis (current
Year imports) e imports) se imports) imports) e imports) US$)
2000 7.2% 10.0% 18.5% 3.3% 60.9% 43,595
2001 7.5% 9.9% 18.3% 3.4% 60.8% 37,534
2002 5.8% 11.1% 21.5% 3.1% 58.4% 38,340
2003 5.3% 11.5% 24.1% 2.9% 56.0% 42,196
2004 4.6% 9.7% 25.8% 3.4% 56.4% 54,877
2005 3.5% 8.1% 30.8% 3.1% 54.6% 75,725
2006 3.4% 8.9% 31.5% 3.5% 52.7% 80,650
2007 3.5% 10.6% 29.7% 3.6% 52.6% 93,101
2008 3.0% 7.3% 23.9% 3.9% 61.9% 127,538
2009 2.8% 8.9% 19.8% 3.1% 65.3% 93,786
2010 3.1% 8.5% 20.4% 3.4% 64.5% 135,323
Source: World Bank data (World Development Indicators & Global Development Finance)

31
 Figure 4-7 Food commodity import volume (% Change)
1200% 60%
1000%
40%
800%
600% 20%
400% 0%
200%
-20%
0%
-200% 1980 1985 1990 1995 2000 2005 2010 -40%

Sugar & Honey Imports Volume (% Change)

Food Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on UN commodity trade data and UNCTAD Statistics

Figure 4-8 Agriculture raw materials imports volume (% Change)

50%
40%
30%
20%
10%
0%
-10% 1980 1985 1990 1995 2000 2005 2010

-20%
-30%

Raw Cotton Imports Volume (% Change)

Agriculture Raw Materials Commodity Prices (in terms of current USD)

Source: Author’s own illustration base on UN commodity trade data and UNCTAD Statistics

Figure 4-9 Fuel imports volume (% Change)

80%
60%
40%
20%
0%
1980 1985 1990 1995 2000 2005 2010
-20%
-40%
-60%

Volume of oil imports (% Change)

Crude petroleum, average of UK Brent (light)/Dubai (medium)/Texas (heavy) equally weighted

($/barrel)

Source: Author’s own illustration base on UN commodity trade data and UNCTAD Statistics

From the data above in table 4-7 and 4-8, it shows that Indonesia imports in
agriculture raw materials and ores and metals relatively stable over the years on
average below 6% share of total merchandise imports except in the 2000 and
2001 where both the value and volume of imports in agriculture raw materials
increase quite high but later in 2002 to 2004 the value of the imports was still
high due to the rise of the prices but then in 2005 it gradually decrease.

32
Imports of food also relatively stable on average below 10% in 1990s.
However, there was increment in food imports in 2000s even in 2004
Indonesia stipulated rice imports ban it didn’t significantly reduce the share of
food imports value where in figure 8 we see that food imports was declining
but the prices was high.

On the other hand, imports of fuel keep increasing from average on 1990s
below 10% to above 20% in 2000s. Increasing imports of fuel is due to the
increasing domestic demand of fuel which also propelled by the subsidy on
fuel that cause the domestic price of fuel to be low. Indonesia imports of fuel
was due to the increasing amount of motor vehicles hence the demand for fuel
keep increasing and also cause by the subsidy that kept the fuel price low
(Beals 1987). The increment of the share of fuel imports value was also due to
the price rises in the early 2000s.

Indonesia imports over the decades have been dominated by the manufactures
imports. Even though Indonesia has developed its manufactures sector,
Indonesia still dependent on imports of technological product particularly
advanced technology and Indonesia also recognized as net importer of
technology (Madanmohan et al. 2004).

In sum, the increment in import value of commodity both oil and non oil was
due to the rise of global commodity prices instead of the rise in volume per se.
The volume of commodity imports only raises in several years such as in the
early 2000s but later it decline but this volume increase propelled by the rise of
the prices hence causes the value imports to rise.

4.3 Impact of commodity dependency on economic

growth
4.3.1 GDP growth and terms of trade
Terms of trade and GDP growth has been argued by many economists to be
closely related and plays key role in explaining growth performance of a
country (Barro and Sala i Martin 1995, EASTERLY and REBELO 1993,
Fischer 1993). Country that specialize in primary commodity would likely to
have deterioration in the terms of trade because the primary commodity prices
tend to fall relative to those of manufactures where the country will become
producer of increasingly cheaper primary commodity and consumer of
increasingly expensive manufacture (Blattman et al. 2003). Hence, this part
would like to analyze on Indonesia GDP growth rate and the change in terms
of trade and see if the long term deterioration of terms of trade that hamper
economic growth imply to Indonesia.

33
 Figure 4-10
Net Barter TOT Index % Change and Annual GDP Growth %
60.0% 15%
50.0%
10%
40.0%
30.0%
5%
20.0%
10.0% 0%
0.0%
1980 1985 1990 1995 2000 2005 2010 -5%
-10.0%
-20.0%
-10%
-30.0%
-40.0% -15%

Net barter terms of trade index % Change

Annual GDP Growth % Change (constant 2000 US$) in Million
Linear (Net barter terms of trade index % Change)

Source: Author’s own illustration base on World Bank data (World Development Indicators &
Global Development Finance) and UNCTAD Statistics

Indonesia in the early development stage in the early 1980s still heavily
dependent on primary commodity exports hence in figure 4-10 we see that
there was deterioration of net barter TOT from 1980 to the mid-1980s and
caused the economic growth to be volatile and propelled by the import pattern
where Indonesia has been importing more than 50% of manufacture products
for a long period.

The data used in figure 4-10 started from 1980 due to the availability of
UNCTAD statistics data. In figure 5 we see that the TOT fell dramatically
during the end of oil booms in the mid-1980 when the economy still depend
so much on oil exports and its GDP growth also fell in 1982 and the mid-
1980s where high dependency on oil cause the terms of trade to be highly
volatile (Backus and Crucini 2000). After the oil boom era in 1982, the growth
in manufacturing sector that boosted by the manufacture exports has played an
important role as the source of export revenue and also as the major engine of
Indonesia economic growth in the late 1980s (Wie 2010). Since then, as shown
in table 9 that in 1990s the manufacture exports share of total merchandise
exports was on average 47% and figure 5 shows that the TOT started to rise in
the late 1980s and Indonesia economic growth became more stable in 1990
onwards until 2010 as the TOT improve.

In sum, Indonesia economy growth was volatile during the early 1980s as they
were still heavily dependent on primary commodity exports revenue. However,
in the late 1980s until 2010 as its exports was dominated by the manufacture
sector, the net barter TOT index percentage change show upward trend and
the annual GDP growth rate became less volatile and more stable as Indonesia
became less dependent on commodity exports and the growth in
manufacturing sector. Hence, from the figure 4-10 above we see that there is
34
no evidence of long term deterioration of terms of trade in Indonesia as
commodity dependence country instead the trend was upward sloping.

4.3.3 GDP growth and exports growth

In 1973 and 1979 when the oil price booms, Indonesia gain tremendous
revenue from the shocks and it was accounted for ¾ of its exports revenue
(Warr 1986, Jacob 2005). The oil exports were the engine of growth for
Indonesia economy during this period (Kuncoro and Resosudarmo 2003) and
the revenue created by the oil booms were used to finance the development
strategy which emphasized on the development in agriculture sector,
infrastructure, education and capital intensive industry and the highest
proportion of the revenue was used in the agriculture sector hence the
technical progress in agriculture played significant role in Indonesia economic
growth (Temple 2001). As shown in table 4-5 that during the year of 1970 to
1979 Indonesia economic growths on average was 8%, where more than 50%
of total merchandise exports were fuel exports and 22% was agriculture raw
material exports.

During 1970s to 1980s Indonesia economic growth was vulnerable to the

global commodity prices as it was still heavily dependent on commodity
exports for exports earnings particularly fuel exports hence what happened in
1980s was oil exports revenue decline as there were declining oil price in 1982
and sharp falls in the next 3 years followed by the world declining demand of
agriculture products in 1980 hence in 1982 Indonesia’s growth rate was only
1% (Kuncoro and Resosudarmo 2003)and sharp rise in current account deficit
(Temple 2001). The rise in the prices of commodity did have positive impact
on the volume of Indonesia exports and economic growth. In the period of
1970 to 1979 Indonesia economic growth was vulnerable to the changes in
primary commodity prices but its average growth during this period was 8%
where in this period Indonesia exports mostly agriculture raw material and fuel
while the manufacture only small proportions of the total exports but
Indonesia GDP growth was high. In the period of 1980 to 1989 Indonesia
GDP growth on average was 6% which due to the fall of fuel prices and the
manufacture sector exports that was still in small proportion of total
merchandise exports.

As shown in figure 4-11 that its exports in the 1970s keep rising particularly
when the first oil price boom in 1973 and 1974, its total exports value rose
significantly where it was contributed mostly by the fuel exports. Later when
oil price fall started in 1982 and dramatic fell in mid-1980s its exports growth
performance was disappointing where it kept falling during this period. Hence,
Indonesia GDP growth during this period was vulnerable following the
commodity prices change particularly oil prices that cause the exports
performance to be volatile.

35
 Table 4-5
Annual GDP Growth and Exports Share
Annual
Agricultural Ores and GDP
raw materials Food Fuel exports metals Manufactures Growth %
exports (% of exports (% of (% of exports (% of exports (% of (constant
merchandise merchandise merchandise merchandise merchandise 2000 US$)
Year exports) exports) exports) exports) exports) in Million
1970 - 1979 22% 13% 59% 5% 2% 8%
1980 - 1989 8% 9% 63% 5% 15% 6%
1990 - 1997 5% 11% 29% 5% 47% 8%
2000 - 2005 5% 11% 26% 6% 53% 5%
2006 - 2010 6% 16% 28% 10% 41% 6%
Source: World Bank data (World Development Indicators & Global Development Finance)

Figure 4-11 Exports Growth and GDP Growth

140% 15%
120%
10%
100%
80% 5%
60%
0%
40%
20% -5%
0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 -10%
-20%
-40% -15%

Total Exports Value % Growth (current US$)

Annual GDP Growth % (constant 2000 US$) in Million

Source: Author’s own illustration base on World Bank data (World Development Indicators &
Global Development Finance)

In the late 1980s until prior to the Asian crisis in 1997/8 Indonesia export
growth performance was relatively stable compare to the prior period as the
manufacture exports value accounted for more than 40% of total merchandise
exports as also its GDP growth performed better with less volatility and better
growth. Indonesia commodity exports value started to fell during this period
due to the unfavorable global commodity prices hence reduce Indonesia
exports revenue from commodity sector but its growth was high during this
period due to the manufacture exports that boost its exports earnings. Hence
its shows that Indonesia growth has been less dependent on the commodity
sector as the manufacture sector has been well developed and dominated the
total share of merchandise exports.

In the year of 2000 to 2005 we see that Indonesia growth was 5% on average
and the share of manufacture exports was more than 50%. Even though the
share of manufacture exports dominates the total merchandise exports, the
36
slow growth was due to the recovery of the aftermath of the Asian crisis. Then
in 2006 to 2010 we see an improvement of Indonesia growth which on average
6%. In this period the share of manufacture exports value decline from the
previous period which was due to the rise in commodity prices.

Indonesia growth pattern has been following the exports growth pattern.
However, in the recent years of 2000s Indonesia growth pattern stopped
following the exports. Indonesia GDP growth in the recent years has been
consistently due to the strong domestic demand growth where over the past 10
years Indonesia domestic demand exceed exports demand hence even during
the global financial crisis in 2008 where the global economic downturn cause
Indonesia exports volume to fell by 20% (Elias and Noone 2011), it didn’t
significantly impact its growth performance as shown in figure 6.

4.3.3 GDP growth by Sector

The growth of manufacturing exports has not performed quite well in the early
1980s hence its exports was still heavily dependent on commodity sector
exports as shown in figure 4-1 above. During the early stage of development in
the early 1970 Indonesia economic growth which still heavily dependent on
commodity exports was vulnerable to the change in commodity prices as
shown in figure 4-12 where from 1970 until the late 1980s its growth moved
following the changes of commodity prices. Indonesia economic growth
started to perform well and relatively stable in the late 1980s was due to its
growth in manufacturing. In figure 4-12 below we see Indonesia growth rate
relative to the changes of global primary commodity prices from 1970 to 2010.

Figure 4-12
GDP Annual Growth and Global Commodity Price
15% 40%

10% 30%

20%
5%
10%
0%
1980 1985 1990 1995 2000 2005 2010 0%
-5%
-10%
-10% -20%

-15% -30%

Annual GDP Growth % Change (constant 2000 US$) in Million

Commodity price index - All groups (in terms of current USD) % Change

Source: World Bank data (World Development Indicators & Global Development Finance)

Indonesia growth rate in the early 1970 to 1985 was vulnerable to the changes
of global commodity prices as the manufacture exports still under 20% as
shown in table 4-5 and figure 4-12. However, in 1986 onwards base on World
Bank Data the manufacture exports was above 25% and keep increasing until
1996 where the exports of manufacture reach above 50% of total merchandise
exports hence Indonesia GDP annual growth rate was steady in 1990s without
any significant fluctuations even though the price of global commodity prices
fall drastically that used to have significant impact on the growth rate in 1970
until the late 1980s. The stable growth in the 1990s was due to its exports that
37
dominated by the manufacture sector. The most interesting part is in the end
of 1980s when global commodity prices fell dramatically, the GDP growth rate
on the other hand rose hence it shows that Indonesia strong economy
structure that caused by the rapid development in the manufacturing sector
reduce Indonesia economy growth vulnerability on global commodity prices
change. However, during the Asian Crisis in 1997/98 the manufacturing sector
in particular the non-oil and gas manufacturing sub sectors declined
dramatically (Wie 2010) hence Indonesia recovered from the crisis by
depending on its primary commodity exports which like most developing
country in the early stage of development that relied upon primary products
(Margono and Sharma 2006). In the aftermath of Asian crisis in 2000
Indonesia economy started to recover even though many manufacture firms
collapsed during the crisis, the economy achieve remarkable growth within 3
years. In the early 2000s Indonesia manufacture exports recorded more than
50% of total merchandise exports value but this value declined over years
where in 2010 the share of manufactures value of total merchandise exports
products only 37% due to the rise in commodity prices. Its economic growth
didn’t show any significant growth achievement but slightly upward trend
constant growth for a decade.

This section focus on the GDP growth by sector in two decades from 1990 to
1996 before the Asian Crisis when the manufacturing sector developed rapidly
hence Indonesia growth became less dependent on commodity sectors and
from 2000 when Indonesia just recently recover from the crisis and achieve
quite stable growth within the years to 2000s. The data used in this section are
from Indonesia statistic center using the constant 2000 price. Due to the
availability of both international and national data, Indonesia GDP growth by
sector data only available from 1990 to 2010. Which also what this paper
would like to focus is on the recent growth.

Figure 4-13 Sectors % growth contribution to GDP

15%
10%
5%
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
-5%
-10%
-15%
-20%
-25%

Agriculture, Livestock, Forestry, and Fishery % Growth

Mining and Quarrying % Growth
Manufacturing Industries % Growth

Source: Badan Pusat Statistik (Indonesia Central Agency on Statistics)

Period 1990 to 1996

According to the figure 4-13, in the early 1990s, Indonesia GDP that
contributed by the primary commodity sector percentage keep declining in
years and this is also confirmed by the data of percentage of merchandise
38
exports by the World Bank in section 4.1 that the reliance on commodity
exports also keep declining, even though that there was a commodity prices
rise in 1994, there was no significant increase of the commodity sector exports.
Surprisingly, even when the commodity price raised in 1994 the manufacturing
industries growth contribution to GDP increased.

The period of 1990 to 1996 clearly shows that there was no evidence of
negative impact from the commodity price rise in 1994 and Indonesia earn
much from the boom as it contribute a quarter of Indonesia GDP from its
commodity sectors without undermined the manufacturing sector. Lipscomb
et al (2010) points out that Indonesia commodity exports grew faster than the
manufacture in the late 1990s which was due to the Asian crisis where many
manufacture industries collapsed but in the early of 1990s its exports was
dominated by the manufacture sectors. However, if we confirm with the data
shown in figure 4-13 above, we see that in the early to the mid-1990s
manufacture sectors contribute a constant value to GDP while the commodity
sectors value keep declining in years.

Table 4-6 Commodity and Manufacture Sectors Share of GDP

Agriculture, Livestock, Mining and Manufacturing
Years Forestry, and Fishery Quarrying Industries
1990 - 1996 17% 12% 28%
2000 - 2010 14% 10% 27%
Source: Badan Pusat Statistik (Indonesia Central Agency on Statistics)

Period 2000 - 2010

In the second decade, after the Asian Crisis hit Indonesia economy severely,
there was a contraction on its GDP but only within 3 years, its economy
recovers quite significantly. Amazingly, its recovery didn’t contribute by the
commodity sector as much as it was in the early stage development where
Margono and Sharma (2006) says that in the aftermath of Asian Crisis,
Indonesia economy growth started to rely heavily on primary products. The
reliance on primary products during its recovery from the crisis didn’t lead to
any resource curse that undermine its manufacture sector and hamper its
growth. When the crisis hit Indonesia, its economy supposed to be dropped to
the lowest point propelled by the foreign investment that fled away during the
crisis. On the contrary, the growths of manufacture sectors turn out to be
higher than the commodity sectors in the next 3 years. The commodity sectors
percentage in GDP declines and hit the lowest point in 2010. Even though
that there was an increase in commodity value exports as boosted by the price
rise, manufacture sectors still hold higher proportion in GDP. From the data
in table 4-6 we can conclude that Indonesia GDP growth today doesn’t
dependent so much on commodity sectors like it was in the 1970s to 1980s.

There was indeed increased in the value of commodity exports due to the price
rise but the volume was narrow where it caused by the low supply response
cause by the low level investment in commodity sector particularly in the
mineral sector where Indonesia is one the countries with high mining potential
(Warr and Aldaz-Carroll 2010). Hence, the contribution of commodity sector
towards GDP was decrease in years where Indonesia should have been able to

39
take the advantage of this external shock to achieve better growth like it was in
the late 1980s than it was recently.

40
Chapter 5
Conclusion and Policy Implications
The objectives of this paper is to analyze to what extent does Indonesia
economy growth depend on primary commodity production and what is the
significant of this dependency for its growth. In the early development stage
during 1970, its economy was heavily dependent on the commodity exports
hence its growth tend to follow the trend of the global commodity prices.
However, as the four stage of development plans took place which the
objective of this plan was to achieve the food self-sufficiency by boosting
development of manufacture sectors to produce capital goods that support the
agriculture sector and later diversify its exports from primary commodity
exports to manufacture exports with its advantage of abundant cheap labor
compare to those developed countries.

Indonesia economic growth has different source led growth. In 1970s to 1980s
its growth was driven by commodity sectors, in 1990s until 1996 its growth
was mainly driven by the manufacture sectors while in 2000 onwards its
growth was driven by both commodity and manufacture sectors.

Period 1970s to 1980s (Commodity led growth)

The world food crisis in 1970s motivated Indonesia economy to achieve the
food self-sufficiency as their main objective. Considering their dense
population and early development stage, it was unwise to import foods to meet
the domestic demand where prices tend to be more expensive than the
domestic prices. Hence, in the early development stage in early 1970s,
Indonesia used its factor endowment which is its abundant natural resources
for exports earning to develop the manufacture sector under the four five
years development plans (Repelita).

In the early 1970 the export was mostly primary products notably agriculture
and fuel products. However, started in 1974 when the oil price boom,
Indonesia merchandise exports was dominated by the fuel exports while the
agriculture and ores and metals exports decreasing as the price of the latter two
didn’t rise as much as the oil prices. The price rise caused windfall revenue for
oil-exporting countries which expected to favor economic development in
these countries (Usui 1997) and Indonesia was one of it. In line with its
development plan where Indonesia use it oil windfall revenue to run the
development plans that focus on the development of manufacture sector.
During the period of 1970s, Indonesia economic growth on average was 8%.
The pattern of Indonesia export kept continuing as the price of oil keep rising,
without any significant changes yet in the manufacture sector. In this period of
time, Indonesia economy was vulnerable and very likely to follow the
fluctuations of commodity price changes relative to its growth. Later, in the
early 1980s, when the oil price boom ends, Indonesia economic growth
contracted for several years but later in the late 1980s its exports started to be
dominated by the manufacture sectors hence its economy grow rapidly and
became less vulnerable to the changes in global commodity prices.

41
The oil price booms during the period of 1970s to 1980s didn’t show any
significant Dutch disease impact on its economy. Dutch disease channels
through resource movement to booming sector which undermines the
manufacture sectors and currency overvaluation. There was currency real
appreciation during the period of oil booms but there was no evidence of
overvaluation where the government sterilized substantial amount of the
windfall revenue to avoid currency overvaluation (Mikesell 1997) while as
shown in the data in chapter 4 the manufacture sectors gradually dominate the
exports several years after the fall in oil prices.

Period 1990 to 1996 (Manufacture led growth)

In 1990 to 1996 Indonesia achieve remarkable economic growth which on
average 8% GDP growth as its manufacture accounted for more than 40% of
total merchandise exports and during this period the price of commodity was
unfavorable where the prices fell.

This period proved that the dependency of commodity sectors in the long
term didn’t have significant adverse impact on its economic growth. The long
term deterioration in terms of trade didn’t occur in its economy. On contrary,
the terms of trade became less volatile in this period and Indonesia economic
growth was on average 8%.

Period 2000 to 2010 (Domestic demand led growth)

After the Asian Financial crisis Indonesia economy recover significantly only
within 3 years which also coincidently was the time when the global
commodity prices rise. As shown in chapter 4, during the recent growth from
2000 to 2010 the primary commodity sectors contribution towards the GDP
slowly declining. While the value of commodity exports exceed the
manufacture exports was due to the price rise.

During this period, Indonesia economic growth was less prone to the changes
in terms of trade. The terms of trade contracted during the global crisis where
there was a fall in global demand of exports but Indonesia growth rate
contracted only for a small amount which was due to its strong domestic
economy that made Indonesia economy rely less on exports market (Elias and
Noone 2011).

In sum, the findings from this research is in line with the arguments where the
changes in global commodity prices continue to have an impact on Indonesia’s
economic growth, but this has declined over time because the industry-
oriented exports have increased and substituted the decline in commodity
exports particularly in the year of 1990s when commodity prices was not
favorable but its growth was high and the recent rise in Indonesia’s economic
growth rate in 2000s can be attributed to the rise in the prices of its primary
commodity exports which cause the value of primary commodity exports to
rise significantly even though the volume didn’t increase much during the
booms but it benefits Indonesia economy without undermine its manufacture
sector.

42
Indonesia dependency on commodity sectors for a long period didn’t show
any significant Resource curse adverse impact that hampers its growth on the
other hand it enhance its growth by boosting the growth of its manufacturing
sector. In the early stage development in 1970s until 1980s Indonesia reliance
on commodity sector was due to the late industrialization and lack of resource
to boost manufacture sector hence Indonesia used its commodity sector
exports revenue to run its development plan that focus on manufacture sectors
development. The remarkable development evidence was in 1990s when the
growth was boosted by the manufacture sectors. Indonesia recent economic
growth has been relying less on commodity sectors where its volume exports
keep declining.

Indonesia success in avoiding resource curse adverse impact was due to the
good management in commodity windfall revenue by using the revenue on
development plans notably the four stages five years development plan
(Repelita). Which is in line with what Collier et al (2010) suggest that when
commodity booms end, windfall revenue should be converted to high return
domestic investment and enable the revenue to foster growth by using it on
public investment spending that rise productivity of private capital.

43
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