Bulletin of Indonesian Economic Studies

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Structural Change and Regional Economic Growth

in Indonesia

Andriansyah, Asep Nurwanda & Bakhtiar Rifai

To cite this article: Andriansyah, Asep Nurwanda & Bakhtiar Rifai (2023) Structural Change and
Regional Economic Growth in Indonesia, Bulletin of Indonesian Economic Studies, 59:1, 91-117,
DOI: 10.1080/00074918.2021.1914320

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 Bulletin of Indonesian Economic Studies, Vol. 59, No. 1, 2023: 91–117

STRUCTURAL CHANGE AND REGIONAL

ECONOMIC GROWTH IN INDONESIA#

Andriansyah
ASEAN+3 Macroeconomic Research Office, Singapore

Asep Nurwanda*, Bakhtiar Rifai

Ministry of Finance, Indonesia

This paper investigates the relationship between structural change and regional
economic growth in Indonesia. We utilise the shift-share method for 30 provinces
over the period 2005–18 as a measure of structural change. We demonstrate that struc-
tural change has occurred across provinces, even though it is slowing towards an
agricultural–services transition. By employing panel data models, this study shows
that structural change is a significant determinant of growth. Structural change mat-
ters for growth if there is an increase in productivity within sectors. This study is
unable to show that the movement of labour across sectors leads to higher economic
growth. However, the increase in productivity within sectors has more impact on
regional growth on a longer-term basis.

Keywords: structural change, regional growth, productivity

JEL classifications: L16, O40, R11

INTRODUCTION
Structural change is an important determinant of economic growth. Kuznets
(1973) claims that a high rate of structural change is one of six characteristics of
the modern economy. Theoretically, the transmission channel linking structural
change to economic growth is through productivity, where there is a cross-sectoral
reallocation from low-productivity economic sectors to higher-productivity sec-
tors. Traditionally, the reallocation occurs from agriculture to industry (Chenery
et al. 1986). The increasing role of the manufacturing sector, well known as indus-
trialisation, as argued by Rodrik (2013) and later supported by Felipe, Kumar
and Abdon (2014), is described as an engine of growth that, empirically, creates

# This research was conducted when the first author was working at the Fiscal Policy Agency,
Ministry of Finance, Republic of Indonesia (MOFI). The findings, interpretations and conclu-
sions expressed here are those of the authors alone and do not necessarily represent those of
MOFI, AMRO or AMRO’s members. No responsibility or liability is accepted by MOFI, AMRO
or AMRO’s members as a consequence of the use of information presented in this paper.

* Corresponding author: asep.nurwanda@kemenkeu.go.id

ISSN 0007-4918 print/ISSN 1472-7234 online/18/00091-117 © 2023 ANU Indonesia Project

http://dx.doi.org/10.1080/00074918.2021.1914320
92 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

an unconditional convergence of increased labour productivity, with its capacity

to absorb capital and technology.1 However, in recent years, as seen in develop-
ing countries (Timmer, de Vries and de Vries 2015), particularly in Asia (Asian
Development Bank 2013), the reallocation has occurred from agriculture to services.
Empirically, the relationship between structural change and economic growth,
either at a regional or national level, is inconclusive. Regionally, evidence of a posi-
tive relationship exists for OECD countries (Dietrich 2011) and Asian economies
(Vu 2017). Szirmai (2012) argues that the manufacturing sector is an important
growth determinant for developing economies in Asia and Latin America, while
the service sector is more important for developed economies. Conversely, evi-
dence of a negative relationship exists for Africa and Latin America (McMillan,
Rodrik and Verduzco-Gallo 2014). At an individual economy level, Padilla-Perez
and Villarreal (2017), for instance, show that Mexico has experienced no positive
impact of structural change due to the wrong direction of reallocation, which is
from high-labour productivity sectors to lower or declining productivity ones.
A recent overview of the relationship between structural change and growth is
given by McMillan, Rodrik and Sepúlveda (2017), who also discuss cases in India,
Vietnam, Botswana, Ghana, Nigeria, Zambia and Brazil.
Studies at the subnational level have also been conducted mainly on China and
India. In China, for example, Jiang (2011) argues that regional growth depends on
structural change for labour productivity growth as the economy evolves. In the
case of India, Babu and Raj (2011) and Thind and Singh (2018) suggest that struc-
tural change has positively contributed to regional economic growth. However,
the latter argue that the contribution of increased productivity within individual
sectors is more important than the structural productivity effect of labour realloca-
tions across different sectors.
While Indonesia compares to China and India in terms of high population
and regional diversity, no studies have been conducted on the impact of struc-
tural change on regional growth in Indonesia. Studies of general regional growth
determinants have been conducted by Hill, Resosudarmo and Vidyattama (2008),
McCulloch and Sjahrir (2008), and Vidyattama (2010). However, they do not
examine the impact of structural change. Vidyattama (2010) uses gross domestic
product (GDP) shares of manufacturing, agriculture and services as determinants
of regional growth, but these metrics are not a direct measurement of structural
change. Like the GDP-share approach, a structural change index is used by Hill,
Resosudarmo and Vidyattama (2008), explaining the sector value-added share
change between agriculture, industry and services. By using a simple scatter plot,
Hill, Resosudarmo and Vidyattama (2008) demonstrate a weak correlation between
structural change and regional growth. This index, according to Vu (2017), is less
meaningful because structural change does not indicate productivity growth or
decline. To fill in this gap, this study aims to measure structural change dynamics
and examine their impact on regional growth in Indonesia, thereby contributing
new perspectives on the structural change and regional growth nexus.

1. O’Rourke and Williamson (2017) provide a comprehensive review of industrialisation,

while Assunção, Burity and Medeiros (2015) show that the convergence depends on country-
specific characteristics, such as political institutions, trade openness and education.
Structural Change and Regional Economic Growth in Indonesia 93

By utilising the shift-share method for 30 provinces between 2005 and 2018, this
study shows that the trend of structural change across provinces has been slow-
ing. The predominant structural change was from agriculture to the service sector.
Statistically, structural change contributes to regional economic growth, especially
when there is an improvement in productivity within sectors. This finding is in
line with Krüger’s (2008) argument that there is an important interaction between
structural change and productivity, where higher productivity as a result of inno-
vation is essential for economic development.
The structure of this paper is as follows. The first section explains the method-
ology and data used to measure structural change and its relationship to regional
economic growth. The second section describes the results, including patterns of
structural change at national and subnational levels and estimations of empirical
models. The final two sections discuss the findings and present conclusions.

METHODOLOGY AND DATA

Measurement of Structural Change
Measurements of structural change are typically calculated in terms of employment
shares or value-added shares. These measurements, however, only reflect quantity
aspects of structural change. Krüger (2008) argues that the interaction between
structural change and productivity is important where higher productivity due
to innovation is crucial for economic development.
Generally, there are four measurements of structural change: structural change
index (SC index), norm absolute value index (NAV index), shift-share method (SS
method) and effective structural change index (ESC index). The first two measure-
ments reflect the quantity aspects of structural change, while the last two reflect
quality. The measurements are explained as follows.

Structural Change Index

The SC index, as used in Hill, Resosudarmo and Vidyattama (2008) and Dietrich
(2011), provides a simple measure of the overall magnitude of structural change
by calculating the change of value-added shares over the period [0, T]:

1 n
=SC ∑ VAiT − VAi 0
2 i =1
(1)

Here, n denotes the number of sectors and VAiT and VAi0 denote the value-added
share of sector i at time T and 0, respectively.

Norm Absolute Value Index

The NAV index, such as used in Vu (2017), is similar to the SC index, but uses
employment share rather than value-added share, and is calculated as follows:

1 n
NAV
= ∑ SiT − Si 0
2 i =1
(2)

where SiT and Si0 denote the employment share of sector i at time T and 0, respectively.
94 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

Shift-Share Method
The SS method is a more common measurement of structural change. The method
decomposes the sectoral contribution to overall labour productivity growth into
three terms as follows:

∆P n
S ∆P n
P ∆S n
∆S ∆P
= ∑ i0 i + ∑ i0 i + ∑ i i (3)
P0 P0 P0 P0
= i 1= i 1= i 1

where n, SiT and Si0 are the same variables as in the NAV index.

∆Si= ( SiT − Si 0 )
is the change of employment share of sector i over time 0 and T, P0 is the level of
labour productivity at time 0 (that is, the value added measured at constant prices
divided by the number of workers), and ∆Pi is the change in the level of labour
productivity of sector i over time 0 and T.
The first term,
n
Si 0 ∆Pi
∑
i =1 P0 ,

commonly known as the ‘within effect’ (Within), captures the improvement of

productivity sourced from the same sector. The number is typically positive, since
labour productivity tends to increase over time, even when a sector has maintained
the same number of shares in total employment as during the base year.
The second term,
n
Pi 0 ∆Si
∑
i =1 P0 ,

is commonly known as the ‘static structural effect’ (Static). It represents the con-
tribution of the reallocation of employment among sectors, given the initial level
of productivity. The number is positive (negative) if the employees reallocate to
above (below) average productivity sectors. In other words, sectors with higher
productivity attract more (less) labour resources.
The third term,
n
∆Si ∆Pi
∑
i =1 P0 ,

can be called the ‘dynamic structural effect’ (Dynamic), as it captures the effect
of both employment reallocation and productivity growth. Dynamic is positive
if, and only if, there is both an increase in employment share and productivity
( ∆S > 0 and ∆P > 0 ), or there is both a decrease in employment share and produc-
tivity ( ∆S < 0 and ∆P < 0 ). The interaction term becomes larger (smaller) when
sectors with fast productivity growth are faced with more (less) labour resources. In
other words, the number is positive (negative) if workers tend to shift from produc-
tivity-declining (improving) sectors to productivity-improving (declining) sectors.
Structural Change and Regional Economic Growth in Indonesia 95

Effective Structural Change Index

This index is proposed by Vu (2017) to combine the strengths of the NAV index
and the SS method. The index is similar to NAV but only considers the sectors
that positively contribute to labour productivity. Hence, equation (2) is modified
as follows:

1
ESC
= ∑ SiT − Si 0
2 i∈Y
with Y = {i} such that Ci > 0 (4)

where n, SiT and Si0 are the same variables as in the NAV index, and Y is the set of
sectors i that has a positive contribution to labour productivity growth (Ci > 0). This
index is believed to be better at measuring structural change since it eliminates the
declining sector in which the reallocation (change) does not contribute to overall
productivity and growth.
Our study argues that the SS method functions better than other structural
measurements. The SS method and the ESC index not only reflect quality aspects
of structural change but also reflect quantity aspects, as do the SC and NAV indices.
For reference, SC and NAV indices measure the total reallocation of value added
and the shifting of employment, respectively; however, neither is able to explain
whether these are directed to better or worse sectors. As argued by Vries, Timmer
and Vries (2013), it is important to distinguish between static and dynamic real-
location effects to understand variations in structural change. In contrast to the
ESC index, which only examines the overall contribution, the SS method breaks
down aggregate labour productivity into the contribution of technological progress
and reallocation of labour. It also quantifies the contribution of labour realloca-
tion to productivity growth. On the other hand, the ESC index accounts only for
productivity-enhancing structural change and eliminates productivity-decreasing
structural change; it cannot decompose proximate drivers of productivity growth,
and its measurement is relatively more complex than other approaches. The SS
method is further justified because it best explains growth, which is the aim of
this study.2
Most studies, such as Dietrich (2011) and Hill, Resosudarmo and Vidyattama
(2008), use the so-called three-sector model (a tripartite decomposition of the eco-
nomic system) in which sectors in an economy are divided into primary, secondary
and tertiary production (agriculture, industry and services). Our study, however,
uses a more detailed disaggregation into nine sectors (n = 9). Since Indonesia’s GDP
was divided into 17 sectors in the period 2010–18, the data were reclassified into
nine sectors. See appendix 1 for the detailed conversion method.

Regional Growth Model

The direction of the causal relationship between structural change and growth
is unclear; it could be that economic growth causes structural change, that struc-
tural change causes economic growth or that both cause each other at the same
time (Krüger 2008; Silva and Teixeira 2008; Dietrich 2011). This study focuses on
the direction whereby structural change causes economic growth, and examines
the impact on economic growth of differences in productivity between sectors

2. A working paper version of this study employed all the measures discussed here.
96 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

(Dietrich 2011). It argues that a change in sectoral employment share can have a
significant impact on growth, especially when the change is followed by an increase
in productivity, as in the case of manufacturing and long-run labour productivity
(Asian Development Bank and Bappenas 2019). Vidyattama (2010) argues that
structural change can explain changes in the behaviour of other growth determi-
nants. However, since it is acknowledged that growth may cause structural change,
further study is needed to explore this scenario in the Indonesia context.
Regional growth models have been employed in many studies, such as
Vidyattama (2010) for Indonesia, Chen and Wu (2005) for China, and Vidyarthi
(2017) for India. To assess the relationship between structural change and growth,
we firstly implement a stable model, provided β 0 < 1 , in the model specification
set laid out by Mankiw, Romer and Weil (1992) and Vidyattama (2010). The model
serves as a basis of empirical analysis for the five-year average data as follows:

GRDPPCi ,t GRDPPCi ,t 5

0 GRDPPCi ,t 5 1 Structural Changei ,t 2 INVTi ,t (5)

3 Schoolingi ,t i Dt i ,t

where GRDPPCi,t — GRDPPCi,t — 5 denotes the growth rate of real gross regional
domestic product per capita (GRDPPC) for province i in the five-year period from
year t – 5 to year t and GRDPPCi,t — 5 is the initial logarithm of real GRDPPC, rep-
resenting the convergence process. Three five-year average periods are used here:
2005–09, 2010–14 and 2015–18.3 GRDPPCi,t—5 is therefore the value of GRDPPCi,t—j
in the years 2005, 2010 and 2015.
Structural Changei,t is our variable of interest—that is, either Withini,t, Statici,t
or Dynamici,t, representing within, static and dynamic structural effects, respec-
tively, as measured in equation (3). This study uses INVTi,t and Schoolingi,t as the
control variables, representing physical and human resource capital, measured
as the share of provincial real gross fixed capital formation in real regional GDP,
and the average number of years spent by the residents of a province in formal
education, respectively. Chen and Wu (2005) and Vidyattama (2010) argue that
INVTi,t is crucial for measuring the impact of capital as a factor of production
on regional economic growth from the production factor’s capital formation.
Meanwhile, Schoolingi,t is included because of human capital’s vital role in induc-
ing structural change (Martins 2019). A country’s average number of schooling
years may provide information on the average skill level of the workforce through
a compulsory national education program, as is the case in Indonesia (Vidyattama
2010). Structural Changei,t, INVTi,t and Schoolingi,t are measured as five-year averages
following the practice employed in empirical studies such as Mankiw, Romer and
Weil (1992) and Vidyattama (2010). The last three variables are: ηi is an unobserv-
able province effect, Dt is a dummy variable for time t, and ε i ,t is the error term
that is assumed to be homoscedastic and mutually uncorrelated over time.
Krüger (2008) argues that structural change is a long-term phenomenon. We
also address the possibility that imposing an average effect limitation makes it
impossible to capture each country’s idiosyncrasy by running regressions for

3. The last period consists of only four years owing to the availability of data.
Structural Change and Regional Economic Growth in Indonesia 97

annual time series data (Aretis and Demetriades 1997). To estimate the panel model
using annual data, we first employ two panel unit root tests: the Im-Pesaran-Shin
(IPS W-t-bar) test (Im, Pesaran and Shin 2003) and the Pesaran’s simple panel
unit root test in the presence of the cross-section dependence (CADF Z-t-bar)
test (Pesaran 2007). Next, we examine the possibility of a long-run relationship
and employ the Westerlund error-correction-based panel co-integration tests
(Westerlund 2007). The test results generally show that: (1) all variables contain a
unit root, except for the structural change variable and GRDPPCi,t—1; and (2) there
is no co-integration between regional economic growth and structural change
measures.4 Based on these findings, we modify equation (5) by using the first dif-
ferences for INVTi,t and Schoolingi,t as follows:

GRDPPCi ,t GRDPPCi ,t 1

0 GRDPPCi ,t 1 1 Structural Changei ,t 2 Structural Changei ,t 1 (6)

3∆ INVTi ,t 1 4∆ Schoolingi ,t 1 i Dt i ,t

Equations (5) and (6) are estimated by employing the two-step system general-
ised method of moments (GMM) developed by Arellano and Bond (1991), Arellano
and Bover (1995), and Blundell and Bond (1998), and also used in Vidyattama
(2010). The use of GMM is motivated by an endogeneity problem that changes in
regional economic growth may lead to changes in structural change measures. We
follow Vidyattama (2010) and set INVTi,t and Schoolingi,t as predetermined variables.
The constant term is excluded because we include all-year dummies as exogenous
instruments as suggested by Han and Kim (2014).5 We also follow Roodman (2009)
to employ the collapsing technique and use only one lag to reduce the number of
instruments used. We transform the data by taking the natural logarithm of all
variables except for the structural change variables.

Data
In addition to the national level, this study calculates the structural change meas-
urement using the SS method for the 30 subnationals (provinces) in Indonesia. It
is worth noting that some provinces have experienced fragmentation, such as Riau
(some areas became Riau Islands), East Kalimantan (North Kalimantan), South
Sulawesi (West Sulawesi) and Papua (West Papua).6 The data used for the calcula-
tion are collected from CEIC, which is mainly derived from Statistics Indonesia
(BPS) covering the 2005–18 period (see panel A, table 1).7

4. The results of the panel unit root tests and of the panel co-integration tests are available
upon request.
5. The GMM estimation employed here does not use any excluded instrument variables. We
acknowledge that the relationship may not be causal; nevertheless, it shows an interesting
correlation between structural change and regional development. We thank the editor for
noting this valid point.
6. See appendix 2 for details.
7. The period 2005–18 is selected to avoid the outlier data in the Asian financial crisis period
(1997–98) as well as to consider the availability of provincial data in CEIC.
98 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

TABLE 1 List of Variables and Their Definitions

A. Structural
change variable Definition Unit Source

GRDPPC Gross regional domestic product per Rp million BPS

capita (at constant prices). BPS used
different base years for regional GDP
data before 2010 (using a fixed price of
2000 base year) and 2010–2018 (using
2010 price). Therefore, we rebase the
data before 2010 using the splicing
method by employing the growth rate of
data before 2010 (2000 price) to the 2010
base year price.
S Employment share by sector in the National Labour
economy. — Force Survey
(Sakernas)
P Labour productivity (GRDP by sector Rp million Own calculation
per employment).
Within See equation 3. — Own calculation
Static See equation 3. — Own calculation
Dynamic See equation 3. — Own calculation

B. Control
variable Definition Unit Source

Schooling The average number of years spent by Year BPS

the residents (aged 25 years and over)
in formal education. BPS used a new
methodology in calculating the variable
after 2010. Hence, we do a backcast for
the data before 2010 using the splicing
method by applying the growth rate of
data before 2010 (the previous method)
to the 2010 data.
INVT Representing the stock of physical BPS
capital that was calculated by dividing
the regional real gross fixed capital
formation (addition of fixed assets
during a given period) and regional GDP
in constant price. Again, we rebase real
gross fixed capital formation data before
2010 using the splicing method for the
same reason as the regional GDP data.

RESULTS
Patterns
Indonesia’s gradual structural transformation from a traditional, agricultural-driven
economy to a manufacturing and services-driven one boosted the nation’s income
per capita and raised its status from an underdeveloped to a developing country by
Structural Change and Regional Economic Growth in Indonesia 99

the late 1980s. However, the 1997–98 Asian financial crisis disrupted this episode
of exponential growth, and Indonesia has not yet fully recovered (Basri, Rahardja
and Fitrania 2016). Manufacturing was the engine of Indonesian growth before the
crisis, growing by 9.3% per year on average from 1961–97; however, between 2000
and 2019, it grew below the national average of 4.7%.
Indonesia also showed disproportionate outcomes between different regions.
Judging from the pace of economic transformation and industrialisation, clear
differences exist between regions due to poor national logistics systems (Axelsson
and Palacio 2018). In terms of the contribution of gross regional domestic product
(GRDP) to the total GDP, a disparity was discovered between Java and non-Java.
For instance, despite representing more than two-thirds of the Indonesian territory,
Kalimantan, Sulawesi, Bali-Nusa Tenggara and Maluku-Papua together made up
only about 20% of total GDP. In terms of manufacturing, Java accounted for 71.1%
of total national manufacturing, amplifying the argument of highly concentrated
economic activity on this small island and indicating that industrialisation has not
occurred to the same degree (or at all) on the other islands.

National Patterns
Between 2005 and 2018, the reallocation of employment shifted from agriculture
and transportation to two main services sectors: trade and government (see the last
line of table 2). In particular, the share of agricultural labour in Indonesia decreased
by 15.2% over that period, or, roughly, 1% per year. On the other hand, sectors
with high productivity, such as manufacturing, construction and financial services
showed, on average, a slight increase in employment.
The shift in employment from agriculture to the government sector may have
been the result of the implementation of a decentralisation policy (Law 32/2004)
that encouraged regional expansion, particularly at the subprovincial level. Over
the period 2004–09, the number of regencies/cities increased by 13%, districts grew
by 26% and villages grew by 10.2%. The fragmentation of administrative entities at
the subnational level was mirrored by a boom in the number of public-service jobs,
from 16.6 public servants per one thousand people in 2003 to 17.5 public servants
per one thousand people in 2014 (Vujanovic 2017). Moreover, Mahi (2016) finds
that over two million public servants, or almost two-thirds of the central govern-
ment workforce, were transferred to the regions.
In terms of the change in value added, the agricultural sector declined by 2.8%
following the significant drop in its workforce (table 3). Meanwhile, the manufac-
turing sector experienced a decrease in the share of value added by 1.9% across
the same period. This decrease was associated with the de-industrialisation phe-
nomenon. Basri, Rahardja and Fitrania (2016) argue that Indonesia’s geographical
landscape, with its varying spatial concentration of population and industrial clus-
tering as well as poor logistics, has made it difficult for the manufacturing sector
to expand its competitive supply chain. In addition, a boom in commodity prices
depressed competitiveness in the manufacturing sector.
The shifting of value added and employment in this period was mainly sup-
ported by the development of e-commerce and the digital economy. For instance,
the improved share of added value in transport, trade and finance followed the rap-
idly increasing roles of advanced technology and automation, reflected in the rise
of gig economy jobs through online service companies (Prospera and AlphaBeta
Advisors 2019). Structural changes in terms of value added and employment
 TABLE 2 Change in Employment Share by Sector (in percentage points), 2005–18

Province Total AGRI MINE MANU UTIL CONS TRAD TRAN FINA GOVE SERV

1 Aceh 17.4 -15.8 0.6 4.7 0.3 2.0 3.0 -1.6 1.3 5.6 8.2
2 North Sumatra 21.1 -20.2 0.6 3.3 0.3 0.3 9.3 -0.9 1.4 5.9 15.6
3 West Sumatra 14.0 -12.7 1.0 0.5 0.4 2.3 8.7 -1.2 1.1 -0.1 8.5
4 Riau 18.5 -9.9 -6.8 -1.6 0.5 -1.5 10.1 -1.5 1.4 3.6 13.6
5 Jambi 16.1 -14.3 0.3 1.2 0.2 2.2 5.5 -1.8 1.2 5.6 10.5
6 South Sumatra 19.2 -19.0 1.0 3.0 -0.2 0.6 6.5 1.0 1.2 5.9 14.7
7 Bengkulu 21.8 -20.9 1.0 4.1 0.8 2.4 7.4 -0.9 1.3 4.7 12.7
8 Lampung 26.6 -26.6 0.6 2.4 0.2 1.8 13.2 0.9 0.9 6.6 21.6
9 Bangka
Belitung 18.3 2.8 -15.8 2.1 0.1 -1.1 7.3 -1.4 1.2 4.9 11.9
10 DKI Jakarta 9.5 0.1 0.4 -5.6 0.6 0.0 -3.9 4.0 3.8 0.6 4.5
11 West Java 17.1 -13.4 -0.1 3.1 0.7 1.8 5.4 -3.6 2.8 3.4 8.0
12 Central Java 17.2 -16.5 0.0 3.9 0.4 3.2 5.2 -0.7 1.7 2.8 9.1
13 East Java 14.9 -13.5 -0.1 2.7 0.5 2.4 5.3 -1.3 1.2 2.7 7.9
14 DI Yogyakarta 14.1 -14.0 0.4 3.3 0.3 -0.1 4.2 1.0 2.3 2.7 10.2
15 Banten 15.3 -13.4 0.0 2.7 0.7 3.0 2.5 -1.9 4.3 2.1 6.9
16 Bali 17.4 -13.4 -0.5 -1.9 0.4 -1.1 11.0 -0.5 3.0 3.1 16.6
17 West Nusa
Tenggara 15.8 -10.3 -2.4 -1.0 1.0 2.3 7.5 -2.1 0.8 4.3 10.5
18 East Nusa
Tenggara 23.2 -23.1 -0.1 1.6 0.4 3.1 6.6 2.1 1.2 8.2 18.1
19 West
Kalimantan 16.6 -14.6 -0.4 1.3 0.3 3.7 4.6 -1.7 1.8 4.9 9.6
20 Central
Kalimantan 28.3 -27.6 4.9 1.1 0.4 3.2 8.1 -0.8 1.2 9.4 18.0
21 South
Kalimantan 14.7 -14.6 1.0 0.0 0.5 -0.1 5.8 0.1 1.7 5.7 13.2
22 East
Kalimantan 18.0 -12.8 4.6 -1.5 0.2 -1.8 5.9 -1.9 3.2 4.0 11.2
23 North Sulawesi 24.9 -23.2 1.8 5.0 0.4 2.1 7.9 -1.7 1.8 5.9 13.9
24 Central
Sulawesi 21.1 -20.2 0.8 3.6 0.6 3.6 3.1 -0.9 1.0 8.4 11.7
25 South Sulawesi 16.8 -14.9 0.4 2.4 0.3 2.2 6.8 -2.0 1.3 3.5 9.6
26 South East
Sulawesi 27.0 -26.7 2.4 2.9 0.5 4.5 8.9 -0.3 1.2 6.6 16.4
27 Gorontalo 22.9 -21.0 1.3 3.6 0.2 2.8 7.1 -1.9 1.2 6.8 13.2
28 Maluku 24.2 -24.2 1.3 5.3 0.5 3.1 4.7 1.5 1.1 6.8 14.1
29 North Maluku 26.2 -26.2 2.4 3.4 0.4 1.5 4.3 1.8 1.4 11.1 18.6
30 Papua 16.0 -16.0 0.4 1.1 0.2 1.7 5.1 0.4 0.3 6.8 12.6
Indonesia 16.0 -15.2 0.1 2.0 0.4 1.8 5.7 -0.9 1.9 4.0 10.7

Note: Total change in employment refers to total magnitude change in employment share by sector correcting
for double counting (known as norm of absolute values). AGRI = Agriculture; MINE = Mining and Quarrying;
MANU = Manufacturing; UTIL = Utilities, which includes electricity, gas and water; CONS = Construction;
TRAD = Trade, Hotel and Restaurant; TRAN = Transportation and Communication; FINA = Finance and
Business Services; GOVE = Government, Social and Other Services; SERV = Combination of TRAD, TRAN,
FINA and GOVE (detail of sector definition in appendix 1).
 TABLE 3 Change in Value-Added Share by Sector (in percentage points), 2005–18

Province Total AGRI MINE MANU UTIL CONS TRAD TRAN FINA GOVE SERV

1 Aceh 31.0 3.0 -18.1 -12.8 0.0 6.2 5.0 4.3 5.3 7.1 21.8
2 North Sumatra 13.1 -3.1 0.1 -5.4 -1.0 8.1 1.8 -1.4 3.1 -2.2 1.4
3 West Sumatra 9.7 -2.4 0.9 -2.3 -1.3 4.1 -0.8 4.3 0.4 -2.9 1.0
4 Riau 17.8 0.6 -16.4 6.9 0.2 5.1 3.6 1.0 0.9 1.0 6.5
5 Jambi 6.5 0.7 2.1 -2.0 -0.8 2.7 -2.3 -0.2 1.1 -1.2 -2.6
6 South Sumatra 14.2 -2.8 -8.3 -2.4 -0.3 6.8 3.6 1.4 2.5 -0.4 7.1
7 Bengkulu 14.8 -11.6 0.2 2.1 -0.2 2.2 -3.0 2.4 4.5 3.4 7.3
8 Lampung 14.1 -7.0 0.8 6.6 -0.5 4.6 -2.0 2.3 -1.5 -3.0 -4.1
9 Bangka
Belitung 15.0 -0.2 -12.4 -1.7 -0.6 4.6 0.9 2.7 2.8 4.1 10.5
10 DKI Jakarta 9.9 0.0 -0.2 -2.8 -0.7 1.6 1.5 3.3 -6.1 3.5 2.2
11 West Java 10.9 -3.3 -1.7 -2.3 -2.2 5.5 -1.4 3.2 1.2 1.0 4.0
12 Central Java 9.5 -5.1 1.6 0.8 -1.0 5.0 -3.3 0.7 1.5 -0.1 -1.3
13 East Java 11.4 -5.3 2.3 -0.3 -1.5 6.1 -3.2 2.4 0.6 -1.2 -1.3
14 DI Yogyakarta 8.9 -6.0 -0.3 -1.2 -1.1 1.5 -0.4 3.6 1.9 1.8 7.0
15 Banten 26.3 -2.7 0.6 -18.5 -2.7 7.9 -2.3 6.0 8.5 3.3 15.5
16 Bali 12.6 -6.5 0.3 -2.6 -1.4 5.4 2.4 2.9 1.7 -2.0 4.9
17 West Nusa
Tenggara 22.4 0.8 -22.2 0.7 -0.2 3.8 5.3 1.8 3.4 6.7 17.1
18 East Nusa
Tenggara 17.5 -12.3 -0.3 -0.5 -0.3 3.3 -4.1 5.7 3.5 5.0 10.1
19 West
Kalimantan 16.5 -6.8 4.2 -2.9 -0.4 4.2 -6.3 2.0 1.9 4.1 1.7
20 Central
Kalimantan 20.5 -14.7 6.4 6.4 -0.5 4.7 -5.1 -0.2 0.8 2.1 -2.3
21 South
Kalimantan 11.7 -8.2 -0.6 1.2 0.0 1.6 -2.9 2.1 2.4 4.5 6.0
22 East
Kalimantan 14.2 2.5 -1.4 -12.5 0.1 3.1 3.1 2.6 1.1 2.2 8.9
23 North Sulawesi 5.5 1.7 0.5 0.7 -0.8 -3.5 -1.0 0.8 1.8 -0.2 1.4
24 Central
Sulawesi 23.5 -17.8 11.3 5.1 -0.6 6.2 -2.8 0.9 -0.2 -2.2 -4.2
25 South Sulawesi 10.3 -5.9 -2.5 -0.9 0.0 2.6 3.5 3.1 1.8 -0.3 8.1
26 South East
Sulawesi 23.3 -18.4 16.4 0.3 -0.8 6.7 -1.0 -1.0 -0.7 -1.3 -4.0
27 Gorontalo 18.4 10.6 0.2 -3.1 -0.7 4.8 2.3 0.5 -4.3 -10.4 -11.9
28 Maluku 24.0 -12.4 1.7 0.8 -0.3 6.4 -10.5 -0.7 0.0 15.0 3.8
29 North Maluku 27.0 -15.6 6.1 -6.3 -0.5 4.7 -4.6 1.7 0.3 14.1 11.5
30 Papua 35.3 0.2 -39.9 6.2 0.0 7.2 3.6 3.7 3.0 6.7 17.0
Indonesia 9.5 -2.8 -4.9 -1.9 -0.1 1.6 2.1 3.6 1.2 0.9 7.7

Note: Total change in value added refers to total magnitude change in value-added share by sector correcting
for double counting (known as structural change index). AGRI = Agriculture; MINE = Mining and Quarrying;
MANU = Manufacturing; UTIL = Utilities, which includes electricity, gas and water; CONS = Construction; TRAD
= Trade, Hotel and Restaurant; TRAN = Transportation and Communication; FINA = Finance and Business
Services; GOVE = Government, Social and Other Services; SERV = Combination of TRAD, TRAN, FINA and
GOVE (detail of sector definition in appendix 1).
102 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

reallocation were followed by an increase in productivity across all sectors, as

presented by the positive total value of shift-share (Within + Static + Dynamic)
(tables 4 and 5). However, productivity has been slowing, as shown by the
value of the 2015–18 period, which is lower than that of the 2005–14 period. The
two sectors that have experienced the largest increase in productivity are trade
and manufacturing. Interestingly, the highest productivity occurred from 2010
to 2014 due to the commodity boom benefiting Indonesia as a large producer
of some commodity-based products: crude palm oil, coal and minerals. Such
increases in productivity at the national level mostly occur in the same sectors
because of the reallocation of employment among sectors, as shown by the
positive values of Within and Static, respectively. Meanwhile, slowing produc-
tivity is caused by the negative dynamic structural effect, which indicates that
workers tend to shift from productivity-improving sectors to productivity-
declining sectors. These findings are similar to Martins’s (2019), who suggests
that improvements in within-sector productivity are more important than
labour reallocations in 169 countries throughout 1991–2013. The sectors expe-
riencing both an increase in labour share and productivity are manufacturing,
construction, trade and government.

Regional Patterns
Figure 1 illustrates the distribution of regional structural change in Indonesia
using the SS method (real labour productivity) across provinces over the
period 2005–18. The real labour productivity of almost all provinces in Java,
except East Java and Central Java, grew only in line with the national average.
Conversely, the provinces with the fastest growth and highest real labour
productivity were mostly in Sulawesi (except Gorontalo), which means that
the reallocation of employment to more productive sectors is happening more
in Sulawesi than in Java.8
The pattern of double-digit decline in agricultural labour share occurred in
all provinces, except DKI Jakarta and Bangka Belitung. As expected, the share
of agricultural labour was very low in DKI Jakarta, while the share of agricul-
ture increased in Bangka Belitung due to a significant decrease in employment
in the mining sector. The share of manufacturing employment showed only
a slight improvement of 2% from 2005 to 2018, where only two provinces
(Maluku and North Sulawesi) rose more than 5%. Maluku’s share of manufac-
turing employment was very low in 2005 at about 3.2% and fluctuated over the
next 14 years, ending at 8.5% in 2018. Violent conflict in Maluku seems to have
played a role in this fluctuation; for example, there was a significant drop in
Maluku’s manufacturing employment from 446,310 people in 2004 to 409,137
people in 2005 (Rao and Vidyattama 2017). The share of the manufacturing
sector in Riau, DKI Jakarta, Bali, West Nusa Tenggara and East Kalimantan
also decreased. Therefore, the slight increase in overall manufacturing amid

8. Sulawesi, also known as the island of Celebes, consists of five provinces: North
Sulawesi, Central Sulawesi, South Sulawesi, South East Sulawesi and Gorontalo.
Meanwhile, Java consists of six provinces: DKI Jakarta, West Java, Central Java, East
Java, DI Yogyakarta and Banten.
 TABLE 4 Change in Productivity by Sector (in percentage points), 2005–18

Province Total AGRI MINE MANU UTIL CONS TRAD TRAN FINA GOVE SERV

1 Aceh -42.2 0.9 -45.4 -9.5 0.1 3.1 2.3 1.5 1.5 3.5 8.7
2 North Sumatra 50.8 9.9 1.0 4.8 0.1 8.2 11.4 5.7 5.8 4.0 26.9
3 West Sumatra 48.4 5.5 1.3 2.5 0.1 6.3 8.7 14.9 2.5 6.7 32.8
4 Riau -1.0 -0.1 -17.1 5.7 0.2 4.6 3.2 0.9 0.8 0.9 5.7
5 Jambi 40.7 11.2 6.6 2.5 0.1 5.0 6.2 3.2 3.5 2.6 15.4
6 South Sumatra 44.9 4.9 4.1 7.7 0.1 7.9 7.4 4.6 4.0 4.3 20.3
7 Bengkulu 58.0 9.4 1.9 3.8 0.2 3.1 12.5 7.8 6.7 12.6 39.6
8 Lampung 49.5 6.3 -0.6 11.7 0.2 5.6 7.8 9.1 5.1 4.3 26.2
9 Bangka
Belitung 14.1 4.1 -6.8 -0.7 0.0 4.2 3.9 2.6 2.0 4.7 13.2
10 DKI Jakarta 59.8 0.0 -0.1 4.1 0.2 6.6 11.7 16.1 13.7 7.5 49.0
11 West Java 46.6 -0.3 -1.6 17.7 0.0 6.2 10.4 7.3 2.6 4.3 24.6
12 Central Java 78.9 5.1 2.0 27.1 0.1 8.9 14.3 8.8 4.4 8.2 35.7
13 East Java 81.6 3.4 4.9 22.4 0.0 7.1 22.8 10.2 5.0 5.9 43.8
14 DI Yogyakarta 52.9 0.3 0.2 3.8 0.1 7.4 10.9 11.1 7.0 12.2 41.2
15 Banten 50.5 1.1 0.1 12.2 -0.2 6.4 9.0 8.6 9.8 3.5 30.9
16 Bali 71.5 4.4 0.4 4.2 0.3 8.4 23.7 11.9 6.2 12.0 53.8
17 West Nusa
Tenggara 41.0 9.1 -9.1 2.3 0.1 7.4 11.7 6.3 5.6 7.5 31.2
18 East Nusa
Tenggara 56.0 7.5 0.7 0.6 0.1 5.9 8.6 10.2 5.4 17.2 41.3
19 West
Kalimantan 56.0 10.5 4.1 4.7 0.1 8.3 7.1 9.2 5.5 6.5 28.4
20 Central
Kalimantan 58.2 2.6 14.3 7.1 0.1 6.2 9.3 5.5 4.8 8.3 27.9
21 South
Kalimantan 43.8 3.7 10.0 2.2 0.3 3.9 6.9 6.0 3.9 6.9 23.7
22 East
Kalimantan 7.9 3.1 1.8 -11.0 0.1 3.7 3.6 3.0 1.2 2.5 10.4
23 North
Sulawesi 78.2 8.3 4.3 7.1 0.0 11.7 14.5 13.7 7.1 11.5 46.7
24 Central
Sulawesi 114.7 17.7 27.5 20.4 0.1 14.0 8.5 9.4 4.5 12.7 35.0
25 South
Sulawesi 79.6 11.8 1.5 9.3 0.2 11.9 16.1 11.0 7.4 10.4 45.0
26 South East
Sulawesi 86.5 9.4 22.5 6.0 0.2 14.3 13.9 7.7 4.2 8.4 34.1
27 Gorontalo 46.2 13.5 0.5 0.7 0.1 6.6 8.4 5.3 3.8 7.4 24.8
28 Maluku 22.7 0.2 -0.3 1.3 0.0 4.0 5.3 3.3 1.5 7.6 17.6
29 North Maluku 55.2 6.0 0.0 5.1 0.1 5.6 15.0 7.8 3.0 12.4 38.3
30 Papua -16.9 -0.6 -42.7 5.5 0.0 6.3 3.0 3.2 2.6 5.8 14.6
Indonesia 52.8 3.7 -0.6 10.7 0.1 7.1 11.4 8.6 5.8 6.0 31.8

Note: AGRI = Agriculture; MINE = Mining and Quarrying; MANU = Manufacturing; UTIL = Utilities, which
includes electricity, gas and water; CONS = Construction; TRAD = Trade, Hotel and Restaurant; TRAN =
Transportation and Communication; FINA = Finance and Business Services; GOVE = Government, Social and
Other Services; SERV = Combination of TRAD, TRAN, FINA and GOVE (detail of sector definition in appendix 1).
 TABLE 5 Structural Change Measurements, 2005–18

Shift-share method

Within Static Dynamic

Province 2005–18 2005–09 2010–14 2015–18 2005–18 2005–09 2010–14 2015–18 2005–18 2005–09 2010–14 2015–18

Aceh -0.480 -0.533 -0.013 -0.024 1.798 1.098 0.078 0.064 -1.740 -0.987 -0.038 -0.036
North Sumatra 0.382 -0.017 0.236 0.014 0.629 0.338 0.113 0.054 -0.503 -0.254 -0.029 -0.038
West Sumatra 0.469 0.058 0.169 0.044 0.156 0.058 0.062 0.032 -0.141 -0.036 -0.042 -0.020
Riau 1.047 1.002 0.052 0.000 -0.309 -0.302 0.037 -0.028 -0.748 -0.684 -0.042 -0.008
Jambi 0.321 0.211 0.191 -0.080 0.186 -0.028 0.137 0.171 -0.100 -0.059 -0.029 -0.061
South Sumatra 0.019 -0.042 0.055 0.022 0.957 0.290 0.128 0.125 -0.527 -0.144 -0.021 -0.051
Bengkulu 0.370 0.029 0.109 0.074 0.558 0.217 0.116 0.053 -0.349 -0.081 -0.026 -0.037
Lampung 0.302 -0.011 0.254 0.039 2.450 2.355 0.095 0.019 -2.257 -2.246 -0.067 -0.016
Bangka Belitung 0.141 0.041 0.115 -0.027 0.148 0.017 0.130 0.063 -0.148 -0.041 -0.042 -0.025
DKI Jakarta 0.493 0.040 0.199 0.235 0.133 0.043 0.115 -0.006 -0.028 -0.016 -0.022 -0.036
West Java 0.400 0.073 0.106 0.063 0.175 0.015 0.031 0.014 -0.109 -0.006 -0.020 -0.013
Central Java 0.629 0.202 0.135 0.082 0.219 0.026 0.056 0.039 -0.059 -0.008 -0.019 -0.009
East Java 0.635 0.149 0.165 0.042 0.195 0.000 0.084 0.086 -0.014 -0.006 -0.015 -0.017
DI Yogyakarta 0.322 -0.010 0.052 0.005 0.245 0.111 0.095 0.085 -0.038 -0.028 -0.031 -0.042
Banten 0.337 0.219 0.155 0.051 0.281 0.060 0.092 0.033 -0.113 -0.002 -0.032 -0.018
Bali 0.661 0.158 0.245 0.131 0.224 0.047 0.046 0.007 -0.170 -0.014 -0.046 -0.024
West Nusa Tenggara 0.671 0.538 0.120 -0.004 -0.051 -0.127 -0.038 0.028 -0.210 -0.286 -0.016 -0.026
East Nusa Tenggara 0.057 -0.177 0.094 0.039 1.240 0.576 0.124 0.050 -0.737 -0.298 -0.048 -0.020
West Kalimantan 0.361 0.104 0.173 -0.011 0.820 0.156 0.047 0.180 -0.621 -0.158 -0.048 -0.062
Central Kalimantan 0.277 0.084 0.210 0.037 0.680 0.275 0.000 0.117 -0.375 -0.199 -0.055 -0.035
South Kalimantan 0.263 0.028 0.174 0.044 0.267 0.080 0.015 0.058 -0.092 -0.036 -0.021 -0.022
East Kalimantan -0.071 -0.067 -0.094 -0.047 0.463 0.074 0.175 0.006 -0.312 -0.074 -0.038 -0.020
North Sulawesi 0.680 0.091 0.153 0.067 0.369 0.167 0.108 0.053 -0.267 -0.073 -0.036 -0.029
Central Sulawesi 0.820 0.189 0.277 0.111 0.321 0.092 0.072 0.072 0.006 -0.035 -0.102 -0.039
South Sulawesi 0.612 0.038 0.208 0.118 0.331 0.122 0.087 0.043 -0.147 -0.066 -0.040 -0.020
South East Sulawesi 0.395 -0.059 0.249 0.050 2.427 2.359 0.136 0.080 -1.956 -2.117 -0.028 -0.052
Gorontalo 0.566 0.008 0.199 0.107 0.189 0.116 0.057 -0.009 -0.293 -0.080 -0.042 -0.021
Maluku 0.045 -0.118 0.186 0.070 0.651 0.178 0.111 0.131 -0.470 -0.125 -0.051 -0.092
North Maluku 0.114 -0.121 0.105 0.102 2.254 1.294 0.060 0.051 -1.816 -1.048 -0.009 -0.002
Papua -0.483 -0.497 -0.124 0.035 0.705 1.319 0.175 0.162 -0.391 -0.928 -0.049 -0.069
Indonesia 0.367 0.081 0.121 0.042 0.225 0.027 0.081 0.046 -0.064 -0.004 -0.019 -0.008
106 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

FIGURE 1 Map of Shift-Share Method, 2005–18

Note: Shift-share method (Real Labour Productivity 2005–18). The index is similar to overall labour
productivity growth from 2005 to 2018.

a significant decrease in the agricultural sector indicates fewer manufacturing jobs

were created relative to services jobs during the period.
Productivity at the national level increased between 2010 and 2014 with all
provinces placing positive value on labour productivity. However, three provinces
experienced decreased productivity: Riau, Papua and Aceh. Aceh’s decreased pro-
ductivity may have been a result of the 2004 tsunami, while Papua and West Nusa
Tenggara experienced a decline in the production of mining companies. The impact
of foreign aid for reconstruction in Aceh may explain the rapid pace of structural
change in that province from 2005 to 2009 and the decreasing level of productivity
during 2010–14 when the program ended (Heger and Neumayer 2019).
High productivity in Indonesia may be caused by high levels of productivity in a
given sector (Within) and the increased share of labour in the same sector (Static), not
by the movement of labour to more productive sectors. The only province that expe-
rienced the movement of labour to more productive sectors was Central Sulawesi,
shown by a positive dynamic structural effect. In terms of the within effect, the larg-
est improvement in productivity was experienced by Riau during 2005–18, while
Aceh and East Kalimantan experienced a consistent decline across the four periods
of study. The variation of the within effect is also relatively small at the national level,
and the variation across provinces is relatively high, especially for Papua.
In terms of static structural change, while most provinces demonstrated a posi-
tive value, showing that their labour share was expanding, a decreasing trend
occurred in Riau and West Nusa Tenggara. In South East Sulawesi, North Maluku
and Lampung the labour share expanded much faster than in other provinces.
Interestingly, the contribution of dynamic structural effects has been negative for
all provinces, meaning that workers have shifted from productivity-growing sec-
tors to productivity-declining sectors, or at least to sectors with no improvement
in productivity growth.
Structural Change and Regional Economic Growth in Indonesia 107

Descriptive Statistics
Tables 6 and 7 present descriptive statistics for the variables of interest. Table 6
summaries the main economic data of Indonesia divided into 30 provinces. Several
indicators portray the characteristics of economic data varying across regions in
Indonesia. GDP from the poorest province is Rp 18 million per capita, lagging
behind the richest province with Rp 248 million per capita.
The average growth per capita also varies from 0.3% to 8.8%. Most provinces
experienced an inclining trend with the national average, which increased in the
2010–14 period but declined in the 2015–18 period. The commodity boom in the
2010–14 period played an important role not only for natural, resource-rich prov-
inces but also for other regions.
Table 7 shows the strength of the relationships among variables. Mostly, a weak
negative correlation exists between structural change measures and GRDPPC,
except for Static. In terms of cross-section dependence in macro panel data,
Pesaran CD cross-sectional independent tests show an interlinkage among prov-
inces that may arise from globally common shocks as a result of local spillover
effects between provinces.

Results Using the Five-Year Average Data and the Annual Data
Table 8 presents the estimates of the traditional growth model using five-year
average data. We find that the coefficient estimates of Static and Dynamic are statisti-
cally insignificant in model 2 and model 3, respectively. On the other hand, Within
is significant in model 1, which demonstrates that within-sector effects are more
important than static and dynamic effects in Indonesia. This finding is similar to
that of India (Thind and Singh 2018) and other international cases (Martins 2019).
Table 9 presents the estimates of the dynamic growth model using annual data.
As in table 8, two specification tests—that is, the AR(2) test in first differences and
the Hansen (1982) test concerning the joint validity of the instruments—suggest
that our models are acceptable.
Table 9 displays similar findings to table 8, in so far as only Within is significant,
especially its final year value. The results affirm the conclusion that structural
change, especially in terms of an increase in productivity within the same sectors,
has a positive relationship to growth.
In general, by comparing the values of coefficient estimates in tables 8 and 9, the
impact of an annual adjustment in structural change measurements on regional
growth does not seem as high as the impact of average structural change meas-
urements over a five-year period. One possible reason is that annual changes in
sectoral productivity, labour and output growth often fluctuate and do not always
move in the same direction. The use of five-year average data can reduce data
fluctuations so that the movement can be more unidirectional. Another possible
explanation is that shifts in labour need time to settle before gains in productiv-
ity can be seen. It may be that structural change needs to be seen as a long-term
phenomenon since it takes time for changes to materialise. The results, in general,
show that structural change matters for regional growth in Indonesia when there
is an increase in productivity within the same sectors. The movement of labour
across sectors seems to have no impact on growth. In particular, the increase in
productivity within the same sectors has more impact than the labour movement
on growth on a longer-term basis.
 TABLE 6 Selected Statistics of 30 Provinces and Indonesia

Average GDP Average GDP/capita Level in 2018

growth (%) growth (%) (in millions)

GDP per
2005– 2005– 2010– 2015– 2005– 2005– 2010– 2015– capita Labour
18 09 14 18 18 09 14 18 (Rp) prod (Rp) Population
Province
1 Aceh 0.3 -4.3 2.8 2.8 -1.4 -5.0 0.4 1.0 24.01 57.55 5,281.3
2 North Sumatra 5.8 6.0 6.2 5.1 4.8 4.8 5.4 3.9 35.57 76.21 14,415.4
3 West Sumatra 5.8 5.9 6.1 5.3 4.4 4.3 4.8 4.1 30.47 68.04 5,382.1
4 Riau 4.1 5.0 4.6 2.5 0.3 0.0 1.0 0.0 73.26 171.82 8,951.4
5 Jambi 6.2 6.4 7.3 4.5 3.7 4.3 3.8 2.8 40.05 83.07 3,570.3
6 South Sumatra 5.4 5.0 5.8 5.3 4.4 5.5 3.8 3.9 35.67 75.32 8,370.3
7 Bengkulu 5.8 5.9 6.3 5.1 4.6 6.0 4.1 3.5 22.50 45.85 1,963.3
8 Lampung 5.4 5.1 5.9 5.2 4.2 4.1 4.5 4.1 27.74 57.19 8,370.5
9 Bangka Belitung 4.7 4.1 5.6 4.3 1.6 0.4 2.2 2.1 35.76 74.44 1,459.9
10 DKI Jakarta 6.1 5.9 6.3 6.0 4.8 4.9 4.5 5.0 165.86 367.31 10,467.6
11 West Java 5.8 5.7 6.1 5.4 3.8 3.6 4.0 4.0 29.16 68.32 48,683.7
12 Central Java 5.4 5.4 5.4 5.3 5.0 5.3 5.0 4.6 27.29 54.58 34,490.8
13 East Java 5.9 5.8 6.3 5.5 5.1 4.8 5.6 4.9 39.59 76.47 39,500.9
14 DI Yogyakarta 5.0 4.4 5.2 5.4 3.6 2.4 4.4 4.2 25.78 46.27 3,802.9
15 Banten 7.1 9.0 6.4 5.6 4.2 6.2 2.7 3.5 34.19 81.37 12,689.7
16 Bali 6.4 6.5 6.6 6.1 4.4 4.8 3.6 4.9 35.91 61.89 4,292.2
17 West Nusa
Tenggara 4.2 4.9 2.2 5.8 3.0 4.0 0.8 4.5 18.02 41.93 5,013.7
18 East Nusa
Tenggara 5.0 4.6 5.4 5.1 2.9 1.9 3.6 3.4 12.28 27.34 5,371.5
19 West
Kalimantan 5.3 5.0 5.6 5.1 4.1 4.9 3.8 3.5 26.11 55.64 5,001.7
20 Central
Kalimantan 6.4 5.9 6.8 6.4 4.2 5.0 3.5 4.2 35.56 72.71 2,660.2
21 South
Kalimantan 5.4 5.6 5.7 4.7 3.2 3.3 3.3 3.0 30.63 63.37 4,182.7
22 East Kalimantan 3.1 3.0 4.4 1.5 0.0 -0.8 1.5 -0.9 119.73 161.48 4,365.2
23 North Sulawesi 6.7 7.2 6.6 6.2 5.4 5.8 5.1 5.1 33.92 76.94 2,484.4
24 Central
Sulawesi 8.8 8.2 8.5 9.7 6.7 6.6 5.7 8.0 34.42 71.39 3,010.4
25 South Sulawesi 7.4 6.7 8.2 7.2 6.1 5.8 6.5 6.0 33.61 77.47 10,127.6
26 South East
Sulawesi 7.8 7.6 8.9 6.6 5.5 5.9 5.8 4.5 33.29 73.15 2,653.7
27 Gorontalo 7.2 7.5 7.6 6.5 5.0 5.1 5.0 4.9 22.54 48.10 1,185.5
28 Maluku 5.8 5.2 6.4 5.7 3.1 3.6 2.0 4.0 16.61 42.09 1,773.8
29 North Maluku 6.8 6.8 6.7 6.9 3.5 2.4 3.5 4.8 20.32 48.58 1,232.6
30 Papua 6.1 8.5 3.4 6.4 1.7 4.2 -3.0 4.4 51.69 100.32 4,260.0
Indonesia 5.5 5.6 5.8 5.0 4.0 4.2 4.0 3.8 39.47 84.89 264,161.6

Min 0.3 -4.3 2.2 1.5 -1.4 -5.0 -3.0 -0.9 12.30 27.30 1,185.5
Max 8.8 9.0 8.9 9.7 6.7 6.6 6.5 8.0 165.90 367.30 48,683.7
Mean 5.7 5.6 6.0 5.4 3.7 3.8 3.6 3.9 39.10 80.90 8,833.8
STDEV 1.5 2.3 1.5 1.5 1.8 2.5 2.0 1.7 30.90 62.00 11,533.7
 TABLE 7 Descriptive Statistics

Statistic GRDPPC Within Static Dynamic

Correlation (no. observations = 420)

GRDPPC 1.000
Within -0.036 1.000
Static 0.009 -0.444 1.000
Dynamic -0.021 -0.056 -0.842 1.000

Pesaran CD cross-sectional independence test

Average coefficient 0.780 0.184 0.122 0.498
CD-statistic 60.840 14.320 9.520 38.870

Note: The null hypothesis is there is cross-section independence. All CD-statistic is significant at the
1% level.

TABLE 8 Two-Step System GMM Estimates Regressions of the Relationship

between Structural Change and Regional Growth, Five-Year Average Data

Variable Model 1 Model 2 Model 3

GRDPPCi,t – 5 -0.087* -0.112* -0.106

(0.043) (0.061) (0.081)
Withini,t 2.857**
(1.394)
Statici,t -0.398
(0.519)
Dynamici,t 0.429
(0.495)
INVTi,t 0.054 0.010 0.015
(0.151) (0.051) (0.077)
Schoolingi,t 0.468* 0.368 0.368
(0.236) (0.275) (0.349)
Time dummies Yes Yes Yes
Observations 90 90 90
Number of instruments 11 11 11
AR (1) 0.501 0.119 0.132
Hansen test 0.121 0.120 0.102

Note: ***, ** and * indicate significance at 1, 5, and 10% levels, respectively. Standard errors are in
parentheses. The standard errors are robust to heteroscedasticity and autocorrelation with Windmeijer
correction. The covariance matrix estimate is based on a small sample correction. The number of instru-
ments used is reduced both by using only one lag (that is, lag 1) and collapsing the instrument matrix.
The instrument variable set is one-period lag exogenous variables.
110 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

TABLE 9 Two-Step System GMM Estimates Regressions of the Relationship

between Structural Change and Regional Growth, Selective Sample, Annual Data

Variable Model 1 Model 2 Model 3

GRDPPCi,t – 1 -0.063 -0.082 -0.091

(0.056) (0.065) (0.115)
Withini,t 0.107
(0.112)
Withini,t – 1 0.072**
(0.028)
Statici,t 0.021
(0.221)
Statici,t-1 0.043
(0.026)
Dynamici,t 0.181
(0.292)
Dynamici,t – 1 -0.044
(0.027)
ΔINVTi,t – 1 -0.082*** -0.085** -0.062
(0.026) (0.035) (0.047)
ΔSchooli,t – 1 -0.153 -0.123 -0.058
(0.248) (0.255) (0.403)
Time dummies Yes Yes Yes
Observations 360 360 360
Number of instruments 20 20 20
AR (1) 0.041 0.087 0.061
AR ( 2) 0.704 0.175 0.172
Hansen test 0.652 0.283 0.170

Note: ***, ** and * indicate p < 0.01, p < 0.05 and p < 0.1, respectively. Robust standard errors with
Windmeijer correction are in parentheses. Covariance estimates are based on a small sample correc-
tion. The number of instruments used is reduced by using only one lag (that is, lag 1) and collapsing
the instrument matrix to a one-period lag of each exogenous variable.

DISCUSSION
Recent studies by Hill, Resosudarmo and Vidyattama (2008) and Axelsson and
Palacio (2018) have examined the pattern of structural change from Indonesia’s
subnational perspective. These studies take a long historical view, 1975–2004 and
1968–2010, respectively. Our study provides further discussion of the pattern of
structural changes in the period 2005–18, but with more detailed decompositions
of structural change.
In terms of the classification of regions based on the progress of structural
changes, Hill, Resosudarmo and Vidyattama (2008) found that provinces experienc-
ing the fastest structural change had no similar characteristics; for example, East
Kalimantan and Riau are resource-rich regions, West Java and Central Java are
industry-dominant regions, and Bali is a tourism-dominant region. Axelsson and
Palacio (2018) classified provinces into three main groups: Java and Kalimantan as
sustained growth regions, Sumatra and Sulawesi as stagnant regions, and Eastern
Indonesia as a continuous shrinking region. Judging from the productivity growth
Structural Change and Regional Economic Growth in Indonesia 111

measured by the SS method (figure 1) and the similarity of regional characteristics,

our study classifies the provinces into three major groups: outperformer regions,
underperformer regions and median regions.
The outperformer regions, including provinces in Sulawesi (except Gorontalo),
Central Java and East Java, are characterised by their productivity, which far
exceeded the national average and was mainly driven by the growth of new indus-
tries. For example, in Sulawesi, new industrial estates were developed for agro- and
metal-processing industries. Central Java and East Java also benefited from new
investments, such as the garment and electronics industries. The underperformer
regions cover the provinces of Aceh, Riau, Bangka Belitung, East Kalimantan,
Maluku and Papua. Productivity growth in this group was far below the national
average. Most of the underperforming regions, such as Riau and East Kalimantan,
were commodity-driven areas that had experienced a downward trend of pro-
duction in the previous 14 years. The final group, the median regions, include
provinces in Sumatra (other than Aceh, Riau and Bangka Belitung), Java (other
than Central Java and East Java), Kalimantan (except East Kalimantan), Gorontalo,
North Maluku, Bali and Nusa Tenggara. Productivity in the median group grew
at the range of the national average. Despite this, the pattern of structural change
varied greatly. Some regions had relatively mature industries, such as West Java,
but others had not yet undergone the process of industrialisation, such as East
Nusa Tenggara and North Maluku.
An interesting question in relation to this grouping was noted during our
research: if the resource cycle drives regional development in a province, why
has the province underperformed? According to McMillan, Rodrik and Verduzco-
Gallo (2014), this may be caused by the nature of extractive sectors, as they do not
require much employment. Meanwhile, the large gaps in employment share and
value added in agriculture resulted in a surplus of labour that was unable to be
absorbed by other more productive sectors (Axelsson and Palacio 2018). Moreover,
the decline in the share of the manufacturing sector in resource-rich regions, such as
East Kalimantan and Riau, implies that the sector still acts as an engine of growth
through higher productivity (Felipe, Kumar and Abdon 2014). Hill, Resosudarmo
and Vidyattama (2008) show a rapid shift away from agriculture in most provinces
in Indonesia, but the development of industrialisation was seen only in seven
provinces, as demonstrated by a manufacturing share above 20% in 2004. Two of
these provinces were in resource-rich regions (Riau and East Kalimantan).
Another telling question was asked during our research: what about Sulawesi,
which is a resource-rich region but a stronger performer? Sulawesi was, surpris-
ingly, the region with the fastest structural change patterns, as supported by
changes in employment shares that were favourable and were above the national
average. The decline in the share of the agricultural sector in the five provinces
of Sulawesi reached an average of 21% (compared to 15.2% at the national level),
followed by an increase in the manufacturing sector, an average of 3.5% (national
only 2%) (see table 2). In terms of GRDP and GRDPPC growth, all five provinces
in Sulawesi were consistently able to outperform the national growth.
Eastern regions, such as Maluku and Papua, indicated more rapid structural
change compared to other provinces. However, the speed of structural change
in this region needs to be interpreted with great caution, given the low level of
productivity and small economic share of the provinces in relation to the national
economy. Conversely, the Java region showed relatively low values across all
112 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

structural change indicators. High indicators of structural change in the eastern

region coupled with the slow pace in Java might indicate the dawn of economic
convergence in Indonesia.
In terms of the relationship between structural change and economic growth,
this study found that structural change matters for regional growth in Indonesia
when there is an increase in productivity within the same sectors, while the move-
ment of labour across sectors seemingly has no impact on growth. Empirically, this
finding is similar to the situation in India (Babu and Raj 2011; Thind and Singh
2018) where within-sector changes have contributed positively to growth. This
suggests that average reallocation of labour occurrences do not create productivity
gains; since the largest reallocation was from the agricultural sector to the services
sector, particularly trade and government, which includes social and community
services, this is confirmed, as those two destination sectors have lower productivity
levels compared to manufacturing and construction sectors. This phenomenon of
agriculture–services transition is common in developing countries, as discussed
by Chenery et al. (1986). The decentralisation and proliferation of a district may
explain the failure of reallocation of labour to more productive sectors due to
diminishing marginal returns in the government sector.
This study also found that sectoral changes in the share of labour are less in
line with changes in value added, causing the change in employment and produc-
tivity to move in the opposite direction. For example, the value-added share of
agriculture (nationally) has declined by 2.8%, following a 15.1% drop in its work-
force share over the last 14 years. Improved productivity among the agricultural
workforce has been the result. On the other hand, improving labour share sectors,
such as manufacturing (labour increased by 2%), have experienced a decrease
in their value-added shares (–1.9%); this implies that labour productivity in the
manufacturing sector has declined. Examining structural change in agriculture and
manufacturing shows that, while labour shifts might reduce sectoral productivity
gaps, they can also reduce productivity gains. The findings in this study confirm
Krüger’s (2008) argument that structural change is a long-term phenomenon and
that productivity gains from shifts in labour take time to materialise.
Given this varied productivity performance, policies to support structural
change among regions need to be customised according to the character of each
region. Mexico, where the wrong direction of reallocation meant that structural
change had no impact on growth (Padilla-Perez and Villarreal 2017), stands as
a great example. The Asian Development Bank and Bappenas (2019) show that
factors such as primary gross enrolment ratio, foreign direct investment, manufac-
turing exports, economic complexity index, high technology exports and current
account openness help to determine productivity growth. Factors that determine
productivity for each region should also be studied further.

CONCLUSION
This paper examined the dynamics of structural change and investigated the rela-
tionship between structural change and regional economic growth in Indonesia. By
calculating the shift-share method, it found that structural change occurred across
30 provinces over the period 2005–18 towards an agricultural–services transition,
Structural Change and Regional Economic Growth in Indonesia 113

that the pace of structural change towards a new economic structure was relatively
slow and that the provinces of Sulawesi outperformed other regions.
By utilising five-year average data and annual data and employing panel data
models with GMM estimators, this study empirically confirms that productiv-
ity within sectors is an important factor that links structural change to economic
growth. Even though the role of manufacturing as the engine of growth needs
improvement, industrialisation policies must be based on the characteristics of
each province. Structural change matters for growth if there is an increase in pro-
ductivity within sectors. This study is unable to show that the movement of labour
across sectors leads to higher economic growth. However, the increase in produc-
tivity within sectors has more impact on growth on a longer-term basis. Policies
to support structural change among provinces need customisation based on the
characteristics of each province, and the factors that determine productivity need
to be further examined.

ACKNOWLEDGMENTS
The authors would like to thank the anonymous reviewers and the editor, as well
as the participants of the 15th Indonesian Regional Science Association International
Conference held in Banda Aceh, Indonesia, on 22–23 July 2019, for their valuable
comments. All errors are our responsibility.

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116 Andriansyah, Asep Nurwanda and Bakhtiar Rifai

APPENDIX 1 Conversion: 17 Sectors into 9 Sectors, Based

on the System of National Accounts, 2008

17 Sectors 9 Sectors Code

Agriculture, Forestry, and Fisheries Agriculture AGRI

Mining and Quarrying Mining and Quarrying MINE
Manufacturing Manufacturing MANU
Electricity and Gas Supply Electricity, Gas, and Water UTIL
Water Supply, Sewerage, Waste and Recycling
Management
Construction Construction CONS
Wholesale and Retail Trade Trade, Hotel, and Restaurant TRAD
Accommodation and Food Beverages Activity
Transportation and Storage Transportation and TRAN
Information and Communication Communication
Financial and Insurance Activity Finance and Business Services FINA
Real Estate
Business Services
Public Admin, Defence, and Social Security Government, Social and Other GOVE
Education Services Services’
Human Health and Social Work Activity
Other Services
Structural Change and Regional Economic Growth in Indonesia 117

APPENDIX 2 Conversion: 34 Provinces to 30 Provinces for Data Analysis

List of provinces

No. Current Combined province Notes

1 Aceh Aceh
2 North Sumatra North Sumatra
3 West Sumatra West Sumatra
4 Riau Riau Riau Islands was established on
Riau Islands 25 October 2002, but the initial
economic data starts in 2006.
5 Jambi Jambi
6 South Sumatra South Sumatra
7 Bengkulu Bengkulu
8 Lampung Lampung
9 Bangka Belitung Bangka Belitung
10 DKI Jakarta DKI Jakarta
11 West Java West Java
12 Central Java Central Java
13 East Java East Java
14 DI Yogyakarta DI Yogyakarta
15 Banten Banten
16 Bali Bali
17 West Nusa Tenggara West Nusa Tenggara
18 East Nusa Tenggara East Nusa Tenggara
19 West Kalimantan West Kalimantan
20 Central Kalimantan Central Kalimantan
21 South Kalimantan South Kalimantan
22 East Kalimantan East Kalimantan North Kalimantan was established
North Kalimantan on 25 October 2012.
23 North Sulawesi North Sulawesi
24 Central Sulawesi Central Sulawesi
25 South Sulawesi South Sulawesi West Sulawesi was established
West Sulawesi on 25 October 2004, but the initial
economic data starts in 2006.
26 South East Sulawesi South East Sulawesi
27 Gorontalo Gorontalo
28 Maluku Maluku
29 North Maluku North Maluku
30 Papua Papua West Papua was established on
West Papua 21 November 2001, but the initial
economic data starts in 2006.

Note: We acknowledge that the conversion of provinces due to changes in administrative boundaries
may introduce considerable bias into parameter estimates. Griffith (1983) reports that the decision to
define the boundary affects spatial distribution identification and statistical parameter estimation.
Further, Weir-Smith (2016) describes the issue of shifting boundaries due to two main problems: first,
scale, in which different results can occur when one set of areal units is aggregated into a lesser number
of larger units for analysis; second, aggregation, in which different results can be obtained when bound-
aries of spatial entities are arranged in different ways.