Total factor productivity convergence of Indonesia’s provincial economies, 2011-2017

Abstract

This study aims to investigate the potential convergence process of total factor productivity (TFP) among 33 provinces in Indonesia in a period between 2011 and 2017. It is the first study that captures the effect of intra-provincial trade and international trade on the TFP convergence. The authors employ stochastic frontier analysis to identify the TFP and generalized methods of moment (GMM) to examine the convergence process. The result of this study confirms that the TFP convergence process in Indonesia occurred in 2011–2017. Concerning intra-provincial and international trades, the study discovered that neither of them promotes TFP growth. Rather, except for the international import, they reduce the gap of TFP growth amongst provinces. The result demonstrates that intra-provincial exports reduce the TFP growth gap by 19.7% more than international exports. This finding indicates that intra-provincial exports are more efficacious in reducing regional inequality. The same is true for the intra-provincial import. This finding delivers essential policy implications such as streamlining the development policies across provinces, albeit the prevailing decentralization program. This should inform the formulation of regional regulations so these will not hinder the provincial growth convergence. This study uses three groups of variables: production frontier, inefficiency effect and the determinants of convergence. Variables in the production frontier are: output proxied by nominal gross domestic regional product (GDRP) in Rupiah, inputs that consist of capital proxied by nominal gross fixed capital formation (GFCF) in Rupiah and labour proxied by the number of labour force. Variables in the inefficiency effect only contain the time trend. Meanwhile, variables in the determinants of convergence encompass: intra-provincial export, international export, intra-provincial import, and international import. The determinants of convergence are measured through their ratio to the GDRP (Mitsis 2021). magnitude at 0.3% in 2011–2017. This suggests that Indonesian provinces have demonstrated a technological progress in terms of the contribution of capital and labour towards obtaining GDRP. This study stresses that three regions which demonstrated the largest technological progress are all on Java Island i.e. Jakarta (1.2%), East Java and West Java (1.1%). This finding indicates that the shifting frontier of capital and labour generating output remains relatively centralised in the area of