Imports and economic growth in Indonesia: 1957-1979
Date
1982-07
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Abstract
This study attempted to: (i) estimate factors affecting the composition of Indonesian imports, using the Economic and the Standard International Trade Classification systems; (ii) investigate import demand functions at aggregative and disaggregative levels, using prices and income as explanatory variables, (iii) analyze the relationships between import structure and economic growth with focus on the role of capacity to import, import of capital goods, and gross capital formation, using data for the period 1957-79.
The findings suggest that: (a) there was a substantial change in import structure during the period covered by this study; (b) import demand tended to react to percentage changes of internal and external variables than to absolute changes in these variables; (c) prices played a less important role in the imports of Indonesia; (d) the imports have a higher elasticity with respect to the income variable of all commodity classes and total imports. On the other hand, certain imports were inelastic with respect to lagged relative prices; (e) the import of capital goods and gross capital formation indicates no relationship, while gross investment looms as a key handle in stimulating gross domestic product; (f) there was a systematic link between import of capital goods and capacity to import, and between income and capacity to import. This suggests that a basic requirement of economic growth, ceteris paribus, is the ability to import the external component of investment.
The policy implications of the above conclusions are that: (i) it is more appropriate to aim policies at income than at prices, because the income variable is more dominant than the price variable in determining the behaviour of quantity of import demanded; (ii) in regard to economic growth, it is required to increase exports, maintain the growth of long-term capital inflow, and redirect sufficient investment to exchange-earning activities, in order to promote a more rapid rate of capital formation and hence a higher rate of growth of output.