The balance of trade constrained growth in the Indonesian economy, 1970-1990
Indonesian economic growth fluctuates in accordance with the country's trade balance positions. A change in terms of trade and world demand for Indonesia's exports has critical impacts on real income through the medium of the balance of payments. The Indonesian government, in response to the changes, made adjustments in its expenditures, exchange rates, and trade regulations. The purposes of this study were: first to estimate the effects of the changes on the trade and income growth relationships. Second, to measure the effectiveness of government policies available to intervene the nature of the relationship between the two variables. A single as well as a simultaneous equation model were derived embodying the structural relationships among income, exports, imports, and other related variables. Data on exports and imports used in the study are classified into three sectors: agricultural, oil and gas, and manufacturing. The study revealed that the impact of relative price increases on income growth are positive for the agricultural and manufacturing sectors but are negative for the oil sector. In the long-run, the impacts are negative for the agricultural and oil sectors but are positive for the manufacturing sector. The implications are that a domestic currency devaluation results in a short-run positive effect on the oil and gas sector only. In the long-run, a devaluation results in positive effect on the agricultural and oil and gas sectors, but negative effect on the manufacturing sector. In addition, the impact of world demand on income growth is invariably positive across the trade sectors in the short-run as well as in the long-run. An increase in government spending has a significant and positive impact on the agricultural and manufacturing sector incomes in the first quarter and then diminishes gradually through the year. However, the impact on oil sector income growth is negative. Although the relationship between income growth and the trade balance is strong, a hypothesis that there is a one-to-one relationship between the two variables is not supported empirically. Moreover, the notion of export-led growth is statistically supported only for the manufacturing sector.