The development of the Indonesian service sector: a first analysis of the estimates

Source: own calculations from table 2
Horlings (1995) found that the Netherlands did not follow the ‘sectoral model’. He argued that ‘instead of transfers of labour from agriculture into industry and then into services, the structure of the Dutch economy became more advanced without significant growth of industry’ (Horlings 1995, p. 107). This scenario seems to hold for its former colony as well. In the case of the Netherlands Smits attributes this development path to important linkages between agriculture and the service sector, especially distributive services (Smits 1990, p. 90). More research is necessary to explain this ‘unusual’ development that emerges from an analysis of the occupational structure in Indonesia.

5. Value added in the service sector

5.1 Economic structure

Table 6 shows the development of the sectoral contribution to service sector GDP based on my reconstruction of the service sector. A number of interesting conclusions can be drawn from this table. Firstly, trade is by far the most important service sector at the beginning of the 20^th century and remains so during the colonial time. A possible explanation for this can be that the Dutch considered the Netherlands-Indies a ‘win-gewest’ (profit generating territory), which should produce for the international market. But also after independence trade is the leading service sector with a contribution between 31.7 and 49.1 per cent to total service sector GDP.

Table 6: Service sector structure (constant 1993 prices), 1900-2000
	Transport & Communication	Government	Trade	Financial Sector	Housing	Total service sector
1900	3.2%	11.6%	67.2%	0.8%	17.1%	100.0%
1910	5.2%	11.2%	66.4%	1.6%	15.7%	100.0%
1920	12.2%	8.8%	63.4%	2.1%	13.6%	100.0%
1930	11.1%	17.5%	57.0%	3.0%	11.2%	100.0%
1939	8.6%	12.0%	59.0%	2.1%	18.3%	100.0%
1950	11.8%	17.6%	47.1%	0.7%	22.8%	100.0%
1960	18.4%	18.9%	39.9%	1.0%	21.8%	100.0%
1970	17.9%	9.5%	50.1%	2.7%	19.8%	100.0%
1980	18.7%	9.9%	52.0%	5.3%	14.1%	100.0%
1990	19.0%	14.3%	42.6%	12.6%	11.4%	100.0%
2000	21.6%	13.1%	39.2%	16.2%	9.9%	100.0%
Source: own calculations

Secondly, transport and communication, being only of relatively small importance in 1900, develops gradually contributing 21.6 per cent to service sector GDP in 2000. An important factor behind these developments is the technological changes that took place in this sector especially during the first half of the 20^th century. Whereas in 1900 transport took place either by sailing vessel, train for long-distances or by becak, dogcart or other forms of traditional transport for shorter distances, in 1940 one could also choose between motor vessels, air transport, automobiles or buses. Nevertheless, contribution to total service sector GDP is halted back between 1930 and 1950. This is mainly due to a fall in rail transport and stagnation in growth of road transport. Probably these developments were linked to the world depression in the 1930s, the Japanese occupation and the subsequent war of independence between 1945 and 1949 which caused severe damage to the infrastructure.

Thirdly, the development of the financial sector is remarkable. The size of the financial sector remains very small until the 1970s, but rapid growth results in a contribution of this sector of 12.5 per cent in 1990 and even 16.2 per cent in 2000.

Fourthly, contribution of the housing sector is quite significant, especially between 1950 and 1970, but also contributing almost 20 per cent to total service sector GDP in 1939. An explanation for this is that this sector grows very gradually, linked to growth in population. So whereas in other sectors growth is seriously halted back from 1940 onwards by the two wars and the subsequent unstable economic situation under Suharto, the housing sector is not much affected, therefore becoming more important.

In conclusion, the structure of the service sector has undergone some significant changes. In 1900 trade made up 2/3 of total service sector GDP. During the 20^th century all sectors, except the housing sector, gained importance at the expense of the trade sector. This has resulted in a more equally diversified service sector.
5.2 Growth in the service sectors

Instead of looking at the structure of the service sector, picturing the growth paths of the different service sectors also reveals some interesting patterns. Figures 2 and 3 show the development of value added in the different transport and communication sectors and that of the different service sectors respectively.

Figure 2 points out that the transport and communication sector as a whole grows steadily with small drops in the early 1920s, the early 1930s and the turbulent 1960s. What also becomes clear from figure 2 is that the different sectors of which the transport and communication sector consists show varying development paths.

Initially railway transport is the leading subsector making up more than half of total value added in the transport and communication sector. Growth however stagnates in the early 1920s. This is mainly due to increasing competition from road transport. Average annual growth in road transport between 1915 and 1929 is 12.7 per cent. Communication also grows rapidly during the colonial period with an annual average growth of around 14 per cent in the period 1900-1929. Developments in water transport are steady, although less impressive. Air transport is only possible by 1928 with the foundation of the Koninklijke Nederlandsch-Indische Luchtvaartmaatschappij (KNILM). Beginning from scratch it is not surprising that growth rates are quite high, but the amount of value added generated in this sector is only small.

Figure 2: Development of value added in the transport & communication, 1900-2000 (in millions of fl/Rp at constant 1993 prices, log scale)

Source: own calculations

After independence developments in rail transport remain problematic. Being the leading sector in 1900, it keeps losing ground becoming the smallest contributor to transport and communication GDP after 1970. Growth is even negative for the period 1960-1973. Air transport on the other hand keeps growing at impressive rates.

Road transport recovered from the halted growth during the 1930s and continuously grows from 1950 onwards. A take off in growth in water transport is halted back after the war of independence by ongoing conflicts between the KPM and the Indonesian government. This ultimately culminates in the expulsion and nationalization of KPM in December 1957. What follows is a period of stagnation. However after 1965 growth picks up and especially the growth spurt between 1965 and 1975 is impressive. Developments in communication are relatively moderate, although on average annual growth in this sector is still 5.2 per cent. Together with rail transport, however, it is the only sector for which growth rates are lower after independence than during the colonial time.

Figure 3 illustrates the growth paths of the sectors of which the service sector consists. On average, annual growth in the service sector is 2.4 per cent between 1900 and 1939, 5.2 per cent between 1950 and 2000 and 3.8 per cent for the whole period. This is somewhat higher than growth in agriculture, and a little lower than growth in industry. But as we have seen before, different subsectors followed different development paths.

Figure 3: Development of value added in the service sector, 1900-2000 (in millions of fl/Rp at constant 1993 prices, log scale)

Source: own calculations

To begin with, developments in the financial sector are very erratic. The sector was only of minor importance during the colonial period with heavily varying growth rates. It took until the late 1960s before growth in this high-value added sector took off. The double-digit growth that followed was very impressive, but unfortunately the sudden drop caused by the Asian crisis in 1998 was just as impressive. Eventually this drop turned out to be only temporary.

Growth in transport and communication has already been discussed above. The role of the government is especially important in the period 1973-1986. Large oil revenues provided the means for the government to navigate the economic development of Indonesia. Large investments were made in programmes in the education and public health sectors. Also a large part of the increase went on salaries of civil servants (Booth, 1998, p. 187).

Ownership of dwelling grew gradually with an average annual growth rate of 2 to 3 per cent. This growth was mainly due to the growing population requiring more houses, and partly to improvements in the housing conditions.

As mentioned before the trade sector was and is the most important service sector in Indonesia, although the economic growth that Indonesia experienced brought other service sectors to development as well. Remarkably growth in the trade sector between 1900 and 1939 was limited to an average annual growth of 2.1 per cent. Since independence, actually since Suharto came to power, average annual growth in the trade sector increased to 5.2 per cent. This increase is mainly due to the linkages with industry. No industry can exist without some distribution network. When a good is produced, someone needs to bring it to the market. Therefore it is not surprising to see that growth in trades coincides with the industrial development that has taken place in Indonesia since the 1970s.

The developments in the service sector are once more summarized in table 7. This table shows the average annual growth rates for the different service sectors. Arguments to support this periodization are the following: 1930 was the start of the world wide depression. Having a relatively open economy this depression also affected Indonesia. 1967/1968 is the year that Suharto came to power. On 11 March 1966 Sukarno already signed a decree giving full authority to General Suharto. In 1967 Soeharto was appointed as Acting President, although only in 1968 he was officially installed as Indonesia’s second president. 1973 was the year of the first oil boom, followed by the second in 1978. The period 1982-1986 is characterized by recession and reorientation of the Indonesian economy. This resulted in a resurgence of the economy which was brought to a sudden end by the Asian crisis in 1997.

Table 7: Average annual sectoral growth rates, 1900-2000
	1900-1915	1915-1929	1930-1939		1950-1960	1960-1967	1968-1973	1973-1981	1982-1986	1986-1997	1997-2000		1900-1939	1950-2000	1900-2000
Railways	7.5%	2.1%	-5.0%		3.6%	-9.0%	-2.2%	2.5%	8.1%	9.6%	3.7%		2.4%	2.3%	1.4%
Road transport	6.7%	12.7%	0.1%		15.7%	6.2%	8.9%	14.5%	8.6%	7.3%	4.1%		7.4%	10.0%	7.1%
Water transport	4.5%	2.7%	1.4%		5.1%	6.7%	24.7%	2.8%	7.8%	9.4%	-3.4%		3.1%	7.8%	5.0%
Air transport^b			10.5%		5.7%	9.7%	28.9%	19.9%	6.7%	8.2%	-13.4%			9.8%
Communication	15.1%	13.4%	-3.3%		6.5%	-5.5%	10.2%	6.4%	6.7%	7.7%	8.4%		9.9%	5.2%	7.6%
Total transport & communication	7.3%	6.8%	-2.0%		8.2%	0.1%	12.3%	10.1%	8.0%	7.8%	3.1%		4.9%	7.2%	5.7%
Government	4.0%	4.7%	-3.3%		-0.3%	-6.2%	7.5%	13.6%	19.4%	4.1%	4.2%		2.5%	4.4%	3.9%
Financial sector	11.2%	3.9%	-3.5%		5.7%	-1.4%	32.8%	16.3%	13.4%	17.1%	-5.4%		4.9%	12.7%	6.9%
Ownership of dwelling	1.2%	1.8%	6.8%		1.9%	1.6%	1.9%	2.4%	2.9%	3.0%	3.1%		2.7%	2.3%	3.2%
Trade	2.0%	2.7%	1.2%		1.5%	2.9%	11.6%	9.6%	3.9%	9.8%	-5.1%		2.1%	5.5%	3.2%
Total service sector	2.5%	3.3%	0.9%		2.1%	0.8%	8.3%	8.6%	7.3%	8.6%	-1.7%		2.4%	5.2%	3.8%
Agriculture^a	2.0%	1.8%	1.2%		2.7%	0.7%	4.9%	4.1%	4.5%	3.3%			1.7%	3.1%	2.1%
Industry^a	1.4%	3.4%	3.9%		1.1%	0.5%	13.9%	9.4%	7.5%	11.4%			2.7%	6.4%	3.9%
Notes: ^a: only for the period 1900-1998 ^b: Air transport only started in 1928 with the foundation of the KNILM Sources: Agriculture and Industry from vd Eng (2002), other sectors: own estimates

6. Labour productivity

The employment figures from section 4 can be combined with the service sector estimates in section 5. This makes it possible to draw some conclusions about developments in labour productivity. The labour productivity estimates are presented in table 8.

The first remark that has to be made is about the rather high labour productivity in 1905. This is mainly due to weakness in the data. As said before the enumeration of 1905 is considered of poor quality in absolute terms, resulting in an underestimation of the number of people employed in most sectors. From 1930 onwards estimates are quite reliable. They are based on a well-conducted population census combined with careful estimates of value added in the different sectors. A number of interesting observations can be made.

Table 8: Labour productivity in Indonesia’s service sector, 1905-2000 (in 1993 Rp per labourer)
	Agriculture	Industry (excl. oil and gas)	Trade	Transport & Communication	Financial sector	Total service sector
1905	1,018.3	4,071.0	3,961.1	1,497.8		3,291.7
1930	978.4	2,625.1	3,726.6	2,976.2		3,682.2
1961	939.5	3,559.2	2,208.6	3,289.8		2,385.7
1971	1,148.7	5,346.7	1,545.9	3,212.3	5,602.6	2,112.0
1980	1,170.0	11,742.8	3,118.8	5,101.4	7,057.0	2,724.1
1990	1,205.8	12,526.8	3,310.5	7,077.7	22,689.9	3,789.7
2000	1,685.6	15,764.6	3,115.8	6,964.6	27,038.2	4,390.4
Sources: Employment figures: Population censuses; GDP estimates: for Agriculture and Industry: vd Eng (2002). Other sectors: own estimates