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

To begin with labour productivity in the service sector turns out to be, as expected, higher than in agriculture. Labour productivity in industry, however, is, except in 1930, significantly higher than in the service sector, even four times higher in 2000.

Mulder (1999) came to different results in his study on the service sector in Brazil, Mexico and the USA. He found that productivity in services was indeed highest at the beginning for all three countries, just as in the case of Indonesia. In the course of time, productivity levels in services and other sectors converged, because of slower growth in productivity in services.⁹ In Indonesia such a convergence in productivity cannot yet be found. Labour productivity in manufacturing in Indonesia is still much larger than in the other sectors. This suggests that the shift from labour to services that is taking place raises the overall performance less than a shift to manufacturing.

The findings above are strengthened if we look at growth rates in labour productivity. As can be seen in table 9 growth in labour productivity in industry was especially high in the 1970s, when industrialization took off in Indonesia. The decrease in labour productivity in trade between 1961 and 1971 and again between 1990 and 2000 is probably because the labour surplus as a result of the crises that took place in these periods was mainly absorbed in this sector.

Growth in labour productivity in transport and communication has been quite steady. This can probably be attributed to the technological developments in this sector and the investments the government has been making in infrastructure. Promising developments also took place in the financial sector. In this sector labour productivity is by far the highest, although the Asian crisis has halted back further growth.

Table 9: Labour productivity growth, 1905-2000
	Agriculture	Industry (excl. oil and gas)	Trade	Transport & Communication	Financial Sector	Total service sector	Total labour productivity
1905-1930	-0.16%	-1.74%	-0.24%	2.78%		0.45%
1930-1961	-0.13%	0.99%	-1.67%	0.32%		-1.39%
1961-1971	2.03%	4.15%	-3.50%	-0.24%		-1.21%	2.32%
1971-1980	0.20%	9.14%	8.11%	5.27%	2.60%	2.87%	4.97%
1980-1990	0.30%	0.65%	0.60%	3.33%	12.39%	3.36%	2.31%
1990-2000	3.41%	2.33%	-0.60%	-0.16%	1.77%	1.48%	2.62%
Source: own calculations from table 6

With the inputs so far it is possible to estimate the contribution of structural change to productivity growth. This method is usually called the shift-share method introduced by Fabricant (1942). The shift-share methodology is still popular in decomposing aggregate productivity growth (see Syrquin, 1984, for an overview and for more recent applications van Ark, 1996; Mulder, 1999; Timmer and Szirmai, 2000; Lains 2004).

where LP denotes labour productivity, Y output, L the labour force, and S the share of labour in each sector.

The difference in aggregate labour productivity levels at time 0 and t can be written as:


The first term on the right hand side represents the intrasectoral productivity growth, and corresponds to that part of the productivity change which is caused by productivity growth within the sectors. The second term is referred to as the static shift effect, and represents the effect of the change in sectoral employment shares on overall growth. This effect is positive when labour moves to branches with relatively high productivity levels. The third effect measures the dynamic shift effect, and is positive when labour shifts to sectors which improve their productivity performance. The sum of the second and third term is referred to as the total structural change effect.

The results of this exercise are given in table 10. In Indonesia productivity growth is increasingly explained by productivity growth within sectors. Structural change accounted for almost 50 per cent of the growth between 1961 and 1971, but only 15 per cent of the growth between 1980 and 1990. The static effect was especially large in the 1960s and the 1990s indicating that in these periods labour shifted to more productive sectors. The dynamic effect has been relatively small.

Table 10: Decomposition of labour productivity growth, 1930-2000
		1930-1961	1961-1971	1971-1980	1980-1990	1990-2000
Labour productivity growth per year		-0.03%	1.53%	4.94%	2.57%	2.97%
Intrasectoral growth			52.4%	67.0%	84.0%	56.4%
Structural change	Static		62.0%	21.8%	12.8%	38.4%
	Dynamic		-14.4%	11.2%	3.1%	5.1%
	Total		100.0%	100.0%	100.0%	100.0%
Source: own calculations from table 6

7. Conclusion
‘Modern economic growth’ is defined as a sustained growth in national income per capita. According to Kuznets (1966) this process was accompanied by important structural changes. The aim of this paper was to assess these changes by looking at developments in occupational structure, value added and labour productivity.

With regard to the occupational structure the case of Indonesia reveals two important findings. Firstly, already in an early phase of development service sector employment is significant and higher than industrial employment. Secondly, growth of service sector employment is not preceded by a growth in industrial employment, but rather coincides or is even followed by it.

The structure of the service sector has undergone some significant changes too. 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.

Labour productivity in Indonesia’s service sectors, except for the financial sector, has not been very impressive. Although compared to agricultural productivity it is both higher in level and growing more rapidly, it cannot keep up with developments in the industrial sector. It seems that Indonesia’s major service sectors are still the traditional sectors with relatively low value added.

Looking at these three measures we see a clear transformation of the economy during the 20^th century, especially during the 1970s. Nevertheless, Indonesia is still in transition. Agriculture is still the largest sector, both in employment and income. Moreover, within the service sector most employment and most income is still in the more traditional service sectors such a transportation and trade, which were already quite important in the colonial period. For a decisive transition to a modern economy, however, developments such as in the financial sector are necessary.

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1 While (re)constructing national accounts, one is forced to make, sometimes rather bold, assumptions, which can obviously be disputed. In this paper I will only briefly discuss the sources and estimation methods showing that the estimates are the result of consistent and transparent calculations. A more detailed description of the methods adopted is available upon request. Eventually it will be published in my dissertation.

2 Jaarverslag der N.V. Deli Spoorweg Maatschappij. Amsterdam, 1883-1940; Verslag over den aanleg en de exploitatie van de Staatsspoorwegen in Nederlandsch-Indië. Batavia, 1887-1915; Verslag der Staatsspoor- en tramwegen in Nederlandsch-Indië. Batavia, 1915-1941; Verslag van den raad van beheer der Nederlandsch-Indische Spoorweg Maatschappij aan de algemeene vergadering van aandeelhouders. The Hague, 1869-1929; Verslag N.V. Nederlandsch-Indische Spoorweg Maatschappij. The Hague, 1930-1940; ARA, inv. 2.20.11, Deli Spoorweg Maatschappij, 1883-1970.

ARA, inv. 2.20.10, Nederlandsch-Indische Spoorweg-Maatschappij, 1863-1973.

3 The name of the railway state enterprise changes several times throughout the second half of the 20^th century. Chronologically the name was: DKA (Djwatan Kereta Api), PNKA (Perusahaan Nasional Kereta Api), PJKA (Perusahaan Jasa Kerata Api), Perumka (Perusahaan Umum Kereta Api) and PT Kereta Api

4 Neumark (1954) and Muljatno (1960) made estimates of Indonesia’s national accounts for 1951/52 (Neumark) and 1953/54 (Muljatno).

5 KNILM, annual reports, ARA, Ministerie van Koloniën, Regeringscommissarissen, Nummer toegang: 2.10.46.01, inv. nr. 121-124.

6 Verslag omtrent den Post- en Telegraafdienst in Nederlandsch-Indië. Batavia, 1876-1907; Verslag omtrent den Post-, Telegraaf- en Telefoondienst in Nederlandsch-Indië. Batavia, 1908-1941.

7 BPS, Tabel Input-Output, 1975, 1980, 1985, 1990, 1995, and 2000.

8 These rents are taken from CKS (1928), CKS (1939) and Colombijn and Barwegen (2005)

9 Similar findings were reached by Maddison (1980), Ohkawa (1993) and Syrquin (1986).