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Interregional resource transfer and economic growth in Indonesia

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  • Toshihiko Kawagoe
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    Abstract

    In 1970, Indonesia was a poor agricultural state, with a per capita GNP (Gross National Product) of only US$80 -- the lowest among Asian economies and substantially lower than such African countries as Kenya and Ghana. Agriculture -- with about 50 percent of GDP (Gross Domestic Product) and 66 percent of the labor force -- was the dominant sector. In the 1970s, however, Indonesia showed rapid economic growth (5 percent a year). Softened world oil markets brought a slowdown in growth in the early 1980s, but growth recovered and per capita GNP in 1994 was US$880, comparable with the Philippines and substantially higher than many South Asian and African countries. Agriculture had only a 22 percent share of GDP; industry, 41 percent; and services, 42 percent. But Indonesia is enormously diverse and some parts of it did much better economically than others. As the country's economy grew, market-based resource transfers helped modernize regional economies, creating the driving force for industrialization. By contrast, government-based resource transfers, in the form of development spending, were more welfare-oriented, favoring the poorer outer islands (and did not contribute to industrialization). In other words, economic growth was sustained by two driving forces, government- and market-based transfers, which complemented each other. The oil boom was a bonanza, producing new fiscal revenue, a luxury only oil-exporting countries could enjoy. It is not always a ticket to successful industrialization, as the tragic experiences of such oil-exporting economies as Mexico show.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1882.

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    Date of creation: 28 Feb 1998
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    Handle: RePEc:wbk:wbrwps:1882

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    Related research

    Keywords: Payment Systems&Infrastructure; Economic Theory&Research; Regional Rural Development; Environmental Economics&Policies; Health Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Poverty Assessment; Achieving Shared Growth; Regional Rural Development;

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    Cited by:
    1. World Bank, 2003. "Decentralizing Indonesia : A Regional Public Expenditure Review Overview Report," World Bank Other Operational Studies 14632, The World Bank.

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