Total factor productivity change in Indonesia's provincial economies for 1990-2015: Malmquist productivity index approach

This study employs the Malmquist productivity index based on data envelopment analysis to measure and decompose total factor productivity (TFP) change into efficiency and technological change by province. Using annual observations of gross regional domestic product and factor inputs (labor, physical, and human capital) for 26 contiguous provinces, we find that over a quarter of them experienced negative TFP growth over 1990-2015 due to technological regress, which was barely offset by efficiency improvements. Three on-Java provinces-Jakarta, West Java, and East Java-contributed to national technological progress with full utilization and optimal allocation of resources at least once over the study period, except during 1995-2005, when Indonesia experienced a financial crisis and subsequent slow recoveries. Jakarta and West Java contributed in all other periods. Considering the high spatial density of urban economic activities in these three provinces, we conclude that urban agglomeration is influential for further regional technological growth in Indonesia.