Perspiration versus inspiration: sources of national and provincial output growth in Indonesia [1990-2015] using province-level non-parametric frontier analysis

The primary source of national/provincial output growth between input growth/factor accumulation growth ("perspiration growth") and total factor productivity (TFP) growth ("inspiration growth") has been long debated in Indonesia. Differing from the existing decomposition studies using the growth accounting analysis and stochastic frontier analysis, we applied a non-parametric frontier analysis method based on conventional and bootstrap data envelopment analysis to examine the sources of the national/provincial output growth for 1990-2015. We found that Indonesia's national/provincial output growth is dominantly attributed to output growth due to input growth. Additionally, the national output growth largely relies on input growth in four on-Java Provinces-West, East, Central Java and Jakarta. Output growth due to TFP growth, which consists of output growth due to efficiency and technological growth, plays a minor role. Consequently, Indonesia experienced "perspiration growth" rather than "inspiration growth" in 1990-2015. The neoclassical model assumes that technological progress is essential for sustainable economic growth as factor accumulations exhibit diminishing returns and efficiency gains cannot recur once the frontier is reached. After 2000, there has been a rise in Indonesia's technological growth, but factor accumulation has still been more substantial. The Indonesian government should coordinate policies promoting factor accumulation and TFP growth to facilitate sustainable economic growth in the future.