New Estimates of Total Factor Productivity Growth in Indonesian Manufacturing

This paper estimates new elasticities of value added with respect to labour and capital in Indonesian manufacturing, controlling for the simultaneity problem that potentially exists between the choice of input levels and a productivity shock (such as an increase in productivity due to new production processes), for plant exit, and for quasi-constant unobservable plant characteristics. It does so by applying the Levinsohn and Petrin (2003) production function estimator to plant-level value added, fixed assets, labour, and electricity consumption data over the period 1988–95. This methodology allows us to revisit the previously used growth accounting based elasticities, and thereby improves total factor productivity (TFP) estimates. The results show that, in the period under study, aggregate TFP growth in Indonesian manufacturing was higher than had previously been estimated.