Economic Growth In Indonesia Economics Essay

Education is one of the key of economic growth in a country, education help the society to endure the rapid growth of globalization. The new era of globalization push the society to reach the highest education that they can achieve so, they can absorb modern technology and develop the capacity for self-sustaining growth for the future. We can also say that education is a vital component of growth and economic development. This can be said because education is one of the inputs in production functions.

In the recent decades we have witnessed a historically unprecedented extension of literacy and other basic education to a majority of people in the developing world. Specifically in Indonesia, the Ministry of Health in Indonesia were still a staggering 80 million or 33.39% of Indonesian people are illiterate people in aged 10 or older in 2010 and 79.98% being educated at least until elementary school. The biggest question between both numbers is many people had receive education until elementary school but the number being illiterate still 33.39%.

In this paper we will seek the answer from the question; is education in Indonesia have an impact in the economic growth in Indonesia? Is there any correlation between education and economic growth it self? The comparison variable that’s being use in this paper is between education indicator (education being receive and literate people in Indonesia) and Indonesia GDP non mineral and oil.

Part II

There are six theory that being related to the human capital that being the basic knowledge of this paper. First, the Solow growth model which is a model of capital accumulation in a pure production economy. The assumption that being use in this model that everyone work all the time, no choice to leisure time, the consumers also always saves a fixed portion of income, there is no taxation, there is no subsidies; using closed economy, there also no trade and this model did not use price because the model strictly focus on the output=real income. The education is not being put as input explicitly but being put in the production variable. We can also input the thought that accumulation of physical capital will not be optimal if it is not balance by an educated workforce (for running machines, management, etc). The second theory is more to the micro sector. The second approach is Gary Becker’s human capital approach, this approach use the function of wage = Price x Marginal product of labor. Where education lead to productivity and productivity lead to higher wage. This approach also use to analyst individual decisions to invest in human capital (such as education). Gary Backer’s said in his journal that “activities that influence future real income through the imbedding of resources in people called investing in human capital”. The next model will support the statement of education increase earning potential and also produce “ripple effect”. The Katharina Michaelowa of the Hamburg Institute for International Economics diagrams the impact of education at both micro and macro levels. The model describes the impact of education in micro and also in macro. In micro education making impact to the externalities and other indirect effects related to education, health and population growth, such as; higher education attainment and achievement of children, better health and lower mortality of children, better (own) health, and lower number of birth. Education also increased earnings (with higher productivity), increase earnings of neighbours, participation in the labor force. The three impact on micro sector also make an impact on the macro sector, increase participation in the labor force make an increase on labor force, increase earnings of neighbours and increased earnings make an impact on higher growth, and the externalities and other indirect effects related to education, health and population growth make an impact to lower population growth and better health population (and labor force). The forth theory is the Nelson and Phelps 1966, where the stock of human capital increase a country ability to adopt or imitate new technology. The others theorists that we already talk about, have embraced that education enhances one’s ability to receive, decode, and understand information, and that information processing and interpretation is important for performing or learning to perform many jobs. The theory postulates a production function which states how maximum current output depends upon the current services of tangible capital goods, the current number of men performing each of these jobs, the current educational attainments of each of these job holders, and time. In the concluding remarks from nelson and Phelps journal, according to the models that they used the rate of return to education is greater the more technologically progressive is the economy. Which suggest that the progressiveness of the technology has implications for the optimal capital structure in the broad sense. Nelson and Phelps also suggest that “may be that society should build more human capital relative to tangible capital the more dynamic is the technology”. This theory also mention other point of relevance for social investment policy, it’s said that if innovations produce externalities, and being cause by show the way to imitators, then education by its stimulation of innovation also yields externalities. Their view also suggests that the usual, straightforward insertion of some index of educational attainment in the production function may constitute a gross misspecification of the relation between education and the dynamics of production. The fifth theory is Robert Lucas (1988), Lucas-Uzawa model, which explain the relationship between the stock of human capital and positive externalities to the economy. Which being elaborate by Lucas model, Lucas (1988) presents a growth model in which output is generated via a production function of the form

Y = AKα(uhL)1−α (1)

where Y, A, and K are as usually defined and 0 < α < 1. The variable u is defined as the proportion of total labor time spent working, and h is what Lucas calls the stock of ‘human capital’. The production function can be rewritten in per-capita terms as

y = Akα(uh)1−α (2)

which is a constant returns to scale production function in k and uh. Capital accumulation proceeds via the usual differential equation,

k ̇ =y−c−(ξ+δ)k, (3)

while h accumulates according to

h ̇ = φh(1−u) (4)

h ̇/h = φ(1−u). (5)

this function clearly give us the picture how the human capital being correlate with income, which lead to economic growth. The last theory will be mention is the Romer (1990) theory which share of educated labor in the research sector (R & D) and non-research. This theory is based on three premises. First, economic growth is driven by technological progress as well as capital accumulation. Second, technological progress results from deliberate actions taken by private agents who respond to market incentives. And the third, technological knowledge is a non-rivalrous input (modelled as positive knowledge spill-overs). In Romer’s theory there also implications, the first one is the long-run growth rate is completely determined by technology and preference parameters. It said that growth is endoge- nous in two senses: First, the growth rate results from the optimizing decisions of private agents (households and entrepreneurs). Second, the productivity parameter hA in the growth rate indicates that an increase in the productivity of the private input L (which is equivalent to a reduction in R&D costs) stimulates growth. Hence, an R&D subsidy can affect the long-run growth rate (policy is effective). The second implication is the above displayed growth rate applies to the market solution. Since there are a number of “market failures” (positive spill-over effects and imperfect competition, which are essential for sustained endogenous growth to be feasible), the market solution does not coincide with the socially optimal solution. The socially optimal long-run growth rate is given by , where gS > gM. Next, the third implication, the long run growth rate implies a scale effect. The larger the economy (measured by L), the faster it grows. The economic intuition behind the scale effect is straight forward : The larger the amount of L, the higher is the amount of labour allocated to R&D and the higher is the long-run growth rate (the dirct connection between L does, however, require a strong form of intertemporal spill-over effects, i.e.). The last implication is the growth condition is . The fact that a measure of the size of the economy enters the growth condition implies that the economy must be sufficiently large in order to exhibit sustained growth (there is a threshold effect). Notice that in the original Romer (1990) formulation the relevant scale variable is human capital H rather than labour L. That’s all the theory that being used to backup writer hypothesis that human capital had corralation with economic growth.

Part III

From the last part we already discuss all six theory that backup the hypothesis, that human capital being correlate with economic growth. Now, we will discuss the other question, is education in Indonesia have an impact in the economic growth in Indonesia? Let’s see the number in now Indonesian conditions. To answer that question we have to determine what are the indicators that can give us the big picture on Indonesia education and Indonesia economic growth, but before we go on we should remember that population of the 33 provinces in Indonesia is 241,182,182 in 2011 according to the Indonesian Ministry of Health. First we will discuss Indonesia condition on education, the writer use two indicators on education. The literacy rate and school enrollment, Indonesia condition on literacy are, for age 10 until 45+ in 2006 40.14%, in 2007 37.29%, in 2008 36.3%, in 2009 34.49%, and in the 2010 33.39. And for age 15 until 44 (productive age) in 2006 2.89%, in 2007 2.96%, in 2008 1.95%, in 2009 1.80%, and in 2010 1.71%. We can see from the data that being produced by the ministry of health of Indonesia, that the literacy rate in Indonesia keep diminishing from time to time. This diminishing condition is being supported by the other education indicator, School Participation Rate (SPR). The School Participation Rate (SPR) in Indonesia being divided into three stage; elementary and other equal, junior high school and other equal, and high school and other equal. For the elementary and other equal level of education in 2006 31.0%, in 2007 30.43%, in 2008 29.08%, in 2009 29.31, and in 2010 29.72%. For the junior high school and other equal level of education in 2006 19.88%, in 2007 19.83%, in 2008 20.23%, in 2009 19.85%, and 2010 20.57%. For the high school and other equal level of education in 2006 25.78%, in 2007 26.73%, in 2008 27.46%, in 2009 28.49%, and in 2010 29.69%. And for the total education attained population 15 years and above are, in 2006 76.66%, in 2007 76.99%, in 2008 76.77%, in 2009 77.65%, and in 2010 79.98%. We can see from the data that literacy rate have a correlation with the School Participation Rate (SPR), because with the increase of the total education attained population 15 years and above a long the years from 2006 until 2010 the number of the total literacy rate which from the age of 10 until 45+ keep diminishing a long the year also from 2006 until 2010. Now, what we need is to find out is there any correlation between the two educations indicator with the Indonesia economic growth. For the economic growth, the indicator that the writer used to see Indonesia economic growth is the GDP and GNI in Indonesia it self, where the GDP it self is the sum of gross value added by all resident producers in the Indonesian economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. GNI is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI, calculated in national currency, is usually converted to U.S. dollars at official exchange rates for comparisons across economies, although an alternative rate is used when the official exchange rate is judged to diverge by an exceptionally large margin from the rate actually applied in international transactions, the writer not only use the GDP because the education were correlate to self achieve of a person so for Indonesian people the writer want to know is the Indonesian people already achieve their return on the education investment that they already invest. Let us see the number of Indonesia GDP from 2006 until 2010 from the data that being taken by CBS (Central Body Stats) of Indonesia. In 2006 3,339,216.80, in 2007 3,950,893.20, in 2008 4,948,688.40, in 2009 5,606,203.40, and in 2010 6,436,270.80. From this data we can see that Indonesian GPD experience growth from year to year. Next we will see the data from the world bank on Indonesia GNI per capita. In 2006 $ 1,370, in 2007 $ 1,600, in 2008 $ 1,950, in 2009 $ 2,160, in 2010 $ 2,500. We can deduct from GDP and GNI number that they both correlate, because when the GDP increasing from 2006 until 2010 as well as GNI. Now, we correlate the growth of the GDP with the literacy rate and the School Participation Rate (SPR). The rate of School Participation Rate (SPR) from 2006 until 2010 is increasing and followed by the decrease of literacy rate from 2006 until 2010. And the Indonesian GDP from 2006 to 2010 is increasing from year to year as well as Indonesia GNI. If we correlate the three data, School Participation Rate (SPR) increase lead to decreasing on literacy rate, which lead to increasing GDP and GNI in Indonesia. Which mean there is positive correlation between education and economic growth in Indonesia. And the data also show that the people in Indonesia get their return on their investment on their education which being shown by the GNI per capita.

Part IV

From the part III we can see the answer from the question at part I, the first answer is that education in Indonesia have an impact in the economic growth in Indonesia and the second answer there is correlation between education and economic growth. Actually in the world bank there already research that prove better education lead to a better growth, research by World Bank that conducts 83 developing countries tells that 10 countries with the highest real GDP growth and GNP per capita in 1960 and 1977 are countries with 16% higher average literacy rate comparing to other 83 countries. Moreover, countries with the lowest illiteracy rate also earned the lowest real GDP growth. This study shows a significant effect caused by education in term of income (GDP).

The researched just show that education really can help the society to endure the rapid growth of globalization. This is why the government should pay more attention to Indonesian education. In now days government only allocate 3.8% of government budget for the education, where more than 53% of the subsidies being used for fuel which not efficient and effective. All of this facts should show that government should not be hesitate to be more firm to give more attention to Indonesia education.