Capital Stock Estimates by Province and Interprovincial Distribution in Indonesia

• Date: 01 December 2013
• DOI: http://doi.org/10.1111/asej.12021
• Author: Mitsuhiko Kataoka
• Published date: 01 December 2013

Capital Stock Estimates by Province and

Interprovincial Distribution in Indonesia*

Mitsuhiko Kataoka

Received 19 May 2011; accepted 10 April 2013

We use the perpetual inventory method to estimate gross fixed capital stock at the

provincial level in Indonesia. We employ a relatively long series of past annual

investments at constant prices for 1983–2007 and a province-specific survival

function for capital. For this purpose, we use published data on provincial income

accounts, input–output tables, and surveys from existing studies. Capital was

found to be over-concentrated in the Java-Bali region and inefficiently distributed

among provinces. This distribution contributed to national growth in the majority

of the sample years.

Keywords: capital stock, economic growth, interprovincial factor distribution,

Indonesia.

JEL classification codes: R11, R12, R58.

doi: 10.1111/asej.12021

I. Introduction

As a factor of production, capital determines the levels of output and productivity

in national and regional economies. In addition, capital investment is the main

means of introducing new technology and, thereby, rejuvenating industrial struc-

tures. However, because of data constraints, relatively few studies examine capi-

tal’s role in regions of developing countries.

Gross capital stock can be estimated using three methods: (i) the perpetual

inventory method (PIM); (ii) the survey method; and (iii) a method that lies

between the PIM and the survey method (OECD, 2001). The PIM is a conven-

tional method of calculating the inventory balance on a continuous basis by

adding the value of past investment and deducting the values of assets that have

reached the end of their service lives. In contrast, the survey method involves

collecting information on all asset values of either historic or acquisition cost

from public/private organizations and individuals through the use of surveys or

questionnaires. Thereafter, the assets are aggregated and revalued at current and

constant prices by statistical authorities or respondents. Meanwhile, the method

*Department of Economics, Chiba Keizai University, 3-59-5 Todoroki-cho, Inage-ku, Chiba

263-0021, Japan. Email: m-kataoka@cku.ac.jp. The author thanks Professor Pierre van der Eng for his

own data provision and anonymous referees for their feedback on an early version of this paper. This

study is supported by a Grant-in-Aid for Scientific Research C (23530285) from the Japan Society

of the Promotion of Science and a fellowship from the Southeast Asia Program, Cornell University.

bs_bs_banner

Asian Economic Journal 2013, Vol. 27 No. 4, 409–428 409

© 2013 The Author

Asian Economic Journal © 2013 East Asian Economic Association and Wiley Publishing Asia Pty Ltd

that lies between the PIM and survey method is applied mainly in centrally

planned economies. Enterprises are required to maintain a running inventory of

property assets by tracking outflows as well as inflows. The results of these

calculations are then reported to the statistical agencies, which obtain the total

capital stock through simple addition and deduction. PIM estimates are less

reliable than estimates obtained from the other two methods because the PIM

requires numerous assumptions regarding, for example, valuation, survival rates,

and survival patterns. However, the PIM is widely used by statistical authorities

to save costs.

Because of data constraints affecting series on historical investment and all

assets values, an alternative method based on the incremental capital-output ratio

(ICOR) can be used to measure gross capital stock. This assumes a steady-state

economy (King and Levine, 1994), in which the capital-output ratio (COR)

and the ICOR are constant. However, this assumption is not suitable for a

fast-growing economy.

Data on capital stock have not been officially published for Indonesia. Since the

pioneering work of Sundrum (1986), several studies have attempted to estimate

data on fixed capital (see Keuning, 1991; Nehru and Ashok, 1993; King and

Levine, 1994; Collins and Bosworth, 1996; BPS, 1997; Timmer, 1999; Sigit,

2004; Handa, 2005; Yudanto et al., 2005; Van der Eng, 2009). Most studies

estimate gross capital values at the national level; some studies, such as those of

Keuning (1991), Timmer (1999), Yudanto et al. (2005) and Van der Eng (2009),

present capital estimates by sector and/or type.

The majority of studies use the PIM approach, while some studies, such as

those of Sundrum (1986), Keuning (1991) and Handa (2005), apply a method that

lies between the ICOR and the PIM. Several studies based on the PIM rely on

unrealistic assumptions; for example, BPS (1997) and Yudanto et al. (2005)

assume that the capital stock for the benchmark year equals the investment in that

year and not the accumulation of investments through the prior year.

Taking into account the shortcomings and strengths of previous studies, Van

der Eng (2009) comprehensively estimates the gross fixed capital stock (GFCS)

for 1950–2007. He expresses his scepticism regarding the quality of the gross

fixed capital formation (GFCF) data series due to the ambiguous revision

process of the constant year prices. Therefore, he generates a GFCF data series

at 2000 constant prices and disaggregates the series into 28 types of capital for

1950–2007 using data from the national income accounts and input–output

tables. Furthermore, he assumes the service life of 28 types of capital, in which

the longest service life is 40 years, and estimates the GFCS with 1990 as the

benchmark year, which is a 40-year accumulation of the GFCF for the years

1951–1990 subject to a deduction of the retirement asset value by type. The

GFCS estimates in the years prior to 1990 are estimated by backward extrapo-

lation on the basis of the GFCF and the assumption of a 7.6-percent retirement

rate of capital, which approximates the implicit depreciation rate of GDP in

1990.

ASIAN ECONOMIC JOURNAL 410

© 2013 The Author

Asian Economic Journal © 2013 East Asian Economic Association and Wiley Publishing Asia Pty Ltd