Export growth, economic growth and real exchange rate in Indonesia
The thesis studies the export growth, economic growth and real exchange rate in Indonesia. The research is a piece of empirical studies mainly covering the period from 1974 to 1993. Indonesia is an oil-exporting country. Economic recession with high inflation rate in the early eighties prompted the government to undertake a series of economic and financial reforms. It was believed that oil export earnings by itself could not sustain long-term economic growth. Trade reform and devaluation would stimulate high economic growth through diversifying non-oil exports, attracting foreign and domestic capital accumulation. The research presented is a contribution to the study of the linkage between export trade and economic growth on one hand, and export trade and real exchange rate on the other hand in Indonesia. In particular, five issues are examined: 1) The role of export growth in economic development. Export growth may boost a country's demand for output and hence cause higher economic growth. It may also increase economic efficiency through economies of scale and liberalization of exchange control; 2) The issue of export-growth can be extended to the argument of export-led growth hypothesis. The hypothesis states that the continuation of merchandise exports would lead to higher output growth. We examine the validity of the hypothesis in the context of the Indonesian export growth economy; 3) To investigate whether export growth is negatively related to real effective exchange rate volatility by the use of cointegrated VAR approach. Policies to minimize exchange rate volatility reduce unfavourable effects on the volume of exports; 4) Since real exchange rate is an important determinant of exports, its behaviour would be worth examining. We particularly examine whether it is stationary by looking at the theory of purchasing power parity. The nonrejection of the purchasing power parity hypothesis implies stationarity of the real exchange rate; 5) Finally, we examine whether the real exchange rate of Indonesia and that of its trading partners share a common trend. This will be an indication that they can form a common currency area. The idea is incorporated into the theory of generalized purchasing power parity. A common currency policy might therefore contribute to intra- and inter-regional trade in the region of Pacific Rim. Hence the research may shed more insight on economic development in one of the less developing countries.