Identifying Human Capital Contributions to Indonesia’s Economic Growth

Abstract

Over the past ten years, labour has been the primary contributor to economic growth as Indonesia benefits from the demographic dividend (Organization for Economic Co-operation and Development [OECD] 2021). Indonesia, though, could not rely on this advantage continually because the demographic bonus will soon dissolve (United Nations 2019). Considering this possibility, based on the structural reform simulation in Indonesia, which demonstrates that investment in human capital is not too costly compared to the growth rate it produces, the OECD encourages Indonesia to prioritize improving human capital accumulation as another factor to boost the economy. Human capital has been the object of research as one of the growth determinants since its inclusion in the growth model by Mankiw–Romer–Weil (1992), including in Indonesia. Similar to research in other countries, numerous studies about human capital and economic growth that has been done so far, exclusively emphasize the correlation between variables, that is one to one and employ static panel data, that neglect changes throughout time. Therefore, the relationship between human capital and economic growth is jointly examined in this study by employing the System General Method of Moments (SYS-GMM) to examine the dynamic growth model. Moreover, some dataset adjustments were performed to reduce the likelihood of bias and measurement error. These include limiting the research period to 2010–2019 and excluding North Kalimantan Province as a unit of observation. By applying these criteria, data on 33 provinces in Indonesia were obtained, resulting in a balanced panel dataset of 330 unit observations. After controlling for other macroeconomic variables, the research findings support the notion that human capital is the major factor influencing the economy in Indonesia, in which health attributes are proven to have a greater economic impact than education.