THREE ESSAYS ON THE MICROECONOMICS OF ECONOMIC DEVELOPMENT IN INDONESIA

Abstract

This thesis contains three essays on the microeconomics of economic development. All three essays provide empirical analysis utilizing microdata from Indonesia. The first chapter is titled “Ethnic Identity and the Internal Migration Decision in Indonesia.” This chapter empirically investigates the role of ethnic identity in individuals' internal migration decisions in Indonesia. Due to differences in geographical situations, historical shocks, and other ethnic-specific factors, different ethnic groups have developed different preferences towards migration as part of their socio-economic norms. Because of this, some ethnic groups in Indonesia have traditionally been known to be more mobile compared to others. An ethnic group’s social norms provide a sense of identification and belonging to its members, and are hence likely to influence the decision-making of the individuals within the group. We hypothesize that the effects of these norms will be attenuated when one’s ethnic group is in the majority in their community. This case has been established in social psychology studies on the salience of social categories. Using the first four waves of the Indonesia Family Life Survey (IFLS) panel dataset combined with the 2000 and 2010 Indonesia population census data, this study examines the effect of ethnic social identity on migration behaviour. The empirical estimation exploits variation in whether an individual is living as a part of the ethnic majority or minority within their community, to explain the variation in migration rates. The results demonstrate that while the individuals from more mobile ethnic groups tend to have a higher probability to migrate compared to those of less mobile ethnic groups, the effect is attenuated when the individuals live as part of the majority ethnic group in the community. The estimation results indicate that individuals from high migrating ethnic groups are 1.6 percent to 2.4 percent less likely to migrate when living as an ethnic majority in the community. These findings imply the need to consider different characteristics of different ethnic groups in designing and delivering policies aimed at managing people’s migration as they may have different impacts across different ethnic groups. The second chapter of this thesis is titled “Ethnic Social Norms and Female Labour Force Participation in Indonesia.” This chapter investigates the effect of ethnic social norms on female labour force participation in Indonesia. In the past three decades, more than 50 percent of working age women in Indonesia have not participated in the labour market, despite the positive trend in female education and the negative trend in fertility. This study examines the role of informal institutions, in terms of ethnic social norms on the kinship structure, to analyse the stagnation of female labour force participation rates in Indonesia. In order to identify the effect of kinship norms, firstly, census data is employed to determine the importance of ethnic social norms on female’s decision to enter the labour market. The estimation results show that ethnic kinship norms contribute to the employment probability of working age females. Then, we assess the role of transmitted ethnic social norms on current working age women’s decision to take on paid employment. To proxy for ethnic social norms, we construct proxies of “private” and “public” social norms. To represent the private signal, we use the number of older women who currently or have ever engaged paid work at the household level, and for the public signal we use the share of females in paid work at the ethnic group level. We employ the five waves of Indonesian Family Life Survey (IFLS) to examine the effect. The results show that while the individual effects of the private signal and public signal on the probability of working age women to have paid work are positives, the interaction between the two variables shows a negative and statistically significant effect. The negative effect may, to some extent, explain the stagnation of female labour force participation in Indonesia, despite women’s increasing education levels and wage rates and decreasing fertility rates. Finally, the third chapter is titled “To what extent are micro firms credit constrained? The effect of a credit policy change on MSE credit availability and MSE transitions in Indonesia.” The last chapter attempts to establish a causal relationship between a government Micro and Small enterprises (MSE) credit promotion policy and MSEs’ upward transitions and growth. Using Indonesian firm level data in conjunction with the cancellation of a mandatory MSE credit policy in 2001 by the Indonesian government, this study examines whether MSEs, particularly micro firms, are credit constrained. In the analysis, first, synthetic panel data is set up using the repeated cross-section data on MSEs, to estimate the year-on-year transitions of MSEs from the micro (defined by maximum turnover of AUD 2,500 per month) to small size category (turnover of AUD 2,500 to AUD 20,800 per month), before and after the policy change. The results indicate that there is some degree of negative effect of the policy change on the upward transition of micro firms. Secondly, to confirm the findings from the first analysis and more credibly establish the causal effect of the policy change, a difference-in-differences (DiD) estimation is carried out. The cancellation of the government’s credit policy is employed as an exogenous shock on the availability of MSE credit, and medium and large enterprises (MLEs) are used as the counterfactual group. In the DiD estimation, a pseudo panel dataset is constructed from the MSE repeated cross-section dataset before being merged to the panel data of the medium and large firms. The DID estimation results show a consistently negative and significant effect of the 2001 policy change on micro firms’ upward transitions in terms of turnover. In this case, the policy change reduces the probability of a micro firm to become a small firm by 1.3 percent relative to the MLEs’ probability of transitioning between size categories. The negative effect of the policy change on turnover growth is also identified. These results imply that MSEs, micro firms in particular, are significantly credit constrained. These findings are relevant to the design and the implementation of policies to support the MSE sector in Indonesia.