Economic liberalization and sources of productivity growth in Indonesian Banks: is it efficiency improvement or technological progress?

ABSTRACT

This article investigates the sources of productivity growth in the Indonesian banking sector during 23 years period from 1993 to 2015. The industry has gone through several episodes of policy reforms, starting from the radical deregulation in the late 1980s, the restructuring period following the 1997 Asian financial crisis, the consolidation period in the mid-2000s to the economic expansion in the 2010s. Using panel data of 98 commercial banks, we explore productivity growth using Malmquist indices complemented with bootstrapping technique to provide measures of the statistical precision of the results. The Malmquist index measures total factor productivity, efficiency change and technological change. Results show that productivity improves moderately and appears to be less volatile towards the end of the period. Furthermore, efficiency change tends to be the main source of productivity improvement rather than technological change.

KEYWORDS:

• Productivity
• banking
• data envelopment analysis
• bootstrap
• Malmquist indices

JEL CLASSIFICATION:

• G21
• C14
• C61

Acknowledgement

This article is based on first author’s PhD thesis submitted to Curtin University. The author is grateful to the Indonesian government for providing her DIKTI scholarship to study at Curtin University. Comments and suggestions from the anonymous reviewer are also gratefully acknowledged. However, the usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The individual bank result of TFP and its components cannot be presented due to limited space.