Abstract
This study aimed to scrutinize the impact of financial development, energy consumption, industrialization, and trade openness on economic growth in Indonesia over the period 1984–2018. To do so, the study employed the autoregressive distributed lag (ARDL) model to estimate the long-run and short-run nexus among the variables. Furthermore, fully modified ordinary least squares (FMOLS), dynamic least squares (DOLS), and canonical cointegrating regression (CCR) were used for a more robust examination of the empirical findings. The result of cointegration confirms the presence of cointegration among the variables. Findings from the ARDL indicate that industrialization, energy consumption, and financial development (measured by domestic credit) positively influence economic growth in the long run. However, financial development (measured by money supply) and trade openness demonstrate a negative effect on economic growth. The positive nexus among industrialization, financial development, energy consumption, and economic growth explains that these variables were stimulating growth in Indonesia. The error correction term indicates a 68% annual adjustment from any deviation in the previous period’s long-run equilibrium economic growth. These findings provide a strong testimony that industrialization and financial development are key to sustained long-run economic growth in Indonesia.
Highlights
To achieve sustainable economic growth during this uncertain time, a targeted policy aiming at expanding economic activities would be the right path
The positive relationship between industrialization, financial development, energy consumption, and economic growth reveals that a 1% increase in industrialization, financial development, and energy consumption is associated with an increase in the economic growth of 0.312%, 0.192%, and 0.873%, respectively
These findings clearly explain that industrialization, financial development, and energy consumption are important factors to stimulate and enhance economic growth and development in Indonesia
Summary
To achieve sustainable economic growth during this uncertain time, a targeted policy aiming at expanding economic activities would be the right path. Industrialization contributes to economic growth by enhancing productive capacity, job creation, innovation, and optimal resource use. Trade openness enhances foreign direct investment (FDI), global market integration, technological advancement, and countries’ productive capacity. Financial development facilitates access to credit and financial services and capital accumulation for future investment. Energy use is one of the key productive factors that contribute to economic growth. Energy use harms the environment with rising carbon dioxide emissions (CO2) which indirectly affect economic growth
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