The Fundamental Economic Structure in Developing Countries: An Empirical Evidence of Indonesia

The aim of this paper is to identify fundamental economic structure (FES) in some regional economies in Indonesia. In general, the finding supports the fundamental economic structure hypothesis. However, results of this study differ from the previous findings, in that the fundamental economic structure is not just contained only in the secondary and tertiary sectors, but also in the primary sectors. Some cells in the interaction of primary-primary and primary-secondary are also significant in the FES. There are some possible explanations for this phenomenon. First, Indonesia is in the early stage of industrialization. Therefore, some primary sectors are still predominant in its regional economies. In other words, subsistence agriculture still occurs in the Indonesian regional economies. Second, Central Government policy is to obtain self-sufficiency in food production at the regional level. Third, limited infrastructure and transportation cause regional trade barriers; therefore, specialization has not developed so far in regional economies. Compared to Australia which is in a mature stage of its development, Indonesia still lies in its early development stage. Therefore, some of the primary sectors are still a part of the fundamental economic structure.