Agriculture-led growth vs. post-Agriculture: A comparative VECM analysis of Indonesia and Japan

Abstract

Background: This study examines the role of agriculture in non-agricultural performance across two contrasting development stages, Indonesia (agriculture-anchored) and Japan (post-agriculture), spanning 1994-2023. To mitigate compositional endogeneity when agriculture is both an explanatory variable and part of total Gross Domestic Product (GDP), this study uses non-agricultural GDP (Net GDP), defined as total GDP minus agricultural value added, as the dependent variable. Methods: This study uses annual World Development Indicators data analyzed through a Vector Error Correction Model (VECM). The analysis was conducted after testing for unit roots using the Augmented Dickey-Fuller (ADF) test and confirming long-run cointegration through the Johansen cointegration test. Granger causality, impulse response functions (IRFs), and forecast error variance decomposition (FEVD) were also used to examine dynamic relationships and shock transmission. Findings: The results show that, in Indonesia, agricultural value added has a positive and significant long-run effect on Net GDP, with a larger elasticity than capital and exports. The IRF and FEVD results further indicate that agricultural shocks generate a positive and relatively persistent response in Indonesia’s Net GDP. In Japan, agricultural value added does not have a significant long-run effect on Net GDP, while capital and exports are the principal drivers. Japan’s Net GDP response to agricultural shocks is weak or negative. Conclusion: These findings suggest that the role of agriculture in economic growth is stage-specific and supports different policy priorities for transition versus post-agricultural economies. Novelty/Originality of this article: This study contributes by comparing the role of agriculture in two economies at different stages of structural transformation. By using Net GDP rather than total GDP, the study shows that agriculture remains an important growth channel in Indonesia, while its role in Japan is more limited in a post-agricultural economy. This finding clarifies that agriculture-led growth is not universal but depends on the stage of development.