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Indonesia: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2018
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The Evolution of Merchandise Exports in the New Millennium1

Since the start of the new millennium, Indonesia has expanded its merchandise trade with the rest of the world. The composition of its main exports and trading partners has evolved, with palm oil and coal replacing oil and gas as Indonesia’s top exports and China taking over Japan as Indonesia’s number one export destination. Nonetheless, the shares of key non-commodity exports, such as electrical appliances and textiles, in total exports declined. Indonesia needs to further pursue structural reforms to improve its competitiveness in higher technology products, economic complexity, and participation in global value chains in order to graduate from the status of basic commodity exporter subject to global price swings, low value added, and limited employment growth.

A. An Overall Picture of Goods Exports

1. The value of goods that Indonesia exported to the rest of the world increased in the new millennium. Export growth averaged 6½ percent in 2000–16, with the value of export doubling between 2000 and 2016. By keeping pace with the expansion of global trade, Indonesia maintained its share in the global market roughly unchanged at one percent (Figure 1), which positioned it as the 29th largest goods exporter in 2016 (up by 5 positions since 2000).

Figure 1.ASEAN: Share of World Exports

(In percent)

Sources: IMF, Direction of Trade Statistics; and IMF staff estimates.

2. Indonesia’s export growth was broadly synchronized with key global developments. After a brief contraction in 2001 following the burst of the dot-com bubble, exports started to expand in 2002 riding on the wave of the global commodity price boom. The expansion was briefly interrupted in 2009 by the global financial crisis but rebounded sharply when the commodity price boom resumed. As the commodity price boom started to fizzle out in 2012, exports contracted.

3. The increase in exports during 2000–16 was mostly due to prices (Figure 2). The year-on-year change in exports volumes was smaller and less volatile than that of the exports values, reflecting the impact of global commodity prices. Despite the increase in exports, the exports value to GDP declined to 15½ percent in 2016 from 34½ percent in 2000.

Figure 2.Export of Goods

(In billionsof U.S. dollar, 2000 prices)

Source: IMF. World Economic Outlook.

4. Five key traditional commodity products (gas, oil, coal, palm oil, and rubber) have contributed much to the dynamics of Indonesia’s exports. Their dynamics were synchronized and influenced by the global commodity price cycle. For instance, their total share in exports jumped from 30 percent in 2000 to a peak of 50 percent in 2011 before gradually declining to 34 percent in 2016 (Figure 3).

Figure 3.Main Exports

(In percent of total exports)

Sources; UN Comtrade; and IMF staff estimates.

5. The importance of these five commodities has shifted over time. Coal and palm oil have replaced oil and gas as the top two export products (oil and gas exports accounted for 80 percent of total exports in 1965–85, Pangestu, Rahardja, and Ing, 2015). The maturing of oil and gas fields, lack of infrastructure investment, and higher domestic demand have turned Indonesia into a net importer of oil and gas since 2011. These trends are also confirmed by their shares in global export markets (Figure 4). The global share of Indonesia’s oil and gas exports halved from 9.4 percent in 2000 to 4.5 percent in 2016, contributing to a sharp decline in oil and gas fiscal revenue (from 5.6 percent of GDP in 2000 to 0.7 percent of GDP in 2016). The global share of palm oil exports almost doubled from 28.1 percent to 54.5 percent and that of coal almost tripled from 6.7 percent to 19.5 percent.

Figure 4.Main Export Shares in the World

(In percent of world’s exports for each goods)

Sources: UN Comtrade; and IMF staff estimates.

6. The shares of key non-commodity exports, such as electrical appliances and textiles, in total exports declined in 2000–16. They have faced increased competition from neighboring countries. Competition from Bangladesh and Vietnam intensified as the WTO phased out quotas on textiles and clothing in 1995–2005, while competition from China rose following its accession to the WTO in 2001 (Pangestu, Rahardja, and Ing, 2015).

7. China has replaced Japan as Indonesia’s top export destination (Table 1). Export values to China quadrupled in 2000–16 on the back of China’s demand for raw materials to support its rapid economic expansion. In 2016 China became the top destination for Indonesia’s coal and base metal exports, and number two destination for oil and palm oil exports. China’s share in Indonesia’s total exports more than doubled from 4½ percent in 2000 to 11½ percent in 2016. During the same period, Japan’s share halved from 23¼ percent to 11 percent (Figure 5). Nevertheless, Japan was still Indonesia’s top export destination for natural gas in 2016, and number two destination for rubber, textiles, and electrical appliances. The United States’ share remained broadly stable over this period (11.2 percent in 2016 versus 13.7 percent in 2000), remaining as the number one market for Indonesia’s rubber and textile exports (Table 2).

Table 1.Indonesia: Main Export Destinations(In percent of total)
200020052016
Japan23.2Japan21.1China11.6
United States13.7United States11.5United States11.2
Singapore10.6Singapore9.1Japan11.1
Korea7.0Korea8.3Singapore7.8
China4.5China7.8India7.0
Taiwan POC3.8Malaysia4.0Malaysia4.9
Malaysia3.2India3.4Korea4.8
Netherlands3.0Taiwan POC2.9Thailand3.7
Hong Kong2.5Thailand2.6Philippines3.6
Australia2.4Netherlands2.6Taiwan POC2.9
Rest of the World26.3Rest of the World26.7Rest of the world31.5
Sources: IMF, Direction of Trade Statistics ; and IMF staff estimates.
Sources: IMF, Direction of Trade Statistics ; and IMF staff estimates.

Figure 5.Major Export Destinations

(In percent of total)

Sources: IMF, Direction of Trade Statistics; and IMF staff estimates.

Table 2.Indonesia: Main Commodity Export by Major Export Destination(In percent of the commodity exported from Indonesia)
200020052016
Natural Gas: SITC-Rev3 34
Japan67,33Japan56.36Japan29,35
Korea20.38Rep. of Korea25.62Singapore24.23
Other Asia, nes10.01China11.75Rep. of Korea18.72
China0,93Other Asia, nes5.62China12,31
USA0,64Philippines0.27Other Asia, nes11,64
Philippines0,39Thailand0.21Malaysia2,66
Australia0.16Malaysia0.04United Arab Emirates0.31
Hong Kong SAR0,11Italy0.04Mexico0,26
Malaysia0,03United Arab Emirates0.03Thailand0,02
Vietnam0,01Australia0.03Timor-Leste0,00
Rest of the World0.01Rest of the World0.03Rest of the World0.00
Oil: SUC-Rev3 33
Japan32,93Japan32.76Malaysia14,46
Rep. of Korea19.11Rep. of Korea21.56China14.32
China12.3SChina15.93Singapore13.63
Singapore9,90Australia10.77Thailand13,53
Australia7,73Singapore7.99Japan12,63
USA5.35USA3.55Australia8.51
Other Asia, nes4.25Thailand3.03USA7.22
Malaysia1,98Other Asia, nes1.71Rep, of Korea7,12
Thailand1,65Malaysia1.22Other Asia, nes4,27
India1.51New Zealand0.90India2.68
Rest of the World2.71Rest of the World0.57Rest of the World1.52
Palm oil: SITC-Rev3 4222+4224
India34,55India22.36India21,38
Netherlands19.33China13.87China13.46
China9,37Netherlands13.59Pakistan8,00
Singapore5,54Pakistan7.42Netherlands5,30
Germany3,01Malaysia6.53Spain4,34
Spain3.00Singapore3..37USA4.30
Malaysia2,39Bangladesh3.58Egypt4,03
USA2,34Germany3.05Bangladesh3,59
Turkey2,32Sri Lanka2.70Italy3,43
Bangladesh2.00Turkey2.37Malaysia3.10
Rest of the World1,7-3Rest of the World20.58Rest of the World29,02
Rubber: S1TC-Rev3 23+62
USA32.72USA27.58USA28.01
Japan10.90Japan15.09Japan13.53
Singapore6,07China9.93China9,66
Germany4,-31Singapore5.63India5,96
Rep. of Korea4.53Germany3.40Rep. of Korea4.63
Canada3.11Rep. of Korea3.11Germany3.03
Belgium2,-5-5Canada2.79Brazil2,56
China2,41Brazil2.05Canada2,12
United Kingdom2.doUnited Kingdom1.73Turkey1.91
Italy2.04Belgium1.59Belgium1.90
Rest of the World0,26Rest of the World27.04Rest of the World26,68
Base metal : SITC-Rev3 67+681-69
Singapore21,98Singapore24,45China17,19
Japan20,42Japan14,97Singapore13,11
USA13.75Malaysia10.94Australia11.09
Malaysia5.61Thailand9.73Malaysia3.33
Other Asia, nes4.90China7.50Thailand7.11
Thailand4,90USA4,56USA6,27
Netherlands4,23Other Asia, nes3,93India5,84
Philippines3.19Philippines3.00Viet Nam4.93
Germany2.05Rep. of Korea2.25Rep. of Korea4.90
Rep. of Korea1.96China, Hong Kong SAR2.03Japan4.87
Rest of the World0,11Rest of the World16,65Rest of the World16,38
Coal : Srrc-Rev3 32
Japan26.39Japan24.79China24.99
Rep, of Korea3,01Rep, of Korea10,60India22,77
Philippines5,35India10,49Japan13,65
Thailand5.27China, Hong Kong SAR6.93Rep. of Korea3.57
India5.26Italy5.12Other Asia, nes6.59
Spain4.57Malaysia4.73Malaysia5.50
Netherlands4,55Thailand4,34Philippines5,49
China, Hong Kong SAR4,37Philippines3,44Thailand4,39
Malaysia3.19Spain2.21China, Hong Kong SAR2.73
Italy2.33Netherlands1.93Spain1.45
Rest of the World0.03Rest of the World25.31Rest of the World3.69
Textile : SITC-Rev3 84
USA42.55USA55.17USA50.05
United Kingdom8.41Germany8.03Japan9.40
Germany7,37United Kingdom6,26Germany6,51
Netherlands4,53France2,67Rep. of Korea3,84
Japan3.92United Arab Emirates2.54United Kingdom2.72
United Arab Emirates3.31Japan2.56China2.42
France2.-35Belgium2.30Belgium2.37
Saudi Arabia2,75Netherlands2,03Australia2,37
Belgium2,65Italy1,86Canada2,29
Singapore2.25Canada1.35United Arab Emirates1.81
Rest of the World0.01Rest of the World14.59Rest of the World16.22
Electrical Appliances : SITC-Rev3 77
Singapore29.31Singapore41.87Singapore25.00
Japan22.08Japan17.05Japan17.74
USA3.74USA6.52USA3.94
Malaysia4,55China, Hong Kong SAR4,55China, Hong Kong SAR5,17
Thailand4,31Malaysia4,34Malaysia4,50
China, Hong Kong SAR3.39Thailand2.55France4.25
Philippines2.92China2.41China4.04
Rep, of Korea2,37Rep, of Korea1,87Thailand3,57
France2,28Australia1,70Philippines2,39
Germany2.03Philippines1.53Rep. of Korea2.33
Rest of the World17.46Rest of the World15.50Rest of the World22.06
Sources: UNComtrade database; and IMF staff estimates.
Sources: UNComtrade database; and IMF staff estimates.

8. Exports to China are concentrated in a few commodities (Figure 6). Five key commodity products accounted for about 60 percent of total exports to China in 2016. Among them, coal has replaced oil as the number one export product to China in line with the decline of oil production in Indonesia and the rising coal demand from China. In 2016, China sourced 26 percent of its coal imports and 62 percent of its palm oil imports from Indonesia. These two commodities accounted for 41 percent of Indonesia’s total exports to China in 2016.

Figure 6.Main Commodities Exports to China

(In percent of total Indonesia export to China)

Sources: UN Comtrade; and IMF staff estimates.

9. Despite rising exports, Indonesia ran a bilateral trade deficit with China. The bilateral trade surplus that Indonesia used to enjoy with China turned into a small deficit in 2008, with the deficit further widening to 1.9 percent of GDP in 2016. While Indonesia maintained its trade surplus with China in resource-based sectors, the shift to deficit took place in the manufacturing sectors, such as machinery and transport equipment, and textiles (Marks, 2015).

10. Indonesia’s trade developments have benefited from regional and bilateral free trade agreements (FTAs), especially with ASEAN. As of September 2017, Indonesia was part of seven regional and two bilateral FTAs,2 and the counterparts of these FTAs accounted for 60 percent of Indonesia’s exports and 70 percent for its imports in 2016. In particular, ASEAN has continued its effort to build a region-wide policy framework to enhance trade, economic cooperation, and financial flows among its member states. The share of Indonesia’s exports to the other ASEAN countries has increased from 17.5 percent in 2000 to 20.7 percent in 2016.

11. Indonesia has low tariff rate but high WTO bound tariff rate (i.e., committed tariff rate under WTO) and services trade restrictiveness. Indonesia’s average applied most-favored-nation (MFN) tariff rate was low at 6.9 percent in 2016, down from 9.5 percent in 2006 (WTO, 2013 and USTR, 2017). On top of this, Indonesia offers additional tariff reductions for the economies in the FTAs. Despite the low applied MFN tariff rate, its average bound tariff rate was 37 percent in 2016 (USTR, 2017). The difference between its bound and applied tariff rates, at 30 percentage points, was higher than the average of 20 percentage points among G20 developing countries. Most of Indonesia’s OECD services trade restrictiveness was higher than the average G20 countries with large gaps in distribution services, maritime transport, and legal services.

12. The increase in nontariff measures (NTMs) has been a prominent feature in Indonesia’s trade policy since the global financial crisis. The share of tariff lines subject to NTMs on the import side grew from 42 percent in 2009 to 51 percent in 2015. On the export side, the share of tariff lines subject to NTMs grew from 4 percent in 2009 to 10 percent in 2015 (Marks, 2017). Data of the World Bank Temporary Trade Barriers indicate that Indonesia’s import restriction decreased in 2004–05 but then increased sharply after the global financial crisis. Despite the recent improvement, import restrictions remain higher relative to the level before the global financial crisis. Based on the data from the Global Trade Alert, Indonesia has introduced more NTMs than other G20 countries since 2008.

B. Composition of Trade and Comparative Advantage

13. An analysis of Indonesia’s trade composition can reveal its comparative advantage in trade. Our analysis of Indonesia’s composition of trade follows the four dimensions presented by Ding and Hadzi-Vaskov (2017): diversification across product and destination, revealed comparative advantage, product sophistication, and economic complexity (see Annex I). In each dimension, Indonesia’s position is analyzed and compared with its regional comparators (i.e., other ASEAN-4, China, India, and Vietnam) and other large emerging market economies (i.e., non-Asian G20 emerging economies— Argentina, Brazil, Mexico, Russia, South Africa, and Turkey).

Product and Destination Diversification

14. Product and destination diversification are analyzed for Indonesia and its comparators. The assessment of diversification is based on the Herfindahl concentration index, which is calculated based on the SITC-Rev3 product classification. A smaller index indicates more diversified or less concentrated markets. More diversified export products and destinations would allow a country to better absorb shocks in its export markets.

15. Indonesia’s export products have become more diversified since 2011, according to the Herfindahl concentration index. Its product diversification stood in the middle among its comparators. Within the region, it has similar level of product diversification as India and Vietnam, while it is more diversified than the Philippines and Malaysia and less diversified than China and Thailand (Figure 7). Compared with other large emerging economies, it has similar product diversification levels as Mexico and South Africa, while is less diversified than Turkey and more diversified than Argentina and Russia (Figure 8).

Figure 7.Asian EMs: Export Products Diversification 1/

(Index 0-1, higher value indicates exports are concentrated on fewer products)

Sources: UN Comtrade database; and IMF staff estimates

1/ Herfindahl Index calculated using S1TC-Rev3 product classification at 4-digit.

Figure 8.Non-Asian EMs: Export Products Diversification 1/

(Index 0-1, higher value indicates exports are concentrated on fewer products)

Sources: UN Comtrade database; and IMF staff estimates.

1/ Herfindahl Index calculated using SITC-Rev3 product classification at 4-digit.

16. Its export destinations have also improved. A similar trend applies to most of its comparators (Figures 9 and 10). The index suggests that Indonesia has improved from the category of moderate concentration to unconcentrated category. It exported one-third of its products to its top three export destinations in 2016, while this proportion was one half in 2000.

Figure 9.Asian EMs: Diversification in Export Destinations

(Index 0 - 1, higher value indicates exports are concentrated on fewer destinations)

Sources: IMF, Direction of Trade Statistics, and IMF staff estimates.

Figure 10.Non-Asian EMs: Diversification in Export Destinations

(Index 0 - 1, higher value indicates exports are concentrated on fewer destinations)

Sources: IMF, Direction of Trade Statistics; and IMF staff estimates.

Revealed Comparative Advantage (RCA)

17. The RCA indicates the country’s relative advantage or disadvantage in exporting a certain product or group of products. It is based on the RCA index introduced by Balassa (1965) that compares the share of a group of products in a country’s total exports with the share of that group of products in total world exports. A RCA larger than one indicates that the country has a revealed comparative advantage in exporting that group of products. Likewise, a RCA below one indicates that a country has a revealed comparative disadvantage.

18. Indonesia has maintained comparative advantage on mineral fuels and low technology industries, in contrast with its Asian comparators (Figure 11). The results suggest that Indonesia’s RCAs in mineral fuels and low technology industries have been consistently above one in 2000–16, with an increasing RCA for the former in 2013–16 and a stable RCA for the latter. The RCA’s stability in low technology industries sets Indonesia apart from its Asian comparators. For those countries with RCA in low technology industries above one in 2000 (China, India, Thailand, and Vietnam), their RCAs declined gradually in 2000–16. In particular, China’s RCA in low technology industries declined below one while its RCA in higher technology industries rose. Other large emerging markets’ RCAs in low technology industries have been relatively stable except for Turkey which has observed a gradual decline in this RCA.

Figure 11.Revealed Comparative Advantage

19. Indonesia’s has yet to improve its competitiveness in products with higher technology components. Its RCA in high technology industries declined gradually in 2000–16, while its RCAs in medium-low and medium-high technology industries remained below one and stable. In contrast, China and Vietnam have gained comparative advantage in high technology industries in this period.

Export Sophistication

20. Export sophistication aims to capture the potential income level at which a product may dominate based on the income level of countries that export that product. For instance, if a country starts to export a new product that is exported by countries with high productivity, it may mean that over time this country can increase prices and its income. This measure is constructed using the framework in Hausmann, Hwang, and Rodrik (2007).

21. Indonesia’s export sophistication has improved, but remains low compared with peers in 2000–16 (Figures 12 and 13). In this period, Indonesia managed to surpass Philippines and be surpassed by China, while it lagged other comparators such as Malaysia, Thailand, and non-Asian large emerging economies.

Figure 12.Asian EMs: Export Sophistication Index 1/

(Index 1-10 with 10 being the most sophisticated)

Sources: UN Contrade database: and IMF staff estimates.

1/ Based on 13 countries [Argentina, Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, Russia, South Africa, Thailand, Turkey. Vietnam).

Figure 13.Non-Asian EMs: Export Sophistication Index 1/

(Index 1-10 with 10 being the most sophisticated)

Sources: UN Comtrade Database: and IMF staff estimates.

1/ Based on 13 countries (Argentina, Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, Russia, South Africa, Thailand, Turkey, Vietnam).

Economic Complexity

22. Economic complexity is a concept developed by Hidalgo and Hausmann (2009) to capture the amount of productive knowledge that is embedded in a country’s products. The economic complexity index (ECI) encompasses two aspects: diversity—the number of distinct products that a country makes; and ubiquity—the number of countries that also make the same product. Countries that produce and export a wide variety of products (high diversity) and those that are less ubiquitous are ranked higher on the ECI.

23. The ECI suggests that Indonesia has low economic complexity. It is relatively less capable of producing a diverse range of products which are less commonly produced by other countries. In 2015, it ranked the 57th out of 108 countries by the Economic Complexity Observatory at The MIT Media Lab Macro Connections Group (Figure 14). While the ECI of most of its comparators increased in 2000–16, Indonesia’s ECI has decreased (Figure 15). Indonesia also registered lower ECI than India, Philippines, and Vietnam despite having higher per capita income (Figure 16, high ECI is usually associated with high per capita income).

Figure 14.Economic Complexity Rank, 2015 1/

Sources: The Economic Complexity Observatory; and IMF staff estimates.

1/ Ranked out of ICS countries. Higher number indicates higher ECI.

Figure 15.Economic Complexity Index 1/

Source: The Economic Complexity Observatory.

1/ Index level measures the knowledge intensity of an economy by considering the knowlwedge intensity of the products it exports.

2/ 2015 data for Thailand and Vietnam.

Figure 16.Economic Complexity Index and Per Capita Income, 2016 1/

Sources; The Economic Complexity Observatory, IMF, World Economic Outlook, and IMF stiff estimates.

1/ Or latest data available.

C. Participation in Global Value Chains

24. Countries can benefit from participating in global value chains (GVC) by enhancing productivity in tradable sectors through knowledge spillovers, technology transfers, and cost-savings (Cheng and others, 2015). The expansion of GVCs has been particularly pronounced among emerging Asian economies.

25. Indonesia’s participation in GVCs remains below Asian comparators, despite a slight increase since 2000 (Figure 17). The increased participation in GVCs came mainly from forward participation—domestically produced intermediate goods to be used in third countries; while backward participation—foreign value added in domestic exports—has declined overtime, likely due to complex regulations including NTMs (Figure 18). Despite the rise in forward participation, Indonesia’s share in global value added remains in the middle of its comparators (Figure 19).

Figure 17.Participation in Global Value Chains 1/

(In percent of gross exports)

Sources: OECD arid WTO, Trade in Value Added database, and IMF staff estimates.

1/ Foreign value added content and domestic value added in percent of gross exports.

Figure 18.Indonesia’s Participation in Global Value Chains

(In percent of gross exports)

Sources: OECD and WTO, Trade in Value Added database; and IMF staff estimates.

Figure 19.Domestic Value Added Share

(In percent of world value added)

Sources; OECD and WTO, Trade in Value Added database, and IMF staff estimates.

26. The origin of value added in exports and final demand became more dominated by domestic sources (Tables 35). The origin of the value added in exports and final demand was dominated by domestic sources in 2011, accounting for 88 percent and 77.9 percent, respectively. China’s shares in Indonesia’s exports, final demand, and import value added has further increased, while the shares of the United States, Japan, Singapore, Germany, and Australia fell.

Table 3.Origin of Value Added in Indonesia Gross Exports
Source Country200020052011200020052011Sparkline
(In millions of U.S. dollar)Share (in percent)
Domestic54,53480,259195,87783.083.988.0
Saudi ArabiaS061,8773,0991.22.01.4
China3911,1182,7890.61.21.3
Japan1.6631,4322,2052.51.51.0
United States1.3121,1911,5762.01.20.7
Malaysia4255901,3560.60.60.6
Korea5325701,2460.90.60.6
Singapore6333651,1031.00.90.5
Australia4796549190.70.70.4
India1924368950.30.50.4
Thailand2394578390.40.50.4
Rest of the world44276,26310,6306.76.54.8
Sources: OECD and WTO, Trade in Value Added database; and IMF staff estimates.
Sources: OECD and WTO, Trade in Value Added database; and IMF staff estimates.
Table 4.Origin of Value Added in Indonesia Final Demand
Source Country200020052011200020052011sparkline
(In millions of U.S. dollar)Share (in percent)
Domestic103,853202,300640,21474.674.977.9
China1.5155.31423.7151.02.02.9
Japan5,5757,94113,6643,32.92.3
United States4.9636,32213,2313.42.31.6
Saudi Arabia1,4753,9299,8031.01.51.2
Korea1,7252,6979,1231.21.01.1
Singapore2,1374.2303,9831.51.61.1
Malaysia1,2792,6648,3580.91.01.0
Australia2,3333,4127,7371.61.30.9
Thailand1,0882,6337,3720.71.00.9
India6112,0236,7380.40.70.3
Rest of the world14.27926,73667.7259.39.93.2
Sources: OECD and WTO, Trade in Value Added database; and IMF staff estimates.
Sources: OECD and WTO, Trade in Value Added database; and IMF staff estimates.
Table 5.Origin of Value Added in Indonesia Gross Imports
Source Country200020052011200020052011sparkline
(In millions of U.S. dollar)Share (in percent)
China1,9056,43226,5043.97.712.6
Japan7,2379,37320,36914.911.29.9
United States6,2757.51314,30713.09.07.0
Saudi Arabia2,2315,30712,9024.76.96.1
Korea2.3073,26710,3754.33.94.9
Singapore2,7765,09610,0365.76.14.3
Malaysia1,7043,2549.7143.53.94.6
Australia2,8124,0668,7065.34.34.1
Thailand1,3283,0908,2112.73.73.9
India3032,4597,6331.72.93.6
Germany1,3182,3235,3013,33.42.5
Domestic2735252,7090.60.61.3
Rest of the world16,33330,22173,05534.936.034.6
Sources: OECD and WTO, Trade in Value Added database: and IMF staff estimates.
Sources: OECD and WTO, Trade in Value Added database: and IMF staff estimates.

27. Literature points to several factors determining the level of GVC participation. They include tariffs (WTO, 2014; and Blanchard, 2013), infrastructure, access to trade finance, regulatory environment, business environment, labor skills, transportation (WTO-OECD, 2013; and Hummels and Schaur, 2012), and economic complexity (Cheng and others, 2015).

28. Indonesia has space for improvements to enhance its participation in GVCs with structural reforms to improve the investment climate. Indonesia’ investment environment, including regulatory quality, labor skills, and quality of infrastructure, is relatively weak compared with most of its comparators (Figure 20). Despite Indonesia’s relatively low tariffs and partial liberalization of the FDI regime, the prevalence of trade barriers and FDI restrictions have also contributed to low integration with GVCs compared to ASEAN peers; while for instance, FDI has brought gains to Vietnam in terms of improving export competitiveness and rising participation in GVCs. The authorities are planning to streamline NTMs, gradually shifting control from border to post border, and open to trade through bilateral and regional trade agreements. Enhancing the investment climate including on infrastructure, regulations, and labor skills would help strengthen links with GVCs and competitiveness (see chapter on “Indonesia’s Growth Strategy: Boosting Potential Growth with Structural Reforms”).

Figure 20.Factors Affecting GVC Participation

D. Conclusion

29. Indonesia has room for strengthening export competitiveness by improving the investment climate. Indonesia has become more integrated with the rest of the world through regional and bilateral FTAs, and its export products and export destinations have become more diversified. Indonesia’s relatively high and stable growth rate and low trade tariffs, have been able to attract GVCs in recent years. However, its comparative advantage still lays in mineral fuels and low technology industries with low economic complexity, and its participation in GVCs remains low compared with Asian comparators. Indonesia needs to strengthen competitiveness in higher technology products, economic complexity, and participation in GVCs, by enhancing its investment environment, including on infrastructure, regulations, and labor skills. By pursuing reforms in these areas, Indonesia would be well positioned to enhance its living standards and graduate from the status of basic commodity exporter subject to global price swings, low value added, and limited employment growth.

Appendix I. Dimensions of Trade Composition and GVCs

Diversification is measured based on Herfindahl-Hirschman Index (HHI). The HHI is calculated as the sum of squared shares of each product in total export for export product diversification and the sum of squared shares of each export destination in total export for market diversification. If N denotes the number of export products or export destinations and s denotes the market share, HHI of a country is calculated as

The HHI values range between 1/N to 1 with smaller index indicates more diversified or less concentrated market. Diversifications of export product and destination are analyzed for Indonesia and its comparators. Product diversifications are calculated based on SITC Rev. 3 at 4-digit product classification and for destination HHIs are calculated using Direction of Trade Statistics data.

Revealed comparative advantage (RCA) is measured according to the RCA index introduced by Balassa (1965) that compares the share of a group of products in a country’s total exports with the share of that group of products in total world exports. RCA > 1 indicates that a country has revealed comparative advantage in exporting that group of products. Likewise, RCA < 1 indicates that a country has revealed comparative disadvantage.

The RCA index for country c in exports of product p is calculated using the following formula:

Where xcp represents the exports of product p by country c. The numerator refers to the share of product p in the total exports of county c and the denominator refers to the share of product p in total world exports.

Hatzichronoglu (1997) and OECD (2003) developed export products classification based on level of skill and technology intensity. This classification has been modified to make it more relevant to Indonesia’s export structure and data availability. Instead of ISIC Rev 3 product classification, we use SITC-Rev 3 at the 4 digit. Export products are classified into five categories: High, Medium-high, Medium-low, Low Technology and Mineral Fuels. Mineral Fuels group is added, as oil and gas are the main export products in Indonesia.

Export sophistication is constructed using Hausmann, Hwang and Rodrik (2007) framework. This measure aims to capture the productivity level associated with a country’s exports. The evolution of sophistication displays trend in high-growth, rich countries versus slow-growing, poor economies. For each product, an associated income/productivity level (PRODY) is generated by taking a weighted average of the per capita GDP, where the weights reflect the RCA of a country in that product. Where p denotes export product or category, t time, c country, and Y per capita income

Then the income/productivity level that corresponds to a country’s export basket (EXPY) is constructed with the weights corresponding to the shares of these products in total exports.

Economic complexity is a concept developed by Hidalgo and Hausmann (2009) to capture the amount of productive knowledge that is embedded in a country’s products. The economic complexity index (ECI) encompasses two aspects: diversity—the number of distinct products that a country makes; and ubiquity—the number of countries that also make the same product. A country that is able to produce and export a wide variety of products (high diversity) and those that are less ubiquitous are ranked high on ECI. ECI ranks how diversified and complex a country’s export basket is. We use ECI data calculated based on Simoes and Hidalgo (2011).

Global value chains (GVCs) are the position and participation of countries in global production. The GVC participation index indicates the extent to which a country is involved in a vertically fragmented production process (in relative and absolute terms). It distinguishes the use of foreign inputs in exports or backward participation and the use of domestic intermediates in third country exports or forward participation (De Backer and Miroudot, 2013). The OECD, in cooperation with the World Trade Organization (WTO), has developed estimates of trade flows in value-added terms. Inter-country input-output tables and a full matrix of bilateral trade flows are used to derive data on the value added by each country in the value chain.

References

Prepared by Agnes Isnawangsih and Yinqiu Lu.

The regional agreements are ASEAN, ASEAN-Australia FTA, ASEAN-New Zealand FTA, ASEAN-China Existing Comprehensive Economic Cooperation Arrangement (CECA); ASEAN-India CECA, ASEAN-Japan CECA, ASEAN-Korea CECA. The bilateral agreements are Japan-Indonesia Economic Partnership Agreement, and Indonesia-Pakistan FTA.

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