The Changing Pattern of Export Structure and Competitiveness in Indonesia s Manufacturing Sectors: an Overview and Assessment

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1 nd Internatonal Conference on Economcs, Trade and Development IPEDR vol.36 (2012) (2012) IACSIT Press, Sngapore The Changng Pattern of Export Structure and Compettveness n Indonesa s Manufacturng Sectors: an Overvew and Assessment Rudy Rahmadd + and Masaru Ichhash Graduate School for Internatonal Development and Cooperaton Hroshma Unversty, Japan Abstract. The paper ams to elucdate the evoluton of export structure and compettveness n Indonesa s manufacturng sectors from 1987 to Usng Constant Market Share (CMS) analyss and Revealed Comparatve Advantage (RCA) ndcators, our study reveals that whle mostly enoyng benefts from world export growth, Indonesa exports performance s deterorated by negatve contrbutons of commodty composton, market dstrbuton, and compettveness effects. In addton, export compettveness n manufacturng commodtes has been dmnshng n recent years and Indonesa stll specalzes n NRI and ULI manufacturng exports even though world demand growth of those commodtes s lower than that of commodtes wth hghly technology-embedded. Thus, the current paper emphaszes on the mportance of compettveness enhancng measures and development of more advanced technology-embedded commodtes. Keywords: Exports performance; specalzaton pattern; Indonesa; constant market share analyss; revealed comparatve advantage. 1. Introducton After the collapse n ol prce n md-1980s, Indonesa started to embark on trade lberalzaton era represented by an outward-orented or export promoton (EP) strategy replacng mport substtuton ndustralzaton (ISI) strategy, whch was spurred by the ol wndfall proft durng md 1970s. GDP growth durng was domnated by real exports or seemngly export-led growth, and the porton of manufactured commodtes n total exports structure ncreased overtme outperformng natural resourcentensve (NRI) exports reachng ts peak of 68% n Durng 1986 to 2008, Indonesa manufactured exports grew at 15% on average wth more than 50% of total exports went to Japan, USA, newly ndustralzng economes or NIEs, and ASEAN3 (Malaysa, Thaland and Phlppnes). As regards of export performance, Leamer and Stern (1970) pont out changes n a country s exports performance can be nfluenced by (a) world export demand; (b) geographcal destnaton; (c) product composton; and (d) changes n country s compettveness. In addton, ADB (2002) argued that assessng exports from ts structure may reveal upgradng process of an economy s exports toward more productve actvtes, whch plays a crtcal role n export-led development and sustaned hgh export growth. Therefore, dentfyng the evoluton of export structure and mpacts of factor determnants on export performance are deemed necessary n supportng the export-led development n Indonesa. Theoretcal foundaton n analyzng the contrbuton of factor determnants n terms of commodty composton, market dstrbuton and compettveness effects on export performance s well explaned n lteratures (Leamer and Stern, 1970; Rchardson 1971). It s drawn from the dea that demand for exports n a gven market from competng sources s a functon of the relatve prces (elastcty of substtuton). Ths ustfy the applcaton of Constant Market Share (CMS) analyss whch assumes that exports share wll reman unchanged over tme except as relatve prce vares. Thus, changes n exports beyond the constant share norm can be attrbuted to prce changes or changes n compettveness level whch captures changng market share effect. CMS analyss poneered by Tyszynsk (1951) has been used wdely on assessng the nternatonal trade flows by many economsts. Some, especally for developng countres case, are presented + Correspondng author. Tel.: (+81) E-mal address: rudyrahmadd@hroshma-u.ac.p 7

2 here. Lloyd and Taguch (1996) analyzed changes n exports compettveness of Chna, Korea and Indonesa. Tran (2011) analyzes Vetnam s export performance n face of Chna s emergence as a maor compettor n world market by employng CMS and Revealed Comparatve Advantage (RCA). Both studes found that compettveness s the most contrbuted factor on export performance compared to commodty composton and market dstrbuton effects for those countres. Emprcal studes on Indonesa s case have been sparse, yet some are worth mentonng. Juswanto and Mulyant (2003) and Sambodo (2004) examned Indonesa manufacturng exports usng one- and two-dgt SITC level, respectvely. Both studes revealed that Indonesa export performance suffered from negatve contrbuton of commodty composton and low response to world demand. Nevertheless, none dd they consder the exstence of European economes (EU) and other sgnfcant markets such as Chna. They dd not explan as well the evoluton of Indonesa manufactured export structure. The latter pont may enable one to lnk the analyss wth specfc polcy mplcaton on targeted export-orented ndustres. Our study attempts to fll these gaps. Our study ams to elucdate the changng pattern of exports structure and compettveness n Indonesa s manufacturng sectors by quantfyng the contrbuton of the geographcal (market), commodty composton and compettveness effects on export performance. In so dong, we employ analyses of CMS and RCA on dsaggregated level of manufacturng commodtes classfed by factor ntensty for perod 1987 to To the best of our knowledge, prevous studes for specfc case of Indonesa have not taken such combned ssues nto account. The rest of paper s organzed as follows. Secton II revews methodology and data used n ths study. The penultmate secton III elucdates emprcal results and dscussons. Secton V provdes some concludng remarks. 2. Analytcal Model and Data 2.1. Analytcal model In revealng underlyng domestc export capabltes n terms of gans n export market share and the upgradng export structure, two respectve standard, complementary export performance ndcators, namely CMS trends and RCA ndces are calculated. Followng Leamer and Stern (1970), among others, the followng export-based CMS dentty decomposes actual change n a country s exports between two perods as follows: V ' V rv where V (V ) s country A s exports value n perod 1 (2), V (V ) s country A s exports value of commodty n perod 1 (2), V (V ) s country s A exports value of commodty to country n perod 1 (2), r s the percentage growth n total world exports from perod 1 (2), r s the percentage growth n total world exports of commodty from perod 1 (2), r s the percentage growth n total world exports of commodty to country from perod 1 (2). The four expressons of the dentty (4) decompose a country s exports growth nto four effects respectvely, as follows. () world trade effect, whch relates any change n country A s actual exports to general rse s the world exports; () commodty composton effect, whch measures the extent to whch A s export dfferental s due to specalzng n specfc commodty where ts export demand s growng faster world average; () market dstrbuton effect, whch measures whether concentraton on market destnaton of country A s exports are growng relatvely faster than world average; (v) compettveness term, an unexplaned resdual, whch reflects the dfference between actual and hypothetcal exports ncrease f country A had mantaned ts share n each commodty group. To reveal the evoluton pattern of changng comparatve advantage n export commodty, whch represents the dynamcs of export structure, ths study employs Balassa (1989) export-based RCA ndex usng the followng formula: k k W W [ X / X ]/ [ X X ] RCA = / tot. + ( r r ) V. + ( r r ) V + ( V V r V ) (4) () () () (v) tot ' (5) 8

3 where X k s Indonesa s exports value of commodty n perod t, X t k s value of Indonesa s exports of total commodty n perod t, X w s world exports value of commodty n perod t, and X t w s world exports value of total commodty n perod t The RCA ndex of a gven product s measured by the commodty s share n the country s exports relatve to ts share n world. It reveals the relatve pattern of export specalzaton for an economy relatve to worldwde patterns. The greater a sector s RCA, the more an economy specalzes n that sector s exports relatve to world specalzaton patterns revealng a stronger comparatve advantage n that sector. Trackng the structure of RCAs over tme reveals an economy s comparatve advantage development and export upgradng process (ADB, 2002) Data Descrpton CMS decomposton and RCA ndcators usng formula (4) and (5), respectvely, are computed usng data from UN-COMTRADE n annual bass at two- to three-dgt SITC commodty level (Rev. 2) of manufactured exports. Utlzng such dsaggregated data enables one to chase the structural mpact of factor determnants on more dsaggregated export commodtes and lnk the analyss wth targeted export-orented ndustres. Followng Aswcahyono and Pangestu (2000), we categorze manufactured export commodtes classfed by factor ntensty nto fve man category-classes namely natural resource-ntensve (NRI), unsklful labour-ntensve (ULI), physcal captal-ntensve (PCI), human captal-ntensve (HCI), and technology-ntensve (TI). Accordngly, we construct Indonesa s 15 maor export destnaton markets, whch can be classed nto 4 ndvdual countres (Japan, US, Chna and Australa) and 4 regons comprsed of NIE (Hong Kong, Korea and Sngapore), ASEAN3 (Malaysa, Phlppnes and Thaland), EU5 (France, Germany, Italy, Netherlands, and UK) and rest of world (ROW). 3. Results and Dscusson 3.1. Decomposton of export structure Fg. 1: CMS Decomposton (numbers are n US$ mllons) Fg. 1 provdes CMS results for some perod ntervals durng 1987 to Trade lberalzaton drove postve contrbuton on all factors of both structural and compettveness terms. Unfortunately, the constructve drvers only lasted untl begnnng of Started from 1993, Indonesa lost n some of market share of ts manufactured commodtes. Even though export compettveness reganed between 1996 and 2002, Indonesa could not mantan ts market share from 2002 untl Changes n Indonesa manufactured exports were manly contrbuted by world export growth especally that of ULI commodtes. In addton, there has been a contnuous negatve contrbuton of commodty effect ndcatng commodty composton seems to be the man problem for Indonesa manufactured exports. From the dstrbuton of each effect based on commodty class, CMS shows evdence that such a negatve effect of commodty composton s due to contnuous negatve effect n most maor commodtes under ULI category classes (textle, garment and footwear). Snce these commodtes domnate not only n ULI category class, but also n overall export performance (37.25% on average), such negatve mpacts are transmtted nto overall export performance wth heavy weghts. The smlar condton also apples for commodtes under NRI category class. 1 In contrast, commodtes under HCI (road vehcles) and PCI (chemcals) classes postvely contrbute 1 For the sake of brevty, we do not provde fgures of CMS analyses depctng dstrbuton of structural effects across ndustres. Detaled CMS decomposton results across ndustres can be obtaned from authors upon request. 9

4 to export growth n recent perod. Ths can be explaned by the fact that world exports growth rate n such commodty classes s hgher than that of NRI and ULI durng (Table 1 panel a). Ths s plausbly because export commodtes under PCI, HCI, and TI are products wth medum to hgh- and hghtechnology embedded levels, whch tend to have hgh ncome elastcty of exports demand (Lall, 2000). Commodtes under these category classes play mportant role n compensatng negatve contrbuton of commodty effect from NRI and ULI durng 2002 to CMS decomposton also ponts to the negatve role of market dstrbuton effect, whch exhbted larger extent than that of product composton effect. Such negatve effect was partly because of lower mport demand growth throughout Indonesa maor export destnatons (Japan and US) compared to other regons such as Chna and Australa (Table 1 panel b). There has been a sgnfcant declne n shares of compettveness gan n manufactured exports after perod of 1993 ndcatng that Indonesa faled to mantan ts market share by losng prce and/or non prce advantage relatve to ts compettors on each commodty to each export destnaton country. Durng perod of recovery followng Asan 1998 crss, Indonesa had tme to regan ts compettveness untl Nevertheless, snce that perod up to recent years, there has been small progress n compettveness ndcator. From the dstrbuton of compettveness effect across ndustres, CMS decomposton reveals that from the onset of trade lberalzaton n 1986 most of compettveness gans were contrbuted by PCI, HCI and TI sectors. In contrast, there has been a contnuous declne of compettveness n NRI and ULI ndustres. Table 1. Share and Growth of Manufactured Exports (Authors calculaton) Product category Avg. share World growth Market destnaton Avg. share World growth NRI 19.40% 7.04% JAPAN 13.26% 5.68% ULI 37.25% 6.76% US 17.53% 6.85% PCI 12.66% 9.67% NIE 19.06% 7.92% HCI 12.17% 8.41% ASEAN 8.54% 6.17% TI 17.57% 8.93% CHINA 3.80% 13.89% EU % 7.08% AUSTRALIA 2.29% 8.86% REST OF WORLD 23.53% 10.73% (a) Product category (b) Market destnaton 3.2. Exports Structure and Comparatve advantage The RCA ndces reveal that Indonesa stll specalzes n NRI and ULI both of whch are characterzed wth fewer added values and man drvers of compettveness come from natural resource endowments n the former one and low wages n the latter. However, world specalzaton pattern exhbts contnuous growth of export demand n more hghly added value commodtes under PCI, TI and HCI class (Table 1 panel a). Summary of RCA ndcators (Table 2) ndcates that (1) exports products wth hgh comparatve advantage (RCA numbers > 1) are stll concentrated n commodtes under ULI category, even though growths of world demand of these commodtes tend to contnuously declne. These commodtes nclude garments, textles, footwear and other low-technology embedded commodtes; (2) though such RCA numbers exceed unty, there has been a recurrent declne n the magntude mplyng a loss n sector s comparatve advantage (market share) relatve to ts compettors n world market; (3) there has not been much mprovement n productve actvtes of commodtes under PCI, HCI and TI categores represented by no upgradng RCA n such categores ether ntensvely or extensvely; (4) n contrast, number of products downgraded (RCA less than unty) after 2002 were contnung. Based on RCA ndcators, t ndcates that Indonesa stll mantans heavy relance on low technologyand medum to low technology-embedded commodtes (NRI and ULI), and s less successful n upgradng ts exports structure toward more productve actvtes and commodtes. Porter (1990) argues that f such problem perssts, t could be a dsadvantage towards a country s sustaned growth and export-led development. Thus, government of Indonesa should put more emphass on contnuously upgradng ts export structure by facltatng and enhancng the development of commodtes wth more advanced technology- embedded. Ths can be done by promotng more R&Ds to mprove product qualty n exportorented ndustres and encouragng more FDI nflow n hghly technology ndustres. Such measures need to be combned by provdng sound nfrastructures and supply logstcs to promote export compettveness. 10

5 Table 2: The Changng Pattern of RCA Indcators (RCA>1) No SITC 1987 SITC 1990 SITC 1993 SITC 1996 SITC 1999 SITC 2002 SITC 2005 SITC SITC upgraded 65, 665, , 76, , 83 76, 62, SITC downgraded , , Concludng remarks Usng CMS and RCA analyses, our study reveals that mostly enoyng benefts from world export growth, Indonesa exports performance were deterorated by the negatve contrbuton of commodty composton and market dstrbuton. The role of compettveness n manufacturng export performance, whch was mproved sgnfcantly rght after trade lberalzaton polcy unleashed n 1986, has been dmnshng n recent years. In addton, Indonesa stll specalzes n NRI and ULI manufacturng exports ndcated from hgh comparatve advantage n those sectors even though world demand growth of those commodtes s relatvely slower than that of commodtes wth hghly technology-embedded. Ths s as evdence that Indonesa needs to contnuously upgradng ts exports towards hghly technology-embedded commodtes. Thus, t s suggested for the government of Indonesa to put more ntegrated efforts on compettveness enhancng measures and the development of commodtes wth more advanced technologyembedded for future development of export-orented ndustres n Indonesa 5. References [1] Asan Development Bank. Dd East-Asan Economes Lose Export Compettveness n the Pre-Crss 1990s? Assessng East-Asan Export Performance from 1980 to ADB Insttute Research Paper Seres. 2002, 34: [2] E. E. Leamer, and R. M. Stern. Quanttatve Internatonal Economcs. London: Aldne Transacton, [3] H. Aswcahyono, and M. Pangestu. Indonesa s Recovery: Exports and Reganng Compettveness. The Developng Economes.2000, XXXVIII (4): [4] H. Tyszynsk. World Trade n Manufacturng Commodtes, The Manchester School. 1951, XIX: [5] J. D. Rchardson. Constant Market Share Analyss of Export Growth. Journal of Internatonal Economcs. 1971, 1: [6] M. Porter. The Compettve Advantage of Natons. New York: The Free Press, [7] M. T. Sambodo. Indonesa s Export Performance: A decomposed Constant Market Share Analyss Jurnal Ekonom dan Pembangunan. 2004, XII (1): [8] P. J. lloyd, and H. Taguch. East Asan Export Compettveness: New Measures and Polcy Implcatons. Asan Pacfc Economc Lterature. 2005, 10 (2): [9] S. Lall. The Technologcal Structure and Performance of Developng Country Manufactured Exports, Oxford Development Studes. 2000, 28 (3): [10] T. A. Tran. Vetnams s Export n the face of Chna s Competton: An Overvew and Assessment. Comparatve Economc Studes. 2010, 52: [11] W. Juswanto, and P. Mulyant. Indonesa s Manufactured Exports: A Constant Market Share Analyss. Jurnal Keuangan and Moneter. 2003, 6 (2):