Domestic Value Added, Exports and Employment: An Input–Output Analysis of Indonesian Manufacturing

Abstract

The paper is motivated by the current emphasis on the share of domestic value added in exports (SVEX) as a policy criterion for export development strategy in developing countries. We hypothesise that the policy emphasis on SVEX, which harks back to the import-substitution era, is inconsistent with the objectives of achieving economic growth with employment generation in this era of economic globalisation. We test this hypothesis by examining the relationship of SVEX with both export-induced employment and the total domestic value added (the contribution of exports to gross domestic product) by applying the standard input–output methodology to data from Indonesian manufacturing. Our findings do not support the view, widely held in policy circles, that manufacturing industries characterised by a higher SVEX have the potential to make a greater contribution to employment generation and total domestic value added. The policy inference is that policymakers should focus on the export potential of industries when designing export development policy, rather than on SVEX.

ACKNOWLEDGMENTS

The authors gratefully acknowledge the excellent comments from the two anonymous referees. We also thank Sulistiyo Ardiyono for his excellent research assistance.

Notes

1 Minister of Finance Regulation 76/2012.

2 Minister of Industry Regulation 29/2017.

3 Henceforth, we use ‘value added’ to imply ‘per unit value added’ for brevity, except when explicit distinction is needed.

4 In recent years, in particular following the onset of the Covid-19 pandemic that temporarily disrupted global supply chains, there has been concern about a possible reversal of the internationalisation of industrial production. However, there is convincing evidence that global production sharing is an enduring structural phenomenon, notwithstanding some isolated cases of ‘reshoring’ that figure prominently in the media (Ando, Kimura and Yamanouchi 2022; Antràs 2020; World Bank 2020). Contrary to the popular perception, there is no evidence to suggest that China’s emergence as the premier assembly centre within global production networks (GPNs) has contributed to the decoupling of the ongoing process of global production sharing between China and the United Sates (Athukorala 2017).

5 Therefore, it is important to distinguish between total value added (addition to GDP) and per unit value added (value added ratio) when analysing gains from exports: the latter may decline while the former goes up.

6 See the literature surveys of Johnson (2014) and Timmer et al. (2014).

7 For a critique of this approach, see the work of Patunru and Athukorala (2021).

8 The latest input–output table (2016) is six years apart from the preceding table (2010). However, according to Statistics Indonesia (BPS), the input–output stature of Indonesian manufacturing remained virtually unchanged between 2015 and 2016.

9 See note 6.

10 Based on the official employment data, one could argue that Indonesia does not have a serious ‘employment problem’: the unemployment rate hovered around 4% in the pre-Covid-19 decade. However, in a developing country such as Indonesia, unemployment figures are a deceptive indicator of the extent to which the labour force is productively deployed: poverty and the lack of a social security system dictate that most people have to scratch a living somehow in order to survive. A significant portion of the labour force is crammed into the unorganised sector doing low-productive work (Pratomo and Manning 2022; Rothenberg et al. 2016), and ‘less than half of those in employment collect a recognizable wage or salary [and] the rest mostly work for themselves or their families’ (Economist 2018, 56).

11 See the work of Hazari (1970), Acharya and Hazari (1971), Bulmer-Thomas (1978) and the literature cited therein. Surprisingly, these papers are missing from the reference lists of recent works on value-added trade, even though there is no real novelty in the methodology used compared to this early literature.

12 The mainstream policy advocacy, which is based on the theory of comparative advantage, is that the industrialisation strategy for improving economic welfare for a country is to produce goods (and services) whose production intensively use the factors of productions in which the country is abundantly endowed compared to its trading-partner countries.

13 For an excellent treatment of the input–output analysis with the latest developments in the subject area, see the textbook by Miller and Blair (2009).

14 Input–output tables take two forms: the ‘complementary import’ type and the ‘competitive import’ type. The former comprises two intra-industry matrices, one for domestic inputs and another for imported inputs. That is, the import content of each inter-industry transaction is identified separately and allocated to a separate import matrix. In the latter, imported inputs and domestically procured inputs are lumped together in a single intraindustry transaction table.

15 According to the Indonesian Standard Industrial Classification used by BPS, animal and vegetable oil, which is dominated by palm oil (input–output sector 55), petroleum processing (99), and smoked and crumb rubber (100) are treated as ‘manufacturing’. We excluded these three sectors from our manufacturing classification because standard (unprocessed or semi-processed) primary products account for over 90% of production in these sectors.

16 For instance, if 30% of the gross output of agriculture is used in the food-processing industry, then 30% of agricultural imports are also used in food processing. Similarly, if 40% of the gross output of the mineral sector goes to the iron and steel industry, so does 40% of the mineral imports.

17 The classification system used for delineating GPN products and further distinguishing between ‘producer-driven’ and ‘buyer-driven’ GPNs (see below) is discussed in the work of Athukorala (2019). It is important to note as a caveat that application of this classification to industries identified based on the two-digit input–output classification (based on the International Standard Industrial Classification) does not permit the precise delineation of the characteristics of GPN products. This is because the output of some ‘GPN industries’ identified at the two-digit level is a combination of production based on global production sharing and production for the domestic market, and normally, the import content of the former tends to be higher than that of the latter (Brumm et al. 2019; Koopman, Wang and Wei 2014).

18 In the late 2010s, buyer-driven GPN products made up less than 8% of total GPN exports from South Korea, Malaysia, Singapore and Thailand (Athukorala 2019, table 2).

19 There was an increase in industrial protection (import tariffs) during 2011–15 (Patunru and Rahardja 2015). However, it is unlikely that this protectionist tendency would have contributed to the increase in the domestic value added of GPN exports, for two reasons. First, the implied structure of GPN industries is determined by the structure of global production sharing rather than by changes in the trade policy regime of a given country. Second, the trade policy regime in Indonesia provides domestic firms involved in GPNs with duty-free access to imported inputs under the duty rebate provisions.

20 For this reason, value added per worker is also used as an alternative measure of capital intensity: capital deepening tends to increase the relative output of the sector with a greater capital share (Acemoglu and Guerrieri 2008).

21 As noted above, firms in GPN-related industries have the opportunity to specialise in a given task within the global manufacturing value chain that fits with its relative cost advantage.

22 Alternative estimates of the model with the GPN intercept dummy and without industry fixed effects are reported in appendix 2 for comparison.