Post-crisis export performance: The Indonesian experience in regional perspective

Abstract

This paper examines post-crisis export performance in Indonesia against the backdrop of pre-crisis experience and the comparative export performance of other Southeast Asian countries. It surveys trends and patterns of export performance, focusing on comparative experience in major commodity categories and changing revealed comparative advantage. It also examines the implications for Indonesia's export performance of China's emergence as a major competitor in world trade, considers market prospects for textile and garment exports following the demise of the Multi-fibre Arrangement, and explores the factors contributing to the post-crisis export slowdown. The findings support the view that Indonesia's poor export performance in the post-crisis era is largely supply driven. They strengthen the case for reversal of recent backsliding in macroeconomic policy reform, and for speedy implementation of the unfinished reform agenda. Prudent macroeconomic management, while necessary, is not sufficient to achieve rapid and sustained export growth in an era of rapid economic globalisation.

Thanks are also due to Nobuaki Yamashita and Tran Quang Tien for help with preliminary data tabulations, and to the Indonesia Project at the Australian National University for fi nancial support.

Notes

1 See, for instance, Aswicahyono and Hill (2004): 288–94; World Bank (2005a).

2 Most of the data used are for the original five members of ASEAN (the ASEAN-5: Indonesia, Malaysia, the Philippines, Singapore and Thailand). Vietnam is included in some of the analysis, with the acronym ‘ASEAN-6’ used for the ASEAN-5 + Vietnam.

3 The well-known ‘J-curve’ effect of currency devaluation/depreciation.

4 Given rampant smuggling of oil and oil products from Indonesia to locations with higher prices, because of Indonesia's subsidised domestic fuel prices, official statistics are likely to understate actual oil exports. However, it is unlikely that the remarkable slowdown in reported oil and gas exports can be ascribed to such under-report-ing alone. In any case, there is little room for smuggling or under-reporting when it comes to trade in gas, which accounts for almost half of Indonesia's total oil and gas exports.

5 The analysis is based on a systematic separation of processed food, and parts and components, from the UN trade data (SITC Revision 3) at the five-digit level of disaggregation. The commodity list used in this reclassification of the standard UN trade data is available from the author on request. For details on the classification system, see Athukorala and Sen (1998) and Athukorala (2006a).

6 The term ‘processed food’ as used in this paper refers to food items that undergo substantial processing in the country of origin before export; they are typically high value and subject to increasingly stringent food safety standards. While international trade in many of these items is not entirely ‘new’, their trade has experienced very rapid expansion in recent years, and they are often described as ‘new food exports’, or ‘non-tradition-al food exports’. To maintain the focus on these new dynamic export items, we exclude from the definition traditional beverages (such as tea and coffee) and cereal grains (such as wheat, maize and rice) exported in bulk form, regardless of the degree of processing involved.

7 This phenomenon goes under various names, such as ‘vertical specialisation’, ‘slicing the value chain’, ‘international production sharing’ and ‘outsourcing’.

8 In addition to a rich agricultural resource endowment, a number of other factors seem to have underpinned Thai export success in processed food. These include: a highly liberal foreign investment policy that facilitated involvement of MNEs in both production (in the early years of export expansion) and trade; the long-standing policy of the Thai government not to intervene in domestic wholesale or retail trade, which provided an environment conducive to the evolution of highly efficient domestic marketing and distribution networks; and the pivotal role played by the ethnic Chinese business community—in particular the Charoen Pokphand (CP) Group—in branching out into food processing for export, based on their deep historical roots in domestic trade in agricultural products and as suppliers of fertiliser and seeds to Thai farmers (Jaffee and Gordon 1993; Kohpaiboon 2005: ch. 7).

9 Thailand is perhaps the best regional comparator because of the nature of its resource endowment, its stage of development and its export composition.

10 In April 1981, the Indonesian government introduced a ban on manual logging coupled with a ‘vertical integration requirement’ for logging rights (that is, logging rights were issued only to companies that operated wood-processing mills) with the aim of reducing tax evasion by logging companies and, more importantly, promoting the domestic plywood industry and other wood-based industries. In 1992, the log ban was replaced by a cascading tariff structure for log and other forestry products (with rates as high as 200%). The ban was reintroduced in November 2001, with the declared aim of protecting plywood and other wood-processing industries from competition with China. These interventionist policies have certainly boosted plywood and other wood-based products through high effective protection, but it is questionable whether they have delivered net national economic gains in terms of government revenue and employment generation.

11 The very high RCA index for wood products mainly refl ects high effective export protection emanating from the restrictions on log exports (see footnote 10).

12 An important point to note here is that the term ‘free trade agreement’ is a misnomer, because in order to become eligible for duty-free market access, partner countries must meet rules of origin (ROOs), which in most cases eat into the ‘published’ preference margin in practice. For instance, under the North American Free Trade Agreement (NAFTA), Mexico gains duty-free access to the US clothing market only if the products meet the ‘triple transformation’ condition (that is, that the transformation from raw material to finished clothing has been undertaken within the NAFTA area). The relative cost disadvantage arising from the use of yarn and textiles imported from the US (instead of from a low-cost source such as China or India) to meet this condition could well erase all or a significant portion of the preference margin for clothing exports to the US offered under NAFTA (Krishna 2004).

13 Growth rates computed from data obtained from the UN Comtrade database.

14 We do not consider textile imports here because the US is not a major market for textile exports from Indonesia. In 2004, the US accounted for less than 5% of Indonesia's total textile exports.

15 A number of excellent and detailed accounts of the reform process are available; see in particular Myint (1984); Hill (2000); Gelb and Associates (1988); Woo, Glassburner and Nasution (1994); and Temple (2003).

16 Indonesia was the only oil-exporting developing country to respond successfully to the macroeconomic crisis following the 1980s collapse of oil prices. Indonesia's choice of policies at the time is widely regarded as a highly successful policy experiment, in which expenditure reduction was combined with exchange rate realignment to stabilise the economy in the face of a severe external economic shock (Gelb and Associates 1988).

17 See in particular Athukorala (2003); Alisjahbana and Manning (2002); MacIntyre and Resosudarmo (2003); Aswicahyono and Hill (2004); and Sen and Steer (2005).

18 Increased agricultural protection (particularly in rice and sugar) is presumably a key factor that constrains diversification of production into high-value export crops. Trade protection in the sugar sector penalises downstream food processing (Alisjahbana and Manning 2002; Stapleton 2006).

19 For example, according to a recent survey by the University of Indonesia's Institute for Economic and Social Research (LPEM–UI 2005, as cited by Sen and Steer 2005: 295), firms lose about 6% of their potential output because of power shortages.

20 The departure of several high-profi le foreign firms (mostly Korean) involved in subcontracting activities for Nike and Reebok contributed to a precipitous fall in Indonesia's world market share in footwear, from 4.2% in 1995 to 2.5% in 2003 (based on data from the UN Comtrade database). Many cases of foreign firms leaving the textile and clothing industries have also been reported. There are no reported cases of entry by foreign fi rms into the electronics and electrical goods industries in Indonesia in recent years, even though these industries have been the major attraction for foreign investors in export-oriented manufacturing elsewhere in the region (Athukorala 2006b).

21 The figures for the other ‘ASEAN-6’ countries were: Malaysia and the Philippines 86%; Singapore 87%; Thailand 63%; Vietnam 57%; see Athukorala (2006b: table 2) for data sources.

22 I owe this point to Thee Kian Wie of the Indonesian Institute of Sciences.

Additional information

Notes on contributors

Prema-Chandra Athukorala

The author is indebted to Satish Chand, Chris Manning, Thee Kian Wee and the two anonymous referees for critical comments and helpful advice.