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Chapter 9: Diversifying Merchandise Exports

Author(s):
Luis Breuer, Jaime Guajardo, and Tidiane Kinda
Published Date:
August 2018
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Information about Asia and the Pacific Asia y el Pacífico
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Author(s)
Agnes Isnawangsih and Yinqiu Lu

Introduction

Since the start of the new millennium, Indonesia has doubled its merchandise trade with the rest of the world and maintained its overall share in the global market broadly unchanged at 1 percent. However, its exports as a percentage of GDP halved between 2000 and 2016. In addition, Indonesia has remained a basic commodity exporter subject to global price swings, attested to by the occurrence of a current account deficit in 2012 after the global commodity supercycle ended in 2011.

Against this backdrop, the objective of this chapter is to explore the composition of Indonesia’s merchandise exports and their competitiveness. It finds that coal and palm oil have replaced oil and gas as the top two export products, and China has replaced Japan as Indonesia’s top export destination. Still, the five key traditional commodity products (gas, oil, coal, palm oil, rubber) have contributed much to the dynamics of Indonesia’s exports, and they accounted for about 60 percent of total exports to China in 2016; however, the shares of its key noncommodity exports, such as electrical appliances and textiles, declined in 2000–16, as a result of increased competition from neighboring countries.

A closer look at the composition of exports from the perspective of competitiveness has confirmed that Indonesia has yet to improve its competitiveness in products with higher-technology components and has low export sophistication and limited economic complexity, whereas some neighboring countries have significantly improved competitiveness. Indonesia’s participation in global value chains (GVCs) is still limited compared with its peers. To graduate from the status of basic commodity exporter subject to global price swings, low value added, and limited employment growth, Indonesia needs to further pursue structural reforms to improve its competitiveness in higher-technology products, economic complexity, and participation in GVCs.

The rest of the chapter is structured as follows. The next section discusses the overall picture of Indonesia’s export structure and briefly discusses its trade policy. The chapter then explores Indonesia’s comparative advantage on the basis of the composition of its exports, and next presents Indonesia’s participation in GVCs. The final section concludes the chapter.

An Overall Picture of Goods Exports

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 exports doubling during the period. By keeping pace with the expansion of global trade, Indonesia maintained its share in the global market roughly unchanged at 1 percent (Figure 9.1), which positioned it as the 29th largest goods exporter in 2016 (up by five positions since 2000).

Figure 9.1.
ASEAN: Share of World Exports

(Percent)

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

Indonesia’s export growth was broadly synchronized with key global developments. After a brief contraction in 2001 after the burst of the dot-com bubble, exports started to expand in 2002, riding 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.

The increase in exports during 2000–16 was mostly due to prices (Figure 9.2). The year-over-year change in export volumes was smaller and less volatile than that of export values, reflecting the impact of global commodity prices. Despite the increase in exports, the ratio of export value to GDP declined to 15½ percent in 2016 from 34½ percent in 2000.

Figure 9.2.
Goods Exports

(Billions of US dollars, 2000 prices)

Source: IMF, World Economic Outlook.

Five key traditional commodity products (gas, oil, coal, palm oil, rubber) have contributed much to the dynamics of Indonesia’s exports. Their dynamics were synchronized with and influenced by the global commodity price cycle. For example, 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 9.3).

Figure 9.3.
Main Exports

(Percent of total exports)

Sources: UN Comtrade database; and IMF staff estimates.

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 from 1965 to 1985; 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 2011.1 These trends are also confirmed by their shares in global export markets (Figure 9.4). The global share of Indonesia’s oil and gas exports fell by close to half of 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 9.4.
Main Export Shares in the World

(Percent of world’s exports for each type of goods)

Sources: UN Comtrade database; and IMF staff estimates.

The shares of key noncommodity 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 World Trade Organization (WTO) phased out quotas on textiles and clothing in 1995–2005, while competition from China rose after its accession to the WTO in 2001 (Pangestu, Rahardja, and Ing 2015).

China has replaced Japan as Indonesia’s top export destination (Table 9.1). Export values to China quadrupled in 2000–16 as a result 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 the 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 about 11 percent (Figure 9.5). Nevertheless, Japan was still Indonesia’s top export destination for natural gas in 2016, and the number two destination for rubber, textiles, and electrical appliances. The US share remained broadly stable over this period (11.2 percent in 2016 versus 13.7 percent in 2000), remaining the number one market for Indonesia’s rubber and textile exports (Annex Table 9.1.1).

TABLE 9.1.Indonesia: Main Export Destinations(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 Province of China3.8Malaysia4.0Malaysia4.9
Malaysia3.2India3.4Korea4.8
Netherlands3.0Taiwan Province of China2.9Thailand3.7
Hong Kong SAR2.5Thailand2.6Philippines3.6
Australia2.4Netherlands2.6Taiwan Province of China2.9
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 9.5.
Indonesia: Major Export Destinations

(Percent of total)

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

Exports to China are concentrated in a few commodities (Figure 9.6). 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 China’s rising demand for coal. 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 9.6.
Main Commodity Exports to China

(Percent of total Indonesian exports to China)

Sources: UN Comtrade database; and IMF staff estimates.

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 a deficit took place in the manufacturing sectors, such as machinery, transport equipment, and textiles (Marks 2015).

Indonesia’s trade developments have benefited from regional and bilateral free trade agreements (FTAs), especially with the Association of Southeast Asian Nations (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 of its imports in 2016. In particular, the ASEAN has continued its efforts to build a regionwide 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 increased from 17.5 percent in 2000 to 20.7 percent in 2016.

Indonesia has a low tariff rate but a high WTO bound tariff rate (that is, committed tariff rate under the WTO) and services trade restrictiveness. Indonesia’s average applied most-favored-nation tariff rate was low at 6.9 percent in 2016, down from 9.5 percent in 2006 (WTO 2013; USTR 2017). On top of this, Indonesia offers additional tariff reductions for the economies in the FTAs. Despite the low applied most-favored-nation 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 Group of 20 (G20) emerging market economies. Most of Indonesia’s Organisation for Economic Co-operation and Development (OECD) services trade restrictiveness was higher than the average for G20 countries, with large gaps in distribution services, maritime transport, and legal services.

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 from the World Bank Temporary Trade Barriers Database 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 than they were before the global financial crisis. On the basis of data from the Global Trade Alert, Indonesia has introduced more NTMs than other G20 countries have since 2008.

Composition of Trade and Comparative Advantage

An analysis of Indonesia’s trade composition can reveal its comparative advantage in trade. This chapter’s 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 9.2). In each dimension, Indonesia’s position is analyzed and compared with its regional peers (that is, the other ASEAN-4 countries plus China, India, and Vietnam) and other large emerging market economies (that is, non-Asian G20 emerging market economies—Argentina, Brazil, Mexico, Russia, South Africa, and Turkey).

Product and Destination Diversification

Product and destination diversification is analyzed for Indonesia and its peers. The assessment of diversification is based on the Herfindahl-Hirschman index of concentration, which is calculated based on the Standard International Trade Classification (SITC) Rev.3 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.

Indonesia’s export products have become more diversified since 2011, according to the Herfindahl-Hirschman concentration index. Its product diversification stands in the middle of its peers. In the region, its level of product diversification is similar to those of India and Vietnam, while it is more diversified than the Philippines and Malaysia and less diversified than China and Thailand (Figure 9.7). Compared with other large emerging market economies, its product diversification level is similar to those of Mexico and South Africa, while it is less diversified than Turkey and more diversified than Argentina and Russia (Figure 9.8).

Figure 9.7.
Asian Emerging Markets: Export Product Diversification

(Index 0-1; higher value indicates exports are concentrated in fewer products)

Sources: UN Comtrade database; and IMF staff estimates.

Note: Herfindahl-Hirschman index calculated using four-digit Standard International Trade Classification Rev.3.

Figure 9.8.
Non-Asian Emerging Markets: Export Product Diversification

(Index 0-1; higher value indicates exports are concentrated in fewer products)

Sources: UN Comtrade database; and IMF staff estimates.

Note: Herfindahl-Hirschman index calculated using four-digit Standard International Trade Classification Rev.3.

Its export destinations have also improved. A similar trend applies to most of its peers (Figures 9.9 and 9.10). The index suggests that Indonesia has improved from the category of moderate concentration to the unconcentrated category. It exported one-third of its products to its top three export destinations in 2016, whereas this proportion had been one-half in 2000.

Figure 9.9.
Asian Emerging Markets: Diversification in Export Destinations

(Index 0-1; higher value indicates exports are concentrated in fewer destinations)

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

Figure 9.10.
Non-Asian Emerging Markets: Diversification in Export Destinations

(Index 0-1; higher value indicates exports are concentrated in fewer destinations)

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

Revealed Comparative Advantage

The revealed comparative advantage (RCA) indicates a 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), which 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. An RCA larger than 1 indicates that the country has a comparative advantage in exporting that group of products. Likewise, an RCA of less than 1 indicates that a country has a comparative disadvantage.

Indonesia has maintained a comparative advantage in mineral fuels and low-technology industries, in contrast with its Asian peers (Figure 9.11). The results suggest that Indonesia’s RCAs in mineral fuels and low-technology industries were consistently above 1 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 peers. The RCAs of countries with RCAs in low-technology industries greater than 1 in 2000 (China, India, Thailand, Vietnam) declined gradually in 2000–16. In particular, China’s RCA in low-technology industries declined to less than 1, 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 experienced a gradual decline in its RCA.

Figure 9.11.
Revealed Comparative Advantage

Sources: UN Comtrade database; and IMF staff estimates.

Indonesia 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 1 and stable. In contrast, China and Vietnam have gained comparative advantage in high-technology industries in this period.

Export Sophistication

Export sophistication aims to capture the potential income level at which a product may dominate on the basis of the income levels of countries that export that product. For example, 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).

Indonesia’s export sophistication has improved, but it remains low compared with peers in 2000-16 (Figures 9.12 and 9.13). In this period, Indonesia managed to surpass the Philippines and be surpassed by China, while it lagged behind other peers such as Malaysia, Thailand, and non-Asian large emerging market economies.

Figure 9.12.
Asian Emerging Markets: Export Sophistication Index

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

Sources: UN Comtrade database; and IMF staff estimates.

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

Figure 9.13.
Non-Asian Emerging Markets: Export Sophistication Index

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

Sources: UN Comtrade database; and IMF staff estimates.

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

Economic Complexity

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.

The ECI suggests that Indonesia has low economic complexity. It is less capable of producing a diverse range of products that are less commonly produced by other countries. In 2015, it was ranked 57th out of 108 countries by the Observatory of Economic Complexity at the Massachusetts Institute of Technology Media Lab Macro Connections Group (Figure 9.14). While the ECI of most of its peers increased in 2000–16, Indonesia’s ECI decreased (Figure 9.15). Indonesia also registered a lower ECI than India, the Philippines, and Vietnam despite having higher per capita income (Figure 9.16) (high ECI is usually associated with high per capita income).

Figure 9.14.
Economic Complexity Rank, 2015

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

Note: Ranked out of 108 countries. Higher number indicates higher economic complexity.

Figure 9.15.
Economic Complexity Index

Source: Observatory of Economic Complexity.

Note: Index level measures the knowledge intensity of an economy by considering the knowledge intensity of the products it exports.

12015 data for Thailand and Vietnam.

Figure 9.16.
Economic Complexity Index and Per Capita Income, 2016

Sources: IMF, World Economic Outlook; Observatory of Economic Complexity; and IMF staff estimates.

Note: 2016 or latest data available. Data labels in figure use International Organization for Standardization country codes.

Participation in Global Value Chains

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

Indonesia’s participation in GVCs remains below Asian peers, despite a slight increase since 2000 (Figure 9.17). 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 content in domestic exports) has declined over time, likely because of complex regulations, including NTMs (Figure 9.18). Despite the rise in forward participation, Indonesia’s share in global value added remains in the middle of its peers (Figure 9.19).

Figure 9.17.
Participation in Global Value Chains

(Percent of gross exports)

Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.

Note: Foreign value-added content and domestic value added as a percentage of gross exports.

Figure 9.18.
Indonesia: Participation in Global Value Chains

(Percent of gross exports)

Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.

Figure 9.19.
Domestic-Value-Added Share

(Percent of world value added)

Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.

The origin of value added in exports and final demand became more dominated by domestic sources (Annex Tables 9.3–9.5). The origin of value added in exports and in final demand was dominated by domestic sources in 2011, accounting for 88.0 percent and 77.9 percent, respectively. China’s shares in Indonesia’s exports, final demand, and import value added have further increased, while the shares of the United States, Japan, Singapore, Germany, and Australia have fallen.

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

Indonesia has space for improvement to enhance its participation in GVCs with structural reforms to improve the investment climate. Indonesia’s investment environment, including regulatory quality, labor skills, and quality of infrastructure, is relatively weak compared with most of its peers (Figure 9.20). Despite Indonesia’s relatively low tariffs and partial liberalization of the foreign direct investment (FDI) regime, the prevalence of trade barriers and FDI restrictions has also contributed to low integration with GVCs compared with ASEAN peers, whereas, for instance, FDI has brought gains to Vietnam in both improving export competitiveness and rising participation in GVCs. The Indonesian authorities are planning to streamline NTMs, gradually shifting control from the border to behind the border, and to become more open to trade through bilateral and regional trade agreements. Enhancing the investment climate, including infrastructure, regulations, and labor skills, would help strengthen links with GVCs and boost competitiveness (see Chapter 3, “Boosting Potential Growth”).

Figure 9.20.
Factors Affecting Global Value Chain Participation

(Percent of world value added)
(Percent of world value added)

Sources: IMF, World Economic Outlook; World Bank, Doing Business; World Bank, Worldwide Governance Indicators; World Economic Forum, The Global Competiveness Index; and IMF staff estimates.

Note: Reflects perceptions that the government will formulate and implement sound policies and regulations that permit and promote private sector development.

Conclusion

Indonesia has room to strengthen its export competitiveness by improving the investment climate. This chapter shows that Indonesia has remained 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 lies in mineral fuels and low-technology industries with low economic complexity, and its participation in GVCs remains low relative to Asian peers.

Looking ahead, Indonesia needs to strengthen competitiveness in higher-technology products, economic complexity, and participation in GVCs by enhancing its investment environment, including 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.

Annex 9.1. Main Commodity Exports and Origins of Value Added

ANNEX TABLE 9.1.1.Main Commodity Exports, by Major Export Destinations(Percent of the commodity exported from Indonesia)
200020052016
Natural Gas: SITC Rev.3 34
Japan67.33Japan56.36Japan29.85
Korea20.38Korea25.62Singapore24.23
Other Asia, nes10.01China11.75Korea18.72
China0.93Other Asia, nes5.62China12.31
United States0.64Philippines0.27Other 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: SITC Rev.3 33
Japan32.93Japan32.76Malaysia14.46
Korea19.11Korea21.56China14.32
China12.38China15.93Singapore13.63
Singapore9.90Australia10.77Thailand13.53
Australia7.73Singapore7.99Japan12.63
United States5.85United States3.55Australia8.51
Other Asia, nes4.25Thailand3.03United States7.22
Malaysia1.98Other Asia, nes1.71Korea7.12
Thailand1.65Malaysia1.22Other Asia, nes4.27
India1.51New Zealand0.90India2.68
Rest of the world2.71Rest of the world0.57Rest of the world1.62
Palm Oil: SITC Rev.3 422214224
India34.55India22.36India21.38
Netherlands19.33China13.87China13.46
China9.37Netherlands13.59Pakistan8.00
Singapore5.54Pakistan7.42Netherlands5.30
Germany3.01Malaysia6.53Spain4.34
Spain3.00Singapore3.87United States4.30
Malaysia2.39Bangladesh3.58Egypt4.03
United States2.34Germany3.05Bangladesh3.59
Turkey2.32Sri Lanka2.70Italy3.48
Bangladesh2.00Turkey2.37Malaysia3.10
Rest of the world1.78Rest of the world20.68Rest of the world29.02
Rubber: SITC Rev.3 23162
United States32.72United States27.58United States28.01
Japan10.90Japan15.09Japan13.53
Singapore6.07China9.93China9.66
Germany4.81Singapore5.68India5.96
Korea4.53Germany3.40Korea4.63
Canada3.11Korea3.11Germany3.03
Belgium2.88Canada2.79Brazil2.56
China2.41Brazil2.06Canada2.12
United Kingdom2.06United Kingdom1.73Turkey1.91
Italy2.04Belgium1.59Belgium1.90
Rest of the world0.26Rest of the world27.04Rest of the world26.68
Base Metal: SITC Rev.3 67 + 68+ 69
Singapore21.98Singapore24.45China17.19
Japan20.42Japan14.97Singapore13.11
United States13.75Malaysia10.94Australia11.09
Malaysia5.61Thailand9.73Malaysia8.33
Other Asia, nes4.90China7.50Thailand7.11
Thailand4.90United States4.56United States6.27
Netherlands4.23Other Asia, nes3.93India5.84
Philippines3.19Philippines3.00Vietnam4.93
Germany2.05Korea2.25Korea4.90
Korea1.96Hong Kong SAR2.03Japan4.87
Rest of the world0.11Rest of the world16.65Rest of the world16.38
Coal: SITC Rev.3 32
Japan26.39Japan24.79China24.99
Korea8.01Korea10.60India22.77
Philippines5.85India10.49Japan13.65
Thailand5.27Hong Kong SAR6.98Korea8.57
India5.26Italy5.12Other Asia, nes6.59
Spain4.57Malaysia4.73Malaysia5.60
Netherlands4.55Thailand4.34Philippines5.49
Hong Kong SAR4.37Philippines3.44Thailand4.39
Malaysia3.19Spain2.21Hong Kong SAR2.78
Italy2.83Netherlands1.98Spain1.46
Rest of the world0.03Rest of the world25.31Rest of the world3.69
Textiles: SITC Rev.3 84
United States42.55United States55.17United States50.05
United Kingdom8.41Germany8.03Japan9.40
Germany7.87United Kingdom6.26Germany6.51
Netherlands4.53France2.67Korea3.84
Japan3.92United Arab Emirates2.64United Kingdom2.72
United Arab Emirates3.81Japan2.56China2.42
France2.96Belgium2.30Belgium2.37
Saudi Arabia2.75Netherlands2.08Australia2.37
Belgium2.65Italy1.86Canada2.29
Singapore2.25Canada1.85United Arab Emirates1.81
Rest of the world0.01Rest of the world14.59Rest of the world16.22
Electrical Appliances: SITC Rev.3 77
Singapore29.81Singapore41.87Singapore25.00
Japan22.08Japan17.05Japan17.74
United States8.74United States6.52United States8.94
Malaysia4.55Hong Kong SAR4.65Hong Kong SAR5.17
Thailand4.31Malaysia4.34Malaysia4.50
Hong Kong SAR3.39Thailand2.55France4.25
Philippines2.92China2.41China4.04
Korea2.37Korea1.87Thailand3.57
France2.28Australia1.70Philippines2.39
Germany2.08Philippines1.53Korea2.33
Rest of the world17.46Rest of the world15.50Rest of the world22.06
Sources: UN Comtrade database; and IMF staff estimates.Note: nes = not elsewhere specified; SITC = Standard International Trade Classification.
Sources: UN Comtrade database; and IMF staff estimates.Note: nes = not elsewhere specified; SITC = Standard International Trade Classification.
ANNEX TABLE 9.1.2.Origin of Value Added in Indonesia’s Gross Exports
Millions of US DollarsShare(Percent)
Source Country200020052011200020052011Sparkline
Domestic54,53480,259195,87783.083.988.0
Saudi Arabia8061,8773,0991.22.01.4
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
Korea5825701,2460.90.60.6
Singapore6388651,1031.00.90.5
Australia4796549190.70.70.4
India1924368950.30.50.4
Thailand2394578390.40.50.4
Rest of the world4,4276,26310,6306.76.54.8
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.
ANNEX TABLE 9.1.3.Origin of Value Added in Indonesia’s Final Demand
Millions of US DollarsShare (Percent)
Source Country200020052011200020052011Sparkline
Domestic108,858202,800640,21474.674.977.9
China1,5155,31423,7151.02.02.9
Japan5,5757,94118,6643.82.92.3
United States4,9636,32213,2313.42.31.6
Saudi Arabia1,4753,9299,8031.01.51.2
Korea1,7252,6979,1281.21.01.1
Singapore2,1374,2308,9831.51.61.1
Malaysia1,2792,6648,3580.91.01.0
Australia2,3333,4127,7871.61.30.9
Thailand1,0882,6337,3720.71.00.9
India6112,0236,7380.40.70.8
Rest of the world14,27926,78667,7259.89.98.2
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.
ANNEX TABLE 9.1.4.Origin of Value Added in Indonesia’s Gross Imports
Millions of US DollarsShare (Percent)
Source Country200020052011200020052011Sparkline
China1,9056,43226,5043.97.712.6
Japan7,2379,37320,86914.911.29.9
United States6,2757,51314,80713.09.07.0
Saudi Arabia2,2815,80712,9024.76.96.1
Korea2,3073,26710,3754.83.94.9
Singapore2,7765,09610,0865.76.14.8
Malaysia1,7043,2549,7143.53.94.6
Australia2,8124,0668,7065.84.84.1
Thailand1,3283,0908,2112.73.73.9
India8032,4597,6331.72.93.6
Germany1,8182,8285,3013.83.42.5
Domestic2785252,7090.60.61.3
Rest of the world16,88830,22173,05534.936.034.6
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.
Sources: Organisation for Economic Co-operation and Development and World Trade Organization, Trade in Value Added database; and IMF staff estimates.

Annex 9.2. Dimensions of Trade Composition and Global Value Chains

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

HHI values range between 1/N and 1, with a smaller index indicating a more diversified or less concentrated market. Diversification of export products and destinations are analyzed for Indonesia and its peers. Product diversifications are calculated based on SITC Rev.3 at four-digit product classification, and for destinations, HHIs are calculated using IMF Direction of Trade Statistics data.

Revealed comparative advantage (RCA) is measured according to the RCA index introduced by Balassa (1965), which 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 an RCA in exporting that group of products. Likewise, RCA <1 indicates that a country has a 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 country c, and the denominator refers to the share of product p in total world exports.

Hatzichronoglou (1997) and OECD (2003) develop an 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 the International Standard Industrial Classification (ISIC) Rev.3 product classification, this chapter uses SITC Rev.3 at the four-digit product classification. Export products are classified into five categories: high, medium-high, medium-low, and low technology, and mineral fuels. The mineral fuels group is added because oil and gas are Indonesia’s main export products.

Export sophistication is constructed using the 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 the trend in high-growth, rich countries versus slow-growing, poor economies. For each product, an associated income and productivity level (PRODY) is generated by taking a weighted average of 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 and 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 can produce and export a wide variety of products (high diversity) and those that are less ubiquitous are ranked high on the ECI. The ECI ranks how diversified and complex a country’s export basket is. This chapter uses 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 WTO, has developed estimates of trade flows in value-added terms. Intercountry 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.

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The Indonesian authorities have taken measures since 2014 to reduce the reliance on oil imports. These include the reduction of fuel subsidies, addition of unsubsidized fuel variants, and renewal of oil refineries.

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

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