Export-Import Manufacturing Sector
By: Prof. Ari Kuncoro, Ph.D., Rector of Universitas Indonesia
KOMPAS – (3/8/2021) The International Monetary Fund (IMF) changed its prediction. Although the global growth forecast for 2021 remains at 6 percent, the IMF raised its forecast for developed countries and corrected the growth of developing countries to the downside. The difference in vaccination rates is the key to this growth divergence.
For Indonesia, what is very relevant is the growth of the two world giants, the US and China. The relevance to the country is felt through export and import activities. China, although its growth was not as fantastic as in the first quarter of 2021, recorded an annual growth of 7.9 percent in the second quarter of 2021. Despite the slowdown in China, US growth can still compensate for it. US growth in the second quarter of 2021 was recorded at 6.5 percent, up from 6.4 percent in the previous quarter.
Trade balance
Indonesia’s trade balance data for July 2021 has not yet been published. However, the growth momentum of the US and China will still be felt until June 2021, which recorded a surplus of US$1.32 billion and helped support the Rupiah exchange rate. Exports in June 2021 rose 9.52 percent compared to May to US$18.55 billion. When compared to June 2020, there was an increase of 54.46 percent. The largest contribution from non-oil and gas exports reached US$17.31 billion. The three main destination countries for non-oil and gas exports are China (US$4.13 billion), the US (US$2.13 billion), and Japan (US$1.36 billion).
Manufacturing industry exports in January-June 2021 rose 33.45 percent. Manufactured exports are mostly demand from the US, whose people have extra purchasing power due to the stimulus and have a preference for durable goods. Exports of agricultural products rose 14.06 percent, indicating that there is still demand from the world supply chain system.
As for semi-finished products, the largest increase was in steel worth US$486.4 million or an increase of 32.31 percent. Meanwhile, finished product exports of vehicles and spare parts rose 42.19 percent.
To export manufactured goods, it is necessary to import raw/auxiliary materials and semi-finished goods, in addition to imports of capital goods. Ideally, to increase leverage, the need for imports of these inputs is met by domestic industries. However, this cannot be forced if imported raw materials actually increase the perception of quality in the international market. This explains why overseas customers require the use of foreign input goods in their orders, unless the domestic input goods have a strong perception of quality or brand.
A simple linear probability model shows that this imported input variable strongly influences export orientation. Before 2020, every 1 percent increase in the ratio of imported inputs will increase the trend of exporting by 0.23 percent. However, this effect disappeared (not statistically significant) in the sample after 2000.
One of the interpretations is that although gradual and not massive, import substitution has begun towards raw materials produced by domestic input industries. Another interpretation is that the import of these inputs is also carried out by non-export-oriented industries that take advantage of the purchasing power of the domestic middle class. This can be seen from the composition of raw/auxiliary materials, which are still around 75 percent of total imports.
Imports in June 2021 were recorded at US$17.23 billion, an increase of 21.03 percent compared to May 2021 or an increase of 60.12 percent compared to June 2020. As a result, the trade balance surplus was US$1.32 billion, smaller than May 2021 which was US$2 .36 billion. However, this is healthier because it indicates economic activity has increased.
The biggest increase was in imports of capital goods (15 percent share), such as machinery and mechanical equipment, amounting to US$506.7 million, up 28.31 percent. Meanwhile, imports of raw/auxiliary materials, which account for about 75 percent of the total imports, are US$13.04 billion, an increase of 19.15 percent per month.
The increase in economic activity can be seen from the increase in the supply manager procurement index in the manufacturing sector (PMI), which, although starting to show a decline as a result of the pandemic spike, is still in the expansion zone because it is supported by exports. Indonesia’s PMI figure fell from 55.3 in May to 53.5 in June.
Implications
The manufacturing PMI figure implies that companies are interrelated because input goods must be purchased, both domestically and imported. To see this, the BPS annual manufacturing survey is used. Small business is defined as a business with a workforce of up to 100 people, while a medium scale business is 100 to 500 people, and the large business category is with a workforce of more than 500 people.
By using the export duration model, the survival ability of small businesses is influenced by the growth of large industries in the form of medium-sized corporations in the same agglomeration. Export-oriented small businesses can make large industries a source of technology and market information as well as a hub for exports. Small businesses that are not exporters can supply a variety of industrial inputs to large businesses. If by chance the big business is also an exporter, indirectly the small business is also listed as an exporter.
Meanwhile, the link between medium-scale and large/corporate industries is statistically weak. In terms of exports, medium-sized enterprises tend to create supply chains among themselves in addition to importing input goods.
Next, the business unit growth model is used to see the potential for promotion. As a result, the growth of medium-sized enterprises is related to the growth of large/corporate industries. It is easier for medium-sized enterprises to upgrade to large-scale compared to small-to-medium scale. For medium-sized enterprises, linkages with large industries occur through technology and information spillovers rather than through supply chains.
Meanwhile, small businesses other than direct exports can become suppliers of large businesses/corporations. However, not all essential input needs can be met by small businesses so that imports must still be carried out by large businesses.
The hollow in the middle character in the description above causes imports to increase faster than exports when the economy is booming. In this case, the Job Creation Law with appropriate derivative regulations has the potential to reduce the high cost economy to strengthen links between business scales so that domestic leverage can be increased.
Source: Kompas Daily. Edition: Tuesday, August 3, 2021. Rubrik Umum – Economic Analysis. Page 15.
(am)