Manufacturing Exports and Imports

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

The International Monetary Fund (IMF) has again revised its global economic forecast. Although the global growth projection for 2021 remains the same at 6 percent, the IMF has raised its forecast for developed countries and revised down its growth estimate for developing countries. The difference in vaccination rates is the key to this growth divergence.

For Indonesia, the most relevant factor is the growth rate of the two world giants, the United States and China. They greatly affect the country’s export and import activities. Although not as dramatic as in the first quarter of 2021, China’s economic growth reached 7.9 percent in the second quarter of 2021. However, the US’s high economic growth compensates for the slowdown in China. 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

The data on Indonesia\'s trade balance for July 2021 has not been published yet. However, the growth momentum in the US and China continued to be felt until June 2021. Indonesia booked a trade surplus of US$1.32 billion in June, which also buoyed the rupiah exchange rate. Exports rose 9.52 percent in the same month from $18.55 billion in May, a year-on-year (yoy) increase of 54.46 percent compared to June 2020. The largest contribution came from non-oil and gas exports, which reached $17.31 billion. The three main destinations for non-oil and gas exports during that month were China ($4.13 billion), the US ($2.13 billion), and Japan ($1.36 billion).

Exports from the manufacturing industry increase 33.45 percent during the January-June period. The majority of manufactured goods were exported to the US, where consumers had additional purchasing power due to stimulus checks and had a preference for durable goods. Agricultural exports increased 14.06 percent, indicating continuing demand in the world supply chain.

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As for semi-finished goods, steel exports recorded the biggest increase of 32.31 percent to $486.4 million. Meanwhile, vehicles and spare parts increased 42.19 percent.

The production of manufactured goods still relies on imported raw materials and semi-finished products in addition to capital goods imports. Ideally, the required raw materials should be provided by the domestic industry in order to make Indonesian exports more competitive. However, this cannot be forced if imported raw materials could actually improve the products’ perceived quality in the international market. This explains why overseas customers require the use of foreign-made raw materials in their products, unless the domestically produced raw materials have good quality or a recognized brand.

KOMPAS/DIDIE SW

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A simple linear probability model shows that the variable of imported inputs strongly influences export orientation. Prior to 2000, every 1 percent increase in the proportion of imported inputs resulted in an export increase of 0.23 percent. However, this effect disappeared (not statistically significant) in the post-2000 sample.

One interpretation is that the domestic industry has gradually begun to replace imported raw materials, albeit not widely. Another interpretation is that industries not oriented towards exports are also importing raw materials to take advantage of the purchasing power of the country’s middle-class consumers. This can be seen from the composition of raw and auxiliary materials, which still account for around 75 percent of total imports.

June 2021 recorded $17.23 billion in imports, a 21.03 percent month-on-month (MoM) increase compared to May, or a 60.12 percent yoy increase compared to June 2020. As a result, the trade balance booked a $1.32 billion surplus, down from $2.36 billion in May. However, this can be deemed healthier because it indicates increased economic activities.

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The largest increase occurred in the share of capital goods imports (15 percent) such as machinery and mechanical equipment, which totaled $506.7 million, or an increase of 28.31 percent. Meanwhile, raw/auxiliary materials imports, which accounted for about 75 percent of total imports, reached $$13.04 billion, a MoM increase of 19.15 percent.

The increase in economic activities can be seen from the Purchasing Managers Index (PMI), which remains in the expansion zone thanks to an increase in exports, even though it has started to show a decline due to an increase in Covid-19 cases. Indonesia\'s PMI fell from 55.3 in May to 53.5 in June.

Implications

The PMI implies the interrelationship between one company and another because input goods must be purchased either from domestic or foreign sources. The annual manufacturing survey of Statistics Indonesia (BPS) can be used to assess this.

A small business is defined as one with up to 100 workers, while a medium-sized business is classified as a business with 100 to 500 workers and a large business has a workforce of more than 500 people.

By using the export duration model, the survivability of small businesses is influenced by the growth of large corporations in the same agglomeration. Small export-oriented businesses can use large industries as a source of technology and market information, as well as an export hub. Meanwhile, nonexport-oriented businesses can supply various industrial inputs to large businesses. If it so happens that the large business is an exporter, the small businesses are also listed as an indirect exporting business.

Meanwhile, the link between medium-sized and large businesses or corporations is weak, statistically speaking. In terms of exports, medium-scale enterprises tend to create supply chains among themselves, in addition to importing raw materials.

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Next, the business growth model is used to look at the potential for advancement. As a result, growth in medium-scale enterprises is closely linked to growth in large enterprises. It is easier for medium-scale enterprises to upgrade their status to large-scale enterprises compared to small-scale enterprises upgrading to medium-scale enterprises. For medium-scale enterprises, their connection to large industries occurs through technology and information spillovers, rather than through the supply chain.

Meanwhile, nonexport-oriented small businesses can become suppliers of large businesses and corporations. However, as not all the required raw materials can be provided by small businesses, large businesses still have to import a share of their raw materials.

The hollow in the middle in the above description indicates that imports increase faster than exports when the economy is booming. In this case, the Job Creation Law and its implementing regulations have the potential to reduce the high-cost economy and strengthen the linkage between the scales of business so as to strengthen the growth engine of the domestic economy.

ARI KUNCORO, Rector of the University of Indonesia

This article was translated by Hendarsyah Tarmizi.