Quality of Domestic Institution and Indonesia’s Export Performance in the Era of Global Value Chain

Presenter: Arief Bustaman (UNPAD)

For countries that adopt an open economic system, foreign trade especially exports, has a very important role in driving national economic growth (engine of growth). Exporting through Global Value Chain (GVC) participation has recently been highlighted as a mean to increase export performance and economic growth. Exports sector has been playing a crucial role in Indonesia economy since the mid 1970s until present and has always been one of government priorities. Yet, despite economic reforms under different regimes, favourable macroeconomic variables and engagement in various free trade agreements, Indonesia exports performance in GVCs is still below its peer East Asia export-oriented countries. Recent growing number of literatures on international trade suggest that institutions play significant role on export performance.

This study aims to evaluate the impact of domestic and trade partners’ institutions quality on Indonesia export performance disaggregated into four group of commodities between 2000 to 2018. Employing augmented gravity model with panel data on Indonesia bilateral exports, in general this study found that institutions quality contributes positively to export performance. At commodity level, however, domestic and trading partners’ institution plays somewhat different roles and magnitude. For raw material and capital goods export, trading partners’ institutions significantly affect Indonesia export performance while domestic institutions are not significant. On the other hand, domestic rather than trading partners institutions contribute more on exports of intermediate and consumer goods- two commodities considered of vital to global value chain.

Given relatively low quality of Indonesia’s institution quality, these findings may explain why Indonesia still relying on raw material exports and not being able to integrate in GVC. Therefore, improvements in domestic quality institution is imperative to support more engagement in the global value chain through export of intermediate and consumer goods.