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GLOBALIZATION AND SPECIALIZATION:
PRODUCTION STRUCTURE ANALYSIS OF INDONESIA AND
OTHER EAST-ASIAN COUNTRIES
By
Emma Natalia
Groningen, 23 July 2014
Supervisor: Dr. T. M. (Dirk) Stelder Co-assessor: Dr. Bart Los
University of Groningen
Faculty of Economics and Business Master Thesis
1 ABSTRACT
Globalization as the result of trade liberalization has made a very significant change in terms of the production process. According to the „new trade theory‟, the monopolistic competition model and the economies scale suggests that the international competition as the result of globalization leads to the expectation that countries become more specialized in the production. This study investigates the specialization degree for nine Asian countries and the USA with a special focus on Indonesia. There are three main findings. First, the empirical findings suggest that the theory seems to work on the manufacture sectors only; the increased export ratio affects the country‟s production specialization. Second, the share of intra-industry trade over all countries that reflects the Baldwin‟s theory on the stage competition has not risen that much within 15 years. Third, a country with a higher production specialization index (less diversified) will have specialized imported inputs but will disperse the exports.
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TABLE OF CONTENT
1. INTRODUCTION ... 3
2. LITERATURE REVIEW ... 4
2.1. Globalization and trade liberalization ... 5
2.2. Increasing returns to scale and monopolistic competition. ... 6
2.3. Spatial concentration ... 9
3. RESEARCH METHODOLOGY ...10
3.1. Introduction to Input-Output Table and Asian Input-Output Table ...10
3.2. Model Specification ...12
4. RESULTS AND ANALYSIS ...17
4.1. Production (value added) specialization ...17
4.2. Specialization index: intermediate and final output ...19
4.3. Export ratio ...21
4.4. Regression results ...22
4.5. Intra-industry trade (“two-way trade” within industries) ...24
4.6. Spatial concentration ...26
5. TRADE LIBERALIZATION AND PRODUCTION SPECIALIZATION IN INDONESIA ...28
6. CONCLUSION ...33
REFERENCES ...34
APPENDICES Appendix-1 GDP growth in Indonesia: 1983-2012 (base year 2000) 36
Appendix-2 Indonesian import duty structure in 2012 36
Appendix-3Indonesian exports based on sector 36
Appendix-4 Average share of manufacturing sectors on total export 37
3 1. INTRODUCTION
Economic globalization has brought various changes in many economic aspects in which one of them is the production structure. The process of producing a single final good can be fragmented into stages that can take place across countries. This fragmentation allows a greater international exchange of inputs (Jones, 2000). The process of adding value in each stage of production across countries is known as the “Global Value Chain” (GVC).
The phenomenon of “global manufacturing” has increased not just in volume but also in the variety of exchanged products. In addition, the more production process is fragmented in terms of GVC, the more increased trade flows for the intermediate goods, especially in the manufacturing sectors. This may lead to the increasing country‟s specialization in production (value added) or known as „vertical specialization‟. Moreover, fragmentation of production process according to Jones (2000) means production activities which are used to be vertically connected or take place in one location, now are broken up or fragmented. This fragmentation makes regions that are especially well suited to the production of parts of the process can now be utilized in producing these fragments.
Accordingly, this thesis is going to study the impact of the economic globalization on the production structure of a country due to the trade liberalization. In other words, we are going to investigate whether or not the globalization has increase the specialization degree of production (value added) over time. The subject of this study is the East Asian countries as in the Asian Input-Output Table (AIO) and the USA as the main trading partner for these Asian countries.
Since 2002, in a decade the emerging East-Asia1 exports increased more than
doubled in value. As a result, the share of emerging Asia‟s exports in total world exports increased from 18.4% in 2002 to 22.6% in 20122. Moreover, by accounting for
23.9% of the world GDP and contributing nearly half of world‟s GDP growth until 2011 and even more than half in 2012, emerging East-Asia has become a key to world‟s economic growth and dynamics.
The emerging East-Asia has developed an increasing trade flows and integrating production process of Asian regional production through institutional cooperation such as ASEAN (Association of South-East Asian Nation) and ASEAN-Plus3 (China, Korea and Japan). Moreover, in order to reinforce the region integration in economy, ASEAN as well as ASEAN-Plus3 started to agree on lowering the trade barriers (tariff and non-tariff) to increase the trade value between countries. For ASEAN itself, the ASEAN Free Trade Area (AFTA) was signed in 1992 and for ASEAN-Plus3 was signed separately after 2003.
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According to AIOT by IDE-JETRO, the emerging Asia is the ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore and Thailand), China, Taiwan, Korea and Japan.
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Although the FTAs for East Asia were signed mostly after 2000, the liberalization process was actually started since General Agreements on Tariffs and Trade (GATT) was established in 1947 and was replaced by the World Trade Organization. All economies agreed to have a cooperation to improve the economy‟s welfare through increasing trade values. One of the ways to encourage the trade is by lowering the trade barriers including the custom duties or the tariffs and non-tariffs measures such as import bans or quotas (www.wto.org). Therefore, it is still relevant to take data from period before the year of 2000 in order to investigate the impact of trade liberalization on the production and trade structures.
Based on the explanations above, the main research question on this paper will therefore be: How does the globalization influence the countries‟ production structures for the emerging East-Asian? Moreover, this thesis will give more attention to Indonesia as a part of the emerging East-Asia. In order to answer the main objective of this study; we use the dataset of Asian Input-Output (AIO) tables of year 1990, 1995, 2000 and 2005 which are compiled by the Institute of Developing Economies Japan External Trade Organization (IDE-JETRO).
This paper represents a new study of the trade liberalization‟s impacts on Asian production structure using an output dataset. The advantage of using the input-output dataset relative to the standard trade flow analysis is that we can measure not only the final goods‟ value but also more specific to the transfer of the intermediate goods from one sector to another sector, and moreover from one sector in a country to another sector of other countries. According to Hayashi (2005), the input-output analysis has an advantage in providing a comprehensive examination of the changes in a structure of production, demand and comparative advantage. Moreover, this study uses the latest AIO table, year 2005. Therefore, the results may also reveal the condition after FTA‟s implementation between Asian countries.
The rest of the thesis is organized as follows. In section 2 I describe some related literature review on international trade and specialization. Next, in Section 3, I outline the methodology that I use to calculate the specialization level and the model specification. In Section 4, I summarize the empirical results or findings. In Section 5, I give a brief introduction on Indonesia‟s trade and industrial policies related to trade liberalization and industrial development and the correlation with the trade theory and the empirical findings. Lastly, Section 6 provides concluding remarks.
2. THEORETICAL FRAMEWORK AND HYPOTHESES
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In this chapter, firstly I discuss a brief introduction on globalization and trade liberalization and followed by how the globalization affects the production structure in general. Secondly, I discuss the relationship between trade liberalization and production specialization from theoretical framework of trade to the hypothesis.
2.1. Globalization and trade liberalization
Before discussing the concept of the global value chains and the production fragmentation, we need to know what the globalization means. Globalization has been defined by many scholars from many dimensional fields: economic, financial, business, political, technological, environmental, cultural, educational, international relations, national and international security-related dimensions. According to Das (2004), from the economic point of view, the globalization represents the increasing international divisions of labor and a growing integration of national economies through the trade in goods and services, the cross-border corporate investment, the capital flows and migration of human resources. Thus, there is no country in this world that does not participate in this globalization process.
Besides the improved technology in transportation and information-communication that make lower trade costs, the trade liberalization has also urged the globalization. Bozyk (2006) mentioned that the globalization process is preceded by the liberalization of commodity market or what we called now as the trade liberalization. He thinked that businesses (both corporate bodies and self-employed individuals) began to go beyond national borders in search of favorable sources of supply and better possibilities for selling goods. The trade liberalization, loosely defined as a move towards freer trade through the reduction of tariff and other barriers, is generally perceived as the major driving force behind globalization (ILO, 2001). Indeed, the trade liberalization involves a dramatic reduction and simplification in the average tariff rates and in quantitative import restrictions (Salvatore, 2012) which in turn resulted in a much higher degree of openness of the international trade, a sharp increase in the ratio of manufactures in the total exports, and the higher rates of growth.
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2.2. Increasing returns to scale and monopolistic competition.
In the early period of trade between countries, the international trade refers to
the theory modeled by David Ricardo and Heckscher-Ohlin3. David Ricardo in the early
1800s developed the theory of comparative advantage. In his theory, a nation should specialize in and export the commodity in which its absolute disadvantage is smaller (this is the commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater. Moreover, the model by David Ricardo was extended by Heckscher (1919) and Ohlin (1933) who modeled the international trade as a trade which is induced by the differences in the factor endowments (labor and capital) of countries, i.e. a nation specializes in the production of and export the commodity that intensively using the relatively abundant and cheap factor, and import the commodity that intensively using scarce and expensive factor. In this theory, when two countries with different factor endowment trade, a capital-abundant country will specialize in producing the capital-intensive commodity, whereas the other country specializes in the production of labor-intensive commodity.
Both theories, the comparative advantage by David Ricardo and the factor endowment by Heckscher-Ohlin, have the same effect of the international trade gain: increased specialization and increase the exchange of different commodities (inter-industry trade). Increased specialization implies that the production structure of one country will be less similar with other countries. Moreover, there is no reason for two countries with a similar comparative (factor endowment) advantage to exchange a same commodity (Feenstra, 2004).
As the trade barriers fall, the world‟s economy has become more integrated which means a larger market size. The international trade provides a new opportunity for firms to expand their productions in order to increase the profits but in the same time they face more stiff competition with the foreign firms. According to the „new trade theory‟ by Krugman (1980), in order to win in the international trade, a country has to produce more but in a lower price or known as the economies of scale or increasing return to scale. This theory is derived from the work by Dixit and Stiglitz (1977) on the monopolistic competition framework. Accordingly, to take an advantage of the economies of scale, each country has to concentrate on producing only a limited number of goods. Nevertheless, a country can specialize producing certain goods without scarifying variety in consumption. Indeed, the international trade leads to a greater variety of products available.
In the monopolistic competition model, a country will differentiate its products from that of its competitors. If in the Heckscher-Ohlin model two countries with identical economy (similarity on comparative advantage) have no rational for trade, in the new trade theory the two countries now have reasons to trade similar commodities. So now the trade is not just one-way trade, i.e. a country will be a net exporter or import only based on its comparative advantage, but it can export and in the same time they will import similar goods. This is called as intra-industry trade.
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Krugman and Obstfeld (1994) explain the difference between the two different ways of trade pattern in monopolistic competition: intra-industry trade (exchange/two-way trade in differentiated products within a single sector) and inter-industry trade (exchange of products from two different sectors). The “one-way trade” implies the country‟s specialization is mainly driven by the comparative advantage. While the intra-industry trade (“two-way trade”) does not reflect the comparative advantage, otherwise it reflects the economies of scale (lower cost) and a wider consumer choice. The economies of scale is the main factor that keeps each country from producing the full range of products by itself, so the specialization is driven by economies of scale. In other words, the intra-industry trade can be regarded as a two-way exchange of goods between countries in which neither country seems to have comparative cost advantage in the industry as a whole (Fertö, 2006).
Today much of the international trade among advanced industrial nations in manufactured goods takes the form of the intra-industry trade which is mainly driven by the economies of scale rather than the comparative advantage. This happens because over the time, the comparative advantage within an industry becomes not clear since the industrial countries have become similar in technology and resource (Feenstra, 2004).
Furthermore, according to Fontagne et. Al (2005), in analyzing a simultaneous exports and imports within a same industry (intra-industry trade) the trade flows are examined in the industry level. There are two different concepts that explain trade in intermediate goods (Figure 1). First, the international division of production process (i.e. the international splitting-up of the value added chain) allows multinational firms to specialize their affiliates in those stages of the value-added chain within a same industry for which they are advantage. Second, the two-way trade of products concerns simultaneous export and imports of products having the same main technical characteristics.
Figure 1. The two concepts of “trade within industries” (or “intra-industry trade”)
Source: adapted from Fontagne et. Al (2005)
Trade within industries International division of production processes Two-way trade of products M of motors Intermediate goods Final goods X of passenger cars X and M of motors Intermediate goods Final goods
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These trade patterns reflect what we called “production fragmentation”, i.e. split up the value chains, performing different stages of production in different countries as a result of globalization. The production chains now increasingly involve parties located in different countries (Yi, 2003). The production fragmentation is also known as vertical
specialization by Hummels et al. (2001). Figure 2 illustrates an example of a vertical
specialization chain in one sector involving three countries. Country 1 produces an intermediated good and export it to Country 2. Country 2 combines the imported intermediates with capital and labor (value added), and domestically produce a final goods (gross output). Finally, Country 2 exports some of the final goods to Country 3. This figure illustrates the flows of intermediate goods within one sector. Moreover, it is showed that each country now specializes in a particular stage of a good‟s production sequence; one country may be specialized in making components or assembling the final products.
Figure 2. Vertical specialization
Source: Adapted from Hummels et al. (2001)
In relation with the intra-industry trade, Baldwin (2011) mentioned that instead of compete at sectors level (say Japanese versus Thai cars); the international competition occurs at a fine degree of resolution, i.e. the level of production stages. In the latter case, Japanese cars may contain Japanese components and vice versa. This is in line with the concept of two-way trade (intra-industry trade) that we have discussed previously. The „Baldwin effects‟ makes sense since consumer like variety, a country has to differentiate its product from their rivals which most probably with differentiated components. These components may come from other countries including its rivals.
Based on the discussions above on trade theories starting from the theory of comparative advantage to the new trade theory, the main question would be whether the globalization leads the production structure to be more specialized or not and what factors that drive the specialization. Therefore the following hypotheses will apply:
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H1: Increased international trade due to globalization will make a country’s production to
be more specialized.
H2: Increased international trade due to globalization will make the intermediate goods’
production to be more specialized than the final goods’ production,
and
H3: Increased international trade due to globalization will increase the intra-industry
trade’s share.
2.3. Spatial concentration
The next question related to the degree of production specialization is whether it is related to the spatial concentration. There are two different implications from a high production specialization. First, when a country concentrates on producing only selected products, this country is likely to importing inputs from specific countries since the inputs may not be produced by many countries. This measurement is closely related to the comparative (factor endowment) advantage of trading economies. Hence, one may expect that the imported inputs will also be specialized if the production specialization high. However, the opposite result may occur for the export destination; instead of exporting goods to specific countries, a less product diversified country will export to various destinations. The rationality is that specialization can be a sign of high productivity that makes a country may be a global market leader, and thus the products will go to any places on the world. Therefore, it is expected that the specialization index for export is low.
Recall the theory of comparative advantage by David Ricardo and factor endowment by Heckscher-Ohlin, where an economy will specialize in the production of and export the commodity that intensively using the relatively abundant and cheap factor, and import the commodity that intensively using scarce and expensive factor. Moreover, the „locational endowment‟ which refers to availability of natural resources, labor supplies, access to markets, and so on, as explained by economic geographers (Martin, 2005) also determine the length of production range. In addition, according to the new economic geography by Krugman (1991) in Storper (2010), which is principally concerned in production; industries with scale economies become geographically concentrated and have closer contact with its markets and access to greater variety of inputs and products. Accordingly, in this case, the decision of one country to import (export) from (to) which nation is based on the comparative (factor endowment) advantage as well as the locational endowment.
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specialization. The more specialized sectors produced by a country can be translated that a country has a less structural similarity with other countries (Kaitila, 2013) and this applies the monopolistic competition framework that we have discussed earlier in the previous chapter but the specialization is not just driven only by economies scale but also by the comparative advantage. Thus, the following hypothesis will apply:
H4: The more specialized a country in production, the more dispersed export destinations
are.
and
H5: The more specialized a country in production, the more specialized the origins of
imported inputs are.
3. Research Methodology
In this section, first of all we discuss the underlying concepts of the Input-Output Table and explain shortly the structure of the Asian Input-Input-Output Table composed by IDE-JETRO. Secondly, I explain the model specification to answer the hypotheses of this paper. This includes a discussion of Herfindahl index as the measurement of specialization degree and the framework on how to calculate the Herfindahl index using the input-output data.
3.1. Introduction to Input-Output Table and Asian Input-Output Table
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Source: adapted from the AIO Table (www.ide.go.jp)
Table 1 provides a general structure of AIO table that is simplified into three countries (I for Indonesia, M for Malaysia and P for Philippines) and two sectors (industry 1 and industry 2). As in the basic input-output table, row-wise, each cell in the table represents the output distributions from given industry of a country, whereas column-wise, each cell in the table shows the input composition of the industries of respective country. The superscript in the intermediate use indicates the flow of transaction between countries while the subscript denotes the transaction between sectors. , for example, represents the value of intermediate goods produced by
industry 2 in Indonesia that is exported to Malaysia and used as input in industry 1. In addition, the output of industry 2 can also serve as final use which is consumed
domestically in Indonesia as well as in other countries which is indicated by and
respectively. , on the other hand, shows the input for producing goods of industry 2
in Indonesia which is imported from Malaysia produced by industry 1.
From the first row in Table 1 we can see the flows of output produced by
Industry 1 in Indonesia is used as intermediate input for domestic production ( and
) and production abroad
, , and
). In addition, the output of Industry 1
in Country 1 can serve as final use consumed domestically ( ) and internationally, or
exported to other countries ( and ). Therefore, these outputs in the first row are
equal to the total output of Industry 1 in Country 1. In another way, we can read it on the column-base, describing the sources of a given output for the intermediate and final use. Taking the first column as an example, the output produced by Industry 1 in Country1 comes from domestic intermediate input ( and ) and imported
intermediate input ( , , and ). In addition, to produce an output of
Industry 1 in Indonesia requires production factors, i.e. labor and capital, which are
Table 1. Basic outline of Asian Input-Output Table (AIOT)
Intermediate Demand (A) Final Demand (F)
Total Output
(X)
Indonesia Malaysia Philippines
Indonesia Malaysia Philippines
Industry 1 Industry 2 Industry 1 Industry 2 Industry 1 Industry 2
Indonesia Industry 1 Industry 2 Malaysia Industry 1 Industry 2 Philippines Industry 1 Industry 2 Freight and Insurance
Duties and import
commodity taxes
Value added
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compensated on the value added, . Moreover, the AIO table also records the
international freight and insurance paid by Indonesian industries for imported inputs in the row vectors and , and records import duties and import commodity taxes
levied on all Indonesian imports in the row vectors and .Therefore, total input
of Industry 1 in Indonesia is the sum of all intermediate inputs (domestic and abroad), the value added (labor and capital compensation), cost of international freight and insurance, and import duties and import commodity taxes. The stylized accounting identity of input-output table implies that the total output in a row must be equal to the total input in a column for the same industry.
3.2. Model Specification
One way to measure the specialization of production‟s structure is to adapt the calculation of the Herfindahl concentration index. The formula of Herfindahl index will be used as the basic calculation to identify the specialization degree for production (based on the sector share from value added, intermediate output and final output), export and import.
Production (value added) specialization
First of all, before we come to the part of answering whether a country is more specialized in intermediate or final output, we will measure the production (value added) specialization of overall sectors. Based on the framework of vertical specialization (production fragmentation), the focus of this framework is the value added creation in each stage (in a country). The value added is the best indicator for specialization performance of a country because the value added shows all domestic activities that are created to produce a product which can be the intermediate goods or final goods. Here we want to find out whether a country is concentrating in particular sectors or diversifying. Hence, for each sector in country ‟s output, the Herfindahl index was computed as:
∑
where ∑
Here, stands for the share of value added of sector in the total value added
of country . The Herfindahl is actually the sum of the squared of the shares over all
sectors. By definition, will therefore be between 1/N and 1, N is the number of total
sectors. The smaller (bigger) the number, the more diversified (specialized) is the sector structure of the involved country.
As an example, to calculate the Herfindahl index for Indonesia, first we get the share of each industry‟s domestic value added by dividing total domestic value added
of each sector, for example sector 1 ( ) over total domestic value added of Indonesian
industries ( + ). Next, take the square of the shares and sum all of them and
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To be more specific by sector, we will calculate the Herfindahl index only over manufacturing sectors. Here we will see whether the production activity of a country is more concentrated in certain manufacturing sectors or diversifying. There is a slight difference of selecting which sector is manufacture between AIO table before and after year 2000. For AIO table before 2000, the total number of sector is 78 with 50 sectors of manufacturing. While for AIO table of year 2000 afterwards, the total number of sectors is 76 with 49 manufacturing sectors.
Intermediate vs. final output
Furthermore, to test the hypothesis, i.e. whether the output is more specialized in intermediate or final output over all sectors, again we use the Herfindahl index to measure the degree of specialization across countries and see the trends for both groups over periods of time (1990 to 2005). Since the Herfindal index captures the degree of absolute specialization, it might be used for the purpose of international comparisons (Beine and Coulombe, 2004). It might reveal to what extent a given country is becoming more specialized or diversified. However, since it measures the production specialization over all sectors, it therefore does not exactly imply that the production is more vertical specialized. In order to know the degree of vertical specialization, we should focus on the trade within industries (two-way trade). We need to calculate the share of intra-industry trade relative to the total trade4. We can interpret from the
calculation that the higher the share of intra-industry trades, the higher the vertical specialization. Therefore, it implies that countries are becoming more concentrate on producing intermediate output.
Since we are going to investigate the trend of specialization degree of final and intermediate goods within a country, using the input-output table, the basic measurement will be separated by the total transaction for intermediate output and for final output. Consequently, stands for the share of output of industry in the total output of country that goes only to the intermediate transaction. For the latter,
stands for the share of output of industry in the total output of country that goes
only to the final demand transaction. As the result, we take the raw sum of the total
intermediate demand and the row sum for the total final demand, and
respectively. Finally, for each country in each period of time, we get two Herfindahl indexes, i.e. one for the intermediate output and the other one for the final output.
As an example, to obtain the Herfindahl index for the intermediate output in Indonesia, we calculate the share of each industry‟s output by dividing the sum of output of each sector that goes for intermediate demand, for example sector 1 (
), over total output of Indonesian industries that goes only to the
intermediate demand ( + ). For the final demand part, the share of each
industry‟s output is obtained by dividing the sum of output of each sector that goes for
final demand, take sector 1 as an example ( , over Indonesian
industries that goes only to the final demand ( + ).
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Export ratio
To test the hypothesis, we will do a statistical regression on a simple model as in the next part in order to test the relationship between specialization index and export ratio as the variable that represent the globalization as a result of trade liberalization. Since the specialization index for production (value added), total intermediate and final output have been obtained, we then calculate three different export ratio: (i) ratio between exported total output and total output, (ii) ratio between exported intermediate output and total intermediate output, and (iii) ratio between exported final output and total final output.
The first equation is export ratio of total output ( ) for each country ( ). Here
we calculate all exported intermediate and final goods. Thus the formulation is as follow:
(1)
where ∑ , ∑ with
s, and ∑ .
The second equation is the export ratio of intermediate output ( for each
country ( ) with the formula as follow:
(2)
where
as in equation (1) and
∑ .
The third equation is the export ratio of final output ( for each country ( ) with the formula as follow:
(3)
where
as in equation (1) and
∑
Note that in calculating the export ratio for intermediate and final output, we only cover the transaction among Asian countries and USA. It does not cover the transaction with the rest of the world (RoW) since it does not differentiate between intermediate and final output. However, in the total export we count all transactions including with the rest of the world. This is also applied in calculating the Herfindahl index for the intermediate and the final demand.
Statistical regression
In order to test the first hypothesis, H1: Increasing international trade due to
globalization will make country’s production to be more specialized, we will test a model
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going to use a model based on panel data, i.e. data structure combination of time series (over time) and cross section (different units or observations). The number of periods for this analysis is four five-year periods, i.e. 1990, 1995, 2000 and 2005; while the number of unit is ten countries, i.e. Indonesia, Malaysia, Philippines, Singapore, Thailand, China, Taiwan, Korea, Japan and USA. Hence there are 40 observations by time and country.
The selected model is relatively simple with one dependent variable and one independent variable. There are three regressions that we are going to conduct which are basically differentiated by the output. The first model is the model to test the relationship between the two variables for the total output as follows:
(4)
where is the Herfindahl specialization index for the total production‟s value added
for each country ( ) and each period ( ) as the dependent variable, is the coefficient
for the independent variable, i.e. export ratio of total output ( ) for each country ( )
and each period ( ), and is the error term. The second model tests the intermediate
output with formulation as follows:
(5)
where is the Herfindahl specialization index of the intermediate output for each
country ( ) and each period ( ) as the dependent variable, is the intercept, is the
coefficient for the independent variable, i.e. export ratio of the intermediate output ( )
for each country ( ) and each period ( ). The last model tests the final output as follows:
(6)
where is the Herfindahl specialization index of final output for each country ( ) and
each period ( ) as the dependent variable, is the coefficient for the independent variable, i.e. export ratio of final output ( ) for each country ( ) and each period ( ).
In the analysis of panel data models, there are two kinds of models, namely the fixed effect model (FEM) and the random effect model (REM). If the FEM treats α as a regression parameter (intercept), the REM treats α as a component of random noise (random error). In order to choose between the REM or FEM, we will conduct the Hausman test to test whether the two models‟ estimators, FEM and REM, are significantly different; if the estimators are very different the FEM should be preferred and vice versa.
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dataset from World Input Output Database (WIOD)5 namely the WIOD socio economic
accounts to calculate the Herfindahl specialization index, while the export ratio is taken
from the World Bank database6 of the share export of goods and services on GDP but
not available for Taiwan. Thus, the number of observation will be 80 by time and country.
Intra-industry trade
With the intention of investigating the “Baldwin effect”, i.e. countries is competing in the production stage, calculating the share of intra-industry trade (or two-way trade within industry) is sufficient to do since it reflects the vertical specialization or fragmentation of production activities. Now we are focusing on the trade between countries (international trade) within industries. Therefore the formulation for the share of total intra-industry trade ( ) will be:
(7)
where
Total intra-industry trade
∑
, with and and Total trade∑
, with .Here, stands for the intermediate flow from sector in country to sector in country .
Furthermore, since we want to examine on the industry level, the above formulation will be narrowed into the share of intra-industry trade for one specific
sector ( ) only. Hence, the formulation is as follow:
(8)
where Total intra-industry trade in one sector
∑
, with and .Thus, stands for the intermediate flow from sector in country to sector in
country . The summation of one sector‟s intra-industry trade for all sectors will be the
share of total intra-industry trade (
)
.Spatial concentration
For the hypothesis H4, we will calculate the Herfindahl index for the exported total
output. Recall the formula of Herfindahl index, here stands for the share of exported
output of sector in the total output of country . In addition, for testing the
hypothesis H5, stands for the share of imported input of sector in the total input
of country .
5 www.wiod.org 6
17 4. Results and analysis
4.1. Production (value added) specialization
First of all, we will see the Herfindahl index for each country based on the sector‟s share of their value added. In Figure 3, the Asian countries plus USA have been divided into two graphs, one for ASEAN-5 countries and another for non-ASEAN countries. The vertical axis has been scaled the same in all graphs to make the results more comparable. Overall, the majority of the results show that over 15 years the specialization indexes are declining but not constantly. One of the exceptions is in the year 1995 where the index of specialization increased quite steep especially for Taiwan, Japan and USA. However, the index fell considerably in 2000 to even lower than 1990. Although the index started to increase in 2005, the increase was not noticeable.
Figure 3. Herfindahl Specialization Index of all sectors
Source: Author‟s calculation based on the AIO table.
The first graph shows ASEAN-5 economies which are consist of Indonesia, Malaysia, Philippines, Singapore and Thailand. With Singapore as an exception, the other four economies are relatively similar in terms of size and/or level of development. Each country has its own shape and we cannot conclude generally that the specialization degree is increasing or decreasing over time. It is expected that the large country is less specialized (or more diversified) than smaller countries. By seeing the graph, the result is confirmed with the expectation; Indonesia, Malaysia, Philippines and Thailand have a similar index ranged between 0.04 and 0.07 over time. In contrast, Singapore, a small country with around 3 million inhabitants, leads the position to be the most specialized ASEAN countries with index 0.10 in 1990 (over 0.1) despite the fall in 2000 and increase very slightly in the next period. Indonesia specialization indexes had been constantly declining from 1990 to 2005. Similarly, Philippines also had downward trend although there was a slight increase in 1995. On the other hand, Thailand is the only one that continuously becomes more specialized in production but the trend is quite flat. Another country that has a same shape with Singapore is
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Malaysia but in the end of the period, Malaysia increased quite steep from 0.04 in 2000 to 0.06 in 2005.
Next, the second graph shows the non-ASEAN countries which are China, Taiwan, Korea, Japan and USA. From this group, there is a same shape for all countries where in 1995 the specialization index went up the fell in 2000 and back to increase in 2005. USA has the highest level of specialization with index 0.14 and followed by Japan and Taiwan in the second and third places. The last two countries, Korea and China, have the most diversified (least specialized) level of production. In this assessment, the country size does not seem to determine the specialization level that we expected. The USA and China are two of biggest countries in the world but have extremely different level of production specialization; the USA is the most specialized nation among all countries with index nearly 0.16 in 1995, whereas China is the least specialized nation with index around 0.03 over time.
The declined specialization index for production (value added) suggests that the countries were diversifying their range of commodities by creating added value in different sectors not just for certain sectors. However, a very different result is showed on the specialization index for the manufacturing sectors (see Figure 4). The results suggest different implications on the analysis. Overall, except Singapore and Malaysia, within 15 years (from 1990 to 2005), most of the countries‟ specialization were slightly increasing. This means that the countries‟ production activities are more concentrated in certain sectors or commodities.
Figure 4. Herfindahl Specialization Index of Manufacturing sectors
Source: Author‟s calculation based on the AIO table.
There are some main interesting findings when calculating the Herfindahl specialization index for manufacturing sectors only. First, country like Malaysia and Philippines show a very different shape from the previous one in overall sectors. For the manufacturing sectors, these two countries together with Singapore obviously become the top highest three specialized countries in the year 2000. The most striking point is in 1995, Singapore‟s and Malaysia‟s specialization index are significantly enlarged but
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fell in 2000 even lower than in 1990 and keep falling afterward. Second, on the other hand, a country like Japan and USA that previously have higher index for overall sectors now have a quite low index and tend to be flat with very slight increase over time and become similar with the specialization level of Indonesia, Thailand, China, Taiwan, and Korea.
From the two examinations of production specialization index, by overall sector and by manufacturing sectors only, it seems the comparative (factor endowment) advantage differences between countries may still drives the specialization. The striking different values of specialization index between by the overall sectors and by the manufacturing sectors for the USA and Japan indicate that these countries have a high value added share in some certain non-manufacturing sectors. In other words these countries have a small range of non-manufacturing products (agriculture, mining and services) which are more likely referred as the factor endowment.
Moreover, the country‟s size may also determine the specialization level. The rationality behind this statement is related to the monopolistic competition model where a large population already makes a high demand on a greater product variety and thus the country will tend to diversify the production range. For example China; this nation has the lowest specialization index for both overall sectors and for the manufacturing sectors. China is a very large country with huge resources; hence this nation can produce almost everything in every sector (agriculture, mining, manufactures and services). China‟s excellence in the low cost production (economies scale) in every sector of production makes China able to be one of the biggest exporters in the world.
4.2. Specialization index: intermediate and final output
After measuring the Herfindahl specialization index of value added for overall sectors, now we will investigate the production structure of the intermediate and final goods. Based on the calculation of Herfindahl index for both the intermediate and final output as seen in Figure 5, the graph illustrates that in general the Herfindahl specialization index of the final output is higher than the intermediate output for every country and every period. This implies that over 15 years the intermediate output is more diversified (or less specialized) than the final output showed by the significant gaps between these two indexes. However, in the meantime there was a prominent change in 2000; the intermediate output were then more specialized than the final output in most countries and moreover the gaps become closer as the Herfindahl index for the final output declined considerably in this year. Thus, starting from year 2000, the ratio between intermediate and final output specialization index is getting bigger or become more balance. Only Malaysia and the USA that can maintain this position since the rest of countries return to be more specialized in final output in 2005.
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by slight increase in 2005. On the other hand, the figure for intermediate output is more flat; the changes are not really noticeable.
Figure 5. Herfindahl index for intermediate and final output for all sectors
0.00 0.05 0.10 0.15 1990 0.00 0.05 0.10 0.15 1995 0.00 0.05 0.10 0.15 2000 0.00 0.05 0.10 0.15 2005
21 4.3. Export ratio
The model that we construct to test the globalization impact on production specialization uses the export ratio as the independent variable to represent the globalization. Figure 6 illustrates the movement of trade from the export ratio, i.e. exported output over total output. We calculate the export ratio in two different scopes, which are the overall sectors and the manufacture sectors only. The first three graphs in general explain that the export ratios were increasing over time. Malaysia was an exception that the export ratio was declining for the total output and the intermediate output. The next three graphs are so much different to the previous one. The export ratio for manufacturing sectors is increasing within 15 years but quite volatile as we can see in the last three graphs. A very remarkable export ratio is for Singapore in 2005, for overall manufacture output, the export ratio reached over 300%. This high ratio is because the total export of Singapore consists of domestic exports and re-exports7.
According to Lim (2013), the re-exports expanded significantly between 2003 and 2012 and accounted about 46% of the total export.
Figure 6. Export Ratio
Export ratio for all sectors
Export ratio for the manufacture sectors
Source: Author‟s calculation based on the AIO table.
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Re-exports comprise all goods which are export in the same form as they have been imported without any transformation. Re-packing, splitting into lots, sorting or grading, marking and the like are not considered as undergoing the process of transformation (Lim, 2013).
0% 50% 100% 1990 1995 2000 2005 0% 50% 100% 1990 1995 2000 2005 0% 50% 100% 1990 1995 2000 2005 0% 50% 100% 1990 1995 2000 2005 0% 50% 100% 1990 1995 2000 2005 0% 50% 100% 1990 1995 2000 2005
Export ratio of total output Export ratio of intermediate Export ratio of final demand
Export ratio of total output Export ratio of intermediate Export ratio of final demand
22 4.4. Regression results
Previously, we have seen the results of which showed in general a decreased production specialization or in other words countries diversified their products into more sectors. Now, we will see the regression results to see whether the trade liberalization affect the production specialization significantly.
According to the panel estimation results (see Table 2); there are two different scope of analysis, one for the overall sectors and another for the manufacture sectors only. As we can see from the first three models for the overall sectors, among the three different regressions between the Herfindahl specialization index as the dependent variable while the export ratio as the independent variable, the only result that gives a statistically significant coefficient for the export ratio variable is the intermediate output as in model (5). In other words, the increased trade value as indicated by the export ratio of intermediate outputs significantly affects the production‟s structure of intermediate outputs to be more specialized or not. From the results of the Hausman test with probability value, P=0.3235, it is suggested that we cannot reject the Null hypothesis, which means the REM (random effect model) should be preferred. For the other two regressions (final output and total output), the estimations for coefficient are not statistically significant in 1%, 5 % or even 10% level of significance both with FEM and REM.
Using the random effect model, given a very small P-Value (0.0017), the coefficient of variable export ratio for the intermediate output is statistically significant (different from zero) at 1% significance level. This means the variable is statistically significant in explaining the Herfindahl index for intermediate output. From the coefficient value (β=0.081281), it means that the specialization degree for intermediate output is positively correlated with its export ratio. In other words, an increase in the ratio of exported intermediate output will raise its specialization index. However, the value of R-squared is small (R-squared=0.231165) and thus the model is not good enough; only 23.11% of data variations can explain the true model. This makes sense since this is a very simple model with only one variable. On the other hand, the fixed effect model gives higher R-squared (0.914003). This value is high because the FEM can eliminate any problem that the individual effects may cause.
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Table 2. Panel estimation results using the Random Effect Model and Fixed Effect Model
Model
Hausman Test (Prob)
Random Effect Model Fixed Effect Model
Constant ( ) Coefficient ( ) R-squared Constant ( ) Coefficient ( ) R-squared Total output (Model 4) 0.5993 0.074519* (0.0000) -0.032911 (0.4992) 0.012333 0.080388* (0.0000) -0.061356 (0.4044) 0.734840 Intermediate output (Model 5) 0.3235 0.038743* (0.0000) 0.081281* (0.0017) 0.231165 0.037244* (0.0000) 0.091148* (0.0015) 0.914003 Final output (Model 6) 0.9745 0.073637* (0.0000) 0.007609 (0.9064) 0.000378 0.008506* (0.0000) 0.077735 (0.6296) 0.730502 Manufacture (Model 4) 0.0000 0.050386* (0.0000) 0.015991* (0.0049) 0.085655 0.061310* (0.0000) 0.015362** (0.0304) 0.773327 Manufacture (Model 5) 0.0063 0.043768* (0.0000) 0.070170* (0.0019) 0.211906 0.061950* (0.0000) 0.009896 (0.7437) 0.742693 Manufacture (Model 6) 0.5934 0.042117* (0.0013) 0.204226* (0.0000) 0.413845 0.052578** (0.0274) 0.158925 (0.1006) 0.625591 Total output using WIOD (Model 4) 0.5250 0.004799* (0.0000) -0.000136 (0.1103) 0.030648 c* (0.0000) -0.000125 (0.1520) 0.787787
* significant at 1% level, ** significant at 5% level
Regression using WIOD dataset is only 5 countries (Indonesia, China, Korea, Japan and the USA) since data on the export share to GDP is not available for Taiwan.
Although the all models are significant for the manufacture sectors, using the dataset AIO table, it seems the export ratio as trade liberalization variable is not good enough to explain the true model of production (value added) specialization degree for the overall sector analysis. For robustness check, we have regressed the same model which is Model (4) using the WIOD dataset and export share from the World Bank database. However, the results still not significant for the coefficient of export share as the indicator of globalization. By looking at the negative coefficient values both using the REM and FEM, the two variables are suggested to have a contrary relationship. The opposite relationship is mainly probably due to the downward trend of the export share of Indonesia and upward trend for China (see Figure 8).
Figure 7. The Herfindahl index of production (value added) specialization
Source: Author‟s calculation using WIOD dataset
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Compare to the results using the AIOT dataset, the WIOD dataset yields completely different patterns. In general the WIOD dataset produce a relatively stable and increased specialization within 16 years, except for China that kept falling over 16 years. One example of the contrary results is that the specialization index for Indonesia with the AIOT was decreasing over 15 years constantly whilst the WIOD suggests the opposite way; the index was increasing and in addition, the index level is higher than Taiwan, Korea and Japan; whereas in the AIOT Indonesia‟s level was always below those countries.
Figure 8. Export share of GDP in percentage (%)
Source: Author‟s calculation using the World Bank dataset (data on Taiwan is not available)
4.5. Intra-industry trade (“two-way trade” within industries)
In this section we test the hypothesis that the intermediate output within one sector is more specialized over time. This hypothesis is based on vertical specialization framework by Hummels et al. (2001) and Baldwin‟s theory (2011) that due to the globalization the international competition is at production stage level, or in other words specialization on intermediate goods. Since we assess the data in sector‟s level, we calculate the share of intra-industry trade as the indicator for vertical specialization (refer to equation (7) and (8)). In order to make it easier to read the results of the analysis, sectors are grouped into four major groups, namely agriculture, mining, manufacturing and services. Then, the manufacturing sector itself is also classified into 22 sectors, as Table 3. This is also due to some differences in classifying sectors between AIO tables. For AIO table before 2000, the total number of sector is 78 with 50 sectors of manufacturing. While for AIO table of year 2000 afterwards, the total number of sectors is 76 with 49 manufacturing sectors.
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The intra-industry trade or two-way trade mainly occurs in the manufacturing sectors; countries exchange the production components (intermediate goods). From the graph below, focusing on the manufacturing sectors, most of the sectors have increased share of the intra-industry trade within 15 years. The most outstanding increase is for the sector of basic industrial chemical products with an increase of 17 times the value in 1990 and a rise of more than 6 times for the sector of glass products. For sectors that face decreasing share, there are two possibilities why the share declines; either the country tries to produce domestically or exchange with other countries (non-Asian countries discussed here and the USA).
Although the share of intra-industry trade was increasing but the rise was not so much. By looking further into each sector, most of the sectors share rose slightly or not even twice. Therefore, the results suggest that the trade pattern between the 10 countries seems to be more on the inter-industry trade than the intra-industry trade. Recall the theory by Krugman and Obstfeld (1994) of the trade patterns in the monopolistic competition, the inter-industry trade implies that the specialization is mainly driven by the comparative advantage than the economies of scale. Considering that the economic development level between the 10 countries are quite different, it is reasonable why the 10 countries exchange goods in different sectors since the factor endowment‟s difference is quite unlike.
Table 3. The share of intra-industry trade 1990-2005
No. Sectors 1990 1995 2000 2005 1 Agriculture 0.04% 0.06% 0.08% 0.05% 2 Mining 0.06% 0.09% 0.04% 0.04% 3 Manufacture: 14.22% 33.42% 26.02% 23.40% Food products 0.72% 0.92% 0.80% 0.80% Beverage 0.01% 0.01% 0.02% 0.01% Tobacco 0.02% 0.02% 0.03% 0.03% Textile products 0.35% 0.50% 0.60% 0.29%
Leather & leather products 0.15% 0.31% 0.31% 0.19%
Wooden products 0.16% 0.31% 0.22% 0.17%
Pulp and paper 0.49% 0.89% 0.83% 0.65%
Basic industrial chemical products 0.11% 0.49% 1.23% 1.92%
Fertilizer and pesticides 0.06% 0.07% 0.05% 0.06%
Drugs and medicine 0.07% 0.15% 0.13% 0.13%
Other chemical products 0.17% 0.42% 0.34% 0.59%
Refined petroleum 0.32% 0.49% 0.44% 0.57%
Rubber products 0.15% 0.38% 0.41% 0.59%
Cement products 0.03% 0.05% 0.04% 0.05%
Glass products 0.03% 0.08% 0.06% 0.18%
Other non-metallic products 0.02% 0.05% 0.05% 0.05%
Metal products 1.92% 3.11% 2.20% 3.64%
Machinery and equipment 0.97% 2.29% 2.02% 1.77%
Electronic products 6.43% 19.38% 12.57% 8.35%
Motor vehicles products 1.48% 2.64% 2.76% 2.47%
Other transport products 0.39% 0.48% 0.72% 0.70%
Other manufacturing products 0.17% 0.38% 0.19% 0.20%
4 Public services 0.05% 0.15% 0.38% 2.00%
26 4.6. Spatial concentration
The purpose of this particular analysis is to investigate whether the specialization level of output has something to do with spatial concentration of where the products go (export) and from where the products come (import). So the question is whether a more specialized production is also having a more specialized imports and exports. The first thing we can notice is the scales of both for import and export specialization index (see Figure 9 and Figure 10), the index value is way higher for export than for import. Take an example for the USA in 1995, the import specialization index is 0.04 whereas the export specialization is 0.5 or ten times bigger and this is happened to all countries. Second, it seems both assessments have a linear relationship, i.e. the higher the production specialization, the higher the import and export. However, we will take a closer look on the graphs.
Figure 9. Herfindahl indices at product and import level in 1990-2005
Source: Author‟s calculation based on the AIO table.
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The trend of specialization for import on average is following the trend for production differentiation. The most striking result is for the year of 2000 where most countries‟ production specialization indexes dropped, the import specialization also fell. In this period, the USA, Japan and Singapore‟s indexes declined extensively just like the production specialization pattern. In 2005, when the production structure back to be more specialized, the specialization index for import again increased except for Malaysia.
Figure 10. Herfindahl indices at product and export level in 1990-2005
Source: Author‟s calculation based on the AIO table.
The results for export specialization index (see Figure 10) is quite interesting since now all Asian countries with high and low production specialization index are less export specialized and leaving the USA with relatively more specialized. In the hypothesis we expect opposite signs of index for production and export specialization. Japan, Singapore and Taiwan with more specialized production structure do export to many destinations which is showed by the low index. Moreover, China, Philippines, Korea and Thailand with low degree of production specialization in general do have a slightly more concentrated on export destination, in fact more concentrated than Japan. These finding is corresponding with the hypothesis we had. For Indonesia as well as Malaysia, the relationship between the two indexes is not really obvious. Indonesia is much less specialized than Japan but higher than China, however Indonesia‟s specialization index for export destination is lower than Japan and China, which means Indonesia‟s export is more dispersed than Japan and China. Moreover, by looking at the trend over periods, the export specialization index is decreasing for all countries; in 2005 all Asian countries have a similarity in the export specialization index which is
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low (between 0.06 and 0.1) with China as the most export specialized. These findings cannot conclude whether the data in accordance with the theory behind the hypothesis since countries with more product diversification (or less specialized) can export to many destinations too.
5. TRADE LIBERALIZATION AND PRODUCTION SPECIALIZATION IN INDONESIA
In this section we will see how the Indonesia‟s economy corresponds to the trade theory that the globalization due to the trade liberalization process leads to the production specialization. First of all we will see the Indonesia‟s trade policies on facing the trade liberalization.
Indonesia as an open economy cannot escape from globalization as a result of trade liberalization. Back to the economic conditions before 1980, Indonesia‟s production structure was driven mostly by its natural resources; a large proportion of Indonesia‟s income was coming from the oil and gas sectors. This trade pattern was mainly driven by Indonesia‟s factor endowment, which is the natural resource abundant. In order to start the industrialization in Indonesia, the government‟s strategy in the manufacture sectors was import-substitution industrialization in order to limit the imported goods by supporting the domestic firms (infant industry). However, when the era of "oil boom" ended with a marked decline in world oil prices in the 1980s, deregulation of the economy into an answer and solution, i.e. slowly reduce the trade protection which previously given to the domestic industry and increase the role of private sector in the international trade to export the non-oil and gas products. (Sjahrir, 1994 in Nurrahma, 2012). Since then, the strategy for the manufacture sectors was changed to export-oriented industries. As a result of the deregulation made by the government which stimulates the private business activities, especially the manufacturing sectors, since 1988 until before the big crisis in 1997, Indonesia‟s annual average growth in GDP exceeded 7%. After recovering from the crisis, the annual GDP growth increased gradually and currently are around 6.5 to 7% despite a short slowdown in 2008 due to global crisis hit the U.S.A and European countries (Appendix 1).
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Moreover, there are at least seven FTA‟s in which Indonesia takes part. Five of them are agreement between ASEAN and its counterparts, namely: ASEAN-China FTA with early-harvest program (EHP)8 starts in 2004 and completely eliminated tariff in
2010, Korea FTA in 2007 and followed by Japan in 2008, ASEAN-Australia-New Zealand FTA in 2008 and ASEAN-India FTA in 2010. Regionally, Indonesia with other nine ASEAN countries also has its own FTA framework, i.e. Common Effective Preferential Tariff (CEPT) Scheme for the ASEAN Free Trade Area (AFTA) signed in Singapore, at 28 January 1992. Lastly, the only bilateral FTA that has implemented is between Indonesia and Japan in the framework of Indonesia-Japan Economic Partnership Agreement (IJ-EPA) signed in 2007. Moreover, currently there four CEPA (Comprehensive Economic Partnership Agreement) or PTA (Preferential Trading Arrangement) frameworks that are actively negotiated bilaterally, i.e. EFTA (European Free Trade Association), Pakistan, Iran and South Korea, and two upcoming negotiation countries, namely Australia and India.
This freer trade framework has brought the manufacturing sector to be more important in the economy showed by an increasing contribution to the Indonesian export value over 15 years (1998-2012) (see Appendix-3, Appendix-4 and Appendix-5). In the recent periods (2006-2012), the share of manufacturing products reaches more than 60% of the total export value and nearly 80% of non-oil and gas export. This implies that Indonesia is trying to focus more in the manufacture sector since this sector creates more added values and brings positive externalities rather than just exporting raw materials and also brings positive externalities such as employment. In addition, the trade liberalization gave a new opportunity for Indonesia‟s firms to widen their market by exporting its products of intermediate and final goods but in the meantime also face a more competitive market since the foreign firms may also have a similar commodity. Thus, based on the „new trade theory‟ on monopolistic competition model Indonesia‟s firms have to differentiate their products and specialized in a certain range of products rather than trying to produce all range of products. As an illustration how the distribution of Indonesia‟s output into sectors, Table 4 summarizes each sector‟s share of the total output.
At glance, over 15 years, the production structure of Indonesia did not change so much but the distribution began to spread. The noticeable change is that the share of manufacture sector has increased by 5% while in the meantime the agriculture sector decreased by a same percentage. Moreover, table 4 shows that the manufacture sectors are mainly in the agro-industry sector but with a decreasing share. The agro-industry sector consists of food-processed products, beverages and tobacco. This sector mainly uses the raw natural resources in which Indonesia is abundant. Thus, it is reasonable why this sector has the biggest share among all manufacture sectors. In the next part, we will see how Indonesia‟s decision on production specialization and what drives the decision to specialize in the production of a certain goods or list of goods.
8
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Table 4. Sector structure of Indonesia‟s production in percentage (%)
Sectors 1990 1995 2000 2005
Agriculture 14 11 11 9
Mining 10 7 9 8
Manufacture 33 36 39 38
Agro-industry products 11 12 12 10
Textile and leather products 4 5 5 4
Wooden and rubber products 4 5 4 3
Chemical 6 6 7 7 Non-metallic products 1 1 1 1 Metal products 2 2 2 3 Machinery 1 1 1 2 Electronics 1 1 3 3 Transport products 3 3 4 5 Services 44 46 41 45 TOTAL 100 136 100 138
Source: Author‟s calculation based on the AIO table.
Specialization index of Indonesia’s production
We have calculated the Herfindahl concentration index of productions in the previous chapter. Now we want to see over the specialization of Indonesia‟s production. Based on the calculation of specialization index of the production‟s value added, Indonesia had low indexes over 15 years with a downward trend constantly (see Figure 11). The decreased specialization index also occurred in the intermediate and final good production but with different pattern. Compare to the intermediate goods, Indonesia is more specialized in the final goods in the first 10 years. However, from 2000 onwards, the index was becoming lower or less specialized. Since 2000, Indonesia‟s production in the intermediate goods and final goods are comparable. Hence, now Indonesia produce more variety of intermediate and final goods in many sectors
Figure 11. Indonesia‟s specialization index of overall sectors
Source: Author‟s calculation based on the AIO table.
0.00 0.05
Total output Intermediate Final demand
