12,000 10,000 _— 2 ers 2 8,000 Malaysia 2 Thailand < 6,000 indonesia = 4,000 hey oe a a Gindia & 2,000 @Japan A SUSA SQSsHes4yezgeranze a EESESSSSSESRS ERE EE Source: Rubber Statistical Bulletin of IRSG (various years) Figure 1. World natural rubber consumption from 1998 to 2015 Figure 2 indicates that Malaysia’s production has started to decline, and has been overtaken by Vietnam and China in 2015. This situation occurred because Malaysia’s shift to the manufacturing sector from the primary sector (Mustafa, Latif, & Egwuma, 2016). Among the new comers, Vietnam shows significant increase in production, having ‘overtaken Malaysia as the third largest producer. —tMalaysia -@-China 5000 . Indonesia Thailand 4500 : Vietnam India 4000 #3500 = 3000 = 2500 2 2000 3 1500 a**In Indonesia, based on the 4 digits Harmonized System (HS), natural rubber ranks fifth in the export top commodities. From 1998 to 2015 export experienced fluctuation, However, after 2009 relatively showing increasing trend. Base on stry of Agriculture, more than 80% of natural rubber production is exported. The consumption of natural rubber in Indonesia also increase in line with the world consumption trend; however, the consumption is low compared to the amount of natural rubber produced. The comparison between the production, consumption, and export can be seen from Figure 3. 3,500 g Production ig, ~ 3000, Consumption 5 2 2500 oa j = & , 2,000 g j BE BS Z 5 1,500 | Z g i ] y 4 i é y = 1,000 AZ g i ; BO AANA AA: 8 Z A Glg g 500 Z Z é 4 0 2 Seas cos a a ERESELEEERR RRR RARE Source: UN Comtrade and IRSG database (various years) Figure 3. Production, consumption, and export in Indonesia The world’s natural rubber consumption is mainly affected by the increasing demand of automobiles in emerging countries such as China and India (IRSG, 2015). IRSG also predicts that from to 2013 to 2023 the number of vehicle use willincrease by 4% and tire production will increase by 4.2% at the same period. That become the main reason the increasing export from natural rubber producing countries such as Thailand and Indonesia, Base on Hirohata (2007), there are four aspects affecting competitiveness in natural rubber market, there are; the availability international certified standard, infrastructure for delivery, government budget for public investment and productivity. Productivity takes important role for the competitiveness, productivity is affected by many aspects such as, natural condition, land area, type of seed. Compare to Thailand and Vietnam productivity of Indonesia is relatively low. Based on the average data from 2009 to 2013, Vietnam had the highest productivity with 1.718,85 Kg/Ha, followed by Thailand 1.624,62 Kg/Ha, and Indonesia was the fifth with 821,59 kg/ha after Malaysia and Cambodia. The reason might be due to more than 80% of natural rubber plantation in Indonesia is owned by smallholder and most of the plantation does not maintain well (Ministry of Agriculture, 2015). Moreover, quality control for smallholder to produce good quality product is also weak, Other problems are low productivity and the low investment in the rubber- based industry since the economic crisis in the end of 1990 (Arifin, 2004). On the other hand, Thailand government started to issued tax (CESS) for rubber export to maintain the sustainability of their production. This fund is used to help farmer to do replanting, and for Thailand natural rubber is the second largest export commodity, so the government focus in development of this commodity by finding innovations through research and technology (AI Swidi & Shahzad 2014).Since the export of natural rubber is affected by demand and supply side, this study has limitation by only including several factors from both demand and supply. For supply side will represent through production and GDP, while for the demand resent by consumption and GDP. Furthermore, other facto cost will also take into account in side will rept rs such as world price, exchange rate, distance and export determining the determinant of natural rubber export in Indonesia. 1.2 Research problems ‘The entry of new natural rubber producing countries in the world market such as Vietnam, China and India increase the competition among exporting countries. To maintain its position as the second largest exporter ‘of natural rubber in the world market, the Indonesian government should redevelop new rubber plantation areas, and also highly support investment especially tire production (Arifin, 2004: Hirohito, 2007; Yanita et al, 2016). By doing so, Indonesia can increase its production as well as its export share of natural rubber. Knowing the factors that positively and significantly impact the export of natural rubber can help Indonesia to increase its export share in the world market, Through all those background, this research intends to find out what are the determinants of natural rubber export in Indonesia. There are two research questions of this study: 1. What are the determinant of natural rubber export in Indonesia? 2. What are policy implications should be applied in natural rubber export?1.3 Objectives of the research The aim of this study is to analyse what is significance factor affecting on natural rubber export especially in Indonesia. I employed the panel data from 2005 to 2014 of harmonized system four-digit, HS: 4001 (ic. natural rubber, balata, gutta-percha, guayule, chicle and similar natural gums, in primary form or in plates, sheets or strip). 1.4 Contribution From the objectives, the study is expected can be contributed for: 1. For the writer, it can give understanding factors affecting natural mbber export in Indonesia 2. For the government, it can be used as consideration in making policy related to natural rubber export. 3. For academia, it can be a part of empirical evidence to develop theory of international trade,CHAPTER II LITERATURE REVIEW, FRAMEWORK OF THINKING, HYPOTHESIS 2.1 Literature Review In this section, I will explain about the framework of gravity equation and how its correlation with Hecksher Oblin theory, and also the literature review about gravity model in explaining trade pattern and also annouced what are the factors affecting trade base on some prevoius studies. I also add some information related to natural rubber trade. 2.1.1 Heckscher Ohlin and Gravity Equation ‘What a particular country exports and how much it exports depend on a number of factors. Every country has its own profile of export commodities. According to ‘Amoro and Shen (2012), a country’s export profile of natural resource products can be observed from its geographical and climatic characteristics. Tropical countries have a high competitive advantage for tropical products in the international market. For example, Middle Eastern countries have a high competitiveness for dates, and Southeast Asian countries have a high competitiveness in natural rubber. Similarly, developed countries have a relatively high competitiveness for manufactured goods, while most developing countries have a high competitiveness in primary or raw materials. This condition is relevant with Heckscher-Ohlin (H-O) theory, which concluded that trade between two countries arises because the difference of factorproduction such as land, labour, and capital (Leamer, 1995) and also the difference of GDP, per capita GDP and tariff (Bergstrand, 1990). H-O theory stated that a country will export a product if they have abundant factor production of that product, and will import if they have scarce factor production to produce that Product. A country might be categorized as capital abundant or labour abundant or land abundant country (Leamer, 1995). In general, the H-O theory predicts the pattern of trade based on the characteristic of the country. This theory is in line with gravity theory that predicts trade pattern also based on characteristic of that country by including economic size, distance, and other characteristics. In 1962, new model used to predict the pattern of international trade named gravity model. Gravity equation can be derived from many various models including Heckscher-Ohlin (H-O) theory. Many scholars derived gravity equation from H-O theory, Leamer (1974) used both the gravity equation and the H-O model ina trade flows regression model, Deardorff (1998) also derives the gravity model in the framework of a H-O model, moreover, Evenett & Keller (1998) find empirical support for the gravity equation, based on both the H-O model and increasing returns to scale. They found that the H-O theory would take into account for the success in explaining bilateral trade flows among countries with large factor proportion differences and high shares of inter-industry. The basic of H-O equation included the difference of factors production such as capital, labour and land, the basic equation of H-O stated that factor production consist of capital and labour. = f(K,L)The difference of capital and labour encourages trade between countries. A capital abundant country will export capital intensive commodity, and labour abundant country will export about intensive commodity. The simplest theorem of H-O is matrix 2x2x2 model. There are two countries: i and j, two commodities x and y, and two factors production K and L. I will attach figure from Leamer (1995), for instance commodity x is machinery, a capital intensive product, and commodity y is clothes, a labour intensive product. z Efficient = capital te) intensity in machinery Efficient capital _—— intensity in clothes Tabour Iw Source: Leamer, 1995. Figure 4, Factor price equalization theoremFigure 4 shows the difference of factor production of machinery and clothes in term of capital and labour. If country i is capital abundant in machinery production and country j is labour abundant in clothes, then county i will export machinery and country j will export clothes. In reality, many other characteristics of a country that induce trade, such as land, weather and natural resources. Many scholars develop H-O theory such as Hecksher-Oblin-Samuelson, Hecksher-Ohlin-Vanek (HOV) and others, Davis & Weinstein (2001) proved that gravity equation can be added to predict demand of trade. One of HOV model assumptions is zero transport cost, however this assumption will lead to overestimate the import level, Then they added the distance as proxy of trade cost into a model using large data of many sectors, Davis & Weinstein (2001) proved that distance is negative and significant affecting import volume for all sectors. Adding distnace into equation will prevent model to overestimate trade volume. The differences of characteristic and factor production also are applied by the gravity to estimate the factors affecting the trade between countries. The basic variables of the gravity equation include production factors, consumption factors and geographic distance between two countries. However, other distance functions are required to be proxy of economic distance (Anderson, 1979), however using real distance in determining cost might be not so effective since distance cannot be the only things matter in predicting cost, a freight cost is needed to prevent misleading interpretation (Gopinath, Helpman & Rogoff, 2014).The basic equation of gravity model as follow Xyp= GSM; 9 Where Xj is the value of exports from country i to country /, S; is the supply side factors, in this term is country i, the M, captures the characteristics of importer J, 99 98 bilateral accessibility between exporter i to importer j, and G represents a constant of gravity. From those above, it can be concluded that the gravity model is supported by H-O theory. 2.1.2 Gravity Equation and Trade Activity Testing There are many studies that use the gravity model to estimate factors affecting trade between countries. Anders and Caswell (2009) used the gravity model to estimate the factors affecting seafood import; Hatab, Romstad, and Huo (2010) determined the factors affecting agricultural exports; Kristjénsdottir (2005) investigated the determinants of Iceland's export; Egger and Pfaffermayr (2002) examined the bilateral exports of 11 APEC countries; and Kien (2009) investigated the determinants of exports in the ASEAN countries. The gravity model is successfully used to determine trade pattern for more than 50 years started from a study by Nobel laureate Jan Tinbergen in 1962, then the theory was developed by several scholars: Anderson (1979), Krugman (1979), Helpman and Krugman (1985), and Bergstrand (1985, 1989, 1990) (Baier & Bergstrand, 2001).Bas © on Head & Mayer (2013), there are three definitions of gravity equation. The first one, general gravity expressed the set of models that yield bilateral trade. X= 6 Si Mj 93 = G51 MO ay 1 already explained this equation in the previous page. The second one, the gravity equation covers characteristic of both exporter ‘and importer (or S and M from equation 1), so the second equation can be defined as oo Xi= Cai; PU (2.2) where Y; = ¥ ;Xj is the production of goods, X; = DiXy is the importer’s consumption of goods, in practise Yi and Xj represent through GDP. While, @; and ; defined as multilateral resistance. This term reffers to: ou) 3) i-y (vie ,-Y (2 a=) (ee) and Oj =) The Q and @ from definition 2 can be solved for a given set of trade cost, So, this equation is considered to be more complete calculation by including the impacts of trade costs changes. From those the equations, resulted the third definition, the naive gravity equation. As follow: (24) Xy~ GVEYP 0This equation covers the important factors of bilateral trade, and has been known by its long empirical successful in Predicting pattern of trade for more than 50 years, mn the natural rubber market, the majority market share is held by several Southeast Asian countries In 2015, the top three producers were Thailand, Indonesia, and Vietnam, and most of their production are exported to meet the international market demand (IRSG, 2016). Some studies have been conducted to ‘entity the factors influencing natural rubber export, For example, a study by Kannan (2013) used OLS regression and found that the world price and world Population were positively impacted to rubber export, while the stock of natural rubber and domestic price negatively impacted the rubber export in India. Another study by Mesike, Giroh, and Owie (2008) examined the factors affecting the export of natural rubber in Nigeria, and concluded that production and producer prices Positively influenced export, while domestic consumption negatively impacted natural rubber export. In Indonesia, a study about natural rubber export was conducted by Yanita et al (2016), but their study only focused on crumb rubber export. It concluded that the production and previous year export quantity positively affected the crumb rubber export quantity, whereas the exchange rate had a negative effect on the crumb rubber export in Indonesia. There are some models that arc used to determine the factors affecting international trade such as export and import. One of the models that has been commonly used to estimate the factors affecting international trade is the gravitymodel (Kien, 2009). The gravity model is originally derived from the Newton’s gravitation law, a physics theory which stated that the degree of attraction between two objects is influenced positively by its mass and negatively by the distance between them, (Abidin, Abu Bakar, & Sahlan, 2013; Niedercorn & Bechdolt, 1969). The application of the gravity model in trade is not limited to only a specific commodity, it can also be applied almost for all commodities, Furthermore, it also can be applied in determining the factors affecting both imports and exports. One ofthe research studies using the gravity model to estimate the factors affecting the natural rubber export of Indonesia was conducted by Sudiyana (2015). His study used the fixed effect gravity model to estimate the natural rubber export from Thailand, Indonesia, and Malaysia using the data from 2003 to 2013. He used the remoteness variable to replace distance, as the invariant variable in the fixed effect model will be omitted, Remoteness is calculated by divided distance of exporter in importer country with importer country's world GDP share, He concluded that both the GDP and the natural rubber’s production positively affect export, while exchange rate was found to have a negative relation, and remoteness was found to have not significant effect. Some studies have proved that the production of rubber positively affects its export value (Amoro & Shen, 2012; Sudiyana, 2015; Yanita et al, 2016). Other factors such as exchange rate was also the focus of some studies. The rescarch by Anders and Caswell (2009) demonstrated that exchange rate is not a significant factor in the seafood imports in USA. On the other hand, Amoro and Shen (2012),I , . ‘Sudiyana (2015) and Yanita et al (2016) found that exchange rate is a negative and significant in the rubber commodity export. i i istance is usually “Another main variable in the gravity model is distance. Distance some scholars used as a proxy for transportation cost (Hatab et al, 2010); however, ; A ie argue that duc to the development of ‘technology distance is no longer a barrier trade, Anders and Caswell (2009) found that in USA, distance significantly affected seafood import, while Sudiyana (2015) stated that distance was insignificant forthe natural rubber export of Thailand, Indonesia, and Malaysia. It can be concluded that the significance of distance in trade is relatively affected by the type of commodity. On the other hand, Amoro and Shen (2012) used production, producer price, world price, exchange rate, domestic consumption, and rainfall and interest rate to find the determinants of rubber export in Cote d'Ivoire. Some previous studies have used the gravity model to explain the factors affecting bilateral trade. Hatab, Romstad, and Huo (2010) applied the gravity model to determine the factors affecting export in Egypt, while, Amoro and Shen (2012) used the same to estimate the factors affecting rubber export in Cote d'Ivoire. Applying the gravity model to estimate the export factors affecting export might help a country to understand the factors that might contribute to the increase their exports. In Indonesia, similar studies about rubber export have been undertaken, Research by Yanita, Yazid, Alamsyah and Mulyana (2016) estimated the variables affecting the export of crumb rubber using the robust regression method. Another study by Sudiyana (2015) used the gravity model to examine the export of naturalrubber from Indonesia, Thailand, and Malaysia from 2003 to 2013 using the fixed effect model. 2.2 Framework of Thinking The model was start from equation 2. 4, Xy= GYPY} o We can linearize the equation, LnX=b0+bl InG+alnYa+binYb+ Oi ‘Where G represents a constant of gravity, and X is export value, Ya is the Production factors from exporter country, Yb is consumption factors from importer country, and @j linkage factor between two countries, the determinant factor according to some gravity studies by Egger and Pfaffermayr (2002); Kristjénsdéttir (2005); Anders and Caswell (2009); Kien (2009); and Hatab, Romstad, and Huo (2010), and also some studies related to natural rubber; Mesike, Giroh, and Owie (2008), Kannan (2013), Sudiyana (2015), Yanita et al (2016) then we have the factor affecting to export are GDP, production, consumption, world price, exchange rate and trade cost and distance. According to the parameter G, X, Ya, Yb, should be gravity constant, export value, Indonesia's GDP and production volume, importer country’s GDP and consumption and the linkage variables between exporter and importer, world price, exchange rate, and proxy trade cost and distance. Increasing in production and GDP of Indonesia might increase export value, and increasing in GDP and consumption in importer country also might lead. to increasing in export. Moreover, higher exchange rate, distance and cost mightdecrease export, while the world price might find to have positive impact to export value. Figure 5 show the framework of thinking. Finding factors that has possiblity affect natural rubber export Finding economic model Estimating Gravity Model Analyzing Determining policy implication Figure 5. Framework of thinking 2.3 Hypothesis There are some hypotheses in this study. According to framework thinking as I mentioned earlier, Firstly, I hypothesize that the domestic production, importer country’s consumption, Indonesia’s GDP and importer country’s GDP to have a positive and significant effect on natural rubber export. It is expected that the higher GDP for a country j, the greater the demand for imports (Egger and Pfaffermayr (2002); Kristjansdéttir (2005); Anders and Caswell (2009); Kien (2009); and Hatab, Romstad, and Huo (2010); Mesike, Giroh, and Owie (2008), Kannan (2013), Sudiyana (2015), Yanita et al (2016). The second hypothesis is that the exchange ter country and proxy cost will have a negative rate between Indonesia and impo! and significant effect on the export of natural rubber, based on previous studies by18 Anders and Caswell (2009); Hatab, Romstad, and Huo (2010);. Amoro & Shen (2012), Abidin, Abu Bakar, & Sahlan, (2013) and Sudiyana (2015). The effect of the world rubber price on export could be either positive or negative, because there are two possibilities. Firstly, from the exporter country’s side, if the price is high, the exporter tends to export more. Secondly, from importer country’s side, there is a possibility that the importer will reduce imports if the price is high. However, based on Kannan (2013), world price gives positive and significant impact to export value.