Key determinants of export competitiveness of the Indonesian palm oil and tea agro-industries

Results of the study revealed that CPO [crude palm oil] and tea are among the most important agro-industrial products in Indonesia because they contribute significant foreign exchange for the country. These products are also used in increasing amounts in the domestic market. For the period 1979-1999, the CPO and tea agro-industries were generally export competitive with RCA [revealed comparative advantage] values averaging 10.94 for CPO and 8.23 for tea. Results of the regression analysis showed that the key determinants of export competitiveness of CPO are factor productivity ; degree of trade liberalization; interest rate; exchange rate; wage rate; research and development investment of two-year lag; foreign per capita income; and prices of soybean oil; rapessed oil; and coconut oil. Except for interest rate, degree of trade liberalization, and prices of soybean oil and coconut oil which have negative relationship with export competitiveness, an increase in the value of each of these variables is expected to improve CPO export competitiveness. For tea, the key determinants are degree of trade liberalization, inflation, exchange rate, wage rate, research and development investment of three-year lag, product differentiation of one-year lag, domestic per capita income, and softdrink price. Except for inflation, wage rate and domestic per capita income, these variables are positively related to export competitiveness of tea. The recommendations are as follows: (1) more promotion of R & D with focus on product development, (2) policy reforms to include appropriate exchange rate adjustment and more controlled and affordable interest rate, (3) close collaboration of the government and private sectors in decisions relating to appropriate wage level consistent with providing incentives for increased productivity of workers, and (4) strong policy advocacy program to ensure favorable policies for CPO and tea agro-industries