Jurnal Ekonomi & Studi Pembangunan

Volume 19, Nomor 2, Oktober 2018, hlm. 134-141

DOI: 10.18196/jesp.19.2.5004

DETERMINANTS OF INDONESIAN CRUDE PALM OIL

EXPORT: GRAVITY MODEL APPROACH
Ridwannulloh, Sunaryati

Fakultas Ekonomi dan Bisnis Islam, Universitas Islam Negeri Sunan Kalijaga Yogyakarta,
Jl. Laksda Adisucipto, Caturtunggal, Depok, Sleman, Daerah Istimewa Yogyakarta 55281
Correspondence E-mail: [email protected]

Received: August 2018; Accepted: October 2018

Abstract: Crude Palm Oil (CPO) is a commodity in the agricultural sector with the largest
contribution to the value of Indonesian exports. Moreover, since 2006, Indonesia has become the
largest CPO producer in the world. Therefore, this research attempts to investigate determinants of
Indonesia CPO export to main trading partners using Gravity model approach. This study is
conducted to analyze the effect of Indonesia’s GDP, GDP of Indonesia’s four main trading partners,
distance, the rupiah exchange rate against US dollar and domestic CPO consumption on Indonesian
CPO exports. The analysis technique is used in this research is panel data regression using fixed effect
model. The results of this study indicate that not all variables have significant effects on Indonesian
CPO exports. Variables such as Indonesia’s GDP and GDP of major trading partners have positive
and significant effect, whereas rupiah exchange rate variable and domestic consumption have negative
and significant effect on Indonesian CPO export. In addition, in line with Gravity model, variable of
distance has negative and significant effect on Indonesian CPO exports.
Keywords: CPO Exports, Growth Domestic Product, Gravity Model, Panel Data
JEL Classification: F10, F11, F12

INTRODUCTION lion, comprise of non-oil and gas at about $US

132.08 billion and oil and gas export at amount
Indonesia is one of the countries applying
$US 13.10 billion.
open economy system. An implications of open
Plantation is a prominent component
economy is observed from the use of interna- from non-oil sector. Plantation sector and gas
tional trade to increase the economic growth sector are important and these sectors become
(Dumairy, 1996). Besides, international trade is supporting sources for Indonesia’s, both income
one of the ammunitions to stimulate the growth and foreign exchange. Based on the data from
of domestic trade (Dodzin and Vamvakidis,
the Ministry of Agricultural, during 2016, Indo-
2004). A country is trading to others with two
nesian commodity export reaches 34.62 million
main reasons, the first is to acquire gain form
ton or equal to $US 25.53 billion, leads to high
trade and the second is to obtain the economics
contribution into our export which around
of scale. (Krugman, 2004). There are two main
17.11% from total (Directorate General of Plan-
variables that should be considered in interna-
tation, 2017). Palm oil is one of the commodities
tional trade such as export and import. Export
that gives the highest contribution to export.
is national production which consumed for
Based on Association of Palm Oil Farmer or
other countries while import is foreign product
(GAPKI) in 2006, Indonesia is the largest palm
consumed nationally (Basri et al., 2010). Accord-
oil distributor followed by Malaysia in second
ing to Labor Statistics Bureau (2018), Indonesian
place.
export in 2016 is approximately $US 145.18 bil-
 Bangladesh Egypt Germany
4% Singapore 3% 2%
Pakistan 4% India
4% Malaysia 29%
5%
Netherlands
9% Others
29%
China
11%

Source: Labor of Statistics Bureau (2018)

Figure 1. Primary Exported Countries CPO to Total of Indonesian CPO Export

Palm oil sector not only as foreign exchange pick bigger country (by bigger GDP amount) as
contributor but also could hire many potential a trading partner compared to smaller country,
workers during its production. The production a country with the closer distance avoiding the
of palm oil in Indonesia mostly to be exported, high cost of transportation, with open eco-
only 20%-30% is used domestically. Based on nomic country rather than closed economic
data from Bureau Labor of Statistics (2018) with country, with almost similar background rather
the average growth of export is 11.22% per than one without similar background.
year, the CPO export has grown from 6.33 mil- Gravity model has a basic notion which
lion ton in 2002 to 24.46 million ton in 2015. On states that the bilateral trade between two
the average, the CPO export in Indonesia is countries will be positively correlated with
amount 74.70%. GDP from two countries and the closer the
Based on figure 1, it can be seen that In- distance of two countries (if all other things are
donesia has 10 main importing countries. India held constant). The higher the economics of
is Indonesia’s the biggest importing countries scale, the closer the distance is, then the volume
with an average contribution of 29.15% from of trading shall be higher (Salvatore, 2007). The
the total of Indonesia’s CPO export. Then fol- construction of this theory is coined from Grav-
lowed by China, and India in the next place, Ity Law created by Issac Newton on Physics
with an average contribution of 11.04% annu- discipline.
ally. Malaysia and The Netherlands are in the Principles of Political Economy and
third and fourth place with an average contri- Taxation (Ricardo, 1817) which is explained the
bution 9% and 5.08% respectively. All four law of comparative absolute advantage, this
countries contributions to Indonesia’s CPO ex- theory is one of the most important law in the
port is about 54.27% of total Indonesia’s CPO international trade to face any challenges in any
export. trade practices (Salvatore, 2014). According to
This research aims to analyze the impact the law of comparative absolute advantage, if
from GDP, CPO domestic consumption, IDR one country is not efficient enough towards the-
exchange rate against $US, the distance of In- other country on producing certain commodity,
donesia with four trading partners. This re- but it should be making good for both coun-
search is using Gravity model, a model that is tries. The first country should specialize in
developed by Tinbergen (1962), this research producing and exporting commodity which has
attempts to analyze the effect of distance of four less absolute loss and importing commodity
main trading partner countries using multiple which has a more absolute loss (Salvatore,
regression method with fixed effect model. Ac- 2014).
cording to Salvatore (2014), a country generally

Determinants of Indonesian Crude Palm Oil Export… (Ridwannulloh, Sunaryati) 135

 The main source of international trade is While CPO export data is taken from Indonesia
the difference in resources having by each Bureau of Statistics, production and consump-
country that affected international trade tion of Indonesian CPO data is taken from Di-
(Krugman, 2004). This theory is developed by rectorate General of Plantation. The distance
two prominent economists from Sweden, Eli variable is using Google Maps in which point
Heckscher dan Bertil Ohlin thus it is famously the distance between two countries.
known as Heckscher-Ohlin theory. It is also
Operational Variables Definition
known as factor proportion theory and en-
On this research, the variables are divided
dowment factor theory. This is because the two
into two groups; dependent and independent
theories emphasize in the difference of
variable. The dependent variable is Export ij=
proportion factor on each country and the
the value of Indonesian CPO export to four
difference used in producing any goods
primary trading partner ($US million), while
(Krugman, 2004). Gross Domestic Product
the independent variable is GDPi = Indonesian
(GDP) is the total value of all goods and
GDP ($US million), GDPj = GDP from four
services produced by one country in a certain
countries ($US million). GDP is the arrow point
period of time (Mankiw, 2014). GDP calculation
for estimation on gravity model, because it de-
can be calculated using three approaches,
picts the demand and supply as a whole
which is expenditure approach, production ap-
(Tinbergen & Hekscher, 1962). CONS i =
proach and income approach (Trenggonowati,
domestic consumption on Indonesian CPO
2010).
(million ton), Exchange rate = rupiah exchange
Our exchange rate between two countries
rate (IDR/$US), DIST = distance between two
is the price where the people is exchanging
capital cities measured by the formula (Li et al.,
goods (Mankiw, 2014). The economists are di-
2008).
viding the exchange rate to real and nominal
exchange rate. Nominal exchange rate is the Analysis Tool
relative price from the two currencies. Real ex- The analysis tool used in this research is
change rate is the relative price from goods in multiple linear regressions with panel data.
each country. It is also known as terms of trade. One of the advantages using this tool is mini-
The real exchange rate is calculated from total mize heterogeneity explicitly and give variable
of nominal exchange rate and price rate in two a specific subject. Other advantages would be,
countries. There is a significant negative rela- give more information, add more variation and
tionship between exchange rate and export. minimize collinearity among variables, thus
much more efficient (Gujarati, 2010). After de-
RESEARCH METHOD ciding which model is the best among the
Data and Source common effect model, random effect model, or
The analysis method that is used in this fixed effect model, the next step is to test
research is quantitative method with regression statistically with t test and F test, as well with
analysis tools taken from panel data during coefficient determination (R2). The below is the
1995-2016. The sample data from this research equation used in this research as indicated in
is taken from the four primary trading partners, equation (1),
such as India, the Netherlands, Malaysia and
China. The variables data are GDP, exchange
rate, domestic consumption, and the distance
between two capital cities of two countries. The
Log-linear equation decides that the trend
data source are from; World Development Indi-
from i to j can be explained from economic
cators World Bank for exchange rate and GDP.

136 Jurnal Ekonomi & Studi Pembangunan Vol. 19, No. 2, Oktober 2018: 134-141
power from its and to source (Bergstrand, Hausman Test
1985). Thus, the equation can be transformed to Hausman test is done to choose the most
this log-linear equation is presented in equation appropriate model in analyzing panel data
(2), between fixed-effect-model and random-effect-
model. The result from Hausman test can be
seen on table 2,
Table 2. The Result of Hausman Test
Chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 13.36
Where, Prob>Chi2 = 0.0202
lnXij =Log of Indonesian CPO Export (V_b-V_B is not positive definite)
lnGDPi = Log of Indonesian GDP Source: Author estimation with Stata14, 2018
lnGDPj = Log of GDP from trading part-
ners The criteria from Hausman test is that if
lnCONSi =Indonesia Consumption of Do- the probability of Chi-square is less than the
mestic Indonesian CPO degree of 5%. H0 is accepted or it can be said
lnKURSi = Exchange rate IDR against US$ that fixed effect model is more appropriate than
lnDISTANCE = Distance between country i &j
random effect model. According to the result of
RESULT AND DISCUSSION Hausman test on the above, it is stated that
Probability of Chi-square is 0.0202 or less than
Based on the estimation from random ef- α (0.05). H0 is accepted, then fixed effect model
fect model and fixed effect model lead to a re- is being used on this research.
sult in which can be an estimator. Thus, it is
Lagrange Multiplier Test
needed to pick the best model by doing some of
Lagrange multiplier test is done to point
the test.
which model is the most appropriate on ana-
Chow Test lyzing panel data between random effect model
Chow test is used to select the most ap- and common-effect-model. The result can be
propriate model to analyze the panel data be- seen on table 3 as follow,
tween pooled least square and fixed effect. The
Table 3. The Result of Lagrange Multiplier
result of chow test can be seen from table 1.
̅̅̅̅̅2(01) = 65.76
Table 1. The Result of Chow test or Likeli- Prob>̅̅̅̅̅2 = 0.0000
hood Ratio Test Source: Author estimation with Stata14, 2018
F test that all u_i=0: F(3, 79) =
Prob > F = 0.0000 The criteria from Lagrange multiplier test
21.17
Source: Author Estimation, using Stata14 is that if probability of Chi-square is less than
the 5% degree, so H0 is accepted, or it is proven
The criteria from Chow test is that if F that random effect model is more appropriate
probability less than 5% degree conclude to re- to be used than the common effect model.
ject H0 or proved that fixed effect model is more Based on Lagrange multiplier test result in table
appropriate than pooled least square model. 4, the Probability of Chi-square is 0.0000 or less
Based on Chow test from the above, we can get than α (0.05). Ho is accepted and random effect
the result that the F probability is F = 0.0000 or model is chosen.
less than α (0.01). H0 is rejected and the most From Chow test, Hausman test and La-
appropriate model that can be used is fixed ef- grange multiplier test we can conclude that the
fect model. most appropriate model to use on this research
is fixed effect model.

Determinants of Indonesian Crude Palm Oil Export… (Ridwannulloh, Sunaryati) 137

 Table 4. Panel Regression Result using Fixed Effect Model
Variable Coef. Std. Err. P>t
lnGDPi 1.98661 1.11884 0.07970*
lngGDPj 2.59407 0.50952 0.00000***
lnKURS -0.02763 0.18681 0.88280
lnDISTANCE -0.00447 0.00199 0.02730**
lnCONS -0.34789 0.79668 0.66350
_cons -101.11099 25.26833 0.00010***
R2 0.77137
Adj R2 0.74822
Prob F 0.00000
N 88
legend: * p<0.1; ** p<0.05; *** p<0.01

a. The Influence of Indonesian GDP and Four global economic is highly needed to lead
Primary Trading Partners toward Indonesia the trading.
CPO Export Value The result is also strongly supported by
The regression coefficients of GDP and the hypothesis of growth driven export
four GDP of four main trading partners are which shows that the economic growth im-
1.1188441 and 0.5095222. Partially, the t pacts on the trade. It will lead to compara-
probability is 0.079 (<α 0.1) and 0.000 (<α tive advantage in certain areas and will give
0.01), thus Indonesian GDP and GDP of 4 its specialization to the country. The main
trading partners positively impact toward qualification for a country to export goods
Indonesia CPO export value. Thereby the is to create the decent situation that will re-
first hypothesis on this research is accepted. sult in a continuously economic growth
The result is supported by the previous (Haryati & Hidayat, 2015).
research conducted by (Yuniarti, 2007) Based on research from (Lee & Huang,
which stated that the GDP from the ex- 2002) the growth of a country’s output will
porter countries is positively affected Indo- increase the export growth. When an econ-
nesian export value. Another research per- omy is growing, thus a number of sectors
formed by (Egger, 2000) also shows the will face a big change in terms of technol-
positive relationship between GDP and ex- ogy and innovation that links to human re-
port volume. source, transfer of technology or capital ac-
Research from (Kalbasi, 2001) GDP of cumulation. In end, the output from one
exporter countries measure the production country is exceeding and has excess supply
capacity of the countries, the higher the in turn the supply will be sold in other
GDP are, the more commodities they could countries.
produce. In addition, GDP of importing
b. The Impact of Exchange Rate towards Indo-
countries measure the absorption capacity.
nesian CPO Export Value
The increasing amount from GDP of im-
The result from the regression coeffi-
porter countries leads to higher absorption
cient of exchange rate is -0.02762789 and
capacity. The finding implicates to increase
partially the probability of t value is 0.88 (>
the production the GDP from each country
α 0.05). This, we can say that exchange rate
should always be increased. According to
is negatively affected to USD is negatively
(Yuniarti, 2007) the decent situation of
and insignificantly affected toward CPO

138 Jurnal Ekonomi & Studi Pembangunan Vol. 19, No. 2, Oktober 2018: 134-141
 export value of four trading partner. The Based on the data from GAPKI, Indone-
second hypothesis is rejected. sian CPO is an export commodity so the
The former researcher (Azizah, 2015) CPO domestic consumption will not sig-
indicates that exchange rate has a negative nificantly affected toward Indonesian CPO
and significant impact on the value of In- export. The domestic consumption of Indo-
donesian CPO export. Other results come nesian CPO is only counted for 30% from
from (Huda, 2017) dan (Ginting, 2013) state total production. In other words, 70% of
that exchange rate has a negative and Indonesian CPO production is to be ex-
significant impact on Indonesian export. On ported not for domestic consumption.
the researches exchange rate has a two-way Indonesian domestic CPO consumption
relationship on international CPO trade, is much lower from the total production
meaning when an exchange rate and CPO export. However, the volume of
depreciates, while export increases and vice domestic consumption each year is in-
versa. creasing. The domestic consumption en-
The finding helps to strengthen the re- compasses biodiesel, soap, and detergent
lationship between exchange rate and ex- (GAPKI, 2017). The CPO production mostly
port-import. If Rupiah appreciates toward intended to be exported, only 20-30% used
forex, it will reduce the export value while for domestic consumption. With an average
import will increase. It happens because the export growth of 11-12% yearly, Indonesian
domestic goods in international market be- CPO export has experienced an increasing
come much more expensive (Huda, 2017). growth from 2002 which only 6.33 million
ton to 24.64 million ton in 2015. The average
c. The Impact of Domestic Consumption on
of Indonesian CPO export is 14.76 million
Indonesian Export Value
ton or 74.70% of the total production.
The estimation result shows the coeffi-
cient regression value of domestic con- d. The Influence of Economic Distance on
sumption of -0.34788871 with t probability Indonesian CPO Export Value
of 0.66 (> α 0.05). It can be concluded that From the estimation, the value of dis-
domestic consumption will negatively im- tance is -0.0047055 with t probability of
pact the export value. It is also insignifi- 0.0273 (< α 0.05). Thus this variable is nega-
cantly affected toward the CPO export tively and significantly affected the export
value. Thus, the third hypothesis is rejected. value. Consequently, the fourth hypothesis
is accepted.
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
-
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Produksi Konsumsi Domestik Ekspor

Figure 2. Consumption and Indonesian CPO Export

Source: Directorate General of Plantation (2016)

Determinants of Indonesian Crude Palm Oil Export… (Ridwannulloh, Sunaryati) 139

 The result is supported by other re- If there is a takeaway from this research, it
searches from (Rahman, 2009), (Sitorus, would be for all the linked institutions such as,
2009) and (Yuniarti, 2007) note that, the far Directorate General of Plantation, GAPKI, mon-
distance it gets between the importer and etary authority or government that is expected
exporter country will lead to the reduction to notice the movement of indicated variables
of CPO export because of the high on export value of Indonesian CPO. For mone-
transportation cost. tary authority it is expected to have the tight
inspection on IDR fluctuations that give an im-
CONCLUSION pact on Indonesian CPO. In addition, the gov-
Based on the research, we can conclude on ernment needs to conduct proactive policy to
the below: stimulate CPO production to become ready-
goods or half-ready goods in order not merely
1. All countries GDP variables are signifi- rely on CPO export.
cantly affected toward Indonesian CPO ex-
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