The Consistency of H-O Theory on Indonesian Agriculture Products

GIE PERSONAL PAPER

THE CONSISTENCY OF H-O THEORY ON INDONESIAN AGRICULTURE PRODUCTS

By : Valentina Tjahjani / 34408057

CHAPTER I

INTRODUCTION

1.1 BACKGROUND

Indonesia is a tropical country and the 16th largest countries in the world in terms of land area with 1,919,440 square kilometer of land. Which means, Indonesia has a high arable land that is very fertile for agriculture. Indonesia is rich in natural resources and billion hectares of land spreading from western to eastern region, making Indonesia becomes an agrarian country for centuries. Indonesia is an agriculture country, means that agriculture sector holds an important role for Indonesian economy. Agriculture sector helps Indonesia to broaden the job opportunity, increase people's income, and give food supply to the people, also agriculture had been Indonesia's largest employers for centuries.

The empirical evidences show that during economic crisis the agricultural industry is proven to be more resistance to external shock than other sectors, so, it has become a buffer of Indonesian economy, especially in supplying food, export earning, job opportunity and poverty alleviation. In addition, agriculture has been a leading sector in rural development through the development of agriculture-based enterprises. With it consistent growth and absorption of huge number of employment, the sector has been contributing to sustainable national economic growth. During the recovery period, the agriculture sector development has shown significant progress. In general, the sector has been able to escape from continuous contraction threat and low spiral growth trap, and even has entered accelerating growth towards sustainable growth.

Labor Force Table

The data above shows that Indonesia has a large amount of labor which is the 4th largest in the world. This condition means that Indonesia has an abundant labor force. Indonesia's labor force keeps on growing every year, and it maintains the position as the 4th largest labor force in the world from 2003 until now.

As shown in the table below that 38,3 percent of Indonesian labors are in agriculture sectors, while service accounts for almost half of Indonesian labors.

However, from the GDP composition by sector, it turns out that service only contributes 37,1% to the total GDP, meaning that Indonesian's service is not a value added service. While in agriculture, the fact is more ironic because agriculture sector only contributes 16,5% to Indonesian GDP, but the labor absorption is more than one third of labor force.

Those fact shows that Indonesia has labor and land abundant, so based from Heckscher-Ohlin theory (H-O theory), Indonesian export should be based on what is provided abundantly in Indonesia while the import should be based on what is not abundantly provided in Indonesia. So, Indonesian Industry should be based on labor and land intensive. Therefore, Indonesia's pattern of trade will be exporting labor and natural resources intensive products such as agriculture products and importing capital intensive's products such as computers.

1.2 PROBLEMS

Since Indonesian is a rich country with abundant labor and land, those gifts will be competitive advantages for Indonesia. Indonesia supposed to have a very strong agriculture sector that can support the economy and help to solve problems, since they have abundant labor and land. Such as solving the unemployment and reduce the poverty in isolated area by providing more jobs opportunity from agriculture sector. In reality, Indonesian agriculture sector is not that strong because Indonesia still needs to import several agriculture products from another countries to fulfill the local demand. As an agriculture country, Indonesia should have a reliable agriculture industry that able to fulfill the local demand for most of agriculture products. Indonesia supposed to be the net exporter of agriculture products instead of net exporter. Indonesia should not import rice from Thailand or Vietnam, because rice is the staple food in Indonesia and the main products of Indonesian agriculture. Indonesia should not import corn from India because corn is also an important commodity of agriculture in Indonesia.

From the previous labor force data, it is clearly shown that Indonesian input for agriculture sectors big, while the output of agriculture products is very low. So there must be a problem in Indonesian agriculture sector.

Therefore, Indonesia should know more about its agriculture industry, whether the agriculture sector is already utilizing its land and labor abundance well or not, and whether Indonesia has already become the net exporter for agriculture products or not. By doing so, Indonesia can analyze in what commodity they need to focus on maximizing their abundance on labor and land. So that the agriculture sector in Indonesia can be the main driver in this agrarian country, which will bring benefit for the whole nation.

In order to know whether Indonesian agriculture industry is already fully utilize its abundances, the agriculture products need to be checked. In checking those products, the researchers picks several products to reflects the agriculture industry, however, the products are highly depends on the availability of the data. In this research, maize corn other seed; other coffee not roasted, not decaffeinated; cocoa beans whole/broken, raw/roasted; crude palm oil, and cane sugar is used because those 5 commodities' data are available during 2001 until 2010.

1.3 OBJECTIVE

* To test whether agriculture products in Indonesia is consistent with H-O Theory or not.

* To test whether Megawati's regime is more supportive to the local agriculture producer than Yudhoyono's regime.

1.4 METHOD

To reach the above