Agricultural Trade, Economic Growth and Free Trade Agreements: Studies of the Indonesian Case

For decades the importance of the agricultural sector in economic development has been overshadowed by the industrialization, and indeed this was the case for much of the 20th century. But the recent revival of the agricultural sector has confirmed its position as a key to growth in many developing countries. One focus of this renewed attention has been free trade agreements, with the hope that these would open markets in large or growing markets in large or rapidly growing countries to the agricultural exports of developing countries.\ud This thesis is concerned with the potential for agricultural exports, particularly that facilitated through free trade agreements, to contribute to Indonesia’s growth. Indonesia’s agricultural exports have risen strongly since 2004, and provide a rising share of exports, so these issues are highly relevant to Indonesia.\ud The objective of this thesis is to examine the impact of agricultural exports on Indonesian economic growth and the implication of the ASEAN-China Free Trade Agreement (ACFTA) on agricultural exports of Indonesia. The study includes 35 of Indonesia’s biggest exported agricultural commodities which covers more than 95 per cent of total agricultural exports of Indonesia. The endogenous gravity model shows that Indonesian agricultural exports to China have a positive and significant impact on Indonesian economic growth. On the other hand, the autoregressive distributed lags (ARDL) time series measurement reveals that the ACFTA programs have mixed implication on Indonesian agricultural exports to China both in the short- and long-run. However, tariff reduction under the Early Harvest Program (EHP) has not significantly affected the export growth of agriculture in the short and long run. Furthermore, trade facilitations under the ACFTA programs have also mixed influences on the competitiveness of agricultural exports depend on the commodities.\ud It is concluded that the ACFTA role has not yet been reflected in the growth of agricultural exports since there is no important agricultural commodities covered by early programs of the ACFTA. Meanwhile the strong growth of agricultural exports should be carefully addressed as an opportunity by Indonesian government to increase its contribution to the economic growth