Services Trade in Indonesia

1.  The role of services in Indonesia’s economy

Abstract

This chapter assesses the role of the services sector in Indonesia with a focus on trade. It presents an overview of aggregate services trade patterns, covering trade in value added, balanced trade flows, and services that are supplied via the establishment of a commercial presence.

Key points

• There has been steady economic growth in Indonesia, characterised by a structural transformation in which services account for an ever-increasing share of economic activity.

• Compared to regional averages, Indonesia trades less in services both in terms of gross trade flows and as value added embedded in aggregate exports. Services value added in Indonesian manufacturing exports originate mainly from the domestic services sector.

• At an aggregate level, Indonesia’s services imports are higher than exports. Significantly, the country’s contribution to global shares of services trade flows did not systematically increase in the last two decades prior to the outbreak of COVID-19 in 2019.

Indonesia is a populous country with a large economy. In 2022, its total population as recorded by the World Bank was 276 million, the fourth largest in the world after India, the People’s Republic of China (hereafter “China”), and the United States. According to World Bank data, Indonesian gross domestic product in 2022 was the sixth largest among countries in the Southeast Asia and Pacific region, after China, Japan, India, Australia, and Korea, and the sixteenth largest in the World. Services are an important element of the Indonesian economy. They account for 58% of total value added, a slightly larger figure than the average of the Association of Southeast Asian Nations (ASEAN) economies (55%). Similarly, 55% of Indonesian workers are active in the services sector, while agriculture and industry account for only 29% and 16%, respectively.1

The change in the composition of employment across sectors reveals a pattern of structural transformation, with the share of Indonesia workers progressively more engaged in services and industry activities as compared to in agriculture (Figure 1.1). This shift has accompanied the overall process of Indonesia’s economic development, the most recent phase reflected in the GDP per capita growth rate which has been almost constantly above 3% since the Asian financial crisis at the end of the 1990s; the exception occurred in 2020 due to the COVID-19 pandemic (OECD, 2021[1]).

1.1. Services in Indonesia’s international trade

Shifting the focus to Indonesia’s trade patterns, services account for 28% of gross exports and 30% of gross imports; they generate 37% and 49% of the value added embedded in total gross exports and imports, respectively.

Overall, the footprint of services in Indonesian trade is smaller than the average regional patterns as computed for ASEAN economies. On average, services across ASEAN countries cover more than 30% of gross trade flows, as well as 44% and 50% of the value added embedded in total gross exports and imports, respectively. These numbers are not far from the averages of the Asia-Pacific Economic Cooperation (APEC) economies but remain several percentage points below those of OECD countries, where services account for more than 40% of gross trade flows and approximately 60% of value added embedded in total gross trade (Figure 1.2).

Decomposing the origin of services value added embedded in Indonesian total gross exports reveals that the majority of value added is generated within the domestic sector. This is true for many other economies, including those with a large and diversified services sector such as the United States.

The evolution in nominal terms on Indonesia’s services trade as reflected by the balanced trade flows of the OECD-WTO Balanced Trade in Services (BATIS) database shows a consistent increase, interrupted only in 2020 due to disruptions caused by the COVID-19 pandemic (Figure 1.4).2 Since 2005, services imports doubled from around USD 15 billion to almost USD 30 billion in 2021. In 2019, they reached a peak of USD 36.6 billion. Similarly, services exports grew from USD 11 to USD 26 billion from 2005 to 2019, decreasing sharply to USD 15 billion in 2020 due to the contraction of travel and construction services during the COVID-19 pandemic (Box 1.1).

From 2005 to 2019, Indonesia’s services trade did not diverge much from the evolution of global services trade, accounting for approximately 0.6% of world services imports and 0.4% of world services exports during the whole period. However, these figures decreased by a decimal percentage point between 2019 and 2020, highlighting the stronger negative impact of the COVID-19 pandemic on Indonesia’s services trade relative to the rest of the world.

Figure 1.4. Indonesia services trade: Values and world shares

Note: Figures represent Mode 1, 2 and 4.

Source: OECD-WTO BATIS Database (balanced flows).

Box 1.1. The heterogeneous responses of services trade to the COVID-19 pandemic

The steep decrease in Indonesia’s aggregate services imports and exports between 2019 and 2020 hides a significant degree of heterogeneity across more granularly defined services sectors. The sectors experiencing the strongest trade disruptions were travel and construction services, for which imports and exports decreased by close to 50% for construction and 75% for travel services (Figure 1.5, Panels 1 and 2). This reflects the type of restrictions implemented during the COVID-19 pandemic, which limited the international movement of people, essential for trade in construction services and for business and personal travel.¹ A very different pattern appears for services with a high degree of digital tradability, such as finance, insurance services, and telecommunications, computer and information services which all experienced sustained import and export growth between 2019 and 2021 (Figure 1.5, Panels 1 and 2).

Although not captured by services trade estimates derived from the balance of payments statistics, Indonesia’s purchase and supply of services through the establishment of a commercial presence ― or Mode 3 services trade ― also increased in nominal terms when compared to the early 2000s (Box 1.2). Mode 3 services trade can be measured by the output of foreign affiliates of multi-national enterprises (MNEs) (e.g. UN et al. (2012[3]) Andrenelli et al. (2018[4])).3 Following this approach, the present study relies on the OECD Analytical Activity of Multinational Enterprises (AAMNE) database (Cadestin et al., 2018[5]) and presents Indonesia’s Mode 3 services imports as proxied by the output of foreign-controlled affiliates located in Indonesia, and Mode 3 services exports by the output of Indonesian MNEs affiliates abroad.

Box 1.2. Services modes of supplies as defined by the WTO

Mode 1. Cross-border trade

From the territory of one Member into the territory of any other Member. Example: A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.

Mode 2. Consumption abroad

In the territory of one Member to the service consumer of any other Member. Example: Nationals of A have moved abroad as tourists, students, or patients to consume the respective services. This mode is not covered in the STRI.

Mode 3. Commercial presence

By a service supplier of one Member, through commercial presence, in the territory of any other Member. Example: The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (e.g. bank, hotel group, construction company).

Mode 4. Movement of natural persons

By a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member. Example: A foreign national provides a service within A as an independent supplier (e.g. consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).

Source: World Trade Organisation, see here.

When considering broad sectoral categories, Mode 3 services imports and exports are consistently ranked above agriculture, but below manufacturing. While there is a clear upward trend in the evolution of Mode 3 services imports in nominal terms, which rose about five-fold between 2000-19, Mode 3 services exports have remained at around USD 20 billion since the early 2010s (Figure 1.6). Indonesia’s share of Mode 3 services trade increased slightly during the period 2000-19. In the case of Mode 3 services imports, the percentage share of world trade went from less than 0.6% for most of the 2000s, to more than 0.8% in 2019. The increase was less pronounced for Indonesia’s Mode 3 exports; the share of world trade grew from just above 0.1% to around 0.2% during most of the 2010s.

Figure 1.6. Mode 3 Indonesia services trade: Values and world shares

Source: OECD Analytical AMNE Database.

Services are important elements in digital trade. Defined in the Handbook on Measuring Digital Trade (IMF; OECD; UNCTAD; WTO, 2023[6]) as “all international trade that is digitally ordered and/or digitally delivered”, digital trade can be proxied using trade in digitally-deliverable services (including computer, telecommunications, financial, and business services) plus measures of digitally-ordered trade. In the absence of official statistics and following the estimation approach proposed by López González, Sorescu and Kaynak (2023[7]),4 digital trade accounted for 12% of Indonesia’s total exports in 2019, an increase from 9% in 1995. While these figures are higher than or very close to other economies in the region (e.g. Viet Nam or Thailand), they remain several percentage points below the OECD average, for which the share of estimated digital trade in total exports was 30% in 2019 (Figure 1.7).

1.2. Concluding remarks

Indonesia’s services shares of value added and employment are consistent with the country’s economic development. However, Indonesia trades relatively less services than its regional and global peers, and has a relatively lower services content in aggregate imports and exports. Prior to the COVID-19 pandemic, Indonesia’s contribution to global services trade flows had remained flat over the previous two decades, accounting for percentage shares that ranged from 0.2% to 0.8% of global trade, depending on the direction of the trade flow and the mode of services provision. Moreover, the Indonesian footprint in digital trade, where services play a crucial role, is relatively low with respect to the OECD average. These patterns highlight a significant potential to strengthen the role of services in Indonesia’s trade strategy.

Services trade is increasingly recognised as an important driver of economic growth and sustainable development (WTO and World Bank, 2023[8]; Nayyar, Hallward-Driemeier and Davies, 2021[9]). One reason for this is the role services play as intermediate inputs across all sectors of the economy. Easier accessibility to these inputs, either from a competitive domestic sector or from international markets, could improve the economic performance of Indonesian firms. The evidence presented in this chapter has shown that services value added in Indonesian manufacturing exports originates mainly from the domestic services sector. The observed higher services intensity of gross exports in regional peers reveals an opportunity for Indonesia to bolster its trade in services in support of its overall export performance.

References

[4] Andrenelli, A. et al. (2018), “Multinational production and trade in services”, OECD Trade Policy Papers, No. 212, OECD Publishing, Paris, https://doi.org/10.1787/16ec6b55-en.

[5] Cadestin, C. et al. (2018), “Multinational enterprises and global value chains: New Insights on the trade-investment nexus”, OECD Science, Technology and Industry Working Papers, No. 2018/05, OECD Publishing, Paris, https://doi.org/10.1787/194ddb63-en.

[11] Fiallos, A. and A. Liberatore (2023), Decoding global services trade: The power of the OECD-WTO BaTIS dataset, https://oecdstatistics.blog/2023/05/03/decoding-global-services-trade-the-power-of-the-oecd-wto-batis-dataset/.

[6] IMF; OECD; UNCTAD; WTO (2023), Handbook on Measuring Digital Trade, Second Edition, OECD Publishing, Paris/International Monetary Fund/United Nations Conference on Trade and Development, Geneva 10/World Trade Organization, Geneva, https://doi.org/10.1787/ac99e6d3-en.

[7] López González, J., S. Sorescu and P. Kaynak (2023), “Of bytes and trade: Quantifying the impact of digitalisation on trade”, OECD Trade Policy Papers, No. 273, OECD Publishing, Paris, https://doi.org/10.1787/11889f2a-en.

[9] Nayyar, G., M. Hallward-Driemeier and E. Davies (2021), At Your Service?: The Promise of Services-Led Development, World Bank, http://hdl.handle.net/10986/35599.

[10] OECD (2024), “OECD-WTO: Balanced International Trade in Services - EBOPS 2010”, OECD Statistics on International Trade in Services (database), https://doi.org/10.1787/08dba674-en (accessed on 23 August 2024).

[2] OECD (2022), OECD Tourism Trends and Policies 2022, OECD Publishing, Paris, https://doi.org/10.1787/a8dd3019-en.

[1] OECD (2021), OECD Economic Surveys: Indonesia 2021, OECD Publishing, Paris, https://doi.org/10.1787/fd7e6249-en.

[3] UN; IMF; OECD; Eurostat; UNCTAD; UNWTO; WTO (2012), Manual on Statistics of International Trade in Services 2010, United Nations publication, https://unstats.un.org/unsd/tradeserv/TFSITS/msits2010/docs/MSITS%202010%20M86%20(E)%20web.pdf.

[8] WTO and World Bank (2023), Trade in Services for Development: Fostering sustainable growth and economic diversification, WTO and World Bank, https://www.wto.org/english/res_e/publications_e/trade_in_serv_devpt_e.htm.

Notes

← 1.  Value added figures are computed from the OECD Trade in Value Added (TiVA) Database, while shares of employments across sectors are calculated using data from the International Labour Organization.

← 2.  The OECD-WTO BATIS database (OECD, 2024[10]) builds on official balance of payments statistics available at the national level and supplements these with estimates derived through different statistical and econometric techniques. This database provides the best possible estimates for bilateral services trade flows, offering state-of-the-art solutions to technical difficulties and limited availability of official statistics on bilateral services trade (Fiallos and Liberatore, 2023[11]). The present study relies only on the OECD-WTO BATIS database. While balanced values are often relatively close to the reported values, differences can exist due to over- or under-reporting.

← 3.  To capture Mode 3 services trade and avoid double counting with BOP reported trade flows, only locally sold output should be considered. However, due to measurement challenges total output is typically used.

← 4.  López González, Sorescu and Kaynak (2023[7]) identify digitally-delivered trade as the sum of trade in telecommunication, IT and other information services, publishing and audio visual, financial and insurance activities, and administrative and support services. Digitally-ordered trade is identified as digital inputs (all previously listed services plus information and communication technology goods) in non-digital sectors (all those not counted as digital).