The political economy of trade policy of Indonesia and Turkey towards Muslim countries in the OIC

Abstract

Despite the fast-growing literature on the political economy over the last three decades, several important issues remain under-examined. This thesis addresses three substantive issues concerning the roles of democratic and non-democratic institutions in the economy. First, this thesis aims to examine the trade intensity of Indonesia and Turkey with OIC member countries. Second, the thesis aims to examine the changing specialization and comparative advantage of Indonesia’s and Turkey’s bilateral trade with their trading partners. Third, this research aims to examine the effect of democracy, governance, openness, FTAs, and RTAs on Indonesia’s and Turkey’s bilateral trade with OIC member countries. In terms of three substantive issues of examination, the results show that Turkey has higher trade intensity with OIC member countries than Indonesia on both overall OIC and individual. The average value of Indonesia’s Trade Intensity Index with overall OIC countries from 2001 until 2018 was more than 1 but has a decreasing trend throughout observation. Note that, if Trade Intensity Index more than 1, it indicates that, Indonesia’s trade intensity with OIC countries is greater than would be expected, given their importance in world trade. Meanwhile, Turkey’s trade intensity is even much higher than Indonesia’s. Since the average value of Turkey’s Trade Intensity Index with OIC countries from 2001 until 2018 was more than 2. Turkey’s trade intensity with OIC countries has an increasing trend but continues to decline for the last four years. In specialization and comparative advantage, Indonesia and Turkey were able to maintain their export of primary products and unskilled-labor intensive products between three points of decades in 1996, 2006 and 2016. Meanwhile, Turkey is more concerned to increase its technology-intensive products than Indonesia. As for the trade determinants examination of Indonesia’s and Turkey’s trade toward OIC countries, the examination results are as follows. In the Indonesian case and Turkey case, most trade determinants on both Indonesia and Turkey are insignificant. In contrast, most of determinants on OIC’s partners have significant effects namely democracy, governance, openness, and trade agreements. In detail, the democracy of OIC partners has a positive and significant effect. Furthermore, voice and accountability, political stability, government effectiveness, and control of corruption have a positive and significant effect on bilateral export. Meanwhile, the rest of the two indicators, such as regulation quality and rule of law have a negative and significant effect on bilateral export. Finally, joint membership in the same Free Trade Agreements and Regional Trade Agreements in both-side have positive and significant effect on bilateral trade flow. Since joint membership is effective, then this might result in trade creation inside trade block and increase bilateral export flow. Nevertheless, if there is only one country joins Free Trade Agreements and Regional Trade Agreements, then there is no trade diversion from Indonesia and Turkey or their OIC partners toward other countries outside their trading bloc. Therefore, there is no significant effect to increase or decrease Turkey’s exports to the OIC countries. In brief, for the Indonesian and Turkey case, some results were in line with the hypothesis. In conclusion, Indonesia and Turkey need to maintain their trade intensity to OIC countries and keep with the trade intensity index, which recently is relatively high. Indonesia and Turkey need to focus on technological deepening in production and exports. Finally, trade policies such as Free Trade Agreements and Regional Trade Agreements are still relevant as modern trade policies. OIC countries’ democracy and governance are effective as a part of trade policy. Therefore, the level of democracy and governance quality has to be enhanced to increase the bilateral export of Indonesia and Turkey toward OIC countries.

Keywords: trade intensity, specialization, comparative advantage, gravity model, RTA, FTA