EXCHANGE RATES ELASTICITY OF EXPORTS IN ASEAN: THE ROLE OF GLOBAL VALUE CHAINS

Abstrak 
Perdebatan tentang pelemahan hubungan antara nilai tukar dan ekspor telah meningkat dalam beberapa tahun terakhir, dan meningkatnya tren perdagangan terkait rantai nilai global (Global Value Chain/GVC) diasumsikan menjadi sumber melemahnya hubungan di antara keduanya. Dengan menggunakan data spesifik industri manufaktur, studi ini bertujuan untuk menyelidiki dampak GVC pada hubungan Nilai Tukar Efektif Riil (Real Effective Exchange Rate/REER) dan ekspor di empat negara ASEAN. Estimasi dilakukan menggunakan regresi Least Square Dummy Variable (LSDV) untuk periode sampel dari tahun 2009 hingga 2015. Hasil penelitian ini menunjukkan bahwa di Filipina, koefisien elastisitas nilai tukar ekspor dan partisipasi ke GVC tidak signifikan secara statistik. Sebaliknya di Indonesia dan Malaysia, secara rata-rata, integrasi ke GVC dengan berbagai pengukuran akan menurunkan elastisitas ekspor terhadap perubahan REER sekitar 70% sampai 89%. Lebih lanjut, estimasi terhadap data Thailand dan kelompok empat negara ASEAN menunjukkan bahwa partisipasi pada GVC mengubah nilai dan tanda elastisitas ekspor terhadap REER. 
Kata Kunci: Ekspor, Nilai Tukar, Rantai Nilai Global 
  
Abstract 
The debate on the issue of the disconnected relationship between exchange rates and exports has risen in recent years, with the growing trend of Global Value Chain (GVC)-related trade assumed to be the source of the weakening link between them. By employing manufacturing industry-specific data, this study aims to investigate the impact of GVC on the nexus of the Real Effective Exchange Rate (REER) and exports in four ASEAN countries. The estimations are conducted using Least Square Dummy Variable (LSDV) regression for the sample period from 2009 to 2015. The findings of this study suggest that for the Philippines, the coefficients of exchange rate elasticity of export and participation to GVC are not statistically significant. Conversely, in the case of Indonesia and Malaysia, integration to GVC, with various measurements, will reduce the REER elasticity of exports by around 70% to 89% on average. Furthermore, the estimation data on Thailand and a group of four countries implies that the presence of GVC changes both the value and the sign of REER elasticity of exports. 
Keywords: Export, Exchange Rates, Global Value Chain 
JEL Classification: F14, F15, F31


INTRODUCTION
It has been suggested that there may be a weakened relationship between exchange rates and exports.
This concern arose after the 2008 global financial crisis and some failed experiences using the exchange rate depreciation policy to increase exports.
The United Kingdom depreciated its currency against the US Dollar by more than 25% in the first quarter of 2009, but the policy did not improve the export performance (Ollivaud et al., 2015).
Also, Giugliano (2015) mentioned that Japan depreciated its Yen against the US Dollar by around 20% in 2012 with the hope of stimulating export-led growth. However, this policy also did not bring any substantial increase to Japanese exports.
Traditional model (such as the Mundell-Fleming model) may not be able to capture this weakening relationship due to its assumption regarding quality of the product, and sources of intermediate input. The theories assumed that the quality of the product in international trade is the same.
Nevertheless, there are differences in product quality that make the exchange rate pass-through to export price incomplete (Mallick & Marques, 2016).
Next, classical theories also assumed that exported products were entirely produced using domestic resources. Nonetheless, with the globalization wave, production processes across countries have become more interrelated. This trend is also supported by the fact that shares of intermediate goods trade were 50% of the total world trade in 2017 (UNCTAD, 2019), and the ratio increased to 62% of the total trade value in the world during 2018 (see Figure 1). An empirical study, Amiti et al. (2014), claimed that large exporters also tended to be involved in importing a large scale of intermediate inputs.
The growing number of imported intermediate goods has generated the idea that the correlation between exchange rates and exports is also influenced by Global Value Chain (GVC) (Ollivaud et al., 2015). GVC is defined as the production arrangement in which different stages of production may be done in several countries (World Bank Group et al., 2017). The existence of GVC has been widespread in recent years due to technological improvements as well as a reduction in political and trade barriers (Amador & Cabral, 2016). In terms of trade statistics, the presence of GVC has weakened the analytical interpretation of conventional export and import statistics (Ahmad et al., 2017). A typical example of GVC is the production of the iPod (Dedrick et al., 2010). The products are being assembled in China, while their components are coming from many countries. Looking at the conventional trade data, it may be inferred that China has a comparative advantage in iPod production. However, the value added by Chinese workers only contributed to about 2% of the total product's price (Timmer et al., 2014 REER describes the competitiveness of a currency in the international market. An increase in REER means appreciation of exchange rates while a fall in this index means depreciation (Krugman et al., 2015).
In standard macroeconomics theory, change in the exchange rate will influence exports through the expenditure-switching mechanism (Obstfeld & Rogoff, 2007). This means that when there is depreciation, the price of exported goods will be more competitive; therefore, demand from abroad increases. The magnitude of change in export volume due to the change in the exchange rate is reflected in the exchange rate elasticity of exports (Krugman et al., 2015). proposed a framework to decompose gross export into value-added export.
The rows in the I- O table show Where c, s, and t denote country, industry, and time, respectively, represents export volume, is the industry-specific real effective exchange rate, is foreign output, represents real output from the manufacturing sector as the proxy of initial production, is the level of integration to GVC, is industry-specific fixed effect, is year fixed effect, and , symbolize error term. Lastly, , , , , , , and are the parameters.
The equation (7) will be estimated for each country and a group of four countries using the Least Square Dummy Variable (LSDV) estimation.
The utilization of LSDV can control timeinvariant variables by using industry and time fixed effects (Soejachmoen, 2016).
Furthermore, for the GVC variable, this study will use three different proxies.
The first two are the GVC participation index and position index developed by Koopman, Wang, & Wei (2014). The other proxy refers to Tan et al.'s (2019) study by using the ratio of foreign valueadded to gross exports.  Table  2 summarizes the regression results for Indonesia. Since there is a heteroscedasticity problem, this regression was conducted using robust standard error.

Indonesia
As presented in Table 2, the estimated coefficients on the lagged value of industry-specific REER are negative and significant at the 5% and 10% levels of confidence only in columns (1) and (3) Therefore, when the exchange rate depreciates, the price of Indonesian exports in the foreign market will be lower. Consequently, the demand for exports will increase.   Ahmed et al. (2016) and Bang & Park (2018).

Malaysia
The regression result for Malaysia (Table 4)   Previous empirical studies support the analysis above. Abeysinghe and Yeok (1998) found that in Singapore's case, in the presence of high import contents, exports were not adversely affected by exchange rate appreciation. Kang & Dagli (2018) (1)

The Philippines
In the case of the Philippines, regression results in Table 5

Group of Four ASEAN Countries
After running the estimation for each country, this study also assesses the effects of GVC on the exchange rate elasticity of exports in the group of four ASEAN countries. The purpose of this estimation is to see whether the results of the individual entity and the group will be the same. As presented in Table 7, the output in columns (1) and (2)