Interaction of Trade in North Sumatra

Bode Haryanto, Hendrik Khosman, Asmiah Hasibuan, Fenny Wijaya, Putri Herfayati and Tubagus

Rayyan F. Sinuhaji

Chemical Engineering Department Faculty Engineering, Universitas Sumatera Utara, Medan 20155, Indonesia

Keywords: Gravity Model, Interaction, Export, Exchange Rate and Income.

Abstract: The purpose of this study is to analyze the factors that influence the interaction between North Sumatra and

Malaysia. The analytical model used in this study is the Gravity Model with export destination country

(Malaysia) and uses time-series data during the period 1983 - 2016. The estimation results show that North

Sumatra’s Export have no effect on Interaction. While Exchange Rate and Malaysia’s Economy have positive

and significant effect on Interaction.

1 BACKGROUND

One of the prerequisites for strengthening national

connectivity is the creation of connectivity between

Indonesian regions which is realized in the form of;

a) realization of an integrated system between the

national logistics system, national transportation

system, regional development, and communication

and information systems, b) identification of

transportation nodes and distribution centers, c)

strengthening intra-connectivity and between

corridors and international connectivity, and d)

improvement of communication networks and

information technology.

As an efficient, robust and integrated maritime

country the inter-regional linkages are the basis of

accelerating the improvement of people's welfare and

regional progress. Based on the Review of Maritime

Transport 2015 issued by UNCTAD, the index value

in 2004 was 25.88 and in 2015 it was 26.98. Sumatra

Corridor is one of the economic corridors set out in

MP3EI which consists of 11 economic centers,

namely Banda Sumatera Utara, Medan, Pekan Baru,

Jambi, Palembang, Tanjung Pinang, Pangkal Pinang,

Padang, Bandar Lampung, Bengkulu, and Serang.

Increased real national income is often not

followed by improving the quality of life of the

population. If population growth exceeds or equals

the growth of national income, then per capita income

can decrease or not change, and this cannot be called

economic development. Benchmarks for the success

of economic development can be seen from economic

growth, economic structure and the smaller income

inequality between residents, between regions and

between sectors. Development gap (income) between

regions will be able to cause serious socio-economic

problems.

Sumatra's economic corridor is one of the

strategic areas in the Western Region of Indonesia

which is geographically located in the Sumatra

corridor in the ALKI I sea shipping lane and facing

the Malacca Strait directly where most of the world's

major shipping passes and utilizes the channel as its

shipping lane. to expand the national and

international trade network. Sumatra Corridor has

high potential in the economic and social fields and

has a competitive advantage in the sectors of

plantations, marine fisheries, food crops, and trade.

All of these potentials are very prospective to be

promoted to markets in regional and international

scale

2 METODHOLOGY

The Gravity Model was first developed by Newton

(1687) to show that the interaction between two

particles is influenced by the mass and distance

between these particles. Based on this idea, then Jan

Tinbergen (1962) and Pentti Poyhonen (1963) used

the gravity model in international trade even without

a strong theoretical basis. Reinert (2008) suggests that

the use of the gravity model in international trade has

several alternative developments from the basic form

442

Haryanto, B., Khosman, H., Hasibuan, A., Wijaya, F., Herfayati, P. and F. Sinuhaji, T.

Interaction of Trade in North Sumatra.

DOI: 10.5220/0009216004420445

In Proceedings of the 2nd Economics and Business International Conference (EBIC 2019) - Economics and Business in Industrial Revolution 4.0, pages 442-445

ISBN: 978-989-758-498-5

of Newton's gravitational theory that has been

transformed into the following natural logarithms:

lnGFij = lnMi + lnMj – lnDij

The basic formula for calculating the number of trips

(trips) between Pi and Pj, namely trips originating

from region i and choosing the destination j region is:

= G

The functional basic approach of the gravity model

was also put forward by Jan Tinbergen in 1962. This

model is still relatively rough for use in the flow of

international trade. However, the form of function

that it proposes has been widely applied so that it is

called the function of "social interaction" because it

includes migration, tourism and direct investment.

The general law of gravity towards the social

interactions that he expressed in a notation is stated as

follows:





GF 

Mathematically, this Newton gravity model can

be formulated as follows.

)(

gG 

Based on the theory review and review of the

results of previous studies related to the purpose and

focus of the research, the research concept that was

built as follows:

Figure 1 Research Conceptual Framework

This gravity model is based on the theory of

export bases which can predict international trade

empirically. This model is developed from its name,

namely the prediction of trade volume between two

countries related in proportion to economic

development (in this case GDP or PNB) and

negatively related to distance (freight) (Rauch, 1999).

Baier and Bergstrand (2001) also made modifications

to the gravity model they used

4321





jiji

ERPPYY

aX 

Next it is specified as a model:

INTRKSI = β0 + β1 EXP + β2 KURS + β3 PDBM + ε

3 DISCUSSIONS

The estimation of interaction function between North

Sumatra and Malaysia can be seen in Table 1.

Table 1: Results of Estimation

North Sumatra Export

Based on table 1, the results of partial hypothesis

testing are as follows. The test results show that the

export coefficient value is 0.443074 and is not

significant (sig = 0.2286). These results indicate that

the increase in North Sumatra exports to Malaysia

had no effect on trade interactions between North

Sumatra and Malaysia.

It was found that exports did not have a

significant effect on changes in North Sumatra trade

interactions to Malaysia. Regions that have grown

and developed, their economic activities will expand

to all sectors and in the long run the expansion of

exports will determine the growth of the region. So

that it can be concluded that the export of North

Sumatra will increase to show that North Sumatra has

experienced an increase in the economy.

Baier and Bergstrand (2001) concluded that the

increase in trade was caused by an increase in the rate

of economic growth, while the reduction in tariffs and

reduction in transportation costs did not have a large

influence. When referring to this opinion, of course

increasing trade between the two countries will have

an impact on increasing interaction because Baier and

Bergstrand concluded that reducing tariffs and

reducing transportation costs had no impact. But

Hegre argues that having to be reviewed is more

important is not the relationship between the value of

bilateral trade and the size of the economy but rather

the efficiency of trade.

In addition, it should be noted that the exports

carried out by North Sumatra to Malaysia were also

Interaction of Trade in North Sumatra

443

stranded by exports carried out by companies located

in North Sumatra. This condition can cause that the

increase in exports does not have an impact on

increasing trade interactions between North Sumatra

and Malaysia.

The increase in exports can be caused by the

weakening of the rupiah so that the products exported

become cheaper so that both Malaysia increase

demand for products originating from North Sumatra.

This condition certainly has no impact at all on the

trade interactions between North Sumatra and

Malaysia.

Exchange Rate

Based on table 1, the results of partial hypothesis

testing are as follows. The test results show that the

exchange coefficient value is 104367.2 and

significant (sig = 0,000). These results indicate that

an increase in the nominal value of the rupiah against

US dollars (weakening of the rupiah) will have an

impact on increasing trade interactions between

North Sumatra and Malaysia.

It was found that the weakening of the rupiah

had a positive impact on the increase in North

Sumatra trade interactions to Malaysia. For

interactions with the weakening of the rupiah,

Malaysia has an interaction increase of 104367.2. The

gravitational theory applied in this study basically

wants to measure the interaction strength between

two or more regions. Abbas and Waheed (2015)

concluded that in the gravitational theory approach

showed an increase in trade caused by an increase in

the rate of economic growth. This opinion further

confirms that an increase in the weakening of the

exchange rate will lead to high trade interactions

between North Sumatra and Malaysia.

Malaysia GDP

Based on table 1, the results of partial hypothesis

testing are as follows. The test results show that the

Malaysian GDP coefficient value is 4.362812 and

significant (sig = 0,000). These results indicate that

the economic growth of Malaysia in this case an

increase in Malaysian GDP will have an impact on

increasing trade interactions between North Sumatra

and Malaysia.

It was found that an increase in Malaysia's GDP

would have an impact on increasing North Sumatra

trade interactions to Malaysia at 4.362812. According

to Hosseini (2013) in the gravity model, the

occurrence of trade between the two countries is more

due to the size of the GDP of the two countries and

the distance between the two countries. This opinion

is in line with the results of research that show that an

increase in GDP will have an impact on trade

interactions between North Sumatra and Malaysia in

addition to being close enough. However, Hosseini

also stated that international trade does not only occur

between the two countries but also between the two

companies in the country. This also contributed to the

increase in Malaysian GDP which had more impact

on increasing trade interactions with North Sumatra.

Hosseini argues that in addition to the government

conducting transactions with other countries,

companies in the country also conduct transactions

with companies in other countries so that this

condition causes factors in international trade no

longer the same as the assumption that international

trade is only trade between two or more countries but

trade between companies in various countries.

Differences in transactions between companies in

North Sumatra and Malaysia also influence changes

in trade interactions.

4 CONCLUSION

Based on the results of the analysis, there are several

things that can be concluded from the results of this

study, including:

1. North Sumatra exports to Malaysia do not affect

the North Sumatra trade interactions to Malaysia

2. Exchange rates have a positive and significant

effect on North Sumatra's trade interactions

3. Malaysia GDP has a positive and significant

effect on North Sumatra trade interactions to

Malaysia

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