West Kalimantan-Sarawak border trade: Gravity model

Abstract

This study provides a comprehensive analysis of the border economy by focusing on the border trade conducted through the regional port of entry at Entikong (West Kalimantan, Indonesia)-Tebedu (Sarawak, Malaysia), by employing time-series secondary monthly data from January 1998 to September 2006. The vector error correction model exercise for the model indicated that the export equation was the only one in the system in which the error correction term (ECT) is statistically significant. This suggests that export solely bears the brunt of short-run adjustments in bringing about the long-run equilibrium in West Kalimantan, where it acts as the initial receptor of any exogenous shocks that disturb the equilibrium system. The ECT coefficient of -0.839 represents the speed of adjustment of export towards equilibrium. The findings from the Gravity Model confirmed that three out of five independent variables are significantly related to cross-border trade. Of these three variables, economic size has a positive effect while income per capita difference and the ASEAN Free Trade Area have negative long run effects on export. The research suggests that West Kalimantan should focus its efforts on pursuing higher economic growth to lower the income per capita difference with Sarawak. Economic cooperation with Sarawak regarding complementarities should be considered. Enhancement of border economic cooperation between West Kalimantan-Sarawak can be used as leverage for extending the cooperation into wider areas across Borneo Island.