THE IMPACT OF IMPORT COMPETITION ON INDONESIA'S TEXTILE AND APPAREL ...

377 Pages·2013·1.47 MB·English

THE IMPACT OF IMPORT COMPETITION ON INDONESIA’S
TEXTILE AND APPAREL INDUSTRIES: A DILEMMA BETWEEN
EMPLOYMENT AND EFFICIENCY

By
YUDHI DHARMA NAULY
FEBRUARY 2013

Dissertation Presented to the Higher Degree Committee
of Ritsumeikan Asia Pacific University
in Partial Fulfillment of the Requirements for the Degree of
Doctor of Philosophy in Asia Pacific Studies
ACKNOWLEDGEMENTS

First of all I wish to thank my academic advisers Professor Yokoyama Kenji for
his intellectual support, encouragement, and enthusiasm, which made this
dissertation possible, and for his patience in correcting both my stylistic and
methodological errors.

I am also grateful for critical comments and suggestion of Professor Kim Sangho
and Professor Eun Sup Lee, my internal and external examiners. Without their
essential support, this dissertation would not meet the required quality. I would
like to express my gratitude to Professor A. Mani, Professor Jeremy Eades and
Professor Yasushi Suzuki for providing valuable critics and comments which
instigate continuous improvement of this dissertation.

I gratefully acknowledge the contribution of my colleagues in Graduate School of
Asia Pacific Studies Doctoral Program of APU, with whom I exchanged ideas and
anxiety. I also extend my gratitude to staffs of the Academic Office at APU.
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TABLE OF CONTENTS

Chapter 1 Introduction ............................................................................................. 1
1.1. Research background .................................................................................... 1
1.2. Research problem ........................................................................................ 20
1.3. Research objectives ..................................................................................... 36
1.4. Research questions ...................................................................................... 39
1.5. Significances of the research ....................................................................... 42
1.6. Research methodology................................................................................. 51
1.7. Limitations of the research .......................................................................... 57
1.8. Contents of the dissertation ......................................................................... 62
Chapter summary ............................................................................................... 64
Chapter 2 The Evolution of Indonesia’s Trade Policy Regime ............................. 65
2.1 Colonial era .................................................................................................. 65
2.2 Soekarno era ................................................................................................ 76
2.3 Soeharto era ................................................................................................. 86
2.4 Trade Agreements ......................................................................................... 95
2.4.1. ASEAN Free Trade Area ....................................................................... 95
2.4.2. The World Trade Organization ............................................................ 101
2.4.3. ASEAN-China Free Trade Area .......................................................... 106
2.4.4. ASEAN-Japan Comprehensive Economic Partnership and
Indonesia-Japan Economic Partnership ........................................................ 111
2.4.5. ASEAN-Korea Free Trade Area ......................................................... 117
2.4.6. ASEAN-Australia-New Zealand Free Trade Area .............................. 120
2.4.7. ASEAN-India Free Trade Area ........................................................... 123
Chapter summary ............................................................................................. 127
Chapter 3 Literature Review ................................................................................ 130
3.1. Measuring import competition .................................................................. 130
3.2. Correlating import competition to number of worker and wages ............. 133
3.3. Defining efficiency ..................................................................................... 140
3.4. Correlating import competition to efficiency ............................................ 144
Chapter Summary ............................................................................................. 147
Chapter 4 Theoretical framework ........................................................................ 150
4.1 Underlying theories .................................................................................... 150
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4.2. Research models ........................................................................................ 161
4.3. Research hypotheses .................................................................................. 166
Chapter summary ............................................................................................. 179
Chapter 5 Research Methodology ....................................................................... 182
5.1. Research methodology............................................................................... 182
5.2. Inductive Reasoning .................................................................................. 185
5.3. Quantitative method and qualitative method ............................................ 186
5.4. Variables and data ..................................................................................... 192
5.5. Data envelopment analysis ........................................................................ 202
5.6. Linear correlation model ........................................................................... 212
5.7. Threshold autoregressive model ................................................................ 227
Chapter summary ............................................................................................. 236
Chapter 6 Analysis and Findings ......................................................................... 237
6.1. Assessment on import competition faced by textile and apparel industries
.......................................................................................................................... 237
6.2. Assessment on efficiency in textile and apparel industries ........................ 239
6.3 Linear regression analysis.......................................................................... 243
6.4. TAR model analysis ................................................................................... 269
6.5. Testing the TAR model ............................................................................... 293
Chapter summary ............................................................................................. 311
Chapter 7 Discussion of research findings .......................................................... 313
7.1. Discussion regarding import competition faced by textile and apparel
industries .......................................................................................................... 313
7.2. Discussion regarding efficiency assessment in textile and apparel industries
.......................................................................................................................... 315
7.3. Discussion regarding the correlation between import competition and the
number of workers in textile and apparel industries ........................................ 318
7.4. Discussion regarding the correlation between import competition and
wages in textile and apparel industries ............................................................ 319
7.5. Discussion regarding the correlation between import competition and
technical efficiency in textile and apparel industries ....................................... 320
7.6. Discussion regarding the correlation between import competition and scale
efficiency in textile and apparel industries ....................................................... 323
7.7. Discussion regarding foreign trade policy for textile and apparel industries
.......................................................................................................................... 327
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Chapter summary ............................................................................................. 332
Chapter 8 Conclusions and policy recommendation ........................................... 335
8.1 Answers to research questions.................................................................... 335
8.2 Conclusions of this research ....................................................................... 349
8.3. Policy recommendations ........................................................................... 355
Chapter summary ............................................................................................. 359
Bibliography ........................................................................................................ 362

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LIST OF FIGURES

Figure 1. 1 Cost of protection – Allocative efficiency ....................................... 9
Figure 1. 2 Cost of Protection – X-efficiency ................................................. 12
Figure 4. 1 Supply and demand models ........................................................ 163
Figure 5. 1 Radial efficiency measure .......................................................... 206
Figure 5. 2 Piece-wise linear convex isoquant ............................................. 208
Figure 5. 3 DEA model with VRS.................................................................. 210
Figure 6. 1 Change in import competition faced by textile and apparel
industry ......................................................................................... 238
Figure 6. 2 Changes in technical efficiency in textile and apparel industries
...................................................................................................... 242
Figure 6. 3 Changes in technical efficiency in textile and apparel industries
...................................................................................................... 242

LIST OF TABLES

Table 1. 1 The role of foreign trade in the economy of Indonesia .................. 14
Table 1. 2 Exports and Imports of Indonesia by selected trading partner 2010
.......................................................................................................... 17
Table 4 Summary of null hypotheses ............................................................. 188
Table 6. 1 Descriptive statistic of import competition faced by Indonesia’s
textile and apparel industries ......................................................... 239
Table 6. 2 Descriptive statistics of efficiency annual mean scores ............... 242
Table 6. 3 ADF test statistics ........................................................................ 256
Table 6. 4 White test and Breusch-Pagan test statistics ................................ 260
Table 6. 5 Durbin's alternative test and Breusch-Godfrey LM test statistics 263
Table 6. 6 Summary of analysis .................................................................... 312

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ABSTRACT

Free trade hurts. Surprisingly, this statement did not come from citizens of a
developing country. That was actually the summary of a 2010 poll conducted by
NBC/WSJ in the United States. It becomes apparent that the adversaries to the
free trade are everywhere. Conversely, governments believe free trade is
indispensable. These contrasting interests put governments in a dilemma.
Governments need import competition for promoting efficiency of their industries,
but it hurts the people. Free trade turns out to be a double-edged blade.

This dissertation tries to look deeper into this dilemma. This dissertation
particularly investigates the impact of import competition on the number of
workers, wages, and technical and scale efficiencies in Indonesia's textile and
apparel industries. This research departs from the idea that import competition
negatively affects the number of workers and wages, and it positively affects
technical and scale efficiencies. Moreover, it is assumed that each correlation is
governed by two regimes separated by a threshold. It is also assumed that the
impacts of import competition are larger in the regime beyond the threshold.
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Correspondingly, this study employs TAR model analysis.

This dissertation finds empirical evidence against the linearity in the
null-hypotheses of the correlations. This dissertation also finds that the dilemma
does not occur in the apparel industry as the threshold regarding the number of
workers and wages are larger than the threshold regarding the two efficiencies.
Unfortunately, the government of Indonesia needs to choose between inducing
scale efficiency and protecting the number of workers and wages in the textile
industry.
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Chapter 1 Introduction

This chapter aims to introduce the circumstances surrounding this research. This
chapter commences by describing the background of this research. This
background is followed by three sections which elaborate the research problems,
objectives which this research is intended to accomplish, and several questions
which keep this research in focus. The next section underlines the significance of
this research. Afterward, applied research methodology is presented. In addition,
this chapter also elaborates several limitations of this research. The last part of this
chapter specifies the content of this dissertation.

1.1. Research background
Nowadays, every country, to some extent, should involve in global trade. There is
no country in this world, as a reason, whose domestic producers can produce all
goods required in the domestic market. Some goods, which are not manufactured
domestically, have to be imported from abroad. There is also no country whose
domestic suppliers can sell all products at a lower price than foreign competitors.
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Many consumers will undoubtedly prefer lower price goods regardless who the
producers are. Additionally, there is no country whose domestic producers do not
appreciate foreign market openings. These domestic producers will grasp every
opportunity to export their products. These circumstances certainly also apply to
Indonesia. There is little doubt that Indonesia needs to trade with other countries.

Past experiences asserted that disengagement with global trade deteriorated the
economy of Indonesia. During the period between 1933 until the end of its
colonialization, the Dutch colonial administration who ruled Indonesia at that time
implemented Crisis Invoer Ordonantie (Dick, 2002, p. 158). This foreign policy
was intended to protect Dutch manufacturers by keeping imports from Britain and
Japan at bay. Sadly, undesirable impact arose as indispensable necessities became
luxurious imports due to limited supply. As a result, living standard in the colony
was deteriorated considerably. Similar situation happened when Indonesia was
occupied by Japanese Military during World War II. The Allied navy ran an
effective blockade which obstructed the exchange of goods and information
among Japan and its occupied territories, including Indonesia. This situation
turned Indonesia into an autarky. History noted that this period as the worst
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