The impact of trade reforms and the multi-fibre arrangement on Indonesian clothing and textile exports in the 1980s

Abstract

This study analyses how macroec.onomic and trade reforms and government assistance made it possibl, for Indonesia to become a major exporter of clothing and textiles in the 1980s. It analyses the impact the removal of the MFA quotas would have on Indonesian clothing and textile exports. The collapse of petroleum prices in dominance of petroleum exports in the the early 1980s ended the Indonesian economy. The macroeconomic and foreign trade regimes, however, had to be reformed to enable non-petroleum manufactured products to become an alternative source of export revenues. The reforms succeeded in reducing the domestic inflation rate, reducing the level of protection on imports and devaluing the real exchange rate. 'True protection' and 'true subsidy' indicate that the reforms shifted policy biases from import-substitution to promoting exportables. Exporters were also supported by duty exemptions and drawback facilities provided by the new trade regime. These were found to be critical sources of the effective rate of assistance to exporters. The effective rate of assistance for exports became higher than assistance for domestic sales. The low cost of labour in Indonesia was an important source of competitiveness for labour-intensive exports from Indonesia. The demand for Indonesian clothing and textile exports has been affected by the Multi- fibre Arrangement (MFA). MFA restrictions on established exporters, notably Hong Kong, the Republic of Korea, and Taiwan, enabled Indonesian clothing and textile exports to enter MFA markets in the early stages of Indonesia's export growth for these products. In the mid-1980s, however, as quotas began to be binding on Indonesia, the MFA become a constraint on Indonesian clothing textile exports. With negotiations in the Uruguay Round taking place, most likely to phase out the MFA in early the 2000s, a multi-country trade model was developed to estimate the impact of the removal of the MFA on world clothing exports in 1988. The results show that world clothing exports would increase markedly if the MFA were phased out. Clothing producers in all MFA exporting countries, including Indonesia, would gain if the MFA were removed. The producers in Indonesia would receive a welfare gain of about US$48 million after an MFA rent loss of as muc h as US$80 million. This results from an increase in total exports from Indonesia of US$208 million (27 per cent of total exports from Indonesia) if the MFA were removed. In addition, the removal of the MFA would also increase the producers export capacity and efficiency as the 'quota market' and resulting rent seeking activities were removed. Consumers in MFA importing countries would gain more than producers in those countries. The principal group that would be less well off would be consumers in non-MFA countries who would suffer a small loss with the removal of the MFA.