Quarterly Report - Kadin Indonesia


Quarterly Report - Kadin Indonesia

Topic Report4 th Quarterly ReportIssued by Indonesia Kadin SecretariatCooperation between KADIN Indonesia and JETROBy Dr. Tulus TambunanKadin IndonesiaJanuary 2006

I. Development of Textile IndustryDevelopment of Textile Industry and itsCompetitiveness and Its Role as a Key EmploymentSource in IndonesiaJanuary 2006After more than forty years of import quotas, the textiles and clothing (say, T&C)sector has become subject to the general rules of the General Agreement on Tariffs andTrade (GATT) from 1 January, 2005. Liberalization has been controversial because T&Ccontribute to employment in developed countries, particularly in regions wherealternative jobs may be difficult to find. In the European Union (EU), for example, thesector is dominated by small and medium-sized enterprises concentrated in a number ofregions that are highly dependent on this sector (Commission of the EuropeanCommunities, 2003). T&C are also among the sectors where developing countries havethe most to gain from multilateral trade liberalization. In fact, the prospect ofliberalization of the T&C sector was one of the reasons why developing countriesaccepted to include services and intellectual property rights in the Uruguay Round(Reinert, 2000).Especially the clothing industry is both labor-intensive and low wage industry and itoffers entry-level jobs for unskilled labor in developed as well as developing countries.Job creation in the sector has been particularly strong for women in poor countries, whopreviously had no income opportunities other than the household or the informal sector(Nordås, 2003a). It is also a dynamic, innovative sector, depending on which marketsegments one focuses upon. In the high-quality fashion market, the industry ischaracterized by modern technology, relatively well-paid workers and designers and ahigh degree of flexibility. The competitive advantage of firms in this market segment isrelated to the ability to produce designs that capture tastes and preferences, and evenbetter in addition to cost effectiveness. The core functions of firms servicing this marketsegment are largely located in developed countries and often in limited geographicalareas or clusters within these countries. The Emilia-Romagna district in the so-called“Third Italy” is one of the most prominent and prosperous T&C clusters in the world,while Italy is the second largest exporter of T&C when intra-EU trade is included.However, this market segment has also seen a significant amount of relocation ofproduction and outsourcing to lower-cost producers, often in geographical proximity tothe major market (Navaretti et al., 2001).Moreover, it is a sector where relatively modern technology can be adopted even inpoor countries at relatively low investment costs. These technological features of theindustry have made it suitable as the first rung on the industrialization ladder in poorcountries, some of which have experienced a very high output growth rate in the sector(e.g. Bangladesh, Sri Lanka, VietNam and Mauritius). These characteristics, however,Quarterly Report - January 2006 1Kadin Indonesia – www.kadinindonesia.or.id

have also made it a footloose industry that is able to adjust to changing market conditionsquickly. At the same time, the T&C industry has high-value added segments wheredesign, research and development (R&D) are important competitive factors. The high endof the fashion industry uses human capital intensively in design and marketing. The sameapplies to market segments such as sportswear where both design and materialtechnology are important. Finally, T&C are closely related both technologically and interms of trade policy. Textiles provide the major input to the clothing industry, creatingvertical linkages between the two (Nordås1, 2004).Table 1 presents the current general condition of T&C industry in Indonesia. Totalnumber of firms in the industry from all size categories, i.e. small, medium and large, isestimated to be around 2.6 thousand units with a total investment at around 132.4 trillionrupiah in 2003. Although traditionally Indonesia has a high degree of specialization in theproduction of textile and clothing, the T&C industry in the country is not so promising; atleast not in the short-run. Many domestic obstacles generate sustained supply bottleneckin the country’s T&C industry, particularly limited access to bank credit, lack of newtechnologies embodied in modern textile producing machineries and tools, high costs inprocurement of raw materials, and underdevelopment of domestic supporting industries.This sustained supply bottleneck is reflected by the continued decline of output share ofT& C in the country’s total output of manufacturing industry and production capacityutilization in the country’s T&C industry, as can be seen, respectively, in Table 2 andFigures 1.Table 1. Current General Condition of Indonesian T&C Industry, 2001-2003DescriptionUnitPeriod2001 2002 2003Total companies Unit 2,665 2,646 2,654Investment billion rupiah 130,823.11 132,101.08 132,354.91Production capacity ton 6,037,448 6,079,874 5,789,834Total workers person 1,219,325 1,182,212 1,182,871Production value billion rupiah 89,417,00 82,411,85 82,285,32volume ton 5,156,842 4,200,006 4,193,552Export value million US$ 7,648 6,889 7,033volume ton 1,717,430 1,758,675 1,773,244Import value million US$ 2,440 1,825 1,673volume ton 1,259,863 1,048,760 962,280Source: Astono and Dwi Bayu R. (2005).2KadinIndonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Further, Table 3 indicates year on year manufacturing growth by industry. As can beseen, in the pre-crisis period (1993-1997), output in textile, leather and footwearindustries as a group grew about 5.4%, and after the crisis or between 2000-2003 it grewat a slightly lower rate at 5.1%. Of course, these industries performed much better ascompared to manufacturing industries as a whole which has a decelerating trend ingrowth from 10.0% to 3.8%.Table 2. Utilization of Production Capacity in Selected Industries (%) (1999- 2004)Industry 1999 2000 2001 2002 2003 2004Metal, machinery & 42.6 46.3 50.5 51 52.8 55.7maritimeLand transportation andaerospace18.2 33.5 39.8 42.2 32.5 33.5IT & electronics 51 65 65 65 65 66T&C 84 81 81 65.1 66.6 70.6Diversity 46 54.3 55.4 55.2 59 59.4Source: Department of Industry and Trade (Depperindag) (website).Figure 1. Output share of T&C in total output of manufacturing industry inIndonesia.252015%10502000 2001 2002 2003 2004Source: see Table 2Quarterly Report - January 2006indonesia.or.id3Kadin Indonesia – www.kadin-

Although the global value chains in T&C are primarily buyer-driven, foreign directinvestment (FDI) plays an important role at the production stage. In many developingcountries, foreign affiliates dominate such exports, and some producers have emerged asmajor transnational players, controlling production plants in several countries. Based onUNCTAD data, during the period 2002–2004, a total of 275 FDI projects related to themanufacturing of T&C were recorded.10 As Table 4 shows, 38% of these projects werein developing Asia. The leading destinations in this region were China (with 48 projects),India (9), Vietnam (8) and Thailand (8). The CEE countries accounted for another 29%,with Bulgaria (18), Hungary (13) and Poland (7) as the main targets (Table 5). LatinAmerica and the Caribbean and Africa attracted 13% and 6% of all projects, respectively.Table 3: Year on year manufacturing growth by group of industryin Indonesia (%)1993 2000Sector 1997 2003(%) (%)Manufacturing Industries (Mfg) 10.0 3.8Petroleum & Gas 2.1 -3.8Petroleum Refinery 1.7 -5.1Natural Gas 2.7 -1.9Mfg. excl. Petroleum & Gas 11.1 4.7Food, Beverage, Tobacco 16.2 2.4Textile, Leather, Footware 5.4 5.1Wood & Wood Products 2.2 1.0Paper Products 10.6 2.6Chemicals & Rubber 8.8 11.7Cement, Non-Metalic 1.4 9.6Iron & Basic Steel 7.9 -0.6Transport Eq. Mach. & App. 5.2 9.8Misc. Mfg Products 9.5 18.6GDP 7.1 3.8Source: from Table 1 in Aswicahyono and Feridhanusetyawan (2004)(data BPS).With respect to Indonesia, Tables 6 and 7 show, respectively, the allocation ofdomestic and foreign investments by groups of industry in Indonesia, and Figure 2 showsthat T&C industry in Indonesia faces heavy competition besides from food industries (seeTables 6 and 7) but also from metal and electronics industries as destination of FDI.4KadinIndonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Table 4. FDI projects in T&C industry, 2002–2004, by host region(Number of projects; %)Destination region No. of projects Share of totalDeveloping Asia-Pacific 106 38.5%Central and Eastern Europe 80 29.1%Latin America and the Caribbean 36 13.1%North America 20 7.3%Africa 16 5.8%Western Europe 14 5.1%Developed Asia-Pacific 3 1.0%Total 275 100.0%Source: UNCTAD database.Table 5. FDI projects in T&C industry, 2002–2004, by host economy(Number of projects; %)Host economyNo. of projectsChina 48Bulgaria 18United States 16Hungary 13Brazil 12Viet Nam 8India 9Thailand 8France 8Poland 7Uzbekistan 7Morocco 6Slovakia 6Mexico 6Croatia 6Russian Federation 6Other host economics 97Total 275Source: UNCTAD database.5KadinIndonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Table 6: Approved Domestic Direct Investment (PMDN) per month (ISIC based) in Industry: 1 January-30 November 2005(Rp. Billion)*January February March April May June July August September October NovemberP I P I P I P I P I P I P I P I P I P I P IIndustrymanufacture 10 769.9 7 1,353.2 14 1,950.0 15 2,166.4 8 4,003.8 11 1,795.7 15 3,659.4 6 828.7 5 1,370.6 14 4,548.5 5 939.3Food (1) 5 573.6 3 1,089.8 6 535.7 7 1,707.3 1 325.6 6 1,066.6 1 261.8 2 537.2 1 123.2 4 998.7 2 471.4T&C (2) 2 8.0 1 73.8 - - 2 24.2 1 81.2 1 414.9 1 77.1 - - - - 2 10.5 - 13.2Leather (incl.footwear) (3) - - 1 3.6 - - - - - - - - - - - - - 20.5 1 3.8 - -Wood (4) - - - 28.2 1 22.0 1 101.0 - 2.0 - 0.7 1 63.3 - - - - - 360.8 - 70.0Paper (incl.publication) (5) - 35.0 - - - 25.2 - 188.6 2 717.0 1 150.0 1 2,570.5 - 212.8 - - 3 817.8 - 94.9Chemical (6) 2 9.0 - 99.3 1 69.9 - - 1 134.5 - - 3 368.0 1 8.2 2 170.0 - - - 8.3Rubber andplastic (7) 1 67.4 - - 2 49.0 3 34.9 1 2,501.2 - 2.9 4 67.8 1 42.0 - 109.7 - - - 26.8Non-meta (8)l - - - - - 579.4 - 66.9 - - 1 120.0 1 21.8 - - 1 703.4 2 2,275.2 - 137.5Basic metal,machinery &electronics (9) - 59.9 1 20.0 3 335.6 1 40.7 2 242.3 2 40.6 3 77.7 1 21.0 1 91.0 1 74.7 3 76.7Medical app.,optic, measuretools &watch.(10) - - 1 36.0 - - - - - - - - - - - - - - - - - -Transportationtools and others(11) - 7.0 - 2.5 1 333.2 1 2.8 - - - - - 151.4 1 7.5 - 152.8 1 7.0 - 40.5Others (12) - - - - - - - - - - - - - - - - - - - - - -Note: * new project + expansion existing investmentSource: BKPMQuarterly Report - January 2006 Kadin Indonesia – www.kadin-indonesia.or.id7

Table 7: Approved Foreign Direct Investment (PMA) per month (ISIC based) in Industry: 1 January-30 November 2005 (US$million)*January FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBERP I P I P I P I P I P I P I P I P I P I P I32 755.9 23 1,747.2 34 432.4 51 206.1 27 248.4 46 243.3 41 314.8 28 407.5 45 512.2 42 167.5 25 386.2(1) 6 89 2 13.7 8 71.7 4 35.9 4 102.7 10 71.4 5 40.3 - 29.9 6 38.9 10 62.0 1 27.2(2) 7 4 6 5.6 7 2.8 11 24.8 7 9.9 4 27.5 8 10.4 10 9.8 8 17.0 8 14.2 6 5.6(3) 2 1 - 9.0 - - 2 5.1 - 0.6 1 18.1 - - - 1.0 3 32.4 2 6.1 1 12.9(4) 1 5 2 1.0 3 4.7 1 0.3 - 12.6 3 6.6 1 1.2 1 38.1 - 0.5 - - 1 5.0(5) - 1 1 0.2 2 199.7 3 19.0 - - 2 1.1 - - 2 3.1 2 2.1 1 0.1 1 1.0(6) 3 553 2 1,661.0 2 3.0 4 7.8 3 16.2 7 18.3 3 19.8 4 175.3 6 58.2 2 42.5 2 265.1(7) 4 12 1 1.3 4 7.7 2 8.1 3 16.0 6 68.4 1 1.9 1 5.7 4 32.0 2 0.9 2 7.8(8) - - 1 0.4 1 24.6 - 0.4 - - 1 5.4 1 12.8 1 0.5 - - 2 3.6 - 3.5(9) 7 81 4 6.8 6 117.9 16 38.6 8 56.4 7 12.0 11 138.8 6 114.1 9 28.3 10 21.9 9 41.5(10) - - - - - - - - - 11.9 - - - 0.2 1 0.6 1 3.4 - - - -(11) 1 10 2 47.0 - - 4 64.8 1 17.8 2 13.7 6 76.1 2 29.2 3 246.9 4 15.7 1 16.2(12) 1 1 2 1.2 1 0.3 4 1.3 1 4.3 3 0.8 5 13.3 - 0.2 3 52.5 1 0.5 1 0.4Note and Source: see Table 3Quarterly Report - January 2006 Kadin Indonesia – www.kadin-indonesia.or.id8

Figure 2. Trend of development of FDI in the two largest recipient industries:T&C and BasicMetals/Electronics (% of total approved projects in all industrial groups)3025201510501998 1999 2000 2001 2002 2003 2004 2005T&CBasic metals & electronicsNote: for 2005, only until JuneSource: Kadin-Jetro Data Bank (2-6).II. Export DevelopmentTime series data from WTO show that developing countries’ share of worldmanufacturing value added has risen substantially in the past two decades. Measured interms of current prices, this rise largely corresponds to the declining share of countries inCentral and Eastern Europe. However, the rise in developing countries’ share is heavilyconcentrated in Asian countries, which now account for about two-thirds of developingcountry value added. Moreover, the increase in developing countries’ share of worldmanufacturing value added is much lower than the increase in their share of worldmanufactured exports. While developing countries have succeeded in increasing theirshare in world manufacturing value added in several industrial sectors, these increaseshave been concentrated in a few sectors include T&C and transport equipment, petroleumproducts, basic metals, tobacco and non-metallic mineral products.T&C exports are very important for many developing countries, including Indonesia.However, in the last few years, world export of T&C has experienced a negative growth.Data from WTO show that while growth trend of total output in manufacturing industryfor the 2000-2004 period is 3.8%, that of T&C is about -2.2%. Recently, the growth ofproduction of T&C is also lower than that of total output of manufacture; during 2003-2004, total output of manufacture increased by 19.07% as compared to 8.44% of T&C.By presenting annual percentage change of world merchandize exports of the most9KadinIndonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

important product groups, Figure 3 shows that exports of T&C grew much lower than theworld average of all the product groups.Figure 3. World Merchandize Exports by Product Group, 2003(Annual percentage change)Source: WTO (2004a)Figures 4 and 5 show the exporting countries most affected by import quotas ofrespectively clothing and textile established by the United States, the EU and Canada. Aquota impact indicator has been designed to measure the extent to which a country hasactually used the quota to its limit and how many quotas have been applied to eachcountry. China is most affected by quotas in the T&C sector. In clothing, the Republic ofKorea’s exports were also significantly bound by import quotas, followed by other mainexporters from Hong Kong, China, and countries in South Asia and South-East Asia.Figure 4. Ten countries most restricted by clothing quota, 2004 (quota impact indicator), Rep.Hong Kong, ChinaBangladeshViet NamIndonesiaMacau, ChinaIndiaPakistanPhilippines10 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: ILO (2005).Figure 5. Ten countries most restricted by textile quota, 2004 (quota impact indicator), Rep.IndonesiaViet NamTurkeyBangladeshBelarusSource: ILO (2005).In the world market for T&C, Indonesia must compete not only with otherproducing/exporting countries within the developing countries such as China, Vietnamand Bangladesh, but also with several developed countries including those which in factare also at the same time markets for Indonesian T&C exports, such as EU. As anempirical illustration, Table 8 shows that in both groups, i.e. exporting as well asimporting T&C countries, the EU is the leader. In 2003, its T&C export market share isclose to 35% (with 15.6% in its export to outside the region). This rank is followeddirectly by China with almost 16%, and the share of Indonesia is only 1.7%. In the importside, the share of EU is more than 29%, followed subsequently by the US and China with,respectively, 10.2% and 7.9%.11 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Table 8: Leading exporters and importers of textile in the World, 2003(bill. US$ and %)Source: WTO (2004a).Data from WTO also indicate that although T&C is among the important exportedgoods of Indonesia, the share of these goods in the country’s total exports has alwaysbeen lower as compared to other countries of which T&C are also among their importantexport items. As shown in Table 9, the share of Indonesian textile in its total merchandize12 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

export ranges from 4.8% to 6% during the 1995-2003 period, compared to, for instance,Bangladesh with around 7% to almost 12% or Egypt from 4.5% to 16.5%. A similarcondition is with respect to Indonesian export of clothing. As can be seen in Tables 10and 11, Indonesia is also not included in the top 5 big suppliers to the EU market and thecountry has a very small share in the world market. Also the share of this item inIndonesia’s total merchandize export is relatively small as compared to other importantexporting countries.Table 9. Selected Textile exporting countries, 1990-03 (bill. US$ and %)13 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: WTO (2004a).Table 10. Leading exporters and importers of clothing, 2003 (bill. US$ and %14 Kadin Indonesia – www.kadin-Source; WTO (2004a).Quarterly Report - January 2006indonesia.or.id

Table 11. Clothing exporters of selected countries, 1990-03 (bill. US$ and %)Source: WTO (2004a)15 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Probably the internal problems faced by the T&C industry in Indonesia as mentionedbefore have made Indonesia as a small country in the T&C global trade. It also revealsfrom database from the Department of Industry and Trade (Depperindag) that the T&Cexport share in Indonesian total exports of manufactured goods has declined steadily(Figure 6). Similar picture for the clothing export (Figure 7). If these declining trendscontinue, it is not impossible that Indonesian T&C industry will loss its share in the worldmarket. The next and probably more important effect would be a serious loss inemployment, as T&C industry together with furniture and shoes are the most labourintensive industries that have been depending besides on domestic demand also on exportfor their growth sustainability (Table 12).Figure 6. Export share of Textile in Indonesia’s total export of manufacturing.%161412108642019931994199519961997Source: see Figure 1.1998199920002001200220032004 (Feb)Figure 7. Export share of Clothing in Indonesia’s total export of manufacturing%18161412108642019931994199516 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id199619971998199920002001200220032004 (Feb)

Source: see Figure 1Table 12. Export of the four (4) most labor intensive industries in Indonesia1990- value(mill.US$)- %1996- value(mill.US$)- %2000- value(mill.US$)- %2001- value(mill.US$)- %2002- value(mill.US$)- %Textile Furniture Garment Shoes Total1,47032.653,50534.23,50530.73,20230.02,89630.5Source: Kuncoro (2005) (data BPS).3387.59529.31,51813.31,42413.41,51215.92,00144.43,59135.14,73441.44,53142.53,94535.469415.42,19521.41,67214.61,50614.11.14810.34,503100.0010,243100.0011,429100.0010,663100.009,501100.00The T&C sector can be seen as a supply chain consisting of a number of discreteactivities. Increasingly the supply chain from sourcing of raw materials via design andproduction to distribution and marketing is being organized as an integrated productionnetwork where the production is sliced into specialized activities and each activity islocated where it can contribute the most to the value of the end product. When thelocation decision of each activity is being made, costs, quality, reliability of delivery,access to quality inputs and transport and transaction costs are important variables.The supply chain in the T&C sector is illustrated by Figure 8. The dotted linesrepresent the flow of information, while the solid lines represent the flow of goods. Thedirection of the arrows indicates a demand-pull-driven system. The information flowstarts with the customer and forms the basis of what is being produced and when. It isalso worth noticing that information flows directly from the retailers to the textile plantsin many cases. The textile industry produces for the clothing industry and for householduse. In the former case there is direct communication between retailers and textile millswhen decisions are made on patterns, colors and material. In the second case textile millsoften deliver household appliances directly to the retailers.At each link in the production chain to the left of the distribution centre in Figure 8,there are usually several companies. In order to make goods, information and paymentsflow smoothly, a number of logistics and business services are needed. Depending on theQuarterly Report - January 2006 17 Kadin Indonesia – www.kadinindonesia.or.id

size and development of the host economy, such services are provided by the lead firm inthe supply chain or independent service providers in the more advanced countries.An example of integrated supply chain from Sri Lanka illustrates how buyers canbenefit from low production costs in developing countries while at the same timeensuring efficient operation of the supply chain in the face of poor financial, physical andinstitutional infrastructure. According to Kelegama and Foley (1999), 15% of Sri Lankanproducers' inputs are provided by the buyers without payment (i.e. the Sri Lankansuppliers are paid anet price for the final output), 55% are bought by the local clothingproducing firm from a supplier nominated by the buyer, while 30% is bought by the localproducer without any restrictions from the buyer. A similar pattern is found in Vietnam,where importers place orders with East Asian intermediaries that provide raw materials,machinery and services such as quality control and packaging to Vietnamese exporters.Figure 8: The supply chain in the T&C sectorSource: from Figure 1 in Nordås1 (2004).The extent to which the T&C industry participates in international productionnetworks can also be illustrated by the so-called vertical specialization index. Thismeasures the share of foreign value-added embodied in exports, or put differently, theimported intermediate inputs contained in exports as a share of total exports. The indexcaptures one important feature of international supply chains: parts, components andsemi-finished goods cross the border several times before the final product reaches theconsumer. This feature of vertical specialization implies that tariffs have a multiplicativeeffect on costs, which makes trade driven by vertical specialization particularly sensitiveto tariffs. Nordås1 (2004) has estimated the vertical specialization index for the T&Csector for a number of countries, including Indonesia, and the result is depicted in Figure9.As can be seen, the poorer and smaller countries in the sample have a highervertical specialization index than the larger and richer ones, indicating that being part of aproduction network could be important for entering the export market for small and/orpoor countries.Quarterly Report - January 2006 18 Kadin Indonesia – www.kadinindonesia.or.id

19 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Figure 9: Vertical specialization share in exports of T&C, selected countries and territories, 2001Source: from Figure 2 in Nordås1 (2004).Quarterly Report - January 2006 Kadin Indonesia – www.kadin-indonesia.or.id20

International trade in T&C has been subject quota restrictions since the 1950s. However,in 1 January 2005, quota-free T&C trade started with the expiration of the Agreement onTextiles and Clothing (ATC). With this new global market situation (although the EU adoptsquota again recently against T&C from China), competition among exporters for post-ATCmarket shares will be even more intensified across the globe, and this will of course createmore opportunities but also more serious threat for the Indonesian T&C.As shown before, the value of world trade in clothing had exceeded that of textiles fromthe early 1990s. During the 1990-2003 period the shares of the EU (excluding intra-EUtrade) and the US in world textiles import declined and increased, respectively. As regardsclothing, the shares of the EU and the US also declined and increased, respectively in thesame period. Thus, the US is not only a faster growing market; it has also remained by far thelargest single destination for textiles, worth US$ 17.2 billion in 2003, and clothing, worthUS$ 68.1 billion.II.1. U.S. MarketBoth the US and the EU have established monitoring programs following the lifting ofquotas. Based on ILO report in 2005, aggregate imports for textiles (SITC code 65) fromselected countries to the US market are presented in Table 13. The countries included are themajor exporters to the US as well as selected developing countries for which textile exportsto the US are an important source of export revenue and employment. The last three columnsshow import values for the first five months of 2004 and 2005 and the percentage changefrom the first five months of 2004 to the same period in 2005. Among the major exporters,China and India have both gained market share since quotas were lifted (i.e. their exportshave grown faster than total world exports to the US), Mexico and the EU15 have lost marketshare and Pakistan has maintained its market share. Turning to the smaller developingcountry exporters, the Philippines, El Salvador, Malaysia and Sri Lanka have suffered adecline in export value, while Cambodia has experienced the largest gain, although from alow level. In addition, some of the smaller Caribbean and Latin American countries increased theirexports many times over, but their total export value during the first quarter of 2005 was still belowUS$1 million (not shown in the table).Next, Table 14 presents data on US clothing imports (SITC code 84). Again it is clearthat the countries that were most restricted by quotas (China and India) are the countries thathave gained market share since the abolition of quotas. It is likely that some of the gainsexperienced by China reflect a rerouting of exports that previously went through Hong KongSpecial Administrative Region and Taiwan, China, which have both experienced a decline inexport values in the post-ATC period. The rise of China is therefore somewhat smaller than itwould appear from a first reading of the data, but it is still quite dramatic. It is encouragingthat Bangladesh, Sri Lanka, Cambodia and Indonesia have been able to increase their marketshares, while Pakistan and Thailand have been able to maintain theirs.Quarterly Report - January 2006Kadin 21 Indonesia – www.kadin-indonesia.or.id

Table 13. Imports of textiles to the United States from selected countries(US$ millions)Source: ILO (2005) (data from United States Department of Commerce and International Trade Commission).Quarterly Report - January 2006Kadin 22 Indonesia – www.kadin-indonesia.or.id

Table 14. Clothing imports to the United States from selected countries(US$ millions)Source: ILO (2005) (data from United States Department of Commerce and International Trade Commission).II.2 EU MarketTable 15 may give some idea about the importance of export of T&C, including fromdeveloping countries, for Western European countries (WEC). As can be seen, the marketshare of these products in this region has always been very small. In 1995, the share was2.8% for textile and 3.6% for clothing, and declined to 1.9% and 3.4% respectively in 2003.The world market share of T&C also declined during the same period. Further, Tables 16 and17 present more interesting facts, namely that intra-trade of respectively textile and clothingwithin the WEC or the 15 members of EU is much larger than inter-trade between the regionand the rest of the world. Recent data from WTO as shown in Table 16 indicate that intratradeshare of textile within the WEC is almost 70% or within the EU is 62%. Anotherinteresting fact is that Indonesia is not included in the top 5 big suppliers outside EU;Indonesia has only less than 1% share in textile imports of EU, compared to, for instance,Quarterly Report - January 2006Kadin 23 Indonesia – www.kadin-indonesia.or.id

China with 5.3%. This fact may suggest that Indonesian textile faces a heavy competition notonly from exporting countries within the EU (or WEC) but also from Asia such as China,India, Pakistan and Japan. Whereas, with respect to clothing, as shown in Table 17, the intratradefor this particular product within the WEC is almost 51% and within the EU is about40.4%; and the Indonesian share is also very small.Table 15. Merchandise imports of Western European Countries by Product, 2003(billions US$ and %)Source: WTO (2004a)Quarterly Report - January 2006Kadin 24 Indonesia – www.kadin-indonesia.or.id

Table 16. Textile imports of EU (15) by region and supplier, 2003(billions US$ and %)Quarterly Report - January 2006Kadin 25 Indonesia – www.kadin-indonesia.or.id

Source: WTO (2004a).Table 17. Clothing imports of EU (15) by region and supplier, 2003(billions US$ and %)Quarterly Report - January 2006Kadin 26 Indonesia – www.kadin-indonesia.or.id

Source: WTO (2004a).Quarterly Report - January 2006Kadin 27 Indonesia – www.kadin-indonesia.or.id

III. Employment, Unemployment and the Role of T&C IndustryOfficial prediction from BAPPENAS with respect to labor market developmentissued in mid.2005 is presented in Table 18. It indicates that open unemployment wasexpected to reach at about 10.22% of total work-age population in 2005. However, recentprediction from BPS has a different picture. The open unemployment was predicted at11.6 million people in October and it would reach 12% (or more) by the end of 2005. Thepredicted number of unemployed people in October is higher by 700,000 people than in 7month before at about 10,9 million persons (or 10.26% of total work-age population at105.8 million people in that period). The BAPPENAS prediction in Table 18 mayoverlooked the possible higher unemployment effect of domestic economic shocks suchas oil subsidy reduction in 2005.Table 18. Predicted Economic Growth and Labor Market Development, 2003-2009(000 000 persons)Total populationWork-age population/labor force- New comersWorking populationNew created employmentEconomic growth (%)New employment by 1%economic growthOpen unemployment- number- %Sumber: Bappenas2004 2005 2006 2007 2008 2009216.4103.971.3493.720.915.13178,00010.259.86219.0105.951.9895.732.015.50365,00010.229.65221.5107.962.0198.322.596.08426,0009.648.93223.96110.012.05101.242.926.70436,0008.777.97226.5112.12.09104.573.337.20463,0007.536.72226.95114.232.13108.393.827.64500,0005.845.11One of the reasons why trade policy regarding the T&C sector has been a politicallysensitive issue is the importance of these activities in employment. Employment datafrom the ILO are presented in Table 19. It should be noted that the figures refer to paidemployment and do not capture self-employment in the sector, which in some countriescan be significant.The T&C industry in Indonesia from all size categories (i.e. small, medium and large)is one among the most important industries in Indonesia from employment creationperspective. Official prediction shows that this industry employs about 3.2 millionpeople. A large-scale T&C factory needs, on average, one person to keep five machinesrunning. This means that a large T&C company that normally has more than 300machines with production of one billion meter of cloth per month would need at least 60workers. This number does not yet include workers for other directly related activitiessuch as packing, machines maintenance, storing raw materials, etc. All these directrelated activities need on average about 140 persons.T&C small and medium sized companies on average have 50 to 300 machines whichcan absorb about 25 to 150 machine operators. Production capacity of this group ofQuarterly Report - January 2006 28 Kadin Indonesia – www.kadinindonesia.or.id

enterprises is about 150,000 meter cloth per month that needs about 140 workers(Kompas, 2005a). Recent data show that T&C SMEs are able to employ 490,000 peoplewith production value of Rp 14.7 trillion and export value of US$ million (Kuncoro,2005).Ironically, though T&C is a key industry in Indonesia which is expected to play asignificant role not only with respect to employment creation but also export growth, thisindustry, as explained before, is not without many problems, of which two main ones arelack of modern machineries which have been responsible for low productivity andcapacity production in the industry, and high energy cost, especially electricity. Thislatter one has caused many companies, especially SME to close down. For instance,during the whole year of 2005, a total of 27 out of 220 textile factories in KecamatanMajalaya (Kabupaten Bandung in West Java) stopped their activities because they couldnot pay electricity anymore. From 193 factories which are still in operation, only 40 ofthem are in good condition, while the other 153 firms operate in half capacity (Kompas,2005b).Table 19: Employment in T&C Industry (thousands)29 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: ILO (2004) and UNIDO, various issues.* Data based on establishment surveys.*** Data based on administrative records.' ISIC revision 2 code for 1995, ISIC revision 3 for subsequent years.'' Data are from UNIDO.IV. Indonesian Competitiveness on T&CWhile the globalization of T&C production has been driven by many factors, chiefamong these are labor costs and the quota system established by the MultifibreArrangement (MFA) in 1974. But, since agreement has been reached about tradeliberalization in T&C (ATC), the only concern about the competitiveness of IndonesianT&C is thus its labour costs and other determinant factors. No doubt that the difference inlabour costs in T&C industry between countries plays a significant role in determiningthe global competitiveness of the industry. As can seen in Figure 10, from the samplecountries Indonesia together with Pakistan are two countries with the lowest labor costsin clothing industries. Shafaeddin (2002) also shows that China has an advantage over mostcountries, but it is no longer a low-wage economy as compared with India, Bangladesh and30 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Indonesia (in the latter case mainly due to devaluation after the Asian crisis)(Table 20).Nevertheless, the non-coastal areas of China show lower wages than in the coastal areaswhere export activities are presently located (Sachs and Woo (2000).Figure 10: Labour costs in the Clothing industry, selected countries, 2000(Average hourly wages in US dollars)Source: UNCTAD (2005).But, the question now is: how come that despite Indonesia is much better than Chinain this respect, China is stronger than Indonesia in T&C global market? Of course, notonly labour costs, others such as quality and design of products, distribution, ways ofmarketing and many others also play a role in explaining the difference performance ofT&C exports between Indonesia and China.Methodologically, the trade performance or global competitiveness of a country canbe examined by analyzing a number of indicators/indices. Among these is the TradePerformance Index (TPI) constructed by International Trade Center (ITC) fromUNCTAD/WTO. It is a tool for assessing and monitoring the multi-faceted dimensions ofthe export performance and competitiveness of countries and their principal exportsectors. At present, the TPI covers 189 countries and 14 different sectors. It reveals howcompetitive and diversified a particular export sector is in comparison to those of othercountries. The TPI covers basic performance characteristics, bringing out gains and lossesin world market shares and shedding light on the factors behind these changes, as well asmonitoring the diversification of export products and markets. Although the TPI islimited by its purely quantitative approach, it does provide a systematic overview of a31 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

country’s sectoral export performance and comparative and competitive advantages. 1 TheTPI consists of 24 quantitative performance indicators. For ease of reference, theseindicators are presented in absolute terms and serve to rank the 189 countries covered.Two composite rankings are calculated, one for the overall current position (CurrentIndex) of the country and sector under review and the other for the change inperformance (Change Index). The Current Index is based on five criteria: the value of netexports, per capita exports, world market share, and the diversification of products andmarkets. These are indicators of a country’s current position, essentially a static view orphotograph of the country’s most recent export performance. The Change Index coversthe following five criteria: change in world market share (and its components), the trendof import coverage by exports, specialization in dynamic products, and changes inproduct and market diversification. These are indicators of a country’s change in exportperformance that capture major trends over the recent past. In sum, the TPIpositions the export sectors of 184 countries on an export competitiveness ladder, bothfrom a static and a dynamic perspective.Table 20: Ratio of hourly labor cost of selected countries to China in T&C industry,19981 The TPI is based on the world’s largest database of trade statistics, COMTRADE, developed by theUnited Nations Statistics Division (UNSD). Thanks to the coverage of COMTRADE (about 90% of worldtrade broken down by 3,500 products at the SITC 5-digit level), the TPI is calculated not only for countriesthat report their own trade data, but also for over one hundred primarily low-income countries that do notreport national trade statistics. The export performances of these countries have been reconstructed on thebasis of partner country data or mirror statistics. Although this approach has its shortcomings, it doesgenerate a wealth of information that would be otherwise unavailable.Quarterly Report - January 2006 32 Kadin Indonesia – www.kadinindonesia.or.id

Source: Shafaeddin (2002) (data USITC)The results of TPI for Indonesian T&C are given in Tables 21 and 22, and Figure 11presents the composite rankings of international competitiveness of Indonesian exports ofT&C and other Indonesian key export goods based on static indicators (current index)and the change in world market share (percentage points) as well as other dynamicindicators (change index). Position 1 in the ranking refers to the best performance out of189 countries. These indicators are grouped vertically into a general profile, the currentposition in 2001, and the change between 1997 and 2001, with both their values andrankings summarized in one column for each sector. The figure indicates clearly how thevarious sectors rank on a global scale and which among Indonesia’ export sectors shownhere is the most competitive in terms of its current position in 2001 or the evolution overthe period from 1997 to 2001. As can be seen, current and change indices vary amongsectors. In the electronic group, the current index of IT and consumer electronics in 2003is 20 with its change index 27, and that of electronic components is 17 (in 2002: 18) andits change index 82. In the textile group, the current index of textile in 2003 is 11 (in2002: 12) with its change index 80 and that of clothing is 10 (2002: 9) with its changeindex 114.Table 21. Trade Performance Index of Indonesian T&C by indicator, 1999-200333 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

IndicatorsGeneral Profile• Value of exports (US$000)• Trend of exports (1999-2003) p.a.• Share in national export• Average annual change in per capita exportTextileClothingValue Rank* Value Rank2,919,7853%5%-4%95894,101,117-1%7%-4%10894Position in 2003 for current index• Share in world market• Product diversification (no. of equivalent products)• Product spread (concentration)• Market diversification (no. of equivalent markets)• Market spread (concentration)1.62%43%25%171715111.70%44%4%14774410Change in 1999-2003 for change index• Change in product diversification• Change in product spread• Change in market diversification• Change in market spread82505171701106466105104Indicators included in Figure 4• Absolute change of world market share (% points p.a.)• Current index• Change index-0.1300%1071180-0.1520%11310114* ranking out of all (112) exporting countries (number).Source: UNCTAD/ITC.Table 22: Relative Change of World Market Share (WMS) of Indonesian T&CExport and Its Sources. (1999-2003)Relative change of WMS (% p.a.)TextileClothingValue(%) Rank* Value(%) Rank-6.25-6.43Sources:• Competitiveness effect p.a.• Initial geographic specialization p.a.• Initial product p.a.• Adaptation p.a.-3.36-0.50-1.24-1.15* ranking out of all (112) exporting countries (number).Source: UNCTAD/ITC.93807762-4.11-0.52-1.13-0.6790688765ITC also conducts the so-called country market analysis profile, which includes thenational export performance. This provides an overview of the export performance ofdeveloping countries and economies in transition in terms of the product composition oftheir exports, the dynamics of international demand, and growth patterns of their leadingexport products. The national export performance analysis shows: the leading exportproducts of each country and their extent of concentration or diversification, the productsfor which each country has out/under performed other countries and increased/decreased34 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

its international market share, the extent to which the leading export products arepositioned in growing or declining markets, and the market segments in which theleading export products are positioned in terms of unit values. Conceptually, the nationalexport performance is based on trade data for the years 1997 to 2001 reported by 184countries and territories to the COMTRADE database of the UN Statistical Division,which together account for more than 90% of world trade.Figure 11 Trade Performance Index of Indonesia export of T&C and Other SelectedProducts, 2003 (in US$ million)Source: UNCTAD(ITC).This analysis yields two types of information. The first information is presented inFigure 12 showing the national export performance of Indonesia vs. international demandfrom the dynamic perspective. The figure presents the performance of Indonesia’s 20leading export product groups. It shows the export value of the products under review(size of the bubbles), and it compares the national export change in world market share(horizontal axis) to the growth of international demand (vertical axis). The figure alsoprovides an overview of the concentration of Indonesian exports: the appearance of oneor a few comparatively large circles shows that exports are highly concentrated. Inaddition, the figure indicates the average nominal growth of world imports (horizontalreference line) over the 1997 to 2001 period, which was 4.5% p.a. Moreover, the verticalline (i.e. the line of constant world market share) divides the figure into two parts.Exports of products to the right of this line have grown faster than world imports andthereby increased their share in the world market. Conversely, products to the left of theQuarterly Report - January 2006 35 Kadin Indonesia – www.kadinindonesia.or.id

vertical line have seen erosion of their world market share. The figure also provides anoverview of the concentration of exports. The appearance of one or a few comparativelylarge circles shows that exports are highly concentrated. The vertical and the horizontalreference lines are of particular interest from a trade development perspective, since theydivide the chart into four quadrants with different characteristics. The quadrants havebeen labeled as follows:1) “Champions”: winners in growth markets (upper right, first quadrant): these are theexport products for which Indonesia has performed very well, such as palm oil and itsfractions and natural rubber. These are particularly dynamic products, which aregrowing faster than world trade in general and for which Indonesia has outperformedworld market growth and increased its share in world imports. Indonesia as anexporter of these products has proven its international competitiveness over the late1990s. Trade promotion efforts for these products are less risky, as there are nationalsuccess stories, which can serve as reference points.Figure 12: Indonesian Export Performance vs. International Demand from theDynamic Perspective: 1999-200336 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: ITC (UNCTAD/WTO37 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

2) “Underachievers”: losers in growth markets (upper left, second quadrant): theseproducts such as women’s suits, jackets, dresses skirts, etc represent particularchallenges for trade promotion efforts in Indonesia. While international demandhasbeen growing at above-average rates, Indonesia has been falling behind. Its exportshave either declined or grown less dynamically than world trade. As a result,Indonesia has been losing international market share. In general, the bottleneck is notinternational demand, but rather on the supply side. For these products, it is essentialto identify and remove the specific bottlenecks, which impede a more dynamicexpansion of exports.3) “Declining sectors” (lower left, third quadrant): 2 the export prospects for theseproducts tend to be gloomy, for example woven fabrics of synthesis. World imports ofthese products have been stagnating or have actually declined, and the market share ofIndonesia has gone down. Trade promotion efforts for product groups in this categoryface difficulty. Indonesia needs to adopt an integrated approach to take into accountbottlenecks both on the supply and on the demand side.4) “Achievers in adversity”: winners in declining markets (lower right, fourth quadrant):products in this quadrant are characterized by growing shares of exporters in worldimport markets, which are declining or growing at a below average rate, such as otherpaper and paperboard in the Indonesian case. From a trade promotion perspective,niche-marketing strategies are required to encourage this positive trade performancedespite the overall decline in these markets.The second information presented in Figure 13 showing the national exportperformance of Indonesia vs. international demand from the structural perspective. Thisfigure is to some extent similar to Figure 12. The size of the bubble for example is alsoproportional to the country’s export turnover. The key difference is in the horizontal axis,specified here as the country’s world market share for the corresponding product group.The vertical axis is also different, since it plots the average growth of world imports inreal terms (i.e. in volume) over 1999-2003. The structural figure is closer to the originalBoston Matrix model, also known as the growth-share model. This figure is “structural”in nature because market shares do not vary much over time and world imports expressedin volume terms are, unlike those expressed in nominal (i.e. in value), not affected byfluctuations in prices and exchange rates. As a result, the overall picture does not changemuch from one year to the next. Figure 12, by contrast, reflects the most recent changesin market shares. The two figures are therefore complementary. Bubbles to the right ofthe vertical axis represent those products in which the country is specialized. That is,those products in which the country has, according to Balassa, a comparative advantage(see next chapter). As in Figure 12, Figure 13 is also divided into four quadrants withdifferent characteristics. The quadrants have been labeled as follows:2 It should be noted that the criterion for distinguishing growing and declining products is the averagenominal growth rate of total world imports from 1999 to 2003, which was at around 4% to 4.5% annually.Quarterly Report - January 2006 38 Kadin Indonesia – www.kadinindonesia.or.id

1) Stars (upper right quadrant): specialization in high growth sectors: Products located inthis quadrant are those that are growing faster than world trade in real terms. They arealso products in which Indonesia is specialized and have captured relatively highworld market shares, such as such as palm oil and its fractions, footwear, women’ssuits and many others. Indonesia as an exporter of these products has proven theirinternational competitiveness over recent years.2) Emerging products (upper left quadrant): low market share in high growth sectors.These products, such television camera, as present particular challenges forIndonesia’s trade promotion efforts. While international demand has been growing atabove average rates, Indonesia is a relatively minor player with a relatively lowmarket share. This may be because Indonesia has only recently started developingexports in these products or it may be because Indonesia is specialized in nicheswithin the product group in question. For these products, Indonesia needs to identifystrategies to increase its market share in these high growth sectors, by analyzing firstsupply-side bottlenecks faced by the country and its opportunities for horizontaldiversification.3) Snails (lower left quadrant): low market share in low growth sectors. Export prospectsfor these products, in which no products are included from Indonesia, tend to be bleakas world imports have been stagnating or declining and the country has a low marketshare in these products. Trade promotion efforts for these products face an up-hillbattle. Trade strategies for these products need to take into consideration bottleneckson both the supply (production) and demand side.39 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Figure 13: National Export Performance vs. International Demand from theStructural Perspective: Indonesia: 1999-2003Source: ITC(UNCTAD/WTO)40 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

4) Traditional Products (lower right quadrant): specialisation in low growth sectors:Products in this quadrant, e.g. parts and accessories of video, are those in whichIndonesia has a high market share (i.e. highly specialised) but where world demand isdeclining or growing at below the world average rate. Trade promotion efforts need tofocus on niche marketing strategies in order to identify and increase Indonesia’sspecialisation in the best performing products within an overall declining productgroup.A similar analysis can be found from Aswicahyono and Feridhanusetyawan (2004),as presented in Figure 14. The vertical axis in the figure indicate the dynamics of thesector in the world market, the horizontal axis measures change in Indonesia's shares ofthe world trade due to the competitiveness factor, while the size of the bubbles reflectsthe important of the sector to Indonesia. The figure reveals an interesting story behind thelag of dynamism in Indonesian exports. First, due to increases in the oil price on theworld market, the share of mineral exports in the world market has increasedconsiderably during the period (1995-2001). Unfortunately, Indonesia missed theopportunity to ride the wave of growing demand. Second, even though Indonesia is stillcompetitive in many products, notably wood products, these products have been laggingbehind and their share in the world market has been shrinking. Third, Indonesia has beenlosing competitiveness in two labor intensive industries, miscellaneous manufacturingand leather products. Fourth, Indonesia have gained competitiveness in fast-growingsectors such as electronics, electronic components and transport equipment.Figure 14: Indonesia’s Export Competitiveness (1995-2001)41 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: from Figure 1 in Aswicahyono and Feridhanusetyawan (2004).Another way often adopted to analyse the global competitiveness of a country for aparticular product (or group of products) is the so-called Revealed ComparativeAdvantage (RCA) Index according to the Balassa formula. The index compares the shareof a given product in Indonesian exports with the share of this product in world exports.Values above 1 indicate that Indonesia is specialized in the product under review, orIndonesia’s global competitiveness for that product is higher than the world average.Values below 1 indicate that Indonesia is not specialized in the product review, or itsglobal competitiveness is lower than the world average.As presented in Table 23, estimates of UNCTAD show interesting findings:Indonesia’s level of global competitiveness based on this index is low for electronics, buthigh for T&C. From all products included in the table, Indonesia has the highest RCA notfor T&C but for wood products, although for this group of products Indonesia was in the18 th place in the world market. Specifically on T&C, Table 24 below presents RCAindices of selected exported textile products of Indonesia for the period 1996-2002 whichindicate that within a product group, level of competitiveness varies among differentitems. For instance, RCA of clothing as a group is 1.98 in 2003 (see Table 23); however,RCA varies among different kinds of clothing.Table 23: RCA of Indonesian Main Exported Goods: 2003Product Rank RCA42 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Wood productsTextilesIT & consumer electronicsLeather productsElectronic componentsMineralsClothingMisc. manufacturingChemicalsProcessed foodNon-electronic machineryBasic manufacturesTransport equipmentFresh foodSource: UNCTAD/ITC18202337474950616668747778973.261.890.801.650.502.621.980.600.561.620.210.640.111.74Table 24: RCA of Selected Indonesia Exported Textile Products\SITC ProductYearcode(319996 1997 1998 1999 2000 2001 2002digit)651652653654655Textile threadCotton/weavingWeaving from fabricated fibreOther weavingKnitting embroiderry3.511. Special thread & textile & its 0.64 0.63 0.63 0.81 0.84 0.76 0.69658841productsOther textile products1.633.341.072.740.943.571.433.891.523.871.673.841.363.36842 Non-knitting cloth for man and 2.89 2.72 2.52 3.33 3.46 3.37 3.03843845boyNon-knitting cloth for woman and3.91.822.641.353.111.524.422.043.592. cloth for man and boyOther non-finished textileproductsSource: Depprind and UNIDO.Nordås1 (2004) also did RCA predictions on T&C from a large number of countries.As can be seen in Table 25, for textile the Indonesian RCA is 1.98, much lower thanmany of its competitors such as India, Hong Kong China, Bangladesh, Cambodia, SriQuarterly Report - January 2006 43 Kadin Indonesia – www.kadinindonesia.or.id

Lanka, Macao China, Egypt and China. The global expansions of textile from thesecountries are indeed a serious threat for the export growth or at least the global marketshare sustainability of Indonesian textile. With respect to clothing, the table indicates thethreats from these countries are more serious.Theoretically, competitiveness correlates positively with export, or hypothetically, itcan be assumed that higher competitiveness will generate higher export, and visa versa.However, many countries have been found to have exported as well as imported similarproducts at the same time. Trade data from the WTO show that since the last, say, twodecades, intra-trade among countries (i.e. trade within a sector/product) has increasedmore rapidly than inter-trade (i.e. trade among different sectors/products). This impliesthat, although Indonesia has comparative advantages in certain products, it does notalways mean that Indonesia is a net exporter of these products. Thus, the question iswhether Indonesia tend to be net exporting (or net importing) country of products inwhich Indonesia are highly specialized (i.e. products with RCA >1)? The index which isoften used to measure this trade tendency is called the Trade Specialization Index (TSI).The index compares the trade balance (export-import) of Indonesia of a given productwith the country’s total trade (export plus import) of this product. Values above 0.5 up to1 indicate that Indonesia tends to be a net exporting country for the product under review,and values below 0.50 and close to -1 indicate that Indonesia tends to be a net exportingcountry for the particular product.Table 25: RCA of T&C by Producing/Exporting Countries44 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: Nordås1 (2004),Based on ITC calculation for the same individual products presented in Table 23,Figure 15 shows the ranking of these products based on TSI. Although no distinction isbetween negative and positive values, it is obvious that after wood products, textile hasthe highest ranking; much higher than clothing has. While, Table 26 shows the calculatedindex for the same products presented in Table 24. As can be seen, the index varies notQuarterly Report - January 2006 45 Kadin Indonesia – www.kadinindonesia.or.id

only by period but also amongst products. In some textile products, Indonesia tends to bea net exporting while for others a net importing.Figure 15. TSI of Indonesian Key Exported Products, 2003Source; Table 23.Table 26: TSI of Indonesian Selected Textile ProductsSITC ProductYearcode (3digit)19996 1997 1998 1999 2000 2001 2002651652653654655657658841842843845Textile threadCotton/weavingWeaving from fabricated fibreOther weavingKnitting embroiderrySpecial thread & textile & itsproductsOther textile productsNon-knitting cloth for man andboyNon-knitting cloth for woman0.540.430.72-0.63-0.69-0.520.871.01.00.990.990.510.340.66-0.64-0.69-0.480.850.990.991.00.980.60.360.65-0.78-0.73-0.410.791.01.00.990.990.710.520.73-0.76-0.41- girlKnitting cloth for man and boyOther non-finished textileproductsSource: Deprind and UNIDO.V. Impact of T&C Trade Liberalization46 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

A very important question now regarding the long-term development prospect ofT&C industry in Indonesia is the impact of T&C global trade liberalization on IndonesianT&C export. This question is said to be very important because of what has been revealedfrom the fact. Take the case of elimination of import quota on T&C in the US and EUmarkets. The fact shows that in the trade-quota era, the average increases of U.S. and E.Uimports on T&C from Indonesia are very small as compared to China (Figure 16). Nowthe question is: what would be reason to expect that after the elimination of importquotas, the average increase in Indonesian T&C exports to these two huge markets willbe higher than in the trade-quota era?There are already several studies which are basically simulations on the impact ofelimination of quota in US and EU on T&C exports from Indonesia and other countries.By using comtrade database, Nordas (2004), for example, did some simulation whichshows that the Chinese market share for clothing in US will increase from 16% in thetrade with quota era to 50% in the post trade-quota era. Indonesia is expected to lose itsshare from 4% to 2% (Figure 17). For textile, after the quota elimination, the marketshare of China will increase from 11% to 18%, and that of Indonesia will stay at 3%(Figure 18). In the EU market, the estimation shows that China will strengthen its marketposition for clothing from 18% to 29%; while the market share of Indonesia will notchange and will stay very small as 3% (Figure 19). In textile, the Chinese share isexpected to increase to 12% from 10% in the pre-quota elimination era, and that ofIndonesia is also expected to increase but at a very small percentage point (Figure 20).Figure 16: Average percentage increases of US and EU T&C Imports from SelectedCountries of Origin6050403020100China India Indonesia Sri Lanka Brazil Honduras Jordania Peru1994-2004 2004-2005Note: for 2005/2004 only for January-MaySource: US Department of Commerce and Erostat.Figure 17. Market shares before and after quota elimination, Clothing, US (%)47 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Rest of the worldEURest of AmericasMexicoThailandPhilippinesIndonesiaBangladeshHong Kong SARCIndiaChina005533242424649101215161628500 10 20 30 40 50 60Before Afterce: Nordas (2004).SourFigure 18: Market shares before and after quota elimination, textiles, USASource: see Figure 15.Figure 19. Market shares before and after quota elimination, Clothing, EU (%)48 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Rest of the worldOther North AfricaOther Central & Eastern EuropePolandMaroccoBangladeshIndonesiaTu rk e yHong Kong SARCIndiaChina3344455566666999182429300 5 10 15 20 25 30 35BeforeAfterSource: see Figure 15.Figure 20: Market shares before and after quota elimination, textiles, EU.Source: see Figure 1549 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Wattanapruttipaisan (2005) also did the similar analysis and his findings can besummarized in the following points. Firstly, China’s share rises from 16% to 50% ofimport demand for garments in the US, and from 18% to 29% in the EU. The marketshares in imported clothing gained by India are more modest, namely from 4% to 15% inthe US, and from 6% to 9% in the EU. Secondly, Indonesia is among the top 10 T&Cexporting countries to the EU. It is likely to maintain its market shares in EU importdemand for T&C and in US demand for imported textiles only. However, the shares ofIndonesia and the Philippines in imported clothing in the US is expected to decline from4% to 2% in each case, due partly to stiffer competition from China. Thailand retains its3% share in the US clothing demand, a market foothold achieved only since the early2000s. Thirdly, the shares of clothing exported by the rest of the world will also contract,from 30% to 24% in the EU, and from as much as 28% to just 12% in the US. Fourthly,most of the top-ten exporting countries, who are the beneficiaries of various tradingpreferential programs from the US and the EU, are expected to lose out to othercompetitors in the post-ATC environment.Source: ILO (2005)50 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

Source: ILO (2005)51 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

RecommendationThe above discussion ends with the following recommendations for policy makers andprivate sector:1) The government should deliver rapid economic growth, which in turn is based on astable and predictable macro-economic environment accompanied with stable andpredictable policy environment, openness to international economy, efficientlyfunctioning financial system and market mechanism for inputs and output, an effectivelegal system, improved physical infrastructure and public utilities and services, andhighly developed in human resource. In the well-known “diamond” model fromPorter, it is stated that undistorted output and inputs markets accompanied with goodquality in human resource and infrastructure simultaneously determine directly thebusiness environment and the country’s competitiveness. As an illustration, withrespect to overall quality of infrastructure, based on The Global CompetitivenessReport 2004-2005, Indonesia is in the 44 th place (from 104 countries) with the score of4.2; while Denmark is in the top position with the highest score of 6.8. Moreover,undistorted market with no restrictions/barriers to all does not only force enterprises toincrease their efficiency and competitiveness and thus encourage them to invest andco-operate among them as well as between them and R&D institutions and universitiesin R&D activities, but it will also eliminate uncertainty in doing business and thusattract FDI. Moreover, when domestic market is working well, a small governmentintervention will yield better results than a big government intervention when marketsignals do not well function. So, this is the most important contribution thegovernment can make to support capacity building or competitiveness improvement indomestic T&C companies.2) Domestic T&C companies should modernize their machineries and production tools,and, if necessary, diversify their products towards markets with greater potentials.They should also establish or strengthen their global distribution networks. In thisQuarterly Report - January 2006indonesia.or.id52 Kadin Indonesia – www.kadin-

case, the Indonesian Association of Textile Producers (API) has a crucial role to playin helping capacity building in T&C companies. The role can be in various ways, suchas marketing research and acts as the information centre for T&C businesses onmarketing potential, tendency in changes in competition in the global market and newtechnologies and inputs.3) The government should give specific incentive to encourage foreign direct investment(FDI) to form subcontracting linkages with local/domestic T&C companies and toupgrade their technological capabilities. The specific incentive can be in variousforms; e.g. taxes (levies) or special tax-rebate schemes.4) The links between firms and R&D institutions and universities should be promoted.From the R&D institutions and universities side, by: (i) changing their missionstatements and philosophies from supply towards demand driven; (ii) removing allbureaucratic constraints; (iii) adopting a more progressive approach to selling theirdeveloped technologies or innovations and to disseminate information to the privatesector; and (iv) providing incentives: e.g. opening access to funding for R&Dactivities or providing direct subsidies to R&D institutions and universities, grantingthese institutions greater managerial autonomy, securing an affective legal system(including the observance of intellectual property rights); giving awards for the mostactive universities or R&D institutions in conducting R&D activities anddissemination of their findings to the private sector (or T&C companies in particular),or as a requirement for universities or R&D institutions to winning governmentfundedresearch projects. From the private sector side, by: (i) allowing accelerateddepreciation; (ii) lowering import tariffs; (iii) giving incentives in terms of e.g. taxincentives (tax credits); and (iv) providing special low interest paid credit scheme forlong-term investment to T&C firms that have linkages with domestic R&D institutionsor universities.5) For the purpose in point 4, R&D capabilities of R&D institutions and universitiesshould be improved by increasing government budget for science and technology,Quarterly Report - January 2006 53 Kadin Indonesia – www.kadinindonesia.or.id

particularly to (i) improve salaries to attract high-skilled staff; (ii) to upgrade theirfacilities (including equipment) so they can meet best practice requirements; and (iii)to increase capacity in those agencies working in remote rural areas to engage inmeaningful outreach activities for the targeted client groups. But, above all these, thegovernment should have a national strategy for technological development.6) All domestic as well as international trade barriers should be removed; also allretributions-led market distortions. Openness in international trade and investment willpromote technology transfer and openness in domestic trade and investment willpromote technology diffusion among domestic T&C firms across regions. But, theopenness policy need to be harmonized with national technology and educationpolicies in order to increase the absorptive capacity of domestic firms, and thus tostrengthen the spillover effects.7) Supporting industries producing such as machines, production tools, accessories, andother necessary inputs for domestic T&C companies should be among top priorities inpolicies to support the development of national T&C industry. Well-developeddomestic supporting industries are among crucial components in the cluster model ofPorter to increase competitiveness of an industry or a nation. 38) Tripartite should be formed between the API representing the T&C sector, theMinistry of Science and Technology (Menristek) and the Ministry of Education (ME).This tripartite has two main functions: (i) to secure full coherence and coordinationbetween T&C firms on the demand side and R&D institutions and universities on thesupply side of development of technology and human resource; and (ii) to harmonizenational policies on technology, education, trade, investment, and industrialization.The key role of the API in this tripartite is to provide inputs regarding the needs ofT&C firms for technology and skills in the context of competition and businessdevelopment and to coordinate with Menristek and ME in meeting those need.3 See appendix for the theoretical cluster development of T&C industry in Indonesia.Quarterly Report - January 2006 54 Kadin Indonesia – www.kadinindonesia.or.id

Appendix: The Theoretical Cluster Development of T&C Industry in Indonesia.55 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

References56 Kadin Indonesia – www.kadin-Quarterly Report - January 2006indonesia.or.id

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