Indonesia's Textile and Garment Industries: Developments in an Asian Perspective 9789814376716

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Occasiona l Pape r No. 87

Indonesia's Textile and Garment Industries Developments in an Asian Perspective

The Institute of Southeast Asian Studies was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

Indonesia 's Textile and Garn1ent Industries Developments in an Asian Perspective

Hal Hill Australian National University

ASEAN ECONOMIC RESEARCH UNIT

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Cataloguing in Publication Data Hill, Hal, 1948lndonesia's textile and garment industries: development s in an A sia n perspective. (Occasional papers I Institute of Southeast Asian Studi es; no. 87) I. Textile industry -Indonesia . 2. Clothing trade-Indonesia. I. Title. II. Series. OS501 159 no. 87 1992 sls91- 19 2060 ISBN 981-3016-06-X ISSN 0073-9731

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved . No part of thi s publi ca tion may be reprodu n ·J , ~ t ored in a retrieval system, or tran smitLed in an y fo rm o r by a ny m ea n ~. el e\.·tronic, mechanical , photocopying, recording, or o therwise, witho ut the prior consent of the In stitute of Southeast Asian Studi e!>.

© 1992 Institute of Southeast A sian Studies The responsibility for Juers and opinions e.Apressed in this publication rests exclusively with the author and his interpretations do nut necessarily reflect the views or the policy of the Institute or its supporters. Typeset by The Fototype

Busine s ~ .

Printed and bound in Singapore by Kin Keong Printing Co . Pte. Ltd .

Contents

List of Tables

I. 2. 3. 4. 5. 6. 7. 8. 9. 10. II. 12. 13. 14. 15. 16. 17. 18. 19.

The Age Profile of Indonesia's Textile and Garment Machinery, 1988/89 Output and Employment in Textiles and Garments Index of Comparative Labour Costs in Textiles and Garments, 1984 Size Distribution of Firms, 1985 Ownership in the Textile and Garment Industries, 1988 Average Firm Size by Industry and Ownership, 1988 Major Foreign Investors in Textiles and Garments, 1967-89 Textile and Garment Machinery by Country of Manufacture, 1987 The Spatial Structure of Textiles and Garments Output Location of Textile and Garment Firms in Indonesia, 1986-87 Exports of Textiles and Garments, 1975-89 Sources of Growth in Textiles and Garments, 1975-88 The Ranking of Indonesian Exports, 1988 Unit Values of Selected East Asian Exports to the United States, 1988 Unit Values of Selected Indonesian Exports by Market Destination, 1988 Quota Utilization Ratios: Garment Exports to the United States Quota Utilization Ratios: Garment Exports to the EC Estimates of Protection for Textiles and Garments, 1971-89 Ex pons under BAPEKSTA, 1986-89

11 13 14 19 21 22 23 24 25 26 36 37 38 47 53 54 54 66 68

List of Figures

I. 2. 3. 4.

5. 6. 7. 8. 9. 10. II. 12. 13. 14.

15. 16.

Key Features of Textiles and Garment in Indonesi a Textile and Garment Producti on in lndon e ia, 1969- 88 Approved Foreign and Domestic Investme nt in Textiles, 1%9- 89 Real Earnings per Worker in Textiles and Garment s, 1975 - 88 Real Producti vity Growth in Textiles and Garment s. 1975 - 87 The Location of Major Textiles Centres on Java, 1988 The Location of Major Garment s Centres on Java and Bali, 1988 Textiles and Garment s in East Asian Exports, 197 5- 88 RCA Indices for Ea t Asian Textile and Garment Exports, 1975- 88 Compos ition of East Asian Textile and Garment Exports, 1986- 88 East Asian Trade in Yarn and Fibre, Fabrics. and Garment s, 1988 Unit Values of Indonesi an Export to the United States, 1983 - 88 The Relative Import ance of MFA Market ~ in East Asian Textile and Garment Expo rt s Major Market for Ind onesian Garment and Fabric Exports, 1981 - 87 Indices of Manufac turing Output in Taiwan. 197 1- 89 Employm ent in Taiwan's Textile and Garment lndu trie . 1970- 89

6 I)

10 16 17 2X 21} 40 41 43 44

50

51

5X

Acknowledgements

A number of institutions and individuals have assisted in the preparation of this paper. An earlier version was prepared for a conference on "Managing Adjustment and Restructuring of the Textiles and Garments Subsector", organized by the Economic Development Institute and the University of Indonesia and held in Bandung, 10-14 September 1990. The paper also draws on fieldwork with Mari Pangestu in July-August 1989 undertaken for the World Bank, and on research in Java-Bali from December 1976 to March 1978 for my doctoral dissertation (Hill 1979). For comments on earlier drafts I am indebted to H.W. Arndt, Stephen Parker, Thee Kian Wie, Louis T. Wells Jr, two anonymous referees, and seminar participants at the Bandung Conference, at the Australian National University, and at Flinders University. I am most grateful to industry representatives in Indonesia and Taiwan for helpful discussions; to Slamet Mukeno, Head of the Industry Section of the Central Bureau of Statistics, Jakarta, for providing unpublished data; and to Prue Phillips and the staff at the International Economic Data Bank, ANU, for much of the international data.

I

Introduction

Textiles' is a most important industry in Indonesia and practically all developing countries. After food processing, it is one of the largest manufacturing activities in the early stages of industrialization. It supplies a basic commodity and is a significant source of employment generation. It has also been one of the spearheads of developing countries' export thrusts, especially - but not only - in East Asia. The prominence of the industry is easily explained: it occupies a substantial proportion of non-food budgets in low income countries and hence constitutes a large domestic market; 2 the production technology is fairly standard and mostly labour-intensive; scale economies are not very significant; and knowledge of technology and products is disseminated rapidly across borders. The extraordinary dynamism of the industry in Asia is documented extensively in Anderson (forthcoming). By the late 1980s, textiles and garments in some countries were contributing 15 per cent or more to manufacturing value added, and in excess of 20 per cent to merchandise exports. 3 In the process there has been a major international relocation of the industry from the developed industrial world towards the countries of East Asia which, including Japan, accounted for some 35 per cent of world exports of textiles and clothing over the period 1985-88. Within East Asia, the industries' relocation has been equally dramatic. During the 1960s Japan was by far the largest exporter of yarn, fibres, and fabrics from the region, while the three Northeast Asian NIEs (Hong Kong, Korea, and Taiwan) had already emerged as significant exporters of garments. During the 1970s Japan began to lose its comparative advantage in ga~ments very quickly, but maintained its important role in the export of certain fibres and fabrics. In the following decade the three NIEs, plus emerging third tier exporters such as China and the ASEAN countries, dominated the region's garment exports and began to capture the major share of yarn, fibres, and fabrics sales. This latter group is likely to generate most of the region's "mass consumption" exports of textiles and garments during the 1990s and beyond. The industry assumes special significance in Indonesia. Although 1

2

INDONESIA'S TEXTILE AND GARMENT INDUSTRIES

resource-based manufactures constitute a larger proportion of exports in Indonesia than in any other East Asian developing country, textiles is by far the largest of the country's "footloose" manufactures. It is no exaggeration to state that the industry will be the litmus test in Indonesia's efforts to diversify the economy away from its earlier heavy reliance on oil and gas. If textile exports flounder, it is unlikely that Indonesia will be able to engineer a strategy of rapidly growing and broad-based non-oil exports, including other manufactures, services such as tourism, and cash crops. A distinctive feature of the industry is its intense international regulation. Much of the world trade in textiles is governed by the Multi-Fibre Arrangement (MFA), aptly described by Cline (1987) as " ... the most trade-restraining international agreement for manufactured products in existence". It is possible that the MFA provided an initial stimulus to countries in the very early stages of export orientation, but it very quickly becomes an important obstacle to growth. Consequently, to sustain rapid export growth, developing countries not only have to achieve international competitiveness in the industry, but also to develop a capacity to manage and respond flexibly to an ever more restrictive and complex international commercial environment. Another important feature of the industry is its rapid technological evolution (Bowring 1989), including the much-debated assertion that textiles is rapidly shedding its labour-intensive status. This trend, it is argued, may undermine the competitive advantage of developing countries in the industry and lead to its "renewal" in developed countries (Yamazawa 1983; Hoffman 1985; Mody and Wheeler 1987; Velasco 1990). The purpose of this paper is to examine the evolution of the Indonesian textile industry, including its abrupt transformation since 1967 (Chapter II), the rapid growth of exports beginning in the early 1980s (Chapter Ill), some international comparisons (Chapter IV), an explanation of the export success (Chapter V), and an identification of key policy and strategy issues for the industry in the 1990s (Chapter VI).

Notes I.

2.

For simplification, and unless otherwise indicated, "textiles" throughout this paper will be a shorthand expression for yarn and fibre (SITC 266 + 651, ISIC 32lll), fabrics and other textiles (SITC 65 excluding 651, !SIC 321 excluding 32111 ), and garments (SITC 84, lSI C 322). A major difficulty for empirical researchers in the area of trade and industry is that the trade and industrial statistics adopt different concepts and measures. The above approximate concordance (SITC codes for trade, ISIC for production) will be used. As an illustration, according to SUSENAS data clothing and footwear accounted for about 14 per cent of average non-food household expenditure in the 1980s, and about 5 per cent of the total.

3

INTRODU CTION

3.

The 1990 World Development Report cites the following shares in exports and production for textiles and garments:

fi!o of manufacturing value added, 1987 filo of merchandi se exports, 1988

China

India

Korea

Thailand

14 24

15 25

17 22

18 17

II Growth and Structuml Change

The industry in Indonesia, as elsewhere, comprises three fairly di stinct sub-sectors, ranging from the capital-intensiv e spinning and synthetic fibre sub-sector, through to weaving and fabric production (including such minor products as carpet and twine), and the highly labour-intensive garments industry. The first and third of these are late-comers to Indonesia, being essentially New Order phenomena; weaving is the longest established industry among the three, and the largest in terms of both output and employment. Indeed, a key argument of this paper is that, although th e sectors are commonly grouped together, there are significant differences among them with regard to history, ownership, sales orientation, location and a range of industrial economics factors. These differences are summarized in Figure I, and will be developed further below.

An 0Yerview or Developments The factory weaving sector emerged in the 1920s following the introduction of upright hand looms (ATBM, alat tenun bukan mesin), and their numbers rose rapidly, from about 257 in 1930 to some 44,000 in 1940. Power looms followed shortly after, rising in number from 44 to 8,000 over the same period (Boeke 1946, p. 122). More than half the country's output at this time originated from West Java, mainly Bandung-Majal aya, a choice dictated initially by access to markets, by government policy (including the establishment of the lnstitut Teknologi Tekstil in Bandung), by the role of several key entrepreneurs early in the industry, and by climate (Hardjono 1990). After a decade of stagnation and possible decline in the 1940s, the industry grew quite rapidly, output expanding by about 150 per cent from 1950 to 1955. Much of this reflected recovery and a return to normal economic conditions, however, because industry capacity expanded little. It is more difficult to track the industry's development in the following decade: the quality of statistical reporting deteriorated, the large foreign mills were nationalized, and weavers were at the mercy of unpredictable supplies of yarn imports, much of them channelled through the Kooperasi 5

0\

FIGURE 1: KEY FEATURES OF TEXTILES AND GARMENTS IN INDONESIA

z

0 0

Feature

Spinning ( + Fibres)

Weaving

Garments

z

rn

UJ

)>

vi

History

Mainly new

Many old firms

Very new (as factories)

Factor proportion s

Moderately capital-intensive (especially fibres)

Labour-inten sive

Very labour-i_ntensive

Scale economies

Significant

Moderate

Unimportant (except in international marketing)

Ownership

Significant foreign and government

Mainly domestic private

Almost all domestic private

Common in spinning (spinning-weaving)

Not widespread (except very large mills)

Rare

Very large firms dominate

Mainly large and medium firms

Many small and medium firms

Vertical integration Size distribution

""X r"" rn

rn

)>

z

0 0

)>

"'3::rn z

""z 0

c

Sales orientation

Mainly domestic (for "direct" sales)

Both export and domestic

Mainly export

Location

Mainly West Java

Mainly West Java; Central Java sizeable

Mainly Jakarta, Botabek-Bandung; Bali rising importance

~

"'rn UJ

GROWTH AND STRUCTURAL CHANGE

7

to hand loom weavers. For what the estimates are worth, output may have risen by about 20 per cent over the decade 1956-66, but with very considerable annual fluctuations. According to the 1964 Industrial Census, power loom employment was about 87,000 persons, approximately half in Jakarta-West Java, while those engaged in hand looms numbered some 160,000, almost half of whom were in Central Java-Yogyakarta. Large hand loom factories were not uncommon then, as illustrated by the fact that about one-fifth of the recorded hand loom employment (and in reality probably more) was in firms with a work-force of at least 50 persons. The state and co-operative firms dominated the large loom sector (and the few spinning mills in existence), absorbing just 17 and 4 per cent of the power loom work-force respectively, but possessing on average II and 4.5 times respectively the installed capacity per firm of the industry as a whole. 1 The New Order regime dismantled the elaborate yarn allocation system, removed the extensive trade and regulatory barriers, and ushered in a virtual technological revolution. The hand loom sector began to shrink rapidly, the number of such looms "in use" falling from about 125,000 in 1968 (Boucherie 1969) to some 66,000 in 1975, and output probably declined even faster. By the late 1970s, their role was confined essentially to the provision of residual capacity in peak demand periods, and to the production of small-volume intricate-design goods not of commercial interest to the mill sector. The explanation for their demise is straight forward: even at very low wage levels, the productivity gap between hand and mechanized techniques is so large that the former are unable to compete. A range of capital-cheapening distortions introduced by the government after 1967 may have hastened the disappearance of hand looms, but the fundamental determinant was an economic one. The switch in consumer preferences away from traditional clothing such as sarung, selendang, and stagen, and from cotton to synthetics, also favoured power looms. Hand loom weavers experience difficulty in achieving uniform cloth density in the case of synthetic fibres, while their operations are better suited to the more intricate narrow-width traditional cloth. 2 Notwithstanding the general decline in the hand loom sector, the technology is still used to serve certain "niche" markets. At the bottom end, hand loom operators are able to capitalize on lower wages - especially during the slack agricultural season - to produce small volumes of specialist products such as lining cloth (for example, for footwear), bandages, towels, and mattress cloth. Some firms have been able to process cotton wastes discarded from the integrated textile mills. A few firms have been able to penetrate the more fashion-intensive, less price-sensitive segments of the market, including some high quality ikat cloth, personalized name-towels, and imitations of the famed products from the islands east of Bali. The village of Troso, just south of Jepara in northern Central Java, has been

8

INDONESIA'S TEXTILE AND GARMENT INDUSTRI ES

particularly successful in this regard, and several key entrepreneurs have developed a profitable trade with outlets serving the booming tourist market in Bali, albeit at the expense of traditional suppliers from Sumba, Timor, and elsewhere. 3 But in general Indonesia has not developed a large handicraft export business on the scale of India, partly because of limited government promotional efforts and partly because of the wise decision since 1966 not to prop up declining activities. In spite of the demise of hand looms, the textiles industry has expanded extremely rapidly since the late 1960s, under the impetus of strong demand growth, a large consumer backlog, and high import protection: output expanded more than seven-fold over the period 1969- 88, while it doubled in each of the first two Repelita, the Five-Year Development Plans (Figure 2). Even these figures understate the pace of expansion, since there were vast improvements in quality and product range over the two decades. The industry did experience a slump 1980-85, owing to weak domestic demand and as the industry exhausted the scope for easy import substitution, but rapid export growth provided a boost after 1985. The spinning, fibre, and garment industries are much more recent in origin. Hand spinning of indigenous and imported fibres has long existed as an occasional household activity in Indonesia, but a small factory sector did not develop until the 1930s. The industry progressed little for the next 30 years, and much of it was state-owned by the early 1960s. Thereafter, output expanded even more quickly than weaving, by some 15-fold from 1969 to 1988 (Figure 2). The factors explaining this rapid growth were similar to those of weaving, except that spinning started from a smaller initial base and, since the industry did not possess an antiquated labourintensive sector, it did not ex perience such a fundamental technological transformation. Polyester fibre production emerged on a significant scale in the early 1980s, promoted by the government as a means of strengthening downstream utilization of energy resources. Garment production, which up to the 1970s had been the preserve of Indonesia's ubiquitous tailor shops, first emerged as a factory activity in the late 1970s, in response to growing export opportunities and to cater to the country's expanding urban middle classes. Output almost doubled from 1983 to 1988 (Figure 2). Two additional data sets underscore both the rapid transformation of the industries and the "episodal" nature of growth since 1966. The first comprise foreign and domestic investment approvals by the Capital Investment Co-ordinating Board (BKPM) which, in spite of well-known deficiencies, 4 at least provide a measure of investor interest in the industry. The real value of approvals, for both domestic and foreign firms, peaked in the early 1970s and again in the late 1980s (Figure 3). In the earlier period the main explanation was profitable import substituting investment opportunities under the impetus of rapid domestic growth and high protection,

GROWTH AND STRUCTURAL CHAN GE

9

FIGURE 2 TEXTILE AND GARMENT PRODUCT ION IN INDONESIA, 1969-88 !000000 - . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , Textiles (million metres) Garments (million dozen) Yarn (thousand bales)

!00000

-----

Polyester fibre (tons)

10000

··················· 1000

...-·····...-······································---··················_..-···················

100

10 1968

1969-88 1969-80 1980-85 1985-88

1972

Text iles 11.4 14.7 4.3 11.9

1976 GROWTH RATE Garments

14.2

1980

Ya rn 15 .3 18.6 9.7 13 . 1

SOURCE: Nota Keuangan . NOTE: Financial years (i.e. , 1969 refers to 1969170 , etc.)

1984

Polyester fibre

12.2

1988

/0

INDONES IA'S TEXTIL E AN D GA RM ENT INDUSTR IES

FIGURE 3 APPROVED FOREIGN AND DOMESTIC INVESTMENT IN TEXTILES, 1969-89 (In $ mi ll ions) 1989- 1822 1988-1290 1973-1155 1000 ,-----------~Tr~----------------------,----r so 900 800 60 700

tV

600

5§ ~

:

Ii\,

500

.s> 400

300 200

)

i t

40

i

I I

i

I I

...··

1I

i I ; d

I

20

'I

100 0 ~------~r-------.--------.----~~r-L------r o 1990 1985 1980 1975 1970 1965 Year - - - - Foreign investment Domestic investment

- - - - - Texti les as o/o of foreign ................... Texti les as o/o of domestic

SOURCES: BKPM for investml!nt data, and IMF, International Financial Statistics for price and exchange rate data. NOTE: Data refer to real approved foreign and domestic investments in texti les, together with smaller quantities in garments, leather, and footwear. The nominal investment series have been deflated by the U.S. producer price for finished goods (capital eq uipment), with domestic investment converted at each year's exchange rate. The shares refer to investments in this sector as a percentage of total man ufacturing investments.

G ROWTH AN D ST RUCTU RAL

/1

HAN GE

while more recently export has been the principal motive. Investment from both sources fe ll away during the mid-!980s, owing to the withdrawal of tax incentives and the economic recession; foreign investor interest was patchy throughout the period 1975-86 for these reasons and also because of the increasingly restrictive foreign investment climate. The share of textiles and garments (together with footwear and leather) in total manufacturing sector approvals was very high through to the mid-1970s, reflecting the significance of these early stage activities in Indonesia's industrial infancy, but waned as heavy processing and engineering industries assumed greater importance (and received more vigorous promotion). The late 1980s witnessed a resurgence in investment shares as these industries became central to Indones ia's strong growth in labour-intensive manufactured exports. A fina l feature of the investment patterns is the dominance of domestic investors. Over the period 1971-89, the real value of domestic investment approvals totalled some $8.9 billion, almost triple that of foreign investments ($3.3 billion); domestic approvals exceeded foreign totals in all but one year, and were double the value of the latter in all but four years. This pattern of domestic domination of most segments of the industry is consistent with ownership patterns to be discussed below. An additional piece of information, emphasizing the "newness" of much of the industry, is the age profile of its capital equipment (Table 1). TABLE 1: THE AGE PROFILE OF INDONESIA'S TEXTILE AND GARMENT MACHINERY, 1988/ 89 Sector

Fibre making Spinning Weaving Knitting Garments

Unit of Machinery

Unit Spindle Loom Unit Sewing Machine

National Total•

Age of Machinery (OJo of Total)

1,000 200- 999 50- 199 20- 49 5- 19 lutal

SI Z E DISTRIBUTION OF FIRI\-IS, 1985 (0/o of indu str y totals)

Srinning (32111)

Weaving (32112)

Garments (32210)

v

N

v

N

v

N

.16 . ~

50. 1 46 .6

~iUi

) 1.5 39 .0 18.8 10.7 0 .2 100

9.0 35.0 12.1 6 .8 37. I 100

11.6 23.4 9.5 7.9

54.5 g,4 0 .2 0.2 100

1.5

0 .7 1.1 100

)6 .8 10.2 4.3 0. 1 100

~7 . 6

100

All Manufacturing

v

N

)).4

22.0 25 .4

34.9 16.5 6.0 9.2 100

13.4 9.4 29 .8 100

v

= value added, N = employment. Data fur small firm s have been deflated back to 1985 by the releva nt wholesale pril'e index .

One puzzling feature of the data in Table 4 is that, unlike manufacturing as a whole, the very large firms (those with a work-force exceeding 1,000) apparently have below average productivity in spinning and garments as compared to all firm s in the industry; that is, their employment shares exceed their value added shares. This phenomenon, found also in other industries (Hill 1990, Part II), could be explained by the presence of a few large and inefficient state enterprises in the case of weaving, and by smaller,

20

I N DONES I A'S T EX TIL E

N D GA RM EN T I N DUSTRI ES

high-fashion producers in garments. Under-reporting or output in the very large firms may also be a problem . Vertical integration within the indu stry is now quite widespread among the larger mills, which generally possess spinning, weaving, finishing, and dyeing stages; indeed, stand-alone spinning mills are comparatively rare. These mills are able to exploit cost savings through speedy and integrated processing across various production stages, especially spinning, weaving preparation, and weaving itself. Vertical inter-firm linkages in the form of subcontracting are less common, especially as compared to the automotive and electronic industries whose myriad production stages are well-suited to such practices. Nevertheless, some putting out does occur in weaving and garments. Garment manufacturers resort to subcontracting for the flexibility it confers in responding to fluctuations in demand, particularly in filling export orders before the completion of the quota year (see also Thee et al. 1989, p. 51). 12 Some specialist functions, such as embroidery or even button stitching, are also put out. Often the subcontractors are former employees of the garment firm who, after childbirth, have purchased a second-hand sewing machine for irregular home employment. In addition, subcontracting is common among small weavers, who receive orders - and often a downpayment in advance - from cloth merchants and larger mills; 13 in many cases the yarn is already sized and wound onto the warp beam. Few firms appear to engage in subcontracting simply to save costs, as in some other countries where, in the presence of segmented labour markets, larger firms seek access to cheaper labour through putting out.

Ownership Patterns Ownership patterns in the industry reflect the interplay of industrial economic factors, history, and government intervention. As with size and factor proportions, the three industries reveal a quite distinct picture. At one extreme, garments are almost entirely in domestic private hands - the government has no "strategic" interest in the industry which would dictate investment, and foreign investors generally do not possess sufficiently powerful firm-specific advantages which would justify investment in productive capacity, as distinct from involvement in the industry's export trade (Table 5). The very small foreign share may also be explained in part by earlier BKPM (Capital Investment Co-ordinating Board) discouragement of foreign in vestment in the industry, although this is unlikely to be a significant factor - "ownershiJ!l" in the industry is such a fuzzy concept, and ownership regulations for export-oriented concerns have in any case been relaxed substantially since 1985. In weaving, government and foreign ownership is somewhat more significant. The government's involvement in weaving is explained mainly by the large mills inherited when Dutch property was

21

GROWTH AND STRUCTURAL CHANGE TABLE 5: OWNERSHIP IN THE TEXTILE AND GARME NT INDUSTRIES, 1988 (IT/o of va lue added a nd employment) Industry

All (non-oil) Textiles (321) Yarn and fibre (32111) Weaving (32112) Garments (322)

Private

Foreign

Government

Total

v

N

v

N

v

N

v

N

59 . 1 68.1 49 .7 71.5 98 .0

74.9 81.8 52.3 87.6 96.1

16.7 24 .8 43.2 20.1 1.8

8.7 10.6 32.4 5.6 3.6

24.2 7.0 7.0 8.4 0.1

16.4 7.6 15.3 6.7 0 .2

100 100 100 100 100

100 100 100 100 100

NOTES: "Foreign" includes foreign-private joint ventures; ''Government" includes also government joint venture firms. Data refer only to large and medium firms . Employment shares for a ll manufacturing only refer to 1985.

nationalized during 1957/ 58, together with a few projects set up with Soviet aid or Japanese war reparations in the late Old Order period. Direct equity investment in the industry has not been a high priority of the government, but some of these mills have been modernized and extended, often as part of the foreign aid programme. 14 Foreign investment in the industry has also been quite significant, particularly among the large fully integrated mills. Spinning differs from both weaving and garments in its much higher foreign ownership, partly because of more liberal BKPM entry provisions, but principally ow ing to the capital and technology-intensive nature of the production process - particularly for fibres - and the necessity to import foreign technology. The role of foreign investors is even more prominent in the larger spinning mills (with a work-force in excess of 200), where these firms generated more than half the industry output in 1985. The spatia l concentration of foreign spinning firms is also striking; they are located especially in West Java where they produced over 62 per cent of the industry's provincial output in 1985, significantly above the national average. Differences in scale across sub-sectors and ownership groups are illustrated clearly in Table 6. Spinning and fibre firms employ on average almost five times as many employees as do weaving mWs and almost six times the number in garments, indicating the significance of scale economies. Domestic firms are also appreciably smaller than either foreign or government firms (apart from the tiny government presence in garments). Foreign firms are the largest, sometimes because of their more capitalintensive technology but more generally because scale assists in overcoming the intrinsic cost of "being foreign". Moreover, the foreign group does not contain the ve tiges of an antiquated stock of looms as the private and, to a lesser extent, the government sectors do.

22

'S Tl: . 1 11 E:

i\B

6:

lndus1ry cxtiles (321) Yarn and fibre (32111) Weavi ng (32 11 2) arments (322)

I)

· RA

ARMI:N I I DUSf RI E .

- FIRM I ZE BY INDU TRY AND WNER H I P, 1988 mployees per firm)

Private

Foreign

Governmen t

Total

142 665 157 132

80 1 1,047 777

459 700 432 64

166 760 17 1 135

355

It i~ imponant to emr> h a~ i ze severa l fea ture~ or th ese ow nership data. Fir\ t, not on ly i ~ forei gn ow ners hip modes t. but se ll er co ncentration is g ~:nerall y low. Thi ~ app li e:, especia ll y to th e co mpeti tive ga rm ent s a nd weavi ng ind u tri e~. th e ro ur-firm se ll er co ncentrati o n rati os fo r which (umon g large a nd medium firms) were just 17.2 a nd 26.2 per cent respec tivel y in 19R5 . In barik (43.9 per ce nt) , knitting (41. 8 per cent) and eve n ~ pinnin g (37 .8 per ce nt) th e ra ti os were also quit e low. Thus, apa rt from a rew 'i pec iali ted · egme nt ~. few firm s possess signifi ca nt ma rket power in the industri es. Seco ndl y, while th e industries remain predominant ly domestica ll y ow ned, important ow nership changes have neve rth eless occurred . Whereas th e tex til e industry was o nce th e stronghold of sanrri (staunchl y Islamic) bu::.iness gro ups, co-o perat ives and th e state (Palmer 1972), non-pribumi (i .e.. non -indigenous) investors have dominated th e industry since 1966. Over 90 per cent of the ga rm ent export quotas are estimated to be in non-pribumi hand s, whil e an exa min ation o f unpubl ished BKPM investment approva ls for th e weaving industry from 1967 to 1978 found th at of th e 7 1 per cent o r productive ca pacity in dom est ic hands, 83 per ce nt was owned by nonpribumi (68 per ce nt) or mi xed (15 per ce nt) busin ess interes ts. Pribumi, co-ope rati ve and state-ow ned firm s thu s accounted for on ly 17 per cent of th e domes! ic total, or 13 per ce nt of the overa ll tota l (Hill 1979, pp. 71 -72 ). The stro ng non-pribumi role in th e industry may in part ex plain th e indus! ry' modest forei gn ownership leve ls. Many of th ese factory ow ners had a comm ercia l tradin g interest (often as importers) in the industry before 1966. This factor, com bined with family links through Southeast Asian hin ese bu siness net work s which tend to blur the di sti net ion bet ween "foreign" and "domestic", bas resulted in such in tense regiona l busi ness co nnection s that the nationalit y of owner hip is often of secondary im portance. It ha th erefore been much eas ier to abso rb foreign busin ess and technologica l know-how under the guise of domestic ownership in Indones ia th an, for exa mple, in Banglades h, where the who lesa le importation of Korean plant and personnel has been a major ca talyst in that country's ga rment expo rts ( ee Rh ee 1990).

oROWTH AND ST RU r URA

H N oE

23

Whereas Indonesia's exports of textile and garment are principally directed towards North America a nd Europe, foreign inve tment in the ector has emanated almost entirely from Northeast Asia (Table 7). And, TABLE 7: MAJOR FOREIGN INVESTORS IN TEXTILES AND GARMENTS, 1967- 89" (llj7o of total) Source

I. Japan

2. Other Asia of which: Hong Kong Korea Taiwan

Reali zed 1967- 89"

1988

1989

79.7

9.8

14.2

I 5.4 (I 5 .0) (0.2) (0.2)

86. 2 (16 .5) (47.4) (20 . 1)

77.5 (12.2) (39 .5) (19. 7)

Approved

3. Europe / North America

1.2

2.9

2 .9

4. Other

3.6

1.1

5.4

SoURCES: Bank Indonesia , Penanaman Modal Asing Dari Tahun 1967 Sl D 30 Juni 1989, for realized data; and unpublished statistics kindly supplied by BKPM for approval data. " Investments from more than one co untry have been allocated across countries according to the single country shares. bThrough to 30 June 1989.

within this region, there has been a remarkable reorientation away from Japan to the Asian NIEs in the late 1980s. Japan's dominance among foreign investors in the industry in the first two decades of the New Order was quite extraordinary. lt can be explained by the si multaneous adoption of liberal investment codes (on outflows from Japan and inflows into Indonesia), and by the coincidence of the loss of comparative advantage in Japan and rapid, import-s ubstituting growth in Indonesia (Yoshihara 1978). Investments from the Asian NlEs over this 20-year period were far smaller - apart from sizeable Hong Kong interests - and so metimes motivated by export "quota-hopping" (Chen 1983; Warr 1983) rather than underlying comparative advantage factors. Thjs situation altered dramatically in the late 1980s, however, as the NlEs became increasingly uncompetitive in garments and textiles, and the industry began to relocate to China, Southeast Asia and the Caribbean. Indonesian approvals data for the last two years of the decade indicate that these three economies began to assume a role in the Indonesian industry as large as that of Japan in the earlier period. Japanese investment has continued on a smaUer scale; with the international relocation of that country's labour-intensive segments now largely complete, most of its recent investments have been

24

INDONESIA'S TEXTILE AND GARMENT INDUSTRIES

in synthetic fibre production, where its firms continue to enjoy a technological superiority. The supply of foreign expertise to the industry is of course much more complex than that portrayed in Table 7. As noted above, business ties between Indonesia's Chinese business community and those throughout East Asia are very strong, and transcend simple notions of "foreign" and "domestic" classifications. Many foreign (especially Taiwanese) technicians, accountants, and managers work in the industry, often on an illegal basis. Foreign buyers play a crucial role, and this constitutes the primary North American input into the industry. Most export-oriented Indonesian firms maintain extremely close relations with these buyers, sometimes resembling an international subcontracting arrangement where these firms produce according to the buyers' exact specifications. In the closer relationships, also, buyers often provide advice on international trends in fashion, design, and fabric use. Another channel through which foreign technical inputs are supplied is in the sale of textile and garment machinery. Here also Japan has played the key role, being the dominant supplier of all major forms of equipment except false twisting and knitting machines (Table 8). TABLE 8: TEXTILE AND GARMENT MACHINERY BY COUNTRY OF MANUFACTURE, 1987 (OJo of total) Sector

Spinning False twisting Embroidery Weaving Knitting Garments

Japan

Europe Europe

53 36 65 57 28 63

15 64 10

Taiwan / Korea I

0

13

4 37

5

5

5

Indonesia

Others

Total

0 0

31 0 2 II 22 17

100 100 100 100 100 100

22 23

0 10

SoURCE: Indonesian Commercial Newsle!ter, 25 July 1988, pp. 12-13; citing data from Asosiasi Pertek stilan Indonesia.

Taiwan and Korea are a good deal less important in this respect, although together they are the major source of knitting machinery. Reflecting Indonesia's small capital goods industry and the "cascading" structure of effective protection within manufacturing, local machine producers are insignificant except in the case of embroidery equipment and weaving looms. In 1988 so me eight local companies were registered as manufacturers of textile equipment. Four of these were specialist component manufacturers; equipment production is confined to small quantities of simple, semi-automatic machinery.

25

GROWTH AND STRUCTURAL CHANGE

Spatial Patterns The industries have always been located overwhelmingly in Java, and in particular West Java and Jakarta (Table 9). About 90 per cent of output TABLE 9: THE SPATIAL STRUCTURE OF TEXTILES AND GARMENTS OUTPUT Region / Province

Java Jakarta West Java Central Java / Yogya East Java

Large and Medium Firms, 1988

Small Firms, 1986"

(Oi'o of Total) (Employment / Firm) (O?o of Total) Textiles" Garment s" Textiles Garments Textiles Garments

98 .4 8. 2 58.9

( 91. 2) 54.5 31.0

174 137 222

134 122 246

(88 .2) 17 .8 20.1

(89 .5) 48 .3 17 .8

23 .7 7.6

3.7 2.0

156 115

73 42

43.4 6.9

11 .5 12 .0

Outer Islands 1.6 of which : North Sumatra 0.3 0 .2 West Sumatra Riau 0.1 0 .2 South Sumatra South Sulawesi 0.2 Bali 0 .5 Indonesia 100 (Rp billion) (I ,240.8)

8.8

75

138

11.8

10.5

66 87 377 223 68 73 166

76 32 182 21

0.5 1.8 n. 0 .9 3.4 2.9 100 (33.0)

2.8 2.2 n. n. 1.0 3.3 100 (71.4)

0 .5 0.1 0.8 n. 0 7.2 100 (270 . 1)

178 135

SOURCE: BPS, unpubli shed data . "Data refer to percentages of national value added . n indicates negligible (less than 0.1O?o)

and employment in small firms is on Java, while for large and medium textiles firms the figure is over 98 per cent. These shares are remarkably similar to those recorded in the 1974175 Industrial Census: for example, 98.4 per cent of weaving value added was produced in Java, fully 63 per cent coming from West Java. Comparatively minor centres of activity outside Java are concentrated mainly in Bali, fuelled by the touri sm and related export boom, in Riau, around the duty free island of Batam, and in North Sumatra, with its sizeable local market. Java's - especially West Java's - factories are also appreciably larger than those outside Java. It is interesting to observe how unimportant the government's various attempts at moving the industry off Java have been. For several years, for example, weaving was closed to new investments in Java except under certain

INDONES I A'S TE X TILE AN D GA RM EN T INDUSTRIES

26

nominally restricti ve conditions . Yet there has never been any pronounce d move away from Java, apart from the unplanned growth of garments in Bali, to be di scussed below. Disaggreg a ting further into key sectors within textiles confirms that this pattern is almost universal (Table 10). With one unimporta nt exception (sewing yarn) , West Java has the largest concentra tion of plants in all segments, and in all but two cases possesses over half the national total. Particularl y notable is the concentra tion of "new" activities there, suc h as dye-stuffs, text ile fibres, fa lse twisting, and dyeing and finishing . The major machine and co mponent producers are also located in the province. TABLE 10: LOCAT ION OF TEXTILE AND GARMEN T FIRMS IN INDONES IA , 1986/ 87 (Number o f firm s) Regio n/ Province

Sector West J ava Dye-s tuffs Tex tile fibre Spinning Fa lse twi stin g Sewing ya rn Weav in g Knitting Embroide ry Dying a nd fini shin g Gar ment s Ca rpets Other tex ti les Tota l

Jakarta

Centra l Java + Yogya karta

East Java

Outer Is la nd s

Total

2 10 52 31 7 373 144 8

I 0 6 6 2 19 65 7

0 2 16 2 0 197 10

0 0 12 0 I4 39 21

0 0 4 0 0 32 6 0

3 I2 90 39 23 660 246 17

162 105 8 15 9 17

20 274

59 25

I 402

2 3 15

12 22 2 7 130

10 27 0 I 80

263 453 12 26 I ,844

Sou RcE: Buku Pentunjuk lndustri Tekstil Nasional 1987 [Guide Book to the Natio na l Tex ti le Indu str y] (Jaka rta : Departeme n Pe rindustrian , 1989). Nm E: Refers to large a nd medium firm s o nl y.

A co mbin at ion of factors ex plains Java's dominanc e. One is history. Bandung-M ajalaya was th e major ce ntre before 1966 and, although the indu stry has disca rded its han d loom sector and shifted somewhat towards the surrounds of the cit y of Bandung and to Botabek (t hat is, t he th ree kabupaten adjacent to Jaka rta), this region possesses the country's foremost texti le "infrastruc ture" - investors with a knowledge of the industry, skilled

GROWTH AND STRUCTUR AL CHANGE

27

personne l, and factory operatives. In addition , during the import substitution era there was a strong incentive to locate near the centre of bureaucr atic power, while in the recent export phase Jakarta's (albeit overstretched) port and transpor t infrastru cture has become a major attractio n. Moreover, wages in Java for factory employees remain competit ive with those elsewhere in the country, and Java's higher land prices are not a significa nt drawbac k. That small textile and garment firms are equally Java-bas ed indicates that the benefits of any "natural protectio n" these operation s might derive from their more remote locations in the Outer I lands are minimal; thi i to be expected since the major market s are in any case urban or fringe-ur ban areas, which with the nation's greatly improved transpor t system are generally acces ible to the factorie of Java. Cottageba ed enterpris e, much of it located in eastern lndone ia, i excluded in thee data. While Java i and will remain the major centre for both indu trie , two interestin g differenc e are evident in the patial pattern . The fir t is that a higher proporti on of garment producti on i located off Java, principal ly in Bali; the econd i that, within Java, garment manufac turers ha e exhibited a trong preference for Jakarta. Th e difference are evident in Table 9 and from in pection of the econd-tie r (kabupol en l kolomady a) data in Figure 6 and 7. Within Java' textile indu try, We t Ja a' firm produce about twothirds of the i land' pinning and fibre output and almo tone-ha lf of it cloth. Central Ja a' output of the e product i only about one-third that of Wet Java. but the former remain the co untry' ~ remo t bolik centre, based around the citie of Solo and Pekalonga n, and at o Yog akarta . Thi indu try at o plain the much larger hare of the two central pro ince in mall indu try output (Thble 9). At the ub-pro incial le el, kobupole n Bandung tands out as by far the large t textile centre, it output being double that of the next larg t centre, Purwakart.a, north of Bandung , where everal textile mill with very large pinning capacity ha e been attracted by the water upplies a ailable from the Jatiluhur dam (Fi gure 6). The output of firm in kabupole n Bandung i in fact orne 40 per cnt of the entire pro incial total and one-quar ter of the national total, thu confirmi ng the continui ng tatu of the city and surround a the "textile capital" of Indonesi a. The dominan ce of the we tern pan f the i land i further illu trated by the fact that it conta.in ix of the eight region in the fir t and econd zone of textiles activity, the exception being ukoharjo , adjacent to the Central Javane e city of olo, and the nearby maller city entral Java' tradition al ba e of Salatiga. At much lower output level of medium- calc textile firm become evident, with co ncentrati on around the north-central zone (the city of Solo, Karanganyar, Kendal and kabupaten Semaran g), and the northwe t (principally Batang and Pekalongan). In a t

FIG U RE 6 THE LOCATION OF MAJOR TEXTILES CEN TRES ON JAVA. 1988

"'

0.,

z J

:;. .i

~

=

--L. ,..

JAKARTA

j.

"

~ ~

z

~p .

90 billion

Rp. 30 billion-< Rp. 90 billion Rp. 10 billion -< Rp. 30 billion

NOTES: Codes refer to citiesl kabupaten with textiles value added (in Rp. billion) among large and medium firms of: (I) ~ 90 (2) 30-< 90 (3) 10- < 30

Kabupaten Bandung indicated by [302), has value added amounting to Rp. 302 billion.

z ,... ·/.

" /

FIGURE 7 THE WCATlON OF MAJOR GARMENTS CENTRES ON JAVA AND BALl, 1988 JAKARTA

. 0

~ ...

JAKARTA

C":

"'

0

~

:r: >

z

0

;::: Rp. 30 billion

~

Rp. 15 billion-< Rp. 30 billion

c

Rp. 5 billion-< Rp. 15 billion

c:--'

7-'

;>;

::r;

:r: NOTES: Citiesl kabuparen wit h value a dd ed (in Rp. bi ll ion) amo ng large a nd med ium firm s of: (I) ~ 30 (2) 15- < 30

(3) 5-< 15 No rth Ja karta, indicated by [85] in the inset, has value added a mountin g to Rp. 85 billi on.

z

""

'0

30

INDONESIA'S TEXTILE AND GARMENT INDUSTRIES

Java, only Surabaya and three surrounding kabupaten are in this category. It is significant how unimportant West Java is in these minor textile centres, indicating the dominance of larger firms in the industry and their heavy concentration in Bandung and surrounds, and Botabek. The garments case requires more explanation. As the newest activity, with strong production, technical and even ownership linkages to textiles, why has its spatial pattern not resembled that of textiles, with its heavy concentration around West Java and in particular Bandung? The emergence of Bali is an interesting case study of the linkages between tourism and manufactured exports. Building on local artistic propensities, Western tourists appear to have facilitated export opportunities by quickly transmitting information on fashion and design to local producers, and by developing international commercial channels. In some instances "commercial tourists" have played a direct role, using the trade to support their lifestyle objectives (that is, prolonged stays in Bali). Many of the local garment firms are producing entirely for the tourist trade, but some have used this as a stepping stone to direct export. Segments of the industry have been upgraded quickly and now focus on the "boutique" end of the market, including some original fashion design. The dominance of Jakarta in garments is at first sight puzzling. North Jakarta is the major concentration, generating almost one-third of national output, while other large concentrations are found in the west and east of the city and across the border in Botabek. Bandung and surrounds are fairly minor centres, and there are still smaller pockets around Central Java's capital, Semarang. A number of factors appear to explain Jakarta's popularity. First, garments factories require even less land than do comparable textiles plants, they are not as noisy, and they generate little or no pollution, especially compared to integrated textile mills which process finishing and dyeing units. For all these reasons the industry is better suited to a city (or at least fringe urban) location than textiles. 15 A second factor is that garment's stronger export orientation, and liberal import provisions for exporters since May 1986, have encouraged more firms to locate in Jakarta, close to the Tanjung Priok Harbour area, where there is also the large Nusantara Bonded Warehouse, or to the airport. Jakarta has the added attraction of being close to government departments. Although the export duty drawback scheme is functioning very smoothly and exerts little centralizing bias, the export quota allocation system is plagued by irregularities and requires constant lobbying efforts in Jakarta. (These bureaucratic policy issues will be examined in detail later in the paper.) The industry's export orientation also requires frequent contact with overseas buyers, many of whom wish to transact business - often preferably on-site, to inspect production methods and quality control - in 24 hours, as part of a crowded regional travel schedule. For this, also, a Jakarta location is preferable. Thirdly, many

GROWTH AND ST RUCTU RAL C HAN GE

JJ

of the entrants to garmen ts have had no prior manufa cturi ng experience in the industry. Some started as traders, others were attracte d simply by the industry 's growing profitab ility and profile. For these investors, unlike those in textiles, there was no special motive for locating around the traditional centre of Bandun g. Finally, it is possible that Census data may have exaggerated the importa nce of Jakarta in the industry, to the· extent that some Jakarta- based factorie s with subcont racting network s reaching into West Java were enumer ated as entirely Jakarta operatio ns. Industry Politics

A final feature of the industry is that it has been the focu s of several intense business disputes during the 1980s, as illumina ted by the detailed account s of Macinty re (1991) and Wibison o (1989). In contrast to the import- substitu ting era of the 1970s, when surging domestic demand and governm ent protecti on amelior ated latent tensions between sub -sectors especially the conflicts between upstream and downstream segments - the imperative of efficiency during the export drive of the 1980s and the allocation of lucrative export quotas (see Chapter s 3 and 6) resulted in protracted, highly visible and bitter conflict between groups of produce rs. The origins of the dispute lay in the proposal to impose a levy on garmen t exporte rs for general industry promoti on, and to award a fibre import monopo ly to a trading enterprise (PT CBTI) as part of a programme to develop the local cotton industry by requiring spinner s to source 10 per cent of their cotton locally. Both measures, introdu ced with the support of the Indones ian Textile Associa tion (API, Asosiasi Pertekstilan Indonesia), which stood to gain materially from them, proved to be high ly unpopu lar with the industry. The initial opposit ion came from the spi nners, the first to be affected, and led to the establi~hment of a ri val industry group - a most unusual step in Indones ia - the Joint Secretariat of Spinners (SEKBERTAL, Sekreta riat Bersam a Peminta lan). The dispute quickly widened to garmen t producers, who were unhapp y both with the export levy (and in particul ar unsatisf actory auditing and explana tion of its use) and the allocati on of export quotas. Subsequently, a general industry body was created as a compet itor to API, namely the Federation of Indones ian Textile Industri es (FITI, Federasi Industri Tekstil Indonesia) . Following a highly professi onal campaig n waged through the media in opposit ion to API (on which see in particul ar Macinty re 1991), culminatin g in presiden tial interven tion, both industry groups - API and FITI - were to be officially recognized. Moreover, the trade reform packages of October 1986 and January 1987, combin ed with the successful operatio n of the duty drawbac k scheme for exporters, removed the spinners' objectio ns, althoug h dissatis faction among many garmen t produce rs

32

INDONE SIA 'S T EXTILE AND GARMENT INDUSTRIE S

remains strong. More generally, the dispute left a legacy of mistrust and bitterness which has undoubtedly harmed the industry's development. The penetration of international markets requires highly skilled negotiating resources, and in turn that the industry and government speak with one voice. The fact that the Department of Trade and FITI have been, and continue to be, protagonists undermines Indonesia's position abroad, 16 and diverts high-level entrepreneurial and official resources.

Notes I.

2.

3.

4.

5.

6.

The 1964 Census data, which actually refer to 1963, covered mechanized firms with at least five workers and non-mechanized firms with at least 10 persons. The data are very approximate. The most detailed studies of textiles before 1966 are Palmer (1972), who provides a detailed account of developments in the first half of the 1960s based on extensive first-hand experience, and Matsuo (1970). Hill (1979, chapter 3) surveys the data sources. Developments in the industry after 1966 and the economics of alternative weaving technologies are examined in Hill (1979, chapters 4 and 9). As an illustration of the range of technologies in the industry, output per worker in firms using automatic power looms is 25-40 times that of the hand loom weavers. For an examination of some successful hand loom operations, see Hardjono (1990, p. 21 ff) and Hill (1979, Appendix 4.3). Hardjono makes the interesting observation that some small weavers have benefited indirectly from the export boom, since larger firms have begun to concentrate on more lucrative export opportunities, in the process shifting their production out of less profitable, low quality cloth for the domestic market. The most relevant deficiencies for this discussion are that (a) some approved projects never eventuate (although the BKPM attempts to delete these from the data during periodic stock-takes); (b) the investment estimates are very approximate; and (c) domestic investors are not compelled to obtain BKPM approval, and many have found it less attractive to do so since the abolition of most fiscal incentives in 1984. The shares in Table I refer to capacity. Owing to the greater productivity and more intensive use of the modern equipment, it is probable that the looms aged 15 or more years generate less than 10 per cent of industry output. These comments apply particularly to garments, but for countries in which fibre manufacture and spinning come to dominate the textile industry the latter's factor proportions are likely to resemble those of the manufacturing sector as a whole. Data from the 1986 Industrial and Commercial Census Taiwan-Fukien Area, The Republic of China (Taipei, 1988) support both these propositions. According to the Census, value added per employee was 96 per cent and 54 per cent of the manufacturing average for textiles and garments respectively, while for wages per employee the respective percentages were 105 per cent and 82 per cent.

GROWTH AND ST RU CTURAL CHANGE

7.

8.

9.

10.

II.

12.

13 .

14.

15.

16.

33

A recent example is provided by Fatimah (1990) who, based on the study of a firm located on the outskirts of Jakarta, concluded that the industry demonstrates" ... how the weak are oppressed in the process of industrialisation" . The data in Table 3 have been converted at official exchange rates, and are thus at best a crude measure of international differences. But they are indicative of broad orders of magnitude and are consistent with alternative estimates cited in Thee et al. (1989, p. 59) and Bowring (1989, p. 60). A more recent study of earnings in the weaving industry is that of Hardjono (1990, pp. 34-37). Conducting surveys over the period 1981 / 82 and 1988, she found that wages in Majalaya's mechanized mills were approximately double those of hand loom operators. But earnings in the mechanized mills were still considerably below the male agricultural wage. The data in Table 4 may overstate the importance of small firms in garments, for two reasons. First, the small firm data refer to 1986 (deflated back to 1985), and so pre-date the latest export surge in the industry, much of it from newly formed large plants. Secondly, the data refer to establishments and, for garments more than most industries, may understate the presence of "multi establishment" enterprises effectively operating as one corporate unit. The size distribution data for weaving underline th e far-reaching technological revolution which has occurred in the industry. According to the 1964 Industrial Census, 43 per cent of the textiles work-force was in firms employing 5-24 persons, and 59 per cent in firms with 5- 49 workers. (These data exclude hand loom operations with 5-9 workers.) Even in mechanized firms, 19 per cent of the work-force was in firms with a work-force of 5-49 persons, almost double the share in 1985. Another response is to increase the number of shifts or hours worked . While this is also common practice, there is occasional employee resistance, and labour regulations discourage night shift employment of females (who comprise the bulk of the garment work-force). All the studies of Majalaya have found this arrangement, known as makloon , to be widespread . In the most recent survey (Hardjono 1990, p. 16 ff) some 60 per cent of the small mechanized mills were operating under such a system. By the 1970s, some of the looms in these factories were 40 years old (Hill 1979, chapter 5), installed by Dutch investors during Indonesia's first period of sustained industrial growth . Faced with a choice of closure or modernization, and flu sh with oil revenue and aid funds, the government chose the latter option. An additional factor relevant to the Jakarta-Bandung comparison is that Bandung's land market appears to be beset by perennial disputes and even outright manipulation, and fringe locations often experience infrastructure problems. For these reasons, some industry sources report that the costs in establishing a garment factory in the two cities are approximately similar. On this point, see for example the report in Kompas 12 July 1990: 'Pertikaian dalam Pertekstilan Pasti Goyahkan Posisi Indonesia' [Quarrels in the textile industry certainly undermine Indonesia's Position] .

III The Export Phase

Until the early 1980s Indonesia's manufacturing sector, unlike those of it.s neighbours, was almost wholly inward-oriented. This was nowhere better illustrated th a n in the case of textiles and garments, exports of which remained very small over this period (Table II). Thereafter an amazi ng transformation occurred. Exports had increased quite sharp ly after the November 1978 devaluation, but the "mini" boom ran out of steam as the beneficial effects of the devaluation were quickly eroded by the real effective appreciation of the rupiah during the second oil boom. However, any fears that Indonesia was about to follow the "Colombian route" (on which see Morawetz 1981) were quickly dispelled by the rapid and sustained growth which occurred after 1982. While the high growth of yarn and fibre exports reflects the small initial base leve ls, impressive growth rates for the more sizeable fabric and garment expo rts were sustained throughout the decade. By the late 1980s, Indonesia appeared at last to be following the East Asian pattern of rapid growth in labour-intensive manufactured exports. Two dimensions of the export boom underline its significance. First, expo rt s bega n to absorb an increasing proportion of output, from comparatively minor levels for yarn and fibre, to modest proportions for fa brics and very high amounts for garments (Table II). Secondly, and related, exports became the majo r engine of growt h in the industries during the 1980s (Table 12) . 1 The effect has been particularly dramatic in the case of garments: exports have generated about 90 per cent of output growth during the 1980s, and absorbed all the 9utput during the "reform phase", 1985-88. 2 Import substitution provided a negligible stimulus because, owing to consumer preferences and to Indonesia's trade regime, imports have always been negligible. Exports have also been very significant in the case of weaving, accounting for about half the indu stry's expansion since 1975 and a considerably hi gher share in the 1980s. Domestic demand growth has been equally important, a factor explained by buoyant consumer demand until the early 1980s and by rapid growth of the dow 1Stream garments industry thereafter.

35

36

INDONES IA'S TEXTILE AND GA RM ENT INDUSTR IES TABLE II : EXPO RTS OF TEXTILES AND GARMENTS, 1975- 89 (In $ millions)

Current Constant pri ces '82 prices 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

n 0.8 0.4 1.8 3.9 3. 1 2.0

n 1.1 0.5 2.3 4.7 3.5 2.0

1.5

1.5

13 .7 17.0 12.6 19.9 85.2 119.6 123.9

13 .7 16.6 12.2 19.3 81.0 109.6 I 13 .0

Real annual growth (%) 42.5 1978-89 - 10. 1 1978-82 101.1 1982-85 75 .3 1985-89

Garments

Fabrics

Yarns and Fibres X p

C urrent Constant prices '82 prices

2.0 2. 1 2.7 4.2 47.8 n 42.7 34.4 n 42 .7 n 2 106.8 2 183 .5 2 227.1 2 286.8 9 384.6 9 503.8 n.a. 726.7

n n n n

3.0 2.9 3.6 5.4 57 .9 47 .6 35.2 42.7 106 .5 178 .7 220 .7 277.9 365 .6 461.8 663 .0 54.9 67.7 72 .9 31.6

X p

Current Constant prices '82 prices

X

n n n n 6 4 3 3 II 7 16 17 22 25 n.a.

3.6 2.4 6.4 4.6 6.4 4.8 19 .2 15 .0 80. 1 66 . 1 109.6 98.3 97.6 95 .3 116.4 116.4 156.7 157.2 287 .9 295 .7 329.6 339 .2 505.9 522.1 566.3 595 .8 726.3 792.4 1, 169.6 1,067 .2

15 18 13 25 90 65 39 38 53 75 76 99 100 92 n.a .

p

44 . 1 56.9 41.4 34.1

SOURCE: BPS, Ekspor, and Statistik lndustri, va ri o us issues. NOTE: Yarn and fibres refer to SlTC 651 and 266; Fabrics to SITC 65 (less SITC 651); and Garments to SITC 84. Data are fob. "n" indicates negli gible (les than $1 million). Current price data are denated by the relevant U.S. wholesale price index series. ~ refers to the percentage of the gross value of outp ut which is exported.

The negative impact of the import subst itution factor during a period when real exports expanded is som ewhat paradoxical. The expla nation is that imports were hitherto constrained by high protection for th e industry (see below), so the scope for substantial growth through import substitution beyond this initial "easy ph ase" was limited. Moreover, the large negative figure for 1985- 88 simply reflects the impact of liberalized import procedures for exporting firms, to be discussed below. Garment expo rters increasingly resorted to imported cloth for a variety of reaso ns - cost in some cases, as a means of establishing produ ct reputation in international markets for other firm s, because of the limited range of domestically

THE EXPORT PHASE

37

TABLE 12: SOURCES OF GROWTH IN TEXTlLES AND GARMENTS, 1975-88 (OJo of total output expansion) Period

Total

Exports

Import Substitution

Domestic Demand

(1) Yarn and Fibres

1975-88 1975-80 1980-85 1985-88

100 100 100 100

II I

7 25

neg -7 83 -22

89 106 10 97

(2) Fabrics

1975-88 1975-80 1980-85 1985-88

100 100 100 100

50

-5

55

14 99 57

-13 39 -15

99 -38 59

100 100 100 100

94 74 83 110

neg 2 neg neg

24 17 -10

(3) Garments

1975-88 1975-80 1980-85 1985-88

6

SOURCE: See text.

produced fabrics in a few instances, while some exporters responded to the specific requirements of global brand name garment outlets which began to source from Indonesia for the first time. Direct exports have been the least important source of growth in the case of yarn and fibre, although their contribution has been rising sharply, and indirect exports have become significant in that the domestic demand factor incorporates the impact of growing fabric and garment exports. Here also the negative influence of import substitution reflects liberalized import procedures for downstream export-oriented u ers after 1985. lndone ia's exporr experience therefore strongly reinforces the basic neo-classical factor proportions theory of international trade. The most labour-intensive component, garments, led the way in exports, its exports are by far the largest, and exports have been the major source of growth. By contrast, for yarn and fibres, the mo t capital-intensive activity, exports have been minimal until recently, nor have they been the most impoitant ource of growth. The fabric industry adopts an intermediate position in all respe ts. How does Indonesia' recent export performance compare in regional per pective, both in ASEAN and with the more advanced NlE ? It is useful to undertake such comparisons, to emphasize Indonesia's late-comer

38

I N DON I: Si i\ '-.; Tl '\ T ill 1\ N I) l;i\ R~ II · N " I I N UU S I" R II ·S

sla t us to th e ra nk s o f int ern a ti o na l ex po rte rs, to co ntras t it s pa th to ex po rt or ient ed indu stri a li zati o n with th a t of it s resource poo r neig hb o urs, a nd to p rov id e clu es rega rdin g future trend s. Th e first a nd do min a nt fea ture o f Indones ian tex til e and ga rm ent s ex po rt s is ho w small th ey a re in inte rna tional perspecti ve, re flecting Indonesia 's la te-co mer sta tu s. Thi s a ppli es to all product s and m a rkets. Focusing o n th e three bi g markets - United Stat es, J a pan, a nd the EC - and th e three m aj o r product gro ups, in no in sta nce does Indon es ia's share exceed 4 per cent o f impo rt s, while in a m ajorit y it is less th a n I per cent (Table 13). TA BL E 13: TH E RAN KIN G OF INDONES I A N E XPORTS, 1988 ( In $ milli o ns)

(/)

USA

Market Japa n

EC 12

902 25 18 33 I (43,20)

I ,310 194 143 5 9 ( 14,9)

8 ,454 15 93 9 6 (40, 17)

5,640 580 434 84 59 (20,9)

2,8 10 833 210 36 86 (7,4)

16,992 327 241 55 48 (33,14)

23,080 2,216 3,060 337 433 (1 2, 9)

6 ,749 I ,461 717 113 12 (16,9)

26 ,557 892 620 302 150 (32, 14)

Yarn and Fibres

To tal C hin a Ta iwa n T ha iland Indo nes ia

(2) Fabrics To tal C hin a Ta iwan Th a ila nd Indones ia

(3} Garments To ta l C hin a Taiwan Th a il a nd Ind o nesia

SOU RCE : Internatio nal Economic Da ta Bank (I E DB), Research School of Pac ifi c Studies, Australian Nation al Universit y. NOTE: Data a re on an import basis. Th e fi gures in p a renth eses refer to Indonesia's ranking as a source of imports amon g all suppli ers, and developin g countries. Thus, for example, Indonesia is th e seventh larges t source of Japanese fa bri c imports, a nd th e fourth largest among developin g countries.

It ranks as one of the top 10 suppliers in only the relatively unimpor tant case of Japanese fabric import s. Its rankings are much improved if

TH • EX PORT PHASE

39

only developing cou ntry expo rters are included in the compa rison (using as "developing co untry " the 1989 World Development Report cut off), espec ially in th e EC where much of th e trade is intra- regional. But even here, the best Indonesia can manage is one "4" ranking and four "9" rankings. It remains far behind Taiwan, an established NIE exporter, and China, a nother giant late-comer. Exports from Thailand, a country which began its strong ex port promotion efforts a decade before Indonesia, are generally larger, although th e gap is not as great. Indonesia differs from its East Asian Neighbours in the key role that textiles and garments have played in most of these co untries' expor s (Figure 8). These differences are pronoun ced es pecia lly for exports as a whole (part A), and also for manufactures to a lesser extent (part B). Despite the recent rapid growth , for example, the share of textiles and garments in Indonesia's total exports is only one-fifth that of China, oneeighth the Hong Kong figure, and one-third of Taiwan and Thailand. It more nearly resembles the share for Malaysia and the Philippines, however (Figure 8, part A). These differences reflect both Indonesia's late-comer status and its stronger natural resource endowment - the latter, in the form of the oil boom, squeezing non-oil tradables in their shares of exports and in their international competitiveness until the mid-1980s. It is noteworthy that Indonesia's shares are similar to those of Malaysia, the other East Asian resource-rich country, which has also promoted electronics very effectively, and the Philippines, which failed to capitalize on its early momentum in manufactured exports. Within manufactures, Indonesia's shares are generally lower also (Figure 8, part B), again reflecting the country's natural resource endowment (manifested in expo rts of plywood, fertilizer, paper, and cement), but the differences are smaller. These differences a re ev ident a lso in the indic es of so-ca lled revealed comparative adva ntage (RCA) for textiles and garments. Th e index, which is a meas ure o f a country's expo rt specialization in a particular commodit y, ass umes a value o f unit y when a co mmodit y's s ha re in a country's exports equ a ls th a t in world exports. The d a ta show clearly the recent rapid transfo rmation in Indo nes ia: the indices were very sma ll up to the mid 1980s, but then rose stee pl y, to exceed unit y for gar ments by 1986, and nea rl y so in the case of fa brics; only for th e ca pita l-intensive yarn and fibre segme nt do th ey rema in low (Figure 9). Nevert heles , Indonesia's ex port spec ia lization in these products remain well below that of the Asian NIEs, C hin a a nd Thailand, a lth o ugh it is co mparable to both Malaysia a nd th e Philippines. Sta ndard neo-clas ica l trade theory, in it simples t two-factor formulation, wo uld pred ict tha t, for low-wage countries uch as Indonesia, garments wo uld suppl y a hi gher proportion of textiles a nd garment s exports, and ya rn and fibre · a lower proportion, as compared to Japan and the NlEs. A

40

INDONESIA'S TEXTILE AND GARMENT INDUSTRIES FIGURE 8 TEXTILES AND GARMENTS IN EAST ASIAN EXPORTS, 1975-88

(Percentage of relevant totals) A: Total Exports

China .....•.......... Indonesia •••.•••• Malaysia _ _ _ _ Philippines ---Thailand ---Taiwan

40

30

,

20

10 ,

__

..............

-

- - .,. ... - - - - - .,. .,.----..... ' " .,. .,. -----.....::::::::::·:.·... tl.:--

............. ~.:.:.:.:.::..~.~-~-~-~-~-~-~-~.:.~:..:.:.:.:.:.:.:.:........

0+----,r-~~~~~--~----,---~~

1975

1977

1979

1981

1983

1985

1987

B: Manufactured Exports

---China ................ Indonesia • • • • • • . • Malaysia _ _ _ _ Philippines -_ - Taiwan Thailand __

70

60 50

40

,__

30

20 10

.

./'

..·•..

~-~::...:

.··.. -......... ......... - ::--"'......-""·~.··-·· ..: . ...·· , , - - - - - 7!- - - - 2···~···················· -

.. -~---·-. ···.'!·---·· ; .-······· ··------~-,-.;·.:·~~,..~~~ ~-- ~ ....................··········

0~---,r----.----.---~----,---~~

1975

1977

1979

1981

1983

1985

1987

SOURCE: IEDB.

NoTE: Manufactured exports refers to SITC codes 5-8 less 68.

TH E EXPORT PHASE

4/

FIGURE 9 RCA INDICES FOR EAST ASIAN TEXTILE AND GARMENT EXPORTS,

1975-88 A: Garments _ _ _ _ China _ _ _ _ Taiwan ----Thailand _____ Philippines ................... Malaysia __________ Indonesia

10

8

-' -...

6 4

2

B: Fabrics

6~----~~====~--------------~ 5 4

.......

3

.......

-...

"

........

__

....--

____

,___.

2

0

1975 5

1977

1979

1981

1983

1985

1987

C: Yarn and Fibre

4

' '-./ /

-..

3

-..._

-- '

'

2

0~~~~--~~~--~~--9=~~~==~~~

1975

1977

1979

1981

1983

1985

1987

42

INDONES I A 'S TEXTI L E AND GARM EN T INDU ST RIES

modification , in troduci ng energy as a third, partially traded input (a releva nt ass umption where, for example, natura l gas is a by-product of pet rol eum output), might posit a higher share for the energy-intensive fibre sub-sector in resource-rich countries such as Indones ia. The East Asian experience supports these theoretical predictions at a general level , but there are exceptions (Figure 10). Indonesia has a fairly high share of exports from ga rm ents, mu ch higher than that of Japan and Taiwan . Energy intensity does not appear to be a particularly important factor in the case of yarn a nd fibre (perhaps because of di stortion s in energy pricing policy or the un suitable location of energy reserves), but ca pit a l intensity is significant, as revealed by the high er share of these products for Japan especially. Nevertheless, the simpl e 2- or 3-factor model is mu ch more successful in exp laining the rise of textiles and garments exports in general, than it is in illuminatin g the compo sition of these expo rt s. Other factors are obviously important - ski ll in desig n and fashion is an example, probably explaining th e very high shares of garments for the Philippines and for high wage Hong Kong . A final feature of thi s international compariso n relates to total trade in these products. Exports are a preferred indicator of the evolution of comparative advantage since they are less disto rted by countries' trade policy interventions. Yet t he inclusion of import data does complement the comparative advantage picture, and is a better overall measure of trade "o penness". Here also, Indonesia differs from the NIEs but has more in common with the ASEAN states. It was a net exporter of garments as earl y as 1978, and of fabrics beginning in 1983, but it remains a large net importer of yarn and fibre. Indonesia differs from the NIEs both in it s lower net trade ratios (that is, net exports as a proportion of exports plu s imports) and its smaller trade volumes - the former explained mainly by its late-comer status, the latter by its (until recently) restrictive trade regime 3 (Figure 11). The two larger NIEs are net exporters of all three product groups, the two city NIEs only of garments, whi le Japan has been a net importer of garments since 1973 and will shortly ass ume such a position for fabrics and yarn and fibre. An important indicator of Indonesia's export growth and its perform ance in international perspective is unit values of major export items, over time and across countries. For finely disaggregated product groups, these values are a proxy for output quality. Unit values of established exporting nations would be expected to be higher than those of newly emerging exporters, and real unit values for countries should increase over time as their technological and marketing competence improves; the increase should accelerate as countries reach quota ceilings, when the major source of export growth to MFA markets is from higher prices. The Indonesian unit value data confirm these hypotheses. The country's

43

rt-IE: 1::\PO RT PHASE

FIGURE 10 C OM POS ITION OF EAST AS IAN TEXTILE AN D GA RMENT EXPORTS. 1986-88 ( o/o of total textile and ga rm e nt export s in eac h co untr y)

China Thail and" Philippines• Malays ia" Indones ia Taiwan Korea" Ho ng Kong Japan World

20

0

10

Ill

Garments

30

40

- Fabrics

SoURCE : IEDB. NOT E:

60 50 Percentage

urefers to 1985 - 87. " re fers to 1985, 1986 a nd 1988 .

D

70

80

Yam and Fibre

90

100

44

I NDONESIA'

TEXTILE AND GARM ENT INDUSTR I ES

FIGURE II EAST ASIAN TRADE IN YARN AND FIBRE. FABRI CS. AND GA RM ENTS. 1988 (In$ millions)

A: Yam and Fibre

1000

"'0

t::

~

w

- 0.47

-0.86

"' t:: 0

0.

.5

-1000

Indonesia

C hin~

- - Net exports SOURCE:

NOTE:

Thailand'

Taiwan

-0.12 Net trade ratio

IEDB.

refers to 1987. b refers to net exports as a proportion o f tota l trade. 0

Malays i.a

Philippines

T H E EXPORT PHASE

45

B: Fabrics

5000,-------,-------,-------.-------~------~-------

0.29

4000

3000

2000 V)

.:0

0.. >(

LlJ

1000

0

- 1000

t!

8.

..5

-2000 -3000 ~------~------~------~------~------~------~

Lndonesia

China

Ne t exports

Thailand a

Taiwan

Malaysia

0. 18 NeLuade ratiob

Philippines

46

INDONES I A'

TEXT IL E AND

oARMENT IN DUSTRII:S

C: Gannents

0.93

0.95

"' t:

0 0..

..§

- 2000 ~------~------~------~~------~------~----~~

Indones ia

Chin a

Net ex ports

Thailand

Taiwan

0.99 Nc1 trade ratiob

SouRCE: IEDB. NOTE: • refers to 1987 . b refers

M alaysia

to net ex ports as a proportion of total trad e.

Philippines

47

TH E EX PORT PHASE

late-co mer sta tu s is co n firm ed by th e fact that, for a represe ntative sample of fa bri c and ga rm ent ex ports to the United States, its unit values are a lmost without exception lower than those of other East Asian exporters (Table 14). The co ntrasts are es pec ia ll y pronounced in the case of the Asian N I Es," but eve n among the "seco nd tier" A SEAN group Indonesia is well behind . Thus, as wo uld be expected, Indonesian f irms are well down th e lea rnin g curve co mpared to their regio nal competitors, and they enco untered expo rt quota cei lin gs - and hence the need for upgrading mo re rece ntl y. Nevert hele , these firms appear to be catching up quickly, as illu strated by a varie ty of data so urces. U.S. import data, for example, show a reaso nab ly co n istent picture of higher real unit values (Figure 12). Moreover, the trend towards higher values appeared to accelerate in 1985-86 as quotas beco me binding. TABLE 14: UN IT VALUES OF SELECTED EAST ASIAN EXPORTS TO THE UN ITED ST TES, 1988" (Indonesia = I 00)

Indonesia

Wo en Synthetic Fabric (6535)

Men' Outerwear

Men 'Underwea r

Under wear, Knitted

(84111)

(84 113)

(84143)

100

100

100

100

16 227 n .a . 141

169 2 10 129 116

117 263 261 139

179 123 115 131

158 n.a. 93

135 106· 13

Ill n.a. 220

119 131 135

/Es

Hong K ng Korea ingapore Taiwan

Other ASEA Malay ia Philippine Thailand o R ·E: IE DB. NoTE : The data are based on U import , and are expre ed as ~ndices with the lndone ian unit values equaJ to 100. Figure in parentheses for each product refer to rfi codes.

Quality upgrading take a variety of forms. lm some cases it simply retlects general improvement in productivity and efficiency as entrepreneurs acqujre more knowledge of tec.hnology and international markets, often from over ea buyers or from Japan or the NIEs, Ln other cases it result~ from explicit product hanges, s uch as the use of better q,ua.lity derum in

48

INDON ES I A 'S TEXT I L E AN D GA RM ENT I NDUSTR I ES

FIGURE 12 UNIT VALUES OF INDONESIAN EXPORTS TO THE UNITED STATES,

1983-88 160~----------------------------------------,

6535 841ll 84113 84143

140

,'---

120

1983

1984

1985

--

1986

1987

11)88

SouRCE : IEDB. N OTE:

T he data re fer to export unit va lu es for th e four pro du cts (de scr ipti o n ~ o r which are provided in Tab le 14), d e llat ed by th e re leva nt wholesa le p ri ~:e series, and expressed as index with 1983 equa l to 100 .

TH E EX PORT PHA SE

49

jeans, or more elaborate st itch in g and embroidery in fashion items. More ri go rou s supervi sion of quality co ntrol procedures, which result s in fewer rejects, is yet another example. The operation of the duty drawback scheme, to be di sc ussed shortly, has also resulted in hig her va lues, as garment expo rters now have access to hi gher quality imported fabrics. All these factors were identified in the author's firm interviews, ; with " progress ive" firm s a t the forefront of the upgradin g process. It needs to be emphasized that the unit value data are only a crude proxy for quality, in that even for very finely disaggregated product cat ego ries changing values could merely reflect different product specifications (for example, more buttons, more cuffs, different stitc hing) . Also, these values display considerable year-to-year fluctuations for a variety of reasons not associated with quality changes, so longer term series are required before definitive trends can be identified . Nevertheless, the major conclusion remains undeniable: Indonesia's export quality is below that of its neighbours, but catching up quickly. For Indonesia, like all developing country exporters, the United States, the EC, and Japan are by far the largest markets, the United States particularly o in the case of garments. Similarly, countries which are signatories to the MFA absorb the lion 's hare of each country's exports, Japan, the Middle East and Australia being the only export markets of any size to which the current MFA doe not extend. In recent years some 90 per cent of Indonesia's garment export have been destined for MFA markets, while for fabrics the figure has been in the range 75-85 per cent. These figures are comparab le to Ea t Asian averages, except that Thailand in recent years ha s been recording appreciably lower MFA shares at around 70 per cent (Fi gure 13). As one of the most aggre ive and successful late-comers, its e-.:po rters have been forced to eek out non-MFA markets, in contrast to the more comfortable position of the N!Es, which possess long-established quotas a nd where in recent years there has even been some difficulty filling quotas for labour-intens ive products owing to lo s of comparative advantage. Unles there is radical refo rm of the. MFA. Indonesia's recent export momentum will be maintained only by increased resort to the Thai route. Owing to in stitutional rigidities imposed as part of the MFA, there is something of a "U-s haped" relationship between the percentage of sales destined for MFA markets and the stage of development of a country's textil e a nd garment industries. Putting aside special country circumstances, both the long-estab lished exporters and the newcomers d.i play a very heavy reliance on MFA markets; it is the middle-staged exporter who are forced to see k out the more competitive non -MFA markets. Throughout the export boom of the 1980s, the United States has been th e dominant market for lndone ian garment exports, absorbing on average about 60 per cent of the total (Figure 14, part A). No other market has

50

INDON ESIA'S TEXTILE AND GARMENT INDUSTR IES

FIGURE 13 THE RELATIVE IMPORTANCE OF MFA MARKETS IN EAST AS IAN TEXTILE AND GARMENT EXPORTS ( o/o of total exports) . : , :,:·:.~.:

Taiwan

·:/.//.:-Y.:(/./;0~~(/,//-//;~///, ~/.. ·Z ~/, -Y.:(//,i;/,~~/:/,i;/,i;/;J

:: :: ::::::::::: ::::::::::::::::::::1

:::.:::.:::.::

Thailand Philippines

.:::·:.

~/,////./////./././,//////.//:/.

::::::::::::::::::::::::::::::::::::::::::::

'/;

1/////./.:~/////./.:l

.;: :;:::;:::: )

... .·.·

·:>:>::: l A '\ I [ \ 111 1 "-"D (,o\ R\1L

producin g an en o rmou range of different iated products. Moreover, in the 1980 the drawback scheme placed exporters on a free-trade footing, at least for traded inputs, thu s removing th e earli er bias against downstream acti itie which wa implicit in the cascading stru cture of production 1hroughout the 1970s. Nevertheless, that there has been high - and highly di spersed - protection for most of the industry is undeniable. TABLE 18: EST IM ATES OF PROTECT ION FOR TEXTILES AND GA RM ENTS, 1971 -89 (ERP, 07o )

pinning Weaving O th er textile good s (excl udin g garme nt ) Kni lling Garments arpe t, rope, etc. Other textiles OUR

E : 197 1: 1975: 1984: 1987: 1989:

1971

1975

1984

1987

1989

134 .3 - IVA

56.0 191 .7

62.0 569. 1

120.0 195 . 1

57.8 217 .3

- IVA - IVA 198 .6 - IVA n .a.

297 .6 331.5 110.0 101.4 n.a.

12.4 91.6 - 19. 1 324.1 - 9.5

94.4 24.9 39.1 44.0 -8.6

84.9 3.5 16.5 50.6 6.8

Pitt 1981. World Bank 1981. Parker 1985. Fane and Phillips 1991. Wymenga 1991 .

NOTE : " n.a." indicates estimates not prepared for this sector. "- IVA" indicates that value added was negative at international prices.

Some may invoke the high protection of the 1970s and the export success a decade later as prima facie vindication of the view that government intervention paid off, that protection during the import-substitu ting phase enabled firms to move up the technological ladder in preparation for the export phase. While this is a popular interpretation of Northeast Asian industrial policy making, and while the industry became increasingly efficient after 1970 (see Figure 5), the Indonesian experience actually provides little support for the " protection-first , export-later" view. For one thing, garments have been the principal export success story, and government policy if anything penalized this sector before 1985, owing to high protection upstream. Secondly, if the estimates of Table 18 are reliable, the high rates for some sectors (especially weaving) are presumptive evidence of continuing inefficiencies, at least among some segments, after two decades of extensive nurturing. Thirdly, the instruments of protection for much of this period - non-tariff barriers, and highly politicized ones at

th at - were often ha rdl y co nducive to the promotion of an effi ie nt indu strial base for ex port. Rather, the Indonesian export success story, as reco rded in Thble 12, underscores the critical importance o f gett ing the macro-econ o mic policy levers right. These are of such impact that they can o fte n o erride a o nfu sed and di storted mi cro, industrial policy environment. Two po li cie. were critical to the rapid growth of exports: exchange ra te management and trade reform. The Indonesian Government has responded decisively to the declining terms of trade since 1982 by large devaluations in Aprill983 and September 1986 and a steady decline thereafter, and by ensuring that infl atio nary pressures were contained. As a result, tradable good s industries have benefited significantly, just as they were squeezed a decade earlier. T here is some debate concerning the magnitude of these real effecti ve devaluations (Warr 1984), but there can be little doubt that they have been large and significant. For example, among the 16 developing countries reported in the Morgan Guaranty Trust Company series, from 1982 to first quarter 1989, Indonesia had the lowest index, below that of several other developing country primary commodity exporters which also experienced sharply declining terms of trade. The net effects of the exchange rate regime on costs vary among firms. But even for the most import-intensive operation (such as a garment manufacturer using only imported cloth), local costs still constitute 30-40 per cent of the total (UNIDO 1989), thus conferring a significant competitive advantage. The second key policy area has been trade reform. While there have been some general modifications to the trade regime, including reduced reliance on non-tariff barriers (NTBs) and a more unified tariff structure, by far the most important reform has been the introduction of a duty exemption and drawback facility, as part of the May 1986 policy package and subsequent amendments. Administered efficiently and liberally by BAPEKSTA from within the Department of Finance, the scheme enables exporting firms to source their inputs at i.nternational prices with little bureaucratic complication. In effect, virtually regardless of their operation, export firms have been able to operate as though they were part of an export processing zone. That firms have responded enthusiastically to the measure is illu strated in Table 19: through to 1988, almost one-quarter of manufactured exports have come under the facility's umbrella; for textiles the proportion has been even higher. The data suggest that there may have been some "plateauing" in the resort to BAPEKSTA, a healthy trend indicating that upstream uppliers are becoming increasingly internationally competitive. Moreover, much of the exports would have occurred anyway if just the Sertifikat Ekspor scheme (in a GATT-compatible form) had been retained, alongside effective exchange rate management. However,

68

INDON ES IA'S TEXT ILE AND GARM ENT

I NDU 5TR I E ~

TABLE 19: EXPORTS UNDER BAPEKSTA. 1986 - 89 (Oi'o of each group's exports)

All manufacturing Footwear Textiles Garments

1986

1987

5

22

29

136

7

25 28

II

1988

1989

24 86

n.a.

36

29

44 39 29

SOURCE : BAPEKSTA, and BPS, Ekspor (variou s i ~s ues). NoTE: BAPEKSTA is Bad an Pelayanan Kemudahan Ek por dan Pengolahan Data Keuangan, wit h an official Iran !arion as Agency for Export Facilit y Services and Financial Data Processing.

this in no way obviates the importance of maintaining the facility. Ind eed, its importance is actually understated by the data in Table 19, because exporting firms frequently use world prices (that is, those obtainable through BAPEKSTA) as a reference point in negotiating their purchases from domestic suppliers. Three other factors contributing to the export drive de erve mention, all less significant than these key policy reform and in their impact allle amenable to direct assessment. Fi.rst, it is possible that I ndone ia benefited from the MFA in the early export phase, when its firms would not ha e been able to compete internationall y with establi hed exporter uch a the Asian NIEs, whose sales were constrained by the Arrangement. That the MFA provides such market guarantees is artested by the generally very high proportion of exports directed to MFA market s in most co untrie 'i nitial export drive. However, as these constraints become binding, which they did for Indonesia in about 1987, the MFA ceases to offer such ex port protection, and firms face the more challenging task of increasing sales by quality up-grading and penetration of non-MFA markets. It is arguable that Indonesia has crossed the threshold and its exporters could probabl y compete in an open and unconstrained international market, particularly in lower value added items where the NIEs have lost competiti vene sowi ng to exchange rate and wage increases. Once a boon, the MFA is now a bane for Indonesia:" Other aspects of the reform packages have undoubtedly enhanced Indonesian exporters' competitiveness: customs procedures are quicker, financial services are more efficient and flexible (although most subsidized

* The literature on the effects of the MFA on developing countries has yet to examine systematically this "cross-over" phenomenon, although several st udies refer to it. See, for .example, Dean (1990), Erzan et al. (1990). and Goto (1989) .

1- ".; PI i\I N ING l HI: EX PORT SUCC ESS

69

credit facilities have been abo lished), licensing requirements are less onerous, and there are fewer restrictions on foreign investment. Moreover, there are genera l positive externaliti es from the country's successful export drive since 1985 : busine s and government alike have become more internationallyminded, the commercial support infrastructure required for a knowledge of international markets and export channels is vastly improved, and I ndone ia - once viewed a simply a primary commodity exporter - is now slow ly developing a reputation in international markets as a low-cost ~upplier of manufacture . Finall y the transition from import-orientation to exports was hastened, at lea t during the reces ion of the mid-1980, by luggish domestic demand growth . 1i tile producer had little incentive to eek markets abroad during the boom condition which prevailed until 1982. Many report the sharp d wnturn in dome tic demand in 1.983 / 84 a the initial timulus to look out~ ard, often exporting on a marginal co t basis to maintain capacity utilization . he e fora abroad were of cour e quic kly reinforced by the ther factor mentioned above.

VI Policy Issues and Future Prospects

Future growth in the industry will depend fundamentally on supply-side factors, that is, continuous improvements in efficiency. However, since exports will be the major source of growth, and these exports will be in the context of a managed international environment, increasing attention will have to be paid to demand side factors. In other words, Indonesia's export prospects are bound to be affected by the future of the MFA . The MFA, first established in 1974, has become ever more restrictive (Hamilton ed . 1990; Cline 1987). The current agreement will expire in late-1991. If discussions aimed at reincorporating textiles and garments trade within the provisions of GATT and removing the harsh provisions of the MFA succeed, Indonesia will be a beneficiary. However, in the absence of major reform, Indonesia's textile and garment exports will be determined by five broad sets of factors, of which the second, third . and fifth will be the most significant: •

•

•

Quota growth in MFA markets, particularly U.S. garments; this will depend in turn on the general parameters of the MFA framework, and on Indonesia's multilateral and bilateral negotiating skills. The effective utilization of existing quotas. The key factors here will be an efficient domestic quota allocation system - which Indonesia does not yet possess - and an efficient local industry able to fill all quotas. Particular attention in this context will have to be paid to the unfilled EC quotas, and to fabric and yarn and fibre exports, notwithstanding the distortions arising from a premature "upgrading" towards the more capital-intensive segments of the industry. There is some scope for more effective utilization of swing provisions between product items for a given market, but much less than was the case previously owing to the increasingly restrictive provisions of successive MFAs. Growth of non-MFA markets. Indonesia will have to reduce its heavy reliance on MFA markets and follow the successful Thai precedent of diversifying towards non-MFA markets, principally Japan, but

71

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INDONES IA'S TEXTILE AND GARMENT INDUSTR IES

•

•

also the Middle East, with its large expatriate Asian work-force, and the Asian NIEs, where rising exchange and wage rates are resulting in loss of comparative advantage in labour-intensive industries such as garments. Since Indonesia enjoys no special privileges in these markets, its share will depend essentially on its firms' international competitiveness. Growth of non-quota items. This is likely to be a negligible source of export growth . The MFA now extends to vi rtually all major product lines; in any case, earlier exemptions for products of "indigenous fibres" (for example, silk) were of little benefit to Indonesia. There will be some scope for synthetic fibre exports, however. Upgrading, that is, shifting to higher value items to circumvent the volume based quotas imposed under the MFA. This factor will depend almost entirely on the local industry's efficiency and flexibility.

The Allocation of Export Quotas

An efficient quota allocation mechanism is absolutely essential to ensure full utilisation of Indonesia's MFA quotas. Ideally, too, the allocation system should incorporate some notion of "fairness". Indonesia's export quotas are allocated by the Department of Trade according to an 80:10:10 formula, representing respectively past export performance, newcomers, and golongan ekonomi lemah (weak economic groups). The emphasis on past performance as an allocative criterion is thus consistent with practice in neighbouring countries. Export quotas can be revoked in the case of non-performance, while further flexibility was incorporated in 1987 with the introduction of an open auction sys tem . The quota allocation system might be regarded as operationally adequate to the extent that Indonesia's quota utilization rates to the United States and the EC are high. However, certain aspects of the system are unsatisfactory and have been the subject of trenchant criticism by producer groups in Jakarta's business press. At the heart of the trouble is the allocation of quota rents which arise from the restraint on trade under the MFA. Quotas for profitable items such as jeans are sold (generally illegally - a sale through the largely moribund bourse entails a cut in the quota holder's ent itlement the following year) for upwards of $20 per dozen (industry so urces report a peak price of $27 in 1989/ 90). Thus the acquisition of a substantial quota (for example, several thousand dozen jeans) is very profitable. 1 One problem is that administrative processes are slow. Quotas generally are not allocated until after the commencement of the quota year (which is the calendar year for the EC and July-June for the US); in some cases the delay can be as much as .three to four months. Without a quota

PO LI C Y ISSUES AN D FUTU RE PROSPECTS

73

allocation, exporters often miss out on lucrative contracts at the beginning of the year, when much business is transacted. Denying exporters maximum nexibility can be especially costly because the market can be quite unpredictable, with the prices of "hot" items nuctuating considerabl y. Delays in allocations instead force exporters to fill their quotas with less profitable end-of-period sales, thus contributing to Indonesia's low export unit values. Secondly, the administration lacks transparency. The Department of Trade rarely publishes a complete list of quota holders, nor are its grounds for quota allocation clearly established. This applies even to the 80 per cent past performance component, and there are widespread allegations of firm s with a satisfactory export performance in the past having their quotas cut back sharply . Clear guidelines concerning the I0 + I0 components have never been established. The absence of published information on quotas serves to reinforce suspicion and mistrust in sections of the business communit y, and to force exporters to spend excessive amounts of time lobbying key government officials. A related problem is that the lack of fully maintained records occasionally leads to problems of over-shipment and sometimes acrimonious disputes with trading partners. 2 Thirdly, there are frequent criticisms that the system is plagued by administrative irregularities. An export quota, as noted above, is a licence to print money, and there are powerful incentives for malpractice. The absence of clear guidelines and transparent allocation procedures therefore adds to suspicion that there are many "bogus" quota holders who possess little, if any, productive capacity and operate simply by "subcontracting" quotas while exporting under their own name. Reform of the system is therefore highly desirable, to ensure that Indonesia fills its export quotas and on the most profitable terms, that detailed and accurate records are available for domestic producers and trading partners alike, and that allocative mechanisms meet some test of "fairness". The minimum requirement would be to make the present system work more effectively. That is, quotas would be allocated quickly; detailed and accurate quota lists would be published frequently, together with data on export performance and quota holders' business address and productive capacity; and guidelines for quota distribution, especially of the 10+ 10 components, would be clear, unambiguous and available to the public. These reforms would contribute to improved export performance and deflect business criticism, especially from among the " non-favoured" groups. But there is also a case, on both efficiency and equity grounds, for the introduction of a quota auction system. Under such a system, which would involve frequent product and market-specific auctions, quotas would be allocated to the most efficient firms (that is, those able to use them profitably for export), while the rents would accrue to the public purse rather than private individuals. Nevertheless, such an innovation

74

INDON ESIA 'S TEXTIL E AND GARMENT INDUSTRIES

would put a premium on administrative capacity and, in order not to jeopardise Indonesia''!! current export quota performance, there may be a case for undertaking the basic reforms outlined above before embarking on more radical measures.

Industry Promotion Since exports are likely to be the major stimulus to growth in the 1990s, it is imperative that industry efficiency be increased. This in turn imposes two requirements on public policy. The first is that the general economic environment be conducive to growth. This involves the maintenance of a competitive real exchange rate, stable macroeconomic conditions, greater investments in physical infrastructure support (ports, roads, telecommunications, etc.), and a continuation of the reform process. The latter includes not only the trade regime and the banking sector, but also the complex regulatory system which - from land titles to labour legislation - continues to impose unreasonable exactions on exporting firms. In the case of trade policy, the liberal import provisions under BAPEKSTA need to be maintained and extended; more attention might also be given to the problems encountered by small and medium firms which supply exporters and which could in principle claim an import duty exemption on that part of their input cost structure which has been imported. Indeed, the industry's international competitiveness is such that all trade protection could probably be dismantled progressively, providing also that other efficiency-retarding business constraints are removed . There is a strong case also for more liberalized entry provisions for skilled workers in the industry. Owing to the past underinvestment in training, there is a serious shortage of accountants, designers, technicians, and marketing experts, and the government's official guidelines on the use of foreign labour are restrictive. The recent export boom has aggravated this shortage and bid up salaries. 3 Many foreign workers are known to be employed illegally in the industry. The government 's half-hearted and largely ad hoc liberalization of foreign worker permits has done little to ease this supply bottleneck; perhaps the government's response is explained by the fact that, in textiles at least, most of the skilled workers are ethnic Chinese from Hong Kong and Taiwan. One final, and somewhat unusual, aspect of the trade regime as it affects textiles and garments should be mentioned. The major input for fibre manufacture, apart from energy, is PTA (purified terephthalic acid). By the late 1980s approximately half of the seven fibre manufacturers' requirements were supplied locally, from a Pertamina plant in Plaju, South Sumatra. PTA imports are not subject to trade restrictions. However, under an informal agreement between the companies and Pertamina, the seven

PO LI C Y ISSUES A ND FUT U RE PROS PECTS

75

manufacturers import PTA only after Pertamina has cleared its stocks; in return, Pertamina has undertaken to supply its PTA at world prices. The problem with this arrangement, it is widely alleged, is that Pertamina's delivery schedule is erratic and uncertain, and its product is frequently of poor quality. 4 Thus the fibre manufacturers are being squeezed between their upstream supplier and downstream users, in the latter case to the extent that exporting firms can use BAPEKSTA. Perhaps the two new PTA plants to be constructed in 1991 - one by the Humpuss group in Aceh, the other by Bakrie in Serang, West Java (Jakarta Post, 30 October and 3 November 1990) - will improve the domestic supply situation. There is also much scope for more vigorous government promotion of the industry to enhance firms' international competitiveness, especially as "upgrading" will be a major source of export growth. The government has a number of industry promotion programmes, principally based around two institutions in Bandung, the Balai Besar Penelitian dan Pengembangan lndustri Tekstil (Institute for Research and Development of the Textile Industry) and the Sekolah Tinggi Teknologi Tekstil (College of Textile lndustry). 5 Yet these interventions are sporadic in nature, being shaped in many cases by foreign donor's strategies, and they have a strong "welfare" orientation, eschewing the' large firms in favour of small enterprise. To encourage Indonesian firms to move towards the frontiers of product design, product quality, management standards, and technological processes, there is a strong case for government-funded but commercially-oriented research institutes, 6 possibly funded from the revenue accruing to the government under an auction scheme. There may be scope for more direct intervention to improve productivity and efficiency, as envisaged in the World Bank's structural adjustment programme for the industry. As noted above, much of Indonesia's weaving machinery is now quite ancient, and there are frequent complaints from buyers - both domestic and foreign - regarding poor quality products and erratic deliveries. Although such targeted packaged interventions, opening credit lines and supplying information and expertise, may work, the most important promotional measures are of the kind described in the previous paragraph. Moreover, any attempt to force the pace of industry "modernization" could be self-defeating. The smaller firms employing older power looms and hand looms have developed market niches, and the owners rarely possess the expertise to manage the big new export-oriented mills. International Initiatives

Maintaining and increasing Indonesia's market shares in these industries requires not only greater domestic efficiency, .but an ever more vigorous

76

INDON ES I A 'S T EX TIL E AN D GARM ENT INDUSTRI ES

range of international initiatives. Notwithstanding past reservations (Mangkusuwondo et al. 1988), Indonesia has an immense stake in the c.urrent round of international trade negotiations. There is thus a case for trade liberalization in Indonesia not only for the immediate domestic economic benefits it confers, but al so to extract concessions from the major MFA signatories. In addition high-level negotiating skill s. buttressed by political clout, are required for the bilateral negotiating round s, particularly with the United States and the EC. There is ev idence, for example, that China was able to in crease its quotas to the United States significantly by stronger commercial diplomacy in the mid-1980s (Cline 1987, pp. 142-43). Indonesia could probabl y have done more in thi s area, with greater emphasis al so on the quality of its trade negotiating staff. More generally, greatly strengthened economic intelligence networks are required, which deliver accurate and timely information on market and product trend s to exporters. Japan is likel y to be the major source of export growth in the 1990s, owing to the fact that it is not a part y to the MFA; it has now lost all comparati ve advantage in these indust ries, and Indonesia-Japan ties are close. The government can facilitate export expansion to thi s market by forging stronger link s with major importers and retailers, and by providing detailed economic and commercial assessments. Such an approach requires the establishment of small but high-level think tanks located strategically in the key Departments in Jakarta, in addition world's principal trading to effective commercial representation in the I centres.

Notes I.

These qu o ta prices hi ghlight two additional aspects of the international reg ulatory regime. One is that these quota rent s beca me available just as the Ja karta Stock Exchange was reinvigorated . It is widely believed in business circles that the commercial attraction of the fast-rising stocks of some of the groups and firms which went public in the early phase was based in part on their ability to obtain large export quotas. The second as pect is the calculation of "export tariff equivalents" (ETE) arising from the quota rents, defined as follow s: ETE where QP AUV

QP AUV- QP

quota price ave rage unit value.

This and related measures, popularized by Hamilton (1985), can be calculated for each product category. The ETE varies considerably both across product groups and over time, and can be as high as 50 per cent, as was the case for

POLICY ISSUES AND FUTURE PROSPECTS

2.

3.

4.

5.

6.

77

medium price ·sweaters for the United States in mid-1990 (based on a quota price of $20 and a unit value of $60). Such a figure is within - though at the top end of - the range of figures presented by Kumar and Khanna (1990, p. 207) for India in 1988 and ·1989. The problem of over-shipment due to poor record-keeping appears to be becoming more - not· less - serious over time. In 1990, for example, embargoes were imposed on Indonesian exports by both Canada and the United States in response to alleged over-shipment. See, for example, Jakarta Post, 29 March ; Business News, 31 July; Kompas, 31 July. Before quotas became binding, the government's practice was to award quotas in excess of the country's entitlement to ensure higher fulfillment. But such a procedure has been discontinued since quota utilization rates approached 100 per cent, and the 1990 difficulties probably reflect outright fraud. In March 1990 the government proposed the introduction of an Automatic Visa Verification System (Kompas, 9 April) in its negotiations with the United States as a means of resolving the dispute. This scheme, implemented by the state-owned PT Sucofindo, became operational on I July (Kompas, 5 June). However, the fundamental problem would appear to lie within the Department of Trade. See, for example, 'Tenaga ahli tekstil jadi obyek bajakan sebab tak imbang' (Skilled textile workers are highly sought after ["plundered'] because of shortages), Business Indonesia, ,10 June 1990. Two further complications arose for the companies. First, on one occasion they broke the informal agreement and imported before Pertamina's supplies were exhausted . The result was the imposition of a 10 per cent import duty, which was revoked only after vigorous protest and a return to the old system. Secondly, politically powerful interests have become involved in the PTA distribution channels - and now, it seems, in production as well - placing further press ure on Pertamina's capacity to operate efficiently. A description of the activities of the two institutions is contained in a paper presented to the September 1990 Bandung conference mentioned in the Acknowledgemen ts. See Pack (1987) for a detailed discu ssion of measures to increase efficiency in developing country textile industries.

References

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THE AUTHOR Hal Hill, Ph.D, is Senior Fellow in Economics and Head of the Indonesia

Project in the Research School of Pacific Studies, Australian National University. He is also editor of the Bulletin of Indonesian Economic Studies. His major publications include Export-Oriented lndustrialisalion: the ASEAN Experience (1985), with Mohamed Ariff, Foreign Investment and Industrialization in Indonesia (1988), and Unity and Diversity: Regional Economic Development in Indonesia since 1970 (1989, editor). He is currently working on books on the ASEAN economies and industrialization in Indonesia.