SMUGGLING IN INDONESIA'S CLOTHING INDUSTRY: ITS PREVALENCE, INCENTIVES, IMPACTS AND INSTITUTIONAL PROBLEMS

Abstract

This thesis examines the smuggling of imported clothing products in Indonesia¿s domestic market through investigation of its prevalence, incentives, impacts and institutional problems. It generally aims at providing a systematic verification study on smuggling and other potential factors contributing to the decline of Indonesia¿s clothing industry. It employs both qualitative information analysis from interviews and fieldwork observations as well as quantitative (empirical) data analysis. The findings show that smuggling of clothing products from Hong Kong, China, and South Korea have rampantly entered Indonesia¿s domestic market during the 2000s. Furthermore, China has come up as the significant source of Indonesia¿s smuggled products and its products have dominated the low-end clothing market. The competitive price offered by the smuggled products from China has attracted many small clothing entrepreneurs to divert their activities from producing the products domestically to distributing the smuggled products. Smuggling thus has plagued Indonesia¿s domestic clothing production. The threat of smuggling in Indonesia¿s market is still significant nowadays. The products have shifted to the high quality products including counterfeit products. As the consumer¿s lifestyle improved, Indonesians have responded positively and continued to increase their demand for smuggled products. The findings also show that the incentive to smuggle is triggered by the existence of price disparity between domestic and import products. The disparity is caused by the declining price of import, increasing price of domestic products, and poor enforcement by Indonesian authorities. The investigation shows that there are significant loopholes that entrepreneurs could use to evade trade restrictions and incur transaction costs lower than the cost of producing domestic products. It has attracted many entrepreneurs to engage in smuggling to gain extra profit margin. The findings also show that smuggling has both positive and negative impacts to economic welfare. Although smuggling causes significant decline in the domestic clothing industry, it could also have positive impact on the welfare improvement of the domestic consumers and give positive response to government to correct its `ill conceived¿ domestic regulations. In the end, this thesis analyzes smuggling as the failure of the regulatory state to create competitive conditions for the domestic clothing sector, which results in the misallocation of the resources away from the sector that is really needed to be developed toward the sector where the access for highest short term-profit is permitted. The competitive policies implemented in the clothing trade and investment did not open up trade broadly, in fact the new restrictions have emerged. Patron¿client relationships still persist in some policy-formulation process, leading to a problem of misdirection of some policies to certain groups with rent-seeking interests. Overall, this research has provided new insights into distinct ways to analyze smuggling as it has employed multidisciplinary approaches from economic perspective to social and political economy dimensions.