Transcript
IMPACT OF DOUBLE SQUEEZE PHENOMENON ON EAST JAVA SMALL MEDIUM INDUSTRIES (SMI) SUSTAINABILITY AFTER ASEAN CHINA FREE TRADE AGREEMENT (ACFTA) IMPLEMENTATION Farah Wulandari Pangestuty Faculty of Economics and Business Brawijaya University
[email protected] Ermita Yusida Faculty of Economics and Business Brawijaya University
[email protected] The role of Small Medium Industries (SMI) in Indonesian economy has long been recognized through its role in alleviating poverty and decreasing unemployment rate. However, C hina’s products have been becoming thread for SMI s’ sustainability through ACFTA scheme. This paper aims at identifying industries in East Java, having the most sensitivity upon huge influx of cheap products imported from China, and ana lyzing its implications to SMIs’ existence. The methodology we use are in-depth interview with some of the respondents, combined with 3 Stage Least Square model used to determine the most uncompetitive variant products produced by East Java SMI. The results show that SMI are facing a double squeeze phenomenon worsening their competitiveness. Furthermore two most sensitive and uncompetitive SMI’s variant products are: (i) handicraft industries, and (ii) metal and electronic industries. On the contrary SMI engage in clothing industries, and chemical and building material industries are the most competitive ones. Hence SMI with natural resources input base still has their attractiveness after the implementation of ACFTA. Field of Research : International Trade, Small Medium Industries, Double Squeeze Phenomenon. --------------------------------------------------------------------------------------------------------------------- 1. Introduction Small Medium Industries (SMI)s’ role on economic development in Indonesia were very important, both their role on employment absorption and economic growth. Based on national statistic data, during the last 5 years, number of employment absorption by SMIs were more than 60% from total number of national workforce and contribute to more than 50% of GDP. This indicates that SMIs were able to boost economic growth and reduced the level of poverty, thus, SMI was a basic foundation of national welfare. However, with all the excellences, problems were still undergone by SMIs in this country. Mainly, the modernization era caused SMI might be able to compete to stay survive in expanding its business. Not only competition between SMIs, competition also occurred between SMIs and big industries, which had larger economies of scale. Furthermore, after ASEAN-China Free Trade (ACFTA) agreement had been signed, SMI should be keener in improving the quality of its products. This was happen because a lot of countries were competing in marketing their goods and services to all over the world without any barriers, so that their domestic products might be able to compete with imported products in their domestic market. So far, there had not been any define theory regarding the advantage and disadvantage of free trade. According to the Classical theory of trade, the advantages of international trade were gains of trade. As stated by Salvator (1997), gains of trade which could be occur were (i) consumption gains of trade, which was availability of goods that could be consumed by the citizens on a country with cheaper price, compared to when there was no trade with another country; (ii) Production gains of trade, which was production by a country that produced a product specialty for its product with relatively more efficient workforce compared to produce another product; and (iii) GDP gains of trade, that was an increase in GDP regarding the increase in domestic output and consumption of a country’s citizens. Nevertheless, gains of trade above were different in every country; depended on how big the term of trade gained from the trade interactions. In this theory, Classical economist assumed that the market structure was perfectly competitive. Meanwhile on the development and empirical condition, market did not run according to Classical assumption. A new theory describes this Classical assumption came from Economic Institutional Theory. The New Economic Institutional Theory stated that free trade not always gave positive impact to a country. This happened because of asymmetric information on the market, and market did not run according to perfectly competitive condition (North, 1990). Cost of transportation and information neglected on the Classical Theory, prove to affect the economic transactions (Yeager, 1999). Information inequality cause free trade not always gave positive impacts. The advantageous sides of free trade were they who had more information, as well as price (Yustika, 2008). The existence of the brokerage and rent seeking had disrupted the market (Olson, 2001). The brokerage who tent to have more information, often manipulate the price of goods, led to market distortion where price received by consumers was not really reflects the actual market price. Surely, a lot of moral hazard in economic activity causes profit to be enjoyed by one party alone. As well as free trade which only profitable to those who had more information than the other. With the shift of economic order towards free trade, it could be said that SMIs face a double squeeze situation, which was situation that come from internal factor namely productivity gap, efficiency and innovation, also from external factor, namely pressure (Tambunan and Ubaidillah, 2008). Based on the description above, the purpose of this study was to examine the impact of ACFTA implementation towards sustainability of SMIs in East Java. Further, after the impact was known, the rate of SMIs’ product sensitivity would be analyzed to see which industries are affected by ACFTA. 2. Literature Review Regionalism creates market Based on the theories of comparative advantages classical economists had promoted, every country having different endowment factors increase their wealth by trading. International trade was becoming a crucial factor through its sharing to sustain countries’ income. Krugman, et al (2012) said that the growth of international trade had been more than doubled recently. This process was accelerated by the formation of Regional Trade Area (RTA). There were several reasons why regional cooperation occurs, however we could classify at least two of them: policy-induced integration and market-driven integration (Cihelkova, et al, 2007 in Stuchlikova, 2008). Policy-induced integration (called regionalism) involves formal economic cooperation arrangements to liberalize or facilitate trade on a regional basis. The Free Trade Agreement (FTA) was the most frequent institutional form of these regional arrangements. On the other hand, market-driven integration (called regionalization) was spurred by regional growth dynamics, the emergence of international production networks and related flows of foreign direct investments. The forms of cooperation among countries de- pend on many internal and external factors and conditions on the specific geographical, historical, cultural and political circumstances in the region, on the current economic policy directions both at the national and global levels, etc. Moreover, this extension of market as a result of RTA formation created new opportunity to achieve economies of scale. Production efficiency occurred when firms spread over their costs to more number of products. Thus, firms could sell the products in a lower price that at the end of the day could booster their competitiveness. This positive impact of RTA formation was not always the case. There were two concepts related to trade creation and trade diversion that at the same time could happen in a country facing this sort of tariff liberalization. Trade creation occurred when the lowering of tariffs allows partner country imports to replace high-cost domestic production. Trade diversion, on the other hand, occurred when the removal of tariffs caused trade to be diverted from a third country to the partner country despite the fact that, the countries treated equally, the third country would be the low cost source of imports. Thus, it depended on the degree of those two effects relatively happening in the country (Clausing, 2001). Consumer choice among goods in relation with Characteristic of SMIs’ pro ducts Theoretically, consumer behaved rationally by maximizing their utility with a certain budget constraint. Individual indifference curve reflected how consumers chose the products they wanted to consume in a certain rate of satisfaction. Consumers would choose any combination that was best for them in terms of quantity. The higher the location of indifference curve from the srcin, the more goods consumers could get, the better off the consumer would be. Indifference curve theory showed that there would be two effects influencing consumers’ welfare if the price changes: substitution effect and income effect. In brief, consumers would be better if the price of the goods or substitutable goods went down. Substitution effect revealed that consumers would tent to move to goods that was cheaper, and would buy more on it. Furthermore, Monroe (1973) stated from his research that pricing was an important decision due to its effects on buyers’ price perception. Consumer price perceptions were interlinked with consumers’ purchase intentions. Price reflected consumers’ willingness to pay. In relation with domestic SMIs’ products which were in general had low competitiveness in terms of price, meaning that SMIs could not produce their products efficiently and sold it in higher prices. In addition, SMIs’ products had many substitution goods (substitutable. Instantly, this fac t would affect the consumers’ preferences which tent to easily moved or shift their consumptions from one good to the others. Market imperfection and Role of middleman New institutional economics explained the Classical assumption regarding perfectly competitive market (Yustika, 2008). Many research also examined concerning imperfect market in international market, both by means of pricing to market approach, which tracks pricing decisions by exporters across markets as bilateral exchange rates change (Krugman, 1987; Knetter, 1989) and New Empirical Industrial Organization (NEIO) methods (Genesove and Mullin, 1998). The pricing to market approach had the advantage of not requiring data on quantity adjustments associated with the price changes. However, it revealed little about the extent of market power and type of game played by firms. Another drawback was that in general it failed to distinguish price discrimination from other phenomena such as product differentiation. On the other hand, NEIO methods focused on structural models of supply and demand and on measuring mark-ups over marginal cost. Furthermore, this imperfect market causes the existence of middleman (brokerages) in the trade. This was caused by asymmetric information in the market, led to the emergence of transaction cost that ought to be taken into account . Mainly in developing countries, middlemen were thought to earn excessive profits (Chau, Hideaki, Ravi :2009). Middlemen, trading entrepreneurs who link the backwaters of developing countries to emerging markets nationally and especially globally, seem to be universally reviled despite the economic service they provide. Without their capital and specialized knowledge, high prices in growing markets might be outside the reach of the small holder in the rural area, or of the home-based artisan in the urban slum. Middlemen made excessive profits because of their market power, which was at the root of much of the concern. Thus, for example, McMillan, Welch and Rodrik (2004) study the case of cashews in Mozambique, and report that cashew growers only receive 40 to 50 percent of the border price, even after border taxes are allowed for. They go on to note: “it is clear that the marketing channels for raw cashew nuts remain imperfectly competitive. Farmers' incomes are depressed not only by transport and marketing costs, but also by the market power exercised by the traders." (p 120) Middleman caused transaction cost rose because information was costly and held asymmetrically by the parties to exchange. As a result, although the players developed institutions to structure human interaction, however, it resulted in some degree of imperfection of the markets. In addition, the incentive consequences of institutions provided mixed signals to the participants, thus, even in those cases where the institutional framework was more conducive to capturing the gains from trade than an earlier institutional framework, there would be incentives to cheat, free ride, and so forth that would contribute to market imperfections (North,1992). Finally, Institutions were the rules of the game in a society; more formally, they were the humanly devised constraints that shape human interaction. In consequence they structured incentives in exchange, whether political, social, or economic. Because Western neoclassical economic theory failed to take account of institutions, it was of little help in analyzing the underlying sources of economic performance. It was no exaggeration to say that although neoclassical theory focused on the operation of efficient markets. 3. Theoretical Framework Picture 1. Theoretical Framework Source: author ilustration, 2012 Figure 1. showed that trade competition occurred between domestic and foreign products, especially in the implementation of ACFTA. Supply products in the domestic and overseas markets would affect the price and quantity, that when there was an excess supply, the market tent to be more competitive which caused the price drops. This price suppression also caused pressure on the quantity of production. Both of these conditions would result in continuing decline of total revenue, with the assumption of constant total cost in the short term. Finally the domestic and foreign pressures would reduce profit. The hypothesis of this study could be stated as follows: 1. ACFTA had a positive impact on quantity 2. ACFTA had a negative impact on price
