Indonesian Textile Exports in the Presence of Bilateral Foreign Aid

Abstract

This study aims to analyze Indonesia’s export of textiles after the abolishment of the quota system from a gravity model perspective. The textile industry is selected because of its growth trend in Indonesia. Bilateral foreign aid is included as a proxy of the close friendship between Indonesia and its trading partners. Data were compiled from various sources, comprising target-export countries during 1999–2009, and a linear regression model was used to estimate the significance of gravity. The results show that the presence of foreign aid leads to higher volumes of textile exports. As expected, distance has a negative impact at a decreasing rate, and Indonesia’s income per capita has a negative impact as well. This indicates that an increase in Indonesia’s income per capita leads to higher domestic consumption. Similarly, the income per capita in export-target countries has a positive impact, wherein international demand for textile increases, leading to an increase in the export of Indonesian textiles. Increases in the price of textiles and the exchange rate lead to a lower volume of exports. Indonesia should increase investment in the textile industry to fulfill domestic demand and reduce its dependency on imported raw materials.