Problem Statement:

In 2019, the government of Indonesia aimed to reduce the country’s reliance on imported goods and promote domestic production. One of the key sectors identified for growth was the textile industry.

Diagram

The diagram is much the same as quota since it has the same effects.

Policy: To achieve this goal, the Indonesian government implemented administrative barriers to limit imports of textiles. Specifically, the government introduced a new regulation requiring importers to obtain a special permit, known as a “Limited Importer Identification Number” (NIK), which would be issued only after a lengthy and costly application process. This policy aimed to increase the cost of importing textiles, thereby making domestic production more competitive.

Numbers:

• In 2018, Indonesia imported approximately $4.2 billion worth of textiles, accounting for about 25% of the country’s total textile market.
• The cost of obtaining an NIK permit was estimated to be around $5,000 per application.
• The government projected that the policy would lead to a 20% reduction in textile imports within the first year of implementation.

Evaluation:

Short-run effects:

• The policy will likely lead to a reduction in textile imports, as the increased cost and bureaucracy of obtaining an NIK permit will deter some importers.
• This reduction in imports may lead to a short-term increase in demand for domestically produced textiles, potentially boosting sales and production for local textile manufacturers.

Long-run effects:

• In the long run, the policy may encourage investment in the domestic textile industry, leading to increased production capacity and efficiency. This could lead to lower prices and improved quality of domestic textiles, making them more competitive with imports.
• However, the policy may also lead to a decrease in consumer welfare, as the reduced availability of imported textiles may limit consumer choice and drive up prices.

Assumptions in the model:

• The policy assumes that domestic textile manufacturers can meet the increased demand for textiles, and that they have the capacity to produce high-quality products at competitive prices.
• The policy also assumes that importers will not find ways to circumvent the NIK permit requirement, and that the government will be able to effectively enforce the regulation.

Pros:

• The policy may help to promote domestic production and reduce reliance on imported goods.
• It may lead to increased investment and job creation in the textile industry.

Cons:

• The policy may lead to a decrease in consumer welfare, particularly if domestic production is unable to meet demand or provide high-quality products at competitive prices.
• The added bureaucracy and cost of the NIK permit may disproportionately affect small and medium-sized enterprises (SMEs), which may not have the resources to navigate the complex application process.