Essays on International Trade and Development: Evidence from Indonesian Microdata

Abstract

No country has achieved significant development without engaging in international trade. However, this insight faces scrutiny as developing countries struggle to reach their potential despite open trade regimes. This thesis presents four empirical papers examining how international trade impacts various development aspects, using rich Indonesian microdata at both firm and individual levels.

The first analytical chapter (Chapter 4) examines trade liberalization's effect on labor share of income in Indonesian manufacturing from 1990-2015. The analysis reveals that reduced trade protection led to the emergence of superstar firms with superior performance and lower labor costs, ultimately reducing labor's income share through market share redistribution. Unlike developed nations where declining labor share coincided with increased market power, Indonesia's manufacturing firms maintained stable market power, suggesting a unique mechanism of trade reform's influence on labor share dynamics in a developing economy context.

Chapter 5 revisits the market discipline hypothesis of trade, which posits that exposure to international trade could limit firms' market power. Using the case of trade liberalization in Indonesian manufacturing, I show that the impact of trade liberalization on competition, measured by markup, will depend on the nature of liberalization itself. While output tariff liberalization creates a market-disciplining effect for firms by reducing markup, this effect is outweighed by input tariff liberalization, which increases firms' markups at a much higher level due to the efficiency effect of cheaper materials. This occurs because competition in Indonesia's manufacturing sector is imperfect, giving firms price-setting power. Thus, the pass-through from cost to price is likely to be incomplete, making the reduction of cost end up in higher markup. In this case, however, although both firms and consumers gain in absolute terms following liberalization, the distribution of the gain favors firms more than consumers.

Chapter 6 deals with the trade and productivity nexus but views it through the lens of allocative efficiency rather than within-firm efficiency improvement extensively discussed in existing studies. Chapter 6 examines trade and productivity through allocative efficiency rather than within-firm improvement. The shift of market share towards more productive firms drove productivity growth in Indonesian manufacturing, particularly in the 1990s, though this pace slowed significantly after 2000. Trade liberalization improves allocative efficiency by reallocating market share towards productive incumbents, forcing less productive firms' exit, and reducing industry distortion. This suggests trade liberalization's crucial role in reducing resource misallocation that hinders developing countries' growth potential.

The last analytical paper in Chapter 7 aims to understand the impact of export expansion to China on labor market outcomes among workers. To broaden the perspective, we include not only the commodity exports but also the manufacturing ones. We find that individuals living in the regions more exposed to export expansion to China experienced improved formal job opportunities. Export expansion also proved relatively progressive, raising formal employment opportunities and earnings growth particularly for lower- and middle-income classes. These results stem from manufacturing exports' expansion within a largely commodity boom period. Show more