AFTA and the textile industry in Malaysia

Abstract

The textile industry, often an important pillar in industrial take-off, generally diminishes in significance as economies reach maturity. Burgeoning costs following rapid industrialisation form the basis for such a transition. Although Malaysia's experience is different in that it is still moving towards industrial maturity the symptoms of spiralling wages and acute labour shortages has created elements of similar pressure for the industry in Malaysia. Rising production costs has inevitably induced production reorganisation within the industry. While export-oriented firms have gradually been adapting with competitive currents, the viability of local-owned textile firms that supply the domestic market leave serious doubts. The gradual elimination of import-substitution rents that will accompany the implementation of the Association of Southeast Asian Nations Free Trade Area (AFTA) agreement will obviously undermine the performance of inward-looking firms. Using both aggregate and selected firm-level data, this paper examines the implications of such trade liberalisation and rapid industrialisation on the competitiveness of the textile industry in Malaysia. Its main conclusions are that local import-substituting firms are likely to close down - benefiting Thai firms in the short fun. However, if liberalisation includes ownership, it will eventually favour foreign firms in the long run.