The economic effects and distributional implications of economic reform policies on the Indonesian economy: a CGE approach

Having discussed issues of economic reform and its applications on the Indonesian economy followed by Indonesian SAMs and CGE applications, three CGE models representative to the economy were developed by using SAMs of 1985, 1990 and 1993 for analysing the effects of economic reform. Production is specified as a two-level nesting of CES functions and total production is allocated to domestic demand and exports. Producers are assumed to be indifferent between selling domestically and exporting, while for imports the `small country' assumption is adopted. Total demands are derived from composite commodities of domestically produced and imported commodities. Fixed and planned consumption patterns are assumed for households and government, which makes government saving a residual. Aggregate investment is accordingly fixed, reflecting the 'investment driven' nature of the economy. Three policy changes (i.e. stabilisation, trade liberalisation and tax reform) are then simulated as well as sequencing simulations, in which the three policy changes are simulated in different orders. Stabilisation simulation results suggest that government spending cut will make contractions, leading to worsening welfare status. This policy, however, has favourable impacts on income distribution, since government consumption has increasingly been favouring higher income households. Trade liberalisation increases trades and availability of products. This in turn improves macroeconomic performance and welfare condition. Trade balance and government deficit, however, worsen. This policy also has favourable impacts on income distribution of rural households since urban households seem to be the ones benefiting from the existing tariff protection. Indirect tax reductions improve macroeconomic performances, welfare condition and income distribution, especially among agriculture households. Government bears the adverse effects due to its consumption behaviour and initial budget deficits. The sequencing simulations show that initial condition is crucial which affects choices of favourable policies. A sensible choice for sequencing of economic reform in Indonesia is to start with tax reform, which can then be followed by, trade liberalisation and stabilisation. By having less distorted domestic market, the benefits from trade and other reform policies can be more realised. If a deficit reduction is a matter of urgency, stabilisation should include other policies that reduce existing distortions. The same is also applied for trade liberalisation. There seems an urgent need to further dismantling the existing distortions in the domestic market, indicating that the actual government policies adopted during, the period concerned were 'not the best ones

Achieving Skill Mobility in the ASEAN Economic Community: Challenges, Opportunity, and Policy Implications

Despite clear aspirations by the Association of Southeast Asian Nations (ASEAN) to create an effective and transparent framework to facilitate movements among skilled professionals within the ASEAN by December 2015, progress has been slow and uneven. This report examines the challenges ASEAN member states face in achieving the goal of greater mobility for the highly skilled, including hurdles in recognizing professional qualifications, opening up access to certain jobs, and a limited willingness by professionals to move due to perceived cultural, language, and socioeconomic differences. The cost of these barriers is staggering and could reduce the region’s competitiveness in the global market. This report launches a multiyear effort by the Asian Development Bank and the Migration Policy Institute to better understand the issues and develop strategies to gradually overcome the problems. It offers a range of policy recommendations that have been discussed among experts in a high-level expert meeting, taking into account best practices locally and across the region

The economic effects and distributional implications of economic reform policies on the Indonesian economy: a CGE approach

Having discussed issues of economic reform and its applications on the Indonesian economy followed by Indonesian SAMs and CGE applications, three CGE models representative to the economy were developed by using SAMs of 1985, 1990 and 1993 for analysing the effects of economic reform. Production is specified as a two-level nesting of CES functions and total production is allocated to domestic demand and exports. Producers are assumed to be indifferent between selling domestically and exporting, while for imports the `small country' assumption is adopted. Total demands are derived from composite commodities of domestically produced and imported commodities. Fixed and planned consumption patterns are assumed for households and government, which makes government saving a residual. Aggregate investment is accordingly fixed, reflecting the 'investment driven' nature of the economy. Three policy changes (i.e. stabilisation, trade liberalisation and tax reform) are then simulated as well as sequencing simulations, in which the three policy changes are simulated in different orders. Stabilisation simulation results suggest that government spending cut will make contractions, leading to worsening welfare status. This policy, however, has favourable impacts on income distribution, since government consumption has increasingly been favouring higher income households. Trade liberalisation increases trades and availability of products. This in turn improves macroeconomic performance and welfare condition. Trade balance and government deficit, however, worsen. This policy also has favourable impacts on income distribution of rural households since urban households seem to be the ones benefiting from the existing tariff protection. Indirect tax reductions improve macroeconomic performances, welfare condition and income distribution, especially among agriculture households. Government bears the adverse effects due to its consumption behaviour and initial budget deficits. The sequencing simulations show that initial condition is crucial which affects choices of favourable policies. A sensible choice for sequencing of economic reform in Indonesia is to start with tax reform, which can then be followed by, trade liberalisation and stabilisation. By having less distorted domestic market, the benefits from trade and other reform policies can be more realised. If a deficit reduction is a matter of urgency, stabilisation should include other policies that reduce existing distortions. The same is also applied for trade liberalisation. There seems an urgent need to further dismantling the existing distortions in the domestic market, indicating that the actual government policies adopted during, the period concerned were 'not the best ones

The Economic Effects and Distributional Implications of Globalisation and Foreign Tourism Boom in the Indonesian Economy: A CGE Assessment

A tourism-CGE model representative of the Indonesian economy is developed based on modified version of the Indonesian SAM 1993, for analysing the economic effects and distributional implications of globalisation and foreign tourism boom. Two policy changes are simulated to represent partial and full-scale globalisation. The former suggests that it will increase the amount of foreign trade and availability of products in the domestic economy. This in turn stimulates production activities, improves macroeconomic performance and welfare, as domestic absorption, household income and consumption increase. Foreign tourists are better off for they can consume more with their benchmark spending level. The trade balance and government deficit, however, worsen, as imports increase more than exports and the government maintains its level of spending despite its ‘lost’ income from tariff reductions. This policy has favourable impacts on the income distribution of rural households even though their incomes decrease. Urban households and farmers benefit from this policy as shown by increases in their both absolute and relative income levels. But their income distributions slightly worsen. The full-scale globalisation results in much higher macroeconomic performance, welfare, and improved income distribution of agriculture households. The government, however, continues to bear the adverse effects due to its consumption behaviour and initial budget deficits. The foreign tourism boom is then introduced in each scenario to complete the analysis. Policy implications of this study call for the government to reduce its reliance on revenues from import tariffs and indirect taxation, but to really embark on globalisation. A sensible way for doing this is to start with removal of distortions in the domestic economy which can then be followed by full-scale globalisation. The growth of foreign tourism could be of an incentive in this case. By having less distorted domestic markets, the benefits from having global markets can be more fully realised. Globalisation, as measured here, seems to be ‘foreign tourism’-friendly as they enjoy lower prices and increased availability of products, and hence is compatible with government efforts to attract more foreign tourism

Trade Liberalisation with Labor Market Distortions: the Case of Indonesia

There is still considerable debate on the issue of trade liberalization in the form of tariff reductions, particularly about its economic benefits and its forms. In contrast to standard assumptions, trade liberalization in developing countries commonly occurs in a context of multiple distortions, notably in the labor market in the form of wage rigidities. Governments have introduced various regulations resulting in wage rigidities with the objective of providing lower cost inputs or restraining relative wage bargaining, thereby limiting the cost of the public sector wage bill. Prediction of trade liberalization effects within this context is by no means clear. An important issue relating to tariff liberalization is, therefore, the economic effects that will ensue within a context of labor market distortions, compared with the effects that would occur if such distortions were removed. A second issue concerns the ways in which the trade liberalization is implemented. Trade liberalization in the form of tariff reductions can be implemented in a variety of ways, including standard percentage reductions in the set of prevailing rates (lump sump rate across the board), differing reductions to achieve a uniform rate and differing reductions to achieve an optimum tariff in the second best situation. The different forms of tariff liberalization give rise to different effects, not only on trade but also on welfare, income, employment and distribution that is relevant to the choice of appropriate policies. Although trade liberalization has been investigated in the context of tax distortions (for example, Konan and Maskus, 2000; Yilmaz, 1999), relatively little attention has been paid to trade liberalization in the context of labor market distortions. Notable exceptions are the intertemporal model of liberalization reforms in the context of financial and labor market distortions developed by Battle (1997), the effects of unions on the outcomes of economic reform (Devarajan et al., 1997) and the effects of trade and labor market distortions on trade volumes and the wage gap between skilled and unskilled workers (Bussolo et al., 2002). Thus, the issue of the relative effectiveness of different forms of tariff liberalization in the context of rigid or flexible labor markets remains obscure. It is, however, of considerable practical importance for developing countries which are considering reforms in their trade and labor market regimes. This paper will build on the literature on trade policy by extending the analysis of tariff reductions to encompass the effects of labor market reform. The effects will be measured not only in terms of changes in welfare but also as changes in income and employment, and in the distribution of income between population groups. The analysis will focus on Indonesia, which is an interesting example of a country that is undertaking ongoing trade reforms. Tariff reductions have been a feature of the economy during recent years and a trend of further reductions is likely. However, intermittent increases in tariffs during also appeal to the government which, as in other developing countries, has limited reserves for financing ongoing expenditure during downturns in economic activity. The availability of quantitative estimates of the range of effects of alternative policy reforms is clearly useful for guiding the liberalization process. The main aims of the paper are to examine and quantify the effects of alternative types of tariff reductions and labor market regimes on welfare, income, employment, the government budget, trade balance and income redistribution in Indonesia, within a general equilibrium, multi-sectoral context. The analysis will be undertaken for different types and levels of tariff reductions, in the context of three different labor market regimes - with wage rigidity in all sectors, rigidity in some sectors or flexibility in all sectors. The case of Indonesia is interesting as the labor market rigidities stem from a range of government regulations, highlighting the role of the regulatory context in determining the effects of liberalization. Different exchange rate and budgetary contexts will also be taken into account. As the effects of tariff policy reform are mediated by the prevailing exchange rate regime, ranging from fixed (with an endogenously determined balance of payments) to market-determined, results will be provided for both types of exchange rate regime. Results will also be provided for both neutrality and non-neutrality of the government budget as although neutrality is a constraint to policy formation over the medium to long term, non-neutrality can occur within the very short term