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

Trade Liberalization and Labor Markets: The Case of Indonesia

Trade liberalization has long been advocated for standard reasons of increasing competition and welfare. Yet, there is still considerable debate, particularly in developing countries, about the range of effects that result from liberalization and the relative magnitudes of different effects. Such debate stems, in part, from the fact that trade reform takes place in a distortionary context. The effects of trade reform in the presence of other distortions fall into two strands: trade liberalization and distortionary domestic taxes, and trade liberalization and labor market distortions. Whereas the former has received significant attention, the analysis has generally been undertaken in the context of an unchanging labor market regime. However, labor market reforms are commonly under consideration, so that it is important to take account of their possible effects on trade liberalization and welfare of different sectors of the population. This paper examines trade liberalization in the presence of alternative labor market regimes in urban and rural sectors. The analysis first considers a form of labor market distortion that is relatively common in developing countries. The presence of wage rigidities in the form of minimum wages, unionized labor or government controls in formal or urban sectors contrasts with the absence of such rigidities in informal or rural sectors. This paper examines the consequences of trade liberalization in such a setting, showing that, under certain conditions, labor market rigidities can mean that trade liberalization reduces welfare. The paper also examines the effects of trade liberalization in the context of higher or lower rigidities in labor markets. The alternative combinations of labor market rigidity/liberalization and trade liberalization are tested in a computable general equilibrium model of Indonesia that incorporates 18 production sectors, 8 types of labor, 5 types of capital and 8 representative household groups. While full trade liberalization is found to be welfare improving, liberalizing only part of the tariff schedule can lead to welfare losses

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