Sugiyarto, Guntur
(2000)
The economic effects and distributional implications of economic reform policies on the Indonesian economy: a CGE approach.
PhD thesis, University of Nottingham.
Abstract
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.
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