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Impact of a Lower Oil Subsidy on Indonesian Macroeconomic Performance, Agricultural Sector and Poverty Incidences: a Recursive Dynamic Computable General Equilibrium Analysis

Author

Listed:
  • Rina Oktaviani
  • Dedi Budiman Hakim
  • Hermanto Siregar
  • Sahara Sahara
Abstract
Budget deficit, exchange rate fluctuation and high fuel world price provides a pressure on budget capacity to stimulate the Indonesian economy. The government has designed several fiscal policies, including reducing the fuel subsidy. The study objective is to analyse the impact of reducing fuel subsidy on macroeconomic variables, agricultural sector, and income distribution. The modification on the basic model, which is a recursive-dynamic CGE model, is made in this study. The data used in the model is of the Indonesian I-O Table 2000, The Indonesian Social Accounting Matrix 2000, National Household Survey data and parameter from some other sources. The results show that the reduction in fuel price subsidy tends to increase prices of industrial outputs that highly depend on fuel, such as transportation and fishery sectors. In contrast, the change in fuel price does not influence the price of paddy. Wage of skilled labor, land rent, and capital rent decline steadily in response to the change in fuel price. Households will lose their income following the reduction in fuel subsidy, which then decreases the welfare of households. Incomes are not evenly distributed within the society (household groups). An increased fuel price at consumer level declines the Indonesian real GDP. The government should give the compensation of reducing the fuel subsidy directly to the poor people. The compensation can also be given directly to the poor people through the development of infrastructure, which may solve some supply side bottlenecks in the economy.

Suggested Citation

  • Rina Oktaviani & Dedi Budiman Hakim & Hermanto Siregar & Sahara Sahara, 2007. "Impact of a Lower Oil Subsidy on Indonesian Macroeconomic Performance, Agricultural Sector and Poverty Incidences: a Recursive Dynamic Computable General Equilibrium Analysis," Working Papers MPIA 2007-28, PEP-MPIA.
    • Handle: RePEc:lvl:mpiacr:2007-28
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    References listed on IDEAS

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    1. Nabil Annabi & Fatou Cissé & John Cockburn & Bernard Decaluwé, 2005. "Trade Liberalisation, Growth and Poverty in Senegal: a Dynamic Microsimulation CGE Model Analysis," Working Papers 2005-07, CEPII research center.
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    Cited by:

    1. Oktaviani, Rina & Amaliah, Syarifah & Ringler, Claudia & Rosegrant, Mark W. & Sulser, Timothy B., 2011. "The impact of global climate change on the Indonesian economy:," IFPRI discussion papers 1148, International Food Policy Research Institute (IFPRI).
    2. Arief Anshory Yusuf, 2006. "Constructing Indonesian Social Accounting Matrix for Distributional Analysis in the CGE Modelling Framework," Working Papers in Economics and Development Studies (WoPEDS) 200604, Department of Economics, Padjadjaran University, revised Nov 2006.
    3. Arief Anshory Yusuf & Budy P. Resosudarmo, 2007. "On the Distributional Effect of Carbon Tax in Developing Countries: The Case of Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 200705, Department of Economics, Padjadjaran University, revised Aug 2007.
    4. Peter Warr & Arief Anshory Yusuf, 2014. "Fertilizer subsidies and food self-sufficiency in Indonesia," Agricultural Economics, International Association of Agricultural Economists, vol. 45(5), pages 571-588, September.
    5. Rahman, Arief & Dargusch, Paul & Wadley, David, 2021. "The political economy of oil supply in Indonesia and the implications for renewable energy development," Renewable and Sustainable Energy Reviews, Elsevier, vol. 144(C).
    6. Yusuf, Arief Anshory & Resosudarmo, Budy P., 2007. "Searching for Equitable Energy Price Reform for Indonesia," MPRA Paper 1946, University Library of Munich, Germany.
    7. Herbert W. V. Hasudungan & Sulthon S. Sabaruddin, 2016. "The Impact of Fiscal Reform on Indonesian Macroeconomy: A CGE Framework," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 8(3), pages 181-202, September.
    8. Hadi Sasana & F. Salman & Suharnomo Suharnomo & S. B. M. Nugroho & A. G. Edy Yusuf, 2018. "The Impact of Fossil Energy Subsidies on Social Cost in Indonesia," International Journal of Energy Economics and Policy, Econjournals, vol. 8(2), pages 168-173.
    9. Shamaila Aziz & Muhammad Rizwan Yaseen & Sofia Anwar, 2016. "Impact of Rising Energy Prices on Consumer’s Welfare: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(4), pages 605-618.
    10. Mathew Adagunodo, 2013. "Petroleum Products Pricing Reform in Nigeria: Welfare Analysis from Household Budget Survey," International Journal of Energy Economics and Policy, Econjournals, vol. 3(4), pages 459-472.
    11. repec:aer:wpaper:346 is not listed on IDEAS
    12. Rina Oktaviani & Eka Puspitawati & Haryadi, 2008. "Impacts of ASEAN Agricultural Trade Liberalization on ASEAN-6 Economies and Income Distribution in Indonesia," Working Papers 5108, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada..
    13. Chatri, Fatemeh & Yahoo, Masoud & Othman, Jamal, 2018. "The economic effects of renewable energy expansion in the electricity sector: A CGE analysis for Malaysia," Renewable and Sustainable Energy Reviews, Elsevier, vol. 95(C), pages 203-216.
    14. Ditya Agung Nurdianto, 2016. "Economic Impacts of a Carbon Tax in an Integrated ASEAN," EEPSEA Special and Technical Paper tp201604t5, Economy and Environment Program for Southeast Asia (EEPSEA), revised Apr 2016.
    15. Arief Anshory Yusuf & Budy P. Resosudarmo, 2007. "Searching for Equitable Energy Pricing Reform for Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 200701, Department of Economics, Padjadjaran University, revised Dec 2007.

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    More about this item

    Keywords

    Fuel subsidy; income distribution; recursive dynamic CGE;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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