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

MPIA Working Paper No. 2007-28

29 Pages Posted: 25 Jan 2008

See all articles by Rina Oktaviani

Rina Oktaviani

Bogor Agricultural University - Department of Economics

Dedi B. Hakim

affiliation not provided to SSRN

Sahara

Bogor Agricultural University - Department of Economics

Hermanto Siregar

Bogor Agricultural University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007

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 indirectly to the poor people through the development of infrastructure, which may solve some supply side bottlenecks in the economy.

Keywords: fuel subsidy, income distribution, recursive dynamic CGE

JEL Classification: C68, D63, I32, I38, O13

Suggested Citation

Oktaviani, Rina and Hakim, Dedi B. and Sahara and Siregar, Hermanto, Impact of a Lower Oil Subsidy on Indonesian Macroeconomic Performance, Agricultural Sector and Poverty Incidences: A Recursive Dynamic Computable General Equilibrium Analysis (December 2007). MPIA Working Paper No. 2007-28, Available at SSRN: https://ssrn.com/abstract=1086380 or http://dx.doi.org/10.2139/ssrn.1086380

Rina Oktaviani (Contact Author)

Bogor Agricultural University - Department of Economics ( email )

Indonesia

Dedi B. Hakim

affiliation not provided to SSRN ( email )

No Address Available

Sahara

Bogor Agricultural University - Department of Economics ( email )

Indonesia

Hermanto Siregar

Bogor Agricultural University - Department of Economics ( email )

Indonesia

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