General equilibrium analysis of the impact of the Indonesian Commitments under the World Trade Organization (WTO) on the macroeconomy, sectoral performance and household income
2005
Hermanto, Philippines Univ. Los Baños, College, Laguna (Philippines)
This study attempted to carry out an analysis of the actual impact of Indonesia's commitments under the WTO on the macroeconomy, sectoral performance and household income using a general equilibrium (CGE) model, specifically the WAYANG and INDORANI models which utilized standard databases drawn from the Indonesian 1995 and 2000 Input-Output data, respectively. The study revealed that the tariff reduction under the WTO commitments caused an increase in Gross Domestic Product (GDP), aggregate output and trade balance surplus. However, some macroeconomic variables such as terms of trade, export price index, aggregate output and tariff revenues have been adversely affected. Likewise, the output of some sectors including the horticulture industry (fruits, vegetables), paddy and sugarcane sectors declined after tariff reduction. The tariff cut has also reduced the nominal household income. However, household consumption still increased due to lower prices following tariff reduction. This led to an increase in the household welfare. This study suggests that the government should provide strong support to facilitate the development of the horticulture industry, paddy and sugarcane sectors. Tariff reduction on these sectors should be undertaken gradually to minimize the social cost of adjustment. The government should improve the competitiveness of agricultural export industries through the development of agricultural processing technology.
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