2003 By Default! Proposal - PEP-NET · ªMany of the WAYANG equations are non-linear. However,...

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Presented byPresented by

HERMANTO RACHMAN HERMANTO RACHMAN ISABELITA M. PABUAYON ISABELITA M. PABUAYON UU--PRIMO E. RODRIGUEZPRIMO E. RODRIGUEZ

Prepared for 4Prepared for 4thth PEP General Meeting: PEP General Meeting: June 13June 13--17, 2005 in Colombo, Sri Lanka17, 2005 in Colombo, Sri Lanka

Proposal :Proposal :

ANALYZING THE IMPACT OF THE URUGUAY ROUND ANALYZING THE IMPACT OF THE URUGUAY ROUND AGREEMENTS ON AGRICULTURE IN INDONESIA AGREEMENTS ON AGRICULTURE IN INDONESIA

USING CGEUSING CGE--MICRO SIMULATION APPROACHMICRO SIMULATION APPROACH

The Indonesian Agency for Agricultural Research and Development The Indonesian Agency for Agricultural Research and Development (IAARD) and University of the Philippines Los (IAARD) and University of the Philippines Los BanosBanos (UPLB(UPLB))

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OutlineOutline

IntroductionPrimary Research Questions and ObjectivesCountry BackgroundBrief Review of Relevant LiteratureThe Model and MethodologyDataThe Contribution of the ResearchDissemination StrategyExpected Capacity Building

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IntroductionThe Uruguay Round established as a new framework for internationThe Uruguay Round established as a new framework for international al trade rule that was completed in 1994. trade rule that was completed in 1994. The real innovations of the Uruguay Round are The real innovations of the Uruguay Round are the Agreement on the Agreement on Agriculture (Agriculture (AoAAoA) ) Three main pillars of Three main pillars of AoAAoA::1.1. Market AccessMarket Access: : tarifficationtariffication, tariff reduction, minimum access, tariff reduction, minimum access

Developed CountriesDeveloped Countries == 36%; 36%; developing Countries =developing Countries = 24%24%2.2. Domestic supportDomestic support: have to be reduced.: have to be reduced.

Developed Countries =Developed Countries = 20%; 20%; developing Countries = 13%developing Countries = 13%3.3. Export CompetitionExport Competition : have to be reduced: have to be reduced

Developed CountriesDeveloped Countries = 36%; d= 36%; developing Countries= 24%eveloping Countries= 24%

Implementation: Implementation: developed Countriesdeveloped Countries (1995(1995--2000) 2000) developing Countries (1995developing Countries (1995--2004)2004)

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Introduction

Global agricultural tariffs remain high (Global agricultural tariffs remain high (IngcoIngco, 1995; 1998)., 1995; 1998).In the case of Indonesian rice:In the case of Indonesian rice:-- High levels of rice tariffHigh levels of rice tariff (30% in 2003)(30% in 2003)-- BULOG'sBULOG's rice import monopoly was eliminated in 1999, rice import monopoly was eliminated in 1999, it continues to intervene in the market to stabilize it continues to intervene in the market to stabilize domestic pricesdomestic prices..

These facts raise an important issue in Indonesia relating to the implementation of Uruguay Round commitments in agriculture:

How effective have the commitments contained in the URAA been in bringing about a reduction in the level of protection?

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Primary Research Questions and ObjectivesThe following questions will be addressed: The following questions will be addressed:

What tariff profile emerged? What tariff profile emerged? How are actual domestic supports and export How are actual domestic supports and export subsidies being applied? subsidies being applied? What have been the impacts of the implementation of What have been the impacts of the implementation of Uruguay Round commitments on the national Uruguay Round commitments on the national objectives from both objectives from both the macroeconomicthe macroeconomic & & microeconomicmicroeconomic (poverty and distribution income) (poverty and distribution income) perspectives?perspectives?

The use of WAYANG model, a CGE model for The use of WAYANG model, a CGE model for Indonesia, linked to a microIndonesia, linked to a micro--simulation approach simulation approach would be used.would be used.

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Primary Research Questions and ObjectivesThe specific objectives of the studyThe specific objectives of the study areare::

to analyze to analyze the nature and extent of implementationthe nature and extent of implementation of the of the Uruguay Round Commitments relating to tariff structure, Uruguay Round Commitments relating to tariff structure, total aggregate measure of support and expenditure on total aggregate measure of support and expenditure on export subsidies, and agricultural protection export subsidies, and agricultural protection

to analyze to analyze the impacts of the implementationthe impacts of the implementation of the of the Uruguay Round Commitments particularly reducing Uruguay Round Commitments particularly reducing agricultural tariffs on domestic output, employment, trade agricultural tariffs on domestic output, employment, trade balance, terms of trade, price, distribution of income and balance, terms of trade, price, distribution of income and poverty poverty

to provide alternative to provide alternative strategies and policy optionsstrategies and policy options for for further trade liberalizationfurther trade liberalization

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COUNTRY BACKGROUNDCOUNTRY BACKGROUNDIndonesia was one of the poorest countries in the world Indonesia was one of the poorest countries in the world 30 years ago (per capita income = 30 years ago (per capita income = US$50)US$50)Since 1994, Indonesia has implemented trade structural Since 1994, Indonesia has implemented trade structural reforms (1996 reforms (1996 GDP = 8.2%GDP = 8.2% and per capita income = and per capita income = US$ 1,049US$ 1,049))In July 1997 the Indonesian economy was interrupted by In July 1997 the Indonesian economy was interrupted by monetary and economic crisis:monetary and economic crisis:-- Depreciation of the domestic currencyDepreciation of the domestic currency ((RupiahRupiah) =) = 137% 137% (Dec (Dec

19971997-- Jan 1998)Jan 1998)-- TThe growth rate of all sectors fell for the period 1997 to 1998he growth rate of all sectors fell for the period 1997 to 1998; ; the manufacturing (the manufacturing (--11.4%), services (11.4%), services (--16.5%) and agricultural 16.5%) and agricultural

sector (sector (--1.3%)1.3%)Data from the Central Statistics Agency: the number of Data from the Central Statistics Agency: the number of people living in poverty = people living in poverty = 37.1 million in 200137.1 million in 2001 and increased and increased to to 38.5 million in 200338.5 million in 2003According to ILO, people living under the international According to ILO, people living under the international poverty standard earn less than US$2 per day = poverty standard earn less than US$2 per day = 110 million110 million

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COUNTRY BACKGROUNDCOUNTRY BACKGROUND

Indonesia agreed to introduce tariff reductions to the WTO. Indonesia agreed to introduce tariff reductions to the WTO. There would be a threeThere would be a three--tiered tariff structure of tiered tariff structure of 0, 5 and 0, 5 and 10%10% in the final year of Indonesia’s tariff reduction schedule in the final year of Indonesia’s tariff reduction schedule in 2003in 2003

Approximately 20% of all agricultural lines are exempted Approximately 20% of all agricultural lines are exempted from the schedule. from the schedule. The average tariff for agriculture would The average tariff for agriculture would be 13.2%be 13.2% in the final year of the schedule (FAO, 2003). in the final year of the schedule (FAO, 2003).

With an average of With an average of 7.2 %7.2 % for all tariff lines in 2003, for all tariff lines in 2003, agricultural sector has a much higher tariff protection than agricultural sector has a much higher tariff protection than industrial imports. industrial imports.

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ScenariosScenarios

100Unchanged6. Experiment F1001005. Experiment E

Unchanged1004. Experiment D

HYPOTHETICAL POLICY HYPOTHETICAL POLICY CHANGES:CHANGES:

85.03Unchanged3. Experiment C85.0391.232. Experiment B

Unchanged 91.231. Experiment A

ACTUAL POLICY ACTUAL POLICY CHANGES:CHANGES:

Non AgricultureAgricultureWAYANG model

Items

Primary experiment is based on changing applied tariff of Primary experiment is based on changing applied tariff of agriculture and nonagriculture and non--agriculture: 91.23% and 85.03% during agriculture: 91.23% and 85.03% during Uruguay Round.Uruguay Round.

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Review of LiteratureReview of Literature

The development of CGE modeling in Indonesia:The development of CGE modeling in Indonesia:

The ORANI modelThe ORANI model(for the Australian economy) (for the Australian economy)

Economic Planning and Policy EvaluationEconomic Planning and Policy Evaluation

ORANIORANI--G G (The basic model for developing new model)(The basic model for developing new model)

INDORANI ModelINDORANI Model andand WAYANG ModelWAYANG Model

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Review of LiteratureReview of LiteratureOther CGE modeling in IndonesiaOther CGE modeling in Indonesia-- Robinson et al. (1997; 1998). Robinson et al. (1997; 1998). The specification of standard CGE followed the The specification of standard CGE followed the neoclassicalneoclassical-- structuraliststructuralist modeling tradition presented in modeling tradition presented in DervisDervis, de , de MeloMelo and Robinson (1982). and Robinson (1982).

-- RobilliardRobilliard et al. (2001) et al. (2001) Robilliard’sRobilliard’s model is the micromodel is the micro--simulation approach that simulation approach that links a CGE model to an econometric household microlinks a CGE model to an econometric household micro--simulation model that focus on national level.simulation model that focus on national level.

-- OctavianiOctaviani et al. (2003) et al. (2003) RinaRina Octaviani’sOctaviani’s model is the micromodel is the micro--simulation with some simulation with some representative household (RH) at national level representative household (RH) at national level

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The Model and Methodology

WAYANG model is like other GE models. WAYANG model is like other GE models. Many of the WAYANG equations are nonMany of the WAYANG equations are non--linear. However, linear. However, model is solved by linear equation relating to percentage model is solved by linear equation relating to percentage change in model variable.change in model variable.Equations of WAYANG model include:Equations of WAYANG model include:-- marketmarket--clearing conditions for commodities and primary factor.clearing conditions for commodities and primary factor.-- producers' demands for produced inputs and primary factor;producers' demands for produced inputs and primary factor;-- final demands (investment, household, export and government);final demands (investment, household, export and government);-- the relationship of prices to supply costs and taxesthe relationship of prices to supply costs and taxes-- a few macroeconomic variables and price indicesa few macroeconomic variables and price indicesThe agents are assumed to be priceThe agents are assumed to be price--takers, with producers takers, with producers operating in competitive marketoperating in competitive market

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Demand and supply equation for privateDemand and supply equation for private--sector sector agents are derived from the solutions to the agents are derived from the solutions to the optimization problemsoptimization problems

The WAYANG model recognizes six categories of The WAYANG model recognizes six categories of demand for commodities: demand for commodities: -- intermediate input demands, intermediate input demands, -- demands for inputs to capital formation, demands for inputs to capital formation, -- household demands, household demands, -- export demands, export demands, -- demands for margins (e.g., transport wholesale and retail demands for margins (e.g., transport wholesale and retail

services),services),-- other demands (e.g., inventory and government demands) other demands (e.g., inventory and government demands)

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The Model and MethodologyWAYANG model is able to evaluate the distribution impacts of cerWAYANG model is able to evaluate the distribution impacts of certain tain economic policies.economic policies.The WAYANG model The WAYANG model is not able to address poverty and income is not able to address poverty and income distribution issues properlydistribution issues properly since it does not provide any information on since it does not provide any information on intraintra--group distribution.group distribution.Ten representative Household groups:Ten representative Household groups:-- HH1 LandlessHH1 Landless-- HH2 Small Cultivator ( < 0.5 ha.)HH2 Small Cultivator ( < 0.5 ha.)-- HH3 Medium Cultivator (0.5 to 1 ha.)HH3 Medium Cultivator (0.5 to 1 ha.)-- HH4 Large Cultivator ( > 1 ha.)HH4 Large Cultivator ( > 1 ha.)-- HH5 NonHH5 Non--Agricultural Agricultural labourlabour: low income: low income-- HH6 Rural nonHH6 Rural non--labor householdslabor households-- HH7 NonHH7 Non--Agricultural Agricultural labourlabour: high income: high income-- HH8 Urban HH8 Urban labourlabour: low income: low income-- HH9 Urban nonHH9 Urban non--labourlabour householdhousehold-- HH10 Urban HH10 Urban labourlabour: high income: high income

The model will include The model will include a topa top--down regional extensiondown regional extension that can simulate that can simulate regional effects of national shocks (e.g. tariff reduction). regional effects of national shocks (e.g. tariff reduction).

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(Micro(Micro--Simulation Approach)Simulation Approach)

Micro-simulation model with some Representative Household (RH) will be usedA parametric method will be used to estimate the distribution function based on survey data (SUSENAS, 1996)The beta distribution will be used to get intra-group distribution for every household group in WAYANG modelthe Foster, Greer and Thorbecke (FGT) will be used in the poverty analysisGini coefficient will be used in income inequality will be used in income inequality analysisanalysis


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The WAYANG model will first The WAYANG model will first examine the effects on factor examine the effects on factor incomes, consumer prices and other variables following the incomes, consumer prices and other variables following the changes in tariff rateschanges in tariff rates. These results will in turn be used as . These results will in turn be used as inputs in the microinputs in the micro--simulation module with ten simulation module with ten representative household (RH) groupsrepresentative household (RH) groups

Estimate changes in distribution of income and poverty based on FGT (the Foster, Greer and Thorbecke) poverty measures and other poverty measures

(Application of CGE(Application of CGE--MicrosimulationMicrosimulation Approach)Approach)The Model and Methodology

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WAYANG Model based on ORANI CGE

Model

WAYANG Model based on ORANI CGE

Model

Micro Simulation

Model

Micro Simulation

ModelIncome

Household(59,918 samples)

Income Household

(59,918 samples)

Poverty IndicatorPoverty

Indicator

Inequality Indicator

Inequality Indicator

Survey data: SUSENAS 1996(59,918 samples)

Survey data: SUSENAS 1996(59,918 samples)

(The linked macro CGE and micro simulation model)The Model and Methodology

Macro economy

impact

Macro economy

impact

Micro economy

impact

Micro economy

impact

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Sources of DataSources of Data

- Poverty impacts- Distribution impact

8. SUSENAS 96 (household income)Macroeconomic impact7. Input Output Table 1995

Implementation of UR (Bound and Applied tariffs

6. Tariffs and Trade CD ROM

Implementation of UR (Bound and Applied tariffs)

5. WTO database

Implementation of UR (Bound and Applied tariffs)

4. AMAD databaseChange in Indonesia agriculture3. FOA databaseChange in Indonesia agriculture.2. The Central Statistics Agency

The background of country and economic development

1. World Development Indicators 2004 CD-ROM

The objective of dataData Sources

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The Contribution of the ResearchThe Contribution of the Research

Information on the implementation and impacts of the Uruguay Information on the implementation and impacts of the Uruguay Round Commitment on agriculture would help identify future Round Commitment on agriculture would help identify future courses of action for further trade liberalization. courses of action for further trade liberalization.

WTO negotiations are still onWTO negotiations are still on--going. going.

Quantifying the income distribution and poverty impacts of such Quantifying the income distribution and poverty impacts of such trade policy changes would help policy makers identify courses otrade policy changes would help policy makers identify courses of f action for enhancing their positive income distributional outcomaction for enhancing their positive income distributional outcomes es or reducing any unfavorable effects. or reducing any unfavorable effects. Incorporating regional extension in CGE model will make it Incorporating regional extension in CGE model will make it possible to assess the regional inequality associated with tradepossible to assess the regional inequality associated with tradepolicy changes.policy changes.

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Dissemination StrategyDissemination Strategy

1.1. Proposal presentation to the academic community at Proposal presentation to the academic community at UPLB UPLB

2.2. Involvement in scientific conferences to discuss Involvement in scientific conferences to discuss research outcome, recommendations and research outcome, recommendations and development strategiesdevelopment strategies

3.3. Publication of results (i.e. Journal of Agricultural Publication of results (i.e. Journal of Agricultural Economic & Development [Philippines], Journal Economic & Development [Philippines], Journal Agro Agro EconomiEconomi [CESAR] and [CESAR] and CESAR’sCESAR’s Web sites)Web sites)

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Expected Capacity Building

Development of the CGE model and microDevelopment of the CGE model and micro--simulation simulation module to explore agricultural trade policy scenarios module to explore agricultural trade policy scenarios and analyze impacts on macroeconomic parameters and analyze impacts on macroeconomic parameters and poverty alleviation and poverty alleviation Adaptation of the quantitative analysis involving the Adaptation of the quantitative analysis involving the CGE model and microCGE model and micro--simulation module as simulation module as framework for analyzing agricultural policiesframework for analyzing agricultural policiesDetailed listing and review of relevant economic Detailed listing and review of relevant economic literatureliteratureThis research can provide teaching materials This research can provide teaching materials (modeling course at UPLB) and potential research (modeling course at UPLB) and potential research areasareas

2003 By Default! Proposal - PEP-NET · ªMany of the WAYANG equations are non-linear. However,...

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