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Searching for Equitable Energy Price Reform for Indonesia

Yusuf, Arief Anshory and Resosudarmo, Budy P. (2007): Searching for Equitable Energy Price Reform for Indonesia.

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Indonesian government implemented a massive fuel price increase in 2005. While the benefit of the reform from efficiency ground had been widely acknowledged, whether or not such reform was equitable still open for debate. In this paper, this question is answered using a Computable General Equilibrium (CGE) model with disaggregated households that allows for rich and accurate distributional story. With this method, various counter-factual scenarios analysis of the recent energy price reform in Indonesia (October 2005 Package) is carried out. The simulations suggest that the reform could have been progresive if it only increases `vehicle fuel' prices. However, if at the same time it also increase the price of domestic fuel (kerosene), it tends to increase inequality, especially in urban area. Proper and effective compensation matters in mitigating the distributional cost or poverty impact of the reform. Uniform cash transfers to poor households disregarding poor households' heterogenity tends to over compensate rural but undercompensate urban poor. Other results suggest that non-cash compensation, by subsidizing the poor's education and health spending may not be effective to mitigate the reform despite its desirability as longer-term poverty alleviation programs.

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