Searching for Equitable Energy Price Reform for Indonesia

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

Abstract

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.

• Item Type: MPRA Paper
• Institution: Department of Economics, Padjadjaran University
• Language: English
• Keywords: Energy price reform; Distribution; CGE; Indonesia
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; D - Microeconomics > D3 - Distribution > D30 - General

References

Annabi, N., F. Ciss, J. Cockburn, and B. Decaluw (2005). Trade lib-eralisation, growth and poverty in Senegal: a dynamic microsimulationCGE model analysis. Cahiers de recherche 0512, CIRPEE. available athttp://ideas.repec.org/p/lvl/lacicr/0512.html. Azis, I. J. (2000). Simulating economy-wide models to capture the transition fromnancial crisis to social crisis. Annals Regional Science 34 (2), 251--278. Azis, I. J. (2006). A drastic reduction of fuel subsidies confuses ends and means.ASEAN Economic Bulletin 23 (1), 114--136. Bourguignon, F., A.-S. Robilliard, and S. Robinson (2003). Representative versusreal households in the macro-economic modeling of inequality. Working paper DT2003-10, DIAL. BPS (2006, September). Tingkat kemiskinan di Indonesia, 2005-2006. Technical re-port, Biro Pusat Statistik. Berita Resmi Statistik. Clements, B. J., S. Gupta, and H.-S. Jung (2003). Real and distributive e ects of petroleum price liberalization: The case of indonesia. IMFWorking Papers 03/204,International Monetary Fund. Cororaton, C. B. and J. Cockburn (2005). Trade reform and poverty in the philippines:a computable general equilibrium microsimulation analysis. Cahiers de recherche0513, CIRPEE. available at http://ideas.repec.org/p/lvl/lacicr/0513.html.44 Cororaton, C. B. and J. Cockburn (2006). WTO, trade liberalization, and ruralpoverty in the Philippines: Is rice special ? Rev. Agr. Econ. 28 (3), 370--377. Deaton, A. and A. Case (1988). Analysis of household expenditures. Technical report,The World Bank. LSMS Working Paper No. 28. Decaluwe, B., J. C. Dumont, and L. Savard (1999). How to measure poverty andinequality in general equilibrium framework. CREFA Working Paper no. 9920.Laval University. ESMAP (2006). Coping with higher oil prices. Technical report, Energy Sector Man-agement Assitance Program, The World Bank. Filho, J. and M. Horridge (2004). Economic integration, poverty and regional in-equality in Brazil. Centre of Policy Studies/IMPACT Centre Working Papers g-149, Monash University, Centre of Policy Studies/IMPACT Centre. available at http://ideas.repec.org/p/cop/wpaper/g-149.html. Horridge, M. (2000). ORANI-G: A general equilibrium model of the Australianeconomy. Centre of Policy Studies/IMPACT Centre Working Papers op-93,Monash University, Centre of Policy Studies/IMPACT Centre. available athttp://ideas.repec.org/p/cop/wpaper/op-93.html. Ikhsan, M., T. Dartanto, Usman, and H. Sulistyo (2005, April). Kajian dampakkenaikan harga BBM 2005 terhadap kemiskinan. LPEM Working Paperhttp://www.lpem.org. Lluch, C., A. Powell, and R. Williams (1977). Patterns in Household Demand andSavings. Oxford University Press, London. NEF (2004). Price of Powers. New Economics Foundation, London. Available athttp://www.neweconomics.org. Oktaviani, R., D. Hakim, S. Sahara, and H. Siregar (2005, May). The impact ofscal policy on Indonesian macroeconomic performance, agricultural sector andpoverty incidences (a dynamic computable general equilibrium analysis. Reportto the Poverty and Economic Policy (PEP) Network http://www.pep-net.org/. Plumb, M. (2001). An integrated microsimulation and applied general equilibriumapproach to modelling scal reform. mimeo. Resosudarmo, B. (2003). Computable general equilibrium model on air pollutionabatement policies with indonesia as a case study. Economic Record 79 (0), 63--73. Savard, L. (2003). Poverty and income distribution in a cge-household micro-simulation model: Top-down/bottom up approach. Cahiers de recherche 0343,CIRPEE. available at http://ideas.repec.org/p/lvl/lacicr/0343.html. SMERU (2006). Kajian cepat pelaksanaan subsidi langsung tunai tahun 2005 di In-donesia: Studi kasus di lima kabupaten/kota. Technical report, Lembaga Peneli-tian SMERU. Laporan Penelitian SMERU January 2006. Sugema, I., M. Hasan, R. Oktaviani, Aviliani, and H. Ritonga (2005). Dampak ke-naikan harga BBM dan efektivitas program kompensasi. INDEF Working Paperhttp://www.indef.or.id/download/pubs/BBM.PDF. Warr, P. (2006). The Gregory thesis visits the tropics. Econ. Record 82 (257), 177--194. World Bank, T. (2006). Making the New Indonesia Works for the Poor. World Bank.45 Yusuf, A. A. (2006). Constructing Indonesian Social Accounting Matrix for distri-butional analysis in the CGE modelling framework. Technical report, AustralianNational University. Mimeo.