The Economic Effects and Distributional Implications of Globalisation and Foreign Tourism Boom in the Indonesian Economy: A CGE Assessment

A tourism-CGE model representative of the Indonesian economy is developed based on modified version of the Indonesian SAM 1993, for analysing the economic effects and distributional implications of globalisation and foreign tourism boom. Two policy changes are simulated to represent partial and full-scale globalisation. The former suggests that it will increase the amount of foreign trade and availability of products in the domestic economy. This in turn stimulates production activities, improves macroeconomic performance and welfare, as domestic absorption, household income and consumption increase. Foreign tourists are better off for they can consume more with their benchmark spending level. The trade balance and government deficit, however, worsen, as imports increase more than exports and the government maintains its level of spending despite its ‘lost’ income from tariff reductions. This policy has favourable impacts on the income distribution of rural households even though their incomes decrease. Urban households and farmers benefit from this policy as shown by increases in their both absolute and relative income levels. But their income distributions slightly worsen. The full-scale globalisation results in much higher macroeconomic performance, welfare, and improved income distribution of agriculture households. The government, however, continues to bear the adverse effects due to its consumption behaviour and initial budget deficits. The foreign tourism boom is then introduced in each scenario to complete the analysis. Policy implications of this study call for the government to reduce its reliance on revenues from import tariffs and indirect taxation, but to really embark on globalisation. A sensible way for doing this is to start with removal of distortions in the domestic economy which can then be followed by full-scale globalisation. The growth of foreign tourism could be of an incentive in this case. By having less distorted domestic markets, the benefits from having global markets can be more fully realised. Globalisation, as measured here, seems to be ‘foreign tourism’-friendly as they enjoy lower prices and increased availability of products, and hence is compatible with government efforts to attract more foreign tourism.