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Projecting the long run impact of an economic reform: the case of the Indonesian Omnibus Law and concurrent changes in trade policy

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  • Gupta, Krisna
  • Gretton, Paul
  • Patunru, Arianto

Abstract

Indonesia has been trying to improve its investment climate. The most recent development in this process is the enactment of a ‘Job Creation Law’ which aims to improve the investment climate through simplifying complicated red tape, eliminating large numbers of overlapping regulations and the adoption of a Risk Based Assessment approach to business licensing. In parallel to this development, the Indonesian Government is pursuing an Import Substitution Strategy to preserve external balance while fostering local activity. This paper discusses the changes introduced by these policies and how each may be captured in policy simulations. It then looks to simulate the potential national and sectoral impacts of the policies using the recursive dynamic GDyn-FS model of the global economy. It highlights impacts of the policies on national investment and trade over time and the flow-on impacts to industries and households. The analysis also takes into account changes caused by the COVID-19 pandemic to Indonesia’s economy in the baseline scenario. The result of the policy simulations reflects a new and materially higher growth trajectory for the Indonesian economy in the situation where institution and country risk is lowered through better regulation. On the other hand, the projections indicate that the pursuit of an import substitution strategy, while possibly favouring individual protected activities, is likely to act as a drag on the wider economy.

Suggested Citation

  • Gupta, Krisna & Gretton, Paul & Patunru, Arianto, 2022. "Projecting the long run impact of an economic reform: the case of the Indonesian Omnibus Law and concurrent changes in trade policy," Conference papers 333472, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:333472
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