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Should Indonesia Suffer from More Reduction of the Subsidy to the Petroleum Sector?

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Author Info

  • Agus Budiyono

    ()
    (Ministry of Internal Affairs of Indonesia)

  • Ryuta Ray Kato

    ()
    (International University of Japan)

Abstract

We numerically examine the impact of the actually implemented reduction policy of the subsidy to the petroleum sector by using a static CGE model with the latest input-output table of Indonesia of year 2008. Our simulation results indicate that the Indonesian economy suffered from the actually implemented policy with a welfare loss of 28,417.78 billion rupiah even with the conversion policy. Furthermore, the proposed future reduction policy by the Ministry of Finance would unavoidably result in a welfare loss even when the government continues the current conversion policy. However, our simulation results also suggest that a new future conversion policy with a slightly additional subsidy to the LPG sector would eventuate in completely offsetting the negative effect of the proposed plan on the future welfare with an expanding government expenditure.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2011_25.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2011_25.

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Length: 46 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2011_25

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Keywords: Computable General Equilibrium (CGE) Model; Petroleum; Subsidy; Welfare; Simulation;

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  1. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "A General Equilibrium Model for Tax Policy Evaluation," NBER Books, National Bureau of Economic Research, Inc, number ball85-1.
  2. Toshihiro Ihori & Ryuta Ray Kato & Masumi Kawade & Shun-ichiro Bessho, 2011. "Health Insurance Reform and Economic Growth: Simulation Analysis in Japan," Working Papers EMS_2011_17, Research Institute, International University of Japan.
  3. Sa'ad, Suleiman, 2009. "An empirical analysis of petroleum demand for Indonesia: An application of the cointegration approach," Energy Policy, Elsevier, vol. 37(11), pages 4391-4396, November.
  4. Scarf,Herbert E. & Shoven,John B., 2008. "Applied General Equilibrium Analysis," Cambridge Books, Cambridge University Press, number 9780521070935, November.
  5. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Introduction to "A General Equilibrium Model for Tax Policy Evaluation"," NBER Chapters, in: A General Equilibrium Model for Tax Policy Evaluation, pages 1-5 National Bureau of Economic Research, Inc.
  6. Djoni Hartono & Budy P. Resosudarmo, 2006. "The Economy-wide Impact of Fuel Oil, Gas and Electricity Pricing and Subsidy Policies as well as Their Consumption Improvement Efficiency in Indonesia," Working Papers in Economics and Development Studies (WoPEDS) 200611, Department of Economics, Padjadjaran University, revised Dec 2006.
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