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Reducing Fuel Subsidies and the Implication on Fiscal Balance and Poverty in Indonesia: A Simulation Analysis

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  • Teguh Dartanto

    ()
    (Institute for Economic and Social Research, Department of Economics, Faculty of Economics, Universitas Indonesia)

Abstract

An increase in world oil prices has forced the government of Indonesia to run a larger budget deficit to finance energy subsidies. Between 2000 and 2011, Indonesia burnt 61 per cent of oil and gas revenues to fuel and electricity subsidies. These subsidies worsen income distribution in Indonesia since almost 72 per cent of these subsidies are enjoyed by the 30 per cent of the richest income groups. Therefore, there are strong economic arguments to reallocate fuel subsidies to infrastructures, education and health sectors that can boast economic growth. Applying a CGE-Microsimulation, this study found that removing 25 per cent of fuel subsidies increases the incidence of poverty by 0.253 per cent. If this money were fully allocated to government spending, the poverty incidence would decrease by 0.270 per cent. Moreover, the 100 per cent removal of fuel subsidies and the reallocation of 50 per cent of them to government spending, transfers and other subsidies could decrease the incidence of poverty by 0.277 per cent. However, these reallocation policies might not be effective to compensate the adverse impacts of the 100 per cent removal of fuel subsidies if economic agents try to seek gain through mark-up pricing over the increase of production costs.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Indonesia in its series Working Papers in Economics and Business with number 201206.

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Length: 24 pages
Date of creation: May 2012
Date of revision: May 2012
Handle: RePEc:lpe:wpecbs:201206

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Keywords: fuel subsidies; fiscal balance; poverty; Indonesia; energy policy;

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  1. Luc Savard, 2005. "Poverty and Inequality Analysis within a CGE Framework: A Comparative Analysis of the Representative Agent and Microsimulation Approaches," Development Policy Review, Overseas Development Institute, vol. 23(3), pages 313-331, 05.
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  10. Teguh, Dartanto, 2010. "Volatility of world rice prices, import tariffs and poverty in Indonesia: a CGE-microsimulation analysis," MPRA Paper 31451, University Library of Munich, Germany.
  11. Teguh Dartanto, 2013. "The Application Of An Endogenous Poverty Line And Its Relationship With The Poverty Impact Of Economic Shocks: An Empirical Investigation," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 58(01), pages 1350005-1-1.
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  13. B. Decaluwé & L. Savard & E. Thorbecke, 2005. "General Equilibrium Approach for Poverty Analysis: With an Application to Cameroon," African Development Review, African Development Bank, vol. 17(2), pages 213-243.
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  15. Jung, Hong-Sang & Thorbecke, Erik, 2003. "The impact of public education expenditure on human capital, growth, and poverty in Tanzania and Zambia: a general equilibrium approach," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 701-725, November.
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