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The Direct and Indirect Effect of Cash Transfers: The Case of Indonesia

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  • Arief Anshory Yusuf

    ()
    (Department of Economics, Padjadjaran University)

Abstract

Economists have long argued that to increase households’ welfare, cash transfers are more efficient than commodities subsidies. However, not many studies address the indirect or economy-wide effect of such transfers especially in the context of poverty reduction programs in developing countries. In this paper, a 50 trillion rupiahs worth of cash transfers, roughly doubling the current level of government spending on poverty reduction program is simulated using a Computable General Equilibrium model of the Indonesian economy. The result suggests that such transfers reduce Indonesian GDP especially if domestically financed through increasing value added tax. However, the GDP reduction can be reduced to around half of that when financed by reducing distortionary fuel subsidy. Moreover, a cash transfers financed by reducing fuel subsidy also give the largest reduction in inequality. Various extents of the distribution of the transfers are compared, from giving it to the poorest 10% to distribute it equally to all households. It is found that the benefit of the transfers in terms of reduced poverty and inequality is smaller when we extend the beneficiaries toward the non-poor but its economy-wide cost in terms of the reduced GDP will be smaller. Policy implications are discussed.

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File URL: http://lp3e.fe.unpad.ac.id/wopeds/201305.pdf
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Bibliographic Info

Paper provided by Department of Economics, Padjadjaran University in its series Working Papers in Economics and Development Studies (WoPEDS) with number 201305.

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Length: 16 pages
Date of creation: Jan 2013
Date of revision: Jan 2013
Handle: RePEc:unp:wpaper:201305

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Keywords: Cash transfer; general equilibrium; Indonesia;

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  1. Warr, Peter G. & Yusuf, Arief Anshory, 2011. "Reducing Indonesia’s Deforestation-based Greenhouse Gas Emissions," 2011 Conference (55th), February 8-11, 2011, Melbourne, Australia, Australian Agricultural and Resource Economics Society 100730, Australian Agricultural and Resource Economics Society.
  2. Sherman, Robinson & Robilliard, Anne-Sophie & Bourguignon, François, 2005. "Representative versus real households in the macro-economic modelling of inequality," Economics Papers from University Paris Dauphine 123456789/4535, Paris Dauphine University.
  3. Samir Cury & Allexandro Mori Coelho & Isabela Callegari, 2010. "The Impacts of Income Transfer Programs on Income Distribution and Poverty in Brazil: An Integrated Microsimulation and Computable General Equilibrium Analysis," Working Papers MPIA, PEP-MPIA 2010-20, PEP-MPIA.
  4. Yusuf, Arief Anshory, 2006. "Constructing Indonesian Social Accounting Matrix for Distributional Analysis in the CGE Modelling Framework," MPRA Paper 1730, University Library of Munich, Germany.
  5. Aswicahyono, Haryo & Narjok, Dionisius, 2011. "Indonesian Industrialization," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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