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The social impact of a WTO agreement in Indonesia

  • Robilliard, Anne-Sophie
  • Robinson, Sherman

Indonesia experienced rapid growth and the expansion of the formal financial sector during the last quarter of the 20th century. Although this tendency was reversed by the shock of the financial crisis that spread throughout Asia in 1997 and 1998, macroeconomic stability has since then been restored, and poverty has been reduced to pre-crisis levels. Poverty reduction remains nevertheless a critical challenge for Indonesia with over 110 million people (53 percent of the population) living on less than $2 a day. The objective of this study is to help identify ways in which the Doha Development Agenda might contribute to further poverty reduction in Indonesia. To provide a good technical basis for answering this question, the authors use an approach that combines a computable general equilibrium (CGE) model with a microsimulation model. This framework is designed to capture important channels through which macroeconomic shocks affect household incomes. It allows making recommendations on specific trade reform options as well as on complementary development policy reforms. The framework presented in this study generates detailed poverty outcomes of trade shocks. Given the magnitude of the shocks examined here and the structural features of the Indonesian economy, only the full liberalization scenario generates significant poverty changes. The authors examine their impact under alternative specifications of the functioning of labor markets. These alternative assumptions generate different results, all of which confirm that the impact of full liberalization on poverty would be beneficial, with wage and employment gains dominating the adverse food price changes that could hurt the poorest households. Two alternative tax replacement schemes are examined. While direct tax replacement appears to be more desirable in terms of efficiency gains and translates into higher poverty reduction, political and practical considerations could lead the Government of Indonesia to choose a replacement scheme through the adjustment of value-added tax rates across nonexempt sectors.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3747.

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Date of creation: 01 Oct 2005
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Handle: RePEc:wbk:wbrwps:3747
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  1. repec:cup:cbooks:9780521319867 is not listed on IDEAS
  2. Hertel, Thomas & David Hummels & Maros Ivanic & Roman Keeney, 2003. "How Confident Can We Be in CGE-Based Assessments of Free Trade Agreements?," GTAP Working Papers 1324, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  3. Sherman Robinson & Andrea Cattaneo & Moataz El-Said, 2001. "Updating and Estimating a Social Accounting Matrix Using Cross Entropy Methods," Economic Systems Research, Taylor & Francis Journals, vol. 13(1), pages 47-64.
  4. World Bank, 2003. "Indonesia Development Policy Report : Beyond Macroeconomic Stability," World Bank Other Operational Studies 14664, The World Bank.
  5. Robilliard, Anne-Sophie & Robinson, Sherman, 1999. "Reconciling household surveys and national accounts data using a cross entropy estimation method:," TMD discussion papers 50, International Food Policy Research Institute (IFPRI).
  6. 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.
  7. Winters, L. Alan, 2000. "Trade, Trade Policy and Poverty: What Are The Links?," CEPR Discussion Papers 2382, C.E.P.R. Discussion Papers.
  8. Essama-Nssah, 2004. "Building and running general equilibrium models in EViews," Policy Research Working Paper Series 3197, The World Bank.
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