This paper examines the effects of duty decrease on the fabrication sector in Indonesia by utilizing estimable general equilibrium ( CGE ) theoretical account. As a effect of rank in the World Trade Organization, since the mid of 1980s Indonesia has been liberalising its market. Goods, services and production input ( capital, engineering and labour ) flows from abroad to the domestic market without any barriers. It can increase volume and value of trade which is heightening economic growing and public assistance. Trade liberalisation viewed as an attempt to better economic fight. Harmonizing to Appleyard, Field, & A ; Cobb ( 2008 ) , cut downing trade barriers brings about a more competitory environment. They besides mentioned that trade liberalisation encourages economic activity and hence rises production and employment. International trade will increase public assistance between states because international trade will increase efficiency of natural resources use. Another theory said that reallocation of labour from inefficient houses ( normally non-restructured province and privatized houses ) to efficient 1s ( normally new private and restructured province and privatized houses ) increases overall labour productiveness and enhances efficiency during the passage from program to market ( Blanchard, 2006 ) .

It has universally been known that enforcing a duty on imported goods protects the domestic industry of the goods, and besides that import duty induces welfare loss of domestic consumers. Therefore, it seems that there is a tradeoff between protection of the domestic manufacturers and betterment of public assistance of domestic consumers, and the permutation frequently appears when economic issues are discussed politically.

The industrialisation procedure in Indonesia began in 1970s with import permutation scheme. The steep autumn in oil monetary values, foremost in 1982 and thenceforth in 1986, prompted the induction of economic reforms and the acceptance of an export-oriented industrialisation scheme. During this stage, industrialisation was based chiefly on resource and labour intensive industries. Before crisis in 1997, Indonesia had a success narrative of transmutation from agribusiness economic system to fabricate one. At that clip, Indonesian industry plays as taking sector, both domestically and in export markets. Since 1991 fabrication sector contribute above 20 per centum to national GDP of Indonesia, the highest between other sectors. In add-on, the figure of people who working on fabricating sector in Indonesia is more than 12 million workers in 2008. It is equal with 12 per centum of entire employment in Indonesia.

However, there are some debatable issues refering the fabrication sector in Indonesia. Manufacturing sector tends to labor-oriented. The degree of engineering is non sophisticated one. In the same clip, the imported fabrication merchandises deluging the domestic market with good quality and cheaper than domestic merchandises. All of it makes Indonesia ‘s industries merchandise less competitory comparison with other states.

Furthermore, there are some challenges for the industries sector development in Indonesia. It urges that some industry should go as a taking sector in get bying with domestic job. They should take advantages from liberalisation in duty.

This paper numerically investigates the effects of the duty decrease on the fabrication sector in Indonesia. Some simulations based on Computable General Equilibrium ( CGE ) attack will be used in gauging on it. In add-on, some revenue enhancement policy simulations will be besides applied as a comparing. Tax policy is taken into consideration in order to replace authorities gross loss from duty decrease. To cover with it, the Indonesian Input-Output tabular array 2008 is employed to build a Social Accounting Matrix ( SAM ) for nine activities/manufactures. The SAM will be utilized to runing the CGE theoretical account.

CGE theoretical account is considered as a simplification from a existent status of a state which is reflected in it input-output tabular array. This paper used a simple building of SAM. A more detail disaggregation of SAM will supply better appraisal and rating on the consequence of a policy.

The organisation of this paper consists of five chapters. The first chapter is an debut to the job, intent of survey, and restraint of it. The 2nd chapter is the literature reappraisal related with liberalisation and its effects. The 3rd chapter explains the methodological analysis and information. The 4th chapter of this paper presents the simulation consequence and its analysis. The last chapter presents the decision and policy recommendation.

Literature Review

This paper employed CGE theoretical account as an analytical method. It is an economic theoretical account that estimates how markets and sectors in the economic system might respond on policy alterations or external dazes by utilizing existent economic system informations. Assorted policy actions, such as trade liberalisation, revenue enhancement, poorness and public assistance, investing, can be analyzed by CGE model.

A CGE theoretical accounts descript a specification of economic agent such as manufacturer, authorities, consumer, and foreign sector. It represents an interrelatedness among them. In the CGE model, every agent is assumed to act optimally. Manufacturers are maximising their income, while consumers are maximising their public-service corporation.

This subdivision discusses the literature reappraisal on effects of liberalisation. To cover with it, a figure of literatures in CGE mold are consulted. CGE theoretical accounts are one of the most popular methods for analysing of trade liberalisation. The application of CGE theoretical accounts to measure the effects of policy changes/options of the authorities and economic dazes began with the work of Johansen ( 1960 ) and Harberger ( 1962 ) . Johansen develop a multi-sectoral theoretical account for Norway. Harberger employed CGE theoretical account to gauge the incidence of the United State corporate revenue enhancement. These theoretical accounts, nevertheless, were fundamentally limited in term of construction and applications. Since thenceforth, many CGE theoretical accounts began to developed and applied in assorted sectors of economic system.

Harmonizing to Lofgren, Harris, and Robinson ( 2002 ) , the CGE theoretical account has been accepted as a really good technique in measuring of policy alteration and analysing the impact of economic activities. The theoretical account become believable because it has ability to capture economic dealing among agents ( e.g houses, family, authorities and foreign sector ) and fulfill its behaviour. Haddad ( 2002 ) described that there are some advantages and disadvantages of CGE theoretical accounts. The first advantage is CGE theoretical account can measure the feasibleness of policies in a systemic manner. The 2nd advantage is CGE theoretical account can makes a comparison across set of compatible policy combination. Finally, CGE theoretical account can be used to break up the consequence of policy alterations and sum up 2nd unit of ammunition effects of the policy. However, there are some disadvantages of these theoretical accounts. CGE theoretical accounts are informations demanding and have no tolerance for incompatibility in informations. These theoretical accounts are non calculating theoretical account every bit good.

In term of trade liberalisation, many authorities policies were evaluated. However, research workers came with different decision on consequence of trade liberalisation. Hardono et Al. ( 2004 ) in their paper argued that despite of the good facets, trade liberalisation brings many drawbacks. Endangering domestic market is one of the negative effects of trade liberalisation. For less develop states, like Indonesia, trade liberalisation means that authorities lose some portion of their gross.

Bautista, Robinson and El-Said ( 1999 ) investigated the economy-wide effects of three alternate growing waies on Indonesia ‘s industrial sector by CGE analysis. They found that industrialisation based on light fabrication contributed the least on GDP growing.

Cororaton ( 2003 ) employed CGE theoretical account to analyse the impact of duty decrease policies on the income and public assistance of families. His simulation indicated an overall decrease in the domestic monetary values of imports and exports.

Felaciano ( 2001 ) found that trade liberalisation reduced comparative rewards of workers but did non impact comparative employment in Mexico. Others said that trade liberalisation have negative consequence on employment ( Revenga, 1997 ; Nambiar, Mungekar, & A ; Tadas, 1999 ) . Whereas Ghose ( 2000 ) mentioned that the benefits of trade liberalisation outweigh the costs. To sum up, trade liberalisation gives different consequence on industries among developing states. The other of import issue is non whether trade liberalisation will hold positive or negative impact, but how to utilize trade liberalisation policy to maximise addition from trade.

On the footing of the literature reappraisal above and by utilizing the standard CGE theoretical account, this paper focuses on analyze the consequence of duty decrease on Indonesia industry within a estimable general equilibrium model.

Data and Methodology

Data and Social Accounting Matrix

This paper uses Indonesian input-output ( I-O ) tabular array for the twelvemonth 2008. It was published by Statistic Board of Indonesia. An input-output tabular array is an integrated information system depicting the inter-relation among sector in the economic system.

A Social Accounting Matrix ( SAM ) is an economic information model which is reflecting the economic system of a state. It has high grade of flexibleness which is can be aggregated or disaggregated based on the demand of policy analysis. It is a square matrix dwelling of rows and columns. The chief constituents of the basic SAM are shown in Table 1.

Table 1. A Basic Social Accounting Matrix ( SAM )

General Account

Production

Activities

Production Factors

Institutions

Rest of the World

Entire Grosss

Production

Activities

Intermediate inputs

Concluding Demand ( ingestion )

Export and Investings

Sum of Production Outputs

Production Factors

Value Added Allocation to Production Factors

Factorial Income from Abroad

Distribution of Factorial Income

Institutions

Allotment of Production Factors Income to Institutions

Transportation between Institutions

Transportation from Abroad to Institutions

Distribution of Institutional Income

Rest of the World

Import Duty and Indirect Taxes

Allotment of Production Factors Income to Abroad

Salvaging and Institution transportations to Abroad

Trade Deficit and Other Capital Transportation

Sum of Other Income

Entire Outgos

Sum of Production cost ( Inputs )

Entire Outlay of Production Factors

Entire Outlay of Institutions

Entire Outlay of Outgos

Grand Total

Each cell reflects the payment from the column ‘s history to the row history. The basic rule is that the sum of entire gross or row ‘s is equal to the sum of entire outgo or column ‘s ( Lofgren et al, 2002 ) . In general, there are four types of history in SAM: production activities, production factors, establishment, and remainder of the universe. The SAM is derived from input-output tabular array of a part or a state and it refers to a individual twelvemonth depicting a inactive image of the economic system for those part or state. In this paper, SAM consists of nine production activities, two production factors ( labour and capital ) , and three establishment ( family, authorities, and investing ) . The production activities consists of industry of nutrient and drinks ( MG31 ) , industry of fabric ( MG32 ) , industry of forests ( MG33 ) , industry of paper ( MG34 ) , industry of non-metallic mineral merchandises ( MG36 ) , industry of basic metal ( MG37 ) , industry of fabricated metal merchandises ( MG38 ) , and industry of others goods ( MG99 ) .The full SAM can be seen in the appendix.

Methodology

A general equilibrium theoretical account considers the interrelatedness among different market and different sector of the economic system. This paper employed a inactive CGE theoretical account which is introduce by Hosoe. N, K. Gasawa, and H. Hashimoto ( 2004 ) . Inactive theoretical account means that no expressed clip dimension is considered in the theoretical account. Therefore, the simulation consequences derived from utilizing of it can be interpreted as a possible consequence merely. GAMS package with CONOPT convergent thinker is utilised to work out non-linear equation.

The CGE theoretical account uses basic premises that household maximise their public-service corporation and houses maximize their net income. The production engineering is assumed to follow Cobb-Douglas map with nothing net income premise. It assumes that all market for trade goods clear to guarantee equilibrium. It means that house ‘s end products are to the full consumed by families and the family ‘s gifts of primary factors are to the full employed by the houses. Therefore, the measure produced is equal to the amount of the measures demanded by the other houses and families in the economic system. In other words, the theoretical account acts in a absolutely competitory scene of an economic system. The specific equations are as follow:

Households ‘ behaviour

All family are assumed to take their ingestion packages to maximise their public-service corporation topic to their income restraints. Household income comes from gift of labour and capital which are in-elastically supplied to houses for production. Household use their income for ingestion, salvaging, paying revenue enhancements and reassigning money to other establishment. The public-service corporation map is assumed to follow the Cobb-Douglas map.

Max U ( X1, X2, aˆ¦ , X9 ) = , ( 0 a‰¤ I±i a‰¤ 1,

Capable to: , ( pi a‰? 0 )

and

Y = ( R + tungsten ) .

The first order conditions yield that:

or

where I, U, , , , Y, K, L, R, w denote trade goods, public-service corporation, ingestion of i-th trade good, portion parametric quantity in public-service corporation map, consumer monetary value of the i-th trade good, value added, capital, labour, monetary value of capital, and monetary value of labour severally.

In this CGE theoretical account, the premise is to the full competitory market and put labour as numaraire. It means that the monetary value of labour remains invariables and all monetary values that are determined endogenously in the theoretical account are calculated comparatively to the labour monetary value.

Firms ‘ behaviour

There are four phases of production in this CGE theoretical account. The elaborate image can be seen in the appendix. The first phase is houses produce their composite good ( Yi ) by utilizing two factor productions which are capital and labour. The maximizing net income map is as follow:

Soap

s.t. , where + = 1.

The net income maximization outputs that:

,

where I? ‘s is the portion parametric quantity in public-service corporation map, and is monetary value of value added.

In the 2nd phase, houses produce domestic goods ( Zi ) by utilizing its ain composite goods and intermediate input under Leontief production map. Therefore, the net income maximization behaviour can be described as follow:

Soap

s.t.

where: is domestic goods produced by house I, is intermediate input of i-th trade good used by house I, is the sum of intermediate good used for bring forthing one unit of I, is the sum of its ain composite goods for bring forthing one unit of its domestic good. represent supply monetary value of i-th trade good, and represent monetary value of the j-th intermediate trade good. Assuming that market is to the full competitory, the equation for zero-profit status is:

The 3rd phase is decomposition of goods into exported goods and concluding domestic goods. In this phase, production map is assumed to follow Constant Elasticity Substitution ( CES ) . Each house is assumed to maximising net income as follow:

Soap

s.t.

where and are monetary value of export and import goods in domestic currency. is production revenue enhancement rate imposed. is the ratio between exported goods and the concluding goods, and it is assumed that the summing up of it equal to one.

The last phase is production of the concluding goods. The concluding goods, Qi, are assumed to be produce utilizing concluding domestic goods and imported goods. The production engineering in this phase assumes to follow CES map.

,

where ( J = m, vitamin D ) is the ratio between imported goods and concluding domestic goods, and is given by:

where denotes the permutation snap between Mi and Di at the given degree of Qi. The parametric quantity of is normally got from the empirical literature. The net income maximization behaviour is given by:

Soap

s.t.

The demand maps are given by:

and

Market-clearing conditions.

The market-clearing conditions are given by:

where is household concumption, is authorities ingestion, is investing demand, and is intermediate input.

Government behaviour

This paper assumes that authorities imposes some revenue enhancements such as direct revenue enhancement, indirect revenue enhancement and import duty. It besides assumes that the dealing between authorities and the remainder of the universe is exogenic. The entire sum of revenue enhancement collected such that:

where is income revenue enhancement rate, is production revenue enhancement rate, and is import duty rate. The budget restraint of the authorities is given by:

where is the authorities ingestion of concluding goods and is the authorities salvaging.

Foreign Sector

The monetary values of import and export goods in the universe are assumed to be exogenously given. The trade balance is given by the undermentioned equation:

where Iµ is the exchange rate, is the monetary value of import goods in foreign currency, is the monetary value of export goods in foreign currency, is the sum of export, is the sum of import, and is the foreign economy.

Salvaging

Salvaging equation is needed in order to do the theoretical account close to existent economic system. However, any optional family behaviour in term of salvaging is ignored in this theoretical account. Therefore, this theoretical account introduces an ad-hoc premise sing nest eggs. Denoting the sum of investing by industries is ; the budget restraint of the investing is given by:

Simulation and Consequence

Benchmark

Before get downing simulation, it is of import to look into whether the theoretical account usage in this paper able to bring forth the benchmark as a base point. It means that the theoretical account generates a value which is convergence with those presented in the societal accounting matrix tabular array. When the benchmark is achieved, so the theoretical account is ready to make simulation of policy alterations within economic system.

Model standardization on the GAMS package found that the theoretical account usage in this paper able to reproduce the existent Indonesian economic system really good. Tabel 2 provides benchmark value for selected parametric quantity resulted from the standardization. Since the benchmark already represents the existent Indonesian economic system, now it is used to compare current status with possible state of affairs in duty decrease on fabrication sector in Indonesia.

Tabel. 2 Benchmark consequence for selected parametric quantities

Sector

End product

Family Consumption

Government Consumption

Export

Import

MG31

384,745

293,684

0

16,679

29,537

MG32

292,978

99,502

0

102,883

16,973

MG33

172,606

33,687

0

37,929

3,873

MG34

145,366

21,087

0

40,581

22,132

MG36

85,845

6,971

0

6,048

7,174

MG37

118,310

0

0

68,245

98,644

MG38

951,465

279,647

0

154,136

361,266

MG39

29,528

15,445

0

13,765

12,438

MG99

8,349,257

2,445,781

657,758

1,046,972

795,719

Simulation Scenario

This paper introduces several simulations to analyze the consequence of duty decrease on fabrication sector in Indonesia. The import duty and indirect revenue enhancements rate used as the benchmark point is the rate which calculated by standardization with GAMS package. It used for all alternate simulation scenarios. The benchmark point for import duty and indirect revenue enhancements rate is presented in Table 2.

Table 3. The bechmark point for duty rate and indirect revenue enhancements rate

Sector

MG31

MG32

MG33

MG34

MG36

MG37

MG38

MG39

NID

Import Tariff Rate

0.188

0.320

0.069

0.136

0.150

0.098

0.125

0.145

0.045

Indirect Taxes Rate

0.131

0.011

0.013

0.010

0.031

0.014

0.014

0.025

0.015

The undermentioned scenarios simulated several instances. The first scenario assumes a nothing duty on several industry while maintaining other industry duties changeless. This is based on the logical thinking that authorities has a opportunity to take which sector will be foremost liberalized. The 2nd scenario assumes a 50 per centum duty decrease on all industry sectors. This scenario based on premise that authorities has to liberalise all sectors together but the duty decrease implemented bit by bit. The 3rd scenario assumes a nothing duty on several industry while maintaining the other industry duty changeless and authorities impose extra revenue enhancements to cover gross loss on duty decrease. This is based on the fact that Indonesian authorities still necessitate duty as a beginning of gross while understanding on duty decrease was approved by the authorities. In this scenario, authorities assumed to increase indirect revenue enhancements or production revenue enhancement by five per centum.

Simulation Consequence: first scenario

Under the first scenario, get rid of the duty for industry of nutrient ( MG31 ) or industry of fabric ( MG32 ) has the same consequence on public assistance sum comparatively. However, consequence on end product in entire and domestic end product is somewhat different. It is favourable if authorities liberalizes MG31 before the others.

In the point of position of public assistance alteration, the largest positive alteration on tantamount fluctuation is 27.046 trillion rupiah. It is happened if zero duties imposed on industry of fancied metal merchandise, machinery and equipment ( MG38 ) while maintaining other industry duties changeless. Positive degree of tantamount fluctuation means that this type of policy is favourable. This consequence can be explained by an statement aˆ¦.. However, this policy makes domestic end product of several industry sector will diminish by 4.71 per centum.

The smallest grade of diminishing on domestic end product is 0.4 per centum on several sector. It is achieved when authorities merely get rid of the duty on industry of wood and wood merchandise ( MG33 ) . This policy besides gives the same consequence for the entire end product by 0.37 per centum away. Furthermore, it gives smallest public assistance by 199.2 trillion rupiah every bit good.

Tabel 4 presented the per centum alteration in domestic end product under the first simulation scenario. The complete consequence of alteration in parametric quantities can be seen in the appendix.

Tabel.4 Percentage alteration in domestic end product

Simulation

MG31

MG32

MG33

MG34

MG36

MG37

MG38

MG39

MG99

100 % decrease on:

MG31

-1.91

0.31

0.08

0.1

0.04

0.67

0.12

0.34

-0.04

MG32

0.04

-4.02

0.1

0.2

0.06

0.64

0.13

0.57

-0.01

MG33

0

0.01

-0.4

0.01

0

0.04

0.01

0.04

0

MG34

0.1

0.15

0.05

-5.08

0.05

0.3

0.08

0.19

0.01

MG36

0.02

0.05

0.02

0.03

-2.52

0.13

0.03

0.12

0

MG37

0.06

0.08

0.08

0.04

0.01

-9.39

0.95

2.29

-0.07

MG38

0.37

1.53

0.36

1.02

0.22

1.42

-4.71

1.56

-0.09

MG39

0.01

0.05

-0.06

0.05

-0.03

0.02

0.1

-8.57

-0.01

MG99

0.5

2.17

0.44

1.35

0.05

5.2

0.86

2.57

-0.6

Simulation Consequence: second scenario

Indonesian consumer would deduce 34.761 trillion rupiah in one-year public assistance benefit if authorities imposes fifty per centum duty decrease on all industry sectors. This policy gives a positive alteration in domestic end product of textile industry and wood industry. The domestic end product for another industries experience a decreasing alteration. However, this policy result a negative alteration on entire end product for nutrient industry, non-metalic mineral industry and fancied machinery industry.

Tabel.5 Parameter resulted if 50 per centum duty decrease enforce to all sector

MG31

MG32

MG33

MG34

MG36

MG37

MG38

MG39

MG99

Government Consumption

-5.03

-3.07

-5.32

-3.93

-5.15

-2.66

-3.44

-2.07

-5.47

Family Consumption

1.22

3.31

0.91

2.39

1.09

3.74

2.92

4.37

0.75

End product

-0.25

2.28

0.98

0.11

-0.82

3.6

-0.43

2.75

-0.06

Domestic Output

-0.35

0.26

0.32

-1.15

-0.98

-0.81

-1.21

-0.54

-0.38

Export

2.27

6.02

3.34

3.35

1.42

6.89

3.61

6.62

2.22

Import

14.46

22.78

3.96

7.02

10.64

0.87

5.6

5.77

1.42

Simulation Consequence: 3rd scenario

dadad

Decision

Using the criterion estimable general equilibrium ( CGE ) theoretical account, this paper examines the effects of duty decrease on the fabrication sector in Indonesia. The Indonesia IO informations for 2008 has been used to obtain a benchmark that really near with world.

Several scenarios of policy alteration have been simulated. The most of import consequence is that

Mentions or Bibliography

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