Implications for Indonesia of Asia’s Rise in the Global Economy

Abstract

This article projects Indonesia's production and trade patterns to 2020 and 2030 in the course of global economic development under various growth and policy scenarios. We support our projections of the global economy by employing the Global Trade Analysis Project (GTAP) model and version 8.1 of the GTAP database, along with supplementary data from a range of sources. Our baseline projection assumes that trade-related policies do not change in each region, but that endowments and real GDP do change, at exogenously selected rates. We use this baseline and its assumptions to analyse how potential global changes may affect the Indonesian economy over this and the next decade. We then consider the potential impacts of three policy reforms by 2020: an increase in global rice exports, associated with the opening of Myanmar; the recently imposed export taxes in Indonesia on unprocessed primary products; and the implementation of Indonesia's new food law.

Tulisan ini memberikan proyeksi terhadap pola produksi dan perdagangan Indonesia sampai 2020 dan 2030 dalam konteks perkembangkan perekonomian global, dengan berbagai skenario pertumbuhan dan kebijakan. Proyeksi yang penulis lakukan dalam tulisan ini dibuat dengan menggunakan model Proyeksi Analisis Perdagangan Global (Global Trade Analysis Project [GTAP]) dan data GTAP versi 8.1, serta berbagai data pendukung dari sejumlah sumber. Proyeksi dasar yang dilakukan penulis mengasumsikan bahwa kebijakan terkait perdagangan tidak berubah di setiap wilayah regional, namun di sisi lain sumber daya dan PDB riil mengalami perubahan (dengan berbagai laju perubahan yang dipilih secara eksogen). Proyeksi dasar ini berikut asumsinya digunakan untuk menganalisis seberapa potensial perubahan global dapat mempengaruhi perekonomian Indonesia dalam dekade ini dan dekade selanjutnya. Kemudian, penulis mengkaji dampak potensial dari tiga reformasi kebijakan pada 2020: kenaikan ekspor beras global yang terjadi karena terbukanya perekonomian Myanmar, pajak ekspor yang baru-baru ini dikenakan di Indonesia pada produk-produk primer yang tidak diolah, serta implementasi dari undang-undang pangan Indonesia yang baru.

Keywords:

• global economy-wide model projections
• economic growth
• structural change
• food policy
• export taxes

JEL classification:

• D58
• F13
• F15
• F17
• Q17

The authors are grateful for comments and suggestions from seminar participants at the Arndt–Corden Department of Economics, The Australian National University, Canberra, 30 April 2013, and at the 16th Annual Conference on Global Economic Analysis, Shanghai, 12–14 June 2013. We also acknowledge helpful interactions with Tom Hertel, Terrie Walmsley, Dominique van der Mensbrugghe, Fan Zhai, and Rob McDougall on a related paper presented at the AARES Annual Conference in Sydney, 6–8 February 2013. Thanks are also due to the anonymous referees for their very helpful comments and suggestions, and to Jayanthi Thennakoon for research assistance with figures 1a and 1b. Funding support from the Australian Research Council and the Rural Industries Research and Development Corporation is gratefully acknowledged. Views expressed are the authors’ alone.

Notes

¹ Anderson and Pangestu's (1998) study provides a similar guide, presenting the results of a modelling exercise that was undertaken just prior to the 1997–98 Asian financial crisis. That study, however, focused on the effects of implementing the Uruguay Round's multilateral trade agreements by 2005, China's accession to the WTO, and the prospective regional trade liberalisation by APEC countries.

² The index of ‘revealed’ comparative advantage in agriculture, following Balassa (1965), is the share of agriculture in Indonesia's exports divided by the share of agricultural products in global merchandise exports.

³ See http://www.gtap.org.

⁴ On the prospective decline in per capita demand for rice as Asian incomes rise, see Timmer, Block, and Dawe's (2010) study. Our modifications are based on econometric cross-country estimates of the relation between per capita incomes and the income elasticities of demand in the full GTAP database for 2007 for its more than 100 countries. We use that estimated relationship and our assumed per capita income growth rates to generate elasticities that lead to slower growth in demand for food staples in growing economies over the period modelled than if we had used the standard GTAP income elasticities. For example, in the case of Indonesia, we estimate that the income elasticities for food crops of 0.53 in the standard GTAP database are 45% smaller in our 2030 projections.

⁵ The baseline projection to 2030 follows the core baseline developed in another of our studies (Anderson and Strutt 2014).

⁶ Data on past reserves are from BP (2012). For coal, production data are used as a proxy, since projections of reserves were not available. Data on Vietnam's coal, oil, and gas were available for only a decade of what was exceptionally high growth, which would have led to implausibly high projections, so we modified them downward. Indonesia's coal reserves are assumed to grow at 3% per year during 2007–20 and then remain static thereafter— since as of 2011 it had only 17 years of production in reserves, compared with twice that in China and six times that in both India and the rest of the world (BP 2012).

⁷ This calibration is consistent with the World Bank's projections over the next four decades (see Roson and Van der Mensbrugghe 2012). An alternative, in which agricultural prices fall, as projected in GTAP-based projection studies in the late 20th century (for example, Anderson et al. 1997), is considered unlikely over the next two decades, given the slowdown in agricultural R&D investment since 1990, the consequent delayed slowing of farm productivity growth (Alston, Babcock, and Pardey 2010), and the decline in the real price of manufactures as industrialisation in China and other Asian countries booms—as occurred in the Industrial Revolution, in the first half of the 19th century (Williamson 2012). It is even less likely that farm products will fall if fossil-fuel prices and biofuel mandates in the United States, the European Union, and elsewhere are maintained over the next decade. Timilsina et al. (2012) project that international prices will be higher by 2020 in the presence versus the absence of those biofuel mandates for sugar (by 10%), corn (by 4%), oilseeds (by 3%), and wheat and coarse grains (by 2%), while prices for petroleum products will be 1% lower. (For Asian growth assumptions that lead to different price projections, see Anderson and Strutt 2014.)

⁸ It may seem surprising that high-income countries’ comparative advantage in primary products increases, but (a) what one part of the world imports the remaining part of the world must export to maintain global equilibrium; (b) the high-income country grouping includes Australia, Canada, and New Zealand (and, in food exports, the United States); and (c) we have not allowed for possible agricultural protection growth in emerging Asia in the core scenario.

⁹ In practice, these populous countries might seek to prevent such growth in food import dependence by erecting protectionist barriers (at least for food staples), but we do not model that here. See, however, Anderson and Nelgen's (2011) study.

¹⁰ We note that these impacts would be much more severe if exports from the large vegetable oils and fats sector were also taxed.

¹¹ The baseline with which this scenario is compared is the updated 2020 database, which includes the impacts of Indonesia's imposing export taxes on selected primary products.

¹² Such a slowdown is less likely than some observers fear. According to one of China's most prominent economists and former senior vice president of the World Bank, ‘China can maintain an 8% annual GDP growth rate for many years to come.… China's per capita GDP in 2008 was 21% of per capita GDP in the United States. That is roughly the same gap that existed between the United States and Japan in 1951, Singapore in 1967, Taiwan in 1975, and South Korea in 1977.… Japan's average annual growth rate soared to 9.2% over the subsequent 20 years, compared to 8.6% in Singapore, 8.3% in Taiwan, and 7.6% in South Korea’ (Lin 2013).