Regional economic consequences of tariff reforms and public investment in Indonesia: An interregional computable general equilibrium approach

Indonesia has achieved a rapid economic growth over the last two and a half decades. Trade liberalization implemented under sound macroeconomic policies among various factors is one of the essential elements which has enabled Indonesia to have succeeded in spectacular economic growth. In the wake of the dynamic movement of global trade liberalization in recent years, this study attempted to analyze the economic impacts of trade liberalization in the form of tariff reforms on Indonesia's regional economy. In addition, in view of the reduced government role in the process of economic development, this study also focuses on the analysis of the shift of the fiscal allocation in public investment. The analytical methodology is the use of a two-region interregional computable general equilibrium model. The model is a comparative static in nature and focuses on the real side of the economy. The effects of tariff reforms are analyzed in two analytical frameworks, the base model and the variant model, while the experiments in public investment are simulated in the base model. In the base model, tariff reforms lead to higher economic growth of the nation by increasing the overall level of technological efficiency. The tariff reforms generate greater economic gain in Java relative to the Outer Islands. There exists a tradeoff between economic growth and the degree of household income inequality. In the variant model, the impacts of tariff reforms always benefit Java in a considerable degree at a huge cost to the Outer Islands due to the massive interregional labor migration. On public investment, given the zero-sum net allocation, Java has a comparative advantage relative to the Outer Islands in terms of overall productivity and economic efficiency. It is found that the national economy entirely relies on Java's economic performance. Out of the three investment categories, economic infrastructure is the most efficient, and general services the least in both regions. However, both tariff reforms and the shift of fiscal allocation in public investment cannot necessarily achieve the country's most essential dual objectives simultaneously: economic growth and equity.