An Inter-regional CGE Model to Assess the Impacts of Tariff Reduction and Fiscal Decentralization on Regional Economy: The Case of Indonesia

Abstract

The objectives of this paper are twofold. First, we construct a new interregional Computable General Equilibrium (CGE) model with three regions in Indonesia. This model is the interregional CGE model based on the 1995 Interregional Social Accounting Matrix (IRSAM). Second, we evaluate the impacts of tariff reduction and fiscal decentralization on these regional economies as well as on the entire Indonesian economy. Scenario 1 of the import tariff cut shows the tariff reduction reduces in tariff revenue and decreases in the imported goods price, but in industry activity, exports sectors such as the textile sector in Java benefits, while Tokunaga, Budy P. Resosudarmo, Luky Eko Wuryanto and Nguyen Tien Dung import competing sectors are more likely to suffer damage. From these scenarios of fiscal decentralization policy, we found that scenario 3 of decentralized government spending in Sumatra is better than Scenario 2 of more equal decentralized government spending in outer Java and Scenario 4 of more decentralized government spending in the rest of Indonesia for fiscal decentralization policies. © 2003, JAPAN SECTION OF THE REGIONAL SCIENCE ASSOCIATION INTERNATIONAL. All rights reserved.