Anti-globalisation, poverty and inequality in Indonesia Arief Anshory Yusuf Universitas Padjadjaran Peter Warr Australian National University 15 December 2017 Universitas Gadjah Mada, Yogyakarta
Introduction 1 our question 1. Since the 1997-99 Asian Financial Crisis (AFC), the rate of poverty reduction in Indonesia has slowed. From an annual reduction of 1.44 % of the total population between 1976 and 1996, the rate slowed to 0.53 % per year between 2000 and 2015. That is, the post-crisis rate of poverty reduction is only 37 % of the pre-crisis rate, whereas the post-crisis rate of GDP growth per person has been 89 % of the pre-crisis rate. 2. Following the crisis, economic inequality increased dramatically. The Gini index of inequality increased from 0.303 in 2000 to 0.41 in 201 5, one of the largest increases ever recorded for any country. 3. Protectionism also increased, both at the global level and within Indonesia. In this presentation we focus on the rise in trade protectionism between 2008 and 2015. 4. To what extent, if any, does point 3 explain points 1 and 2?
Introduction 2 our answer 1. Reminder: the post-crisis vs. pre-crisis slowdown in the rate of poverty reduction is 1.44 0.53 = 0.91 percentage points per year. 2. We estimate that since 2008 increased protectionism at the global level may have reduced the annual rate of poverty reduction within Indonesia by 0.018 percentage points. 3. Increased protection within Indonesia between 2008 and 2015 reduced the annual rate of poverty reduction by an estimated 0.010 percentage points. 4. Implication: the poverty effects were negative but small. 5. Protectionism also increased inequality, but the effects were even smaller. 6. Anti-Globalisation had harmful effects on both poverty reduction and inequality, but it was not the major cause of either the slowdown in poverty reduction or increased inequality.
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 In Indonesia, poverty reduction has slowed and inequality has increased to an unprecedented level. 70 60 50 Poverty incidence (% population) 0.45 0.4 Gini coefficient of inequality Indonesia Urban Rural 40 30 0.35 20 10 0.3 0 0.25 0.2 Urban Rural All Urban Rural All 1976 1996 Annual change 2000 2008 Annual change 2008 2016 Annual change Poverty 40.100 11.300-1.440 19.100 15.412-0.461 15.412 10.860-0.569 Inequality 0.346 0.365 0.001 0.303 0.367 0.008 0.367 0.397 0.004
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 After the 2008 global financial crisis, world trade growth slowed. World GDP growth slowed too, but not as much. 5.8 5.6 5.6 2.8 2.0 1.4 5.0 1.5 5.5 6.2 3.1 2.9 6.6 3.3 7.3 7.2 3.6 2.6 6.4 3.3 7.0 4.4 6.0 1.8 4.7 5.0 2.1 2.9 5.9 4.1 5.0 3.6 6.7 7.4 4.0 3.9 6.7 1.4 2.1 4.1 3.7 2.9 3.0 2.2 2.3 2.4 2.2 5.3 3.0 2.7 2.7 2.2 2.3-2.1 World Trade (5 years average) World GDP Source: World Trade Organisation
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 The world trade to GDP ratio stopped rising after 2008. Indonesia s trade/gdp ratio has fallen absolutely. 100 90 80 70 Trade to GDP (%) 60 50 Indonesia's Export and import (% of GDP) 60 50 40 40 30 30 20 10 20 10 0 0 World trade (% of GDP) Indonesia trade (% of GDP) Export (% of GDP) Import (% of GDP) Source: World Bank WDI
Global trade restriction has increased since 2008, including Indonesia More liberal 5 TRADE POLICY CHANGE Indonesia Malaysia Thailand 0-5 -10-15 -20-25 -30-35 Source: WTO -40 2008 2009 2010 2011 2012 2013 2014 2015 2016 More protectionist Source: GTA (calculated by Kyunghoon Kim)
Food crops Estate & other crops Livestock & their products Forestry Fisheries Oil & gas extraction Other mining Food, beverages & tobacco Textiles, apparel & leather Wood products Paper products Chemicals Oil refining & LNG Non-metal products Metals and metal products Machinery & transport equipment Other manufacturing Overall Indonesia s nominal rate of protection (NRP) has increased since 2008 40.0 30.0 20.0 10.0 0.0-10.0-20.0-30.0 33.0 8.8-18.2 13.7 2008 2015 Source: Marks (2017)
How globalisation-reversal may affect poverty and inequality: A modeling perspective Changes in protection policy are known to have powerful effects on poverty and inequality. To what extent, if any, can Indonesia s poverty-inequality story be explained by changes in trade policy? Changes other countries protection alters the international prices for commodities and traded inputs and this in turn affects the domestic prices faced by both producers and consumers within Indonesia. Changes in Indonesia s protection policies affect Indonesian households by changing both their incomes and the prices they face for consumer goods. We analyse these complex effects using INDONESIA-E3, a computable general equilibrium model of the Indonesian economy with disaggregated households, enabling detailed calculation of the poverty and inequality impact of policy changes and external shocks (Yusuf, 2008). The essence of the analysis is the comparison between the welfare of households under the existing policies and what their welfare would be under a hypothetical alternative set of policies the counterfactual.
Simulating the impact of globalisation-reversal on poverty and inequality: the INDONESIA-E3 model Scenarios: 1. The world s globalisation-reversal. Using the World Bank s estimated levels of global protection, we simulate the effects on Indonesian households of a 20% increase in all rates of protection in all countries, except Indonesia. 2. Indonesia s own globalization-reversal: We simulate the effects on Indonesian households of the observed increase in trade protection between 2008 and 2015 (based on Marks, 2017). We focus on food crops, livestock, manufactured food and minerals.
How the world s globalisation-reversal affects Indonesia
1 11 21 31 41 51 61 71 81 91 1 11 21 31 41 51 61 71 81 91 The world s globalisation-reversal hurts Indonesian agriculture and unskilled labor. It increases poverty, especially rural poverty, but does not change inequality. 0.1 0 Growth Incidence curve (percentage change in real expenditure per person) Percentile of expenditure per person Real return to factors of production Skill Skill informal formal 1 0.5-0.1-0.2-0.3-0.4-0.5-0.6 dpov = 0.061% dgini = 0.00 Urban + rural dpov = 0.124% dgini = 0.00 urban dpov = 0.182% dgini = 0.000 rural Unskill Unskill Informal Formal Agricultur al worker Capital Land 0-0.5-1 -1.5
The world s globalisation-reversal harms many Indonesian agriculture-based exporting sectors WaterTransp 2.32 WoodPrd 0.27 Cement 0.06 Livestock -0.16 TranspSvc 1.37 RubbrPlastic 0.26 OthAgric 0.05 Maize -0.20 OthManufact 1.10 Communicaton 0.23 Fuel 0.04 Coconut -0.21 RestrntHotel 0.65 VegFruits 0.23 OthMining 0.04 Beverages -0.47 Beans 0.60 OthFoodCrops 0.21 Oil 0.01 Tea -0.58 OthEstateCrp 0.58 RoadTransp 0.20 GeneralGov 0.01 Clove -0.78 Coffee 0.52 RootCrops 0.17 GasGeo 0.01 Flours -0.86 BasicFerrous 0.50 RiceMilling 0.15 Construction 0.00 Tobacco -0.87 Chemicals 0.47 Paddy 0.15 OthServices -0.02 Cigarettes -1.12 AirTransp 0.47 Slaughtering 0.13 SocCommunSvc -0.04 Sugarcane -1.13 Machines 0.44 Rubber 0.12 Trade -0.04 Sugar -1.17 TranspEquip 0.41 Poultry 0.09 Fishery -0.05 OthFoodPrd -1.22 FabMetalPrd 0.34 Banking 0.09 RailTransp -0.05 TCF -1.45 FertPestcide 0.30 OthForestPrd 0.09 Others -0.06 OilPalm -1.49 PaperPrd 0.30 CoalMetalMin 0.07 Finance -0.10 FibrerCrops -1.61 NMetalMinPrd 0.29 Wood 0.07 ElecGasWater -0.14 YarnSpinning -1.61 FuelSub 0.29 Metal 0.06 BasicNFerros -0.14 OilAndFat -1.84 FoodProcess -3.99
How Indonesia s own globalisation-reversal affects Indonesia
Distributional effect of a shock or policy change: For an individual household: Total Effect (Real expenditure effect) = Income Effect Price Effect - The Income Effect measures, for each household, how a shock affects income from the ownership of factors of production (labour, capital and land). - The Price Effect measures the impact on the household s cost of living.
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 % deviation from baseline Distributional effect of Indonesia s rising protectionism: (imported) food products 1.2 1 URBAN Rent from quantitative trade restriction RURAL 0.8 0.6 price effect price effect 0.4 income effect income effect 0.2 poorest richest poorest richest 0-0.2-0.4 total effect total effect
% deviation from baseline 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 Distributional effect of Indonesia s rising protectionism: (exported) minerals 0.1 0.05 total effect poorest richest poorest richest 0-0.05-0.1-0.15 price effect price effect total effect income effect income effect -0.2-0.25-0.3-0.35 URBAN RURAL
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 % deviation from baseline Distributional effect of Indonesia s rising protectionism: food + mineral products 1.2 1 URBAN Rent from quantitative trade restriction RURAL 0.8 0.6 price effect price effect 0.4 0.2 0 income effect income effect poorest richest poorest richest -0.2-0.4 total effect total effect
Indonesia s globalisation-reversal has diverse effects on real returns to factors of production Food import Mineral exports Food+Mineral Land Land Land Capital Capital Capital Skilled informal labor Skilled informal labor Skilled informal labor Skilled formal labor Skilled formal labor Skilled formal labor Unskilled informal labor Unskilled informal labor Unskilled informal labor Unskilled formal labor Unskilled formal labor Unskilled formal labor Agricultural labor Agricultural labor Agricultural labor -0.6-0.4-0.2 0 0.2 0.4-0.6-0.4-0.2 0 0.2 0.4-0.8-0.6-0.4-0.2 0 0.2 0.4
Summary of the impacts on poverty and inequality Poverty Urban Rural All Urban Rural All Urban Rural Urban Rural Ex-ante 11.650 18.930 15.412 0.369 0.277 0.371 7.620 3.893 1.276 0.803 SIM1-Food 11.729 18.992 15.482 0.370 0.277 0.372 7.681 3.892 1.288 0.803 Change 0.079 0.062 0.070 0.001 0.000 0.001 0.062-0.001 0.012 0.000 SIM2-Mineral 11.643 18.942 15.415 0.368 0.277 0.371 7.602 3.889 1.275 0.802 Change -0.007 0.012 0.003 0.000 0.000 0.000-0.018-0.004-0.002-0.001 SIM3-Food+Minerals 11.722 19.004 15.485 0.370 0.277 0.371 7.663 3.888 1.285 0.802 Change 0.072 0.074 0.073 0.001 0.000 0.001 0.044-0.005 0.009-0.001 Gini Top10/Bottom10 (Decile dispersion) Top10/Bottom40 (Palma Ratio)
Conclusions -1 Since the 1997 98 Asian financial crisis, the rate of poverty reduction in Indonesia has slowed and inequality has increased - From a reduction of 1.44 per cent of the total population per year between 1976 and 1996, the rate of poverty reduction slowed to 0.53 per cent per year between 2000 and 2016. - Therefore, the post-crisis rate of poverty reduction was only 37 per cent of the pre-crisis rate, whereas the post-crisis rate of GDP growth per person was 89 per cent of the pre-crisis rate. Following the crisis, economic inequality increased dramatically. - The Gini index of inequality increased from 0.303 in 2000 to 0.41 in 2015, one of the largest increases ever recorded for any country.
Conclusions -2 At the same time, protectionism also increased, both globally and within Indonesia. The objective of this study was to estimate the extent to which protectionism, both at the global level and within Indonesia, explains the observed slowdown in poverty reduction and rise in inequality. We did this using the INDONESIA-E3 model, a general equilibrium model of the Indonesian economy that enables detailed calculation of the poverty and inequality effects of policy changes and external shocks.
Conclusions -3 The difference between the pre- and post-crisis rates of poverty reduction was 1.44 0.53 = 0.91 percentage points per year. Our findings are: - Increased protectionism at the global level since 2008 reduced the annual rate of poverty reduction in Indonesia by 0.018 percentage points. - Increased protectionism within Indonesia between 2008 and 2015 reduced the annual rate of poverty reduction by 0.010 percentage points. - Therefore, protectionism increased poverty, but this effect was small. - Increased protectionism from 2008 to 2015 also increased inequality, but the effect was smaller still.
Conclusions -4 Anti-globalisation had harmful effects for both poverty reduction and inequality within Indonesia. But that was not the major cause of either the slowdown in poverty reduction or the rise in inequality. The main causes of these changes are important issues for ongoing research.
Thank you Arief Anshory Yusuf Universitas Padjadjaran arief.yusuf@unpad.ac.id Peter Warr Australian National University Peter.Warr@anu.edu.au
The distribution of value of net sales of rice of urban households, 2007 Source: Calculated from IFLS4 (2007).
0 PDF of net sales 1.000e-07 2.000e-07 3.000e-07 4.000e-07 The distribution of value of net sales of rice of rural households, 2007-10000000 0 10000000 20000000 30000000 Value of net sales of rice, rupiah Source: Calculated from IFLS4 (2007).
We all know what to do. What we don t know is how to get re-elected after we do it. Muhammad Chatib Basri, former Minister of Finance.