Impact of Trade Liberalization and Deoentralization on Urban and Rural Economies in Indonesia

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In this paper, following the 1995 Interregional Social Accounting Matrix (IRSAM), we constructed an interregional Computable General Equilibrium (IRCGE) Model for three regions of Java, Sumatra and other region in Indonesia, and examined the impacts of the trade liberalization and decentralization on regional economy. From simulation of the tariff reduction by 50% in 1995, we found that the direct effects with the tariff cut are the reduction in tariff revenue and the reduction in the imported goods price. The tariff cut affects the real GRDP in each region directly through equation. However, since tariff cut lowers the imported goods price and the composite goods price, the value-added price is increasing due to cost reduction. Then, in industry activity, exports sectors such as textile sector in Jawa benefit, while import-competing sectors are more likely to suffer damage. Thus, the real GRDP of Java is increasing than in outer-Java. The regional government revenue of Java is slightly decreasing, but government expenditure of Java does not change, thus central government borrowing from abroad is increasing. Regarding the price index, the regional the price index is decreasing ranging from -1.16 % (other region) to -1.38% (Java). On the other hand, from simulations of decentralization policy, we found that decentralization has a positive impact on GRDP in Table la and Table Ib. That is, the real GRDP of outside-Java is increasing, and the regional government revenue of outside-Java is increasing by decentralization.