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  • Author: Samuel Nursamsu, Dionisius Narjoko, Titik Anas
  • Publication Date: 02-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: Can firms reallocate their imported inputs to domestic sources when faced with import tariffs? To answer this question, we analyse the input allocation behaviour of Indonesian medium and large-sized manufacturing firms in responding to the movement of import tariffs from 2000 to 2013 by utilising plant-level input data of Indonesian manufacturing. We find that an increase in tariffs only creates a weak substitution effect. Our findings indicate that firms reallocate their inputs towards domestic sources, although this is accompanied by a decrease in the firms’ value added. This implies that domestic inputs are worse substitutes for imported inputs and that firms’ capacity to switch over to domestic products is limited, suggesting that firms will immediately switch back to importing when the tariff is removed. We find no evidence that firms make any adjustment towards more domestic-oriented input composition over time; and heterogeneity exists within the result, as industries with a strong basis in the domestic market are more capable of adjusting.
  • Topic: Industrial Policy, International Trade and Finance, Tariffs, Manufacturing
  • Political Geography: Indonesia, Asia
  • Author: Toshiyuki Matsuura, Hisamitsu Saito
  • Publication Date: 02-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: This study examines the impact of inward foreign direct investment on the wages and employment of skilled and unskilled workers in Indonesian manufacturing plants. Entry of multinational enterprises affects local labour markets through spillovers as well as labour and product market competition. Our results show that spillovers increase the labour demand of local plants for unskilled workers, but increased wages due to severe labour market competition reduce the demand for skilled workers. We also find that product market competition causes resource reallocation from low- to high-productivity plants. Thus, attracting inward foreign direct investment effectively enhances aggregate productivity growth, but may retard the transition to skill-intensive production in Indonesian manufacturing.
  • Topic: Development, Foreign Direct Investment, Manufacturing, Labor Market
  • Political Geography: Indonesia, Asia
  • Author: Hiroaki Ishiwata, Hiroyuki Wada, Koji Suzuki, Naoto Tada
  • Publication Date: 06-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: This paper analyses the long-term impacts of large-scale disasters on the economic growth of developing countries in the Association of Southeast Asian Nations (ASEAN) Community, by the scale of disaster risk reduction (DRR) investments. As a means of quantitatively analysing the optimal level and economic efficiency of DRR investments, a case study was conducted on Indonesia by using a dynamic stochastic macroeconomic model. The results showed that in Indonesia, although greater economic growth is expected when additional DRR investments are made, an excessive DRR investment may contrarily lead to a slowdown in economic growth: an optimal level of DRR investment exists and maintaining its level is essential for sustainable economic growth. Furthermore, it was confirmed that there is a break-even point when the amount of accumulated disaster damage mitigation benefits exceeds the amount of accumulated DRR investment. This demonstrated that the funds invested in DRR could be recovered. Additionally, the results also showed that even if no disaster damage is caused over a long period of time, DRR investments are by no means redundant as the ‘ex-ante risk reduction effect’ will be generated when the optimal level of DRR investment is made. Lastly, it was determined that providing a continuous DRR investment is important in achieving the global target set forth in the Sendai Framework for Disaster Risk Reduction. In addition, it is considered desirable to maintain a higher level of DRR investment than that which is currently being implemented.
  • Topic: Economic Growth, Investment, Risk, Disaster Management
  • Political Geography: Indonesia, Asia, Indo-Pacific
  • Author: Kiki Verico, Mari Pangestu
  • Publication Date: 08-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: This paper analyses the economic impact of globalisation in Indonesia from the end of the 1960s to date. The analysis found that globalisation generated a positive impact on Indonesia’s economic growth through the trade and investment channel; reduced wage inequality and child labour participation; and increased labour absorption, including women's participation in the labour market. Through the trade channel, globalisation also contributed to Indonesia’s productivity and structural economic transformation, benefited small and medium-sized enterprises (SMEs), contributed to poverty alleviation and reduced inequality, and increased trade in services such as tourism. Through the investment channel, there is evidence of the spillover effect of technology transfer, technology progress, improvement of the role of SMEs, and contribution to poverty alleviation. The waves of open and more restrictive trade and investment policies, which Indonesia has gone through in the last few decades, reflect the political economy reality – that is, the impact of globalisation is dynamic and only felt in the medium term, whereas the cost and potential negative impact is often felt more immediately throughout trade creation. The trade creation increases imports from countries with which free trade agreements have been negotiated, decreasing the domestic producer surplus. Since globalisation will create net benefits in the long run, Indonesia should continue its process of globalisation and integration with the world economy to ensure the net benefits and to move forward in its structural transformation, while managing the costs of globalisation and its transition process.
  • Topic: Globalization, International Cooperation, International Trade and Finance, Economic Growth
  • Political Geography: Indonesia, Asia, Indo-Pacific
  • Author: Rashesh Shrestha, Samuel Nursamsu
  • Publication Date: 09-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: This paper discusses the status of financial inclusion in Indonesia and examines the impact of financial inclusion – based on availability of bank branches on household outcomes – in Indonesia. Based on analysis of the World Bank’s Financial Inclusion Survey (FINDEX) data, Indonesia has made some progress on expanding financial inclusion. The share of individuals with bank accounts rose from less than 20% to just under 50% in 2017. Interestingly, while the gain between 2011 and 2014 was greater for individuals in the upper 60 percentile of income, the gains between 2014 and 2017 were more pro-poor. This progress was made possible due to concerted government efforts to expand financial inclusion. In our empirical analysis, we study how financial inclusion enables households with income gains into savings for assets and earnings. Using the Indonesian Family Life Survey data, we find that living in areas with high density of bank branches helps poor households accumulate savings. The marginal effect of financial inclusion on savings is highest amongst the households in the bottom quintile of per capita consumption distribution. Thus, access to formal financial institutions can lead to improvement in household welfare.
  • Topic: Inequality, Finance, Banks, Domestic Policy
  • Political Geography: Indonesia, Asia-Pacific, Indo-Pacific
  • Author: Takahiro Akita, Sachiko Miyata
  • Publication Date: 11-2020
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: This study measures the pro-poorness of urban and rural economic growth by region from 2004 to 2014 in Indonesia using pro-poor growth indexes, with data from the National Socio-Economic Survey (Susenas). It also conducts a probit analysis to explore the determinants of poverty. All regions (Sumatra, Java–Bali, Kalimantan, Sulawesi, and East Indonesia) experienced a substantial increase in expenditure inequality in both urban and rural areas; thus, the change in poverty incidence due to redistribution effects is positive. Apart from East Indonesia, they reduced the incidence of poverty in both areas, but their growth was not pro-poor in the strict sense. According to the pro-poor growth indexes, urban areas performed better than rural areas; in most regions, the growth of urban areas was moderately pro-poor, while that of rural areas was weakly pro-poor or anti-poor. The government needs to take urban–rural and regional differences into account when formulating poverty alleviation policies and programs since these differences would affect economic growth and changes in inequality.
  • Topic: Poverty, Inequality, Economic Growth, Urban, Rural
  • Political Geography: Indonesia, Asia-Pacific, Indo-Pacific
  • Author: Arianto A. Patunru
  • Publication Date: 08-2019
  • Content Type: Working Paper
  • Institution: Economic Research Institute for ASEAN and East Asia (ERIA)
  • Abstract: The paper is motivated by the current emphasis on the share of domestic value added in exports (SVEX) as a policy criterion for export development strategy in developing countries. Our hypothesis is that the policy emphasis on SVEX, which harks back to the import substitution era, is inconsistent with the objectives of achieving economic growth with employment generation in this era of economic globalisation. We test this hypothesis by examining the relationship of the SVEX with both export-induced employment and the total domestic value added, or the contribution of exports to gross domestic product, by applying the standard input–output methodology to data from Indonesian manufacturing. Our findings do not support the view, widely held in policy circles, that industries characterised by a higher SVEX have the potential to make a greater contribution to employment generation and total domestic value added. The policy inference is that, in this era of economic globalisation, policy makers should focus on the export potential of industries in designing export development policy, rather than on the SVEX.
  • Topic: Globalization, Labor Issues, Trade, Global Value Chains
  • Political Geography: Indonesia, Indo-Pacific