Regional Economic Modelling for Indonesia: Implementation of IRSA-INDONESIA5

Abstract

Ten years after Indonesia implemented a major decentralisatžon policy, regional income per capita disparity and excessive rate of natural resource extraction continue to be pressing issues. There are great interests in identifying macro policies that would reduce regional income disparity and better control the rate of natural extraction, while maintaining reasonable national economic growth. This paper utilises an inter-regional computable general equilibrium model, IRSA-INDONESIÅ5, to discuss the economy-wide impacts of various policies dealing with the development gap among regions in the country, achieving low carbon growth, and reducing deforestation. The results of simulations conducted reveal that, primarily, the best way to reduce the development gap among regions is by creating effective programs to accelerate the growth ofhuman capital in the less developed regions. Secondly, in the short-tenn, the elimination of enerv subsidies and/or implementation ofa carbon tax is effective in reducing C02 emission and producing higher economic growth, while in the long-run, however, technological improvement, particularly toward a more enerv efficient technoloc, is needed to maintaina relatively low level ofemission with continued high growth. Thirdly, ifreducing deforestation means reducing the amount of timber harvested, it negatively affects the economy. To eliminate this negative impact, deforestation compensation is needed.