The Impact of Trade Costs in Indonesian Agri-food Sectors: An Interregional CGE Analysis

An interregional Computable General Equilibrium (CGE) approach is used to measure the impact of variable internal trade costs have on regional consumer welfare and interregional market integration within the Indonesian economy. Existing high interregional price differences in the agri-food markets suggest the presence of variable internal trade costs, which serve as effective barriers to interregional trade. Given the important role of agri-food markets in both food security and income generation for rural households, these price differences can have significant welfare impacts on both producers and consumers. Reducing the costs of trade between Indonesia\u27s various regions could facilitate interregional trade. Trade costs consist of various components, such as trade and transport margins, which vary in their welfare and distribution effects; as such, reducing each cost component is likely to yield different effects on regional welfare. To assess the extent to which aggregate trade costs may contribute to observed interregional price differences in Indonesia\u27s agri-food markets, an interregional CGE modeling framework is used to separately analyze the individual impacts of trade margin and transport margin on trade flow within the Indonesian Economy. The interregional SAM-based CGE model (IRSAM) constructed by Resosudarmo et al. (2009) for the Indonesian economy is used in this analysis. IRSAM divides the economic activities for each of Indonesia\u27s five major economic regions into 35 production sectors, 6 labor classifications, 2 types of capital, 2 types of household, local government and companies, and maintains other national accounts. In this analysis, the trade and transportation margins between regions originally imbedded in the trade and transportation sectors of the IRSAM were netted out of these sectors and isolated into separate margin accounts unique to each industry and region. Three interregional trade flow simulations are performed using the modified CGE model and the simulated output is subsequently evaluated relative to the existing baseline condition. The three simulations individually examine the economic impact of a reduction in trade margin or transport margin on a variety of micro and macroeconomic variables used to estimate policy induced trade flow and welfare impacts in each region. Specifically, the impact of trade costs under three scenarios is considered: (1) reduce trade margin to 50% of its baseline value for all agri-food commodities; (2) reduce transport margin to 50% of its baseline value for all agri-food commodities; and (3) reduce transport margin to 10% of its baseline value for all (not just agri-food) commodities. Results from these simulations varied depend upon which type of trade costs was adjusted. Reducing trade margin has higher impact to the increase of regional GDP, compared to reducing transport margin. It suggest that reducing trade margin or \u27soft infrastructure\u27 margin offers the more effective approach to improving economic outcomes across Indonesia\u27s regions. Also, reducing trade margin improved the poverty incidence for residence in all regions; however, the primary beneficiaries of this policy were those live in urban areas