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THE IMPACT OF DIVERTING OF FUEL SUBSIDY TO AGRICULTURAL SECTOR ON POVERTY

4The Impact of Diverting of Fuel Subsidy to Agricultural Sector on Poverty

CMU. JOURNAL OF ECONOMICS 16:1 JAN–JUN 2012

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บทคัดย่อ วัตถุประสงค์ของการศึกษาเพ่ือต้องการวิเคราะห์นโยบายการถ่ายโอนของการอุดหนุนเช้ือเพลิง ของภาคกสิกรรม และพืชที่เกี่ยวข้องต่อระดับรายได้และความยากจนในประเทศอินโดนิเซีย การศึกษาในคร้ังนี้ใช้แบบจำาลองดุลยภาพครอบคลมุ(ComputableGeneralEquilibrium(CGE))ในการจำาลองการวดัความยากจนเชน่การนบัหวัชว่งหา่งความยากจน(povertygap)และดัชนีความรุนแรงของความยากจนดัชนีความยากจนพัฒนาโดยFoster-Greer-Thorbecke(FGT) นำามาใช้ในการวัดความยากจน ผลที่ได้จากการจำาลองจะแสดงให้เห็นถึงการถ่ายโอนการอุดหนุนเชื้อเพลิง ต่อภาคกสิกรรมและภาคเกษตรชนิดอ่ืนท่ีทำาให้เกิดความยากจนลดลงอย่างไรก็ตามความเบ่ียงเบนของการอุดหนุนเช้ือเพลิง ตอ่ภาคกสกิรรมขนาดเลก็อ่ืนๆสง่ผลมากกวา่ตอ่การลดลงของความยากจนมากกวา่เม่ือเทยีบกบัการใชน้โยบายอดุหนนุเชื้อเพลงกับภาคกสิกรรม ผลการศึกษาแสดงใหเ้หน็วา่การลดลงของการจา่ยเงนิอดุหนนุเชือ้เพลงิและเมือ่เทยีบเปน็จำานวนเดยีวกนัเมือ่ใช้กบัภาคเกษตรจะไมท่ำาใหค้วามยากจนเพิม่ขึน้ซึง่ในความเปน็จรงิแลว้นัน้การศกึษาครัง้นีพ้บวา่อตัราความยากจนลดลงนั้นเป็นผลมาจากการจำาลองการใช้นโยบายดังกล่าว

Keywords:เงินอุดหนุนระดับรายได้ความยากจน

The Impact of Diverting of Fuel Subsidy to Agricultural Sector on PovertyIndra Maipita1

Mohd. Dan Jantan2

Fitrawaty3

Sabar Narimo4

1 FacultyofEconomics,StateUniversityofMedanCorrespondingauthor:[email protected] DepartmentofEconomics,UniversityUtaraMalaysia,Kedah,Malaysia,Correspondingauthor:[email protected] FacultyofEconomics,StateUniversityofMedanCorrespondingauthor:[email protected] FacultyofTeacherTrainingandScienceofEducation,MuhammadiyahUniversity,Correspondingauthor:[email protected]

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ABSTRACT TheIndonesiangovernmenthasbeenspendingabigsumofmoneyonfuelsubsidy.However,studiesshowthatfuelsubsidyfailedtohitthetargetgroup,i.e.thepoor,effectivelyandatthesametimefuelsubsidycontributedtoabudgetdeficit.Toreducethebudgetdeficit,thegovernmenthasstartedtoreducethissubsidygradually.Thus,thepriceoffuelhasincreasedandatthesametimethereisachaineffectonthepriceofothergoodsandservices.Tolightentheburdenofthepeopleasaresultofanincreaseinthepricelevel,thegovernmenthasintroducedadirectcashaidtothepoor.However,studiesshowthatthetransferofpaymenttothepoorisunabletooffsettheeffectofanincreaseinthepricelevel.Sincemajorityofthepoorlivesintheruralareaandmostofthemarefarmers,thisstudyexploresanalternativepolicyinwhichtheamountsavedfromareductioninfuelsubsidyisre-distributedtoagriculturalsector.Agriculturalsubsidycanbeintheformsofinputsandpricesubsidywiththeobjectivesoftohelpthefarmerstoincreaseproductionandefficiency. Thus,thepurposeofthisstudyistoanalyzetheimpactofthetransferpolicyoffuelsubsidytothefoodcropsandothercropssub-sectorsonthelevelofincomeandpoverty.Themajorfoodcropsarerice,corn,cassavaandsoybean.Mostofthefoodcropsareconsumeddomestically.Othercropsrefertoplantationcropssuchasoilpalm,rubber,sugarcaneandcocoa.Thesecropsareexportscrops.ThisstudyemploysaComputableGeneralEquilibrium(CGE)modeltosimulatepovertymeasuressuchasheadcount,povertygap,andpovertyseverityindices.ThepovertyindicesdevelopedbyFoster-Greer-Thorbecke(FGT)areusedtomeasurepoverty.Itisfoundthatthetransferoffuelsubsidytofoodcropssub-sectorshowamixedresults.Ifthepercentageofthetransferofthesubsidyisbigenough,itwillbeabletoincreaseincomeforallgroupsofhousehold,exceptfortheurbanpoor.Also,thesimulationresultsshowthatthepovertygapandseverityamongtheruralpoorareimproved.But,asaresultofadecreaseinincome,thepovertygapandseverityamongtheurbanpoorbecomeworseoff.Thetransferoffuelsubsidytoothercropssub-sector,i.e.plantation crops,showsanincreaseinthelevelofincomeforallhouseholdgroups.Thus,thenumberofrural-andurban-poorhouseholdsisdecreased.Povertygapandseverityamongthesetwogroupsofhouseholdsarealsoimproved.However,thediversionoffuelsubsidytoothercropssub-sectorhasabiggerimpactonpovertyreductionascomparedtothetransferoffuelsubsidytothefoodcropssub-sector.

Keywords:Subsidy,IncomeLevel,andPoverty

1. INTRODUCTION Anincreaseinthepriceoffuelhasanimpactonitsconsumption,aswellasontheconsumptionofothergoodsandservices,eitherdirectlyorindirectly.Thereisachaineffectofanincreaseinthepriceoffueltothepriceofothergoodsandservice.Asaresult,realincomeofthegeneralpopulationandpovertyareaffected.Toprotectthewelfareofthepoorandthosewhoareslightlyabovepovertyline,thegovernment needstointerveneagainstanincreaseinthepriceoffuelbyprovidingvarioustypesofsubsidy.Thedrasticandcontinuousincreaseintheworldoilpricesince2008(Reyes,atal,2009;FAO,2008)andtheshiftofIndonesia’spositionfromnetexportertonetimporterofoilandfuelcontinuethegrowingneedstofinancethesubsidies.Thus,theburdenofsubsidieskeepsgrowingasshowninFigure1andcontributestothegovernment’sbudgetdeficit.Atthesametime,somepeoplebelievethatfuelsubsidyfailstohittheintendedbeneficiary,


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i.e.thepoor.Therichgetsthebenefitoffuelsubsidymorethanthoseofthepoor.Toeasetheburdenonthebudget,thegovernmenthastakenvariousfiscalpolicymeasuressuchasreducingthefuelsubsidygraduallyasperthePresidentialDecreeNo.55/2005.Consequently,attheendtherewillbenomorefuelsubsidy,althoughthetimeisyettobedecided(WordBank,2005).Itisexpectedthatwithoutfuelsubsidy,thepricewillincreasewhichwillalsotriggeranincreaseinthepriceofothergoodsandservice,thustheinflation.Thegeneralpublicpurchasingpowerwillbeeroded,resultinginanincreaseinpoverty.

Figure 1. Burden of Energy Subsidy (Fuel and Electricity) in National Budget

Source: Depkeu, 2010

Fuel

Electricity

Energy (Total)

% Fuel

250

200

150

100

50

0Year

Trilli

on R

upiah

95.5985

8.8506

104.4491

91.53

2005

64.2121

30.3933

94.6054

67.87

2006

83.7923

28.0735

111.8658

74.90

2007

139.1067

83.9065

223.0132

62.38

2008

54.3001

48.1616

102.4617

53.00

2009

Povertyisstillacrucialissueandaverycomplexphenomenonforeachcountry(Hung&Makdissi,2004;Marianti&Munawar,2006).Povertyalleviationhasbecomeamajorgoalofpublicpolicyinalmostallindustrialsocieties(Moller,etal,2003)soasthegovernmentineachcountryseekstoreducetheproblemthroughfiscalinstruments. Reducingfuelsubsidygraduallyuntilitreacheszeropercentisexpectedtohaveabigdetrimentalimpacttothesocietywherethepoorbecomespoorer,eventhoughitisgoodtoreducebudgetdeficit.Howaboutifthefuelsubsidyisreducedgraduallyandthe“saving”isusedtosubsidizeagriculturalsector?Thus,theaimofthisstudyistodeterminetheimpactofthetransferoffuelsubsidytotheagriculturalsectorandanalyzeitsimpactonthelevelofincomeandpovertyinIndonesia.In2009,atotalof41.6million(39.7percent)ofthe104.9millionworkerswereintheagriculturalsector.

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Thereasonsunderlyingtheselectionofagriculturalsectorare(1)mostpoorpopulationisfoundinruralareareliesonagriculturalsector,(2)Indonesia’sexperienceduringthemonetarycrisisin1998showedthattheagriculturalsectorisoneofthefewsectorsthatremainedresilientduringthecrisis,(3)agriculturalsectorprovidesfoodandrawmaterialforindustrialandservicesectors,(4)laborabsorptionintheagriculturalsector isrelativelyflexible,sothatagriculturecanbeseenasasafetynet(survivalsector)duringanemergency(Stringer,2001;Bautista,2000;Maipita,etal,2010;Maipita,2011).SuseloandTarsidin(2008)foundthatagriculturalsectorhasrelativelyhighpovertyratesandalsorelativelyhighelasticityofpovertywithrespect toeconomicgrowth.ThenewparadigmofagriculturaldevelopmentinIndonesiaisagricultural demand-led industrialization,asanindustrializationstrategythatfocusedonthedevelopmentprogramsintheagriculturalsector,sinceitisconsideredasanappropriatepolicytobeimplementedinadevelopingcountry(Susilowati,2008). Asubsidyisaimedtoincreasenationaloutputanddemandforgoodsandservices.Itisexpectedthatasubsidyenhancesproductivityandmaintaineconomicstability,especiallythepricestability.Throughthesubsidy,basicgoodsandservicesforasocietyisexpectedtobeavailableinsufficientquantityandatastableandaffordableprice(Handoko&Patriadi,2005;Norton,2004;Kasiyati,2010).Asubsidyisapaymentbythegovernmenttohouseholdorfirmtoachieveaspecificgoal.Forafirm,asubsidymakesitabletoproduceeitherinalargerquantityoratacheaperpricethanwithoutasubsidy.Forahousehold,asubsidymakesthemabletoconsumeabiggerquantityatalowerpricethatifitiswithoutasubsidy.Then,theobjectiveofasubsidyistoeithertoreducethepriceortoincreasethequantityofproductionandconsumption.Asubsidycanbeintheformofatransferofpayment,suchasfoodstampsandhousingsubsidies,andintheformofaninputandpricesubsidiessuchasintheagriculturalsector(Ericson,etal,1998).Asubsidyalsocanbeintheformofgoodsandservicesprovidedbythegovernmentforacertainquantityforfreeoratapricelowerthantheprevailingmarketprice(Handoko&Patriadi,2005). Inadevelopingcountry,asubsidyisasignificantfiscalinstrumenttoboostproductivityandimprovepeople’swelfare(Norton,2004).Asubsidyisanefficientformofgovernmenttransferasameantoredistributewealthamongthecitizensaswellasbetweenproducersandconsumers.Thisisthefundamentalimportanceofasubsidyandevenadevelopedcountryusesasubsidyinstrumenttosupportitsprivatesector.Fromtheinstitutionalside,lowertaxesandanincreaseinasubsidycanincreaseincomeandpurchasingpowerofhouseholds.Anincreaseinincomecouldsupportgreaterhousehold’sconsumption(Simorangkir&Adamanti,2010).Anegativeeffectofasubsidyisaninefficientallocationofgoodsandservicesbecausesinceconsumerspayalowerpricethanthemarketprice,thereisatendencyfortheconsumersnottobethriftyinconsuming subsidizedgoods.Inaddition,sincethesubsidizedpriceislowerthantheopportunitycost,thenthereiswasteful intheuseofresourcestoproducethegoods.Asubsidythatisnottransparentandnotwell-targetedmaycauseapricedistortion,inefficiencyandnotenjoyedbytheintendedrecipients(Basri,2002). Theorganizationofthispaperisasfollows:Inthenextsection,weofferthemethodologyanddata.SectionIIIdiscussestheresultsofthesimulationsofvariouspolicyscenarios.Thisisfollowedbytheconcluding remarksinSectionIV.


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2. METHODOLOGY AND DATA Toachievetheaimofthisstudy,weconstructaComputableGeneralEquilibrium(CGE)modelcalledAGEFIS+.ThismodelisanextensionoftheAGEFISCGEmodelconstructedbytheFiscalPolicyOffice,Ministry ofFinanceoftheRepublicofIndonesiaincooperationwiththeCenterforEconomicsandDevelopment Studies,UniversityofPadjadjaran,Indonesia(BKFDK-RI,2008a;2008b).Ingeneral,thestructureofthismodelfollowstheAGEFISmodeldevelopedbyYusuf,etal(2008). ThedatausedinthisstudyisextractedfromtheSocialAccountingMatrix(SAM)ofIndonesiafor2005andthedataofpovertyindicatorsin2005.TheIndonesianSAMdataareaggregatedto47x47sectors.Theaggregatedproductionfactorsconsistofcapital,laborandintermediateinputs.Therearethreeinstitutions–households,firms,andgovernments–asperIndonesianSAM2005.Forthepurposeoftheanalysis,thehouseholdsinSAMtableareaggregatedintofourgroups,consistingof(1)urbannon-poor,(2)urbanpoor,(3)ruralnon-poor,and(4)ruralpoorhouseholds.Productionsectorconsistsof27sub-sectorsaggregatedfromtheproductionsectorinSAMtable.ThegroupingoftheproductionsectorisbasedontheStandardIndustrialClassification(KLU).Theagriculturalsectorisdividedintotwosub-sectors,i.e.thefoodcropsandothercrops.Themainfoodcropsarerice,corn,cassavaandsoybeanandmostofthesecropsareplantedonsubsistencebasisanddomesticconsumption.Othercropssub-sectorconsistsofplantationcropssuchasoilpalm,rubber,andsugarcanethataremostlyexportscrops. Policysimulationsareconductedbasedontwoscenarios.Thefirstscenarioisthediversionoffuelsubsidytofoodcropssub-sector,andthesecondscenarioisthetransferoffuelsubsidytoothercrops sub-sector.Sincethegovernmentreducesfuelsubsidyinstages,eachscenarioisthenrunthreesimulationstoreflectthepercentageofreductioninfuelsubsidybythegovernment.Simulation“a”isa12.5percentreductioninfuelsubsidyandthesameamountsavedbythegovernmentistransferredtotheagriculturalsector.Simulation“b”consistsofa43.2percentreductioninfuelsubsidyanditistransferredtoagriculturalsector.And,simulation“c”istheabolishmentoffuelsubsidyandthesameamountofsavingistransferredtotheagriculturalsector.Thisstudycoverssubsidyingeneral,i.e.divertingoffuelsubsidytoagriculturalsector.Inotherwords,theagriculturalsubsidycanbeeitherintheformsofinputsubsidyorpricesubsidy. Itisassumedthatthetransactioncostsandtheefficiencyofthegovernmentbureaucracyinimplementingfuelsubsidyandagriculturalsubsidyremainthesame. Thestructuresoftheproductionfunction,suchasLeontief,Cobb-Douglas,andconstantelasticity ofsubstitution(CES),areusedtodeterminetherelationshipbetweeninputs,outputsandtheirelasticities.Thecoefficientsoftheelasticitycanbeestimatedortheycanbegatheredfrompreviousstudiesthatarecomparabletothiscurrentstudy.ThetypesandvaluesoftheelasticityoftheparametersusedinthisstudyfollowtheAGEFISdatabase.Theelasticitiesoftheparameterare(1)theArmingtonelasticitythathasavalueoftwoanditisequalacrosssectors,(2)thefactorofproductionelasticitythathasavalueof0.5and itisequalacrosssectors,and(3)theexpenditureelasticitythathasavalueoffiveanditisequalacross sectors. ThemagnitudeoftheimpactofthepolicysimulationsonthelevelofhouseholdincomeisestimatedusingtheCGEmodel.Toanalyzetheimpactofthepolicysimulationsonpoverty,thisstudyemploystheFoster-Greer-Thorbecke(FGT)IndexassuggestedbyKakwani,Khandker,andSon(2004).Iftheaverage

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incomeofthehouseholdisincreasedbyψ,thentheincomeofeachhouseholdinagroupshouldalsoincreased byψ.Followingthisrule,thedistributionofincomeisshiftedhorizontallyinproportiontoanincreasein income.Thisruleallowsustocomparepovertyratebeforeandafterthepolicysimulation.TheFGTequation ispresentedinequation(1)below:

Pα = 1n ∑

i=1

q

giz

α ; α ≥ 0 ; gi =

Z – yi

Z(1)

whereyiistheaverageincomeortheaverageexpenditureofthepoor,nisthenumberofindividualsorhouseholdsinthepopulation,qisthenumberofindividualsorhouseholdswholivebelowpovertyline,gi isthepovertygapofithhousehold,zthepovertyline,PαistheFGTpovertyindexαthatisanarbitrarynumber.Whenαequalstozero,thenP0isalsocalledtheheadcountindexthatshowstheproportionofpopulationbelowthepovertyline.Headcountindexisdefinedasthepercentageofpoorpopulationtototalpopulation.Whenαequalstoone,thenwegetP1index.Thisindexiscalledpovertygapindexanditisusedtomeasurethedepthofpovertyorpovertygaporthedegreeofinequalityofpoverty.Thisindexdescribestheaveragesizeofinequalityinexpenditureofthepoorcomparedtopovertylineoratotalgapofallhouseholdsinthegroupcomparedtopovertyline.Whenαequalstotwo,thenP2indexisobtainedandthisindexisusedtomeasurethelevelofpovertyseverityindex.Thevalueofgiequalstozero,ifyi > z. Theequationsinthemodelaregroupedintoseven,namely:(1)domestic-importsourcing,i.e.theequationsrelatedtothecompositionofdemandaccordingtotheoriginofthegoods;eitherdomestically producedorimportedgoodsbasedontheArmingtonspecification,(2)purchaser’sprice,i.e.theequationsthatlinkbetweenproducer’spriceorinternationalpricetothebuyer’sprice,(3)demandforcommodity,i.e.theequationsthatrelatethedemandforgoodsbyvarioususers,(4)productionsectorthatshowstheequationsrelatedtotheproductionofbothgoodsandservices,(5)marketclearingthatshowstheequationsrelatedtothemarketclearinginwhichthesupplyofandthedemandforgoodsandservicesareequal,aswellasthoseoffactorsofproduction,(6)institutioncontainstheequationsrelatedtoearnings(income)andexpenditure oftheinstitutionsuchashouseholds,governments,firms,andtherestoftheworld,and(7)Closure (BKFDK-RI,2008a).Conventionally,inaCGEmodel,thenumberofequationshastobeequaltothenumberofexogenousvariables.Iftheyarenotequal,thenaclosureisusedtocoverthisdeficiency.Aclosureiseitherashortrunoralongrunclosure. EconomicactorsseektooptimizethecompositionofimportedanddomesticallyproducedgoodsandservicesbyminimizingthecostssubjecttoconstraintasshownbytheCESaggregationfunctioninequation(2)below:

Minimize : ∑s

PQ(c , s). XD (c , s)subjecttotheconstraintof

XD_S(c) = CES(XD (c , s) σ (c)) = α (c , s) ∑s

δ (c , s)–ρ(c)1

ρ(c)(2)

wherePQ(c , s)istheconsumerpriceforcommoditycbysources,XD (c , s) isthedemandforcommodityc,fromsources,XD_S(c) isthedemandforacompositecommodity,α (c , s)istheeconomicsofscale,andδ (c , s)istheelasticityofsubstitutionofcommodityc,fromcourses.


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Thepricethatisreceivedbytheconsumeristhenetpriceaftertaxesandsubsidies.Therefore,thepricereceivedbytheconsumercanbewrittenasequation(3).Equation(3)isinthelevelform.

PQ(c , “dom”) = (1 + TX(c) – SC(c)). PTOT(c) (3)

wherePQ(c , “dom”)isdomesticpriceofeachcommodity,c,receivedbytheconsumer,TX(c) istaxesleviedoneachcommodityc,SC(c) issubsidyreceivedforeachcommodityc,andPTOT(c)isthepriceofeachcommodity,c,receivedbytheconsumer.Sincedomesticpriceisassociatedtotheinternationalprice,tariffsandexchangerates,theequationforthedomesticpriceeachimportedcommodityisshowninequation(4).

PQ(c , “imp”) = EXR. (1 + tm(c)). PFIMP(c) (4)

wherePQ(c , “imp”) isthedomesticpriceforeachimportedcommodityc,EXR istheexchangerate,tm(c)istheimporttariffsforeachcommodityc,andPFIMP(c) istheimportpriceforeachcommodityc. ThedemandforeachcommodityisobtainedbyminimizationofcostwithaconstrainedLeontief productionfunctionasbelow

min : PPRIM(i). XPRIM(i) + ∑c

PQ_S(c). XINT_S(c , i) subjectto

XTOT(i) = 1ATOT(i)

.MIN all , c , com : XINT_S(c , i)AINT(c , i)

, XPRIM(i)APRIM(i)

(5)

Whereasequationforitsintermediategoodsbecomes

XINT_S(c , i)ATOT(i)

= XTOT(i)(6)

wherePPRIM(i) isthepriceofcompositeprimaryfactorbyindustry,XPRIM(i) isthedemandofcompositeprimaryfactorbyindustry,XINT_S(c , i) isthedemandforcommoditybyindustry,XTOT(i) istheoutputorsupplyofcommodity,ATOT(i)isthetechnicalchangeofallfactors,andAPRIM(i)istheArmingtonelasticity. Thetotaldemandforcompositegoodsiswritteninequation(7).

XD_S(c) = sum(i , XINT_S(c , i) + XHOU_S(c) + XG_S(c) + XINV_S(c) (7)

whereXD_S(c) isthetotaldemandforgoodc,XINV_S(c) isthetotalindustrialdemandforgoodc, XHOU_S(c) isthetotalhouseholddemandforgoodsc,XG_S(c) isthetotalgovernmentdemandforgoodsc, andXINV_S(c)isthetotaldemandofgoodscforinvestment.

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ThedemandequationforthefactorofproductionisderivedbycostminimizationsubjecttotheconstraintoftheCESproductionfunction.

min : ∑f

WDIST(f , i). PFAC(f ). XFAC(f , i) subjectto

XPRIM(i) = XFAC(f , i)AFAC(f , i)

∑f

δf

–ρ 1ρ

(8)

whereXFAC(f , i) isthedemandforfactor fbyindustry i,PFAC(f ) isthepriceoffactorof productionf,WDIST(f , i) isthedistortionpremiumforfactorfinindustryi,andXPRIM(i) isthetotalvalueadded. Inmarketclearingsituation,thetotaloutputorsupplyofacommodityandthetotaldemandforgoodsareequal.Thedemandforgoodsconsistsofthedemandforthedomesticallyproducedgoodsandthe demandfortheexportgoods.Atthislevel,thesupplyofacommoditycanbewrittenasequation(9).

XTOT(c) = XD(c , “dom”) + XEXP(c) (9)

whereXTOT(c)isthetotaloutputofcommodityc , XD(c , “dom”)isthetotaldomesticdemandforcommodityc,andXEXP(c)istheexportsdemandforcommodityc.

3. RESULTS AND DISCUSSIONS ThesummarystatisticsofthefourgroupsofhouseholdarepresentedinTable1.Thevariationinthemaximumincomeofthehouseholdgroupsrangesfrom117,259permonthfortheruralpoorto38,213,000permonthforurbannon-poorhousehold.Thevariationintheminimumincomerangesfrom23,456permonthfortheurbanpoorto151,345permonthfortheurbannon-poor.Thelowestaveragemonthly incomefortheruralpooris94,673.Itisfoundthat54.62percentofthetotalincomeisreceivedbytheurbannon-poor,butthisgroupofhouseholdconsistsonly32.73percentofthetotalpopulation.Theruralnon-poorreceived42.84percentofthetotalincome,buttheyarerepresentedby50.80percentofthetotalpopulation.Theruralpoorcontrols1.68percentofthetotalincome,buttheyareconsistedof11.77percentofpopulation.Theurbanpoorconsistedof4.71percentofthetotalpopulationandreceivedonly0.86percentofthetotalincome.

Table 1: The Income Distribution by Household Groups

HouseholdIncome (Rp/Month) Population

Mean Max Min Total (000) % N %Urban non-poor 1,108,536 38,213,000 151,345 93,562,688 54.62 84,402 32.73Urban poor 121,908 150,797 23,456 1,479,600 0.86 12,137 4.71Rural non-poor 560,245 16,605,113 117,267 73,395,415 42.84 131,006 50.80Rural poor 94,673 117,259 27,262 2,872,952 1.68 30,346 11.77Total 171,310,655 100.00 257,891 100.00Source: Susenas 2005


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The Impact of policy scenarios of the transfer of fuel subsidy to food crop sub- sector Theimpactofthepolicyscenariosofthetransferoffuelsubsidytothefoodcropssub-sectorvariesforeachincomelevelofallhouseholds,dependingonvarioussimulationsaspresentedinTable2.Asmentionedbefore,thetransferoffuelsubsidytoagriculturalsectormeanscuttingfuelsubsidybyacertainpercentageandthegovernmentusesthesameamountofmoneysavedtosubsidizetheagriculturalsector.Inthisstudywedonotspecifythetypeofsubsidythatshouldbegiventotheagriculturalsector.Inotherwords,thissubsidycanbeintheformsofinputsubsidyorpricesubsidy.Thesimulationofthetransferoffuelsubsidytofoodcropssub-sectorby12.35percent(sim1_a)hasanegativeimpactorareductioninthelevelofincomefortheurbannon-poor,urbanpoorandruralpoorhouseholds.Theonlyhouseholdgroupthatrealizesanincreaseinincomeistheruralnon-poor.Thedeclineinincomeofthethreegroupsofhouseholdcanbeattributedtotheamountofsubsidygiventothefoodcropssub-sectoristoosmallinordertooffsettheimpactofcuttingfuelsubsidy.Whiletheincreaseinincomeoftheruralnon-poorhouseholdsisbecausethesehouseholdshaverelativelygreatercommandofresourcesinthefoodcropssub-sector.Theruralnon-poorhouseholdsconsistofland-andcapital-ownersinthissub-sector.Tothisgroupofhouseholds,areductioninfuelsubsidyby12.35percentandatthesametimetheamountofmoneysavedbythegovernmentischanneledtofoodcropsub-sectormakesthemwelloff.

Table 2: Simulation Results: The transfer of fuel subsidy to the food crops sub-sector on household income levels

HouseholdPercentage Change

Sim1_a Sim1_b Sim1_cUrban non-poor -0.0416 0.0340 0.8312Urban poor -0.2056 -0.5260 -0.4964Rural non-poor 0.0814 0.4511 1.8091Rural poor -0.0226 0.0850 0.9000Notes: Sim1_a: transfer of fuel subsidy by 12.35%; Sim1_b: transfer of fuel subsidy by 43.2%; Sim1_c: transfer of fuel subsidy by 100%.

Thesimulationsofthetransferofafuelsubsidytofoodcropssub-sectorby43.2percent(Sim1_b)andby100percent(Sim1_c)showanincreaseinincomeoftheurbannon-poor,ruralnon-poor,andruralpoorhouseholds.Theonlyhouseholdgroupthatrealizesareductioninincomeistheurbanpoor.Theincreaseinincomeofthenon-poorandpoorhouseholdsintheruralareamaybeattributedtothesehouseholdsheavilyinvolvedinthissub-sectoranditisawellknownfactthatthissub-sectormostlylocatedinruralareas.Anincreaseintheincomeoftheurbannon-poorhouseholdsmaybeattributedtothespillovereffectsincesomeoftheurbannon-poorhouseholdshaveacontrolonruralagriculturalsectorasownersoflandandcapital,aswellassellersandbuyersofagriculturalinputsandoutputsandotheragriculturalbusinessactivitiesrelatedtofoodcrops.Inotherwords,theeffectofthesubsidygiventothefoodcropssub-sectorisbigenoughtooffsettheeffectofanincreaseinthegeneralpricelevelisrealizedinsimulations1-band1-c.Areductioninincomeoftheurbanpoorisrealizedasthisgroupofpeoplehasalmostnothingtodowithfoodcropssub-sector.Also,mostlikelytheurbanpoor’smarketbasketisdifferentfromthoseofothergroups,thustheimpactondivertingfuelsubsidytofoodcropssub-sectorshowsadecreaseintheirrealincome.

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Thenexteffortistoinvestigatetheimpactofthechangeinincometothenumberofpoorpeople (αequalstozero),povertygap(αequalstoone),andpovertyseverity(αequalstotwo).Despitethedeclineinhouseholdincome,thisdoesnotcontributetoanincreaseinthenumberofpoorhouseholdsasshownbyzeropercentagechangebetweensimulatedresultsandthebaselineforallgroupsofhousehold(Table3).However,thispolicyonlyaddstothepovertygapamongthepoorandalsothereisanincreaseintheseverityofpoornessasshownbythepovertyseverityindex.Thepovertygapindexoftheruralpoorhasincreasedby0.10percentcomparedtothoseoftheurbanpoorthathasincreasedby0.84percent.Thepovertyseverityindexoftheruralpoorhasincreasedby0.16percent,butfortheurbanpoorthisindexhasincreasedby0.87percent.Theincreaseinthepovertygapandseverityindicesfortheurbanpoorisgreaterthanthoseoftheruralpoor.Itissuspectedthattheruralpoorhavemorecontroloftheagriculturalsector,eitherasafarmerorasafarmworker,comparedtothoseoftheurbanpoor.So,thetransferoffuelsubsidyby12.35percentmadeboththeurbanandruralpoorworseoffintermsofpovertygapandseverity,buttheseeffectsweremoresevereamongtheurbanpoor.

Table 3: The Impact of Policy Simulation: Transfer of fuel subsidy to the food crops sub-sector by 12.35 percent on poverty

FGT IndexBaseline Sim1_a Percentage Change

α = 0 α = 1 α = 2 α = 0 α = 1 α = 2 α = 0 α = 1 α = 2Urban non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Urban poor 1.0000 0.1916 0.0577 1.0000 0.1932 0.0582 0.0000 0.8351 0.8666Rural non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Rural poor 1.0000 0.1926 0.0620 1.0000 0.1928 0.0621 0.0000 0.1038 0.1613

Ifthereductioninfuelsubsidyis43.2percentandthesameamountofmoneysavedistransferredtofoodcropssub-sector(Table4),thenumberofpoorhouseholdsintheruralareaisdecreasedby0.42percent.Thepovertygapandpovertyseverityindicesaredecreasedby0.36percentand0.32percent.Ingeneral,thissimulationnotonlyabletoincreaseinthelevelofhouseholdincome,butalsoitisabletoreducepovertygapandpovertyseverityamongruralpoor.However,amongurbanpoorthissimulationshowsthatthelevelofinequality(povertygap)isincreasedby2.19percentandtheseverity(povertyseverity)isincreased2.43percent.

Table 4: The Impact of Policy Simulation: Transfer of fuel subsidy to the food crops sub-sector by 43.2 percent on poverty

FGT IndexBaseline Sim1_b Percentage Change

α = 0 α = 1 α = 2 α = 0 α = 1 α = 2 α = 0 α = 1 α = 2Urban non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Urban poor 1.0000 0.1916 0.0577 1.0000 0.1958 0.0591 0.0000 2.1921 2.4263Rural non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Rural poor 1.0000 0.1926 0.0620 0.9958 0.1919 0.0618 -0.4200 -0.3634 -0.3227


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Thepolicysimulationofcutting100percentoffuelsubsidyandtransferredtheamountsavedtothefoodcropssub-sectoryieldsthesamedirectionaleffectsasthoseoftheeffectsofthesimulation1_b,butwithgreatereffectsonpoverty,asshowninTable5.Theresultsofthesimulationshowthatthispolicyisabletoincreasethelevelofincomeofallhouseholdsexceptfortheurbanpoorhouseholds.Anincreaseinincomereducespovertyby4.33percentamongruralpoorhouseholds.Also,anincreaseinincomereducesthedisparityandtheseverityofpovertyintheruralareaasshownbyadecreaseinthepovertygapandpovertyseverityindicesby3.69percentand3.71percent.Althoughthispolicyisabletoreduceoverallpoverty,butfortheurbanpoorthispolicyhavedetrimentaleffectsasshownbyanincreaseinthepovertygapindexby2.09percentandanincreaseinthepovertyseverityindexby2.25percent.

Table 5: The Impact of Policy Simulation: Transfer of fuel subsidy to the food crops sub-sector by 100 percent on poverty

FGT IndexBaseline Sim1_c Percentage Change

α = 0 α = 1 α = 2 α = 0 α = 1 α = 2 α = 0 α = 1 α = 2Urban non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Urban poor 1.0000 0.1916 0.0577 1.0000 0.1956 0.0590 0.0000 2.0877 2.2530Rural non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Rural poor 1.0000 0.1926 0.0620 0.9567 0.1855 0.0597 -4.3300 -3.6864 -3.7097

Insummary,amongthethreesimulations,itisfoundthat,simulation1_chasagreatercontributiontopovertyreductionincomparisontotwoothersimulations.However,simulation1_chasadrawbackintermsofwideningthepovertygapandincreasingseverityofpovertyfortheurbanpoorhouseholds.ThesefindingsareintandemwiththeresultsofastudybyYudhoyono(2004)whoconcludedthat,inshortterm,anincreaseingovernmentspendingintheagriculturalsectorhasanimpactonruralpovertyreduction.Likewise,accordingtoSimatupangandDermoredjo(2003)anincreaseinGDPofagriculturesectorhasanimpactonreducingpovertyinruralareas.

The Impact of Policy Scenarios of the transfer of fuel subsidy to other crops sub-sector Aswehavementionedearlier,othercropssub-sectorconsistsofplantationcropssuchasoilpalmandrubber.ThesearemajorexportscropsofIndonesia.Cuttingfuelsubsidybyacertainpercentageandchanneledthissavingtoothercropssub-sectorshowsaninterestingresultsonthelevelsofincomeofthefourgroups ofhouseholdsaspresentedinTable6.Itisfoundthatallofthemrealizeanincreaseintheirincome.Thesefindingsmaybeattributedtothefactthatmosthouseholdsineachgroupreliesontheseplantationcrops,eitherasaworker,landowner,supplierofinputs,buyerofoutputs,andotherdownstreamandupstreamactivitiesrelatedtothesecrops.Plantationcropssuchasrubberandoilpalmprovidebigemployment,eitherdirectlyorindirectly.Indonesiaistheworld’slargestoilpalmproducerandthesecondlargestrubberproducer.Itisfoundthatruralhouseholdsrealizealargerincreaseinincomecomparedtothoseofthehouseholdsintheurbanarea.Itisawellknownfactthattheproductionactivityoftheothercropssub-sectoristakingplacemostlyinruralareaswhilesomeotherupstreamanddownstreamactivitiesofthissub-sectorareinurbanareas.Itisalsofoundthatthegreaterthetransferoffuelsubsidytoothercropssub-sector,thegreatertheincreaseinincomelevelsexperiencedbyeachhouseholdsgroup.

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Table7revealstheresultsofthesimulationsoftransferring12.35percentoffuelsubsidytoothercropssub-sectoronpoverty.Itisfoundthatthispolicyisabletoincreasethelevelofincomeforallhouseholdgroupsandatthesametimethispolicyisabletoalleviatepoverty,especiallyforthepoorwhoareplacedslightlybelowpovertyline.

Table 6: Simulation Results: The transfer of fuel subsidy to the other crop sub-sector on Household Income Levels

HouseholdPercentage Change

Sim2_a Sim2_b Sim2_cUrban non-poor 0.4674 1.2544 16.7885Urban poor 0.3224 0.5230 11.7780Rural non-poor 0.5709 1.8104 20.5742Rural poor 0.4589 1.3746 17.4994Notes: Sim2_a: transfer of fuel subsidy by 12.35%; Sim2_b: transfer of fuel subsidy by 43.2%; Sim2_c: transfer of fuel subsidy by 100%.

Table 7: The Impact of Policy Simulation: Transfer of fuel subsidy to other crops sub-sector by 12.35 percent on poverty

FGT IndexBaseline Sim 2_a Percentage Change

α = 0 α = 1 α = 2 α = 0 α = 1 α = 2 α = 0 α = 1 α = 2Urban non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Urban poor 1.0000 0.1916 0.0577 0.9839 0.1890 0.0568 -1.6100 -1.3569 -1.5598Rural non-poor 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000Rural poor 1.0000 0.1926 0.0620 0.9782 0.1890 0.0608 -2.1800 -1.8692 -1.9355

Thetransferoffuelsubsidyby12.35percentwasabletoreducethenumberofruralpoorby2.18percentandthoseinurbanareaby1.61percent.Thetransferoffuelsubsidyby43.2percentwasabletoreducepovertyoftheurbanandruralpoorby2.35percentand6.45percent,asshowninTable8.Thehigherthepercentageofthetransferoffuelsubsidytoothercropssub-sectorshowsagreaterpercentageofpovertyreduction.Itisinterestingtonotethatifthegovernmentabolishes,i.e.reduces100percent,ofthefuelsubsidyandusethesavingtosubsidizeothercropssub-sector,thenumberofurbanpoorisreducedby35.57percent.And,atthesametimetheruralpoorhouseholdsisreducedby48.40percent,asshowninTable9.

Table 8: The Impact of Policy Simulation: Transfer of fuel subsidy to other crops sub-sector by 43.2 percent on poverty

FGT IndexBaseline Sim 2_b Percentage Change



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Anincreaseinthehouseholds’incomecanbeattributedtotheabilityofthissub-sectortogeneratemanyemployments.Severalstudiesshowthatemploymentisthekeytopovertyalleviationandthusreduceincomeinequality(forexample,seeBluestoneandHarrison,2000).Ifthereissomeoneinahousehold workingformoney,itismostunlikelythathouseholdispoor(Hills2004;Lohmann2009). Theresultsofthesimulationsshowthattheimpactonthereductionofpovertyinruralareaisgreaterthanthoseoftheurbanarea.Itisbelievedthattheruralcommunityhasgreateraccesstoothercrops sub-sector,suchaslandownership,supplyoflabor,andcontrolofinputs,comparedtothoseofurbanpeople.Thus,theruralpoorhasarelativelyhigherincreaseinincome.Furthermore,theruraleconomicstructureissimple,anditisrelativelyeasytofindjobintheruralarea,sothattheimpactofreductioninfuelsubsidyislessstressfultoruralfolksthanthoseintheurban.AccordingtoWilson(1996)andBrady,etal(2010)theconcentrationofpovertyintheurbanareaistheresultofthedisappearanceofjobs. Itisalsofoundthatareductionaswellastheremovaloffuelsubsidyandtheamountofmoneysavedisusedtosubsidizeothercropssub-sectorisabletoreducepovertyincidencesforallhouseholdgroup.Thus,ifthegoalofthegovernmentistolightentheburdenoffuelsubsidypaymentandatthesametimeistoreducepoverty,thenthesubsidytoothercropsisfeasibletobeundertaken.Othercropssub-sector consistsofplantationcropssuchasoilpalmandrubberthatareconsideredasexportscropsofIndonesia.Thissub-sectorisabletogeneraterelativelybiggeremploymenteitherdirectlyorindirectlythroughupstreamanddownstreamactivities.ThesefindingsareinsupporttoAbhimanyu(2000)whofoundthattheagriculturalsector,especiallyrubberplantationactivities,providesgreatbenefitstothesociety.Furthermore,asubsidyisoneoftheeffectivewaysforpovertyalleviationespeciallyamongtheruralcommunity.TheLembaga Penelitian IPB(2002)foundthatamodelforagriculturaldevelopmentcalledAgriculturalBasedDevelopmentisabletospurhigheconomicgrowth.ThisisinsupporttoanearlierworkbyArndt,etal(1998)whofoundthatthedevelopmentoftheagriculturalsectorisabletoreducepoverty.RavallionandDatt(1999)suggestthatanincreaseinthegrowthoftheagriculturalsectorisoneofthemostefficientwaystoreduceincomeinequality andpoverty.Thegrowthinthemanufacturingsectorisimportantforoverallgrowthofacountry,butthegrowthintheagriculturalsectorisveryimportantforemploymentandpovertyreduction.BigstenandLevin(2000) suggestseveralstrategicelementsthatareabletoreducepoverty,amongothersareoutward-oriented strategyforexport-ledeconomicgrowthforlaborintensivemanufacturing,andagriculturalandruraldevelopment programs.Bautista(2001),JansenandTarp(2004),andSusilowati(2008),arguedthattheconceptofagricultural demand-ledindustrialization,inadditiontoimprovingmacroeconomicperformance,alsoplayaroleinreducingincomeinequalityandpovertyamongruralhouseholds.SuseloandTarsidin(2008)concludedthatthemost

Table 9: The Impact of Policy Simulation: Transfer of fuel subsidy to other crops sub-sector by 100 percent on poverty

FGT IndexBaseline Sim2_c Percentage Change


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appropriatemeasuretoreducepovertyistogivemoreattentiontoagriculturalsector,suchasplantation,andfisheriessub-sectors.

4. CONCLUDING REMARKS Fromtheresultsoftheanalysisandthediscussion,itcanbeconcludedthatthepolicyofreducingfuelsubsidyandtransferthesameamountofmoneysavedtofoodcropssub-sectorisabletoreducepovertyincidences,especiallyintheruralarea.Thegreaterthetransferofthisfuelsubsidytothefoodcrops,thebiggertheimpactinpovertyreductionamongtheruralpoor.However,thispolicyhasadrawbackintermsofanincreaseinthepovertygapandpovertyseverityindicesforpoorhouseholdsintheurbanarea.Inotherwords,ifthispolicyistobeimplementedtoreducepoverty,thereshouldbeotherpolicyorprogramfortheurbanpoorsothatthisgroupisnotleftbehind. Thetransferoffuelsubsidytoothercropssub-sectorgivesabetterimpactonpovertyreductionascomparedwiththetransfertothefoodcropssub-sector.Wefoundthatthispolicyisabletoreducepoverty.However,furtherresearchtoanalyzethemechanismofthispolicyshouldbeundertaken.Ingeneral,thetransferoffuelsubsidytotheagriculturalsectorgivesapositiveimpactonruralhouseholdgroupscomparedtourbanhouseholdgroups.Thepolicytotransferfuelsubsidytotheagriculturalsector,eitherfoodcropsorothercropssub-sector,maybeimplementedasanalternativemeasuretoreducepoverty.Itisassumedthatthetransactioncostandthelevelofgovernmentbureaucracyremainthesameinimplementingfuelandagriculturalsubsidies.


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