Introduction Data and empirical approach

Results Conclusion

Trade liberalization, poverty and inequality in Indonesia

Yessi Vadila

Arndt-Corden Department of Economics Crawford School of Public Policy

College of Asia and Pacific

Crawford PhD Conference 2014: Big Data, Big Opportunity 19 November 2014

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Research question

How did regional exposure to trade liberalization affect poverty and inequality in Indonesia?

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Source: Indonesian Tariff Books and UNCTAD/TRAINS

Trade liberalization in Indonesia, 1977- 2012 Reduction in MFN tariff rates

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Source: BPS

Poverty rate in Indonesia

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Source: Alatas, World Bank 2013

Inequality in Indonesia

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Source: Alatas, World Bank 2013 Gini: 2012, Povrate 2011

Inequality in Indonesia

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Theory and global evidence Trade liberalization and poverty Labor Markets Channel Trade policy and unemployment Economy-wide changes in the wages of unskilled labor Industry Wages Trade policy and compliance with labor market standards Child Labor Household Consumption and Production Relative price changes: as buyer vs seller Evidence on poverty effects

.., Mixed for Latin American countries (Goldberg and Pavcnik 2007)

.., Potentially harmful poverty effects in India (Topalova 2010)

.., Market access beneficial in Vietnam (McCaig 2011)

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Theory and global evidence Trade liberalization and Inequality Increase of the Skill Premium Changes in the Returns to Skill-Intensive Occupations Stolper-Samuelson Effects

Relocation of Intermediate-Goods Production Skill-Biased Technological Change

Changes in Industry Wage Premiums Changes in the size of the informal sector

Evidence on inequality effects - No significant effects, mixed countries (Berg & Nilson 2010) - Reduced poverty, but higher inequality in India (Jha, 2000) - Lower rate of poverty reduction & no effects on inequality in India (Topalova, 2005) - Higher inequality in Argentina (Galiani & Sanguinetti 2003) - Differ effects for different country groups (Celik & Basdas 2010)

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Empirical evidence for Indonesia

... Equalise wage (Suryahadi 2003)

... Productivity gains for firms that import inputs (Amiti and Konings 2007)

... Improved working conditiond (Robertson et al. 2009)

... Reduced industrial skill premia (Amiti and Cameron 2012)

... Child labor decreased (Kis-Katos and Sparrow 2011)

... Poverty reduced more in exposed districts (Kis-Katos and Sparrow 2011)

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Our main findings

Regions that were exposed more to trade liberalization experienced

a larger reduction in absolute poverty a larger decrease in average real income of bottom 20% a larger reduction in absolute and relative inequality

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Data Measuring regional trade liberalization Estimation approach

Sample and data sources

... Sample: .., 26 provinces (out of 33 currently), crosswalk for initial period...

Regional trade data: .., Tariff measures: Indonesian Customs Tariff Book & UNCTAD-TRAINS .., Initial regional labour market structure (Census 1976) .., National Input Output (IO) table, 1975 (BPS)

... Outcome variables: .., Poverty rates (poverty headcount poverty gap, (Susenas) .., Average real income of the bottom 20%, (Susenas) .., Gini coefficients, (BPS, various publication) .., Share of the top and bottom 10% and 20%, (Susenas)

Trade liberalization, poverty and inequality in Indonesia

Trade liberalization, poverty and inequality in Indonesia

Change in Tariffs, 1977-2012 Relative to initial levels

Introduction Data and empirical approach

Results Conclusion

Data Measuring regional trade liberalization Estimation approach

11

1213

14

1516

1718

31

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51

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53

61

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71

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81

94

-15

-10

-50

Chan

ge in

tariff

1977

-201

2

0 5 10 151976 tariff

Introduction Data and empirical approach

Results Conclusion

Data Measuring regional trade liberalization Estimation approach

Province level tariff exposure

... Captures province level exposure to import tariffs

... . . . for province p, year t, sector s (S = 16)

Trade liberalization, poverty and inequality in Indonesia

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = �𝐿𝐿𝐿𝑇𝑇, 1980𝐿𝐿𝑇𝑇, 1980

𝑥𝑥 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐿𝑇𝑇

𝐻𝐻

𝐿=1

Introduction Data and empirical approach

Results Conclusion

Data Measuring regional trade liberalization Estimation approach

Distinguishing between output and input tariffs

... . . . for province p, year t, sector s and j (S , J = 50)

Trade liberalization, poverty and inequality in Indonesia

𝑂𝑂𝑂𝑂𝑇𝑇𝑇𝑇𝑂𝑂𝑇𝑇 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = �𝑄𝑄𝑄𝑄𝑇𝑇, 1980𝑄𝑄𝑇𝑇, 1980

𝑥𝑥 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐿𝑇𝑇

𝑆𝑆

𝑄𝑄=1

𝐼𝐼𝐼𝐼𝑇𝑇𝑂𝑂𝑇𝑇 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑇𝑇𝑇𝑇� �𝑄𝑄𝑄𝑄𝑇𝑇,1980𝑄𝑄𝑇𝑇,1980

𝑆𝑆

𝑄𝑄=1 𝑥𝑥 � 𝑀𝑀𝑀𝑀𝑄𝑄,1980

𝑀𝑀𝑄𝑄,1980 𝑥𝑥 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑀𝑀𝑇𝑇

𝐽𝐽

𝑀𝑀=1�

Introduction Data and empirical approach

Results Conclusion

Data Measuring regional trade liberalization Estimation approach

Fixed effects panel regressions

... . . . for province p, year t , region r ... Xpt : GRDPp, agric., manu. & mining value added, years of schooling, infant mortality rate,

governmen expenditure, share of gov. quality, political diversion, participation rate in election.

... Ip : initial sectoral labor shares, initial rural share

... 36 years, 1977-2012

Trade liberalization, poverty and inequality in Indonesia

ypt = α + β · Δ Tariffpt + Δ X'pt + I'p θ + λrt + Δ εpt

Introduction Data and empirical approach

Results Conclusion

Poverty Inequality Robustness

Tariff reductions and poverty Tariff coefficients from regressions of poverty measures (P0)

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff 1.626*** 1.388*** 1.214** 1.381** s.e. (0.358) (0.301) (0.496) (0.539)

Manufacturing Output Tariff 0.393*** 0.357*** 0.285*** 0.319*** s.e. (0.090) (0.076) (0.099) (0.104) Manufacturing Input Tariff 0.639*** 0.527*** 0.402** 0.513*** s.e. (0.120) (0.107) (0.166) (0.161)

N 910 876 876 823 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and poverty Tariff coefficients from regressions of Average real expenditure of the bottom 20%

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff -0.188 0.059 0.795*** 0.935*** s.e. (0.212) (0.149) (0.230) (0.217)

Manufacturing Output Tariff -0.037 -0.010 0.087* 0.108** s.e. (0.035) (0.037) (0.050) (0.048) Manufacturing Input Tariff -0.131*** -0.105** 0.061 0.143 s.e. (0.050) (0.047) (0.096) (0.090)

N 832 804 804 754 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and Inequality Tariff coefficients from regressions of Gini

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff 0.101 0.375 1.217** 1.082** s.e. (0.446) (0.297) (0.490) (0.498)

Manufacturing Output Tariff 0.037 -0.003 0.153** 0.133* s.e. (0.063) (0.061) (0.074) (0.075)

Manufacturing Input Tariff -0.067 -0.116 0.108 0.101 s.e. (0.079) (0.079) (0.070) (0.076)

N 910 876 876 823 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and Inequality Tariff coefficients from regressions of Top 10% share of expenditure

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff 0.406 0.740*** 1.226** 1.008** s.e. (0.399) (0.197) (0.499) (0.508)

Manufacturing Output Tariff -0.019 0.010 -0.040 -0.024 s.e. (0.144) (0.117) (0.137) (0.147)

Manufacturing Input Tariff -0.019 0.040 -0.039 0.015 s.e. (0.192) (0.179) (0.189) (0.193)

N 910 902 902 867 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and Inequality Tariff coefficients from regressions of Top 20% share of expenditure

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff 0.429 0.700*** 1.373** 1.109** s.e. (0.411) (0.199) (0.538) (0.548)

Manufacturing Output Tariff -0.006 0.011 -0.054 -0.046 s.e. (0.141) (0.116) (0.138) (0.151)

Manufacturing Input Tariff 0.008 0.050 -0.050 0.011 s.e. (0.191) (0.179) (0.196) (0.204)

N 910 902 902 867 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and Inequality Tariff coefficients from regressions of Least 10% share of expenditure

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff -0.012 -0.040 -0.158** -0.127* s.e. (0.049) (0.029) (0.070) (0.070)

Manufacturing Output Tariff -0.002 -0.000 0.009 0.012 s.e. (0.010) (0.008) (0.012) (0.012)

Manufacturing Input Tariff -0.009 -0.007 0.011 0.007 s.e. (0.016) (0.011) (0.023) (0.023)

N 910 902 902 867 R2 0.360 0.312 0.325 0.372 Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Tariff reductions and Inequality Tariff coefficients from regressions of Least 20% share of expenditure

Trade liberalization, poverty and inequality in Indonesia

(1) (2) (3) (4) Labour weighted tariff -0.063 -0.115** -0.414*** -0.327** s.e. (0.096) (0.056) (0.145) (0.145)

Manufacturing Output Tariff -0.010 -0.005 0.011 0.015 s.e. (0.020) (0.019) (0.026) (0.027)

Manufacturing Input Tariff -0.017 -0.010 0.019 0.007 s.e. (0.031) (0.022) (0.045) (0.045)

N 910 902 902 867 R2 0.333 0.270 0.290 0.340

Year-island dummies Yes Yes Yes Yes Time variant controls No Yes Yes Yes Initial labour force and rural population shares No No Yes Yes Dependent variable 1976 No No No Yes

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Further robustness checks

Different lags Controlling for crisis effects Divide sample including dummy crisis Placebo test : recent changes of dependents regressed on future tariff

changes

The results are robust..

Trade liberalization, poverty and inequality in Indonesia

Poverty Inequality Robustness

Introduction Data and empirical approach

Results Conclusion

Poverty Inequality Robustness

Potential problem - Endogeneity of Tariff

In progress.. Preliminary findings: Tariff76, rubber price, oil price and political power as instruments using 2SLS method Same effects, larger size Pass first & post-est. tests

The key message remains..

Trade liberalization, poverty and inequality in Indonesia

Introduction Data and empirical approach

Results Conclusion

Conclusion

... Poverty and inequality reduced by more in province with larger exposure to tariff reductions

... Bottom quintile average real expenditure reduced by more in province with larger exposure to tariff reductions

Need to examine the channels..

Trade liberalization, poverty and inequality in Indonesia

Thank you..

yessi.vadila@anu.edu.au

Trade liberalization, poverty and inequality in Indonesia