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Desi Aryanti 0804455/ mpp 3AJurnal ini mengemukakan bahwa perkembangan pariwisata Indonesia memperluas efek positif globalisasi tanpa efek yang berlawanan, buktinya produksi bertambah dan kesejahteraan maju yang mana akan mengurangi defisit pemerintah dan neraca perdagangan.
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1
Economic Impact of Tourism and Globalisation in Indonesia
Guntur Sugiyarto, Adam Blake, M. Thea Sinclair 1
Abstract
The issue of whether globalisation is beneficial remains controversial.
Knowledge about its effects is only partial, as globalisation policies are often
examined without consideration of their interactions with key sectors of the
economy, notably tourism. This paper uses a computable general equilibrium
model of the Indonesian economy to examine the effects of globalisation via
tariff reductions, as a stand-alone policy and in conjunction with tourism
growth. The results show that tourism growth amplifies the positive effects of
globalisation and lessens its adverse effects. Production increases and welfare
improves, while adverse effects on government deficits and the trade balance
are reduced.
Keywords: Tourism, globalisation, taxation, economic impact, SAM, CGE,
welfare, distribution.
JEL classification: C68, D58, E62, L83, O53
1). The authors are respectively Research Associate, Research Fellow and Professor at the Christel DeHaanTourism and Travel Research Institute, Nottingham University Business School, Jubilee Campus, NottinghamNG8 1BB, UK. http://www.nottingham.ac.uk/ttri
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Economic Impact of Tourism and Globalisation in Indonesia
Guntur Sugiyarto, Adam Blake and M. Thea Sinclair
INTRODUCTION
In recent years, tourism and its associated economic repercussions have taken place
within a wider context of globalisation of the world economy. Macroeconomic policy-
makers have been concerned to decrease barriers which impede international flows of
goods, services and financial capital and to ensure flexibility of exchange rates,
interest rates and wages, with the aim of inducing markets to operate more efficiently.
The introduction of such macroeconomic policies has been a source of some
controversy because of the implications for income and employment, as well as
income distribution and the welfare of local populations.
Policies to promote trade liberalisation are a case in point. Trade liberalisation is
occurring in conjunction with World Trade Organisation, IMF and World Bank
pressures for lower tariffs and the elimination of import quotas, and also as part of the
process of integration within regional trading blocs. Although trade liberalisation is
supposed to bring about long-term benefits by allowing countries to reap gains from
specialisation in production on the basis of their comparative advantage, a number of
problems may occur. The first can take the form of a balance of trade deficit, as
consumers purchase increasing quantities of the cheaper imports. The second involves
a government budget deficit, as the government receives less revenue from the lower
tariffs. The third concerns the effects of trade liberalisation on the distribution of
income and levels of welfare of the local population. The issue addressed here is,
therefore, whether the growth of tourism can help to resolve these problems.
3
This issue has received little attention from macroeconomic policy-makers, who
have tended to formulate and implement policies without taking account of their
predicted effects in the context of tourism growth, even in countries whose economies
are highly dependent on tourism. Nor has the issue received much attention in the
tourism literature, which has tended to concentrate on the income and employment
impacts of tourism per se, rather than on its wider range of economic impacts,
including those on distribution and welfare, in alternative macroeconomic contexts.
Therefore the aim of this paper is to develop existing research in the area by
examining the economic impacts of tourism within the macroeconomic context of
globalisation in the form of increasing trade liberalisation, as well as in the context of
lower domestic taxation. The issue will be examined for the case of Indonesia, the
fourth largest country in the world in terms of its population of over 210 million
inhabitants. As one of the former ‘Asian tigers’, Indonesia is an important emerging
economy which has experienced both growth in tourism and a push towards
increasing trade liberalisation in recent years. It has a wide range of tourist attractions
and natural resources. The growing international demand for these assets, in the
context of decreasing levels of trade protection, has significant implications for
domestic income and employment generation, income distribution and welfare. This
paper will examine these effects in the cases of tourism, trade and tax policies in
Indonesia.
The paper will build on previous contributions to research in the area of tourism
impact analysis, which has been undertaken using direct and indirect income changes
(Gartner and Holecek 1983), input-output models (Archer 1995; Archer and Fletcher
1996; Fletcher 1989; Johnson and Moore 1993) and, subsequently, by using a social
accounting matrix (Wagner 1997) and computable general equilibrium (CGE) models
4
(Adams and Parmenter 1995 for the Australian economy; Zhou et al. 1997 for
Hawaii; Alavalapati and Adamowicz 2000 for the environmental impacts of tourism
in Canada; Blake 2000 for Spain; and Dwyer et al. 2000 for the Australian economy).
All of these approaches have the advantage of taking account of the interrelationships
between tourism and other sectors of the economy. This paper will use a CGE model,
which has the advantages of incorporating the full range of feedback between the
different sectors of the economy, along with flexibility of prices and factor
substitutability. It is well suited for examining the effects not only of tariff reductions
but also of domestic taxation, which is a topic of growing concern in the tourism
literature (Jensen and Wanhill, 2002).
The paper is organised as follows. The next section of the paper will be concerned
with explaining recent trends in tourism in Indonesia and outlining the types of trade
liberalisation that have been undertaken. The following section will set out the main
characteristics of the Indonesian Social Accounting Matrix (SAM), which is used to
characterise the flows between different sectors of the economy. The computable
general equilibrium (CGE) model which is used to undertake the analysis will then be
developed, enabling the full range of economic impacts to be quantified within a
multi-sectoral framework. The model is particularly useful for understanding the
characteristics of the economy and for quantifying the effects of alternative policies in
relation to tourism, trade liberalisation and taxation. The results from using the model
to measure the effects of trade liberalisation per se and of trade liberalisation
combined with decreases in domestic taxation will be compared with the results
obtained from implementing these policies in a context of tourism growth. The final
section of the paper will provide some policy implications and conclusions.
5
TOURISM AND TRADE LIBERALISATION IN THE INDONESIANECONOMY
Indonesia is the largest archipelago in the world, stretching 5.110 km along the
equator from east to west and 1.888 km from north to south. It consists of five mayor
islands (Java and Bali, Sumatra, Kalimantan, Sulawesi and Irian Jaya) and about 30
smaller groups, with more than 17,000 islands in total. The chain of islands divides
the Indian and Pacific Oceans and is enriched with natural resources and diverse
cultures, offering a vast range of tourism activities. It has long been a popular tourist
destination.
Foreign tourism is an integral part of the Indonesian economy. For the decade prior
to the crisis of 1997 the tourism industry experienced strong growth, with large
increases in arrivals of foreign tourists, tourist spending and investment. The growth
of foreign visitors was more than 15% per year, contributing to an increase in foreign
currency receipts as both foreign tourists’ expenditure and their length of stay
increased. The number of foreign visitors in 1997 was 5.2 million, contributing
around 6.6 billion US$ to foreign income - about 3 % of GDP (World Bank, 2002). In
2005, the number of arrivals from abroad is expected to be around 11 million,
generating foreign currency receipts of over $15 billion. Tourism contributed 16% of
total job creation in 1995, and in 2007 it is estimated that 1 of every 11 new jobs will
originate from tourism (Kompas, 06/02/1999). Despite many criticisms of its adverse
effects (see, for instance, Copeland 1991; Pleumarom 1999a, 1999b), tourism in
Indonesia is expected to play a more important role in the future, especially in the face
of the declining role of oil and dependence on low wage, labour-intensive sectors. The
increasing reliance on the tourism sector is also demonstrated by the government’s
efforts to attract more foreign investment in the tourism industry, by allowing 100 %
6
foreign ownership, introducing a tax holiday and welcoming foreign professional
workers in the tourism sector (Kompas, 30/01/1999).
Other policies pursued by the Indonesian government have been concerned with
trade liberalisation. Decreases in the world prices of oil and other primary products,
along with the international debt crisis of 1982, resulted in deterioration of the current
account of the balance of payments and encouraged the Indonesian government to
introduce remedial measures. These included cuts in the number of tariffs from 25 to
11 and a reduction in the top tariff rate from 225% to 60%. Following the fall in the
price of oil in 1986, many import licenses were converted to tariffs and the licensing
procedures for hotels and other tourism facilities were simplified.
During the 1990s, there were further reductions in tariffs in line with Indonesia’s
membership of AFTA (the ASEAN Free Trade Agreement) and APEC (the Asia-
Pacific Economic Co-operation) Agreement. After the Asian crisis of 1997, import
tariffs on over 150 goods were decreased, import subsidies on some goods were
eliminated and import quotas were replaced by tariffs. Thus, the policy is one of
moving away from an import substitution strategy towards an outward-oriented
economy. However, various problems remain. The trade balance remains highly
vulnerable to changes in world prices of oil and other natural resources and the
government has also incurred budget deficits. Employment levels, poverty and
income distribution worsened considerably following the crisis. The question of
whether a policy of further trade liberalisation combined with tourism growth can
contribute to alleviating these difficulties will be examined in the following sections.
7
THE CGE MODEL FOR TOURISM IN INDONESIA
Despite the important role of foreign tourism in the Indonesian economy, there has
been a lack of comprehensive studies of its economic impacts, especially in the form
of economy-wide modelling using the CGE approach. Previous applications of CGE
modelling to the Indonesia economy were not concerned with tourism (Azis 1996;
Behrman et al. 1989; Devarajan et al. 1997; Roland-Holst 1992; Thorbecke et al.
1992; Robinson et al. 1997). Therefore, this is the first attempt at developing such a
model, in line with similar research on different economies (for instance Adams and
Parmenter 1995, Zhou et al. 1997 and Blake 2000). In addition to these ‘flexible
price’ CGE models, there have been some economic impact studies using ‘fixed-
price’ input-output or SAM-based multiplier models (for instance Bergstrom et al.
1990; Fletcher 1989; Heng and Low 1990; Khan et al. 1990; West 1993; Loomis
1995; Wagner 1997; Huse et al. 1998).
The tourism-CGE model that will be developed for Indonesia will permit a range
of analysis relating to ongoing economic issues related to tourism. The model’s
development and its use in policy analysis (comparing simulation results with
benchmark conditions) is directed towards, first, encapsulating the main
characteristics of the Indonesian economy, especially with regard to the current level
of foreign tourism and the globalisation process. Second the model will facilitate
analysis of the economy-wide effects and distributional implications of globalisation
and the growth in foreign tourism. The results that are obtained from the model should
provide useful implications for future economic policy-making, which is also
compatible with the growth of foreign tourism and the overall development of the
economy.
8
In the model, foreign tourists consume a range of exported commodities,
particularly services. This assumption is in line with the World Tourism Organisation
recommendations on Tourism Satellite Accounts (TSA) that some parts of exports
should be attributed to foreign tourism. Given the way that foreign tourism is
modelled, it is important to note that this study does not aim to measure the ‘actual-
definitive’ magnitude of the tourism impacts (as commonly estimated in fixed-price
input-output and SAM-based models, for instance Archer 1995; Archer and Fletcher,
1996), but rather to measure the ‘overall-indicative’ directions of the effects,
especially on production activities, factor markets, foreign trade, the welfare of
domestic residents and income distribution, i.e. the general equilibrium economy-
wide effects (see Greenaway et al. 1993; Shoven and Whalley 1992; and Robinson
et al. 1999 for fuller discussions of CGE modelling).
The globalisation process is modelled by a combination of appropriate functional
specifications used in the modelling development and in the policy scenarios
introduced in the simulations. The modelling specifications capture various
transactions between the domestic economy and the rest of the world. These include
factor payments coming to and going from the domestic economy, capital injections
from the rest of the world to the domestic economy (i.e. for financing the savings-
investment gap) and transfers from the rest of the world to the government and
domestic firms (i.e. as part of the open capital account policy adopted by the
Indonesian government).
The policy scenarios are modelled by classifying the process into two stages:
partial and far-reaching globalisation. The former is represented by changes in
government policies towards more open international trade, while maintaining other
taxation and an open capital account to balance the domestic saving-investment gap
9
and the domestic current account deficit. The move towards greater trade
liberalisation seems inevitable, given the Indonesian government’s commitments to
the World Trade Organisation (WTO), Asia-Pacific Economic Co-operation (APEC)
and Association of South East Asian Nations (ASEAN) agreements to liberalise
international trade. The lowering of tariffs is then combined with reduction in the
indirect taxation levied on the domestic economy in the far-reaching stage. The tariff
reduction, in conjunction with other measures such as domestic tax reform and the
replacement of quantitative restrictions by tariffs, has been part of the policy package
of the IMF/World Bank conditional loans in which the Indonesian government is
currently involved.
The Social Accounting Matrix used in the Model
A Social Accounting Matrix (SAM) is a system of representing the economic and
social structure of a country (region) at particular time, by defining its economic
actors and recording their transactions. It is an accounting record for a whole
economy. The disaggregation level and choice of representative actors depend on the
motivation underlying its development and the availability of data, so that there is no
'standard SAM'. In a statistical system, a SAM provides complementary economic
indicators, which concern not only the macroeconomic aggregates of the System of
National Accounts (SNA) but also the socio-economic structure and distributional
aspects of the economy. Accordingly, it can be thought of as a further development of
input-output accounts, which concentrate only on the production side of the economy.
Entries in a SAM can be categorised into two groups, one that reflects flows across
markets (i.e. representing product and factor markets) and the other that reflects
nominal flows or transfer payments. The transactions are presented in a square matrix,
10
with rows representing receipts and columns recording expenditures. It then follows
that every income has its corresponding expenditure, and the inflows and outflows of
any account always balance.
It must be noted that every SAM provides a static image or 'snapshot' of an
economy. Nevertheless, it can provide the statistical basis for the development of
plausible models when more than a static image is required (see Pyatt and Round
1985; Drud et al. 1986; Pyatt 1988; de Melo 1988; Robinson and Roland-Holst 1988
for fuller discussions about a SAM and modelling based on a SAM)
A schematic representation of the SAM for Indonesia is shown in Table 1. The
SAM captures the circular flows of income from activities to factors and then to
institutions, which create demand for goods and services. The factor accounts receive
factor incomes from both domestic activities and the rest of the world (ROW), while
current transfers are recorded in the intersection of rows and columns of institutions
(households, firms, government and ROW). These transfers constitute the non-factor
incomes, which augment the factor incomes to yield the income of institutions. By
representing transactions in this way, factor classifications may be set independently
of institutions, enabling the underlying characteristics and policy concerns about
factor markets and domestic institutions to be accommodated simultaneously. This
provides useful information and increases the versatility of the models developed
subsequently. The separation of commodity accounts from production accounts is
especially useful for models that focus on international trade (Robinson, 1989). The
disaggregation of commodities into domestically produced and imported also provides
a good background for modelling imperfect substitutability characteristics between
the two goods (Armington, 1969).
11
Production activities are classified into 18 categories and the commonly used
assumption that one sector produces one good is adopted, so that classifications for
sectors and commodities are the same. Each production activity employs different
kinds of labour and capital. Labour is categorised into eight groups based on a
combination of sector, type of workers and job status, namely wage and non-wage.
The former refers to employees while the non-wage category includes employers,
self-employed and family workers. In the Indonesian economy context, the former
tends to be associated with higher income groups as most of the latter consists of self-
employed and unpaid family workers. On the capital side, capital is disaggregated into
five categories based on ownership and the nature of the capital. Land and other
agricultural capital, for instance, are combined into one category, while private
domestic capital is an aggregation of corporate and non-corporate private capital. The
other two categories of capital are government and foreign capital.
Households are classified into 10 groups, based on a combination of income
sources, area of residence and job status of the head of household or the highest
income earner. First, households are divided into agricultural and non-agricultural
households. The former is then split into employee landless farmers, small farmers
(land size < 0.5 hectare), medium farmers (between 0.5-1.0 hectare) and large farmers
(>1.0 hectare). For the non-farmers, the disaggregation is based on area of residence
(urban and rural), level of income and a combination of occupation and job status.
Based on these variables, the non-farmers in each area are then classified into low,
dependent and high-income groups. The dependent term refers to the households
whose highest income earner (head of the households) is not in the labour force,
relying instead on transfer incomes from relatives, friends and the government. The
household classification has been developed based on ‘real’ variables, which can
12
easily be identified for policy targeting, as commonly suggested in the development of
a SAM.
Main Characteristics of the Model
Production/Supply Side
In the model, output was specified as an input-output function of intermediate
input and value added. The intermediate input consumption was set as a constant
elasticity of substitution (CES) aggregation of domestically produced and imported
commodities (allowing imperfect substitution between the two commodities, with a
different degree of substitution for each type of commodity, as reflected by the value
of elasticity used) in the form of:
[ ]INT A D Mi d i d ii i i i
i i= + −− − −α ασ σ σ σ σ σ( )/ ( )/ / ( )
( )1 1 11
(S.1)
where A = scale parameter, αd = share parameter for domestically produced
commodities as a share of total commodities available in the domestic economy
(0<αd <1), and Di and Mi are domestically produced and imported commodities,
respectively. The elasticity of substitution between domestically produced and
imported commodities is represented by σi.
The value added was set as a Cobb Douglas function of eight different types of
labour (farmers wages and non wages, production wages and non-wages, clerical
wages and non-wages and professional wages and non-wages) and five different types
of capital (land and agricultural, non-corporate private domestic, corporate private
domestic, foreign, and government capital). Moreover, the wage rates of farmers and
production workers were fixed to reflect the excess supply and various government
interventions to control the wage rates of these types of workers. For other types of
labour and capital, wages and rents are flexible to clear the market. These market-
clearing levels reflect the marginal productivity of the factor.
Total production was allocated to domestic demand and exports, which were then
disaggregated into two product categories: services, and agriculture and
13
manufacturing. The former is assumed to be consumed by foreign tourists, while the
latter is other exports. This treatment of foreign tourism is reasonable as fluctuations
in foreign tourist consumption should be reflected in the fluctuations of service
exports, as most of the service exports are consumed by foreign tourists. With regard
to the CGE modelling, policy analysis should place more emphasis on the general
equilibrium effects or direction of the impacts rather than on the magnitude of the
change. For the latter, a more refined method for estimating foreign tourist
consumption should, ideally, be used prior the development of the CGE model. This
may be possible in the future if a TSA is calibrated for Indonesia.
Demand Side
Total final demand in the domestic market consists of demand for consumption and
for investment purposes. Consumption is the sum of household and government
consumption, while the demand for investment is generated by the aggregated saving-
investment (capital) account. A schematic representation of the demand system of the
model is shown in Figure 2.
The Cobb-Douglas utility function used in household consumption implies that
households have a fixed consumption pattern. On the other hand, the government is
assumed to have planned consumption, which is reflected in the input-output
specification. The government consumption is, therefore, not affected by commodity
prices or the government’s income. Government saving is, accordingly, residual. In
addition, the government has access to foreign borrowing for balancing its budget
deficit -since 1967, the Indonesian government has continuously adopted a budget
deficit, which is financed by foreign funds. The same applies to domestic firms, so
that the two deficits have been contributing to Indonesia’s total foreign commitments.
14
In addition, there are direct transactions among institutions (i.e. the Rest of the World,
government, firms and households) in the form of direct taxes and other transfers that
are taken into account in the models.
Consistent with the government consumption behaviour, aggregate investment is
fixed (in quantity), reflecting the 'investment-driven' nature of the economy. This
specification was chosen to reflect the fact that the Indonesian government (the main
economic agent) has always set its budget and other macroeconomic targets at the
beginning of the year which, in turn, affects the economic behaviour of both firms and
households. In addition to the main functional specifications for production and final
demand, there are other equations in the model to define prices (for activities,
commodities, and factors), incomes and expenditures (by institutions) and to balance
the model.
Price Equations
The domestic price of each composite commodity (Pi) can be written as a CES
function of the domestic prices of imported (PMi) and domestically produced goods
(PDi):
[ ]P PD PMi d i d ii i i i
i i= + −− − −α ασ σ σ σ σ σ( ) / ( )/ /( )
( )1 1 11
(P.1)
On the import side, the adoption of the small country assumption implies that the
domestic economy is a price taker and there is unlimited supply from the ROW at the
given world price. The domestic price of imports is given by
PM PW tm ERi i i= +( )1 (P.2)
where iPW is the world price, ER is the exchange rate and tm is the tariff rate on
imported commodities. The bar sign indicates that the variable is fixed. Assuming
15
that domestic products sold in the international market face a downward sloping
demand curve, the export price (PWE) can be represented as
PWE PD te ERi i i= +/ ( )1 (P.3)
where te is the export subsidy rate.
Income and Expenditure Equations
Household incomes (Yh) consist of factor incomes (wages and rent payments for its
capital used domestically and abroad, expressed by the first two parts of equation I.1
on the right hand side) and transfer incomes from the government (TGH)gh, domestic
firms (TFH)fh, other households (THH)hh and the ROW (TWH)wh. These incomes can
be written as:
++++
−+=
∑ ∑∑∑ERTWHTHHTFHTGH
LWXPNLWY
whhhfhgh
ih
kkiki
iikih
kk
h
)()()()(
)(
(I.1)
Firms’ incomes (Yf) include payments for capital used in production, transfers from
other firms (TFF)ff and transfers from the ROW (TWF)wf, which is set as a residual. It
is given by:
Y PN X W L TFF TWF ERf i i k kik
fi
ff wf= − + +
∑∑ ( ) ( ) ( )
(I.2)
Government income (Yg) can be categorised into payments for capital used in
production activities, income taxes from domestic institutions (households, domestic
firms and government-owned companies), income from indirect taxes levied on
commodities and transfers from ROW (TWG)wg, which is endogenously determined
by the model. It is given by:
Y
PN X W L t Y t Y
td X PD TWG ERg
i i k kik
gi
h h f ffh
i iS
i wgi
=
− ∑∑ + + +∑∑
+ +∑
( )
( )(I.3)
16
Transfer payments from the Rest of the World to households are set exogenously
(as shown by a bar sign on the variables in the equations), while transfers to
government and firms are set endogenously (as residuals). This is consistent with the
behaviour of domestic firms as well as the fiscal policy of the government; both rely
on foreign sources for funding their deficits. These transfer payments consist of
foreign loans, grants and other transfers.
Household expenditure (Eh) consists of consumption of composite commodities,
direct tax payments to the government, transfers to other household groups and
savings:
E C t Y THH Sh ihi
h h gh
hh h= + + +∑ ∑( ) ( ) ( )(E.1)
The expenditures of firms (Ef) consist of transfers to households, direct tax
payments to the government, transfers to other firms (retained profit), transfers to the
ROW (TFW)fw and saving:
E TFH t Y TFF TFW Sf fh f f gf
ff fw f= + + + +∑( ) ( ) ( ) ( ) (E.2)
Government expenditure (Eg) consists of consumption of composite commodities,
transfers to households (TGW)gh, transfers to the government (TGW)gg, transfers to
the ROW (TGW)gw and saving:
ggwgghgi
igg STGWTGGTGHCE +++∑+= ∑ )()()()((E.3)
Saving and Investment Equations
Total saving in domestic economy consists of household savings (Sh), firms saving
(Sf), government saving (Sg) and capital injections from the Rest of the World (Sw):
S S S S Sh f g w= + + +(S-I.1)
17
In equilibrium, total saving equals total investment, which is distributed to each
sector based on fixed shares.
∑ ∑ ==
=
i iiii andII
IS
1δδ(S-I.2)
Aggregate final demand (total final consumption of composite commodities) is
accordingly given by
ig
igh
ihi ICCC ++= ∑∑(S-I.3)
where
(1 )(1 ) , ,jij ij h jC MPS t Y j h gδ= − − =
Employment and Wages
For non-agricultural and non-production workers in Indonesia, wages are set in
competitive markets and reflect the marginal product of labour:
1
( / )n
D D Si i ki k k ki k k
i
PN X L W with L L and L L∂ ∂=
= = =∑ ¨(L.1)
For labour in the agricultural sector and production workers, wages are fixed and the
last part of equation above becomes
kkS
kSk
Sk
Dk WWandLLwhereLL =<= *
(L.2)
Thus, allowing for unemployment in the agricultural sector and among production
workers. D and S in the equations above refer to demand and supply while Wk is the
wage at equilibrium level.
Foreign Trade
The export demand equation is
i)PWE/AVE(EE iiiiη= (F.1)
18
where iE = exports when AVEi = PWEi, PWE = supply price of domestic exports in
foreign currency, AVE = average world price of the commodity, η= the export
demand elasticity.
The import demand equation is
M PD PM Di i i i i ii i= −( / ) ( / )δ δ σ σ1 (F.2)
where: δ = share parameter and Di = total demand for domestic use
The balance of payments equilibrium equation is given by:
( ) ( ) ( )
( ) ( ) ( ) ( )
i i gw fw kwi
i i wk wh wf wgi
PW M TGW TFW RMTW
PWE E RMFW TWH TWF TWG
+ + +
= + + + +
∑
∑(F.3)
The left hand side of the equation above is the ROW revenue that consists of imports,
capital flight, transfers from government and firms, and capital payment from foreign
capital used in domestic production to the ROW (remittances). On the right hand side
is the ROW total expenditure, covering exports, capital payments and transfers to
domestic households, firms and government. Since the transfers from ROW to
domestic firms and government are set as residuals, the current account deficit
equation is given by
( ) ( ) ( ) ( ) ( )
( ) ( )
iwf wg i gw fw kwi
i i wk whi
TWF TWG PW M TGW TFW RMTW
PWE E RMFW TWH
+ = + + +
− + +
∑
∑ (F.4)
The model provided by the equations above is used to quantify the effects of trade
liberalisation, changes in taxation and foreign tourism growth in the Indonesian
economy.
19
RESULTS
Two main macroeconomic policy scenarios were considered, first in isolation and
subsequently in conjunction with foreign tourism growth. The first is termed ‘partial
globalisation’ and is modelled by a reduction of 20% in the tariffs on imported
commodities. This reflects external pressure on the government to implement tariff
reductions in conjunction with Indonesia’s membership of AFTA and APEC. It
occurs in the context of the government’s reluctant attitude towards globalisation,
stemming from its increasing reliance on revenue from import tariffs. Despite the
government’s trade liberalisation efforts, especially after 1982, revenue from import
tariffs contributed 4% of total government income in 1985. This amount more than
doubled to 10% in 1993 (Sugiyarto et al. 2001). In this scenario, the government is
assumed to reduce tariffs on imports but not on exports, owing to its reliance on
revenue from the external sector, and to maintain all kinds of taxation in the domestic
economy.
In the second scenario, termed ‘far-reaching globalisation’, the government is more
pro-business and balances the ‘involuntary’ (externally determined) import tariff cuts
with a ‘voluntary’ removal of distortions in the domestic market. The latter is
represented by the same reduction (20%) in indirect taxation levied on domestic
commodities. Another reason for considering a combination of the two policies is that
reductions in the level of indirect taxation on domestic commodities are a common
feature of tax reform policies, especially in developing countries (see Ahmad and
Stern 1991; Bird 1992; Bird and Oldman 1990; Gillis 1989; Newbery and Stern
1988; and Rao 1993).
The two scenarios are analysed by using the CGE model to estimate the effects of
partial and far-reaching globalisation on key economic variables: GDP, employment,
20
a range of measures of inflation, external performance, welfare, household and
foreign tourist consumption. The results are given in Table 2 and are calculated as
percentage changes from the benchmark data, where the benchmark refers to the
equilibrium values of the variables prior to the simulations. In most cases, a positive
number reflects an improvement and vice versa. Percentage changes in balance of
payments (BOP) deficits and trade balances should be interpreted carefully since the
absolute numbers can switch from negative to positive.
Partial Globalisation
The effect of decreases in tariffs is to reduce government revenue and also to lower
the price of imported commodities in the domestic market. As the domestic economy
is a price taker, this will increase the demand for imported products, contributing to an
increase in the availability of products in the domestic economy. On the other hand,
the demand for domestically produced goods in the domestic market decreases as
their prices become relatively more expensive. This will induce producers to export
more and, in turn, to produce more, as some of the lower price imported commodities
are also used as intermediate inputs. The stronger price effects on imports result in a
worsening the trade balance as imports increase by more than exports. The increase in
demand for imported products is also higher than the reduction in domestic demand
for domestic products, so that the total supply of products in the domestic economy
still increases. The overall effects increase GDP.
Column 2 in Table 2 summarises the effects of introducing import tariff reductions
on the key variables concerned, measured by the percentage changes from the
benchmark. It can be seen that the tariff reductions increase imports and foreign trade,
thus increasing the availability of products in the domestic economy (by 0.1%). This,
21
in turn, creates additional demand and stimulates production activities so that GDP
increases by 0.1%. Adverse effects of the policy take the form of a worsening of the
trade balance (imports increase by more than exports) and the government current
account deficit. The deficit deteriorates significantly due to the government’s loss of
revenue from tariffs combined with adherence to its planned expenditure. Welfare
improves, as indicated by the increases in total domestic absorption (by 0.1%) and
household real consumption (by 0.2%).
Foreign tourists are also better off as they can consume more with their benchmark
level of spending. Their expenditure on hotels and restaurants (the main items of
expenditure for foreign tourists) increases by 1%. The modelling procedure assumed
that there is no change in the total income (equals total spending) of foreign tourists.
The increase in consumption by foreign tourists may be higher, as the lower prices of
domestic commodities may encourage them to consume more or even attract more of
them to visit Indonesia (see Sinclair and Stabler, 1997, for discussion of the
microeconomic foundations of tourism demand and Smith, 1994, and Watson and
Kopachevsky, 1994, for analyses of tourism as a commodity). Moreover, a wide range
of studies, reviewed by Crouch (Crouch 1994a, 1994b), indicate that price is a crucial
factor for most tourists when choosing a holiday destination. Note that while total
GDP increases, some (import competing) sectors experience a decline in output and
GDP contribution. These loses are concentrated in agriculture (-0.06%) and
manufacturing (-0.04%) sectors. There may therefore be additional adjustment costs
as the economy reacts to tariff liberalisation by reducing employment in these sectors.
22
Far-reaching Globalisation
The positive effects of partial globalisation discussed above are amplified in the
far-reaching globalisation scenario, when import tariff reductions are combined with
reductions in indirect taxation on domestic commodities. The reason for this can be
traced from the effects of introducing the indirect tax reductions. On the production
side, this policy will reduce the domestic prices of domestic products, making them
more competitive. This, in turn, stimulates domestic production, creates more
employment and increases GDP. The greatest expansions are in the trade, food
processing and hotel and restaurant sectors. The increases in domestic production and
employment raise household incomes, which creates more demand for goods in the
domestic market. Imports increase to meet the higher domestic demand but exports
decrease due to the fact that the domestic market becomes more profitable for
producers. Therefore the trade balance deteriorates. The policy will reduce the
government’s income from indirect taxation and worsen its deficit, as the loss of tax
revenue has made the government less able to finance its planned expenditure. The
policy has positive impacts on welfare, as domestic absorption (including household
and government consumption as well as investment), and household consumption
increase.
Column 3 in Table 2 summarises the effects of the far-reaching globalisation. The
direct effect of the combined cuts is a decrease in the domestic prices of imported and
domestic commodities. The demand coming from higher household incomes (as a
result of the cuts in indirect taxation) magnifies the increase in import demand due to
lower import prices (resulting from the first policy). Therefore, the trade balance
deteriorates further as imports increase, while the positive impact of import tariff
reductions on exports is offset by the negative effects of indirect tax reductions on
23
exports. The end results show that imports increase by 1.9% while exports decrease
by 0.2% and the trade balance deteriorates by 23.5%. The increasing availability of
products in the domestic economy creates additional demand and stimulates
production activities, which results in higher GDP (0.6% increase) and employment
(1.3% increase). The government continues to experience adverse effects on its
current account deficit. Welfare improves, as can be seen from the increases in total
domestic absorption (1.1%), and household real consumption (2.0% increase).
Foreign tourists are better off for paying lower prices for the products and services
they consume. Their real consumption on hotels and restaurants increases by 0.9%.
Increasing Demand by Foreign Tourists
The growth of revenue from international tourism in Indonesia was expected to be
more than 15% per year, as was explained in the second section of the paper.
However, in the face of economic and then political crisis, this forecast may be too
optimistic. The governments of some western countries, including the USA and UK,
have warned their citizens not to visit some parts of Indonesia and the number of
foreign visitors from Australia could also be affected by the East Timor independence
process. In this section, therefore, a more reasonable 10% increase in foreign tourism
demand is simulated and is then combined with the previous two globalisation
simulations. This increase in foreign tourist expenditure can be achieved by an
increase in foreign tourist arrivals of less than 10% as, over the years, their spending
level tends to increase. Columns 4 - 6 in Table 2 summarise the results.
The increase in foreign tourism demand will create more production (GDP
increases by 0.1%) and employment (increases by 0.2%) but, at the same time, puts
pressure on domestic prices. This is clearly shown in the foreign tourist consumption.
24
The foreign tourists’ real consumption increases by 9.4% -less than the 10% increase
introduced in the initial simulation. Welfare improves, as domestic absorption and
household real consumption increase. Domestic absorption increases by 0.1%, while
household real consumption increase by 0.2%. Exports increase by more than imports,
resulting in an improvement in the trade balance (increase by 0.7%). The same
improvement also applies to the balance of payments deficits (reduced by 2.2%).
Globalisation and Foreign Tourism
The next two simulations consider the globalisation scenarios in the context of
foreign tourism growth. The results are given in columns 5 and 6 of Table 2 and show
that growth of foreign tourism demand amplifies the positive effects of globalisation
and, at the same time, reduces its adverse effects. The levels of GDP and employment
are higher, particularly in the case of the combination of tourism growth, trade and tax
liberalisation (column 6). The trade balance is in deficit, but to a lesser extent than in
case of trade and tax liberalisation without tourism growth. The balance of payment
deficit is now in a better position, owing to the increased income from foreign
tourism.
An obvious policy that the government can undertake is, therefore, to embark on
globalisation by reducing its reliance on import tariffs and indirect taxation at a rate
that enables the revenue lost by tariff and tax reductions to equal the additional
income due to the growth of foreign tourist arrivals. The income from foreign tourism
will enable the government’s income to be maintained at the benchmark level, so that
involvement in globalisation will not disrupt the government’s expenditure program.
This is a means by which governments, such as the Indonesian government, can
maintain their credibility and avoid fiscal problems. The government’s ability to
25
maintain its expenditure level is also important within a context of overall deflation,
as expenditure by the government can help to offset reductions in other components of
aggregate demand, such as exports of primary products.
The results obtained from different policy scenarios were subjected to sensitivity
analysis, in order to examine their robustness to changes in the export demand
elasticity value. This parameter value quantifies the responsiveness of the demand for
Indonesia’s exports to changes in their price and is particularly important for an
economy which is increasingly open to international trade and a depreciating
exchange rate. Columns 7 - 11 in Table 2 summarise the results of the sensitivity
analysis, which is conducted by doubling the export demand elasticity values used in
the five simulations. The increase in the elasticity values will make the demand from
the ROW more elastic, so that domestic market prices will be determined, to a greater
extent, by the export market. The results confirm that the elasticity values are
important in determining the overall results, including the magnitude and, in some
cases, the direction of the changes. For any policy changes introduced in the model,
higher export demand elasticity values will produce bigger impacts on the
real/quantity variables, as clearly shown in the case of globalisation (columns 7 and
8). On the other hand, the increase in foreign tourism demand will result in lower
price effects for the domestic economy, as shown by the results of third simulation
(column 9). The outcomes of these offsetting effects are shown by the last two
simulations (columns 10 and 11). In general, the sensitivity analysis shows the
robustness of the results and functional specifications employed in the models, as the
results conform to the theoretical predictions.
26
CONCLUSIONS
This study has shown that globalisation combined with tourism does not
necessarily have adverse effects on the domestic economy, in contrast to the past
portrayal of the combination as ‘a deadly mix’ (for example Chavez 1999).
Globalisation and foreign tourism growth can, in fact, reduce the domestic price level
and increase the amount of foreign trade and availability of products in the domestic
economy, thereby stimulating further production. The end result in the Indonesian
case is improved macroeconomic performance and welfare, as domestic absorption,
and household consumption increase. Foreign tourists are also better off for they can
consume more, given their spending level, and also benefit from the greater
availability of products. The trade balance and current account deficits are of concern,
indicating the need for appropriate accompanying policies, such as the promotion of
investment in manufacturing, underpinned by the booming service sector. Moreover,
the positive findings from this study do not take account of effects that foreign
tourism may have on the environment and culture.
The combined effects of the growth of foreign tourism and globalisation are
beneficial, overall, as the foreign tourism growth amplifies the positive effects of
globalisation and at the same time reduces its adverse effects. The trade balance and
government accounts are in a better position, owing to the additional receipts from
tourism. The ongoing growth of foreign tourism also reduces the government’s
burdens as a result of embarking on globalisation, by enabling it to reduce its reliance
on import tariffs and indirect taxation while, at the same time, maintaining the level of
income necessary to finance its expenditure. Tourism growth would, therefore, enable
the government to follow a fiscal policy of revenue neutral globalisation, allowing it
27
to finance its expenditure without imposing higher taxes on the Indonesian
population.
28
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Figure 1. Schematic Representation of Production System
Figure 2. Schematic Representation of Demand System
33
Table 1: Schematic Representation of the Indonesian SAM
EXPENDITURERECEIPTS 1.Factor 2.Institutions 3.Activity 4.TTM 5.Dom.Com 6.Imp.Com 7.Capital 8.Ind. Tax 9. ROW
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1.Factorsa).Labour Wages
b).Capital Profits/Rents Remittances
2.Institutionsa).Households
FactorIncome
Transfers Transfers
b).Firm FactorIncome
Transfers Transfers
c).Government FactorIncome
Direct Tax Ind. TaxRevenue
Transfers
3.Activities Transfer Production
4.Trade andTransport Margin(TTM)
Mark-up Mark-up
5.DomesticCommodity
Consumption Intermediate Investment Exports
6.ImportedCommodity
Consumption Investment
7.Capital Savings
8.Net Indirect Tax Tax Tax
9.Rest OftheWorld (ROW)
Remittances Transfers Imports CapitalOutflows
34
Table 2: Effects of Globalisation and Foreign Tourism Growth in the Indonesian Economy(Percentage Change from the Benchmark)
Scenarios of Globalisation and Foreign Tourism Growth Sensitivity Analysis of Doubling the Values Of ExportDemand ElasticitiesVariables Concerned
PG FG DI PG & DI FG & DI PG FG DI PG & DI FG & DI(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
A. Macroeconomic Aggregates1. GDP 0.05 0.64 0.06 0.11 0.70 0.11 0.69 0.03 0.14 0.72
a. Agriculture -0.06 1.54 0.17 0.11 1.71 0.02 1.65 0.12 0.14 1.77b. Mining 0.00 -0.74 -0.14 -0.14 -0.88 -0.06 -0.81 -0.11 -0.17 -0.91c. Manufacturing -0.04 0.33 -0.05 -0.09 0.28 0.08 0.41 -0.09 0.00 0.33d. Services 0.04 0.46 0.14 0.18 0.60 0.05 0.45 0.12 0.17 0.56
-Hotel 0.04 0.87 2.81 2.90 3.60 -0.02 1.21 2.73 2.70 3.74-Restaurant 0.00 1.47 0.53 0.54 1.98 0.04 1.58 0.50 0.53 2.04
2. Employment -0.01 1.34 0.16 0.15 1.49 0.11 1.42 0.10 0.21 1.51B. External Conditions1. Foreign Trade
a. Real Export 0.64 -0.18 0.24 0.88 0.05 0.88 -0.10 0.14 1.02 0.03
b. Real Import 0.91 1.86 0.20 1.11 2.06 1.09 1.87 0.12 1.21 1.99
c. Trade Balance -2.43 -23.49 0.70 -1.75 -22.90 -1.56 -22.60 0.36 -1.23 -22.332. BOP Deficits
a. Government 349.15 1195.34 30.41 380.35 1227.58 357.45 1189.06 24.74 382.20 1213.55
b. Firm -14.65 -42.91 -3.58 -18.28 -46.47 -16.48 -43.32 -2.63 -19.10 -45.79
c. Total 0.53 8.76 -2.16 -1.64 6.70 -0.88 8.10 -1.49 -2.36 6.76C. Welfare and Distribution1.Domestic Absorption 0.09 1.06 0.05 0.14 1.11 0.14 1.09 0.03 0.17 1.122. Household Real Consumption 0.16 1.97 0.15 0.32 2.12 0.25 2.01 0.11 0.36 2.11
a. Farmers 0.15 2.15 0.13 0.28 2.28 0.22 2.24 0.09 0.31 2.32
b. Rural Households 0.14 1.92 0.14 0.28 2.05 0.23 1.97 0.09 0.32 2.06
c. Urban Households 0.19 1.83 0.18 0.38 2.01 0.29 1.83 0.13 0.43 1.953. Foreign Tourist Consumption
a. Hotel and Restaurant 0.10 0.92 9.37 9.65 10.08 -0.04 2.20 9.09 9.03 10.67
b. All other services 0.13 -0.28 9.37 9.67 8.80 0.00 -0.26 9.09 9.09 8.08
Note: PG and FG are Partial and Far-reaching Globalisation, while DI is Foreign Tourist Demand Increase.