Likely Impact of the WTO “July Package” 2004 Agreement on Trade Liberalization in Agriculture on Poverty in Indonesia: A Comparative Study Between A Partial Equilibrium Model and Existing CGE/GTAP Based Studies

The purpose of this study is to predict empirically the poverty impact in Indonesia of the reduction of agricultural subsidies in OECD countries agreed at the WTO meeting in July 2004 (known as the WTO July Package), and the focus of the study is on rice. Methodologically, this study uses partial equilibrium techniques. It calculates the first-order effects with quantities constant and then tries to incorporate some second-round effects by allowing quantities to vary. Second round effects are estimated using econometric techniques: time series for production response, labor supply, demand systems for rural and urban consumptions. Some equations are estimated simultaneously. The study shows three important findings. First, the supply response in Indonesian agriculture is weak, which means that Indonesian farmers would not benefit much from the higher prices for agriculture in the world market. Second, wages and employment have positive correlations with price increases. Third, for any given rise in poverty line due to increase the elasticity of percentage change in poverty rate to percentage change in poverty line (PL) is positive. This is more or less consistent with the estimated regression coefficients of the percentage change in poverty rate and the percentage change in PL in urban areas and rural areas, suggesting that for every 1% increase in PL, poverty rates in urban and rural areas will increase by 0.87% and 0.67%, respectively.