The Impacts of Higher Energy Prices on Indonesia’s and West Java’s Economies using INDOTERM, a Multiregional Model of Indonesia

Indonesia’s national and regional/local policy makers are becoming increasingly concerned with disparities between regions. Aggregate incomes and expenditures in one region may change proportionally more than national changes. This paper contains a technical summary of the structure and special features of INDOTERM model, a member of the TERM family (TERM = The Enormous Regional Model). It treats West Java and the rest of Indonesia as separate economies. We discuss the data required to prepare a version of INDOTERM that represents all the provinces of Indonesia. Finally, we present a long-run simulation of the impacts of the recent hike in global energy prices on the Indonesian economy combined with possible depletion of Indonesia’s crude oil supplies. The special features for future development of INDOTERM are multiple household incomes and expenditures and a “top-down” extension representing sub-provincial municipalities. Nationally, Indonesia’s real income losses due to resource depletion are more than compensated by the sharp increase in the terms of trade arising from the increase in global demand for energy. West Java and the rest of Indonesia fare similarly, as a large proportion of the composite region consists of the remaining provinces of Java which have a similar economic structure to West Java. The relatively sparsely populated outer islands that are relatively rich in mineral resources are not represented separately. Using a “top-down” extension of West Java’s 25 municipalities and districts in INDOTERM, the simulation shows that Kabupaten Indramayu fares best. This local region also loses from the decline in crude oil productivity, and indeed the output loss more than outweighs the increase in natural gas production for this effect. But it gains substantially from the energy price hikes: the increase in nominal income has a substantial positive effect on the municipality, with local industries, including trade and motor repairs experiencing output increases in excess of 40%. Overall, the municipality experiences a gain in factor income of 7.3%, whereas most other regions of West Java lose income in the scenario.