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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

Abstracts of doctoral theses on the Indonesian

economy

To cite this article: (2012) Abstracts of doctoral theses on the Indonesian economy, Bulletin of Indonesian Economic Studies, 48:3, 429-436, DOI: 10.1080/00074918.2012.728689

To link to this article: http://dx.doi.org/10.1080/00074918.2012.728689

Published online: 20 Nov 2012.

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ISSN 0007-4918 print/ISSN 1472-7234 online/12/030429-8 http://dx.doi.org/10.1080/00074918.2012.728689

ABSTRACTS OF DOCTORAL THESES

ON THE INDONESIAN ECONOMY

Tax Policy, Growth, and Income Distribution in Indonesia:

A Computable General Equilibrium Analysis

Hidayat Amir (hamir@iskal.depkeu.go.id)

Accepted 2012, University of Queensland, Brisbane

This study analyses the impacts of Indonesia’s 2008 income tax policy reform on its economy, using a computable general equilibrium (CGE) framework.

In 2008, parliament approved a proposal to amend Indonesia’s income tax laws. Essential amendments included adjusting the personal income tax (PIT) rates and adopting a single corporate income tax (CIT) rate. These amendments are part of a tax reform and iscal adjustment program implemented gradually since the early 2000s, with a value added tax and luxury sales tax reform still on the agenda. These policies have two objectives: to increase tax revenue and to promote sustainable economic growth. Income equality is also an important tax policy objective.

A good tax system should protect low-income households from paying exces-sive tax and reduce the number of households below the poverty line. The rela-tionship between tax policy reforms and the economy is complex; in some cases, large-scale tax reform can have multiple impacts through inter-industry linkages simultaneously, making it dificult to explain, in theoretical terms, what the eco -nomic impacts are. However, identifying important relationships among these inter-industry linkages may help to measure and evaluate these impacts.

For this study, three policy scenarios were simulated: an adjustment in the PIT rate structure; the application of a single rate to the CIT; and a combination of these two policies. The simulations were conducted under a balanced budget con-dition (budget neutrality) – where government spending and revenue move in a way that maintains a constant budget balance – and under a non-balanced budget condition. They were run under short- and long-run scenarios.

The results suggest that under a balanced budget condition the income tax reform that comprises the adjustment of the PIT rate structure and the applica -tion of a single CIT rate (the combined scenario) beneits the overall economy. In the long run, the policies increase aggregate welfare, as indicated by increases in real GDP and consumption expenditure. The results also show that income taxes tend to have a distortionary effect on the economy. As a result, the tax cut policy increases economic welfare.

The policies also cause production factors to be reorganised. Excess labour, particularly in the government sector, is reallocated to other industries; this

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430 Abstracts of doctoral theses on the Indonesian economy

re-allocation of labour occurs not only between sectors but also between labour categories – from skilled labour categories (management/professional and cleri-cal) to more unskilled labour categories (production and agricultural).

While the policy simulations cause only a small reduction in poverty incidence, they do increase income inequality. A closer look at the policies’ impacts indicates that the adjustment of the PIT rate structure and the application of a single CIT rate provide more beneits to those in higher income groups than to those with the lowest income. The impact on lower income groups arises more from the indirect effects of economic growth. The CIT policy is more successful than the PIT policy in promoting exports, controlling inlation and attracting investment.

This study improves our understanding of how Indonesia’s tax policies affect the economy. Importantly, it examines the taxation policy’s impact both at a macro level, through changes in economic growth and employment, and at a micro level, through changes in poverty and income distribution. The indings provide impor -tant lessons for similar developing countries that are reforming their tax systems.

The Impact of State Restructuring on Indonesia’s Regional Economic Convergence

Adiwan Fahlan Aritenang (a.aritenang@gmail.com)

Accepted 2012, University College London

In recent decades, state restructuring policies such as trade liberalisation and decentralisation have emerged globally as part of attempts to promote more equal economic growth. This occurred in Indonesia following the Asian inancial crisis of 1997–98. Indonesia provides two important examples of the impact of state restructuring on regional convergence, the process that occurs when poor coun-tries or regions grow faster than rich ones and begin to catch up with them. First, Indonesia, as a member of the ASEAN Free Trade Area (AFTA), is free to choose the sectors and determine the schedules for its own trade liberalisation. Second, Indonesia’s transition from a centralised to a decentralised regime relects a rapid shift in politico-economic and social institutional arrangements. These external and internal forms of state restructuring can be expected to inluence patterns of regional economic development and convergence.

This research aims to analyse the impact of state restructuring on dispari-ties at the district level for the period 1993–2005 and two subperiods, the pre decentralisation years (1993–2000) and the decentralisation era (2001–05). Borrowing ideas from the ield of new institutional economics, the study argues that state restructuring provides opportunities to accelerate economic growth by promoting property rights and lowering transaction costs.

The thesis employs three empirical studies to test these hypotheses. First, using economic indices, it examines levels of inequality in district economic growth and industry concentration. The measures used are coeficients of variation (CV) and the Lorenz curve for inequality patterns; the Theil index for inequality decompo -sition analysis; and the Herindahl index (Hindex) for industry agglomeration analysis. Second, econometric analysis is conducted to explore the impact of trade

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liberalisation and decentralisation on regional economic growth. The analysis uses traditional ß convergence aspatial and spatial dependence autocorrelation analysis. The third empirical study adopts the methods of comparative political analysis, using a historical institutionalism approach to explain variations in the impact of state restructuring. In this approach, critical antecedents (the institu-tional knowledge and experience previously gained) are available to economic agents during critical junctures at which choices about institutional paths need to be made. However, the chosen institutional path is not static, but is reproduced through an iterative process of institutional learning and feedback. In this pro-cess, property rights and transactions are arranged and regulated, for example, through raising regional shares of natural resource revenues and introducing one-door policies for investments. Thus the study proposes that regional economic variation is related to past institutional capacity.

The indings show that, despite evidence of regional convergence, disparities are persistent and severe in the post–state-restructuring period. The quantitative analysis shows that AFTA has had an insigniicant impact on regional economic growth, while decentralisation has signiicantly contracted it. Qualitative case studies in Batam and Bandung ind that institutional history and path devel -opment have strongly inluenced the progress and discourses of devel-opment. Hence, placespeciic spatial development policy should be a priority. Given that path dependence and nontraded industries are embedded within speciic loca -tions, policies should embrace local values and knowledge. Regions that exhibit strong capacity for innovative policy making, and a dynamic form of governance capable of mobilising local actors, are better able to gain from state restructuring. For a country such as Indonesia, with a long history of authoritarian rule, the role of the nation-state remains important in promoting balanced local development.

The Management of Liquidity Risk in Islamic Banks: The Case of Indonesia

Rifki Ismal (rifki_ismal@yahoo.com) Accepted 2010, University of Durham

Islamic banking and inance has made progress all over the world since its incep -tion as a commercial banking model in the mid-1970s. As the world’s largest Muslim nation, Indonesia has initiated a number of policies to expand its Islamic banking industry.

Like conventional banks, Islamic banks face areas of risk that may affect their performance and operations. One such area is liquidity risk, which has additional features in the case of Islamic banks. Both international banking standards and

syariah guidelines suggest that, to manage liquidity risk, banks should have robust liquidity risk management policies; a responsive asset and liability committee; effective information and internal control systems; and methods for managing deposits to reduce on-demand liquidity. The aim of this research is to analyse the management of liquidity risk in Islamic banks through the balancing of assets and liabilities, with a view to recommending policies to improve the management of

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such risk. This is done through an examination of the Indonesian Islamic banking industry.

The data collection and analysis methods employed in this research involved triangulation using a combination of quantitative and qualitative approaches. Both industry performance analysis and econometric time-series analysis were conducted to assess liquidity risk and its management in the context of Islamic banking. The study used monthly data published by Bank Indonesia for the Indo-nesian Islamic banking industry from December 2000 to November 2009. It exam-ined the liquidity behaviour of both banking depositors and Islamic banks. In addition, primary data were assembled through a questionnaire survey, with the aim of identifying the actual practices and problems involved in managing liquid-ity risk. The survey investigated the perceptions of Islamic banking depositors and Islamic bankers to shed further light on liquidity risk issues that were not captured in the time series analysis.

The empirical analyses conducted in the study demonstrate: (i) the sub-optimal organisational structure of Islamic banks for managing liquidity; (ii) the signii -cant demand for liquidity withdrawals from depositors and the fragility of Islamic banks in terms of their ability to mitigate certain liquidity withdrawal scenarios; (iii) the factors that are critical to explaining the liquidity behaviour of banking depositors and Islamic banks; (iv) the reasons depositors withdraw funds from Islamic banks, and the suboptimal management of funds by Islamic banks; and (v) the limited Islamic money market instruments available to manage demand for liquidity from depositors.

Based on these indings, the study then constructs an integrated and com -prehensive program for managing liquidity risk. It consists of three elements: (i) institutional deepening; (ii) restructuring of liquidity management on the asset and liability sides; and (iii) revitalisation of the use of Islamic liquid instruments. This integrated and comprehensive program of liquidity risk management rec-ommends a better way of managing liquidity risk based on syariah-compliant instruments and international standard banking practices.

The Determinants of Indonesian Exports

Titik Anas (titik.anas@csis.or.id)

Accepted 2012, Australian National University

This thesis examines Indonesia’s export performance since the 1970s. It aims to contribute to the limited discussion of this ield by providing a rigorous and com -prehensive analysis of issues relating to Indonesia’s trade. There are three main research questions. How good has Indonesia’s export performance been over the last 30 years? How does it compare with the performance of its close competitors? What factors contributed to Indonesia’s performance?

The thesis begins with a discussion of economic policy dynamics in Indonesia since the 1970s, with a particular focus on the economic reforms undertaken from the mid-1980s. This is followed by chapters devoted to discussion of Indonesia’s comparative advantage and competitiveness relative to its close competitors, and of the determinants of exports at the macro and irm levels.

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On comparative advantage, the thesis shows that the number of products for which Indonesia has a comparative advantage has increased over time, owing mainly to changes in the manufacturing sector. Closer assessment of the sector conirms Indonesia’s comparative advantage in labourintensive and resource based labour-intensive industries. However, recent data show that exports in these industries have weakened.

The study shows that, relative to China, Malaysia, Thailand and Vietnam, Indo-nesia is more competitive in agriculture (especially in recent times); relatively less competitive in manufacturing; and on a par in the mining sector except during the last few years, when Indonesia has been relatively more competitive. More detailed analysis reveals that Indonesia is relatively more competitive in resource-based labour-intensive and resource-resource-based capital-intensive industries.

One chapter traces the long-run relationship of exports to the real exchange rate and demand and supply factors. The effect of each of these variables differs in sign and magnitude across sectors and sub-sectors. For manufactured exports, the coeficients for the real exchange rate and demand and supply factors are positive and statistically signiicant. For agricultural exports, the coeficients for the real exchange rate, world demand and supply capacity are also positive. However, only the coeficients for world demand and supply capacity are statistically signif -icant. For the mining sector, although the real exchange rate, world demand and supply capacity exhibit positive effects on exports, only world demand shows a statistically signiicant impact. This chapter also illustrates the particular impact of economic reform on the manufacturing sector, and reveals that there were dif-ferences in export performance among manufacturing sub-sectors during the 1997–98 Asian inancial crisis.

At the irm level, the thesis shows the impact of irm heterogeneity and spill over effects on export decisions and export performance. The results are relatively consistent for the pre-crisis and post-crisis periods. On export decisions, the data show that labour productivity, size, foreign ownership, and sectoral and regional spillovers have a positive effect. On export performance, the effects of irm hetero geneity and spillovers are also relatively consistent for the pre- and post-crisis periods, while the magnitudes are generally higher for the post-crisis period, except in the case of sectoral spillovers. Labour-intensive sub-sectors show supe-rior export performance to other manufacturing sub-sectors. An assessment of the Batam free trade zone reveals that its export performance is superior to that of other regions.

Why Is Indonesia Left Behind in Global Production Networks?

Moekti Prasetiani Soejachmoen (utibrata@gmail.com)

Accepted 2012, Australian National University

International trade in the electronics and automotive industries, including manu-facture of parts and components, has grown rapidly in the last two decades, but Southeast Asia’s largest economy, Indonesia, is lagging behind in its export per-formance. This research uses a comparative perspective to examine Indonesia’s

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role in electronics and automotive production networks, in the context of the con-temporary debate on opportunities for reaping gains from economic globalisation through engagement in global production networks.

The study aims to answer two questions: the irst concerns the determinants of a country’s participation in global production networks, the second the reasons why Indonesia is being left behind in these networks. To the author’s knowledge, this study is the irst systematic attempt to answer the second question.

The analysis is conducted at both the macroeconomic and the irm level. The macroeconomic analysis is based on fragmentation theory. An unbalanced panel trade data set covering the electronics and automotive sectors in 98 countries over the period 1988–2007 is estimated using the least square dummy variable method. Meanwhile, the irmlevel analysis is based on a model of irm heterogeneity and its implications for international trade. This random-effect probit dynamic model is adopted for the estimation, which uses irmlevel data on the Indonesian elec -tronics and automotive sectors for the period 1990–2007.

The macroeconomic analysis shows that service link cost variables are more important than production cost variables in determining a country’s participation in global production networks. Infrastructure is the most important determinant in developing countries for both sectors, followed by labour quality and openness to foreign direct investment. For developed countries, trade openness is the most important determinant in the electronics sector, and trade cost the most important in the automotive sector. The second most important determinant is labour qual-ity in the electronics sector and infrastructure in the automotive sector.

The study demonstrates that Indonesia is being left behind in electronics global production networks because of the poor condition of its infrastructure; its rela -tively restrictive investment policies towards foreign investment; and its low edu -cation levels, which hamper irms’ capacity to absorb technology – a crucial factor in the electronics sector.

With Indonesia’s huge domestic market, which creates economies of scale, it would be expected that the country’s automotive industry could participate more fully in global production networks than it does at present. However, its par-ticipation is hampered by its investment policies, trade costs and continuing high protection in the automotive sector.

The irmlevel analysis reveals that a decision to engage in global production networks through export activities depends on irm characteristics as well as sunk cost and location spillover effects. For both the electronics and automotive sectors, larger and foreignowned irms with higher labour quality and located in close proximity to each other are more likely than other irms to participate in produc -tion networks.

The study concludes that Indonesia needs to improve its infrastructure, invest-ment policies and education levels to increase its participation in global produc-tion networks.

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Global Value Chains and Technological Capabilities: Analysing the Dynamics of Indonesia’s Garments

and Electronics Manufacturers

Yohanes Berenika Kadarusman (kadarusman69@yahoo.com)

Accepted 2010, University of Manchester

The Indonesian manufacturing sector faces signiicant challenges in attempting to upgrade its capabilities and remain competitive in both domestic and global markets. Its irms are increasingly integrated into global markets via global value chain ties. Yet little is known about how such integration affects the ability of Indonesian irms to upgrade the skill content of their activities and functions. This study aims to understand the nature of upgrading processes within the Indo-nesian manufacturing sector through a comparison of garment and consumer electronics irms.

The analysis integrates the conceptual frameworks of technological capability (TC) and global value chains (GVC). The GVC literature provides insights into the role global value chain leaders play in assisting, or constraining, through the ways in which they govern value chain ties, the upgrading processes of local pro-ducers. The TC framework helps to explain the role played by the capabilities of local irms in the upgrading process. Combining these two frameworks, the study asked what roles governance and technological capability play in upgrading pro-cesses within Indonesian garment and consumer electronics value chains.

Quantitative and qualitative data were gathered in 2008 through surveys and indepth interviews of irm personnel. Eleven irmlevel case studies were ana -lysed to obtain detailed insights into the process and dynamics of upgrading, value chain governance and capability acquisition in these irms.

The evidence from the surveys and case studies suggests that forms of value chain governance and types of technological capability both played important roles in upgrading processes. Process and product upgrading took place within captive value chains (in which suppliers with low-level capabilities are depend-ent on larger buyers for complex transactions). Functional upgrading took place to a lesser extent within modular governance structures (where suppliers with highlevel capabilities make products to customer speciications) and hierarchi -cal governance structures (where transactions are complex, supplier capabilities are low and production is often vertically integrated within a single irm), and to a greater extent within market-based structures (where buyer–seller transac-tions are simple and suppliers capable). Meanwhile, the distinct types of upgrad-ing processes required different types of capability and knowledge. To undertake process upgrading, irms needed to possess both operative and innovative pro -cess capabilities to improve production eficiency and product quality. To achieve functional upgrading, irms needed product innovative capabilities, to undertake design and product and market development.

The results demonstrate that Indonesian irms that engaged in global value chains obtained support from global buyers that led them to acquire process oper-ative and innovoper-ative capabilities, but not product innovoper-ative capabilities. They acquired product innovative capabilities through their own efforts. Furthermore, upgrading processes in Indonesian irms took place not only in global but also

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in domestic value chains. Insertion into domestic value chains may, in fact, assist some Indonesian irms to undertake functional upgrading, for example, in prod -uct design and market development. Within domestic value chains, Indonesian irms were able to exploit not only process operative and innovative capabilities but also product innovative capabilities. They were involved in design, product development and marketing functions.

By demonstrating that the technological capability of Indonesian garment and consumer electronics manufacturing irms can play an important role in upgrad -ing when irms are engaged in domestic value chains, but that this role is less pronounced when irms are engaged through hierarchical ties in global value chains, this study provides a more dynamic perspective than standard studies on upgrading and value chain linkages.