Crawford PhD Conference 2014

1. 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: BigData, BigOpportunity 19 November 2014
Trade liberalization, poverty and inequality in Indonesia

2. 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

3. 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

4. Introduction Data and empirical approach Results Conclusion
Source: BPS
Poverty rate in Indonesia
Trade liberalization, poverty and inequality in Indonesia

5. Introduction Data and empirical approach Results Conclusion
Source: Alatas, World Bank 2013
Inequality in Indonesia
Trade liberalization, poverty and inequality in Indonesia

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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
1112131415161718313233343551525361626364717273748194 -15-10-50Change in tariff 1977-2012 0510151976 tariff

13. 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
푇푇푇푇푇푇푇푇푇푇푇푇푇푇푇푇=෎ 퐿퐿퐿퐿,1980 퐿퐿퐿,1980 푥푥 푇푇푇푇푇푇푇푇푇푇푇푇 ℎ푡퐻퐻 ℎ=1

14. 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
푂푂푂푂푂푂푂푂 푇푇푇푇푇푇푇푇푇푇푇푇푇푇푇푇=෎ 푄푄푄푄푄,1980 푄푄푄,1980 푥푥 푇푇푇푇푇푇푇푇푇푇푇푇 ℎ푡푆푆 푠=1
퐼퐼퐼퐼퐼 푇푇푇푇푇푇푇푇푇푇푇푇 푝෍ቀ푄푄푄푄푄,1980 푄푄푄,1980 푆푆 푠=1 푥푥 ෍푀푀푀푀푀,1980 푀푀푀,1980 푥푥 푇푇푇푇푇푇푇푇푇푇푇푇 푗 퐽퐽 푗=1 ቁ

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. Thank you..
yessi.vadila@anu.edu.au Trade liberalization, poverty and inequality in Indonesia