Improving Indonesia's Domestic Connectivity: An Inter-regional CGE Analysis

Transport difficulties hamper all industries, by imposing extra costs on trade between regions, and on trade with other countries. Regional imbalances are exacerbated, since peripheral regions (which face higher transport costs) tend to be poorer. This paper provides some rough estimates, generated using a regional CGE model (IndoTERM), of the possible benefits to Indonesia of reducing transport costs. We simulate the effects of a 5% reduction in the costs of road and sea transport within and between the peripheral regions, or between any peripheral region and Java/Sumatera/BaliNT and also add a 1% reduction in iceberg trade cost.

Findings suggest total benefits of around 5% of GDP, with the great bulk of benefits arise in the core regions of Sumatera, Java, and BaliNT—simply because they account for so much of the Indonesian economy. However, we also notice that benefits accrued in the core spill over to peripheral regions. The combined transport improvement also reduces the country’s poverty incidence by 2.2% (4.7 million people). Interestingly, poverty reduction is higher in the eastern part of Indonesia as those provinces are suffering more from connectivity impediments. In addition, it is also due to a higher poverty base in those provinces.