Assessing development policy using IndoTERM, a dynamic multi-regional CGE model of Indonesia

This paper outlines the theory and database preparation of IndoTERM, a 'bottom-up' computable general equilibrium model of the Indonesian economy. IndoTERM follows the pattern of other CGE models of the TERM family: it treats each region of a single country as a separate economy, linked to other regions by domestic trade. However, unlike most TERM variants, IndoTERM is a multi-period model: recursive dynamic mechanisms link a sequence of annual solutions. IndoTERM supports considerable sectoral and regional detail, distinguishing up to 179 sectors and all 33 provinces. As well, 'top-down' methods can flesh in sub-regional detail for up to 500 sub-provincial regions. Usually, to speed simulations, an application-specific aggregation reduces the number of sectors and regions. Most data comes from the BPS 2005 Indonesian national and inter-regional input-output tables, but several other sources have been used. The dynamic multi-regional CGE model provides a framework that we could apply to many different policies. We can use IndoTERM to analyse the regional and national economic impacts of region-specific shocks. Such shocks could include major construction projects or investments in health and education sectors, in an effort to accelerate economic growth in the lagging eastern island provinces. In this paper we present simulations based around the growth of the Oil Palm industry. We investigate the national and regional effects of limiting forest clearing for new plantations.