More on Structural Reform

Kereta Rangkaian Listrik (KRL)

Professor Christopher Findlay, University of Adelaide

An article by  by Maria Monica Wihardja in the Jakarta Post(21/9/2011) adds another valuable contribution to the continuing discussion of the structural reform challenge of Indonesia.

Dr Wihardja mentions the APEC study which was also noted here in a recent post.  She mentions the size of the gains from structural reform.    This is an important point and the results of that analysis are interesting and worth exploring a bit further.

The modelling work in the report was led by Philippa Dee from the ANU and its an important example of how to capture the effects of this type of reform.

In the report we look at the following package of reforms across the region: in

  • air transport, a range of reforms to air services agreements, to entry conditions for domestic and foreign carriers, and to ownership;
  • maritime transport, the dismantling of remaining entry restrictions, quotas or cargo sharing arrangements and the granting of national treatment to foreign-owned carriers located domestically;
  • rail transport, vertical separation and free entry in freight operations in those economies that do not yet have them;
  • electricity and gas, third party access, unbundling, wholesale markets and/or retail competition in economies that have not yet implemented them; and
  • telecommunications, the removal of remaining foreign equity limits.

The report says that this package to generate USD175 billion a year in additional real income (in 2004 dollars), relative to what would have accrued had no reforms occurred. This is a snapshot of the steady state gains after a 10-year adjustment period, during which smaller gains accrue.

This is a big number.

Indeed, in the report we say that, APEC-wide, the projected gains from  structural reforms are almost twice as big as the gains from further liberalisation of merchandise trade. Yet the sectors where the structural reforms occur are less than a quarter of the size of those engaged in merchandise trade.    This means big returns to effort.

In our modelling, structural reform has the effect of lowering costs of services in the industries in which the reform occur.  When structural reforms lower real production costs, they generate a ‘bang for the buck’ that is much greater than from trade reforms.

These cost reductions can also contribute to further trade gains. Exporters which capture benefits can use cost advantages to decrease the costs of the products they export.

We note that structural reforms to generate significant gains are also likely to generate significant structural adjustment costs. We also examined the expected size and extent of those adjustments has also been examined. At the sectoral level, the projected output gains tend to be in the services sectors undergoing reform, and in the sectors that use their services intensively. These can include metals (intensive users of electricity), chemicals (intensive users of gas), wood and paper products (intensive users of domestic transport services), and a range of industries (meat and livestock, forestry and fishing, grains, dairy, other manufacturing) that are intensive users of international transport services. Construction is typically also projected to gain slightly from the additional impetus given to industry investment.

The sectors projected not to gain (and, therefore, could be viewed as losing in relative terms) are typically those that do not fall into the above categories. They suffer indirectly from higher wages and rates of return, effects that are induced primarily by the expansions in overall activity. Industries typically losing in this way include textiles and clothing, motor vehicles, other transport equipment, electronic equipment and other machinery and equipment.

The relative losses in industry output in these sectors are relatively minor, however. And they are even smaller when reforms in other APEC economies are taken into account. Thus, structural reforms in other APEC economies can play a useful role in helping to cushion the adjustment costs of reforms at home, even if they do not add greatly to the overall gains from reform.

There is more in the report on the employment effects of reform (making the point that the modelling and real world examples demonstrate that displaced workers earn higher real wages in their new occupations) and the interactive effects of reform in other countries (where lower transport costs including those induced by reform elsewhere generate important gains for the ‘home’ economy).

There is also detail on the assessment of policy the impact of reform in Indonesia in the detailed modelling paper (ch. III in the report)  which is one the largest gainers.

This material is extracted from (and further information is available in) Chapter 1 by Christopher Findlay of the report of the project on The Impacts and Benefits of Structural Reforms in the Transport, Energy and Telecommunications Sectors in APEC Economies APEC#211-SE-01.1. The material is reproduced with the permission of the PSU. The views expressed in that chapter are those of the author and do not necessarily represent those of the APEC Secretariat or APEC Member Economies.


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Filed under Economic development, Economic Integration, Employment, Indonesia, Reform, Review of article, Services, Trade, Transport and logistics

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