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Tourism and globalization
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Annals of Tourism Research, Vol. 30, No. 3, pp. 683–701, 2003 2003 Elsevier Science Ltd. All rights reserved. Printed in Great Britain 0160-7383/03/$30.00
doi:10.1016/S0160-7383(03)00048-3
TOURISM AND GLOBALIZATION Economic Impact in Indonesia Guntur Sugiyarto Adam Blake M. Thea Sinclair University of Nottingham, UK Abstract: The issue of whether globalization is beneficial remains controversial, particularly because globalization policies are often examined without consideration of their interactions with key sectors of the economy, notably tourism. This paper uses a computable general equilibrium model of the Indonesian economy to examine the effects of globalization via tariff reductions, as a stand-alone policy and in conjunction with tourism growth. The results show that tourism growth amplifies the positive effects of globalization and lessens its adverse effects. Production increases and welfare improves, while adverse effects on government deficits and the trade balance are reduced. Keywords: globalization, taxation, economic impact, computable general equilibrium. 2003 Elsevier Science Ltd. All rights reserved. Re´sume´: Tourisme et mondialisation : impact e´conomique en Indone´sie. La question des avantages de la mondialisation reste controverse´e, surtout parce que les politiques de la mondialisation sont souvent e´tudie´es sans e´gard a` leurs interactions avec les secteurs cle´ de l’e´conomie, en particulier le tourisme. Cet article utilise un mode`le d’e´quilibre ge´ne´ral calculable de l’e´conomie indone´sienne pour e´tudier les effets de la mondialisation par des re´ductions de tarifs douaniers, comme politique inde´pendante et conjointement avec la croissance du tourisme. Les re´sultats montrent que la croissance du tourisme amplifie les effets positifs de la mondialisation et en re´duit ses effets ne´gatifs. La production augmente et le bien-eˆtre s’ame´liore, tandis que les effets ne´gatifs sur les de´ficits gouvernemental et exte´rieur sont re´duits. Mots-cle´s: mondialisation, taxation, impact e´conomique, e´quilibre ge´ne´ral calculable. 2003 Elsevier Science Ltd. All rights reserved.
INTRODUCTION In recent years, tourism and its associated economic repercussions have taken place within a wider context of globalization of the world economy. Macroeconomic policymakers have been concerned to decrease barriers which impede international flows of goods, services and financial capital and to ensure flexibility of exchange rates, interest rates, and wages, with the aim of inducing markets to operate more efficiently. The introduction of such macroeconomic policies has been
The authors are respectively Research Associate, Research Fellow, and Professor at the Christel DeHaan Tourism and Travel Research Institute (Nottingham University Business School, Nottingham NG8 1BB, UK. Email). The authors’ research interests cover a wide range of topics including tourism economics and policies, modeling the economic effects of tourism, demand analysis, taxation, competitiveness, and other development economics and tourism related issues. 683
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a source of some controversy because of the implications for income and employment, as well as income distribution and the welfare of local populations. Policies to promote trade liberalization are a case in point. Trade liberalization is occurring in conjunction with World Trade Organization, International Monetary Fund, and World Bank pressures for lower tariffs and the elimination of import quotas, and also as part of the process of integration within regional trading blocs. Although trade liberalization is supposed to bring about long-term benefits by allowing countries to reap gains from specialization in production on the basis of their comparative advantage (for example, Begg, Fischer and Dornbusch, 2000:553–71; Krugman and Obstfeld 1997:13–37), a number of problems may occur. The first can take the form of a balance of trade deficit, as consumers purchase increasing quantities of the cheaper imports. The second involves a government budget deficit, as the government receives less revenue from the lower tariffs, especially if exports are not stimulated by reciprocal liberalization by trade partners. The third concerns the effects of trade liberalization on the distribution of income and levels of welfare of the local population, and particularly on the income levels of the poorest households in the economy. Thus, the issue addressed here is whether the growth of tourism can help to resolve the problems inherent in trade liberalization by decreasing the trade deficit, increasing government revenues, and improving income distribution. This issue has received little attention from macroeconomic policymakers, who have tended to formulate and implement policies without taking account of their predicted effects in the context of tourism growth, even in countries whose economies are highly dependent on this industry. Nor has the issue received much attention in the literature, which has tended to concentrate on the income and employment impacts of tourism per se, rather than on its wider range of economic impacts, including those on distribution and welfare, in alternative macroeconomic contexts. Therefore, the aim of this paper is to develop existing research in the area by examining the economic impacts of tourism within the macroeconomic context of globalization in the form of increasing trade liberalization, as well as in the context of lower domestic taxation. The issue will be examined for the case of Indonesia, the fourth largest country in the world in terms of its population of over 210 million. As one of the former “Asian tigers”, Indonesia is an important emerging economy which has experienced both growth in tourism and a push towards increasing trade liberalization in recent years. It has a wide range of attractions and natural resources. The growing international demand for these assets, in the context of decreasing levels of trade protection, has significant implications for domestic income and employment generation, income distribution, and welfare. This paper will examine these effects in the cases of tourism, trade, and tax policies in Indonesia. The paper will build on previous contributions to research in the area of tourism impact analysis, which has been undertaken using direct and indirect income changes (Gartner and Holecek 1983; Gartner 1987), input–output models (Archer 1995; Archer and
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Fletcher 1996; Fletcher 1989; Johnson and Moore 1993) and, subsequently, by using a social accounting matrix (Wagner 1997) and computable general equilibrium (CGE) models (Adams and Parmenter 1995 for the Australian economy; Zhou, Yanagida, Chakravorty and Leung 1997 for Hawaii; Alavalapati and Adamowicz 2000 for the environmental impacts of tourism in Canada; Blake 2000 for Spain; and Dwyer, Forsyth, Madden and Spurr 2000 for the Australian economy). All of these approaches have the advantage of taking account of the interrelationships between tourism and other sectors of the economy. This paper will use a CGE model, which has the advantages of incorporating the full range of feedback between the different sectors of the economy, along with flexibility of prices and factor substitutability. It is well suited for examining the effects of tariff reductions and of domestic taxation, which are a topic of growing concern in the tourism literature (Jensen and Wanhill 2002). The CGE model developed in this study is used to undertake the analysis, enabling the full range of economic impacts to be quantified within a multisectoral framework. The model is particularly useful for understanding the characteristics of the economy and for quantifying the effects of alternative policies in relation to tourism, trade liberalization, and taxation. The results from using the model to measure the effects of trade liberalization per se and of trade liberalization combined with decreases in domestic taxation will be compared with the results obtained from implementing these policies in a context of tourism growth. TOURISM AND TRADE LIBERALIZATION Indonesia is the largest archipelago in the world, stretching 5,110 km along the equator from east to west and 1,888 km from north to south. It consists of five major islands (Java and Bali, Sumatra, Kalimantan, Sulawesi, and Irian Jaya) and about 30 smaller groups, with more than 17,000 islands in total. The chain of islands divides the Indian and Pacific Oceans and is enriched with natural resources and diverse cultures, offering a vast range of tourism activities. It has long been a popular destination. Foreign tourism is an integral part of the Indonesian economy. For the decade prior to the 1997 crisis, the industry experienced strong growth, with large increases in foreign arrivals (Figure 1), tourist spending, and investment. The growth of the former was more than 15% per year, contributing to an increase in foreign currency receipts as both foreign tourists’ expenditure and their length of stay increased. The number of arrivals in 1997 was 5.2 million, contributing around $6.6 billion to export income, or about 3% of GDP (World Bank 2002). In 2005, the number of arrivals from abroad is expected to be around 11 million, generating foreign currency receipts of over $15 billion. Tourism contributed 16% of total job creation in 1995, and in 2007 it is estimated that 1 of every 11 new jobs will originate from tourism (Kompas 1999a). Despite short-term disruptions of tourism and criticisms of its adverse effects (Copeland 1991; Pleumarom 1999a, 1999b),
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Figure 1. Tourist Arrivals (in Millions) to Indonesia
tourism in Indonesia is expected to play a more important role in the longer-term future. The increasing reliance on tourism is also demonstrated by the government’s efforts to attract more international investment in the industry by allowing 100% foreign ownership, introducing a tax holiday, and welcoming non-national professional workers in this field (Kompas 1999b). Other policies pursued by the Indonesian government have been concerned with trade liberalization. Decreases in the world prices of oil and other primary products, along with the international debt crisis of 1982, resulted in deterioration of the current account of the balance of payments and encouraged the government to introduce remedial measures. These included cuts in the number of tariffs from 25 to 11 and a reduction in the top tariff rate from 225% to 60%. Following the fall in the price of oil in 1986, many import licenses were converted to tariffs and the licensing procedures for hotels and other tourism facilities were simplified. During the 90s, there were further reductions in tariffs in line with Indonesia’s membership in the ASEAN Free Trade Agreement and the Asia-Pacific Economic Cooperation agreement. After the Asian crisis of 1997, import tariffs on over 150 goods were decreased, import subsidies on some goods were eliminated and import quotas were replaced by tariffs. Thus, the policy is one of moving away from an import substitution strategy towards an outward-oriented economy. However, various problems remain. The trade balance remains highly vulnerable to changes in world prices of oil and other natural resources and the government has also incurred budget deficits. Employment levels, poverty, and income distribution worsened considerably following the crisis (Asian Development Bank 2000a, 2000b). The question of whether a policy of further trade liberalization combined with tourism growth can contribute to alleviating these difficulties presents itself as an important research topic.
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The CGE Model for Tourism in Indonesia Despite the important role of foreign tourism in the Indonesian economy, there has been a lack of comprehensive studies of its economic impacts, especially in the form of economy-wide modeling using the CGE approach. Its previous applications to the Indonesian economy were not concerned with tourism (Behrman, Lewis and Lofti 1989; Devarajan, Ghanem and Theirfelder 1997; Robinson, El-Said and San 1997; Roland-Holst 1992; Thorbecke 1992). Therefore, this is the first attempt at developing such a model, in line with similar research on different economies (for instance Adams and Parmenter 1995, Blake 2000 and Zhou et al 1997). In addition to these “flexible price” CGE models, there have been some economic impact studies using “fixed-price” input–output or SAM-based multiplier models (for instance Bergstrom Cordell, Ashley and Watson 1990; Fletcher 1989; Heng and Low 1990; Huse, Gustavsen and Almedal 1998; Khan, Seng and Cheong 1990; Loomis 1995; Wagner 1997; West 1993). The tourism-CGE model of Indonesia presented in this paper permits a range of analysis relating to ongoing economic issues related to this industry (see Sugiyarto, Blake and Sinclair 2002 for more details about the construction of the model). Its use for policy analysis (comparing simulation results with benchmark conditions) is directed towards, first, encapsulating the main characteristics of the Indonesian economy, especially with regard to the current level of foreign tourism and the globalization process. Second the model will facilitate analysis of the economy-wide effects and distributional implications of globalization and the growth in foreign tourism. Third, the results that are obtained from the model should provide useful implications for future economic policymaking, compatible with the growth of foreign tourism and the overall development of the economy. An early version of the model was developed for analyzing the economic effects and distributional implications of economic reform policies on the Indonesian economy (Sugiyarto 2001) In the model, foreign tourists are treated as economic actors, who consume a range of exported commodities, particularly services. This assumption is in line with the United Nations and World Tourism Organization recommendations on Tourism Satellite Accounts that some parts of exports should be attributed to the foreign tourism. Given the way that the industry is modeled, it is important to note that this study does not aim to measure the “actual-definitive” magnitude of the tourism impacts (as commonly estimated in fixed-price input– output and models based on Social Accounting Matrix, for instance Alavalapati and Adamowicz 2000; Archer 1995; Archer and Fletcher 1996), but rather to measure the “overall-indicative” directions of the effects, especially on production activities, factor markets, foreign trade, the welfare of domestic residents and income distribution (that is, the general equilibrium economy-wide effects). The globalization process is represented by changes in government policies towards more open international trade, while maintaining an open capital account. The move towards greater trade liberalization
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seems inevitable, given the Indonesian government’s commitments to the World Trade Organization, Asia-Pacific Economic Cooperation, and Association of South East Asian Nations agreements to liberalize international trade. In addition, the lowering of tariffs, in conjunction with other measures such as domestic tax reform and the replacement of quantitative restrictions by tariffs, has been part of the policy package of the International Monetary Fund/World Bank conditional loans, in which the Indonesian government is currently involved. The Social Accounting Matrix A Social Accounting Matrix (SAM) is a system of representing the economic and social structure of a country (region) at a particular time, by defining its representative economic agents and recording their transactions. It is an accounting record for a whole economy. The disaggregation level and choice of representative actors depend on the motivation underlying its development and the availability of data, so that there is no “standard SAM”. In a statistical system, it provides complementary economic indicators, which concern not only the macroeconomic aggregates of the System of National Accounts but also the socioeconomic structure and distributional aspects of the economy. Accordingly, it can be thought of as a further development of input–output accounts, which concentrate only on the production side of the economy. Entries in a SAM can be categorized into two groups, one that reflects flows across markets (represented in the sales of goods and services, employment of labor, and use of capital markets) and the other that reflects nominal flows or transfer payments such as income allocations from different categories of labor to different categories of households and transfer payments among the latter, firms, and the government. The transactions are presented in a square matrix, with rows representing receipts and columns recording expenditures. It then follows that every income has its corresponding expenditure, and the inflows and outflows of any account always balance. The SAM captures the circular flows of income from activities to factors and then to institutions, which create demand for goods and services. The factor accounts receive factor incomes from both domestic activities and the rest of the world, while current transfers are recorded in the intersection of rows and columns of institutions (households, firms, government, and the rest of the world). These transfers constitute the non-factor incomes, which augment the factor incomes to yield the income of institutions. In the disaggregated version of the Indonesian SAM 1993 adopted in the model, production activities are classified into 18 categories. Each production activity employs different kinds of labor and capital. Labor is categorized into eight groups based on a combination of sector, type of workers, and job status (namely, wage and non-wage). The former refers to employees while the non-wage category includes employers, self-employed, and family workers. In the Indonesian economy context, the former tends to be associated with higher income groups as most of the latter consists of self-employed and unpaid family
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workers. On the capital side, it is disaggregated into five categories based on its ownership and nature. Land and other agricultural capital, for instance, are combined into one category, while private domestic capital is an aggregation of corporate and non-corporate private sources. The other two categories are government and foreign capital. Households are classified into 10 groups, based on a combination of income sources, area of residence, and job status of the head of household or the highest income earner. First, households are divided into agricultural and non-agricultural households. The former is then divided into employee landless farmers, small farmers (land size <0.5 hectare), medium farmers (between 0.5–1.0 hectare), and large farmers (>1.0 hectare). For the non-farmers, the disaggregation is based on area of residence (urban and rural), level of income, and a combination of occupation and job status. Based on these variables, the nonfarmers in each area are then classified into low, dependent, and highincome groups. The dependent term refers to the households whose highest income earner (head of the household) is not in the laborforce, relying instead on transfer incomes from relatives, friends, and the government. The household classification has been developed based on “real” variables, which can easily be identified for policy targeting, as commonly suggested in the development of a SAM. The main source of information is the Indonesian Central Bureau of Statistics (1994, 1996). The development of SAMs in Indonesia has been conducted continuously since 1975 as an integral part of its national statistical system, based on initial collaboration between the Central Bureau of Statistics and the Institute of Social Studies, the Netherlands. The method of updating the 1993 SAM is explained in Sugiyarto (2001). Supply and Demand Sides of the Model The schematic representation of the production system adopted in the model is shown in Figure 2 (the main equations used in the model are provided in Sugiyarto et al 2002). As depicted in the figure, output is specified as an input-output function of intermediate inputs and
Figure 2. Schematic Representation of Production System
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value added. Intermediate input consumption is a constant elasticity of substitution aggregation of domestically produced and imported commodities allowing imperfect substitution between the two commodities, with a different degree of substitution for each type of commodity, as reflected by the value of elasticity used. Value added is a Cobb Douglas function of eight different types of labour (wage earning and self-employed farmers, production workers, clerical workers, and professional workers) and five different types of capital (land and agricultural, non-corporate private domestic, corporate private domestic, foreign and government capital). The “wages” term refers to employees while the “self employed” category includes employers, selfemployed, and family workers. In the context of the Indonesian economy, the former tends to be associated with higher earnings as most non-wage employment consists of self employed and unpaid family workers. Moreover, the wage rates of farmers and production workers are fixed to reflect the excess supply and various government interventions to control the wage rates of these types of workers. For other types of labour and capital, wages and rents are flexible to clear the market. These market-clearing levels reflect the marginal productivity of the factor. Total production is allocated to domestic demand and exports, which are then disaggregated into two product categories: services, and agriculture and manufacturing. Most of the former is assumed to be consumed by foreign tourists, while the latter is other exports. This treatment of tourism is reasonable, as fluctuations in consumption by foreign tourists should be reflected in the fluctuations of service exports, as most exports of services are consumed by them. With regard to the CGE model, policy analysis should place more emphasis on the general equilibrium effects or direction of the impacts rather than on the magnitude of the change. For the latter, a more refined method for estimating foreign tourist consumption should, ideally, be used prior to the development of the CGE model. This may be possible in the future if a Tourism Satellite Account is calibrated for Indonesia. Total final demand in the domestic market consists of demand for consumption and for investment purposes. Consumption is the sum of household and government consumption, while the demand for investment is generated by the aggregated saving-investment (capital) account. A schematic representation of the demand system of the model (Figure 3) depicts that households have a fixed consumption pattern and the government is assumed to have planned consumption, which is not affected by commodity prices or the government’s income. In addition, the government has access to foreign borrowing for balancing its budget deficit. Since 1967, the Indonesian government has continuously adopted a budget deficit, which is financed by foreign funds. The same applies to domestic firms, so that the two deficits have been contributing to Indonesia’s total foreign commitments. Aggregate investment is fixed (in quantity), reflecting the “investment-driven” nature of the economy.
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Figure 3. Schematic Representation of Demand System
Price, Incomes, Expenditure, Savings-Investments, Wages and Foreign Trade The domestic price of each composite commodity is a constant elasticity of substitution function of the domestic prices of imported and domestically produced goods. On the import side, the adoption of the small country assumption implies that the domestic economy is a price taker and there is unlimited supply from the rest of the world at the given world price. Assuming that domestic products sold in the international market face a downward sloping demand curve, the export price depends on domestic prices, the export subsidy rate, and the exchange rate. Household incomes consist of factor incomes (wages and rent payments for capital used domestically and abroad) and transfer incomes from the government, domestic firms, other households and the rest of the world. Firms’ incomes include payments for capital used in production, transfers from other firms and transfers from from the rest of the world. Government income can be categorized into payments for capital used in production activities, income taxes from domestic institutions (households, domestic firms, and government-owned companies), income from indirect taxes levied on commodities, and transfers from the rest of the world. The transfer payments consist of foreign loans, grants, and other transfers. Household expenditure consists of consumption of composite commodities, direct tax payments to the government, transfers to other household groups, and savings. The expenditures of firms consist of
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transfers to households, direct tax payments to the government, transfers to other firms (retained profit), transfers to the rest of the world and savings. Government expenditure consists of consumption of composite commodities, as well as transfers to households, to the government, and to the rest of the world and savings. Total savings in the domestic economy consist of household, firms’, and government savings, and capital injections from the rest of the world. In equilibrium, total saving equals total investment, which is distributed to each sector based on fixed shares. Aggregate final demand consists of consumption by households, the government, and private investment. For non-agricultural and non-production workers in Indonesia, wages are set in competitive markets and reflect the marginal product of labor. However, for labor in the agricultural sector and production workers, wages are fixed. The balance of payments equilibrium consists of the sum of imports, transfers from government and firms, and capital payments from foreign capital used in domestic production to the rest of the world (remittances), which are equal to exports, capital payments and transfers to domestic households, firms, and government. The model was used to quantify the effects of trade liberalization, changes in taxation, and foreign tourism growth in the Indonesian economy. Study Results Two main macroeconomic policy scenarios were considered, first in isolation and subsequently in conjunction with foreign tourism growth. The first is termed “partial globalization” and is modeled by a reduction of 20% in the tariffs on imported commodities. This reflects external pressure on the government to implement tariff reductions in conjunction with Indonesia’s membership of the ASEAN Free Trade Agreement and the Asia-Pacific Economic Cooperation group. It occurs in the context of the government’s reluctant attitude towards globalization, stemming from its increasing reliance on revenue from import tariffs. Despite its trade liberalization efforts, especially after 1982, revenue from import tariffs contributed 4% of total government income in 1985. This amount more than doubled to 10% in 1993 (Sugiyarto et al 2001). In this scenario, the government is assumed to reduce tariffs on imports and to maintain other taxes at their original level. In the second scenario, “far-reaching globalization”, the government is more pro-business and balances the “involuntary” (externally determined) import tariff cuts with a “voluntary” removal of distortions in the domestic market. The latter is represented by the same reduction (20%) in indirect taxation levied on domestic commodities. Another reason for considering a combination of the two policies is that reductions in the level of indirect taxation on domestic commodities are a common feature of tax reform policies, especially in developing countries (Ahmad and Stern 1991; Bird 1992; Bird and Oldman 1990; Gillis 1989; Newbery and Stern 1988; Rao 1993). The two scenarios are analyzed by using the CGE model to estimate
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the effects of partial and far-reaching globalization on key economic variables: GDP, employment, a range of measures of inflation, external performance, welfare, household, and foreign tourist consumption. The results are given in Table 1 and are calculated as percentage changes from the benchmark data, where the benchmark refers to the equilibrium values of the variables prior to the simulations. In most cases, a positive number reflects an improvement and vice versa. Percentage changes in balance of payments deficits and trade balances should be interpreted carefully since the absolute numbers can switch from negative to positive. Table 1a. Effects of Globalization and Foreign Tourism Growth (%) Main Scenarios Variables (1)
PGa (2)
A. Macroeconomic Aggregates 1. GDP 0.05 a. Agriculture ⫺0.06 b. Mining 0.00 c. Manufacturing ⫺0.04 d. Services 0.04 Hotels 0.04 Restaurants 0.00 2. Employment ⫺0.01 B. External Conditions 1. Foreign Trade a. Real Exports 0.64 b. Real Imports 0.91 c. Trade Balance ⫺2.43 2. Balance of Payments Deficits a. Government 349.15 b. Firms ⫺14.65 c. Total 0.53 C. Welfare and Distribution 1. Domestic 0.09 Absorption 2. Household Real 0.16 Consumption a. Farmers 0.15 b. Rural Households 0.14 c. Urban 0.19 Households 3. Foreign Tourist Consumption a. Hotels and 0.10 Restaurants b. All other Services 0.13 a
FGa (3)
DIa (4)
PG & DI (5)
FG & DI (6)
0.64 1.54 ⫺0.74 0.33 0.46 0.87 1.47 1.34
0.06 0.17 ⫺0.14 ⫺0.05 0.14 2.81 0.53 0.16
0.11 0.11 ⫺0.14 ⫺0.09 0.18 2.90 0.54 0.15
0.70 1.71 ⫺0.88 0.28 0.60 3.60 1.98 1.49
⫺0.18 1.86 ⫺23.49
0.24 0.20 0.70
0.88 1.11 ⫺1.75
0.05 2.06 ⫺22.90
1195.34 ⫺42.91 8.76
30.41 ⫺3.58 ⫺2.16
380.35 ⫺18.28 ⫺1.64
1227.58 ⫺46.47 6.70
1.06
0.05
0.14
1.11
1.97
0.15
0.32
2.12
2.15 1.92 1.83
0.13 0.14 0.18
0.28 0.28 0.38
2.28 2.05 2.01
0.92
9.37
9.65
10.08
⫺0.28
9.37
9.67
8.80
PG and FG are Partial and Far-reaching Globalization, while DI is Foreign Tourist Demand Increase.
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Partial Globalization The effect of decreases in tariffs is to reduce government revenue and also to lower the price of imported commodities in the domestic market. As the domestic economy is a price taker, this will increase the demand for imported products, contributing to an increase in the availability of products in the domestic economy. Producers export more as some of the lower price imported commodities are also used as intermediate inputs. The stronger price effects on imports result in a worsening of the trade balance as imports increase by more than exports. The decrease in the price of imported intermediate inputs Table 1b. Effects of Globalization and Foreign Tourism Growth (%) Sensitivity Analysis Variables (1)
PGa (7)
A. Macroeconomic Aggregates 1. GDP 0.11 a. Agriculture 0.02 b. Mining ⫺0.06 c. Manufacturing 0.08 d. Services 0.05 Miles:Hotels ⫺0.02 Restaurants 0.04 2. Employment 0.11 B. External Conditions 1. Foreign Trade a. Real Exports 0.88 b. Real Imports 1.09 c. Trade Balance ⫺1.56 2. Balance of Payments Deficits a. Government 357.45 b. Firms ⫺16.48 c. Total ⫺0.88 C. Welfare and Distribution 1. Domestic 0.14 Absorption 2. Household Real 0.25 Consumption a. Farmers 0.22 b. Rural Households 0.23 c. Urban Households 0.29 3. Foreign Tourist Consumption a. Hotels and ⫺0.04 Restaurants b. All other Services 0.00 a
FGa (8)
DIa (9)
PG&DI (10)
FG&DI (11)
0.69 1.65 ⫺0.81 0.41 0.45 1.21 1.58 1.42
0.03 0.12 ⫺0.11 ⫺0.09 0.12 2.73 0.50 0.10
0.14 0.14 ⫺0.17 0.00 0.17 2.70 0.53 0.21
0.72 1.77 ⫺0.91 0.33 0.56 3.74 2.04 1.51
⫺0.10 1.87 ⫺22.60
0.14 0.12 0.36
1.02 1.21 ⫺1.23
0.03 1.99 ⫺22.33
1189.06 ⫺43.32 8.10
24.74 ⫺2.63 ⫺1.49
382.20 ⫺19.10 ⫺2.36
1213.55 ⫺45.79 6.76
1.09
0.03
0.17
1.12
2.01
0.11
0.36
2.11
2.24 1.97 1.83
0.09 0.09 0.13
0.31 0.32 0.43
2.32 2.06 1.95
2.20
9.09
9.03
10.67
⫺0.26
9.09
9.09
8.08
PG and FG are Partial and Far-reaching Globalization, while DI is Foreign Tourist Demand Increase.
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and accompanying fall in the price of goods in the domestic market result in a rise in real income and rise in demand for domestically produced goods. The net effect is a rise in GDP. Column 2 in Table 1 summarizes the effects of introducing import tariff reductions on the key variables concerned, measured by the percentage changes from the benchmark. It can be seen that the tariff reductions increase imports and foreign trade, thus increasing the availability of products in the domestic economy (by 0.09%). This, in turn, creates additional demand and stimulates production activities so that GDP increases by 0.05%. Adverse effects of the policy take the form of a worsening of the trade balance (imports increase by more than exports) and the government current account deficit. The deficit deteriorates significantly due to the government’s loss of revenue from tariffs and low reliance on direct tax revenue, combined with adherence to its planned expenditure. Welfare improves, as indicated by the increases in total domestic absorption (0.09%) and household real consumption (0.16%). Foreign tourists are also better off as they can consume more with their benchmark level of spending. Their expenditure on hotels and restaurants (the main items of expenditure for them) increases by 0.10%. The modeling procedure assumed that there is no change in the total income (equals total spending) of foreign tourists. The increase in their consumption may be higher, as the lower prices of domestic commodities may encourage them to consume more or even attract more of them to visit Indonesia (see Sinclair and Stabler 1997, for discussion of the microeconomic foundations of tourism demand, and Smith 1994 and Watson and Kopachevsky 1994 for analyses of tourism as a commodity). Moreover, a wide range of studies, reviewed by Crouch (1994a, 1994b), indicates that price is a crucial factor for most tourists when choosing a destination. Note that while total GDP increases, some (import competing) sectors experience a decline in output and GDP contribution. These losses are concentrated in agriculture (⫺0.06%) and manufacturing (⫺0.04%). Therefore, there may be additional adjustment costs as the economy reacts to tariff liberalization by reducing employment in these sectors. Far-reaching Globalization The positive effects of partial globalization discussed above are amplified in the far-reaching globalization scenario, when import tariff reductions are combined with reductions in indirect taxation on domestic commodities. The reason for this can be traced from the effects of introducing the indirect tax reductions. On the production side, this policy will reduce the domestic prices of domestic products, making them more competitive. This, in turn, stimulates domestic production, creates more employment, and increases GDP. The greatest expansions are in the trade, food processing, and hotel and restaurant sectors. The increases in domestic production and employment raise household incomes, which creates more demand for goods in the domestic market. Imports increase to meet the higher domestic demand
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but exports decrease as producers find it more profitable to switch their production to meet the higher level of domestic demand for the more competitively priced goods sold internally. This way, the trade balance deteriorates. The policy will reduce the government’s income from indirect taxation and worsen its deficit, as the loss of tax revenue has made the government less able to finance its planned expenditure (the revenue loss from the indirect tax cuts is higher than the increases in the government incomes as a result of higher household incomes and hence direct tax revenue). The policy has positive impacts on welfare, as domestic absorption (including household and government consumption as well as investment) and household consumption increase. Column 3 in Table 1 summarizes the effects of the far-reaching globalization. The direct effect of the combined cuts is a decrease in the domestic prices of imported and domestic commodities. The demand coming from higher household incomes (as a result of the cuts in indirect taxation) magnifies the increase in import demand due to lower import prices (resulting from the first policy). Therefore, the trade balance deteriorates further as imports increase, while the positive impact of import tariff reductions on exports is offset by the negative effects of indirect tax reductions on exports. The end results show that imports increase by 1.86% while exports decrease by 0.18% and the trade balance deteriorates by 23.49%. The increasing availability of products in the domestic economy creates additional demand and stimulates production activities, which results in higher GDP (0.64% increase) and employment (1.34% increase). The government continues to experience adverse effects on its current account deficit. Welfare improves, as can be seen from the increases in total domestic absorption (1.06%), and household real consumption (1.97% increase). Foreign tourists are better off by paying lower prices for the products and services they consume. Their real consumption in hotels and restaurants increases by 0.92%. Indonesia achieved high growth rates for tourism during the past decade. Events, such as the travel warnings given to tourists after the Bali bombings, may cause arrivals to fall in the short run. However, tourism is likely to grow over the long run and the purpose of this paper is to show the effects of trade liberalization in the presence of tourism growth occurring after a short term disruption. Therefore, a 10% increase in foreign tourist expenditures is simulated and is then combined with the previous globalization simulations. Columns 4–6 in Table 1 summarize the results. As shown in column 3, the increase in foreign tourism demand will create more production and employment (with market-determined supply responses, GDP increases by 0.06%, and employment increases by 0.16%); however, at the same time, this puts pressure on domestic prices. This is clearly shown in the real consumption by foreign tourists which increases by 9.37% (less than the 10% increase introduced in the initial simulation). Welfare improves, as domestic absorption and household real consumption increase. Domestic absorption increases by 0.05%, while household real consumption increases by 0.15%.
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Exports increase by more than imports, resulting in an improvement in the trade balance (increases by 0.70%). The improvement also applies to the balance of payments deficits (reduced by 2.16%). The next two simulations consider the globalization scenarios in the context of foreign tourism growth. The results, given in columns 5 and 6, show that growth of foreign tourism demand amplifies the positive effects of globalization and, at the same time, reduces its adverse effects. The levels of GDP and employment are higher, particularly in the case of the combination of tourism growth, trade, and tax liberalization (column 6). The trade balance is in deficit, but to a lesser extent than in case of trade and tax liberalization without growth in this industry. The balance of payments deficit is reduced, owing to the increased income from foreign tourism. Therefore, an obvious policy that the government can undertake is to embark on globalization by reducing its reliance on import tariffs and indirect taxation at a rate that enables the revenue lost by tariff and tax reductions to equal the additional income due to the growth of foreign arrivals. The income from tourism will enable the government’s income to be maintained at the benchmark level, so that involvement in globalization will not disrupt its expenditure program. This is a means by which governments, including Indonesia’s, can maintain their credibility and avoid fiscal problems. The ability to maintain the expenditure level is also important within a context of overall deflation, as expenditure by the government can help to offset reductions in other components of aggregate demand, such as exports of primary products. The results obtained from different policy scenarios were subjected to sensitivity analysis, in order to examine their robustness to changes in the export demand elasticity value. This parameter value quantifies the responsiveness of the demand for Indonesia’s exports to changes in their price and is particularly important for an economy which is increasingly open to international trade and a depreciating exchange rate. Columns 7–11 in Table 1 summarize the results of the sensitivity analysis, which is conducted by doubling the export demand elasticity values used in the five simulations. The increase in the elasticity values will make the demand from the rest of the world more elastic, so that domestic market prices will be determined, to a greater extent, by the export market. The results confirm that the elasticity values are important in determining the overall results, including the magnitude and, in some cases, the direction of the changes. For any policy changes introduced in the model, higher export demand elasticity values will produce bigger impacts on the real/quantity variables, as clearly shown in the case of globalization (columns 7 and 8). On the other hand, the increase in foreign tourism demand will result in lower price effects for the domestic economy, as shown by the results of the third simulation (column 9). The outcomes of these offsetting effects are shown by the last two simulations (columns 10 and 11). In general, the sensitivity analysis shows the robustness of the results and functional specifications employed in the models, as the results conform to the theoretical predictions.
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CONCLUSION This study has shown that globalization combined with tourism does not necessarily have adverse effects on the domestic economy, in contrast to the past portrayal of the combination as “a deadly mix” (Chavez 1999). Globalization and foreign tourism growth can, in fact, reduce the domestic price level and increase the amount of foreign trade and availability of products in the national economy, thereby stimulating further production. The end result in the Indonesian case is improved macroeconomic performance and welfare, as domestic absorption and household consumption increase. Foreign tourists are also better off, for they can consume more, given their spending level, and also benefit from the greater availability of products. The trade balance and current account deficits are of concern, indicating the need for appropriate accompanying policies, such as the promotion of investment in manufacturing, underpinned by the booming service sector. Moreover, the positive findings from this study do not take account of effects that foreign tourism may have on the environment and culture. The combined effects of the growth of foreign tourism and globalization are beneficial, overall, as the foreign tourism growth amplifies the positive effects of globalization and at the same time reduces its adverse effects. The trade balance and government accounts are in a better position, owing to the additional receipts from tourism. The ongoing growth of foreign tourism also reduces the government’s burdens as a result of embarking on globalization, by enabling it to reduce its reliance on import tariffs and indirect taxation while, at the same time, maintaining the level of income necessary to finance its expenditure. In essence, tourism growth would enable the government to follow a fiscal policy of revenue neutral globalization, allowing it to finance its expenditure without imposing higher taxes on the A Indonesian population.왎 REFERENCES Adams, P., and B. Parmenter 1995 An Applied General Equilibrium Analysis of the Economic Effects of Tourism in a Quite Small, Quite Open Economy. Applied Economics 27:985–994. Ahmad, E., and N. Stern 1991 The Theory and Practice of Tax Reform in Developing Countries. Cambridge: Oxford University Press. Alavalapati, J., and W. Adamowicz 2000 Tourism Impact Modeling for Resource Extraction Regions. Annals of Tourism Research 27:188–202. Archer, B. 1995 Importance of Tourism for the Economy of Bermuda. Annals of Tourism Research 22:918–930. Archer, B., and J. Fletcher 1996 The Economic Impact of Tourism in the Seychelles. Annals of Tourism Research 23:32–47. Asian Development Bank 2000a Asian Development Outlook 2000. New York: Oxford University. 2000b Country Economic Review. Manila: Asian Development Bank. Begg, D., S. Fischer, and R. Dornbusch
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2000 Economics. Maidenhead: McGraw-Hill. Behrman, J., J. Lewis, and S. Lofti 1989 The Impact of Commodity Price Instability: Experiments with A General Equilibrium Model for Indonesia. In Economics in Theory and Practice: An Eclectic Approach, L. Klein and J. Marquez, eds., pp. 59–100. Dordrecht: Kluwer Academic Publisher. Bergstrom, J., H. Cordell, G. Ashley, and A. Watson 1990 Economic Impacts of Recreational Spending on Rural Areas: A Case Study. Economic Development Quarterly 4:29–39. Bird R., ed. 1992 Tax Policy and Economic Development. London: John Hopkins University Press. Bird R., and O. Oldman, eds. 1990 Taxation in Developing Countries. London: John Hopkins University Press. Blake, A. 2000 A Computable General Equilibrium Model of Tourism in Spain. Mimeo, Christel DeHaan Tourism and Travel Research Institute, University of Nottingham Business School, UK. Central Bureau of Statistics 1994 The Indonesian Social Economic Accounting System (Sistem Neraca Sosial Ekonomi Indonesia) 1990, Volumes I and II. Jakarta: Central Bureau of Statistics. 1996 The Indonesian Social Economic Accounting System (Sistem Neraca Sosial Ekonomi Indonesia) 1993, Volumes I and II. Jakarta: Central Bureau of Statistics. Chavez, R. 1999 Globalization and Tourism: Deadly Mix for Indigenous Peoples. Third World Network. Copeland, B. 1991 Tourism, Welfare and De-Industrialization in a Small Open Economy. Economica 58:515–530. Crouch, G. 1994a The Study of International Tourism Demand: A Survey of Practice. Journal of Travel Research 32(4):41–55. 1994b The Study of International Tourism Demand: A Review of Findings. Journal of Travel Research 33(1):12–23. Devarajan, S., H. Ghanem, and K. Thierfelder 1997 Economic Reform and Labor Unions: A General Equilibrium Analysis Applied to Bangladesh and Indonesia. The World Bank Economic Review 11. Washington DC: The World Bank. Dwyer, L., P. Forsyth, J. Madden, and R. Spurr 2000 Economic Impacts of Inbound Tourism under Different Assumptions Regarding the Macroeconomy. Current Issues in Tourism 3:325–363. Fletcher, J. 1989 Input-Output Analysis and Tourism Impact Studies. Annals of Tourism Research 16:514–529. Gartner, W. 1987 Environmental Impacts of Recreational Home Developments. Annals of Tourism Research 14:38–57. Gartner, W., and D. Holecek 1983 Economic Impact of Annual Tourism Industry Exposition. Annals of Tourism Research 10:199–212. Gillis M., ed. 1989 Tax Reform in Developing Countries London: Duke University Press. Heng, T., and L. Low 1990 Economic Impact of Tourism in Singapore. Annals of Tourism Research 17:246–269. Huse, M., T. Gustavsen, and S. Almedal 1998 Tourism Impact Comparisons among Norwegian Towns. Annals of Tourism Research 25:721–738.
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Jensen, T., and S. Wanhill 2002 Tourism’s Taxing Times: Value Added Tax in Europe and Denmark. Tourism Management 23:67–79. Johnson, R., and E. Moore 1993 Tourism Impact Estimation. Annals of Tourism Research 20:279–283. Khan, H., C. Seng, and W. Cheong 1990 Tourism Multiplier Effects on Singapore. Annals of Tourism Research 17:408–418. Kompas 1999a Citra Pariwisata 1998, terburuk dalam satu decade (Tourism profile in 1998: the worst in a decade). 1999b Menteri Pariwisata se ASEAN: Investasi di pariwisata diberi “tax holiday” (Tourism Ministers of the ASEAN countries: “tax holiday” for investments in the tourism industry). Krugman, P., and M. Obstfeld 1997 International Economics Theory and Policy. New York: Addison Wesley. Loomis, J. 1995 Four Models for Determining Environmental Quality Effects on Recreation Demand and Regional Economics. Ecological Economics 12:55–66. Newbery D., and N. Stern, eds. 1988 The Theory of Taxation for Developing Countries New York: Oxford University Press. Pleumarom, A. 1999a Eco-Tourism: An Ecological and Economic Trap for Third World Countries. Third World Network. 1999b The Rise and Fall of South-East Asian Tourism. Third World Network. Rao, M. 1993 Reform of Indirect Taxes in Developing Countries: Selected Issues. Asian Development Review 10:145–158. Robinson, S., M. El-Said, and N. San 1998 Rice Policy, Trade and Exchange Rate changes in Indonesia: A General Equilibrium Analysis. Journal of Asian Economics 9:393–423. Roland-Holst, D. 1992 Stabilization and Structural Adjustment in Indonesia: An Intertemporal General Equilibrium Analysis. Paris: OECD. Sinclair, M., and M. Stabler 1997 The Economics of Tourism. London: Routledge. Smith, S. 1994 The Tourism Product. Annals of Tourism Research 21:582–595. Sugiyarto, G. 2001 The Economic Effects and Distributional Implications of Economic Reform Policies on the Indonesian Economy: A CGE Approach. Ph.D. thesis submitted for the School of Economics, University of Nottingham. Sugiyarto, G, A., Blake, and M. Sinclair 2001 The Economic Effects and Distributional Implications of Globalization and Foreign Tourism Boom in the Indonesian Economy: A CGE Assessment. Paper presented at the Far Eastern Meeting of the Econometric Society, Kobe, Japan. 2002 Economic Impact of Tourism and Globalization in Indonesia, Christel DeHaan Tourism and Travel Research Institute Discussion Paper 2002/2.
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Watson, G., and J. Kopachevsky 1994 Interpretation of Tourism as Commodity. Annals of Tourism Research 21:643–660. West, G. 1993 Economic Significance of Tourism in Queensland. Annals of Tourism Research 20:490–504. World Bank 2002 World Development Indicator Data Base. Zhou, D., J. Yanagida, U. Chakravorty, and P. Leung 1997 Estimating Economic Impacts of Tourism. Annals of Tourism Research 24:6–89.
Submitted 11 April 2002. Resubmitted 20 November 2002. Accepted 1 December 2002. Final version 7 February 2003. Refereed anonymously. Coordinating Editor: Stephen L.J. Smith
Annals of Tourism Research, Vol. 30, No. 3, pp. 683–701, 2003 2003 Elsevier Science Ltd. All rights reserved. Printed in Great Britain 0160-7383/03/$30.00
doi:10.1016/S0160-7383(03)00048-3
TOURISM AND GLOBALIZATION Economic Impact in Indonesia Guntur Sugiyarto Adam Blake M. Thea Sinclair University of Nottingham, UK Abstract: The issue of whether globalization is beneficial remains controversial, particularly because globalization policies are often examined without consideration of their interactions with key sectors of the economy, notably tourism. This paper uses a computable general equilibrium model of the Indonesian economy to examine the effects of globalization via tariff reductions, as a stand-alone policy and in conjunction with tourism growth. The results show that tourism growth amplifies the positive effects of globalization and lessens its adverse effects. Production increases and welfare improves, while adverse effects on government deficits and the trade balance are reduced. Keywords: globalization, taxation, economic impact, computable general equilibrium. 2003 Elsevier Science Ltd. All rights reserved. Re´sume´: Tourisme et mondialisation : impact e´conomique en Indone´sie. La question des avantages de la mondialisation reste controverse´e, surtout parce que les politiques de la mondialisation sont souvent e´tudie´es sans e´gard a` leurs interactions avec les secteurs cle´ de l’e´conomie, en particulier le tourisme. Cet article utilise un mode`le d’e´quilibre ge´ne´ral calculable de l’e´conomie indone´sienne pour e´tudier les effets de la mondialisation par des re´ductions de tarifs douaniers, comme politique inde´pendante et conjointement avec la croissance du tourisme. Les re´sultats montrent que la croissance du tourisme amplifie les effets positifs de la mondialisation et en re´duit ses effets ne´gatifs. La production augmente et le bien-eˆtre s’ame´liore, tandis que les effets ne´gatifs sur les de´ficits gouvernemental et exte´rieur sont re´duits. Mots-cle´s: mondialisation, taxation, impact e´conomique, e´quilibre ge´ne´ral calculable. 2003 Elsevier Science Ltd. All rights reserved.
INTRODUCTION In recent years, tourism and its associated economic repercussions have taken place within a wider context of globalization of the world economy. Macroeconomic policymakers have been concerned to decrease barriers which impede international flows of goods, services and financial capital and to ensure flexibility of exchange rates, interest rates, and wages, with the aim of inducing markets to operate more efficiently. The introduction of such macroeconomic policies has been
The authors are respectively Research Associate, Research Fellow, and Professor at the Christel DeHaan Tourism and Travel Research Institute (Nottingham University Business School, Nottingham NG8 1BB, UK. Email
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a source of some controversy because of the implications for income and employment, as well as income distribution and the welfare of local populations. Policies to promote trade liberalization are a case in point. Trade liberalization is occurring in conjunction with World Trade Organization, International Monetary Fund, and World Bank pressures for lower tariffs and the elimination of import quotas, and also as part of the process of integration within regional trading blocs. Although trade liberalization is supposed to bring about long-term benefits by allowing countries to reap gains from specialization in production on the basis of their comparative advantage (for example, Begg, Fischer and Dornbusch, 2000:553–71; Krugman and Obstfeld 1997:13–37), a number of problems may occur. The first can take the form of a balance of trade deficit, as consumers purchase increasing quantities of the cheaper imports. The second involves a government budget deficit, as the government receives less revenue from the lower tariffs, especially if exports are not stimulated by reciprocal liberalization by trade partners. The third concerns the effects of trade liberalization on the distribution of income and levels of welfare of the local population, and particularly on the income levels of the poorest households in the economy. Thus, the issue addressed here is whether the growth of tourism can help to resolve the problems inherent in trade liberalization by decreasing the trade deficit, increasing government revenues, and improving income distribution. This issue has received little attention from macroeconomic policymakers, who have tended to formulate and implement policies without taking account of their predicted effects in the context of tourism growth, even in countries whose economies are highly dependent on this industry. Nor has the issue received much attention in the literature, which has tended to concentrate on the income and employment impacts of tourism per se, rather than on its wider range of economic impacts, including those on distribution and welfare, in alternative macroeconomic contexts. Therefore, the aim of this paper is to develop existing research in the area by examining the economic impacts of tourism within the macroeconomic context of globalization in the form of increasing trade liberalization, as well as in the context of lower domestic taxation. The issue will be examined for the case of Indonesia, the fourth largest country in the world in terms of its population of over 210 million. As one of the former “Asian tigers”, Indonesia is an important emerging economy which has experienced both growth in tourism and a push towards increasing trade liberalization in recent years. It has a wide range of attractions and natural resources. The growing international demand for these assets, in the context of decreasing levels of trade protection, has significant implications for domestic income and employment generation, income distribution, and welfare. This paper will examine these effects in the cases of tourism, trade, and tax policies in Indonesia. The paper will build on previous contributions to research in the area of tourism impact analysis, which has been undertaken using direct and indirect income changes (Gartner and Holecek 1983; Gartner 1987), input–output models (Archer 1995; Archer and
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Fletcher 1996; Fletcher 1989; Johnson and Moore 1993) and, subsequently, by using a social accounting matrix (Wagner 1997) and computable general equilibrium (CGE) models (Adams and Parmenter 1995 for the Australian economy; Zhou, Yanagida, Chakravorty and Leung 1997 for Hawaii; Alavalapati and Adamowicz 2000 for the environmental impacts of tourism in Canada; Blake 2000 for Spain; and Dwyer, Forsyth, Madden and Spurr 2000 for the Australian economy). All of these approaches have the advantage of taking account of the interrelationships between tourism and other sectors of the economy. This paper will use a CGE model, which has the advantages of incorporating the full range of feedback between the different sectors of the economy, along with flexibility of prices and factor substitutability. It is well suited for examining the effects of tariff reductions and of domestic taxation, which are a topic of growing concern in the tourism literature (Jensen and Wanhill 2002). The CGE model developed in this study is used to undertake the analysis, enabling the full range of economic impacts to be quantified within a multisectoral framework. The model is particularly useful for understanding the characteristics of the economy and for quantifying the effects of alternative policies in relation to tourism, trade liberalization, and taxation. The results from using the model to measure the effects of trade liberalization per se and of trade liberalization combined with decreases in domestic taxation will be compared with the results obtained from implementing these policies in a context of tourism growth. TOURISM AND TRADE LIBERALIZATION Indonesia is the largest archipelago in the world, stretching 5,110 km along the equator from east to west and 1,888 km from north to south. It consists of five major islands (Java and Bali, Sumatra, Kalimantan, Sulawesi, and Irian Jaya) and about 30 smaller groups, with more than 17,000 islands in total. The chain of islands divides the Indian and Pacific Oceans and is enriched with natural resources and diverse cultures, offering a vast range of tourism activities. It has long been a popular destination. Foreign tourism is an integral part of the Indonesian economy. For the decade prior to the 1997 crisis, the industry experienced strong growth, with large increases in foreign arrivals (Figure 1), tourist spending, and investment. The growth of the former was more than 15% per year, contributing to an increase in foreign currency receipts as both foreign tourists’ expenditure and their length of stay increased. The number of arrivals in 1997 was 5.2 million, contributing around $6.6 billion to export income, or about 3% of GDP (World Bank 2002). In 2005, the number of arrivals from abroad is expected to be around 11 million, generating foreign currency receipts of over $15 billion. Tourism contributed 16% of total job creation in 1995, and in 2007 it is estimated that 1 of every 11 new jobs will originate from tourism (Kompas 1999a). Despite short-term disruptions of tourism and criticisms of its adverse effects (Copeland 1991; Pleumarom 1999a, 1999b),
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Figure 1. Tourist Arrivals (in Millions) to Indonesia
tourism in Indonesia is expected to play a more important role in the longer-term future. The increasing reliance on tourism is also demonstrated by the government’s efforts to attract more international investment in the industry by allowing 100% foreign ownership, introducing a tax holiday, and welcoming non-national professional workers in this field (Kompas 1999b). Other policies pursued by the Indonesian government have been concerned with trade liberalization. Decreases in the world prices of oil and other primary products, along with the international debt crisis of 1982, resulted in deterioration of the current account of the balance of payments and encouraged the government to introduce remedial measures. These included cuts in the number of tariffs from 25 to 11 and a reduction in the top tariff rate from 225% to 60%. Following the fall in the price of oil in 1986, many import licenses were converted to tariffs and the licensing procedures for hotels and other tourism facilities were simplified. During the 90s, there were further reductions in tariffs in line with Indonesia’s membership in the ASEAN Free Trade Agreement and the Asia-Pacific Economic Cooperation agreement. After the Asian crisis of 1997, import tariffs on over 150 goods were decreased, import subsidies on some goods were eliminated and import quotas were replaced by tariffs. Thus, the policy is one of moving away from an import substitution strategy towards an outward-oriented economy. However, various problems remain. The trade balance remains highly vulnerable to changes in world prices of oil and other natural resources and the government has also incurred budget deficits. Employment levels, poverty, and income distribution worsened considerably following the crisis (Asian Development Bank 2000a, 2000b). The question of whether a policy of further trade liberalization combined with tourism growth can contribute to alleviating these difficulties presents itself as an important research topic.
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The CGE Model for Tourism in Indonesia Despite the important role of foreign tourism in the Indonesian economy, there has been a lack of comprehensive studies of its economic impacts, especially in the form of economy-wide modeling using the CGE approach. Its previous applications to the Indonesian economy were not concerned with tourism (Behrman, Lewis and Lofti 1989; Devarajan, Ghanem and Theirfelder 1997; Robinson, El-Said and San 1997; Roland-Holst 1992; Thorbecke 1992). Therefore, this is the first attempt at developing such a model, in line with similar research on different economies (for instance Adams and Parmenter 1995, Blake 2000 and Zhou et al 1997). In addition to these “flexible price” CGE models, there have been some economic impact studies using “fixed-price” input–output or SAM-based multiplier models (for instance Bergstrom Cordell, Ashley and Watson 1990; Fletcher 1989; Heng and Low 1990; Huse, Gustavsen and Almedal 1998; Khan, Seng and Cheong 1990; Loomis 1995; Wagner 1997; West 1993). The tourism-CGE model of Indonesia presented in this paper permits a range of analysis relating to ongoing economic issues related to this industry (see Sugiyarto, Blake and Sinclair 2002 for more details about the construction of the model). Its use for policy analysis (comparing simulation results with benchmark conditions) is directed towards, first, encapsulating the main characteristics of the Indonesian economy, especially with regard to the current level of foreign tourism and the globalization process. Second the model will facilitate analysis of the economy-wide effects and distributional implications of globalization and the growth in foreign tourism. Third, the results that are obtained from the model should provide useful implications for future economic policymaking, compatible with the growth of foreign tourism and the overall development of the economy. An early version of the model was developed for analyzing the economic effects and distributional implications of economic reform policies on the Indonesian economy (Sugiyarto 2001) In the model, foreign tourists are treated as economic actors, who consume a range of exported commodities, particularly services. This assumption is in line with the United Nations and World Tourism Organization recommendations on Tourism Satellite Accounts that some parts of exports should be attributed to the foreign tourism. Given the way that the industry is modeled, it is important to note that this study does not aim to measure the “actual-definitive” magnitude of the tourism impacts (as commonly estimated in fixed-price input– output and models based on Social Accounting Matrix, for instance Alavalapati and Adamowicz 2000; Archer 1995; Archer and Fletcher 1996), but rather to measure the “overall-indicative” directions of the effects, especially on production activities, factor markets, foreign trade, the welfare of domestic residents and income distribution (that is, the general equilibrium economy-wide effects). The globalization process is represented by changes in government policies towards more open international trade, while maintaining an open capital account. The move towards greater trade liberalization
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seems inevitable, given the Indonesian government’s commitments to the World Trade Organization, Asia-Pacific Economic Cooperation, and Association of South East Asian Nations agreements to liberalize international trade. In addition, the lowering of tariffs, in conjunction with other measures such as domestic tax reform and the replacement of quantitative restrictions by tariffs, has been part of the policy package of the International Monetary Fund/World Bank conditional loans, in which the Indonesian government is currently involved. The Social Accounting Matrix A Social Accounting Matrix (SAM) is a system of representing the economic and social structure of a country (region) at a particular time, by defining its representative economic agents and recording their transactions. It is an accounting record for a whole economy. The disaggregation level and choice of representative actors depend on the motivation underlying its development and the availability of data, so that there is no “standard SAM”. In a statistical system, it provides complementary economic indicators, which concern not only the macroeconomic aggregates of the System of National Accounts but also the socioeconomic structure and distributional aspects of the economy. Accordingly, it can be thought of as a further development of input–output accounts, which concentrate only on the production side of the economy. Entries in a SAM can be categorized into two groups, one that reflects flows across markets (represented in the sales of goods and services, employment of labor, and use of capital markets) and the other that reflects nominal flows or transfer payments such as income allocations from different categories of labor to different categories of households and transfer payments among the latter, firms, and the government. The transactions are presented in a square matrix, with rows representing receipts and columns recording expenditures. It then follows that every income has its corresponding expenditure, and the inflows and outflows of any account always balance. The SAM captures the circular flows of income from activities to factors and then to institutions, which create demand for goods and services. The factor accounts receive factor incomes from both domestic activities and the rest of the world, while current transfers are recorded in the intersection of rows and columns of institutions (households, firms, government, and the rest of the world). These transfers constitute the non-factor incomes, which augment the factor incomes to yield the income of institutions. In the disaggregated version of the Indonesian SAM 1993 adopted in the model, production activities are classified into 18 categories. Each production activity employs different kinds of labor and capital. Labor is categorized into eight groups based on a combination of sector, type of workers, and job status (namely, wage and non-wage). The former refers to employees while the non-wage category includes employers, self-employed, and family workers. In the Indonesian economy context, the former tends to be associated with higher income groups as most of the latter consists of self-employed and unpaid family
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workers. On the capital side, it is disaggregated into five categories based on its ownership and nature. Land and other agricultural capital, for instance, are combined into one category, while private domestic capital is an aggregation of corporate and non-corporate private sources. The other two categories are government and foreign capital. Households are classified into 10 groups, based on a combination of income sources, area of residence, and job status of the head of household or the highest income earner. First, households are divided into agricultural and non-agricultural households. The former is then divided into employee landless farmers, small farmers (land size <0.5 hectare), medium farmers (between 0.5–1.0 hectare), and large farmers (>1.0 hectare). For the non-farmers, the disaggregation is based on area of residence (urban and rural), level of income, and a combination of occupation and job status. Based on these variables, the nonfarmers in each area are then classified into low, dependent, and highincome groups. The dependent term refers to the households whose highest income earner (head of the household) is not in the laborforce, relying instead on transfer incomes from relatives, friends, and the government. The household classification has been developed based on “real” variables, which can easily be identified for policy targeting, as commonly suggested in the development of a SAM. The main source of information is the Indonesian Central Bureau of Statistics (1994, 1996). The development of SAMs in Indonesia has been conducted continuously since 1975 as an integral part of its national statistical system, based on initial collaboration between the Central Bureau of Statistics and the Institute of Social Studies, the Netherlands. The method of updating the 1993 SAM is explained in Sugiyarto (2001). Supply and Demand Sides of the Model The schematic representation of the production system adopted in the model is shown in Figure 2 (the main equations used in the model are provided in Sugiyarto et al 2002). As depicted in the figure, output is specified as an input-output function of intermediate inputs and
Figure 2. Schematic Representation of Production System
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value added. Intermediate input consumption is a constant elasticity of substitution aggregation of domestically produced and imported commodities allowing imperfect substitution between the two commodities, with a different degree of substitution for each type of commodity, as reflected by the value of elasticity used. Value added is a Cobb Douglas function of eight different types of labour (wage earning and self-employed farmers, production workers, clerical workers, and professional workers) and five different types of capital (land and agricultural, non-corporate private domestic, corporate private domestic, foreign and government capital). The “wages” term refers to employees while the “self employed” category includes employers, selfemployed, and family workers. In the context of the Indonesian economy, the former tends to be associated with higher earnings as most non-wage employment consists of self employed and unpaid family workers. Moreover, the wage rates of farmers and production workers are fixed to reflect the excess supply and various government interventions to control the wage rates of these types of workers. For other types of labour and capital, wages and rents are flexible to clear the market. These market-clearing levels reflect the marginal productivity of the factor. Total production is allocated to domestic demand and exports, which are then disaggregated into two product categories: services, and agriculture and manufacturing. Most of the former is assumed to be consumed by foreign tourists, while the latter is other exports. This treatment of tourism is reasonable, as fluctuations in consumption by foreign tourists should be reflected in the fluctuations of service exports, as most exports of services are consumed by them. With regard to the CGE model, policy analysis should place more emphasis on the general equilibrium effects or direction of the impacts rather than on the magnitude of the change. For the latter, a more refined method for estimating foreign tourist consumption should, ideally, be used prior to the development of the CGE model. This may be possible in the future if a Tourism Satellite Account is calibrated for Indonesia. Total final demand in the domestic market consists of demand for consumption and for investment purposes. Consumption is the sum of household and government consumption, while the demand for investment is generated by the aggregated saving-investment (capital) account. A schematic representation of the demand system of the model (Figure 3) depicts that households have a fixed consumption pattern and the government is assumed to have planned consumption, which is not affected by commodity prices or the government’s income. In addition, the government has access to foreign borrowing for balancing its budget deficit. Since 1967, the Indonesian government has continuously adopted a budget deficit, which is financed by foreign funds. The same applies to domestic firms, so that the two deficits have been contributing to Indonesia’s total foreign commitments. Aggregate investment is fixed (in quantity), reflecting the “investment-driven” nature of the economy.
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Figure 3. Schematic Representation of Demand System
Price, Incomes, Expenditure, Savings-Investments, Wages and Foreign Trade The domestic price of each composite commodity is a constant elasticity of substitution function of the domestic prices of imported and domestically produced goods. On the import side, the adoption of the small country assumption implies that the domestic economy is a price taker and there is unlimited supply from the rest of the world at the given world price. Assuming that domestic products sold in the international market face a downward sloping demand curve, the export price depends on domestic prices, the export subsidy rate, and the exchange rate. Household incomes consist of factor incomes (wages and rent payments for capital used domestically and abroad) and transfer incomes from the government, domestic firms, other households and the rest of the world. Firms’ incomes include payments for capital used in production, transfers from other firms and transfers from from the rest of the world. Government income can be categorized into payments for capital used in production activities, income taxes from domestic institutions (households, domestic firms, and government-owned companies), income from indirect taxes levied on commodities, and transfers from the rest of the world. The transfer payments consist of foreign loans, grants, and other transfers. Household expenditure consists of consumption of composite commodities, direct tax payments to the government, transfers to other household groups, and savings. The expenditures of firms consist of
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transfers to households, direct tax payments to the government, transfers to other firms (retained profit), transfers to the rest of the world and savings. Government expenditure consists of consumption of composite commodities, as well as transfers to households, to the government, and to the rest of the world and savings. Total savings in the domestic economy consist of household, firms’, and government savings, and capital injections from the rest of the world. In equilibrium, total saving equals total investment, which is distributed to each sector based on fixed shares. Aggregate final demand consists of consumption by households, the government, and private investment. For non-agricultural and non-production workers in Indonesia, wages are set in competitive markets and reflect the marginal product of labor. However, for labor in the agricultural sector and production workers, wages are fixed. The balance of payments equilibrium consists of the sum of imports, transfers from government and firms, and capital payments from foreign capital used in domestic production to the rest of the world (remittances), which are equal to exports, capital payments and transfers to domestic households, firms, and government. The model was used to quantify the effects of trade liberalization, changes in taxation, and foreign tourism growth in the Indonesian economy. Study Results Two main macroeconomic policy scenarios were considered, first in isolation and subsequently in conjunction with foreign tourism growth. The first is termed “partial globalization” and is modeled by a reduction of 20% in the tariffs on imported commodities. This reflects external pressure on the government to implement tariff reductions in conjunction with Indonesia’s membership of the ASEAN Free Trade Agreement and the Asia-Pacific Economic Cooperation group. It occurs in the context of the government’s reluctant attitude towards globalization, stemming from its increasing reliance on revenue from import tariffs. Despite its trade liberalization efforts, especially after 1982, revenue from import tariffs contributed 4% of total government income in 1985. This amount more than doubled to 10% in 1993 (Sugiyarto et al 2001). In this scenario, the government is assumed to reduce tariffs on imports and to maintain other taxes at their original level. In the second scenario, “far-reaching globalization”, the government is more pro-business and balances the “involuntary” (externally determined) import tariff cuts with a “voluntary” removal of distortions in the domestic market. The latter is represented by the same reduction (20%) in indirect taxation levied on domestic commodities. Another reason for considering a combination of the two policies is that reductions in the level of indirect taxation on domestic commodities are a common feature of tax reform policies, especially in developing countries (Ahmad and Stern 1991; Bird 1992; Bird and Oldman 1990; Gillis 1989; Newbery and Stern 1988; Rao 1993). The two scenarios are analyzed by using the CGE model to estimate
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the effects of partial and far-reaching globalization on key economic variables: GDP, employment, a range of measures of inflation, external performance, welfare, household, and foreign tourist consumption. The results are given in Table 1 and are calculated as percentage changes from the benchmark data, where the benchmark refers to the equilibrium values of the variables prior to the simulations. In most cases, a positive number reflects an improvement and vice versa. Percentage changes in balance of payments deficits and trade balances should be interpreted carefully since the absolute numbers can switch from negative to positive. Table 1a. Effects of Globalization and Foreign Tourism Growth (%) Main Scenarios Variables (1)
PGa (2)
A. Macroeconomic Aggregates 1. GDP 0.05 a. Agriculture ⫺0.06 b. Mining 0.00 c. Manufacturing ⫺0.04 d. Services 0.04 Hotels 0.04 Restaurants 0.00 2. Employment ⫺0.01 B. External Conditions 1. Foreign Trade a. Real Exports 0.64 b. Real Imports 0.91 c. Trade Balance ⫺2.43 2. Balance of Payments Deficits a. Government 349.15 b. Firms ⫺14.65 c. Total 0.53 C. Welfare and Distribution 1. Domestic 0.09 Absorption 2. Household Real 0.16 Consumption a. Farmers 0.15 b. Rural Households 0.14 c. Urban 0.19 Households 3. Foreign Tourist Consumption a. Hotels and 0.10 Restaurants b. All other Services 0.13 a
FGa (3)
DIa (4)
PG & DI (5)
FG & DI (6)
0.64 1.54 ⫺0.74 0.33 0.46 0.87 1.47 1.34
0.06 0.17 ⫺0.14 ⫺0.05 0.14 2.81 0.53 0.16
0.11 0.11 ⫺0.14 ⫺0.09 0.18 2.90 0.54 0.15
0.70 1.71 ⫺0.88 0.28 0.60 3.60 1.98 1.49
⫺0.18 1.86 ⫺23.49
0.24 0.20 0.70
0.88 1.11 ⫺1.75
0.05 2.06 ⫺22.90
1195.34 ⫺42.91 8.76
30.41 ⫺3.58 ⫺2.16
380.35 ⫺18.28 ⫺1.64
1227.58 ⫺46.47 6.70
1.06
0.05
0.14
1.11
1.97
0.15
0.32
2.12
2.15 1.92 1.83
0.13 0.14 0.18
0.28 0.28 0.38
2.28 2.05 2.01
0.92
9.37
9.65
10.08
⫺0.28
9.37
9.67
8.80
PG and FG are Partial and Far-reaching Globalization, while DI is Foreign Tourist Demand Increase.
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Partial Globalization The effect of decreases in tariffs is to reduce government revenue and also to lower the price of imported commodities in the domestic market. As the domestic economy is a price taker, this will increase the demand for imported products, contributing to an increase in the availability of products in the domestic economy. Producers export more as some of the lower price imported commodities are also used as intermediate inputs. The stronger price effects on imports result in a worsening of the trade balance as imports increase by more than exports. The decrease in the price of imported intermediate inputs Table 1b. Effects of Globalization and Foreign Tourism Growth (%) Sensitivity Analysis Variables (1)
PGa (7)
A. Macroeconomic Aggregates 1. GDP 0.11 a. Agriculture 0.02 b. Mining ⫺0.06 c. Manufacturing 0.08 d. Services 0.05 Miles:Hotels ⫺0.02 Restaurants 0.04 2. Employment 0.11 B. External Conditions 1. Foreign Trade a. Real Exports 0.88 b. Real Imports 1.09 c. Trade Balance ⫺1.56 2. Balance of Payments Deficits a. Government 357.45 b. Firms ⫺16.48 c. Total ⫺0.88 C. Welfare and Distribution 1. Domestic 0.14 Absorption 2. Household Real 0.25 Consumption a. Farmers 0.22 b. Rural Households 0.23 c. Urban Households 0.29 3. Foreign Tourist Consumption a. Hotels and ⫺0.04 Restaurants b. All other Services 0.00 a
FGa (8)
DIa (9)
PG&DI (10)
FG&DI (11)
0.69 1.65 ⫺0.81 0.41 0.45 1.21 1.58 1.42
0.03 0.12 ⫺0.11 ⫺0.09 0.12 2.73 0.50 0.10
0.14 0.14 ⫺0.17 0.00 0.17 2.70 0.53 0.21
0.72 1.77 ⫺0.91 0.33 0.56 3.74 2.04 1.51
⫺0.10 1.87 ⫺22.60
0.14 0.12 0.36
1.02 1.21 ⫺1.23
0.03 1.99 ⫺22.33
1189.06 ⫺43.32 8.10
24.74 ⫺2.63 ⫺1.49
382.20 ⫺19.10 ⫺2.36
1213.55 ⫺45.79 6.76
1.09
0.03
0.17
1.12
2.01
0.11
0.36
2.11
2.24 1.97 1.83
0.09 0.09 0.13
0.31 0.32 0.43
2.32 2.06 1.95
2.20
9.09
9.03
10.67
⫺0.26
9.09
9.09
8.08
PG and FG are Partial and Far-reaching Globalization, while DI is Foreign Tourist Demand Increase.
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and accompanying fall in the price of goods in the domestic market result in a rise in real income and rise in demand for domestically produced goods. The net effect is a rise in GDP. Column 2 in Table 1 summarizes the effects of introducing import tariff reductions on the key variables concerned, measured by the percentage changes from the benchmark. It can be seen that the tariff reductions increase imports and foreign trade, thus increasing the availability of products in the domestic economy (by 0.09%). This, in turn, creates additional demand and stimulates production activities so that GDP increases by 0.05%. Adverse effects of the policy take the form of a worsening of the trade balance (imports increase by more than exports) and the government current account deficit. The deficit deteriorates significantly due to the government’s loss of revenue from tariffs and low reliance on direct tax revenue, combined with adherence to its planned expenditure. Welfare improves, as indicated by the increases in total domestic absorption (0.09%) and household real consumption (0.16%). Foreign tourists are also better off as they can consume more with their benchmark level of spending. Their expenditure on hotels and restaurants (the main items of expenditure for them) increases by 0.10%. The modeling procedure assumed that there is no change in the total income (equals total spending) of foreign tourists. The increase in their consumption may be higher, as the lower prices of domestic commodities may encourage them to consume more or even attract more of them to visit Indonesia (see Sinclair and Stabler 1997, for discussion of the microeconomic foundations of tourism demand, and Smith 1994 and Watson and Kopachevsky 1994 for analyses of tourism as a commodity). Moreover, a wide range of studies, reviewed by Crouch (1994a, 1994b), indicates that price is a crucial factor for most tourists when choosing a destination. Note that while total GDP increases, some (import competing) sectors experience a decline in output and GDP contribution. These losses are concentrated in agriculture (⫺0.06%) and manufacturing (⫺0.04%). Therefore, there may be additional adjustment costs as the economy reacts to tariff liberalization by reducing employment in these sectors. Far-reaching Globalization The positive effects of partial globalization discussed above are amplified in the far-reaching globalization scenario, when import tariff reductions are combined with reductions in indirect taxation on domestic commodities. The reason for this can be traced from the effects of introducing the indirect tax reductions. On the production side, this policy will reduce the domestic prices of domestic products, making them more competitive. This, in turn, stimulates domestic production, creates more employment, and increases GDP. The greatest expansions are in the trade, food processing, and hotel and restaurant sectors. The increases in domestic production and employment raise household incomes, which creates more demand for goods in the domestic market. Imports increase to meet the higher domestic demand
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but exports decrease as producers find it more profitable to switch their production to meet the higher level of domestic demand for the more competitively priced goods sold internally. This way, the trade balance deteriorates. The policy will reduce the government’s income from indirect taxation and worsen its deficit, as the loss of tax revenue has made the government less able to finance its planned expenditure (the revenue loss from the indirect tax cuts is higher than the increases in the government incomes as a result of higher household incomes and hence direct tax revenue). The policy has positive impacts on welfare, as domestic absorption (including household and government consumption as well as investment) and household consumption increase. Column 3 in Table 1 summarizes the effects of the far-reaching globalization. The direct effect of the combined cuts is a decrease in the domestic prices of imported and domestic commodities. The demand coming from higher household incomes (as a result of the cuts in indirect taxation) magnifies the increase in import demand due to lower import prices (resulting from the first policy). Therefore, the trade balance deteriorates further as imports increase, while the positive impact of import tariff reductions on exports is offset by the negative effects of indirect tax reductions on exports. The end results show that imports increase by 1.86% while exports decrease by 0.18% and the trade balance deteriorates by 23.49%. The increasing availability of products in the domestic economy creates additional demand and stimulates production activities, which results in higher GDP (0.64% increase) and employment (1.34% increase). The government continues to experience adverse effects on its current account deficit. Welfare improves, as can be seen from the increases in total domestic absorption (1.06%), and household real consumption (1.97% increase). Foreign tourists are better off by paying lower prices for the products and services they consume. Their real consumption in hotels and restaurants increases by 0.92%. Indonesia achieved high growth rates for tourism during the past decade. Events, such as the travel warnings given to tourists after the Bali bombings, may cause arrivals to fall in the short run. However, tourism is likely to grow over the long run and the purpose of this paper is to show the effects of trade liberalization in the presence of tourism growth occurring after a short term disruption. Therefore, a 10% increase in foreign tourist expenditures is simulated and is then combined with the previous globalization simulations. Columns 4–6 in Table 1 summarize the results. As shown in column 3, the increase in foreign tourism demand will create more production and employment (with market-determined supply responses, GDP increases by 0.06%, and employment increases by 0.16%); however, at the same time, this puts pressure on domestic prices. This is clearly shown in the real consumption by foreign tourists which increases by 9.37% (less than the 10% increase introduced in the initial simulation). Welfare improves, as domestic absorption and household real consumption increase. Domestic absorption increases by 0.05%, while household real consumption increases by 0.15%.
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Exports increase by more than imports, resulting in an improvement in the trade balance (increases by 0.70%). The improvement also applies to the balance of payments deficits (reduced by 2.16%). The next two simulations consider the globalization scenarios in the context of foreign tourism growth. The results, given in columns 5 and 6, show that growth of foreign tourism demand amplifies the positive effects of globalization and, at the same time, reduces its adverse effects. The levels of GDP and employment are higher, particularly in the case of the combination of tourism growth, trade, and tax liberalization (column 6). The trade balance is in deficit, but to a lesser extent than in case of trade and tax liberalization without growth in this industry. The balance of payments deficit is reduced, owing to the increased income from foreign tourism. Therefore, an obvious policy that the government can undertake is to embark on globalization by reducing its reliance on import tariffs and indirect taxation at a rate that enables the revenue lost by tariff and tax reductions to equal the additional income due to the growth of foreign arrivals. The income from tourism will enable the government’s income to be maintained at the benchmark level, so that involvement in globalization will not disrupt its expenditure program. This is a means by which governments, including Indonesia’s, can maintain their credibility and avoid fiscal problems. The ability to maintain the expenditure level is also important within a context of overall deflation, as expenditure by the government can help to offset reductions in other components of aggregate demand, such as exports of primary products. The results obtained from different policy scenarios were subjected to sensitivity analysis, in order to examine their robustness to changes in the export demand elasticity value. This parameter value quantifies the responsiveness of the demand for Indonesia’s exports to changes in their price and is particularly important for an economy which is increasingly open to international trade and a depreciating exchange rate. Columns 7–11 in Table 1 summarize the results of the sensitivity analysis, which is conducted by doubling the export demand elasticity values used in the five simulations. The increase in the elasticity values will make the demand from the rest of the world more elastic, so that domestic market prices will be determined, to a greater extent, by the export market. The results confirm that the elasticity values are important in determining the overall results, including the magnitude and, in some cases, the direction of the changes. For any policy changes introduced in the model, higher export demand elasticity values will produce bigger impacts on the real/quantity variables, as clearly shown in the case of globalization (columns 7 and 8). On the other hand, the increase in foreign tourism demand will result in lower price effects for the domestic economy, as shown by the results of the third simulation (column 9). The outcomes of these offsetting effects are shown by the last two simulations (columns 10 and 11). In general, the sensitivity analysis shows the robustness of the results and functional specifications employed in the models, as the results conform to the theoretical predictions.
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CONCLUSION This study has shown that globalization combined with tourism does not necessarily have adverse effects on the domestic economy, in contrast to the past portrayal of the combination as “a deadly mix” (Chavez 1999). Globalization and foreign tourism growth can, in fact, reduce the domestic price level and increase the amount of foreign trade and availability of products in the national economy, thereby stimulating further production. The end result in the Indonesian case is improved macroeconomic performance and welfare, as domestic absorption and household consumption increase. Foreign tourists are also better off, for they can consume more, given their spending level, and also benefit from the greater availability of products. The trade balance and current account deficits are of concern, indicating the need for appropriate accompanying policies, such as the promotion of investment in manufacturing, underpinned by the booming service sector. Moreover, the positive findings from this study do not take account of effects that foreign tourism may have on the environment and culture. The combined effects of the growth of foreign tourism and globalization are beneficial, overall, as the foreign tourism growth amplifies the positive effects of globalization and at the same time reduces its adverse effects. The trade balance and government accounts are in a better position, owing to the additional receipts from tourism. The ongoing growth of foreign tourism also reduces the government’s burdens as a result of embarking on globalization, by enabling it to reduce its reliance on import tariffs and indirect taxation while, at the same time, maintaining the level of income necessary to finance its expenditure. In essence, tourism growth would enable the government to follow a fiscal policy of revenue neutral globalization, allowing it to finance its expenditure without imposing higher taxes on the A Indonesian population.왎 REFERENCES Adams, P., and B. Parmenter 1995 An Applied General Equilibrium Analysis of the Economic Effects of Tourism in a Quite Small, Quite Open Economy. Applied Economics 27:985–994. Ahmad, E., and N. Stern 1991 The Theory and Practice of Tax Reform in Developing Countries. Cambridge: Oxford University Press. Alavalapati, J., and W. Adamowicz 2000 Tourism Impact Modeling for Resource Extraction Regions. Annals of Tourism Research 27:188–202. Archer, B. 1995 Importance of Tourism for the Economy of Bermuda. Annals of Tourism Research 22:918–930. Archer, B., and J. Fletcher 1996 The Economic Impact of Tourism in the Seychelles. Annals of Tourism Research 23:32–47. Asian Development Bank 2000a Asian Development Outlook 2000. New York: Oxford University. 2000b Country Economic Review. Manila: Asian Development Bank. Begg, D., S. Fischer, and R. Dornbusch
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Submitted 11 April 2002. Resubmitted 20 November 2002. Accepted 1 December 2002. Final version 7 February 2003. Refereed anonymously. Coordinating Editor: Stephen L.J. Smith