Application of a general equilibrium model for agricultural policy analysis: A case study of fertilizer input subsidy in rice production for Indonesia

Scope and method of study. This study was designed to analyze the economic impact of the Bimas rice intensification program on socio-economic groups in Indonesia utilizing a general equilibrium framework. Specific objectives were to: (1) develop a social accounting matrix (SAM) for Indonesia identifying agriculture and the Bimas program and disaggregated by socio-economic and institutional groups, production and commodity activities, factor income payments, trade, and other variables; (2) estimate the general equilibrium results of reduced fertilizer subsidy to Bimas rice producers; (3) estimate the general equilibrium results of alternative government programs of revenue transfers, agricultural employment generation, and increased agricultural non-food exports; and; (4) evaluate the results of alternative policy formulations of the Bimas program and of the alternative government programs on variables such as commodity prices, household real incomes, and basic nutrition.;Findings and conclusions. Results of the general equilibrium model indicate that reducing the fertilizer subsidy significantly affects sector outputs, input and commodity prices, household real incomes, government and other institutional revenues, and rice consumption. Removing all fertilizer subsidies and holding commodity exports constant at the base price increases the aggregate price index by 12.1 percent, reduces total household real income by 4.1 percent, increases government revenue by 1.5 percent, and decreases rice consumption for all households. Results indicate that the fertilizer subsidy benefits agricultural laborers and consumers the most. Reducing the subsidy has the least adverse effects on agricultural producers. Transferring government revenue to households equal to savings from reduced subsidies does not completely restore household incomes. The alternative government programs had mixed results. Employment generation had positive affects on household incomes, moderate affects on commodity price increases, positive affects on rice consumption, and significant negative affects on exports. Increased agricultural non-food exports had moderate affects on household real incomes, significant affects on increasing commodity prices, negative affects on rice consumption, and positive affects on exports.