#### Transcript slides - Editorial Express

TRAPPED IN RESOURCE CURSE AFTER SURVIVED; OIL PRICE AND INDONESIAN MACROECONOMIC RELATION BEFORE AND AFTER ASIAN CRISIS Ahmad Luthfi Graduate School for International Development and Cooperation The Basic Problems (World) 1 Energy is vital for our activities 2 Oil is still the main source of energy (at least) until 2040 3 Oil is both economic and political commodities (flexible) (reference price) OPEC (Maintain the Production Level) Shale Oil Production -> Increasing Oil Supply 2015 4 Oil Price (Level, Volatility,Non Linier) has negative 2 impact to the economy The Basic Problems Previous Works Main Results Basic Idea for Proof The Basic Problems (Indonesia) Capital Investment 1/3 times Fuel Subsidy 8.6 times President Energy/Fiscal Policy Indonesia is pointed as a role model because survived from resource curse (Rosser,2007),secured from oil price shock (Mehrara & Oskui,2008) and gets out from oil as primary income source (Basri,2004) ? 3 The Basic Problems Previous Works Main Results Basic Idea for Proof Previous Works (Oil Price and Macroeconomic Relation) • For Oil Exporting (Importing) Countries The Impact of increasing oil price usually positive (negative) to the GDP, no matter the size, but the impact is declining after 1980’s. • For Oil Importing Countries The Impact of oil price volatility/uncertainty usually negative to the GDP, no matter the size. Single Country Oil Exporter Mixed Oil Importer Multiple Countries Small Country Big Country Similarities Compare & Contrast Trinidad Nigeria OPEC - - - - OECD Tunisia USA, China Pacific Island Countries Brazil VS USA My novelty : Single country (Indonesia) but trying to compare and contrast before and after crisis and do counterfactual analysis on those periods 4 The Basic Problems Previous Works Main Results Basic Idea for Proof Previous Works (Oil Price and Macroeconomic Relation) Authors (Jbir & Gorbel, 2009) Scope Methodology VAR (Real Oil Price,GDP,Price Index,Government Spending,Real Exchange Rate) 1993 Q1- 2007Q4 Tunisia Findings Oil subsidy effectively transmits the oil price shock Oil price shocks (Mehrara & Oskui, 2008) (Cavalcanti, Jalles, 2013) OPEC Members (Iran, Saudi Arabia, Indonesia,Kuwait) Brazil (oil import has decrease sharply), USA (oil import has increase sharply SVAR (Real Oil Price,GDP,Price Index,Real Exchange Rate) 1970-2002 SVAR (Oil Price,GDP,Inflation,) (1985-2008) Saudi and Iran Oil Price shocks has insignificant effect to Indonesia (diversify income, prudent fiscal policy) & Kuwait (stabilization and savings fund) 1. Brazil : Oil price shock does not have a clear impact on output growth, and only account for very small fraction in inflation. 2. USA: Oil price have a moderate effect on output growth but decreasing over time. The impact to inflation is larger than to output growth 3. Output level would be roughly the same but 10 % less volatile if the USA had the actual Brazilian import share 5 The Basic Problems Previous Works Main Results Basic Idea for Proof Main Results (Oil Price Macroeconomy (GDP,Inflation, Interest Rate,Fuel Subsidy, Unemployment) Before Asian Crisis (1984-1997), The VAR Model shown that the impact of oil was neutral to the Indonesian macroeconomic indicators, except for fuel subsidy. In the first period, the fuel subsidy could be one of factors which successfully protecting Indonesia from negative impact of the oil price In contrast, In Post Asian Crisis (1998 -2012), Indonesia’s macroeconomic variables such as GDP Growth, Inflation, and Interest Rate were influenced by the Oil Price. GDP growth in first (second) period would have been 22% lower (32% higher) if net-oil import share in first (second) period behaved similarly with the second (first) period 6 The Basic Problems Previous Works Main Results Basic Idea for Proof Basic Ideas for Proofs/Implementations Research Questions Do the oil prices (linier,volatility and non linier increase and decrease)have significant effect to Indonesian macroeconomics indicators in before and after Asian Crisis? How real output growth in 1st period (1984 -1997) would had been if net oil import share in 1st period behaved similarly to 2nd Period (1998 -2012) and vice versa Research Objectives Comparing the impact of oil price (linier,volatility and non linier increase and decrease)have to Indonesia’s economic activities in before and after crisis Predicting the effect of import dependency by counterfactual analysis 7 The Basic Problems Previous Works Main Results Basic Idea for Proof 8 Basic Ideas for Proofs/Implementations No. Variable Formula Oil Price (Level) 1. ROPt ,q Source of Data 1 n ICPt ,q / CPI t ,q n i 1 Ot= MAX[0,log(Oil Pricet)-log(MAX(Oil Pricet-1, Oil Pricet-2,…, Oil Pricet-4) Net Oil Price Increase (Non Linier) (if the oil price higher than 4 previous quarters) Ot= MIN[0,log(Oil Pricet)-log(MIN(Oil Pricet-1, Oil Pricet-2,…, Oil Pricet-4) Net Oil Price Decrease (Non Linier) Indonesian Crude Oil Price (ICP) (Monthly data, released by Ministry of Energy and Mineral Resources) (if the oil price lower than 4 previous quarters) Indonesian Crude Oil Price (ICP) 2. 𝒎=𝟑 Quarterly Realized Oil Volatility (Monthly data, released by (𝑹𝑬𝑻𝒎 )𝟐 𝑹𝑽𝒒𝒕 = Ministry of Energy and Mineral 𝒎=𝟏 Resources) International Financial Statistics IMF 3. GDP Growth 4. Real Subsidy 5,6 Inflation rate, Interest Rate The Basic Problems 𝑺𝑼𝑩𝒒𝒕 = (𝑮𝑴𝑷𝒒𝒕 – 𝑮𝑺𝑷𝒒𝒕 ) – 𝑮𝑺𝑷𝒒𝒕 ) 𝟒 𝒒=𝟏(𝑮𝑴𝑷𝒒𝒕 Previous Works 𝒙 𝑺𝑼𝑩𝒕 Main Results International Financial Statistics IMF International Financial Statistics IMF Basic Idea for Proof Basic Ideas for Proofs/Implementations Vector Autoregression Models Introduced by Sims (1980), Vector autoregression (VAR) is an econometric model used to capture the linear interdependencies among multiple time series. All variables in a VAR are treated symmetrically in a structural sense. 𝐴11 (𝐿) 𝐴10 𝑑(log 𝑂𝑖𝑙 𝑃𝑟𝑖𝑐𝑒 𝑡 ) 𝐴12 (𝐿) 𝐴20 𝐺𝐺𝐷𝑃𝑡 𝐼𝐹𝑡 = 𝐴30 + 𝐴13 (𝐿) 𝐴40 𝐼𝑅𝑡 𝐴14 (𝐿) 𝑑(𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑡) 𝐴50 𝐴15 (𝐿) 𝐴21 (𝐿) 𝐴22 (𝐿) 𝐴23 (𝐿) 𝐴24 (𝐿) 𝐴25 (𝐿) 𝐴31 (𝐿) 𝐴32 (𝐿) 𝐴33 (𝐿) 𝐴34 (𝐿) 𝐴35 (𝐿) 𝐴41 (𝐿) 𝐴42 (𝐿) 𝐴43 (𝐿) 𝐴44 (𝐿) 𝐴45 (𝐿) 𝐴51 (𝐿) 𝐴52 (𝐿) 𝐴53 (𝐿) 𝐴54 (𝐿) 𝐴55 (𝐿) 𝑒1𝑡 𝑑(log 𝑂𝑖𝑙 𝑃𝑟𝑖𝑐𝑒 )𝑡−𝑖 𝑒 𝐺𝐺𝐷𝑃𝑡−𝑖 2𝑡 𝐼𝐹𝑡−𝑖 + 𝑒1𝑡 𝑒4𝑡 𝐼𝑅𝑡−𝑖 𝑒5𝑡 𝑑(𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦)𝑡−𝑖 Tools : 1. Granger Causality (Causal relationship) 2. Impulse Response Function (Sign and time) 3. Variance decomposition (Relative importance) 1. Granger Causality 1998 - 2012 1984 - 1997 9 The Basic Problems Previous Works Main Results Basic Idea for Proof Basic Ideas for Proofs/Implementations 10 2. Impulse Response Impulse responses trace out the response of current and future values of each of the variables to a one-unit increase current value of one of the VAR errors. 1st Period 1984 - 1997 The Basic Problems Previous Works 2nd Period 1998 - 2012 Main Results Basic Idea for Proof Basic Ideas for Proofs/Implementations 3. Variance Decomposition separates the variation in an endogenous variable into the component shocks to the model, and provides information about the relative importance of each random innovation in affecting the variables in the VAR model Variance Decomposition 1984 -1997 Variance Decomposition 1998 -2012 11 The Basic Problems Previous Works Main Results Basic Idea for Proof Basic Ideas for Proofs/Implementations 12 Counterfactual (Measure oil import dependency) 1. Construct new measure of Oil Shock • 𝑂𝑖𝑙 𝑃𝑟𝑖𝑐𝑒 𝑡= net oil import share * oil price t • Net import share = ( • Oil Price t = MAX[0,(Oil Price)-(MAX(Oil Pricet-1, Oil Price-t-2,…, Oil price t-4) 𝐶𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 −𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛+𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 2. Change the data (a.Oil Price Growth t = α + γ1Growth β1Oil Price 1984 1997 1998 2012 t-1 t-1 t-1 + γ2 Growth + β2 Oil Price t-2 t-2 ) , ∈[-1,1] b. βi) + γ3Growth t-3 + β3 Oil Price + γ4 Growth t-3 t-4 + β4 Oil Price + t-4 +ε Basis Period 1 using a. Oil Price in period 2 using β in period 2 Growth 0.6842 0.7411 (108.31%) 0.5286 (77.25%) Standard Deviation 0.0318 0.0303 (95.18 %) 0.0297 (93.44) Basis Period 2 using Oil Price in period 1 using β in period 1 Growth 0.2296 0.1711 (74.53%) 0.3021 (131.55%) Standard Deviation 0.0227 0.0143 (63.11%) 0.0253 (111.39%) The Basic Problems Previous Works Main Results Basic Idea for Proof Key References Basri MC, Hill H (2004) Ideas, Interest and Oil Prices- The Political Economy of Trade Reform During Soeharto’s Indonesia. World Econ Volume 27, Issue 5, pages 633–655. Mehrara M, Oskoui KN (2007) The sources of macroeconomic fluctuations in oil exporting countries: A comparative study. Econ Model 24:365–379. doi: 10.1016/j.econmod.2006.08.005 Rafiq S, Salim R, Bloch H (2009) Impact of crude oil price volatility on economic activities: An empirical investigation in the Thai economy. Resour Policy 34:121–132. doi: 10.1016/j.resourpol.2008.09.001 Rosser A (2007) Escaping the resource curse: The case of Indonesia. J Contemp Asia 37:38–58. doi: 10.1080/00472330601104557 Sims CA (1980) Macroeconomics and Reality. Econom Soc 48:1– 48. 13 Thank you for your kind attention. Any question, comment and suggestion are welcome 14