George Fane

Neutral taxation under uncertainty

Abstract The analogs under uncertainty of two well-known certainty results are derived: first, if there are timing differences between tax payments and accruals, neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk-free interest rate, provided that tax credits and liabilities are sure to be redeemed eventually. Second, the invariance of asset valuations with respect to the rate of income tax, at a given pre-tax interest rate, proved by Johansson and Samuelson under certainty, can be extended to cover the case of uncertainty, given analogous ceteris paribus conditions.

Trade Reform in Indonesia, 1987–95

This paper quantifies Indonesian trade liberalisation between 1987 and 1995 as measured by changes in real effective rates of protection (RERP), i e effective rates of protection corrected for trade policy-induced changes in wages. The RERP for manufacturing, including oil refining, fell from 27% in 1987 to 11% in 1995, for manufacturing, excluding oil refining, the fall was from 59% to 16%, and for agriculture from 9% to 4% The standard deviation of RERPs for all tradeable sectors fell from 42 percentage points to 26; and for manufacturing, excluding oil refining, from 102 percentage points to 39.

Effective Protection in Indonesia in 1987 1

This paper provides estimates of the 1987 levels of nominal and effective protection for 134 tradeable industries based on the 1985 Indonesian input-output table. The average nominal rate of protection was 11.5%; the average effective rate was 18.5%. The standard deviations of nominal and effective rates across the 134 tradeable sectors were 17 and 48 percentage points, respectively. The results confirm that the net effect of policies has been to subsidise manufacturing at the expense of mining and quarrying, and to a lesser extent agriculture. The average effective rates of protection for these broad aggregates were. 44% for manufacturing, including oil refining; 80% for manufacturing, excluding oil refining; 19% for agriculture; and -1% for mining (including crude oil and gas) and quarrying. Policy in 1987 was also strongly biased in favour of import substitution at the expense of export expansion: the average effective rate of protection for all import-competing sectors was 47%, while that for all expo...

CHANGE AND CONTINUITY IN INDONESIA'S NEW FISCAL DECENTRALISATION ARRANGEMENTS

The changes in grant allocation among regions have been less revolutionary than the 1999 decentralisation legislation envisaged because the resource-rich regions were able to force the government to modify the proposed fiscal gap formula for allocating general purpose grants so as to put more weight on the status quo. Partly for this reason, and partly because no major tax was decentralised, there has not been much increase in autonomy for the regions that have few natural resources. In addition, it is argued here that the procedures for grant allocation in 2002 created incentives for regional fragmentation and did not take account of poverty in an appropriate way.

AGRICULTURAL PROTECTION IN INDONESIA

Abstract Throughout the second half of the 20th century, Indonesias trade policies favoured the modern manufacturing sector relative to agriculture. Within agriculture, they favoured import-competing sectors at the expense of export-competing sectors. Rice is the most important import-competing agricultural sector and, until 2000, assistance to rice growers came mainly from input subsidies. The extent of subsidies to rice and other import-competing agriculture varied with foreign exchange availability and the governments budgetary circumstances: ‘good’ times produced more interventionist policies and ‘bad’ times produced less government intervention. Since the mid-1980s, the aggregate bias in favour of manufacturing has declined greatly and agriculture is now only lightly taxed relative to manufacturing. This change resulted from the reduction in manufacturing protection that has characterised this period and from the increased protection of rice and sugar occurring after 2000. We attempt to explain the political forces underlying these changes in trade policy.

Trade Liberalization, Economic Reform and Poverty Reduction in Lao PDR

ABSTRACT Since 1986 Lao PDR has greatly reduced the barriers to international trade and the governments direct controls over the economy. Aggregate growth during this reform period has been quite rapid. Although the benefits of growth have gone disproportionately to the non-poor and inequality has increased, poverty incidence is nevertheless estimated to have fallen from about 45% in 1992–93 to 30% in 2002–03. After surveying these developments, this paper discusses the policies that the government is currently proposing as ways to ensure that the benefits of further opening of the economy are more equally shared.

Lessons for monetary and banking policies from the 1997-98 economic crises in Indonesia and Thailand

There is little disagreement that the Asian crisis would not have happened if the financial systems of the affected countries had not been vulnerable to panic and speculative attack (Corsetti et al., 1998; Radelet & Sachs, 1998). Nor is there much disagreement about the factors that helped trigger the attack: because of the generally poor performance of the Japanese economy in 1996–97 and strong competition from China, most other Asian countries experienced a reduction in the demand for their exports. This was exacerbated by the loss of export competitiveness resulting from the weakening of the yen relative to the dollar, given that most Asian currencies had been pegged to the latter. This slowdown in export growth was particularly marked in the case of Thailand, although much less so in Indonesia. A mood change against the excessive optimism of the earlier boom appears also to have been important. The second generation speculative attack models help to illustrate the kinds of mechanisms that were probably at work. 1 If the government is expected to respond to bank failures by bailing out depositors—and to finance this by money creation for fear that any increase in interest rates due to selling securities would cause bankruptcies and further bank failures— then in conditions of financial vulnerability any small trigger can induce self-fulfilling expectations of bank and corporate losses, monetary expansion, capital outflow and devaluation. Such vulnerability will exist if long-term investments have been financed by short-

Post-crisis monetary and exchange rate policies in Indonesia, Malaysia and Thailands

This paper surveys the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.

Indonesian Monetary Policy During the 1997-98 Crisis: A Monetarist Perspective

This paper defends the IMFs strategy of targeting base money (M0) in 1997–98 against the criticism by Grenville (2000) that it was destined to fail because M0 is mainly demand determined and the demand for it was increased by a large and unpredictable amount by the banking panic. Grenville contends that Indonesian monetary policy should have aimed at domestic price stability. It is argued here that the growth of M0 far exceeded what could be justified by last resort lending to accommodate the banking panic, and that rapid inflation could only have been avoided by preventing most of the expansion of the publics cash holding that actually occurred. Achieving a modest target for domestic inflation would not therefore have been very different in practice from setting tight limits on the growth of M0. In contrast, both these policies would have been very different from the loss of control over M0 that actually occurred.

Alternative ways of measuring and decomposing equivalent variation

Abstract Two different concepts of ‘equivalent variation’ have been used to measure the welfare effects of policy changes. One applies to uncompensated changes in which utility can vary, the other to compensated changes in which it is held constant. Harberger [J. Economic Lit. 9 (1971) 785–797] decomposed infinitesimally small changes in the uncompensated measure into components that measure the alleviation, or exacerbation, of existing distortions. We extend his methodology to obtain an exact decomposition of the compensated measure for finite changes, and show that no corresponding decomposition of the uncompensated measure is generally possible for finite changes, without introducing a residual or a scaling factor.