MINISTRY OF NATIONAL DEVELOPMENT PLANNING /

NATIONAL DEVELOPMENT PLANNING AGENCY

MODELING ECONOMIC DEVELOPMENT PLANNING

Prof. Armida S. Alisjahbana, Ph.D

MINISTER OF NATIONAL DEVELOPMENT PLANNING /
HEAD OF NATIONAL DEVELOPMENT PLANNING

INTERNATIONAL CONFERENCE ON ECONOMIC MODELING

Bali, July 18, 2014

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Assalamualaikum Warohmatullohi Wabarokatuh,
Selamat siang dan salam sejahtera untuk kita semua,

On this occasion, let me say thank you for the invitation to be a speaker
at the International Conference on Economic Modeling (EcoMod) 2014 in
Bali with the topic "Modeling Economic Development Planning." I also
express my appreciation to Bank Indonesia as the host of this
conference. Hopefully the goals and objectives of the conference can be
achieved and the results obtained can benefit the development of
economic modelers around the world.

Distinguished guests, ladies and gentlemen

Before outlining the economic planning model used in Bappenas, let me

start my address by outlining the planning system in Indonesia, as well as
Bappenas duties and responsibilities related to Indonesias national
development planning.

Broadly speaking, Indonesia has three types of national development

plans.

First is the National Long Term Development Plan (RPJP), which

stretches twenty years and aims to achieve the development goals as
mandated in the Preamble to the Constitution of 1945. This long term
plan involves conducting institutional restructuring while simultaneously
keeping Indonesia in pace with other nations. The targets contained in the
long-term plan are therefore qualitative. The RPJP consists of four
stages, each lasting five years.

Second is the National Medium Term Development Plans (RPJMN), each

of which last five years and run parallel with a new government taking
office. Through the RPJMN, the President, Vice President and Cabinet
can articulate their own vision, mission and program for Indonesias
national development, on the condition that these priorities are in line with
the long term plan. The RPJMN includes a variety of quantitative and
qualitative targets for the next five years. Bappenas is responsible for
coordinating and preparing the technocratic draft of the RPJMN with input
from line ministries, academia, political parties and civil society.

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Third is the annual Government Work Plan (RKP), which is an elaboration
of the medium term plan, and includes a thorough overview of the
economy, as well as programs of ministries, line agencies, regional
programs, and a variety of qualitative and quantitative targets.

In addition to the three areas of responsibility for planning I have just

described, Bappenas is also responsible for monitoring and evaluating
the implementation of the plan. Of course, external or internal conditions
may interfere with the smooth execution of the plan, and policies must be
prepared to respond to emerging problems and ensure that everything is
back to running as expected.

Preparation for planning, especially for the long and medium-term plans,
is always supported by background studies. These studies are carried out
for over a year before the period of the plan begins. The preparation of
these background studies in each field estimate or project to determine
the amount or variables that will be the basis of a policy determination or
a future target. Economic development planning models are a key part of
this process.

Ladies and Gentlemen,

The government develops and uses economic models that can highlight
the structure of the economy and evaluate the impact of various
phenomena on the economy. This is key to produce a good design and a
comprehensive economic development plan. Some of the models we use
are as follows.

First is the Macro Econometric Model. Macro Econometric models consist

of a number of structural equations simultaneously constructed by using
econometrics. Such models are built partially in the form of equations
used by regression analysis.

Second is the Bappenas version of the CGE model, which is crucial to

analyze the impact of massive shocks on the economy. The Bappenas
CGE model follow the standard ORANI-G model. However, in contrast to
the ORANI-G standard model which uses Input-Output data, Bappenas
CGE model is enriched by input-output data from the Social Accounting
Matrix (SAM) Table, which is further modified to incorporate multiple
transfers between institutions, especially government transfers to
households.

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Third is Bappenas Financial Programming Model Policies (FPP). This
model is a modification of financial Programing Model Policies of the IMF,
which was developed to establish a mechanism of coordinated
macroeconomic policies, with the aim to achieve macroeconomic
objectives such as economic growth, inflation, balance of payments, and
others. This model is further modified, developed and adapted to the
conditions of the planning needs of the Indonesian economy.

Fourth is the Bappenas Trade and Investment Model developed together

with Oxford Economics. This model is intended for medium and long-term
projections in the field of trade and investment. This model is based on
the global macroeconomic model owned by Oxford Economics, which
later was developed specifically to look at trade and investment in
Indonesia.

This model consists of hundreds of simultaneous equations. Through this

model the direction of global economic developments can be estimated,
especially regarding geo-economic aspects. Thus, the geo-economic
analysis can be more up-to-date and anticipatory, which is then used as a
reference for sectoral and regional planning processes. Through this
model we can also estimate effects of the global economic dynamics of
Indonesias flow of exports and imports, Indonesia's investment
performance, as well as the distribution of exports, imports, and
investment in 34 provinces in Indonesia.

In addition to the models above, in the field of economic planning,

Bappenas also utilizes commonly used models, such as GTAP version 8,
which includes 57 sectors and 129 countries in the world, and which is
used as a tool in simulating foreign trade policy and international
economic cooperation.

Ladies and Gentlemen

Allow me to give you some examples of Bappenas experience in using

these models. One is the use of the Bappenas version of the CGE model
to estimate the impact of the fuel price hike in June 2013, which was
subsequently used as the basis for setting policy. The conditions at the
time showed that the impact of an increase in fuel prices would be a
cause for concern and required some policies to manage the process.

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The problem that arises is of course the fuel price increase will lead to
higher inflation and in turn would increase the cost of living, particularly
impacting the poor. Therefore, the impact of increasing fuel prices had to
be precisely predicted to determine the appropriate policies to lessen the
burden on the poor.

By using Bappenas CGE models we learned that a Rp500 increase in

the fuel price will increase inflation by 0.818%, whereas the effect on
economic growth is very small if the savings obtained by reducing the
portion spent fuel subsidy by the government and partly distributed to
help the poor. Thus with fuel price increase of Rp2000, inflation will
increase by 3.27%. In other words, if inflation in 2013 was 5%, then with
the fuel price rise inflation would reach 8.27%. This figure was then used
to calculate the impact on the poor and to determine the compensation to
assist them. In reality, inflation in 2013 reached 8.38% and there was a
slight increase in the number of people living in poverty. Although the
estimates and the reality were different, this difference was very small
and the model was considered successful to estimate the impact of the
fuel price hike.

Another example is the use of macro econometric models for projecting

economic growth for the Technocratic Draft of the Medium Term
Development Plan for 2015-2019 (RPJMN). Through macro econometric
models, we obtained figures of Indonesian economic growth forecast for
the 2015-2019 period, which is subsequently determined to be the base
line or low growth scenario. Furthermore, by using a macro econometric
models we calculated the magnitude of potential GDP for the 2015-2019
period, and calculated the magnitude of the economic growth needed to
achieve the potential GDP in that period. Economic growth was set to be
subjected to the high growth scenario. With this mechanism, the target of
low economic growth scenario for the period 2015-2019 is at an average
of 6.16%, and for the high scenario the average is 6.90%. As for the
medium scenario, growth is set at an average of 6.62%.

This growth target, together with the results of calculations with other
models such as trade and investment projections obtained by the
Bappenas Trade Investment Model as well as other assumptions, are
used as input variables in the FPP model. Through this FPP model
obtained magnitudes of the economy such as the current account deficit,

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investment needs, ICOR, and others that will be used as the basis for
setting targets or policies for the period 2015-2019.

Distinguished guests, ladies and gentlemen

In order for the targets obtained through modeling to be achieved, there

are various preconditions or assumptions that must be fulfilled when
running the model. For example, to achieve the potential GDP in the
2015-2019 period as set out in the high scenario case, we need to have
conditions of full employment in all factors of production: Labor, Capital,
and Total Factor Productivity. In order for this condition to be fulfilled, we
need comprehensive reform to achieve an average economic growth rate
of 6.9% for the period 2015-2019. Such reforms are encouraged in the
Technocratic Draft of the 2015 -2019 RPJMN.

To achieve the economic performance targets, various assumptions such

as exchange rates, inflation rates, oil prices, oil lifting, and others must
also be met. It is assumed also that the global economy is gradually
recovering and there will be no new problems that may cause a global
economic crisis, which could in turn put pressure on the Indonesian
economy.

In addition, a variety of policies need to be implemented in order to

achieve the set targets. In the technocratic draft, we have stated that to
achieve the targets set by the government we will also need to reduce
spending on subsidies, which will be done by gradually raising the price of
subsidized fuel over several years. Incumbent government for the period
2015-2019 should consider this if it wants to achieve the set targets.

If the comprehensive reforms do not occur, or if the assumptions are

incorrect, the results achieved will be lower than the set target. This is
what happened in the 2010-2014 Medium Term Development Plan. At the
two year mark of implementing the Development Plan, the results
achieved were in line with the targets. However, as we entered the third
year, the impact of the financial crisis that hit Europe was strong enough
to put pressure on the Indonesian economy. These events were not taken
into account when preparing the targets to be achieved in the period
2010-2014. Therefore, although the performance of the Indonesian
economy is quite good, the achievements were lower compared to what
was previously targeted.

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Ladies and gentlemen

Bappenas experience in using models for setting targets and as the basis
of policy-making shows that there are several important points we need to
consider. First, we need to realize that models are tools and their capacity
is surely limited. One model can certainly not be a panacea. Therefore, in
developing models, we need to consider their needs and limitations, and
how they can be used alongside other models. Second, good models are
very useful. However, a good model without support of the proper
assumptions will produce biased results. Therefore it is necessary to
consider how the appropriate assumptions can be properly set. Third,
sometimes models are developed by experts based on conditions in
advanced economies and do not consider the limitations of data
availability in developing countries such as Indonesia, meaning that the
application of these models will be limited to certain countries. Therefore
we hope that modeling experts consider conditions in developing
countries when developing their models.

Distinguished guests, ladies and gentlemen

I have come to the end of my address, I hope that some of the points that
I have mentioned can be used as input to discussions in this conference. I
also hope that this seminar provides benefits not only for the experts in
the field of modeling, but also for those users who really need a good
model, which can be practically applied.

Thank you

Wassalamualaikum warahmatullahi wabarakatuh.

Minister of National Development Planning /

Head of the National Development Planning Agency.

Armida S. Alisjahbana