Reducing Petroleum Subsidy in Indonesia: An Interregional General Equilibrium Analysis

This chapter discusses the political economy of petroleum subsidy reform in Indonesia. It starts with a general review on the energy subsidy debate, followed by historical summary of subsidy regimes in Indonesia under different administrations. Using an inter-regional general equilibrium model we simulate two scenarios of petroleum subsidy reform: with and without revenue recycling through indirect tax cut. The results are evaluated at national and regional levels. We show that petroleum subsidy reform through removing the subsidy and recycling the revenue to the economy benefit the overall economy. However, the impact will vary across regions and across industries. Furthermore, we argue that public support for such reform will depend on the sectoral distribution of the resulting economic outputs.