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) Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems Energy is vital for our activities Oil Price (Level, Volatility,Non Linier) has negative impact to the economy Oil is both economic and political commodities Oil is still the main source of energy (at least) until 2040 (flexible) (reference price) Shale Oil Production -> Increasing Oil Supply OPEC (Maintain the Production Level)

The Basic Problems (Indonesia) Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 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) ? Capital Investment 1/3 times Fuel Subsidy 8.6 times 3

Previous Works (Oil Price and Macroeconomic Relation) Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems Single CountryMultiple Countries Small CountryBig CountrySimilaritiesCompare & Contrast Oil Exporter TrinidadNigeriaOPEC- Mixed---OECD Oil Importer TunisiaUSA, China Pacific Island Countries Brazil VS USA 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. My novelty : Single country (Indonesia) but trying to compare and contrast before and after crisis and do counterfactual analysis on those periods 4

Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems AuthorsScopeMethodologyFindings (Jbir & Gorbel, 2009) Tunisia VAR (Real Oil Price,GDP,Price Index,Government Spending,Real Exchange Rate) 1993 Q Q4 Oil subsidy effectively transmits the oil price shock (Mehrara & Oskui, 2008) OPEC Members (Iran, Saudi Arabia, Indonesia,Kuwait) SVAR (Real Oil Price,GDP,Price Index,Real Exchange Rate) Oil price shocks Saudi and Iran Oil Price shocks has insignificant effect to Indonesia (diversify income, prudent fiscal policy) & Kuwait (stabilization and savings fund) (Cavalcanti, Jalles, 2013) Brazil (oil import has decrease sharply), USA (oil import has increase sharply SVAR (Oil Price,GDP,Inflation,) ( ) 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 Previous Works (Oil Price and Macroeconomic Relation)

Main Results (Oil Price  Macroeconomy (GDP,Inflation, Interest Rate,Fuel Subsidy, Unemployment) Before Asian Crisis ( ), 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 Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 6 In contrast, In Post Asian Crisis ( ), 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

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 1 st period ( ) would had been if net oil import share in 1 st period behaved similarly to 2 nd Period ( ) 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 Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 7

Basic Ideas for Proofs/Implementations Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems No. VariableFormulaSource of Data 1. Oil Price (Level) Net Oil Price Increase (Non Linier) Net Oil Price Decrease (Non Linier) O t = MAX[0,log(Oil Price t )-log(MAX(Oil Price t-1, Oil Price t-2,…, Oil Price t-4 ) (if the oil price higher than 4 previous quarters) O t = MIN[0,log(Oil Price t )-log(MIN(Oil Price t-1, Oil Price t-2,…, Oil Price t-4 ) (if the oil price lower than 4 previous quarters) Indonesian Crude Oil Price (ICP) (Monthly data, released by Ministry of Energy and Mineral Resources) 2. Quarterly Realized Oil Volatility Indonesian Crude Oil Price (ICP) (Monthly data, released by Ministry of Energy and Mineral Resources) 3.GDP Growth International Financial Statistics IMF 4.Real Subsidy International Financial Statistics IMF 5,6 Inflation rate, Interest Rate International Financial Statistics IMF 8

Basic Ideas for Proofs/Implementations Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 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. 1. Granger Causality 9 Tools : 1.Granger Causality (Causal relationship) 2.Impulse Response Function (Sign and time) 3.Variance decomposition (Relative importance)

Basic Ideas for Proofs/Implementations Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 1 st Period nd Period 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. 10

Basic Ideas for Proofs/Implementations Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems 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 Variance Decomposition Variance Decomposition 11

Basic Ideas for Proofs/Implementations Previous WorksMain ResultsBasic Idea for ProofThe Basic Problems Counterfactual (Measure oil import dependency) Change the data (a. Oil Price t-1 b. β i ) Growth t = α + γ 1 Growth t-1 + γ 2 Growth t-2 + γ 3 Growth t-3 + γ 4 Growth t-4 + β 1 Oil Price t-1 + β 2 Oil Price t-2 + β 3 Oil Price t-3 + β 4 Oil Price t-4 +ε Basis Period 1 using a. Oil Price in period 2using β in period 2 Growth (108.31%) (77.25%) Standard Deviation (95.18 %) (93.44) Basis Period 2 using Oil Price in period 1using β in period 1 Growth (74.53%) (131.55%) Standard Deviation (63.11%) (111.39%)

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: /j.econmod  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: /j.resourpol  Rosser A (2007) Escaping the resource curse: The case of Indonesia. J Contemp Asia 37:38–58. doi: /  Sims CA (1980) Macroeconomics and Reality. Econom Soc 48:1–

Thank you for your kind attention. Any question, comment and suggestion are welcome 14