1 Warwick J McKibbin ANU Centre for Applied Macroeconomic Analysis (CAMA), RSPAS and Lowy Institute for International Policy Indonesia in a Changing Global Environment Presentation at the Indonesia Update September 24, 2004

2 Overview Short Term Global Economic Outlook –World growth –Oil prices –Global imbalances Longer Term Issues –Energy use –Carbon Emissions –Resource depletion (many issues) Forestry Conclusion - Linking the short term and long term

3 Short term outlook World economic growth is strong Oil prices are high and possibly rising Global imbalances are a serious risk

6 Short term outlook World economic growth is strong Oil prices are high and possibly rising Global imbalances are a serious risk

8 Impacts on the world economy of higher oil prices For every $US10 per barrel rise in oil prices, world economic growth falls by 0.6% –BUT very different effects across countries (see Significant potential to slow economic growth but unlikely to create a global recession

9 Impacts of higher oil prices on Indonesia Indonesia is a significant liquid energy producer –1.4 million barrels/day out of world total of 76 million barrels/day or 3.8% of OPEC in 2003 Higher oil prices should be a bonanza through higher export revenue but domestic use is subsidized by the central government and so instead there are severe strains on the fiscal position

10 Short term outlook World economic growth is strong Oil prices are high and possibly rising Global imbalances are serious a risk

11 Global Imbalances Current accounts reflect gaps between savings and investment in different countries

13 2 main sources of the Transpacific Trade Imbalance Sharp rise in US fiscal deficits Large fall in public and private investment in East Asia

15 2 main sources of the Transpacific Trade Imbalance Sharp rise in US fiscal deficits Large fall in public and private investment in East Asia

17 The adjustment to the global shift in savings and investment imbalances has been postponed through massive accumulation of foreign reserves in Asia

19 What are the relative contributions of Asian Investment decline and US Fiscal Policy? From Lee, McKibbin and Park (2004) “Transpacific Imbalances: Causes and Cures”

Source: G-Cubed Asia Pacific Model version 58n

22 Longer term Resource Issues

23 Energy Use

28 Carbon Emissions and global climate change policy 1% of global total in 1998 Ratified UNFCCC Signed but not ratified Kyoto Protocol

31 Forestry

33 Global Climate Policy Global community is formulating actions to reduce carbon emissions –Kyoto Protocol 1997 set binding targets and timetables for Industrial countries A damaging approach for a country like Indonesia –Developing country participation mainly through the Clean Development Mechanism but this is unlikely to generate much abatement activity Global action against climate change (such as the Kyoto Protocol) will impact on Indonesia in the short run –Indonesia exports fossil fuel energy –Indonesia will have to limit domestic emissions eventually

34 Indonesia needs to adopt a strategy that makes economic development and good environmental outcomes compatible. Well defined property rights over resources and the environment are critical Can link the issue of greenhouse gas emissions and management of forestry, other resources and land use through a domestic market based mechanism such as the McKibbin-Wilcoxen Blueprint for climate policy It is in Indonesia’s interest to promote (and implement) better approaches to climate policy than the flawed Kyoto Protocol

35 Conclusion Indonesia faces a complex global environment with risks from higher oil prices and potential adjustment to global macroeconomic imbalances Issues such as land use, forestry, and carbon emissions have local as well as global implications that will eventually require local responses Need to tackle these issues in the short run –remove energy subsidies –create a clear system of property rights that give incentives for future investments in energy infrastructure, forestry and land use management

36 Background Papers