The Right Tool for Better Planning: USAID EGSA Strengthens the Government of Indonesia’s Capacity in Formulating Effective Development Plans

USAID EGSA Strengthens the Government of Indonesia’s Capacity in Formulating Effective Development Plans

The economic and social disruption caused by the COVID-19 pandemic has been dramatic and far reaching. Though the rapidly evolving nature of the COVID-19 pandemic in Indonesia has proven to be challenging, it has also presented the country with an opportunity to review how future plans and roadmaps for the economy and other social reforms should be implemented. Indeed, the Government of Indonesia (GOI) immediately responded to the pandemic by refocusing its development programs on health system reforms, social system reforms, disaster resilience reforms, and economic recovery.

While these initiatives represent a great start to the country’s COVID-19 response, the magnitude of this crisis and the long-term impact that any policies developed as part of the GOI’s pandemic response call for the design and implementation of all-encompassing economic and social policies. Additionally, the GOI’s ministries should come up with new approaches for more effective fiscal policies to help accelerate economic recovery. In short, the implementation of active, responsive, and inclusive policies in Indonesia’s development is vital and expected to be beneficial in both the short and long term. Effective policies may also help to prevent a free-fall of unmanaged crises that would be particularly costly for a large and diverse country like Indonesia, a matter of particular interest to the GOI, which has raised serious concerns over the sustainability of the country’s economic growth in light of more potential crises.

To succeed in economic recovery, the GOI’s ministries need to understand the different economic characteristics of each region and how the regions are connected through trade by factoring in productivity in labor, capital, and select economic sector. The complexity of such a relationship requires an up-to-date economic tool that integrates a theoretically consistent framework of the Indonesian economy on the regional level with relevant information and data. The GOI, through the Ministry of National Development Planning (Bappenas), has been utilizing IndoTERM, a bottom-up inter-regional computable general equilibrium (CGE) model of the Indonesian economy that considers each province and many sectors. This general equilibrium model serves as an analytical tool that can help analyze various issues of interrelationships among regions, specifically ensuring consistency both in economic theory and empirical data. Before 2021, the latest version of IndoTERM was still based on the 2010 Indonesian Input-Output (IO) table, which is considered outdated.

Realizing the importance of a well-researched and aligned macroeconomic framework at the national and regional levels, Bappenas requested USAID support through the Economic Growth Support Activity (EGSA) in facilitating an IndoTERM database update as well as developing a policy dashboard, which would allow Bappenas to estimate more rapidly the impact of certain policy alternatives. The IndoTERM update was deemed to be crucial, as the previous model of the regional macroeconomic framework lacked forecasting tools and satellite models.

In late January of 2022, the GOI launched its updated IndoTERM model, which it developed with the support of USAID EGSA. The new version of the model features the 2016 IO table—the most up-to-date table available—as well as the inter-regional IO table (IRIO) that covers 185 economic sectors and can be disaggregated to 34 provinces in Indonesia. It also incorporates more regional data compared to the previous version. Additionally, USAID EGSA organized a training attended by 40 planners from Bappenas. The training covered such topics as how to utilize the updated IndoTERM CGE model and how to effectively analyze the impact of various policies and initiatives to improve domestic connectivity in Indonesia.

As part of the training, participants were asked to run simulations to estimate the impact of actual policy scenarios relevant to their daily tasks. Simulations included the impacts of developing food barns in several regions, developing a super-tourism destination, implementing a carbon tax to meet Indonesia’s carbon commitment, and relocating the capital city to East Kalimantan, among others. Following the training, 75 percent of participants reported an increase in their capacity and a deepened understanding of CGE as an analysis tool of policy modeling.

Bappenas, through the Director of Macroeconomic and Statistical Analysis Mr. Eka Chandra Buana, expressed their appreciation for USAID support and affirmed that the updated model would strategically support the ministry to ensure consistency in nation-wide development plans using regional development policy simulation scenarios.

The model can also be used by Indonesia’s government agencies, sub-national governments, the Central Bank, universities, and the public to run simulations to formulate strategic planning or impact analyses of economic development.

The Economic Growth Support Activity (EGSA, or the Project), implemented by DevTech Systems, Inc., aims to assist the U.S. Agency for International Development (USAID) to re-engage in economic growth (EG) programming in Indonesia. To learn more about EGSA and its year two results, read the EGSA Annual Report for Fiscal Year 2021.

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