THE IMPACT OF CLIMATE CHANGE ON PRICE OF AGRICULTURE
PRODUCT AND ITS IMPLICATION ON THE INDONESIAN ECONOMY:
A DYNAMIC GENERAL EQUILIBRIUM ANALYSIS
Wawan Hermawan, Sutyastie Soemitro, Arief Anshory Yusuf and Djoni
Hartono
ABSTRACT
Development in Indonesia Economy has been toward the manufacturing sector and
the role of agricultural is sometime neglected. Climate change has an effect on the
increase in temperature and change in rain precipitation. The effect of these two
combine with the increase of international commodity prices have cause adverse
effect to agricultural sector as measured by its output. This research is an attempt to
analyze the impact of climate change and change in international commodity prices to
agricultural prices that includes some trade policy related recommendations. To this
end, this research constructs a recursive computable general equilibrium model. 20
sectors including 4 agricultural sectors are used as research data. The model extends
its projection capabilities until 2030, when the effect of climate change start to happen
in Indonesia. The results of all the simulations show that until the year 2030, the
policies of import restrictions on agricultural products exacerbate the negative impact
of climate change on welfare if climate change occurs through a reduction in domestic
agricultural productivity. Restrictions on imports of agricultural policies reduce the
negative impacts of climate change on price and welfare if the effects of climate
change through an increase in the prices of agricultural commodities internationally.
Keywords: Climate change, CGE, agricultural output, rice, imports of agricultural
output.
JEL Code: Q17 and Q54,
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Background
Agriculture is an economic sector that is vital to the sustainability of human
life. This sector provide a biological basis for life and continues to contribute revenue
in the agricultural sector. Indonesia as a developing country still relies on agriculture
as one of the major sectors contributing to GDP, where the contribution of the
agricultural sector to the GDP of Indonesia from 1993 to 2010 ranged at 15% per year
and experienced a tendency to continue to fall. Contribution of other sectors, such as
industry has increased its contribution to GDP.
Agricultural production is highly dependent on the weather in the short term or
the long-term climate, where temperatures and rainfall have a major impact to
productivity of various agricultural commodities. Climate change which will alter
weather patterns, to some extent will affect the level of productivity of the agricultural
sector (Adam, 1998).
Weather phenomena can not be separated from the issue of climate change.
The impact of greenhouse gas increases over the years, have contributed in increasing
the temperature of the earth's surface and changing weather patterns. Changes in
weather or climate on planet earth would affect changes in the various activities,
especially depend directly on the weather rotation. The agricultural sector is a sector
that receives direct impact that is very fragile in the face of climate change impacts
(Yusuf, 2010).
The issue of climate change have drawn the attention of the leaders of the
countries in the world. Indonesia has also felt the temperature rise of 0.3 °C from
1900 to 2000 ( Hulme, 2000). The increase of CO2 concentration causes many to be
the main cause of greenhouse effect that raises the temperature of the planet's surface
(Stern , 2006). Increased CO2 causes climate change impact on changes in rainfall
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patterns, increased frequency of extreme climate events, as well as the rise in
temperature and sea levels are a serious impact of climate change faced by Indonesia
(Surmaini & Runtunuwu , 2010) .
Indonesia as a country that has a large contribution from the agricultural sector
to GDP will not be separated from the effects of global warming. Agricultural sector's
contribution to GDP in Indonesia reached 15.34 % in 2010 and a decrease from 1993
of 17.88 % as a result of changes in the structure of the economy from agriculture to
industry.
The climate change then will increase the price of food crops because of
failure of the harvest. This fenomenon will occur in many country and reach in
Indonesia. People will feel the impacts of climate change both domestically and from
abroad. The increase in population also certainly increase demand for agricultural
products, especially on food crops. The gap for the high increase in demand for
agricultural products is giving a chance for the import of food stuffs, especially rice as
a staple food in Indonesia. On the other hand, Indonesia also impose import tax as a
protection for agricultural products even for rice, so the impact of changes in prices
and well-being of the people of Indonesia at the discretion of agricultural imports to
withstand the impact of climate change becomes an interesting topic in this paper.
The usefulness of this study is expected to provide an overview of the impact
of climate change on the Indonesian economy especialy price. Changes in household
consumption and economic growth are analyzed attempted to determine the direction
of the Indonesian economy as a result of climate change.
The purpose of the study can be briefly shown as follows: 1). Analyzing the
impact of climate change on the agricultural sector and policy import protection to
agricultural products and price in Indonesia in 2030. 2) Analyzing the impact of
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climate change on the international agricultural sector and policy import protection to
agricultural products in Indonesia in 2030. 3) Analyzing the impact of climate change
both in domestic and international to the agricultural sector and price with policy
import protection to agricultural products in Indonesia in 2030.
Reference
The impact of climate change had been felt in Indonesia. According to the
Indonesia Climate Change Sectoral Roadmap (ICCSR) in 2009, showed the effects of
climate change are already being felt in Indonesia. Some effects can already indicated
is as follows:
 There has been an increase in temperature of about 0.5 °C during the 20th
century.
 Based on the Global Circulation Model (GCM) temperature in Indonesia is
projected to rise between 0.8 - 1 °C in the period 2020-2050 relative to the
1961-1990 average.
 Rainfall is expected to rise in December, January, February and March for the
period 2010-2020, but not too different for the period 2010-2015.
 The temperature is expected to rise 0.65 °C by 2030, 1.1 °C to 1.7 °C by 2050
and 2.5 °C by 2080 to 2100 (based on trend data), where the fish will move
away as a result of rising temperatures.
 Sea level rise, will rise about 0.6-0.8 cm per year, or the year 2100 is expected
to rise about 80 cm or the pessimistic scenario could be more than 5 meters.
 Interval of El Nino and La Nina will change from 3-7 years to 2-3 years which
have an impact on changes in precipitation and sea level.
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The agricultural sector will receive a direct effect on climate change. Along
with the modern economy of a country that is characterized by the higher contribution
of the industrial sector to Gross Domestic Product (GDP). Agriculture will decrease
its contribution to GDP and lower the supply or input for various food processing
industries. According to Zhai, Lin and Byambadorj (2009), by anticipating the decline
in agriculture's contribution to GDP, the impact of climate change on China's macroeconomy in the country will be moderate.
Similar results of research Zhai et al was conducted by Zhuang (2008), where
the impact of climate change on the agricultural sector in the region. The results
showed that the impact of climate change on the agricultural sector is moderate.
Based on IFPRI publication (2009) asserts that there is a negative effect of climate
change on agriculture and human welfare. The above studies indicate that agriculture
requires more attention from the visible effects of climate change.
Boer (2009) showed that rice yields would decline by about 34% in Indonesia.
It is expected to begin to occur in 2030 assuming no adaptation is done and there is no
technical improvement. The study, conducted by Peng et al (2004) found that rice
products will fall by 10% for each decrease in temperature by 1 °C during the
growing season at the lowest temperature. For the production of corn products will
fall between 5 - 44 % depending on the location of production such as those found in
studies conducted by the Office of Natural Resources and Environmental Policy and
Planning (ONEP 2008).
Indonesia is predicted to experience the effects of temperature rise and its
impact on the agricultural sector in 2030 (Oktaviani, 2011). According to the
Intergovernmental Panel on Climate Change (IPCC , 2008), Indonesia might see a rise
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in temperature of about 0.8 0C in 2030. Several other studies have shown the impact
of climate change in Indonesia will be in the range of 2020-2050 (Boer, 2008) and
Clien (2008 ) also showed the same time frame to several countries in Asia.
High prices of agricultural products will increase in agricultural incomes.
Agriculture will experience an increase in revenue, but on the other hand will
decrease consumer welfare as a result of the increase of prices. Challenges to the
existence of climate change, a result of the increase in agricultural prices will have a
positive impact for landowners with rising rental income.
The impact of climate change and international prices on agricultural products
will affect agricultural output. Output of Rice as a staple food in Indonesia are
vulnerable to climate change and international prices of agricultural products. To that
end, the government's policy of agricultural products will greatly affect the welfare of
the public with regard to consumption of staples .
Methodology
To answer the problem above, We will be used general equilibrium model
(Recursif Dynamic Computable General Equilibrium Model). This model is expected
to provide an overview of the various changes in the exogenous variables, so they can
answer the problems that have been formulated.
In this study, CGE models are used to seeing a broader picture of the impact of
climate change on the agricultural sector. How to respond to changes in the
productivity of crop products to various sectors of the economy simultaneously.
General equilibrium model is a model that describes the market relationship of
all goods and services in an economy. Each market will be in equilibrium, so that all
market linkage will occur in the balance between supply and demand of each market.
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Therefore, any change in the balance of a market, a reaction to the change of the
balance of other markets is a response to changes in the market equilibrium. Modeling
Computable General Equilibrium (CGE) is an attempt to take advantage of the
general equilibrium theory as a tool to perform an empirical analysis of the issues of
resource allocation in a market economy (Bergman 2005).
The forerunner of the CGE model used in this study will be based on the CGE
model used in the model of economic equilibrium in Australia ORANI - G models.
This model is a static model which has the main equations to explain the relevance of
various factors:
 Request input factors of production by industry
 Commodities Supply
 Request input for capital formation
 Household Demand
 The demand for export
 Request the government
 The link between the basic values of the costs of production and producer
prices
 The market clearing for commodities and primary factors
 A number of macroeconomic variables and price indices (Horridge 2000).
Some of the assumptions in this model suggests that all markets are in
equilibrium. Therefore, the concept of optimization present in all equations in
accordance with the concept of neo-classical economics. Utility maximization and
cost minimization constraints on the functions implemented in the model, so that the
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output is produced in the equation - the equation always refers to the concept of
efficiency .
Application of CGE models in this study will have a general idea as follows :
1. It is a multi - sectoral model that can dissagregation into 20 industries and 20
commodities.
2. There are 18 types of inputs, capital, land and 16 of labor groups.
3. Production structure distinguishes several types of labor that will be used
through the CES function optimization. While the composition of intermediate
inputs and primary inputs are optimized through a Leontief function .
4. The data are generally fundamentally based on 2008 Indonesian Input-Output
table, while General Equilibrium models also require some of the data
provided in 2008 Indonesian Social Accounting Matrix Table (SAM).
Scenarios
To get a change or impact in this model is indicated by the percentage change,
then we need a base case as a starting point of the change. The base case are also
known as business as usual scenario and basically is what will happen in the absence
of shock. This model also requires a base year as the starting point for defining
change dynamically, which in this study used 2008 as the base year. The assumptions
used in the baseline scenario is that economic growth will underpin the growth of all
sectors will be cap at 6.5% according to the medium-term plan of the Indonesian
economy. The second of assumption is the number of household or q that always
reduced to 2030, using projections used by the World Bank to assume the
Demographic Dividend in Indonesia (Mason & Lee, 2000). Other assumption is the
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trend of employment in Indonesia (emptrend). At the beginning of the period, the data
is projected in 2:26% and continues to rise along with the rise and fall of the economy
and the growing amount of household. The last two variables are used as assumption
are land use (x1lnd) and the shift of the export demand curve (f4q). Both variable are
assumed to increase by 6% per year.
In general there are two main scenarios, ie. the baseline scenario and the
second scenario is the presence of a shock for a particular purpose. In this study will
try to analyze the impact of climate change on agricultural output in Indonesia, the
influence of international prices for agricultural products as a result of climate change
overseas and how the impact of both. Three such simulations will be seen the impact
on policy that prohibits the import of rice or if only the international rice prices rise
and if all imported agricultural products are prohibited.
The magnitude of decline in agricultural output and international prices
change as a result of climate change overseas will be referred to a study conducted by
Oktaviani in 2011. In 2030 as a result of climate change will reduce output and
increase in international prices as shown in the following table:
Table 1. Percentage Change in Output and International Price of Climate Change in 2030
Agricultural
No
Output
Decrease in Output
1 Paddy
10.13
2 Beans
20.39
3 Maize
20.8
4 OthAgric
35.26
5 RiceMilling
10.13
Source: Oktaviani et.al., 2011
Price Increase
28.9
30.7
29.9
11.8
Results
Prior to the analysis of the simulation of the model that has been built before,
the first stability test performed with respect to the model parameters used. Method to
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perform this test using a test sensitivity of the various parameters used in the model.
Three main parameters will be used to see the extent to which variables are generated.
The parameters are the Armington Elasticities, Export elasticities and the elasticity of
the primary factors.
Sensitivity test carried out on the three scenarios are divided into three
combinations of parameters with different of multipliers. Simulation of sensitivity
analysis performed in 3 combinations constants. The results of analysis gives an
overview of various combinations of parameters that are used for a variety of
simulated scenarios. Three policies are divided into three combinations of parameters
gives the same conclusion for all combinations of parameters. The change from a
variety of major variables such as import price and real consumption gives the same
direction. These results demonstrate the power of simulation models to provide the
same result even if there is a change in the parameters used. This gives confidence
that the model used has the power to estimate the percentage change in each variable
for each year simulated.
Baseline Scenario
Formulation of a simulation of the CGE model will look at the impact of a
shock or some of the baseline data. Dynamic CGE model used in this study will look
at a range of variables due to policy changes undertaken shock to the baseline
scenario. We do this by comparing the simulation results generated by the simulation
on the baseline scenario or a scenario which shows the changes in the economy
without any disturbance/shock in the form of climate change.
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For the baseline model, the important thing to do is to control the growth of
output of each sector in the database. To that end , twenty sectors which are used as a
database of controlled growth based on projections that have been made, where every
year has a different growth.
The results of all simulations are shown from the perspective of climate
change to the baseline scenario. Each figure shows the simulation results of the same
economy as the Baseline Scenario with a disturbance in the form of 'shock'.
Therefore, each digit of the simulation results will be read: what percentage change in
a variable ‘x’ relative to the baseline scenario, where the figure shows the impact of
the shock is purely done .
GDP
Total Consumption
CC (Rice Import
Restricted)
CC (Open Rice
Import)
-6.43
-5.94
-8.66
-7.94
HH Consumption -11.55
-8.97
0.00
Import
Price, HH Dom/Imp
41.27
18.60
29.73
Output -12.08
-11.54
-20
-10
0
10
Figure 1. Scenario A
20
30
40
50
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International
Price (Rice
Import
Restricted)
-0.03
-0.02
GDP
-0.26
-0.25
Total Consumption
-0.13
-0.45
HH Consumption
Import
0.00
Price, HH Dom/Imp
0.04
-0.20
Output
-2
-1
0.97
0.73
0
1
2
Figure 2. Scenario B
-6.25
-6.25
Total Consumption
HH Consumption
CC & Int' Price (Rice
Import Restricted)
CC & Int' Price
(Open Rice Import)
-4.64
-4.64
GDP
-11.11
-10.22
0.00
Import
13.49
26.44
22.55
Price, HH Dom/Imp
Output -11.87
-11.68
-20
-10
0
10
20
30
Figure 3. Scenario C
Simulations were carried out consisting of three scenarios, namely the impact
of Climate Change decrease agricultural productivity (Scenario A), the impact of
climate change through international agricultural commodity price increases to
domestic agricultural output (Scenario B) and the impact of climate change on
domestic and foreign climate change through increase in the international prices of
agricultural outputs of the agricultural sector (Scenario C).
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All simulations will be discussed by comparing the effect of each policy on
the agricultural sector output, agricultural output prices, household wealth represented
by the level of real consumption and gross domestic product. All analyzes referred to
in 2030, which predicted the effect of climate change is already happening in
Indonesia (Oktaviani, 2011).
Scenario of Climate Change in Indonesia
Simulations conducted in this section is conducted three major simulation by
dividing the two scenarios. The first is free to import rice and second by prohibiting
the import of rice. The results of both scenarios for each of the three simulations will
be compared to see the extent of the rice import policy affects the economy specialy
the price in conditions of climate change, see the figure 1.
The rice output decrease relative to baseline for both scenarios. The decrease
in the percentage change of the rice output is lower in open policy to rice import
compare to prohibit the rice import. The decline in output is increasing the price
received by households and eventually lower the level of household consumption for
rice. Judging from the total real household consumption and real GDP changes, for
both scenarios, the open import policy is quite high compared to restrain imports. This
is evident from the level of household consumption of rice fell up to 11.55% relative
to baseline with the rice import policy compared to a fall of 8.97 % if the imports of
rice is opened.
Real total household consumption and GDP have low enough difference
between free import policy and prohibit import policy. There is 6.43% decline of
GDP and 8.66% on Total Consumption Real household. This decrease is different
about one percent lower in the open import policy is 5.94% and 7.94% for the
variables Real GDP and total household consumption.
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Global Climate Change Scenario
The second simulation, see the Figure 2, shows how the impact of rising
international prices for agricultural products as a result of climate change overseas.
Assumptions, domestic has not been impacted of climate change, then the simulation
is discussed for two scenarios. The first scenario shows the increase in the percentage
change in the output of rice by 0.73% relative to baseline compared with the second
scenario actually fell by 0.2% relative to baseline. The impact of climate change in
overseas through the international price increases for rice, the price of rice increase
that received by households. Rice import levels down, and increasing of price rice
will reduce of household consumption and the total consumption of rice. Same with
the first type of simulation, open rice imports still provide a lower cost facing an
international price increase as a result of climate change overseas. This is reinforced
by the decline in GDP relative to baseline in the prohibit imports of 0.03% greater
impact than the decrease of 12.02% on the open import policy.
Scenario of Climate Change in Domestic and Abroad
Climate change is happening either directly perceived in Domestic (Indonesia)
or even abroad gives the same effect as the previous two scenarios. This suggests that
the impact of the decline in output becomes apparent to the existence of climate
change. In the third type of simulation (Figure 3) or the impact of climate change in
the domestic and international impact described further strengthen the image of
Figure1 and Figure 2.
The increase in the domestic prices of agricultural commodities, decrease total
household consumption and a decrease of Real Economic Growth's policy to prohibit
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the import of agricultural products, lowering the welfare impact is greater than the
release of all imported agricultural products.
Conclusions
Based on the three major and eight simulation scenarios that have been done,
there are several conclusions that can be drawn as follows:
1. Climate change impact on reducing agricultural output in Indonesia in 2030.
Of the three scenarios that have been done, perform import protection for
agricultural output will decrease welfare views of real household consumption
and economic growth greater than removing import protection.
2. Impact of global climate change through an increase in the international prices
of agricultural products. The increase in international prices for all agricultural
products could increase agricultural output in Indonesia, except for the policy
of prohibiting the import of agricultural output and rising prices of rice price
only. If the international price of rice has increased, it is better to immediately
open the taps of imported rice. In addition to rewarding farmers for price
increases, not too big affect real consumption level of the household or the
macro economy.
3. Judging from the indicators of economic growth and real consumption of
households, then open import agricultural products have a negative impact on
the economy smaller than prohibit import agricultural products under
conditions of climate change in Indonesia.
4. Implications for government policy is to be a breakthrough in Indonesia to
prepare agriculture resilient to climate change in terms of foreign trade policy
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for agricultural products should be directed to the open market or no import
ban on all agricultural products for the welfare of the community in the future.
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