The Impacts of Indian Ocean Rim Association (IORA) Economic Integration on Indonesian Macro and Sectoral Economy

Abstract

Economic cooperation among countries aims primarily to eliminate trade barriers, including Indian Ocean Rim Association (IORA) with 21 participating members. This study is designed to examine impacts of Indian Ocean Rim Association (IORA) economic integration would have on Indonesian economy. The analysis employs the Global Trade Analysis and Policy (GTAP) model and simulates four tariff elimination scenarios. Within the analysis it has been noticed that relatively bigger tariff reduction delivers higher increase in Indonesian welfare and GDP growth. However, the overall gain has dampened due the presence of deficit in trade balance, except in simulation where 95% tariff reduction applies only on request-offer sectors. Only three sectors show consistently high competitiveness under IORA framework with increasing output and export numbers, and other sectors demand for imports remains high. All in all, the result confirm that IORA is beneficial for Indonesia in terms of welfare and growth of real GDP. On the other hand, increasing demand for imports exceeds its exports, which will lead to huge deficit in trade balance.