| Summary: | This paper utilizes conventional static computable general equilibrium (CGE) to
numerically analyze the effect of the trade liberalization policy on foods, livestock feed,
and fertilizer industries in Indonesia by employing the latest Indonesian Input-Output
table year 2005. Furthermore, this paper also tries to present the best welfare enhancing policy by introducing other policy options namely increasing subsidy with two different allocation methods and also explicitly incorporating government budget constraint. Three policy options followed by three financing methods have been simulated which generate the following results: First, both reducing tariff and increasing subsidy policies generate positive direct effect on Indonesian economy. However, the result will be totally opposite if government budget is financed by decreasing subsidy on petroleum refinery industry.
Meanwhile, if government budget shortage is satisfied by increasing individual income
tax, zero tariff policy negatively affects the Indonesian economy. In contrast, subsidy
policy generates positive effect on welfare. Notably, all simulation results highlight that
increasing subsidy policy based on forward linkage allocation gives the best outcome in all indicators.
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