Poverty, labour markets and trade liberalization in Indonesia

We measure the effects of trade liberalization over the period of 1993-2002 on regional poverty levels in 259 Indonesian regions, and investigate the labour market mechanisms behind these effects. The identification strategy relies on combining information on initial regional labour and product market structure with the exogenous tariff reduction schedule over four three-year periods. We distinguish between tariffs for output markets and for intermediate inputs, and find that poverty reduced more in regions that were more strongly exposed to import tariff liberalization. Among the potential channels behind this effect, we show that job formation and increases in low-skilled wages were related to reductions in import tariffs on intermediate goods and not to reductions in import tariffs on final outputs. These results point towards increasing firm competitiveness as a driving factor behind the beneficial poverty effects.