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International trade in food crops has historically played a residual, supply-augmenting role in the Indonesian food economy. Indonesia was able to transform its rice economy technologically and stimulate rapid growth in rural income and consumption levels while protecting the domestic economy over the 15-year period ending in 1985. A slowdown in economic growth, combined with a deteriorating external payments situation, has led Indonesian planners to adopt a more open and outward-oriented approach to economic management. For agriculture, trade liberalization is understood as being a part of this new, outward-oriented, development approach. The costs of shifting the agricultural economy to a more liberalized trade rCgime were simulated using a multimarket agricultural sector econometric model. The results of the static simulation show that the transition costs, in terms of higher impon demand, lower fann income, and lower employment absorption, will be high. This argues that, particularly in a depressed world primary commodities market, a sound economic case can be made for special and differential treatment of protectionism in the developing economies. The extent to which labour wages are flexible will also have a significant influence on the economic gains from trade liberalization. In the Indonesian agricultural economy, where a high degree of rural underemployment is evident, complete trade liberalization will not be a first-best development policy choice.


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