The impact of mandatory halal food certification on Indonesian economy : a computable general equilibrium analysis

Abstract

This dissertation develops a Computable General Equilibrium (CGE) model to measure the macroeconomic impacts of mandatory halal certification on the Indonesian economy. The research is conducted sequentially. Firstly, a standard CGE model is built and tested for stability and consistency. Then a calibrated Halal-CGE model estimates the economy-wide implications of mandatory certification costs under various fiscal adjustment mechanisms. A fundamental structural change in Indonesia's halal regulation is Law No. 33 of 2014 on Halal Product Assurance. It has gained widespread adoption, but its macroeconomic implications have not been fully quantified as the literature has mostly studied it at the micro level. The dissertation measures the transmission of mandatory certification costs through inter-sectoral linkages, household income, trade performance and national output. The dissertation gives a macroeconomic perspective of the policy. The analysis was conducted at two levels. First, a standard CGE model of 17 sectors based on the 2022 Social Accounting Matrix (SAM) was developed and validated and was expanded into a Halal SAM of 20 sectors by disaggregating Accommodation and Food Services into Accommodation, Halal-Certified Food, Uncertified Food and Non-Halal Food. Three price shocks (3%, 5%, 7%) to the domestic prices of the Uncertified sector were applied for Halal-CGE simulations under three fiscal closures: endogenous government transfers, endogenous net tax on production and endogenous household tax rate. The Halal-CGE model is calculated using General Algebraic Modeling System (GAMS) software. The simulation assumes, that producers will pass on certification costs in higher prices. All simulations show a positive impact on GDP, ranging from 0.23% to 1.24% across the scenarios, although the institutional and sectoral dynamics are quite different. Under Scenario 1 (endogenous transfers), GDP expands 0.23%-0.50%, but government revenue shrinks significantly (-23.44% to -44.18%) and the income for the poorest quintile declines. Scenario 2 (endogenous production tax) presents a more modest growth (0.09%-0.22%) but more equally distributed, with middle to lower-income households (H1-H3). Under Scenario 3 (household tax endogenous), GDP rises significantly, but private consumption falls sharply (-14.89% to -28.01%) and income decreases for all households' quintiles. These results are robust to sensitivity analyses at trade elasticities of 1.5, 2.0 and 2.5. The best result is obtained in Scenario 2, which works on the supply side without putting great pressure on households' incomes. Scenarios 1 and 3 show that the government should not cut transfers or raise taxes on households to pay for this policy as both could reduce the purchasing power of lower-middle-income households. To the best of the author's knowledge, this is the first attempt to use the CGE framework to analyze the mandatory halal certification policy in Indonesia, compared to the previous literature that use CGE in the halal context, which focused on trade liberalization. It contributes methodologically through the Halal SAM and Halal-CGE model as a new analytical tool in the research landscape of Islamic economics.