The real devaluation affects prices throughout the economy and has a major impact on growth, production, deforestation, and income distribution in the Sumatera region. Simulations are conducted for the short and medium run under alternative scenarios of macro adjustment. Structural adjustment causes Sumatera's economy to contract in both the short and medium run.
Devaluation leads to increases in the prices of tradable goods.
Regional exports increase, mainly from the non-agricultural sectors, and imports decline. Food crops, except for rice and sugar, decline while tree crops increase. Deforestation is likely to increase because demand for forestry products increases, both as final products and as intermediate goods for the wood processing industry, both of which are sold on international markets. We analyze a possible policy response of imposing an export tax of 5-20 percent on processed wood to discourage further deforestation in the region. The results show that the proposed export tax reduces production of raw timber and processed wood, but at the cost of lowering exports and hence making the macro adjustment more difficult.