Indonesia’s Rice Price Stabilisation: Policy Responses to the Staple Food Price Spikes of 2007–2008
INDONESIA’S RICE PRICE STABILISATION: POLICY
RESPONSES TO THE STAPLE FOOD PRICE SPIKES OF
2007–2008
TESA LISTYA KUSUMAWARDANI
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
STATUTORY DECLARATION
I, Tesa Listya Kusumawardani, hereby declare that the master thesis entitled
“Indonesia’s Rice Price Stabilisation: Policy Responses to the Staple Food Price
Spikes of 2007–2008” is my original work under the supervision of Advisory
Committee and has not been submitted in any form and to another higher education
institution. This thesis is submitted independently without having used any other
source or means stated therein. Any source of information originated from
published and unpublished work already stated in the part of references of this
thesis.
Herewith I passed the thesis copyright to Bogor Agricultural University.
Bogor, March 2015
Tesa Listya Kusumawardani
H151120181
RINGKASAN
TESA LISTYA KUSUMAWARDANI. Stabilisasi Harga Beras di Indonesia:
Respon Kebijakan Terhadap Kenaikan Harga Pangan Pokok pada Tahun 2007–
2008. Di bawah bimbingan HERMANTO SIREGAR and KYM ANDERSON.
Sebagaimana lonjakan kenaikan harga beras internasional pada tahun 2007–
08 diduga telah mengakibatkan timbulnya berbagai permasalahan ekonomi dan
politik di banyak negara berkembang, banyak pemerintah telah mengubah
pembatasan perdagangannya untuk mengurangi transmisi dampak lonjakan harga
tersebut terhadap pasar domestik. Selain itu, mereka juga menerapkan berbagai
kebijakan dalam negeri untuk menjaga stabilitas harga beras di pasar domestik.
Studi ini mengevaluasi kebijakan stabilisasi harga beras yang diterapkan oleh
Pemerintah Indonesia dalam merespon naiknya harga beras internasional, guna
menyelidiki tujuan dan konsekuensi dari kebijakan tersebut.
Hasil evaluasi menunjukkan bahwa tidak mungkin untuk menjamin
tercapainya ketahanan pangan (beras) negara dengan harga terjangkau bagi
konsumen sekaligus meningkatkan kesejahteraan petani secara bersamaan dengan
hanya menggunakan langkah-langkah kebijakan perdagangan. Studi ini
menekankan pentingnya perjanjian perdagangan internasional. Beberapa altenatif
kebijakan seperti pencegahan degradasi sekaligus ekspansi lahan pertanian,
investasi dalam infrastruktur pedesaan, R&D, dan ICT pertanian, serta
pengembangan aspek kelembagaan, seperti yang diusulkan dalam studi ini, dapat
meningkatkan ketahanan pangan dan mengurangi kemungkinan terjadinya lonjakan
harga beras internasional di masa depan.
Kata kunci: stabilisasi harga beras, lonjakan harga pangan pokok, respon kebijakan.
SUMMARY
TESA LISTYA KUSUMAWARDANI. Indonesia’s Rice Price Stabilisation:
Policy Responses to the Staple Food Price Spikes of 2007–2008. Under Supervision
of HERMANTO SIREGAR and KYM ANDERSON.
As the upward spike of international rice prices in 2007–08 might have
generated a wide range of economic and political problems in many developing
countries, the governments altered their trade restrictions to reduce the transmission
of its impact to the domestic market. In addition, they applied various domestic
policies to maintain the stability of the domestic rice prices. The aim of this study
is to evaluate the rice price stabilisation policies applied by the Government of
Indonesia in response to the soaring international rice prices in order to investigate
the objectives and consequences of the policies.
The findings show that it is impossible to ensure the country’s food (rice)
security at affordable prices for consumers and improve farmers’ welfare
simultaneously using just trade policy measures. The study also stresses the
importance of international trade agreements. It suggests the prevention of
agricultural land degradation, agricultural land expansion, high-payoff investments
in rural infrastructure, R&D, and ICT for agriculture, and institutional development
could increase food security and reduce the likelihood of international rice prices
spiking in the future.
Keywords: rice price stabilisation, staple food price spikes, policy responses.
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INDONESIA’S RICE PRICE STABILISATION: POLICY
RESPONSES TO THE STAPLE FOOD PRICE SPIKES OF
2007–2008
TESA LISTYA KUSUMAWARDANI
Master Thesis
as a requirement to obtain a degree
Master of Science in
Economics Program
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
Externally Advisory Committee Examiner: Dr M. Parulian Hutagaol, MS
Thesis Title
Name
NIM
: Indonesia’s Rice Price Stabilisation: Policy Responses to
the Staple Food Price Spikes of 2007–2008
: Tesa Listya Kusumawardani
: H151120181
Approved
Advisory Committee,
Prof Dr Ir Hermanto Siregar, MEc
Prof Kym Anderson
Agreed
Coordinator of Major Economics
Dean of Postgraduate School
Dr Ir Nunung Nuryartono, MSi
Dr Ir Dahrul Syah, MScAgr
Examination Date: 05 December 2014
Submission Date:
ACKNOWLEDGEMENT
Above all, my greatest gratitude goes to Allah SWT God almighty for the
multitude of His mercies. I would also like to take this opportunity to express my
immense gratitude to all those persons who have given their invaluable support and
assistance. In particular, I am profoundly indebted to my supervisors, Professor
Hermanto Siregar and Professor Kym Anderson, who were very generous with their
time and knowledge and assisted me in each step to complete the dissertation.
Without their supervision and constant help, this dissertation would not have been
possible.
I also extent my gratitude to all lecturers and staff at the University of
Adelaide especially Athena Kerley, Niranjala Seimon, Augustine Bhaskarraj and
Nicole Rizzo-Gray for their support and contribution to my study at The University
of Adelaide.
I would like to acknowledge with thanks to the Ministry of Trade Republic of
Indonesia and the Australian Award Scholarship for sponsoring my entire studies.
I would also like to thank Bogor Agricultural University and The University of
Adelaide for giving me the opportunity to study my master degree.
I would also like to acknowledge Elite Editing for giving me editorial
assistance to improve the quality of my thesis. The editorial intervention was
restricted to Standards D and E of the Australian Standards for Editing Practice.
Also I want to thank all my friends, especially lima sekawan plus one (Shanty,
Nadya, Indra, Meindro, and Ari) and my friends in Indonesia (Tresna, Renita,
Ratna, Lia, Alfie, Ricky, and Angga) for their help and spiritual support.
Notwithstanding all of the above support for this thesis, any errors and/or
omissions are solely my own.
Finally I would like to thank my parents, my beloved husband, Aulia, and our
lovely children, Nadia & Alta, for their love, prayers, sacrifice and support
throughout entire process. This thesis is dedicated to them.
Bogor, March 2015
Tesa Listya Kusumawardani
TABLE OF CONTENTS
LIST OF FIGURES ......................................................................................... xi
LIST OF TABLES .......................................................................................... xi
LIST OF ABBREVIATIONS ......................................................................... xi
1. INTRODUCTION ........................................................................................1
2. BACKGROUND ..........................................................................................2
3. LITERATURE REVIEW ..............................................................................4
Theoretical Framework..................................................................................4
Impact of Rising International Rice Prices ................................................4
The Approaches of Stabilising Domestic Rice Prices ...............................5
The Impact of Governments’ Interventions on World Rice Prices ...........5
Empirical Framework ....................................................................................6
4. DISCUSSION................................................................................................7
The Evaluation of Indonesia’s Rice Price Policy Responses ........................8
Reduction in Import Restrictions...............................................................8
Export Ban .................................................................................................9
Raising the Government Reference Purchase Price ................................11
Consumer Subsidy for the Poor ...............................................................11
Suggested Implementation ..........................................................................13
Prevention of Agricultural Land Degradation .........................................14
Agricultural Land Expansion ..................................................................14
Investment ...............................................................................................15
International Trade Agreement................................................................17
Institutional Aspect ..................................................................................17
5. CONCLUSION ..........................................................................................18
REFERENCES ................................................................................................19
BIOGRAPHY ..................................................................................................23
LIST OF FIGURES
Figure 2.1: International Rice Prices and Indonesia’s Producer Support
Estimates
on Rice, 2000–2013........................................................................ 3
Figure 3.1: Effect of Offsetting Export Barrier Increases and Import Barrier
Reductions in the International Food Market ................................. 6
Figure 4.1: Indonesia’s Imported Quantity of Rice (HS 1006), 2001–2008 ..... 9
Figure 4.2: Indonesia’s Exported Quantity of Rice (HS 1006), 2001–2008 ... 10
Figure 4.3: International and Domestic Wholesale Rice Prices, 2000–2008 .. 12
Figure 4.4: Perceptions of the Quality of Local Road Infrastructure in
Indonesia,
by Province, 2011 ......................................................................... 15
Figure 4.5: The Share of Indonesia’s GDP in Improving Telecommunication
Services, 2000–2013 .................................................................... 16
LIST OF TABLES
Table 4.1: Policy Responses to Rising Commodity Prices in 2007–08 ............ 8
LIST OF ABBREVIATIONS
ASEAN
GDP
GOI
GPP
ICT
IMF
NTB
PSE
R&D
WTO
Association of Southeast Asian Nations
Gross Domestic Product
Government of Indonesia
Government Purchase Price
Information and Communication Technology
International Monetary Fund
Non-tariff Barriers
Producer Support Estimates
Research and Development
World Trade Organization
1
1
INTRODUCTION
Staple food price spikes in 2008 triggered panic situations in many
developing countries. Since then, global commodity prices have fallen. However,
they still fluctuate above the prior price levels, which causes uncertainty and leads
to higher prices for domestic foods, including rice, in many countries. Rice is one
of the staple foods that play an important role in the economic, social and political
stabilisation of most Asian developing countries, including Indonesia. Higher rice
prices can harm poor net buyers of rice, thereby inducing economic and social chaos
(Ahsan, Iftikhar & Kemal 2012). Therefore, governments attempt to stabilise the
domestic price of rice.
There is an intense polemic about the approaches governments can take to
stabilise food prices. Due to the international staple price spikes of 2007/2008, this
issue has recently become a major concern in many international forums, such as
G20 annual meetings. One approach is for countries to agree multilaterally to trade
liberalisation. Another approach is for national governments to intervene by varying
their border restrictions on trade. Trade liberalisation is theoretically considered to
be the best way to provide efficient resource allocation. However, many
governments, especially in developing countries, argue that the existence of market
failures, such as imperfect markets and the low quality of infrastructure (which
commonly occur in these countries, including Indonesia) requires government
intervention to help stabilise domestic prices of staple foods.
Hence, the question arises as to whether the market intervention applied by
the Indonesian government is effective in stabilising the prices of staple foods,
particularly rice. The next questions are:
What are the real objectives of Indonesia’s rice price stabilisation policy?
What are the costs and benefits of the implementation of these policies?
An effective policy applied by the government is expected to reduce the adverse
impact of the global rice price spikes that occurred in 2007–2008 and prevent it
from occurring in the future. This would be beneficial to the economic welfare of
Indonesia.
This study aims to evaluate the implementation of rice price stabilisation
policies in Indonesia. It also investigates what factors should be considered in
applying these policies. The next section of the paper outlines the background of
Indonesia’s rice price policies. Following this, the literature review focuses on the
theoretical and empirical framework of the food price stabilisation approaches. The
final section discusses the effectiveness of Indonesia’s policy responses to the staple
price spikes of 2007–2008 in terms of rice, and offers several policy
recommendations for improvements in the stabilisation of food prices.
2
2
BACKGROUND
Rice is the staple food of more than 90 per cent of the population of Indonesia
(McCulloch & Timmer 2008). Thus, a high weight of expenditure (or earnings
spent on rice sellers) for the majority of Indonesian households, especially the poor,
is allocated to rice consumption. This could be the reason why rice prices have
become one of the important factors that affect the economic and social stability of
Indonesia. Therefore, rice price stabilisation is an important goal for the
Government of Indonesia (GOI). Government policies have non-trivial effects on
other countries however, because, in terms of rice consumption, Indonesia is the
third largest consuming country in the world after China and India (USDA 2014).
Prior to the staple food price spikes of 2007–2008, the changes in the rice
policies applied by the GOI can be divided into four broad phases. These phases
include the period of import substitution (the late 1960s–1984), export orientation
(1985–1996), crisis (1997–1999), and recovery (2000 onwards) (Fane & Warr
2009). The first phase started in the late 1960s, when the New Order regime, under
Suharto's leadership as the second president of Indonesia, began. At the beginning
of this period, the rice policies implemented by the Government were directed at
maintaining the stability of rice prices in the domestic market. The purpose of these
policies was to prevent the occurrence of high inflation due to rising prices in staple
foods on a large scale, as had occurred at the end of the Old Order regime. In order
to achieve this goal, the Government attempted to boost domestic rice production
and reduce rice imports by supporting the local market with the provision of input
subsidies, better infrastructure, irrigation systems, and innovation, such as the green
revolution programme (McCulloch & Timmer 2008).
In the early 1970s, protection for agricultural commodities, mainly rice, was
largely increased. At that time, the Government put forth import reductions as it
aimed to achieve rice self-sufficiency and started to implement import-substituting
industrialisation (Fane & Warr 2008). By organising a massive guidance
programme called Bimas, the Government provided input and credit subsidies for
farmers. This assistance was financed by additional oil export revenue earned from
rising world oil prices in the 1970s.
During 1985–1996 however, the Government phased out protection for rice.
The first reason for the change was the falling international oil price in the mid1980s, which led to a decline in the Government’s export revenues. Thus, the
Government could no longer afford to provide the same level of subsidies to
farmers. As a result, the domestic production of rice continued to decline until the
Asian financial crisis of 1997–1998 (McCulloch & Timmer 2008). The other reason
is Indonesia became a member of the World Trade Organization (WTO) in 1995.
Since then, several trade reforms, such as reductions of tariffs or non-tariff barriers
(NTBs), and cuts to agriculture input subsidies, have been implemented for most of
Indonesia’s import-competing commodities.
In 1997, the Indonesian economy was hit by the external shock that came
from the Asian financial crisis. It caused a depression in the Indonesian economy,
leading to a drop in the annual growth rate of -13% in 1998 (World Bank 2014b).
When the rupiah depreciated due to the crisis, many manufacturing industries were
in debt, thereby forcing the GOI to borrow funds from the International Monetary
3
Fund (IMF) (van Dijk & Szirmai 2006). However, The IMF gave a conditional loan
that required the Government to remove its restrictions on imports, especially for
agricultural commodities such as rice and sugar. Moreover, the Government was
obliged to abolish the rice import monopoly of the national logistics agency
(Bulog). Thus, during the period of debt repayment to the IMF, the Government
implemented a pro-market mechanism as an approach to rice price stabilisation.
However, in the recovery period after the Asian financial crisis of 1997–1998,
there has been a reversal of the rice policies applied by the GOI. The Government
again intervened to stabilise domestic rice prices. In 1999, the Government began
to impose rice import tariffs of 20 per cent, which was then changed to a specific
tariff (Rp430/kg). Further, in 2002 the Government returned a mandate to Bulog
regarding the monopoly on rice imports. Finally, in 2004, restrictions on rice
imports were again imposed by the Government.
After 2004, there has been an upward trend in international rice prices. As
shown in Figure 2.1, the real annual prices of rice increased gradually from
US$279/mt in 2004 to US$342/mt in 2007, and rose sharply to US$632/mt in 2008.
During this period, the international rice price rose by more than 200 per cent. This
price surge has led to the higher domestic prices of rice in many countries,
depending on the price transmission mechanism and the exchange rate movements
of each country (Abbott & de Battisti 2011).
60.00
700.00
50.00
600.00
40.00
30.00
500.00
20.00
400.00
10.00
300.00
0.00
-10.00
200.00
-20.00
-30.00
100.00
Indonesia's PSE on Rice (%)
International Price of Rice ($/MT)
Chart Title
-40.00
-50.00
Rice, Thai 5% ($/mt)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.00
Producer Single Commodity Transfers on Rice (%)
Figure 2.1 International Rice Prices and Indonesia’s Producer Support Estimates
on Rice, 2000–2013
Source: (World Bank 2014a & OECD 2013a)
Since the transmission of price is closely related to government protection
policies, the GOI reversed its protective trade policy during the upward spike of
international rice prices in 2008 in order to minimise the impact on the domestic
market. It can clearly be seen from Figure 2.1 that the movements of Indonesia’s
4
Producer Support Estimates (PSE) on rice were mostly positive between 2000 and
2013, except for the rice price spike in 2008. The PSE fell from 25 per cent in 2007
to -40 per cent in 2008, and rose again to 30 per cent after the international rice
price had declined in 2010 (OECD 2013a). This means that the Government policy
was not only aimed at assisting farmers in low price periods, but also preventing a
spike in domestic consumer rice prices when there is an international price shock
as occurred in 2008.
3
LITERATURE REVIEW
Volatile world food prices, especially for rice, such as those from 2008, can
be problematic for countries due to the high degree of risk for poor economic agents
(FAO 2011). This section discusses the impacts of rising international rice prices
from the microeconomic and macroeconomic perspectives, and theoretically
describes two approaches to stabilising domestic rice prices. This discussion is
supported by various empirical studies.
Theoretical Framework
Impact of Rising International Rice Prices
From a microeconomic perspective, higher rice prices will have a different
impact on consumers (net buyers) and producers (net sellers of rice). For
consumers, rising rice prices will reduce their welfare and lead to substitution and
income effects (Dorward 2012). The substitution effect suggests that consumers
will reduce their consumption of rice and substitute it with lower-price food. The
income effect suggests that the real income of consumers will decrease as a result
of the higher cost of buying this important product. In this case, poor consumers
tend to suffer most from the drop in real income because a large portion of their
income is spent on rice.
Moreover, Dorward (2012) states that an increase in rice prices will benefit
the producers of the good through profit and substitution effects. Higher rice prices
give the producers higher revenue, leading to more profit. It can then create a
substitution effect in which the higher prices of the good encourage other producers
of competitive products, which give less profit due to relatively cheaper prices, to
produce the now higher-priced and more-profitable good.
In terms of the macroeconomic perspective, in the absence of government
policies, such as taxes and subsidies, higher international food prices will have a
different impact across countries depending on whether they are rice-importing or
-exporting countries. A rice net-importing country will suffer from a welfare loss
as increases in the prices of imported food will raise the import bills, which could
result in the depreciation of the country’s currency (Dorward 2012). Conversely,
rice net-exporting countries will gain more income as their export revenue increases
due to the higher prices of their export commodities.
5
However, besides the direct impact of higher rice prices described above, in
the long run there is also an indirect impact of higher rice prices through the wages
of farmers and non-farmers (McCulloch 2008). As rising rice prices give incentives
for farmers to enhance their production, it would raise the demand for labour, which
benefits farm workers due to a higher wage. It might also draw non-farm labour
into the agricultural sector, leading to a rise in wage for labour outside the
agricultural sector to maintain employment in the rural non-farm sector. However,
the impact of rising rice prices on the welfare of both farm and non-farm workers
would be ambiguous depending on whether it offsets the increase in their cost of
living. Even so, many governments are likely to implement policies that can
minimise the negative impact of rising international food prices on urban net buyers
of rice.
The Approaches of Stabilising Domestic Rice Prices
There are two approaches used by governments to stabilise domestic rice
prices. The first approach is a pro-market mechanism through trade liberalisation.
This approach considers the efficiency in resource allocation based on the
comparative advantage of each country (Markusen et al. 1995). In a perfect
competitive market, this approach can work effectively. If there is an increase in
international rice prices, which results from an expanded demand for the
commodity, with an invisible hand or market mechanism, the price can return to its
earlier equilibrium level since a supply response to the high price will lead to a
reduction in quantity demanded of the commodity. In contrast, if international rice
prices fall resulting from excess supply of rice, through the market mechanism, the
price will go back to the equilibrium level due to fewer incentives for the producers
to grow and sell the good.
The second approach is market intervention through government trade
policies. In order to maintain domestic price stability, exporting countries use
different policies from importing countries in terms of responding to the changes in
international commodity prices (Anderson & Nelgen 2012b). In the case of an
increase in international food prices, food net-exporting countries attempt to
stabilise domestic markets by raising their export taxes or quantitative restrictions
on food exports, so there will be relatively greater supply of food in the domestic
market, leading to a lower prices for food than in the international market.
Conversely, food net-importing countries will reduce their restrictions on food
imports, leading to a relatively lower food prices in the domestic market.
Overall, the effect of the trade measures applied by both exporting and
importing countries will be the same on the rice producers and consumers’ welfare
in these countries, as these policies will reduce the welfare of domestic rice
producers, but increase domestic rice consumers’ welfare. Nevertheless, the net
impact on the countries’ net welfare might be ambiguous depending on whether the
increase in consumers’ welfare is greater than the loss in producers’ welfare.
The Impact of Governments’ Interventions on World Rice Prices
As illustrated in the partial equilibrium diagram of International Trade in
Figure 3.1, Anderson and Nelgen (2012a) show that if both food exporting and
importing countries try to insulate their domestic market at the same time, it can
generate a spill-over effect. This is because it contributes to a higher international
6
price for food compared with the international market equilibrium price in which
there is no intervention from any government. An increase in export barriers applied
by exporting country governments will shift up the supply curve from ES0 to ES2,
while import barrier reductions applied by importing countries will simultaneously
shift up the demand curve from ED0 to ED’.
Although this collective action allows both exporting and importing countries
to retain their domestic rice price below that in the international market, this action
could induce a further rise in the international price for rice to P3 rather than P1 when
there is no any government intervention. If exactly the same quantity of
international rice were traded, as would be the case without any government
intervention, Q1, neither the rice-exporting nor the rice-importing countries would
have prevented this domestic price from rising to P3.
Figure 3.1. Effect of Offsetting Export Barrier Increases and Import Barrier
Reductions in the International Food Market
Source: (Anderson & Nelgen 2012a)
Empirical Framework
Many previous studies on the impact of rising international food prices on
both global and domestic markets provide evidence that suggests many countries,
especially developing ones, try to protect their domestic markets using trade policy
intervention. A recent study by de Hoyos and Medvedev (2011) reveals that the
food price surge in 2008 led to a higher number of poor people being under the
extreme poverty line (155 million), with the highest increase in poverty occurring
7
in East Asia. The level of poverty incidence in Mexico increased by 9.94 per cent
during the upward spike of global food prices between 2006 and 2008 (Valero-Gil
& Valero 2008). Fears of an increase in the incidence of poverty caused by global
food price escalation in 2008 could be the main reason governments attempted to
stabilise their domestic food prices by implementing protectionist trade policies,
such as export bans for exporting countries and the reduction of import restrictions
for importing countries.
However, most governments may be unaware of the consequences of their
policies’ impacts on the international market. A recent empirical study shows that
the collective action undertaken by rice exporting and importing countries to
stabilise their domestic price of rice as a response to the international rice price
hikes of 2007–2008 eliminated the effectiveness of each country’s change in trade
restrictions. In addition, it contributed to a further 45 per cent increase in
international rice prices (Martin & Anderson 2012). Moreover, this study has been
extended by Anderson, Ivanic and Martin (2014) to show these interventions did
not prevent extra people falling below the poverty line. This is because such
collective action leads to a more fluctuated price of rice in the domestic markets
(Ivanic & Martin 2014).
At a regional level, such as in South Asia, Dorosh (2008) found that
restrictions on exported cereal imposed by India and Pakistan in responding to the
staple price spikes of 2007–2008 led to a further increase in imported cereal prices
in Bangladesh and Afghanistan. Therefore, such protectionist policies that attempt
to insulate the domestic market are wasteful and could in fact exacerbate the impact
of rising international food prices. This is because it may even increase global
poverty, even though the initial objective of this policy ostensibly is to alleviate the
possibility of rising poverty (Anderson 2012). Further, based on the evidence from
14 developing countries, Watson (2013) has revealed that the real objectives behind
the governments’ protectionist policies are mostly driven by political interests,
which include preventing social unrest that would threaten the political position at
the next election, rather than by considerations of the cost and impact of the policy
on other countries.
4
DISCUSSION
To help the Government cope with rising global rice prices over the last
decade, this study aims to evaluate the rice price stabilisation policies that have been
implemented in response to the staple food price spikes of 2007–2008. This will
determine the real objectives of the policies, and determine what factors should be
considered in applying these policies (costs and benefits). Although evaluating
these policies is challenging, due to political interests, it may be possible to find
some solutions to mitigate the impact of rising global rice prices on the domestic
market and prevent it from occurring in the future, which would benefit Indonesia’s
economic welfare.
8
The Evaluation of Indonesia’s Rice Price Policy Responses
Under the sectoral strategic plan (Renstra) of the National Development Plans
(Rencana Pembangunan Nasional), food security and improvements in farmers’
welfare are still the two main targets for development in Indonesia’s agricultural
sector (MoA 2010). When there was an upward spike in global food prices,
including rice prices, in 2007–2008, the Government applied several trade and
domestic policies to stabilise the domestic price of rice. This is because it is an
important factor in achieving Indonesia’s agricultural sector development target as
stated in the Government Decree 68/2002 on Food Security. Table 4.1 gives a
sequenced list of the Government policy responses to rising global rice prices in
2007–08.
Table 4.1 Policy Responses to Rising Commodity Prices in 2007–08
Commodity
Policy response
Period
Rice
Permission given to BULOG to import Between January
significant quantities of rice
2007 and April 2008
Lowered tariff from IDR 450/kg (USD Between March 2007
49/tonne) to IDR 200/kg (USD
and May 2007
22/tonne)
Raised the government reference
2007 onwards
purchase price for farmers (HPP)
Expanded the quantity of rice
February 2008
distributed to poor households through onwards
RASKIN
Restrictions placed on exports
Between April 2008
and May 2009
Source: (OECD 2012)
Reduction in Import Restrictions
One of the Government trade policy responses to the rising international rice
prices was to change its import policies by reducing import restrictions on rice. For
example, Bangladesh removed its import duty on rice in 2007 (Raihan 2013), while
the Philippines increased its rice imports by approximately two million tonnes per
year during 2006–2008 (Balisacan, Sombilla & Dikitanan 2010). Similarly to these
countries, the GOI also responded by giving permission to Bulog to import a
significant quantity of rice from January 2007 to April 2008, and reducing the
specific tariff on rice imports during March–May 2007 as shown in Table 4.1.
From Figure 4.1, it can be seen that in 2007, this policy increased Indonesia’s
rice imports by nearly one million tonnes, a rise from 438 to 1,406 thousand tonnes.
As a result, in 2007 rice imports contributed to four per cent of the total domestic
rice supply, an increase from only one per cent of the total domestic rice supply in
2006 (FAO 2014). This increase in import supply would lead to the lower rice price
in the domestic market. Thus, it is believed that a reduction in import restrictions
would protect domestic consumers, mainly poor households, from unaffordable
domestic rice prices and food insecurity (Saifullah 2010).
9
Indonesia's imports from world
2000
1805.38
1800
1000 tonnes
1600
1428.505
1406.848
1400
1200
1000
800
644.733
600
438.109
400
289.689
236.867 189.616
200
0
2001
2002
2003
2004
2005
2006
2007
2008
Figure 4.1 Indonesia’s Imported Quantity of Rice (HS 1006), 2001–2008
Source: (TradeMap 2014)
However, from a unilateral perspective based on the theory described
previously, the effect of reduction in import restrictions on Indonesia’s economic
welfare is ambiguous. In addition, from a global perspective, Anderson, Ivanic and
Martin (2014) found that such policies applied by many governments to insulate
their domestic markets from the soaring global commodity prices in 2008 lead to
an even higher global food price. Further, they estimate this raised the number of
global poor by eight million people.
There are two other points to consider in implementing this policy. First, the
reduction in import barriers, particularly by reducing import tariffs, would be costly
for the Treasury, as it would reduce Government tax revenues. Second, there is no
guarantee that Bulog would not seek to profit from the sale of imported rice in the
domestic market, as it is no longer a non-profit institution. Since it became a private
agency (Perum) in 2003, based on the Government Decree 7/2003, it is allowable
for Bulog to make a profit by purchasing imported rice from the international
market at a relatively cheaper price, and selling it to the domestic market at a price
that is relatively more expensive.
Export Ban
The other trade measure applied by the Government to protect the domestic
rice market from the rising global food prices was the export ban on rice exports
during April 2008–May 2009. The application of the export ban was based on the
Regulation of the Minister of Trade 12/M-DAG/PER/4/2008 concerning the
regulation of rice imports and exports. This policy followed the prior application of
export bans imposed by major rice-exporting countries, such as India and Vietnam,
between 2007 and 2008 (Dorosh 2009).
10
Indonesia's exports to world
42286
45000
40000
35000
Tonnes
30000
25000
20000
15000
10000
4010
3991
5000
675
905
2003
2004
958
1614
876
2006
2007
2008
0
2001
2002
2005
Figure 4.2 Indonesia’s Exported Quantity of Rice (HS 1006), 2001–2008
Source: (TradeMap 2014)
The reason for the implementation of this policy was to prevent the large scale
export of rice, as a higher world price than the domestic price of rice would give
incentives for traders to export. If this occurred, it would drive the domestic rice
price higher. Further, it would thwart the Government's efforts in achieving food
security, in particular rice. As can be seen in Figure 4.2, during the implementation
of the rice export ban, the volume of Indonesia’s exported rice fell from 1,614 to
876 tonnes between 2007 and 2008. It is claimed that the rice export ban, during
which only Bulog was allowed to export, resulted in a more stable price of rice in
the domestic market during the global food price surges in 2008 (Saifullah 2010).
However, from the implementation of the rice export ban, it can be concluded
that the Government did not pay much attention to the welfare of rice farmers when
responding to the soaring global food prices in 2008. This policy eliminated the
incentive for farmers to obtain higher profits. Therefore, it might reduce the
motivation for farmers to produce more rice, which would ultimately have a
negative impact on Indonesia’s food security. This situation could become worse
because the increase in the price of other food commodity prices would require rice
farmer households to allocate greater budgets for their consumption, thereby
reducing the production of rice because they cannot finance the costs of farming
(Susilowati & Rachman 2009).
The lack of attention given by the Government to farmers is also proven by
the low rate of Government support for rice farmers during the global food price
surges of 2007–2008, as depicted in Figure 2.1. Thus, once again, such trade
measures cannot be used to achieve both targets of the developments in Indonesia’s
agricultural sector at the same time.
In addition, the export ban is a costly policy, as it will reduce Government
export revenues. Meanwhile, from the global perspective, even though the volume
of Indonesia’s exported rice is only a small portion of the world's total rice exports,
as Indonesia is typically a net importer of rice, it still potentially contributes to the
further increase in global rice prices. This is due to the spill-over effect from
11
collective action among other countries as explained earlier in the theoretical
framework.
Raising the Government Reference Purchase Price
Beside the two types of trade policies discussed above, the Government also
implemented two domestic policies in order to pursue domestic rice price stability
during the global food price surges between 2007 and 2008. One of them was
raising the government purchase price (GPP). It was aimed at maintaining the
incentives for farmers since their welfare was reduced by the implementation of
export restrictions and the reduction in import barriers on rice.
The GPP was commonly applied by many countries as a measure in response
to the soaring global rice prices. For example, during the rising rice prices in 2008,
the Government of Vietnam also raised the GPP to buy rice from its domestic sellers
in order to increase the country’s stocks of rice (Nguyen & Talbot 2013). Thus, the
GPP was not only useful to support domestic rice farmers, but also to increase the
domestic rice stocks in order to ensure the countries’ food security.
However, if a government raised the GPP too high, it would push rice prices
at the consumer level, leading to the volatility of domestic rice prices, which could
harm poor households. Therefore, the important factors that need to be considered
in the implementation of GPP is the determination of GPP, in which the reference
purchase price should provide sufficient incentives for farmers to continue or
increase their production of rice at a level that remains affordable for domestic
consumers. According to Saifullah (2010), the increase in the GPP for milled rice
and paddy, for approximately 7.5 per cent and 10 per cent respectively, set by the
Government as a response to the soaring world food prices during 2007–2008,
remained at levels that did not trigger a rise in consumer prices, so as not to harm
poor consumers. Moreover, Sembiring et al. (2012) estimate that an increase in the
GPP for paddy of 15 per cent would lead to a rise in the rice production of 17.907
per cent, causing the domestic rice supplies rose by 10.880 per cent. Thus, it would
help achieve Indonesia’s food security.
Consumer Subsidy for the Poor
The other domestic policies applied by the Government to protect the
domestic market, especially poor households, from the soaring global food price
between 2007 and 2008 was the provision of a rice consumer subsidy for the poor
(Raskin). The goal of this policy was to reduce the expenditure burden of poor
households by fulfilling their need for rice as the main staple food as stated in the
Presidential Decree 8/2008 on Rice Policy. Total Raskin distributed by Bulog for
the full 12-month period in 2008 was 3.3 million tonnes to 19.1 million targeted
households with an allocation of 15 kg per targeted household (Bulog 2008). The
similar programme was also adopted in the Philippines. The Government of the
Philippines allocated 0.1 per cent of the country’s gross domestic product (GDP) to
fund the rice subsidy programme in 2007 and increased the allocation to 0.6 per
cent of the GDP in 2008 as international rice prices rose significantly (Ramesh
2014).
However, the effectiveness of this policy in achieving the goal is still under
debate. It is argued that Raskin had no significant effect in alleviating poverty
(Strauss et al. 2004 cited in McCulloch 2008). This might be due to several
12
drawbacks in the implementation of this policy. Besides being difficult to define
the categories of eligible poor families who could receive the subsidised rice,
through a survey, it has been found that by more than 18 per cent of the total
distributed subsidised rice was not received by the targeted poor households due to
corruption (OECD 2012). Therefore, in order to make this policy more effective in
achieving its goal, it is necessary to design a transparent mechanism for its
implementation as well as monitoring and evaluating it periodically to determine
whether the policy is being run in accordance with the target set.
Overall, during the upward spike of staple food prices during 2007–2008, in
particular of rice, the GOI gave higher priority to ensuring food security for the poor
consumers with an affordable level of rice prices than it gave to the improvements
in farmers’ welfare. Hence, Indonesia’s rice policy was directed at maintaining the
stability of domestic rice prices. Applying a mix of the policy response, including
the tariff reduction on rice imports, the export ban, GPP and Raskin, the GOI was
successful in maintaining the stability of the domestic rice prices (Saifullah 2010).
It can be seen from Figure 4.3 that during 2007–2008, the domestic price of rice
was more stable than the international price of rice.
Figure 4.3 International and Domestic Wholesale Rice Prices, 2000–2008
Source: (Saifullah 2010)
Despite the fact that the Government could maintain the stability of the
domestic rice prices to achieve food security, by analysing these policies, it has
been shown that it is difficult to improve farmers’ welfare at the same time using
just trade policies. Moreover, such insulation policy applied by the Government has
13
contributed to an increase in the number of Indonesian poor people by 0.7% (1.5
million people) (Anderson, Ivanic & Martin 2014). Further, the collective action of
altering trade policies applied by other countries could lead to spill-over effects that
would exacerbate the increase in rice prices in the future. Thus, it would be more
effective for the Government to stabilise rice prices without altering its trade
restrictions.
However, to what extent can Indonesia rely on trade liberalisation to support
the stability of domestic food prices, particularly rice as Indonesians’ staple food?
This question arises because in the absence of government intervention, rising
international food prices might lead to higher inflation in domestic food prices,
which can cause more hunger and poverty, especially for developing countries that
tend to spend a higher share of their budget on food (Abbott & de Battisti 2011).
Therefore, government intervention still plays an important role in controlling the
domestic price. The following subsection will discuss some of the policy proposals
that could be used to stabilise domestic food prices, in particular rice, without
having to isolate the country from international trade.
Suggested Implementation
As discussed above, the trade policies applied by the GOI in response to the
soaring rice prices in 2008 cannot be used to simultaneously achieve the country’s
food security with stable domestic rice prices and improve rice farmers’ welfare.
Such trade measures hindered the international rice prices to be fully transmitted to
the domestic market, so that it would harm farmers due to lower prices of rice in
the domestic market and loss of incentives to produce more rice (Abbott & de
Battisti 2011). This could in turn have a negative impact on the country’s food
security. Meanwhile, such insulation policies would trigger collective action among
other countries, which generates the spill-over effect, leading to less stable rice
prices in the domestic market.
Therefore, it is better to stabilise the domestic price of rice without using trade
measures. In the short term, the GOI is expected to optimize the management of
public stockholding to achieve food security with more stable domestic prices of
rice in accordance with the agreement of the Ministerial Conference of the World
Trade Organization IX which was held on 3-6 December 2013 in Bali, Indonesia.
This can be attained by revitalizing the role of Bulog in handling procurement,
storage, process and rice trading among districts, provinces, and also trading with
other countries (Maisyarah 2013).
In addition to the better implementation mechanism of the two domestic rice
price stabilisation policies described previously, prevention of agricultural land
degradation, agricultural land expansion, high-payoff investment in rural
infrastructure and improvement in agricultural technology can be applied by the
GOI as a better policy alternative to improve farmers’ welfare and simultaneously
achieve food security with more stable domestic prices of rice in the long term.
International trade agreements also need to be considered as a forum for addressing
the problem of international rice price volatility. Further, institutional aspect should
be improved to achieve the goals.
14
Prevention of Agricultural Land Degradation
Indonesia has been experiencing problems of agricultural land degradation
from year to year. This could threaten the sustainability of domestic food
production, including rice, which would have a negative impact on food (rice)
security and farmers' welfare. The primary factor causing land degradation in
Indonesia is deforestation which is triggered by the increase in the number of
population of Indonesia (Winoto & Siregar 2008). Further, this study finds that
deforestation has led to climate change, floods during rainy seasons, and drought
during dry seasons resulting in poor quality of the river flowing areas, which in turn
lowers the efficiency of irrigation system. This ultimately reduces the capacity of
domestic rice production, thereby disrupting food (rice) security.
To be able to address the agricultural land degradation issues in Indonesia,
the GOI should improve the implementation of soil conservation policies. It is
crucial to be done because according to the results of the analysis and calculations,
it is found that during 2000–2012 the historical deforestation rate in Indonesia
reached 671.420 ha per year (BPREDD+ 2014). In this case, the GOI can increase
research and development programs of conservation technologies, especially for
controlling soil pollution and forest fires. In addition, the GOI should develop the
technology of land erosion control, and promote agricultural innovation as well.
Agricultural Land Expansion
To maintain rice price stability and prevent rice crisis in the future, the
government needs to increase domestic rice production. It can be done by
expanding paddy fields, and maintaining productive agricultural land by limiting
the conversion rate of such land into residential or industrial. In fact, the GOI
targeted the expansion of paddy fields of 14,500ha in 2009, but the government
only succeeded to expand the area of paddy fields by approximately 80 per cent of
the target set (MoA 2013). Factors that caused this failure was the unpreparedness
of local governments in terms of human resources and the design or zoning in
conducting the program.
In 2014, the GOI set a target of 40,000ha paddy field expansion. To be able
to achieve the goal, it is necessary to conduct Survey Engineering and Design (SED)
before implementing the program (MoA 2014). Additionally, the GOI needs to
consider whether it is better to optimize unproductive land or open new areas of
paddy fields. This is crucial because large investments are required to open a new
field. These investments do not include investments for infrastructure development
such as roads, irrigation, and other supporting facilities. Meanwhile, the
enforcement of the law of land conversion should be applied not only by the central
government but also by local governments. In this case, they should limit the
conversion of productive paddy fields into residential or industrial.
15
Investment
Figure 4.4: Perceptions of the Quality of Local Road Infrastructure in Indonesia,
by Province, 2011
Source: (OECD 2013b)
Public investments for rural areas, such as roads, t
RESPONSES TO THE STAPLE FOOD PRICE SPIKES OF
2007–2008
TESA LISTYA KUSUMAWARDANI
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
STATUTORY DECLARATION
I, Tesa Listya Kusumawardani, hereby declare that the master thesis entitled
“Indonesia’s Rice Price Stabilisation: Policy Responses to the Staple Food Price
Spikes of 2007–2008” is my original work under the supervision of Advisory
Committee and has not been submitted in any form and to another higher education
institution. This thesis is submitted independently without having used any other
source or means stated therein. Any source of information originated from
published and unpublished work already stated in the part of references of this
thesis.
Herewith I passed the thesis copyright to Bogor Agricultural University.
Bogor, March 2015
Tesa Listya Kusumawardani
H151120181
RINGKASAN
TESA LISTYA KUSUMAWARDANI. Stabilisasi Harga Beras di Indonesia:
Respon Kebijakan Terhadap Kenaikan Harga Pangan Pokok pada Tahun 2007–
2008. Di bawah bimbingan HERMANTO SIREGAR and KYM ANDERSON.
Sebagaimana lonjakan kenaikan harga beras internasional pada tahun 2007–
08 diduga telah mengakibatkan timbulnya berbagai permasalahan ekonomi dan
politik di banyak negara berkembang, banyak pemerintah telah mengubah
pembatasan perdagangannya untuk mengurangi transmisi dampak lonjakan harga
tersebut terhadap pasar domestik. Selain itu, mereka juga menerapkan berbagai
kebijakan dalam negeri untuk menjaga stabilitas harga beras di pasar domestik.
Studi ini mengevaluasi kebijakan stabilisasi harga beras yang diterapkan oleh
Pemerintah Indonesia dalam merespon naiknya harga beras internasional, guna
menyelidiki tujuan dan konsekuensi dari kebijakan tersebut.
Hasil evaluasi menunjukkan bahwa tidak mungkin untuk menjamin
tercapainya ketahanan pangan (beras) negara dengan harga terjangkau bagi
konsumen sekaligus meningkatkan kesejahteraan petani secara bersamaan dengan
hanya menggunakan langkah-langkah kebijakan perdagangan. Studi ini
menekankan pentingnya perjanjian perdagangan internasional. Beberapa altenatif
kebijakan seperti pencegahan degradasi sekaligus ekspansi lahan pertanian,
investasi dalam infrastruktur pedesaan, R&D, dan ICT pertanian, serta
pengembangan aspek kelembagaan, seperti yang diusulkan dalam studi ini, dapat
meningkatkan ketahanan pangan dan mengurangi kemungkinan terjadinya lonjakan
harga beras internasional di masa depan.
Kata kunci: stabilisasi harga beras, lonjakan harga pangan pokok, respon kebijakan.
SUMMARY
TESA LISTYA KUSUMAWARDANI. Indonesia’s Rice Price Stabilisation:
Policy Responses to the Staple Food Price Spikes of 2007–2008. Under Supervision
of HERMANTO SIREGAR and KYM ANDERSON.
As the upward spike of international rice prices in 2007–08 might have
generated a wide range of economic and political problems in many developing
countries, the governments altered their trade restrictions to reduce the transmission
of its impact to the domestic market. In addition, they applied various domestic
policies to maintain the stability of the domestic rice prices. The aim of this study
is to evaluate the rice price stabilisation policies applied by the Government of
Indonesia in response to the soaring international rice prices in order to investigate
the objectives and consequences of the policies.
The findings show that it is impossible to ensure the country’s food (rice)
security at affordable prices for consumers and improve farmers’ welfare
simultaneously using just trade policy measures. The study also stresses the
importance of international trade agreements. It suggests the prevention of
agricultural land degradation, agricultural land expansion, high-payoff investments
in rural infrastructure, R&D, and ICT for agriculture, and institutional development
could increase food security and reduce the likelihood of international rice prices
spiking in the future.
Keywords: rice price stabilisation, staple food price spikes, policy responses.
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INDONESIA’S RICE PRICE STABILISATION: POLICY
RESPONSES TO THE STAPLE FOOD PRICE SPIKES OF
2007–2008
TESA LISTYA KUSUMAWARDANI
Master Thesis
as a requirement to obtain a degree
Master of Science in
Economics Program
POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015
Externally Advisory Committee Examiner: Dr M. Parulian Hutagaol, MS
Thesis Title
Name
NIM
: Indonesia’s Rice Price Stabilisation: Policy Responses to
the Staple Food Price Spikes of 2007–2008
: Tesa Listya Kusumawardani
: H151120181
Approved
Advisory Committee,
Prof Dr Ir Hermanto Siregar, MEc
Prof Kym Anderson
Agreed
Coordinator of Major Economics
Dean of Postgraduate School
Dr Ir Nunung Nuryartono, MSi
Dr Ir Dahrul Syah, MScAgr
Examination Date: 05 December 2014
Submission Date:
ACKNOWLEDGEMENT
Above all, my greatest gratitude goes to Allah SWT God almighty for the
multitude of His mercies. I would also like to take this opportunity to express my
immense gratitude to all those persons who have given their invaluable support and
assistance. In particular, I am profoundly indebted to my supervisors, Professor
Hermanto Siregar and Professor Kym Anderson, who were very generous with their
time and knowledge and assisted me in each step to complete the dissertation.
Without their supervision and constant help, this dissertation would not have been
possible.
I also extent my gratitude to all lecturers and staff at the University of
Adelaide especially Athena Kerley, Niranjala Seimon, Augustine Bhaskarraj and
Nicole Rizzo-Gray for their support and contribution to my study at The University
of Adelaide.
I would like to acknowledge with thanks to the Ministry of Trade Republic of
Indonesia and the Australian Award Scholarship for sponsoring my entire studies.
I would also like to thank Bogor Agricultural University and The University of
Adelaide for giving me the opportunity to study my master degree.
I would also like to acknowledge Elite Editing for giving me editorial
assistance to improve the quality of my thesis. The editorial intervention was
restricted to Standards D and E of the Australian Standards for Editing Practice.
Also I want to thank all my friends, especially lima sekawan plus one (Shanty,
Nadya, Indra, Meindro, and Ari) and my friends in Indonesia (Tresna, Renita,
Ratna, Lia, Alfie, Ricky, and Angga) for their help and spiritual support.
Notwithstanding all of the above support for this thesis, any errors and/or
omissions are solely my own.
Finally I would like to thank my parents, my beloved husband, Aulia, and our
lovely children, Nadia & Alta, for their love, prayers, sacrifice and support
throughout entire process. This thesis is dedicated to them.
Bogor, March 2015
Tesa Listya Kusumawardani
TABLE OF CONTENTS
LIST OF FIGURES ......................................................................................... xi
LIST OF TABLES .......................................................................................... xi
LIST OF ABBREVIATIONS ......................................................................... xi
1. INTRODUCTION ........................................................................................1
2. BACKGROUND ..........................................................................................2
3. LITERATURE REVIEW ..............................................................................4
Theoretical Framework..................................................................................4
Impact of Rising International Rice Prices ................................................4
The Approaches of Stabilising Domestic Rice Prices ...............................5
The Impact of Governments’ Interventions on World Rice Prices ...........5
Empirical Framework ....................................................................................6
4. DISCUSSION................................................................................................7
The Evaluation of Indonesia’s Rice Price Policy Responses ........................8
Reduction in Import Restrictions...............................................................8
Export Ban .................................................................................................9
Raising the Government Reference Purchase Price ................................11
Consumer Subsidy for the Poor ...............................................................11
Suggested Implementation ..........................................................................13
Prevention of Agricultural Land Degradation .........................................14
Agricultural Land Expansion ..................................................................14
Investment ...............................................................................................15
International Trade Agreement................................................................17
Institutional Aspect ..................................................................................17
5. CONCLUSION ..........................................................................................18
REFERENCES ................................................................................................19
BIOGRAPHY ..................................................................................................23
LIST OF FIGURES
Figure 2.1: International Rice Prices and Indonesia’s Producer Support
Estimates
on Rice, 2000–2013........................................................................ 3
Figure 3.1: Effect of Offsetting Export Barrier Increases and Import Barrier
Reductions in the International Food Market ................................. 6
Figure 4.1: Indonesia’s Imported Quantity of Rice (HS 1006), 2001–2008 ..... 9
Figure 4.2: Indonesia’s Exported Quantity of Rice (HS 1006), 2001–2008 ... 10
Figure 4.3: International and Domestic Wholesale Rice Prices, 2000–2008 .. 12
Figure 4.4: Perceptions of the Quality of Local Road Infrastructure in
Indonesia,
by Province, 2011 ......................................................................... 15
Figure 4.5: The Share of Indonesia’s GDP in Improving Telecommunication
Services, 2000–2013 .................................................................... 16
LIST OF TABLES
Table 4.1: Policy Responses to Rising Commodity Prices in 2007–08 ............ 8
LIST OF ABBREVIATIONS
ASEAN
GDP
GOI
GPP
ICT
IMF
NTB
PSE
R&D
WTO
Association of Southeast Asian Nations
Gross Domestic Product
Government of Indonesia
Government Purchase Price
Information and Communication Technology
International Monetary Fund
Non-tariff Barriers
Producer Support Estimates
Research and Development
World Trade Organization
1
1
INTRODUCTION
Staple food price spikes in 2008 triggered panic situations in many
developing countries. Since then, global commodity prices have fallen. However,
they still fluctuate above the prior price levels, which causes uncertainty and leads
to higher prices for domestic foods, including rice, in many countries. Rice is one
of the staple foods that play an important role in the economic, social and political
stabilisation of most Asian developing countries, including Indonesia. Higher rice
prices can harm poor net buyers of rice, thereby inducing economic and social chaos
(Ahsan, Iftikhar & Kemal 2012). Therefore, governments attempt to stabilise the
domestic price of rice.
There is an intense polemic about the approaches governments can take to
stabilise food prices. Due to the international staple price spikes of 2007/2008, this
issue has recently become a major concern in many international forums, such as
G20 annual meetings. One approach is for countries to agree multilaterally to trade
liberalisation. Another approach is for national governments to intervene by varying
their border restrictions on trade. Trade liberalisation is theoretically considered to
be the best way to provide efficient resource allocation. However, many
governments, especially in developing countries, argue that the existence of market
failures, such as imperfect markets and the low quality of infrastructure (which
commonly occur in these countries, including Indonesia) requires government
intervention to help stabilise domestic prices of staple foods.
Hence, the question arises as to whether the market intervention applied by
the Indonesian government is effective in stabilising the prices of staple foods,
particularly rice. The next questions are:
What are the real objectives of Indonesia’s rice price stabilisation policy?
What are the costs and benefits of the implementation of these policies?
An effective policy applied by the government is expected to reduce the adverse
impact of the global rice price spikes that occurred in 2007–2008 and prevent it
from occurring in the future. This would be beneficial to the economic welfare of
Indonesia.
This study aims to evaluate the implementation of rice price stabilisation
policies in Indonesia. It also investigates what factors should be considered in
applying these policies. The next section of the paper outlines the background of
Indonesia’s rice price policies. Following this, the literature review focuses on the
theoretical and empirical framework of the food price stabilisation approaches. The
final section discusses the effectiveness of Indonesia’s policy responses to the staple
price spikes of 2007–2008 in terms of rice, and offers several policy
recommendations for improvements in the stabilisation of food prices.
2
2
BACKGROUND
Rice is the staple food of more than 90 per cent of the population of Indonesia
(McCulloch & Timmer 2008). Thus, a high weight of expenditure (or earnings
spent on rice sellers) for the majority of Indonesian households, especially the poor,
is allocated to rice consumption. This could be the reason why rice prices have
become one of the important factors that affect the economic and social stability of
Indonesia. Therefore, rice price stabilisation is an important goal for the
Government of Indonesia (GOI). Government policies have non-trivial effects on
other countries however, because, in terms of rice consumption, Indonesia is the
third largest consuming country in the world after China and India (USDA 2014).
Prior to the staple food price spikes of 2007–2008, the changes in the rice
policies applied by the GOI can be divided into four broad phases. These phases
include the period of import substitution (the late 1960s–1984), export orientation
(1985–1996), crisis (1997–1999), and recovery (2000 onwards) (Fane & Warr
2009). The first phase started in the late 1960s, when the New Order regime, under
Suharto's leadership as the second president of Indonesia, began. At the beginning
of this period, the rice policies implemented by the Government were directed at
maintaining the stability of rice prices in the domestic market. The purpose of these
policies was to prevent the occurrence of high inflation due to rising prices in staple
foods on a large scale, as had occurred at the end of the Old Order regime. In order
to achieve this goal, the Government attempted to boost domestic rice production
and reduce rice imports by supporting the local market with the provision of input
subsidies, better infrastructure, irrigation systems, and innovation, such as the green
revolution programme (McCulloch & Timmer 2008).
In the early 1970s, protection for agricultural commodities, mainly rice, was
largely increased. At that time, the Government put forth import reductions as it
aimed to achieve rice self-sufficiency and started to implement import-substituting
industrialisation (Fane & Warr 2008). By organising a massive guidance
programme called Bimas, the Government provided input and credit subsidies for
farmers. This assistance was financed by additional oil export revenue earned from
rising world oil prices in the 1970s.
During 1985–1996 however, the Government phased out protection for rice.
The first reason for the change was the falling international oil price in the mid1980s, which led to a decline in the Government’s export revenues. Thus, the
Government could no longer afford to provide the same level of subsidies to
farmers. As a result, the domestic production of rice continued to decline until the
Asian financial crisis of 1997–1998 (McCulloch & Timmer 2008). The other reason
is Indonesia became a member of the World Trade Organization (WTO) in 1995.
Since then, several trade reforms, such as reductions of tariffs or non-tariff barriers
(NTBs), and cuts to agriculture input subsidies, have been implemented for most of
Indonesia’s import-competing commodities.
In 1997, the Indonesian economy was hit by the external shock that came
from the Asian financial crisis. It caused a depression in the Indonesian economy,
leading to a drop in the annual growth rate of -13% in 1998 (World Bank 2014b).
When the rupiah depreciated due to the crisis, many manufacturing industries were
in debt, thereby forcing the GOI to borrow funds from the International Monetary
3
Fund (IMF) (van Dijk & Szirmai 2006). However, The IMF gave a conditional loan
that required the Government to remove its restrictions on imports, especially for
agricultural commodities such as rice and sugar. Moreover, the Government was
obliged to abolish the rice import monopoly of the national logistics agency
(Bulog). Thus, during the period of debt repayment to the IMF, the Government
implemented a pro-market mechanism as an approach to rice price stabilisation.
However, in the recovery period after the Asian financial crisis of 1997–1998,
there has been a reversal of the rice policies applied by the GOI. The Government
again intervened to stabilise domestic rice prices. In 1999, the Government began
to impose rice import tariffs of 20 per cent, which was then changed to a specific
tariff (Rp430/kg). Further, in 2002 the Government returned a mandate to Bulog
regarding the monopoly on rice imports. Finally, in 2004, restrictions on rice
imports were again imposed by the Government.
After 2004, there has been an upward trend in international rice prices. As
shown in Figure 2.1, the real annual prices of rice increased gradually from
US$279/mt in 2004 to US$342/mt in 2007, and rose sharply to US$632/mt in 2008.
During this period, the international rice price rose by more than 200 per cent. This
price surge has led to the higher domestic prices of rice in many countries,
depending on the price transmission mechanism and the exchange rate movements
of each country (Abbott & de Battisti 2011).
60.00
700.00
50.00
600.00
40.00
30.00
500.00
20.00
400.00
10.00
300.00
0.00
-10.00
200.00
-20.00
-30.00
100.00
Indonesia's PSE on Rice (%)
International Price of Rice ($/MT)
Chart Title
-40.00
-50.00
Rice, Thai 5% ($/mt)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.00
Producer Single Commodity Transfers on Rice (%)
Figure 2.1 International Rice Prices and Indonesia’s Producer Support Estimates
on Rice, 2000–2013
Source: (World Bank 2014a & OECD 2013a)
Since the transmission of price is closely related to government protection
policies, the GOI reversed its protective trade policy during the upward spike of
international rice prices in 2008 in order to minimise the impact on the domestic
market. It can clearly be seen from Figure 2.1 that the movements of Indonesia’s
4
Producer Support Estimates (PSE) on rice were mostly positive between 2000 and
2013, except for the rice price spike in 2008. The PSE fell from 25 per cent in 2007
to -40 per cent in 2008, and rose again to 30 per cent after the international rice
price had declined in 2010 (OECD 2013a). This means that the Government policy
was not only aimed at assisting farmers in low price periods, but also preventing a
spike in domestic consumer rice prices when there is an international price shock
as occurred in 2008.
3
LITERATURE REVIEW
Volatile world food prices, especially for rice, such as those from 2008, can
be problematic for countries due to the high degree of risk for poor economic agents
(FAO 2011). This section discusses the impacts of rising international rice prices
from the microeconomic and macroeconomic perspectives, and theoretically
describes two approaches to stabilising domestic rice prices. This discussion is
supported by various empirical studies.
Theoretical Framework
Impact of Rising International Rice Prices
From a microeconomic perspective, higher rice prices will have a different
impact on consumers (net buyers) and producers (net sellers of rice). For
consumers, rising rice prices will reduce their welfare and lead to substitution and
income effects (Dorward 2012). The substitution effect suggests that consumers
will reduce their consumption of rice and substitute it with lower-price food. The
income effect suggests that the real income of consumers will decrease as a result
of the higher cost of buying this important product. In this case, poor consumers
tend to suffer most from the drop in real income because a large portion of their
income is spent on rice.
Moreover, Dorward (2012) states that an increase in rice prices will benefit
the producers of the good through profit and substitution effects. Higher rice prices
give the producers higher revenue, leading to more profit. It can then create a
substitution effect in which the higher prices of the good encourage other producers
of competitive products, which give less profit due to relatively cheaper prices, to
produce the now higher-priced and more-profitable good.
In terms of the macroeconomic perspective, in the absence of government
policies, such as taxes and subsidies, higher international food prices will have a
different impact across countries depending on whether they are rice-importing or
-exporting countries. A rice net-importing country will suffer from a welfare loss
as increases in the prices of imported food will raise the import bills, which could
result in the depreciation of the country’s currency (Dorward 2012). Conversely,
rice net-exporting countries will gain more income as their export revenue increases
due to the higher prices of their export commodities.
5
However, besides the direct impact of higher rice prices described above, in
the long run there is also an indirect impact of higher rice prices through the wages
of farmers and non-farmers (McCulloch 2008). As rising rice prices give incentives
for farmers to enhance their production, it would raise the demand for labour, which
benefits farm workers due to a higher wage. It might also draw non-farm labour
into the agricultural sector, leading to a rise in wage for labour outside the
agricultural sector to maintain employment in the rural non-farm sector. However,
the impact of rising rice prices on the welfare of both farm and non-farm workers
would be ambiguous depending on whether it offsets the increase in their cost of
living. Even so, many governments are likely to implement policies that can
minimise the negative impact of rising international food prices on urban net buyers
of rice.
The Approaches of Stabilising Domestic Rice Prices
There are two approaches used by governments to stabilise domestic rice
prices. The first approach is a pro-market mechanism through trade liberalisation.
This approach considers the efficiency in resource allocation based on the
comparative advantage of each country (Markusen et al. 1995). In a perfect
competitive market, this approach can work effectively. If there is an increase in
international rice prices, which results from an expanded demand for the
commodity, with an invisible hand or market mechanism, the price can return to its
earlier equilibrium level since a supply response to the high price will lead to a
reduction in quantity demanded of the commodity. In contrast, if international rice
prices fall resulting from excess supply of rice, through the market mechanism, the
price will go back to the equilibrium level due to fewer incentives for the producers
to grow and sell the good.
The second approach is market intervention through government trade
policies. In order to maintain domestic price stability, exporting countries use
different policies from importing countries in terms of responding to the changes in
international commodity prices (Anderson & Nelgen 2012b). In the case of an
increase in international food prices, food net-exporting countries attempt to
stabilise domestic markets by raising their export taxes or quantitative restrictions
on food exports, so there will be relatively greater supply of food in the domestic
market, leading to a lower prices for food than in the international market.
Conversely, food net-importing countries will reduce their restrictions on food
imports, leading to a relatively lower food prices in the domestic market.
Overall, the effect of the trade measures applied by both exporting and
importing countries will be the same on the rice producers and consumers’ welfare
in these countries, as these policies will reduce the welfare of domestic rice
producers, but increase domestic rice consumers’ welfare. Nevertheless, the net
impact on the countries’ net welfare might be ambiguous depending on whether the
increase in consumers’ welfare is greater than the loss in producers’ welfare.
The Impact of Governments’ Interventions on World Rice Prices
As illustrated in the partial equilibrium diagram of International Trade in
Figure 3.1, Anderson and Nelgen (2012a) show that if both food exporting and
importing countries try to insulate their domestic market at the same time, it can
generate a spill-over effect. This is because it contributes to a higher international
6
price for food compared with the international market equilibrium price in which
there is no intervention from any government. An increase in export barriers applied
by exporting country governments will shift up the supply curve from ES0 to ES2,
while import barrier reductions applied by importing countries will simultaneously
shift up the demand curve from ED0 to ED’.
Although this collective action allows both exporting and importing countries
to retain their domestic rice price below that in the international market, this action
could induce a further rise in the international price for rice to P3 rather than P1 when
there is no any government intervention. If exactly the same quantity of
international rice were traded, as would be the case without any government
intervention, Q1, neither the rice-exporting nor the rice-importing countries would
have prevented this domestic price from rising to P3.
Figure 3.1. Effect of Offsetting Export Barrier Increases and Import Barrier
Reductions in the International Food Market
Source: (Anderson & Nelgen 2012a)
Empirical Framework
Many previous studies on the impact of rising international food prices on
both global and domestic markets provide evidence that suggests many countries,
especially developing ones, try to protect their domestic markets using trade policy
intervention. A recent study by de Hoyos and Medvedev (2011) reveals that the
food price surge in 2008 led to a higher number of poor people being under the
extreme poverty line (155 million), with the highest increase in poverty occurring
7
in East Asia. The level of poverty incidence in Mexico increased by 9.94 per cent
during the upward spike of global food prices between 2006 and 2008 (Valero-Gil
& Valero 2008). Fears of an increase in the incidence of poverty caused by global
food price escalation in 2008 could be the main reason governments attempted to
stabilise their domestic food prices by implementing protectionist trade policies,
such as export bans for exporting countries and the reduction of import restrictions
for importing countries.
However, most governments may be unaware of the consequences of their
policies’ impacts on the international market. A recent empirical study shows that
the collective action undertaken by rice exporting and importing countries to
stabilise their domestic price of rice as a response to the international rice price
hikes of 2007–2008 eliminated the effectiveness of each country’s change in trade
restrictions. In addition, it contributed to a further 45 per cent increase in
international rice prices (Martin & Anderson 2012). Moreover, this study has been
extended by Anderson, Ivanic and Martin (2014) to show these interventions did
not prevent extra people falling below the poverty line. This is because such
collective action leads to a more fluctuated price of rice in the domestic markets
(Ivanic & Martin 2014).
At a regional level, such as in South Asia, Dorosh (2008) found that
restrictions on exported cereal imposed by India and Pakistan in responding to the
staple price spikes of 2007–2008 led to a further increase in imported cereal prices
in Bangladesh and Afghanistan. Therefore, such protectionist policies that attempt
to insulate the domestic market are wasteful and could in fact exacerbate the impact
of rising international food prices. This is because it may even increase global
poverty, even though the initial objective of this policy ostensibly is to alleviate the
possibility of rising poverty (Anderson 2012). Further, based on the evidence from
14 developing countries, Watson (2013) has revealed that the real objectives behind
the governments’ protectionist policies are mostly driven by political interests,
which include preventing social unrest that would threaten the political position at
the next election, rather than by considerations of the cost and impact of the policy
on other countries.
4
DISCUSSION
To help the Government cope with rising global rice prices over the last
decade, this study aims to evaluate the rice price stabilisation policies that have been
implemented in response to the staple food price spikes of 2007–2008. This will
determine the real objectives of the policies, and determine what factors should be
considered in applying these policies (costs and benefits). Although evaluating
these policies is challenging, due to political interests, it may be possible to find
some solutions to mitigate the impact of rising global rice prices on the domestic
market and prevent it from occurring in the future, which would benefit Indonesia’s
economic welfare.
8
The Evaluation of Indonesia’s Rice Price Policy Responses
Under the sectoral strategic plan (Renstra) of the National Development Plans
(Rencana Pembangunan Nasional), food security and improvements in farmers’
welfare are still the two main targets for development in Indonesia’s agricultural
sector (MoA 2010). When there was an upward spike in global food prices,
including rice prices, in 2007–2008, the Government applied several trade and
domestic policies to stabilise the domestic price of rice. This is because it is an
important factor in achieving Indonesia’s agricultural sector development target as
stated in the Government Decree 68/2002 on Food Security. Table 4.1 gives a
sequenced list of the Government policy responses to rising global rice prices in
2007–08.
Table 4.1 Policy Responses to Rising Commodity Prices in 2007–08
Commodity
Policy response
Period
Rice
Permission given to BULOG to import Between January
significant quantities of rice
2007 and April 2008
Lowered tariff from IDR 450/kg (USD Between March 2007
49/tonne) to IDR 200/kg (USD
and May 2007
22/tonne)
Raised the government reference
2007 onwards
purchase price for farmers (HPP)
Expanded the quantity of rice
February 2008
distributed to poor households through onwards
RASKIN
Restrictions placed on exports
Between April 2008
and May 2009
Source: (OECD 2012)
Reduction in Import Restrictions
One of the Government trade policy responses to the rising international rice
prices was to change its import policies by reducing import restrictions on rice. For
example, Bangladesh removed its import duty on rice in 2007 (Raihan 2013), while
the Philippines increased its rice imports by approximately two million tonnes per
year during 2006–2008 (Balisacan, Sombilla & Dikitanan 2010). Similarly to these
countries, the GOI also responded by giving permission to Bulog to import a
significant quantity of rice from January 2007 to April 2008, and reducing the
specific tariff on rice imports during March–May 2007 as shown in Table 4.1.
From Figure 4.1, it can be seen that in 2007, this policy increased Indonesia’s
rice imports by nearly one million tonnes, a rise from 438 to 1,406 thousand tonnes.
As a result, in 2007 rice imports contributed to four per cent of the total domestic
rice supply, an increase from only one per cent of the total domestic rice supply in
2006 (FAO 2014). This increase in import supply would lead to the lower rice price
in the domestic market. Thus, it is believed that a reduction in import restrictions
would protect domestic consumers, mainly poor households, from unaffordable
domestic rice prices and food insecurity (Saifullah 2010).
9
Indonesia's imports from world
2000
1805.38
1800
1000 tonnes
1600
1428.505
1406.848
1400
1200
1000
800
644.733
600
438.109
400
289.689
236.867 189.616
200
0
2001
2002
2003
2004
2005
2006
2007
2008
Figure 4.1 Indonesia’s Imported Quantity of Rice (HS 1006), 2001–2008
Source: (TradeMap 2014)
However, from a unilateral perspective based on the theory described
previously, the effect of reduction in import restrictions on Indonesia’s economic
welfare is ambiguous. In addition, from a global perspective, Anderson, Ivanic and
Martin (2014) found that such policies applied by many governments to insulate
their domestic markets from the soaring global commodity prices in 2008 lead to
an even higher global food price. Further, they estimate this raised the number of
global poor by eight million people.
There are two other points to consider in implementing this policy. First, the
reduction in import barriers, particularly by reducing import tariffs, would be costly
for the Treasury, as it would reduce Government tax revenues. Second, there is no
guarantee that Bulog would not seek to profit from the sale of imported rice in the
domestic market, as it is no longer a non-profit institution. Since it became a private
agency (Perum) in 2003, based on the Government Decree 7/2003, it is allowable
for Bulog to make a profit by purchasing imported rice from the international
market at a relatively cheaper price, and selling it to the domestic market at a price
that is relatively more expensive.
Export Ban
The other trade measure applied by the Government to protect the domestic
rice market from the rising global food prices was the export ban on rice exports
during April 2008–May 2009. The application of the export ban was based on the
Regulation of the Minister of Trade 12/M-DAG/PER/4/2008 concerning the
regulation of rice imports and exports. This policy followed the prior application of
export bans imposed by major rice-exporting countries, such as India and Vietnam,
between 2007 and 2008 (Dorosh 2009).
10
Indonesia's exports to world
42286
45000
40000
35000
Tonnes
30000
25000
20000
15000
10000
4010
3991
5000
675
905
2003
2004
958
1614
876
2006
2007
2008
0
2001
2002
2005
Figure 4.2 Indonesia’s Exported Quantity of Rice (HS 1006), 2001–2008
Source: (TradeMap 2014)
The reason for the implementation of this policy was to prevent the large scale
export of rice, as a higher world price than the domestic price of rice would give
incentives for traders to export. If this occurred, it would drive the domestic rice
price higher. Further, it would thwart the Government's efforts in achieving food
security, in particular rice. As can be seen in Figure 4.2, during the implementation
of the rice export ban, the volume of Indonesia’s exported rice fell from 1,614 to
876 tonnes between 2007 and 2008. It is claimed that the rice export ban, during
which only Bulog was allowed to export, resulted in a more stable price of rice in
the domestic market during the global food price surges in 2008 (Saifullah 2010).
However, from the implementation of the rice export ban, it can be concluded
that the Government did not pay much attention to the welfare of rice farmers when
responding to the soaring global food prices in 2008. This policy eliminated the
incentive for farmers to obtain higher profits. Therefore, it might reduce the
motivation for farmers to produce more rice, which would ultimately have a
negative impact on Indonesia’s food security. This situation could become worse
because the increase in the price of other food commodity prices would require rice
farmer households to allocate greater budgets for their consumption, thereby
reducing the production of rice because they cannot finance the costs of farming
(Susilowati & Rachman 2009).
The lack of attention given by the Government to farmers is also proven by
the low rate of Government support for rice farmers during the global food price
surges of 2007–2008, as depicted in Figure 2.1. Thus, once again, such trade
measures cannot be used to achieve both targets of the developments in Indonesia’s
agricultural sector at the same time.
In addition, the export ban is a costly policy, as it will reduce Government
export revenues. Meanwhile, from the global perspective, even though the volume
of Indonesia’s exported rice is only a small portion of the world's total rice exports,
as Indonesia is typically a net importer of rice, it still potentially contributes to the
further increase in global rice prices. This is due to the spill-over effect from
11
collective action among other countries as explained earlier in the theoretical
framework.
Raising the Government Reference Purchase Price
Beside the two types of trade policies discussed above, the Government also
implemented two domestic policies in order to pursue domestic rice price stability
during the global food price surges between 2007 and 2008. One of them was
raising the government purchase price (GPP). It was aimed at maintaining the
incentives for farmers since their welfare was reduced by the implementation of
export restrictions and the reduction in import barriers on rice.
The GPP was commonly applied by many countries as a measure in response
to the soaring global rice prices. For example, during the rising rice prices in 2008,
the Government of Vietnam also raised the GPP to buy rice from its domestic sellers
in order to increase the country’s stocks of rice (Nguyen & Talbot 2013). Thus, the
GPP was not only useful to support domestic rice farmers, but also to increase the
domestic rice stocks in order to ensure the countries’ food security.
However, if a government raised the GPP too high, it would push rice prices
at the consumer level, leading to the volatility of domestic rice prices, which could
harm poor households. Therefore, the important factors that need to be considered
in the implementation of GPP is the determination of GPP, in which the reference
purchase price should provide sufficient incentives for farmers to continue or
increase their production of rice at a level that remains affordable for domestic
consumers. According to Saifullah (2010), the increase in the GPP for milled rice
and paddy, for approximately 7.5 per cent and 10 per cent respectively, set by the
Government as a response to the soaring world food prices during 2007–2008,
remained at levels that did not trigger a rise in consumer prices, so as not to harm
poor consumers. Moreover, Sembiring et al. (2012) estimate that an increase in the
GPP for paddy of 15 per cent would lead to a rise in the rice production of 17.907
per cent, causing the domestic rice supplies rose by 10.880 per cent. Thus, it would
help achieve Indonesia’s food security.
Consumer Subsidy for the Poor
The other domestic policies applied by the Government to protect the
domestic market, especially poor households, from the soaring global food price
between 2007 and 2008 was the provision of a rice consumer subsidy for the poor
(Raskin). The goal of this policy was to reduce the expenditure burden of poor
households by fulfilling their need for rice as the main staple food as stated in the
Presidential Decree 8/2008 on Rice Policy. Total Raskin distributed by Bulog for
the full 12-month period in 2008 was 3.3 million tonnes to 19.1 million targeted
households with an allocation of 15 kg per targeted household (Bulog 2008). The
similar programme was also adopted in the Philippines. The Government of the
Philippines allocated 0.1 per cent of the country’s gross domestic product (GDP) to
fund the rice subsidy programme in 2007 and increased the allocation to 0.6 per
cent of the GDP in 2008 as international rice prices rose significantly (Ramesh
2014).
However, the effectiveness of this policy in achieving the goal is still under
debate. It is argued that Raskin had no significant effect in alleviating poverty
(Strauss et al. 2004 cited in McCulloch 2008). This might be due to several
12
drawbacks in the implementation of this policy. Besides being difficult to define
the categories of eligible poor families who could receive the subsidised rice,
through a survey, it has been found that by more than 18 per cent of the total
distributed subsidised rice was not received by the targeted poor households due to
corruption (OECD 2012). Therefore, in order to make this policy more effective in
achieving its goal, it is necessary to design a transparent mechanism for its
implementation as well as monitoring and evaluating it periodically to determine
whether the policy is being run in accordance with the target set.
Overall, during the upward spike of staple food prices during 2007–2008, in
particular of rice, the GOI gave higher priority to ensuring food security for the poor
consumers with an affordable level of rice prices than it gave to the improvements
in farmers’ welfare. Hence, Indonesia’s rice policy was directed at maintaining the
stability of domestic rice prices. Applying a mix of the policy response, including
the tariff reduction on rice imports, the export ban, GPP and Raskin, the GOI was
successful in maintaining the stability of the domestic rice prices (Saifullah 2010).
It can be seen from Figure 4.3 that during 2007–2008, the domestic price of rice
was more stable than the international price of rice.
Figure 4.3 International and Domestic Wholesale Rice Prices, 2000–2008
Source: (Saifullah 2010)
Despite the fact that the Government could maintain the stability of the
domestic rice prices to achieve food security, by analysing these policies, it has
been shown that it is difficult to improve farmers’ welfare at the same time using
just trade policies. Moreover, such insulation policy applied by the Government has
13
contributed to an increase in the number of Indonesian poor people by 0.7% (1.5
million people) (Anderson, Ivanic & Martin 2014). Further, the collective action of
altering trade policies applied by other countries could lead to spill-over effects that
would exacerbate the increase in rice prices in the future. Thus, it would be more
effective for the Government to stabilise rice prices without altering its trade
restrictions.
However, to what extent can Indonesia rely on trade liberalisation to support
the stability of domestic food prices, particularly rice as Indonesians’ staple food?
This question arises because in the absence of government intervention, rising
international food prices might lead to higher inflation in domestic food prices,
which can cause more hunger and poverty, especially for developing countries that
tend to spend a higher share of their budget on food (Abbott & de Battisti 2011).
Therefore, government intervention still plays an important role in controlling the
domestic price. The following subsection will discuss some of the policy proposals
that could be used to stabilise domestic food prices, in particular rice, without
having to isolate the country from international trade.
Suggested Implementation
As discussed above, the trade policies applied by the GOI in response to the
soaring rice prices in 2008 cannot be used to simultaneously achieve the country’s
food security with stable domestic rice prices and improve rice farmers’ welfare.
Such trade measures hindered the international rice prices to be fully transmitted to
the domestic market, so that it would harm farmers due to lower prices of rice in
the domestic market and loss of incentives to produce more rice (Abbott & de
Battisti 2011). This could in turn have a negative impact on the country’s food
security. Meanwhile, such insulation policies would trigger collective action among
other countries, which generates the spill-over effect, leading to less stable rice
prices in the domestic market.
Therefore, it is better to stabilise the domestic price of rice without using trade
measures. In the short term, the GOI is expected to optimize the management of
public stockholding to achieve food security with more stable domestic prices of
rice in accordance with the agreement of the Ministerial Conference of the World
Trade Organization IX which was held on 3-6 December 2013 in Bali, Indonesia.
This can be attained by revitalizing the role of Bulog in handling procurement,
storage, process and rice trading among districts, provinces, and also trading with
other countries (Maisyarah 2013).
In addition to the better implementation mechanism of the two domestic rice
price stabilisation policies described previously, prevention of agricultural land
degradation, agricultural land expansion, high-payoff investment in rural
infrastructure and improvement in agricultural technology can be applied by the
GOI as a better policy alternative to improve farmers’ welfare and simultaneously
achieve food security with more stable domestic prices of rice in the long term.
International trade agreements also need to be considered as a forum for addressing
the problem of international rice price volatility. Further, institutional aspect should
be improved to achieve the goals.
14
Prevention of Agricultural Land Degradation
Indonesia has been experiencing problems of agricultural land degradation
from year to year. This could threaten the sustainability of domestic food
production, including rice, which would have a negative impact on food (rice)
security and farmers' welfare. The primary factor causing land degradation in
Indonesia is deforestation which is triggered by the increase in the number of
population of Indonesia (Winoto & Siregar 2008). Further, this study finds that
deforestation has led to climate change, floods during rainy seasons, and drought
during dry seasons resulting in poor quality of the river flowing areas, which in turn
lowers the efficiency of irrigation system. This ultimately reduces the capacity of
domestic rice production, thereby disrupting food (rice) security.
To be able to address the agricultural land degradation issues in Indonesia,
the GOI should improve the implementation of soil conservation policies. It is
crucial to be done because according to the results of the analysis and calculations,
it is found that during 2000–2012 the historical deforestation rate in Indonesia
reached 671.420 ha per year (BPREDD+ 2014). In this case, the GOI can increase
research and development programs of conservation technologies, especially for
controlling soil pollution and forest fires. In addition, the GOI should develop the
technology of land erosion control, and promote agricultural innovation as well.
Agricultural Land Expansion
To maintain rice price stability and prevent rice crisis in the future, the
government needs to increase domestic rice production. It can be done by
expanding paddy fields, and maintaining productive agricultural land by limiting
the conversion rate of such land into residential or industrial. In fact, the GOI
targeted the expansion of paddy fields of 14,500ha in 2009, but the government
only succeeded to expand the area of paddy fields by approximately 80 per cent of
the target set (MoA 2013). Factors that caused this failure was the unpreparedness
of local governments in terms of human resources and the design or zoning in
conducting the program.
In 2014, the GOI set a target of 40,000ha paddy field expansion. To be able
to achieve the goal, it is necessary to conduct Survey Engineering and Design (SED)
before implementing the program (MoA 2014). Additionally, the GOI needs to
consider whether it is better to optimize unproductive land or open new areas of
paddy fields. This is crucial because large investments are required to open a new
field. These investments do not include investments for infrastructure development
such as roads, irrigation, and other supporting facilities. Meanwhile, the
enforcement of the law of land conversion should be applied not only by the central
government but also by local governments. In this case, they should limit the
conversion of productive paddy fields into residential or industrial.
15
Investment
Figure 4.4: Perceptions of the Quality of Local Road Infrastructure in Indonesia,
by Province, 2011
Source: (OECD 2013b)
Public investments for rural areas, such as roads, t