00074910012331338993
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Indonesia's Trade and Price Interventions: Pro-Java
and Pro-Urban
Jorge García García
To cite this article: Jorge García García (2000) Indonesia's Trade and Price Interventions: ProJava and Pro-Urban, Bulletin of Indonesian Economic Studies, 36:3, 93-112
To link to this article: http://dx.doi.org/10.1080/00074910012331338993
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Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 93–112
INDONESIA’S TRADE AND PRICE
INTERVENTIONS: PRO-JAVA AND PRO-URBAN
Jorge García García*
The World Bank, Washington DC
In 1987 and 1995 Indonesia’s price and trade policies (intervention regime)
increased the income of Java’s urban centres and reduced that of people
living in rural Java and the other islands. This happened because the regime
protected manufacturing activities, most of them located in Jakarta,
Bandung and Surabaya, and taxed primary sector based activities, located
outside urban Java. It protected some primary sector based activities
directly, but the entire intervention regime, with manufacturing protection
included, taxed them. As a result, regions deriving income from primary
sector based activities lost. Indonesia’s intervention regime is regressive:
it transfers income from poorer to richer regions. This regime and its effects
on regional incomes continue. Governments have designed programs to
raise the income of Eastern Indonesia, but have omitted the most effective
instrument: opening the economy to international competition. A serious
attempt to reduce regional income disparities should begin by eliminating
barriers to international trade.
INTRODUCTION
Indonesia experienced remarkable development between 1967 and 1996
(Hill 1996): income per capita increased from about $60 to about $1,000,
and the share of the population under poverty declined from about 70%
to below 15%. Once the largest rice importer in the world, Indonesia
became self-sufficient in rice in the mid 1980s, as rice yields increased
from 2.1 tons per hectare in the mid 1960s to about 4.3 tons per hectare in
the early 1990s. People and regions enjoyed large increases in real income
(Hill 1991), while regional incomes converged and the distribution of
personal income remained the most egalitarian in East Asia (García García
and Soelistianingsih 1998; Krongkaew 1994). Indonesia could, however,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
94
Jorge García García
have grown faster, and regional income inequalities could have fallen
faster, if the country had adopted a more open trade regime, and if the
government had not controlled the price and trade of selected products
from the primary sector (agriculture, forestry, fishing and mining). This
paper looks at how trade and price policies (the ‘intervention regime’)
affected regional incomes.
In what follows I show that the intervention regime has favoured
Java and taxed the non-Java provinces. This has occurred because
provinces have different factor endowments, and productive activities
have enjoyed different rates of protection. Java has a large labour/land
ratio and produces most of Indonesia’s manufacturing output, while the
Outer Islands—Sumatra, Kalimantan and Eastern Indonesia (Nusa
Tenggara, Sulawesi, Maluku and Irian Jaya)—have a small labour/land
ratio and a large natural resource endowment (land, forest, fisheries,
mining, oil and gas), and produce most of the country’s output from
natural resources. Interventions have protected manufacturing 10 times
as much as they have protected agriculture and forestry, and have taxed
the oil, gas and mining sectors. The intervention regime has thus favoured
urban over rural people, manufacturing over activities in the primary
sector, and Java over Bali, Sumatra and Eastern Indonesia. The taxation
of the Eastern Indonesian provinces is more striking, because they have
the lowest per capita income and the highest incidence of poverty in the
country.
From a regional perspective, Indonesia’s intervention regime is
regressive: it transfers income from the poorer to the richer regions. The
intervention regime has caused losses to the Outer Islands and held back
their development relative to what it could have been. Although Java
has gained at the expense of the Outer Islands it has lost, in a way, relative
to its potential. Java, and Indonesia, could have grown faster had there
been a more open trade regime. The farmers and rural workers of Java
could have been better off, and so could the people in the Outer Islands,
had there been fewer interventions in price and trade.
This paper argues that there is room to improve the incentives to
produce in Java and the Outer Islands, by eliminating protection to
manufacturing and taxation of activities in the primary sector. The next
section summarises information on the location of production in
Indonesia. The paper then sets out a simple model of trade and price
interventions and the regional distribution of income, and presents the
results on rates of protection for manufacturing and the primary sector.
Finally, it provides estimates of the net effect of trade and price policy
interventions on the regional distribution of income and the incentives
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
95
for regions to produce tradable commodities, and offers conclusions based
on the results. The term ‘region’ is used in this paper to refer not to
provinces but to islands (e.g. Java) and island groups (e.g. Nusa Tenggara).
THE DISTRIBUTION AND LOCATION OF PRODUCTION
Natural resources constitute an important source of income and
employment in Indonesia. Activities directly related to the primary sector
generate about 30% of the country’s GDP (table 1), 50% or more of the
GRDP (Gross Regional Domestic Product) of Sumatra, Kalimantan, Irian
Jaya (sometimes referred to in post-Soeharto Indonesia as Papua) and
Maluku, and about 40% of the GRDP of Sulawesi and Nusa Tenggara.
Only in Java and Bali does the primary sector generate less than 25% of
GRDP. Most of Indonesia’s modern industries and infrastructure are
concentrated in three metropolitan–industrial areas in Java (Greater
Jakarta, Bandung and Greater Surabaya).1 The manufacturing sector of
West Java, Jakarta and East Java produces about 60% of the non-oil and
gas manufacturing GDP of Indonesia. I emphasise the origin of output
from the primary sector because it has implications for analysing the
structure of incentives and the regional distribution of income, as the
next sections will show.
TRADE AND PRICE INTERVENTIONS AND REGIONAL
INCOMES: A SIMPLE MODEL
In this section I look at how interventions in the markets for agricultural
and non-agricultural goods affect the incentives to produce and the
distribution of income among regions. First, I explain briefly what the
direct and indirect interventions are. Second, I examine how these
interventions affect the incentives to produce between natural resource
based activities and manufacturing, in Indonesia and by region. Third, I
look at how interventions affect the distribution of income between urban
and rural people and among islands.
The government influences the production of goods and services
through several mechanisms, including support prices and ceiling prices,
import tariffs, export subsidies, subsidies on inputs, tax concessions, and
restrictions on movements of goods and services among islands. Several
types of intervention have affected agriculture: support and ceiling prices,
prohibitions to export outside Indonesia (rattan, for example) or to other
islands (cattle), monopoly rights to traders of certain commodities (cloves
Primary sector
Agriculture
Oil & gas
Mining & quarrying
Manufacturing without oil & gas
Services
Total
Natural resources & manufacturing
Indonesia
Sumatra
Java
Bali
Kalimantan
29
17
10
2
19
52
100
48
51
22
27
2
9
40
100
60
17
13
2
1
25
58
100
42
22
21
0
1
8
71
100
29
49
18
27
4
14
37
100
63
Nusa
Sulawesi Maluku,
Tenggara,
Irian Jaya
East Timora
40
38
0
2
4
57
100
43
38
35
0
3
10
52
100
48
57
23
4
31
9
34
100
66
a
In 1987 and 1995, for which Fane and Phillips and Fane and Condon estimated rates of protection, and in 1997, when this paper was
written, the Indonesian government set the trade and price policy regime for East Timor, which de facto was a province of Indonesia
at that time.
Source: Derived from BPS (Badan Pusat Statistik, Statistics Indonesia), Regional Accounts of Indonesia, 1993–1995.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
96
TABLE 1 Share of Sectors in Regions’ Average Real GDP, 1993–95
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
97
and oranges), and subsidies to inputs (fertilisers and irrigation water).
Import tariffs and quantitative import restrictions have applied to
manufacturing products. Prohibitions to export wood and logs have
applied to the forestry sector. Pertamina (the state-owned oil company)
has had the monopoly over the oil and gas market. Other interventions
enforced by the central, regional and local governments have also affected
the incentives to produce across sectors and regions, but their impact
has tended to be lower than those listed above.2 The collection of price
and trade interventions is referred to in this paper as the ‘intervention
regime’, and the net effect of this regime on the price of a commodity (or
the output of a sector or a region) determines its total impact on the income
of factors of production in an activity or a region. The paper thus measures
the impact of the intervention regime on the value added (income of
factors of production—land, labour and capital) of regions, and establishes
in which regions value added has increased and decreased because of
the interventions.
Interventions to stimulate the production of certain goods have differential impacts across regions on the incentives to produce. Thus, I need
a number that summarises the effect of interventions on the net income
of the region. That number is the net rate of protection to tradable activities, which I calculate as a weighted average of the rates of effective protection (ERP: the percentage change in factor income) to manufacturing
and primary sector activities for each region. The weights are the shares
of manufacturing (α) and primary sector activities (1 – α) in the region’s
tradable GDP. The effective rate of protection to value added in region J,
vJ, is defined as
J
J
+ (1 − α )v PS
v J = αv M
(1),
where M represents manufacturing and PS the primary sector.
The net effective rate of protection to value added in region J relative
to value added in region K is
vJ /K =
(1 + v J )
−1
(1 + v K )
(2).
If vJ/K > 0, region J gains from the interventions and, obviously, region
K, representing all Indonesia, loses. The number vJ/K measures the net
effect of all interventions on the income of region J, and represents the
net rate of tax (or subsidy) on that region’s value added.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
98
Jorge García García
NET RATES OF PROTECTION AND THE PRO-URBAN BIAS OF
THE INTERVENTION REGIME
In this section I discuss first how the intervention regime has affected the
structure of protection across activities in Indonesia. For this exercise I
use the estimates of effective rates of protection from Fane and Phillips
(1991) for 1987 and from Fane and Condon (1996) for 1995.3 Fane and
Phillips estimated rates of protection for 138 sectors in 1987, and Fane
and Condon estimated rates of protection for 131 sectors in 1995. To
compare the evolution of protection and its effects on incentives and
income distribution between 1987 and 1995, I grouped the information
for 138 sectors from Fane and Phillips into the 131 sectors of Fane and
Condon. The weights for grouping the sectors are the share of each sector’s
value added in the group’s value added at free trade prices. Table 2
presents the effective rates of protection in 1987 and 1995 for each group.
The results set out in table 2 show the government’s overwhelming
promotion of the industrial sector. Although agricultural policies sought
to promote agricultural activities, they fell far behind the protection to
manufacturing. Government policies taxed the oil, gas and mining sectors.
Interventions thus discriminated against primary sector activities and in
favour of manufacturing. Under this structure of protection it can hardly
be argued that incentives in the economy favoured the agricultural sector,
let alone the oil and mining sectors. In favouring manufacturing over
agriculture, the intervention regime also advantaged the urban sector
TABLE 2 Effective Rates of Protection by Main Sector, 1987 and 1995
(%)
Agriculture
Oil & gas
Mining & quarrying
Manufacturing
1987
1995
4
–11
–27
110
–4
–6
–8
5
Source: Calculated by the author from information in Fane and Phillips (1991) and
Fane and Condon (1996), and data on value added supplied by George Fane.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
99
over the rural. However, discrimination against primary sector activities
was reduced between 1987 and 1995, largely because the effective rate of
protection for manufacturing fell from 110% in 1987 to 5% in 1995.
Despite its economic transformation, Indonesia continues to be a
largely agrarian society, and a large part of its population still derives its
income from agricultural activities.4 For this reason, it is important to
know how the reduction in discrimination affected the different activities within agriculture; in particular, it would be interesting to know
whether the intervention regime discriminated against labour-intensive
activities in 1995 as much as it did in 1987. To answer this question, I
calculated the net rate of taxation of agriculture and its subsectors relative to manufacturing. The net tax on agriculture (and its subsectors) is
defined as
vA/ M =
(1 + v A )
−1
(1 + v M )
(3),
where vA represents the effective rate of protection of agriculture and vM
represents the effective rate of protection of manufacturing. Table 3
presents the net rates of protection for agriculture and its subcomponents.
The first row shows a sharp decline in the taxation of agriculture, from
50% in 1987 to 9% in 1995, although the taxation still exists. Thus, rural
people continue losing, but much less in 1995 than they did in 1987.
Table 3 also shows that interventions taxed all agricultural activities in
TABLE 3 The Urban Bias of the Intervention Regime: Net Rates of Taxation of
Agricultural Activities Relative to Manufacturing, 1987 and 1995
(%)
Net tax on agriculture
Farm food crops
Estate crops
Livestock
Forestry
Fisheries
1987
1995
–50
–46
–55
–44
–67
–50
–9
1
–12
2
–59
13
Source: Calculated by the author from data in Fane and Phillips (1991) and Fane
and Condon (1996), using equation (3).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
100
Jorge García García
1987, but provided a small to moderate protection of food crops, livestock
and fisheries in 1995 (1%, 2% and 13% respectively), while continuing to
tax forestry and estate crops (59% and 12% respectively). Because the
bulk of people employed in agriculture work in farm food crops and
estate crops, and the taxation of these subsectors fell substantially during
the period 1987–95, it can be said that the bias of the intervention regime
against rural people has declined sharply.
PROTECTION AND INCOME DISTRIBUTION BY REGION
This section discusses how the intervention regime affected regional rates
of protection and the distribution of income by region. The results show
that the intervention regime increased the income of Java and reduced
that of the other islands. This may seem obvious to those who know
Indonesia well but, to my knowledge, these are the first results that show
how much the intervention regime affects the pattern of regional incomes.
I hope that these results will encourage others to do more detailed studies
of how policies for external and domestic trade influence the pattern of
regional incomes and the incentives to produce across regions. I first
explain how I calculated rates of protection for regions and then identify
the winners and losers from the intervention regime and the extent of
their gains and losses.
Calculating Regional Rates of Protection
To calculate the impact of the national intervention regime on regional
incomes and on the rates of protection (incentives to produce) in the
regions, I proceeded in two steps. First, I calculated rates of protection by
national accounts sector in each region. Second, I used the calculated
rates of protection for the sectors in each region to calculate that region’s
rate of protection.
Rates of Protection by National Accounts Sector. I calculated these rates
using data from Fane and Condon (1996),5 who had calculated rates of
protection for 131 sectors of the input–output table. I converted their rates
for 131 sectors into rates of protection for 10 sectors of the BPS national
accounts by mapping the 131 sectors of the input–output table into the
10 sectors of the national accounts. After this first mapping I converted
the 10 sectors of the national accounts into two sectors: primary and
manufacturing. The primary sector is composed of five subsectors from
agriculture (food crops, estate crops, livestock, forestry and fisheries) and
four subsectors from oil, gas and mining (oil mining, oil and gas
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
101
manufacturing, quarrying and non-oil mining). I grouped the
manufacturing of oil and gas in the primary sector because I wanted to
separate activities based on natural resources from those that did not
depend on them. The manufacturing sector of the national accounts stands
alone as manufacturing.6
After mapping sectors of the input–output table into sectors of the
national accounts, I began calculating the effective rate of protection for
the manufacturing category and for each component of the primary sector
category. The effective rate of protection for the primary sector category
is a weighted average of the rates for mining, agriculture, and oil and
gas. In turn, the rate for each of mining, agriculture, and oil and gas is a
weighted average of the rates for the subsectors in the national accounts
that constitute each of them (appendix 1); the weight is the share of each
component of mining, agriculture, and oil and gas in their value added
at international prices from the 1990 input–output table. The rate of
protection for the five subgroups of agriculture, and for oil, gas, mining
and quarrying, is a weighted average of the rates of protection for each
of their members, the weights being the share of their value added in
total value added at international prices.
Regional Rates of Protection. I calculated the regional rate of protection
for the primary sector category as a weighted average of the national rates
of protection of the nine sectors that make up the category, the weights
being the share of each sector in the GDP of the region. I calculated the
regional rate of protection for manufacturing as follows. First, I mapped
the sectors of the input–output table into sectors of the International
Standard Industrial Classification (ISIC) at the three-digit level. Second,
I calculated national rates of protection for ISIC sectors as a weighted
average of the rates of protection for their input–output components, the
weight being the share of value added of the sector in the input–output
table in the value added of its respective ISIC sector. Value added is
measured at 1990 international prices. Third, I calculated the regional rate
of protection for manufacturing as a weighted average of the ISIC national
rates of protection, the weight being the share of each ISIC sector’s gross
value of output at international prices in the gross value of the region’s
manufacturing output. I had to use regional gross value of output rather
than regional value added because only these data were available from
BPS. BPS does not publish information on manufacturing production at
the regional level, but gave me its unpublished data on gross value of
output at the three-digit ISIC level by region for 1990 and 1995. I used
this information to generate the weights for the rate of protection in 1987
and 1995.
Indonesia Sumatra
1
1 Primary Sector
–1
Agriculture
8
Oil & gas (includes oil refining & LNG)
–11
2 Manufacturing
116
3 Weighted average of 1 & 2 (ERPT)
27
4 Net rate of protection: regions vs Indonesiab
0
a
See table 1, note a.
b
Net Rate of Protection = (
(1+ ERPT for Region)
(1+ ERPT for Indonesia)
2
–6
5
–11
64
1
–20
Java
Bali
3
4
6
11
–11
125
54
21
13
13
0
52
17
–8
Kaliman- Nusa Sulawesi Maluku Eastern
tan
Tenggara
and Indonesia
and East
Irian
Timora
Jaya
5
6
7
8
9
–9
–4
–11
142
12
–12
11
11
–2
91
14
–10
8
9
–7
65
15
–10
–4
1
–10
9
–3
–23
6
8
–10
43
9
–14
− 1) * 100 .
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Sector
102
TABLE 4 Effective Rates of Protection and Net Impact of Interventions on Regional Income, 1987
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
103
Winners and Losers from the Intervention Regime
This section presents estimates of rates of protection by region, and of
the effect of this protection on the real income of regions; it discusses
how changes in the rates of protection altered the regional distribution
of income between 1987 and 1995. Tables 4 and 5 present the rates of
protection and the change in regions’ value added in 1987 and 1995
respectively. Rows 1–3 of each table show the rates of protection for the
primary sector, manufacturing and the two sectors combined. Row 4
shows by how much the intervention regime artificially increased (+) or
reduced (–) the real value added of each region relative to the value added
in the primary and manufacturing sectors of Indonesia. The numbers in
rows 1, 2 and 4 of tables 4 and 5 show that interventions benefited Java
relative to the other islands, that they protected manufacturing about 15
times as much as they protected agriculture, and that they taxed the oil,
gas and mining sectors. The intervention regime thus favoured
manufacturing over primary sector activities, urban people over rural
people, and Java over Sumatra, Bali, Kalimantan and Eastern Indonesia.
I first discuss the results for 1987 (table 4), then examine the evolution of
incentives and the distribution of income between 1987 and 1995, and
look at the pro-urban bias of the intervention regime.
Interventions and Income Distribution in 1987. Table 4 shows the effective
rates of protection for the primary and manufacturing sectors of Indonesia
and of each region. Column 1 shows the rates for Indonesia, and columns
2–8 summarise the results by region. The data in column 1 show that
interventions taxed Indonesia’s primary sector at 1% and protected
(subsidised) the manufacturing sector by 116%. The two sectors combined
received a rate of protection of 27%. Within the primary sector the rates
of protection differed substantially: interventions protected agriculture
by 8% and taxed oil, gas and mining by 11%. Interventions protected
agriculture in all regions but Kalimantan, and taxed oil and gas production
in all regions (Bali neither produces nor refines oil).
Evolution of Protection and Income Distribution, 1987–95. The
government reduced the level of protection and simplified the structure
of incentives across activities and among regions between 1987 and 1995
(compare tables 4 and 5). Between 1987 and 1995 the effective rate of
protection for manufacturing fell from 116% to 32%, and for the primary
sector from –1 to –3%. The combined rate of protection for the
manufacturing and primary sectors fell from 27% in 1987 to 11% in 1995,
but the ranking of protection by region stayed the same. Thus,
interventions protected activities in the manufacturing and primary
Java
Bali
2
3
4
–3
–1
–7
–6
–3
–8
2
4
–6
6
7
–6
–11
–20
–5
4
5
–6
3
4
–6
–8
–11
–6
–1
1
–6
32
11
0
28
–1
–10
33
20
9
12
8
–3
31
–1
–11
17
5
–5
14
5
–5
25
–4
–13
18
2
–8
1
1 Primary sector
Agriculture
Oil, gas & mining
(includes oil refining & LNG)
2 Manufacturing
3 Weighted average of 1 & 2 (ERPT)
4 Net rate of protection: regions vs Indonesiab
a
Kaliman- Nusa Sulawesi Maluku Eastern
tan
Tenggara
and Indonesia
and East
Irian
Timora
Jaya
5
6
7
8
9
See table 1, note a.
b
See table 4, note b.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia Sumatra
104
TABLE 5 Effective Rates of Protection and Net Impact of Interventions on Regional Income, 1995a
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
105
sectors of Java by 20%, Bali by 8%, and Sulawesi, Nusa Tenggara and
East Timor by 5%, and taxed them in Kalimantan and Sumatra by 1%
and in Maluku and Irian Jaya by 4%.
The reforms in the trade regime reduced the incentives to produce in
Java relative to the other regions. Compare, for example, Java and
Sumatra: in 1987 interventions reduced value added in Sumatra by 20%,
while they increased it in Java by 21%. In 1995 interventions reduced
value added in Sumatra by 9%, while they only increased it in Java by
9%. Similar results hold for the other regions. But despite the improved
conditions for producers in the manufacturing and primary sectors
outside Java, the intervention regime continued taxing value added in
these sectors in regions other than Java. These regions would be better
off in the absence of interventions.
Eastern Indonesia. The government has stated its desire to develop
Eastern Indonesia, and many ideas have been proposed to achieve that
objective. What is interesting to note in this context is that analysts have
ignored the impact of the intervention regime on the regional distribution
of income (Jones and Raharjo 1995; Sondakh 1996). The previous
paragraphs and the results in tables 4 and 5 show how the intervention
regime reduced the income of the islands outside Java and Bali. It thus
seems reasonable to suggest that the government could help promote
the development of Eastern Indonesia by removing the onerous taxes on
this region imposed through the intervention regime. In 1987 the
intervention regime taxed value added in the primary and manufacturing
sectors of Eastern Indonesia by 14%. As the government reduced
interventions between 1987 and 1995 by liberalising the trade regime, it
reduced the tax on the region’s value added to 8%. From a regional
perspective, the intervention regime acts like a Robin Hood in reverse: it
takes income away from the poor and gives it to the rich.
The Pro-Urban Bias of the Intervention Regime. The above discussion
shows that islands outside Java lost from the intervention regime, but
leaves aside the issue of the distribution of income between the urban
and rural areas of Indonesia and of the regions. The results indicate that
the intervention regime had a strong pro-urban bias, favouring urban
activities and discriminating against non-urban activities. Because most
of the population in the non-urban sector works in agriculture, the prourban bias of the intervention regime can be examined by looking at the
relative incentives between agriculture and manufacturing. To arrive at
a comparable measure across regions of the discrimination against nonurban areas, I measured the rate of protection of value added in
agriculture in each region relative to the rate of protection of value added
in manufacturing in Indonesia. Table 6 presents the net rate of protection
Sumatra
Java
Bali
Kalimantan
1
2
3
4
–50
–25
–52
–26
–49
–21
–48
–19
1987
1995
Sulawesi
Maluku
and
Irian Jaya
Eastern
Indonesia
5
Nusa
Tenggara
and East
Timorb
6
7
8
9
–56
–39
–49
–20
–50
–21
–53
–32
–50
–23
(1 + v )
A
− 1) * 100 , where v and v represent the effective rates of protection to agriculture
Net Rate of Protection to Agriculture = (
A
M
(1 + v M )
and manufacturing.
a
b
See table 1, note a.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia
106
TABLE 6 The Urban Bias of the Intervention Regime: Net Rate of Protection to Agriculture Relative to Manufacturing, 1987 and 1995a
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
107
of agricultural value added in 1987 and 1995 by region. The numbers in
rows 1 and 2 show that the intervention regime taxed agricultural value
added in Indonesia and all its regions.7 In 1987 it taxed value added in
Indonesian agriculture by 50%, while by region the rates of taxation varied
between 56% in Kalimantan and 48% in Bali; the intervention regime
taxed agriculture in Eastern Indonesia by 50%.
The reforms of the trade and price policy regime between 1987 and
1995 reduced the discrimination against non-urban areas, with the net
tax rate on Indonesian agriculture falling to 25%. Although taxation fell,
tax rates of 25% on agricultural value added are high, and distort relative
prices in a significant manner. Protection of manufacturing caused the
high taxation of agriculture (compare lines 1 and 3 of tables 4 and 5);
even ‘low’ rates of manufacturing protection, like the 32% calculated for
1995, can reduce the incentives to produce in the non-urban sector. The
government has expressed interest in improving the welfare of people in
rural areas and has programs that aim to do this, but some of its actions,
like the protection of manufacturing, achieve the opposite effect, thereby
nullifying the effects of specific interventions to favour the agricultural
sector. Thus, a policy aimed at improving living conditions in rural areas
must be looked at in conjunction with policies that protect activities in
urban areas. A clean way to start reducing the discrimination against the
rural sector would be to reduce the protection to manufacturing activities,
most of them located in the three large urban centres of Java: Jakarta,
Bandung and Surabaya.
Further Issues for Analysis
This paper has presented an incomplete view of the issues that have to
do with interventions in foreign and domestic trade and their impact on
the distribution of regional incomes. I would like to suggest some issues
for consideration in future research. First, this analysis has ignored
tourism, an important foreign exchange earner and employment
generator (Booth 1990; Spillane 1994), whose contribution to the regional
economies (in particular those of Bali and Yogyakarta) appears in the
services sector; protection tends to appreciate the rupiah and makes
exports of services like tourism less competitive. Second, in Sumatra and
Kalimantan one should separate the provinces that produce oil from those
that do not, in order to have a better perspective on how the intervention
regime affects provinces in these two regions. Third, I calculate regional
rates of protection under the assumption that the same rate of protection
applies to a sector in all regions, but this is not the case. In fact, the regions
produce different products within each sector, so the rates of protection
for the same sector should differ among regions. Although I have
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
108
Jorge García García
attempted to eliminate part of this problem by estimating rates of
protection for manufacturing by region, I have not covered the various
distortions in agricultural markets at the regional level. Future research
on the area of trade distortions should consider the different incentives
and taxes to activities and products that prevail in each region. In many
instances, the differences in incentives result from regulations that
provincial and local governments impose (Pomeroy 1997; Quizon et al.
1997; García García 1997).
CONCLUSION
This paper has shown that activities in Indonesia’s primary sector lose
from the intervention regime. Although in the primary sector policies
specific to agriculture tend to protect that sector (see, for example,
Erwidodo and Trewin 1996; Gonzales et al. 1993), the interventions in
manufacturing offset the effects of these and, as a result, agriculture loses
from the interventions as a whole. The paper also identifies the regions
that lose and gain from interventions in the agriculture, manufacturing,
and oil, gas and mining sectors. The intervention regime has protected
the urban sector of Java but taxed Sumatra, Kalimantan, the Eastern
Islands, and the rural sector of Java. The protection of manufacturing,
located mostly in Java, has taxed activities that produce exportable goods
and services and caused income losses for the rest of Indonesia. Although
Java has gained, most of the gains have gone to its urban sector, while its
rural sector has suffered from discrimination against primary sector
activities; the subsidies to rice production and other agriculture based
activities have not offset the losses from the implicit tax imposed by the
intervention regime. The truth is that indirect interventions have distorted
the incentives to produce among activities in Java; rural people and
agricultural activities have lost relative to urban people and
manufacturing activities.
Despite the discrimination against agriculture, the past 25 years show
remarkable achievements in this sector. It grew rapidly after
macroeconomic policies provided a stable framework for sustained
growth. Farmers expanded food production, as better incentives and
investments in irrigation induced them to adopt the new technologies
that the green revolution had put at their disposal. Indonesia turned from
a ‘basket case’ to a country that could produce enough food to feed its
people. These remarkable achievements occurred despite the distortions
in relative prices that affected the sector. Indonesia’s agriculture and other
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
109
natural resource based activities can increase their productivity and
output, but that potential can best be achieved under agricultural
institutions and policies different from those prevailing today. As D. Gale
Johnson points out (1997: 11), ‘the major factors that limit the growth of
food production in developing countries are knowledge and research,
the availability of non-farm inputs at reasonable prices and the
governmental policies that affect incentives. If policies provide for the
first two and do not discriminate against agriculture in trade and
macroeconomic policies farmers will do the rest.’ This applies well to
Indonesian farmers and to people in the poorest provinces of Indonesia.
If the intervention regime does not discriminate against primary sector
based activities, people outside Java and rural people in Java will do
what needs to be done to improve their lot.
NOTES
*
Revised version of ‘Trade and Price Policies: Incentives or Disincentives for
Indonesian Agriculture?’, written while the author was posted in The World
Bank’s Jakarta office, and presented at the conference ‘Sustaining Economic
Growth in Indonesia: A Framework Towards the Twenty First Century’, held
in Jakarta in December 1997. The findings, interpretation and conclusions
represent the author’s views, and not necessarily those of the World Bank, its
Executive Directors or the countries they represent. I would like to thank
George Fane and an anonymous referee for their comments on an earlier
version of this paper. George Fane provided the data on valued added by
sector from the input–output table which permitted recalculation of my original
rates of protection by region.
1
The central statistics agency, BPS (Statistics Indonesia), generates information
(but does not publish it) on value added in manufacturing by metropolitan
areas. The information can be obtained from the tapes of the industrial surveys.
2
A good account of the regulations affecting productive activities can be found
in World Bank (1994, 1995, 1996, 1997).
3
Wymenga (1990) estimated the structure of protection in Indonesia for 1989. I
have omitted these estimates from the discussion because two points in time,
1987 and 1995, suffice for my purposes.
4
I have looked at agriculture only, because it employs about 45% of the labour
force; by contrast, mining employs about 1% (World Bank 1997: appendix
table 1.3).
5
Other authors (Pitt 1981; World Bank 1981; Pangestu and Boediono 1986;
Wymenga 1990, 1991) also calculate rates of protection by sector, but I prefer
to use the rates from Fane and Phillips (1991) and Fane and Condon (1996)
because they cover two years, 1987 and 1995, and follow the same methodology.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
110
Jorge García García
6
BPS divides manufacturing into two sectors: oil and gas manufacturing and
the rest of manufacturing. In this paper the rest of manufacturing constitutes
the manufacturing category. Oil and gas manufacturing is classified in the
natural resource based category.
7
This result holds whether agricultural incentives are measured relative to
protection for manufacturing in the region or in Indonesia.
REFERENCES
Booth, Anne (1990), ‘The Tourism Boom in Indonesia’, Bulletin of Indonesian
Economic Studies 26 (3): 45–73.
Erwidodo and Ray Trewin (1996), ‘The Social Welfare Impact of Indonesian Dairy
Policies’, Bulletin of Indonesian Economic Studies 32 (3): 55–85.
Fane, George, and Chris Phillips (1991), ‘Effective Protection in Indonesia in 1987’,
Bulletin of Indonesian Economic Studies 27 (1): 105–26.
Fane, George, and Timothy Condon (1996), ‘Trade Reform in Indonesia, 1987–95,’
Bulletin of Indonesian Economic Studies 32 (3): 33–55.
García García, Jorge (1997), Rural Markets and Local Institutions in Indonesia:
The Case of the Provinces of Jambi and East Nusa Tenggara, Jakarta (mimeo).
García García, Jorge, and Lana Soelistianingsih (1998), ‘Why Do Differences in
Provincial Incomes Persist in Indonesia?’, Bulletin of Indonesian Economic
Studies 34 (1): 55–93.
Gonzales, Leonardo, Faisal Kasryno, N. Perez and M. Rosegrant (1993), Economic
Incentives and Comparative Advantage in Indonesian Food Crop Production,
Research Report 93, International Food Policy Research Institute,
Washington DC.
Hill, Hal (ed.) (1991), Unity and Diversity: Regional Economic Development in Indonesia
since 1970, Oxford University Press, Singapore.
—— (1996), The Indonesian Economy since 1966: Southeast Asia’s Emerging Giant,
Cambridge University Press, New York.
Johnson, D. Gale (1997), ‘Agriculture and the Wealth of Nations’, American Economic
Review 87 (2): 1–11.
Jones, Gavin, and Yulfita Raharjo (eds) (1995), People, Land and Sea: Development
Challenges in Eastern Indonesia, Australian National University, Canberra.
Krongkaew, Medhi (1994), ‘Income Distribution in East Asian Countries: An
Update’, Asian-Pacific Economic Literature 8 (2): 58–73.
Pangestu, Mari, and Boediono (1986), ‘Indonesia: The Structure and Causes of
Manufacturing Sector Protection’, in Christopher Findlay and Ross Garnaut
(eds), The Political Economy of Manufacturing Protection: Experiences of ASEAN
and Australia, Allen and Unwin, Sydney.
Pitt, Mark M. (1981), ‘Alternative Trade Strategies and Employment in Indonesia’,
in Anne O. Krueger, Hal B. Lary, Terry Monson and N. Akrasanee (eds), Trade
and Employment in Developing Countries, Vol. I, Individual Studies, University
of Chicago Press, Chicago IL.
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Pomeroy, J. (1997), Distribution Systems for Selected Commodities: A Summary
of Survey Results from Several Provinces, Trade Implementation and Policy
Project, USAID, Ministry of Industry and Trade, Jakarta (mimeo).
Quizon, Jaime, Hania Rahma and Nina Toyamah (1997), Regional Regulations
and Agricultural Commodity Price Distortions: A Study of Four Indonesian
Provinces, The World Bank and Center for Policy and Implementation Studies,
Jakarta (mimeo).
Sondakh, Lucky (1996), ‘Agricultural Development in Eastern Indonesia:
Performance, Issues and Policy Options’, in Colin Barlow and Joan Hardjono
(eds), Indonesia Assessment 1995: Development in Eastern Indonesia, Research
School of Pacific and Asian Studies, Australian National University, Canberra,
and Institute of South East Asian Studies, Singapore: 141–63.
Spillane, James (1994), Pariwisata Indonesia: Siasat Ekonomi and Rekayasa Kebudayaan,
Monografi Lembaga Studi Realino 5, Penerbit Kanisius, Yogyakarta.
World Bank (1981), Indonesia: Selected Issues of Industrial Development and Trade
Strategy, Annex 2, The Foreign Trade Regime, Report No. 3182-IND,
Washington DC.
—— (1994), Indonesia: Stability, Growth and Equity in Repelita VI, Report No. 12857IND, 20 July, Washington DC.
—— (1995), Indonesia: Improving Efficiency and Equity: Changes in the Public Sector’s
Role, Report No. 14006-IND, 24 July, Washington DC.
—— (1996), Indonesia: Dimensions of Growth, Report No. 15383-IND, 7 May,
Washington DC.
—— (1997), Indonesia: Sustaining High Growth with Equity, Report No. 16433-IND,
30 May, Washington DC.
Wymenga, Paul S.J. (1990), The 1989 Structure of Protection in Indonesia, Industry
Analysis Project, Centre for Data Processing and Analysis, Ministry of
Industry, Working Paper No. 17, January, Jakarta.
—— (1991), ‘The Structure of Protection in Indonesia in 1989’, Bulletin of Indonesian
Economic Studies 27 (1): 127–53.
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Indonesia's Trade and Price Interventions: Pro-Java
and Pro-Urban
Jorge García García
To cite this article: Jorge García García (2000) Indonesia's Trade and Price Interventions: ProJava and Pro-Urban, Bulletin of Indonesian Economic Studies, 36:3, 93-112
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Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 93–112
INDONESIA’S TRADE AND PRICE
INTERVENTIONS: PRO-JAVA AND PRO-URBAN
Jorge García García*
The World Bank, Washington DC
In 1987 and 1995 Indonesia’s price and trade policies (intervention regime)
increased the income of Java’s urban centres and reduced that of people
living in rural Java and the other islands. This happened because the regime
protected manufacturing activities, most of them located in Jakarta,
Bandung and Surabaya, and taxed primary sector based activities, located
outside urban Java. It protected some primary sector based activities
directly, but the entire intervention regime, with manufacturing protection
included, taxed them. As a result, regions deriving income from primary
sector based activities lost. Indonesia’s intervention regime is regressive:
it transfers income from poorer to richer regions. This regime and its effects
on regional incomes continue. Governments have designed programs to
raise the income of Eastern Indonesia, but have omitted the most effective
instrument: opening the economy to international competition. A serious
attempt to reduce regional income disparities should begin by eliminating
barriers to international trade.
INTRODUCTION
Indonesia experienced remarkable development between 1967 and 1996
(Hill 1996): income per capita increased from about $60 to about $1,000,
and the share of the population under poverty declined from about 70%
to below 15%. Once the largest rice importer in the world, Indonesia
became self-sufficient in rice in the mid 1980s, as rice yields increased
from 2.1 tons per hectare in the mid 1960s to about 4.3 tons per hectare in
the early 1990s. People and regions enjoyed large increases in real income
(Hill 1991), while regional incomes converged and the distribution of
personal income remained the most egalitarian in East Asia (García García
and Soelistianingsih 1998; Krongkaew 1994). Indonesia could, however,
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
94
Jorge García García
have grown faster, and regional income inequalities could have fallen
faster, if the country had adopted a more open trade regime, and if the
government had not controlled the price and trade of selected products
from the primary sector (agriculture, forestry, fishing and mining). This
paper looks at how trade and price policies (the ‘intervention regime’)
affected regional incomes.
In what follows I show that the intervention regime has favoured
Java and taxed the non-Java provinces. This has occurred because
provinces have different factor endowments, and productive activities
have enjoyed different rates of protection. Java has a large labour/land
ratio and produces most of Indonesia’s manufacturing output, while the
Outer Islands—Sumatra, Kalimantan and Eastern Indonesia (Nusa
Tenggara, Sulawesi, Maluku and Irian Jaya)—have a small labour/land
ratio and a large natural resource endowment (land, forest, fisheries,
mining, oil and gas), and produce most of the country’s output from
natural resources. Interventions have protected manufacturing 10 times
as much as they have protected agriculture and forestry, and have taxed
the oil, gas and mining sectors. The intervention regime has thus favoured
urban over rural people, manufacturing over activities in the primary
sector, and Java over Bali, Sumatra and Eastern Indonesia. The taxation
of the Eastern Indonesian provinces is more striking, because they have
the lowest per capita income and the highest incidence of poverty in the
country.
From a regional perspective, Indonesia’s intervention regime is
regressive: it transfers income from the poorer to the richer regions. The
intervention regime has caused losses to the Outer Islands and held back
their development relative to what it could have been. Although Java
has gained at the expense of the Outer Islands it has lost, in a way, relative
to its potential. Java, and Indonesia, could have grown faster had there
been a more open trade regime. The farmers and rural workers of Java
could have been better off, and so could the people in the Outer Islands,
had there been fewer interventions in price and trade.
This paper argues that there is room to improve the incentives to
produce in Java and the Outer Islands, by eliminating protection to
manufacturing and taxation of activities in the primary sector. The next
section summarises information on the location of production in
Indonesia. The paper then sets out a simple model of trade and price
interventions and the regional distribution of income, and presents the
results on rates of protection for manufacturing and the primary sector.
Finally, it provides estimates of the net effect of trade and price policy
interventions on the regional distribution of income and the incentives
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Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
95
for regions to produce tradable commodities, and offers conclusions based
on the results. The term ‘region’ is used in this paper to refer not to
provinces but to islands (e.g. Java) and island groups (e.g. Nusa Tenggara).
THE DISTRIBUTION AND LOCATION OF PRODUCTION
Natural resources constitute an important source of income and
employment in Indonesia. Activities directly related to the primary sector
generate about 30% of the country’s GDP (table 1), 50% or more of the
GRDP (Gross Regional Domestic Product) of Sumatra, Kalimantan, Irian
Jaya (sometimes referred to in post-Soeharto Indonesia as Papua) and
Maluku, and about 40% of the GRDP of Sulawesi and Nusa Tenggara.
Only in Java and Bali does the primary sector generate less than 25% of
GRDP. Most of Indonesia’s modern industries and infrastructure are
concentrated in three metropolitan–industrial areas in Java (Greater
Jakarta, Bandung and Greater Surabaya).1 The manufacturing sector of
West Java, Jakarta and East Java produces about 60% of the non-oil and
gas manufacturing GDP of Indonesia. I emphasise the origin of output
from the primary sector because it has implications for analysing the
structure of incentives and the regional distribution of income, as the
next sections will show.
TRADE AND PRICE INTERVENTIONS AND REGIONAL
INCOMES: A SIMPLE MODEL
In this section I look at how interventions in the markets for agricultural
and non-agricultural goods affect the incentives to produce and the
distribution of income among regions. First, I explain briefly what the
direct and indirect interventions are. Second, I examine how these
interventions affect the incentives to produce between natural resource
based activities and manufacturing, in Indonesia and by region. Third, I
look at how interventions affect the distribution of income between urban
and rural people and among islands.
The government influences the production of goods and services
through several mechanisms, including support prices and ceiling prices,
import tariffs, export subsidies, subsidies on inputs, tax concessions, and
restrictions on movements of goods and services among islands. Several
types of intervention have affected agriculture: support and ceiling prices,
prohibitions to export outside Indonesia (rattan, for example) or to other
islands (cattle), monopoly rights to traders of certain commodities (cloves
Primary sector
Agriculture
Oil & gas
Mining & quarrying
Manufacturing without oil & gas
Services
Total
Natural resources & manufacturing
Indonesia
Sumatra
Java
Bali
Kalimantan
29
17
10
2
19
52
100
48
51
22
27
2
9
40
100
60
17
13
2
1
25
58
100
42
22
21
0
1
8
71
100
29
49
18
27
4
14
37
100
63
Nusa
Sulawesi Maluku,
Tenggara,
Irian Jaya
East Timora
40
38
0
2
4
57
100
43
38
35
0
3
10
52
100
48
57
23
4
31
9
34
100
66
a
In 1987 and 1995, for which Fane and Phillips and Fane and Condon estimated rates of protection, and in 1997, when this paper was
written, the Indonesian government set the trade and price policy regime for East Timor, which de facto was a province of Indonesia
at that time.
Source: Derived from BPS (Badan Pusat Statistik, Statistics Indonesia), Regional Accounts of Indonesia, 1993–1995.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
96
TABLE 1 Share of Sectors in Regions’ Average Real GDP, 1993–95
(%)
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Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
97
and oranges), and subsidies to inputs (fertilisers and irrigation water).
Import tariffs and quantitative import restrictions have applied to
manufacturing products. Prohibitions to export wood and logs have
applied to the forestry sector. Pertamina (the state-owned oil company)
has had the monopoly over the oil and gas market. Other interventions
enforced by the central, regional and local governments have also affected
the incentives to produce across sectors and regions, but their impact
has tended to be lower than those listed above.2 The collection of price
and trade interventions is referred to in this paper as the ‘intervention
regime’, and the net effect of this regime on the price of a commodity (or
the output of a sector or a region) determines its total impact on the income
of factors of production in an activity or a region. The paper thus measures
the impact of the intervention regime on the value added (income of
factors of production—land, labour and capital) of regions, and establishes
in which regions value added has increased and decreased because of
the interventions.
Interventions to stimulate the production of certain goods have differential impacts across regions on the incentives to produce. Thus, I need
a number that summarises the effect of interventions on the net income
of the region. That number is the net rate of protection to tradable activities, which I calculate as a weighted average of the rates of effective protection (ERP: the percentage change in factor income) to manufacturing
and primary sector activities for each region. The weights are the shares
of manufacturing (α) and primary sector activities (1 – α) in the region’s
tradable GDP. The effective rate of protection to value added in region J,
vJ, is defined as
J
J
+ (1 − α )v PS
v J = αv M
(1),
where M represents manufacturing and PS the primary sector.
The net effective rate of protection to value added in region J relative
to value added in region K is
vJ /K =
(1 + v J )
−1
(1 + v K )
(2).
If vJ/K > 0, region J gains from the interventions and, obviously, region
K, representing all Indonesia, loses. The number vJ/K measures the net
effect of all interventions on the income of region J, and represents the
net rate of tax (or subsidy) on that region’s value added.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
98
Jorge García García
NET RATES OF PROTECTION AND THE PRO-URBAN BIAS OF
THE INTERVENTION REGIME
In this section I discuss first how the intervention regime has affected the
structure of protection across activities in Indonesia. For this exercise I
use the estimates of effective rates of protection from Fane and Phillips
(1991) for 1987 and from Fane and Condon (1996) for 1995.3 Fane and
Phillips estimated rates of protection for 138 sectors in 1987, and Fane
and Condon estimated rates of protection for 131 sectors in 1995. To
compare the evolution of protection and its effects on incentives and
income distribution between 1987 and 1995, I grouped the information
for 138 sectors from Fane and Phillips into the 131 sectors of Fane and
Condon. The weights for grouping the sectors are the share of each sector’s
value added in the group’s value added at free trade prices. Table 2
presents the effective rates of protection in 1987 and 1995 for each group.
The results set out in table 2 show the government’s overwhelming
promotion of the industrial sector. Although agricultural policies sought
to promote agricultural activities, they fell far behind the protection to
manufacturing. Government policies taxed the oil, gas and mining sectors.
Interventions thus discriminated against primary sector activities and in
favour of manufacturing. Under this structure of protection it can hardly
be argued that incentives in the economy favoured the agricultural sector,
let alone the oil and mining sectors. In favouring manufacturing over
agriculture, the intervention regime also advantaged the urban sector
TABLE 2 Effective Rates of Protection by Main Sector, 1987 and 1995
(%)
Agriculture
Oil & gas
Mining & quarrying
Manufacturing
1987
1995
4
–11
–27
110
–4
–6
–8
5
Source: Calculated by the author from information in Fane and Phillips (1991) and
Fane and Condon (1996), and data on value added supplied by George Fane.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
99
over the rural. However, discrimination against primary sector activities
was reduced between 1987 and 1995, largely because the effective rate of
protection for manufacturing fell from 110% in 1987 to 5% in 1995.
Despite its economic transformation, Indonesia continues to be a
largely agrarian society, and a large part of its population still derives its
income from agricultural activities.4 For this reason, it is important to
know how the reduction in discrimination affected the different activities within agriculture; in particular, it would be interesting to know
whether the intervention regime discriminated against labour-intensive
activities in 1995 as much as it did in 1987. To answer this question, I
calculated the net rate of taxation of agriculture and its subsectors relative to manufacturing. The net tax on agriculture (and its subsectors) is
defined as
vA/ M =
(1 + v A )
−1
(1 + v M )
(3),
where vA represents the effective rate of protection of agriculture and vM
represents the effective rate of protection of manufacturing. Table 3
presents the net rates of protection for agriculture and its subcomponents.
The first row shows a sharp decline in the taxation of agriculture, from
50% in 1987 to 9% in 1995, although the taxation still exists. Thus, rural
people continue losing, but much less in 1995 than they did in 1987.
Table 3 also shows that interventions taxed all agricultural activities in
TABLE 3 The Urban Bias of the Intervention Regime: Net Rates of Taxation of
Agricultural Activities Relative to Manufacturing, 1987 and 1995
(%)
Net tax on agriculture
Farm food crops
Estate crops
Livestock
Forestry
Fisheries
1987
1995
–50
–46
–55
–44
–67
–50
–9
1
–12
2
–59
13
Source: Calculated by the author from data in Fane and Phillips (1991) and Fane
and Condon (1996), using equation (3).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
100
Jorge García García
1987, but provided a small to moderate protection of food crops, livestock
and fisheries in 1995 (1%, 2% and 13% respectively), while continuing to
tax forestry and estate crops (59% and 12% respectively). Because the
bulk of people employed in agriculture work in farm food crops and
estate crops, and the taxation of these subsectors fell substantially during
the period 1987–95, it can be said that the bias of the intervention regime
against rural people has declined sharply.
PROTECTION AND INCOME DISTRIBUTION BY REGION
This section discusses how the intervention regime affected regional rates
of protection and the distribution of income by region. The results show
that the intervention regime increased the income of Java and reduced
that of the other islands. This may seem obvious to those who know
Indonesia well but, to my knowledge, these are the first results that show
how much the intervention regime affects the pattern of regional incomes.
I hope that these results will encourage others to do more detailed studies
of how policies for external and domestic trade influence the pattern of
regional incomes and the incentives to produce across regions. I first
explain how I calculated rates of protection for regions and then identify
the winners and losers from the intervention regime and the extent of
their gains and losses.
Calculating Regional Rates of Protection
To calculate the impact of the national intervention regime on regional
incomes and on the rates of protection (incentives to produce) in the
regions, I proceeded in two steps. First, I calculated rates of protection by
national accounts sector in each region. Second, I used the calculated
rates of protection for the sectors in each region to calculate that region’s
rate of protection.
Rates of Protection by National Accounts Sector. I calculated these rates
using data from Fane and Condon (1996),5 who had calculated rates of
protection for 131 sectors of the input–output table. I converted their rates
for 131 sectors into rates of protection for 10 sectors of the BPS national
accounts by mapping the 131 sectors of the input–output table into the
10 sectors of the national accounts. After this first mapping I converted
the 10 sectors of the national accounts into two sectors: primary and
manufacturing. The primary sector is composed of five subsectors from
agriculture (food crops, estate crops, livestock, forestry and fisheries) and
four subsectors from oil, gas and mining (oil mining, oil and gas
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
101
manufacturing, quarrying and non-oil mining). I grouped the
manufacturing of oil and gas in the primary sector because I wanted to
separate activities based on natural resources from those that did not
depend on them. The manufacturing sector of the national accounts stands
alone as manufacturing.6
After mapping sectors of the input–output table into sectors of the
national accounts, I began calculating the effective rate of protection for
the manufacturing category and for each component of the primary sector
category. The effective rate of protection for the primary sector category
is a weighted average of the rates for mining, agriculture, and oil and
gas. In turn, the rate for each of mining, agriculture, and oil and gas is a
weighted average of the rates for the subsectors in the national accounts
that constitute each of them (appendix 1); the weight is the share of each
component of mining, agriculture, and oil and gas in their value added
at international prices from the 1990 input–output table. The rate of
protection for the five subgroups of agriculture, and for oil, gas, mining
and quarrying, is a weighted average of the rates of protection for each
of their members, the weights being the share of their value added in
total value added at international prices.
Regional Rates of Protection. I calculated the regional rate of protection
for the primary sector category as a weighted average of the national rates
of protection of the nine sectors that make up the category, the weights
being the share of each sector in the GDP of the region. I calculated the
regional rate of protection for manufacturing as follows. First, I mapped
the sectors of the input–output table into sectors of the International
Standard Industrial Classification (ISIC) at the three-digit level. Second,
I calculated national rates of protection for ISIC sectors as a weighted
average of the rates of protection for their input–output components, the
weight being the share of value added of the sector in the input–output
table in the value added of its respective ISIC sector. Value added is
measured at 1990 international prices. Third, I calculated the regional rate
of protection for manufacturing as a weighted average of the ISIC national
rates of protection, the weight being the share of each ISIC sector’s gross
value of output at international prices in the gross value of the region’s
manufacturing output. I had to use regional gross value of output rather
than regional value added because only these data were available from
BPS. BPS does not publish information on manufacturing production at
the regional level, but gave me its unpublished data on gross value of
output at the three-digit ISIC level by region for 1990 and 1995. I used
this information to generate the weights for the rate of protection in 1987
and 1995.
Indonesia Sumatra
1
1 Primary Sector
–1
Agriculture
8
Oil & gas (includes oil refining & LNG)
–11
2 Manufacturing
116
3 Weighted average of 1 & 2 (ERPT)
27
4 Net rate of protection: regions vs Indonesiab
0
a
See table 1, note a.
b
Net Rate of Protection = (
(1+ ERPT for Region)
(1+ ERPT for Indonesia)
2
–6
5
–11
64
1
–20
Java
Bali
3
4
6
11
–11
125
54
21
13
13
0
52
17
–8
Kaliman- Nusa Sulawesi Maluku Eastern
tan
Tenggara
and Indonesia
and East
Irian
Timora
Jaya
5
6
7
8
9
–9
–4
–11
142
12
–12
11
11
–2
91
14
–10
8
9
–7
65
15
–10
–4
1
–10
9
–3
–23
6
8
–10
43
9
–14
− 1) * 100 .
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Sector
102
TABLE 4 Effective Rates of Protection and Net Impact of Interventions on Regional Income, 1987
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
103
Winners and Losers from the Intervention Regime
This section presents estimates of rates of protection by region, and of
the effect of this protection on the real income of regions; it discusses
how changes in the rates of protection altered the regional distribution
of income between 1987 and 1995. Tables 4 and 5 present the rates of
protection and the change in regions’ value added in 1987 and 1995
respectively. Rows 1–3 of each table show the rates of protection for the
primary sector, manufacturing and the two sectors combined. Row 4
shows by how much the intervention regime artificially increased (+) or
reduced (–) the real value added of each region relative to the value added
in the primary and manufacturing sectors of Indonesia. The numbers in
rows 1, 2 and 4 of tables 4 and 5 show that interventions benefited Java
relative to the other islands, that they protected manufacturing about 15
times as much as they protected agriculture, and that they taxed the oil,
gas and mining sectors. The intervention regime thus favoured
manufacturing over primary sector activities, urban people over rural
people, and Java over Sumatra, Bali, Kalimantan and Eastern Indonesia.
I first discuss the results for 1987 (table 4), then examine the evolution of
incentives and the distribution of income between 1987 and 1995, and
look at the pro-urban bias of the intervention regime.
Interventions and Income Distribution in 1987. Table 4 shows the effective
rates of protection for the primary and manufacturing sectors of Indonesia
and of each region. Column 1 shows the rates for Indonesia, and columns
2–8 summarise the results by region. The data in column 1 show that
interventions taxed Indonesia’s primary sector at 1% and protected
(subsidised) the manufacturing sector by 116%. The two sectors combined
received a rate of protection of 27%. Within the primary sector the rates
of protection differed substantially: interventions protected agriculture
by 8% and taxed oil, gas and mining by 11%. Interventions protected
agriculture in all regions but Kalimantan, and taxed oil and gas production
in all regions (Bali neither produces nor refines oil).
Evolution of Protection and Income Distribution, 1987–95. The
government reduced the level of protection and simplified the structure
of incentives across activities and among regions between 1987 and 1995
(compare tables 4 and 5). Between 1987 and 1995 the effective rate of
protection for manufacturing fell from 116% to 32%, and for the primary
sector from –1 to –3%. The combined rate of protection for the
manufacturing and primary sectors fell from 27% in 1987 to 11% in 1995,
but the ranking of protection by region stayed the same. Thus,
interventions protected activities in the manufacturing and primary
Java
Bali
2
3
4
–3
–1
–7
–6
–3
–8
2
4
–6
6
7
–6
–11
–20
–5
4
5
–6
3
4
–6
–8
–11
–6
–1
1
–6
32
11
0
28
–1
–10
33
20
9
12
8
–3
31
–1
–11
17
5
–5
14
5
–5
25
–4
–13
18
2
–8
1
1 Primary sector
Agriculture
Oil, gas & mining
(includes oil refining & LNG)
2 Manufacturing
3 Weighted average of 1 & 2 (ERPT)
4 Net rate of protection: regions vs Indonesiab
a
Kaliman- Nusa Sulawesi Maluku Eastern
tan
Tenggara
and Indonesia
and East
Irian
Timora
Jaya
5
6
7
8
9
See table 1, note a.
b
See table 4, note b.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia Sumatra
104
TABLE 5 Effective Rates of Protection and Net Impact of Interventions on Regional Income, 1995a
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
105
sectors of Java by 20%, Bali by 8%, and Sulawesi, Nusa Tenggara and
East Timor by 5%, and taxed them in Kalimantan and Sumatra by 1%
and in Maluku and Irian Jaya by 4%.
The reforms in the trade regime reduced the incentives to produce in
Java relative to the other regions. Compare, for example, Java and
Sumatra: in 1987 interventions reduced value added in Sumatra by 20%,
while they increased it in Java by 21%. In 1995 interventions reduced
value added in Sumatra by 9%, while they only increased it in Java by
9%. Similar results hold for the other regions. But despite the improved
conditions for producers in the manufacturing and primary sectors
outside Java, the intervention regime continued taxing value added in
these sectors in regions other than Java. These regions would be better
off in the absence of interventions.
Eastern Indonesia. The government has stated its desire to develop
Eastern Indonesia, and many ideas have been proposed to achieve that
objective. What is interesting to note in this context is that analysts have
ignored the impact of the intervention regime on the regional distribution
of income (Jones and Raharjo 1995; Sondakh 1996). The previous
paragraphs and the results in tables 4 and 5 show how the intervention
regime reduced the income of the islands outside Java and Bali. It thus
seems reasonable to suggest that the government could help promote
the development of Eastern Indonesia by removing the onerous taxes on
this region imposed through the intervention regime. In 1987 the
intervention regime taxed value added in the primary and manufacturing
sectors of Eastern Indonesia by 14%. As the government reduced
interventions between 1987 and 1995 by liberalising the trade regime, it
reduced the tax on the region’s value added to 8%. From a regional
perspective, the intervention regime acts like a Robin Hood in reverse: it
takes income away from the poor and gives it to the rich.
The Pro-Urban Bias of the Intervention Regime. The above discussion
shows that islands outside Java lost from the intervention regime, but
leaves aside the issue of the distribution of income between the urban
and rural areas of Indonesia and of the regions. The results indicate that
the intervention regime had a strong pro-urban bias, favouring urban
activities and discriminating against non-urban activities. Because most
of the population in the non-urban sector works in agriculture, the prourban bias of the intervention regime can be examined by looking at the
relative incentives between agriculture and manufacturing. To arrive at
a comparable measure across regions of the discrimination against nonurban areas, I measured the rate of protection of value added in
agriculture in each region relative to the rate of protection of value added
in manufacturing in Indonesia. Table 6 presents the net rate of protection
Sumatra
Java
Bali
Kalimantan
1
2
3
4
–50
–25
–52
–26
–49
–21
–48
–19
1987
1995
Sulawesi
Maluku
and
Irian Jaya
Eastern
Indonesia
5
Nusa
Tenggara
and East
Timorb
6
7
8
9
–56
–39
–49
–20
–50
–21
–53
–32
–50
–23
(1 + v )
A
− 1) * 100 , where v and v represent the effective rates of protection to agriculture
Net Rate of Protection to Agriculture = (
A
M
(1 + v M )
and manufacturing.
a
b
See table 1, note a.
Jorge García García
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
Indonesia
106
TABLE 6 The Urban Bias of the Intervention Regime: Net Rate of Protection to Agriculture Relative to Manufacturing, 1987 and 1995a
(%)
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
107
of agricultural value added in 1987 and 1995 by region. The numbers in
rows 1 and 2 show that the intervention regime taxed agricultural value
added in Indonesia and all its regions.7 In 1987 it taxed value added in
Indonesian agriculture by 50%, while by region the rates of taxation varied
between 56% in Kalimantan and 48% in Bali; the intervention regime
taxed agriculture in Eastern Indonesia by 50%.
The reforms of the trade and price policy regime between 1987 and
1995 reduced the discrimination against non-urban areas, with the net
tax rate on Indonesian agriculture falling to 25%. Although taxation fell,
tax rates of 25% on agricultural value added are high, and distort relative
prices in a significant manner. Protection of manufacturing caused the
high taxation of agriculture (compare lines 1 and 3 of tables 4 and 5);
even ‘low’ rates of manufacturing protection, like the 32% calculated for
1995, can reduce the incentives to produce in the non-urban sector. The
government has expressed interest in improving the welfare of people in
rural areas and has programs that aim to do this, but some of its actions,
like the protection of manufacturing, achieve the opposite effect, thereby
nullifying the effects of specific interventions to favour the agricultural
sector. Thus, a policy aimed at improving living conditions in rural areas
must be looked at in conjunction with policies that protect activities in
urban areas. A clean way to start reducing the discrimination against the
rural sector would be to reduce the protection to manufacturing activities,
most of them located in the three large urban centres of Java: Jakarta,
Bandung and Surabaya.
Further Issues for Analysis
This paper has presented an incomplete view of the issues that have to
do with interventions in foreign and domestic trade and their impact on
the distribution of regional incomes. I would like to suggest some issues
for consideration in future research. First, this analysis has ignored
tourism, an important foreign exchange earner and employment
generator (Booth 1990; Spillane 1994), whose contribution to the regional
economies (in particular those of Bali and Yogyakarta) appears in the
services sector; protection tends to appreciate the rupiah and makes
exports of services like tourism less competitive. Second, in Sumatra and
Kalimantan one should separate the provinces that produce oil from those
that do not, in order to have a better perspective on how the intervention
regime affects provinces in these two regions. Third, I calculate regional
rates of protection under the assumption that the same rate of protection
applies to a sector in all regions, but this is not the case. In fact, the regions
produce different products within each sector, so the rates of protection
for the same sector should differ among regions. Although I have
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
108
Jorge García García
attempted to eliminate part of this problem by estimating rates of
protection for manufacturing by region, I have not covered the various
distortions in agricultural markets at the regional level. Future research
on the area of trade distortions should consider the different incentives
and taxes to activities and products that prevail in each region. In many
instances, the differences in incentives result from regulations that
provincial and local governments impose (Pomeroy 1997; Quizon et al.
1997; García García 1997).
CONCLUSION
This paper has shown that activities in Indonesia’s primary sector lose
from the intervention regime. Although in the primary sector policies
specific to agriculture tend to protect that sector (see, for example,
Erwidodo and Trewin 1996; Gonzales et al. 1993), the interventions in
manufacturing offset the effects of these and, as a result, agriculture loses
from the interventions as a whole. The paper also identifies the regions
that lose and gain from interventions in the agriculture, manufacturing,
and oil, gas and mining sectors. The intervention regime has protected
the urban sector of Java but taxed Sumatra, Kalimantan, the Eastern
Islands, and the rural sector of Java. The protection of manufacturing,
located mostly in Java, has taxed activities that produce exportable goods
and services and caused income losses for the rest of Indonesia. Although
Java has gained, most of the gains have gone to its urban sector, while its
rural sector has suffered from discrimination against primary sector
activities; the subsidies to rice production and other agriculture based
activities have not offset the losses from the implicit tax imposed by the
intervention regime. The truth is that indirect interventions have distorted
the incentives to produce among activities in Java; rural people and
agricultural activities have lost relative to urban people and
manufacturing activities.
Despite the discrimination against agriculture, the past 25 years show
remarkable achievements in this sector. It grew rapidly after
macroeconomic policies provided a stable framework for sustained
growth. Farmers expanded food production, as better incentives and
investments in irrigation induced them to adopt the new technologies
that the green revolution had put at their disposal. Indonesia turned from
a ‘basket case’ to a country that could produce enough food to feed its
people. These remarkable achievements occurred despite the distortions
in relative prices that affected the sector. Indonesia’s agriculture and other
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Indonesia’s Trade and Price Interventions: Pro-Java and Pro-urban
109
natural resource based activities can increase their productivity and
output, but that potential can best be achieved under agricultural
institutions and policies different from those prevailing today. As D. Gale
Johnson points out (1997: 11), ‘the major factors that limit the growth of
food production in developing countries are knowledge and research,
the availability of non-farm inputs at reasonable prices and the
governmental policies that affect incentives. If policies provide for the
first two and do not discriminate against agriculture in trade and
macroeconomic policies farmers will do the rest.’ This applies well to
Indonesian farmers and to people in the poorest provinces of Indonesia.
If the intervention regime does not discriminate against primary sector
based activities, people outside Java and rural people in Java will do
what needs to be done to improve their lot.
NOTES
*
Revised version of ‘Trade and Price Policies: Incentives or Disincentives for
Indonesian Agriculture?’, written while the author was posted in The World
Bank’s Jakarta office, and presented at the conference ‘Sustaining Economic
Growth in Indonesia: A Framework Towards the Twenty First Century’, held
in Jakarta in December 1997. The findings, interpretation and conclusions
represent the author’s views, and not necessarily those of the World Bank, its
Executive Directors or the countries they represent. I would like to thank
George Fane and an anonymous referee for their comments on an earlier
version of this paper. George Fane provided the data on valued added by
sector from the input–output table which permitted recalculation of my original
rates of protection by region.
1
The central statistics agency, BPS (Statistics Indonesia), generates information
(but does not publish it) on value added in manufacturing by metropolitan
areas. The information can be obtained from the tapes of the industrial surveys.
2
A good account of the regulations affecting productive activities can be found
in World Bank (1994, 1995, 1996, 1997).
3
Wymenga (1990) estimated the structure of protection in Indonesia for 1989. I
have omitted these estimates from the discussion because two points in time,
1987 and 1995, suffice for my purposes.
4
I have looked at agriculture only, because it employs about 45% of the labour
force; by contrast, mining employs about 1% (World Bank 1997: appendix
table 1.3).
5
Other authors (Pitt 1981; World Bank 1981; Pangestu and Boediono 1986;
Wymenga 1990, 1991) also calculate rates of protection by sector, but I prefer
to use the rates from Fane and Phillips (1991) and Fane and Condon (1996)
because they cover two years, 1987 and 1995, and follow the same methodology.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
110
Jorge García García
6
BPS divides manufacturing into two sectors: oil and gas manufacturing and
the rest of manufacturing. In this paper the rest of manufacturing constitutes
the manufacturing category. Oil and gas manufacturing is classified in the
natural resource based category.
7
This result holds whether agricultural incentives are measured relative to
protection for manufacturing in the region or in Indonesia.
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