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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Institutional determinants of Indonesia's sugar
trade policy
Tim Stapleton
To cite this article: Tim Stapleton (2006) Institutional determinants of Indonesia's
sugar trade policy, Bulletin of Indonesian Economic Studies, 42:1, 95-103, DOI:
10.1080/00074910600632401
To link to this article: http://dx.doi.org/10.1080/00074910600632401
Published online: 18 Jan 2007.
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Date: 18 January 2016, At: 21:40
Bulletin of Indonesian Economic Studies, Vol. 42, No. 1, 2006: 95–103
INSTITUTIONAL DETERMINANTS OF
INDONESIA’S SUGAR TRADE POLICY
Tim Stapleton*
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Australian National University
An analysis of contemporary sugar trade policy in Indonesia highlights problems in
the institutional framework for trade policy making. The institutions through which
sugar trade policy is formulated entrench the interests of rent-seeking bureaucrats,
import licence holders and traders to the detriment of consumers and downstream
producers of processed products. Moreover, the resulting trade policy regime has
problematic effects on sugarcane farmers. The structure of regulatory intervention is due less to democratic pressures than to the inclusion of vested interests
in the institutions that formulate policy. Further, the lack of effective mechanisms
for inter-ministerial coordination and for resolving conflicting policy preferences
among ministries hinders the development of coherent trade policy and obstructs
reform efforts. An institutional framework that facilitates representation of all interests affected by sugar trade policies and public scrutiny of the effects of policy intervention is likely to deliver better outcomes for consumers and producers alike.
INTRODUCTION
The institutional framework for trade policy making is a critical element in the
political economy of regulation in the sugar sector in contemporary Indonesia.
Sugar, like other traded agricultural products, has a long history of protection.
In 1998 the highly regulated and protectionist sugar trade regime that prevailed
under Soeharto’s New Order government was liberalised to meet the loan conditions of the International Monetary Fund (IMF). Yet despite subsequent democratic reforms, the sugar sector has been heavily re-regulated since 2002. Seasonal
import quotas, import licensing arrangements, inter-island trade restrictions,
specific tariffs, and a high minimum price for domestic sugarcane procurement
have been instituted. Consequently, consumers and downstream industries are
once again burdened with domestic prices approximately twice the international
level, just as they were during the Soeharto era when the national logistics agency,
Bulog, was afforded a virtual monopoly over imports, domestic procurement and
marketing (Iqbal et al. 1999: 1, 8).
* The author thanks Andrew MacIntyre and the Asia Pacific School of Economics and
Government, ANU, where he undertook this project as a visiting scholar; Peter Drysdale
for his encouragement and guidance throughout; three anonymous referees for valuable
feedback on earlier drafts; and a number of people in Indonesia for their time and advice.
ISSN 0007-4918 print/ISSN 1472-7234 online/06/010095-9
DOI: 10.1080/00074910600632401
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As the IMF’s influence over trade policy diminished in the post-crisis period,
overlapping, contradictory and protectionist sugar trade policies began to emerge.
This new policy regime is of limited benefit to smallholder cane farmers, particularly on Java, where nearly 50 outdated, predominantly state-owned mills produce approximately 60% of domestic sugar (Stapleton 2005: 28). As argued in
detail below, the regulatory regime discourages procurement of sugarcane cultivated domestically, fails to address declining sucrose extraction rates, and deters
diversification into more profitable agricultural activities. At the same time, two
relatively new, lower cost, private sector plantations are able to derive excess
profits in Sumatra’s Lampung province (Abidin and Ismono 2004), which now
accounts for up to 40% of sugar production (Stapleton 2005: 28).1
Thus intensified lobbying from producer interests—in particular, smallholder
cane farmers—in the post-crisis transition to democracy cannot adequately
explain current regulatory distortions in the sugar sector. Although sectional
interests may have a more powerful bearing on trade policy during democratic
transitions (Liu 2002, cited in Basri and Hill 2004: 639), and can unduly influence economic policy outcomes (Boediono 2005: 316), factors other than pressure
from cane growers appear to have underpinned the re-regulation of Indonesia’s
sugar industry—despite the fact that intervention is typically undertaken in their
name. This paper argues that the nature of intervention in the sugar sector, and
the ‘creeping protectionism’ evident in Indonesia generally (Basri and Soesastro
2005: 10–12; World Bank 2005: 4), are largely attributable to deficiencies in the
institutional framework for trade policy making.
RECENT DEVELOPMENTS IN SUGAR TRADE POLICY
On 1 January 2000, a 20% tariff on sugarcane and industrial-grade refined sugar
and a 25% tariff on white plantation sugar for human consumption (hereafter
‘white sugar’) were imposed (Finance Ministry decree 568/KMK.01/1999) and
the minimum price paid on domestic sugarcane was set at Rp 2,600/kg of white
sugar equivalent extracted by the mills (Forestry and Plantations Ministry decree
145/KPTS-VII/2000). Following President Megawati’s July 2001 election victory,
low import prices and widespread smuggling2 to evade the tariff were damaging farm-gate returns, and threatening the agriculture ministry’s legitimacy with
farmers (JP, 1/5/2002). Agriculture minister Bungaran Saragih pushed for the
imposition of higher tariffs on sugar, rice, soybeans and corn (JP, 26/6/2002)—
notwithstanding the likelihood that this would boost smuggling and therefore
do little to protect farmers. His proposal was successfully opposed by finance
minister Boediono, however. The Ministry of Finance (MoF) is responsible for
tariff implementation, although other ministries are generally consulted and their
advice sought through a Tariff Committee (Tim Tarif). This committee comprises
trade experts and representatives from the agriculture, trade and industry ministries, but is responsible to the finance minister.
1 A small quantity of sugar is also produced in Sulawesi and Kalimantan, and in other
provinces of Sumatra.
2 Including physical smuggling and administrative smuggling by collusion with customs officials to avoid import duties.
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Although the traditionally protectionist Ministry of Trade (Basri and Hill
2004: 638) cannot impose tariffs, it has authority over various non-tariff barriers (NTBs). Previously, as the Ministry of Industry and Trade (MIT),3 it publicly
advocated either an import quota system or a floor/ceiling price mechanism (JP,
4/5/2002)—its then minister, Rini Soewandi, asserting that consumers would be
burdened with higher prices if tariffs were increased (JP, 26/4/2002), though in
fact quotas or floor prices would have the same effect.
On 3 July 2002 (MoF decree 324/KMK.01/2002), Boediono sought to curb rampant under-invoicing by replacing the prevailing ad valorem tariffs with specific
tariffs of Rp 550/kg on sugarcane and Rp 700/kg on industrial-grade and white
sugar (based on the logic that the quantity is easier to validate than the purchase
price). These specific tariffs were equivalent to 30% and 35% ad valorem import
duties, according to the World Trade Organization (WTO 2003: 5–6), or an average
of about 45% according to the World Bank (2005: 4). The Association of Indonesian
Sugarcane Farmers (APTRI) played a significant role in pushing for the new sugar
tariffs in 2002.4 Its supporters applied pressure by staging disruptive rallies and
ransacking warehouses suspected of containing illegal imports (JP, 26/4/2002,
4/7/2002). Arum Sabil, head of APTRI in the operating region of one of the largest state-owned sugar plantations, lobbied key decision makers involved in the
policy process (personal communication, 9/9/2005); again, such tactics ignored
the reality that smuggling is encouraged rather than curbed by tariffs.
Boediono had engaged Soewandi in negotiations to formulate the tariff decree.
However, immediately after it was issued the MIT erected an elaborate licensing
system that limited the importation of industrial-grade sugar (10 August 2002)
and of white sugar (23 September 2002) (MIT decrees 456/MPP/Kep/6/2002 and
643/MPP/Kep/9/2002). The new arrangements reallocated white sugar imports
from 800 private importers (JP, 26/5/2003) to just five entities: three of the largest state-owned sugar plantation and mill management units, PTPN IX, PTPN
X, PTPN XI5—which account for over 90% of white sugar produced on Java and
over 60% in total (Stapleton 2005: 19)—and two state-owned trading firms, PT
Rajawali Nusantara Indonesia and PT Perdagangan Indonesia.6 The more marketoriented MoF lacked the authority or mandate to prevent MIT from instituting
these arrangements, which effectively circumvented the tariff decree negotiated
between the two ministers.
According to Marks (2004: 169),
… the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha) … observed that the sugar import restraint system could give rise
to cartel practices, and suggested that it be revised (Tempo Interaktif, 29/3/04). Nevertheless, the value of sugar imports increased by 54.2% between 2002 and 2003,
even though the decree was issued in late September 2002. The cartel seems to have
worked most imperfectly!
3 The trade and industry portfolios were formally separated in the October 2004 cabinet.
4 Interview with a senior member of the Megawati administration, 28/7/2005.
5 ‘PTPN’ stands for Perusahaan Terbatas Perkebunan Negara (state plantation company).
6 These five designated importers lack sufficient financial and warehousing capacity, and
so engage traders to operate on their behalf.
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Tim Stapleton
FIGURE 1 Retail Domestic and World Prices of White Sugar, 1997–2004
(Rp/kg)
5,000
4,000
Domestic
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3,000
2,000
World
1,000
0
1998
2000
2002
2004
Source: Data provided by the Ministry of Trade.
Marks goes on to detail new decrees issued early in 2004, which seemed likely
to make the cartel more effective. By April 2003 the domestic retail price of sugar
had surged to Rp 5,000–6,000/kg in some areas (JP, 22/4/2003, 1/5/2003), which,
as figure 1 shows, was not attributable to any increase in the international price.
The price increases may reflect the fact that with so few licensed importers there
is indeed a strong possibility of earning high profits through oligopolistic behaviour. MacIntyre and Resosudarmo (2003: 151–2) suggest that the price surge may
have stemmed from a dispute between the licensees and the Directorate General
for Customs and Excise over the division of these profits, which precipitated a
supply shortage by trapping a significant quantity of white sugar in the ports.
Domestic prices have remained around twice the international level, despite
Indonesia’s proximity to highly efficient exporters such as Thailand and Australia. High prices are a significant burden for consumers and erode the competitive position of the food, beverage and pharmaceutical industries. Production
costs for biscuits and bread, and candy and syrup, rose by approximately 30% and
60% respectively as a result of the increased sugar prices (World Bank 2005: 4).7
MIT ostensibly attempted to protect sugarcane farmers by permitting imports
only for a four-month period outside the milling season (527/MPP/Kep/9/2004),
and only on condition that at least 75% of licensees’ raw material originated from
local farmers (643/MPP/Kep/9/2002), that the Indonesian Sugar Council deemed
domestic production inadequate (527/MPP/Kep/9/2004), and that farmers
received at least the minimum guaranteed price (643/MPP/Kep/9/2002). Set at
Rp 3,100/kg of refined sugar equivalent in September 2002 and increased subse-
7
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quently to Rp 3,410/kg, the minimum equivalent price paid for domestic sugarcane
was, and remains, well above sugar import prices (figure 1).
Consequently, there is a significant incentive for sugar import licensees (in particular, the PTPNs) and associated traders to extract rents by importing low-cost
foreign sugar, and even to engage in smuggling, to the detriment of domestic sugarcane producers. The 73,000 tonnes of sugar imported illegally from Thailand,
purportedly under PTPN X’s licence (JP, 17/7/2004, 19/6/2004), was a small portion of the estimated 500,000 metric tonnes smuggled in 2003/04 (Ordon and Thomas 2004: 32).8
To the limited extent that smallholders are able to sell at the high minimum
price for cane, they are still unable fully to capitalise on it, since farmer returns
also depend on the average amount of sucrose extracted by the mills over a given
period, rather than simply on the quantity of sugarcane delivered. The stateowned mills on Java have low levels of efficiency, which helps explain the steady
decline of average sucrose extraction rates to less than one-third of the level before
World War II, when Indonesia was the world’s second largest exporter.9
While internationally competitive cane is cut only twice and then replanted,
smallholders in Java prune the cane up to 12 times during the productive life of
the plant, cultivating ratoon (second and subsequent) crops with progressively
lower sucrose content. It has been argued that excessive pruning reflects substantial land preparation costs, high input prices, scarcity of fertiliser, inadequate irrigation infrastructure, insufficient access to timely credit, and the many taxes and
levies imposed by local governments (Asia Foundation and World Bank 2005:
72–5; USDA-ERS 2003: 22). Micro-level trade and agricultural policies directed at
alleviating these problems are lacking, but the more fundamental problem is the
lack of economies of scale inherent in smallholder cane cultivation on Java. This
is a legacy of the 1975 Smallholder Cane Intensification Program (TRI),10 which,
until 1998, formally compelled farmers periodically to cultivate cane.11
Viewed from this perspective, it is unfortunate that the artificially high minimum price guaranteed under the trade regime (even though partially offset
by low sucrose extraction rates) deters smallholders from shifting into higheryielding agricultural activities: horticulture, vegetables and shrimp farming
all offer potentially better opportunities for income growth on Java, according
to Athukorala (2002: 157). On the other hand, as mentioned earlier, regulatory
intervention generates large excess profits to lower cost producers in Lampung
that derive economies of scale from plantation-style cultivation.
Licensed state-owned millers and trading firms, and efficient plantations in
Lampung, appear to have been the primary beneficiaries of changes in the regulatory regime since September 2002, rather than Javanese smallholders. Nevertheless, representatives of the Java-based APTRI strongly defend the MIT licensing
8 The basis for this estimate is not explained.
9 The marginal recovery of sucrose extraction rates after 1998 has been driven largely by
rapid expansion of privately owned plantations in Lampung (Stapleton 2005: 24–8).
10 Presidential decrees 9/1975, Smallholder Sugarcane Development Program, and
5/1998, Discontinuation of Implementation of Presidential Decree No. 5/1997 on the
Smallholder Sugarcane Development Program.
11 Irrigated sugarcane cultivation under the TRI system was found to be unprofitable for
farmers for this reason (Nelson and Panggabean 1991: 708–12).
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decrees. This may perhaps be explained by the fact that senior APTRI figures have
been linked to sugar traders that profit significantly from the sugar trade regime,
although these links are flatly denied by Arum Sabil (personal communication,
9/9/2005). The requirement for APTRI representatives to certify that potential
licensees adhere to the 75% domestic procurement criterion prior to licensing
(MIT decree 527/MPP/Kep/9/2004) creates a lucrative opportunity to generate
rents. APTRI officials therefore have a keen interest in the maintenance of the
sugar trade regime, irrespective of the interests of sugarcane farmers.
In implementing restrictive sugar quota licensing systems, Rini Soewandi
appears to have been influenced heavily by her ministry, which had direct control
over licensing trading activity—and the rents from it. There is no transparency
in the allocation and revocation of import licences and inter-island trade licences
(regulated by MIT decrees 61/MPP/Kep/2/2004 and 334/MPP/Kep/5/2004) by
the trade ministry’s Directorate General of Foreign Trade and Directorate General
of Domestic Trade, respectively. These directorates general are afforded significant discretion in approving the quantity and timing of each inter-island shipment and white sugar import.
Moreover, senior bureaucrats from various ministries dominate the Indonesian
Sugar Council (Dewan Gula Indonesia, DGI), which apportions the annual sugar
import quota among appointed licensees. The rents that accrue to licensed PTPNs
and state-owned trading enterprises are proportional to the amount of sugar they
are permitted to import. Authority over quota allocations is therefore likely to be a
lucrative asset for bureaucrats in Indonesia’s civil service, where jobs and promotions are commonly bought and sold based on the opportunities they present for
generating informal income (ADB 2004: 62).
INSTITUTIONAL IMPEDIMENTS TO REFORM
Beyond Tim Tarif there is no formal framework for coordination among economic
ministries. This places a significant burden on ministers to negotiate and coordinate policy formulation, so the inclinations of individual ministers are critical. Often from non-political backgrounds, ministers in economics portfolios do
not have the advantage of inter-ministerial structures that demand and facilitate
cooperation and transparency in policy development. Inadequate mechanisms
for inter-ministerial coordination, and for resolution of conflicting policy preferences among ministries, thus represent a significant obstacle to the development
of a coherent trade regime in Indonesia. As the former finance minister, Yusuf
Anwar, has acknowledged, Tim Tarif has been plagued historically by an overly
sectoral focus, which has resulted in the formulation of inconsistent and ill-measured policies (MoF decree 71/KMK.010/2005: 1). This is compounded by a lack of
expertise and capacity to analyse the opportunity costs of trade policies. In short,
the limited capacity of individual ministries to analyse and coordinate policy
development effectively is an institutional weakness that enlarges the scope for
entrenched interests to capture the policy process.
Sugar trade policy reform is also hindered by the narrow composition of
the DGI, which was established during the Soeharto era as a forum for consultation on sugar industry problems. The Council is directly responsible to the
president, who appoints and dismisses all members. Reformed by Presidential
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Decree 63/2003 issued by the Megawati government on 11 August 2003, the
DGI is dominated by ministers and senior bureaucrats from various ministries.
Critically, and in contrast to its composition under Presidential Decree 109/2000
issued by the Wahid government, interest group representation on the DGI’s
primary decision-making body is now confined to farmer associations (APTRI
and the Indonesian Farmers Association), sugar mills (the Indonesian Sugar
Association) and the Chamber of Commerce and Industry. Unlicensed importers, independent experts and consumers (as well as plantation and mill workers) no longer have a role on this body, and lack any direct input into sugar trade
policy decisions. Direct representation from the food, beverage and pharmaceutical industries is similarly foreclosed.
Given the current composition of the DGI, its decisions are inevitably skewed
towards rent-seeker interests at the expense of consumers, downstream producers
and potential importers. The DGI appears to exemplify the type of institution that
privileges groups opposed to reform and denies political representation to groups
that would benefit from it (Keohane and Milner 1996: 250–4). It will be difficult for
reform-minded ministers and civil servants to counter-balance entrenched protectionist interests as long as the DGI is overwhelmingly weighted toward perpetuating the status quo on sugar.
Meaningful improvements to the sugar trade policy regime and the sugar
industry are therefore unlikely without reform of the DGI itself. The removal
of rent-seeking bureaucrats and the inclusion of representatives of downstream
producers (such as the Indonesian Food and Beverages Association), unlicensed
importers (such as the Indonesian Association of Sugar and Flour Traders and
Distributors) and consumer groups on the Council’s primary decision-making
body would provide a counterweight to entrenched interests. It is costly for consumers to organise independently, and they are commonly ineffective against
concentrated producer or trader interests. However, representation of consumer groups on the DGI may facilitate the collective projection and defence
of consumer interests. In addition, the inclusion of independent experts would
enhance the Council’s capacity to analyse policy options for the sugar industry.
To allow it to focus on evaluating proposals to lift productivity and improve
competitiveness in the industry, the DGI’s influence over trade policy could
be confined, for example, to advising Tim Tarif and the Minister of Finance on
sugar industry developments that affect the appropriateness of tariff levels and
other intervention measures.
As we have seen, individual ministries can circumvent the trade policy decisions of others, since no ministry has authority over policy coordination. Moving
forward, one ministry—most logically the Coordinating Ministry for Economic
Affairs—could be given the mandate to resolve conflicting policy preferences
among ministries on trade and industry policy decisions. Alternatively, a new or
existing agency could be given authority to coordinate trade and industry policy making. The trade minister’s current responsibilities could, for example, be
expanded to those of a Trade and Productivity portfolio, with authority to coordinate all aspects of trade and industry policy, subject to representations by other
relevant ministries. Tim Tarif is the body with perhaps the greatest potential to
analyse policy alternatives, yet its role is presently confined to tariff policies. It
might be worthwhile for this team to be developed into an independent agency
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Tim Stapleton
with responsibility for analysing and publicising the opportunity costs of alternative trade and industrial policies.
However, unless much better analytical expertise is developed within the
bureaucracy, institutional reforms in themselves are unlikely to foster the formulation of trade policies that uphold the broader public interest. In turn, enhancing the
analytical capacity of the bureaucracy may not be feasible in the absence of broader
civil service reforms directed at attracting individuals with appropriate skill sets to
senior positions in the public service (McLeod 2005a: 154–6; 2005b: 377–82).
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CONCLUSIONS
Recent developments in sugar trade policy suggest that even the most determined
and reform-minded political leaders are unlikely to prevail unless priority is given
to reform of institutional arrangements. The composition of the Indonesian Sugar
Council effectively prevents proper consideration of trade policy alternatives,
and constitutes a significant barrier to reform of the sugar trade regime and the
sugar industry. By privileging entrenched bureaucrats, import licence holders and
traders, and effectively denying representation to groups that would benefit from
sugar trade policy reform, the framework for policy formulation distorts trade outcomes—as is consistent with the predictions of broader institutional theories on
policy making (MacIntyre 2003: 53, 106; Keohane and Milner 1996: 250–4). In effect,
institutions such as the DGI can be conceptualised, in Riker’s (1980: 445) terms, as
representing ‘congealed preferences’.12 Their re-emergence in recent years is no
cause for surprise, nor is it a consequence of democratic reform; rather, they are a
throwback to an earlier bureaucratic era.
In the case of sugar regulation (and regulation more generally), democratic processes potentially open the way to a more transparent and balanced consideration
of trade and industry policy alternatives. For this to occur, however, the institutional framework for trade policy making in Indonesia itself requires reform. Implementing and sustaining meaningful sugar trade policy reform in the short term
may hinge on the incorporation of a broader cross-section of interests in the DGI
and increased transparency in the policy-making process. In the longer term, the
strategic formulation of balanced and productivity-improving trade policies will
be aided by effective cross-ministerial coordination mechanisms and by building
up the capacity to expose and analyse policy alternatives. Until such reforms are
implemented, trade policy will continue to be deployed as a redistributive mechanism that serves the interests of a well placed few, rather than as a forward-looking
instrument operating in the interests of the broader public.
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sugarcane farming in Lampung Province, Unpublished paper, University of Lampung,
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ADB (Asian Development Bank) (2004) Country Governance Assessment Report, Republic of
Indonesia, Asian Development Bank, Manila.
12 In essence, ‘congealed preferences’ are policy preferences that are served and perpetuated by an institutional structure.
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Asia Foundation and World Bank (2005) Improving the Business Environment in East Java:
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Athukorala, P. (2002) ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies 38 (2): 141–62.
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McLeod, R. (2005b) ‘The struggle to regain effective government under democracy in Indonesia’, Bulletin of Indonesian Economic Studies 41 (3): 367–86.
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Ordon, D. and Thomas, M. (2004) ‘Agricultural policies in Indonesia: producer support
estimates 1985–2003’, MTID (Markets, Trade, and Institutions Division) Discussion
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Riker, W. (1980) ‘Implications from the disequilibrium of majority rule for the study of
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Stapleton, T. (2005) The political economy of Indonesian trade policy: the case of sugar,
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ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Institutional determinants of Indonesia's sugar
trade policy
Tim Stapleton
To cite this article: Tim Stapleton (2006) Institutional determinants of Indonesia's
sugar trade policy, Bulletin of Indonesian Economic Studies, 42:1, 95-103, DOI:
10.1080/00074910600632401
To link to this article: http://dx.doi.org/10.1080/00074910600632401
Published online: 18 Jan 2007.
Submit your article to this journal
Article views: 125
View related articles
Citing articles: 6 View citing articles
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji]
Date: 18 January 2016, At: 21:40
Bulletin of Indonesian Economic Studies, Vol. 42, No. 1, 2006: 95–103
INSTITUTIONAL DETERMINANTS OF
INDONESIA’S SUGAR TRADE POLICY
Tim Stapleton*
Downloaded by [Universitas Maritim Raja Ali Haji] at 21:40 18 January 2016
Australian National University
An analysis of contemporary sugar trade policy in Indonesia highlights problems in
the institutional framework for trade policy making. The institutions through which
sugar trade policy is formulated entrench the interests of rent-seeking bureaucrats,
import licence holders and traders to the detriment of consumers and downstream
producers of processed products. Moreover, the resulting trade policy regime has
problematic effects on sugarcane farmers. The structure of regulatory intervention is due less to democratic pressures than to the inclusion of vested interests
in the institutions that formulate policy. Further, the lack of effective mechanisms
for inter-ministerial coordination and for resolving conflicting policy preferences
among ministries hinders the development of coherent trade policy and obstructs
reform efforts. An institutional framework that facilitates representation of all interests affected by sugar trade policies and public scrutiny of the effects of policy intervention is likely to deliver better outcomes for consumers and producers alike.
INTRODUCTION
The institutional framework for trade policy making is a critical element in the
political economy of regulation in the sugar sector in contemporary Indonesia.
Sugar, like other traded agricultural products, has a long history of protection.
In 1998 the highly regulated and protectionist sugar trade regime that prevailed
under Soeharto’s New Order government was liberalised to meet the loan conditions of the International Monetary Fund (IMF). Yet despite subsequent democratic reforms, the sugar sector has been heavily re-regulated since 2002. Seasonal
import quotas, import licensing arrangements, inter-island trade restrictions,
specific tariffs, and a high minimum price for domestic sugarcane procurement
have been instituted. Consequently, consumers and downstream industries are
once again burdened with domestic prices approximately twice the international
level, just as they were during the Soeharto era when the national logistics agency,
Bulog, was afforded a virtual monopoly over imports, domestic procurement and
marketing (Iqbal et al. 1999: 1, 8).
* The author thanks Andrew MacIntyre and the Asia Pacific School of Economics and
Government, ANU, where he undertook this project as a visiting scholar; Peter Drysdale
for his encouragement and guidance throughout; three anonymous referees for valuable
feedback on earlier drafts; and a number of people in Indonesia for their time and advice.
ISSN 0007-4918 print/ISSN 1472-7234 online/06/010095-9
DOI: 10.1080/00074910600632401
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As the IMF’s influence over trade policy diminished in the post-crisis period,
overlapping, contradictory and protectionist sugar trade policies began to emerge.
This new policy regime is of limited benefit to smallholder cane farmers, particularly on Java, where nearly 50 outdated, predominantly state-owned mills produce approximately 60% of domestic sugar (Stapleton 2005: 28). As argued in
detail below, the regulatory regime discourages procurement of sugarcane cultivated domestically, fails to address declining sucrose extraction rates, and deters
diversification into more profitable agricultural activities. At the same time, two
relatively new, lower cost, private sector plantations are able to derive excess
profits in Sumatra’s Lampung province (Abidin and Ismono 2004), which now
accounts for up to 40% of sugar production (Stapleton 2005: 28).1
Thus intensified lobbying from producer interests—in particular, smallholder
cane farmers—in the post-crisis transition to democracy cannot adequately
explain current regulatory distortions in the sugar sector. Although sectional
interests may have a more powerful bearing on trade policy during democratic
transitions (Liu 2002, cited in Basri and Hill 2004: 639), and can unduly influence economic policy outcomes (Boediono 2005: 316), factors other than pressure
from cane growers appear to have underpinned the re-regulation of Indonesia’s
sugar industry—despite the fact that intervention is typically undertaken in their
name. This paper argues that the nature of intervention in the sugar sector, and
the ‘creeping protectionism’ evident in Indonesia generally (Basri and Soesastro
2005: 10–12; World Bank 2005: 4), are largely attributable to deficiencies in the
institutional framework for trade policy making.
RECENT DEVELOPMENTS IN SUGAR TRADE POLICY
On 1 January 2000, a 20% tariff on sugarcane and industrial-grade refined sugar
and a 25% tariff on white plantation sugar for human consumption (hereafter
‘white sugar’) were imposed (Finance Ministry decree 568/KMK.01/1999) and
the minimum price paid on domestic sugarcane was set at Rp 2,600/kg of white
sugar equivalent extracted by the mills (Forestry and Plantations Ministry decree
145/KPTS-VII/2000). Following President Megawati’s July 2001 election victory,
low import prices and widespread smuggling2 to evade the tariff were damaging farm-gate returns, and threatening the agriculture ministry’s legitimacy with
farmers (JP, 1/5/2002). Agriculture minister Bungaran Saragih pushed for the
imposition of higher tariffs on sugar, rice, soybeans and corn (JP, 26/6/2002)—
notwithstanding the likelihood that this would boost smuggling and therefore
do little to protect farmers. His proposal was successfully opposed by finance
minister Boediono, however. The Ministry of Finance (MoF) is responsible for
tariff implementation, although other ministries are generally consulted and their
advice sought through a Tariff Committee (Tim Tarif). This committee comprises
trade experts and representatives from the agriculture, trade and industry ministries, but is responsible to the finance minister.
1 A small quantity of sugar is also produced in Sulawesi and Kalimantan, and in other
provinces of Sumatra.
2 Including physical smuggling and administrative smuggling by collusion with customs officials to avoid import duties.
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Although the traditionally protectionist Ministry of Trade (Basri and Hill
2004: 638) cannot impose tariffs, it has authority over various non-tariff barriers (NTBs). Previously, as the Ministry of Industry and Trade (MIT),3 it publicly
advocated either an import quota system or a floor/ceiling price mechanism (JP,
4/5/2002)—its then minister, Rini Soewandi, asserting that consumers would be
burdened with higher prices if tariffs were increased (JP, 26/4/2002), though in
fact quotas or floor prices would have the same effect.
On 3 July 2002 (MoF decree 324/KMK.01/2002), Boediono sought to curb rampant under-invoicing by replacing the prevailing ad valorem tariffs with specific
tariffs of Rp 550/kg on sugarcane and Rp 700/kg on industrial-grade and white
sugar (based on the logic that the quantity is easier to validate than the purchase
price). These specific tariffs were equivalent to 30% and 35% ad valorem import
duties, according to the World Trade Organization (WTO 2003: 5–6), or an average
of about 45% according to the World Bank (2005: 4). The Association of Indonesian
Sugarcane Farmers (APTRI) played a significant role in pushing for the new sugar
tariffs in 2002.4 Its supporters applied pressure by staging disruptive rallies and
ransacking warehouses suspected of containing illegal imports (JP, 26/4/2002,
4/7/2002). Arum Sabil, head of APTRI in the operating region of one of the largest state-owned sugar plantations, lobbied key decision makers involved in the
policy process (personal communication, 9/9/2005); again, such tactics ignored
the reality that smuggling is encouraged rather than curbed by tariffs.
Boediono had engaged Soewandi in negotiations to formulate the tariff decree.
However, immediately after it was issued the MIT erected an elaborate licensing
system that limited the importation of industrial-grade sugar (10 August 2002)
and of white sugar (23 September 2002) (MIT decrees 456/MPP/Kep/6/2002 and
643/MPP/Kep/9/2002). The new arrangements reallocated white sugar imports
from 800 private importers (JP, 26/5/2003) to just five entities: three of the largest state-owned sugar plantation and mill management units, PTPN IX, PTPN
X, PTPN XI5—which account for over 90% of white sugar produced on Java and
over 60% in total (Stapleton 2005: 19)—and two state-owned trading firms, PT
Rajawali Nusantara Indonesia and PT Perdagangan Indonesia.6 The more marketoriented MoF lacked the authority or mandate to prevent MIT from instituting
these arrangements, which effectively circumvented the tariff decree negotiated
between the two ministers.
According to Marks (2004: 169),
… the Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha) … observed that the sugar import restraint system could give rise
to cartel practices, and suggested that it be revised (Tempo Interaktif, 29/3/04). Nevertheless, the value of sugar imports increased by 54.2% between 2002 and 2003,
even though the decree was issued in late September 2002. The cartel seems to have
worked most imperfectly!
3 The trade and industry portfolios were formally separated in the October 2004 cabinet.
4 Interview with a senior member of the Megawati administration, 28/7/2005.
5 ‘PTPN’ stands for Perusahaan Terbatas Perkebunan Negara (state plantation company).
6 These five designated importers lack sufficient financial and warehousing capacity, and
so engage traders to operate on their behalf.
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Tim Stapleton
FIGURE 1 Retail Domestic and World Prices of White Sugar, 1997–2004
(Rp/kg)
5,000
4,000
Domestic
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3,000
2,000
World
1,000
0
1998
2000
2002
2004
Source: Data provided by the Ministry of Trade.
Marks goes on to detail new decrees issued early in 2004, which seemed likely
to make the cartel more effective. By April 2003 the domestic retail price of sugar
had surged to Rp 5,000–6,000/kg in some areas (JP, 22/4/2003, 1/5/2003), which,
as figure 1 shows, was not attributable to any increase in the international price.
The price increases may reflect the fact that with so few licensed importers there
is indeed a strong possibility of earning high profits through oligopolistic behaviour. MacIntyre and Resosudarmo (2003: 151–2) suggest that the price surge may
have stemmed from a dispute between the licensees and the Directorate General
for Customs and Excise over the division of these profits, which precipitated a
supply shortage by trapping a significant quantity of white sugar in the ports.
Domestic prices have remained around twice the international level, despite
Indonesia’s proximity to highly efficient exporters such as Thailand and Australia. High prices are a significant burden for consumers and erode the competitive position of the food, beverage and pharmaceutical industries. Production
costs for biscuits and bread, and candy and syrup, rose by approximately 30% and
60% respectively as a result of the increased sugar prices (World Bank 2005: 4).7
MIT ostensibly attempted to protect sugarcane farmers by permitting imports
only for a four-month period outside the milling season (527/MPP/Kep/9/2004),
and only on condition that at least 75% of licensees’ raw material originated from
local farmers (643/MPP/Kep/9/2002), that the Indonesian Sugar Council deemed
domestic production inadequate (527/MPP/Kep/9/2004), and that farmers
received at least the minimum guaranteed price (643/MPP/Kep/9/2002). Set at
Rp 3,100/kg of refined sugar equivalent in September 2002 and increased subse-
7
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Presumably these estimates relate to the cost of materials only.
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quently to Rp 3,410/kg, the minimum equivalent price paid for domestic sugarcane
was, and remains, well above sugar import prices (figure 1).
Consequently, there is a significant incentive for sugar import licensees (in particular, the PTPNs) and associated traders to extract rents by importing low-cost
foreign sugar, and even to engage in smuggling, to the detriment of domestic sugarcane producers. The 73,000 tonnes of sugar imported illegally from Thailand,
purportedly under PTPN X’s licence (JP, 17/7/2004, 19/6/2004), was a small portion of the estimated 500,000 metric tonnes smuggled in 2003/04 (Ordon and Thomas 2004: 32).8
To the limited extent that smallholders are able to sell at the high minimum
price for cane, they are still unable fully to capitalise on it, since farmer returns
also depend on the average amount of sucrose extracted by the mills over a given
period, rather than simply on the quantity of sugarcane delivered. The stateowned mills on Java have low levels of efficiency, which helps explain the steady
decline of average sucrose extraction rates to less than one-third of the level before
World War II, when Indonesia was the world’s second largest exporter.9
While internationally competitive cane is cut only twice and then replanted,
smallholders in Java prune the cane up to 12 times during the productive life of
the plant, cultivating ratoon (second and subsequent) crops with progressively
lower sucrose content. It has been argued that excessive pruning reflects substantial land preparation costs, high input prices, scarcity of fertiliser, inadequate irrigation infrastructure, insufficient access to timely credit, and the many taxes and
levies imposed by local governments (Asia Foundation and World Bank 2005:
72–5; USDA-ERS 2003: 22). Micro-level trade and agricultural policies directed at
alleviating these problems are lacking, but the more fundamental problem is the
lack of economies of scale inherent in smallholder cane cultivation on Java. This
is a legacy of the 1975 Smallholder Cane Intensification Program (TRI),10 which,
until 1998, formally compelled farmers periodically to cultivate cane.11
Viewed from this perspective, it is unfortunate that the artificially high minimum price guaranteed under the trade regime (even though partially offset
by low sucrose extraction rates) deters smallholders from shifting into higheryielding agricultural activities: horticulture, vegetables and shrimp farming
all offer potentially better opportunities for income growth on Java, according
to Athukorala (2002: 157). On the other hand, as mentioned earlier, regulatory
intervention generates large excess profits to lower cost producers in Lampung
that derive economies of scale from plantation-style cultivation.
Licensed state-owned millers and trading firms, and efficient plantations in
Lampung, appear to have been the primary beneficiaries of changes in the regulatory regime since September 2002, rather than Javanese smallholders. Nevertheless, representatives of the Java-based APTRI strongly defend the MIT licensing
8 The basis for this estimate is not explained.
9 The marginal recovery of sucrose extraction rates after 1998 has been driven largely by
rapid expansion of privately owned plantations in Lampung (Stapleton 2005: 24–8).
10 Presidential decrees 9/1975, Smallholder Sugarcane Development Program, and
5/1998, Discontinuation of Implementation of Presidential Decree No. 5/1997 on the
Smallholder Sugarcane Development Program.
11 Irrigated sugarcane cultivation under the TRI system was found to be unprofitable for
farmers for this reason (Nelson and Panggabean 1991: 708–12).
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decrees. This may perhaps be explained by the fact that senior APTRI figures have
been linked to sugar traders that profit significantly from the sugar trade regime,
although these links are flatly denied by Arum Sabil (personal communication,
9/9/2005). The requirement for APTRI representatives to certify that potential
licensees adhere to the 75% domestic procurement criterion prior to licensing
(MIT decree 527/MPP/Kep/9/2004) creates a lucrative opportunity to generate
rents. APTRI officials therefore have a keen interest in the maintenance of the
sugar trade regime, irrespective of the interests of sugarcane farmers.
In implementing restrictive sugar quota licensing systems, Rini Soewandi
appears to have been influenced heavily by her ministry, which had direct control
over licensing trading activity—and the rents from it. There is no transparency
in the allocation and revocation of import licences and inter-island trade licences
(regulated by MIT decrees 61/MPP/Kep/2/2004 and 334/MPP/Kep/5/2004) by
the trade ministry’s Directorate General of Foreign Trade and Directorate General
of Domestic Trade, respectively. These directorates general are afforded significant discretion in approving the quantity and timing of each inter-island shipment and white sugar import.
Moreover, senior bureaucrats from various ministries dominate the Indonesian
Sugar Council (Dewan Gula Indonesia, DGI), which apportions the annual sugar
import quota among appointed licensees. The rents that accrue to licensed PTPNs
and state-owned trading enterprises are proportional to the amount of sugar they
are permitted to import. Authority over quota allocations is therefore likely to be a
lucrative asset for bureaucrats in Indonesia’s civil service, where jobs and promotions are commonly bought and sold based on the opportunities they present for
generating informal income (ADB 2004: 62).
INSTITUTIONAL IMPEDIMENTS TO REFORM
Beyond Tim Tarif there is no formal framework for coordination among economic
ministries. This places a significant burden on ministers to negotiate and coordinate policy formulation, so the inclinations of individual ministers are critical. Often from non-political backgrounds, ministers in economics portfolios do
not have the advantage of inter-ministerial structures that demand and facilitate
cooperation and transparency in policy development. Inadequate mechanisms
for inter-ministerial coordination, and for resolution of conflicting policy preferences among ministries, thus represent a significant obstacle to the development
of a coherent trade regime in Indonesia. As the former finance minister, Yusuf
Anwar, has acknowledged, Tim Tarif has been plagued historically by an overly
sectoral focus, which has resulted in the formulation of inconsistent and ill-measured policies (MoF decree 71/KMK.010/2005: 1). This is compounded by a lack of
expertise and capacity to analyse the opportunity costs of trade policies. In short,
the limited capacity of individual ministries to analyse and coordinate policy
development effectively is an institutional weakness that enlarges the scope for
entrenched interests to capture the policy process.
Sugar trade policy reform is also hindered by the narrow composition of
the DGI, which was established during the Soeharto era as a forum for consultation on sugar industry problems. The Council is directly responsible to the
president, who appoints and dismisses all members. Reformed by Presidential
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Decree 63/2003 issued by the Megawati government on 11 August 2003, the
DGI is dominated by ministers and senior bureaucrats from various ministries.
Critically, and in contrast to its composition under Presidential Decree 109/2000
issued by the Wahid government, interest group representation on the DGI’s
primary decision-making body is now confined to farmer associations (APTRI
and the Indonesian Farmers Association), sugar mills (the Indonesian Sugar
Association) and the Chamber of Commerce and Industry. Unlicensed importers, independent experts and consumers (as well as plantation and mill workers) no longer have a role on this body, and lack any direct input into sugar trade
policy decisions. Direct representation from the food, beverage and pharmaceutical industries is similarly foreclosed.
Given the current composition of the DGI, its decisions are inevitably skewed
towards rent-seeker interests at the expense of consumers, downstream producers
and potential importers. The DGI appears to exemplify the type of institution that
privileges groups opposed to reform and denies political representation to groups
that would benefit from it (Keohane and Milner 1996: 250–4). It will be difficult for
reform-minded ministers and civil servants to counter-balance entrenched protectionist interests as long as the DGI is overwhelmingly weighted toward perpetuating the status quo on sugar.
Meaningful improvements to the sugar trade policy regime and the sugar
industry are therefore unlikely without reform of the DGI itself. The removal
of rent-seeking bureaucrats and the inclusion of representatives of downstream
producers (such as the Indonesian Food and Beverages Association), unlicensed
importers (such as the Indonesian Association of Sugar and Flour Traders and
Distributors) and consumer groups on the Council’s primary decision-making
body would provide a counterweight to entrenched interests. It is costly for consumers to organise independently, and they are commonly ineffective against
concentrated producer or trader interests. However, representation of consumer groups on the DGI may facilitate the collective projection and defence
of consumer interests. In addition, the inclusion of independent experts would
enhance the Council’s capacity to analyse policy options for the sugar industry.
To allow it to focus on evaluating proposals to lift productivity and improve
competitiveness in the industry, the DGI’s influence over trade policy could
be confined, for example, to advising Tim Tarif and the Minister of Finance on
sugar industry developments that affect the appropriateness of tariff levels and
other intervention measures.
As we have seen, individual ministries can circumvent the trade policy decisions of others, since no ministry has authority over policy coordination. Moving
forward, one ministry—most logically the Coordinating Ministry for Economic
Affairs—could be given the mandate to resolve conflicting policy preferences
among ministries on trade and industry policy decisions. Alternatively, a new or
existing agency could be given authority to coordinate trade and industry policy making. The trade minister’s current responsibilities could, for example, be
expanded to those of a Trade and Productivity portfolio, with authority to coordinate all aspects of trade and industry policy, subject to representations by other
relevant ministries. Tim Tarif is the body with perhaps the greatest potential to
analyse policy alternatives, yet its role is presently confined to tariff policies. It
might be worthwhile for this team to be developed into an independent agency
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with responsibility for analysing and publicising the opportunity costs of alternative trade and industrial policies.
However, unless much better analytical expertise is developed within the
bureaucracy, institutional reforms in themselves are unlikely to foster the formulation of trade policies that uphold the broader public interest. In turn, enhancing the
analytical capacity of the bureaucracy may not be feasible in the absence of broader
civil service reforms directed at attracting individuals with appropriate skill sets to
senior positions in the public service (McLeod 2005a: 154–6; 2005b: 377–82).
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CONCLUSIONS
Recent developments in sugar trade policy suggest that even the most determined
and reform-minded political leaders are unlikely to prevail unless priority is given
to reform of institutional arrangements. The composition of the Indonesian Sugar
Council effectively prevents proper consideration of trade policy alternatives,
and constitutes a significant barrier to reform of the sugar trade regime and the
sugar industry. By privileging entrenched bureaucrats, import licence holders and
traders, and effectively denying representation to groups that would benefit from
sugar trade policy reform, the framework for policy formulation distorts trade outcomes—as is consistent with the predictions of broader institutional theories on
policy making (MacIntyre 2003: 53, 106; Keohane and Milner 1996: 250–4). In effect,
institutions such as the DGI can be conceptualised, in Riker’s (1980: 445) terms, as
representing ‘congealed preferences’.12 Their re-emergence in recent years is no
cause for surprise, nor is it a consequence of democratic reform; rather, they are a
throwback to an earlier bureaucratic era.
In the case of sugar regulation (and regulation more generally), democratic processes potentially open the way to a more transparent and balanced consideration
of trade and industry policy alternatives. For this to occur, however, the institutional framework for trade policy making in Indonesia itself requires reform. Implementing and sustaining meaningful sugar trade policy reform in the short term
may hinge on the incorporation of a broader cross-section of interests in the DGI
and increased transparency in the policy-making process. In the longer term, the
strategic formulation of balanced and productivity-improving trade policies will
be aided by effective cross-ministerial coordination mechanisms and by building
up the capacity to expose and analyse policy alternatives. Until such reforms are
implemented, trade policy will continue to be deployed as a redistributive mechanism that serves the interests of a well placed few, rather than as a forward-looking
instrument operating in the interests of the broader public.
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