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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

DEREGULATION OF INDONESIA'S INTERREGIONAL
AGRICULTURAL TRADE
Roger Montgomery , Sudarno Sumarto , Sulton Mawardi , Syaikhu Usman ,
Nina Toyamah , Vita Febriany & John Strain
To cite this article: Roger Montgomery , Sudarno Sumarto , Sulton Mawardi , Syaikhu
Usman , Nina Toyamah , Vita Febriany & John Strain (2002) DEREGULATION OF INDONESIA'S
INTERREGIONAL AGRICULTURAL TRADE, Bulletin of Indonesian Economic Studies, 38:1, 93-117,
DOI: 10.1080/000749102753620301
To link to this article: http://dx.doi.org/10.1080/000749102753620301

Published online: 17 Jun 2010.

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Bulletin of Indonesian Economic Studies, Vol. 38, No. 1, 2002: 93–117

DEREGULATION OF INDONESIA’S INTERREGIONAL
AGRICULTURAL TRADE
Roger Montgomery*

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HTS Development Ltd
Sudarno Sumarto, Sulton Mawardi, Syaikhu Usman,
Nina Toyamah, Vita Febriany and John Strain

SMERU Research Institute**
In January 1998 a significant policy reform deregulated agriculture in Indonesia. It
sought to eliminate distorting local monopolies, monopsonies, trade restrictions,
interisland maximum shipment quotas and other barriers that effectively lowered
farmgate prices. Many of these had been constructed to benefit the Soeharto family
and their business cronies. The reform also sought to lower local taxes and levies
targeted at agriculture. This paper demonstrates that deregulation eliminated many
of the distorting taxes and levies, and dismantled many (but not all) local monopolies, monopsonies and quotas. Farmers typically now receive a higher percentage of
the destination market price. Many also receive significantly higher real prices for
their products, although this differs dramatically across commodities. Local governments complained about local revenues lost through the reforms. Detailed budget
analyses reveal that deregulation did not substantially harm local government budgets; instead, other factors caused a decline in the local-source revenue contribution
to local budgets.

INTRODUCTION
This article reports on how both central
and local governments deregulated agricultural trade from January 1998. Deregulation involved both the reform of
provincial and district-level taxes and
levies and a reduction of controls. We
report on a reform monitoring study that
examined changes in the domestic trade

regulatory environment and tested the
success of the deregulation in liberating
the agricultural sector.
The January 1998 Letter of Intent
(LOI) to the International Monetary
Fund (IMF) deregulated agriculture. The
LOI also reaffirmed that an earlier but

widely disregarded law that reformed
local taxes (No. 18/1997) would indeed
be implemented. Box 1 presents the four
most important points affecting agriculture in the January 1998 agreement.
After the publication of the LOI, the
central government issued a series of
implementation decrees making the
measures official policy (Montgomery et
al. 1998/99). These decrees not only reformed existing central government
regulations affecting agriculture, but
also required local governments to review their regulations, dropping those
that violated the spirit (or at least the

ISSN 0007-4918 print/ISSN 1472-7234 online/02/010093-25

© 2002 Indonesia Project ANU

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94

letter) of the LOI commitments. Locally
created and enforced monopolies and
monopsonies were to be abolished. Distorting local taxes and levies were to be
abolished or reduced.
SMERU’s Persepsi Daerah team (see
note **) monitored and reported on the
regional implementation of the structural reforms and deregulation program. This article presents summary
information from the field research.
Readers interested in more detailed accounts are directed to the provincial reports issued by the team (Montgomery
et al. 1998/99). Three aspects of the deregulation of domestic agricultural trade
were examined. The first was whether

local governments actually carried out
deregulation. Were local monopolies,
monopsonies and other trade restrictions broken? Did local governments
withdraw or change local revenue regulations as required? The second was the
impact of deregulation on the share of
destination prices, and on the absolute
(inflation-adjusted) prices, received by
farmers. The third aspect was the consequences for local government budgets. What was the impact of reductions
in taxes and levies on the ability of local
governments to generate revenues to
meet their budget requirements?
The initiative to deregulate agriculture has a long history. The first phase,
undertaken by the Center for Policy and
Implementation Studies, took place during the early and middle 1990s. The
Center’s studies focused on the impact
of both legal and illegal taxes on agricultural trade, particularly for tradable
goods such as livestock and plantation
crops (Toyamah 1997; Rahma and Toyamah 1997).
A second phase occurred during the
preparation of the World Bank’s Village

Infrastructure Project in 1994/95. A
policy study was conducted on trade
and transport related causes of rural

Roger Montgomery et al.

poverty in five provinces.1 Field investigations showed that high levels of informal taxes and restrictive market
arrangements substantially lowered
farmgate prices and were a cause of
poverty (Montgomery 1995).
The third phase was the ADB (Asian
D ev elo pm ent Bank) phase (M o ntgomery et al. 1997/98). An ADB strategy review reported a number of cases
of restrictive agricultural marketing arrangements. It investigated the burden
caused by local commodity-specific
taxes and levies, both legal and illegal.
Finally there was a fourth phase, conducted in 1998 and 1999. SMERU studied the implementation of Law 18/1997
and the deregulation agreed in the LOI.
Many of the data in this article are from
the fourth (SMERU) phase.
Although the central government

chose not to respond to this decade-long
policy advice, civil society outside government became increasingly aware of
the urgency of deregulating internal
trade. The January 1998 steps decreasing
regulation of agriculture proved popular with the farming and trading communities. The LOI’s specific mention of
oranges, cloves and cashew nuts sent a
clear message about just how seriously
the international community viewed the
restrictive business practices of then
President Soeharto, his family and his
business partners. The January 1998 LOI
confronted them with a direct challenge.
Soesastro and Basri (1998: 27–8) state:
The inclusion or exclusion of structural
reforms must have been a matter of serious consideration during the closed
negotiations [on the January 1998 LOI].
But it is probable that both sides realised their importance in producing a
credible program, capable of restoring
the confidence not only of international
markets but also of the Indonesian public. The importance of their inclusion has

been emphasised by Professor Sumitro
Djojohadikusumo (JP, 12/1/98).

Deregulation of Indonesia’s Interregional Agricultural Trade

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B OX 1 T HE J ANUARY 1998 L ETTER OF INTENT’S D EREGULATION M EASURES
FOR A GRICULTURE AND R ESOURCE-B ASED P RODUCTS
Point 40:
The second major thrust of the structural reform strategy will be
to deregulate and privatise the economy, in order to promote domestic competition and expand the scope of the private sector. All existing formal and
informal restrictive marketing arrangements, including those for cement, paper and plywood, will be dissolved as of February 1, 1998. No firm will be
forced to sell its product through a joint marketing organisation, nor be required to pay fees or commissions to it. Nor will any organisation be allowed
to assign exclusive marketing areas, or to dictate production volumes or market shares to individual enterprises. …
Point 41:
Similarly, trade in agricultural products is also being deregulated.
Effective February 1, 1998, traders will have the freedom to buy, sell, and

transfer all commodities across district and provincial boundaries, including
cloves, cashew nuts, oranges, and vanilla. In particular, traders will be able to
buy and sell cloves at unrestricted prices to all agents, effective immediately,
and the Clove Marketing Board will be eliminated by June 1998. The system
of quotas limiting the sale of livestock will be abolished by September 1998.a
Furthermore, provincial governments will be prohibited from restricting interprovincial or intraprovincial trade effective February 1, 1998.
Point 42:
To support expansion the government is now enforcing the prohibition of retribusi (local taxes) at all levels on export goods. To strengthen
competition and market integration, government will develop and implement a one-year program for abolishing taxes on interprovincial and
interdistrict trade. Any loss of local government revenue will be addressed
through a combination of local fuel taxes and transfers from the central government.
Point 43:
… farmers will be released from the formal and informal requirements for the forced planting of sugar cane. This … will rationalise sugar
production, enabling old and inefficient government mills to be closed. It
[will] increase rice output, as farmers [switch] from growing cane on irrigated land to producing higher value-added paddy. Also it [will] increase
the efficiency and competitiveness of sugar-using industries (food processing).
a

Ministry of Agriculture Decree SK No. 931/TN.120/Kpts/DJP/Deptan, dated 31 December 1997, originally valid for the entire year 1998, was to be cancelled by September 1998. This date was brought forward to February 1998.
Source: LOI, January 1998.

ECONOMIC IMPORTANCE OF
COMMODITIES STUDIED
Agriculture was the sector of choice for
this study because of its importance in
poverty research. In February 1999, the
agricultural sector workforce had the

highest sectoral rate of poverty and also
held the largest number of poor. Agriculture’s 1999 headcount poverty rate
was 39.7%, and more than 58% of poor
people gave their primary field of work
as agriculture (Pradhan et al. 2000).

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96

During the financial crisis, agriculture
was the only sector to absorb large numbers of unemployed. Employment in agriculture rose by 13% or 4.6 million

persons in just one year, from 34.8 million in 1997 to 39.4 million in 1998 (BPS,
Sakernas 1997 and 1998).
To understand the impact of deregulation on the regional economy, SMERU
undertook case studies of several leading commodities produced and traded
in various provinces and districts. Table
1 presents provincial-level information
on the production and economic importance of the commodities studied, while
appendix 1 shows the location (district)
of each commodity case study. The selection of commodities for study was
based on the following factors: total
planted area; quantity produced; value
of production; and number of farmers
involved (in many cases it was difficult
to find an estimate for this last number).
The gross value of annual production of
the commodities studied was more than
$1 billion . Rice, soybeans and maize
were intentionally not examined. Over
the years there had been almost no reports of distortions caused by local taxes
or monopsonies for these commodities.
Seldom were trucks carrying rice,
soybeans or maize stopped and taxed,
probably because they were too strategically important.
BARRIERS TO DOMESTIC
AGRICULTURAL TRADE
During the 1980s and much of the 1990s
there was growing concern about the
welfare of farmers, based on perceptions
that they received a declining percentage of the final prices for their goods.
Incentives to supply the market seemed
to be falling. Indonesia’s economy was
not an internal free trade area. The
problems fell into two categories, price
distortions and non-price distortions.
Provincial and district taxes (pajak) and

Roger Montgomery et al.

lev ies (c a lled retr ibus i; o ri gin a ll y
opcenten 2 in Dutch during the colonial
period) on agricultural trade led to distorted prices. Some of the taxes and levies were legal, but many were not.
Among non-price distortions, regulatory controls on national, provincial and
district agricultural production and
agricultural trade created local monopolies and monopsonies. Other controls, such as quota rights and central
government imposed maximum levels
for interisland livestock shipping, presented barriers to entry and restricted
competition. Once the regulations were
abolished or could be ignored, monopoly and monopsony power disappeared.
Local Taxes and Levies as
Disincentives to Agricultural Trade
Provincial and district governments do
not have the authority to tax income or
assets. All of them have therefore turned
to taxing trade. Regulations authorising
provincial or district governments to
apply taxes or levies are officially issued
by local parliaments (Dewan Perwakilan
Rakyat Daerah, DPRD). But in the past,
most such regulations were drafted by
local administrations, then approved by
the DPRD without serious review. Seldom were elements of civil society presented with a chance to comment on
draft revenue legislation before enactment. Trade levies and charges for
government-provided services became
an important revenue source for local
governments, which became dependent
on this restricted fiscal base (although,
as we shall see later, it did not yield
much revenue for either provinces or
districts).
Retribusi had a more serious impact
than local taxes. Such levies were originally intended by law to be a form of
cost recovery to government, a user
charge for facilities or services provided.

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Deregulation of Indonesia’s Interregional Agricultural Trade

Over time, retribusi levies were extended
to include compensation to government
for extraction of non-renewable natural
resource products (since all natural resources belong to the government). The
definition of natural resource products
(hasil bumi) then was extended to include
agriculture, which is renewable and not
owned by government.
In time, retribusi became a trade tax
on goods shipped outside a district. Levies mushroomed. Trucks were stopped
at retribusi posts every few kilometres
along the road. The levies were against
physical quantities traded, with no link
to profitability, net income or value
added. Ability to pay (the level of income of the original producing farmer)
was also not taken into account. Methods of collection (stopping trucks along
isolated rural roads) led to abuse; much
of the money collected did not make its
way into official coffers. Agricultural
product prices became badly distorted
by retribusi levies. The impact of levies
was highest for products from forestry,
livestock and fisheries (Usman et al.
19 99 a; R ahma and Toyamah 19 97;
Toyamah 1997).
The first significant reform of local
taxes and levies came with the passage
of central government revenue Law No.
18/1997. It restricted the types of local
taxes and retribusi levies permitted
(Montgomery et al. 1997/98, Vol. A–2:
29), reducing the number of regional
taxes from 42 to 9, and of retribusi levies
from 192 items to only 30.3
Local Non-Tax Barriers to Trade:
Monopolies and Monopsonies
Governments at all levels created, inspired and supported local monopolies,
monopsonies and interregional trade
quotas for the favoured few. These distortions drove wedges between farmgate prices (pushing them lower) and
destination market prices (pushing them

97

higher). The price difference (‘rent’) was
to the advantage of the holder of the
monopoly, monopsony or quota right.
Benefits of these price wedges were
shared with the people who gave such
rights. Many were specifically created to
benefit Soeharto children or cronies. We
turn now to describe several specific
examples.
Oranges from West Kalimantan.4 Until
the early 1990s, citrus production was
increasing rapidly in West Kalimantan,
rising from just 76,000 tons in 1988 to
199,800 tons in 1991/92. Almost all of
West Kalimantan’s citrus production
was shipped to Java. In 1991 the West
Kalimantan governor issued a decree
(No. 296 of 18 July) stating that PT Bima
Citra Mandiri (a member of the Bimantara group controlled by Soeharto’s son
Bambang Trihatmojo) was appointed to
be the official ‘coordinator’ of the citrus
tra de. All citrus trade had to pass
through Village Unit Cooperatives
(Koperasi Unit Desa, KUD). Farmers
could sell only to KUD -appointed
collector–traders, who were then required to sell to PT Bima Citra Mandiri
for interisland trade. Farmgate prices
dropped precipitately. Exports from the
province fell by 63%. Angry orange producers brought truckloads of oranges
into Pontianak and dumped them in
front of government offices in protest.
Many orange producers abandoned
their trees, and have not tended them
s inc e. T he 1 9 91 m on o pso ny rig ht
granted to PT Bima Citra Mandiri was
abolished by a governor’s decree (SK
No. 555/1993) that ‘encouraged’ (but no
longer required) marketing through
KUD cooperatives. But the orange trade
has never recovered.
Cocoa and Cashew Nuts in South Sulawesi.5 Cocoa and cashew nuts are important export crops for Sulawesi,
particularly in poor isolated upland districts that do not have much flat or

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98

TABLE 1 Commodities Studied in Relation to Provincial and District Deregulation

Planted Areaa
Commodity

Province

Food crops & horticulture
Onions
West Nusa Tenggara
Potatoes
Jambi
South Sulawesi
Oranges
South Sulawesi

(% national
area)

(‘000 tons
p.a.)

(% national
production)

Value of
Production
($ million p.a.)c

Number of
Farmers
(‘000)

9.7
2.8
2.4
19.6

11
6
5
n.a.

64.5
26.4
26.0
316.8

11
3
3
52

32.3
5.0
4.6
40.0

n.a.
n.a.
n.a.
n.a.

55.0
154.8
34.5
27.6
256.5
86.9
27.1
279.5
43.0
58.1
145.2
508.3
129.8
779.9
54.8
52.3

85
41
3
2
23
8
2
8
n.a.
24
59
17
4
26
11
46

23.5
130.2
12.4
7.4
108.1
37.6
5.2
298.6
7.0
40.7
128.3
237.1
66.0
317.7
9.5
19.3

72
49
3
2
27
9
1
11
n.a.
20
62
20
6
27
13
52

1.4
111.4
19.9
13.1
84.1
35.5
4.0
66.3
9.4
27.0
256.6
37.2
8.1
57.4
7.4
6.4

39.0
68.6
15.6
n.a.
n.a.
n.a.
n.a.
26.3
n.a.
n.a.
n.a.
n.a.
112.6
260.0
n.a.
40.4

Roger Montgomery et al.

Plantation estate crops & forest products
Tea leaves, fresh
West Java
Cocoa beans
South Sulawesi
Coffee (arabica)
South Sulawesi
Coffee (robusta)
Central Java
South Sumatra
East Java
Jambi
Coconuts
North Sulawesi
Cloves
North Sulawesi
Tobacco, shredded
Central Java
East Java
Rubber
Riau
South Kalimantan
South Sumatra
Cashew nuts
East Java
Cinnamon
Jambi

(‘000 ha)

Productionb

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Planted Areaa
Commodity

Candlenuts
Rattan
Fishery products
Sea fish
Tiger prawns
Livestock
Milk (litres)
Cattle, slaughter

Duck eggs

Province

(‘000 ha)

(% national
area)

Productionb
(‘000 tons
p.a.)

(% national
production)

Value of
Production
($ million p.a.)c

Number of
Farmers
(‘000)

West Nusa Tenggara
South Sulawesi

3.3
n.a.

2
n.a.

6.0
5.2

12
n.a.

1.3
n.a.

n.a.
n.a.

D.I. Yogyakarta
North Sulawesi
South Sulawesi

n.a.
n.a.
1.6

n.a.
n.a.
n.a.

1.4
123.3
4.6

1
3
n.a.

0.4
17.7
36.1

n.a.
29.1
4.0

118.4
840.6
294.7
472.8
3,382.7
3,116.3

35
7
2
4
28
10

432.0
56.1
7.7
32.4
440.0
12.0

n.a.
37
1
21
27
n.a.

44.6
11.5
2.1
7.8
136.9
0.9

n.a.
n.a.
n.a.
n.a.
n.a.
44.1

West Java
South Sulawesi
North Sulawesi
West Nusa Tenggara
East Java
South Kalimantan

a

For livestock, ’planted area’ = livestock population (head).

b

For livestock, ’production’ = litres in the case of milk, and number of livestock sold for slaughter in the case of cattle.

Deregulation of Indonesia’s Interregional Agricultural Trade

TABLE 1 (continued) Commodities Studied in Relation to Provincial and District Deregulation

c

In 1997; the exchange rate used for that time was Rp 9,000/$.
n.a. = data not available.
99

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100

gently rolling land suitable for rice or
other grain cultivation. For instance, in
1998 in Polmas district in the hilly northwestern part of South Sulawesi, there
were 27,764 hectares of cocoa, grown by
43,361 families (about 30% of all Polmas
farm families). Polmas had a smaller
area of cashew nuts (2,914 hectares), but
cashews were the main source of income
for a further 6,700 poor upland farm
families. In Bone district, another poor
area of South Sulawesi surveyed, cocoa
was important for 25,192 farm families
(27% of all farm families), who operated
10,490 hectares of cocoa trees. In Bone,
cashews were the main source of income
for another 11,706 families (13%) who
tended 9,050 hectares of cashew trees.
South Sulawesi’s smallholder plantation crop producers were faced with a
regulation that required cocoa beans and
cashew nuts to be processed within the
province. The largest cashew nut processing factory in Ujung Pandang benefiting from the regulation was PT Citra
Sekarwangi Agro Persada, part of the
Citra group and owned by Siti Hardiyanti Rukmana (‘Tutut’), a daughter of
then President Soeharto. Cashew nut
buyers wanted raw, unprocessed cashew
nuts (for export to lower-cost processors
in India) and were prepared to pay higher
prices than South Sulawesi’s cashew processing factories were willing to pay. The
main cocoa bean importing country, the
US, wanted only unfermented cocoa
beans.6 Required local processing in this
case was not value adding but rather
‘value subtracting’.7 By 1999 this regulation remained officially on the books,
but was no longer heeded, because
former President Soeharto and his
daughter had lost political influence.
After experiencing the impact of de
facto deregulation, the cocoa bean and
cashew nut processing industries tried
again in 1999 to persuade government
to force high-cost local processing. They

Roger Montgomery et al.

requested the imposition of a 20–30% export tax on unprocessed cocoa beans and
cashew nuts (Harian Ekonomi Neraca,
3/6/99; JP, 4/6/99) to help guarantee
supplies of raw materials to existing (favoured) processing factories. By this
time elements of civil society were more
vocal about the impact of governmentcreated marketing restrictions. Many
saw this move as one-sided, helping local processing firms but harming farmers by forcing down the farmgate price.
The Cocoa Association of Indonesia
objected strongly to the proposal, as did
both the Indonesian Farmers Union and
the Association of Indonesian Food and
Beverage Producers (Kompas, 14/6/99;
Harian Ekonomi Neraca, 14/6/99). Only
the Cashew Nut Industry Association of
Indonesia supported the imposition of
an export tax. Its secretary general stated
that the farmgate price of cashew nuts
was rocketing upward, benefiting the
farmers to the detriment of processors
(Bisnis Indonesia, 27/8/99). As at July
2001, its lobbying appeared to have been
unsuccessful, and there were no new
export taxes on cashew nuts. There
were als o no new export taxes o n
cocoa beans.
Clove Marketing. Cloves were an important source of income for upland
farming areas in Sulawesi. For instance,
in S outh Sulawesi’s im pov erished
Polmas district, cloves were the main
source of income for 2,000 farming families cultivating 882 hectares, while in
Bone they were grown by 5,776 families
operating about 4,000 hectares. Cloves
were even more important in North
Sulawesi, with a total of 43,000 hectares
planted, but by the period just before
deregulation only 20,000 hectares were
productive, yielding just 7,000 tons. The
remaining 23,000 hectares of clove plantations had largely been abandoned because of the disincentive effect of low
farmgate prices.

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Deregulation of Indonesia’s Interregional Agricultural Trade

Before deregulation, clove producers
were required to sell their output to a
much criticised Clove Support and Marketing Board (Badan Penyangga Pemasaran Cengkeh, BPPC), controlled by
Soeharto’s youngest son, Hutomo Mandala Putra (‘Tommy’). Clove prices at
the producer level plummeted, but clove
prices to the kretek cigarette manufacturers in Java did not fall commensurately.
There was suspicion of super-normal
profits made by the BPPC monopsony
right holder, whose accounts were never
made transparent. 8
The measures taken to break the
power of the clove marketing board appear to have been both complete and
effective. Pr esidentia l D ec ree No .
21/1998 established the right of all farmers to sell cloves to anyone, and for traders to buy cloves from all agents at a
freely determined market price. An instruction letter from the Minister of Indu stry a nd Tra de 9 supported this
Presidential Decree. BPPC wound up
its affairs at the end of June 1998, after
which time supervision of the clove
trade became the responsibility of the
Director General of Domestic Trade. A
site investigation in North Sulawesi
(Montgomery et al. 1998/99: No. 5)
showed no residual trace of the BPPC
monopsony. Farmers and traders said
the trade was by then free from interference by the government and ‘Tommy’
Soeharto.
Smallholder Tea Processing in West
Java.10 Tea is an important export crop
for Indonesia. Exports in 1998 earned
$108 million. West Java is the chief producin g province. In the 19 80s, PT
Tehnusamba Indah, a company controlled by Mohamad ‘Bob’ Hasan, a Soeharto business associate, built four
tea-processing factories in West Java, a
region known already to have excess
processing capacity following a decline
in the area planted with tea. Farmers

101

said Tehnusamba’s factories offered
lower prices than competitors for fresh
tea leaves and so they declined to sell to
them. In 1990 the governor of West Java
issued a letter11 instructing district heads
to implement rayonisasi, or market ‘rationalisation’, which prescribed area allocations for the collective buying of
fresh tea leaves. The district heads in
turn issued letters telling farmers near
Tehnusamba factories to sell only to
Tehnusam ba, thus creatin g a local
monopsony position.
The letter fro m the go vernor o f
West Java requiring this geographic
market allocation for fresh tea leaves
has never formally been withdrawn,
and no r hav e d is trict government
market area allocation letters in favour
of Tehnusamba. But farmers now disregard these instructions and sell to
whomever they choose. This is one example of legislation created to benefit
private parties with political influence. After Bob Hasan’s mentor Soeharto lost political power, the legislation
was no longer enforced.12
Interisland Livestock Trade. Interisland
livestock trade is important for farmers
in the dry provinces of West and East
Nusa Tenggara (NTB and NTT). These
relatively poor islands export livestock
mainly to Java. In 1998 NTT had a large
livestock population of 803,000 head (almost all cattle). Producing slaughter cattle for market was important to more
than 200,000 NTT farmers (a rough estimate). In NTB there were 470,000 head
of livestock, which were estimated to be
a major source of income for more than
150,000 farmers. Most (280,000 head) of
NTB’s cattle were on Lombok Island.
Livestock trade was subject to both
local trade taxes and interisland shipping quotas. By mid 1997, just before the
economic crisis, NTT cattle farmers and
traders had to pay a total of $40 per head
through 16 different kinds of taxes and

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102

levies, amounting to about 13% of the
farmgate value of a slaughter animal.
On Lombok Island in NTB, farmers
and traders paid 24 different taxes and
retribusi on livestock trade: three to the
central government, nine to the province and 12 to the district (Montgomery et al. 1998/99, No. 3: 37, table 10).
The total cost was about $31 per head
in taxes and levies, or 5% of the $570
farmgate value of a typical slaughter
animal. In Bima (on NTB’s Sumbawa
Island), traders and farmers had to
pay the same three central and nine
provincial taxes and levies, plus 18
district charges. In South Sulawesi,
traders bringing cattle from Bone to
Ujung Pandang (five hours away) had
to pay 31 different taxes and levies
along the road (M ontgomery et al.
1998/99, No. 2: 26, 27, tables 6–7). Of
these, six were legal and 25 illegal.
Twenty of the posts charging illegal
levies were police and military checkpoints . The sum paid represented
about 4% of the farmgate value of a
typical animal. A tandem-trailer truck
carrying 18 head of cattle from Bone
to Ujung Pandang had to be prepared
to pay $228 in taxes and levies.
Until deregulation in 1998, the Ministry of Agriculture’s Director General
(DG) of Livestock set interisland livestock trade quotas (Montgomery et al.
1997/98, Vol. A-2: 33).13 These severely
limited the number of animals that could
be marketed, to 5–6% of the local livestock populations at most. In fact, a well
managed herd in NTT should be able to
reach 10–13% off-take from a stable livestock population (ACIAR 1998: 30, 31)
under extensive grazing (though not
under intensive stall-feeding management systems). Each year the DG issued
a letter giving provinces annual maximum quotas for shipments. He even
determined destinations (not permitting

Roger Montgomery et al.

NTT to ship to East Kalimantan despite
high prices and a shortage of beef, for
example). Trade was restricted. The cattle quota for NTT fell each year, from
67,000 head in 1994 to only 41,000 head
in 1997. The livestock populations were
increasing, but the opportunity to market was decreasing. Livestock (and
meat) prices in Jakarta rose and farmgate prices in the outer islands fell as a
result of this quota system. A large price
wedge was formed, which benefited
only the interisland shipping quota right
holders.
The January 1998 LOI stated that
interisland livestock shipment quotas
were to be abolished, and formally they
were. But in February 1999 the then DG
of Livestock still wanted interisland livestock trade quotas, and he instructed the
heads of Provincial Livestock Services
to set their own provincial quotas.14 Interviews showed that the new quota
system did not actually limit shipments,
but it did raise transaction costs once
initial quotas had been filled. A trader
informed us: ‘when the quota is used up,
there is still a quota’.15 Relaxation of the
quota is arranged in an ‘informal’ way
(i.e. through bribery). Pepehani (Persatuan Peternak dan Pedagang Hewan
Nasional Indonesia), the livestock trade
association, arranges additional quota
rights.
The reform of the interisland livestock
trade was deliberately being flouted.
Government finally took action to correct the livestock quota situation: on 12
August 1999, the Jakarta business newspaper Harian Ekonomi Neraca reported
that the Minister of Agriculture had dismissed the Director General of Livestock. One reason given for the dismissal
was that ‘several regulations, which are
not appropriate, must be changed and
simplified in agreement with the demands for reform’.

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Deregulation of Indonesia’s Interregional Agricultural Trade

DISMANTLING PUBLIC AND
PRIVATE INTERVENTIONS
Removing Non-Tax Distortions
Monopoly and monopsony distortions
proved more difficult to remove than
distortions caused by taxes and levies.
In a few cases, the central government
gave specific instructions to local governments to break monopolies (or the
centre broke the monopoly/monopsony
itself, as with the cloves and livestock
trade). When presented with specific
instructions, central and regional governm ents co mplied; otherwise the
distortions continued. In contrast to government action on monopolies, no instruction was issued specifically to ban
or break restricted-buyer monopsonies,
with the exception of cloves, oranges
and livestock.
Removing Tax Type Distortions
Regional governments did deregulate
official taxes and levies on agricultural
goods in trade as required by the 1998
deregulation. But unofficial, illegal collections still occur along roadsides, especially at truck weighbridges (Siregar
2001: 300–01). Local governments (provincial and district) complied with Law
No. 18/1997. SMERU examined the reform of taxes and levies in 13 provinces
and 23 districts. Table 2 presents a summary of changes in those local taxes and
levies that either directly or indirectly
affected agricultural trade and transport.
Of the 18 types of provincial retribusi that
were changed, seven were transferred
downward to become new sources of
revenue for districts. Approximately
50% of all levies in the districts shown
were abolished.
IMPACT OF DEREGULATION
To quantify the impact of local taxes, levies, monopsonies and other distortions
on domestic agricultural trade, SMERU

103

analysed price formation for several
commodities in a number of provinces
and districts. Information on prices and
costs was gathered at each stage along
the marketing chain from farm to destination. The destination was usually the
large provincial port city, but in some
cases it was on another island. Price and
payment information was recorded
from interviews between December
1998 and October 1999 with farmers,
collector–traders, interisland traders,
wholesale buyers and processors in the
provincial towns. Information was collected about all taxes and levies paid,
legal or illegal. Farmers and traders were
asked about both current prices and
prices ‘before the crisis’ (approximately
July 1997). The price information was
cross-checked with official statistics collected by agricultural services and offices of the Ministry of Industry and
Trade.
In this section we examine the impact
of deregulation from two perspectives:
first, changes in the share of the wholesale price received by farmers; and second, changes in the real price received
by farmers (i.e. the nominal farmgate
price adjusted for changes in the CPI).
An increase in the price share to farmers indicates a decline in the relative
importance of taxes and levies, marketing costs and wholesalers’ profits. But
such a decline might, in principle, result only in a reduction in the final price
to consumers, without any gain to farmers; by looking at real prices received
by farmers we can get an idea of the extent to which farmers have gained from
deregulation. The components of price
formation from farmer to wholesaler before and after deregulation, and changes
therein, are presented in appendix 1,
a long with ch anges in r eal pr ices
received by farmers.16 Across all commodities, the proportion of the whole-

104

Roger Montgomery et al.
TABLE 2 Number of Local Taxes and Retribusi Levies
Before and After Tax Reform Law No. 18/1997, Selected Regionsa
Number of Local Taxes and Retribusi Levies

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Province/District

West Java
Sukabumi
Bandung
Garut
Central Java
Brebes
Temanggung
Klaten
D.I. Yogyakarta
Gunung Kidul
West Nusa Tenggara
Lombok Timur
Bima
Sumbawa
South Sulawesi
Bone
Polmas
North Sulawesi
Gorontalo
Minahasa
Riau
Bengkalis
North Sumatra
Karo
West Kalimantan
Sambas
South Kalimantan
Hulu Sungai Tengah
East Java
Malang
Sampang
South Sumatra
Musi Banyuasin
Ogan Komering Ilir
Jambi
Kerinci

Before Law
No. 18/1997

Abolished
by Law
No. 18/1997

New
Regulations

% Abolished
since Law
No. 18/1997

n.a.
40
63
n.a.
33
42
28
37
28
30
20
36
41
42
26
38
34
31
37
33
18
40
41
35
25
33
31
24
n.a.
42
46
24
28
24
20
26

n.a.
22
39
n.a.
19
27
14
18
11
22
11
22
28
34
20
26
17
21
22
18
15
16
33
24
18
24
21
18
24
36
26
19
16
12
15
21

n.a.
n.a.
n.a.
n.a.
1
4
3
2
1
3
8
10
17
7
1
5
n.a.
3
13
15
3
6
11
13
3
6
3
2
7
9
12
12
16
21
3
18

n.a.
55
62
n.a.
58
64
50
49
39
73
55
61
68
81
77
68
50
68
59
55
83
48
80
69
72
73
68
75
n.a.
86
57
79
57
50
75
81

a

Taxes and levies directly or indirectly affecting agricultural trade and transport. Fieldwork
was carried out over one year between December 1998 and October 1999.
n.a. = data not available.
Source: Persepsi Daerah provincial monitoring reports (Montgomery et al. 1998/99, various
volumes).

Deregulation of Indonesia’s Interregional Agricultural Trade

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sa le pric e ac cruing to fa rm ers increased on average by 8.8% (median
increase 6.5%) from an average of 74%
before deregulation to 83% after deregulation. During the same period
the average increase in real farmgate
prices was 40%, with a median in crease of 19%.
Impact on Farmgate Prices
as a Share of Wholesale Prices
The deregulation measures adopted in
1998 corrected many market distortions
for farm commodities. Farmers now
have a wider choice of markets in which
to sell their produce. The lifting of restrictions on where and to whom farmers can sell their produce improved
their bargaining position. Commercial
costs were brought down by the reduction of official and unofficial levies.
These changes made it possible for
traders to pay higher purchase prices
to farmers while offering lower prices
to consumers. Table 3 summarises
changes in farmgate prices as a percentage of wholesale prices after deregulation.
In 32 (89%) of the 36 case studies
there was an increase in the proportion of the price reaching the farmer.
In more than half the case studies, the
increase was less than 10%. 17 For another third of the cases the price share
increased by more than 10%, and in
four cases (11% of the total), by 20%
or more. For only four commodities
did the farmer’s share decline, but in
all but one of these cases (sea fish in
G u n u n g K i d u l ), th e d e c l i n e w a s
negligible. 18
The commodity that experienced the
largest increase in the share price to
farmers (32%) was processed tobacco,
but this was an anomaly. In the year of
observation, traders actually experienced losses in tradin g tobacco in

105

Temanggung, Central Java. The traders
paid farmers high prices, intending to
dry the tobacco and sell it to cigarette
companies for a healthy profit. However, the weather was not conducive to
drying, and the prices traders received
from cigarette factories fell.
A short explanation is needed for
differences in the price share to farmers noted for particular commodities
studied in more than one province.
In the case of potatoes (studied in
both Gowa and Kerinci), different final destination prices were used. For
Gowa (in South Sulawesi) the final
potato wholesale price used was that
in Banjarmasin (on the island of Kalimantan), where prices were high. This
trade required interisland shipping.
But in Kerinci (in the southern Sumatran province of Jambi), the final
destination wholesale potato price
used was much nearer to the subdistrict level market price. For Kerinci
trade, only land transport was in volved. The share of the wholesale
price received by coffee farmers in
Karo (North Sumatra) was smaller
than that for coffee farmers in other
areas, for the following reasons. First,
Karo produces a small quantity of
coffee. Distances are great and real
transport costs are therefore high in
Karo. Before deregulation there were
few coffee collector–traders in Karo,
and this is still the case; hence there
is relatively little competition among
traders. For differences reported in
farmer share of the rubber price, it is
important to note that the Sumatra
rubber farmers in Musi Banyuasin
and Bengkalis produce low er quality
raw rubber (containing many impurities that must be removed) than that
produced in Hulu Sungai Tengah in
Kalimantan. This quality problem is
reflected in a lower proportion of the

106

Roger Montgomery et al.
TABLE 3 Changes in Farmgate Prices as a Percentage of Destination Wholesale Prices in
Surveyed Areas Following Deregulation

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Change in Price Proportion
to Farmer (CPP)

Case

% of Cases

CPP > 20%

Coconuts, fresh (Minahasa)
Tobacco, shredded (Temanggung)
Sea fish (Gorontalo)
Cattle, slaughter (Gorontalo)

11

10% < CPP < 20%

Onions (Bima)
Potatoes (Gowa)
Copra (Minahasa)
Cloves (Minahasa)
Rubber, scrap (Muba)
Candlenuts (Bima, shipped to Banjarmasin)
Rattan (Luwu)
Milk (Sukabumi)

22

0% < CPP < 10%

Potatoes (Kerinci)
Oranges (Luwu)
Tea leaves, fresh (Sukabumi)
Cocoa beans (Polmas)
Coffee (5 cases)
Tobacco, shredded (Sampang)
Rubber, slab (Bengkalis)
Rubber, scrap (Hulu Sungai Tengah)
Cashew nuts (Sampang)
Candlenuts (Bima, shipped to Mataram)
Tiger prawns (Bone)
Cattle, slaughter (4 cases)
Duck eggs (Hulu Sungai Tengah)

56

CPP < 0%

Cocoa (Bone)
Cinnamon (Kerinci)
Sea fish (Gunung Kidul)
Rubber, RSS a (Hulu Sungai Tengah)

11

Total (36 cases)

100

Largest increase (Tobacco, shredded, Temanggung)
Largest decrease (Sea fish, Gunung Kidul)
Average change
Median change
a

31.9%
–5.7%
8.8%
6.5%

Ribbed Smoke Sheet.

Source: Calculated from appendix 1.

final commodity price being received
in Musi Banyuasin and Bengkalis than
elsewhere. Finally, in the two cases
studied involving Bima’s candlenuts,

the final destinations and the prices
received in them were quite different
(even though the initial rupiah farmgate price in Bima was the same in

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Deregulation of Indonesia’s Interregional Agricultural Trade

both cases). Candlenuts sell for much
more in Banjarmasin (on Kalimantan)
than in Mataram, the NTB provincial
capital. The price share received by the
Bima farmer should be expected to be
less for nuts shipped to Banjarmasin
than for those shipped to Mataram.
The general increase in the share
to farmers is equal in magnitude to
the sum of changes in taxes and levies, marketing costs, and wholesalers’
profit. Of these three components, the
reduction in wholesalers’ profit is by
far the most important, contributing
6.7% of the 8.8% average increase in
far m er s ’ s ha re ( a ppe nd ix 1 ). T he
wholesalers’ profit decline was observed in 33 of the 36 cases, which
may indicate that deregulation has
resulted in considerably greater competition at this level; more detailed
research would be needed to substantiate this proposition, however. The
contribution of declines in taxes and
l ev ie s , the s h a r e o f w hi c h in the
wholesale price was very small to begin with, was far more modest, at
only 1.4% (appendix 1).
Impact on Real Farmgate Prices
Table 4 summarises changes in real
farmgate prices in surveyed areas foll o w in g d e re gu lati o n . T h e l ar ge s t
change in real farmgate prices for all
commodities studied was for onions
in NTB, where the increase was 615%.
The supply of onions was sharply reduced when they ceased to be supplied from Brebes in Central Java, and
NTT onion farmers took advantage of
this to raise their prices. The 113% incr eas e in real fa rm gate pric es fo r
cloves was in part due to the abolition
of the Clove Marketing Board. Many
farmers had neglected their clove trees
before deregulation because of low
profitability; this resulted in a shortage of cloves im mediately after de-

107

regulation. The real price to farmers
for export commodities such as tiger
prawns, fish, cocoa beans, coffee and
rattan increased because of the large
depreciation of the rupiah. Farmers
also benefited from increased competition among buyers and traders, particularly in the case of copra, tea and
milk.
There were several cases in which
real prices declined. The real farmgate price of cinnamon fell because
of a decline in the world price. Farmers received lower prices for rubber
in Riau and South Kalimantan, first,
because the quality of rubber in both
provinces declined, and second, because the world demand for rubber
fell. It is not clear why the farmgate
price for other commodities declined,
although this is probably due to an
in crea se in lo cal supply . This category includes potatoes from Kerinci
in Jambi and Gowa in South Sulaw es i , o r an ge s fr o m L u w u , S o u th
Sulawesi, and liv estock from Sampang , East Ja v a. In N TB , the rea l
farmgate price of livestock in Bima
increased by 18%, while in Lombok
it fell by 5%. This is explained by the
price difference before deregulation,
w he n l iv e s to c k w as s i gn i fic a ntl y
cheaper in Bima than in Lombok: the
price change after deregulation was
therefore larger in Bima.
Changes in real farmgate prices are
not always consistent with changes in
share to the farmer. The latter is not
a fully reliable indicator of benefit to
farmers because it ignores changes in
wholesale prices: a farmer might receive a larger share of a lower wholes a l e p r ic e an d be w o r s e o ff, a nd
conversely. Table 5 summarises the
correlation between changes in real
farmgate prices and changes in the
farmers’ share of wholesale prices. In
two cases, the decline in the farmers’

108

Roger Montgomery et al.
TABLE 4 Changes in Real Farmgate Prices in Surveyed Areas Following Deregulation

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Change in Real
Farmgate Price (CFP)

Case

% of Cases

CFP > 100%

Cloves (Minahasa)
Cocoa beans (Polmas)
Coffee (Temanggung)
Onions (Bima)
Rattan (Luwu)
Tiger Prawns (Bone)

17

50% < CFP < 100%

Cattle, slaughter (Gorontalo)
Cocoa (Bone)
Coffee (Karo)
Copra (Minahasa)
Tea leaves, fresh (Sukabumi)

14

0% < CFP < 50%

Candlenuts (2 cases in Bima)
Cattle, slaughter (Bone, Bima)
Coconut, fresh (Minahasa)
Coffee (Polmas, Malang, Kerinci)
Duck eggs (Hulu Sungai Tengah)
Milk (Sukabumi)
Rubber, scrap (Muba)
Sea fish (Gorontalo, Gunung Kidul)
Tobacco, shredded (Sampang)

39

CFP < 0%

Cashew nuts (Sampang)
Cattle, slaughter (Lombok Timur, Sampang)
Cinnamon (Kerinci)
Oranges (Luwu)
Potatoes (Kerinci, Gowa)
Rubber, slab (Bengkalis)
Rubber, RSS a (Hulu Sungai Tengah)
Rubber, scrap (Hulu Sungai Tengah)
Tobacco, shredded (Temanggung)

31

Total (36 cases)
Largest increase (Onions, Bima)
Largest decrease (Cinnamon, Kerinci)
Average change
Median change
a

100
615%
–59%
40%
19%

See table 3, note a.

Source: As for table 3.

share is offset by increases in the
whole sale price sufficient to leave
farmers better off, while in six other
cases increases in the farmers’ share
are not enough to offset the im pact

of declining wholesale prices. In the
majority of cases, however, farmers
benefited both from deregulation and
from incre ases in wholesale prices
during the period in question.

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Change in Real Farmgate Prices (CFP)
Change in Price Proportion
to Farmer (CPP)

CFP ³ 100%

CPP ³ 20 %
10% £ CPP < 20 %

0%< CPP < 10%

CPP < 0 %

a

50% £ CFP < 100%

Cattle (Gorontalo)
Onions (Bima)
Cloves (Minahasa)
Rattan (Luwu)
Cocoa beans (Polmas)
Tiger prawns (Bone)
Coffee (Temanggung)

Copra (Minahasa)
Milk (Sukabumi)
Tea (Sukabumi)
Coffee (Karo)

Cocoa (Bone)

0%< CFP < 50%

CFP < 0%

Coconuts, fresh (Minahasa)
Sea fish (Gorontalo)
Rubber, scrap (Muba)
Candlenuts (Bima to Banjarmasin)

Tobacco (Temanggung)

Coffee (Polmas, Malang, Kerinci)
Tobacco (Sampang)
Duck eggs (Hulu Sungai Tengah)
Cattle (Bone, Bima)

Potatoes (Kerinci)
Oranges (Luwu)
Rubber, slab (Bengkalis)
Rubber, scrap (Hulu
Sungai Tengah)
Cashew nuts (Sampang)
Cinnamon (Kerinci)
Rubber, RSS a (Hulu
Sungai Tengah)

Candlenuts (Bima to Mataram)
Sea fish (Gunung Kidul)

Potatoes (Gowa)

Deregulation of Indonesia’s Interregional Agricultural Trade

TABLE 5 Changes in Real Farmgate Prices and Farmers’ Share of Wholesale Prices

See table 3, note a.

Source: As for table 3.

109

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110

IMPACT OF LAW NO. 18/1997
ON REGIONAL BUDGETS
Deregulating interregional agricultural
trade often resulted in higher prices to
farmers for their produce and lower
prices to consumers for agricultural products. Many provincial and district governments have ignored these benefits,
however, preferring to complain that deregulation removes a valuable source of
revenue. There are five categories of locally derived revenues (Pendapatan Asli
Daerah, PAD): taxes; levies; user charges
for facilities and services; profits from local government enterprises; and various
other local revenues. In total, the amount
collected is quite limited, but PAD revenues are important, because they are not
tied to specific programs or projects of
the central government. Provincial and
district governments see agricultural
commodities being transported to other
regions as a legitimate and attractive target for taxation. In assessing regional governments’ complaints about lost revenue,
however, it should be borne in mind that
only a small part of regional annual
budgets (Anggaran Pendatapan Belanja
Daerah, APBD) comes from locally derived revenues. For provinces, PAD revenues often financed less than one-third
of the APBD in the past, while for districts they usually represented less than
one-tenth of the APBD financing requirement. The major local source of revenue
for both provinces and districts has been
transfers (revenue sharing) from the central government.
Below we consider the