IMF misjudgment fuels food riots<\/p>\n
By David Ray<\/p>\n
The following article is an excerpt from a paper presented at
\nthe recent Crisis in East Asia conference held in Sydney and
\nMelbourne.<\/p>\n
SYDNEY (JP): That Indonesia is facing its worst economic
\ncrisis in three decades has been well documented recently in the
\ninternational print media. The crisis has been exacerbated by the
\nongoing drought leading to falling food production for a second
\nyear and increased political tension as the country undergoes a
\nchange in government, albeit retaining its national leader.<\/p>\n
The rising incidents of social unrest are a matter of
\nparticular concern to local authorities as it has become a major
\nfocus of the international media. Images of rioting, looting and
\nracial violence have been broadcasted, in a sometimes
\nsensationalized manner, throughout the world, thus, further
\neroding market confidence in Indonesia and, perhaps, the entire
\nregion.<\/p>\n
So, what has been driving the recent food price increases? Due
\nto late rains last year, there are expectations of low rice crops
\nthis year, that is a 4 percent to 8 percent drop in rice
\nproduction. Falling production of rice and other important
\nstaples has led to greater imports.<\/p>\n
This year, Indonesia will import more than 5 million tons of
\nrice (US$1 billion to $1.5 billion), as well as large volumes of
\nother key staples. However, the 80 percent devaluation of the
\nlocal currency over the past eight months has meant that the
\nimported shortfall will be, on average, three times to four times
\nmore expensive in rupiah terms.<\/p>\n
Also, the higher costs of key imported inputs have already had
\na major impact on downstream producers in the food industry. In
\nthe poultry industry, for example, meat and egg production has
\nvirtually collapsed because companies cannot afford to buy
\nimported feed. Further upward pressure on food prices has also
\ncome about recently through the cessation of an informal
\narrangement between a number of food producers and the government
\nto hold down prices during Ramadhan, the Moslem holy month of
\nfasting.<\/p>\n
However, arguably the most important factor driving the food
\nprice inflation (and therefore the recent riots) has been the
\nincreased expectation of rapid increases in food prices in the
\nnear future. Such expectations have led to speculative (and also
\npanic-driven) hoarding.<\/p>\n
Latest data available shows that prices for many essential
\nfood commodities remained fairly stable until late November 1997,
\nbut showed a sharp increase in December 1997 and January 1998.
\nFor example, over the December 1997 to February 1998 period,
\naverage prices for rice, flour and cooking oil in Jakarta markets
\nincreased by 23 percent, 28 percent and 62 percent respectively.<\/p>\n
A devalued rupiah would lead to expectations of higher food
\nprices. Adding to those expectations is the announcement in late
\nNovember that the National Logistics Agency (Bulog), the state-
\nowned food price regulator, would be dismantled.<\/p>\n
Bulog was formed more than 40 years ago to ensure food
\nsecurity and price stability for Indonesian farmers and
\nconsumers. The body has long held the sole import monopoly on
\nrice and rice flour, white sugar, soybeans, garlic, wheat and
\nwheat flour, onions, garlic, leeks, cooking oil and a number of
\nother commodities. When local prices of these commodities rise
\nabove critical levels, Bulog intervenes by selling at below
\nmarket prices.<\/p>\n
As part of the 50-point plan with the IMF, the Indonesian
\ngovernment agreed to phase out all of Bulog's monopolies for all
\ncommodities except rice beginning in February 1998.<\/p>\n
For many Indonesian producers and consumers, the dismantling
\nof the very institution charged with the responsibility of
\nproviding food security and price stability could not have come
\nat a worse time. Moreover, there is widespread skepticism that
\nremoving the government's monopoly over the distribution of food
\nwill lead to more competitive conditions and therefore lower
\nprices.<\/p>\n
This is because food production and distribution networks have
\nlong been dominated by large Chinese-Indonesian business groups.
\nBy removing the government monopoly, there is a real fear that
\nsuch monopoly power will simply move to the hands of a few large
\nbusiness groups.<\/p>\n
While the operations of Bulog have long been exploited as a
\ntool for rent-seeking activities by politically well-connected
\nbusiness groups, it has nevertheless served to hold down or
\nstabilize prices for ordinary Indonesians. There is no doubt that
\nIndonesia's food distribution is badly in need of reform, quite
\nindependently of the financial crisis.<\/p>\n
However, the first step must be to abolish the monopolies
\nthrough effective legislation and implementation of antitrust
\nlaws, and to introduce genuine competition into the system. Only
\nthen will it make sense to phase out Bulog, the mechanism for
\nprotecting ordinary people from the monopolies.<\/p>\n
In the meantime, there is expectation that prices will
\ncontinue to rise.<\/p>\n
Throughout February and March, however, it has been reported
\nthat Bulog has and will continue to shield consumers from the
\nfull brunt of import-price increases by releasing existing stocks
\nat subsidized prices and by absorbing the cost of new imports.<\/p>\n
However, according to the Asian Wall Street Journal, Bulog's
\nstocks of rice, sugar, wheat and soybeans are only sufficient to
\nlast until April. The problem of higher expected prices for
\nstaple commodities in April is expected to be exacerbated further
\nby the IMF-imposed abolishment of fuel, kerosene and electricity
\nsubsidies also in that month.<\/p>\n
David Ray is an Indonesia specialist at the Center for
\nStrategic Economic Studies, a think tank attached to Victoria
\nUniversity. He has recently completed his PhD on Indonesian
\neconomic development.<\/p>\n
Window: However, arguably the most important factor driving the
\nfood price inflation (and therefore the recent riots) has been
\nthe increased expectation of rapid increases in food prices in
\nthe near future.<\/p>",
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