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WB/Boom, Bust and Up Again? Evolution, Drivers and Impact of Commodity Prices: Implications for Indonesia
* The main driver of the food price increases from 2002 to 2008 was the increased demand for biofuels and the consequent pressure on grain stocks, large land-use shifts, speculative activity and export bans. The impact of demand increases from China and India was minimal.
* Unlike in other crops, the spike in rice prices was caused by a sudden change in the trade policies of rice-exporting countries and the urgent efforts of some rice-importing countries to secure supplies at any price, leading to hoarding and speculation.
* International price shocks are fully transmitted to the domestic prices of some key commodities. However, the speed and magnitude of price changes in remote provinces is found to be generally slower and less significant than in other regions.
* Unlike in other countries, the effects of the commodity price increases between 2005 and 2008 were generally positive for Indonesia's poor. Although the price of commodities consumed by the poor increased, this negative effect was outweighed by the benefits they received on the income side combined with the fact that the rice price remained relatively stable. With the exception of resource-poor Jakarta and Banten province, all provinces benefited from commodity price increases.
* The most effective ways of protecting the poor and some vulnerable producers against price fluctuations are likely to involve a mixture of social safety net programs, such as targeted cash transfers to poor households, and the smart use of trade policies and import regulations (tariff cuts and the relaxation of import restrictions). They also include measures to reduce price volatility across Indonesian regions, such as improved infrastructure (ports, roads and distribution networks) and private sector stocking. Finally, it is also important to improve agricultural productivity to enable an improved supply response to higher commodity prices.
* The report finds that the commodity sector on its own will be unable to generate the employment growth needed, so the manufacturing and services sector also need to be promoted.
* High commodity prices present an important development opportunity for natural-resource-abundant Indonesia. To maximize this development potential it is important to: (i) facilitate the supply response of the commodity sector through improved regulations, (ii) use the resource windfall to relieve infrastructure bottlenecks and promote the development of a knowledge-based economy to increase competitiveness, and (iii) take measures to mitigate the impact of commodity price volatility.
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