After Cancun: Indonesia needs pro-poor trade strategy

After Cancun: Indonesia needs pro-poor trade strategy
Indonesia's trade policy after Cancun

Neil McCulloch
Senior Economist
The World Bank
Jakarta

The failure of Cancun has been heralded by many in Indonesia
as a victory. Indeed, the recent trade talks in Cancun, Mexico,
represents one of the first times in which developing countries
have worked together to form a powerful negotiating block to
pressure rich countries for greater liberalization.

But the failure of Cancun's will only be a true victory for
Indonesia, if the Doha round of the World Trade Organization
(WTO) is concluded successfully. Indonesia still faces
significant barriers to selling its goods and services abroad and
without a WTO deal these barriers will remain.

For example, in agriculture huge subsidies and domestic
support payments by rich countries distort world markets and hurt
poor farmers throughout the world. The World Bank estimates that
agricultural liberalization could produce over US$350 billion in
gains worldwide, although to achieve these gains both developed
and developing countries must liberalize.

However, although agricultural subsidies grabbed most
attention in Cancun, it is not the most important issue for
Indonesia. This is because these subsidies are heavily
concentrated on meat, dairy products, and cereals.

With the notable exception of rice, Indonesian farmers are not
directly engaged in these distorted world markets. Other barriers
in international agricultural markets are more important for
Indonesia. Four developed country trade practices are especially
harmful.

First, the use of specific rather than ad valorem tariffs
often leads to very high effective protection, particularly on
low quality goods. Specific tariffs mean that the lower the
price, the higher the rate of protection, and thus low cost
countries such as Indonesia get hurt. Products such as palm oil,
rice, and sugar, as well as fish, crustaceans, and fruits and
vegetables are most affected.

Second, developed countries use tariffs that cascade upwards
on goods such as coffee and vegetables, as protective devices for
their agro-processing industries. Developing countries such as
Indonesia therefore face a bigger disadvantage in higher value
added processed goods compared to raw materials.

Third, complex rules of origin make it hard for countries like
Indonesia to avail of all the special treatment and incentives
theoretically made available to them.

Fourth, conformance with health and safety regulations,
notably maximum pesticide residue levels and difficulties with
understanding and administering standards, are costly for
Indonesia's exports, and hampers their capability to export these
goods. To remove these barriers, a multilateral trade deal is
critical.

It is important that Indonesia does not react to Cancun's
failure by retreating into protectionist policies. There are many
voices in the public arena now calling for such protection --
particularly in agriculture.

For example, leaders of farmers organizations argued for the
need to protect poor rice farmers against imports, particularly
during the harvest season. These leaders are right to highlight
food security and vulnerability as key concerns, and indeed much
more needs to be done to address these issues. But raising the
tariff on rice, or, worse, restricting imports to specific
importers or places of imports is not the answer.

The reason is easy to see -- people consume rice as well as
producing it. Rice is by far the most important food constituting
more than 25 percent of food expenditure for households in the
bottom half of the expenditure distribution.

And the vast majority of households here consume more rice
than they produce -- so increasing the price of rice hurts these
households. Virtually none of Indonesia's 22 million urban
households produce rice, so the urban poor would be hit hard by
increases in the price of rice.

Some argue that this is a price worth paying to help the many
more rural poor, but data from the Central Bureau of Statistics
own household survey show that 60 percent of rural households
also produce no rice.

Even among households that grow rice, many are marginal
farmers whose holdings are so small that they cannot grow enough
for their own family's needs.

The poorest households in rural areas are landless laborers
and marginal farmers, who are net buyers of rice. When rice
prices rise, the urban and rural poor suffer an immediate decline
in their standard of living.

But policies are needed to help the poor, including poor
farmers. The right approach is to construct a pro-poor trade
strategy. Such a policy would address the large domestic barriers
to trade by improving road transportation, port facilities and
logistics services, and reducing bureaucratic red tape in customs
and elsewhere.

This policy should also seek to improve food security by
improving productivity through better agricultural extension and
increasing the access of poor farmers to credit and warehousing
services.

Furthermore the evidence shows that maintaining an open
trading regime actually helps to reduce rice price fluctuations.
During May to December last year retail prices rose less than one
percent in Indonesia despite the simultaneous occurrence of a
drought and the onset of Ramadhan in November.

This price stability was mainly due to the fact that rice
imports more than doubled -- thus openness to world markets can
also be a mechanism for cushioning domestic shocks. Restricting
rice imports to specific importers would have exactly the
opposite effect, increasing price fluctuations and raising prices
for poor consumers.

East Asia, including Indonesia, would particularly benefit
from the greater liberalization in trade in services that the
Doha round is pursuing.

Evidence suggests that the productivity gains associated with
more efficient services are particularly high, and that
competitiveness in high-value agriculture and in manufacturing
depends on efficient business services. Services liberalization
throughout the developing world could yield gains of around $270
billion or 10 percent of gross domestic product for East Asia by
2015.

Cancun showed the ability of developing countries to come
together on a joint agenda. Indonesia's leadership was recognized
in bringing these countries together. Now, Indonesia has a great
opportunity to use that leadership to get the parties at the
table again, and conclude a Doha trade round that benefits all.