Economist warns of worsening poverty as real incomes drop

JAKARTA (JP): American economist Steven R. Tabor warns that Indonesia's food security is being threatened and nearly 18 million people, currently classified as being near poor, may fall into absolute poverty, thereby increasing the number of those living below the poverty line to more than 40 million.

Tabor, from the Economic Management Services International based in Leiden, Holland, ties his observation to the combined impact of the recent forest fires, the prolonged dry season and the current macroeconomic distress.

Tabor, who has had many years of working experience in the country, predicted here yesterday that Indonesia's macroeconomic problems would continue for some time, depressing the real income and purchasing power of the majority of the population.

He based his bearish outlook on the assumptions that the economic problems in several Southeast and East Asian countries have yet to be fully resolved and that the IMF-funded stabilization package would tighten monetary and fiscal policies.

"Moreover, Indonesia's overheated property market has yet to fully correct itself. And when it does correct itself, some companies will find it difficult to service their bank loans," noted Tabor, who, in the 1980s, worked for several years here as a consultant at the Ministry of Agriculture.

He argued that even if the US$23 billion IMF rescue package for Indonesia does succeed, the country would end up with a very large debt and this would make the economy highly vulnerable to the whims of international creditors and currency speculators.

The economist, also a former consultant of the World Bank, cited the upcoming transition of the national leadership as another political factor which is raising great concern among foreign investors.

Tabor is here for a few days as a guest of the Indonesian Society of Agricultural Economics. He discussed yesterday Indonesia's macroeconomic distress and its likely impact on the country's food and agricultural sector at a seminar organized by the Centre for Agricultural Policy Studies.

The three-hour meeting, which was opened by Beddu Amang, Chairman of the society and chief of the National Logistics Agency, and chaired by H.S. Dillon, the Executive Director of the Centre, was attended by Indonesian and foreign economists.

Tabor observed that in the early phase of current stabilization efforts, all sectors of the economy would initially contract, as expenditures are reduced to bring real spending in line with national income.

"The agriculture and other tradable sectors will suffer from the fall in aggregate demand," he added.

Theoretically, according to Tabor, the steep depreciation of the rupiah can benefit the agricultural sector which could export its surplus output. But that would not likely be the case.

Excerpts

The following are the more salient points made by Tabor in his presentation:

Viewed from supply-side expectations, the agricultural sector would not likely be in a good position to tap the export market due to several restraints.

Primary among these restraints is the negative impact of the recent haze and drought on agricultural production. This, in turn, would result in little excess production in the agricultural sector.

Rice, formerly the growth engine, has been replaced by plantation crops, horticulture, fisheries and livestock. The problem, though, is that most of the largest investors in plantation crops are also members of conglomerates who are now suffering from the weakness in the banking system, tight liquidity, falling property prices, short-term borrowing exposure and a bearish stock market.

In the medium and long-term perspective, non-price variables may exert an adverse impact. The most important among these non- price variables are the intersectoral shift or irrigated land out of agriculture, the development and diffusion of improved technology, basic infrastructures, new investment into the agribusiness sector and the availability of rural credit.

These factors are highly sensitive to the level and allocation of public expenditures which are expected to slow down during the stabilization period.

The fall in purchasing power (with per capita income falling from the equivalent of US$1,200 before the rupiah depreciation to $750 to $800) would certainly depress the demand for both basic foods and high-value processed food products. This would be especially burdensome as Indonesia relies partly on imports for sugar and soybean and wholly for wheat.

As the world prices of sugar and wheat strengthen in the coming months, it is doubtful that the government, faced with a very tight budget, would continue to subsidize these commodities.

Hence, as subsidies would at least be reduced, the real prices of these food commodities would rise at a time when the real purchasing power of the majority of the population is being eroded.

One also should keep in mind that a stabilization program usually initially worsens, instead of improves, income distribution. The poor and lower middle-income groups bear a disproportionate share of the burden because they derive the bulk of their income from their own labor.

The macroeconomic distress, besides increasing the number of poor families, would likely reduce opportunities for income- stabilization in low-income, rural households.

This condition raises food security concerns, especially because off-farm income sources are bound to suffer as growth slows and several sectors begin job layoffs.

Therefore, the present macroeconomic shock raises the need for a reliable food relief system to supplement Bulog's operations in order to help the very poor cope with a sudden income loss.

But such a system can be effective only if local officials do away with their ordinate preoccupation with "prestige" and report immediately any signs of food problems to provide an early warning system.

An effective early warning system is especially needed because the food insecurity tends to remain hidden from view as hungry children rarely take to the streets with their plight. (vin)