End to fertilizer subsidies is pure folly

End to fertilizer subsidies is pure folly

A huge hue and cry has ensued in recent weeks over the lifting
of fertilizer subsidies. The Jakarta Post asked Dr. H.S. Dillon,
executive director of the Center for Agricultural Policy Studies
in Jakarta, for his perspective on the raging debate.

Question: How do you view the lifting of fertilizer subsidies?

Dillon: Unfortunate. This policy induced crisis is the last
thing we needed at a time like this. I fail to comprehend its
logic.

Q: What do you mean?

D: Well, we all knew that fertilizer demand would increase as a
result of the large program to plant rice, soybeans and maize
launched by the Ministry of Agriculture, and the attendant call
for massive subsidies on fertilizers.

The A,B,C of agricultural planning dictates that you should be
sure of the availability of land, seed and fertilizers before
launching any such program. If anyone had dipped into the
ministry's institutional memory, then he would have learned that
subsidized fertilizer -- like any other input -- flows to uses
which promise the largest returns. One need not have a PhD to be
able to figure out that the subsidized KCL fertilizer would end
up on palm oil estates. Thus, the subsidy policy on KCL was ill-
conceived.

Q: The government has changed the policy regime. Why don't you
give it credit for these policy changes?

D: That is precisely what is not needed at this time. It would
seem that policymakers are oblivious to one of the major
characteristics of agriculture: seasonality. What matters most to
farmers is that high-quality seeds and fertilizer are available
when they are needed. In simple terms, seed should be available
at time of planting and fertilizer applied when the rice shoots
need it most. Timeliness is of the essence. What the ministers
should have done was to secure adequate and timely input for the
farmers.

Q: But the ministers have done exactly that. They have abolished
the state monopoly and liberalized fertilizer trade. Don't you
approve of that?

D: Pure folly during a crisis. In the best of times, one has to
make sure that the proposed policy has a very good chance of
succeeding before espousing a change in the policy regime. These
ministers seemed to be far removed from reality, from the world
of business. They believe that the world revolves by fiat. They
are of the opinion that traders should fall over each other
trying to rush fertilizer imports to the countryside now that
they have waved their magic wand! No, my dear friends, the
private sector does not move by fiat, it -- whether you like it
or not -- is driven by profits. Expected profits, to be more
precise. In times of such turmoil and uncertainty, no bona fide
importer is going to be foolhardy enough to commit millions of
his own dollars to import a shipload of fertilizer and pray that
he garners huge profits in a few months.

Q: Does this mean that you favor a continuation of subsidies and
state monopolies?

D: No, I do not. When domestic rice prices have been allowed to
be higher than world prices -- which I do not think should be
done while millions of our brethren are suffering the worst
income shock of their lifetimes -- then there is no reason why
input prices should not be at world levels. But this is not a
matter of subsidies, this is a matter of availability of critical
inputs. By the way, please note that farmers and rural
entrepreneurs do not normally demand subsidies.

Just look at the size of the KUPEDES nonsubsidized credit
program, and its fantastically high repayment rate. With regard
to state monopolies, I have been arguing for the infusion of more
competition (and thereby, greater efficiency) into agricultural
factor markets for a long time. But the timing is way off.

Q: You told us some time ago that the new ministers were better
than their predecessors. What has gone wrong?

D: I don't know. Poor counsel, perhaps. If they had been solely
concerned with producing enough food to feed ourselves, and
merely regarded farmers as factors of production, they would have
still needed to ensure that the farmers were provided the
incentives to increase their productivity. But if they had really
empathized with the farmers, then they would have realized that
many of the farmers are still reeling from the crises and badly
need a breather.

The ministers would then have allowed the farmers to make
larger than normal profits this season, thereby placing them on a
sounder footing. I am confident that with such encouragement, our
farmers would have done their utmost to increase their output.
Instead, the ministers have triggered rural unrest with their
cavalier policymaking.

Q: In light of these recent events, what is your prognosis?

D: I despair. These gentlemen had come in on a reform ticket, and
I had high hopes that they would actually turn things, and place
our people and our nation ahead of their own interests. This
fertilizer fiasco and the levying of a very stiff export tax on
crude palm oil demonstrate that they are merely muddling through,
and perpetuating the injustice against farmers, who have no voice
at all. By experimenting with such critical policy, they are
playing with fire. Such policy-making -- showing total disregard
for the well-being of farmers -- is more reminiscent of the last
years of the Soeharto regime than a harbinger of fundamental,
pro-people change. These ministers are making a mockery out of
their own stated objectives of creating a people's economy.