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.