IMF misjudgment fuels food riots

By David Ray

The following article is an excerpt from a paper presented at the recent Crisis in East Asia conference held in Sydney and Melbourne.

SYDNEY (JP): That Indonesia is facing its worst economic crisis in three decades has been well documented recently in the international print media. The crisis has been exacerbated by the ongoing drought leading to falling food production for a second year and increased political tension as the country undergoes a change in government, albeit retaining its national leader.

The rising incidents of social unrest are a matter of particular concern to local authorities as it has become a major focus of the international media. Images of rioting, looting and racial violence have been broadcasted, in a sometimes sensationalized manner, throughout the world, thus, further eroding market confidence in Indonesia and, perhaps, the entire region.

So, what has been driving the recent food price increases? Due to late rains last year, there are expectations of low rice crops this year, that is a 4 percent to 8 percent drop in rice production. Falling production of rice and other important staples has led to greater imports.

This year, Indonesia will import more than 5 million tons of rice (US$1 billion to $1.5 billion), as well as large volumes of other key staples. However, the 80 percent devaluation of the local currency over the past eight months has meant that the imported shortfall will be, on average, three times to four times more expensive in rupiah terms.

Also, the higher costs of key imported inputs have already had a major impact on downstream producers in the food industry. In the poultry industry, for example, meat and egg production has virtually collapsed because companies cannot afford to buy imported feed. Further upward pressure on food prices has also come about recently through the cessation of an informal arrangement between a number of food producers and the government to hold down prices during Ramadhan, the Moslem holy month of fasting.

However, arguably the most important factor driving the food price inflation (and therefore the recent riots) has been the increased expectation of rapid increases in food prices in the near future. Such expectations have led to speculative (and also panic-driven) hoarding.

Latest data available shows that prices for many essential food commodities remained fairly stable until late November 1997, but showed a sharp increase in December 1997 and January 1998. For example, over the December 1997 to February 1998 period, average prices for rice, flour and cooking oil in Jakarta markets increased by 23 percent, 28 percent and 62 percent respectively.

A devalued rupiah would lead to expectations of higher food prices. Adding to those expectations is the announcement in late November that the National Logistics Agency (Bulog), the state- owned food price regulator, would be dismantled.

Bulog was formed more than 40 years ago to ensure food security and price stability for Indonesian farmers and consumers. The body has long held the sole import monopoly on rice and rice flour, white sugar, soybeans, garlic, wheat and wheat flour, onions, garlic, leeks, cooking oil and a number of other commodities. When local prices of these commodities rise above critical levels, Bulog intervenes by selling at below market prices.

As part of the 50-point plan with the IMF, the Indonesian government agreed to phase out all of Bulog's monopolies for all commodities except rice beginning in February 1998.

For many Indonesian producers and consumers, the dismantling of the very institution charged with the responsibility of providing food security and price stability could not have come at a worse time. Moreover, there is widespread skepticism that removing the government's monopoly over the distribution of food will lead to more competitive conditions and therefore lower prices.

This is because food production and distribution networks have long been dominated by large Chinese-Indonesian business groups. By removing the government monopoly, there is a real fear that such monopoly power will simply move to the hands of a few large business groups.

While the operations of Bulog have long been exploited as a tool for rent-seeking activities by politically well-connected business groups, it has nevertheless served to hold down or stabilize prices for ordinary Indonesians. There is no doubt that Indonesia's food distribution is badly in need of reform, quite independently of the financial crisis.

However, the first step must be to abolish the monopolies through effective legislation and implementation of antitrust laws, and to introduce genuine competition into the system. Only then will it make sense to phase out Bulog, the mechanism for protecting ordinary people from the monopolies.

In the meantime, there is expectation that prices will continue to rise.

Throughout February and March, however, it has been reported that Bulog has and will continue to shield consumers from the full brunt of import-price increases by releasing existing stocks at subsidized prices and by absorbing the cost of new imports.

However, according to the Asian Wall Street Journal, Bulog's stocks of rice, sugar, wheat and soybeans are only sufficient to last until April. The problem of higher expected prices for staple commodities in April is expected to be exacerbated further by the IMF-imposed abolishment of fuel, kerosene and electricity subsidies also in that month.

David Ray is an Indonesia specialist at the Center for Strategic Economic Studies, a think tank attached to Victoria University. He has recently completed his PhD on Indonesian economic development.

Window: However, arguably the most important factor driving the food price inflation (and therefore the recent riots) has been the increased expectation of rapid increases in food prices in the near future.