IMF misjudgment fuels food riots

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.