Policies caused food price hikes

Policies caused food price hikes

Drastic increases in the cost of basic needs and a shortage in
their supply has led to riots in several towns in Java and
Sulawesi. H.S. Dillon, executive director of the Center for
Agriculture Policy Studies, speculates on how agricultural
policies may have contributed to this.

Question: Do you think the rise in prices of basic needs that
presumably triggered recent riots is caused by the monetary
crisis or a short supply of basic commodities?

Dillon: The price increases were caused by a sharp
depreciation in the value of the rupiah against the U.S. dollar.
No means exists to halt price increases in this type of
situation.

We need to review the price of unhusked rice. Farmers need
incentives to increase production. The depreciation of the rupiah
has negated Tuesday's decision by the government to raise the
producer price of unhusked rice by 14.2 percent, from Rp 525
(about 5 U.S. cents) to Rp 600 per kg.

Agricultural policy has also contributed to the price rises in
so far as the country has failed to increase production of the
main commodities and the Ministry of Agriculture has failed to
anticipate consumption. The ministry does not pay adequate
attention to the development of those commodities, while staff do
not have a good relationship with the farmers.

There are adequate supplies of basic food in market places
because the State Logistics Agency (Bulog), even though most of
its monopolistic privileges have been removed, continues working
as it used to. The agency has imported 2.5 million tons of rice
(of which 1.7 million tons will be kept as stock) and has a good
distribution network throughout the country. But we still must
provide relief for the five million poorest people who cannot
afford to buy food in this time of difficulty.

Q: Do you think somebody is engineering the price increases to
advance a political objective?

D: No, I think that is impossible. What we have seen is the
result of a lack credibility in information released by the
government.

Q: Do you think there is a relationship between shortages and
recent reforms dismantling the monopoly rights of Bulog?

D: The government, with International Monetary Fund (IMF)
assistance, is mistaken in thinking that a market structure
developed over a long period of time can simply be changed with a
letter of intent. It would be more appropriate to dismantle the
monopoly rights of Bulog in phases, starting at the point of
contact with the consumer.

By first taking care to ensure stability in the retail sector,
the government could then safely move backwards and tackle
distribution, storage and importation respectively. I think the
government and the IMF have been unprofessional in the
preparation of this reform.

In theory, the reform is correct because it will encourage
competition and benefit producers and consumers. However, who is
going to bear adjustment costs in the short term? The government
should have anticipated lesser purchasing power as a result of
the monetary crisis.

Furthermore, due to the very sudden dismantling of Bulog's
monopoly rights, no private companies are ready to step into the
breach and import commodities, except those controlled by
powerful business tycoons. This will result in a further
concentration of trade.

Q: How badly has the monetary crisis affected farmers?

D: If farmers can continue producing, they will remain in good
shape, but we must enhance agricultural productivity. Forty-six
percent of our population make a living through agriculture and
55 percent of the population live in rural areas.

Q: What steps should we take to assure the security of food
supplies?

D: We need increased research and development, and expanded
production. Research and development activities are planned by
the National Development Planning Board (Bappenas).

Subsidies must be made available to assist producers adopt
new technology as this will increase output. Subsidies are needed
to negate risk inherent in adapting to new technology.

Subsidizing beneficial new technology is a more prudent use of
funds than, for example subsidizing domestic consumption of wheat
over the last 25 years. Wheat cannot be grown in Indonesia and a
subsidy has only encouraged the country into a continued
dependence on imports. (riz)