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)