Rice costs up, most lose

Rice costs up, most lose

C. Stuart Callison, Chief of Party, Partnership for Economic Growth
(PEG), Jakarta, stu@pegasus.or.id

The Ministry of Agriculture has proposed a 15 percent increase
in the price of rice and, in support of this, a 71 percent
increase in the tariff on rice imports. The Ministry wants to
provide incentives for farmers to produce more rice and help
Indonesia achieve food security. These are worthy goals. However,
it is questionable whether a further increase in the price of
rice is the best way to achieve them, and the impact of this
change on consumers, especially poor consumers, should also be
considered.

Since the beginning of the economic crisis in mid-1997, the
price of food in Indonesia has risen more rapidly than any other
component of the cost of living -- more rapidly than housing,
clothing, transport, education, and health care. Among food
items, the price of rice has risen more than the average cost of
food. The current price of rice is therefore higher, in real
terms, than at any time since the world food crisis of the early
1970s, and it has been considerably higher than the world market
price for rice since 1999, in contrast to its long-standing
parity with the world market price before that.

Although most rice farmers are not wealthy, due to the small
size of their farms, rice farming itself remains a very
profitable activity, with profits averaging at least 25 percent
of production costs in 2001. If this is not enough financial
incentive to call forth more rice production, another 15 percent
increase in price is not likely to do so, either. The
improvement and maintenance of rural infrastructure, such as
irrigation works, farm-to-market roads and post-harvest
facilities, especially in the more marginal areas of production,
is more likely to be successful at raising production.

With world rice prices low and more stable than in the past,
Indonesia's food security can be achieved for much less cost by
simply topping off domestic production with imports, assured by
Indonesia's macroeconomic growth and by its own exports of other
commodities, both agricultural and manufactured.

The vast bulk of Indonesia's domestic rice requirements will
continue to be met by its main rice producing areas, which can
easily compete with foreign producers -- who must after all
absorb the higher costs of moving such a high-bulk, low-value
commodity overseas. But if foreign rice producers can provide
rice more cheaply than the marginal rice farmers in Indonesia,
the latter should be encouraged, through relative market prices
and agricultural research, to diversify into higher value crops,
both for domestic markets and for export. This will not happen if
domestic rice prices are maintained at artificially high levels.

Indonesian consumers are already paying a very high price,
both relative to pre-crisis levels and by world standards, for
their rice. Research has proven that the price of rice plays a
significant role in the incidence of poverty here, since
expenditures on rice alone comprise 20 percent of total family
budgets of the poor. It has been reliably estimated that a 15
percent increase in the retail price of rice would increase the
total number of Indonesians falling below the poverty line by 3
million. The rural poverty rate would increase from 18.7 percent
to over 20 percent. The proposed increase in rice prices would
act like a 3 percent tax on the total income/expenditures of
these poorest elements of the population (and the same tax on
higher income groups, although a lower percentage of their
incomes).

When poor families have to spend more money on their basic
staple, rice, they have less to spend on other important family
needs like health care and education, and less to spend on other
food items, like eggs and fish and vegetables, with negative
implications for their own nutrition and health, especially for
growing children.

Only one third of rural households in Indonesia own enough
land to produce a surplus of rice for the market. They represent
less than 20 percent of the total population. Less than 40
percent of the income of rice farmers comes from selling rice,
more than 60 percent of their income is from other activities.
Some 45 percent of rural households do not own any land and
another 20 percent own less than 0.25 hectare, not enough to
produce a marketable surplus.

Farm families who produce just enough rice for their own
consumption obviously would not benefit from an increase in rice
prices.

Those who must buy additional rice to get through the year
would suffer the higher price tax like other consumers. Rice
farmers who have enough land to produce a surplus for the market,
while not rich, are not among the very poorest families living in
rural areas. Raising the price of rice would essentially tax all
consumers who do not grow enough rice for themselves for the
benefit of those rice farmers who are generally somewhat better
off than many of their landless or land-poor neighbors.

Finally, every increase in the cost of food, the real "wage
good" in economic terms, ultimately leads to demands for higher
wages, making Indonesian workers and the products they produce
less competitive on world markets (something Indonesia's
competitors, like China, are avoiding). This in turn reduces the
profitability of enterprises competing against imports or
producing for export and lowers the attractiveness of Indonesia
for new investment. This leads to higher unemployment in the
future while more productive employment is the only way to reduce
poverty and improve income and welfare for all Indonesians.

If the price of rice is artificially increased, everyone loses
except the surplus rice producers.

The views expressed here are those of the author, C. Stuart
Callison, Ph.D. and not necessarily of his affiliated
institutions, USAID, or the U.S. government.