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.