The palm oil puzzle
The palm oil puzzle
The persistent volatility of the price of cooking oil above
the official level should have awakened the government to the
blunt reality that market-control measures without the support of
subsidy spending are not an effective way to either ensure supply
or control prices. However, the government seems unwilling to
learn from the failure of the series of antimarket measures it
has imposed since earlier this year. It is now running the great
risk of making another big mistake, namely destroying the
nationwide cooking-oil distribution system.
It was most puzzling to note how the domestic market remained
short of stock during the first four months of this year even
though the blanket export ban was still in effect. Seen from the
supply-demand perspective, this did not make any sense at all. As
the world's second largest producer after Malaysia, with an
annual output of more than six million metric tons and domestic
demand of only about 3.5 million tons, the country actually has
an exportable surplus of more than two million tons.
The government stubbornly ignored the warnings from
businesspeople and analysts that the export ban would never be
effective for a country like Indonesia with so vast a coastline
and a government notorious for its corruption. Moreover, given
Indonesia's role as the second largest producer, the export ban
further increased the differential between international and
domestic prices.
The potential profit had become so big, as a result of the 80
percent depreciation of the rupiah, that the temptation to
smuggle, through collusion with local officials, was hard to
resist. Smugglers had a powerful leverage to make local officials
turn their eyes away from contraband trade.
The imposition of export taxes of as high as 40 percent in
April and up to 60 percent as of early July in lieu of the export
ban should be more successful in discouraging exports because
exporters would get only 40 percent of the international prices
with the other 60 percent going to the state coffers.
But this measure may also meet a similar fate because the
government is about to commit another big mistake. By assigning
cooperatives, irrespective of their experience, to be the main
distributors for wholesale and retail chains, the government
risks destroying the distribution system developed over decades
by the 12 major cooking oil producers.
True, the price of cooking oil, as one of the basic staples,
should be kept at a level affordable for the general public. But
the root problem is not so much the "profiteering" attitude on
the part of old distributors, as the government seems to see it,
but the rupiah's exchange rate. As long as the rupiah remains
below 13,000 against the dollar, the market dictates that
exports, let alone smuggling overseas, are still more profitable
than domestic sales even with a 60 percent export tax.
But building from scratch a completely new distribution system
involving cooperatives almost to the complete exclusion of
noncooperative distributors may neither ensure adequate domestic
supply nor stabilize the cooking oil price in the long term.
Developing a distribution system takes a lot of time and involves
big investments.
It would be much better for the government to periodically
raise the buying price, Bulog, as the monopoly holder, pays to
producers an amount that gives them a reasonable margin and at
the same time removes the big differential between domestic and
international prices. The government can simply use the huge
revenue already accrued from the export tax to subsidize Bulog's
sales prices to wholesale traders.
Of most importance, though, is that Bulog should always
procure cooking oil through a competitive bidding procedure and
allow all trading firms, not only cooperatives, to distribute the
subsidized cooking oil. But even this measure would not be
effective unless Bulog is tightly audited and the government is
serious about preventing smuggling.