What about monopoly on clove trading?

The government has abolished monopolies in some commodities but maintained a private agency's monopoly in clove trading. Economist Kwik Kian Gie discusses the costs and benefits of the clove monopoly.

JAKARTA (JP): The International Monetary Fund's (IMF) reform package for Indonesia, which includes measures on finance, fiscal affairs and trading, has scrapped the monopolistic practices of the National Logistic Agency (Bulog) but failed to address the monopoly in clove trading.

The package is more concerned with the kinds of commodities, not the holders of the monopolies, because only monopolies in wheat flour, soybean and garlic have been scrapped from Bulog, while its monopolies in sugar and rice have been maintained.

Clove trading is now monopolized by the Agency for Clove Bufferstocking and Trading (BPPC), a private organization established to carry out clove trade set within government decrees.

But it is questionable whether clove should be regarded as being as vital as sugar and rice, such that the government considers it necessary to maintain its monopoly, or whether clove is more important than wheat flour, soybean and garlic, or edible oil.

Perhaps the IMF suggested the scrapping of Bulog's monopolies because it is a government agency so bearing in mind that a monopoly by the government means etatism, an ideology which is popular in Indonesia but a taboo for the United States.

BPPC's monopoly in clove trading is contradictory to economic principles because it is based on assignment from the government.

Privatization should be based on self-regulation by all related private parties -- including producers and consumers of clove -- without involving a third party, like BPPC, which has no business in production and consumption.

What are the benefits of BPPC, which aims to help stabilize the revenues of clove farmers by fixing prices and controlling the volume of production?

Market mechanism of clove trading has been eliminated. Why? Because a free market mechanism could harm clove farmers. Clove prices are very elastic -- prices usually fall very sharply when production is abundant and soar when supplies are scarce, causing farmers' revenues to fluctuate wildly.

The number of clove trees in Indonesia once had a total output capacity far exceeding demands. If there had been no coordinated reduction of the trees, farmers would have suffered. BPPC, therefore, was given a monopolistic authority in everything.

Under the arrangement, big producers of clove-blended cigarettes, for example, are required to buy clove from BPPC at Rp 12,000 (US$3.47) per kg and smaller producers at Rp 10,000. Farmers are only allowed to sell their clove at Rp 5,000 a kg to village cooperatives, which will also give them Rp 2,000 a kg in investment capital for trade regulations and another Rp 1,000 in the fund for the conversion of plantation areas from clove to other crops. The remainder of the funds are used for various purposes, such as procurement costs of Rp 125 for the cooperatives, processing costs of Rp 150, packaging costs of Rp 60, procurement costs of Rp 75 for the association of village cooperatives, warehousing costs of Rp 70, surveying costs of Rp 30, bufferstocking costs of Rp 50, insurance costs of Rp 150, depreciation costs of 3 percent, operational costs of Rp 500, costs for banking interest -- depending on developments -- operational costs of Rp 25 for the National Clove Body, a contribution of Rp 150 for clove tree diversification and costs for clove transportation to cigarette producers.

Farmers complain that they cannot sell their clove to cooperatives because their produce is of low quality, or the cooperatives have no cash to pay. The farmers are forced to sell their products to brokers, who will not give them investment capital for trade regulations and funds for the conversion of their plantation areas. Where have such funds gone to?

Because the difference between the total money received by farmers and the prices paid by cigarette producers is so large, the government should have BPPC audited.

Based on rough calculations on the total sales of 100,000 tons of clove per annum, cigarette producers will have to spend no less than Rp 1.18 trillion (at Rp 11,800 per kg), while farmers receive only Rp 350 billion (at Rp 3,500 per kg), leaving the difference to reach up to Rp 850 billion.

Now that the farmers' revenues are declining, many of them have let their trees go untended or replaced them with other crops, causing the country's clove production capacity to steadily decline.

As Indonesia's clove consumption is put at 90,000 tons a year, far higher than current production capacity, the country might have to import clove in the future and the IMF should support the abolition of the clove monopoly, allowing clove trading to follow the market mechanism. To protect the interest of farmers, a floor price -- of Rp 4,000 a kilogram, for example -- should be set.