Where should Indonesian agricultural policy go?
A debate has been raging on the course that Indonesian agricultural policy under the new government should be taking. The Jakarta Post talked to H.S. Dillon, executive director of the Center for Agricultural Policy Studies about the issue.
Question: There seems to be an ample supply of rice in the markets -- are our food problems finally over?
Answer: Only for the very rich. Our national food security has been badly compromised. For the second year running we are the world's largest rice importer; paddy farmer incomes are well below the poverty line, real wages for unskilled labor are still only half of what they were some three years ago, under-nutrition is crippling and nearly a quarter of the population can only afford adequate supplies of rice thanks to the government's low- cost rice program.
Q: Will free trade solve our problems in rice?
A: World market rice prices are below US$200 per ton CIF (cost, insurance and freight) -- the lowest levels in real terms for nearly three decades. Free trade would mean that the rich will have access to cheaper rice, farm incomes will collapse and rural poverty will deepen. Java is already reeling from El Nino and the financial crisis -- this would certainly put rural Java into the intensive care ward.
Regardless of whether world prices are abnormally low, free rice trade simply doesn't make sense for Indonesia. When rice is produced here, we enjoy many social benefits -- food security, political stability, rural employment generation, environmental and cultural preservation -- that aren't reflected in the price of the crop.
The real value to society of domestic rice production is probably two to three times the market price. To embrace free trade is equivalent to ignoring the much higher social opportunity cost of domestic rice production -- this is simply bad economics.
Q: Will a tariff help?
A: A little bit. We could levy a tariff of 30-40 percent on rice imports without massive smuggling or collusion. If we set a tariff any higher than this, it simply wouldn't be enforceable. Consumers won't suffer too much, since a 35 percent tariff is about equivalent to the current protection rate afforded by the partial BULOG (National Logistic Agency) monopoly.
But if we put a tariff on rice, we should do the same on wheat and wheat products. Otherwise, we'd be encouraging consumers to switch to wheat-based imports. We cannot produce wheat domestically and its processing is still in the hands of the conglomerates.
Remember, a rice import tariff only helps us to modestly correct the distortion between market prices and the shadow-price of rice -- it certainly is not a protective measure.
Q: Should we, then, abandon the rice floor price program?
A: Not at all. The rice floor price program is the "price of last resort". It is designed to inject competition into the markets and ensure that prices don't collapse at harvest time. Without it, small farmers could easily become indentured servants, working to pay off credit from large traders and the mills.
Under a tariff based regime, we will have to make sure that the floor price isn't set above comparable import parity prices. We can also bring the floor price closer to the producers by ensuring that BULOG buys part of the harvest in the form of rough, rather than milled, rice.
Q: Should we eliminate the subsidy on low-priced rice for the poor?
A: No. The current "market operations" (subsidized sale) programs have been one of the lifelines that has actually worked far better than expected. Lets face it, we have many very poor and desperate people. Food security is not an abstract notion for them. The targeted rice subsidy program provides the poor a minimal amount of rice at a price they can afford. The fiscal costs are trivial compared, for example, to energy subsidies. The nutrition, economic and rural development benefits are positive and significant. One of the lessons of the financial crisis is that we must have in place instruments aimed at ensuring that the poor can survive. This means that a targeted rice subsidy program should continue as the backbone of our national food security effort.
Q: We used to be self-sufficient in rice. What went wrong?
A: Productivity has been falling since the late 1980s. After the initial burst of green revolution success, our 1990s rice breeding efforts have been a failure. We've invested heavily in irrigation, but gross rice area harvested has only increased at about 0.5 percent per annum, and this is not enough to offset the loss of rice lands to urbanization in Java.
We tinkered with decentralizing our agricultural extension and research services and have practically decimated both in the process. Our agro-input and credit services were more interesting in chasing government subsidies than in serving the farmers, and the cooperatives were anything but proper vehicles for advancing farmer business interests.
Milling yields have been falling since the 1950s and our levels of waste, pest and disease loss are two to three times those of other Asian states.
The "low-price" rice policy meant that returns to paddy production were very low indeed. The best of the rural labor force left rice production and farmers had very little discretionary income to invest in raising their own productivity.
Rice production can become an engine for sustained, rural development. But quick fixes, like establishing rice plantations, are not the solution. We must, very quickly, improve the rice technology effort, and as this is now the biotech era, cooperation with the IRRI (International Rice Research Institute) becomes very important. We must complete the existing irrigation systems, turn over irrigation organization and management to farm water user associations, and strengthen watershed basin management. Off Java, we should be able to roughly double rice yields through much better extension.
Fertilizer and credit subsidies are not the solution. What is needed are commercially viable and competitive rural agro-input and capital markets. Rather than subsidize banks and public enterprises, it makes more sense to simply support a minimal farm income. Producer income supports, crop insurance and public support for rural financial markets will help.
Q: Will closing BULOG help?
A: Don't be silly. BULOG is still needed to manage a targeted rice subsidy program, implement the floor price program, maintain a national strategic rice stock; and to provide rice to the Indonesian Military (TNI), to selected groups of civil servants and to the victims of natural and man-made emergencies.
An archipelago nation needs an organization that can ensure that the main staple food is available and affordable at all times. The main problem is that BULOG financed its operations from market-distorting, or what economist's call rent-seeking practices. This must change. BULOG's public rice services should be financed from the budget, and the agency should be transformed into a well-governed, accountable and commercial state companies. This institutional transformation can be made, but it will take courage, conviction and strong leadership.
Q: Couldn't decentralization solve the country's food problems?
A: Maybe yes, and maybe no. Decentralization will bring government closer to the people, and this should mean much better returns on public outlays. But food security must be a national objective, and strong national measures must be taken to see that it is not further compromised.
If the decentralization process isn't managed correctly, we could easily return to the situation prevailing in the 1960s when food markets were restricted at regency borders and when water use conflicts were common.
Decentralization can produce a race to the bottom, in which local governments prefer to neglect the poor -- largely in the hope that some other jurisdiction will handle their poor and generate national food security for them. We certainly need to reap the gains from decentralization, but let us do this in a way that ensures poverty will be reduced and that food security will be safeguarded.