[Nasional-e] Rice costs up, most lose

[Ambon]

The Jakarta Post
Oct. 3, 2002

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.
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