Indonesia rice tariff

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1 Poverty and Social Impact Analysis Indonesia rice tariff Jennifer Leith Catherine Porter SMERU Institute Peter Warr March 2003

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3 Background to the PSIA Studies Poverty and Social Impact Analysis (PSIA) is an important feature of the new approach to supporting poverty reduction in developing countries. PSIA is defined as the analysis of intended and unintended consequences of policy interventions on the well-being or welfare of different groups, with a special focus on the vulnerable and poor. Well-being or welfare includes the income and non-income dimensions of poverty. 1 The overarching objective of PSIA is to promote evidence-based policy choices, by explicitly including poverty and social impacts in the analysis of policy reforms, and to build country ownership of policies by informing a public debate on the trade-offs between policy choices. Analysing poverty and social impact is not new, but it has yet to be routinely applied to macroeconomic and structural policy measures. In August 2000 the International Monetary Fund (IMF) and World Bank agreed to consider the poverty and social impact of major reforms in their lending programmes to developing countries. 2 Increasingly, developing country governments are initiating plans to undertake PSIA of key policy measures as part of the process of refining their Poverty Reduction Strategies (PRSs). In 2001, the UK Department for International Development (DFID) undertook to support demonstration studies in six countries, in response to requests from governments and other national stakeholders for ex ante analysis of the likely poverty and social impact of particular policies or programmes. Six DFID-supported PSIA pilot studies were carried out in Indonesia, Honduras, Armenia, Uganda, Rwanda, and Mozambique. The World Bank also undertook to pilot PSIA in six countries. In October 2002, findings from the DFID- and World Bank-supported pilot studies were brought together at a workshop in Washington DC, hosted by the World Bank, the IMF and DFID. Key findings of the workshop include that it is feasible to undertake PSIA using existing data and knowledge in country, and that for PSIA to be effective in informing policy decisions, it needs to be country-owned and embedded in the national PRS process. 3 The following report has been produced by independent researchers, and has been independently peer reviewed. The analysis and views contained in the study are the authors alone. 1 See World Bank, 2002, 'A User's Guide to Poverty and Social Impact Analysis,' available at and Robb, C, 2003, Poverty and Social Impact Analysis - Linking Macroeconomic Policies to Poverty Outcomes. Summary of Early Experiences, Working Paper, IMF Washington, DC. 2 See for example, IMF 'Key Features of IMF Poverty Reduction and Growth Facility', August 16, See 'Poverty and Social Impact Analysis- Linking Policies to Poverty Outcomes'. Workshop Summary Report, October 15-17, DFID/World Bank/IMF (available at

4 Disclaimer This report is the work of independent researchers. It was commissioned by the Government of Indonesia in collaboration with the Department for International Development (DFID). The report does not necessarily represent either the views of the Government of Indonesia or of the Department for International Development. In its present form, the responsibility for any of the opinions expressed in this report rests with the authors alone. Comments may be directed to: Simon Hunt PSIA Team Coordinator Oxford Policy Management 6 St Aldates Courtyard 38 St Aldates Oxford OX1 1BN Simon.Hunt@opml.co.uk

5 Contents 1 BACKGROUND TO THE INDONESIA PSIA PSIA in Indonesia Choice of Policy for Analysis Methodology and Report Structure INDONESIA CONTEXT: RICE TRADE, RICE TARIFFS AND POVERTY-LED POLICY DECISION-MAKING Indonesia Background: Crisis and Political Change Poverty Reduction and Macroeconomic Policy-Making The Rice Trade in Indonesia The Debate: Rice Tariffs Key Players in the Rice Tariffs Debate and What they Say POVERTY IN INDONESIA Poverty Definitions How Many are Poor Rice Production in Indonesia The Importance of Rice for the Poor Links between Rice Tariff and Poverty CGE MODEL AND RESULTS The Case for a General Equilibrium Treatment The Wayang General Equilibrium Model Results CRITICISM, VARIATIONS AND LIMITATIONS OF THE CGE MODEL Assumptions of the Model Timeframe of the CGE Model Dataset Used in the CGE ModelLing Exercise Effects of Varying Key Parameters Conclusions IMPLICATIONS AND RECOMMENDATIONS The Political Economy of Decision-Making Methodology Process Implementation of PSIA Demand Institutional Options for PSIA Implementation Recommendations... 46

6 Poverty and Social Impact Analysis: Indonesia Rice Tariff FIGURES Figure 6.1 Real Price of Rice, Indonesia, 1969 to Figure 6.2 World Price and Domestic Price of Rice, Indonesia, 1985 to Figure 6.3 Simulated Changes in Poverty Incidence: Varying Elasticity of Import Supply of Rice Figure 6.4 Simulated Changes in Poverty Incidence: Varying Elasticity of Substitution in Rice Production Figure 6.5 Simulated Changes in Poverty Incidence: Varying Armington Elasticity of Substitution in Rice Demand TABLES Table 3.1 The Population Classified as Poor in Indonesia ( ) Table 3.2 Changes in the Mean of Nominal and Real Expenditures by Quintile Table 3.3 Human Poverty Index Table 3.4 Human Development Index Table 3.5 Poverty Incidence and Human Development Index Table 3.6 Percentage Changes in Inequality Indices between 1996 and 1999 Based on Per Capita Real Expenditure Table 3.7 Poverty Incidence and Contribution to Total Poor by Main Sector of Occupation, February 1996 and February 1999 (%) Table 4.1 Poverty Rates by Household Type, Before and After Tariff Rise Table 6.1 Indonesia: Rice Production, Consumption and Trade, 1990 to Table 6.2 World Rice Trade by Country Table 6.3 Expenditure and Poverty Incidence by Household Group Table 6.4 Factor Ownership of the Broad Household Groups Table 6.5 Simulated Macroeconomic Effects of a Rice Tariff: Varying Rice Import Supply Elasticity (per cent change) Table 6.6 Simulated Distributional Effects of a Rice Tariff: Varying Rice Import Supply Elasticity Table 6.7 Simulated Macroeconomic Effects of a Rice Tariff: Varying Elasticity of Substitution in Paddy Production (per cent change) Table 6.8 Simulated Distributional Effects of a Rice Tariff: Varying Elasticity of Substitution in Paddy Production Table 6.9 Simulated Macroeconomic Effects of a Rice Tariff: Varying Armington Elasticities in Rice Demand (per cent change) Table 6.10 Simulated Distributional Effects of a Rice Tariff: Varying Armington Elasticities in Rice Demand

7 Abbreviations BAPPENAS BKPK BPS CES CGE CGI DFID HDI HIPC HPI I-PRSP IMF KPK NGO PIM PRGF PRS PRSC PRSP PSIA Rp SAM Susenas UNDP USAID National Planning Board Poverty Reduction Cooperation Board Statistics Indonesia constant elasticity of substitution computable general equilibrium Consultative Group on Indonesia Department for International Development human development index Highly Indebted Poor Countries human poverty index Interim Poverty Reduction Strategy Paper International Monetary Fund Poverty Reduction Committee non-governmental organisation policy interests matrix Poverty Reduction and Growth Facility poverty reduction strategy Poverty Reduction Support Credit Poverty Reduction Strategy Paper Poverty and Social Impact Analysis Rupiah social accounting matrix National Socio-Economic Survey United Nations Development Programme United States Agency for International Development 3

8 Poverty and Social Impact Analysis: Indonesia Rice Tariff 1 Background to the Indonesia PSIA 1.1 PSIA IN INDONESIA 1. In August 2002 a scoping mission team, with members from SMERU (a Jakartabased economic think tank) and three staff from DFID London, spent a week in Jakarta meeting with key stakeholders in the Indonesia policy-making process. This was to build interest and support for PSIA and to identify a current policy issue where a PSIA might usefully inform government on poverty outcomes of a proposed policy. The DFID Jakarta office had earlier laid groundwork to build interest in the PSIA. 2. In attempts to link PSIA with the emerging Indonesian Interim Poverty Reduction Strategy Paper (I-PRSP), the scoping team met with most of the senior decision-makers from government who have been engaged with the production of the I-PRSP and representatives from civil society concerned with poverty. 3. The users of the PSIA are expected to be those connected to the production of the PRSP and those in civil society with an interest in the policy being analysed. Interest in the PSIA as an emerging methodology for policy making so far remains donor-driven. However, the potential for PSIA to lead to more transparent decision-making and wide dissemination of its outputs that could assist civil society groups to monitor policy decisions was also investigated. 1.2 CHOICE OF POLICY FOR ANALYSIS 4. After consultation over the course of a week, the policy chosen for analysis was rice trade policy (import tariffs / pricing issues). This issue emerged strongly in our discussions with the various stakeholders including government, civil society and the World Bank. 5. The government expressed an interest in raising tariffs on imported rice. Bulog (the state commodities logistical agency) advocates increasing the import tax on rice from the current Rp 450/kg to Rp 750/kg, equivalent to moving from 25% to 50% ad valorem. 6. Simplified, there are currently two main opposing arguments for and against rice import tariffs: some support a high rice tariff policy since higher prices are associated with higher incomes for farmers; others believe that poor people are net rice consumers or buyers, who will suffer due to high rice prices. Rice Tariff Policy Background 7. In 1998, under structural agreements with the IMF, Indonesia began a market liberalisation process, which removed Bulog s monopoly position with food commodities. Legislation in June 1998 allowed private enterprises to compete with Bulog in importing and marketing of several commodities, including rice. On 22 September 1998 rice imports were freed with 0% tariff. On 01 January 2000 the Ministry of Trade began 4

9 imposing tariff on rice imports of Rp 430/kg (equivalent then to 30% ad valorem tariff). 4 In September 2000, based on Bulog s recommendation, the Directorate General of Customs and Excise put red lane inspection on rice imports in place Recently Bulog announced its plan to implement a quota-tariff to maintain the domestic rice price through import limitation 6. The resulting controversy became even more marked when the Tariff Team of the Ministry of Agriculture proposed a further rice import tariff increase to the National Tariff Team of the Ministry of Finance. The Ministry of Agriculture is also suggesting that only selected importers will be allowed to import rice to protect Indonesian farmer incomes Rice policy is an emotive issue in Indonesia and rice issues are constantly headline news. Recently, on behalf of rice farmers, the governor of South Sulawesi refused to have 100,000 tons of imported rice unloaded in that province 8. A similar action was taken by the East Java provincial government, which issued a regulation to ban rice imports to protect farmers incomes. A PSIA on rice tariff policy is timely as decisions are soon to be made in terms of specific rice tariff policy. Existing Data 10. Considerable data and reports on the issue of rice trade policies over the last 30 years already exists, much of which appears contradictory. Timmer s work on rice policy and rice self-sufficiency in Indonesia has been prominent. More recent work has focused on the costs to the poor of higher rice prices as a result of the increase in rice tariffs to 30% in 2000 (which also occurred in the context of rapidly falling world rice prices). Both Ikhsan at University of Indonesia and additionally the Centre for Agro-Sociological Research (Bogor) have done work showing that the poor are net rice consumers, and so have suffered as a result of the tariff rise. 11. This research is well summarised in a recent BAPPENAS (national planning board) report, 'An Approach to Macro Food Policy' (March 2001, with the support of the United States Agency for International Development (USAID)) which also argues that Indonesia s rice productivity is already very high (eg. above Thailand) and that there are few linkages between rural wage rates and the rural economy with higher rice prices. Thus, according to the BAPPENAS paper, these justifications for higher rice prices are spurious. Indeed farm labour rates are slow to change and already there is extensive non-rice diversification. However, HS Dillon and other Indonesian researchers challenge this approach. They argue that rice prices are still key to the rural economy and that high prices would increase rural agricultural wages in the long term. 12. It was expected that developing a computable general equilibrium (CGE) model of the Indonesian economy, in order to model the impact of increasing rice import tariff from 4 M. Husen Sawit, et al., BULOG: Pergulatan dalam Pemantapan Peranan dan Penyesuaian Kelembagaan [BULOG: a Struggle in the Role Establishment and Institutional Adjustments], (2002), p 'Jalur Merah Bagi Impor Beras Sudah Berlaku' [The Red Lane Inspection on Rice Import is in Effect], September 25, Kompas, July 26, Kompas, August 20, 2002, Media Indonesia, August 18, Bisnis Indonesia, July 31,

10 Poverty and Social Impact Analysis: Indonesia Rice Tariff 25% to 45%, could contribute to understanding and anticipating the longer-term issues in rice pricing and its effects on poor people. Rationale 13. Examining the rice tariff question was well supported, despite the presence of considerable research on the topic already, because: existing research is contradictory and there are varying perspectives on the impact on the poor of raising rice import tariffs and prices. No previous research using a CGE model in Indonesia had yet looked at second-stage effects of an increase in rice import tariffs; the topic is timely with potentially great impacts on poor people; it was the right size of a question in this technical exercise which could be done in the short time-frame allowed in the pilot; SMERU had identified an international economist who had done some work already on a general equilibrium model of the Indonesia economy from which we could examine the long-term effects of increasing rice tariffs; other existing qualitative data was available on the impact of increased rice prices on various groups of poor people during the recent Asia financial crisis. 14. These factors were felt to be important enough to choose rice tariff policy over other policies that emerged through our discussions. Decentralisation was also raised as a pressing issue by some but the team felt that it was too big a question to examine with such a short period of time available. 1.3 METHODOLOGY AND REPORT STRUCTURE 15. The PSIA methodology recommended that two national consultants (an economist and a sociologist) and two international consultants (an economist and a sociologist) be engaged for 40 days. SMERU fielded two to six staff members for various periods throughout the exercise. The international economist who developed the CGE model could participate for only 10 days. DFID London provided in-house expertise with a sociologist, who was also team leader, and an economist who could add to the modelling work. 16. It was expected that a CGE model would allow an analysis of both first and second round effects of a change in the tariff (ie. on prices, and on rural wages/employment), and their relative magnitudes, to provide an assessment of the net impact of the change on welfare and especially on the poor. Existing data sets from 1995 were used and augmented by further published data sets acquired by SMERU. Indonesia has good data, statistics and research capabilities, unlike many other countries engaged in PSIA. However, data from the 2000 census was net yet available. 17. Where PSIA can make a contribution in a poor policy-making climate is to link existing research and data with a transparent and inclusive process for policy decisions. With the CGE model at the heart of the PSIA, a further qualitative method the policy interests matrix (PIM) was developed to address the poverty impacts of the rice tariff policy issue, focusing on mapping the policy decision-making process and the interests of 6

11 key stakeholders in the process. In contrast to the CGE model, the PIM reveals the underlying politics of policy decision making. 18. Key stakeholder perspectives were gained from interviews and existing documentation, reports and published statements and formed the basis of the policy interests matrix. Civil society contributed their assessments of key actors perspectives on the rice tariff that were included in the policy mapping. There was some recognition of the sensitive of mapping departmental self-interest, which will be discussed later in the report. 19. A workshop was held at the end of the PSIA exercise to provide a forum for discussion of the results of the CGE modelling and the overall analysis of the PSIA outputs, and also to enable others actors with perspectives on rice tariff pricing to participate. This was well attended by academics, and donors but fewer from government and civil society attended than originally had agreed to participate. 20. Since the workshop held in mid-october 2002, no announcement has been made of a rice tariff increase. 21. The report is divided into six chapters: 22. Chapter 2 provides very brief background on the Indonesia rice trade and rice tariffs issues and experience with poverty led policy decision-making. It identifies the economic logic associated with both pro- and anti-tariff increases. It reviews the positions of key actors, both individuals and institutions, on the rice tariff debate. 23. Chapter 3 highlights data on the situation of poverty in Indonesia in the last five years with information focused on the effects of the Asia Financial Crisis on poverty. Some focus is given to consumption issues and the provision of safety nets in the form of cheap rice for poor people. This chapter also provides descriptive experiences of poor people and their agricultural livelihoods as a result of the shocks associated with the financial crisis. This is intended to provide the context for the next chapters which models the potential effects of an increase in rice tariffs on the well being of various categories of people in Indonesia, both rural and urban. 24. Chapter 4 explains the CGE model, its structure and assumptions, and provides the result of the analysis. This chapter is a limited technical discussion, with more detail provided in the appendix. 25. Chapter 5 critically discusses the model and its findings, including variations and limitations of the CGE analysis. This includes comments raised by DFID economists, academics and researchers both in Indonesia, and in Washington, who attended the joint DFID World Bank PSIA workshop in late October Chapter 6 takes the results of the PSIA and puts it into the policy-making context in Indonesia. The results indicate that raising the tariff increases poverty in the majority of income and livelihoods categories, though the effects are small, and some rural groups do benefit. The chapter provides thoughts and comments on how the PSIA results can be used in pro-poor policy making. Some discussion is provided on the PSIA process itself, and thoughts for PSIA s use in the future. 7

12 2 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making 2.1 INDONESIA BACKGROUND: CRISIS AND POLITICAL CHANGE 27. The last five years in Indonesia have been a tumultuous period economically and politically. During mid-1997, Indonesia became engulfed in the regional economic crisis that also affected other South East Asian countries. The Indonesian currency collapsed from near Rp 3,000 per US dollar in the second half of 1997 to Rp 15,000 by mid Inflation skyrocketed 9. In the domestic political crisis that followed, massive riots in May 1998 in the capital Jakarta led to further political instability. With the murders of students in street demonstrations protesting the effects of the economic crisis, Suharto, who had been the president for more than 32 years since 1965, was forced to step down. Democracy is now emerging slowly in Indonesia, with the current president, Megawati Sukarnoputri, the third since the end of the Suharto era in The financial and political crises of 1997 and 1998 led to a contraction of GDP by 13.7% in The social impact of the crisis, particularly in terms of poverty, was immediate and substantial (see also Chapter 3). The pre-crisis poverty rates of almost 11% in the second half of 1997 (according to data from phase 2 of the Indonesian Family Life Survey) increased more than two-fold to 27% by February Although the poverty rate appears to have improved since February 1999, poverty is still higher than at its pre-crisis level. Currently (September 2002) the Indonesian rupiah remains at just under 9,000 to the US dollar, a significant devaluation from 1997 levels of Rp 2,500 to the US dollar Indonesia today is considered to be 'post crisis', but the current levels of international debt remain high at US$150 billion, with debt servicing representing more than 40% of government revenues for several years to come (Tabor 2001). Debt payments have recently been rescheduled. The advice given to Indonesia during the crisis by the IMF has come under considerable criticism in Indonesia and been blamed for ongoing poor economic performance. Though further loans have been negotiated with the World Bank and IMF, the Indonesian government has not taken many of these up. Not considered a Highly Indebted Poor Countries (HIPC) country, Indonesia is not likely to participate in Poverty Reduction Support Credit (PRSC) or Poverty Reduction and Growth Facility (PRGF) mechanisms. Considerable suspicion remains towards international financial institutions. 30. In the current complicated political climate of policy-making with a fragile democracy and lagging reform, as well as endemic graft and corruption, there is a need for policy transparency, with more policy-making built on solid analysis linked to data generation. In this context the PRSP has been undertaken with guidance from the World 9 The food price index, which was 100 in the second half of 1996 increased to 261 in September 1998, with housing, clothing and health price indices increasing to only 156, 225, and 204 respectively. 10 A. Suryahadi and S. Sumarto, The Chronic Poor, the Transient Poor, and the Vulnerable in Indonesia Before and After the Crisis (May 2001) 11 The economic crisis resulted in sharp increases in the number of the poor (see Ch3). In order to overcome the impact of the crisis, the government implemented a Social Safety Net Program (JPS/SSN). This includes a) Health SSN programs, b) Education SSN programs, and C) Cheap Rice Programs (OPK).

13 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making Bank, as a demonstration of good governance, as an act of global citizenship but which is not a requirement of any loan facility. An I-PRSP has just been produced, which will be revised over the next two years before a full PRSP is completed. The high levels of foreign debt, suspicion of international pressure for good governance, and the increasing decentralisation of decision making make it difficult to gain support for poverty reduction led by the PRSP. 2.2 POVERTY REDUCTION AND MACROECONOMIC POLICY-MAKING Early New Order Era 31. The Government of Indonesia began implementing poverty reduction programmes in the 1960s with the beginning of the New Order period of Suharto. During this early period several departments implemented these programmes, including the Department of Home Affairs, through experimental savings and loans projects; the Department of Social Affairs, through projects focused on increasing the welfare of the poor and needy; and the Department of Agriculture through programmes endeavouring to increase the income levels of small farmers. Late New Order Era 32. Beginning in 1994, the government implemented several new and more direct programmes of community-managed social fund mechanisms to fight poverty, including: Presidential Instruction on Disadvantaged Villages (IDT); Disadvantaged Village Infrastructure Development Programme (P3DT); Urban Poverty Reduction Programme (P2KP); Takesra/Kukesra; Small Farmers/Fisherman Income Expansion Project (P4K); Kecamatan (Sub-district) Development Programme (PPK/KDP). Post New Order Era 33. At the beginning of April 2001 during the Abdurrahman Wahid administration, the government formed the Poverty Reduction Coordination Board (Badan Koordinasi Penanggulangan Kemiskinan BKPK), headed by HS Dillon. Institutionally, this board existed under the coordination of the Vice President of the day, Megawati Sukarnoputri. The primary objective of the BKPK was to co-ordinate the poverty reduction programs more effectively and in an integrated manner. To carry out their function, the BKPK undertook four main roles as co-ordinator, catalyst, mediator and facilitator for poverty reduction. 34. In December 2001, through Presidential Decision No.124, 2001, Megawati, after replacing Wahid as president, established the Poverty Reduction Committee (KPK) dissolving the BKPK. The co-ordinating minister for Peoples Welfare and Poverty Alleviation heads the KPK. Articles 4 and 5 of this decree state that the function of the committee is to 'take concrete measures to accelerate the reduction in the number of poor people in all regions of Indonesia. The function of the KPK is to make policy, monitor, and report on poverty alleviation to the president'. The Secretariat of this committee is based in BAPPENAS, with committee chair Jusuf Kalla from the Ministry for Peoples Welfare and Poverty Alleviation. The development of a PRSP was pledged in November 2001 at the Consultative Group on Indonesia (CGI) meetings of donors and government. It is the KPK that is responsible for the production of the PRSP. Commitment to the PRSP at both the political and bureaucratic levels remains elusive. 9

14 Poverty and Social Impact Analysis: Indonesia Rice Tariff 35. Independently of the PRSP, the Government of Indonesia must prepare a plan of action for poverty reduction as part of its basis for accountability under the national planning mechanisms, the Propenas in 2004 and the Repeta exercises in 2003 and This will be an interim strategy, and BAPPENAS is responsible for working out the policy and how it will be operationalised. These difficulties between the I-PRSP's role in leading a poverty strategy and the poverty reduction imperatives from national government led by BAPPENAS highlights the difficulties of harmonising externally led processes and ongoing government imperatives in an unclear and uncertain policy environment marked by slow democratisation of government. 2.3 THE RICE TRADE IN INDONESIA 36. Indonesia is a net importer of rice, though the magnitude of its imports varies from year to year depending on domestic production, international prices and the size of stocks. Over the four years following the crisis of (1998 to 2001 inclusive) rice imports were 9.1% of total consumption of rice (Table 1). Indonesia is the world s largest rice importer, accounting for 18% of the world s total imports between 1998 and 2000 (Table 2). Thailand is the largest exporter, followed by Vietnam and the USA. 37. Prior to the crisis Indonesia s rice imports were monopolised by a public agency, Bulog. Figure 1 shows that except for the periods of the 1973 commodity price boom and the exchange rate crisis, the real price of rice in Indonesia has been relatively stable, but its post-crisis level has been above its level over the previous three decades, even though international rice prices have declined relative to other traded commodities. 38. From this and from Figure 2 it is apparent that the effects of Bulog s market interventions were to stabilise rice prices relative to international prices at a level not significantly different from the trend level of world prices. With the exchange rate volatility of the crisis period, local currency prices of imported rice surged. For a brief period, Indonesian domestic prices remained well below exchange rate adjusted world prices, but from about 2000 onwards they have stabilised at levels 40 50% above import prices. 39. The large difference between the domestic and import price arose from changes in rice import policy that followed the crisis. After Bulog s monopoly on rice imports was abolished in 2000, agency still accounted for around 75% of total imports. Private imports were subject to a specific tariff (rather than an ad valorem tariff) of Rp 430/kg, which in mid-2002 was around 25% of the import price (cif). In addition, private sector rice imports were subject to 'red lane' customs treatment, meaning stricter standards of customs inspection than other food items, and were also subject to special import licensing requirements. 12 The tariff plus these non-tariff barriers apparently account for the increased difference between the border price of imported rice and domestic prices. 40. There is now a proposal before the Parliament to increase the tariff by 75%, from Rp 430/kg to Rp 750/kg, raising the ad valorem equivalent tariff from 25% to about 45%. 12 These requirements are known as NPIK: Nomor Pengonal Impor Khusus. 10

15 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making 2.4 THE DEBATE: RICE TARIFFS 41. This section first discusses the various political and economic arguments used by proponents of both an increase and an abolition of the import tariff on rice in Indonesia. The section that follows offers some empirical evidence that backs up the debate and the third part discusses a methodology that can analyse the welfare effects of the tariff. Arguments for Raising the Rice Tariff: Tariff Theory 42. The arguments for raising the tariff on rice that have been made in the Indonesian debate thus far focus on the political value of self-sufficiency in rice, global trade issues, and the role of rice in income generation for the rural poor. These have been extensively debated in public 13, and are briefly outlined below. Thin World Rice Market / Self-sufficiency in Rice Production 43. Achieving self-sufficiency in rice production has been a long-standing goal of Indonesian agricultural policy. Due to the thin and unstable international rice market (only 4% of rice production is traded), the price of rice can fluctuate and a large buyer can drive up prices rapidly (Indonesia accounted for around 10% of total world rice imports in 1998, the peak of the economic crisis). Unfair Competition / Dumping 44. Governments around the world subsidise and protect their domestic rice industry. An oft-quoted argument for increasing tariffs is to protect domestic producers from the 'dumping' of cheap imports on the world market. To the extent that such price fluctuations have a short-term effect that distorts longer-term resource allocation decisions, proponents of an increased tariff argue that Indonesia should isolate its rice industry from the world market. Improving Incomes of Rural Farmers 45. Advocates of an increase in the tariff stress the importance of rice incomes to the rural economy. The induced increase in domestic rice prices would feed through into better incomes for rural farmers, who are widely perceived to be amongst the poor (NB. 70% of the poor in Indonesia are rural, though rice farmers are not necessarily the poorest group (Ikhsan 2001)). Rice Industry as an Engine of Growth in Rural Areas 46. Following on from the above point, increased returns to rice farming may act as an incentive to increase production of rice in Indonesia, which would be a stimulus to the rural economy through some combination of wage and employment effects, which have not been documented in any quantitative study as yet. An increase in the price of rice would increase the aggregate demand for unskilled labour that would produce some combination of increased employment and increased real wages for landless labourers. Longer-Term Incentives to Improve Rice Productivity 47. A further long-term effect of protecting the rice industry now is that increased price generates incentives to invest and therefore improve rice productivity in the longer term See Ikhsan, 2001, Timmer, 2000, Bappenas, 2001 for more details 14 Bulog has also claimed that protecting the rice industry is good for the environment, because it would keep irrigated land in rice production that might otherwise become idle. Few observers have agreed that the increased pesticide and fertilizer use that would follow, not to mention increased demand for irrigation water, could have environmental benefits. In any case, there seems little possibility that irrigated land not used for rice production would be left idle. 11

16 Poverty and Social Impact Analysis: Indonesia Rice Tariff The 'infant industry' argument is often used in this context. However, Indonesian rice production is amongst the most productive in the world (Robinson et al., 2000). The Optimal Tariff Argument 48. Indonesia is a large importer of rice relative to the world market and therefore the volume of Indonesian imports can affect the world price 15. The gains in national income from imposing a positive tariff are achieved through an improvement in the terms of trade the tariff induces a reduction in the price of imports relative to exports by reducing the quantity of imports. If the elasticity of supply of imports to a country is, then the proportional rate of tariff that maximises national income is 1/. For example, if the elasticity of world supply was 5, the optimal tariff would be 20%. Warr (2002) considers that a reasonable estimate of the long run elasticity of supply of rice imports to Indonesia would be between 7% and 10%, and therefore that tariffs in the neighbourhood of 10 14% would be the largest that could be justified through the optimal tariff argument. Nevertheless, the true value of the long run elasticity of supply of rice imports to Indonesia must be considered uncertain. Arguments Against Higher Rice Tariff 49. Arguments that have been raised in the Indonesian context against raising the tariff are diverse. In terms of welfare, the main concern is that the poor are net consumers of rice and will necessarily be hurt by an increase in price. Some consider the tariff not to be the source of the high domestic rice price and therefore irrelevant to the above arguments. An Increase in the Rice Price Hurts the Poor 50. 'High rice prices have been a large burden on consumers and have been a primary cause of the surge in poverty in recent years. Allowing rice price to fall by Rp 430/kg through elimination of the current rice import tariff would do more for poverty alleviation in Indonesia than all other government programs combined' Poor people are net consumers of rice, and therefore would lose out from an increase in rice. There are more net rice consumers amongst the poor than net producers. Rice consumption is inelastic with respect to price. If the price goes up, poor people tend to protect their rice consumption and consume less of other foods (that may have more nutritional content). Despite a rise in the relative price of rice, rice consumption has steadily increased from million tons in 1990 to million tons in In the Long Term, Rice is a Declining Industry and Tariffs Distort Resource Allocation 52. Economic theory suggests that in the long term, and with no distortions in markets, zero tariffs would be the optimal rate (except possibly in the case of optimal tariff argument). A competitive price is more efficient in terms of both productive efficiency and allocative efficiency. In practice there are many departures from perfect competition, especially in agricultural trade. However, higher tariffs can distort resource allocation away from the sectors in which a country has a comparative advantage. Raising the tariff artificially raises the returns to rice and creates incentives for farmers to produce rice, 15 In economic terms, the marginal cost of Indonesia s imports exceeds the world price 16 Indonesian Food Policy Program, Policy Brief No

17 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making whereas allowing the rice price to be market-determined would create incentives for farmers to diversify into higher-yield export crops. Import Tariff is Not the Most Efficient Way to Protect Rural Farm Incomes 53. Rodrik (1995) argues that a tariff is the most costly way of achieving the objective of protecting an industry. Cheaper policies include subsidising agricultural workers directly or subsidising rural farmers directly through an employment subsidy or a production subsidy. The reason a tariff is often chosen is that it is the only option that increases government revenue. However, it would still be possible to introduce a subsidy, and raise taxes from another, less discriminatory source. This introduces political economy issues, since a tariff on rice can be considered regressive in terms of its effect income distribution when the poor spend disproportionately more of their incomes on it. Farmers May Not Receive the Benefits from the Tariff 54. The domestic rice price is already higher than imported rice price. During this period, the average domestic rice price was Rp 2,511.66/kg while the average imported rice price is Rp 2,337.14/kg KEY PLAYERS IN THE RICE TARIFFS DEBATE AND WHAT THEY SAY 55. The section above provides an overview of the rationale used by proponents of both a higher tariff and a lower tariff. Given the degree of research and data available in Indonesia to justify each perspective, it is useful to try to make sense of these arguments by situating them in the Indonesian policy context. 56. One of the challenges for the PSIA researchers was to link the politics of policy making with the body of evidence collected on the topic of rice pricing and rice tariffs. 57. Decision-making in Indonesia appears to be rooted in politics and bureaucratic economic interests, as our scoping mission found in interviews with key players To link policy perspectives and policy-makers, the various policy narratives of key Indonesian government, academic, non-governmental organisation (NGO) and donor actors in the policy debate were identified and examined. These are presented in the matrix below (Table 2.1). Each key actor cited was considered key because of public pronouncements on the issue of rice tariff increases. Not all, however, have the same degree of influence. 59. The horizontal logic of the matrix presents the policy perspectives of the institutions or individuals, explains how the benefits and constraints of the policy perspective were viewed by the individual or institution and assesses the relative degree of influence of each actor. This was done through analysis of documents, through interviews, through newspapers and through discussions with individual academics and focus group discussions with Jakarta-based civil society (Appendix 2). 17 Thai 25% broken f.o.b plus US$ 20 per ton shipping cost from Bangkok to Jakarta wholesale market, plus rice import tariff of Rp 430 per kg, plus wholesale-retail price margin of 10%. 18 The logic of sound argument which assumes a rational approach with a technical fix based on sound data ignores the actual experience of policy making. Any process of policy change is inherently political. It can include and exclude interests and perspectives of various groups of people including the poor. 13

18 Poverty and Social Impact Analysis: Indonesia Rice Tariff 60. The policy actor narratives can also be grouped together from the vertical logic by columns, on the basis of pro- or anti-tariff, on the basis of the rationale or argument or by key interests. 61. It was agreed by those interviewed that the four key Indonesian institutional actors for policy-making in the rice tariff issue include the Ministry of Economy (low tariff); BAPPENAS (no tariff); Bulog, which advocates a high tariff; and the Ministry of Agriculture, also advocating a high tariff. The coordinating ministry for People s Welfare and Poverty Alleviation has made contradictory statements on the issue. The World Bank is a highly influential non-state actor, though it functions outside direct decision-making. 62. Whose interest do the key actors represent and how much do their interests count? The final chapter, chapter 6 will return to examine this in more detail. 14

19 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making Key Actors Policy Interest Matrix Key players Policy Objective Argument rationale BULOG Explicit high tariff, regulate imports In formal source of finance protect local farmers from import dumping Benefits Constraints Transmission channel stable rice mkt, domestic production Increase rice produce increase farmers (profitability) self sufficiency control of rice economy don't have control of policy smuggling (Shortterm) (Mediumterm) (Longterm) (Shortterm) (Mediumterm) Tariff less binding Creation of black market high pricehigher wages for labour, benefit to farmers Interests Source of income Degree of influence high linked to ruling party fund raising Dept Agric. High tariff Encourage domestic prod of rice Self sufficiency Its their job perform based on Agri prod Higher returns to rice farmers Maintain high income of farmers More rice availability None stated. Unsure if would encourage high wages Political High tariff local rice prod High (less than Bulog) Bappenas/DAI (consult ants No tariff to maintain low rice prices None DAI represents US interests? Java should diversify out of rice low price benefit to poor stable economy food available Efficient resource allocation removes distortion Farmers will plant high yield crop Sustainability of diversity Low price for rice Pro free market, allied with intl community WB High but declining Influence is waning 15

20 Poverty and Social Impact Analysis: Indonesia Rice Tariff Key players Policy Objective Argument rationale Ministry Finance Ministry Economy & Explicit Low prices for rice In formal No No rice tariff will help poor people Benefits Constraints Transmission channel Increase purchase power Flexibility to plant high price crops, less dependent on govt Better resource allocation Farmers will suffer in short term Employment probs (Shortterm) (Mediumterm) (Longterm) (Shortterm) (Mediumterm) Shortage of rice, no self sufficiency Prices wages and Interests Stabilized lower price of basic needs Degree of influence (econ high, fin high but less so) lower than BULOG Min Trade/ Industry No tariff more open trade Lower direct/ indirect costs indust less politics to efficient resource allocation low price ease pressure on wage demands Macro econ benefit No power to enforce Low price for rice industry/ prices, clean govt medium (less than agri) declining Min Peoples Welfare Kalla-low tariff Lubis-high tarrif None low food price for poor low price benefit poor less burden on them! high (more than Bapp) some say no influence on tariff setting 16

21 Indonesia Context: Rice Trade, Rice Tariffs and Poverty-Led Policy Decision-Making Key players Policy Objective Argument rationale Explicit In formal CAP (an NGO) High tariff None protect agri prod increase product vity before indust rialise Benefits Constraints Transmission channel higher rural wage lowers poverty high productivity in agri sector (Shortterm) (Mediumterm) (Longterm) (Shortterm) (Mediumterm) price increase wages rise Interests maybe political ambition? Degree of influence No (has no allies) a. Academ b. Research Low tariff Econ principles high price bad for poor net cons. Low price helps poor Increased consumption Academic based on theory and data medium (some access to minister and media USAID/ WB/IMF/ADB No tariff Trade liberal isation increase welfare high price leads to black market Cheap price Helps poor Stabilize price Market efficiency Better resource allocation not policy makers Like BAPPENAS free trade high (can block) usually informal c. HKTI Producers NGO High tariff Business interest Higher prices protects farmers Benefit farmers Higher productivity not part of govt see Bulog low but vocal 17

22 Poverty and Social Impact Analysis: Indonesia Rice Tariff Key players Policy Objective Argument rationale Governor East Java of Explicit Ban Imports In formal Populist Rent seeking Protect farmer interests Benefits Constraints Transmission channel Greater sales of domestic rice Higher incomes for farmers Expansion of rice production Un enforce able (Shortterm) (Mediumterm) (Longterm) (Shortterm) (Mediumterm) Blockages at ports, customs Interests Election 2004 Degree of influence Access to media and politicians 18

23 3 Poverty in Indonesia This chapter provides data on the situation of poverty in Indonesia in the last five years, and focuses on the effects of the Asia financial crisis on poverty. This is the context for poor people that the proposed rice tariff policy will affect. 3.1 POVERTY DEFINITIONS 63. Indonesia s approaches to poverty have been characterised as welfarist, using a narrow and traditionalist approach linking to income and consumption definitions of poverty. The consumption-based measurement of poverty (defined as the inability of a person to fulfil their minimum basic material needs of consumption) encompasses a poverty line, which identifies the minimum requirements needed to live, including both food and non-food stuffs, which are consumed by each person. Though consumptionbased poverty is useful for identifying the numbers of vulnerable in economic terms, poverty may be defined more broadly to include other dimensions of life in which people may be vulnerable. If we examine poverty incidence from Sen s human capability perspective, which includes not only income dimensions but unmet basic needs in health, housing, education and literacy, clean water and access to infrastructure, the consumption-based indicators of poverty and deprivation only partially capture the magnitude and intensity of poverty in Indonesia. More recently the concept of poverty has included dimensions of future security, and social participation, vulnerability, powerlessness, and voicelessness of the poor. The Consumption / Expenditure approach to Measuring Poverty 64. Beginning in 1976, based on data from the National Socio-Economic Survey (Survey Sosial Economi Nasional Susenas), Statistics Indonesia (Badan Pusat Statistik BPS) has been estimating poverty rates using this approach. The poverty line determined by the BPS is made up of two components: the food poverty line and the non-food poverty line. The food poverty line is based on the minimum food requirements to live healthily, which is determined to be approximately 2,100 calories per person per day. Up until 1990, this minimum value was obtained by directly calculating the value (cost) of 2,100 calories in rupiah. However, the price of the calories used actually referred to the price paid by people whose income was sufficient to purchase 2,100 calories of food per person per day. Beginning in 1993, the food poverty line was determined by calculating the value in rupiah of a basket of commodities (containing 2,100 calories). The basket of food commodities (including 52 types) was chosen based on the amount of calories consumed, the frequency with which a household consumed the calories, and other considerations. 65. For non-food commodities, adequacy is based on a level of expenditure considered to reflect basic non-food needs. Until 1990, 14 types of non-food commodities were included in the calculation of the poverty line for urban areas and 12 types of non-food commodities for rural areas. Beginning in 1993, the composition of the non-food commodities was increased to 46 types without distinguishing between urban and rural areas. The urban rural differences were accounted for by the price differences for each of the commodities used in the calculation.

24 Poverty and Social Impact Analysis: Indonesia Rice Tariff 3.2 HOW MANY ARE POOR 66. Using this method of calculation, Table 3.1 below indicates the developments in the total population categorised as poor in Indonesia between 1981 and In 1981, 40.6 million people were recorded to be poor (26.9%). A number of direct and indirect government development and poverty alleviation programmes carried out after 1981 significantly reduced the total population categorised as poor. The total poor population dropped to 27.2 million (15.1%) in 1990, and 22.5 million (11.3%) in The economic crisis, which began in mid-1997, caused a large proportion of the population s real incomes to experience a drop. The direct impact of this has been a sharp increase in the poor population. Based on data from December 1998, the poor population reached 49.5 million (24.2%), 17.6 million of them residing in urban areas and the remaining 39.1 million in rural areas. 68. In 1999, based on these methods of calculation, the value of the poverty line for Indonesia was Rp 94,507 or US$10.60 (for urban areas), and Rp 74,405 or US$8.40 (for rural areas) 19 per capita per month calculated at the present exchange rate. This level of the poverty line constitutes the total value of food commodities equivalent to 2,100 calories valued at Rp 70,741 (for urban areas), and Rp 58,917 (for rural areas) per capita per month; and non-food commodities valued at Rp 23,766 (for urban areas) and Rp 15,488 (for rural areas) per capita per month. 69. In 2000, the total poor population in Indonesia (excluding the provinces of Aceh and Maluku) was 37.3 million (19.0%), the majority of them residing in rural areas (25.1 million), while the remainder were in urban areas (9.1 million). A large proportion of these were living primarily in Java and Bali (59%), Sumatra (25%), as well as Kalimantan, Nusatenggara, Maluku and Irian (25%). 70. In 2001, preliminary data from the Central Bureau of Statistics indicated that the total poor population in Indonesia (excluding Aceh) was 18.4% (PRSP, 2001). TABLE 3.1 THE POPULATION CLASSIFIED AS POOR IN INDONESIA ( ) Year Total Poor Population (million) Pre-crisis Urban Rural Total Post-crisis Source: Coordinating Team for the Preparatory Stages of Policy Formulation on Poverty Alleviation (2002), Rancangan Kebijakan Interim Strategi Penanggulangan Kemiskinan. The Mean of Real Expenditures Declined from the Crisis 71. Table 3.2 shows the mean of nominal and real expenditures by quintile in February 1996 and February Nominal expenditures show an increasing trend from 1996 to 19 The current exchange rate at present is approximately Rp8.900/USD 20