Saturday, November 26, 2005

The Politics of Rice 4

[This is a cross-posting to Cafe Salemba]

I've been meaning to bring up this issue of rice import in the Cafe, as I did here, here, and here. I'm for removing the rice import ban. But I am against the idea that the government should give an import monopoly rights to Bulog. That's even worse. When we allow importation, why should we allow it only for one single institution? I'll talk more on import monopoly rights next time. Now, I want to elaborate more on the first issue, import ban.

My supporting on import ban removal is based on the fact that majority of Indonesian peasants are net consumers. Therefore the arguments of keeping price high in order to protect peasants (or the poorest farmers) break down.

A moment of reflection, however, might undermine my claim. I failed to consider the employment effect of high rice price. That is, my argument only looked at the consumer price faced by both net producers and net consumers, not their incomes. High price, however, is an incentive for land holders to expand production. As production expands, the demand for landless laborers increases. This would increase employment and real wages of peasants. Therefore, any argument for or against rice import should look at both price effect and income effect.

Fortunately, Peter Warr of Australian National University has recently studied this issue. In his paper, he rightly uses a general equilibrium framework that involves 1,000 individual households. He factors in the distributional effects of rice import restrictions both on households' expenditures and their incomes. He even considers the effect of price increase on the demand for other staple foods, such as corn and wheat flour.

The Warr conclusion is interesting:
[T]he [Indonesia's] rice import ban raises poverty incidence by a little less than one per cent of the population. Poverty rises in both rural and urban areas. Among farmers, only the richest gain.
It is not possible to justify the import ban by claiming that it reduces poverty.
That said, I keep my position: remove rice import ban.

No comments: