The Politics of Rice 13

The Jakarta Post's editorial today. It is sensible. While I can't agree more that "[a]rguing that the [rice] import would hurt Indonesian farners is an insult to common sense", there are some points I don't agree with completely. First, that the government requires import at the situation where the quantity of rice falls below 1m tons and the price rises above Rp 3,500. I think when that happens, foreign rice will automatically come in; provided that everybody is free to import. Second, and this always troubles me, the claim that rice is a "strategic and vital" commodity, so that the government should always have some buffer stock. If market can handle that, why bother the stocking?

Barking up the wrong tree (©The Jakarta Post, Jan 24, 2006)

The House of Representatives, already facing a very tight legislative agenda, will simply be wasting its resources if it pushes ahead with its demand to exercise its right of inquiry and investigation into the government's decision to import 110,000 metric tons of rice.

Arguing that the import would hurt Indonesian farmers is an insult to common sense. How could the import, which accounts for a mere 0.003 percent of national consumption, disrupt domestic market prices? Therefore, we cannot help but smell a hidden political subterfuge behind the stubborn opposition to the rice import.

It is indeed the right and duty of the House to oversee government policy. However, in so far as the rice import is concerned the dogged opposition by the majority of the House members is utterly irrational, an insensible subterfuge that would only stupefy the general public.

It would be much better for the House, if it is really concerned about the farmers' income, to scrutinize the implementation of the integrated program to revitalize the agriculture sector, which the government launched last year. There is also an even more important legislative agenda of almost 30 bills that have to be completed by the House during the current session period, which will end in March.

The rationale of the rice import is quite obvious. The government has explained that it would be required if the State Logistics Agency's (Bulog) stocks fall below one million tons and domestic prices rise above the Rp 3,500 (US$0.30) ceiling retail price per kilogram. The government also has assured that imported rice will not be released to the domestic market unless local prices rise far in excess of the ceiling. It would then be in the best interests of the farmers if the House helps the government to install a control mechanism to ensure that the imported rice achieves its objective.

It is strategic and even vital for both political and economic stability that as the world's fourth most populous country with more than 230 million people, the government should always have a buffer stock of at least one million tons to meet urgent needs in emergency situations such as natural disasters or crop failures. It is also worth emphasizing that most rural households are net consumers of rice, and steep rises in rice prices could trigger a social and political crisis because food usually accounts for the bulk of the spending of poor families and weighs heavily in the consumer price index.

It is also a fact, despite the government campaign over the past three decades to diversify the national staple, that food security still means the availability of rice, the main staple, at affordable prices.

The government has not changed its rice policy. It remains the same -- controlling rice prices within a periodically reviewed range of floor and ceiling prices to ensure fairness for both consumers and producers and totally banning rice import to protect the farmers from unfair import competition.

Hence, the import is not a permanent policy, but only a contingency measure, aimed at preempting any shortage before the start of the next harvest in February. Starting preparations for imports only after a major shortage takes place would be calamitous because what may start as an isolated shortage could soon escalate into a crisis as speculators join the fray.

Building the stocks from the domestic market now when most rice farmers have sold their surplus output would benefit only traders. Procuring such a big volume in one transaction within such a short period of time also could disrupt the market and trigger excessive price rises.

The government, nevertheless, should also be blamed for the unnecessary furor over the rice import. It does not seem to have taken a lesson from the controversy over the fuel price increases last March and October.

The rice import, like fuel price hikes, is quite rational, making a lot of economic and political sense and is for the good of the people. However, both measures will always be politically controversial if the public opinion environment is not conducive.

The government cannot simply launch a policy and sit back and relax, hoping that all things will run smoothly. The government should still go all out to sell its policies to the public.

However, the policy cannot be sold in a vacuum, meaning that the environment should be made favorable to the policy. The government needs to change Bulog's notorious reputation. The logistics agency has been known as a corruption-infested institution, a cash cow for rent-seekers and vested interest groups, who profited the most from the trading of such controlled commodities as fuel, rice and sugar.

A high degree of transparency early on regarding the real condition of the national rice stock, the process of imports, which parties are involved and how the imported rice will be controlled could have helped precondition the public opinion climate for the contingency measure.

The Politics of Rice 12

Once again, my position with regards to the rice furor is: 1) Rice import is good, 2) Giving an exclusive right to Bulog is not good. It seems to me that people think that the fact that I support rice import automatically means I also support the role of Bulog. No. In fact, whenever the right to import is given only to one entity, my suspicion arises. The effect of such practice on the economy is just similar to the effect of quota. And it's bad.

Readers should not, however, confuse between rice import issue and Bulog's role issue. They are two different things, to be addressed separately, even though the policy implication would be heavily related. I have raised both issues simultaneously many times to avoid misunderstanding that my supporting rice import meaning I am supporting the import mechanism as it is now. Which is fallacious.

The press have quoted me in the way that might lead such misunderstanding about my position. Read here or here, for example. In the latter, they misinterpreted my table. I presented a simple calculation to show that Bulog's claim that they can stabilize rice price is not well founded. I compared two periods, namely the period when Bulog was given the sole right to import rice, and the period when the rice market was liberalized. The coefficient of variation of rice retail prices in Indonesian regions were all higher in the first period than in the latter. Meaning, under Bulog's authority, prices were more unstable. So, the claim was false.

Today, The Jakarta Post has an opinion written by Peter Milne. As I'm writing this, the online version isn't available yet. Milne argues, correctly, that importing rice is pro-poor. Please find and read it.

2006 Outlook

We just released our 2006 outlook yesterday. Here's a press coverage by Bisnis Indonesia (non-permanent link). Keypoints:

1. The economy is to slow down up to the 1st half of 2006, then rebound in the third quarter.
2. The government should focus on effective fiscal policy (especially in the first two quarters), while maintaining tight monetary policy.
3. The effectiveness of government bureaucary is still an obstacle in promoting better investment climate.
4. Reducing high cost economy, ensuring labor market flexibility, and improving the effectiveness of decentralization are keys.
5. Further liberalization is needed to foster growth.

The Politics of Rice 11

Finally, a newspaper editorial on the rice furor that makes sense (Over at the Cafe Salemba, Ape has pointed out the other sensible editorial, also by the same newspaper). The Jakarta Post has another good editorial today about what it calls, "The Politics of Rice" -- sounds familiar? (The problem with the Jakarta Post's web version, it doesn't provide permanent links, so don't be surprised if you click the link tomorrow and you are brought to another piece of article. To avoid you missing this important piece, I copy paste it in its entirety below -- I hope JP doesn't mind).

The politics of rice (© The Jakarta Post, Jan 12, 2006)

The current furor over rice imports flared up when late last year the trade minister gave clearance to the State Logistics Agency (Bulog) to import over 70,000 tons of rice to supplement its buffer stock. The agriculture minister protested, saying the country's stocks were sufficient, and that importing rice would depress domestic prices, penalizing rice growers, most of whom are subsistence farmers.

After several meetings, the agriculture minister backed down and agreed the country needed to import rice to fortify Bulog's stocks. Earlier this week, the government announced it would allow Bulog to import another 110,000 tons of rice from Vietnam through the end of January.

From this, it may be safe to assume the country does need additional rice supplies to keep prices from rising out of control. Higher rice prices are bad for inflation, as rice plays a major role in the calculation of the consumer price index. At the same time, there are people who are making huge profits importing the rice. Well, that's the politics of rice.

It is necessary to take a more rational look at the issue of rice imports. Seen from the interests of the nation, i.e. keeping rice available and affordable for most people, importing rice is not bad, and is also a way to contain inflation.

But we need to take a look at the bigger picture of the role rice plays in Indonesia. As the most important staple food for a large portion of the population, rice is not just another commodity. It is both a market and a political commodity, and any government that failed to ensure the availability of rice at affordable prices would face serious problems.

But just how far should the government go in controlling the rice trade, and who should the government favor in its rice policy -- the growers or the consumers?

By keeping rice prices low, the government sides more with consumers than growers, while at the same time keeping inflation in check. By allowing prices to go up, the government helps farmers and penalizes consumers.

So a balance must be reached. But even such a balance would not be a true balance, as one group would benefit over the other. The easiest and least politically risky decision would be to keep rice prices low. It is rarely beneficial for a politician to favor the interests of rice farmers, who are largely uninterested in politics. Which is why most politicians would rather come down on the side of consumers, especially urban residents who want low rice prices, are politically active and make campaign contributions.

Keeping rice prices low also benefits farmers, who normally become consumers between harvests. So, consumers outnumber growers, making siding with consumers more morally defensible.

Given all of this, the best rice policy would be to keep prices affordable to most people, while importing rice is the best remedy when domestic prices begin to creep up. Imports should also serve as a way to improve the efficiency of our rice growers, so they can eventually become more competitive.

As long as the domestic market remains protected, importing rice will remain attractive for anyone eager to make a big profit. Putting domestic prices on a par with prices in the international market should be the ultimate objective for the country, which would protect farmers from rice imports.

Rice imports are not a problem, but a solution. The problem lies in the process of importing rice. When done by cronies of government officials and Bulog executives, through dubious tenders, the people have a right to raise questions. The government must make the process more transparent. Then no one will raise questions, and the people will have all the affordable rice they can eat.

I hope to see many of this.

The Politics of Rice 10

Kompas reports today, a House member from PAN says that the recent rise of rice price is due to increase in production costs, not to a decrease in supply. The other factor, he adds, is the supply holding by rice speculators to take advantage of price differentials. This is a partial, incomplete way of looking at the problem. Cost of production, supply, and arbitrage are not unrelated. When costs increase, the price would respond upward (or else, the profit margin will be pressed down). And there would be a slowing down in the supply growth, until the adjustment is complete. In the meantime, some economic agents will do arbitrage until the price differential vanishes (taking into account any distortion).

But there's another disturbing statement in the same article. Some analysts say that the recent rice import approval by the government is just a way to get political support from ... urban middle class! I'm no political scientist but isn't it stupid to try getting support from minority, not majority when you want to keep your political position? In fact, if vote getting is of concern, then this person might be more likely to win the majority. And somehow that explains... Or not?

The Politics of Rice 9

Minister of Agriculture, HKTI chairpersons, House members, politicians, rentseekers, sorry activists, flipflop economists, misled journalists should read this.

Then why don't you tell the "tukang becak"s (rickshaw drivers) and "buruh angkut"s (those who help carry heavy stuff for a small payment -- what's the English?): "Sorry, guys, we don't care about you all. We only want to protect "farmers". You're not in the equation. Rice price should be high".

SHAME ON YOU. (I shouldn't be that impolite)

The Politics of Rice 8

The government has decided to lift import ban as reported in Kompas today, as the main headline. Good. The next good thing would be to let importation be done by anybody who wants. Or, create another institution to compete with Bulog. And another, and another, and another.

Meanwhile, opposition keeps arising. To which, I would address the following:

Some say the government does not stand for farmers' interest. They want the price high so as to protect farmers' income. I have stated so many times that the farmers they want to protect are actually net consumers, not producers, who will be happy with lower price. But, even if I was wrong; that is, if all farmers -- and most importantly, the majority, or the poorest of the poor -- are net producers, I would like to ask this question to the opponents of rice import: Suppose the rice price increases (as they like), do they not think that would also trigger increase in other prices? Most Indonesians eat rice. Higher price means higher spending. Marginal consumers will cut on other spending, and marginal consumers who produce will pass the burden on to other consumers through increase in the price of whatever they produce. And it will snowball. This is what the opponents of rice import fail to see (or choose not to see). They think rice lives in its own and has nothing to do with other prices that would impact on them.

The Politics of Rice 7

I'm tired of doing this. But I have to, 'cause too many people are misled by politicians and rent-seekers. (This one is not cross-posted at Cafe Salemba anymore -- I don't want to spoil the party there with too much of my "political" view).

Read this article from Kompas. Also, this editorial and this opinion in the same newspaper. Among all, it is reported that:

• Farmers refuse to sell rice to Bulog, "not due to shortage, but the price is not good".
• Even though the price is high, West Jave governor refuses importation.
• South Sumatra governor says, the price in his region is abnormally high, because the region is a surplus area (I hear you laughing).

Other newspapers have the same non-sensical accounts (not to mention confusing statements from the government, especially Minister of Agriculture).

Honestly, I never thought that lack of understanding of the role of price can have this big of impact on the way people think.

It's obvious. If you are free to import, do you want to do that for a loss? If you are about to sell, do you want lower price? If you are buyer, do you like higher price? You say, this is political. Nothing is political about the nature of price -- it's common sense.

It's also obvious. The government created Bulog to "help" the farmers. The farmers don't want to sell to Bulog. This is just another way of saying that Bulog is useless. Dissolve it.

Deflation?

Unofficially I was told, December inflation is negative. Let's see tomorrow in the newspapers. My hunch is, the media won't make a big deal out of this, the way they did when two months ago inflation soared, due to the BBM price hike.

"Stagflation" worriers, what's up?