Thursday, April 20, 2006

The Politics of Sugar 1

This can go on and on and on. Now is sugar time.

Kompas reports the government has set a new "support price" for sugar. Read here (in Bahasa).

What is "support price"? It's just another form of protection given by the government to, well, support the price of a product. The idea is to "ensure that farmers receive a reasonable, fair price" -- just like Minister Pangestu claimed.

As the name suggests, support price is supposed to keep the price not to fall below a certain level. (Clearly for the benefits of producers and at the consumers' expense).

What happens if domestic production of a good increases? Well, naturally the price should go down. But the government and the producer don't like that. Hence the support price. What happens if domestic production stays constant or even decreases? Obviously, you don't need a support price. Or you can have one, but it will be useless, or ineffective.

But, surely an effective support price is an incentive for foreign production to enter the domestic market through import. How to "protect the domestic producers"? Impose import quota, or stronger yet, just impose a total ban on import.

Now the best part. What if the government sets a support price which is ineffective? "It's politics, stupid".

After all, the whole idea is to protect the sugar farmers (again, as the Minister claims). Now, the world market price is Rp 6,200 per kg, while the domestic support price Rp 4,800. If you really want to do farmers a favor, why not letting them enjoy that higher world price? But the government says, the buyers out there are ... evil (an evil who offers higher price?). Let's get back to this evil buyer issue later...

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