The 2008  food crisis in Indonesia was  the result of the free-market economic reforms undertaken by the Indonesian government in compliance with the conditionalities imposed by the International Monetary Fund (IMF) for its ‘bailout’ loan in the 1997 Asian financial crisis.

This was written at that year and publsihed in Third World Resurgence #212 (April 2008). The situation persists today. 

IN mid-January 2008, some 10,000 tofu and tempeh (fermented soybean cake) producers and vendors rallied at the State Palace, Jakarta, demanding the government lower soybean prices and discontinue the free trade policy that allows private companies to control prices. This was followed by a three-day strike by thousands of tofu and tempeh producers and vendors in Greater Jakarta to protest the rocketing price of soybeans (1) Tofu and tempeh are a cheap source of proteins for many poor and middle-class families in Indonesia, particularly in Java. When the price of soybean increases, it means the poor cannot afford tofu and tempeh, and the small producers will have to sell at a loss or close shop.

The price crisis of another household staple, cooking oil, is marked by a striking irony. While the country is the largest producer of palm oil (together with Malaysia), Indonesians saw the illogical price hike of cooking oil from Rp. 6,000 (about US 60 cents) to Rp. 16,000 (US$1.60) per kg in late 2007 (2). The strange thing was that the price of cooking oil without trademarks (3) in traditional markets increased more than the price of those sold with trademarks in supermarkets and hypermarkets.

The price hike in soybean and cooking oil was followed by increases in the price of other foodstuff, particularly meat and processed products. Like in many other developing countries, the price hike is due to a combination of factors, mainly neglect of food security policy at the national level, the dismantling of safety nets through elimination of food price control or food subsidy for the poor, and trade liberalisation leading to domestic prices being influenced by import and export prices.

This article discusses only the relationship between trade liberalisation and dismantling of the price control system and the looming food crisis in Indonesia, taking the example of rice, the staple food of most Indonesians. The price hike in soybean and cooking oil, which is also linked to the trade liberalisation policy, is examined as well.

Throwing the baby with the bath water

For many years, during the Suharto era, rice was not an object of the free market. In addition to providing subsidies for fertilisers, seeds and irrigation, the government provided subsidies for buying rice from the farmers at a certain floor price and maintaining a low rice (ceiling) price in the market that was affordable particularly to the urban poor. Although this was done mainly to maintain its political power, the government had been able to somewhat stabilise rice prices over many years.

In 1967, the government formed the Logistics Agency (known as Bulog) at the national level, with the Logistics Warehouse (Dolog) at the provincial level. The function of Bulog was to stabilise the price and supply of food, particularly rice. But eventually it also played a role in stabilising prices and ensuring the availability of other foodstuff such as sugar, wheat flour, soybean, animal feed, cooking oil, eggs and meat, even spices. This function was carried out in an ad hoc manner whenever there was price escalation (4).

Until the mid-1990s, Bulog defended a floor price and a ceiling price for rice through a combination of four policy instruments: (1) monopoly control over international trade in rice; (2) access to an unlimited line of credit (at heavily subsidised interest rates in the early years and at commercial rates with a central bank guarantee in later years); (3) procurement of as much rice as necessary by Dolog to lift the price in rural markets to the policy-determined floor price; and (4) extensive logistical facilities, including a nationwide complex of warehouses, which permitted seasonal storage of substantial quantities of rice.

These rice stocks, accumulated through domestic procurement in defence of the floor price and, when these supplies were inadequate, through imports, were then used to defend a ceiling price in urban markets. In the early years, the ceiling price was explicit and announced publicly; subsequently, a more informal system was adopted, providing local Dolog officials more flexibility in maintaining stability of rice prices. In essence, Bulog was tasked with creating price stability, distributing rice to remote areas and certain segments of the population, and managing the stockpile. If the price of rice fell in a certain area, Dolog would immediately buy the commodity at the floor price. If the rice price increased in the market, Bulog would release its stock to stabilise prices (5).

Despite heavy government intervention in the formation of rice prices, virtually none of Indonesia’s developed-country trading partners protested against this, and multilateral agencies such as the World Bank also did not raise objections. If anything, this intervention, together with agricultural subsidies, was hailed as reflecting a ‘pro-poor’ policy that could lift many communities, especially in the rural areas, out of poverty and provide access to food. But even at that time it was common knowledge that Bulog had become a political machine for the ruling party and ‘the goose that laid the golden egg’ in terms of money sources for the elite. Corruption and collusion were rampant but came into light only in later years. Despite these fundamental weaknesses, Bulog did play its role in ensuring access to rice for the population.

But in 1998, in the wake of the 1997 economic crisis, state intervention in rice production and distribution was no longer considered a ‘pro-poor policy’. As part of its crisis ‘bail-out’ loan, the International Monetary Fund (IMF) imposed many conditionalities including in matters that were related to food security. Some of these conditionalities were: elimination and/or reduction in subsidies, reducing import tariffs on staple commodities, particularly rice, and substantially reducing the role of the government in food trading by transforming Bulog from a non-department government agency into a state-owned company and curtailing its market intervention role.

Next, the IMF asked the government to reduce the rice import tariff to 5%, which essentially brought the rice trading system into the free market. Although, due to protests and criticisms, the tariff was raised to 30% by 2000 (6), the damage had already been done, since the low tariff was combined with elimination of the government’s monopoly over rice imports. Since September 1998, private companies can import rice and trade in the market along the same lines as Bulog. Within four months the private sector had imported 1.3 million tons, while Bulog had previously imported 5.78 million tons due to the long drought and economic crisis of 1997, to secure the rice reserve. Thus there were 7.1 million tons of rice in 1998, although the rice shortage was only 3.2 million tons. Since then the private sector had imported more rice than Bulog, flooding the market and drastically decreasing the price.

In 1999, the private sector accounted for 64% of the total rice imports, creating excessive supply and decreasing the price further. The price of rice in the international market was US$150 per metric ton. With an exchange rate of Rp. 10,000 per US$ and an import tariff of Rp. 430 per kg, the wholesaler price of imported rice was Rp. 1,930 per kg or 20% below the price at which Bulog bought rice from the farmers (7). At first glance this might have benefited the poor, but a substantial part of the poor are farmers; decreasing rice prices also hurt them. Since the Green Revolution era, most rice farmers have sold their harvest to the market via government-established village cooperatives, and thus have to buy rice at the market for their own food needs. This means that if they get a lower price for their harvest, they are less able to afford rice from the market.

Unlike in the past, Bulog cannot buy up farmers’ rice at floor price with unlimited credit. Bulog now buys unhusked rice, which is more appropriate to raise the price of grains. But it has been provided with a limited budget by the state, and has to obtain credit at commercial rates. Thus Bulog cannot buy unhusked rice at a subsidised price; neither can it stabilise the market price. Now its roles are to formulate a policy in determining the price at which the government buys farmers’ harvest, and to manage stockpiles for emergency situations. It can no longer maintain price control. Bulog will soon become a commercial enterprise with social functions, a situation that may create further confusion.

To sum up, by January 2000, the rice market had been fully liberalised. Anyone and everyone can import rice at 30% specific import duty (8). This has created some problems. First, rice distribution by the private sector increased to about 90% of the national needs, while Dolog and Bulog supplied only 10% of rice by the year 2000. Secondly, the rice market becomes unpredictable and prey to speculators. Sometimes the rice price can be raised arbitrarily by traders in the market, such as the situation during December 2006 when the highest price was Rp. 8,000 per kg (9), the highest since the 1997 crisis. Bulog no longer has the authority to set the floor retail price of rice (10).

This leaves the government with two options. First is to import rice in order to increase supply and thus reduce the price. However, rice imports hurt poor rice farmers who would not get enough money for their harvest and thus would not have enough money to buy food. The second option is to procure rice domestically. But, because the floor price offered by Bulog is lower than that offered by middlemen in the field, farmers prefer not to sell their rice harvest to Bulog. As a result, Bulog has problems buying domestic rice to create a sufficient stockpile for price stabilisation in the market as well as a reserve supply for emergency situations such as harvest failure, disasters and during festivals when rice demand increases at the national level (11).

The results have been clear: dependence on food imports, farmers having to compete with a surge of cheap imports without any transition period or any safeguard, and fluctuating prices of food in the market, especially rice.

What is disturbing is the lack of a protection mechanism for small farmers, a mechanism that even developed countries have put in place. Even the European Union conducts market price intervention in 72% of its agricultural products, while the US implements a minimum price for farmers, and intervenes when prices fall below the targeted minimum price (12). Indeed, these were the roles played by Bulog in the past. Granted, there was corruption and unfair practices. But one should not ‘throw the baby with the bath water’; the bad practices must be eliminated without eliminating the important roles of Bulog. Likewise, Bulog could not intervene much when the prices of soybean and cooking oil escalated drastically.

Import or export?

The soybean problem is due to excessive dependence on imports, while the cooking oil issue is due to lack of government control over exports. But both have to do with market liberalisation and inappropriate domestic policy.

For decades, the government has focused on rice, at the expense of other crops such as soybean and corn. Soybean farmers often lost money because they are not accorded as much protection as the rice farmers. The area planted to soybean decreased from 1,665,706 hectares in 1992 to only 456,824 hectares in 2007. The demand for soybean is 1.8 million tons a year, but Indonesia produces only about 600,000 tons; thus, more than 60% of its soybean needs are met by imports, mostly from the US (13).

One of the reasons for farmers’ reluctance to plant soybean is that they cannot compete with the artificially lower price of imported soybeans, particularly from the US. The price of soybean in the world market is distorted by subsidies. In the US, soybean is one of the 20 commodities that are protected and subsidised. About 70-80% of the US$24.3 billion US subsidy goes to these 20 commodities. Indeed, soybean dumping rose from 2% to 13% after the 1996 Farm Bill. In addition, the US export credit in 2001 was US$750 million, some of which was also extended to Indonesian soybean importers. At that time imported soybean cost only Rp.1,950 per kg compared to domestic soybean at Rp. 2,500 per kg. An import duty of 5-10% could not protect farmers from the artificially cheap soybean imports. So farmers simply did not want to plant soybean, except perhaps, for local use.

Today, as part of the soybean output in the US is used for producing biofuel, prices have skyrocketed, from about Rp. 3,300 per kg in January 2007 to about Rp. 7,500 in January 2008. Slashing the import duty to 0% also does not help. Indonesia is still reeling from the high price of soybean in the world market, without being able to provide a safety net. Any policy to boost production will need some time to take effect. But one thing remains clear: liberalisation has created price destabilisation, as some officials at the ministry of agriculture are now admitting. To attract farmers to plant soybean, the government cannot take a ‘hands off’ approach and let the market be flooded by cheap imports.

Vulnerability in cooking oil comes from another angle – the desire to export, rather than dependency on imports. The increasing demand for biofuels as a quick fix for reducing carbon emissions and as a response to the rising price of oil, has created a higher demand for palm oil as fuel. This is the reason why cooking oil has suddenly deserted the domestic market, forcing consumers, in the country where it is produced, to pay skyrocketing prices. In 2007, production of crude palm oil (CPO) was 17 million tons, while domestic demand was only about 4.5 million tons, thus the remainder was exported (14). Seen in the light of these figures, the price hike appears illogical, creating a situation that is somewhat similar to the root causes of famine in Bengal in 1943 as explained by Nobel laureate Amartya Sen.

The combination of price hikes in soybean and cooking oil can be devastating for many Indonesian poor and middle-class families. For example, there are many vendors selling fried tofu, tempeh, banana and other fried snacks at the roadside. These snacks are relatively affordable to many people. If the vendors increase their prices because of the double price hike, buyers become reluctant to buy. If they do not increase their prices or increase only slightly without reflecting the real cost of production, they lose money. In the end, neither the food vendors nor the consumers know what to do. Sometimes the vendors prefer not to sell snacks rather than lose money, or they reduce the size of the snacks sold.

Meanwhile, the cooking oil price hike benefits the already rich tycoons such as Aburizal Bakrie (minister of social affairs), who owns the palm oil company PT Bakrie Sumatra Plantations Tbk. (BSP) and is one of the richest men in Indonesia, worth US$5.4 billion. Another on the rich list who deals in palm oil production and sale is Sukanto Tanoto, who is worth US$4.7 billion. For them and other exporters, selling cooking oil overseas spell more profit than selling at the domestic level. And since the implementation of the conditionalities under the IMF loan in 1997/1998, the government has been left with little or no power to regulate prices and exports and stabilise food supply.

As a result, the solutions taken are ad hoc in nature. For cooking oil, the government designed three policy instruments: increase the export duty, provide subsidised cooking oil, and eliminate taxes on cooking oil. The last measure needs the approval of the parliament. The first two measures have not proven to be effective.

The government decided to determine export tax for CPO and its derivatives progressively based on the fluctuating prices at the Rotterdam stock market, with a maximum of up to 40%. This has not discouraged exports, however, as the international prices remain high. There is also a vicious cycle at work: if export taxes are raised, because Indonesia is a key player in CPO, the international prices will keep rising, and thus the domestic prices would have to be adjusted to be high, or producers will refuse to supply the domestic market. In addition, due to weak law enforcement, CPO could be smuggled overseas, in which case the government loses revenue from the taxes.

The market operation measures, i.e. supplying the traditional markets with subsidised cooking oil at lower prices, can also backfire. The case of RASKIN (rice for the poor) has shown that often the poorest cannot access this facility; manipulation is rampant, with people buying in bulk and then reselling the commodity, and then there are other complications such as late distribution, low quality, etc.

The Indonesian case is rich with irony. A country with abundant natural resources should not have faced food insecurity. Domestic mismanagement of agriculture policy and international pressures to liberalise trade in food have had a tremendous adverse impact on food security. Besides increase in productivity of farm produce, Indonesia needs to formulate policies that would ensure a safety net for farmers and poor people in accessing food. Otherwise, it may be a case of hunger amidst plenty, or chickens dying in the rice barn, as the Indonesian saying goes.

Hira Jhamtani is a Third World Network Associate based in Bali, Indonesia.

Endnotes

1 Jakarta Post, 15 January 2008, ‘Tofu, tempeh disappear from dishes’.  

2 ‘Harga Minyak Goreng Meroket: Rakyat Menderita, Pengusaha Semakin Kaya.’

http://www.wartaekonomi.com/detail.asp?aid=10105&cid=24, 26 March 2008.

3 Unlabelled cooking oil (also rice, wheat flour) is sold in traditional markets where people can buy a small amount, say a quarter of a litre, and the price is generally lower compared to packed cooking oil bearing a company’s trademark sold in shops and supermarkets. However, this time the price of unlabelled cooking oil was almost the same and sometimes illogically higher than the price of packed cooking oil.

4 Saifullah, A., 2001, ‘Peran Bulog Dalam Kebijakan Perberasan Nasional’ [online]. Available from: http://www.bulog.co.id/kajian%20Ilmiah/aPapBulBer.pdf

5 Timmer, P., 2004, ‘Food Security in Indonesia: Current Challenges and the Long-Run Outlook’, Center for Global Development, Working Paper Number 48, November 2004; and Krishnamurthi, B., 2006, ‘Fakta dan kebijakan perberasan’, discussion paper in the WTO Forum mailing list, 20 January 2006.

6 Some experts say the rice import tariff should be 61-76%, others say 90%, to protect domestic rice production and small farmers (Wahono, F., 2001, ‘Kondisi Ketahanan Pangan di Indonesia’, paper presented at Lokakarya Ketahanan Pangan Nasional. Organised by Yayasan Lembaga Konsumen Indonesia (YLKI) with Consumers International Regional Office for Asia and the Pacific (CIROAP). Jakarta, 28-29 August 2001.). There is extensive debate on whether to protect small farmers or to ensure the poor can afford rice. But the fact remains: small farmers are also poor people who buy rice. Clearly a more balanced development approach is needed rather than extensive debate on import quotas and tariffs, because ensuring an affordable price has more to do with productivity, terms of trade for farmers and a whole range of development issues.

7 Surono, S., 2001, ‘Dampak kebijakan pasar bebas terhadap kesejahteraan petani’, paper presented at Workshop on Sustainable Agriculture, 9-11 November 2001, Yogyakarta.

8 A new trade ministry regulation on rice import and export set in April 2008 stipulates that the import of rice for price stabilisation, emergency situations, poor communities and to tackle food supply vulnerability may only be undertaken by Bulog. How this new regulation will play out and what its impacts on the poor will be remain to be seen.

9 Media Indonesia, ‘Harga Beras yang tidak Terkendali’, Editorial, 13 December 2006. Available from: http://www.mediaindonesia.com/editorial.asp?id=20061213184923XX

10 Kompas [online], ‘Benahi manajemen beras’, 14 December 2006. Available from:

http://www.kompas.com/kompas- cetak/0612/14/UTAMA/3170882.htm

11 Surono, 2001.

12 Surono, 2001.

13 Bustanul, A., 2008, ‘Krisis kedelai, potret kebijakan pangan yang buruk’, Bisnis Indonesia, 21 January 2008; and Khudori, K., 2008, ‘Gonjang-ganjing Republik Tempe’, Kompas, 18 January 2008.

14 Information on palm oil taken from ‘Penyelundupan CPO, Naikkan harga minyak goreng’, www.berpolitik.com, 14 March 2008; and ‘BI: Inflasi Agustus 0,49%, Hapuskan PPN untuk tekan harga minyak goreng’, Investor Daily, 3 September 2007.