WORKING PAPER 99.13
UNDERSTANDING THE 1998 FOOD CRISIS: SUPPLY,
DEMAND OR POLICY FAILURE?
Steve R. Tabor, H.S. Dillon and M. Husein Sawit
March 1999
A joint research project on
Linkages Between Indonesia’s Agricultural Production, Trade and the Environment
funded by the Australian Centre for International Agricultural Research,
between
CASER (Bogor) • CIES (Adelaide) • CSIS (Jakarta) • RSPAS (ANU, Canberra)
Lead institution: CIES • University of Adelaide • Adelaide • SA 5005 • Australia
Telephone (61 8) 8303 4712 • Facsimile (61 8) 8223 1460 • email: cies@economics.adelaide.edu.au
Homepage: http://www.adelaide.edu.au/cies/
CASER/CSIS/CIES/ANU
joint research project on
Policy analysis of linkages
between Indonesia's agricultural
production, trade and
environment
Rapid economic growth in Indonesia has been accompanied by significant structural
changes, including for its agricultural sector and its unique natural environment. Recently questions
have been raised about the impact of Indonesia’s agricultural, industrial, trade and environmental
policies on sustainable rural development. The nature of interactions between the economic activities of
different sectors and the environment are such that an intersectoral, system-wide perspective is essential
for assessing them. An international perspective also is needed to assess the impact on Indonesia of
major shocks abroad, such as the implementation of the Uruguay Round agreements, APEC initiatives,
or reforms in former centrally planned economies. There is increasing pressure on supporters of liberal
trade to demonstrate that trade reforms at home or abroad affecting countries such as Indonesia will not
add to global environmental problems (e.g., deforestation, reduced biodiversity). Again, this requires
system-wide quantitative models of the economy and ecology, because typically there are both positive
and negative effects at work, so the sign of the net effects ultimately has to be determined empirically.
To begin to address these issues, the Australian Centre for International Agricultural Research
(ACIAR) has generously provided funds for a collaborative 3-year project (to mid-1999) involving the
University of Adelaide’s Centre for International Economic Studies (CIES) as the lead institution,
Bogor’s Centre for Agro-Socioeconomic Research (CASER) which is affiliated with the Ministry of
Agriculture, Jakarta’s independent Centre for Strategic and International Studies (CSIS), and the
Economics Division of the Research School of Pacific and Asian Studies (RSPAS) at the Australian
National University in Canberra. Being based on Indonesia with its rich diversity of environmental
resources (and on which there are relatively good data) and its rapid economic growth, the project could
also serve as a prototype for similar studies of other developing countries in Southeast Asia and
elsewhere.
The key objective of the project is to assess the production, consumption, trade, income
distributional, regional, environmental, and welfare effects of structural and policy changes at home and
abroad particularly as they will or could affect Indonesia’s agricultural sector over the next 5-10 years.
Among other things, the analysis will focus both on the effects of economic changes on the
environment, and on the impacts on Indonesia’s agricultural production and trade of resource and
environmental policy changes. The implications of regional and multilateral trade liberalization
initiatives and Indonesia’s ongoing unilateral trade reforms will be analysed, along with other potential
domestic policy changes and significant external shocks such as the entry of China and Taiwan into the
World Trade Organization. The analysis will draw on and adapt computable general equilibrium (CGE)
models such as the national INDOGEM Model (built as part of an earlier ACIAR project) and the global
GTAP Model.
The project is being undertaken in close collaboration with the Indonesian Ministry of
Agriculture and ministries involved in trade, planning, and the environment. A Research Advisory
Committee has been established to encourage close collaboration of representatives from those and other
ministries.
ACIAR INDONESIA RESEARCH PROJECT
WORKING PAPER 99.13
UNDERSTANDING THE 1998 FOOD CRISIS:
SUPPLY, DEMAND OR POLICY FAILURE?
Steve R. Tabor, H.S. Dillon and M. Husein Sawit
Senior Agricultural Economist
International Service for National Agricultural Research
The Hague, Netherland.
Agricultural Economist and Executive Director
Center for Agricultural and Policy Studies
Jakarta, Indonesia
Senior Agricultural Economist
Center for Agro-Socioeconomic research
Bogor, indonesia
March 1999
Indonesian food security in historical perspective
During the past three decades prior to 1997, Indonesia made
remarkable progress in improving food security. Throughout this period,
food security was accorded a very high political priority. Key elements
in the campaign to enhance food security included a rice self-sufficiency
oriented agriculture development effort, rice price stabilisation, rural
infrastructure investment, human resource development, labor-intensive
industrialisation and the generation and dissemination of improved
smallholder food crop technology (Sajogyo 1980, Amang 1996). These
microeconomic efforts were embedded within a macroeconomic
framework characterised by financial stability, equity and
competitiveness (Tabor and Meijerink 1997). Over time, the focus on
improving food security led to a pattern of economic growth in which
the poor actively participated, resulting in what Sen (1981) has
described as “growth mediated security”. According priority to
agriculture development and labor-intensive industrialisation were
considered the main elements of Government’s efforts to bolster food
security, in contrast to the numerous income transfer schemes used in
other middle-income economies (Peng 1997).
Food availability and poverty indicators attest to the success of
this strategy. Per capita food availability increased from around 2000
calories per day in the 1960s to close to 2700 calories per day by the
early 1990s (FAO 1996). The proportion of the population classified as
poor fell from 44 percent in the 1970s to 11 percent in 1996. The
combination of higher levels of food availability and a much smaller
poor population significantly enhanced food security, at both a national
and a household level.
But the climatic and economic shocks of 1997 and 1998 reversed
many of these hard fought gains. An unprecedented series of climatic,
food supply, economic and political shocks caused the numbers of poor
to surge, food prices to oscillate wildly and, for months at a time, priced
basic foodstuffs out of many consumer’s reach. Ultimately, the
combination of rising staple food prices and falling real incomes brought
large numbers of angry protesters to the streets. Paradoxically, it was
mounting food insecurity that triggered the downfall of the New Order
government.
The FAO (1997) defines food security as a situation in which all
households have both physical and economic access to adequate food
for all members, and where households are not at risk of losing such
access. Food security implies that there is adequate availability, stability
and access to essential foods. Adequate food availability means that, on
average, sufficient food supplies should be available to meet
consumption needs. Stability refers to the probability that, in difficult
years or seasons, food consumption will not fall below consumption
requirements. Access refers to the fact that many people still go hungry
because they do not have the resources to produce or purchase the food
they need. The principal determinant of food security is purchasing
power, or income adjusted for the cost of living (FAO, p.7, 1996).
In Indonesia’s case, the 1997 and 1998 shocks adversely affected
all three dimensions of food security: availability, stability and access.
Mounting food insecurity was first triggered by a sharp decline in
domestic food production. Food production levels fell as a result of the
18 month El-Nino drought and the forest fires that blazed in the wake of
the drought. In 1998, after more normal rains resumed, an upsurge in
pest and rodent infestation battered food production levels. To combat
domestic food supply shortages, official imports were increased to
record levels.
Coming shortly on the heels of the El Nino drought, Indonesia’s
financial crisis resulted in a sharp fall in domestic demand, soaring
inflation, falling real wages, rising under-employment and a surge in
urban poverty levels. Despite ample pledges of international financial
assistance, the growing ranks of distressed companies and moribund
financial institutions caused investment to fall and capital outflows to
rise. The Rupiah’s free-fall, from Rp.2,450 to the US dollar in June
1997 to Rp. 14,900 to the US dollar in June of 1998 propelled the cost
of basic foodstuffs beyond the means of large segments of the domestic
population.
The May 1998 civil disturbances and the riots and civil strife that
followed in late 1998 and early 1999 further aggravated the food
security situation.
Ethnic Chinese grain traders were one of the
“targets” in the May 1998 disturbances. In various parts of the country,
private food stocks were subject to confiscation and traders were
charged with hoarding and price manipulation. The partial breakdown in
law and order effectively raised the costs and hampered the delivery of
food from surplus to deficit regions.
Indonesia’s political transition has ushered in a far greater degree
of press freedom than ever before. This, in turn, had an important effect
on domestic food security. In early 1998, the agencies charged with
stabilising food prices came under greater public scrutiny, leading to
reports of corruption and misuse of authority in the public grains trade.
Public confidence in the ability of Government to secure an adequate
food supply plummeted. In mid-1998, the Chairman of BULOG was
replaced and in May and June of 1998, (inaccurate) press reports of
empty BULOG warehouses sparking panic buying and a sharp upsurge
in retail prices (Kompas 8 June 1998).
Table 1: Retail foodstuff prices in 27 major cities
Period
Rice
Wheat
flour
Soybean
Sugar
Cooking
oil
(Rp./kg)
1994
1995
1996
1996-1
1996-2
1996-3
1996-4
1996-5
1996-6
1996-7
1996-8
1996-9
1996-10
1996-11
1996-12
660
776
883
857
860
856
851
849
855
899
913
910
904
915
918
836
872
905
879
890
880
888
894
895
906
916
922
925
927
930
1233
1271
1324
1263
1265
1281
1282
1303
1314
1317
1331
1382
1377
1383
1392
1287
1428
1502
1454
1475
1461
1489
1516
1522
1533
1527
1516
1511
1507
1509
1347(*)
1453 (*)
2724
2724
2740
2780
2804
2819
2826
2880
2917
2899
2892
2893
1997-1
1997-2
1997-3
1997-4
1997-5
1997-6
1997-7
1997-8
1997-9
1997-10
1997-11
1997-12
965
972
1014
1016
1021
1033
1046
1062
1088
1123
1207
1215
959
972
966
980
1000
994
988
992
1009
1017
1018
1015
1410
1430
1452
1470
1471
1485
1481
1474
1475
1707
1548
1666
1514
1522
1522
1534
1577
1573
1567
1561
1560
1567
1584
1581
2905
2907
2904
2903
2906
2905
2903
2921
2907
3122
3117
3210
1998-1
1290
1086
1888
1723
1998-2
1439
1164
2171
1836
1998-3
1475
1115
2329
1715
1998-4
1532
1625
2569
2153
1998-5
1623
1816
2632
2285
1998-6
1988
1935
Na
2368
1998-7
2202
2950
Na
2802
1998-8
2529
3676
Na
3599
1998-9
3009
3753
Na
3891
1998-10
2828
3582
Na
3785
• prices refer to average quality in major urban centers throughout Indonesia.
• 1995 and 1996 values are Rupiah per bottle for cooking oil.
Source: BULOG.
3785
5158
5266
5778
6959
6414
6834
6512
6130
5015
In 1997 and 1998, public policies were crafted to restore food
security. From mid-1997 to mid-1998, the Government maintained
administrative controls on the food supply, held domestic food prices
well below world market prices and provided highly subsidised agroinputs to food producers. After the May 1988 civil disturbances,
government-backed cooperatives were authorised to market a growing
range of price-controlled foodstuffs.
Government’s ability to provide food at a low price hinged on its
ability to defend a large wedge between domestic and world market
prices. In a nation of thousands of islands, enforcing such a policy
would be a costly undertaking, even in periods of relative calm. From
May to September 1998, as Indonesia was battered by civil unrest, the
authorities were no longer able to defend the large wedge between
domestic and international prices. Domestic food prices soared while
the press regularly issued reports of rice and fertiliser being smuggled
out of the country.
More market-friendly approaches to food policy were adopted
after the May to September price surge. In the last quarter of 1998, the
government liberalised food trade, limited BULOGs mandate to rice
operations, removed fertiliser subsidies and marketing restrictions,
sharply increased the sums provided for subsidised farmer working
capital, increased funding for a wide sweep of public works programs
and provided monthly rice rations at low prices to a large number of
poor households.
Global grain prices fell in the second half of 1998, thanks partly
to Russia’s unexpected withdrawal from global grain markets. Falling
global grain prices amplified the effects of Indonesia’s exchange rate
appreciation and helped to lower the cost of food on the domestic
market. By early 1999, domestic rice prices were some 20 to 30 per cent
higher than equivalent import parity prices, prompting calls for the
application of an import tariff to protect producer incomes and stabilise
domestic rice prices.
The events of 1997 and 1998 leave us with many important, and
still largely unanswered questions. Why did food security deteriorate so
quickly in Indonesia after such impressive progress was been made in
reducing poverty levels and stabilising domestic food markets during the
past three decades? Was this due more to production shortfalls, the
impacts of the financial crisis, political upheaval or to flaws in food
policy? This paper reviews some of the evidence regarding the causes
of Indonesia’s recent bout of food insecurity and draws lessons for
future policy making.
Mapping shocks to food security
Both supply and demand-side shocks influence food security
through their effect on “food entitlements”, or the ability of households
to afford an adequate diet. An environmental shock (such as El Nino,
forest fires or widespread pest infestation) that reduces food output will
generally lower the incomes of food producers, raise food prices to
consumers and require increased reliance on food imports. Food
entitlements can decline because of lower producer incomes, falling
consumer purchasing power and the diversion of public and private
resources to pay for staple food imports instead of, for example, more
costly (but more protein and vitamin-rich) foods.
The main way in which Indonesia’s financial crisis affects food
security is through a fall in aggregate demand and a sudden increase in
the price of tradeables (such as food) to non-tradeables (such as property
or other home goods). As a result of the macro-economic crisis,
aggregate demand falls as output declines. Rising inflation causes a
decline in real (but temporarily sticky) wages, reduces consumer
purchasing power and erodes the real value of private savings. Falling
demand and a downturn in investment reduce labor demand, adding to
the ranks of the under-employed and unemployed. Capital outflows
cause the nominal exchange rate to devalue, raising the price of
imported goods and increasing the opportunity cost of domestically
produced foodstuffs. Devaluation, rising interest rates and financial
sector distress raise enterprise capital costs and trigger an upsurge in
private enterprise failure. This, in turn, further reduces labor demand
and caps real wage growth. As economic activity declines, government
revenues fall. This, together with a rising public debt burden, constrains
Government’s capacity to transfer income or otherwise protect the poor.
How can the effects of food supply and macro economic shocks
be disentangled, particularly when both influence incomes and both are
so closely inter-related? To answer this, we apply a conceptual
framework developed by C. Peter Timmer (1997) that relates income
growth, income distribution and food security.
Figure one presents the familiar Engel’s relation (in semi-log
form) between income and food consumption. According to Engel’s
law, when income rises, consumers spend a declining share of their
household budget on foodstuffs. Below a certain point, households are
poor, and when incomes drop even further, households will not have
sufficient purchasing power to maintain adequate food security.
The degree to which household food security is protected or
threatened also depends on whether or not food prices are kept “high” or
“low”. For any given level of income, food consumption will be higher
at “low” than at “high” prices. Linked to the Engel’s curve, in figure 2,
is a plot of the cumulative distribution of income against the log of
income growth. The steeper the curve, the more equitable the income
distribution.
For Indonesia, the income and food security situation in the early
1990s was similar to that depicted as curve C1 in figure 1 and curve
Yd1 in figure 2. Food prices had been kept somewhat high, because of
modest amounts of trade protection accorded to rice and wheat and
relatively high levels of trade protection accorded to sugar and soybeans.
In addition, after many years of rapid economic growth with low
inequality, income was quite evenly distributed.
In 1996, the average incomes of the top 20 per cent of the
household expenditure classes were 43 per cent and the bottom 40 per
cent had 20.5 per cent of total income. Only one-seventh of the
population had incomes that would place them below the poverty line,
and of this, only a very small segment had an income below the ‘serious
food security risk’ line.
In response to the 1997 and 1998 shocks, Government initially
intervened to reduce and to stabilise food prices. Prices of basic staple
foods were held from 10 to 50 percent below prevailing import parity
prices. In figure 1, the shift from a “high” to a “low” food price policy
is equivalent to a shift from curve C2 to curve C1.
At the same time, there was a sudden reduction in aggregate
income and an increase in income inequity. Falling real wages, fewer
inflation hedges for the poor and the government’s limited capacity to
effectively transfer income would have led to a shift in the aggregate
income curve from (Yd1) to (Yd2). In this situation, a larger number of
households would have an income below the poverty line, and more
would have an income below the “food security” risk threshold.
Figure 1 : Income Growth, Poverty and Severe Food Insecurity
Food Consumption
Y/P Low = C2
C1=Y/Phigh
Poverty Line
Severe Food
Insecurity Line
Log Y
YSFI
Yp
Figure 2 : Cumulative Income Distribution, Growth and Shocks
Yd2
1.0
Yd1
0.14
Log Y
.
YSFI
Yp
In the last quarter of 1998, the Government abandoned the ‘low
food price’ policy and concentrated its efforts on targeted income
transfers to the poor. This would be equivalent to an attempt to increase
the slope of the Yd2 curve (in figure 2) while shifting back to the lower
C2 Engel’s curve (in figure 1). The ultimate effect on food security
would depend on the degree to which the income gains to the poor from
a targeted ‘cheap food’ transfer effort would outweigh the effects of
higher prices on the ability of the poor to afford an adequate diet.
During an economic crisis, there is a strong economic rationale
for Governments to intervene to keep food prices low (on the C2 curve),
to stimulate income growth (to shift back from the Yd2 to the Yd1
curve) and to redistribute income to the poorest groups (to raise the
slope of the Yd2 curve to keep the poor from falling below the food
security threshold). In practice, this has high fiscal costs and requires
well-functioning institutions to implement effectively.
Figures 1 and 2 also illustrate another important point. In an
“income shock” situation, income transfers, between households and
between government and households, are often the most important
buffer between “poverty” and a severe “food security risk”. Within the
household, inter-temporal income transfers can occur through dissaving---selling off land or other assets. Income transfers can occur
through borrowing, either through banks or more commonly for the
poor, in the curb markets. Indonesia also has long-established traditions
of mutual self-help, which take hundreds of different forms in villages
throughout the country. By keeping income distribution within
reasonable bounds, private income transfers help ensure that the poor do
not fall below the food security risk line.
At any point in time, Government can combine “cheap food” and
“income redistribution” efforts to deliver as much “food security output”
as possible within the limits of the resources that can be mobilised for
these efforts. In figure 3, this is portrayed as a public sector production
problem, in the form of a set of production isoquants (P1, P2, P3) and
fiscal budget constraints (the amount of funding allocated to these
efforts, B1, B2, B3).
In the short-run, the issue may not be so much one of funding
resources that can be mobilised, but of the capacity of Government to
effectively deliver “food at affordable prices” and “income
redistribution” services. In figure 3, this would be the difference
between curve P1 and curve P3. In general terms, the institutional
capacity to effectively deliver “food at affordable prices” and to
“transfer income to the poor” is a function of: i) the information
available about the nature and extent of the food insecurity problem; ii)
the speed of problem recognition, understanding and response by policy
makers; iii) the amount of institutional change necessary to deliver the
needed services (noting that large public institutions tend towards
inertia); iv) the general level of managerial efficiency and accountability
within these government services; and v) the degree to which
institutional incentives guide efficient and effective service delivery.
What research does exist on this point suggests that
Government’s institutional capacity to deliver such services varies
considerably from Province to Province. A study published by the
Agricultural University (IPB), Unicef and the Ministry of Agriculture’s
Planning Office (Hardinsyah et. al, 1998) suggests that poor
coordination, limited information availability and weak accountability
systems significantly inhibit Government’s capacity to monitor the food
security situation and deliver relief. Other studies have pointed at delays
and weaknesses in the delivery of social safety net programs and
attributed this to hurried planning, excessive centralisation and
inadequate involvement of non-governmental organisations in publicly
funded community development efforts.
What is often ignored is the fact that Government’s ability to
stabilise food prices or to transfer income to the poor is seriously
constrained by macro economic volatility itself. Exchange rate
volatility, unto itself, causes food prices to oscillate quickly from a
“high” to a “low” cost Engel’s curve. The contractionary effects of a
real exchange rate devaluation cause aggregate demand to fall, exposing
a growing segment of the population to poverty and food insecurity.
Macro economic volatility is quickly transmitted to the domestic
economy, causing immediate changes in domestic supply and demand
conditions. By the time public policy responds, macro-economic
conditions may have changed once again.
We can depict the food security dilemma posed by macro
economic distress in figure 4 below. Imagine that prior to the crisis, the
Indonesian economy was operating at point A somewhere within the
production possibility frontier PPF(1). Because of extensive capital
inflows, the economy was producing an amount of food (which will be a
proxy for tradeables) and non-tradeables at point Q1 ( or A), and the real
exchange rate (tangent ER1) was defined at an equilibrium point that
reflected the expectations of healthy growth and continued net capital
inflows.
Figure 3. Government Food Security Interventions : Production Side Issues
Q2
Government
Affordable
Food Price
Service
C
B
A
P2
B3
B2
B1
P1
P3
Q1
Government Income
Redistribution Service
Where P = f ( institutional capacity)
B = f (fiscal capacity)
With the onset of the macroeconomic crisis, capital inflows
became a flood of outflows and, for many different reasons, confidence
turned sharply against the Rupiah. The real effective exchange rate
ratcheted downward and has oscillated within a band shown in figure 4
as ER2. To restore external equilibrium, aggregate demand would have
to be sharply compressed, to a point such as Q2 or Q2* in figure 4.
While ultimately the output of tradeable goods may not fall very much
(for example, to point B in figure 4), the incomes of producers of nontradeable goods, spread over the labor force involved in those subsectors, may be insufficient to afford an adequate diet. But identifying
and transferring income to those whose cannot afford an adequate diet
may be difficult, particularly if the exchange rate is volatile (and hence
shifting the aggregate demand curve facing different sectors) and if, as is
expected, labor shifts from the production of non-tradeable to tradeable
goods and services.
In fact, devaluation should inspire resource allocation shifts from
the non-tradeable good sectors (such as property) into the tradeable good
sectors (such as agriculture). But in the short-run, inter-sectoral
resource shifts are constrained by structural factors, such as banking
sector distress and inter-regional barriers to labor mobility. Furthermore,
with capacity constraints (such as small, fragmented land holdings) it
may be difficult for the tradeable goods sectors to quickly absorb large
labor inflows.
Macroeconomic distress also causes the economy’s overall
technical production capacity to erode (PPF1 in figure 4 above becomes
PPF2). Institutions function less efficiently, the technology stock
becomes “globally” stale and education quality declines. In effect, the
nation’s production potential gradually declines.
F ig u re 4 : M a c ro - C ris is , F o o d O u tp u t a n d D e m a n d
Q nt
ER1
Y = Q nt + Q T
A
Q1
Q 1*
non T ra d a b le s
O u tp u t
E R 2 ( v o la tile )
B
Q2
Q 2*
PPF2
PPF1
QT
Q 2*
Q 1*
Q2 Q1
F o o d ( + o th e r tra d a b le s ) o u tp u t
Q 1 * = p re - s h o c k m a c ro -e q u ilib riu m w ith o u t c a p its l in f lo w s
Q 2 * = p o s t- s h o c k m a c ro - e q u ilib riu m w ith u n re s tric te d c a p ita l o u tflo w s
Q1
= p re -s h o c k m a c ro - e q u ilib riu m
Q 2 * = p o s t- s h o c k m a c ro - e q u ilib riu m , w it h c re d it -c o n st ra in e d g o v e rn m e n t in te rv e n tio n
in
The food supply situation: availability, imports and public stocks
Food production and availability
The available evidence suggests that aggregate national food
availability did not play a significant role in Indonesia’s food insecurity
in1997 and 19981. Although food production did register a sharp fall,
this was off-set by rising imports and government grain stock releases.
Pierre van der Eng (1997) has compared food availability during
the 1890 to 1990 period with a number of indicators of social welfare,
such as infant mortality rates and human nutrition. His research shows
that mass hunger problems (of the sort that result in significant upsurges
in infant mortality) have occurred in Indonesia during periods when
average food staple availability fell below 1500 kilocalories per capita
per day for several years in a row. This was the case in the 1890s, the
1920s, the 1940s and in the early 1960s. In 1997 and 1998, by contrast,
there is no evidence whatsoever that staple food availability was ever
less than 2500 kilocalories per capita per day---well above the levels
historically associated with widespread hunger in Indonesia.
Rice output and secondary food crop production estimates are
presented below in tables 2 and 3. The Ministry of Agriculture reports
that 1997 rice production fell by 3.7 percent, due mainly to a 4.3 percent
fall in area harvested. Corn production fell by 5.9 percent due primarily
to a 10.5 percent fall in area harvested. Soybean production declined by
10.5 percent and cassava production fell by 8.6 percent. Sugar
production was little changed from previous years, but was some 30
percent below levels prevailing in the early 1990s.
In 1998, rice production is estimated to have fallen by 8.8 per
cent, the biggest single-year decline in the past two decades. Rice
yields are estimated to have fallen by 5.2 per cent and area harvested by
5.9 per cent. Milling yield is also estimated to have declined by 3 per
cent due to poor grain quality. For 1998, domestic rice production is
estimated at 29.2 MMTs of milled rice, some 4 MMT’s less than what
was produced in 1996, and a level comparable to domestic supply a
decade earlier.
With the exception of corn, production of the other secondary
food crops continued to decline in 1998. Corn production rose by 11 per
cent in 1998 while cassava, soybeans and sugar production fell by 1.1,
3.7 and 15.5 per cent respectively. The growth in corn production is
explained primarily by a shift in nearly 400,000 hectares of land from
rice production to corn, largely in response to drought conditions.
1
Garcia-Garcia (1998) was one of the first to point out that rising food insecurity was not a
problem of aggregate food availability.
In 1997 and the first half of 1998, the El-Nino induced drought
was the major cause of the food production decline. This was
aggravated by the effects of Eastern Indonesia forest-fires, particularly
in the latter half of 1997 (Fox, 1998, Department Perhubungan 1998).
In mid-1998, pest, disease and rodent outbreaks contributed to the
decline in domestic production. In late 1998, some areas experienced
flooding, delaying domestic production credit in 1997 and early 1998
contributed to a fall in agro-input applications. While farm credit
conditions eased in the second half of 1998, shortages of key fertilisers,
followed by a surge in domestic fertiliser prices in November after
subsidies were removed, reduced agro-input applications (FAO-WFP,
1998, Ministry of Agriculture 1998). planting and reducing expected
output. A sharp decline
The decline in domestic food production was partly offset by an
increase in food imports and a diversion of secondary food crop use
from livestock feed to human consumption. Table 4 below presents an
estimate of changes in food crop trade for the main staples during the
1990 to 1998 period. In both 1997 and 1998, imports of rice, wheat,
soybeans and sugar were significantly increased to offset the low levels
of domestic production.
From 1996 to 1998, there was a 4.1 MMT decline in rice
availability, a 2.1 MMT decline in cassava availability, and a decrease
of 200,000 tons and 250,000 tons of soybeans and sugar respectively.
To compensate for this, rice imports were increased by 3.1 MMT’s (over
1996 levels), wheat imports by .4 MMT’s and sugar imports by 700,000
tons. As a result of higher rice, sugar and wheat imports, total “starchy
staple” availability declined by only about 1.2 million metric tons over
the two year period.
Table 5 below estimates the effect of a 1.2 million metric ton
grain decline on per capita calorie availability. Given that the
population has increased by approximately 6 million persons between
1996 and 1998, a reduction of 1.2 million metric tons in grain
availability (compared to 1995/96 conditions) would imply a decline in
per capita grain availability of 9 percent.
A 9 percent decline in per capita grain availability would reduce
aggregate caloric availability by approximately 200 Kcal per day. This
would imply that staple food availability has been reduced to just over
2500 Kcal per day, a level prevailing in the early 1990s.
Table 2: Rice - area harvested, production and yield 1982 - 1998
Year
Area
harveste
d
(‘000)
8509
8495
8368
8360
8929
8850
9005
9382
8988
9162
9764
9902
9988
9923
10138
10531
10502
10282
11103
11013
10734
11439
11569
11141
11055
Average
yield
(tons/ha)
Paddy
output
(‘000
tons)
22464
22331
23301
23347
25772
26283
29652
32774
33584
35302
38134
39033
39726
40078
41676
44726
45179
44689
48240
48181
46641
49744
51101
49377
46443
Rice
output
(‘000
tons)
15276
15185
15845
15876
17525
17872
20163
22286
22837
24006
25933
26542
27014
27253
29340
29072
29366
29048
31356
31318
30317
32334
33215
32095
29167
Growth
(%)
1974
2.64
1975
2.63
-0.6
1976
2.78
4.3
1977
2.79
0.2
1978
2.89
10.4
1979
2.97
2.0
1980
3.29
12.8
1981
3.49
10.5
1982
3.74
2.5
1983
3.85
5.1
1984
3.91
8.0
1985
3.97
2.3
1986
4.00
1.8
1987
4.04
0.9
1988
4.11
4.0
1989
4.25
2.6
1990
4.30
1.0
1991
4.35
-1.1
1992
4.34
7.9
1993
4.38
-0.1
1994
4.35
-3.2
1995
4.35
6.7
1996
4.41
2.7
1997
4.43
-3.7
1998
4.20
-8.8
RII
a/ Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior
to 1989, and a factor of 0.65 for the years 1989 and following. 1998 refers to the third forecast.
For 1998, the milling yield was reduced to 0.63.
Source: Ministry of Agriculture, Bulletin Informasi Agribisnis, Oct-Dec 1998, 1998 and
Department of Statistics, Third Production Forecast, 1998.
Food stocks
Food stocks provide a line of defence against sudden food
availability shocks, at both the national and household levels. Because
of a high degree of seasonality in supply, the Indonesian rice market
needs to keep about 6 million metric tons of rice in storage from the
peak season to the deficit season, for the market to stay in balance.
Table 3: Production, area and yield of the other staple food crops 1993-1997, and 3rd forecast for
1998)
1993
1994
1995
1996
1997
1998 R3
Corn
Area (mill ha)
2.94
3.11
3.65
3.74
3.35
3.75
Yield (kw/ha)
21.9
22.1
22.6
24.9
26.2
26.1
Output (mmt)
6.5
6.9
8.2
9.3
8.76
9.79
Cassava
Area (mill ha)
1.40
1.36
1.32
1.42
1.24
1.21
Yield (kw/ha)
123
116
117
120
122
123
Output (mmt)
17.3
15.7
15.4
17.0
15.07
14.9
Soybeans
Area (mill ha)
1.47
1.41
1.48
1.28
1.12
1.10
Yield (kw/ha)
11.6
11.1
11.4
11.9
12.1
11.9
Output (mmt)
1.71
1.56
1.68
1.52
1.36
1.31
Sugar (mmt)
2.46
2.44
2.08
2.09
2.19
1.85
Source: Ministry of Agriculture, Bulletin Informasi Agribisnis, Jan-Mar 1998, 1998 and
Department of Statistics, Second Production Forecast, 1998.
Table 4: Food imports, 1990 - 1998 (‘000 mt)
Year
Rice
Corn
Soybeans
Wheat
Sugar
1990
29
-127
475
1,680
278
1991
178
292
526
2,071
306
1992
634
-81
558
2,270
316
1993
0
442
752
2,459
260
1994
876
1084
697
3,188
128
1995
3.014
894
473
3,614
687
1996
1.090
595
593
3,820
975
1997
3,582(*)
619
779
3,958
1,336
1998
4,200(*)
500
700
4,250
1,716
forecast
Note: 1997 and 1998 rice import values refer to the fiscal year estimates provided by
BULOG.1998 values are BULOG forecasts for the fiscal year.
Source: Bulog.
Table 5: Staple food availability in Indonesia, 1970-1998
Year/Ind
icator
1970
1995
Cereals
produced
(000 mt)
15,719
41,425
Cereals
imported
(000 mt)
1,527
8,598
Per capita
kilograms of
cereals
(per annum)
123
189
1998
39,770
9,350
175
Source: FAO Agrostat for 1970 and 1995. Author’s calculations for 1998.
Total staple
calories
(per day)
1824
2732
+-2500
Ellis et. al. (1991) surveyed the Indonesian rice market during
three relatively favourable years. They found that farmers and traders
typically hold the largest rice stocks. In the early 1990s, farmers carried
over rice stocks equivalent to 1.3 MMTs from the first to the second
season and normally increased these to 2.0 MMTs in the third season.
Private traders carried over rice stocks of 3.3 MMTs from the first to the
second season and reduced these to 2.7 MMTs in the third season. By
comparison, Bulog typically carries over stocks equivalent of 1.2 to 1.5
MMTs throughout the year to meet sudden shortfalls in domestic
demand and to provide food rations for budget groups.
The same survey finds that farmer and trader stockpiling has little
to do with the profitability of storage. Farmers primarily store rice to
meet household consumption requirements while traders store rice to
maintain supply continuity and meet milling requirements. In both
cases, private rice storage activity is sensitive to supply availability.
Farmers will store more in poor production years to meet home
consumption requirements while traders will store less if milling
requirements fall and if they can speed-up transactions.
In good years, the marketed surplus of rice is approximately 70
percent of what is produced, and of this, just over half reaches the urban
areas. In poor production years, we can expect that the rice producers
(some 12 million out of Indonesia’s 32 million households) will increase
their own stocks to protect home consumption. A 10 percent increase in
the level of private, on-farm stocks (meaning that only 60 percent of
what is produced is sold) would mean a 17 percent reduction in
availability for non-rice producers in both urban and rural areas.
If private food stocks did increase in 1997 and 1998, then
Government would have to raise its stock levels to maintain adequate
inter-seasonal supplies. The results presented in Table 6 below suggest
that Government did, in fact, increase its public food stocks in response
to the various shocks of 1997 and 1998. Food stock levels rose in 1997
and declined modestly in 1998. The fall in public stocks in May of 1998
can be explained by the fact that Government planned to rely far more
on official imports of rice for market operations, and hence, was relying
on the “international market” to hold a larger portion of Indonesia’s
public rice stocks. At all times, Bulog maintained public stock levels
above its target one million metric ton, “iron reserve stock” level.
Bulog’s market operations---or injections of rice into the market
to maintain stable prices---increased substantially in 1997 and 1998.
During the years 1994 to 1996, Bulog injected an average of 700,000
mts of rice into the domestic market to stabilise rice prices. In 1997,
Bulog’s market operations increased to 1.3 MMT’s and in the first 10
months of 1998 to 2.6 MMTs. During the May to September 1998
period, BULOG market operations increased substantially, rising to
more than 300,000 tons in August of 1998----straining the limits, in fact,
of the amount of rice that Government could inject into the market at
that time.
Table 6a: Bulog food stocks (‘000 metric ton)
May 1996
May 1997
May 1998
Rice
2.866
3.108
2.371
Sugar
432
480
425
Wheat
490 (*)
470
463
Soybean
102 (*)
124
120
* refers to end-April values;
Source: Bulog, Monthly Report to Ekuin, June 1998 and June 1997.
Table 6b: Bulog's rice market operations in the 1990s (tons)
Month
Avg. 1990-93
Jan
44,435
Feb
35,654
Mar
7,507
Apr
4,294
May
3,204
Jun
9,466
Jul
2,696
Aug
2,737
Sept
6,010
Oct
10,062
Nov
33,341
Dec
54,471
Total
213,877
Source: Bulog
Avg. 1994-96
165,311
82,037
39,021
22,769
30,227
29,576
34,668
27,017
35,678
48,196
91,634
115,115
721,248
1997
50,533
18,770
26,362
59,612
40,744
12,364
21,904
15,266
34,951
269,276
341,901
445,734
1,337,417
1998
413,974
482,793
386,882
120,080
77,632
162,519
216,437
310,306
284,678
145,862
Na
Na
2,601,163
Whether or not public stock and market injections were adequate
or inadequate hinges very much on the size and utilisation of private
stocks. Unfortunately, information on private food stock changes in
1997 and 1998 is unavailable. In past years, farm level stocks increased
when food production levels fell or when inflation rose. Field reports
suggest that this also occurred in 1997 and 1998. Consumer (or
household) food stocks may have also increased, particularly in response
to press reports of urban shortages and low public stocks. On the other
hand, stocks held by the private grain traders in major urban areas are
likely to have declined due a rising risk of confiscation and urban
lawlessness.
Macroeconomic volatility and food insecurity
Macroeconomic distress has had a direct affect on the second and
third components of food security---stability and access. Food prices
were highly unstable in 1998, due largely to exchange rate instability
and shifts in Government food trade and marketing policy. The macroeconomic crisis has also reduced “access” to adequate amounts of food
because of the fall in aggregate demand, erosion of real wages and the
sharp decline in output and incomes.
The wild gyrations of domestic food prices are a sign that the
stability of the food supply was compromised in 1998, particularly
during the period from April to September. Sharp, sudden changes in
food prices threaten the consumption levels of the poor and reduce the
purchasing power of the wage-earning population. Poor households
spend between 60 and 70 per cent of their earnings on food stuffs. A
sudden increase in real food prices of 20 to 30 per cent can price basic
foodstuffs beyond the reach of the poor and near-poor households.
Since more than half of the food producers are net food consumers,
rapid oscillation in food prices threatens both their incomes and
consumption levels.
All of Indonesia’s main food staples are products that are
internationally traded. Changes in the exchange rate will either change
the price directly (after a lag for stocks to adjust) or change the level of
wedge between domestic and international prices.
The principal cause of food price instability was exchange rate
volatility and the shift in public policy from an “administratively low” to
a “market determined” food price policy stance. Civil disturbances also
added to market price volatility, as political uncertainties increased the
risks and uncertainty faced by consumers and producers.
From November 1997 to January 1998, the Rupiah devalued from
3648 to 10, 375 to the US dollar. This increased the import parity price
for imported rice from just under Rp. 1,000 per kilogram to just under
Rp. 3,000 per kilogram. Government intervened heavily to maintain
low rice prices, but with porous borders, domestic prices began to creep
upwards to world market levels. Domestic rice prices rose by 6 per cent
in January, 12 per cent in February, 3 per cent in March and 4 per cent
in April of 1998. Still, by April, domestic rice prices were still only 60
per cent of equivalent import parity prices2.
Between April and June, the Rupiah devalued from 7,970 to
14,900 to the US dollar. Global grain prices also tightened between
January and June of 1998, pushing up the equivalent import parity price
for rice to the equivalent of Rp. 4,600/kilogram.
Despite an increase in market operations, from May to September
1998, domestic food prices lurched sharply higher. Average retail rice
prices rose from Rp.1623 per kilogram in May to Rp. 3,000 per
2
Global grain prices for Thai 25% rice were $232 per metric ton in December 1997, $260
in June 1997 and $220 in December 1998. An additional $25 per ton and 8 per cent for
handling charges is added to compute an equivalent import parity price. The world market
price for sugar (CIF London) rose from US$272 per ton between December 1997 to $302 in
June 1998. During that same period, wheat (Australia White FOB) prices eased from $171
per ton to $145 per ton, corn (No. 2 Yellow Bangkok) prices fell from $133 per ton to $89
per ton and palm oil prices (5% bulk Malaysian) fell from $566 per ton to $533 per ton.
kilogram in September, rising by 22 per cent in June, 11 per cent in July,
15 per cent in August and 19 per cent in September. Rapid increases in
food prices contributed to high rates of inflation and by July and August
of 1998, had priced basic foods beyond the reach of many low-income
households.
From September to December of 1998, the exchange rate
strengthened. The average bilateral rate of exchange to the US dollar
increased from 14,900 to 8,025 to the US dollar. On global markets,
grain prices also eased, bring the import parity price for rice down to
approximately Rp. 2200 per kilogram. Domestic rice prices gradually
adjusted downwards, but were still some 25 per cent higher than import
parity levels at the end of the year.
Throughout 1998, food producers and consumers were exposed
to tremendous food price volatility. In some months, basic staple prices
changed by 10 to 20 per cent. The volatility in food prices can be
traced, initially, to volatility in the exchange rate, and secondly, to a
switch in Government’s food price policy stance. Extreme volatility in
food prices threatens food security for the poor, for food accounts for a
large share of their total consumer expenditures and their ability to use
savings to stabilise consumption is limited.
The failure to stabilise food prices is not a failure of food policy
per se. Macro economic instability, in the form of tremendous exchange
rate volatility, created “wedges” between global and domestic prices
that, by mid-1998, Government could simply no longer maintain. In
1998, the main cause of food price volatility was volatility in the
exchange rate, and in this sense, the “culprit” for threatening food price
stability was clearly the macro economic crisis, and in particular, its
effects on the exchange rate.
Indonesia’s macro-economic crisis also had a direct effect on
access to food, by increasing the numbers of the absolute poor and by
reducing the purchasing power of low income households. The Central
Statistics Bureau reports that real GDP declined by 13.7 per cent in
1998. Per capita incomes, in constant 1993 terms, are reported to have
fallen from Rp.2.2 million in 1997 to Rp.1.8 million in 1998. The IMF
(Long et. al. 1999) estimates that domestic demand will have fallen by
close to 20 per cent in 1998. According to reports from the Statistic’s
Department, on an annually adjusted basis, real private consumption
expenditures fell by 3.4 per cent in the second quarter and 5.1 per cent in
the third quarter of 1998 alone.
Table 7: Consumer price, food price, exchange rate and rice price instability in 1998
Month
Food
Price
Index
1996=100
Consumer
Price
Index
1996=100
Rupiah to
US$
exchange
rate
% change
in the
Rp/US$
exchange
rate
June-97
104
105
2450
0.4%
Nov-97
117
110
3648
-0.1%
Dec-97
121
112
4650
27.47%
Jan-98
133
120
10375
123.12%
Feb-98
158
135
8750
-15.66%
Mar-98
167
142
8325
-4.86%
Apr-98
177
149
7970
-4.26%
May-98
183
157
10525
32.06%
Jun-98
196
164
14,900
41.6%
Jul-98
220
178
13,000
-12.75%
Aug-98
240
189
11,075
-14.8%
Sept-98
261
196
10,700
-12.42%
Oct-98
256
196
7,550
-29.4%
Nov-98
256
196
7,300
-3.3%
Dec-98
263
198
8,025
9.93%
note: rice prices refer to medium-quality rice in major urban areas (Bulog)
Source: Bank Indonesia and Bulog.
Average
Rice Price
in Major
Cities
(Rp/kg)
1033
1207
1215
1290
1439
1475
1532
1623
1988
2202
2529
3009
2828
2830
2758
% change
in medium
rice prices
The effect of the “demand collapse” on access to food depends on
how the fall in incomes was distributed across different classes of
households. A national household income and expenditure survey, and
preferably one conducted post September1998, will be needed to
accurately assess the distribution of the income collapse.
Unfortunately, the economic crisis also disrupted Indonesia’s
regular socio-economic reporting and poverty assessment system. Firm
comparisons between the numbers of those classified as poor prior to the
macro economic crisis and those reported as “absolutely poor” in 1997
and 1998 will have to await the processing of the 1999 SUSENAS
survey. In the absence of a national household income and expenditure
survey, indirect indicators and small-sample surveys have to be relied
on to assess the probable impacts of the macro-economic shocks on
absolute poverty and food access.
What is known, however, is that prior to the macro-economic
shocks, a large segment of the population was classified as “nearly
absolutely poor” and that those who were “absolutely poor” had a high
risk of food insecurity.
Furthermore, a large share of the “nearly
absolutely poor” households had malnourished children.
In 1996, 23 million persons were classified as absolutely poor,
while another 37 million persons reported monthly expenditures that
were within Rp. 10,000 per month of the absolute poverty line (see
table 8). The absolute poverty incidence was higher in rural areas (12.3
per cent) than in urban (9.7 per cent). By the yardstick used prior to the
1.2%
7.48%
0.66%
6.17%
11.55%
2.50%
3.86%
5.94%
22.5%
10.8%
14.8%
18.9%
-6.0%
0.0%
-2.5%
1997 and 1998 shocks, some 23 million Indonesians would have been
classified as “poor”.
Table 8: Absolute poverty incidence, 1976-1996
Year
Urba
n (%)
Rural
(%)
Total
(%)
Urban
(millio
ns)
10
9.5
9.4
7.2
Rural
(milli
ons)
44.2
32.8
17.2
15.3
Total
(mill
ions)
54.2
42.3
25.9
22.5
1976
38.8
40.4
40.1
1980
29.0
28.4
28.6
1990
16.8
14.3
15.1
1996
9.7
12.3
11.3
38,42
27,413
Poverty
6
Line
(1996
Rp)
1998
20
30
26
15
38
53
est.
note: 1998 values are author’s estimates based on 1996 income distribution, and applying an
estimate of a 10 percent real income decline and a 12 percent in real prices facing the near-poor in
1996.
Source: BPS (1998) and author’s calculations for 1998 values.
Prior to the macro-economic crisis, the share of households with
malnourished children was approximately three times higher than the
share of households classified as absolutely poor. In the early 1990s,
progress was made in reducing child malnutrition rates. The percentage
of children under 5 years of age who were malnourished declined from
35 per cent in 1992 to 30 per cent at the start of 1998-. Malnutrition
rates in early 1998 were 32 per cent in rural areas and 27 per cent in
urban areas (Saadah 1999).
Absolute poverty is closely correlated to food insecurity and
under-nutrition in Indonesia. According to nutrition surveys, those
earning less than Rp.40,000 per month in 1996 report average energy
consumption levels below minimum-norms set for Indonesia (Jalal and
Atmojo 1997). A special food security concern is the plight of the most
nutritionally vulnerable groups. UNICEF (1997) reports that, of the
under-five year old children, 36 percent suffer from energy/protein
deficiency, 35 percent from anaemia and 30 percent from an iodine
deficiency. Of the pregnant women, 41 percent suffer from energy
deficiency. Of all women, 24 percent suffer from chronic food energy
deficiency. Mild and moderate forms of malnutrition are reported to be
the main cause of almost half of all child deaths in Indonesia.
How did the macro economic collapse affect the numbers of the
poor? In early 1998, the Department of Statistics issued estimates of a
rise in the number of absolutely poor to nearly 80 million persons. This
appears to be an over-estimate, and is based largely on assuming
unchanged nominal incomes and triple-digit price inflation.
Table 9: Monthly expenditures, calorie and protein consumption in 1996
Daily protein
Population share
Daily energy
Expenditure
consumption
(percentage)
consumption
group
(grams)
(Kcal)
(Rp/month)
under 15,000
.1
1240
28
15,0001.3
1404
33
19,999
20,00010.7
1604
40
29,999
30,00018.0
1786
46
39,000
40,00029.5
1985
52
59,999
Source: Central Bureau of Statistics as reported in Jalal and Atmojo (1997).
The IMF (IMF, October 1998) estimates that the numbers of
absolute poor increased by between 4.8 and 11.2 per cent of the total
population (or to some 32 to 45 million persons) in 1998. The IMF
estimates are based on estimating the elasticity of the number of poor to
average consumption expenditures and adding an additional amount for
higher unemployment.
A national Ministry of Family Planning (BKKBN 1998) survey of
living standards conducted in September 1998 reports that 18 per cent of
the population are impoverished and that another 21 per cent of the
population are nearly-impoverished. In September 1998, the BKKBN
reported that 8.1 million households in Indonesia (or some 36 million
persons) could be classified as badly impoverished (“pra-sejahtera”).
Another 9.4 million households (42 million persons) were classified as
KS-1 households, or those “having less than adequate means”. The
poorest BKKBN group (the KPS) are those households that are unable
to satisfy their basic needs, including food. BKKBN reports that the
highest incidence of badly impoverished households was in East Timor
(56%), Nusa Tenggara Timor (52%), Irian Jaya (46%), Central Java
(33%), and Lampung (28%).
Out of 140 districts surveyed nation-wide in May of 1998, the
Ministry of Food and Horticulture reports that 40 percent could be
classified as food insecure. More than 50 million rural residents live in
districts that were classified as food insecure. This includes 9 out of 25
districts in West Java, 12 out of 33 districts in Central Java, 3 out of 5
districts in Yogyakarta and 16 out of 37 districts in East Java. The
highest absolute number of food insecure rural households are in Java.
But the highest regional incidence of rural food insecurity was reported
in West Kalimantan, Central Kalimantan, Maluku, Irian Jaya, NTB,
NTT and East Timor.
The results of a number of small sample surveys suggest that the
largest declines in income in 1997 and 1998 have been registered by the
middle and upper income groups, that urban areas have been hit harder
than rural areas and that the greatest increase in poverty levels has been
registered in the urban areas and in Java (SMERU 1998 and Poppele et.
al. 1999).
The pronounced fall-off in construction, industrial and
services sector activity has disproportionately reduced urban labor
demand and urban incomes. Rising export prices (post-devaluation)
appears to have increased tree crop producer incomes, an important
source of earnings for the residents of Sumatra, Kalimantan and
Sulawesi. Parts of eastern Indonesia that were hard hit by the drought
appear to have recovered, and some are enjoying record earnings from
tree crop exports. The data also show that there has been little change in
open unemployment, a modest decline in urban secondary school
enrolment and insignificant change in household nutrition status. The
small-scale survey results indicate that the effects of the macroeconomic crisis on living standards bear little relationship to the
numbers and distribution of the poor prior to the macro-shock (Filmer
et. al. 1999, Poppele et. al. 1998).
Field surveys report that households are adopting a number of
coping strategies to offset the adverse income shocks. In some areas,
poor urban residents are returning to villages, local communities are
pooling resources to cushion consumption from the income loss, and
falling incomes and rising import costs are leading to a substitution of
domestically produced (and labor intensive) goods and services (such as
food consumption at open-air markets instead of restaurants) for imports
(Irwanto 1998, World Bank 1998b).
Real wages, for unskilled labor, are often used as an indirect
indicator of poverty levels. Many poor households depend primarily on
wage labor for their income. With falling aggregate demand, the scope
for higher employment will be limited. Accordingly, a decline in real
wages would be consistent with an increase in the numbers of absolute
poor.
Although real wage data is subject to considerable error, the
evidence suggests that growth in nominal wages has lagged significantly
behind inflation and behind the rise in food prices. According to the BPS
data, between 1997 and 1998, agricultural wages for unskilled rural
Javanese labourers working in land preparation and planting increased in
nominal terms by an average of 21 to 43 per cent. By comparison, on a
year-to-year basis, inflation was 77 per cent and food prices rose by 117
per cent.
Between December and March of 1998, average wages in
industry, hotel and mining rose by 1, 21 and 22 per cent respectively.
Average food prices increased by 34 per cent during this period while
average retail rice prices rose 21 per cent (see Table 10b).
The CASER’s PATANAS survey on socio-economic conditions
in rural areas is one of the most accurate barometers or rural living
conditions. According to PATANAS reports, from the wet season in
1998 to the dry season in 1998, average agricultural day-wages rose
from 9 to 14 per cent (see Table 10b). During this same period, food
prices and rice prices increased by more than 70 per cent.
In January 1997, the minimum daily wage was equivalent to 6.3
kilograms of rice. In December 1997, the minimum wage was
equivalent to.
Table 10a: Rural wage growth in 1997 and 1998
Land preparation
Province
Planting
Year
1995
1996
1997
1998*
%
change
98/97
Year
1997
1998*
%
change
98/97
Daerah
Istimewah
Aceh
Sumatera
Utara
Sumatera
Barat
Sumatera
Selatan
Lampung
2,706
3,077
3,329
4,848
46
2,704
3,914
45
2,675
3,019
3,315
4,382
32
2,948
3,935
33
2,419
2,627
2,910
3,741
29
2,905
3,725
28
2,329
2,463
2,555
3,258
28
2,161
2,699
25
2,162
2,527
2,590
3,011
16
2,101
2,527
20
Jawa Barat
3,593
3,914
4,320
5,353
24
2,690
3,371
25
Jawa Tengah
2,023
2,438
2,701
3,441
27
2,101
2,588
23
D.I.
Yogyakarta
Jawa Timur
1,089
1,176
1,258
1,801
43
927
1,182
28
3,103
3,555
4,025
5,411
34
2,640
3,198
21
Bali
3,760
4,165
4,507
5,915
31
2,853
3,527
24
30
2,494
3,237
30
22
3,549
4,564
29
39
5,091
7,489
47
25
2,391
2,856
19
Nusa
2,485
2,800
3,073
3,999
Tenggara
Barat
Kalimantan
3,624
4,138
4,344
5,318
Selatan
Sulawesi
3,025
3,476
4,141
5,747
Utara
Sulawesi
2,185
2,492
2,688
3,358
Selatan
\Source: BPS, Statistik Upah Buruh Tani di Pedesaan, Jakarta.
Table 10 b: Average weekly wages for selected sectors and daily agriculture wages
Sector
Industry
Hotel
Mining
December 1997
(Rp 000)
52,8
54,8
111,2
West Season 1998 (Rp)
March 1998
(Rp 000)
53,4
66,2
135,9
Dry Season 1998 (Rp)
Agriculture1)
Jawa Tengah
5.800
6.800
Jawa Timur
4.500
4.900
Lampung
3.700
4.200
Notes: (1) Average wage rates for a half days work from the CASER’s PATANAS survey.
(2) Preliminary data.
Source: BPS (Statistik Upah Triwulanan I tahun 1998) and CASER Bogor (PATANAS data)
4.8 kgs of rice. By June 1998, the “rice purchasing power” of the
minimum wage had fallen to 2.6 kgs. of rice.
Falling real wages are a sign that the purchasing power of the
poor has declined. Since many of the households classified as “nearpoor” in 1996 would rely primarily on unskilled wage labor for their
income, even a modest decline in real wages would be enough to expose
a large segment of this group to absolute poverty
Both survey and real wage data are consistent with a rise in the
number of poor households, particularly in urban areas and in Java.
While estimates of the number of households that could be classified as
absolutely poor (and hence at high risk of being food insecure) due to
the macro-economic crisis are not known with any certainty, there is
agreement that the main causes of deepening absolute poverty include
the fall in real incomes, an increase in food prices faster than the rate of
inflation and a decline in real wages.
One way to make an approximate estimate of the number of poor
households is to use the income distribution and poverty line measures
prevailing in 1996 and to convert 1998 income to 1996 levels using
estimates of the real income fall and the change in the GDP deflator
facing the poor and near-poor. Even if one were to assume that most of
the income shock was registered by upper-income groups, a fall in real
income of 5 to 10 per cent for the middle and lower-middle income
households in 1998 could be expected. Furthermore, with food prices
rising in excess of the CPI (and the GDP-deflator) we would expect that
the poor and near-poor faced a larger increase in the cost-of-living than
for the average income earner. If we combine a conservative estimate of
the income-shock (5-10 per cent) and higher cost-of-living (10-15 per
cent) for households that were classified as lower-middle income (or
“near-poor”) in 1996, this would imply an increase of 8 million urban
poor and 23 million rural poor residents in 1998. In total, this would
increase the number of absolute poor (or those vulnerable to food
insecurity) to approximately 53 million persons in 1998.
Not all of those who would become absolutely poor will be
immediately food insecure. Private savings will be drawn down to
protect consumption levels. Assistance will be provided by family
members and the local communities. Efforts to combine resources,
particularly in rural areas, will also help to buffer the poor from food
insecurity.
The Government has also attempted to cushion the fall in incomes
for the low income groups. In 1996, nearly 6 per cent of GDP was
expended on what the Government classifies as social safety net activity
(Lane 1999). Of this, close to a quarter was provided in the form of
food subsidies. Subsidies have also been provided for fuel, electricity
and basic medicines. Other social safety net outlays have been provided
for community-based, public employment activity, the abolition of
school fees, an expansion of school lunch programs, and an increase in
farm working capital credit (KUT) and special credit schemes for small
enterprises (Gupta 1998).
Food Policy and Food Insecurity
From mid-1997 to mid-1998, the government used trade
restrictions and BULOG subsidies to hold food prices below prevailing
import-parity levels. Subsidies were provided for the import and sale of
rice, sugar, soybeans, wheat, corn, soy meal and fish meal. Export
restrictions were used to maintain domestic cooking oil prices below
export parity levels. For 1998 alone, the budgetary cost alone of
maintaining general food subsidies was estimated to be approximately
Rp. 12 trillion3.
In addition to large fiscal costs, a policy of low food prices also
constituted a large transfer of income from food crop producers to food
consumers. Since food crop producers are also the single largest group
of low income households in Indonesia, a “low” food price policy
would be expected to aggravate income distribution and increase the
number of rural poor.
In the first half of 1998, the domestic price of rice was held at
approximately 60 percent of the equivalent import parity price of $295
per metric ton. On average, consumers were paying Rp.2200 per
kilogram for their rice instead of an import parity price equivalent of Rp.
3,500 per kilogram. Farmers were receiving (approximately) Rp. 1600
per kilogram (for milled rice equivalent at the farm gate) instead of Rp.
2200 (milled equivalent import parity price).
3
Until September 1998, Bulog was provided monopoly import authority, budgetary
subsidies and access to foreign exchange and credit on preferential rates to maintain food
prices below import parity levels.
Consumers gain and producers lose income from a low food price
policy. If we assume that the aggregate rice supply elasticity is 0.3 and
that the aggregate price elasticity is 0.4 (Suryana et. al. 1997), and if we
apply the 1997 rice production and consumption estimates as basevalues, than the total consumer surplus from a “cheap” rice policy in
1998 was equivalent to 42 trillion rupiah. The producer surplus was
equivalent to -21 trillion rupiah. In other words, small farmers assumed
a large share of the economic costs for providing general price subsidies
to the rest of the economy.
Although food producers bore a large share of the cost of general
food subsidies, this might have a positive welfare effect if, in fact, the
poor consumed the bulk of the subsidised food stuffs. The evidence,
however, indicates that this was not the case.
Using the 1996 SUSENAS data, we can examine the distribution
of food consumption by the very poor (the bottom 10 percent of the
households), the poor and near-poor (the bottom 30 percent of the
households) and the middle and upper income groups. For the lower
income groups, rice is a major part of the diet and accounts for a
significant share of their total expenditures. But only about 28 percent
of all of the rice is consumed by the lowest 30 percent of the 1996
income earners. The upper 70 percent consume 72 percent of all of the
rice. For the other food commodities, the distribution is even more
skewed to the middle and upper income groups. In the case of wheat
and sugar products, the poorest thirty percent consumes only about onefifth of the total consumption; eighty percent is consumed by the upper
70 percent of the income spectrum.
Table 11: Share of basic staple food consumption by income group, 1996
Commodity
Rice
Wheat
Corn a/
Soybeans
Palm Oil
Poultry
Sugar
Lowest Decile *
9.6
4.5
13.6
5.5
6.9
0.8
5.5
Lowest 3 Deciles
**
27.5
18.3
22.7
23.5
21.5
3
21.3
Upper 70 percent
72.5
81.7
77.3
76.5
78.5
97
78.7
* refers to the bottom 12 percent of the households, as classified by total expenditures in 1996.
** refers to the bottom 30.1 percent of the households, as classified by total
expenditures in 1996.
a/ adjusted to reflect the allocation of two-thirds of total corn availability to the feed industry in
1996.
Source: CBS, Susenas 1996.
In fact, wheat products are primarily consumed by the upper third
of the income spectrum. About two-thirds of the imported sugar is used
in the confectionery and processed food industry, whose products are
sold mainly to middle and upper income consumers. Soy meal and
fishmeal are high value inputs for feed manufacture. Feed is primarily
used in the poultry and beef industry, products which are consumed
predominantly by the upper income groups.
In August 1998, the Government changed its food price policy to
allow food products to trade at international market prices. Food
imports were opened to private traders holding general import licenses.
BULOG’s monopolies on imports and domestic marketing of food
staples were eliminated. Budget subsidies and preferential exchange
rate arrangements for BULOG were halted. In place of general food
subsidies, the Government introduced a special market operations
program (the OPK program) in which households classified as
impoverished by BKKBP family planning surveys were allowed to
purchase 10 kilograms of rice per month at a concessionary price of
Rp.1,000 per kilogram.
Implementation of the program proceeded
rapidly, and by October of 1998, the program was providing low-cost
rice to nearly 7 million households.
OPK program monitoring reports indicate that the program was
generally implemented effectively and that the recipients are, by and
large, drawn from low income households. However, the program fails
to reach many peri-urban poor households who lack proper urban
residency permits. In some regions, the ration rice is shared amongst a
larger group within the village, reducing the income-transfer benefit to
the very poor. Public awareness of OPK program goals, eligibility
criteria and implementation responsibilities is also reported to be limited
(SMERU 1998).
In October, the Government announced that the OPK program
would be extended to 17 million households, involving nearly one out of
every two households. In addition, the monthly ration amount would be
increased to 20 kilograms per beneficiary. In practice, the scaling-up the
ration amount and beneficiary coverage has been limited by Government
budget constraints.
In November 1998, the Government also abolished subsidies on
fertilisers. To compensate for this, the amount of working capital
production credit was sharply increased, outstanding farm working
capital loan arrears were forgiven and fertiliser marketing restrictions
were eased. Fertiliser price liberalization was undertaken in response to
reports of widespread shortages of fertiliser in late 1998. Higher
domestic prices were viewed as a way of discourage stockpiling and
smuggling and to improve incentives for retailers to sell fertiliser to
small farmers.
After subsidies were removed, the price of urea rose from Rp. 450
per kilo to Rp.1,115 per kilo. On a per hectare basis, the Ministry of
Agriculture estimates that total fertiliser costs would rise by
approximately Rp. 350,000, or approximately Rp.83 per kilogram of
expected paddy output (Department of Agriculture, 1998).
While
higher fertiliser prices will reduce the benefit-cost ratio from producing
rice, it is expected that improved availability will largely off-set these
losses (Department Pertanian 1998).
From September to December 1998, the exchange rate
strengthened and global rice prices fell. By the end of the year,
Indonesia’s domestic rice prices were 20 to 30 per cent high than
equivalent global rice prices. Private international rice trade has started,
narrowing the margin between global and domestic prices. With the
start of the 1999 wet-season rice harvest, domestic farm gate prices have
been falling. In some areas, there are reports that farm gate prices have
fallen from Rp.1800 per kilogram for rough rice in mid-1998 to less than
Rp. 1000 per kg in early 1999.
In the first five months of 1998, Bulog’s procurement and market
operations prices were changed three times. Procurement prices were
increased from Rp. 600 to Rp. 700 and then to Rp. 1000 per kilogram.
As a result of inflation and devaluation, Bulog had little choice but to
raise procurement prices to keep pace with prevailing market conditions.
Furthermore, since almost all Bulog stocks in 1997 and 1998 were from
imports, the actual floor price had relatively little effect on the agency’s
operations.
In early 1999, there are reports that farm prices are falling below
the Bulog floor price level, and that neither the cooperatives or private
traders are able to procure adequate supplies of rice on Government’s
behalf. In response to falling farm gate prices and BULOG’s apparent
inability to defend the floor price, in early 1999, the Minister of Food
declared that the Government should impose an import tariff of 30 to 40
per cent to support rice producer incomes.
But would higher farm prices necessarily increase rural welfare?
The answer to this depends very much on the degree to which farm
producers are net sellers or net purchasers of rice, and the relevant
demand and supply elasticities prevailing in the market. Since some 11
million rice producers cultivate plots that are less than 0.35 hectares, and
since an estimated 7 million rural households are landless or nearlandless labourers, this would imply that a large segment of the rural
work force are net rice consumers.
Myer’s et. al. (1986) have derived a reduced form model that can
be used to estimate the effect of varying rice procurement prices on
different categories of producers. The model is as follows:
%Yg = ((MS/QC + e(s) (1 + MS/QC) - e(d) )/ (Y/(P*QC) + n )*
dPR/PR
where:
% Yg =
MS =
QC =
e(s) =
e(d) =
PR =
n
=
percent change in income;
marketed surplus (positive, if net seller)
household consumption
supply elasticity (w.r.t.. price)
demand elasticity (w.r.t. price)
price
income elasticity
The computations presented in table 12 below employ this model
to estimate the effect of a 40 percent price rise (ie. the difference
between domestic prices and prices with a 40 per cent import tariff) on
income for agricultural producers who would buy all of their rice, buy
half of their rice, buy none of their rice and sell half of their rice.
If real farm-gate prices were increased by 40 percent (to 40 per
cent above world market import parity levels), those farmers who buy
all of their rice would suffer a fall in incomes equivalent to 24 per cent
of their total income. Those who are self-sufficient would suffer a
modest income increase (6 per cent) while those with a positive
marketed surplus would witness about a 26-34 percent rise in household
income. Ultimately income distribution would widen between those
farm families with a large marketed surplus and those who are net rice
consumers. Landless labourers and the near-landless farmers, who are
already amongst the poorest rural residents, would suffer a pronounced
fall in their real income. Should this happen, this could lead to further
rural asset concentration and deeper rural poverty.
This does not necessarily imply that farm gate floor prices should
not be held above border prices to enhance agricultural incentives. As
the above example demonstrates, the effect of boosting farm prices
would be to significantly raise the incomes of those producers with a
positive marketed surplus of rice. It does imply, however, that such
policies could have long-lasting social dislocation effects if real farm
gate procurement prices are adjusted rapidly at a time when the “net
consuming” producers have little ability to offset the adverse household
income effects resulting from much higher rice prices.
Table 12: Simulation of the impact of a 40 percent real price rise in paddy prices
on different classes of rice producer households
Impact of the price rise on farm households who
Buys all
Buys
Buys None
Sells Half
Half
Assumptions
MS/Q
C
QP/Q
C
-1
-0.5
0
0.5
0
0.5
1
1.5
-0.5
-0.5
-0.45
-0.45
Rice expenditure share
43
35
28
19
Income elasticity
0.6
0.6
0.5
0.5
Supply elasticity
0.3
0.3
0.3
0.3
SIMULATION
RESULTS
% change in household
-23.93
6.07
25.79
34.01
income
Note: Based on a model developed in Myers et. al. (1986) and using expenditure and supply
elasticities reported in Boediono (1978), Tabor (1989), and Suryana (1997).
Conclusions: rebuilding food security
The 1997 and 1998 shocks adversely affected all three
dimensions of food security: food availability, stability and access.
Availability was affected by the El-Nino drought, with rice output
falling by more than four million metric tons between 1996 and 1998.
Availability was also adversely affected by the civil disturbances which
targeted the grain trade and hindered the movement of basic foodstuffs
from surplus to deficit regions. But aggregate food availability, at a
national level, never reached critical levels in 1997 and 1998.
Government was able to secure adequate food imports, build public
grain stocks and increase injections of rice into the domestic market.
Stability of the food supply was, however, a serious problem.
This is reflected in the wild gyrations of domestic food prices,
particularly during the April to September of 1998 period. Sharp,
sudden increases in food prices threatened the consumption levels of the
poor and reduced the purchasing power of the wage-earning population.
The principal cause of price instability was exchange rate volatility and
the shift in public policy from a “low” to a “market determined” food
price stance. No doubt, the civil disturbances added to market price
volatility, as political uncertainties added to the risks faced by
consumers and producers.
Access to basic foodstuffs emerged as the most serious food
security concern in 1997 and 1998. The macroeconomic crisis resulted
in a sharp fall in aggregate demand. Many of the households that were
“near-poor” in 1996 would have been classified as absolutely poor in
1998. Those who were absolutely poor would have been at high risk of
being food insecure because of inadequate incomes. The economic
crisis hit the urban areas particularly hard, and many middle and lowmiddle income urban households found themselves cast into poverty.
The Government first tried to combat mounting food insecurity
by maintaining market controls and keeping domestic food prices low.
This policy conveyed benefits mainly to middle and upper income
households, and acted as a heavy tax on low-income domestic food
producers. In September 1998, the Government scrapped its general
food subsidy effort, liberalised international food trade, and introduced a
program to provide subsidised rice to low-income households. By the
end of 1998, the combination of a stronger exchange rate and falling
global food prices caused Indonesia’s food prices to rise above world
market price levels. While a “high” food price policy might be expected
to stimulate domestic supply, this would also aggravate rural income
distribution and tax domestic food consumers.
Looking ahead, the Indonesian Government has a difficult but
well-defined political, macroeconomic and microeconomic agenda. On
the political front, the challenge is to manage the transition to a
pluralistic, representative Government. On the macroeconomic front,
the challenge is to restore stability, address the overhang of financial and
corporate distress and restart the growth process. On the microeconomic
front, the main challenge is to cushion the fall in incomes and rebuild
food security. Progress must be forged on all three fronts, for political
stability, macroeconomic stability and food security are closely interrelated.
But in the short-term, food security must take precedence.
Societies that suffer from widespread hunger will be unable to generate
the political and social consensus necessary to undertake fundamental,
and often painful, macroeconomic reforms4. Furthermore, in an
environment in which food security has broken down, macroeconomic
reforms will have little effect on investor confidence or investment.
The 1997 and 1998 experience demonstrate that improvements in
food security should provide no reason for policy complacency. A firm,
long-standing commitment to achieving food security is required. But
for this to be effective, the Government will need to seek ways of
reforming policy and institutions to deliver an acceptable level of food
security in a cost-effective manner.
One of the first ways of enhancing food security would be to
ensure that the private sector continues to be provided the opportunity to
use global markets to satisfy domestic food shortfalls. In practice, this
4
To quote Peter Timmer (1988) ... “food shortages in urban areas evokes a universal and
visceral reaction. Governments are held accountable for provisioning cities at reasonable
costs, and citizens have repeatedly demonstrated their capacity to bring down governments
that fail in this obligation (p. 10).”
would mean that BULOG’s price stabilisation and floor price protection
mandate continue to be limited to rice. During the last quarter of 1998,
the private sector demonstrated that it can trade effectively on
international markets to satisfy domestic food staple demand and that it
can play an important role to augment official rice imports (World Bank
1998a).
The Government should continue to aim to buffer the economy
from severe rice price instability, but this should be done in a more cost
effective fashion. Stabilising rice prices helps to smooth consumer and
producer incomes, particularly when supply and price shocks in the thin
global rice market are covariant (Timmer 1997a and 1997b).
The challenge, however, is to deliver rice stability in the most
cost-effective manner possible (Pearson 1997, Sawit 1998, Soetrisno
1998). There are three main strategies that could be pursued to lower
the costs of achieving an “affordable level” of rice price stability:
•
phase out the provision of budgetary rice allocations to civil
servants, the military and other special groups. This would reduce the
demand for public stocks by approximately one million metric tons;
•
open up both rice imports and exports to the private sector and
use trade-related (eg. tariffs or variable levies) or financial instruments
to stabilise import or export parity prices; and
•
reduce public sector grain holdings to an “iron stock” of rice
sufficient to offset sudden, unanticipated disruption in the international
rice trade.
While there are still large numbers of food insecure households,
the Government could continue to use subsidised sales of low-quality
rice (the OPK program) to augment incomes of the very poor. The
main challenge is to ensure that subsidised rice is, in fact, provided to
the food insecure, and not to the large numbers of near-poor and
middle-income households (Wiebe 1998 and SMERU 1998).
Economic recovery is needed to raise incomes of the poor and the
food insecure. An agriculture-led recovery provides the best chance to
stimulate sustainable growth while addressing food security, poverty and
income distribution concerns. Given the macroeconomic imperative of
encouraging resource flows into agriculture and rural development, the
faster the pace of reform, the greater the benefits to the economy as a
whole.
There are a large number of policy and institutional
impediments to efficient resource use in the agriculture sector. For much of
the past decade, these were but a minor drag on rural economic performance
since rural growth was largely carried along by booming urban demand
(Tabor 1992). But with the economic crisis delaying recovery in the industry
and service sectors, policy and institutional impediments to rural growth
have become binding constraints to rural economic growth.
An urban (and Java) bias has permeated the development of
social and economic infrastructure in Indonesia for the better part of the
past two decades (World Bank, 1996). It is important that this be
reversed. Despite severe fiscal constraints, public expenditure priority
should be accorded to rural primary education, primary health care, and
the development of efficient rural road, port and rural power
infrastructure. Fiscal transfer mechanisms that allow rural communities
a high degree of autonomy in designing and executing rural
development efforts can help ensure that rural development efforts
capitalise on Indonesia’s heterogeneous regional resource base.
Indonesia cannot solve its agricultural and rural development
problems by increasing rural public expenditures. The fiscal constraints
are too severe, and in many cases the expenditures would do little good
anyway. Improving Indonesia’s policy and institutional environment is
essential if scarce resources are to flow into rural areas, and if these
resources are to be used efficiently and effectively (Tabor 1998).
The broad direction for food policy reform is reasonably clear. If
resources are to be used more efficiently, the Government should ease
regulatory and “public enterprise” impediments to a more business-oriented
rural agricultural environment. Over time, the parastatal enterprises and
cooperatives providing seeds, fertilisers, pesticides and marketing services
should be transformed into market-oriented private businesses. Public
investment in rural economic and social infrastructure should be increased,
but uneconomic public investment should no longer be tolerated.
Completing and capitalising on past investment in rural infrastructure and
services is the immediate public investment challenge. Institutional reform
should be launched to improve the flexibility and efficiency of rural factor
and product markets. An accelerated land registration effort combined with
improvements in rural judicial processes is badly required. Special attention
should also be provided to augmenting the shelf of relevant rural
technology. And finally, the downward spiral of rural resource degradation
should be reversed.Few of these challenges can be met in the near-term, and
sadly, Government continues to focus its efforts on achieving selfsufficiency in the main foodstuffs rather than improving the rural business
environment. A short-lived increase in food production, unto itself, will play
only a minor part in restoring national food security. Higher real incomes
and wages will result if productivity and competitiveness in agriculture (and
other resource-based sectors) increases. For this to happen, the rural
business environment will have to improve.
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