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I. Introduction
Scott Pearson and Eric Monke
In 1991, agricultural policymakers in Indonesia confront a frustrating dilemma.1 Virtually all the main economic indicators-positive contribution to rural income and employment, efficient saving of foreign exchange, and security of domestic food supplies-point to the desirability of expanding domestic rice production to keep pace with the growth of Indonesian consumption. Yet all available policy options to induce farmers to grow more rice are severely constrained. Greater public investments in irrigation and research are limited by increased competition for government funds after several years of budgetary stringency, higher rice prices are unpopular with rice consumers and macro policymakers concerned with inflation, and conversion of irrigated sugar land into crop rotations involving two or three annual crops of rice runs headlong into government efforts to utilize sugar refining capacity and reduce imports of sugar.
This book examines the components of Indonesia's rice policy dilemma to help policymakers, analysts, and observers sort out the pros and cons of alternative courses of action. The study combines new field-based empirical evidence on the profitability of rice farming and on rural employment and wages with long experience in the analysis of food policy issues in Indonesia and the international market for rice. I The intended result is policy-relevant information gleaned from microeconomic studies of rice production systems and rural labor markets set within a macro food policy context.
Framework for Agricultural Policy Analysis
Alternative Strategies
The Indonesian government faces a choice among three broad strategies for rice policy. The first possible direction is to aim for a rapid acceleration of growth in rice production, to raise and keep annual output well above consumption levels. This effort would allow absolute self-sufficiency, ensuring that the country would never import rice and in most years would have rice supplies available for export. At current levels of growth in consumption, this strategy would involve expanding rice production at perhaps 4 percent per year over the next five years.
At the opposite extreme, the country could aim to diversify the rural economy, encouraging rice farmers to grow a range of other crops and undertake off-farm activities. This strategy of diversification would require frequent and increasingly large rice imports, although local surpluses might be available in years of exceptionally good harvests. On average, rice production might grow only 1 percent annually, with much more rapid growth in other income-earning activities.
An intermediate strategy would target production growth roughly equal to consumption growth, at about 2.5 percent per year over the next half decade. To maintain steady consumption levels at stable prices, this strategy would entail either considerable storage of rice from good years into bad, occasional imports and exports, or some combination of the two. Even with frequent rice trades, however, on average exports would equal imports and the country would follow a trend of self-sufficiency.
This book discusses what would be required to reach each of these alternative target growth rates and what effects the pursuit of each strategy would have on the Indonesian economy. It focuses on the impact of rice policy on rural income and employment but also considers its effects on urban consumers through the level and stability of rice prices and on government expenditures through subsidized storage and trade. Although no definitive judgments about relative priorities are made, whenever possible the advantages and disadvantages of the three alternative strategies are spelled out and quantified.
Available Instruments
Pursuing any of these strategies-high growth with exports, low growth with imports, or trend self-sufficiency-requires the use of several interrelated policy instruments. These instruments can be grouped into five categories: price level policies, price stabilization policies, public investment policies, macroeconomic policies, and crop regulatory policies.
For rice in Indonesia, the two main price levels are those of rice and fertilizer; each year the government sets and defends a floor price for unmilled rice (gabah) and a set of wholesale prices for the major types of chemical fertilizers. The National Food Logistics Agency (BULOG) defends the rice floor price through government purchases of gabah and milled rice. BULOG also works to stabilize the consumer price of rice by injecting stored or imported rice supplies into domestic markets when shortages cause the price to rise excessively. Accomplishing these tasks has required large and ongoing subsidies through the credit system and from tax revenues, but BULOG has been successful in defending appropriate rice prices during the past fifteen years. Although price stability has been an important element of Indonesia's success in expanding rice production, specific stabilization mechanisms are not discussed at length in this book. 2
The major public investments (capital spending from the government budget) affecting rice production are the construction and maintenance of infrastructure for irrigation and transportation and the provision of research and extension services. Expenditures in these areas have had very high payoffs. But the highest rate of investment was reached when government oil revenues were large, and the rate of spending has fluctuated along with oil income. Growth in the area planted to high-yielding irrigated rice varieties has been particularly dependent on these investments.
Macroeconomic policies include government revenues and expenditures (fiscal policy), the rate of expansion of the money supply and hence the cost and availability of credit (monetary policy), and the exchange rate for Indonesia's rupiah relative to foreign currencies (exchange rate policy). These policies are set for the economy as a whole, but they have a profound effect on agricultural investment and growth because they affect the profitability of agricultural production. Unlike those in many other developing countries, Indonesian macroeconomic policies generally have been balanced across sectors, avoiding heavy taxation of the agricultural sector and promoting sustainable growth throughout the economy.2
The final category of policy instruments includes rural production programs and regulations, which directly influence farm activities in certain areas. In Indonesia, rice hectarage has been reduced because of government-enforced production targets for sugarcane, tobacco, and, more recently, soybeans. The degree of enforcement and the competitiveness with the rice production calendar vary among crops and locations but seem most significant for sugarcane in East and Central Java. The desire to promote self-sufficiency in sugar and to utilize capacity in the sugar processing industry has led to the enforced use of about 15o,ooo hectares of highly productive, irrigated land for sugarcane.
Governments typically enact policies individually and often do not consider all of the interacting influences that policies have on one another. In part, this occurs because of the division of responsibility among government ministries and agencies. Nevertheless, it is desirable analytically for planners to consider the strategies implied by individual or collective policy decisions. Each of these policy instruments depends to a considerable degree on the others for its success or failure. For example, rural irrigation infrastructure may be necessary for fertilizer applications to increase yields reliably, while rice price policy may determine how much fertilizer it is profitable for farmers to use in any given year.
Because policies tend to reinforce each other so strongly, the approach taken in this book is to analyze the contributions of each category of the various policy instruments to rice output, farm income, and rural income distribution. Then the policies are viewed in the context of agricultural strategy to learn whether collectively they can deliver the quantities of additional rice output needed to fulfill each strategy. In this way, the analysis contrasts the three alternative targets of high growth (and absolute rice self-sufficiency), low growth (and rural diversification), and medium growth (for trend self-sufficiency). Each of these targets can be achieved with a range of policy instruments, but each strategy has advantages and disadvantages.
Government Objectives
The appropriateness of the individual and collective policies underlying each of the three strategies considered here can be evaluated by assessing how well they advance government objectives. Three fundamental indicators of national welfare-food security and price stability, rapid income growth, and desirable income distribution-can be seen as the central objectives of government policy.3
The first objective, food security at the national level, is the capability of the country to produce adequate amounts of foodstuffs for all consumers at affordable prices. Since food shortages are quickly reflected in rising food prices, food security is closely related to the government's ability to maintain stable domestic food prices.
The second objective, income growth, demands that resources be allocated as efficiently as possible. National income will be maximized if land, labor, and all other goods and services in the economy are allocated to their most profitable uses, when profits are measured in terms of the social value or opportunity cost of each good. This goal is common to government policy-making in all sectors of the economy. It implies that policies should create incentives for individuals to make the most valuable use of the nation's resources in both production and consumption.
The third objective of food policy is a satisfactory distribution of income to needy groups and to poorer regions. Because the production incentives of food policy apply to the agricultural sector, the income distributional objective often refers to greater incomes being generated for the rural poor, including farmers, agricultural laborers, and rural workers employed off the farm. Since food policy influences consumer prices for food and other agricultural goods, the real incomes of the urban poor are affected as well. Issues involving regional income distribution go beyond the consideration of urban versus rural inequities. The economic importance of agriculture in many of the poorer regions of Indonesia means that food policies inevitably influence the welfare of all groups; higher rice prices, for example, could transfer income from poor rural rice consumers to relatively well-off rice farmers, many of them living in higher-income regions.
These three government objectives are closely interrelated. At times they may be in conflict with one another so that the government must trade off one objective for another. For example, holding a large food security rice stock ties up government funds that could be invested else-where and therefore reduces the growth rate of the economy as a whole. At other times, these objectives may be complementary because two or three of them are served simultaneously by a given policy. Investment in rural infrastructure, for example, can both generate growth and improve income distribution. An important element of the analysis in this book, therefore, is to link the effects of policy to all three fundamental food policy objectives, looking for a rice strategy that will exploit potential complementarities among them.
The analysis in this book brings together the linkages among rice policy instruments, rice-related variables in the rural economy, and the objectives of government to answer the question, Does more rice output (good for food security) create efficient income growth (required for efficiency) and labor-intensive employment (needed for better income distribution)? The study evaluates the effectiveness of past rice policy and the options for future policy by tracing empirically the relationships among five categories of policy instruments (price level, price stabilization, public investment, macro, and crop regulatory), three principal economic variables (rice output, income, and employment), and three fundamental food policy objectives (food security, efficiency, and income distribution). The links between policy and the economy can be traced conveniently through Figure i. i, which shows how a given strategy, implemented through a variety of policy instruments, affects several economic variables that might further the government's objectives, thus conditioning the government's choice of strategy.
Organization and Content of the Book
This book is divided into three sections, plus this introduction, which outlines the analytical and historical context of the study, and a conclusion, which summarizes the study and its principal results.
The first section (Chapters z and 3) provides the analytical foundation for the book, drawing links among food policy objectives, rice policies, and the resulting levels of rice output, income, and employment. Chapter z is a survey of the recent history of all five categories of policy that influence the production and price of rice. Some of these policies are also the instruments by which Indonesia escapes full dependence on the world market, helping to reduce the level and instability of domestic prices. In Chapter 3, the external market for Indonesian rice is reviewed. The world price is the starting point for rice policy because Indonesians almost certainly would trade at that price if no policy were in place. The chapter shows how the price of Indonesian imports or exports of rice is determined, why the world rice price is inherently unstable, and why predictions of future world prices are so difficult to make with much accuracy.
The second section (Chapters 4, 5, and 6) covers the current situation and recent changes in output, income, and employment levels in Indonesia's main rice production systems. It documents the successes of the
policies enacted during the 1970s and 8os through support of gabah prices and use of public investment to raise domestic rice output and stabilize domestic rice prices. Chapter 4 contains an empirical examination, based on original fieldwork, of the profitability of Indonesia's main wetland rice production systems in 1987. This chapter gives a detailed cross section of technological practices and income levels from rice. Then, in Chapter 5, data on rural labor markets document changes in employment opportunities, labor market institutions, and real wages during the ig8os. The aim is to investigate the competitiveness of rural labor markets and the trends in real rural wages to aid later analysis of the efficiency and equity effects of alternative rice strategies. In Chapter 6, time series data are combined with backward extrapolations of the 1987 budgets (to 198o and 1969) to investigate how input substitution and technical change in rice farming have affected the expansion of rice output, employment, and rice farming profits on Java.
The third and last section of this book goes to the heart of the inquiry: what direct and indirect effects might future rice policies have on the level and distribution of rural income? The first part of this question is addressed in Chapter 7, which presents the production and profitability effects of alternative sets of policies that might underlie the strategies. The second is addressed in Chapter 8, which describes the impact of those policies on rural employment, wages, and income distribution.
The book ends with a set of conclusions, reviewing the impact of policy in the past and the prospects for the future. Although the spectacular increases in rice productivity of the recent past might not be achievable again, sustained improvements in the level and distribution of rural income are clearly possible. But this desired outcome will eventuate only if policymakers are successful in finding an appropriate set of rice policies. Resourceful, innovative farmers remain ready to expand rice production in response to public incentives. In question is whether the political consensus can be found to put in place an appropriate strategy.
'This book contains the principal results of the Food Research Institute's third multi-year research project on Indonesian food policy within the past decade. The results of the first two projects are reported in Falcon, Jones, Pearson, et al. and in Timmer, ed. The conceptual framework for all three investigations is presented in detail in Timmer, Falcon, and Pearson, The methodology underlying the analysis of comparative advantage and policy transfers in Indonesia's rice production systems, presented in Chapter of this volume, is set forth in Monke and Pearson
This analysis of Indonesia's rice economy draws on the earlier analysis and insights of two colleagues, Leon A. Mears and C. Peter Timmer. The authors also have benefited greatly from having access to work in progress of several agricultural economists working in the Ministry of Agriculture, most notably Klaus Altemeier, Faisal Kasryno, and Steven Tabor. A recent book, presenting contrasting views, is Booth
BULOG's price stabilization activities are analyzed in Falcon et al. (1985) and in Timmer (1989). pp. 22-64.
This conceptual approach is spelled out in the first chapter of Timmer, Falcon, and Pearson (1983), pp. 3-18.
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