FOOD POLICY AND POVERTY: A GENERAL EQUILIBRIUM ANALYSIS FOR INDONESIA

Abstract

The distributional effects of trade policies involving food are always controversial, particularly in countries for which staple foods are net imports. Indonesia is the world’s largest importer of its staple food, rice, and this commodity simultaneously accounts, in its consumption, for a large share of consumers’ budgets, and in its production, for a large share of total employment. These points apply with particular force for the poor. For them, both the share of rice in total consumption and the dependence on rice production as a source of employment are much greater than they are for the general population. From the 1960s onwards Indonesia’s imports of rice were subject to a government monopoly. This monopoly was ended in 1998, when private importation was permitted. There was a brief period of free trade, but from 2000 imports were subject to a specific tariff (levied per ton of imports rather than as a proportion of the landed value) equivalent to about 25 per cent of c.i.f. import values. Then, as of early 2004, and continuing to the present, imports were officially banned. Although the ban was said to be ‘seasonal’, at the end of 2004 it remained in place. The ‘ban’ is not fully effective, in that a small amount of rice imports still enter Indonesia, but much less than occurred before the ban was announced. The intention of the post-1997 policies on rice imports has been to increase the domestic price of rice, but the way this outcome affects the poor has been hotly debated. Advocates of protection have claimed that it reduces poverty among those farmers who are net producers of rice, while opponents have stressed increases in poverty among net consumers. None of these analyses is fully satisfactory. An adequate analysis of the distributional effects of restrictions on rice imports needs to take account of its effects on different households’ expenditures, disaggregated by household group, but also its effects on their incomes, operating through its effects on wages and on the returns to land. A general equilibrium framework is therefore essential and it must include a disaggregated household sector. This paper applies the Wayang general equilibrium model of the Indonesian economy to analyze the effects of a 90 per cent effective import ban on rice, relative to its level in 2000. Extensive disaggregation of the household sector is a feature of the analysis. The model recognizes the 10 household categories defined in the official Indonesian Social Accounting Matrix (SAM) for 2000 and links them to the household income and expenditure survey for 1999 (Susenas) to divide each of the 10 SAM categories into 100 centile groups, arranged by real expenditures per household member. The analysis thus recognizes 1,000 individual households, fully incorporated into the general equilibrium framework. The results indicate that a 90 per cent reduction rice imports has effects on the domestic price roughly corresponding to roughly a 125 per cent tariff, five times the pre-existing tariff. This policy intervention increases the headcount measure of poverty incidence by a little less than one per cent of the population. Poverty incidence rises in rural areas as well as urban areas and among all farming household categories. Among farmers, only the richest are net beneficiaries. These effects on poverty incidence are qualitatively robust to variations in the key parametric assumptions underlying the analysis; both rural and urban poverty incidence increase under all parametric combinations which were tried.