Grain in Indonesia

Southeast Asia Grain in Indonesia Ray Trewin and Thomas Tomich •IN• 338.959 E19 94-6 Research School of Pacific and Asian Studies w;j~•••  Enquiries The Editor, Working Papers Economics Division Research School of Pacific and Asian Studies The Australian National University Canberra 0200 Australia Tel (61-6) 249 4700 Fax (61-6) 257 2886 The Economics Division encompasses the Department of Economics, the National Centre for Development Studies and the Australia-Japan Research Centre from the Research School of Pacific and Asian Studies, the Australian National University. Its Working Paper series is intended for prompt distribution of research results . This distribution is preliminary work; work is later published in refereed professional journals or books. The Working Papers include work produced by economists outside the Economics Division but completed in cooperation with researchers from the Division or using the facilities of the Division. Papers are subject to an anonymous review process. All papers are the responsibility of the authors, not the Economics Division .  • conom1cs Division Working Papers Southeast Asia Grain in Indonesia Ray Trewin and Thomas Tomich Cli- Research School of Pacific and Asian Studies Cj~••• © Economics Division, Research School of Pacific and Asian Studies, The Australian National University, 1994. This work is copyright. Apart from those uses which may be permitted under the Copyright Act 1968 as amended, no part may be reproduced by any process without written permission from the publisher. Published by the National Centre for Development Studies Printed in Australia by Better Printing Service, 1 Foster Street, Queanbeyan, NSW, 2620. The Economics Division acknowledges the contribution made by the Australian International DevelopmentAssistance Bureau towards the publication of this working paper series. ISBN O 7315 1951 5 ISSN 1038-412X Key to symbols used in tables n.a. Not applicable Not available Zero Insignificant Ray Trewin is a visiting research fellow in the Economics Department, Research School of Pacific and Asian Studies at the Australian National University. He has been working on an Australian Centre for International Agricultural Research-funded project analysing policies affecting the Indonesian agricultural sector. Thomas Tomich is a Senior Natural Resource Economist at the International Centre for Research inAgroforestry in Bogar, Indonesia. Much of the work for this paper was undertaken whilst he was attached to the Harvard Institute for International Development. The paper draws on earlier work involving Dr Erwidodo. The authors also wish to acknowledge comments on earlier drafts, without implications for the final contents of the paper, made by Dr Erwidodo, George Fane, Ross Garnaut and Hal Hill as well as by participants at a number of seminars given at the Australian National University. Thanks is given to Mark Rosegrant for permission to use the International Food Policy Research Institute's Food Crop Supply /Demand Model. Finally the assistance of Tendai Gregan with the CGE modelling is gratefully acknowledged. • ii • Economics Division Working Paper abstract Rice for food dominates the Indonesian grain sector and grain policy, in particular the policy of rice self-sufficiency aimed at food security, stabilisation and price support. Rice self-sufficiency has been achieved in Indonesia through a package of policies, significant amongst these were policies affecting the development of irrigation and the lowering of fertiliser costs to encourage their use as a necessary input for high- yielding rice varieties. Various institutions were seen to be necessary to implement elements of the rice policy, for example BULOG was charged with regulation of markets for rice and other commodities through its stock holding, sales and purchases, including its exclusive control over international trade in rice and some other commodities. However, these were high-cost policies and their continued effectiveness has been questioned with the slowdown in grain yields and Indonesia's move into solid middle- income status. Still the income gap between farmers and others in Indonesian society is likely to widen further in the future, creating political pressures that led some other Asian countries to introduce high levels of protection on major agricultural products such as rice. Thus, Indonesia is faced with fundamental questions regarding the future course of its rice and grain policies. How far and how fast will the dominanace of rice policy, especially that in relation to self-sufficiency, diminish? And what role will rice- orientated institutions such as BULOG play in the future that may bring greater internationalisation of grain trade? These and other key questions are discussed in the paper in a structure that considers them in relation to the past and future prospects for grain demand, production and trade. Southea s tA s ia 94 / 6 • iii •  ,, ii 'I II ff rain in Indonesia Rice for food dominates the Indonesian grain 1 sector and grain policy. Specifically, rice self-sufficiency2, which was first achieved in 1984, has been the focus of agricul- tural policies throughout Suharto's New Order government. From 1985 to 1990, self- sufficiency officially meant 'no rice imports'. Suharto's public acceptance in late 1991 of the broader notion of trend self-sufficiency (Manning 1992) was a watershed in Indonesia's food policy. Trend self-sufficiency means that imports and exports of rice are expected to balance over time. Experience in 1991 and 1992 demonstrated that stocks held by BULOG (Indonesia's food logistics agency), supplemented by occa- sional imports, could carry the country through substantial year-to-year fluctuations around trend caused by climate. The costs of maintaining the policy of trend self- sufficiency, however, depend on efficient rice output growth keeping pace with con- sumption over the next 5 to 10 years. Rice self-sufficiency has been justified on several grounds: Indonesia's history of large rice imports influencing world prices; providing food security for consumers; providing price support for small-scale farmers; and stabilising prices to serve both macroeconomic and political considerations (Tlffiffier 1991). More recently, some of these justifications have been questioned (for example, Fane 1992) but the important aspect for this paper is the effect on overall grain demand, supply and trade of the evolving policies used to achieve rice self-sufficiency. Rice self-sufficiency has been pursed in Indonesia through a package of policy instruments. Significant instruments used were public investment in irrigation infra- structure to improve water control and the lowering of fertiliser costs through subsi- dies to encourage the use of fertilisers, necessary inputs for high-yielding rice varie- ties. (Other policies were also pursued at various times in the past, including subsi- dies on pesticides and credit.) Various institutions were seen to be necessary to imp le- Southeast Asia 94/6 • 1 •  RAY TREWIN AND THOMAS TOMICH ment elements of rice policy, including rice price stabilisation, agricultural research and extension, and, more recently, integrated pest management and more efficient operation and maintenance of irrigation systems. For example, BULOG was charged with regulation of markets for rice and other commodities through its stock holdings, sales and purchases, including its exclusive control over international trade in rice and some other commodities. The pursuit of rice self-sufficiency over the last 25 years involved remarkably few tradeoffs among Indonesia's three fundamental development goals: growth, equity, and stability However, there were costs associated with policies and programs aimed at achieving self-sufficiency. For example, budgetary expenditures on the fertiliser subsidy to farmers were around US$500m in the early 1990s but have at times reached twice this amount (World Bank 1992). Other possible costs include losses in economic efficiency and environmental damage from excessive fertiliser use. Moreover, the continued effectiveness of the current mix of policies to maintain self-sufficiency is being questioned, especially in view of the slowdown in yield gains from the intro- duction of high-yielding rice varieties (Tabor 1992). New policy mixes in relation to rice have been suggested, with less emphasis on fertiliser subsidies and new irriga- tion infrastructure investment and more on research and extension advice aimed mainly at a wider variety of crops (World Bank 1992). As Indonesia moves into solid middle-income status, inevitable changes in food • consumption patterns will shift the sources of agricultural growth away from rice to fish and livestock products (especially poultry), the feeds needed to produce them, and to fruit and vegetables. Horticulture, poultry, and fish ponds all can produce profits that will rival rice, even on Java's sawah. Each also holds potential for forward link- ages to food processing and high-value exports. For the first time, then, fixation with self-sufficiency in rice and other 'strategic' crops may become a significant brake on growth in agricultural value-added, jobs, and exports. And internationalisation of the Indonesian economy, especially in respect of trading arrangements such as the GAIT, will also lead to broader agricultural policy considerations. Indonesia's agriculture has had impressive growth by international standards (Booth 1988). Nevertheless, the extraordinary growth in labour-intensive manufac- tures resulted in manufacturing's share of GDP in 1991 surpassing that of agriculture (19.9 per cent compared to 18.5 per cent) (Tomich 1992). Structural transformation will also bring two turning points in agricultural employment in the 1990s. The first, reported in Manning (1992), was reached in 1990 when agriculture's relative share fell below half of the labour force. The coming peak in size of the agricultural labour force-probably before 2000--will mark the second turning point for agricultural employment and will herald the subsequent decline in the absolute number of work- ers primarily dependent on agriculture. This last aspect, which mainly results from • 2 • Economics Di v i s ion Working Paper  GRAIN IN INDONESIA developments on Java, enables growth in agricultural labour productivity to acceler- ate as land/labour ratios increase and enables rural wages to rise. Still the income gap between farmers and the rest of the Indonesian society is likely to widen further in the future . This will create the political pressures that led other Asian countries such as Japan, Taiwan and South Korea to introduce high levels of protection on major agricultural products such as rice. But such protection may not be inevitable, and indeed may even be foreclosed by a new GATT agreement. Until po- litical coalitions coalesce in rural society to demand protection for rice-and there is no evidence yet that this has happened-Indonesia has a window of opportunity to seek an alternative, more efficient agricultural growth path. On the other hand, no rice consumer or industrial groupings have yet formed that could advocate this path. Seizing this opportunity, however, may be inhibited by two barriers that already exist in Indonesia's political economy. First, interests vested in 'strategic crops' like rice, soybeans, and sugar have kept agricultural trade reform behind the pace of struc- tural transformation and sectoral change. Second, difficulties in maintaining rice self- sufficiency over the next five years or so may lead to costly crash programs for rice production and thereby delay development of other crops, livestock, and fisheries, divert investment to irrigation from higher-return projects in rural roads, ports, com- munications, and other infrastructure, and postpone (the inevitably slow) adjustment of rice-oriented institutions to broader development roles. Thus, Indonesia is faced with fundamental questions regarding the future course of its rice and grain policy. How far and how fast will the dominance of rice policy, especially that in relation to self-sufficiency, diminish? And what role will rice-ori- ented institutions such as BULOG play in the future that may bring greater interna- tionalisation of grain trade? These key questions will be discussed in what follows in a structure that considers in order, the past and future prospects for grain demand, production and trade. Past patterns of consumption Past patterns of consumption give useful information on the possible development of future food demand. Even when structural changes take place in the economy and some previous relationships change fundamentally, comparisons of past patterns in relation to more developed parts of the Indonesian economy or with neighbouring countries still supply useful information on future trends. Southeast Asia 94/6 • 3 •  RAY TREWIN AND THOMAS TOMICH Relative to incomes and over time As incomes rise a more diverse pattern of consumption evolves with traditional foods being gradually replaced by higher valued and more processed foods (Table l3 and Figure 1). In the first stage of this evolution, inferior staples such as cassava are re- placed by more valued cereals such as rice and wheat. This stage is shown in Table 1 with cassava consumption showing an accelerating decline in contrast to the increased consumption of rice and wheat, the latter showing significant growth from a low base. The corn or maize consumption appears a contradiction to this pattern but a more detailed breakdown of consumption between uses (Sudaryanto et al 1992) shows the increase in corn consumption would appear due to an increase in the use of corn for animal feed. Table 1 Per capita consumption of major foods (kg/year and per cent growth) Rice Maize Wheat Cassava Sugar Fruit Vegetables Fish Meat kg/yr 1968-70 99.1 19.4 3.4 70.8 6.83 254.0 183.0 9.9 3.0 1978-80 121.5 21.6 6.5 66.0 10.6 237.3 160.7 11.2 3.4 1988-90 139.8 27.1 9.8 55.4 12.4 328.3 198.7 13.9 5.5 Growth (per cent p.a.) 1970s 2.1 1.6 6.8 -0.7 4.5 -0.7 -1.3 1.2 1.2 1980s 1.8 3.1 5.4 -2.1 2.0 4.1 2.7 2.8 6.2 Source: World Banlc, 1992. Agricultural Transformation: Challenges and Opportunities, Agricultural Opera- tions Division, Country Department III, East Asia and Pacific Regional Office, World Bank, Washington, D.C. The next stage of the evolution in consumption is the replacement of cereal con- sumption by higher valued foods such as fruits, vegetables, fish and meat. Cereal consumption is still increasing but at a decreasing rate when measured in terms of its share of calorie intake in the case of its major component-rice (World Bank 1992). The consumption of fruits, vegetables, fish and meat are all increasing at an accelerat- ing rate but their share of consumption is still small. The consumption of sugar which often reflects the increased consumption of more highly valued and processed foods also shows a marked increase over the period. • 4 • Economics Division Working Paper  GRAIN IN INDONESIA Figure 1 Real per capita income and food consumption in Indonesia, 1968-91 160 600 140 500 ~ 120 :;i :;; 400 ~ ~ >- 100 i 8- 80 300 ·s.. e ~ 60 [ ~ - - ~ 200 ~ ~ 40 Corn l? 100 ;;; 20 ~ 0 0 "' 68 70 72 74 76 78 80 82 84 86 88 90 Source: Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia , Centre for Agro-Socioeconomic Research (CASER), Bogor, Indonesia and Inter- national Food Policy Research Institute (IFPRI), Washington DC.; van der Eng, P., 1993. 'Food consump- tion and the standard of living in Indonesia, 1880-1990', Economics Division Working Paper 93/1, South- east Asia, Research School of Pacific and Asian Studies, The Australian National University, Canberra. Figure 2 Urban and rural expenditure compositions (per cent share) Urban Rural 80 00 70 Food 60 ~ Ill ..c: 50 Cereals C:"' 40 Cereals ...el QI 30 p.. 20 Prepared foods 10 0 70 76 78 80 81 84 87 70 76 78 80 81 84 87 Source: World Bank, 1992. Agricultural Transformation: Challenges and Opportunities, Agricultural Opera- tions Division, Country Department III, East Asia and Pacific Regional Office, World Bank, Washington, D.C. • 5 • Southeast Asia 94/6  RAY TREWIN AND THOMAS TOMICH Within regions The influence of growth and rising incomes on the pattern of food consumption is also evident from comparing consumption by regions over time (Figure 2 and Table 2). Table 2 Average weekly consumption of rice, corn, cassava and sugar by region, selected years (kilogram per capita) 4 Rice Com Cassava Sugar 1976 1980 1984 1987 1976 1980 1984 1987 1976 1980 1984 1987 1976 1980 Java Rural 1.85 1.96 2.00 2.12 0.36 0.48 0.43 0.32 0.54 0.50 0.64 0.53 0.07 0.04 Urban 2.04 2.97 2.13 2.05 0.04 0.04 0.09 0.02 0.11 0.14 0.31 0.13 0.14 0.15 Total 1.89 1.96 2.02 2.10 0.31 0.37 0.29 0.21 0.46 0.41 0.48 0.38 0.08 0.11 Off Java Rural 2.40 2.43 2.39 2.34 0.25 0.31 0.19 0.26 0.53 0.45 0.55 0.62 0.16 0.18 Urban 2.32 2.24 2.23 2.29 0.05 0.05 0.04 0.05 0.25 0.13 0.28 0.19 0.19 0.21 Total 2.39 2.45 2.28 2.33 0.21 0.26 0.16 0.20 0.48 0.39 0.47 0.49 0.17 0.18 Indonesia Rural 2.05 2.15 2.08 2.27 0.32 0.41 0.48 0.28 0.54 0.48 0.44 0.59 0.10 0.13 Urban 2.14 2.05 1.97 2.20 0.04 0.05 0.06 0.04 0.16 0.13 0.15 0.17 0.16 0.17 Total 2.07 2.13 2.05 2.25 0.27 0.33 0.38 0.20 0.47 0.40 0.37 0.46 0.11 0.14 Source: Center for Agro-Socioeconomic Reasearch, Bogor, Indonesia and International Food Policy Re- search Institute, Washington, DC. The first point to note is that both urban and rural average per capita expenditures rose over time but that urban expenditures rose more rapidly. The impact of this is reflected in the broad expenditure shares with the food and cereals shares of urban expenditure falling much more rapidly, and prepared foods share rising much more rapidly, than for rural expenditures. Some differences are evident in the consumption of rice on a regional basis with rural consumption off-Java being higher than urban consumption off-Java and overall off-Java consumption being higher than that on-Java. These results are consistent with the above discussion of an eventual movement away from rice into higher valued products as development and incomes progress. The results do not, however, capture • 6 • Economics Di v i s ion Work i ng Paper  GRAIN IN INDONESIA quality differences such as the more affluent eating similar quantities but higher qual- ity rice. More marked differences are evident with the other commodities. Com con- sumption is higher in the rural areas and on-Java, results that are consistent with growth being in the use of corn for feed. Cassava consumpt ion is likewise higher in the rural areas but more so off-Java, results that are consistent with the 'progress in develop- ment and incomes' story. Finally, sugar consumpt ion is higher in urban areas and off-Java. The first aspect, higher urban consumpt ion, is consistent with the 'growth and incomes' story but not the second. The second aspect has a number of possible explanatio ns. For example, it could be the result of an aggregatio n effect (some rural areas having relatively high incomes but even higher sugar consumpti on); or non-mark et effects (from BULOG's involveme nt in sugar marketing ); or the greater availability of artificial sweetener s on-Java (the consumpt ion of which has been stimulated by the sugar price distor- tions); or just cultural practices. This multitude of possible explanatio ns points to the need for careful analysis of the underlyin g determina nts of food demand in any pro- jections exercise and not just an extrapolat ion of past trends. The regional differences in conjunction with changes in regional income distribu- tions could have important implicatio ns for future changes in overall food demand. Relative to other countries Comparis on of Indonesia with other countries in the region gives additional useful informatio n on the influence of developm ent and rising incomes on the pattern of food consumpt ion. Figure 3 Calorie consumpt ion versus income (average for 7 Asian countries) >, 3,000 "' "Cl 2,500 [ 2,000 ,:: 0 1,500 .,~ 0.. 1,000 . ~ ~ 0.. 500 0 3,000 4,000 0 1,000 2,000 Per capita GDP (1986 US$) Source: World Bank, 1992. Agricultural Tran sformation : Challenges and Opportunities, Agricultural Opera- tions Division, East Asia and Pacific Regional Office, World Bank, Washington, D.C. • 7 • Southeas t Asia 94/6  RAY TREWIN AND THOMAS TOMICH Figure 3 shows that as incomes rise a maximum of about 2,850 calories per person per day is reached. The high income Asian countries of Japan, Singapore and South Korea are at this stage. However, Indonesia is exhibiting a significantly higher aver- age calorie intake given its level of development than suggested by the chart, equiva- lent to countries with 3 or 4 times the per capita income. The share of grains in Indone- sia's average calorie intake is also exceptionally high given its level of development, and thus the share of some other foods relatively low. On average, the share of cereals in all seven Asian countries peaks at about 68 per cent or 1500 calories per day per person when incomes reach US$350 (1985 prices) and becomes an inferior good at about US$950. These comparisons suggest Indonesia's food demand, and cereals' share of this, may peak much more quickly if it follows the development of these other countries than would be suggested by Indonesia's current level of economic develop- ment as measured by per capita incomes. On the other hand, Indonesia's food de- mand may maintain some unique characteristics such as it high per capita consump- tion of cassava based products. One qualifier to abovecited trend is that recent works by Gamaut and Ma (1992) and Summers and Heston (1991) suggest some developing countries per capita in- come can be under reported and not represent the true purchasing power of consum- ers in these countries. Thus, Indonesia may not be on a different (Engle) curve as suggested by Figure 3 but just have a per capita income that is not comparable to the purchasing power represented by the average per capita incomes of the other coun- tries in the figure. In terms of the projections described later, these will not be affected so long as any biases are constant and no turning points are reached in the projections period. Non-food demand for grain The non-rice grains often have more diversified uses than rice, for example corn and wheat are major and growing sources of animal feed . The rapid increase in demand for intensively produced meats, especially poultry, has resulted in an increased de- rived demand for suitable feeds. Growth in the commercial poultry sector, generally on the urban fringes, has been rapid as a result of the easy transferability of interna- tional technology. Growth has averaged around 27 per cent per annum during the 1980's. Growth in beef feedlotting usually takes place at a later stage of a country's development. Changes in feed conversion rates will also affect the demand for feeds, for example more intensive feeding operations require grains for faster weight gain but improved feeding practices and animal husbandry could compensate this through more efficient feed conversion rates. Com used for feed has grown to about 6 per cent of Indonesian corn supplies with another 7 per cent processed by manufacturing industry, primarily for cooking oil and other foods (Sudaryanto et al 1992). The World Bank classify non-food uses of corn as • 8 • Economics Division Working Paper  GRAIN IN INDONESI A feed uses and record feed use at about 20 per cent in 1988 with the expectation that this will rise to SO per cent by the year 2010. Soybean is another importan t source of feed with 30 per cent of supplies being used for this purpose. Cassava is also a non- grain source of feed with around 2 per cent of supplies being used for this purpose and another 20 per cent further processed, mainly into flour. Indonesi a has a surplus of energy feeds (for example, rice bran and corn) but a deficit of protein feeds (for example, soybean). Soybean meal was imported until 1987 but since then much of it has been domes- tically produced and greater quantitie s of soybean grain imported . The feed industry has grown from 2 factories in the early 1970's to 71 in 1986. Approxi mately 90 per cent of all mixed and concentr ated feeds are currently used by the commercial poultry sector and growth in this sector has been a leading indica- tor of that in the feed sector. A typical mix for poultry feed in Indonesi a is 45 to 60 per cent corn and 10 to 25 per cent rice bran with the remaind er protein (for example, soybean) and vitamin supplements. As long as Indonesian trade policies lead to soybean meal prices being 40 per cent above the import parity price, poultry feed in Indonesi a will contain only 10 per cent soybean meal instead of the norm of 20 per cent or more. As a consequence, the feed mix will include more corn. The higher costs are an im- pedimen t to growth in domestic consump tion and to exports of poultry. According to estimates by the US Agricultural Counsellor, Indonesi a's poultry production costs could be 15 per cent below Thailand but this potential compara tive advantag e is negated by the higher feed costs. Determ inants of food deman d The major determin ants of food demand tend to be populati on growth and its distri- bution, income growth and its distribution, prices, policies that affect these determi- nants and socioeconomic characteristics of the populati on such as tastes. Price and income levels are importan t determin ants of food demand, especially on a per capita basis. Thus it is necessar y to consider their changing impact on food demand even if these tum out to be insignificant relative to other determin ants. Income growth and food demand The previous section illustrate d the relationship between income levels and the level and composition of food consump tion. The relations hip was illustrate d both in rela- tion to time and income, regional and country grouping s. Over time as incomes grow it would be expected that the overall income elasticity of demand for food would decline, as would those for the more staple products , and that those for the more • 9 • Southea st Asia 94/6  RAY TREWIN AND THOMAS TOMICH valued products would increase relatively. The dispariti es between income levels and other socioeconomic characteristics in urban and rural areas suggest income elasticities may need to be estimate d on a regional basis if they are to be useful in predictin g future demand. Table 3 lists income elasticities for various key products from a number of different studies and points in time. Table 3 Income elasticiti es of demand by source IFPRI/ Wld Bank MOAb CARDC BAP- A&T' CASER• On Off Urban Rural Urban Rural PENASd Java Java Java Java off-Java Rice 0.17 0.26 0.29 0.29 0.35 0.44 0.26 0.48 0.31 0.40 Wheat 0.42 0.84 0.84 0.98 0.45 0.55 Corn 0.39 0.88 0.41 - food -0.26 0.48 0.47 - feed 1.50 0.53 0.56 Soybean 0.54 0.56 0.54 0.96 0.75 - food 0.54 - feed 1.50 Cassava 0.30 0.10 0.10 0.26 0.10 0.10 Sugar 0.53 0.51 0.78 0.85 0.81 0.98 0.45 1.20 Vegetables 0.92 0.99 0.92 1.10 Fruits 1.13 1.39 1.35 1.56 Beef 0.96 0.66 0.58 0.74 0.79 1.00 Poultry 0.89 0.69 0.77 0.68 0.84 1.10 Fish 1.07 - Fresh 1.07 1.02 1.04 1.15 - Dried 1.14 1.19 1.06 1.28 Dairy 0.83 1.00 0.74 0.94 1.00 Food 0.88 0.89 0.85 0.90 - Prepared .. 1.49 1.78 1.50 1.68 a 1981 SUSENAS b 1987 SUSENAS c 1987 SUSENAS d 1989/90 base • Anderson and Tyers, 1982 base Sources: Ellis, F., 1988. 'Workshop on issues in research methodolo gy for Indonesian agriculture ', Febru- ary, Jakarta, Indonesia; Center for Agricultural and Rural Development, 1990. Analysis of Food Crop Policy for Indonesia, CARD, Iowa State University; Altemeier, K., 1992. 'BAPPENAS agricultural sector model', Consultancy Report; Tyers, R. and Anderson, K., 1992. Disarray in World Food Markets, Cambridge Univer- sity Press, Cambridge . • 10 • Econom ics Divisio n Workin g Paper  GRAIN IN INDONESIA The first four columns were obtained from the Ellis Report (1988) and represent estimates from studies using different approaches as well as points in time. The most striking difference is in the estimates for corn as food and as feed with only the IFPRI/ CASER estimates showing the expected negative elasticity with corn as food and a high positive elasticity with corn as feed. The next five columns are also compared and contrasted in a consultancy report on the BAPPENAS Agricultural Sector Model (Altemeier 1992). This is a model that has been periodically updated as more recent data became available. The updates showed that total expenditure elasticity estimates were relatively constant or changing according to expectations. For example, expendi- ture elasticities for rice fell from 0.33 using a 1988 base year to 0.26 with a 1989 base year. Soybean expenditure elasticities fell from 0.75 to 0.54. The CARD estimates (CARD 1990) in the table show that there are quite significant differences in expenditure elasticities over regions; rural elasticities being generally higher than urban ones. This outcome is also apparent in the results obtained by Turnner and Alderman (1979) which also illustrated that income elasticities decline as consumers move into higher income classes. The role of prices Price is another generally significant variable affecting the demand for food. Own price elasticities would be expected to fall with respect to some staple foods as devel- opment progresses but could also be affected by changes in some policies, such as those connected with price support. The estimated elasticities reflect the policy situa- tion at the time and need to be reassessed on their applicability to different policy situations. For example, the estimated elasticities for wheat reflect a situation of con- strained supply and may not be applicable if wheat imports were opened up. Table 4 lists own price elasticities for various key products from a number of different studies and points in time. As with Table 3 the first four columns relate to results given in the Ellis Report (1988). The results display reasonable agreement for the main commodity, rice, and for sugar and soybean but display more marked differences for other commodities such as wheat, corn and cassava. The CARD (1990) estimates show quite marked dif- ferences in terms of whether they relate to Java, off-Java, rural or urban areas (and hence differences in associated characteristics such as income levels5), stressing the importance of not blindly applying aggregate estimates in any food demand analysis. This comprehensive set of estimates also illustrate the relatively higher own price elasticities of more valued commodities such as wheat, sugar, vegetables, fruit, meat and fish, eggs and dairy, and prepared foods. Comparison of more recent estimates, such as those ofAltemeier (1992), with older estimates, such as those of Deaton (1990) and Tyers and Anderson (1992), show how some estimates have changed over time. Southeast Asia 94/6 • 11 •  RAY TREWIN AND THOMAS TOMICH Most notably, rice estimates have fallen from around -0.42 or -0.51 in the early 1980's to around -0.10 in the late 1980's. Table 4 Own-price elasticities of demand by source IFPRI/ World Bank MOAb CARDC BAP- A& Of CASER" On Off Urban Rural Urban Rural PENASd T" Java Java Java Java off-Java off-Java Rice -0.25 -0.20 -0.19 -0.17 -0.12 -0.71 -0.18 -0.43 -0.10 -0.51 -0.42 Wheat -0.32 -0.56 -0.54 -0.56 -0.85 -1.20 -0.69 Corn -0.19 -0.22 -0.33 -0.82 - food -0.52 -0.60 -0.43 - feed -0.50 -0.21 -0.28 Soybean -0.55 -0.69 -0.69 -0.22 -0.54 - food -0.46 - feed -0.30 Cassava -0.50 -0.29 -0.29 -0.37 -0.02 -0.17 -0.33 Sugar -0.30 -0.31 -0.82 -0.80 -0.78 -0.72 -0.32 -1.20 .. Vegetables -0.68 -0.89 -0.86 -0.77 -1.11 Fruits -0.70 -0.64 -0.71 -0.67 -0.95 Beef -0.51 -0.58 -1.11 -0.92 -0.51 -1.40 -1.09 Poultry -0.73 -0.79 -0.98 -0.72 -0.65 -1.40 -1.09 Fish -0.39 -0.76 - Fresh -0.98 -0.89 -1.23 -1.14 -0.24 - Dried -1.00 -1.00 -0.82 -1.13 Dairy -0.62 -0.69 -0.67 -0.78 -1.00 .. Food -1.09 -0.94 -1.10 -0.98 - Prepared .. -0.96 -1.02 -1.08 -1.10 ' 1981 SUSENAS b 1987 SUSENAS ' 1987 SUSENAS d 1989 /90 base • Anderson and Tyers, 1982 base r Deaton's estimates Sources: As in Table 3; Deaton, A., 1990. 'Price elasticities from survey data: extensions and Indonesian results', Journal of Econometrics, 44. Demand for a specific commodity is not only affected by its own price but by the price of other commodities, especially those that are strong competitors or substitutes. • 12 • Economics Division Working Paper  GRAIN IN INDONESIA These effects are summarised in cross-price elasticity estimates, which would be ex- pected to change as development progresses and the demand for more staple com- modities is replaced by that for more valued commodities. Table 5 lists cross price- elasticities for various key products from a number of different studies and points in time as presented in the Ellis Report (1988). Table 5 Cross-price elasticities of demand 6 Rice Com Wheat Soybean Cassava Sugar Rice n.a. 0.04 -0.01 0.03 0.02 n.a. 0.08 0.02 0.02 0.06 0.02 n.a. 0.15 Com 0.34 n.a. -0.03 0.03 -0.02 0.15 n.a. 0.02 0.02 0.10 0.02 1.34 n.a. Wheat n.a. 0.20 0.05 n.a. 0.02 0.02 0.02 n.a. Soybean -0.18 -0.03 n.a. -0.10 0.49 -0.50 0.05 0.02 n.a. 0.05 0.02 0.30 n.a. Cassava 0.42 0.04 0.07 n.a. -0.01 -0.45 0.15 0.02 0.05 n.a. 0.02 0.21 n.a. Sugar 0.13 -0.10 0.19 -0.01 n.a. 0.02 0.02 0.02 0.02 0.02 n.a. n.a. Upper Estimates from Ministry of Agriculture. Middle Estimates from IFPRI/CASER (medium rural income). Lower Estimates from World Bank. Source: Ellis, F., 1988. 'Workshop on issues in research methodology for Indonesian agriculture', February, Jakarta, Indonesia. The most obvious feature of this table is the marked difference in a number of the estimates of the same cross-price elasticities. This no doubt reflects the different econo- metric approaches more than the time period as often there are differences of sign as well as of degree even when the period differences are small. Many of the cross-price elasticities appear insignificant, for example those in the rice 'row' which correspond Southeast Asia 94/6 • 13 •  RAY TREWIN AND THOMAS TOMICH to the elasticity of demand for rice with respect to the price of other commodities. This contrasts to the relatively high cross-price terms for the rice 'column' which corre- spond to the elasticity of demand for other commodities with respect to the price of rice. This is particularly the situation for corn with respect to the price of rice which suggests corn is a significant substitute for rice. Other commodities such as soybean would appear complementary products of rice. The high cross-price terms for the effect of rice price on other items, and the lack of significant terms for the effect of other items on rice, reflects the current relatively high budget share of rice. Demographics Population growth is likely to become an increasingly important determinant of food demand as income and price elasticities decline towards zero and income elasticities even become negative. Indonesia's population growth has slowed and is expected to slow further in the future. The 1990 Census shows a 1980-90 average annual popula- tion growth rate of only 1.8 per cent compared to a rate of 2.4 per cent during the 1970s. Rates of between 1.4 and 1.0 per cent are predicted for the first two decades of the next century. However, given the large size of the Indonesian population even small rates of growth in the population will mean large absolute increases in demand. For example, the World Bank estimates that each 0.1 per cent increase in Indonesia's population growth rate adds about 300 thousand tonnes to total rice demand after ten years. Population growth is not the only demographic factor to affect food demand. The distribution or age composition of the population has an effect also. Since the early 1970's the proportion of the Indonesian population falling in the higher nutritional needs group of 15 to 44 year olds has been increasing and this is expected to continue into the next century. Another demographic factor that will affect food demand is the amount of the population that lives in urban areas. Urban lifestyles tend to be less physically de- manding and result in a lower demand for food for nutritional purposes as evident from Table 2. By 1990, 30 per cent of the Indonesian population lived in urban areas and this trend to urbanisation is increasing with development. Policies affecting food demand Policies can affect food demand either directly, or indirectly via their impact on key determinants such as income and prices. The most important direct Indonesian poli- cies affecting food demand concern the operations of BULOG. BULOG is a govern- ment authority that regulates the market for rice, wheat, wheat and other flours, cere- als and cereal by-products, sugar and soybeans through its stock holdings, sales and purchases, including its exclusive control over rice exports and imports which are • 14 • Economics Division Working Paper  GRAIN IN INDONESI A importan t instrume nts under trend self-sufficiency. Its objectives have been stated as stabilising consume r supplies and prices; promotin g domestic producti on and pro- ducer incomes; supplyin g the military and civil service; and maintain ing reserve stocks. The jump in flour consump tion following a relaxation in the tight wheat import policy in 1991 illustrates the power of such trade policies to affect the consump tion of vari- ous substitut e commodities such as wheat and rice.And this jump was despite BULOG maintain ing wheat flour prices above those of milled rice in an effort to promote do- mestic food crop producti on. BULOG's responsibility for the distribut ion of rice to military personne l and civil servants (the 'budget groups') could have a direct impact on the level of rice consump tion, and hence an impact on the consump tion of other commodities, or it may just be a costly income transfer mechani sm. The effects of this policy are complicated by the quality of the rice distribut ed. Many recipients trade the distribut ed grain and buy better quality rice for their own consump tion. Many policies indirectly affect food demand, with some more significant than oth- ers. Of the producti on orientate d policies, various input subsidie s of fertiliser, water, credit and pesticide were mainly aimed at rice producti on and have led to the greater availability of rice and relatively lower rice prices. These policies affected producti on and demand for other commod ities including other grains. Similarly, policies on the consump tion side such as those that increase the consume r price of wheat have led to the greater consump tion of rice and lesser consump tion of substitut e commodities. The differential regional impact that various policies such as those concerni ng infra- structure developm ent have on relative prices and incomes also affects consump tion patterns. Broader still, internati onal trade arrangem ents can have significant effects on food demand through tariff and non-tariff barriers and hence market prices and quantitie s (Tyers and Anderso n 1992). Socioeco nomic characte ristics Socioeconomic characteristics such as taste preferences can be key determin ants in food demand. For example, many Asian countries have higher than world average consump tion of rice and lower than world average consump tion of dairy products . But tastes can change with developm ent. More develope d Asian countries have sub- stituted high rice consump tion for consump tion of more valued and highly processe d products. Grain deman d project ions to year 2000 • The key aspect about projections is not the resultant numbers per se but the underly- ing assumpt ions and methods used to obtain the numbers . From the earlier sections • 15 • S o uth e a s t Asia 94 / 6  RAY TREWIN AND THOMAS TOMICH dealing with key determinants of demand it can be appreciated that assumptions on population growth, economic growth as reflected in per capita incomes, relative prices, the policy environment (eg open or restricted trade) and structural changes (eg changes in elasticities, tastes and feed demand) are important in terms of the projections pro- duced. Whether feed demand for grains is obtained directly or as a derived demand from the demand for intensively produced meats could also be important in terms of the projections obtained. Table 6 Comparison of rice demand projections to 2000 7 Real Projected Due to Population income growth Net Due to Income, growth growth on demand change population others IBRD (92) Base growth 1.8 6.0 2.2 7.7 6.0 1.6 High growth 1.8 4.0 2.1 7.3 6.0 1.2 Low growth 1.8 7.0 2.2 7.6 6.0 1.6 BAPPENAS Import parity 1.8 6.1 1.6 5.4 6.0 -0.6 Export parity 1.8 6.4 1.9 6.4 6.0 0.4 Ellis 2.0 4.5 2.6 9.2 7.0 2.3 FAO Neutral 1.6 3.5 2.5 9.0 5.5 3.5 Urban-Bias 1.6 3.5 2.4 8.5 5.5 3.0 Rural-Bias 1.6 3.5 2.6 9.5 5.5 4.0 IBRD (88) 2.2 3.6 2.5 9.0 7.0 2.0 Card-MOA 1.9 5.0 2.1 7.2 6.5 0.7 DGF-MOA 2.0 3.5 2.3 8.1 7.0 1.1 CWFS 1.9 4.3 2.8 10.2 6.7 3.6 IF PRI/CASER 2.0 3.0 2.2 7.7 Sources: World Bank, 1992. Agricultural Transformation : Challenges and Opportunities, Agricultural Opera- tions Division, East Asia and Pacific Regional Office, World Bank, Washington, D.C.; Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook/or Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Insti- tute, Washington, DC.; Ellis, F., 1988. 'Workshop on issues in research methodology for Indonesian agri- culture', February, Jakarta, Indonesia. • 16 • Economic s Division W o rking Paper  GRAIN IN INDONESI A Compar ison of rice demand projecti ons Many sets of projections have been produced of Indonesi a's future demand for vari- ous commodities, reflecting different assumpti ons, methods and time periods. It is worthwh ile analysin g these projections as a group to see if they are robust or sensitive to particula r assumpt ions before consider ing individu al projections. The World Bank (1992) undertoo k such an exercise for rice in its recent report on Indonesi an agricul- ture and this is reproduc ed in Table 6 along with more recent rice projections by IFPRI/CASER (Sudarya nto et al 1992). Projections of growth in aggregat e rice demand for the 1990s ranged between 1.6 and 2.8 per cent per year. Despite differences in underlyi ng assumpti ons, with popu- lation growth ranging between 1.6 and 2.0 per cent and income growth between 3.5 and 7.0 per cent, five of the eight studies project a relatively narrow annual growth in aggregate rice demand between 2 and 2.5 per cent for the 1990s • This is a significant 8 slowdow n in rice demand which increased by 3.7 per cent per annum during the 1980's. Most of the projected increase in demand is due to populati on growth with that due to income and other factors generally small. Projections based on high in- come elasticities of demand and high income growth project a larger increase in de- mand. However, the faster income grows the sooner rice consump tion per capita should peak (income elasticities of demand approach zero) and the faster should be the even- tual decline in aggregat e rice consump tion. The World Bank report referred to above has a compreh ensive coverage of projec- tions for various types of grains and grain uses. It produces these for a range of real income growth rates but gives a preferred rate of 6 per cent per annum. Populati on projections were obtained from BPS and were for an increase of l. 9 per cent per annum between 1988 and 1995 and then a fall to a rate of 1.4 per cent per annum. These rates lead to per capita real income growth rates of 4.1 per cent per annum between 1988 and 1995 and then 4.8 per cent per annum. The food demand projections are based on calorie consump tion curves for major food groups estimate d from data for sevenAs ian countries at various stages of developm ent (income levels) with individu al commod - ity projections being determin ed from a multi-sta ge decision process • Feed demand 9 projections are based on the assumpt ion that growth in livestock producti on matches the growth in demand for animal products and that feed conversi on rates are con- stant. Demand projections under the 6 per cent income growth assumpt ion are given in Table 7. The key points to note from Table 7 are the transitio n out of staples, especially inferior staples, with the per capita consump tion of grains expected to peak towards the end of the century This is replaced by growth in more preferred foods such as meats, especially intensive ly-raised poultry in the first instance, and associated feeds. These trends are even more evident under higher growth scenarios. • 17 • Southea st Asia 94/6  RAY TREWIN AND THOMAS TOMICH Table 7 Demand projections for food and feed• Growth(%) 1988- 1995- Test Units 1988 1995 2000 1995 2000 Population Million 176 200 216 1.9 1.6 Real PCE b Trillion Rp 65 98 130 6.0 6.0 Per cap. PCE US dollar 333 440 544 4.1 4.3 Cereals Indexed 100 118 129 2.4 1.8 Rice '000 t 26,075 30,836 33,725 2.4 1.8 Wheat '000 t 1,593 2,237 2,788 5.0 4.5 Com '000 t 5,740 6,797 7,654 2.4 2.4 Food '000 t 4,725 5,157 5,307 1.3 0.6 Feed '000 t 1,015 1,639 2,347 7.1 7.4 Root Crops Indexed 100 100 99 0.1 -0.3 Cassava '000 t 11,555 11,558 11,567 0.0 0.0 Sweet potato '000 t 1,900 1,701 1,565 -1.6 -1.7 Other Indexed 108 72 53 -5.6 -5.9 Sugar '000 t 2,201 3,171 4,052 5.4 5.0 Veg. oils Indexed 100 142 180 5.1 4.8 Oil crops Indexed 100 124 146 3.1 3.3 Soybeans '000 t 1,737 2,345 2,959 4.4 4.8 Food '000 t 1,378 1,751 2,098 3.5 3.7 Feed '000 t 359 593 861 7.4 7.7 Peanuts '000 t 545 600 645 1.4 1.5 Other Indexed 100 126 150 3.3 3.5 Vegetables Indexed 100 128 154 3.6 3.8 Pulses Indexed 100 127 146 3.5 2.8 Fruit Indexed 100 145 195 5.5 6.1 Meats Indexed 100 142 189 5.1 5.8 Pork '000 t 106 153 202 5.4 5.7 Viii. poultry '000 t 98 139 181 5.1 5.4 Inten. poultry '000 t 99 186 300 9.4 10.0 Other Indexed 100 120 138 2.7 2.8 Milk '000 t 729 1,059 1,404 5.5 5.8 Eggs '000 t 385 610 832 6.8 6.4 Fish '000 t 2,218 3,148 4,000 5.1 4.9 Total Calories Indexed 100 121 137 2.8 2.5 a At real GDP growth of 6 percent per annum. b Private Consumption Expenditure in GDP accounts in 1985 rupiah. Source: World Bank, 1992. Agricultural Transformation: challenges and opportunities, Agricultural Opera- tions Division, Country Department ill, East Asia and Pacific Regional Office. • 18 • Economics Division Working Paper  GRAIN IN INDONESIA Another set of even more comprehensive projections in relation to the use of grains for feed have been produced by IFPRI/CASER making use of a multi-market model of food crops supply and demand (Sudaryanto et al 1992). Per capita demand for food crops by income classes and regions are estimated as functions of per capita consump- tion expenditures, own prices and the prices of complementary and substitute food commodities. Demand functions for corn and soybean for feed are similarly specified. Seed, waste and others are a constant proportion of production or net imports. Class specific demand elasticities are assumed to change over time as per capita expendi- tures change. The effects of some government policies are captured via the level of irrigation investment, food crop prices and fertiliser subsidies and the level of rice imports. The uptake of new technology such as high yielding varieties are assumed to follow recent trends. Projections are produced for alternative income growth, pricing, irrigation investment and fertiliser subsidy policies 1°. Table 8 Projected food crop supply and demand under current policies Produc- Change Net Total Feed Seed, Food tion in stock imports supply waste, etc. Rice (milled) Base (1989) 26928 0 70 26998 0 658 26341 1995 30927 0 -871 30056 0 753 29303 2000 33813 0 -665 33148 0 825 32323 Com Base (1989) 6248 0 -188 6067 3158 807 2103 1995 7536 0 -1 7534 4376 965 2193 2000 9239 0 -39 9200 5727 1164 2309 Cassava Base (1989) 17177 0 127 17304 119 7574 9614 1995 18300 0 1016 19316 386 8513 10417 2000 20358 0 543 20901 421 9282 11198 Soybeans Base (1989) 1345 5 946 2286 562 144 1579 1995 1557 0 1297 2854 779 179 1896 2000 1708 0 1741 3449 1020 196 2233 Sugar Base (1989) 2137 33 289 2392 0 224 2168 1995 2624 0 327 2951 0 351 2600 2000 2982 0 476 3458 0 411 3047 Wheat Base (1989) 0 46 1813 1767 0 88 1685 1995 0 0 2122 2122 0 124 1999 2000 0 0 2468 2468 0 144 2325 Southeast Asia 94/6 • 19 •  RAY TREWIN AND THOMAS TOMICH Table 9 Projected food crop supply and demand with input and output pricing subsidies removed and with rice following world prices Produc- Change Net Total Feed Seed, Food tion in stock imports supply waste, etc. Rice (milled) Base (1989) 26866 0 79 26945 0 656 26290 1995 29440 0 145 29586 0 739 28847 2000 32023 0 362 32385 0 807 31578 Corn Base (1989) 6232 0 -163 6069 3165 805 2100 1995 7687 0 -7 7680 4553 987 2140 2000 9189 0 106 9295 5860 1176 2260 Cassava Base (1989) 17168 0 121 17288 118 7570 9603 1995 18852 0 33 18885 381 8394 10110 2000 20628 0 -426 20202 406 8958 10838 Soybeans Base (1989) 1344 5 971 2310 563 144 1602 1995 1158 0 2225 3383 811 133 2439 2000 1090 0 3053 4143 1043 125 2974 Sugar Base (1989) 2137 33 308 2412 0 224 2188 1995 2278 0 1072 3350 0 388 2961 2000 2586 0 1209 3795 0 453 3342 Wheat Base (1989) 0 46 1814 1768 0 88 1685 1995 0 0 2114 2114 0 123 1991 2000 0 0 3795 3795 0 453 3342 Sources of Tables 8 and 9: Sudaryanto, T., Herrnanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogar, Indonesia and International Food Policy Research Institute, Washington, DC. Some relevant results when real prices, irrigation investment and fertiliser subsi- dies are assumed to remain constant (that is under current policies) and when prices follow world prices (as projected by the World Bank) and fertiliser is not subsidised (that is under expected long-run policies) are given in Tables 8 and 9 respectively. Population projections were obtained from BPS. Per capita incomes are assumed to grow at 3 per cent per annum in the baseline projections (equivalent to an overall growth in incomes of around 5 per cent per annum). 11 • 20 • Economics Division Working Paper  GRAIN IN INDONESIA There are a number of features of Table 8 worth highlighting. First, declining in- creases in rice consumption are projected. Com and soybeans are projected to have strong growths in demand to the year 2000. Most of the growth in corn demand con- cerns its use as feed. This is despite the feed-related parameters used in the model being the most likely to become dated given the high growth rates in this sector. Wheat also is projected to have strong growth in demand but the model assumes most of this to be used as food and none to be used as feed, this last aspect being an unlikely situation if Indonesian intensive meat industries are able to follow feed practices else- where in the world. Table 9 illustrates the combined effects of changes in pricing policies and input subsidies from the baseline situation represented in Table 8. Some of the individual effects may counteract each other. For example, the introduction of flexible pricing of rice on its own results in smaller trade balances. This is because Indonesian imports raise the world price of rice and hence, under flexible pricing, the domestic price of rice. This domestic price increase in tum stimulates production and depresses con- sumption. However, the removal of the fertiliser subsidy will depress production and have an opposite effect on the trade balance. These interrelated effects are discussed in more detail later in the section dealing with international trade. The demand projections from the various agencies presented in Table 6 do not differ much despite differences in methods and certain assumptions such as income growth. This is a result of the major assumption on population growth being much the same. Comparison of the World Bank projections in Table 7 and the IFPRI/CASER ones in Tables 8 and 9 draw out some differences, for example that the World Bank is more pessimistic on corn and cassava and more optimistic on wheat, but these can be traced back to assumptions concerning land allocations, uses, etc. Because of these similarities, and the comprehensive ness and flexibility of the IFPRI/CASER model in generating required projections in relation to various assumptions, the IFPRI/ CASER projections will be mainly used in this paper. The policy implications of the demand and supply projections presented later, will be discussed when they are brought to- gether in the section on international trade. Past patterns of grain production Like past patterns of grain demand, past patterns of grain production give useful information on the possible future developments in grain production even when ma- jor structural changes take place. SoutheastAs ia 94/6 • 21 •  RAY TREWIN AND THOMAS TOMICH Table 10 Net crop imports, 1968-89 (thousand tons) Rice Com Soybeans Cassava Produc- Net Produc- Net Produc- Net Produc- Net tion imports tion imports tion imports tion imports 1968 10798 491 3166 -66 420 -8 11356 -521 1969 12788 604 2293 -156 389 -1 10917 -930 1970 12179 956 2825 -253 498 -4 10478 -945 1971 12585 506 2606 -219 516 -1 10690 -1494 1972 12327 748 2254 -78 518 -3 10385 -1007 1973 13551 1863 3690 -181 541 -36 11186 -210 1974 14190 1132 3011 -197 586 -4 13031 -1104 1975 14100 690 2903 -51 590 0 12546 -303 1976 14737 1290 2572 50 521 171 12190 -173 1977 14757 1973 3142 -1 522 89 12487 -432 1978 16284 1842 4029 4 617 130 12902 -856 1979 16369 1929 3724 63 680 177 13751 -1972 1980 18437 2017 3991 19 653 101 13726 -1073 1981 20369 525 4509 -6 704 1 13301 -1036 1982 20912 311 3235 75 521 1 12988 -616 1983 21955 1172 5087 10 536 222 12103 -748 1984 23736 414 5288 -100 769 401 14167 0 1985 24316 -358 4330 46 870 302 14057 -1561 1986 24744 -178 5920 54 1227 359 13312 -1281 1987 24970 5 5155 216 1161 287 14356 0 1988 25949 33 6652 26 1270 466 15471 0 1989 26657 163 6193 -194 1315 390 17117 0 Source: Sudaryanto, T., Hennanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Institute, Washington, DC. Over time There are a number of interesting trends over time as evident from past patterns of grain production illustrated in Table 10 along with net imports to be discussed later. There have been significant increases in production of all grains, although this has been more marked for some. The most significant increases in quantity terms has been in rice production. Rice has also been significant in terms of growth rates along with corn and soybean production. In recent times growth rates of soybeans have acceler- ated. Analysing over grains, rice has been the dominant grain followed by cassava, • 22 • Economics Division Working Paper  GRAIN IN INDONESIA corn, and then soybeans. This pattern has been consistent over time although the shares have changed. Rice's share has increased from around 40 per cent to 50 per cent of grain production over the period whilst cassava has fallen from 40 per cent to around 33 per cent. Key determinan ts of past patterns The increases in production came from increases in area under production (extensification) and improvemen ts in yields (intensification), although the latter has tended to dominate as is evident from Figure 4. Figure 4 Annual yield of major food crops, 1961-90 (tons/ha) 20 18 16 14 12 l...... 10 ~ £ 8 6 4 2 0 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 Source: International Economic Databank, The Australian National University, Canberra. There are a number of interconnec ted reasons and relevant policies underlying the increases in yields (see Trewin and Erwidodo 1993). The introduction of high-yieldin g rice varieties following research at the Internationa l Rice Research Institute was a key factor, as were some of the policies that facilitated the availability and use of the nec- essary inputs for applying this new technology (Table 11). Irrigated area and other key inputs such as fertiliser increased, the former by about 40 per cent between 1969 and Southeast Asia 94 / 6 • 23 •  RAY TREWIN AND THOMAS TOMICH 1989 and the latter by around a massive 900 per cent over the same period. These increases were assisted by policies designed to subsidise the use of key inputs. Table 11 Rice production inputs and fertiliser costs in Indonesia, 1969/70-1989/90 Irrigation Total fertiliser Implicit and wet area Intensification use (NPK) low- tariff on harvested area land harvested urea (mha) (mha) (per cent) (kg/ha) (per cent) 1969/70 6.5 2.1 (26.5) 54.5 na 1970/71 6.7 2.1 (25.6) 27.4 -28.7 1971/72 6.9 2.9 (34.7) 66.8 -28.1 1972/73 6.6 3.3 (41.3) 78.1 -37.9 1973/74 7.1 4.1 (48.9) 112.1 -37.3 1974/75 7.3 3.7 (43.8) 108.1 -74.0 1975/76 7.3 3.6 (42.8) 123.1 -53.2 1976/77 7.2 3.6 (43.2) 120.8 -0.9 1977 /78 7.2 4.2 (50.8) 162.0 -21.9 1978/79 7.7 4.8 (54.3) 161.2 -47.3 1979/80 7.7 5.4 (61.8) 188.3 -58.3 1980/81 7.8 5.5 (61.3) 278.8 -54.9 1981/82 8.2 6.2 (55.3) 335.5 -57.1 1982/83 7.9 6.3 (70.6) 377.7 -52.0 1983/84 8.0 6.7 (73.1) 398.8 -40.6 1984/85 8.5 7.4 (75.5) 415.0 -46.3 1985/86 8.7 7.7 , (77.4) 419.0 -42.8 1986/87 8.8 8.0 (79.7) 450.4 -32.7 1987 /88 8.8 8.5 (82.3) 463.8 -38.5 1988/89 8.9 8.3 (82.1) 483.7 -50.1 1989/90 9.3 8.8 (94.5) 481.8 -45.3 Source: Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992, Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Institute, Washington, DC. The increasing yield story evident from Figure 4 is fairly consistent between the various grains although the increases in yields for soybeans is markedly lower than that for the other grains. Regional variation in yields within particular crops is also evident as illustrated in Table 12 for rice. It is noticeable that rice yields on-Java are consistently higher than those off-Java. This is also the situation for corn and soybeans. The situation with cassava is more • 24 • Economics Division Working Paper  GRAIN IN INDONESIA mixed with yields off-Java being higher in the past but yields on-Java becoming higher since the late 1970s. These results are the outcome of natural endowment s of soil types and rainfall plus the impact of policies targeting the availability and use of key inputs such as fertilisers, credit and extension advice. Table 12 Annual average of area, yield and production of rice in Indonesia, 1969- 73 to 1984-90 Area (million ha) Yield (ton/ha) Production (million mt) Region 69-73 74-78 79-83 84-90 69-73 74-78 79-83 84-90 69-73 74-78 79-8384-90 East Java 1.2 1.3 1.5 1.6 2.9 3.3 4.4 5.0 3.6 4.4 6.5 7.8 Central Java 1.4 1.4 1.5 1.6 2.7 3.0 4.0 4.8 3.8 4.2 5.9 7.8 West Java 1.7 1.8 1.8 2.1 2.6 2.9 3.8 4.6 4.6 5.4 7.0 9.5 Java 4.4 4.6 4.8 5.3 2.7 3.1 4.0 4.8 12.0 14.0 19.4 25.1 North Sumatera 0.5 0.5 0.5 0.6 2.8 2.8 3.1 3.6 1.5 1.4 1.7 2.3 Rest Sumatera 1.4 1.4 1.6 1.8 2.0 2.4 2.9 3.4 2.8 3.4 4.5 6.1 South Sulawesi 0.5 0.5 0.5 0.7 2.4 2.6 3.4 4.1 1.1 1.4 19.2 2.8 Rest Sulawesi 0.2 0.2 0.2 0.2 1.8 2.0 2.4 3.2 3.3 0.4 0.5 7.8 Rest Indonesia 1.2 1.3 1.4 1.4 1.7 2.0 2.6 2.9 2.0 2.6 3.6 4.1 Off Java 3.8 4.0 4.3 4.8 2.0 2.4 2.8 3.4 7.7 9.3 12.2 16.1 Indonesia 8.1 8.5 9.1 10.1 2.4 2.7 3.5 4.1 20.0 23.3 31.6 41.1 Source: Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Institute, Washington, DC. Indonesia's rice yields are high by world standards although they have some way to go before they reach the levels of some parts of China and other high yielding areas. This is not the case with some other crops such as soybeans where a combina- tion of inappropria te resource endowment s and the absence of key inputs such as research and extension have resulted in low yields by world standards. Determin ants of food productio n The major determinant s of food production are production technologies, the avail- ability and cost of inputs such as land, labour and capital, output prices relative to South e ast A s ia 94 / 6 • 25 •  RAY TREWIN AND THOMAS TOMICH competing products, infrastructure and policies that affect these determinants. Out- put price is an important determinant of supply along with key input costs such as those for fertiliser. The influence of these determinants is often represented in the form of elasticities. Supply elasticities A number of supply elasticity estimates exist for Indonesia. As with the demand elasticities many of these are documented in the Ellis Report (1988), including those contained in Tables 13 and 14. Others are contained inAltemeier (1992) and Tyers and Anderson (1992). Although there are differences of degree in the various estimates, the signs and general orders are basically similar. For this reason, and because the IFPRI/ CASER model is used in the projections, only the IFPRI/ CASER elasticity esti- mates are presented in Tables 13 and 14. Table 13 IFPRI/CASER long and short run price elasticities of harvested area Rice Com Soybeans Cassava Sugar Rice 0.09 (0.36) Com -0.22 0.28 -0.04 -0.03 (-0.43) (0.56) (-0.09) (-0.03) Soybeans -0.34 0.16 (-0.87) (0.49) Cassava -0.05 -0.08 -0.03 0.09 (-0.18) (-0.26) (-0.13) (0.33) Note: Long run figures are in parentheses. Source: Ellis, F., 1988. 'Workshop on issues in research methodology for Indonesian agriculture', February, Jakarta, Indonesia. Differences in, and inconsistencies concerning, some of the estimates are docu- mented in the Ellis Report (1988). For example, the fact that the impact on rice yields of changing the fertiliser price is greater than the own price yield elasticity is noted. Other inconsistencies in these elasticity estimates include the own price elasticities of supply for cassava being positive in the short run and negative in the long run, and the elasticity of rice area with respect to fertiliser price on-Java being larger in the short run than in the long run. The short-run estimates incorporated in the most re- • 26 • E c onomics Di v ision Working Paper  GRAIN IN INDONESIA cent IFPRI/CASER model used in producing the projections for this chapter do not suffer from such inconsistencies. For example, the (on-Java) yield elasticities with re- spect to rice and fertiliser prices are 0.18 and -0.12 respectively (or 0.09 and -0.04 off- Java). Table 14 Various rice supply elasticities for the IFPRI/CASER model On Java Off Java Indonesia short Jong short Jong short long run run run run run run Elasticity of yield to fertiliser application rate 0.28 0.12 Own-price elasticity of demand for fertiliser -0.71 -0.57 Yield elasticity with respect to: Rice price 0.13 0.20 0.04 0.12 0.11 0.16 Fertiliser price -0.20 -0.20 -0.06 -0.12 -0.15 -0.15 Area elasticity with respect to: Rice price 0.10 0.35 0.08 0.30 Fertiliser price -0.20 -0.05 -0.01 -0.04 Rural wage rate -0.03 -0.09 -0.02 -0.07 Production elasticity for rice with respect to: Rice price 0.23 0.55 0.12 0.51 0.20 0.53 Fertiliser price -0.22 -0.25 -0.07 -0.16 -0.16 -0.21 Rural wage rate -0.03 -0.09 -0.06 -0.02 -0.08 Source: Ellis, F., 1988. 'Workshop on issues in research methodology for Indonesian agriculture', February, Jakarta, Indonesia. Southeast Asia 94/ 6 • 27 •  RAY TREWIN AND THOMAS TOMICH It is noticeable from Table 13, and in the most recent elasticity estimates incorpo- rated in the IFPRI/CASER model, that the own price elasticity for rice is much lower than those for corn and soybeans. Moreover, the harvested areas of corn and soy beans are relatively responsive to changes in the price of rice. As expected the supply elasticities are much lower than the equivalent demand elasticities. An interesting aspect apparent from Table 14 is the relatively high elasticity of fertiliser demand to its own price, -0.57 to -0.71. Some other estimates, such as that by Tabor (1992), are of a similar order whilst others have been around -0.3. Also of interest is the generally relatively higher responsiveness of production to rice prices than to fertiliser costs suggesting output pricing is a more effective policy than input subsidies (Hedley and Tabor 1989) and the relatively small responsiveness of production to rural wage rates. Land availability As mentioned at the beginning of this section there are a number of other key determi- nants of grain supply apart from price and inputs such as fertiliser and labour. Good quality land for example is a key factor for all forms of agricultural production. Eco- nomic development can lead to increases and decreases in the amount of land avail- able for agricultural production. Irrigation development is a perfect example of how economic development can lead to an effective increase in the productivity of land available for agricultural production. However, agriculture has to compete with other increasing needs for land as development proceeds. Examples of these needs are hous- ing and industrial uses. The World Bank estimates that losses to these uses will be compensated for by continued expansion of low-cost irrigation developments and increases in cropping intensities and yields. In a physical sense, there would appear ample opportunities for further irrigated land developments. About 7 million hec- tares of land off-Java has been identified by the Ministry of Public Works as suitable for irrigation development, with about 3 million hectares of this being so-called low- cost developments (World Bank 1992). In addition there is about 80 thousand hectares of land within existing irrigation schemes on-Java that could be irrigated at a rela- tively low cost. However, many favourable irrigation sites have been developed and, as a consequence of this rational development pattern, the unit costs of expanding irrigation area have increased. There is wide agreement that improving performance within existing irrigation systems deserves priority over investment to expand irri- gated area. However, there have been problems with operations and maintenance of irrigation systems. These are one reason for the low rates of return on past invest- ments and will have to be addressed to realise the potential of any new investments. Efficient operations and maintenance requires something that public money cannot buy-responsiveness to farmers. The institutional development (some might call it a • 28 • Economics Division Working Paper  GRAIN IN INDONESIA revolution) necessary to have a nationwide approach that is responsive to farmers may require a decade or more of effort and certainly will require official commitment at a high level if it is to overcome local bureaucratic resistance. Thus new investments to expand irrigation now will have little impact during the period when additional output seems likely to be needed most to maintain trend self-sufficiency. In summary, it is not physical constraints that will limit the potential benefits of increased produc- tion from new irrigation developments but economic cost constraints or efficiency. Putting this more general competition for resources aside and considering the com- petition between crops, rice has dominated agricultural production and was still the largest single agricultural product in 1990 at 28 per cent of gross agricultural revenue. Sugarcane stands alone as a significant yet unprofitable competitor for irrigated land on Java. Sugar farmers are mandated to plant sugar in the pursuit of self-sufficiency and to ensure continued operation of inefficient mills on Java. Since the 1980's plans have been announced to move sugar production off-Java gradually while continuing to seek self-sufficiency. These plans have been retarded by vested interests associated with mills on Java and generally disappointing sugar yields Off-Java. Because of these vested interests, rapid phase out is unlikely in the absence of a severe shock such as two years of rice imports in excess of 500 thousand tons. In contrast to sugar, other activities such as horticulture, poultry and fish pond production, each with potential forward linkages to food processing and high-value exports, can rival rice profits. Other food crops, in the main vegetables and fruit produced on Java, have increased in production dramatically over the 1980s and were 20 per cent of gross agricultural revenue in 1990. Secondary food crops, notably corn, cassava and soybeans, are in- creasingly becoming principal feedstuffs and now represent 10 per cent of agricul- tural production. In terms of agricultural value added, exports and jobs, fixation with rice self-sufficiency and other 'strategic' crops may become a significant brake on growth. Technology It is becoming clear that the remarkable increases in sawah rice yields in the early 1980s that resulted from the introduction of new high yielding varieties and that con- tributed most to Indonesia's drive to self-sufficiency are over for now. No technical breakthroughs appear on the near-term horizon; a workable hybrid rice technology is at least five years away for Indonesia. Breakthroughs in genetic engineering that prom- ise to improve yields by altering plant architecture are probably 10 to 15 years away. However, the World Bank {1992) has estimated that the introduction of hybrid rice and the development of high-yielding varieties that are pest resistant could lead in the longer term to yield gains in Indonesia of at least 20-30 per cent, lifting maximum yields from around 10 t/ha to near the 15 t/ha goal set for China. S o uth e ast Asia 94 / 6 • 29 •  RAY TREWIN AND THOMAS TOMICH Efficient policies Renewed increases in yields would have to come from research results like those just discussed raising the current yield plateau (movement up), any additional gains from even more intensive use of inputs (movement along) or improvements in the effi- ciency of the current technology (movement towards the frontier). The current mix of policies primarily targets the first two movements through expansion in irrigation and intensive use of inputs. A better policy would be to aim for the third type of movement, that is efficiency gains11 . Efficiency gains take the form of more production for the same amount of inputs, the same production for fewer inputs (these saved inputs being able to be applied to other production), or some position between these two. In this way, gains in efficiency can lead directly to increased production, but they can also lead to secondary production gains. In a competitive economy, resources will be allocated to their most efficient marginal use, and so relative efficiency gains in an activity will attract additional resources and lead to greater production in this rela- tively more efficient activity. Efficiency gains should offer the same general incentive to increased production as input subsidies would seem to have offered in an earlier period. It is not a lower input cost per se that stimulates increased production from a farmer but the better rate of return these lower input costs induce. One way to ensure domestic production to gain in efficiency is to make the domestic market more com- petitive, for example through competition from imports. It can be appreciated from the above discussion that policies in respect of subsidis- ing output prices or input costs (including infrastructure investment such as irriga- tion developments) and in respect of research and extension are critical determinants of the level of grain supply and the efficiency of its provision. Past policies have con- centrated on subsidising input costs but it has been suggested that future policies give greater emphasis to efficiency and productivity through better irrigation operations and maintenance, other more beneficial infrastructure investments, research and ex- tension (World Bank 1992). Implications of economic growth on grain production One limitation of the elasticity estimates described above is that they reflect past be- haviour. Even if no changes are introduced into the Indonesian grain sector it will be affected by changes taking place elsewhere in the economy. For example, general eco- nomic growth that is taking place in the Indonesian economy, especially in the manu- facturing sector on-Java, will increase the demand for and the relative cost of factors of production such as land, labour and capital to agriculture. Other forces associated with development may lower absolute costs, for example risk and the cost of capital may be lowez: Economic theory (in the form of Rybcynski's Theorem) plus the experi- • 30 • Economics Division Working Paper  GRAIN IN INDONESIA ence of other East Asian economies suggests that Indonesia's agricultural labour will decline relatively and then absolutely in line with strong economic growth. The early signs of this are evident with agriculture's share of the labour force falling below 50 per cent for the first time in 1990. Economic growth will also increase the demand for and relative price of consumer goods such as higher valued agriculture products like meat, fish, fruit and vegetables. Other aspects associated with development, the introduction of new technologies and the like, will lower production costs. Commodities such as corn, cassava and soybeans will shift from secondary food crops to principal feedstuffs. A potential source of in- creased fish production could be ponds in joint production with rice although this form of production is still in the developmental stage. Institutional constraints such as requirements to grow certain agricultural prod- ucts will become under increasing pressure to change. Long held traditional practices and structures will be under similar pressures. For example, the traditional small size of individual household land holdings could change as employment opportunities elsewhere increase and potential productivity gains and income requirements sug- gest larger land holdings would be more viable. Grain supply projections This section is concerned with the grain supply prospects for Indonesia. Looking at past supply patterns it is evident that supplies that were struggling to keep pace with population growth quickly accelerated on the introduction of high yielding varieties but have recently started to taper off. A combination of factors were important in the uptake of the high yielding varieties, for example policies of irrigation development and the subsidisation of the costs of inputs such as fertilisers. But development affects the responsiveness of production to input and output prices and hence the continued effectiveness of such policies. Development or economic growth alters the cost of la- bour, capital, the value of alternative activities and so on, all of which will influence the supply of various grains. Comparison of grain supply projections The last set of demand projections presented in the earlier section included projec- tions for the production of various food crops. In fact, most of the demand projections mentioned in the earlier section have associated supply projections. Demand needs to be looked at in conjunction with supply because generally they are jointly determined along with the market clearing price. Southeast Asia 94/ 6 • 31 •  RAY TREWIN AND THOMAS TOMICH As with the grain demand projections the assumptions underlying the supply pro- jections are the fundamental aspect. The key components of supply are primarily area and yields. Key determinants of these components are prices, costs, technology (eg capital to labour ratio) and government policies. Future production increases will have to come from any expansion in the area under irrigation, renewed increases in yields or a combination of these. The World Bank report referred to earlier provided a comprehensive set of supply projections. These were not based on formal econometric models because of the long projection period and the changes occurring in past trends. Technical judgements, resource constraints and domestic demand played key roles in the estimation of the supply projections. The technical judgements used by the World Bank were described earlier in the chapter. The resource constraints concern mainly land, or more specifi- cally irrigated land on Java. The threats of urbanisation and other pressures for changes in land use were also described earlier in the chapter. Efficiency gains were suggested as the best means of increasing production from available resources but technological changes offered prospects only in the medium term. These aspects suggest agricul- tural supplies will diversify towards products of high income elasticities and low in- tensity of land use. Key products fitting these characteristics are horticulture, small intensive livestock (for example, poultry) and fisheries. Grains will continue to domi- nate production although there will be a shift away from rice towards corn for feed use. The World Bank felt prospects for continued rice self-sufficiency looked good in the medium and longer term. The World Bank projections for key agricultural prod- ucts and those from some other agencies are given in Table 15. The projections from all agencies are generally similar. The BAPPENAS projec- tions for rice are much lower. It appears to be due to the use of export rather than import parity prices, the current basis. The growth in rice output projected by the World Bank is a result of further increases in low cost irrigation being assumed early on in the period and improvements in yields from technological advances later in the period. Corn projections from all agencies are high. The World Bank projections are lower for sugar and soybeans. The low soybean projections reflect an assumption that soybean production potential is low. The World Bank approach of concentrating on physical considerations (available land, irrigation, yield potential) as distinct from economic considerations (eg costs of production, relative prices, subsidies, infrastructure investment, opportunity costs) has been criticised (Garnaut and Ma 1992). This approach, described as that of an 'agricultural fundamentalist', diverts attention from important economic concepts such as efficiency and international competitiveness. In the approach, the appropriateness of autarky and the cost of associated efficiency losses are down played. Autarky is accepted as a target and then efficient means of achieving it analysed (eg efficient • 32 • Economics Division Working Paper  GRAIN IN INDONESIA irrigation, research and extension). However, there could be substantial efficiency losses by accepting autarky as an objective and not integrating Indonesian grain with world markets. Trend self-sufficiency, in which world prices are tracked and imports allowed so long as they balance exports over the longer term, is aimed at reducing such effi- ciency losses. Table 15 Projections of supply of agricultural products (per cent per year) BASM• 1991-2000 AARD• 1988-2000 World Bank 1988-2000 Rice 1.3 3.2 3.2 Com 3.9 3.0 3.8 Root crops 3.5b l.4f -0.1 Sugar 4.1 3.3 2.0 Soybean 5.6 3.4 2.3 Vegetables 0.9 3.7 Fruit 1.0 5.7 Meat 4.4< 4.lc 5.4c Eggs n.a. 4.88 6.2 Fish 4.4 5.2 Coconut 3.7 4.9 3.3 Oil palm 6.4 18.6 5.7 Rubber 4.5 5.4 2.9 Beverages 3.3d 2.8d 3.0d Spices 2.8h 2.8 Forestry 1.0 BAPPENAS Agricultural Sector Model, Rice at export parity price. b Cassava. Weighted average of poultry (0.35) and other meat (0.65), weights from BAPPENAS Ag. Sector model. Production increases are assumed to equal the increases in domestic demand. d Coffee only. AARD-BORIS. Cassava and Sweet Potato. g Rate of growth of modem technology layers. h Average of six spices. Source: World Bank, 1992. Agricultural Transformation: challenges and opportunities, Agricultural Operations Division, Country Department ill, East Asia and Pacific Regional Office, World Bank. The IFPRI/CASER supply projections, included in Tables 8 and 9 along with the demand projections, were produced from a multi-market model of food crops supply and demand. The supply side of this model consisted of fertiliser demand, yield re- South e ast Asia 94/6 • 33 •  RAY TREWIN AND THOMAS TOMICH sponse and area response functions for Java and off-Java. Key determinants of these functions were irrigated areas, prices, technology, and fertiliser use and lagged yields in the case of yield responses. This last aspect introduces some dynamics into the model. From the supply projections it can be seen that growth rates in rice production are expected to fall. This outcome is attributed to assumptions that the spread of high yielding varieties is completed, the rate of application of fertilisers is slowing down and irrigation development is declining because of budget constraints and the in- creasing scarcity of potential land. Most of the IFPRI/CASER projections are in line with those of the World Bank mentioned earlier. There are some differences, for example in relation to soybeans. This is reflective of the underlying assumptions, in particular those on land availabil- ity, technology and input usage. International trade in grain Indonesia has had a varied history of grain imports. In the case of rice, imports have varied between being the world's largest to being zero, with no consistent trend over this history. With other grains the variation has tended to be more consistent. Wheat imports have trended upwards with incomes as have some of the feed grains. These trends, especially those associated with rice, have been influenced by institutional arrangements aimed at separating the domestic market from the international market and in the process affecting prices and quantities in both markets. The key question is what is the best form of any intervention. History of grain trade Table 10 presents the net imports along with domestic production of various crops in Indonesia over the period 1968-1989. The pattern of net imports differs among crops. For rice, Indonesia was a large importer up till the mid 1980's but became an exporter in 1985. This outcome was the consequence of the dominant Indonesian agricultural policy of rice self-sufficiency, which is to be discussed shortly. Com net imports dis- play no significant trend but were mainly in surplus over the period. Soybeans on the other hand have trended towards significant net imports as a result of large increases in the demand for feed . Cassava was in surplus over all the period. The rapid expan- sion of dried cassava exports to Europe in the 1980's has been constrained by quotas since 1988. These exports are an artefact of distorted corn and soybean prices in Eu- rope and would fall if these distortions were removed. • 34 • Economics Division Working Paper  GRAIN IN INDONESIA The role of self-sufficiency Rice self-sufficiency has been justified in Indonesia on a number of grounds (see Trewin and Erwidodo 1993). Self-sufficiency is one approach to achieving the broader objec- tive of food security, which is basically concerned with ensuring adequate and stable supplies of food. However, self-sufficiency in the sense of 'no imports' may not be an effective approach to achieving food security. A country relying solely on domestic production introduces greater production risks because there is a narrower range of potential climatic conditions. Alternative approaches to food security include holding stocks, direct investments or long-term contracts in food supplies from other coun- tries or securing such supplies through market dependencies with domestic food proc- essors, and developing a more efficient production sector. Indonesia has relied to vary- ing degrees on all these alternatives for food security. It has been argued that Indonesian rice imports raise international prices and that self-sufficiency is thus cost-effective. However, allowing imports and applying a tariff if it is believed Indonesia has some influence in the world rice market, could be a more efficient means of satisfying consumption than the implicit trade constraints intro- duced through a self-sufficiency policy (Fane 1992). This is not to say there may be some net benefits from interventions aimed at stabilising seasonal variation in domes- tic markets, although often uninhibited market forces will encourage stabilising prac- tices such as private stock holding. As rice is a basic foodstuff, self-sufficiency in rice has been justified on the grounds that it provides development opportunities, support for farmers and consumers, as well as stability in prices, the macroeconomy and politically. Stability appears to be the main underlying justification for the rice self-sufficiency policy. However, with development, the importance of rice in production and consumption has and will continue to diminish, as will the possible merit of these justifications. Moreover, stabilisation is probably best addressed through the development of private risk mar- kets, such as private storage, insurance and futures markets, that are currently not fully available (Newbery and Stiglitz 1981). Futures markets appear to be an option only for the large estates. However, given time to develop without being crowded out by government-sponsored institutions, such markets can also become an option for the small farmer, either directly or with the assistance of intermediaries such as farm- ing cooperatives or merchants. Such developments are being investigated by the World Bank (Duncan 1993). Currently no futures market exists for rice, mainly because of the thin market and heavy government involvement. Rice self-sufficiency was achieved as a consequence of production increases more than covering the increase in consumption that resulted from total population and per capita consumption increasing under such influences as improving incomes. Most of the production increases came from a marked improvement in yields following the Southeast Asia 94/6 • 35 •  RAY TREWIN AND THOMAS TOMICH introduction of high-yielding varieties in conjunction with associated inputs such as irrigation and fertilisers. There is always a price or a constrained quantity where self- sufficiency can be satisfied. The key question is at what price and consumption level and hence at what cost. The policies introduced to support the uptake of the high-yielding varieties in- volved some high costs because of substantial subsidy elements and this in conjunc- tion with the recent plateauing of yields has led to some reconsideration of 'self-suffi- ciency'. From meaning 'no rice imports', rice self-sufficiency has now come to mean imports and exports of rice are expected to balance over time - trend self-sufficiency. This reinterpretation had been advocated for some time to give BULOG the addi- tional policy instrument of importing to replenish stocks and thus avoid the difficult choice between market operations for stabilisation purposes or maintaining prudent stock levels12 • However, trend self-sufficiency needs to be interpreted flexibly as any policy imposing that imports and exports balance after a fixed period could involve large costs. For example, large costs would result if the initial years of the fixed period were drought, decreasing domestic supplies and resulting in high import prices, and this was followed by 'balancing' exports at prices lowered as a result of the excess supplies stimulated by earlier high prices. Moreover, there may be benefits in Indone- sia being a small opportunistic operator on the world market. Large purchases are more likely to affect world prices and hence the prices Indonesia pays for rice imports. There will be varying pressure on rice self-sufficiency in the future. On the con- sumption side, slowing population growth and diversification of consumer diets away from rice as their incomes grow will relieve the pressure on rice self-sufficiency. On the production side, the increasing opportunities for more lucrative uses of agricul- tural land, capital and labour will exert more pressure on rice self-sufficiency. How- ever, these last aspects will be counteracted to some extent in the longer term by the potential to increase yields through the introduction of hybrids and pest-resistant va- rieties. Institutional arrangements The main institutional arrangements used to separate the domestic from the interna- tional market concern some of the operations of BULOG. The role of BULOG has been coming under increasing questioning and there have been a number of conflicting signals as to its future. At the time when rice self-sufficiency was redefined, wheat import policy which is also administered by BULOG was relaxed. In addition, changes were introduced allowing maize imports with a 10 per cent tariff and the import of soybean meal with a 5 per cent tariff and 35 per cent surcharge. However, no major BULOG commodities were affected by the changes in the policy reform package (PakJul 1992). Although a new package of reform measures affecting tariffs and trading ar- • 36 • Economics Division Workin g Pap e r  GRAIN IN INDONESIA rangements was introduced in June 1993 the overall impact of the package was as- sessed as equivocal (McLeod 1993). Another package announced in late 1994 lists the elimination of all tariffs on BULOG imports (for example wheat and rice flour, yellow soybeans) and the reduction by 5 percentage points of tariffs on other products such as corn and soybean meal but little loss of BULOG control. In fact, the important agri- cultural commodity of garlic was added to BULOG's list of items for which it was the sole importer (Pangestu andAzis 1994). BULOG operations have also been notified to the GAIT as those of a State-Trading Enterprise to be possibly examined in the future by a World Trade Organisation committee. Most of the monopoly rents from BULOG's operations appear to be going to pri- vate mills that process wheat and soybeans on BULOG's behalf. Expectations are that the agency's monopoly for commodities other than rice will end. Another option would be to cut back costly operations such as those concerning the budget groups'. There is no economic nor social case for the distribution of rice by BULOG to the budget groups', a function that accounts for 75 per cent of BULOG's turnover. BULOG's future role in terms of distributing rice should be more focused on targeting to alleviate poverty or offering disaster relief. Table 16 gives some indications of the importance of the price distortions intro- duced by the institutional arrangements discussed above in conjunction with the ef- fects of variable world prices. What is noticeable from the table is the generally high and positive nominal protection rate associated with soybean production. The oppo- site situation appears to apply to corn production. Rice production has varied from periods of quite high positive to periods of quite high negative nominal protection rates as generally domestic prices have been stabilised within the cif/fob band (see Figure 5). Recent trends, and reports that BULOG is being requested to purchase lesser quality rice above that it would like to purchase for stabilisation operations (McLeod 1993), raise concerns that rice arrangements are becoming more about price support than stabilisation. Recent work by Jones (1994) shows that although BULOG's opera- tions have stabilised real domestic prices relative to world prices they have also shifted risk onto producers. In other words, they have raised both the mean and variance of producer profits. The production effect of these aspects is ambiguous, the increase in profits encouraging production whilst the increase in risk counteracts this. There may be other costs and benefits associated with BULOG's operations that are not taken into account in this analysis. Broader measures of protection, capturing protection in non-agricultural sectors and constraints on imports and the like, have also been produced. For example, work by Fane and Phillips (1991) using 1987 data found that manufacturing industry in Indonesia has been heavily protected at the expense of mining and agriculture. The effective protection rate (EPR) in agriculture was estimated to be 19 per cent and that Southeast Asia 94/6 • 37 •  RAY TREWIN AND THOMAS TOMICH for manufacturing 80 per cent. In terms of import and export competing sectors, the import-competing sector was heavily subsidised with an EPR of 47 per cent com- pared to -2 per cent for the export-competing sector. Food crops, an import-compet- ing sector, had an EPR of 15 per cent. There have been many changes in policies affect- ing these sectors since 1987 but, in general, these would not appear to have signifi- cantly affected the relative sectoral standings. Table 16 Comparison of border and wholesale prices of grains, 1972-90 Rice Com Soybean Border W'sale Ratio Border W'sale Ratio Border W'sale Ratio 1972 53 48 -10.3 111 65 -41.2 1973 60 82 36.5 37 114 97 -14.3 1974 311 95 -69.5 109 49 -48.4 123 117 -4.6 1975 146 103 -29.5 71 56 -20.9 106 136 28.4 1976 110 142 29.8 67 69 3.3 118 148 25.2 1977 116 142 22.5 64 68 6.1 134 171 27.4 1978 233 150 -35.4 92 68 -27.0 194 186 -4.2 1979 224 185 -17.2 120 90 -25.2 223 254 13.9 1980 281 221 -21.3 135 115 -14.9 221 295 33.6 1981 308 246 -20.2 133 161 22.6 225 349 55.1 1982 213 255 20.1 128 133 3.5 215 367 70.6 1983 295 285 -3.1 188 147 -21.8 339 411 21.6 1984 305 339 11.4 194 158 18.8 329 501 53.5 1985 280 329 18.3 188 166 -11.2 413 553 38.3 1986 343 392 14.5 191 159 -16.7 419 620 48.0 1987 383 409 10 223 184 -17.5 440 702 59.5 1988 504 506 0 309 223 -27.8 508 667 31.3 1989 558 527 -5.6 307 236 -23.1 538 755 40.3 1990 577 553 -4.2 309 283 -8.4 552 553 0 Source: Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Institute, Washington, DC. Grain trade projections The prospects for grain trade were presented in Tables 8 and 9 where the demand and production projections using the IFPRI/CASER model under various assump- tions were brought together. These projections predicted that under a continuation of present policies Indonesia would remain an exporter of corn and rice. In contrast, wheat and soybean imports would grow. The projections for rice require some quali- • 38 . Economics Division Working Paper  GRAIN IN INDONESIA fication. As pointed out by Pearson et al (1991) the current quality of Indonesian rice is a limiting factor in it becoming a large competitive exporter. This quality problem with exportable supplies stems in a large part from marketing arrangements which can lead to an accumulation of a surplus of low quality domestic rice with BULOG. These quality problems conceivably could be addressed through changes in rice mar- keting, but still could require substantial investment in marketing infrastructure. More fundamentally, while domestic production of rice is competitive with imports, the analysis by Pearson et al (1991) indicated that Indonesia would have to resort to sub- sidies in most years in order to export. A similar story could apply to corn in relation to the presence of alphatoxins restricting export markets. Figure 5 Rice prices in Indonesia and the world market, January 1987-April 1991 800 'iii' QJ u ·i:: 600 0... 'E QJ 400 ~ __. u ..c: 200 -~0... :l ~ 0 86 87 88 89 90 91 Source: BULOG. The situation changes quite dramatically under changed policies in which subsi- dies are removed and rice prices follow world prices. Indonesia becomes a growing importer of rice. Soybean imports become even larger. These outcomes are being driven in the case of rice by the declines in production following the removal of subsidies. In the case of soy beans, these outcomes appear to be driven by the increases in consump- tion that follow the availability of imports at world prices. The World Bank projec- tions of net imports obtained by comparing the earlier World Bank production and demand projections agree with the direction of the above net import projections al- though the orders of magnitude differ. South e ast Asia 94/6 • 39 •  RAY TREWIN AND THOMAS TOMICH The sensitivity of the above projections to changes in world prices were tested by rerunning the model under changed policies with world prices 20 per cent higher. As would be expected, production has risen and net imports fallen. Total supplies, made up of production and imports, have risen. On the consumption side, rice consumption has risen whilst that of other commodities have fallen reflecting the current primary position of rice in Indonesian food crop consumption. The projections just described are partial in nature, being derived from a sectoral model. Exogenous choices of policy variables such as fertiliser and rice prices are given along with some non-policy variables, such as wage rates and per capita incomes. These non-policy variables are really endogenous in the sense that their values can be affected by the choices for the policy variables. Economy-wide constraints, like on budgets and the availability of labour, introduce indirect linkages between policy and these other variables. These indirect linkages could be significant when the sector is a large component of the economy as is the case with Indonesian agriculture in terms of both employment and consumption. Exogenous choices of wage rates and per capita incomes should differ if, say, a fertiliser subsidy is in place or not as this would deter- mine scarce resources attracted to agriculture and hence agricultural and overall wage rates and per capita incomes. Adding to the complexity, at the same time as resources moved into agriculture there would be resource movements in other sectors leading to counterbalancing effects on overall wage rates and per capita incomes. Changing these exogenous choices on the basis of the policy variables would re- quire at least some implicit modelling. This would be explicit in a CGE model with its emphasis on economy-wide relationships. However, CGE models have generally not been used for such detailed forecasting but for answering 'what if' questions from a static equilibrium perspective. Intertemporal changes in variables such as the popula- tion numbers have until recently not been important in the usage of CGE models. Salrna and Warr (1994) used a static CGE model to supplement forecasts of Bangla- desh food grains obtained from a partial approach. They simulated general trade and specific grain policies to see which had the greater influence; that is are the partial or general effects more important. The conclusions from this analysis are not built into actual forecasts of the effects of agricultural policy changes. A more specific question is raised in relation to the forecasts given in this paper; namely can the wage and income variables be assumed to be exogenous in relation to the policy changes being analysed. This could be measured using a CGE model by observing the impact changes in the policy variables have on the variables assumed exogenous in the sectoral model. If significant impacts are observed then adjustments that are dependent on the policy settings may have to be introduced to the assumed exogenous settings used in the forecasts. To give an idea of the validity of the assump- tion that different policy settings will not significantly affect wages and incomes, a • 40 • Economics Division Working Paper  GRAIN IN INDONESIA simulation of removing the fertiliser subsidy was undertaken using a CGE model of the Indonesian economy with an emphasis on agriculture (INDOGEM, see Trewin, Erwidodo and Huang 1993). Removal of the fertiliser subsidy was simulated by increasing taxes (a negative subsidy) on fertiliser. Although the effects were small, an increase in the price of ferti- liser to the key rice industry was accompanied by a roughly equal decrease in total real disposable income but no significant effect on wages. The aggregate effects are mixed. The insignificant response of wages, which is highly dependent on how wages are assumed to be determined, suggests forecasts obtained by a CGE approach may not differ significantly from those obtained using a partial approach with the same assumptions. On the other hand, the significant response of incomes, which is highly dependent on how the funds from the removal of the subsidy are distributed, sug- gests at a minimum the exogenous settings of incomes in the sectoral model should be lower if the fertiliser subsidy is not in place. This could be implemented by calculating high and low growth projections and then using the low growth projections for com- parison purposes in scenarios in which the policies are not being applied. There are a number of policy implications that follow from the projections. For example, agriculture's contribution to the economy will continue to decline in relative terms and its ability to attract resources through economic returns diminish. Greater diversification will take place in Indonesian agriculture. Even given the generous cur- rent policies underlying the baseline projections, it would appear inevitable that the policy of rice self-sufficiency will be under increasing economic pressures. Self-suffi- ciency could be achieved by banning imports and it is interesting to consider the con- sequences of such action as they reflect some of the consequences of more sophisti- cated self-sufficiency policies. Such action would lead to marked price increases in the products concerned and disruption in markets as substitute products are sought. The efficient allocation of resources would be distorted and farmers would try to shift production into the constrained, high-price products and thus reduce supply of other products. Overall objectives such as stabilisation and food security are likely to be severely affected. Now is an opportune time whilst the adjustment costs are low to analyse alternate policies that can deliver the underlying objectives such as stabilisation and food security without the high costs of current policies. The next section considers such options. Prospects for internationalisation The prospects for internationalisation will depend on both external and internal de- velopments. The outcome of the Uruguay Round could impose greater internationali- Southeast Asia 94/ 6 • 41 •  RAY TREWIN AND THOMAS TOMICH sation on Indonesia through requirements to diminish trade barriers. The continued realisation in Indonesia of the benefits of more open trade arrangements in other sec- tors could lead to internal pressures for changing various institutional arrangements that restrict trade in the grains sector. Trade reform Contrary to expectations for fundamental reform, the most important categories sub- ject to non-tariff barriers -including agricultural- were left essentially untouched by PakJul 1992 and most subsequent packages. The most recent package at the end of June 1994 reduced tariffs but did little to address non-tariff barriers including the monopoly power of various institutions such as BULOG (Pangestu and Azis 1994). Overall, PakJul 1992's tidying-up of various loose ends in trade policy (mainly out- side agriculture) was a step toward eventual tariff reductions required for participa- tion in AFTA (ASEAN Free Trade Agreement). Concern about slow progress on the Uruguay round of GAIT, the signing of NAFTA (North American Free Trade Agree- ment), and a perceived drift toward regional trading blocks and increasing protec- tionism prompted interest in new regional trading arrangements likeAFTA andAPEC (Asia Pacific Economic Cooperation) forum (Drysdale and Garnaut 1993). Agreement to bring agriculture under GATT- albeit gradually- almost certainly assures some agricultural policy changes for Indonesia. In particular, BULOG's im- port monopolies on sugar and soybeans and the 35 per cent tariff surcharge on soybean meal would be subject to reform. Indonesia, however, would have substantial flexibility under 'special and differ- ential treatment' accorded developing countries 13. Indonesia's rice almost certainly would qualify for exemption under a standard that no reductions are necessary if protection for a commodity is below 10 per cent. Measures of effective protection in Indonesia usually put rice under or near 10 per cent, even though current world prices may be depressed. (Fane (1991), for example, estimates the effective rate of protection for rice was 11 per cent in 1990.) Furthermore, GAIT-mandated rice trade liberalisa- tion in Japan and other high-income countries could raise the world rice price - thereby giving Indonesia a reduction in its already low levels of protection for rice. Indications are that under the special and differential treatment for developing countries, input subsidies and agricultural investments would not have to be curtailed. This is another reason why (urea) fertiliser prices may be retained as an instrument for fine tuning, instead of the output price that comes under GAIT discipline. Over the long term, however, a successful implementation of the Uruguay Round probably would fore- close the option of following the 'East Asian Path' to high levels of protection for rice. Even though the level of protection for rice probably would not be affected signifi- cantly in the short run, the implementation of rice price policy may be subject to re- • 42 • Economics Division Working Paper  GRAIN IN INDONESIA form because GATI generally requires the replacement of non-tariff barriers (NTBs) with tariffs ('tariffication'). However, implementation details would not be worked out until country-by-country negotiations on 'special and differential treatment' are undertaken after a broader agreement. Since protection for rice is relatively low in Indonesia, forcing a shift from NTBs to tariffs might well increase protection as meas- ured by tariff levels. The relatively low protection for rice in Indonesia, with domestic prices fluctuat- ing closely around international prices, offers a window of opportunity for Indonesia over the next few years. This window of opportunity concerns moves towards inter- nationalisation of Indonesia's grain sector at relatively low adjustment costs. This con- trasts to the situation in countries such as Japan where domestic prices have risen well above international prices in moves to assist their grains sector and adjustment may be much more costly and difficult. High return alternative uses for resources, such as recreational use of rice land in Japan, would assist in the adjustment process. The political economy of internationalisation The policy of strict self-sufficiency in rice (i.e., no imports) would have lead Indonesia inexorably down the East Asian path to heavily-protected agriculture. Adoption of the more flexible policy of trend self-sufficiency was only a first step toward inter- nationalisation, but it did explicitly acknowledge the gains to be had from trade. Moreo- ver, the gains from trade are evident from Indonesia only having a policy of rice self- sufficiency as distinct from grain self-sufficiency and allowing the relatively uninhib- ited import or internationalisation of certain other grains. This last aspect also brings into question some of the perceived objectives of rice self-sufficiency, such as food security. However, there are signs, such as the continuing high domestic rice prices, that Indonesia is on the verge of an historic choice, between the East Asian path and the internationalisation path of more open agricultural trade based on comparative advantage. The public interest in rice self-sufficiency is rooted in food security but also has been associated with Indonesia's three fundamental development goals, namely growth, equity (including farm income support), and stability. As stated earlier, strict self-sufficiency is not an effective way of achieving food security. Exclusive reliance on domestic production forces all adjustment to shocks from climate, pests, and other production risks onto the domestic market--especially low-income consumers. (Simi- larly, without imports, the poor would bear a disproportionate share of the burden of adjustment to higher prices if the rice production growth trend fell behind growth in population and income.) Indonesia's rice buffer stock and the policy of allowing rice imports to replenish stocks have proven effective in dealing with short-term fluctuations in domestic sup- Southeast Asia 94/6 • 43 •  RAY TREWIN AND THOMAS TOMICH ply. From the standpoint of food security, the question in the current policy environ- ment is not whether to import rice, but how to manage rice trade. For twenty-five years, the twin goals of growth and equity were served well by a development strategy that included the pursuit of rice self-sufficiency. Now Indone- sia's growth prospects rest primarily with continued increases in manufactured ex- ports-growth has less and less to do with agriculture. The difficulty, in terms of eq- uity, is that a share of the benefits of future growth also need to flow to the rural areas, where a significant share of the Indonesian workforce is based still. This issue is a focus of current policy analysis (see Sjarifudin 1993). Demand for farm income support is one factor that has driven other countries down the East Asian path, which is characterised by mounting subsidies to rice pro- duction in the advanced stages of structural transformation. Rising protection slows the agricultural sector's relative decline and offsets the erosion of comparative ad van- tage in rice production by rising wages. However, this rising protection for agricul- ture is at the expense of other sectors of the economy. There are other possible approaches to narrowing the gap between rural incomes and the rest of society. Indeed, evidence given elsewhere illustrates that rice self-suffi- ciency is not a cost-effective means of supporting rural incomes. This will become even more the case as rice's predominance in production diminishes. Moreover, off- farm incomes will become a more important component of overall rural incomes as development progresses. Policies to promote productivity growth across a range of agricultural commodities and expansion of off-farm rural enterprises provide alter- native means to raise rural incomes. A rural growth strategy encompassing a range of agricultural products plus rural non-farm economic activities certainly will be more complex to ochestrate than the rice-centred development of the past. But, over the long term, economic growth in Indonesia will be assisted by an efficient agricultural sector that develops according to comparative advantage. Moreover, as argued above, the provisions of the Uruguay Round would seem to foreclose the levels of agricultural protection associated with the East Asian path. Indonesia, then, is faced with the prospect of pioneering a devel- opment path that was forsaken by a number of other Asian rice producers when they reached a similar stage of structural transformation. The stakes are different now be- cause of GAIT. Forsaking markets for manufactured exports in order to pursue the East Asian Path of agricultural protection would come at a high price for Indonesia in terms of both growth and equity. The interest in stability encompasses concern about the macroeconomic and politi- cal effects of rice price fluctuations as well as effects on rice consumers and producers. Stabilisation has been seen as requiring trade restrictions to insulate domestic markets • 44 • Economics Division Working Paper  GRAIN IN INDONESIA from instability in world markets, including shocks from the 'large country' effects on world prices of rice trade undertaken by Indonesia. The decline in rice's importance in food consumption and agricultural production and agriculture's declining share in total output and employment raises-for the first time-real questions about the im- portance of rice in reaching these goals and about the appropriateness of the associ- ated policies. Stability may prove to be the most durable justification for Indonesia's rice trade restrictions. The force of this justification depends, however, on developments in the world rice market. A larger world market which would result from multilateral inter- nationalisation as envisioned under GATI would lessen the influence of any one coun- try's trade on world prices and thereby lessen the need for Indonesia to insulate itself from the world market. Other things being equal, the removal of subsidies and trade barriers would result in rice prices being more stable (Monke and Pearson 1991), prob- ably settling at higher levels. More broadly, analysis by Tyers and Anderson (1992) suggests agricultural trade reforms under GATI would benefit developing countries like Indonesia which are agricultural exporters by stimulating greater production. Even if one accepts that this transition will occur, realisation of these benefits of freer agricultural trade will take time, requiring some interim measures. Indonesia could internationalise its grain market unilaterally. But it is not clear that the benefits to Indonesia from unilateral adoption of free trade in rice exceed the costs in terms of perceived political and economic risks from possibly greater instabil- ity in the market, especially if it abandoned its buffer stock operation. Even if stability were the likely outcome of a larger market, what is the Indonesian interest in assum- ing the potential risks of such a move for only a share of the benefits? Pursuit of inter- national rice price stability is an international collective good and, if it were feasible at all, it would require an international trading agreement among the interested nations and an institution to implement its provisions. Experience with specific international agreements for other commodities (see Bohman et al [1994] on the capture and dissi- pation of quota rents in relation to coffee) suggests that such an approach for rice is inappropriate. Reform in the context of GATI and similar general agreements would appear the most promising option. So where do Indonesia's interests lie as long as rice price instability continues, international markets remain relatively thin, and one can make a plausible case that Indonesia's rice trade can affect world prices? Trade theory suggests that there may be efficiency gains from substituting a system of taxes and subsidies on rice trade for BULOG's monopoly on international trade and its role as buffer stock manager. Al- though generally viewed as benign-or even beneficial-in its impact on domestic rice marketing, some of BULOG's operations probably crowd out private storage. Other attractive features of tariffs compared to physical interventions such as stock holding Southeast Asia 94/6 • 45 •  RAY TREWIN AND THOMAS TOMICH are relatively low budgetary or infrastructure costs and easier administration (Monke and Pearson 1991). There are safeguards built into the recent GATI outcomes that allow tariffs to vary to stabilise domestic prices if triggered by a sharp drop in world prices or rapid increase in import volumes. However, substituting a system of taxes and subsidies for existing quantitative restrictions runs the danger of the benefits be- ing inappropriately captured as has occurred in relation to European beef. There also are more basic questions of how to administer an 'optimal' tariff (actu- ally a variable levy) to protect producers when world prices are low, whether those revenues (or other revenues) would be available to subsidise imports to protect con- sumers when prices are high, how such a scheme would be viewed under GATI, and whether other countries would retaliate. Of course, these questions diminish in im- portance as world trade grows following reform. Methods of reducing exposure to commodity price uncertainty by transferring it externally through financial markets (for example through futures, options and swaps) could make open trade policies even more attractive. The World Bank is currently doing research in this area (Duncan 1993). Recent problems in Indonesia's financial sector, such as Bank Duta's huge losses through foreign exchange speculation, raise questions about whether the necessary skills and regulations are in place to link rice price formation to exotic financial instruments. Longer term capital market reforms would increase the feasibility of these options. As others have concluded "The basic strategy for rice should be to maintain bal- anced growth in domestic production and demand at long-term world prices. Sus- tained divergences from a balanced growth path may have particularly large costs in the case of rice because Indonesia is a major actor (or potential actor) in the world rice market." (Gonzales et al 1993:96; also see Pearson et al 1991; Piggott et al 1993). Thus, investments in rice productivity growth-provided they are economically feasible- can be seen as part of a stabilisation strategy as well as part of a strategy for growth with equity. Fine-tuning rice trade policy may yet tum out to be merely an academic exercise. Reports of proposals for rice import duties of 180 per cent as well as an explicit quota being imposed are a worrying indication of a tilt toward the East Asian path (Fane 1994). On the other hand, these pronouncements may simply represent an initial bar- gaining position in discussions of implementation of the Uruguay Round-illustrat- ing the risk that forced 'tariffication' (putting in high tariffs before negotiations so that reductions come from a high base) could increase distortions compared to the current low levels of protection to Indonesia's rice. Moreover, the flexibility that has been applied to rice self-sufficiency in the 1990s and the ongoing debate over BULOG's future give hope that policy will not be imposed without regard to its cost and effec- tiveness. • 46 • Economics Division Working Paper  GRAIN IN INDONESIA Past performance of officials charged with economic management is cause for op- timism that the policies that emerge will reflect a pragmatic approach to serving broad public interests while striking a fine balance among contending private interests in Indonesia's complex political economy. No broad coalitions have formed amongst rice producers to demand protection and resist internationalisation. (No counteract- ing coalitions of consumers have been formed either.) This may provide an opportu- nity to build producer coalitions with a stake in efficient, export-oriented agriculture. The most visible potential losers from freer agricultural trade are the private mills that receive monopoly rents from processing wheat and soybeans on BULOG's behalf. Their interests conflict with other processors who are beginning to organise and to press for reform. There have even been proposals by some potential winners to com- pensate potential losers, for example, by assuming financial obligations. Indonesia's buoyant growth provides the opportunities for profits that make such compensation possible. Analysts should look to future innovations in trade policy for wheat or soybeans-and the political deals they reflect-for clues to the future course of rice trade policy. Southeast Asia 94/6 • 47 •  RAY TREWIN AND THOMAS TOMICH Notes 1 Grain obviously refers to products such as rice, corn and wheat but other commodi- ties such as soybeans which compete with traditional grains, both in demand and in supply for land resources and so on, are also discussed in the context of this paper. 2 Interpreted initially as domestic production satisfying domestic consumption at sta- ble prices. 3 The source material for Table 1 appears to have some incorrect decimal places in consumption levels, especially in sugar, fish and meat. However, the estimated growth rates will be unaffected even if this is the case. 4 Some of the individual figures in this table have rounding or other errors as the averages for some totals do not lie between those for the component parts. Still correct measures of general trends can be obtained from the table. 5 Sudaryanto et al (1992) and Turuner and Alderman (1979) give various demand elasticities estimates for low, medium and high income groups and these portray the expected decline as incomes rise. 6 Other more up-to-date or broader commodity estimates are available in studies by Deaton (1990),Altemeier (1992) and Tyers and Anderson (1992) but these estimates fit the basic story obtained from the estimates presented in the Ellis Report (1988). 7 The IFPRl/CASER projections do not allocate the net change as due to population or other changes but sensitivity analysis on the impact of changes in the income elasticities suggests this is not the most significant factor and that population changes would dominate the demand projections. 8 Evidence of slower population growth, available after the projections were made, suggests the trend in consumption may be towards the lower end of this range. 9 The multi-stage process allocates between staples and non-staples first then between major groups such as cereals and finally between individual commodities. The equations are based on data from the seven Asian countries apart from the last stage which uses Indonesian data only. Constant calorie conversion factors are used to produce product weights. With some products such as vegetable oils, sugar and poultry where consumption is abnormally high given Indonesia's stage of devel- opment, estimates were not undertaken but lower income elasticities of demand assigned. 10 Even the best projections of world prices, etc are subject to large forecast errors. Therefore, it is important to determine the sensitivity of the projections to key as- sumptions such as world prices, population growth, etc. The risks associated with an over or under prediction may differ because of differing adjustment lags, costs, etc. 11 Historically, the subsidisation of fertiliser was justified on efficiency grounds (for example, 'learning by doing' and addressing capital market failure) but these jus- tifications no longer appear valid. • 48 • Economics Division Working Paper  GRAIN IN INDONESIA 12 In late 1991, there were prospects that the situation in domestic rice markets could be worse than FY 1987 /88-when there was a real seasonal price increase of 24 per cent for milled rice in urban areas. Market indicators showed a tightening rice supply in Indonesia and pointed toward rising prices in world markets too. Coin- cidence of this emerging scenario and 1992 national elections was decisive in the change in interpretation to self-sufficiency on trend. 13 As pointed out by Snape (1993) such 'concessions' raise the danger of encouraging the view that a country's own trade barriers are less of a cost than other countries' barriers or no cost at all. Southeast Asia 94/6 • 49 •  RAY TREWIN AND THOMAS TOMICH References Altemeier, K, 1992. 'BAPPENAS agricultural sector model', Consultancy Report. Bohman, M., Jarvis, L. and Barichello, R., 1994. 'Rent seeking and international commodity agreements: the case of coffee', forthcoming in Economic Development and Cultural Change. Booth,A., 1988. Agricultural Development in Indonesia, Allen and Unwin, Sydney. Center for Agricultural and Rural Development, 1990. Analysis of Food Crop Policy for Indonesia, CARD, Iowa State University, Iowa. Deaton,A., 1990. 'Price elasticities from survey data: extensions and Indonesian results', Journal of Econometrics, 44. Drysdale, P. and Gamaut, R., 1993. 'The Pacific: an application of a general theory of economic integration', in C.F. Bergsten and M. Noland (eds), Pacific Dynamism and the International Economic System, Institute for International Economics, Washington, DC. Duncan, R., 1993. 'Commodity terms of trade and instability', paper presented at the Helen Hughes Festschrift Seminar 'Sustaining the development process', August 19-20, The Australian National University, Canberra. Ellis, F., 1988. 'Workshop on issues in research methodology for Indonesian agriculture', February, Jakarta, Indonesia. Fane, G., 1994. 'Survey of recent developments', Bulletin of Indonesian Studies, 30(1), The Australian National University, Canberra. Fane, G., 1992. 'Review of "Rice Policy in Indonesia", by Pearson, Scott, et al., Bulletin of Indonesian Economic Studies, 28(1), The Australian National University, Canberra. Fane, G. and Phillips, C., 1991. 'Effective protection in Indonesia in 1987', Bulletin of Indonesian Studies, 27(1), The Australian National University, Canberra. Garnaut, R. and Ma, G., 1992. Grain in China, East Asia Analytical Unit, Department of Foreign Affairs and Trade, Canberra. Gonzales, L. A., Kasryno, F., Perez, N. and Rosegrant, M. W., 1993. 'Economic incentives and comparative advantage in Indonesian food crop production', Research Report 93, International Food Policy Research Institute, Washington, DC. Hedley, D. and Tabor, S., 1989. 'Fertiliser in Indonesian agriculture: the subsidy issue', Agricultural Economics, 3:49-68. • 50 • Economics Division Working Paper  GRAIN IN INDONESIA Jones, C., 1994. 'Rice price stabilisation in Indonesia: an economic assessment of the changes in risk bearing', Department of Economics, The Australian National University, Canberra (mimeo). Manning, C., 1992. 'Survey of recent developments', Bulletin of Indonesian Studies, 28(1), The Australian National University, Canberra. McLeod, R., 1993. 'Survey of recent developments', Bulletin of Indonesian Studies, 29(2), The Australian National University, Canberra. Monke, E. and Pearson, S., 1991. 'The international rice market', in Pearson, S., Falcon, W., Heytens, P., Monke, E. and Naylor, R., 1991. Rice Policy in Indonesia, Cornell University Press, New York Newbery, D. M. G. and Stiglitz, J. E., 1981. The Theory of Commodity Price Stabilisation: a study in the economics of risk, Clarendon Press, Oxford. Pangestu, M. and Azis, I.W., 1994. 'Survey of recent developments', Bulletin of Indonesian Studies, 30(2), The Australian National University, Canberra. Pearson, S., Falcon, W., Heytens, P., Monke, E. and Naylor, R., 1991. Rice Policy in Indonesia, Cornell University Press, Ithaca, New York Piggot, R.R., Parton, K. A., Treadgold, E. M. and Hutabarat, B., 1993. 'Food price policy in Indonesia', ACIAR Monograph No. 22,Canberra. Salma, U.and Warr, P. G., 1994. 'Foodgrains policy in Bangladesh', Economics Division Working Paper 94/2, South Asia, Research School of Pacific Studies, The Australian National University, Canberra. Sjarifudin, B., 1993. Opening address to Workshop on 'Alternative models, measurement and data for supporting sustainable development in Indonesia', November, Depok, Indonesia. Snape, R., 1993. 'Economic ideas and trade and development', paper presented at the Helen Hughes Festschrift Seminar 'Sustaining the development process', August 19-20. The Australian National University, Canberra. Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E., and Rosegrant, M. R., 1992. Food Situation and Outlook for Indonesia, Centre for Agro-Socioeconomic Research, Bogor, Indonesia and International Food Policy Research Institute, Washington, DC. Summers, R. and Heston, C., 1991. 'The Penn World Table (Mark 5): an expanded set of international comparisons, 1955-88', Quarterly Journal of Economics, May. Tabor, S. R., 1992. 'Agriculture in the eighties: a period of transition', in Anne Booth (ed.), The Oil Boom and After: Indonesian economic policy and performance in the Soeharto era, Oxford University Press, Oxford. Southea s t A s ia 94 / 6 • 51 •  RAY TREWIN AND THOMAS TOMICH Timmer, P. C., 1991. 'Food price stabilisatio n: rationale, design, and implementa tion', in D. H. Perkins and M. Roemer (eds),Reforming Economic Systems in Developing Countries, Harvard Institute for Internation al Developmen t, Cambridge, Massachusetts. Trmmer, C. P. andAlderm an, H., 1979. 'Estimating consumptio n parameters for food policy analysis', American Journal of Agricultural Economics, 61. Tomich, T. P., 1992. 'Survey of recent developmen ts', Bulletin of Indonesian Studies, 28(3), The Australian National University, Canberra. Trewin, R. and Erwidodo, 1993. 'Agricultur al policy options to maintain Indonesian rice self-sufficie ncy', paper delivered to the 37th Annual Conference of the Australian Agricultura l Economics Society, University of Sydney, Sydney. Trewin, R., Erwidodo and Huang, Y., 1993. 'Stages of developmen t of an Indonesian CGE model (INDOGEM) with application to analysis of key agricultural policies', paper delivered to 1993 Conference of Economists, Murdoch University, Perth. Tyers, R. and Anderson, K., 1992. Disarray in World Food Markets', Cambridge University Press, Cambridge. van der Eng, P., 1993. 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Agricultural Transformation: Challenges and opportunities, Agricultura l Operations Division, Country Department III, East Asia and Pacific Regional Office, World Bank, Washington, DC. • 52 • Economics Division Working Paper l Economics Division • Research School of Pacific and Asian Studies • The Australian National University Recent publications Economics Division Working Papers EA 94/1 Reform, internationalisation and ISSN 1038-412x macroeconomic instability in China, Ross Gamaut and Guonan Ma, Development issues 26pp. DI 94/7 Changing sources of international EA 93 / 6 Reforming a centrally planned foreign comparative advantage: a Bayesian trade system: the Chinese experience, estimation of the trade dependence Zhang Xiao Guang, 40pp. model, Ligang Song, 40pp. EA 93 / 5 Expanding the scope of human capital DI 94/6 Financial deregulation and trade theory: explaining wages in the expansion, Suiwah Leung, 30pp. Chinese rural industrial sector, Bob Gregory and Xin Ming, 28pp. DI 94/5 Banco solidario S.A.: micro- enterprise financing on a commercial South Asia scale in Bolivia, Alexander SA 94/2 Foodgrains policy in Bangladesh, Agafonoff, 32 pp. Umme Salma and Peter G. 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Books Australia-Japan Research Centre NC8 The Thai Economy in Transition,Peter Monographs Warr (ed.), 1993, Cambridge University Press, Sydney, 488pp. AJRC 21Asia Pacific Regionalism: ISBN O521 38186 x A$65.00 readings in international economic relations, Ross Garnaut NC7 The European Community and the and Peter Drysdale (eds), A-JRC/ Developing World, Enzo R Grilli, HarperEducational Publishers, 1992, Cambridge University Press, Sydney, 452pp. Sydney, 408pp. A$65.00 ISBN O06 3121 40 9 A$39.95 ISBN O521 38511 3 NC6 Disarray in World Food Markets: a AJRC 20 Wool in Japan : structural change in quantitative assessment, Rodney Tyers the textile and clothing market, and Kym Anderson, 1992, Cambridge Christopher Findlay and University Press, Sydney, 470pp. Motoshige Itoh (eds),A-JRC/ ISBN O521 35105 7 A$59.95 HarperEducational Publishers, 1994, 206pp. tables, figures, NC5 The China-Hong Kang Connection: the key bibliography, index, paperback to China's '¥11 dror,xiicy, ~WngSung, ISBN O06 312162 X A$34.95 1991, Carrt.rnge University Press, Sydrey, 198pp. ISBN O521 38245 9 A$45.00 AJRC 19 A Life in Economic Diplomacy, NC4 New Silk Roads, Kym Anderson (ed.), Saburo Okita, A-JRC, 1993, 194pp. 1992, Cambridge University Press, photographs, index ISBN O8641314 0 hardback A$29.95 Sydney, 272pp. ISBN O52139278 0 A$59.50 AJRC 18 Pacific Dynamism and the NC2 Achieving Industrialization in F.ast Asuz, International Economic System, Helen Hughes (ed.), 1988, Cambridge C.Fred Bergsten and Marcus Noland (eds), 1993, 400pp. University Press, Sydney, 3%pp. ISBN O88132 196 6 $35.95 ISBN O521 35129 4 A$65.00 Recent publications . .~ T1900083178 AJRC 17 Pacific Coal Trade in the 1990s: PEP 233 Taiwan's industry policy during the energy or environmental priorities, 1980s and its relevance to the theory Paul Parker (ed.), 154 pp. . of strategic trade, Heather Smith, ISBN 0 86413 139 9 A$25.00 1994 AJRC 16 International Adjustment and the PEP 232 Why is Japanese working time so Japanese Firm, Paul Sheard (ed.), long? 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