Saturday, November 26, 2005

On rice imports

I've been meaning to bring up this issue of rice import in the Cafe, as I did here, here, and here. I'm for removing the rice import ban. But I am against the idea that the government should give an import monopoly rights to Bulog. That's even worse. When we allow importation, why should we allow it only for one single institution? I'll talk more on import monopoly rights next time. Now, I want to elaborate more on the first issue, import ban.

My supporting on import ban removal is based on the fact that majority of Indonesian peasants are net consumers. Therefore the arguments of keeping price high in order to protect peasants (or the poorest farmers) break down.

A moment of reflection, however, might undermine my claim. I failed to consider the employment effect of high rice price. That is, my argument only looked at the consumer price faced by both net producers and net consumers, not their incomes. High price, however, is an incentive for land holders to expand production. As production expands, the demand for landless laborers increases. This would increase employment and real wages of peasants. Therefore, any argument for or against rice import should look at both price effect and income effect.

Fortunately, Peter Warr of Australian National University has recently studied this issue. In his paper, he uses a general equilibrium framework that involves 1,000 individual households. He factors in the distributional effects of rice import restrictions both on households' expenditures and their incomes. He even considers the effect of price increase on the demand for other staple foods, such as corn and wheat flour.

Warr's conclusion is reassuring:
[T]he [Indonesia's] rice import ban raises poverty incidence by a little less than one per cent of the population. Poverty rises in both rural and urban areas. Among farmers, only the richest gain.
Therefore, unsurprisingly:
It is not possible to justify the import ban by claiming that it reduces poverty.
That said, my position remains: remove the rice import ban.


  1. Forgive me for "lacking" in general equilibrium theory here, but how can we argue with "farmer welfare" due to low price of rice if and only if removal rice imports ban exist? I mean, I belive that before removing rice imports ban, we need to improve agriculture market condition (internalize the externalities) to improve farmers' ability to compete in the market. Moreover, the infrastructure support on competing in agriculture "ideal perfect market" need to be emphasize since it is clear that the problem for farmers actually either missing market or market failure to adapt with price mechanism/policies (include BULOG in this case). All I want to say is that 'yes' rice imports ban is 'distortion' to some extent (so I support your opinion here), but 'umbigously' farmers' welfare could not be neglected without reasoning their nature condition of being 'ignored' so far in competitive market. My point of view started from the experience of Norwegian farmers which also being protected by the government through international trade policies (incl. import ban, etc). Maybe Aco or Ape could explained more regarding this concern. Thanks. - dewa -

  2. Dewa, that leads us back to defining what or which farmers we are talking about. As I said, those who we think we care about are landless peasants. They work at paddy field, but they don't get the rice they plant. They should buy it at market. Many times, they help plant high quality rice; yet they end up buying broken rice. Would you rather have them buy at higher price?

    But again, the above argument is not sufficient. We need to look at the employment effect of higher rice price (thanks to import ban, supposedly). This is where Warr's paper kicks in. Import ban is detrimental to poverty alleviation.