RICE PRICES AND POVERTY IN INDONESIA

Abstract

One of the reasons often given for government policies that promote higher rice prices is the desire to protect farmers and to reduce poverty, particularly in rural areas. The underlying assumption is that farmers benefit from higher rice prices and that helping farmers will reduce poverty since the majority of the rural poor are connected in some way with agriculture. This paper examines the evidence underlying this assumption. I show that only around a quarter of all households plant rice. A large majority of the population, including in rural areas, consume more rice than they produce and most are therefore harmed by higher rice prices. Those that gain from higher prices tend to be farmers with access to slightly larger plots of land. Thus an increase in the rice price constitutes a transfer from the large majority of consumers to a minority of producers at all income levels.

Notes

¹See also ‘Kemiskinan akibat beras [Poverty is caused by rice [prices]’, Kompas, 15 November 2006.

²For example, ‘Bank Dunia tidak pahami soal beras [The World Bank misunderstands the rice problem]’, Kompas, 16 November 2006.

³See for example: ‘Lembaga internasional gagal potret soal Indonesia [International agency's failed snapshot of Indonesia's problem]’, Kompas, 17 November 2006; ‘Inflasi, kemiskinan, dan beras [Inflation, poverty, and rice]’, Kompas, 23 November 2006; ‘Harga beras kambing hitam kemiskinan [Rice prices scapegoat for poverty]’, Kompas Focus, 25 November 2006; and ‘Kemiskinan dan harga beras [Poverty and rice prices]’. Editorial, Bisnis Indonesia, 17 November 2006.

⁴Within the international context, there has been much more analysis of the impact of rice trade liberalisation on poverty (for example, Gulati and Narayanan 2006) and on food security (Dorosh 2001).

⁵See also Chen and Ravallion (2004), McCulloch (2005) and Minot and Goletti (2000) for a detailed exposition.

⁶Winters's framework also considers a third direct pathway of impact through changes in revenue received at the border as a result of changes in trade policy (Winters 2002). However, this would have a relatively minor impact in the case of rice. Even if rice imports were allowed, the revenue raised would probably be less than Rp 1 trillion. Since this is only a small fraction of the government's budget it would be unlikely to have any appreciable impact on poverty through changes in expenditure.

⁷See World Bank (2006a) for a detailed description of these structural changes. Most of them occurred before the economic crisis.

⁸This corresponds closely with the estimate of 25% from the 2004 Susenas data.

⁹Susenas 2004 contained a special module on rice production. From the data collected, it is possible to estimate how many households grow rice and, using the Susenas consumption data, how many are net producers or net consumers.

¹⁰Since the Susenas income data only report income from food crops rather than from rice, this simulation assumes that households that consume rice from their ‘own production’ earn 100% of their food crop income from rice, while those that do not report any ‘own consumption’ do not earn income from rice. A range of alternative assumptions was also tested with broadly similar results.

¹¹This estimate of the number of gainers is slightly smaller than the share of net producers implicit in table 6, because this simulation compares income from rice production with the value of rice consumption rather than the quantity of production with the quantity of consumption.

¹²Controlled land is land that is owned plus land obtained from other parties (for example, rented-in land) minus land that is being used by other parties (such as rented-out land). Of course in the medium term the benefit of higher rice prices will accrue to the owners of land rather than to those that control or operate it, since land prices will rise.

¹³Paddy (gabah) is rice in the husk after harvesting and threshing. GKP (gabah kering panen) is the term used for harvested and semi-dried rice grain before milling.

¹⁴The model assumes that the ban is only 90% effective, since some imports do occur

¹⁵This change in poverty is not trivial: it involves over 1.5 million people.

Additional information

Notes on contributors

Neil McCulloch*

* My greatest debt is to Lina Marliani, who faithfully provided me with superb research assistance. Extensive comments and criticisms were received from David Dawe, Paul Dorosh, Stephen Mink, Peter Rosner, Pantjar Simatupang, Peter Timmer and Vivi Alatas. I am also grateful for comments from Ilham Abla, Magda Adriani, Robin Bourgeois, Richard Chisholm, Mona Haddad, Mohamad Ikhsan, Petrarca Karetji, Ronnie Natawidjaja and Arianto Patunru, as well as the participants at workshops at the World Bank Office in Jakarta, the Bogor Agricultural Institute and the United Nations Centre for Alleviation of Poverty through Secondary Crops’ Development in Asia and the Pacific (UN-CAPSA). Thanks are also due to two anonymous referees for helpful comments and suggestions. All remaining errors are my own