GOVERNMENT POLICIES

Crops and government policies

Since the early 1980s trade policy in Indonesia has changed significantly with the government trying to make export earnings less dependent upon oil (Kasryno and Suryana 1992). Encouraging more private sector involvement and encouraging more non oil exports have been major objectives. As Kasryno and Suryana point out, agriculture has been directly affected by the reforms which have seen the substitution of a more systematic set of policy instruments for non tariff barriers such as export quotas. More value adding is an objective of government policy for the agricultural sector and the private sector - particularly that part involved in processing activities - is seen to play an important role in achieving this objective.

With regard to specific commodities, the price competitiveness of corn, cassava, soybeans and sugar was investigated by the International Food Policy Research Institute (1996). Since less than 15% of the cost of production comes from material inputs, and this was used as an argument for using relative domestic prices as a measure of price competitiveness. Cassava, soybeans and corn are part of the palawija or the secondary food crops sector. Sugar cane is considered an estate crop. According to the International Food Policy Research Institute (1996), from the mid 1970s until the mid 1980s, government policies were heavily biased towards rice. The relative price of rice to other crops was in favour of rice.

The International Food Policy Research Institute (1996) report that while much of Indonesia’s agricultural trade has been heavily regulated, agriculture has - until recently - been largely isolated from the trade reform programs that began in 1985.[16] The reform program reduced the tariffs and raised the number of items with low tariffs. Agricultural commodities imported by BULOG or by other state trading companies covered 54% of domestic production in 1986. The 1991 trade policy reforms, which focused on agriculture, reduced to 30% the share of agricultural production subject to import licences (International Food Policy Research Institute 1996).

In 1989 BULOG’s monopoly in corn importing was withdrawn. The floor price for corn (this program began in 178) was discontinued in 1990. Nominal protection for corn has been estimated to be moderately negative in the mid 1980 and moderately positive in recent years. Import restrictions have continued to apply to soybeans while cassava (which is exported by Indonesia) is almost free of government intervention.

Foreign investment, particularly in poultry, was important in the growth of the livestock industries. The government has used regulations to control investment in the food processing industries.

Table 46 contains estimates of the domestic resource cost (DRC)[17] to shadow exchange rate ratio assembled by Gunawan (1995). The estimates of the ratio of DRC to SER shows that major food crops in many parts of the country lack comparative advantage. Gunawan argues that “market inefficiency is probably one of the most important factors which caused high production costs and uncompetitiveness of Indonesian food commodity on the world market.” (p. 13). More specifically, he identifies five general factors leading to market inefficiencies. These are an imbalance in market power between farmers and traders in favour of the traders; excessive protection of inputs; a deficient incentive system, such as a lack of infrastructure and legal support; improper harvesting, storage and transportation technologies[18]; and weak cooperation between different levels of agribusiness.

Table 46. DRC/SER for several food commodities in Indonesia, 1989 and 1994

Commodity		West Sumatera	West Java	Central Java	East Java	South Sulawesi
Rice		1.2	0.83	0.77	0.87	0.99
Corn		0.74	0.71	0.76	0.83	0.77
	IS(a)		0.86	0.54	0.7	0.85
	EP(b)		1.53	0.93	1.23	0.75
Soybean		1.24	1.27	1.28	1.38	1.08
	IS(a)		1.41	0.66	0.95	0.46
	EP(b)		1.59	0.76	1.07	0.56
Cassava(c)			0.46	0.41	0.46	0.31
Sugar		1.73(d)	1.80

Notes: ^(a) Under import substitution assumption (Kasryno and Simatupang,1990); ^(b) Under export promotion assumption (Kasryno and Simatupang, 1990); ^(c) Under export promotion assumption (Kasryno and Simatupang, 1990); ^(d) For Java

Source: Gunawan (1995), p. 9.

Border protection

Since January 1993, Indonesia has begun to implement the ASEAN Free Trade Agreement, under which a Common Effective Preferential Tariff is to be introduced by 2003. When fully implemented, intra-ASEAN trade will be subject to maximum tariffs of 5%, subject to exclusions, including services and most unprocessed agricultural products (General Agreement on Tariffs and Trade 1995). There are some in Indonesia who argue that Indonesia will be ready by 2000 to export livestock to other ASEAN countries because by then Indonesia will have overcome its sanitary and livestock disease problems. This prediction was made before the depreciation of the rupiah in 1997 and 1998. Indonesia was a member of the Cairns Group during the Uruguay Round of trade negotiations conducted under the auspices of the GATT. Indonesia’s commitments on tariff bindings cover all agricultural tariff lines, most of which represent new bindings. Tariff bindings will initially range from 10% on non-wheat cereal flour to 238% on some dairy products. These rates are above existing tariff rates for livestock products. Ceilings are to be reduced by Indonesia over a ten year period by a minimum of 10% each (General Agreement on Tariffs and Trade 1995). Its general obligations to liberalization are summarised by Table 47 and Box 2, while Table 48 shows the commitment Indonesia has given for livestock and feed inputs. There is some uncertainty as to the extent to which these will now be changed as announcements have been made that under the IMF program tariffs will be reduced on many products to 0% or 5%.

Table 47. Tariff bindings made by Indonesia as a result of the Uruguay Round

Item		No.	Per cent	US$ mill.	Per cent
Total bound manufactures		7537	80.3	22529	82.6
	existing bindings	823	8.8	6227	22.8
	new bindings	6714	71.6	16302	59.8
Total agriculture (all bound)		1341	14.3	2464	9.0
Exceptions		504	5.4	2285	8.4
Total		9382	100.0	27279	100.0

Box 2. Summary of Indonesia’s Uruguay Round commitments on agriculture

Tariffication and binding, or ceiling binding for all agricultural items Duty reduction of 10% by tariff line over 10 years Elimination of local content requirements for fresh milk products and soybean oil cake Agreed annual access of 70000 t. of rice import. Dairy products, some of which were previously bound at a rate of 10% were all tariffied at an initial rate of 238%, subject to maintaining current market access of 414700 t. of dairy products (fresh milk equivalent) at a reduced maximum bound in-quota rate of 40%. According to General Agreement on Tariffs and Trade (1995), “Indonesia has agreed to levy a lower tariff of 5 per cent on in-quota imports of dairy products”(p. 26). Removal of non tariff barriers on bound tariff items NTBs on 98 industrial tariff lines affecting US$358 million of imports (1992) to be removed within 10 years Elimination of import surcharge on bound tariff items Surcharges varying between 5% and 25% on 159 tariff lines affecting US$838 million of imports (1992) to be removed within 10 years.

Table 48. Market access commitments by Indonesia on livestock feed inputs

H.S. Chapter/Code	Product	Existing tariff	Rate of ceiling tariff binding
			Initial	Final
			(%)	(%)
12.01.00.100	Soybeans	10	30	27
12.08.10.000	Soybean meal	10	45	40
01	Livestock	0.15	50, 45	40
02	Meat	20, 30	70	50, 40
04	Dairy products	20, 30, 40	50, 70, 100, 238	210, 40
04.07-08	Eggs	20, 30	80, 50	40
10.01.90 - 10.05, 07, 08, 11.02.10-20, 11.03.09	Cereals & products thereof	5, 10, 15	45	40
12.01.20	Oilseeds	5, 10	45	40

Notes: Under the special safeguard provisions of Article 5 of the Uruguay Round Agreement on Agriculture, members may - if the volume of imports in any year exceeds, or the price of imports[19] falls below, certain trigger levels - impose additional duties up to one third of the ordinary customs duty for the remainder of the year in which they are imposed. Information on the trigger prices or volumes could not be obtained.

Source: General Agreement on Tariffs and Trade (1995), p. 25

A quantitative assessment of the agricultural results obtained in the round by the OECD and reported by Stephenson and Erwidodo (1995) suggest that the total welfare gains to the world economy in 2002 could be between US$25 billion and US$48 billion. Almost all regions gain, although small losses were recorded for China, Africa, Canada, Australia and Latin America. The welfare gains for Indonesia are negligible according to the findings of studies referenced by Stephenson and Erwidodo (1995). Import prices for wheat, rice, coarse grains and sugar are estimated to remain unchanged, while for oilseeds they are expected to decline by about 33 percent..[20]

The Busep or mixing ratio used in the dairy industry (and discussed in an earlier part of this appendix) was to have to been maintained until 2003. By then, the ratio was to have fallen to 1:1.25 (PT Corinthian Infopharma Corpora 1995). Other government measures in place for the dairy industry include the prohibition of cheese imports, unless special permission has been obtained from the Department of Health. Similarly, importers of yogurt and other soft products have to apply to the government for permission to import. Most of these regulations have been modified as a result of the IMF reforms.