The
beef industry is becoming more economically and politically important in
Indonesia. Political sensitivity in the beef sector has significantly
escalated after the Corruption Eradication Commission (KPK) named a
political party’s leader a suspect in a bribery case related to the
government’s procurement of imported beef.
While it is
important to continue the legal process, a better understanding of how to
best approach Indonesia’s beef self-sufficiency target is required. Many Indonesians
ask one “simple” question through social media “Why do we still need to
import beef?” They say this question is relevant because of the potential
rent-seeking activities triggered by the implementation of protectionist
trade and the figure of 14.8 million head of cattle reported in the 2011
livestock census.
Indonesia
defines self-sufficiency as local production being able to meet 90 percent
of domestic demand. Hence, even when we are self-sufficient, there will
still be a 10 percent “gap” for imported beef to cater to specific domestic
demand, in particular demand from the hospitality industry and high-end
markets.
But meeting 90
percent of domestic beef consumption is a big task. History has shown that
such a self-sufficiency target is ambitious given the high volatility of
beef production. But the Indonesian government believes that the figure of
14.8 million head of cattle signals a positive indicator that the target is
achievable.
However,
self-sufficiency is not simply about having a sufficient national cattle
herd. Various sources suggest that the Gross Domestic Product (GDP) growth
of about 6 percent per annum has led to a 3-5 percent increase in beef
consumption. This figure is expected to soar given increased urbanization,
modern retail penetration and an expanding middle class (estimated at 30
million people in 2012).
In the past,
the deficit was met by live cattle imports, including slaughter and feedlot
cattle, and boxed beef imports. However, the current self-sufficiency
program restricts these imports, in particular that of boxed beef. The
import quota for boxed beef was slashed from 100,000 tons in 2011 to 34,000
tons in 2012 aimed at providing greater opportunities for local beef
producers.
Despite massive
government programs to assist smallholder cattle producers, the success
rates of such programs are limited to some regions like West Nusa Tenggara
and, therefore, their impact is insignificant in boosting cattle production
at a national level. It is generally accepted that the biggest obstacle to
Indonesia’s self-sufficiency target is breeding.
The number of
breeding units, however, has not shown a consistent increase over the
years. In 2007 there were only 10 units of cattle breeding across
Indonesia, which were inadequate to meet the demand.
Foreign
investment in breeding establishments is also low. Breeding activities in
smallholder systems are also problematic, with farmers struggling to adopt
simple farm management such as early weaning, seasonal mating, good animal
husbandry, etc.
This highlights
the importance of research into farmer’s barriers to adoption of new
technology and better management.
In addition to
substantial challenges to boosting the national cattle herd, problems along
supply chains persist. Typical cattle farmers in Indonesia are smallholders
owning three to four head of cattle and are “keepers” instead of producers.
They do not always respond to price incentives or other changes in the
market. Instead, they keep their cattle as assets and sell them as and when
they need cash.
In addition,
inefficiencies also persist and farmers are often those who receive the
least benefit as they lack access to market information and bargaining
power. Beef supply chains are often long, from local traders to inter-island
traders to retailers where adequate infrastructure may not be available.
Given these supply-chain problems, it is difficult to measure the actual
volume of beef that the 14.8 million can cattle provide.
Due to the
enormous challenges in improving productivity, a protectionist trade policy
can be seen as a “shortcut” to achieving self-sufficiency. If imports
decreased, keeping domestic production constant, the self-sufficiency ratio
would increase. Problems related to this protectionist approach are
multifold.
First,
Indonesia is facing strong pressure from the international community to
open its domestic markets. Other countries may retaliate with trade
policies to “level the playing field” in other sectors. This beef saga may
also signal an unfavorable business climate in Indonesia due to policy
uncertainty.
Second, the
government’s decision to restrict or even ban imports with the subsequent
significant increases in prices may lead to a greater challenge to control
the slaughter of female cattle that has already been an issue.
This can happen
when cattle farmers respond to decreased supply due to import reductions by
selling their cattle, including productive females, to benefit from the
price hike. In such a situation, instead of achieving the self-sufficiency
target, Indonesia will be dealing with a drop in its cattle herd.
Third, one may
argue that the current government’s approach is effective as an
import-substitution policy. But such an approach would only be effective if
certain conditions were met.
First, the
protectionist trade policy must only be temporary. This is to provide
incentives to beneficiaries, through the future threat of the removal of
protection, to focus on improving productivity.
Unfortunately
many of these beneficiaries use this opportunity to “lock in” the temporary
protection.
Second,
selected beneficiaries have to be those which have potential comparative
advantage (picking winners) which is difficult to determine in a
non-dynamic, protected environment.
Third, as
evident from the earlier points, a strong government is a necessity to
implement such a strategy. A strong government is needed to ensure that the
most cost-effective decision is made rather than a decision based on solely
political considerations. The key question is whether Indonesia is up for
such a challenge.
Solutions to
those problems may require a political-economy framework. Let us assume
that producers have two means of generating profits: they can dedicate
resources to compete in markets (e.g. to improve efficiency along supply
chains), or they can spend resources in getting import licenses i.e. rent
seeking. Professor Anne Krueger in her 1974 work The political economy of
the rent-seeking society published by the American Economic Review suggests
that competition in general is most efficient. But with an import quota,
competition among importers is more inefficient than a monopoly.
The government
has several policy options. First, to persuade rent-seekers that the
government cannot or will not provide sufficient rents, thus encouraging
rent-seekers to opt for improving efficiency. This requires a strong
government and law enforcement.
Second, Krueger
believes that creating a monopoly importer may actually decrease the
dead-weight loss associated with quotas although this may increase income
inequality. However, the efficiency of such a monopoly importer would
likely affect the outcome of this approach.
The third
option, which potentially is the best option, is to improve farm productivity
and efficiencies along supply chains. Indonesian researchers have
sufficient knowledge and capacity to address technical issues in the beef
sector.
The remaining
challenge is how to ensure local producers adopt better systems taking into
account government policy, which unfortunately changes more often than it
should do. ●
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