Beef importation : Slow productivity, protectionist policy and rent-seeking

Beef importation : Slow productivity, protectionist policy and rent-seeking Risti Permani ;  A Research Fellow of Global Food Studies at the University of Adelaide

JAKARTA POST, 06 Februari 2013

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. ●

If it’s not the economy, then what todo?

If it’s not the economy, then what todo? Risti Permani ;   A Post-Doctoral Fellow at the School of Economics, University of Adelaide

JAKARTA POST, 25 September 2012

Budi Akmal Djafar’s opinion piece in The Jakarta Post (Sept. 20) entitled “It’s [not] the economy stupid!” intrigued me. I like and support his overall idea that we should not only focus on the size of the pie (or box using his illustration) but also how to share the pie. 

But being a mother of a five-year-old boy (and a baby) who is expanding his vocabulary at a pace much faster than the Chinese economy’s growth rate, the word “stupid” is a big no-no in our household. 

Sure, as an economist, I know where the term originated from but mentioning that term has a big implication on how we should perceive the existing problems that Indonesia is facing now, as suggested by Budi’s piece.

First, I agree that even a stupid person knows the importance of the second fundamental theorem of welfare economics. That is, that society can attain any efficient outcome by suitable redistribution of resources and free trade. But we all know society most often faces an equity-efficiency trade-off. 

Given that income inequality still exists in many countries including Indonesia, we know that “understanding” does not mean knowing how to solve the widening income gap. If you said “better income redistribution”, I would reply “would you be happy to pay more tax?” If you said “help the poor through poverty-reduction programs”, I would reply “how to make effective targeting, how to decide the best timing to allocate the funds, who will supervise the distribution of the funds?”

The Indonesian government must state and act on its poverty-reduction priorities.

Second, do we really need to choose between expansion and equality? Should a better question not be how to achieve inclusive growth? Budi gave an example of how Jakarta is now becoming more polluted raising concerns over the benefits of increased income per capita on our welfare. 

But has this issue not been a long-debated topic? The Environmental Kuznets Curve (EKC) suggests an inverted-U relationship between pollution and economic development. Air and water pollution increase with development until the economy reaches a particular range of income per capita. 

When income rises beyond that level, pollution starts to decline as people value the environment more highly and better environmental standards and regulations are applied effectively. 

The key question is at what income range pollution starts declining. According to Dasgupta, et al., in the Journal of Economic Perspectives (2011), earlier studies suggest a range of US$5,000 to $8,000. 

A “revised” estimate by the World Bank in 2000 suggests income per capita level of $2,407 for Indonesia in 1998. We have exceeded this level and should have expected improvement in our environmental management. I think this is what we should worry about.

So, what to do? Well if only stupid people think it is the economy that matters, let us ask smart people what it should be. 

I consider myself “average”. But here is what I think might help. In my opinion piece in the Post (July 22, 2011) entitled “Moving beyond the blame game”, I prescribed three generic reasons for our problems: Lack of clarity regarding national priorities, failure to give the right response and low education. 

It is the complementary nature of the above three factors and possibly some other factors that can solve most of the issues including dealing with expansion-equality trade offs. For example, having kids taught at school how to minimize plastic bag usage would minimize environmental damage from increased 
consumption.

From little things big things happen. But education alone is insufficient to solve the problems. Improved governance is needed. The Indonesian government must state and act on its poverty-reduction priorities, if that even is its priority. For that, we need smart people to figure out the solutions at the practical level as it is certainly not easy to resolve problems in such a big country as Indonesia.

Lastly, let us appreciate what the Indonesian government has done and help it improve the effectiveness of its programs. 

This would involve more fruitful discussions between researchers, policy makers, students, industry bodies, etc for which I thank Pak Budi. ●

Bulog: A good or confused choice?

Bulog: A good or confused choice?

Risti Permani ;  A Post-Doctoral Fellow at the School of Economics, University of Adelaide

JAKARTA POST , 04 September 2012

In early August 2012, President Susilo Bambang Yudhoyono decided to revitalize the state logistics agency (Bulog) in order to stabilize prices and enable the country to be self-sufficient in five food commodities: soybeans, corn, sugar and beef, in addition to rice, which is already controlled by Bulog. 

The decision followed the soybean price hike earlier this year.

Whilst this “welcoming back Bulog” program might be seen as a serious attempt by the Indonesian government to achieve food self-sufficiency, the program is costly and reflects the government’s inability to distinguish between food self-sufficiency and food security. 

To some extent, Bulog’s past reputation lowers our expectations on how effective and efficient this program will be.

The concept of self-sufficiency is closely related to food security, but the two terms differ. According to Government Regulation (Peraturan Pemerintah) No. 68/2002, food security is a food-sufficient condition for households indicated by availability of adequate food in terms of quantity, quality, security, equality and affordability. 

Food supply can come from both/either domestic production and/or other sources.

Self-sufficiency, on the other hand, is defined as a condition in which at least 90 percent of domestic demand for food is met by domestic production. 

Hence, while food security emphasizes the importance of access to food, self sufficiency requires sufficient domestic food production capacity to meet domestic demands. In other words, self sufficiency is an important but not a necessary condition to achieve food security.

It would be ideal to be able to produce all food commodities domestically, but in many cases, domestic production is often more costly than importing food from overseas. 

Indonesia does not have a comparative advantage in several food commodities. For example, whilst we tend to believe that our country has vast land, our livestock industry struggles to compete with live cattle exporting countries such as Australia and Brazil due to limited land. We might however have a potential comparative advantage in some agricultural commodities that will require some time to develop before we compete in the global market. 

In such conditions, temporary protection to develop the competitiveness of selected industries may be effective, although implementation can be quite complex.

Regardless of whether or not they have improved their performance, the image of Bulog is quite negative due to its association with the New Order government. Its efficiency is also questionable. 

Taking lessons from the distribution of the raskin (rice for the poor) program that delivers subsidized rice to nearly 9 million households, Bulog’s operational cost is relatively high. 

The World Bank reports that 30 percent of the raskin budget goes to operating costs and Bulog’s profit, while only 18 percent of the subsidy is received by the poor. About half of the subsidy is mistargeted and received by non-poor.

In addition, the “cost” of Bulog controlling key agricultural commodities should take into account the potential impact on established private marketing channels. 

Furthermore, the government must ensure that Bulog has adequate infrastructure. Having beef as a new addition to the list of commodities being controlled by Bulog, it is unclear whether Bulog would then invest in farms, abattoirs or warehouses.

Nevertheless, Bulog remains one of the most important institutions to ensure food security in Indonesia. Bulog’s legal status changed in 2003 from an Agency to a State-owned enterprise enabling Bulog to undertake commercial activities. 

Having said that, it is not clear who holds the supervisory role. Will Bulog serve the government’s, consumers’ or farmers’ interests?

My biggest concern is that seeing Bulog as a solution to recent price rises equates to a belief that the problem is with distribution instead of production. Is this true?

The Bulog issue shifts our focus, again, away from improving productivity — a message that many researchers have attempted to deliver to the government. Bulog cannot do much about productivity. 

In Bulog’s role of buying rice from farmers, many farmers do not want to sell rice to Bulog because they prefer to sell rice to ijon before harvest. Here the problem is not with distribution, but the limited access to finance that most Indonesian farmers have. 

Effective solutions are not easy to find. They require good targeting, timing and programs. We can only hope that this attempt is not simply the government doing “something” — rather than nothing — to appease the public opinion in a confused situation of how to improve productivity. ●

As expected, beef prices increase despite sufficient live cattle

As expected,

beef prices increase despite sufficient live cattle

Risti Permani ; Post-Doctoral Fellow at School of Economics, University of Adelaide

JAKARTA POST, 26 Juli 2012

Muslims around the globe, including those living in Indonesia, are welcoming the fasting month of Ramadhan. Although the key lesson of fasting is self-control by refraining from eating and drinking, rising food prices have always been the norm in Indonesia at the beginning of Ramadhan. Increased demand for food is due to various reasons. 

Ramadhan is perceived to be the best time to give food to the poor. During this month, Muslims also tend to hold gatherings with their family and relatives more often than they normally do.  They also mark the month, as well as the end of Ramadhan, Idul Fitri, as the festive season. 

They tend to consume and serve their guests better quality food than they normally have. This puts pressure on food items, especially the ones considered to be special, such as beef, thereby increasing prices.  This year is rather different, following the changing nature of trade relations between Indonesia and Australia.

It is inevitable to eventually talk about Indonesian beef markets without including Australian live cattle and beef exports to Indonesia. This is a love-hate relationship. 

The relationship has been put to the test since mid 2011 following the spread of a video showing Australian cattle being subjected to inhumane treatment in Indonesian abattoirs. 

The video had prompted a one-month ban on live cattle exports to Indonesia. Our previous opinion piece (The Jakarta Post, June 9, 2011) suggested that assistance to improve Indonesian livestock industries’ productivity and animal welfare regimes should have been chosen by Australia and the experience could be a learning curve for Indonesia to improve its regulatory framework for animal welfare.

Nevertheless, both countries — whether they like it or not, or whether they want to admit it or not — need each other. Australia is a big producer of live cattle and beef and has a solid reputation of producing good, if not the best, quality beef. 

Australia needs a big market to sell its products, making Indonesia, with its over 200 million population, an attractive market. Given significant investments in livestock industries in Indonesia that Australia has made, losing the market can have a substantial impact on Australia.

In Indonesia, on the other hand, as much as it wants to be self-sufficient in livestock, its domestic consumption still exceeds its ability to produce domestically. 

It is true that Indonesia’s latest survey suggested that the country has sufficient live cattle to meet domestic demand. Yet, the total number of live cattle may not tell us the entire story to be able to conclude that the country can soon be self-sufficient in beef.

For example, we need to know the proportion of home-produced livestock as we stated in our previous opinion piece (the Post, Dec. 27, 2011). Again, we strongly believe that better cooperation could have been achieved by focusing on improvements in productivity rather than a blunt protectionist trade policy. 

Indonesian cattle farmers may deserve to enjoy assistance and protection from the government helping them reach economies of scale. 

Such preferential treatment, however, should be temporary in order to give people incentives to improve their productivity.

Following the live cattle and beef quota in early 2012, we predicted that beef prices would eventually increase. In the first half of 2012, the impacts might not have been evident as Indonesia normally has sufficient stocks to meet at least three-month demand. 

But now, Ramadhan is coming and demand for beef has increased. Average prices are expected to reach Rp 100,000 per kg or about US$10/kilogram.

Beef sellers at retail markets have blamed import quota cuts to be the major cause of price hike. They experience supply shortage and blame importers on acting as “oligopolists” controlling supply.

Importers, who previously only supplied imported live cattle, have now turned to distributing domestic cattle following the implementation of the import quota. 

For beef retailers, increasing their selling price is not that simple because consumers would react to the increase by shifting their choice to cheaper commodities such as chicken and eggs, which have unfortunately also experienced price increases, as we predicted.

The government insists that we still have enough back-up supply at the feedlot, as stated by Minister of Agriculture Suswono (Gatra, July 18, 2012). Reliance on supply at the feedlot, which are normally imported cattle, raises a question over the self-sufficiency claim that the government is confident about.

We do not necessarily suggest that the government should excessively open the market. Infant industry arguments should be applied. The Indonesian government should provide temporary protection and assistance to domestic farmers. 

We emphasize the term temporary, meaning that the government must know when it can lift protection. Ongoing coordination between the Minister of Trade and the Minister of Agriculture is much appreciated for further discussion, but not by merely focusing on protectionist trade policy. 

If it were true that Indonesia does have sufficient supply of live cattle and beef, monitoring of distribution and industry practices would need to be improved. Without effective monitoring, having sufficient supply of domestic live cattle and beef cannot be translated into economic gains, neither for farmers nor consumers, resulting in further net economy-wide losses coming from protectionist policies. ●