Indonesian agricultural trade policy at the crossroads

Abstract

Following the global spike in food prices in 2008, there is renewed interest in Indonesia in self-sufficiency as a means of achieving food security. Restrictive trade policies, including specific tariffs on rice and sugar, and quantitative restrictions on imports and exports, have been used in an attempt to meet conflicting objectives of assisting both producers and consumers. Meanwhile, palm oil exports to the European Union are constrained by the importer‟s concerns about deforestation and its contribution to climate change. Similar constraints may be applied to other commodities as production moves into pristine areas in an attempt to maintain self-sufficiency. On the other hand, more open trade may offer better options to address any agricultural-related costs associated with climate change. A computable general equilibrium model is used to analyze the efficiency and distributional impacts of these agricultural trade policies. The results suggest that removing or reducing tariffs on rice and sugar would increase imports substantially in relative terms but have only a small impact on domestic prices and production. A ban on palm oil exports to the European Union would have a significant impact, although offset somewhat by increased exports elsewhere. In each case the major effects are distributional, involving transfers between producers and consumers. Multiple instruments are necessary to achieve conflicting objectives. For example, social safety nets rather than trade bans should be used to support poor consumers. Support for the agricultural sector should focus on the provision of rural infrastructure, research and development, and the encouragement of private sector investment.