The Impact of Government Purchase Price Rice Policy on Producers’ and Consumers’ Welfare in Indonesia

Abstract

Government Purchase Price Rice Policy is one of the important instruments in order to ensure national food security. The objectives of this research were to (1) analyze the factors that influence the supply and demand for rice in Indonesia, (2) to analyze the impact of the government purchase price rice policy on the producers’ and consumers’ welfare and, (3) to formulate alternative strategies that could ensure fair welfare distribution to both the producers and the consumers. Four policy alternatives set for the period 2002-2008 were simulated with econometric model of the Indonesian supply and demand of rice industry. Time Series secondary data 1980-2008, especially from BPS, Ministry of Agriculture and BULOG was rice quantitatively analyzed using a system of simultaneous equations econometric model. The econometric model is a simultaneous equations model consisting of eight behavioral equations and three identity equations. The Two Stages Least Squares (2SLS) method was used to estimate the parameters of the behavioral equations in the model. This study showed that the government price rice policy is good for increasing rice production but not the best policy for welfare and as a result the society as a whole is worse off. This study suggests that the government purchase price rice policy should be accompanied with other policies government programs like: (1) increased irrigated area and, (2) increased rice intensification through improved infrastructural development and, (3) high time food diversification is intensified to reduce overdependence on rice.