Impact Of Changes In World Rice Price On Welfare At Various Price Transmission And Domestic Policy

Abstract

Rice is the main staple food in Indonesia. Rice self-sufficiency policy has become a government priority to ensure the availability of food at favorable prices for farmers. It has caused a distortion in Indonesian rice market. World rice prices fluctuate from year to year and increased sharply, especially in 2007 and early 2008. The high world price becomes an important issue in Indonesia due to the inelastic nature of rice commodity. The objectives of this study are (1) to analyze price transmission and rice market integration of world markets to domestic market, (2) to analyze the impact of changes in world rice price on producer and consumer welfare with different scenarios of price transmission, and (3) to analyze changes in world price and domestic policy (government purchases price policy, import tariffs and import quotas of rice) impact on producers and consumers welfare. Market integration and rice price transmission is analyzed by estimating the Ravallion model and calculate the Market Integration Index (MII). Effect of change in world rice prices on the community welfare in various price transmission and domestic policy conditions are analyzed with simulation of Indonesian rice market integration model. The results showed that Indonesia's rice market is integrated with the world rice market with very weak degree. Changes in world market prices are transmitted to the Indonesian rice market, but not perfect. Increase in world rice prices could lead to the increase of farmers’ welfare, while consumers’ welfare decreases. World prices change will give a higher impact on public welfare when the domestic rice market conditions increasingly integrated with world markets. HPP policy is effective in stabilizing domestic rice prices and protecting farmers. But the increase in import tariffs by 10 per cent has not been able to protect farmers from world prices decline. However, the policy of 1.57 million tons annual import quotas can reduce farmers welfare and improve consumers welfare and able to protect consumers from the increase in world prices. Therefore, the strategic role of rice commodity has lead to the importance of government intervention to maintain domestic rice prices.