UNEP Country Project on Trade Liberalisation in the

UNEP Country Project on Trade Liberalisation in the Agriculture sector and the Environment The rice sector in Indonesia 19 February 2003 Geneva Project Leader: M. Suparmoko, Ph. D [Jenderal Soedirman University]

Trade liberalization in the Indonesia rice sector Background Relevance of the rice sector to the national economy • • • Rice is the main staple food of the Indonesian people Rice consumes 13. 8% of family expenditures Share of employment in agriculture 44. 4% Rice is the main wage component of Indonesian workers High rice price was a barometer of the Indonesian stabilization policy • Great amount of foreign exchange is used to import rice • Approximately 40 million people engaged in rice production

Trade liberalization in the Indonesia rice sector Project Approach and Process • National Institution – Jenderal Soedirman University - Matius Suparmoko Husein Sawit Hermanto Maria Ratnaningsih Ahmad Noor J. B. Karnomo : Team Leader (environmental economist) : Team member (agricultural economist) : Team member (environmental economist) : Team member (agricultural engineer)

Trade liberalization in the Indonesia rice sector Steering Committee Name Prof. Rubyanto Misman Mr. Dedi Mr. Achmad Suryana Ms. Halida Mr. Tito Pranolo Mr. Hutomo Mr. Triansyah Djani Institution Rector Jenderal Soedirman University Deputy Minister on Natural Resources and Environmental Management Director of Food Security Agency of Department of Agriculture Expert Staff of Department of Trade and Industry and Chairwoman on the Antidumping Committee of Indonesia Deputy of the National Food Logistic Agency Deputy Minister on Global Resource Management, Ministry of Environment Head of Trade and Environment Directorate, Department of Foreign Affairs

Trade liberalization in the Indonesia rice sector Stake Holder Meeting • • Ministry of Agriculture Ministry of Industry and Trade Ministry of Environment State Food Logistic Agency The Farmer Organization (HKTI) The Pesticides Analytical Network (PAN) Indonesia The Land Research Institude The Research & Training Institute Wacana Mulia

Trade liberalization in the Indonesia rice sector Information is obtained from: • • Department of agriculture National Food Logistic Agency Central Statistics Agency Local Governmets Village Staffs Rice Farmers as Respondents Members of Steering Committee

Trade liberalization in the Indonesia rice sector Project objectives 1. Develop in-country methodologies 2. Carry out integrated assessments of trade liberalisation for the rice sector 3. Develop policy packages 4. To test whether Ao. As - WTO decrease rice price and cause rice farmers shift to other crops 5. To test whether decrease rice reduce employment in agricultural sector 6. To test whether shift in agricultural practices will improve environment quality 7. To test whether land use rights affect the environment quality 8. To develop national policies in line with the Ao. A - WTO 9. Perform Benefit Cost Analysis of point 8 10. Enhance and support national capacity in international trade policy research 11. Assess the positive and negative environmental impacts of trade liberalization policies namely Ao. A taking into account social and economics impacts.

Trade liberalization in the Indonesia rice sector Development of In-Country Methodology DATA COLLECTION 1. Field interview with rice farmers, local government village staffs, traders 2. Agricultural Rapid Appraisal 3. Discussion with stakeholders and members of Steering Committee DATA ANALYSIS 1. Cross tabulation 2. Input-output analysis, but environment sector has not been included 3. Benefit Cost Analysis of the impact national policies in line with the Ao. A WTO

Trade liberalization in the Indonesia rice sector Rice sector has large backward and forward linkage effects so input-output analysis will be employed together with the Benefit Cost Analysis to evaluate the net social benefit of the Ao. A - WTO in Indonesia Indicators: • Changes in rice production • Changes in net income of farmers • Changes in employment • Changes in use of agricultural inputs • Changes in rice price • Changes in hectarage of rice, other crops and non-agricultural land use

Trade liberalization in the Indonesia rice sector Methodology • NPV = (Bd+ Be) - (Cd + Cp + Ce) • • • NPV = Net Present Value • Ce = environmental costs Bd = direct benefits Be = environmental benefits Cd = direct cost Cp = prevention cost Since rice is in fact not only planted in Java, the analysis should cover the impact of trade liberalization on the economy of the whole country. Benefits and costs of the impacts of Ao. A-WTO will be evaluated based on the national figures. Approximation will be adopted based on the field studies in Java.

Trade liberalization in the Indonesia rice sector Integrated Assessment of Impacts of Trade Liberalization and WTO Ao. A Trade related policies affecting the rice sector • Rice price policy • Trade policy • Agricultural inputs subsidy policy • Energy price policy as macro economic policies • Development policies (irrigation development, transmigration program) • Fiscal and monetary policies

Trade liberalization in the Indonesia rice sector Environmental Impacts • • Impacts on land fertility Impacts on water resources and soil erosion Impacts on human health Impacts on flora and fauna

Trade liberalization in the Indonesia rice sector Negative Impacts • • • Dropped in income of rice farmers • Some farmers attempt to supplement chemical fertilizers with the organic fertilizer, but it may increase the costs of production • More foreign exchange will spent to import rice rather than to import capital goods Lower terms of trade of rice relative to non-agricultural products Loss in employment of large number of people (about 40 million people) Some farmers sell their lands and move out to non-agricultural sectors The younger group of villagers preffer to work outside of agricultural sector Large number of farmers are forced to suffer because they lacked of alternatives skills and very poor

Trade liberalization in the Indonesia rice sector Positive Impacts • The Price of rice as staple food is cheap and affordable by all segments of society • The poor are guaranteed with low price of their basic food • A decrease in government budget due to reduction in agricultural inputs subsidy • Low rice price contribute to social, economic and political stability

Trade liberalization in the Indonesia rice sector Valuation of the Impacts Benefit Cost Analysis will be used to analyze the impacts of Ao. A - WTO on economic, social and environment in the rice sector. All benefits and costs will be evaluated 1. Using market price and productivity approach 2. Real market price instead of shadow price will be employed, for the non marketed impacts 3. The non-quantifiable variables: Flora and Fauna, Sosial and political stability

Trade liberalization in the Indonesia rice sector Combined Environmental, Economic and Social Costs BENEFITS AND COSTS HAVE NOT BEEN COMPUTED

Trade liberalization in the Indonesia rice sector Development of Policy Package Action Plan: Current action by the Government: • Increase the production of chemical fertilizer • Increase the floor price of rice seeds • Provides fertilizers subsidy • The social program of “raskin” (rice for the poor)

Trade liberalization in the Indonesia rice sector Proposed Action Package Development of Policy Proposed Action • Rice farming has to be maintained in Indonesia • Give incentives to farmers to plant more rice with high rice price • Economize the rice consumed and supplement it with other foods • Should introduce differential tarrifs for different amount of imported rice.

Trade liberalization in the Indonesia rice sector Development of Policy Package Ministries to be involved in policy development: • • • Ministry of Agriculture Ministry of Trade and Industry Ministry of Environment Ministry of Planning Ministry of Foreign Affairs National Food Agency Farmers Organization of Indonesia Pest Analytical Networks Local Governments

Trade liberalization in the Indonesia rice sector Project Experience: Main Conclusions and Steps Forward

Trade liberalization in the Indonesia rice sector Project Experience: Main Conclusions and Steps Forward

Trade liberalization in the Indonesia rice sector Project Experience: Main Conclusions and Steps Forward

Trade liberalization in the Indonesia rice sector Constraints Faced: A. National Level: • Indonesia is still facing heavy economic crisis • The aim of National Government is to reduce government subsidy to all sectors • The Government has low foreign exchange reserve • The Government has a limited budget • Farmers demand higher price of rice and low price of agricultural inputs • Lacks of Government programs to improve the agricultural sector • Lacks of coordination among the government agencies

Trade liberalization in the Indonesia rice sector Constraints Faced: B. International Level: • There is a trend of globalization and free trade • International rice price is lower than the national rice price