Cronyism, price controls and import restrictions are making basic food items unaffordable for Indonesia's poor

Just like all Muslims, who makes up 87% of the total population of Indonesia, Painem and her family are happy that Ramadan begins this month. It’s one of the major holiday seasons in the country. Families and friends will gather around to enjoy meals together, sharing stories and happiness with one another. During the festivities, Painem will temporarily leave her dishwashing job at a restaurant in Jakarta, and travel with her husband and two children to her hometown in East Java to celebrate Eid Mubarak with her extended family. A time like this should be a moment of celebration for most Indonesian people. However, rising food prices during this period have become a concerning issue for Painem, and approximately 96 million other poor and vulnerable people in the country.

The Monthly Household Food Index, compiled by the Center for Indonesian Policy Studies (CIPS), shows that the prices of basic food items have increased from February to March. The price of rice increased by 19.82%, from $0.85 to $1.02 per kg; cooking oil from $1.02 to $1.04; vegetables such as green beans from $1.10 to $1.35 per kg; and even fruit such as apples from $2.39 to $3.15. You can see the price increases charted below.

This situation is perplexing, as food prices in several neighboring countries decreased during the same period. Rice, for example, decreased in Thailand from $0.44 to $0.40 per kg; and in Malaysia from $0.58 to $0.54.  If only Painem could have purchased her rice from these countries, she would have saved at least half of her rice expenses. That is a significant premium, considering low-income people like her only earn around $23 per month.

Why have prices in Indonesia increased?

Simple economic theory states that prices of a commodity increase whenever its supply is low and the demand for it is high. But instead of addressing the issue of low supply in Indonesia, the government has attempted to address rising prices by imposing nationwide price control for the consumers. Beef, sugar, and cooking oil now have their own ceiling prices which all modern market retailers must adhere to, and soon traditional markets must also follow suit. The government went further by stating that they will conduct market operations to ensure that all retailers will follow the ceiling prices to the letter.

This policy hurts the sellers as it does not take into account the distribution costs. This means that a beef seller in Jakarta who gets his supply from a producer located around 660 km away in Tuban (East Java) must sell his products at the same price as other beef sellers located in the same area as the producer. While the impact may not be significant to the modern, well-connected retailers, this policy hurts the small-scale sellers in the traditional markets with limited capital at their disposal. When this happens, these sellers might opt to hoard their stocks, and then sell them illegally at much higher prices. It is poor people like Painem who will suffer the most from this practice, as they lose their access to affordable food prices.  

Import restrictions, competition, and corruption

Indonesian food prices could be much lower if only the government were willing to embrace freer international trade by allowing access to cheaper, good-quality food items imported from abroad. Unfortunately, they insist on pursuing a food self-sufficiency agenda by restricting imports via various protectionist trade policies. For example, the licenses to import rice are granted only to the state-owned National Logistics Agency (Bulog) and a handful of companies that they appoint. Consequently, the competition within the rice market is overly concentrated among only a few players who then become free to control the prices. Worse still, these circumstances might trigger corruption practices, since politicians can be offered bribes from companies who want to retain their position as key market players.

The case of rice is just one example of what is happening to several basic food items, such as beef, chicken, sugar, and soy. All of these items are of high demand in Indonesia, and therefore import restrictions on them hurt the poor, while benefitting the well-connected importers. In January 2017, a judge from the Constitutional Court was arrested by the Anti-Corruption Commission. He had allegedly received bribes from a beef importer in exchange for a decision that would favor the importer’s business. 

Recommended solutions

For low-income people like Painem, it is important that basic food items are affordable, whether they are locally produced or imported from abroad. The government needs to avoid market intervention that distorts the prices and even leads to black market practices. Instead, it must focus on ensuring the market has sufficient supply to meet the growing consumers’ demand by easing their import restrictions. 

Business opportunities for importing food items must be opened up to all qualified importers in a fair, transparent, and accountable manner. Import licenses must not be used as an instrument of restriction, but rather as a tool to expedite importers identification process and reasonable quality checks.

Furthermore, instead of relying on government intervention, market mechanisms must be allowed to do their job in setting the prices for consumers. As the imported food items complement the domestically produced ones, there will be more supply to meet the market demand. In these circumstances, food prices will become lower, so Painem and other poor people in the country can afford them. 

Ramadan is less than a month away and the clock keeps ticking. If the government truly wants to lower food prices for people like Painem before that holiday season, the time to act is now.