Agriculture Reference
In-Depth Information
In addition, bad seasons of drought (related to the El Niño weather event)
in 1997/98 and floods (La Niña) in 1998/99, which occurred during the severe
economic crisis, and resumption of large-scale imports of rice since 1998 raised
questions about BULOG's ability and effectiveness to stabilize rice prices, even
in the short run. Empirical studies show that the overall policy implementation
of price stabilization was transformed into economic distortion, imbalanced
market power, and abuse of market operation, especially during the economic
crisis (Arifin et al. 2001). These actions caused price disparities between pro-
ducer or farmgate prices and retailer's or consumer prices. In mid-1998, the
price differences between producer and consumer prices were the highest in the
history of rice.
Costs and Benefits
Table 6.2 summarizes the benefits and the costs, which include:
1. the cost of running BULOG (for example, wages, warehouse rental, and
interest paid);
2. the deadweight, efficiency losses of not having domestic prices conform
to the short-run opportunity cost of rice as reflected in world markets;
3. a lack of diversification and flexibility in the farm sector as farmers were
encouraged to shift production from other crops into rice because the lat-
ter's price was relatively stable;
4. a potential retarding effect on the development of a private marketing sec-
tor; and
5. both direct and indirect subsidies needed to keep BULOG in operation.
2
During the first Five-Year Development Plan (Repelita I; 1969-74), costs
of rice price stabilization averaged just US$30 million per year (in 1991 prices;
see Timmer 2001). These costs rose to about US$40 million per year in Repelita
II (1974-79). Thus, during the first 10 years of price stabilization, the program
generated an average added value of US$270-300 million per year (in 1991
prices), or nearly 1 percentage point of economic growth each year. The costs of
stabilization rose to roughly US$80 million per year during the third and fourth
Repelitas and rose only to US$90 million during the fifth Development Plan
(Repelita V; 1989-94). During Repelita V, which ended on March 31, 1994, the
average cost of stabilization declined as BULOG brought the costs of managing
large surpluses under control. These cost reductions were a direct result of its
adoption of a more flexible approach to achieving food security—self-suffi-
ciency on trend—instead of year-to-year absolute sufficiency. However, the cost
in 1993/94 of the price stabilization program was more than US$90 million, at
a time when the benefits had declined to only about double this amount. To main-
2. For detailed analyses on these costs, see Pearson (1993) and Timmer (1996, 2001).
