Indonesia's Food Law Backfires

In its intensifying drive for economic nationalism, the Indonesian government once again appears to have mistepped, with the passage of a food self-sufficiency law that has driven the price of beef to more than it costs in Tokyo, considered one of the world's most expensive cities.

Nor is beef the only food that has skyrocketed. The price of garlic is up by eight times the normal price. Critics lay the blame on the Ministry of Agriculture, which has fallen behind issuing recommendation letters for importers to obtain revised import licenses under the new food law. The delay from January to March meant that garlic was stockpiled in ports and unable to make it to market. Chilies, a crucial ingredient in Indonesian cooking, have more than tripled in price.

Indonesia, with 237 million people on 17,000 islands, has been attempting to reform its agricultural sector since the 1997-1998 Asian Financial Crisis, which deeply affected the country's economy. Since that time it has put in place a large number of reforms with the objectives of achieving food security through production of rice, sugar, soybeans, maize and beef, ensuring that prices are affordable for consumers, diversifying production away from carbohydrates to animal-based products, raising the level of competitiveness for agricultural products and improving the lot of farmers.

Rising food prices are crucial to Indonesia, the world's fourth most populous country, which despite its attractiveness to investors continues to rank 124th of 187 countries in the 2011 Human Development Index, with food insecurity and malnutrition continuing. Despite the remarkable socio-economic and political progress since the strongman Suharto was ousted in 1998, 7.7 million children had stunted growth, with stunting higher than 30 percent in some districts according to the World Food Program.

While tariffs have been brought down from 20 percent to 5 percent over the intervening years and import monopolies and licensing have been largely abolished, corruption in the food process is endemic and debilitating despite abolishing the licensure procedures. Several years ago all beef was stopped from coming into the country when government officials were attempting to blackmail suppliers. Australian beef was stopped again in 2011, although this time because of an outcry in Australia over the lack of humane treatment of animals being slaughtered in Indonesia. Agricultural products regularly disappear from the market, not because of shortages but because of officials seeking to blackmail the importers.

At the root of the problem today is the new Food Law, passed on Oct. 18, 2012, and signed by President Susilo Bambang Yudhoyono in November, that was intended to institutionalize self-sufficiency in food production and "food sovereignty" as overarching food security policies, according to the US Department of Agriculture's Foreign Agricultural Service.

Among its provisions, Article 14 states that "Sources of food supply are from domestic production and national food reserves. In the case of shortage of food supply from those two sources, food can be fulfilled by importation, as needed." Another provision, Article 24, limits the export of food, saying exports "can be carried out by taking into account the needs of domestic food consumption and national interest. The export of staple food can only be carried out after the fulfillment of domestic consumption and national food reserves."

The new law has driven overall prices up as much as 15 percent across the board, adding to rising inflation, which has in turn driven inflation to 5.6 percent in March after a 4.31 percent increase in February. That and other issues have driven the rupiah downward falling to Rp9,772:US$1 from about Rp9,100 a year ago.

In recent months, officials have drafted new trade and industry laws that have concerned American and European multinationals operating in country because of fears they will constrict investment and cut further into market access in a country increasingly in the grip of economic nationalists. The country has been the focus of investor concerns for months as officials have constricted the ability to operate on the part of multinationals, particularly in the extractive industries such as oil and gas and minerals. (See Indonesia Trade Law Worries Multinationals)

The food security law is considered to be very much a part of that trend. Indonesia's Ministry of Trade and a USAID program drew 200 people to a conference last month at the Borobudur Hotel in Jakarta to discuss the new law, with many people critical of it.

Kym Anderson, a consultant for the USAID program, told the conference that the food law is a blunt protection instrument that makes no economic sense. Food trade protection, he said in his presentation, "reduces overall efficiency of national resource use in agriculture. This may help some poor households, but at the expense of other households while unnecessarily helping some non-poor groups."

Siswono Yudo Husodo, a member of the House of Representatives (DPR) Commission IV, which oversees agriculture, underlined the need for a food policy at the Borobudur meeting, saying that the law had been passed and is here to stay regardless of the problems, which have driven food sellers in Jakarta and other cities to the wall.

Siswono said Yudhoyono is backing the food security agenda by agreeing to raise research and development on food production to 1 percent of GDP in the upcoming budget, and that the government had produced a draft law on the protection of farmers, according to a report by the American Chamber of Commerce in Indonesia.

Anderson said that one option to counteract the new food trade restrictions would be the passage of new export disciplines and a special safeguard mechanism in the World Trade Organization's currently stalled Doha Development Round of trade negotiations.

In its 2012 OECD Review of Agricultural Policies: Indonesia, (available by subscription only) the 32-member Organization for Economic Cooperation and Development warned that trade is an essential part of food security strategy and that relying only on domestic production may make Indonesia vulnerable to fluctuations in supply. "Thus," the report said, "to improve food security the country needs to have the ability to buy food on international markets. Import protection is inconsistent with Indonesia's objective to be a trading nation and increase its export performance."

However, the report said, "A growing number of administrative requirements are being placed on imports. While many of these are justifiable from a food safety or sanitary perspective…others appear to be introduced to specifically reduce the 1uantity of imports, increase the cost of importing, or make the process of importing more difficult. These need to be reformed, at least by improving their transparency."

That does not appear to be an objective of the Indonesian government, however.