Indonesia | Economics

Monday, July 24, 2006

Will agricultural liberalization increase poverty?

Source: AsiaWeekTrade Minister Mari Pangestu, in today's Jakarta Post article:
For certain products that affect a large part of a country's population, liberalization would only bring more poverty (emphasis added). One should have the ability to protect these people and this is why we are fighting to have control over special products.

Is this true? Theoretically, falling prices due to agricultural liberalization create countervailing forces to a typical farmer's welfare. On the income side, falling prices reduce a farmer's income. However, assuming the farmer consumes the commodities whose prices are falling, this also reduces the farmer's overall expenditure.

The question is: Which force dominates – from the income side, or from the expenditure side? The evidence seems to point to the latter. This is true because poor farmers (and poor households generally) spend a significant share of their income on food. This implies that falling agricultural commodities' prices actually increase instead of reduce poor farmers' welfare (hence reducing their poverty). In the case of rice, here is a quote from last month's CGI brief:
[The rice price increases of around 30% between March 2005 and 2006] are extremely difficult for the poor since rice accounts for 24 percent of their total consumption. Based on simulations, the rice price increase in excess of the overall inflation rate (about 14 percent) may have moved over 5 million people temporarily below the poverty line (emphasis added). (CGI Brief, p. 58)

So, at least in the case of rice in Indonesia, it's not true that liberalization will bring more poverty. This is not necessarily generalizable to other commodities, but I suspect the same for Indonesia's other "special product" commodities (I have sugar in mind).

For a short article the political economy of the rice import policy in Indonesia, see this Jakarta Post article


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