WTO, Indonesian Agriculture and Food Security

WTO, Indonesian Agriculture, and Food Security
by Nur Hidayat
Institute for Global Justice, Jakarta, Indonesia

prepared for AFTINET seminar on
Alternatives to the WTO, Sydney, 8 November 2002



Before the economic crisis hit in 1997, Indonesia was known as one of the Asian "Tigers", because of its phenomenal economic growth and modernization. The World Bank dubbed it the "East Asian miracle". From 1992, Indonesia enjoyed increasing growth in real GDP, from 6.3 per cent in 1992 to 7.3 per cent in 1994. With exports of US$ 36.8 billion in 1993, Indonesia continued to push economic growth to the limits right through 1995, before finally, in 1996, things started to come crashing down. Hardly anyone had suspected that Indonesia would ruin its economy in such a short time. Today, the country faces not only economic but also political problems.

Indonesia had campaigned hard for trade liberalisation and economic co-operation with other nations, both at the regional and international levels. It played an active role in WTO, APEC (Asia Pacific Economic Co-operation), AFTA (ASEAN Free Trade Area) and other FTAs (Free Trade Agreement). Indonesia’s commitment to these organisations is quite strong, even when the economic benefits are not so apparent as, for instance, in the case of AFTA.

The ‘miracle’ label did not stick for long. In fact, ridden with duplicity, it turned out to be not a miracle at all. The dirty practices of the regime in power at that time were a time bomb ready to explode and destroy Indonesia. The political system was not responsive to popular pressure. A corrupt bureaucracy, dirty business practices and a repressive regime all pointed to the inevitable destruction of the nation’s economy.

When the economic crisis first hit, policymakers were starting to prioritise, among others, the agricultural sector. Indonesia is an agrarian country, with the majority of the people living in rural areas. The ‘New Order regime’ paid little attention to the agricultural sector (except achieving self-sufficiency in fast-growing varieties of rice, which were disastrous in terms of ecological effects) for over 30 years, while it professed broad-spectrum industrialisation. Indonesia had, in the past, sizeable and quite sophisticated industrial bases. It has substantial investment in roads, irrigation and other rural infrastructure. This was the result of dominant economic elites who had considerable influence in determining government policy on the one hand and oil price "booming" on the other.

If there had been a tendency for people to leave rural homes and migrate to urban areas earlier, during the crisis most returned home in the hope of some security. Meanwhile, the crisis caused a slide in the exchange rate of the rupiah, prices of basic goods soared, making access to food and basic needs key issues.

The direct and indirect impact of the slide in the rupiah on food supply and on food producers was severe. Soaring inflation and a negative growth in GDP of 14 per cent added to the woes of the people. The worst affected were the rural people (according to the 1993 Agricultural Census, there are over 23 million farming households in the country, representing the majority of the households). The farming households were the most vulnerable to the impact of the crisis, though being laid off from jobs in manufacturing and industry, people in the urban areas also suffered. One must remember that even under normal economic conditions, farmers, as food producers, often received low returns compared to the final market price of their products. Now, as well as an economic crisis, the country faced other problems such as natural disasters including a fall in the price of palm oil.

Indonesia in Crisis and Trade Liberalisation

Many think that the Indonesian economic crisis is linked to the world economy and to big international players controlling the market—the World Bank with its Structural Adjustment Programmes (SAPs), the IMF with its Letter of Intent (LoI), and the WTO, with, among other things, its Agreement on Agriculture(AoA). In many ways, these organisations are enforcing economic prescriptions that have been shown to have failed in other countries. Those professing a populist ideology tend to place the blame on the invariably repressive response of the ‘New Order regime’, over the past 30 years, to any form of criticism.

In Indonesia, the World Bank- and IMF-driven SAP’s has failed in many ways. First, no effort is being made to deal with the broad structural problems of the economy. The SAP recipe prescribes the restructuring of the economy and also conditions that will allow the government to more closely regulate the private sector, to make it more responsible about its business practices. It does not, however, seek to respond to the rent-seeking behaviour of the private sector and the economic instability this has led to. Second, SAP’s do not seek to find out why the Indonesian government, as a member of the IMF and the World Bank, pays no heed to the risks arising from its decisions, including the decision to participate in international trade organisations.

With SAPs in place, state intervention in economic activities declined to minimum levels. The state and the state apparatus were forced to stop intervening in the market, to provide incentives to exporters, were required to cut public spending in order to save money and later use it to import goods from the international market. Tariffs were reduced and local currencies were devalued (generally against the U.S. dollar) to bring them more in line with the real economic condition. Thus the orientation of their economies shifted from a domestic economy to an international or global economy.

The primary reason for implementing SAPs was that government expenditure exceeded government income. This was often the basis for intervention by the Bretton Woods organisations. Indeed, their response reflected just this. Cutting government expenditure, controlling money supply, raising interest rates, restricting imports, expanding exports and devaluing local currencies were all fairly common place among SAPs.

Moreover, the World Bank urged even greater trade liberalisation. Competition on the international market was tightened. Eradicating import tariffs, particularly on food crop products, and eliminating protection for workers are the other components of World Bank policies.

How are the SAPs executed or implemented? More important, what is the basic problem? This needs to be evaluated to see whether, measured against certain standards, the programmes are successful or not.

The Uruguay Round and the Agricultural Sector

As mentioned earlier, according to the 1993 Agricultural Census, the agricultural sector was the largest in terms of the number of households. No less than 23 million households, the majority in rural areas, depended on this sector. In 1993, this sector accounted for 16.6 per cent of the total GDP. It is not surprising that Indonesia tried to compete in the international arena by lobbying international trade organisations, including GATT, to liberalise trade in agricultural products.

An active member of GATT since 1950, Indonesia was also a force in the birth of the Uruguay Round, which later became the WTO. Consequently, it had to adhere to all WTO regulations. Even so, Indonesia seemed assured it would benefit from participation in international organisations such as the WTO. Several others had also predicted so. According to USAID, in 1994 for instance, Indonesia would reap US$ 2.3 million in additional exports in 2004, and the value of exports would grow 7.5 per cent annually.

Indonesia agreed to introduce tariff reductions and to gradually link all agricultural products to GATT. However, it retained high tariffs on rice, meat, several kinds of fruits and vegetables, tea, coffee and spices, margarine, sugar, alcoholic beverages, and cigarettes. The highest tariff was on rice at 180 per cent, followed by sugar at 110 per cent. Only the Logistics Depot, operating under the auspices of the state-owned Logistics Bureau, was permitted to import these commodities.

Although as a result of the depreciation of the rupiah, producers of some agricultural products have benefited from the export of their commodities, their prices are too high to continue reaping the profits offered by international trade. Meanwhile, the slide in the value of the rupiah has also pushed up food prices. This prompted the government to take special action by introducing Special Market Operations for rice, under which rice is sold at 60 per cent of the market price.

As agrarian country with bi-modal agrarian structure. Most of the Indonesian population relies heavily on agricultural sector as the backbone of their living and characterized by an overwhelming predominance of small farm operating units. Up to the mid 1990s, the agricultural sector absorbed more than 50 percent of the Indonesia’s labor population. This number increased enormously in 1997 when Indonesia was hit by acute financial crisis.

Since the 1960s Indonesia has imported 25 percent of the global rice market. Though national rice production has increased since the late 1960s to 1980s, due to the Green Revolution-, it has not been followed by its production capacity. The decrease has been significant within the past ten years and peaked at the end of the 1990s. Since the end of the 1980s, Indonesia has not managed to export its rice production though its agricultural sector contributed as much as 22 percent of Indonesia’s GDP in 1990.

Rice is an important commodity in Indonesia. It was subsidized by the government by means of input aids and price protection. In 1984, Indonesia even managed to stop rice imports and be self-supporting for a couple of months. But since 1980, except in 1984, Indonesia has re-initiated rice imports. The Food and Agricultural Organization (FAO) recorded than in 1980, Indonesia imported as much as 2 million tons of rice. In 1985, rice imports were recorded as high as 33.853 tons, and were followed by another rice import of 50.000 tons in 1990. In 1995, this increased drastically to 3.2 million tons of rice.

There have also been other increases in imports of agricultural food products such as soybeans, sugar and corns. Indonesia has consistently imported soybeans. From 1998/1999, 1999/2000, up to 2000/2001, Indonesia imported as much as 1.07 million tons of soybeans, 1,36 million tons of sugar, and 1,77 million tons of corn. Within the past 6 years, the percentage of imported sugars and soybeans, has increased 45 to 40 percent each.

Indonesia and Cairns Group


The agricultural sector in Indonesia contributed 16.6 percent of GDP in 1993, just behind industry and manufacturing at 16.7 percent. Indonesia was a member of the Cairns Group which actively pushed for the liberalization of agricultural trade and integration of agriculture into the disciplines of the GATT. In terms of its own commitments, Indonesia agreed to the tariffication and binding of all agricultural items, with a tariff reduction of at least 10 percent per line item (33 percent overall) to be carried out over 10 years. Bound tariffs initially will range from 10 percent (on non-wheat cereal flour) to 238 percent (on some dairy products).

Cairns Group is a coalition of countries that export agriculture products, who hold one-third of the global agriculture products export. Established in 1986, member countries of the coalition have managed to push agriculture on to the agenda of multilateral trade since Uruguay Round and even at the current WTO fora. Member countries of Cairns Group include Argentina, Australia, Bolivia, Indonesia, Brazil, Canada, Chili, Colombia, Costa Rica, Fiji, Guatemala, New Zealand, Malaysia, Paraguay, Phillipine, Uruguay, Thailand, and South Africa. Australia is the permanent chair of this coalition.

How should Indonesia see its position in Cairns Group? It should be clear that Indonesia does not fit into Cairns group. As an agrarian country, many principles of the Cairns Group on the liberalization of agricultures can not be accepted by Indonesia.

This is primarily because, the Indonesian government insists on its demands for special and differential treatment, and the need to address ‘non-trade concerns’, e.g.; in food security, poverty alleviation, rural development and many other things unregulated within the Cairns Groups and its agenda of liberalising the agricultural sector. This fact has probably prompted an Indonesian ambassador for the WTO, to once ask the then Indonesian president (Abdurrahman Wahid) to withdraw Indonesia’s membership in the Cairns Group, but unfortunately the request was denied.

So, our further question is, how true is it that Indonesia is still an exporting country for agricultural commodities? Only when we are talking about tropical products such as rubbers, copra and crude palm and others, the answer is YES. But, for agricultural food products, the answer is definitely NO. However, these agricultural food products are the ones aimed to be liberalized within the agricultural agreement in the WTO or the Cairns Groups. The same situation applies to sugar, corn and wheat and soybeans. This should make it clear that it is really inaccurate to define Indonesia as an exporting country of agricultural products, as it should be more properly defined as a net-importing country. All these facts lead to only one conclusion, Indonesia has no ground nor reason to be part of the Cairns Group.

Together, we must highlight the fact that there seems to be a very strong tendency from the developed countries like Australia and New Zealand, to enforce their agenda through the coalition of the Cairns Group. Of course these countries want the agendas for their own countries’ benefit but they have also profited more than enough from their advanced national economic status. Australia, as the chairman of the Cairns Group has even pushed Indonesia into a strategic alliance at WTO forum to help push the agenda of liberalization of global agriculture. Through its small aid programs to Indonesia, the Australian government often used its bilateral relationship to nurture Indonesia’s membership in the Cairns group. However, this will not lead into any benefits for Indonesia at all, but will threaten its agricultural sector.