8 - The Political Economy of Rice and Fuel Pricing in Indonesia

Summary

The years of the 1980s witnessed a declining trend of trade protection in many countries in the world. In Indonesia, trade protection levels were relatively high from the 1970s up to the mid-1980s, before a substantial reduction as a result of various trade reforms. Despite a slow progress of trade reform in the 1990s, Indonesia has become a relatively open economy and deserves much credit for its unilateral liberalization. The trade regime became more open when the International Monetary Fund (IMF) entered following various unsuccessful attempts by the Indonesian Government to stabilize the rupiah. Unlike in Thailand and in other countries, IMF packages in Indonesia included trade reform which was normally beyond the mandate of the Fund. As discussed in Soesastro and Basri (2005), the structural adjustment programme encouraged a gradual reduction of import tariffs. In addition, as part of the structural reform programme of 15 January 1998, domestic trade in agricultural products, including rice, was fully deregulated. The clove marketing board owned by President Soeharto's son was eliminated. In February 1998 all other marketing arrangements were terminated, specifically those of cement and paper, while plywood cartels were dissolved. Formal and informal barriers to investment in palm oil plantations were removed, followed by the removal of all investment restrictions in wholesale and retail trades. Proposals for trade deregulation commonly associated with the World Bank had been captured in these IMF packages. The trade reform programme was obviously significant and has removed most of the non-tariff barriers.

Indonesia has been making efforts to increase efficiency by removing restrictions on trade, investment, and production, and streamlining procedures at the border. As a consequence it has been able to cut tariffs to an average of below 10 per cent. In general the Indonesian average tariff is relatively low compared to some Asian countries and to Mexico, Poland, Brazil, and Turkey. Furthermore, the implementation of the tariff reduction programme has reduced the un-weighted average applied tariff rate from 15.5 per cent in 1995 to 7.2 per cent in 2002 (WTO 2007). However, although the number of Indonesia's applied MFN (most-favoured nation) tariffs under 10 per cent decreased from 83.4 per cent of the total tariff lines in 2002 to 75 per cent in 2006, the share of duty-free tariff lines remain at 22 per cent.