Thursday, November 30, 2006

poor farmers, is it always the price that matters?

Well this morning, digging up to one of my favorite blog, founding interesting article,Oke then, what in the hell people is talking about anyway, rising price of rice would hurt the farmers or not? , well that's an old story i have had in the past, and really, till now, i'm still wondering why would that happened anyway.

The Quarrel between works of economist in development economics, in a certain manner would however change a cross time. My guess is the man, from whom kompas has quoted his words in this article is an old fashioned one -if I say he to be an economist though. What he’s arguing is nowadays still being such a controversy among development economics, whether rising price of rice would make farmers better off? whether farmers will increase their production as a result of price effect?, would the income-marshallian effect would eliminate slutsky substitution effect ? Well I would say, that depends, depend on where do you look, what do you seek, and when.

You see, that’s the problem being Political economist, you’ll never be, or- even better - consider to be neutral, though I should say Economics were never been neutral anyway, but policy must be neutral, neutral with what you keep in your tiny head, because your head could not keep up with all complexity in this growing market economies. Neither if you are market fundamentalist, nor I should say Structuralist.

That’s why I’m completely disagree with people considering themselves as an economist,development economist, talking to the news, about policy, without solid facts, to me, they are nothing but politician needing some vote for another election campaign success. What these guys were telling the news is that Farmers are often abused by the global market, and therefore we need to accelerate their income by keep the price (of rice) rising, well guys.. reveillez-vous… have you heard anything about such a complex problem with agricultural households?

There is a problem called Separability problem, which shows that agricultural household is facing two intertwined problem in the same time, because they are acting as a producer and consumer at once, for agricultural products. Therefore their profit maximizing condition were constrained in a non-recursive way and instead, simultaneity occurred. Thus the agricultural household could not operate as a common maximizing behaviour individuals.

Even when price is rising up to the sky, farmers will surprisingly might reduce their production, and therefore cause a higher gap of income, because the price negative effect is not only the rice, it multiplies a lot,seeing that the other consumption goods will rise as well.

So when will farmers will have a greater profit, and becoming rich?, frankly I don’t really know, what the answer for this, anyone has a clue? I’ve been thinking about this since I was studying Introduction to Development Economics, well, I suppose that farmers will get better off by increasing their production, not by raising their price, because their welfare is endogen to the price itself.

Nevertheless some research as Benjamin(1992), Pitt and Rozenweig(1987) has proven that there is no such things like separability condition in Indonesia, well I think they have overrated our country, first of all, their research is only conducted in Java region, could not aggregate their result though,What happen if this separable thing were concentrated in some areas without adequate source of water, with pathetic quality of soil? Seeing that Jakarta is so polluted, then what happened in Jakarta, would be totally different with what would happened in Papua for instance.
Secondly, their stories were way out of our time, it’s been almost 20 years now, and were facing a lot of up and downs in our economy. Thirdly, these researches were concentrated in labor market imperfect market, in a general term. Off course there should be another way in having another conclusion totally way around.

Another thing to look more precise is that often, the cause of non-separable problem is complex, it might comes from any different kind of market imperfection, and even the source might come from one market that is totally perfect ,why? Well because this one single market that is ironically perfect has caused some other market imperfect as noted by some of easterly in his critics of multi tasking of MDG

Looking to the facts on the field, people has a large constrained of collateral, thus access in credit, Farmers have a large barriers of trade because no easy access to the market, then the transport cost is high, people in the mountains were so isolated that their cultivated their land on and on without sufficient fertilizers, there are too many imperfection against the farmers, and I agree that these guys need help. But saying that rising prices of basic needs is a fair deal for consequences of oil price shock is confusing and misleading.

Instead of using our budget for subsidizing rice, we should increase the ability of trade and access on information, by giving them decent infrastructure, friendly bureaucracy, cutting some hands in the bureaucracy in export and import for example, do you know that rice produced in Thailand is far more “pulen” and More tasty, and it smell so good, that people would prefer buying it than other cheap rice. Here, thousand miles from Thailand, we eat Thailand product, and we pay in euro, and no indo-rice product made it to come here. Anyway how many Indonesian people, having opportunity to go abroad, who consume Indonesian rice, if they already had a chance to have Thailand rice? not many I guess, with a small disparity of price I’d prefer to let go my nationalism in rice, though.

You may argue that they are dumping their products, I would say, if they do that, why don’t we do the same thing? We import rice from Thailand, which is relatively cheaper, and then we export, say to France, all of our commodity, or may be even exported it to Thailand, in the end, the price would converge, and the only thing that that we could use in comparing the two is their quality, that is our base line, and In the end, no one will buy our rice, since we’re consuming the same Thailand rice.

So the bottom line is, the problem is not what Thailand has did with their price, but why they could make such quality to be well known to the world. Another example is another close neighbor of ours, Vietnam, they Exported many kinds of things, small agricultural things, like chilies, spinach, noodles, fisheries, fast food-kind of things, which were really fancy in this country. As a result, their price goes up, with a single addition in their package, a usual package of frozen “tongkol” mixed up with ingredients,-with a little help of Microwaves- will change to a well prepared Vietnam gourmand, , and so is fast food, we could get a tasty Chinese foods by buying all the ingredients available there.

A strange thing is Indofood, and KOKITA stuff were easily found here, but no Indonesian imported it, it licensed to some Indian company, in contrast, Chinese supermarket “tang frere” were amazingly famous, and we can find all asian taste ingredients there, even Indonesian’s sambel oelek, what's I’m going to say about this is that,global market were not so racial to the agricultural goods, the thing is. you have to improve your quality, your package, your additional values, and the most important, increase your market. That’s where Chinese success came from, they have already ruled the world, even before Chinese open up their market. That’s why we always find Chinese restaurant every where, Chinese banks in every corners of the street of Paris.

What I’m saying is, if you want your farmers to be rich, stop them of being a farmer, and a farmer only, instead, becoming a farmer and entrepreneur as well. Farmers in Indonesia were so characterized with lack of education, and information. Indeed, they lack of source of money, but they need education and information the most, to reveal what is really the meaning of globalization, what is to have freedom to choose, and how they could sell their product. Of course we have no means to give such policy like the common agricultural policy in Europe, and certainly we could not let the farmers hurt by the prices.

But still do not give up hope, we could make it, as long we stop complaining, and stop listening to politician, pretending as an economist.

Rizal Adi Prima

3 comments:

Berly said...

This is a very thoughtful and comprehensive analysis of farmer’s welfare. If only more of Indonesian media quoted this and more of national politician read this article, the debate will be much more productive.

Few people realize that farmer also consume, so a complete analysis (I don’t recommend using CGE though, ever heard of long period method ?) would need to take into account the effect of high price of rice (positive) to increase of price in basket commodity consume by farmers (negative).

Note on your seventh paragraph, as I recalled the agricultural product has low elasticity so farmer will gain more by raising price than by increasing production.

Farmers face problem with imperfect credit market (thus a fitting Nobel Prize for M. Yunus and Gramen Bank) and numerous layers of intermediaries (thus the immediate need for a farmers union to sell (more) directly to consumers).

Just like raising education of women give millions of them choice to delay child bearing and having fewer babies, higher education and economic growth will give farmers more choice on occupation. Those remains should resemble farmers of developed countries with more technology and higher productivity.

The state could play a role with biotech research to increase quality and consistency of harvest. Little known that Thailand (and Australia) imported the seed of many plant species from Indonesia, genetically engineered it and later export it. IPB certainly need to step up the effort to produce better generation of plant, after all they have department of seed technology (I am not kidding, click here)

I don’t understand your last point on implicit support for CAP in Europe (which very few economists would agree) and the role of state to protect farmer from price volatility.

Rajawali Muda said...

thanks for the comment, empirically what you've stated is slightly incorrect, De-janvry,and Sadoulet have proved brilliantly in the case of imperfect market (whether labor,food, or other kind of imperfect market)

rising the price of rice (in this case I suppose your highlighting the cash crops)will only increase production very slightly,

due to the fact that farmers no matter how being incentivized to produce cash crops,they still need to maintain factor production for food crops production for consumption as well(which is constrained by the imperfect market of factor production.

the increasing price, which increase the income of farmers, thus will transfered to the non-agricultural sector,that is the increase of demand in manufacturing goods.

The problem is, if there is no manufacturing goods available enough in the market, with the case of imperfect info to credit-saving markets, farmers would finally reluctant to price increase. Then, at some point,the inelasticity of demand in agricultural products, would in reality more elastic than the elasticity of supply of these products

briefly,every incitation of price to production, would surprisingly in the end reflected to complete ignorance of farmers, and thus farmers would never be better off after all.

embun said...

Interesting argument and it makes me have to re-read again those Singh, Squire, and Strauss book of Agricultural Household Models (makes me miss my up-north school, hiks! :( ).

Anyway, my simple and stupid comment is first of all the analysis should be start from the question of what kind of farmer the Indonesian farmers are. In Agricultural Household Model Analysis (as you quote also from De-Janvry & Sadoulet, my favorite teacher though), we know that there are two types of farmers: Net Buyer and Net Seller. And, CMIIW, Indonesian farmers are dominantly net buyer (espcially food crops farmers), meaning that they’re maybe produced less than they consumed. Those, they are less responsive to any pricing policy.

Another issue is regarding the effect, beside income and substitution effect, which is the profit effect. The profit effect is important for describing farm households’ responses to changes in prices of farm inputs and outputs. And, result from profit effect analysis using the general equilibrium model shows that it is correct that imperfect market mostly affecting the farmers’ slow response to any policy (See Ellis, Barmun, and Squire about study on Malaysian farmers).

To make it short, my point is: pricing policy (to maintain high price of farm output, i.e. rice) is actually imperfect market creation policy. Instead of looking only on conventional policy, e.g. price management and regulation, the government should look at other policy as to shifting the farmers from net buyer into net seller – in the way that increasing the farm productivity. On the other hand, speaking about farmers' welfare, government also should look at the non-farm economy sector to be supporter of income/consumption smoothing strategy for rural-farm households. Especially, if we know that agricultural sector could not support the growing number of population in rural area, where only small fraction of land owned by the farmers. How could we expect that farmers could be rich only by cultivating a tiny land?