Bulletin of Indonesian Economic Studies, Vol. 44, No.

1, 2008: 115–32

CAN INDONESIA TRUST THE WORLD RICE MARKET?

David Dawe*

Food and Agriculture Organization of the United Nations, Rome

Geography suggests that Indonesia will continue as a net rice importer for the fore-
seeable future, because it is an island nation without dominant river deltas provid-
ing abundant water and flat land suitable for rice growing. Yet policy makers re-
main reluctant to use the world rice market to achieve domestic food security goals
for at least two reasons. First, there is concern that trade policies of other countries
create a heavily distorted world market price. Second, there is fear of world market
price volatility. It is argued here that distortions in the segment of the international
market relevant to Indonesia are relatively small, and that world rice prices are con-
siderably more stable now than during the 1970s world food crisis. Thus, the fear
of price distortion and volatility appears unfounded, and engaging fully with the
world market is a much more viable alternative than it was 30 years ago.

INTRODUCTION
Historically, the world rice market has been an unstable and unreliable source of
supply (Falcon and Monke 1979–80; Monke and Pearson 1991; Siamwalla and Hay-
kin 1983). During the world food crisis in the early 1970s, world rice market prices
tripled in little more than a year, and rice importers scrambled to divert ships on
the open seas in desperate efforts to find more grain. Since the mid-1980s, how-
ever, the world rice market has become much more reliable, with trade volumes
increasing substantially and prices becoming less volatile. This improved perform-
ance has been due to more stable production—the result of wider use of irrigation
and improved pest resistance in modern varieties—and to a stronger commercial
orientation on the part of major rice exporters (Dawe 2002).
Despite its improved performance, many Asian countries—and Indonesia, in
particular—are still reluctant to make greater use of the world rice market to help
provide domestic food security. One common policy recommendation is to aim for
self-sufficiency in rice (which Indonesia achieved briefly in the 1980s), regardless
of cost and distributional considerations. There are at least two reasons for such
recommendations. First, many argue that the world market cannot be trusted to
provide a true (often expressed as ‘fair’) measure of the opportunity cost of rice

* Email: david.dawe@fao.org. The author would like to thank Neil McCulloch, Ross
McLeod and two anonymous referees for many helpful comments. Thanks are also due
to Lina Marliani and Jack Molyneaux, both of the World Bank, who kindly supplied the
results of their calculations on rice’s share of consumer expenditures.

ISSN 0007-4918 print/ISSN 1472-7234 online/08/010115-18 © 2008 Indonesia Project ANU

DOI: 10.1080/00074910802008053

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 116 David Dawe

TABLE 1 Volatility of World Market Grain Pricesa

(%)

Period Rice Wheat Maize

1950–64 7.0 4.2 4.8

1965–81 24.1 16.4 11.7
1985–2006 11.5 12.8 12.7

a Volatility is calculated as the average absolute value of annual percentage price changes in real US
dollars. Maize and wheat data for the first period pertain to 1957–64, because pre-1957 data are not
available. The years 1982–84 are ignored in the calculation of volatility for all three grains because these
years represented a transition period from high to low prices (see Dawe 2002 for more discussion).
Source of raw data: IMF (2007).

production because of trade policies in other countries—such as production sub-

sidies in OECD economies that could threaten the livelihood of Indonesian rice
farmers, or the formation of a cartel that may jeopardise the food security of con-
sumers. A second concern is possible disruption caused by volatility of world
market prices—which is problematic for both producers and consumers (Dawe
2001; Timmer and Dawe 2007).
World rice prices were quite volatile from the middle of the 1960s to the early
1980s, as shown in table 1 and figure 1. As a policy response, under the New
Order government led by former President Soeharto, Indonesia successfully

FIGURE 1 World Market Real Rice Prices, 1950–2006

(Thai 100B, constant 2006 dollars/tonne, annual data)a
2,500

2,000

1,500

1,000

500

0
1950 1960 1970 1980 1990 2000

a ‘Thai 100B’ refers to high-quality non-aromatic long-grain rice from Thailand. It is a common stand-
ard when quoting world market prices.
Source of raw data: IMF (2007).

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 Can Indonesia trust the world rice market? 117

FIGURE 2 World and Domestic Real Rice Pricesa

(Rp/kg, monthly data)

10,000

Domestic
8,000
World

6,000

4,000

2,000

0
Jan–69 Jan–77 Jan–85 Jan–93 Jan–01
a Domestic price data are for medium-quality rice as monitored by Bulog, Indonesia’s logistics agency.
World price data are for Thai 100B f.o.b. (free on board) (IMF 2007) adjusted to retail level by adding
$20 per tonne from f.o.b. Bangkok to Jakarta and a 10% mark-up from wholesale to retail. Thai 100B
f.o.b. prices are also adjusted downward for quality by 20% from 1969 to 2000 and by 10% from 2001 to
the present (based on trends in quality preferences in the world market). Prices are in May 2007 rupiah
and are deflated by consumer price index data from IMF (2007).

stabilised its domestic rice price at a level equivalent to the average of the long-
run world price from 1969 to 1996. Since the end of the financial crisis in the
late 1990s, however, rice policy has changed dramatically, with various import
restrictions such as tariffs and import bans raising the domestic price to a sub-
stantially higher level relative to both its long-term trend and the world price
(figure 2). This paper investigates whether the present policy or some other
would better serve Indonesia’s interests.

STRUCTURE OF THE WORLD MARKET

Determining the most appropriate policy for Indonesia in relation to international
trade in rice requires a clear understanding of some of the basic characteristics
of the world rice market, including the global structure of production and trade,
and the broad effects of government policy interventions in major exporting and
importing markets.
The world rice market now trades 27–29 million tonnes per year, compared
with less than 9 million tonnes during the 1970s world food crisis. Thailand is
by far the world’s leading exporter (table 2), a position it has occupied for more
than 20 years. From 2003 to 2006 it exported an average of 8.07 million tonnes
per year—29% of the world market. After Thailand, the most important export-
ers are Vietnam and India, followed by the USA, Pakistan and China. During the
past 10 years, these six countries have usually accounted for about 85% of world
exports.

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 118 David Dawe

TABLE 2 World’s Leading Rice Exporters and Importers, 2003–06a

(million tonnes p.a.)

Country Exports Country Imports

Thailand 8.07 Nigeria 1.55

Vietnam 4.57 Philippines 1.55
India 4.02 Saudi Arabia 1.25
USA 3.62 Indonesia 1.20
Pakistan 2.49 Iran 1.01
China 1.30 EU-25 0.98
Egypt 0.88 Senegal 0.89
Uruguay 0.74 Iraq 0.89
Argentina 0.29 Bangladesh 0.85
Guyana 0.20 Cote d’Ivoire 0.80

a Data are in milled rice equivalent, average for 2003–06.

Source of raw data: USDA (2006).

The market share of the top six importers is much smaller than that of the top
six exporters (table 2). During the past few years the world’s largest import-
ers have been Nigeria and the Philippines, each importing an average of 1.55
million tonnes (about 6% of the world market) between 2003 and 2006. After
these two countries come Saudi Arabia, Indonesia, Iran and the EU (table 2).
These six markets combined accounted for about 27% of the total, on average,
from 2003 to 2006.

Comparative advantage1
In Asia in particular, the spatial distribution of rice importers and exporters is
quite striking, and highlights the major role geography plays in determining
agricultural comparative advantage. An examination of historical trading pat-
terns in those Asian countries where rice is the dominant staple food shows that
trade status (as net exporter or importer) has been remarkably consistent for the
past century.2 Figures 3a and 3b show the trade status of most of the Southeast
Asian countries or regions, plus Sri Lanka and Japan, during this time. It can
be seen that members of the exporters club are on the mainland, while those
in the importers club are on islands or narrow peninsulas. The countries on
the mainland have dominant river deltas that provide ample water and flat
land suitable for growing rice. These countries have consistently exported rice
except when revolutionary events (war or radical changes to economic systems)
intervened, as happened in Indochina. By contrast, islands and peninsulas have
more varied landscapes that sometimes favour corn, oil palm or coconut. These
countries have consistently imported rice for a hundred years, with the major

1 This section draws heavily on Dawe (2004).

2 India and China are excluded from this analysis because wheat is the dominant staple
food in large parts of these countries.

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 Can Indonesia trust the world rice market? 119

FIGURE 3a Net Trade Status, Consistent Rice Importers in Asiaa

(%)
100
Philippines Japan
80
Malaysia Indonesia

60 Sri Lanka

40

20

-20
1900 1920 1940 1960 1980 2000

FIGURE 3b Net Trade Status, Consistent Rice Exporters in Asiaa

(%)
20

-20

-40

-60 Thailand Indochina

Myanmar
-80
1900 1920 1940 1960 1980 2000

a Countries included are those for which rice is the dominant staple food. The values shown are cen-
tred five-year moving averages, used in order to smooth fluctuations. When imports exceed exports
(+), net trade status is expressed as a percentage of consumption. When exports exceed imports (–),
net trade status is expressed as a percentage of production. This convention avoids reporting values
greater than 100%. Gaps reflect unavailable data. Indochina includes Vietnam, Cambodia and Laos
until 1949; from 1950 onwards, it includes Vietnam and Cambodia. Vietnam dominates trends in both
periods.
Sources of raw data: Rose (1985) and FAO (2006).

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 120 David Dawe

exceptions being again due to revolutionary change, in this case adoption of

‘green revolution’ technologies. Even with this technology, exports from the
traditional importers were small, sporadic and short-lived. The importance of
geography can also be seen at sub-national levels: southern Thailand, a narrow
peninsula, produces insufficient rice to feed its population, while Central Luzon
in the Philippines, fed by the Pampanga River, produces more than enough rice
for its own needs.
Bangladesh is the major exception to this geographical rule; it is on the
mainland and is dominated by river deltas, but its extraordinarily high popu-
lation density means that it cannot produce enough rice for its population.
This shows that geography is not the sole determinant of trade status, but its
importance remains striking.
The difference in the type of land available to countries with and without deltas
is reflected in the percentage of rice in total crop area harvested. Rice accounts for
more than half of crop area harvested in Thailand, Cambodia, Bangladesh and
Vietnam, but less than 40% in island nations such as Indonesia, the Philippines
and Sri Lanka. Rice also accounts for a relatively small share of crop area harvested
in mainland nations without major river deltas (such as Nepal and Bhutan).

Government policies
Government interventions in the rice sector are pervasive throughout the world. It
is well known that the United States and Europe heavily subsidise rice producers.
In Asia, by contrast, many countries restrict imports through quotas and tariffs
(either fixed, or variable in an ad hoc fashion from year to year), and some export-
ers (for example, Vietnam) use similar instruments to stabilise domestic prices.
Support prices for procurement are another common intervention, although in
most cases the support is limited to a relatively small share of the total crop (India
and Thailand in recent years being exceptions). Direct subsidies have been used
less often in developing Asian countries. When they are used, they are at much
lower levels than those used in OECD economies (see, for example, Gale, Lohmar
and Tuan 2005 for recent experience in China).

Different market segments3

Rice is traded in many forms in the international market; for example, rice can be
milled, parboiled, husked or paddy (still in the husk), and different percentages
of broken grains will dictate different prices. With respect to race,4 about 80%
of the world market is for indica, a long, slender grain that accounts for most of
the rice grown in the tropics and sub-tropics. Another important race, japonica,
accounts for 9–12% of world trade. It has short, round grains and is grown in the
sub-tropics and temperate zones. The major importers of japonica are Japan and
Korea, and the major exporters are China (from the north-eastern part of the coun-
try), the United States and Australia. Indica is the type of rice consumed by most
Indonesians and produced by Indonesian farmers. As we shall see later, the policy

3 This section draws on Dawe and Slayton (2004) and Prakash (2004).
4 A race is defined as a ‘genetically and often geographically distinct mating group within
a species’. Indica and japonica are the two major races of Oryza sativa L., by far the most
important cultivated rice species in the world (IRRI 2007).

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 Can Indonesia trust the world rice market? 121

TABLE 3 US and Thai Rice Pricesa

Period R2

1985–89 0.428
1986–90 0.403
1987–91 0.370
1988–92 0.255
1989–93 0.452
1990–94 0.290
1991–95 0.347
1992–96 0.356
1993–97 0.348
1994–98 0.099
1995–99 0.137
1996–2000 0.031
1997–2001 0.021
1998–2002 0.010
1999–2003 0.013
2000–04 0.004
2001–05 0.001
2002–06 0.003

a The table presents the R2 from a regression of the price of Thai 100B on that of US#2/4% rice (see
footnote 5), using five years of monthly data for the years indicated. Regression was done using the
first difference of the logarithm of inflation-adjusted prices, which is stationary for both US and Thai
rice for the period examined.
Source of raw data: IMF (2007); USDA (2005, 2007).

distortions mentioned above are much greater in the japonica than in the indica
market, and so are correspondingly less important in the Indonesian context.
Because of the different types and races of rice that are traded in the world
market, there are different sub-markets that are weakly linked at best in the short
term. For example, consider the markets for Thai 100B and US#2/4%.5 Between
2003 and 2006 (inclusive), in a span of just four years, the premium of US#2/4%
over Thai 100B varied from a low of –9% to a high of +78%. In the 1980s, a given
monthly percentage change in the price of US#2/4% could to some extent predict
the concurrent monthly percentage change in the price of Thai 100B, but that is no
longer the case. Computed using monthly data from 1985 to 1989, a regression of
the first difference of the price of Thai 100B on the first difference of the price of
US#2/4% (in log terms) yielded an R2 of 0.43 (table 3). Similar regressions were
computed on a rolling five-year basis, and from 2002 to 2006 the R2 was 0.003.
Indeed, the coefficient on the price of US rice was not significant for any five-year
period from 1996. One reason for this increasing disconnect may be the rising

5 ‘US#2/4%’ refers to long-grain rice from the southern USA, and is a standard when
quoting US export prices; for an explanation of ‘Thai 100B’, see figure 1, note a.

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 122 David Dawe

share of US exports that are in the form of paddy;6 this rose from less than 5% in
1992 to 30% in recent years (as indicated by raw data from FAO 2006). In any case,
the Asian rice market and the US rice market are to some extent markets for dif-
ferent commodities.

CAN THE WORLD MARKET BE TRUSTED?

The fact that the members of the rice importers club are islands or peninsulas
and have imported rice so consistently for so long—despite some being rich
and some being poor—strongly suggests that government policies have limited
capacity to affect trade status except at considerable cost. For example, all of the
traditional Asian importers have made substantial investments in irrigation sys-
tems to increase rice production. These countries (shown in grey in figure 4) now
irrigate a much higher percentage of their rice land than do exporters (shown in
white in figure 4), but this increasingly costly effort has failed to eliminate the
need to import. These observations suggest that it is unduly costly for Indonesia
to aim for self-sufficiency in rice: it will probably need to import rice indefinitely
if it wants to maintain domestic prices at levels comparable to world prices. A
further disadvantage of a policy of self-sufficiency is that domestic production
fluctuations can cause considerable instability in domestic prices, given that rice
demand is relatively price inelastic (i.e. the autarky domestic rice price is unsta-
ble). Perhaps most important is that higher domestic prices due to import restric-
tions result in higher poverty (Warr 2005), so the pursuit of self-sufficiency has
serious negative distributional consequences, notwithstanding the benefits to
farmers.
Even with all these arguments in favour of a liberal rice trade policy, it is neces-
sary to consider whether Indonesia can safely put its trust in the world market. As
suggested above, two questions concern policy makers: first, the extent to which
world market rice prices are distorted by other countries’ trade policies; and sec-
ond, the possibility of excessively volatile world rice prices.

TRADE POLICY DISTORTIONS IN OTHER COUNTRIES

Prospects for formation of an exporters cartel
One possible source of distortion in world rice prices would be the formation of a
rice exporters cartel. Since the major rice exporting nations are few in number and
control a large share of the world market, it is not surprising that there have been
discussions about the formation of an OPEC-style cartel. Forming a sustainable
cartel for rice would be quite difficult in practice, however.
The success of such a cartel requires world prices to increase, and this pro-
vides an incentive for farmers to produce more, whereas what is needed is that
they produce less. Rice is produced by millions of small farmers acting inde-
pendently, so it would not be feasible directly to require them to cut back their
output in order to contribute to achieving the desired increase in the world
price. Rather, presumably it would be necessary to reduce their incentive to

6 Nearly all internationally traded rice in Asia is in milled form.

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 Can Indonesia trust the world rice market? 123

FIGURE 4 Percentage of Rice Area That Is Irrigated, 1990sa

100

80

60

40

20

0
Thailand Myanmar Viet Nam Malaysia Sri Lanka Philippines Indonesia Japan

a The white series represents traditional exporters of rice, the grey series traditional importers.

Sources of raw data: data on irrigated rice area are from IRRI (2006) for the most recent year available.
Data on total rice area are from FAO (2006) for the year corresponding to the data on irrigated rice area.
Data for Malaysia come from Huke and Huke (1997).

produce by controlling rice exports, probably through the imposition of an

export tax (given that export bans are technically prohibited by the World Trade
Organization).7 This approach has the potential to generate gains for countries
that join the cartel, but would defeat the purpose of making farmers better off.
It might be possible to allocate the export tax revenue to the farmers, but doing
so without ‘leakage’ of the money to non-farmers and in a manner that did not
induce farmers to increase production would be extremely difficult. Such prob-
lems are minor in the case of OPEC because the number of producers in each
member country is small and their output relatively easily controlled.
Moreover, rice has closer substitutes in the short term than does oil (although
oil producers certainly worry about long-term shifts to other forms of energy).
The main substitute for rice is wheat, which is becoming an increasingly impor-
tant component of Asian diets. The world wheat market annually trades over 100
million tonnes, making it more than three times the size of the world rice market.
Since many Asians already consume substantial quantities of wheat products,

7 In the short term, governments of exporting countries can also force world rice prices
higher by stockpiling the commodity so as to hold supplies off the world market. But this
is very costly because of the perishability of rice and the storage expenses involved, and
thus not feasible on a continuing basis. Indeed, Thailand recently incurred losses of nearly
half a billion dollars in just two years owing to its policy of raising prices to farmers and
holding supplies off the world market. In response, the government installed in late 2006
lowered procurement prices paid to farmers by 10%.

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 124 David Dawe

there is some potential for substitution away from rice to wheat in the event that
a cartel is able to raise rice prices.8
Rice exporters have been trying to form a cartel for many years, but without
success, because the interests of the exporters are very diverse. In the absence of a
collective agreement, Thailand has to some extent tried to raise prices on its own,
but has been undercut by Vietnam, Pakistan and India, who are happy to provide
more opportunities for their farmers to export while Thailand (a relatively rich
country compared to the others) holds supplies off the market. As a result, Thai-
land’s market share fell from an average of 32% in 2003 and 2004 to 26% in 2005
and 2006. In short, the coordinated action among exporters that is necessary for
a successful cartel has not been achieved to date. From a different perspective,
formation of a cartel would undercut Thailand’s and Vietnam’s ability to argue
for further reduction of rice trade barriers within the ASEAN Free Trade Area
(AFTA).
Paradoxically, to the extent that Indonesia is concerned about the volatility of
world rice prices, the formation of a rice cartel might even be of some advantage.
It has been observed that OPEC, the classic example of an international commod-
ity cartel, tries to stabilise world prices if they are rising (or falling) too suddenly,
because it is worried about driving away customers if prices increase too rap-
idly (Chalabi 2003). Saudi Arabia has often intervened to pump more oil when
prices started to rise. It is hard to imagine why Thailand and Vietnam should
behave any differently if they were indeed to form a rice cartel, especially since
the complicated politics of US – Middle East relations are absent from the world
rice market.

Producer subsidies and protection

Producer subsidies and protective tariffs are other sources of distortions in world
rice prices. Although a global movement to free trade in this commodity seems
highly unlikely in the foreseeable future, it is necessary for completeness to con-
sider how these distortions affect world rice prices, and what would be the conse-
quences for Indonesia if they were removed. There are a large number of models
that attempt to assess the impact of trade intervention policies and the possible
effects of trade liberalisation on the world rice market. The models differ in many
important respects: partial equilibrium (PE) versus computable general equilib-
rium (CGE); dynamic versus static; and parameterisation of supply and demand
elasticities. In general, most models, both PE and CGE, find that trade barriers,
not domestic support, are the major source of market distortions (FAO 2005).
Unfortunately, most of these models fail to distinguish between indica and
japonica rice. Given low substitutability in both production and consumption
between indica and japonica, and the fact that policy distortions are much greater
in the japonica than in the indica market, this simplification can be a major
shortcoming. However, two recent models, AGRM (the Arkansas Global Rice
Model) and RICEFLOW, distinguish different classes of rice (Wailes 2005). Both of
these models are partial equilibrium in nature. The AGRM model distinguishes

8 Guo et al. (1999) estimate a cross-price elasticity of wheat demand with respect to the rice
price of about 0.3 for China. Jha, Srinivasan and Landes (2007) cite an estimate of about 0.1
for India.

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 Can Indonesia trust the world rice market? 125

between indica and japonica, includes 31 countries/regions, and can track dynamic
adjustments to policy. RICEFLOW can solve only for static equilibria, but has
other key advantages that make it more suitable for analysis of trade policy. It
can solve for spatial equilibria, includes 62 countries/regions, and disaggregates
into five classes of rice: long-grain (both low and high quality), medium-grain,
fragrant rice and paddy. In the RICEFLOW model, the price of low-quality long-
grain rice (the type imported by Indonesia) is projected to increase by 6.6% with
full rice trade liberalisation, while the price of medium-grain rice is projected to
rise by 91%.9
The price increases that would result from a movement to free trade can be
taken as a measure of the policy-induced distortions in the world rice market. In
the case of medium-grain rice the effects are quite large, but it is important to note
two points in that regard. First, the large distortions are due primarily to import
restrictions imposed by Japan and South Korea, not to subsidies in OECD export-
ing countries. Second, the medium-grain market is largely irrelevant to Indonesia,
because Indonesians do not produce or typically eat medium-grain japonica rice.
The small size of the price changes in the long-grain indica market that result from
the removal of subsidies and trade distortions may be surprising at first glance,
but upon reflection the surprise diminishes. While the magnitude of domestic
support to rice producers in the USA is large (Lee, Hoffman and Cramer 2003),
US exports do not enter the indica trade in Asia to a significant extent, primarily
because they are too expensive to compete on a landed commercial basis. The
USA does export rice to Japan, but these exports are of medium-grain japonica
rice, and most US indica exports are bound for Latin America, Europe or the Mid-
dle East. As noted earlier, there is little correlation between movements in US rice
prices and Asian export prices, so it seems that the US market does not influence
the Asian market to an appreciable degree.
In summary, neither producer subsidies in the US and the EU nor import
restrictions in Japan and South Korea have much of an impact on the segment
of the world rice market relevant to Indonesia. The important implication is that
these distortions do not substantially affect the livelihood of Indonesian farmers,
even if they are ‘unfair’. Moreover, Indonesia has little to fear from a sustained,
significant increase in world rice prices due to trade liberalisation at the WTO.

PRICE INSTABILITY ON THE WORLD MARKET

Sudden price surges
The foregoing discussion suggests that Indonesia has little reason to be concerned
about trade policy distortions in other countries. We turn now to consider whether
concern about world price volatility is well founded. The experience of the world
food crisis in the mid-1970s, when world rice prices soared and the world’s lead-
ing exporter, Thailand, banned all exports for several months, has not been forgot-
ten by Asian policy makers. The world in which Indonesia finds itself today is a
very different place from that of 30 years ago, however.

9 The AGRM model finds that full trade liberalisation would result in an increase in long-
grain prices of 22%, and an increase in medium-grain prices of 80%. Nearly all of these
effects are due to removal of import restrictions, not removal of domestic support.

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 126 David Dawe

First, rice production is substantially more stable, because of the increased

prevalence of irrigation and of modern rice varieties that are more resistant to
pests, diseases and windstorms. In this regard, it should be remembered that the
initial cause of the world rice crisis in the mid-1970s was not OPEC and world oil
prices, but production disruptions—indeed, world rice prices had already dou-
bled from January 1972 to July 1973, a few months before OPEC announced its
restrictions on oil exports.
Second, the world’s rice exporters are now more dependent on the international
market for the health of their own domestic rice economy, owing to the very large
proportion of production that is exported. Today, that proportion exceeds 40% in
Thailand, compared with only 14% from 1968 to 1971. It is not politically feasible
for Thailand to ban exports today: this would be strongly opposed by farmers and
gain very little support from consumers. Even rice export taxes are not seriously
discussed by policy makers.10 The rice economies of Vietnam and Pakistan are
also critically dependent on exports. Between 1996 and 2005, Vietnam exported
18% of its production on average, while for Pakistan the share was 44%.
Third, Indonesia’s economy is much less dominated by rice than it was 30
years ago. Rice accounted for 23% of all consumer expenditures in 1981, but this
had declined to 12% by 2005.11 In addition, the ratio of annual export earnings to
cereal imports (mainly rice) has grown substantially. It reached a value of 69 in
2004, compared with just 9 in the early 1970s. If, say, 20% of domestic consump-
tion (about 7 million tonnes of milled rice) were to be imported, at about $300
per tonne, this would amount to an import bill of $2.1 billion annually. This is
very small by comparison with Indonesia’s exports of goods and services of $110
billion in 2006, so plausible price increases would have very little impact on the
balance of payments, the exchange rate, or real national income.12 By contrast, in
1970 (even before the world food crisis raised prices), importing 20% of domes-
tic consumption requirements at the world prices then prevailing would have
cost about $370 million—a far more significant figure relative to the then value of
goods and services exports, which was just $1.3 billion.13
Ironically, between July 1999 and May 2007 (the most recent data available),
the world price in real rupiah terms was relatively stable at the same level as
the long-run average domestic price during the New Order period. Further, over
these eight years the standard deviation of monthly world prices (in real rupiah
terms) was 25% lower than the standard deviation of monthly domestic prices.
The implication is obvious. If the world market can now provide the same level
of stability as was provided by the New Order government, then it is difficult to

10 For example, domestic wholesale rice prices in Thailand increased by 50% in 1998, but
no export tax was implemented in response. This contrasts sharply with policy responses
in the 1960s and 1970s, when rice represented a much larger share of consumer budgets.
11 These figures were calculated from Susenas module data (Lina Marliani and Jack Moly-
neaux, World Bank, personal communication).
12 A rice import shock of this magnitude would also be minor relative to the size of Indo-
nesia’s international reserves, which stood at about $53 billion in late 2007.
13 All numbers in this paragraph are in nominal terms.

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 Can Indonesia trust the world rice market? 127

justify any interventions to stabilise domestic prices: simply opening Indonesia to

the world market would achieve precisely that objective. 14
Of course, prices will still fluctuate on occasion, as happened in 2004 and 2005,
when China ceased being a major net exporter to the world market owing to a
reduction in the area planted to rice in some of the rapidly growing coastal prov-
inces. World prices increased by about $80 per tonne (36%) from 2003 to 2005,
but in both absolute and proportional terms this was a small increase compared
with those in previous decades. World rice prices for the past 20 years have been
less volatile than from 1965 to 1981, and were also less volatile than wheat and
maize prices during the more recent period (table 1). Furthermore, the recent price
increases on the world rice market are due largely to the weak US dollar; in real
rupiah terms, the world price in 2007 was just 19% higher than in 2003 (compared
to an increase of 45% in real dollar terms over the same period).
Choosing to rely on the world market for a significant share of consumption
needs would become problematic only if imports were unavailable at any price (as
happened during the world food crisis for a time), but this seems highly unlikely
in today’s world. The world rice market is much deeper, and the importance of
rice exports to the domestic rice economies of the major exporters means that their
own political interests require a firm engagement with the world market.

Exchange rate movements

Another source of volatility in rice prices is exchange rate movements. A slight
modification of the model of US dollar world market rice prices in Dawe (2002)
to incorporate more recent data shows that world prices are sensitive to exchange
rates—in particular, the rate of the Thai baht (table 4).15 And, of course, the Indo-
nesian domestic equivalent of the world price is sensitive to movements of the
rupiah. Given the increased openness of world financial markets, it is important
to understand the risks of sudden exchange rate fluctuations for the Indonesian
rice economy.
While fluctuations in the Thai baht relative to the US dollar do affect world
prices, the response seems to be felt with some lag, as there was no association
between contemporaneous movements in the baht and the world rice price in the
multiple regression framework specified in table 4. This is consistent with a lag of
several months to a year before Thai farmers can increase the area planted to rice
in response to the increased profitability of rice cultivation that results when the
baht depreciates against the dollar, and vice versa.16 Thus, the empirical evidence

14 An import tariff that varies according to the level of the world price (Timmer and Dawe
2007) could be helpful if the world price became very unstable in the future. Such an out-
come might result if bio-fuel demand causes food prices to become as volatile as petroleum
prices, for example.
15 The magnitude and statistical significance of the regression coefficients are relatively
robust in response to changes in the years used for estimation and to the inclusion of other
plausible variables such as oil prices, per capita production lagged one year, and the mag-
nitude of China’s net trade in rice.
16 A constant world price in dollars coupled with a depreciation of the Thai baht leads to
increased profits for Thai farmers in baht terms and a stronger incentive to expand the area
under rice cultivation (and conversely).

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 128 David Dawe

TABLE 4 An Econometric Model of Inflation-adjusted World Rice Pricesa

Variable Coefficient Estimate Standard Error t-Statistic p-Value

Constant 2430 311 7.81 <0.01

PCP(–2)b –5.94 1.67 –3.55 <0.01
lnBahtUS$(–1)c –341 36 –9.49 <0.01
IndonImportsd 12.38 5.72 2.17 0.04

Number of observations = 23.

R2 = 0.85.
Adjusted R2 = 0.83.
Breusch–Godfrey Lagrange multiplier test statistic = 2.40 ~ χ2(1). Cannot reject null hypothesis of no
first order serial correlation.
Ramsey RESET test statistic = 0.09 ~ F(3,16). Cannot reject null hypothesis of no omitted variables.
Breusch–Pagan/Cook–Weisberg test statistic for heteroscedasticity = 0.32 ~ χ2(1). Cannot reject null
hypothesis of constant variance.

a The table presents coefficient estimates and summary statistics from an econometric model of
inflation-adjusted world rice prices. The dependent variable is the real price of 15% brokens (a mid- to
low-quality rice with 15% broken grains) (USDA 2006; IMF 2007). Estimation uses annual data from
1984 to 2006. The dependent variable and all independent variables are in levels, but results from a
first difference specification are similar. (Dickey–Fuller tests indicate that the null hypothesis of a unit
root for real prices cannot be rejected, but weighted symmetric (tau) tests indicate real prices are I(0).
Since tau tests dominate Dickey–Fuller tests in terms of power (Pantula, Gonzalez–Farias and Fuller
1994), the levels specification is reported in the table.)
b PCP(–2) is per capita rice production (lagged two years) for an aggregate of 17 large Asian coun-
tries (Bangladesh, Cambodia, China, DPR Korea, India, Indonesia, Japan, Laos, Malaysia, Myanmar,
Nepal, Pakistan, the Philippines, Republic of Korea, Sri Lanka, Thailand, and Vietnam). Source of raw
data: FAO (2006).
c lnBahtUS$(–1) is the natural logarithm of the Thai baht/US$ exchange rate lagged one year. Source

of raw data: IMF (2007).

d IndonImports is net rice imports by Indonesia in million tonnes of milled rice equivalent (USDA
2006).

is that most of the effect of fluctuations in the value of the baht will be delayed
and give Indonesia a chance to react. On the other hand, it is also true that some
price effects will be felt sooner than that, as exporting companies can adjust prices
if they feel the exchange rate move is permanent.
The main worry for Indonesian food security would be a sudden increase
in the world price in response to a sudden sharp appreciation of the baht. This
seems much less likely than a sudden depreciation of the baht, as happened dur-
ing the financial crisis in 1997. The Thai baht appreciated against the US dollar
during 2006 and 2007, but this process was gradual and slow. Coupled with the
lagged response to world prices, this reasoning suggests that baht fluctuations are
unlikely to lead to sudden increases in world rice prices.
A sudden depreciation of the Indonesian exchange rate is likely to be a larger
source of risk than fluctuations in the baht–dollar exchange rate. In this case,

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 Can Indonesia trust the world rice market? 129

the outcome might be large shipments of rice out of the country and high prices
for farmers (and consumers), in response to which new policies may need to be
implemented; for example, exports might need to be heavily taxed.17 However,
this is more a question of the conduct of monetary policy than of rice trade policy.
Countries that manage their monetary policies with care rarely, if ever, experience
large, sustained exchange rate movements.

IMPACT OF INDONESIAN POLICIES ON THE WORLD MARKET

On the basis of the arguments presented above, it would appear that Indonesia
has little to fear from the subsidisation or protection of rice production in other
countries, from volatility of rice prices in the world market, from the possibil-
ity of major exporters establishing a cartel, or from the possibility of a global
movement towards liberalisation of the rice trade. In short, the policy that would
appear to serve Indonesia’s best interests is something close to free trade in rice.
Pure free trade, with no restrictions on imports at all, is unlikely to be optimal,
however.
Warr (2005) points out that because of Indonesia’s large size, substantial
increases in Indonesian imports as a result of liberalising the import regime
would raise the world price of rice. Thus, the marginal cost to Indonesia of
importing a tonne of rice is greater than the price, and there will be an optimal
tariff that maximises Indonesia’s welfare by restraining Indonesia’s impact on
the world price. This optimal tariff depends on the elasticity of supply of rice
imports to Indonesia, which Warr (2005) suggests is probably in the range of 7 to
10. The optimal tariff would thus be the inverse of the elasticity (Corden 1974),
or 10–14%.
This range for the optimal tariff may be an over-estimate, however, as it was
derived from econometric analyses of Thailand trade data, on the assumption
that Indonesian imports are 70% of the level of Thai exports. During the past 25
years, Indonesian imports were as high as this only in 1998; the average from 1984
to 2006 was just 18%. Using the estimates of Thai export elasticities cited in Warr
(2005), this lower percentage implies an elasticity in the range of 14–28, or an opti-
mal tariff of 4–7%. Further, to the extent that this range of elasticities represents a
short-term response (and is thus lower than the long-term elasticity), the optimal
tariff will be even lower.
The model of world market rice prices in table 4 estimates that an additional
one million tonnes of rice imports by Indonesia leads to an increase in the world
price of $12.38 per tonne. This coefficient implies an elasticity at the means of 23,
within the range suggested by slightly modifying the calculations in Warr (2005)
as described in the preceding paragraph. This elasticity implies an optimal tariff
of about 4%, which is quite small and not much different from free trade.18

17 Note, however, that most international rice buyers will not take the risk of purchasing
from unknown origins, so large exports in the short term are unlikely.
18 This optimal tariff is optimal only from the viewpoint of maximising Indonesia’s na-
tional income; it does not take account of other policy goals such as income distribution
(Warr 2005).

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 130 David Dawe

SUMMARY AND CONCLUSIONS

Indonesia’s reluctance to use the world rice market to achieve domestic food secu-
rity goals is partly explained by concern about whether the world market price
reflects the true opportunity cost of producing rice, given trade-distorting subsi-
dies and import restrictions in other countries. A survey of models shows that sub-
sidies actually play a small role in lowering prices on the world market, with the
role of import restrictions (especially in Japan and South Korea) being much more
significant. However, these import restrictions occur in the japonica rice market,
which is relatively unimportant to Indonesia, since Indonesians neither consume
nor produce much of this type of rice. By implication, global liberalisation would
only raise the prices relevant to Indonesia by a small proportion. Moreover, the
likelihood that a successful rice cartel could be established seems slight.
Indonesian policy makers are also worried about world market volatility, but
these fears seem misplaced, since the world rice market is much larger and more
stable than it was during the world food crisis of the 1970s. The frequency and
magnitude of sudden price surges has been reduced, and rice price volatility is
not significantly different from that for other grains (such as wheat and maize)
with deeper world markets. It is true that the world market rice price (in rupiah
terms) will be unstable if the Indonesian exchange rate is unstable, but in the face
of large-scale macroeconomic instability it will be difficult to stabilise domestic
prices under either free trade or autarky. Moreover, given the greatly reduced
importance of rice in the economy as compared with the 1970s (in terms of pro-
duction, consumption and trade), the macroeconomic consequences of rice price
instability are far less significant today. Compared with the 1970s, Indonesia now
has substantially more export earnings that it can use to import very large quanti-
ties of rice when necessary, and can afford to source even a relatively large share
of its domestic rice consumption from the world market on a regular basis.
The costs of isolation from the world market are substantial. Geography sug-
gests that it will be very difficult for Indonesia to achieve rice self-sufficiency at
world prices. Moreover, the use of import restrictions—whether in the pursuit of
self-sufficiency for its own sake or for the benefit of farmers—appears to raise the
incidence of poverty (Warr 2005).
In sum, these arguments suggest that the world market can be trusted to play
an important role in providing food security in Indonesia. Engaging fully with
the world market is a much more viable alternative than it was 30 years ago.
Isolation from the world market is costly, and it has an undesirable distributional
impact.

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