Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji 000749102753620301

(1)

Full Terms & Conditions of access and use can be found at

http://www.tandfonline.com/action/journalInformation?journalCode=cbie20

Download by: [Universitas Maritim Raja Ali Haji] Date: 19 January 2016, At: 20:23

Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

DEREGULATION OF INDONESIA'S INTERREGIONAL

AGRICULTURAL TRADE

Roger Montgomery , Sudarno Sumarto , Sulton Mawardi , Syaikhu Usman ,

Nina Toyamah , Vita Febriany & John Strain

To cite this article: Roger Montgomery , Sudarno Sumarto , Sulton Mawardi , Syaikhu Usman , Nina Toyamah , Vita Febriany & John Strain (2002) DEREGULATION OF INDONESIA'S INTERREGIONAL AGRICULTURAL TRADE, Bulletin of Indonesian Economic Studies, 38:1, 93-117, DOI: 10.1080/000749102753620301

To link to this article: http://dx.doi.org/10.1080/000749102753620301

Published online: 17 Jun 2010.

Submit your article to this journal

Article views: 71

View related articles

(2)

DEREGULATION

OF

INDONESIA’S

INTERREGIONAL

AGRICULTURAL

TRADE

RogerMontgomery*

HTSDevelopment Ltd

SudarnoSumarto,SultonMawardi,SyaikhuUsman,

NinaToyamah,VitaFebrianyandJohnStrain

SMERUResearchInstitute**

In January 1998 a significant policy reform deregulated agriculture in Indonesia. It sought to eliminate distorting local monopolies, monopsonies, trade restrictions, interisland maximumshipmentquotasandotherbarriersthateffectively lowered farmgateprices.Manyofthesehadbeenconstructed tobenefittheSoehartofamily and their business cronies. The reform also sought to lower local taxes and levies targeted at agriculture.This paper demonstrates that deregulation eliminated many of the distorting taxes and levies, and dismantled many (but not all) local monopo -lies,monopsoniesandquotas.Farmerstypicallynowreceiveahigherpercentageof thedestination marketprice.Manyalsoreceivesignificantly higherrealpricesfor their products, although this differs dramatically across commodities. Local govern -ments complained about local revenues lost through the reforms. Detailed budget analyses reveal that deregulationdid not substantiallyharm local government budg -ets;instead,otherfactorscausedadeclineinthelocal-sourcerevenuecontribution tolocalbudgets.

widelydisregarded law thatreformed

localtaxes(No.18/1997)wouldindeed

beimplemented.Box1presentsthefour

mostimportantpointsaffectingagricul

-tureintheJanuary1998agreement.

Afterthepublication oftheLOI,the

central government issued a series of

implementation decrees making the

measuresofficialpolicy(Montgomeryet

al.1998/99).Thesedecreesnotonlyre

-formed existing central government

regulations affecting agriculture, but

alsorequired localgovernments tore

-viewtheirregulations, dropping those

that violated thespirit (or at least the

INTRODUCTION

Thisarticlereportsonhowbothcentral

andlocalgovernments deregulated ag

-riculturaltradefromJanuary1998.De

-regulationinvolved boththereformof

provincial and district-level taxes and

levies anda reduction ofcontrols.We

reportonareformmonitoringstudythat

examinedchangesinthedomestictrade

regulatory environment andtestedthe

successofthederegulation inliberating

theagricultural sector.

The January 1998 Letter of Intent

(LOI) to the International Monetary

Fund(IMF)deregulatedagriculture.The

LOIalsoreaffirmedthatanearlierbut

(3)

Roger Montgomery etal. 94

letter)oftheLOIcommitments.Locally

created and enforced monopolies and

monopsonies weretobeabolished.Dis

-tortinglocaltaxesandleviesweretobe

abolishedorreduced.

SMERU’sPersepsiDaerahteam(see

note**)monitoredandreportedonthe

regional implementation of thestruc

-tural reforms and deregulation pro

-gram. This article presents summary

information from the field research.

Readersinterestedinmoredetailedac

-countsaredirectedtotheprovincialre

-portsissuedbytheteam(Montgomery

etal.1998/99).Threeaspectsofthede

-regulationofdomesticagriculturaltrade

wereexamined.The first waswhether

localgovernments actuallycarried out

deregulation. Were local monopolies,

monopsonies and other trade restric

-tions broken? Did local governments

withdraworchangelocalrevenueregu

-lationsasrequired?Thesecondwasthe

impactofderegulation ontheshare of

destination prices,andontheabsolute

(inflation-adjusted)prices, receivedby

farmers.Thethird aspect wasthecon

-sequencesfor localgovernmentbudg

-ets.Whatwastheimpactofreductions

intaxesandleviesontheabilityoflocal

governments to generate revenues to

meettheirbudgetrequirements?

The initiative to deregulate agricul

-turehasalonghistory.Thefirstphase,

undertakenbytheCenterforPolicyand

ImplementationStudies,tookplacedur

-ing the early and middle 1990s. The

Center’sstudiesfocusedontheimpact

ofbothlegaland illegal taxes onagri

-culturaltrade,particularlyfortradable

goodssuchaslivestockandplantation

crops(Toyamah1997;RahmaandTo

-yamah1997).

Asecondphaseoccurredduringthe

preparation oftheWorldBank’sVillage

Infrastructure Project in 1994/95. A

policy study was conducted on trade

and transport related causes of rural

povertyinfiveprovinces.1 _Field_inves

-tigationsshowedthathighlevelsofin

-formal taxes and restrictive market

arrangements substantially lowered

farmgate prices and were a cause of

poverty(Montgomery 1995).

ThethirdphasewastheADB(Asian

Dev elo pm ent Bank) phase (M o nt

-gomeryetal.1997/98).AnADBstrat

-egyreviewreportedanumberofcases

ofrestrictive agricultural marketingar

-rangements. Itinvestigated theburden

caused by local commodity-specific

taxesandlevies,bothlegalandillegal.

Finallytherewasafourthphase,con

-ductedin1998and1999.SMERUstud

-iedtheimplementationofLaw18/1997

andthederegulation agreedintheLOI.

Manyofthedatainthisarticlearefrom

thefourth(SMERU)phase.

Although the central government

chosenottorespondtothisdecade-long

policyadvice,civilsocietyoutsidegov

-ernmentbecameincreasingly aware of

the urgency of deregulating internal

trade.TheJanuary1998stepsdecreasing

regulationofagriculture provedpopu

-larwiththefarmingandtradingcommu

-nities. The LOI’s specific mention of

oranges,clovesandcashewnutssenta

clearmessage aboutjusthowseriously

theinternationalcommunityviewedthe

restrictive business practices of then

PresidentSoeharto, hisfamily and his

businesspartners.TheJanuary1998LOI

confrontedthemwithadirectchallenge.

SoesastroandBasri(1998:27–8)state:

Theinclusionorexclusionofstructural reformsmusthavebeenamatterofse -riousconsideration duringthe closed negotiations [on the January 1998 LOI]. But it is probable that both sides real -isedtheirimportanceinproducinga credibleprogram,capableofrestoring theconfidencenotonlyofinternational markets but also of the Indonesian pub -lic. The importance of their inclusion has beenemphasisedbyProfessorSumitro Djojohadikusumo(JP,12/1/98).

(4)

Deregulation of Indonesia’s Interregional Agricultural Trade 95

BOX1 THEJANUARY1998LETTEROFINTENT’SDEREGULATION MEASURES

FORAGRICULTUREANDRESOURCE_-BASEDPRODUCTS

Point40: Thesecondmajorthrustofthestructuralreformstrategywillbe

toderegulateandprivatisetheeconomy,inordertopromotedomesticcom

-petitionandexpandthescopeoftheprivatesector.Allexistingformaland

informalrestrictivemarketingarrangements,includingthoseforcement,pa

-perandplywood,willbe dissolvedasofFebruary1,1998.Nofirmwill be

forcedtosellitsproductthroughajointmarketingorganisation, norbere

-quiredtopayfeesorcommissions toit.Norwillanyorganisation beallowed

toassignexclusivemarketingareas,ortodictateproductionvolumesormar

-ketsharestoindividualenterprises. …

Point41: Similarly,tradeinagriculturalproductsisalsobeingderegulated.

Effective February 1,1998, traderswill have the freedomto buy,sell, and

transferallcommodities acrossdistrictandprovincialboundaries, including

cloves,cashewnuts,oranges,andvanilla.Inparticular,traderswillbeableto

buyandsellclovesatunrestricted pricestoallagents,effectiveimmediately,

andtheCloveMarketingBoardwillbeeliminatedbyJune1998.Thesystem

ofquotaslimitingthesaleoflivestockwillbeabolishedbySeptember1998.a

Furthermore, provincialgovernments willbeprohibitedfromrestricting in

-terprovincial orintraprovincial tradeeffectiveFebruary1,1998.

Point42: Tosupportexpansionthegovernmentisnowenforcingthepro

-hibitionofretribusi(localtaxes)atalllevelsonexportgoods.Tostrengthen

competition and marketintegration, governmentwill develop and imple

-ment a one-year program for abolishing taxes on interprovincial and

interdistrict trade.Anylossoflocalgovernmentrevenuewillbeaddressed

throughacombination oflocalfueltaxesandtransfersfromthecentralgov

-ernment.

Point43: …farmerswillbereleasedfromtheformalandinformalrequire

-mentsfortheforced plantingof sugarcane.This … will rationalise sugar

production, enabling old andinefficient governmentmills to be closed. It

[will] increase rice output,as farmers [switch]from growing caneonirri

-gatedland toproducing highervalue-added paddy.Alsoit [will]increase

theefficiencyandcompetitivenessofsugar-usingindustries(foodprocessing).

a_Ministry_of_Agriculture_Decree_SK_No._{931/TN.120/Kpts/DJP/Deptan,}_dated₃₁_De

-cember 1997, originally valid for the entire year 1998, was to be cancelled by Septem -ber1998.ThisdatewasbroughtforwardtoFebruary1998.

Source:LOI,January1998.

ECONOMICIMPORTANCEOF

COMMODITIESSTUDIED

Agriculture wasthesectorofchoicefor

thisstudybecauseofitsimportancein

povertyresearch.InFebruary1999,the

agricultural sector workforce had the

highestsectoralrateofpovertyandalso

heldthelargestnumberofpoor.Agri

-culture’s1999 headcountpoverty rate

was39.7%,andmorethan58%ofpoor

peoplegavetheirprimaryfieldofwork

as agriculture (Pradhan et al. 2000).

(5)

During the financial crisis, agriculture

wastheonlysectortoabsorblargenum

-bersofunemployed.Employmentinag

-riculture rose by 13% or 4.6 million

personsinjustoneyear,from34.8mil

-lionin1997to39.4millionin1998(BPS,

Sakernas1997and1998).

Tounderstandtheimpactofderegu

-lationontheregionaleconomy,SMERU

undertookcasestudiesofseverallead

-ingcommodities producedandtraded

invariousprovincesanddistricts.Table

1presentsprovincial-levelinformation

ontheproductionandeconomicimpor

-tanceofthecommodities studied,while

appendix1showsthelocation(district)

ofeachcommoditycasestudy.These

-lection of commoditiesfor study was

based on the following factors: total

plantedarea;quantityproduced;value

of production; andnumberoffarmers

involved(inmanycasesitwasdifficult

tofindanestimateforthislastnumber).

Thegrossvalueofannualproductionof

thecommodities studiedwasmorethan

$1 billion . Rice, soybeans and maize

wereintentionally notexamined.Over

the yearstherehadbeen almostnore

-portsofdistortionscausedbylocaltaxes

ormonopsonies forthesecommodities.

Seldom were trucks carrying rice,

soybeansormaize stopped andtaxed,

probablybecausetheyweretoostrate

-gicallyimportant.

BARRIERSTODOMESTIC

AGRICULTURALTRADE

Duringthe1980sandmuchofthe1990s

there was growing concern about the

welfareoffarmers,basedonperceptions

thattheyreceivedadecliningpercent

-age of thefinalprices for their goods.

Incentivestosupplythemarketseemed

tobefalling.Indonesia’seconomywas

not an internal free trade area. The

problemsfellintotwocategories,price

distortionsandnon-pricedistortions.

Provincialanddistricttaxes(pajak)and

lev ies (c alled retr ibus i; o ri gin all y

opcenten2 _in_Dutch_during_the_colonial

period)onagricultural tradeledtodis

-tortedprices.Someofthetaxesandlev

-ies were legal, but many were not.

Amongnon-price distortions, regula

-torycontrolsonnational,provincialand

district agricultural production and

agriculturaltradecreatedlocalmono

-polies and monopsonies. Other con

-trols,suchasquotarightsandcentral

governmentimposedmaximumlevels

forinterisland livestock shipping, pre

-sented barriers to entryand restricted

competition. Oncetheregulations were

abolished or could be ignored, mo

-nopoly and monopsony powerdisap

-peared.

LocalTaxesandLeviesas

DisincentivestoAgricultural Trade

Provincialanddistrictgovernments do

nothavetheauthoritytotaxincomeor

assets.Allofthemhavethereforeturned

totaxingtrade.Regulations authorising

provincial or district governments to

applytaxesorleviesareofficiallyissued

bylocalparliaments(DewanPerwakilan

RakyatDaerah,DPRD).Butinthepast,

mostsuch regulations weredraftedby

localadministrations, thenapprovedby

theDPRDwithoutseriousreview. Sel

-domwereelementsofcivilsocietypre

-sented with a chance to comment on

draft revenue legislation beforeenact

-ment. Trade levies and charges for

government-providedservicesbecame

animportant revenue source for local

governments, whichbecamedependent

onthisrestricted fiscalbase (although,

as we shall see later, it did not yield

muchrevenue for eitherprovinces or

districts).

Retribusi had amore seriousimpact

thanlocaltaxes.Suchlevieswereorigi

-nallyintended bylaw to be a form of

cost recovery to government, a user

chargeforfacilitiesorservicesprovided.

(6)

Overtime,retribusilevieswereextended

toincludecompensation togovernment

forextractionofnon-renewablenatural

resourceproducts(sinceallnaturalre

-sourcesbelongtothegovernment). The

definitionofnaturalresource products

(hasilbumi)thenwasextendedtoinclude

agriculture, whichisrenewableandnot

ownedbygovernment.

Intime, retribusi becameatrade tax

ongoodsshippedoutsideadistrict.Lev

-iesmushroomed.Truckswerestopped

at retribusi postsevery few kilometres

alongtheroad.Thelevieswereagainst

physicalquantitiestraded,withnolink

to profitability, net income or value

added.Ability topay (the level of in

-comeoftheoriginalproducingfarmer)

wasalsonottakenintoaccount.Meth

-odsofcollection(stoppingtrucksalong

isolatedruralroads)ledtoabuse;much

ofthemoneycollecteddidnotmakeits

way into official coffers. Agricultural

productpricesbecamebadlydistorted

byretribusi levies.Theimpactoflevies

washighestforproductsfromforestry,

livestock and fisheries (Usman et al.

1999a; R ahma and Toyamah 1997;

Toyamah1997).

The first significant reform of local

taxesandleviescamewiththepassage

ofcentralgovernmentrevenueLawNo.

18/1997.Itrestrictedthetypesoflocal

taxes and retribusi levies permitted

(Montgomery et al. 1997/98,Vol.A–2:

29), reducing the number of regional

taxesfrom42to9,andofretribusilevies

from192itemstoonly30.3

LocalNon-TaxBarrierstoTrade:

MonopoliesandMonopsonies

Governments at all levels created, in

-spiredandsupportedlocalmonopolies,

monopsonies and interregional trade

quotasforthefavouredfew.Thesedis

-tortions drove wedgesbetween farm

-gate prices (pushing them lower) and

destinationmarketprices(pushingthem

higher).Thepricedifference(‘rent’)was

to the advantage of the holder of the

monopoly, monopsonyor quotaright.

Benefits of these price wedges were

sharedwiththepeoplewhogavesuch

rights.Manywerespecificallycreatedto

benefitSoehartochildrenorcronies.We

turn now to describe several specific

examples.

OrangesfromWestKalimantan.4_Until

the early 1990s,citrus productionwas

increasingrapidlyinWestKalimantan,

rising from just 76,000 tonsin 1988 to

199,800 tons in1991/92.Almost all of

West Kalimantan’s citrus production

was shippedtoJava.In1991 the West

Kalimantan governor issued a decree

(No.296of18July)statingthatPTBima

CitraMandiri(amemberoftheBiman

-taragroupcontrolledbySoeharto’sson

BambangTrihatmojo)wasappointedto

betheofficial‘coordinator’ofthecitrus

tra de. All citrus trade had to pass

through Village Unit Cooperatives

(Koperasi Unit Desa,KUD). Farmers

could sell only to KUD-appointed

collector–traders, who were then re

-quiredtoselltoPTBimaCitraMandiri

for interisland trade. Farmgate prices

droppedprecipitately.Exportsfromthe

provincefellby63%.Angryorangepro

-ducers brought truckloads of oranges

into Pontianak and dumped them in

front ofgovernmentoffices in protest.

Many orange producers abandoned

theirtrees,and havenottendedthem

sinc e. T he 1991 m on o pso ny rig ht

grantedtoPTBimaCitraMandiriwas

abolished by a governor’s decree (SK

No.555/1993)that‘encouraged’(butno

longer required) marketing through

KUDcooperatives. Buttheorangetrade

hasneverrecovered.

CocoaandCashewNutsinSouthSula

-wesi.5 _Cocoa_and _cashew_nuts_are_im

-portant export crops for Sulawesi,

particularly inpoorisolateduplanddis

-tricts that do not have much flat or

(7)

R

o

ge

r

M

on

tgo

m

er

y

et

al

.

98

TABLE 1 CommoditiesStudiedinRelationtoProvincialandDistrictDeregulation

PlantedAreaa _Productionb

Commodity Province (‘000 ha) (% national (‘000 tons (% national Value of Number of

area) p.a.) production) Production Farmers

($millionp.a.)c _(‘000)

Foodcrops&horticulture

Onions West Nusa Tenggara 9.7 11 64.5 11 32.3 n.a.

Potatoes Jambi 2.8 6 26.4 3 5.0 n.a.

SouthSulawesi 2.4 5 26.0 3 4.6 n.a.

Oranges SouthSulawesi 19.6 n.a. 316.8 52 40.0 n.a.

Plantationestatecrops&forestproducts

Tea leaves, fresh West Java 55.0 85 23.5 72 1.4 39.0

Cocoabeans SouthSulawesi 154.8 41 130.2 49 111.4 68.6

Coffee(arabica) SouthSulawesi 34.5 3 12.4 3 19.9 15.6

Coffee (robusta) Central Java 27.6 2 7.4 2 13.1 n.a.

South Sumatra 256.5 23 108.1 27 84.1 n.a.

East Java 86.9 8 37.6 9 35.5 n.a.

Jambi 27.1 2 5.2 1 4.0 n.a.

Coconuts NorthSulawesi 279.5 8 298.6 11 66.3 26.3

Cloves North Sulawesi 43.0 n.a. 7.0 n.a. 9.4 n.a.

Tobacco, shredded Central Java 58.1 24 40.7 20 27.0 n.a.

East Java 145.2 59 128.3 62 256.6 n.a.

Rubber Riau 508.3 17 237.1 20 37.2 n.a.

SouthKalimantan 129.8 4 66.0 6 8.1 112.6

South Sumatra 779.9 26 317.7 27 57.4 260.0

Cashew nuts East Java 54.8 11 9.5 13 7.4 n.a.

Cinnamon Jambi 52.3 46 19.3 52 6.4 40.4

(8)

Deregulation

of

In

d

on

es

ia

’s

Interregional

Agricultural

T

ra

de

9

TABLE1(continued) CommoditiesStudiedinRelationtoProvincialandDistrictDeregulation

Planted Areaa _Productionb

Commodity Province (‘000 ha) (% national (‘000 tons (%national Valueof Numberof

area) p.a.) production) Production Farmers

($ million p.a.)c _(‘000)

Candlenuts West Nusa Tenggara 3.3 2 6.0 12 1.3 n.a.

Rattan South Sulawesi n.a. n.a. 5.2 n.a. n.a. n.a.

Fisheryproducts

Seafish D.I.Yogyakarta n.a. n.a. 1.4 1 0.4 n.a.

North Sulawesi n.a. n.a. 123.3 3 17.7 29.1

Tiger prawns South Sulawesi 1.6 n.a. 4.6 n.a. 36.1 4.0

Livestock

Milk(litres) West Java 118.4 35 432.0 n.a. 44.6 n.a.

Cattle, slaughter South Sulawesi 840.6 7 56.1 37 11.5 n.a.

North Sulawesi 294.7 2 7.7 1 2.1 n.a.

West Nusa Tenggara 472.8 4 32.4 21 7.8 n.a.

EastJava 3,382.7 28 440.0 27 136.9 n.a.

Duckeggs SouthKalimantan 3,116.3 10 12.0 n.a. 0.9 44.1

a_For_livestock,_’planted_area’₌_livestock_population_(head).

b_For_livestock,_{’production’}₌_litres_in_the_case_of_milk,_and_number_of_livestock_sold_for_slaughter_in_the_case_of_cattle.

c_In_1997;_the_exchange_rate_used_for_that_time_was_Rp_9,000/$.

n.a.=datanotavailable.

(9)

gently rolling land suitable for rice or

othergraincultivation. Forinstance,in

1998inPolmasdistrictinthehillynorth

-western part of SouthSulawesi, there

were27,764hectaresofcocoa,grownby

43,361families(about30%ofallPolmas

farm families). Polmas had a smaller

areaofcashewnuts(2,914hectares),but

cashewswerethemainsourceofincome

for a further 6,700 poor upland farm

families.InBonedistrict,anotherpoor

areaofSouthSulawesisurveyed,cocoa

wasimportantfor25,192farmfamilies

(27%ofallfarmfamilies),whooperated

10,490hectaresofcocoa trees.InBone,

cashewswerethemainsourceofincome

for another 11,706 families (13%)who

tended9,050hectaresofcashewtrees.

SouthSulawesi’ssmallholder planta

-tion crop producerswerefaced witha

regulationthatrequiredcocoabeansand

cashewnutstobeprocessedwithinthe

province. The largest cashew nutpro

-cessingfactoryinUjungPandangben

-efitingfromtheregulationwasPTCitra

SekarwangiAgro Persada,part of the

Citra group andownedby Siti Hardi

-yantiRukmana(‘Tutut’),adaughterof

then President Soeharto. Cashew nut

buyerswantedraw,unprocessedcashew

nuts(forexporttolower-costprocessors

inIndia)andwerepreparedtopayhigher

pricesthanSouthSulawesi’scashewpro

-cessingfactorieswerewillingtopay.The

maincocoabeanimportingcountry,the

US, wanted only unfermented cocoa

beans.6_Required_local_processing_in_this

case wasnot value addingbut rather

‘value subtracting’.7 _By₁₉₉₉_this_regu

-lationremainedofficiallyonthebooks,

but was no longer heeded, because

former President Soeharto and his

daughterhadlostpoliticalinfluence.

After experiencing the impactof de

facto deregulation, thecocoa beanand

cashew nutprocessingindustriestried

againin1999topersuade government

toforcehigh-costlocalprocessing.They

requestedtheimpositionofa20–30%ex

-porttaxonunprocessedcocoabeansand

cashew nuts (Harian Ekonomi Neraca,

3/6/99;JP,4/6/99) to help guarantee

suppliesofrawmaterialstoexisting(fa

-voured) processing factories. By this

timeelementsofcivilsocietyweremore

vocalabouttheimpactofgovernment

-created marketing restrictions.Many

sawthismoveasone-sided,helpinglo

-calprocessingfirmsbutharmingfarm

-ersbyforcingdownthefarmgateprice.

The Cocoa Association of Indonesia

objectedstronglytotheproposal,asdid

boththeIndonesianFarmersUnionand

theAssociation ofIndonesianFoodand

BeverageProducers (Kompas,14/6/99;

HarianEkonomiNeraca,14/6/99).Only

theCashewNutIndustryAssociationof

Indonesiasupportedtheimposition of

anexporttax.Itssecretarygeneralstated

thatthefarmgatepriceofcashew nuts

was rocketing upward,benefiting the

farmerstothedetrimentof processors

(Bisnis Indonesia,27/8/99). Asat July

2001,itslobbyingappearedtohavebeen

unsuccessful, and there were no new

export taxes on cashew nuts. There

were als o no new export taxes o n

cocoabeans.

CloveMarketing. Cloveswereanim

-portant source of income for upland

farmingareasinSulawesi.Forinstance,

in South Sulawesi’s im pov erished

Polmas district, cloves were the main

sourceofincomefor2,000farmingfami

-lies cultivating 882 hectares, while in

Bonetheyweregrownby5,776families

operatingabout4,000 hectares.Cloves

were even more important in North

Sulawesi,withatotalof43,000hectares

planted,but by the periodjust before

deregulation only 20,000hectareswere

productive,yieldingjust7,000tons.The

remaining23,000hectaresofcloveplan

-tationshadlargelybeenabandonedbe

-cause of thedisincentive effectof low

farmgateprices.

(10)

Beforederegulation, cloveproducers

wererequired tosell their outputto a

muchcriticisedCloveSupportandMar

-ketingBoard(BadanPenyanggaPema

-saran Cengkeh, BPPC), controlled by

Soeharto’syoungestson,HutomoMan

-dala Putra (‘Tommy’).Clove prices at

theproducerlevelplummeted,butclove

pricestothekretekcigarettemanufactur

-ersinJavadidnotfallcommensurately.

There wassuspicion of super-normal

profits madeby theBPPCmonopsony

rightholder,whoseaccountswerenever

madetransparent.8

The measures taken to break the

poweroftheclovemarketingboardap

-pear to have beenboth complete and

effective. Pr esidentia l Dec ree No .

21/1998establishedtherightofallfarm

-erstosellclovestoanyone,andfortrad

-ers to buy cloves from all agents at a

freelydeterminedmarketprice.Anin

-structionletterfromtheMinisterofIn

-du stry and Trade9 _supported _this

Presidential Decree. BPPC wound up

itsaffairsattheendofJune1998,after

which time supervision of the clove

tradebecame the responsibility ofthe

DirectorGeneralofDomesticTrade.A

site investigation in North Sulawesi

(Montgomery et al. 1998/99: No. 5)

showed noresidualtrace oftheBPPC

monopsony.Farmers and traders said

thetrade was by then freefrom inter

-ferencebythegovernmentand‘Tommy’

Soeharto.

Smallholder Tea Processing in West Java.10 _Tea _is_an _important_export_crop

for Indonesia. Exports in 1998 earned

$108million.WestJavaisthechiefpro

-ducing province. In the 1980s, PT

TehnusambaIndah,acompanycontrol

-led byMohamad ‘Bob’ Hasan,a Soe

-harto business associate, built four

tea-processingfactoriesinWestJava,a

region known alreadyto have excess

processingcapacityfollowingadecline

in the area planted with tea. Farmers

said Tehnusamba’s factories offered

lowerpricesthancompetitors forfresh

tealeavesandsotheydeclinedtosellto

them.In1990thegovernorofWestJava

issuedaletter11 _instructing_district_heads

toimplement rayonisasi, ormarket‘ra

-tionalisation’,whichprescribedareaal

-locations for the collective buying of

fresh tea leaves. The district heads in

turn issuedletterstellingfarmers near

Tehnusamba factories to sell only to

Tehnusam ba, thus creating a local

monopsonyposition.

The letter fro m the go vernor o f

West Java requiring this geographic

marketallocationforfresh tealeaves

has never formally been withdrawn,

and no r hav e d is trict government

marketareaallocationlettersinfavour

ofTehnusamba.Butfarmersnowdis

-regard these instructions and sell to

whomevertheychoose.Thisisoneex

-ampleoflegislationcreatedtobenefit

private parties with political influ

-ence. After BobHasan’s mentor Soe

-hartolostpoliticalpower,thelegislation

wasnolongerenforced.12

InterislandLivestockTrade.Interisland

livestocktradeisimportantforfarmers

in thedry provinces of Westand East

NusaTenggara (NTBandNTT).These

relativelypoorislandsexportlivestock

mainlytoJava.In1998NTThadalarge

livestockpopulationof803,000head(al

-mostallcattle).Producingslaughtercat

-tle for market was important to more

than200,000NTTfarmers(aroughesti

-mate).InNTBtherewere470,000head

oflivestock,whichwereestimatedtobe

amajorsourceofincomeformorethan

150,000farmers.Most(280,000head)of

NTB’scattlewereonLombokIsland.

Livestock tradewas subject to both

local trade taxes and interisland ship

-pingquotas.Bymid1997,justbeforethe

economiccrisis,NTTcattlefarmersand

tradershadtopayatotalof$40perhead

through16differentkindsoftaxesand

(11)

levies,amountingtoabout13%ofthe

farmgatevalueofaslaughteranimal.

On Lombok Island in NTB, farmers

andtraderspaid24differenttaxesand

retribusionlivestocktrade:threetothe

centralgovernment,ninetotheprov

-ince and 12 to the district (Montgo

-meryetal.1998/99,No.3:37,table10).

Thetotalcostwasabout$31perhead

in taxesandlevies,or5% ofthe$570

farmgatevalue ofa typicalslaughter

animal. InBima(onNTB’sSumbawa

Island), traders and farmers had to

pay the same three central and nine

provincial taxes and levies, plus 18

district charges. In South Sulawesi,

traders bringing cattle from Bone to

UjungPandang(fivehoursaway)had

to pay 31 different taxes and levies

along the road (M ontgomery et al.

1998/99,No.2:26,27,tables6–7).Of

these, six were legal and 25 illegal.

Twenty of the posts charging illegal

levieswerepoliceandmilitarycheck

-points. The sum paid represented

about 4% of the farmgate value of a

typicalanimal.Atandem-trailertruck

carrying 18 head of cattle from Bone

toUjungPandanghadtobeprepared

topay$228intaxesandlevies.

Untilderegulation in1998,theMin

-istry ofAgriculture’s Director General

(DG) of Livestock set interisland live

-stock trade quotas (Montgomery et al.

1997/98,Vol.A-2:33).13 Theseseverely

limitedthenumberofanimalsthatcould

be marketed,to5–6%ofthelocallive

-stockpopulations atmost.Infact,awell

managedherdinNTTshouldbeableto

reach10–13%off-takefromastablelive

-stock population(ACIAR1998: 30,31)

under extensive grazing (though not

under intensive stall-feeding manage

-mentsystems).EachyeartheDGissued

a letter givingprovinces annualmaxi

-mum quotas for shipments. He even

determineddestinations(notpermitting

NTTtoshiptoEastKalimantandespite

highprices anda shortageofbeef,for

example).Tradewasrestricted.Thecat

-tle quotafor NTT fell eachyear, from

67,000headin1994toonly41,000head

in1997.Thelivestockpopulations were

increasing, buttheopportunity tomar

-ket was decreasing. Livestock (and

meat)prices inJakarta roseand farm

-gatepricesintheouterislandsfellasa

resultofthisquotasystem.Alargeprice

wedge was formed, which benefited

onlytheinterislandshippingquotaright

holders.

The January 1998 LOI stated that

interisland livestock shipmentquotas

weretobeabolished,andformallythey

were.ButinFebruary1999thethenDG

ofLivestockstillwantedinterislandlive

-stocktradequotas,andheinstructedthe

headsof Provincial Livestock Services

tosettheirownprovincialquotas.14 _In

-terviews showed that the new quota

systemdidnotactuallylimitshipments,

but it didraise transaction costs once

initialquotashad beenfilled.Atrader

informedus:‘whenthequotaisusedup,

thereisstillaquota’.15 _Relaxation_of_the

quotaisarrangedinan‘informal’way

(i.e.through bribery). Pepehani (Per

-satuanPeternakdanPedagangHewan

NasionalIndonesia), thelivestocktrade

association, arrangesadditional quota

rights.

Thereformoftheinterislandlivestock

trade was deliberately being flouted.

Governmentfinally tookactiontocor

-rectthelivestockquotasituation:on12

August1999,theJakartabusinessnews

-paperHarian Ekonomi Neraca reported

thattheMinisterofAgriculture haddis

-missed the Director General of Live

-stock.Onereasongivenforthedismissal

wasthat‘severalregulations, whichare

notappropriate, mustbechangedand

simplified in agreement with the de

-mandsforreform’.

(12)

DISMANTLINGPUBLICAND

PRIVATEINTERVENTIONS

RemovingNon-TaxDistortions

Monopolyandmonopsonydistortions

proved more difficult to remove than

distortions causedby taxesand levies.

Inafewcases,thecentralgovernment

gave specificinstructions tolocalgov

-ernmentsto break monopolies (or the

centrebrokethemonopoly/monopsony

itself,as with the cloves and livestock

trade). When presented with specific

instructions, central and regionalgov

-ernm ents co mplied; otherwise the

distortionscontinued.Incontrasttogov

-ernment action on monopolies, noin

-structionwasissuedspecifically toban

orbreakrestricted-buyermonopsonies,

with the exception of cloves, oranges

andlivestock.

RemovingTaxTypeDistortions

Regional governments did deregulate

officialtaxesandleviesonagricultural

goodsintradeasrequired bythe1998

deregulation. Butunofficial, illegalcol

-lections stilloccuralongroadsides,es

-peciallyattruckweighbridges(Siregar

2001:300–01).Localgovernments (pro

-vincialanddistrict)compliedwithLaw

No.18/1997.SMERUexaminedthere

-formoftaxesandleviesin13provinces

and23districts.Table2presentsasum

-maryofchangesinthoselocaltaxesand

levies thateither directly orindirectly

affectedagriculturaltradeandtransport.

Ofthe18typesofprovincialretribusithat

werechanged,seven weretransferred

downward to become new sources of

revenue for districts. Approximately

50%ofalllevies inthedistrictsshown

wereabolished.

IMPACTOFDEREGULATION

Toquantifytheimpactoflocaltaxes,lev

-ies,monopsonies andotherdistortions

ondomesticagricultural trade,SMERU

analysed price formation for several

commodities inanumberofprovinces

anddistricts.Information onpricesand

costs wasgatheredateachstagealong

themarketingchainfromfarmtodesti

-nation.Thedestination wasusuallythe

large provincial port city,but in some

casesitwasonanotherisland.Priceand

payment information was recorded

from interviews between December

1998 and October 1999 with farmers,

collector–traders, interisland traders,

wholesalebuyersandprocessorsinthe

provincialtowns.Information wascol

-lected aboutall taxes and levies paid,

legalorillegal.Farmersandtraderswere

asked about both current prices and

prices‘beforethecrisis’(approximately

July 1997). The price information was

cross-checkedwithofficialstatisticscol

-lected by agricultural services and of

-fices of the Ministry of Industry and

Trade.

Inthissectionweexaminetheimpact

ofderegulationfromtwoperspectives:

first,changesintheshareofthewhole

-salepricereceivedbyfarmers;andsec

-ond,changesintherealpricereceived

by farmers (i.e. the nominal farmgate

price adjustedforchangesintheCPI).

Anincreaseinthepricesharetofarm

-ers indicates a decline in the relative

importanceoftaxesandlevies,market

-ing costs andwholesalers’profits.But

such a decline might,in principle, re

-sultonlyinareductioninthefinalprice

toconsumers,withoutanygaintofarm

-ers; by looking at real prices received

byfarmerswecangetanideaoftheex

-tenttowhichfarmershavegainedfrom

deregulation.Thecomponentsofprice

formationfromfarmertowholesalerbe

-foreandafterderegulation,andchanges

therein, are presented in appendix 1,

along with ch anges in r eal pr ices

received by farmers.16_Across _all _com

-modities,theproportionofthewhole

(13)

TABLE 2 NumberofLocalTaxesandRetribusiLevies BeforeandAfterTaxReformLawNo.18/1997,SelectedRegionsa

Number of Local Taxes and RetribusiLevies

Province/District BeforeLaw Abolished New %Abolished

No.18/1997 byLaw Regulations sinceLaw

No. 18/1997 No. 18/1997

WestJava n.a. n.a. n.a. n.a.

Sukabumi 40 22 n.a. 55

Bandung 63 39 n.a. 62

Garut n.a. n.a. n.a. n.a.

CentralJava 33 19 1 58

Brebes 42 27 4 64

Temanggung 28 14 3 50

Klaten 37 18 2 49

D.I.Yogyakarta 28 11 1 39

Gunung Kidul 30 22 3 73

WestNusaTenggara 20 11 8 55

LombokTimur 36 22 10 61

Bima 41 28 17 68

Sumbawa 42 34 7 81

SouthSulawesi 26 20 1 77

Bone 38 26 5 68

Polmas 34 17 n.a. 50

NorthSulawesi 31 21 3 68

Gorontalo 37 22 13 59

Minahasa 33 18 15 55

Riau 18 15 3 83

Bengkalis 40 16 6 48

NorthSumatra 41 33 11 80

Karo 35 24 13 69

WestKalimantan 25 18 3 72

Sambas 33 24 6 73

SouthKalimantan 31 21 3 68

Hulu Sungai Tengah 24 18 2 75

EastJava n.a. 24 7 n.a.

Malang 42 36 9 86

Sampang 46 26 12 57

SouthSumatra 24 19 12 79

Musi Banyuasin 28 16 16 57

Ogan Komering Ilir 24 12 21 50

Jambi 20 15 3 75

Kerinci 26 21 18 81

a_Taxes_and_levies_directly_or_indirectly_affecting_agricultural _trade_and_transport._Fieldwork

wascarriedoutoveroneyearbetweenDecember1998andOctober1999. n.a.=datanotavailable.

Source: Persepsi Daerah provincial monitoring reports (Montgomery etal.1998/99, various volumes).

(14)

sale pric e ac cruing to farm ers in

-creased on average by 8.8% (median

increase6.5%)fromanaverageof74%

before deregulation to 83% after de

-regulation. During the same period

the averageincrease inreal farmgate

prices was 40%, with a median in

-creaseof19%.

ImpactonFarmgatePrices

asaShareofWholesalePrices

Thederegulationmeasuresadoptedin

1998correctedmanymarketdistortions

for farm commodities. Farmers now

haveawiderchoiceofmarketsinwhich

tosell theirproduce.Thelifting ofre

-strictionsonwhereandtowhomfarm

-ers can sell their produce improved

theirbargainingposition.Commercial

costswerebroughtdownbythereduc

-tion of official and unofficial levies.

These changes made it possible for

tradersto pay higherpurchase prices

tofarmerswhileofferinglowerprices

to consumers. Table 3 summarises

changesinfarmgatepricesasapercent

-ageofwholesalepricesafterderegula

-tion.

In 32 (89%) of the 36 case studies

there was an increase in the propor

-tionof the pricereaching the farmer.

Inmorethanhalfthecasestudies,the

increase wasless than 10%.17 _For_an

-otherthirdofthecasesthepriceshare

increased by more than 10%, and in

four cases (11% of the total), by 20%

or more. For only four commodities

didthe farmer’ssharedecline, but in

allbut oneof thesecases(sea fish in

G u n u n g K i d u l ), th e d e c l i n e w a s

negligible.18

Thecommoditythatexperienced the

largest increase in the share price to

farmers(32%)wasprocessedtobacco,

butthiswasananomaly.Intheyearof

observation, traders actually experi

-enced losses in trading tobacco in

Temanggung,CentralJava.Thetraders

paid farmershigh prices,intendingto

drythetobaccoand sellit tocigarette

companies for a healthy profit. How

-ever,theweatherwasnotconduciveto

drying,andthepricestradersreceived

fromcigarettefactoriesfell.

A short explanation is needed for

differencesinthepricesharetofarm

-ersnotedforparticularcommodities

studied in more than one province.

In the case of potatoes (studied in

bothGowaandKerinci),differentfi

-naldestinationpriceswereused.For

Gowa (in South Sulawesi) the final

potatowholesalepriceusedwasthat

inBanjarmasin(ontheislandofKali

-mantan),wherepriceswerehigh.This

trade required interisland shipping.

But in Kerinci (in the southern Su

-matran province of Jambi), the final

destination wholesale potato price

usedwasmuchnearertothesubdis

-trict level market price. For Kerinci

trade, only land transport was in

-volved. The share of the wholesale

price received by coffee farmers in

Karo (North Sumatra) was smaller

than that forcoffee farmers in other

areas,forthefollowingreasons.First,

Karo produces a small quantity of

coffee. Distances are great and real

transport costs are therefore high in

Karo.Beforederegulationtherewere

few coffeecollector–traders in Karo,

and thisis still thecase; hence there

isrelativelylittlecompetitionamong

traders. For differences reported in

farmershareoftherubberprice,it is

important to note that the Sumatra

rubber farmers in Musi Banyuasin

andBengkalisproducelowerquality

raw rubber (containing many impu

-ritiesthatmustberemoved)thanthat

produced in Hulu SungaiTengah in

Kalimantan. Thisquality problem is

reflectedinalowerproportionofthe

(15)

TABLE 3 ChangesinFarmgatePricesasaPercentageofDestination WholesalePricesin SurveyedAreasFollowingDeregulation

ChangeinPriceProportion Case %ofCases

to Farmer (CPP)

CPP>20% Coconuts,fresh(Minahasa) 11

Tobacco,shredded(Temanggung) Sea fish (Gorontalo)

Cattle, slaughter (Gorontalo)

10%<CPP<20% Onions(Bima) 22

Potatoes(Gowa) Copra (Minahasa) Cloves (Minahasa) Rubber, scrap (Muba)

Candlenuts(Bima,shippedtoBanjarmasin) Rattan(Luwu)

Milk (Sukabumi)

0%<CPP<10% Potatoes(Kerinci) 56

Oranges (Luwu)

Tea leaves, fresh (Sukabumi) Cocoabeans(Polmas) Coffee(5cases)

Tobacco,shredded(Sampang) Rubber, slab (Bengkalis)

Rubber, scrap (Hulu Sungai Tengah) Cashewnuts(Sampang)

Candlenuts(Bima,shippedtoMataram) Tigerprawns(Bone)

Cattle, slaughter (4 cases) Duck eggs (Hulu Sungai Tengah)

CPP<0% Cocoa(Bone) 11

Cinnamon(Kerinci) Sea fish (Gunung Kidul)

Rubber,RSSa_(Hulu_Sungai_Tengah)

Total(36cases) 100

Largest increase (Tobacco, shredded, Temanggung) 31.9%

Largest decrease (Sea fish, Gunung Kidul) –5.7%

Averagechange 8.8%

Medianchange 6.5%

a_Ribbed_Smoke_Sheet.

Source: Calculated from appendix 1.

finalcommodity pricebeingreceived

inMusiBanyuasinandBengkalisthan

elsewhere. Finally, in the two cases

studiedinvolving Bima’scandlenuts,

the final destinations and the prices

receivedinthemwerequitedifferent

(eventhoughtheinitialrupiahfarm

-gate price in Bima was the same in

(16)

bothcases).Candlenutssellformuch

moreinBanjarmasin(onKalimantan)

thaninMataram,theNTBprovincial

capital.Thepricesharereceivedbythe

Bimafarmershouldbeexpectedtobe

less for nuts shipped to Banjarmasin

thanforthoseshippedtoMataram.

The general increase in the share

to farmers is equal in magnitude to

thesum ofchangesin taxesand lev

-ies,marketingcosts,andwholesalers’

profit.Ofthesethreecomponents,the

reductioninwholesalers’profitisby

farthemost important,contributing

6.7% of the 8.8% average increase in

far m er s’ sha re ( appe nd ix 1). T he

wholesalers’ profit decline was ob

-served in 33 of the 36 cases, which

may indicate that deregulation has

resultedinconsiderablygreatercom

-petition at this level; more detailed

researchwouldbeneededtosubstan

-tiate this proposition, however. The

contributionofdeclinesintaxesand

l ev ie s, the sh ar e o f w hi c h in the

wholesalepricewasverysmalltobe

-gin with, was far more modest, at

only1.4% (appendix1).

ImpactonRealFarmgatePrices

Table 4 summarises changes in real

farmgatepricesinsurveyedareasfol

-l o w in g d e re gu lati o n . T h e l ar ge st

changein realfarmgatepricesforall

commodities studied was for onions

inNTB,wheretheincreasewas615%.

Thesupplyofonionswassharplyre

-duced when they ceased to be sup

-pliedfromBrebesinCentralJava,and

NTTonionfarmerstookadvantageof

thistoraisetheirprices.The113%in

-cr ease in real farm gate pric es fo r

cloveswasinpartduetotheabolition

of theClove Marketing Board. Many

farmershadneglectedtheirclovetrees

before deregulation because of low

profitability; this resultedin a short

-age of cloves immediately after de

-regulation. The real price to farmers

for export commodities such as tiger

prawns,fish,cocoa beans,coffeeand

rattan increasedbecause of the large

depreciation of the rupiah. Farmers

alsobenefitedfromincreasedcompe

-titionamongbuyersandtraders,par

-ticularlyinthe caseof copra, teaand

milk.

Therewereseveral casesinwhich

real prices declined. The real farm

-gate price of cinnamon fell because

ofadeclineintheworldprice.Farm

-ers received lower prices for rubber

in Riauand South Kalimantan,first,

becausethequalityofrubberinboth

provinces declined, and second, be

-cause the world demand for rubber

fell. It is notclear why the farmgate

priceforothercommoditiesdeclined,

although this is probably due to an

increase in lo cal supply. This cat

-egoryincludespotatoesfromKerinci

in Jambi and Gowa in South Sula

-w esi , o r an ge s fr o m L u w u , So u th

Sulawesi, and livestock from Sam

-pang , East Jav a. In N TB , the real

farmgate price of livestock in Bima

increased by 18%, while in Lombok

itfellby5%.Thisisexplainedbythe

price differencebeforederegulation,

w he n l iv e sto c k w as si gn i fic a ntl y

cheaperinBimathaninLombok:the

price change after deregulation was

thereforelargerin Bima.

Changesinrealfarmgatepricesare

notalwaysconsistentwithchangesin

share tothe farmer. Thelatter isnot

afullyreliableindicator ofbenefitto

farmersbecauseitignoreschangesin

wholesale prices: a farmer might re

-ceivealargershareofalowerwhole

-sal e p r ic e an d be w o r s e o ff, a nd

conversely. Table 5 summarises the

correlation between changes in real

farmgate prices and changes in the

farmers’shareofwholesaleprices.In

twocases,thedeclineinthefarmers’

(17)

TABLE4 ChangesinRealFarmgatePricesinSurveyedAreasFollowingDeregulation

ChangeinReal Case %ofCases

Farmgate Price (CFP)

CFP > 100% Cloves (Minahasa) 17

Cocoabeans(Polmas) Coffee(Temanggung) Onions(Bima) Rattan (Luwu) Tiger Prawns (Bone)

50%<CFP<100% Cattle,slaughter(Gorontalo) 14 Cocoa(Bone)

Coffee (Karo) Copra (Minahasa)

Tealeaves,fresh(Sukabumi)

0%<CFP<50% Candlenuts(2casesinBima) 39

Cattle, slaughter (Bone, Bima) Coconut, fresh (Minahasa) Coffee(Polmas,Malang,Kerinci) Duckeggs(HuluSungaiTengah) Milk(Sukabumi)

Rubber, scrap (Muba)

Sea fish (Gorontalo, Gunung Kidul) Tobacco,shredded(Sampang)

CFP<0% Cashewnuts(Sampang) 31

Cattle, slaughter (Lombok Timur, Sampang) Cinnamon (Kerinci)

Oranges(Luwu)

Potatoes(Kerinci,Gowa) Rubber,slab(Bengkalis)

Rubber, RSSa_(Hulu_Sungai_Tengah) Rubber,scrap(HuluSungaiTengah) Tobacco,shredded(Temanggung)

Total (36 cases) 100

Largest increase (Onions, Bima) 615%

Largest decrease (Cinnamon, Kerinci) –59%

Average change 40%

Medianchange 19%

a_See_table_3,_note_a.

Source:Asfortable3.

share is offset by increases in the

whole sale price sufficient to leave

farmers betteroff,whilein sixother

cases increasesin thefarmers’ share

are not enough to offset the impact

of decliningwholesale prices. Inthe

majority of cases, however, farmers

benefitedbothfromderegulationand

from increases in wholesale prices

duringtheperiodinquestion.

(18)

Deregulation

of

In

d

on

es

ia

’s

Interregional

Agricultural

T

ra

de

1

0

9

TABLE5 ChangesinRealFarmgatePricesandFarmers’ShareofWholesalePrices

ChangeinRealFarmgatePrices(CFP)

Change in Price Proportion CFP ³100% 50% £CFP < 100% 0%< CFP < 50% CFP < 0%

to Farmer (CPP)

CPP ³20 % Cattle (Gorontalo) Coconuts, fresh (Minahasa) Tobacco (Temanggung)

Seafish(Gorontalo)

10%£CPP<20% Onions(Bima) Copra(Minahasa) Rubber,scrap(Muba) Potatoes(Gowa)

Cloves (Minahasa) Candlenuts (Bima to Banjarmasin)

Rattan (Luwu) Milk (Sukabumi)

0%< CPP < 10% Cocoa beans (Polmas) Tea (Sukabumi) Coffee (Polmas, Malang, Kerinci) Potatoes (Kerinci)

Tigerprawns(Bone) Coffee(Karo) Tobacco(Sampang) Oranges(Luwu)

Coffee(Temanggung) Duckeggs(HuluSungaiTengah) Rubber,slab(Bengkalis)

Cattle (Bone, Bima) Rubber, scrap (Hulu

Sungai Tengah)

Candlenuts (Bima to Mataram) Cashew nuts (Sampang)

CPP<0% Cocoa(Bone) Seafish(GunungKidul) Cinnamon(Kerinci)

Rubber, RSSa_(Hulu

Sungai Tengah)

a_See_table_3,_note_a.

Source: As for table 3.

(19)

IMPACTOFLAWNO.18/1997

ONREGIONALBUDGETS

Deregulating interregional agricultural

trade often resultedin higherprices to

farmers for their produce and lower

pricestoconsumersforagriculturalprod

-ucts.Many provincialanddistrictgov

-ernmentshave ignored these benefits,

however,preferringtocomplainthatde

-regulationremovesavaluablesourceof

revenue.Therearefivecategoriesoflo

-callyderivedrevenues(PendapatanAsli

Daerah,PAD):taxes;levies;usercharges

forfacilitiesandservices;profitsfromlo

-calgovernmententerprises;andvarious

otherlocalrevenues.Intotal,theamount

collectedis quitelimited,butPADrev

-enuesareimportant,becausetheyarenot

tied tospecific programsor projects of

the centralgovernment. Provincialand

district governments see agricultural

commodities beingtransportedtoother

regionsasalegitimateandattractivetar

-getfortaxation.Inassessingregionalgov

-ernments’complaintsaboutlostrevenue,

however,itshouldbeborneinmindthat

only a small part of regional annual

budgets(AnggaranPendatapanBelanja

Daerah, APBD)comesfrom locally de

-rivedrevenues.Forprovinces,PADrev

-enuesoftenfinancedlessthanone-third

ofthe APBDinthe past,whilefor dis

-trictstheyusuallyrepresented lessthan

one-tenthoftheAPBDfinancingrequire

-ment.Themajorlocalsourceofrevenue

forbothprovincesanddistrictshasbeen

transfers(revenuesharing)fromthecen

-tralgovernment.

BelowweconsidertheimpactofLaw

No.18/1997onlocaltaxesandlocallev

-iesinPADcollectionsandAPBD.Weex

-aminerevenuesandbudgetsfirstatthe

provincial level,andthenatthedistrict

(kabupaten)level.Basicdataontheroleof

taxandlevyrevenuesinprovincialAPBD

arepresented inthe toppartoftable 6.

Districtrevenuesandbudgetsareshown

inthelowerpartofthetable.

ProvincialGovernmentRevenues

In the provinces studied, locally col

-lected taxes, levies and PADrevenues

fell in nominal rupiah terms between

1997/98 and 1998/99 (table 6, upper

half).WastaxreformLawNo.18/1997

thecauseofthisdecline?Orwereother

factors(e.g.thegeneralbusinessdown

-turn)moreimportant?Attheprovincial

level,localPADcollections werearela

-tivelysignificantsourceofrevenuetothe

APBDbeforethefinancialcrisis,contrib

-utinganaverageof30%oftheprovinces’

budgets19 _(from_a_low _of_20%_in_North

Sulawesi to a high of 68% in Central

Java).Taxes,mostlyonmotorvehicles,

werethemajorsourceofPAD.Thetax

reformlawof1997didnotreducemo

-tor vehicle taxes. Retribusi levies were

relativelylessimportantasasource of

provinces’ PAD. Before the crisis, the

contribution oftaxandlevieswasabout

92% of provinces’ average PAD. In

1998/99theroleoftaxesandleviesfell

in10ofthe12provincesstudied;20_their

contribution declined on average to

about22%ofprovinces’APBD,ranging

from alowof13%inNTBtoahighof

46%inEastJava.

LocallycollectedPADrevenuesfellin

absolutetermsinallofthe12provinces

surveyed.Atthe provincial level,taxes

werealwaysmuchmoreimportantthan

retribusilevies,andthereforePADcollec

-tionsfell whentax collections fell.The

majorcauseofthedeclineinprovincial

-leveltaxeswasthecollapse oftheauto

-mobilemarketduringthecrisis.Taxeson

registrationsofnewvehiclessloweddra

-matically,asdidthetaxonvehicletrans

-fers.Inmostareas surveyedthis single

factor,the automobilemarket,was the

determiningcauseofthedeclineintaxes

andinPAD.

TaxreformLawNo.18/1997bycom

-parison had a relativelyminor impact

onlevelsofPADrevenuecollectedand

provincialAPBDbudgets.Onaverage,

(20)

TABLE 6 ShareofTaxandLeviesinProvincialandDistrictBudgets (%)

TaxesandLeviesLost Share of Local Taxes due to Abolition of

and Levies in: Distortions, as % of:

PAD APBD PAD APBD

1997/98 1998/99 1997/98 1998/99 1997/98 1997/98

Provinces

Riau 93 74 36 19 18 7

South Kalimantan 88 81 27 15 18 6

South Sulawesi 93 85 34 22 17 6

South Sumatra 94 89 31 17 17 6

North Sulawesi 90 86 20 15 14 3

West Nusa Tenggara (NTB) 83 74 20 13 13 3

West Kalimantan 95 83 23 16 11 3

Central Java 95 86 68 36 10 2

Jambi 96 86 25 15 10 3

East Java 96 92 29 46 6 2

North Sumatra 86 87 24 31 6 2

Yogyakarta 92 85 24 22 5 1

Maximum 96 92 68 46 18 7

Minimum 83 74 20 13 5 1

Average(unweighted) 92 84 30 22 12 4

Districts

Lombok Timur 90 81 6 4 57 4

Sumbawa 92 88 7 22 50 4

Bone 97 77 6 5 36 2

Kerinci 87 74 4 3 36 2

Bima 92 78 4 3 32 2

Polmas 82 79 3 10 23 1

Ogan Komering Ilir 59 31 2 2 20 0.8

Sambas 84 82 4 3 17 1

Karo 88 89 12 6 16 2

Bengkalis 64 78 4 8 14 1

Muba 59 56 2 3 14 0.5

Gowa 92 85 10 9 12 1

Sampang 88 63 6 4 12 1

Minahasa 89 73 3 2 10 0.4

Gorontalo 59 82 2 2 9 0.3

Kulon Progo 38 78 5 8 8 1

Brebes 90 87 12 8 7 1

Klaten 78 71 9 5 7 1

Gunung Kidul 79 77 8 5 5 1

Sleman 72 72 10 9 5 1

Temanggung 87 84 12 8 5 1

Hulu Sungai Tengah 56 81 2 3 3 0.1

Malang 91 75 16 8 3 1

Maximum 97 89 16 22 57 4

Minimum 38.0 31.0 1.8 1.6 3.0 0.1

Average (unweighted) 78.8 75.7 6.5 6.0 17.4 1.3

Source: Montgomery etal.(1998/99), various volumes.

(21)

theimpactwasadecreaseof12%inpro

-vincialPADrevenuesandofonly4%in

provincialAPBDbudgets.Formanyof

theprovincialtaxesandlevieschanged

by LawNo.18/1997,therevenues did

notdisappear.Thelawtransferredthem

downwardtothedistricttobecomenew

sourcesofrevenue.

DistrictGovernmentRevenues

Atthedistrictlevel,locallycollectedtaxes

and levies provided relatively little in

-cometoAPBDbudgetsbothbeforeand

after deregulation (table 6, lower half).

Beforederegulation,taxesandleviessup

-pliedonlyabout6.5% ofatypicaldistrict’s

budget(therangewas2%to16%), and

afterderegulationandthecrisis,about6%

(rangingfrom2%to22%).Districtswere,

andstillare,heavilydependentuponrev

-enue sharing from thecentral govern

-ment,andongrantsandassistancefrom

theprovinceandthecentralgovernment.

The fiscal equalisation law (No. 25/

1999)21 _will_do_little_to_improve_the_abil

-ityoflocalgovernmentstoraisetheirown

revenues.LawNo.25didnotcreatenew

sourcesofrevenueforlocalgovernment:

itmerelyreorganisedtheprocessesand

formulas for revenue sharing from the

centre.

Law No. 18/1997abolished a num

-berofdistortingdistrict-leveltaxesand

levies. Inbudgetyear1997/98around

17% of an average district’s PAD rev

-enues werelost.Despite this,inactual

rupiah terms, district PADincreased

about 16%in1998/99becauseofcom

-pensatingmeasuresgrantedtodistricts.

These included new taxes and levies,

amongthema newfueltax,and taxes

and levies devolved down from the

province(andthecentre),forexamplea

taxontheminingoflowvaluedminer

-alssuchassandandstone(galianC),and

taxes ongroundwater andstream wa

-ter exploitation. District budgets rose

about36%owingtoincreasedtransfers

fromthecentre(box1,point42).Insum

-mary,LawNo.18/1997wasofpositive

benefittodistrict-levelbudgets.

CONCLUSIONS

Themoreseriousproblemsofexcessive

regulationandtaxationofagricultureoc

-curredoutsideJava.PricesineasternIn

-donesiawerebadlydistorted.Themost

severeproblemsoccurredintheprovinces

ofNTB,NTTandSouthSulawesi.Incon

-trast,fewcasesofseriousmarketdistor

-tions were found in the Kalimantan

provinces,withtheexceptionsoforanges

andrattan.Majorfoodstaplecommodi

-tiessuchasrice,soybeansandmaizewere

generallynotthetargetofmarketregula

-tions,taxesandretribusilevies,butthese

mayhavebeenillegallytaxedalongwith

other commodities duringtruck trans

-port.Plantationtreecropswerefrequently

thetargetsofmarketdistortingpolicies.

Anotherfrequenttarget was livestock.

Distortionsweremostseriousinthecat

-tletrade.

Much has beenaccomplished in in

-creasingtheshareofthewholesaleprice

receivedbythefarmer,throughreducing

localtaxesandabolishinglocalmonopo

-liesandmonopsonies.Taxesandabusive

levieshavebeenreformed,asrequiredby

Law18/1997. Manylocal monopsonies

andmonopoliesarenoweffectivelypow

-erless,althoughtheyremainonthebooks.

Thelivestockinterislandtradequotasys

-temhasfinallybeenbroken,andlivestock

producersarereceivingastimulus.Inreal

terms,farmgatepriceshaverisenformost

farmers,butin almostone-third of the

casesstudiedtheyhavefallen, oftenby

largepercentages. Furtherresearchwill

beneededtoexplainadequatelytheob

-serveddramaticdifferencesinrealfarm

-gatepricesacrosscommodities.

Several issues remain. Among the

most intractable is market allocation

(rayonisasi).Thispractice isstillencour

-aged by various agricultural agencies.

(22)

Marketallocationretainsthepotentialto

createandenforcelocalmonopoliesand

monopsonies. Non-taxpricedistortions

haveprovedmoredifficulttoreformthan

taxtypedistortions.Manyarestillonthe

booksandhavenotbeencancelled.For

exampledocumentsonthecollectionof

Third Party Contributions (voluntary

contributions tolocal government) list

fixedratessimilartotheformerretribusi

levy rates,so the elementofvoluntari

-nessislost,andthemethodofcollection

violatesthe spirit ofLawNo. 18/1997.

ThirdPartyContributionchargeslinked

tothegrantingofcertainpermits—pro

-viding opportunities for collusion—

presentagrowing sourceofconcernin

regionssuchas NTB.User-benefittype

taxes(retribusileviesforusingservicesor

facilitiesprovidedbygovernment) have

alreadybeenfullyexploitedbylocalgov

-ernments;theywereintendedtobe(and

noware)limitedtouserbases.Withde

-centralisation, there is a risk that local

governments will revert to relying on

commodity-specific trade levies once

more. If this happens, retribusi could

again become a source of distortions,

withnolinkbetweenthechargeandthe

provisionoffacilitiesorservices.

Intermsof‘abilitytopay’typetaxes,22

localgovernmentsstillhaveaverylim

-itedrevenuebaseandarenotpermitted

to taxmany economic activities. Itap

-pearedtolocalgovernmentsthatagricul

-turalcropsandlivestock beingshipped

outofaregionwerealegitimatebasisfor

taxation. Province and district govern

-mentsignored the fact that theincome

generatedinagricultureaccruedtoalarge

numberofrelativelypoorpeople,how

-ever.Theimpactontheirwelfareofatax

orlevywasnotconsidered.

Sincethereformagendaof1998,much

hasbeenachievedinremovingpricedis

-tortionsbyderegulation,butithasbeen

achieved by centralist imposition. The

stage nowmoves totheregionstocon

-tinuetheprocessofeconomicreformin

concertwiththeirownlocalDPRDpar

-liaments. NOTES

* E-mail address: RogerDMontgomery @yahoo.com or hts@htsdevelopment. com. We would like to express our grati -tudetotheEuropeanUnionASEM(Asia– EuropeMeeting)TrustFunds,theWorld Bank and the Asian Development Bank for funding during the phases of this study. We also extend special thanks to our men -tors,includingFridaJohansen,BenFisher, ScottGuggenheim, JacquelinePomeroy, Ade Tunus, Mark Mitchell and Brad Philips. We are grateful for comments on an earlier draft of this article by several anonymous reviewers.The views con -tainedinthisreportdonotrepresentthe official views of any of these organisations or individuals. Any mistakes are ours alone.

** FormerlySMERU(SocialMonitoringand EarlyResponseUnit);www.SMERU.or.id; e-mail: Ssumarto @smeru.or.id. These six authors are members of the former SMERU Persepsi Daerah team, a unit of the World

BankfundedSMERU,whichin2001be -came TheSMERU Research Institute, funded by AusAID (the Australian Agency for International Development) and The Ford Foundation. ‘Persepsi Daerah’ is an acronym of ‘Pemantauan Reformasi StrukturEkonomidanProgramDeregulasi Daerah [Monitoring the Regional Imple -mentation of Indonesia’s Structural Re -forms and Deregulation Program]. In the newInstitute,thisteamhasbeenrenamed theDecentralizationandLocalGovernance Division.

1 West Java, South Sumatra, West Kali -mantan, South Sulawesi and East Nusa Tenggara.

2 ThankstoMaxZierenofCOREMAP(the Coral Reef Management Project) for this explanation.

3 Law No. 18/1997 was to become effec -tivebyMay1998,a yearafterpublica -tion.Duringthesecondhalfof1997and early 1998, local governments gave

(23)

indicationsthattheyintendedtoignorethe law and continue to levy agriculture. 4 Based on materials from the Centre for

PolicyandImplementationStudies. 5 Theproblemof regulationintheSouth

Sulawesitradeincocoaandcashewnuts was identified in Montgomery etal.(1997/ 98, Vol. A-2: 33, 36).

6 Processing(includingfermentation)of cocoabeanswithinIndonesiawouldpre -cludetheiruseintheUS.ThankstoDavid Quane of Australia (a member of the USAID funded Agribusiness Project in the MinistryofAgricultureduringthe1990s) forthisexplanation.

7 Attemptstoforcevalueaddingaremore likely to be value subtracting, since they usually imply a distortion of resource al -location.Suppose,forexample,thatpolicy forcesdomesticvalueaddingtologsthat couldotherwisebe exported atan as -sumed world price of Rp 10. If labour in -puts worth Rp 5 are added so as to turn logsintoplywood,and the plywoodis thensoldattheworldmarketpriceofRp 13,valueaddedfortheeconomyfallsby Rp 2 because of the misallocation of labour to plywood production, despite a rise in valueaddedforthetimberindustryofRp3. 8 ‘Tommy’Soehartowassentencedin2000 to18monthsinjailforcorruptbusiness practices. He became a fugitive from jus -tice until his arrest in November 2001 on suspicionofmurderandbombing,thecor -ruptionconvictionhavingbeenquashedon 1October(AgenceFrance-Presse,2/12/2001. 9 SK No. 22/MPP/Kep/1/1998, signed 21 January 1998, effective 2 February 1998. 10 Thesourceforthediscussionofteapro

-cessingisthePersepsiDaerahteam’sWest JavaSiteVisitReportofDecember1998 (Montgomery etal.1998/99, No. 1: 15, 16). 11 West Java, Letter No. 525.22/3671 Bin -prod/90,‘Increasing the Supplyof Tea Leavesto theTea Factoriesof PTTeh -nusambaIndah’.

12 At the time of writing Bob Hasan was serv -ing a six-year jail term, having been found

guiltyofcorruptbusinesspractices. 13 An example of the regulations was No.

946/TN.120/Kpts/DJP/Deptan/1996, whichsetinterislandlivestockquotasfor 1997.

14 LetterfromtheDGofLivestocktoallprov -inces, No. TN 120/21/A/0299,23 Febru -ary 1999.

15 ‘Habisjatahadajatah’.

16 Fullmarketing-marginanalysesaregiven inthePersepsiDaerahsitereports(Mont -gomery etal.1998/99).

17 Deregulation did not have a large influ -enceonthepriceofcoffee(thesubjectcom -modityoffiveofthe20casestudiesinthis group),becausethecoffeemarketinthe areas SMERU studied was relatively free of distortions before deregulation. 18 DeregulationledfishermeninGunung

KidultoreceiveRp6,000perkgfortheir fish,asagainstRp3,000perkgbeforede -regulation. At the same time, however, fish selling prices increased by more than 100% becauseofcollusionbetweenwholesalers. Thenetresultwasthat thefisherman’s pricefellto 80%ofthewholesale price, from 86% before deregulation (Usman et al. 1999b).

19 Averagesareunweighted.

20 Whenthesurveyof13provinceswascon -ducted,dataonprovincialrevenuewere not available for West Java, so only 12 provinces are included in this part of the discussion.

21 Undang-Undang25Tahun1999tentang PerimbanganKeuanganantaraPemerin -tah Pusat dan Daerah [Law 25/1999 on the Financial Balance between the Centre and RegionalGovernments].Lewis(2001)pro -videsfurtherdiscussionofthislaw. 22 ‘Abilitytopay’type taxes arethoseap

-plied to all taxpayers, regardless of what services they use. For example, all taxpay -ers,whetherroadusersornot,makeacon -tributiontowardsroadtax.Unlike‘user pays’taxes,‘abilitytopay’typetaxesare collected according to the taxpayer’s abil -ity to pay.

REFERENCES

ACIAR (Australian Centre for International AgriculturalResearch)(1998),PovertyRe -ductionthroughSustainableLivestockDe

-velopment, ACIAR Commissioned Live -stockSectorProgrammingStudyofEast -ernIndonesia,AS1-97/320,Universityof