As defined by The Worl Bank, the internal poverty line is $1.90/day. 10% of Indonesians and 6% of Cambodians are living under this poverty line. Given that this should supply ample cheap labour to the supply side of the market, how can classical economics explain the fact that the price of a kilogramme of rice was $0.40 in Cambodia $0.70 in Indonesia?
Can’t the fact that Indonesia is an archipelago with poor infrastructure explains this disparity? How about the fact that Indonesia is a net importer of rice (remember, price and demand)? The answer is no, and that is because transportation costs only make up a small fraction of the total cost of rice.
The real culprit is government policies, which are heavily skew the market and give local farmers supposed boost. The figure below is humorous as it contrasts that Indonesia’s policies and Cambodia’s policies.
Let’s not forget that Asia consumes 90% of the world’s rice and that rice is deeply interwoven into the culture, religion, and society of billions.
Governments effect rice prices at both the national and internal level. In 2007, there was a run on rice as India limited exports, which pushed up prices, the Philipines, who had vast private stockpiles, bought massive amounts of Vietnamese rice at above average prices, and so on. Governments large and small reacted by limited exports and purchasing stockpiles, which pushed prices up significantly. Governments also impact prices nationally by subsidising electricity, water, loans, seeds, etc. for their rice farmers. For example, Japan maintains a network of inefficient and outdated farms by subsidising them via exorbitant international tariffs.Even though Japan has joined the Trans-Pacific Partnership, it still taxes milled rice at a rate of 778%!
The impact on the rice market is even more pronounced in Indonesia and the Philipines, where the volume of imported rice is announced by the government and there a minimum price for producers and a maximum price for consumers. Similarly, Vietnam controls local prices by limiting exports. Are these governments trying to encourage smugglers?
Governments also manipulate supply by purchasing rice from farmers at above-market prices and sell them to consumers at below-market prices. This manipulation not only inefficient, but also creates many opportunities for corruption. A revelaing example of these subsitied at play are currently playing out in Indenedia, where the government spends more than $1.7 Billion/ year to subsidize rice price that often rot by the time they reach the intendended consumers or are sold back to distributors at multiples of the subsidized price. Nothing is more power than than numbers: according to an OECD study, rice in Indonesia costs 60% more than it does on the market. Thailand also had a similary disasterous outcome when acquired vast stockpiles in hopes of driving up prices and then reselling the rice, the end result was a $16 Billion dollar loss, many unpaid farmers and an impeaches president.
These failing policies do not help the average citizen as they raise prices for consumers which has been directly corelated with increased malnutrition. Although it the hard to swim against the current as many ruling parties (e.g. Japan’s ruling Liberal Democratic Party) have risen to power on the promise of eaither maintenainig or eliminating the current subsidies. Overall, the current policies are certainly failing the average citizen, but the politcal will to change the status quoe may be far too weak to overcome the principles required to establish a truely fair economy.
Source: The Economist. http://www.economist.com/news/finance-and-economics/21678256-meddling-market-rice-asian-governments-make-their-own-citizens