Economic incentives and comparative advantage in rice production in Indonesia

The study aimed to analyze the effects of government policies on the rice industry in Indonesia and to examine whether these government policies are consistent with efficient resource allocation. The rice production systems analyzed in this study were rice production under gravity irrigation, under tube well irrigation and upland rice in Java, in 1983. The impact of price intervention policies on production incentives was measured by nominal protection rate (NPR), implicit tariff (IT) for the main inputs and effective protection rate (EPR). Comparative advantage in rice production was determined by estimating the domestic resource cost (DRC). During the old regime (1950-1965), the NPR for rice was generally positive, averaging to 23 percent. In comparison, during the current regime (1966-1984), the NPR was generally negative with an average of -13%. Government policies on inputs were favorable to farmers, as indicated by the negative implicit tariffs (IT) for the major inputs, mainly fertilizers, pesticides and irrigation services. With the positive NPR per rice in 1983 and the negative ITs for major inputs, rice farmers in all studied systems enjoyed protection. The estimated EPRs ranged from 23 percent for upland rice production in West Java to 29 percent for rice production under tube well irrigation in East Java. The DRC analysis indicates that the country, especially Java, has comparative advantage in rice production. The estimated DRCs ranged from 576, where the ration of DRC to SER (shadow exchange rate) equal to 0.609 for rice production under gravity irrigation in East Java to 881 (the DRC/SER=0.932) for that system in West Java. Note however, that the DRC results are very sensitive to change in world rice price, shadow price of land, and rice yield. The break even point (BEP) of the world rice price at which the DRC is equal to the shadow exchange rate (SER) ranged from Rp 230.751 or US$253.77 per ton rice for rice production under gravity irrigation in West Java to Rp 156.101 or US$171.67 per ton rice for that system of rice production in East Java. These BEP prices were still higher than the present border price.