Economic developments in the agrifood sectors of Indonesia, Malaysia and South Korea: Background Working Papers
RIRDC Pub. No. 99/157 Project No. STA-1A
i © 1999 Rural Industries Research and Development Corporation. All rights reserved.
ISBN 0 642 57991 1
ISSN 1440-6845
Economic developments in the agrifood sectors of Indonesia, Malaysia and South Korea: Background Working Papers. Publication no 99/157 Project no.STA-1A
The views expressed and the conclusions reached in this publication are those of the author and not necessarily those of persons consulted. RIRDC shall not be responsible in any way whatsoever to any person who relies in whole or in part on the contents of this report.
This publication is copyright. However, RIRDC encourages wide dissemination of its research, providing the Corporation is clearly acknowledged. For any other enquiries concerning reproduction, contact the Communications Manager on phone 02 6272 3186.
Researcher Contact Details Name Dr Ray Trewin Address C/O AJRC, Building 13, ANU, ACT 0200
Phone: 6249 0134 Fax: 6249 0767 Email: [email protected] Website: http://www.anu.edu.au
RIRDC Contact Details Rural Industries Research and Development Corporation Level 1, AMA House 42 Macquarie Street BARTON ACT 2600 PO Box 4776 KINGSTON ACT 2604
Phone: 02 6272 4539 Fax: 02 6272 5877 Email: [email protected] Website: http://www.rirdc.gov.au
ii Foreword
The Asian agrifood markets have been of growing importance to the Australian agrifood industry. In the last financial year Australia exported A$10.4 billion of food to Asia. Japan, Indonesia, Malaysia and the Republic of Korea were the major markets, in that order. The last three markets have been adversely affected by the Asian economic crisis. Australian industry and policymakers need to understand the changes in trends occurring in these markets and the possible impacts these may have on Australian industry.
In response to these needs, Supermarket to Asia Ltd initiated a review of economic developments in the agrifood sectors of Indonesia, Malaysia and South Korea. The research was funded by the Rural Industries Research and Development Corporation (RIRDC), with supplementary funding provided by Supermarket to Asia Ltd and the Department of Industry, Science and Tourism (DIST). The research was contracted to the Australian National University (ANU) and the Meyers Strategy Group. In conjunction with researchers based in the three countries, the ANU and Meyers Strategy Group produced background papers on each economy, and across economies, that are incorporated into this publication and were drawn on in the main reports.
The publication is structured into two volumes and four parts. The first three parts cover the individual country papers for Indonesia (volume one), Malaysia and South Korea respectively, and the fourth part contains across-country reports. Within the country parts, there are reports written by the local research groups, in conjunction with the ANU, on economic developments in the agrifood sectors up to the crisis and then following the onset of the crisis, and by the Meyers Strategy Group on the food retailing and services markets. The across-country section contains a paper comparing and reviewing the literature on economic developments in the Indonesian and Malaysian agrifood sectors, plus an overview paper of the three country reports. A bibliography of references drawn on in the background papers completes the publication.
Peter Core Managing Director Rural Industries Research and Development Corporation
iii iv FOREWORD III LIST OF AUTHORS XIV EXECUTIVE SUMMARY XV CHAPTER 1 KEY AGRICULTURAL AND AGRIBUSINESS POLICY ISSUES IN INDONESIA. 1 1.1 Introduction 1 1.2 The share of agriculture in GDP 1 1.3 Production 3 1.3.1 Food crops 3 1.3.2 Horticultural crops 6 1.3.3 Estate crops 7 1.3.4 Livestock and fisheries 8 1.4 Consumption 10 1.4.1 Food crops 10 1.4.2 Horticultural and estate crops 12 1.4.3 Livestock and fisheries 13 1.5 Trade 14 1.5.1 The importance of international trade for Indonesian agriculture 14 1.5.2 Agricultural trade performance 15 1.5.3 Direction of agricultural trade 17 1.6 Indonesia’s agribusiness: the concept and practise 19 1.6.1 The concept 19 1.6.2 The policies 20 1.6.3 Investment in agriculture 21 1.6.4 The structure of Indonesian agroindustry 24 1.7 Assessment of the current crisis 28 1.7.1 Economic crisis: the wind of change 28 1.7.2 Crisis impact assessment: the issues 33 1.8 The new vision and mission 36 1.8.1 Agricultural development on Java 37 1.8.2 Agricultural development Off Java. 37 1.9 Conclusion 38 1.10 References 40 Appendix 1.1: Agribusiness investment policies – pre-reform 42
v CHAPTER 2 INDONESIA’S PRE-CRISIS AGRICULTURE PROFILE: RECENT POLICY CHANGES AND INVESTMENT OPPORTUNITIES. 69 2.1 Introduction 69 2.2 A brief background to the crisis 69 2.3 Implication of the crisis for the agricultural sector and rural economy 70 2.4 The crisis and Indonesia’s agricultural policies 72 2.4.1 Pre-crisis policies 72 2.4.2 Crisis-induced policies 78 2.5 Production and consumption 88 2.5.1 Production 88 2.5.2 Consumption 98 2.6 Exports and Imports 101 2.6.1. Cereals, roots, tubers and pulses 101 2.6.2. Vegetables 102 2.6.3 Fruit 103 2.6.4 Tree Crops 104 2.6.5 Livestock commodities 105 2.6.6 Fishery commodities 106 2.7. Investment opportunities for agribusiness 107 2.7.1. Prospective commodities for agribusiness 107 2.7.2 Resource potential 108 2.7.3 Suggested investments 109 2.8 References 111 CHAPTER 3 INDONESIA: RETAIL AND FOOD SERVICE MARKETS. 123 3.1 Structure and developments in the retail sector 123 3.1.1 Overview 123 3.1.2 Market structure 124 3.1.3 Consumer and retail trends 127 3.1.4 Impact of the crisis 128 3.1.5 Competitor responses 130 3.1.6 Implications for Australian trade 130 3.1.7 Products 131 3.2 Structure and developments in the food service sector 132 3.2.1 Overview 132 3.2.2 Market structure 133 3.2.3 Consumer and food service trends 136 3.2.4 Impact of the crisis 137
vi 3.2.5 Competitor responses 138 3.2.6 Implications for Australian exports 138 3.3 Company profiles 139 PT Matahari Putra Prima 139 Pt Hero Supermarket Tbk 139 Ramayana Department Store – PT Ramayana Lestari Sentosa Tbk 140 PT Gelael Supermarket 140 Golden Truly Supermarket – PT Golden Truly 140 Makro 140 Goro 140 Circle K Convenience Store - Circle K Indonesia Waserda 141 Fresh Mart Convenience Store - The Fresh Mart 141 AM/PM Indonesia Convenience Store - PT Sinar Sahabat 141 KFC/PT Fast Food Indonesia Tbk 141 McDonald’s/PT Ramako Gerbangmas 141 Texas Fried Chicken/PT Cipta Selera Murni 142 California Fried Chicken (CFC)/PT Putra Sejahtera Pioneerindo Tbk (PSP) 142 PT Wendy’s Citrarassa 142 A & W Family Restaurant/PT Biru Fast Food Husantara 142 Other Fast-Food Outlets 143 3.4 References 144 VOLUME TWO 1 CHAPTER 4 THE IMPACT OF TRADE LIBERALISATION IN ASEAN/APEC ON AGRICULTURAL TRADE AND INVESTMENT IN MALAYSIA. PHASE I. 11 4.1 Introduction 11 4.2 Trade impact studies: the conceptual framework 11 4.3 Survey of literature 12 4.4 Recent economic performance 15 4.4.1 Trade Performance 18 4.4.2 Trade Policy 27 4.4.3 The place of agriculture in an industrialised economy 30 4.5 Incentive policies in the agricultural sector 31 4.5.1 Export agriculture 31 4.5.2 Domestic Agriculture Production Sector 35 4.6 Current Issues and Concerns 39 4.7 References 42
vii CHAPTER 5 RECENT ECONOMIC AND AGRIFOOD POLICY DEVELOPMENTS IN MALAYSIA. 43 5.1 Current status of and prospects for the economy 43 5.1.1 Before the crisis 43 5.1.2 Current economic situation and macro policy changes 43 5.1.3 Medium-term outlook 45 5.1.4 Macro factors affecting agrifood policy 46 5.2 Structure of the agrifood sector (structure–conduct–performance since 1990) 47 5.2.1 Production and consumption structures (including key products) 47 5.2.2 Trade and competitiveness 52 5.2.3 Australia’s market share 57 5.2.4 Business structures 58 5.2.5 Organisational issues 58 5.3 Policy overview 61 5.3.1 After the Uruguay Round until the crisis 62 5.3.2 Current situation and outlook 63 5.4 References 65 CHAPTER 6 MALAYSIA: RETAIL AND FOOD SERVICE MARKETS. 67 6.1 Structure and developments in the retail sector 67 6.1.1 Overview 67 6.1.2 Market structure 68 6.1.3 Consumer and retail trends 70 6.1.4 Impact of the crisis 71 6.1.5 Competitor responses 72 6.1.6 Implications for Australian exports 73 6.2 Structure and developments in the food service sector 74 6.2.1 Overview 74 6.2.2 Market structure 75 6.2.3 Consumer and food service trends 78 6.2.4 Impact of the crisis 78 6.2.5 Competitor responses 79 6.2.6 Implications for Australian exports 79 6.3 Company profiles 81 Dairy Farm International/Wellsave/Cold Storage/Guardian 81 Jaya Jusco Stores Bhd 81 Metrojaya Berhad/Metrojaya Department Stores 81 Giant Cash and Carry 82
viii Aktif Lifestyles Stores Sdn Bhd ( formerly Yaohan) 82 MAKRO Cash and Carry Distribution 82 Royal Ahold/TOPS 82 The Lion Group/Parkson Corporation Sdn Bhd 83 Antah Holdings Berhad/7-Eleven 83 KFC Holdings (Malaysia) Bhd 83 McDonald’s 84 Berjaya Land Bhd ( formerly Berjaya Leisure Bhd) 84 Shakey International (Shakey Restaurants) 85 Tricon Restaurants International (TRI) 85 Genting Bhd/Resort World Bhd 85 6.4 References 87 CHAPTER 7 ECONOMIC AND POLICY DEVELOPMENTS IN THE KOREAN AGRIFOOD SECTOR. 89 7.1 Introduction 89 7.2 Economic developments in Agriculture 90 7.2.1 Agriculture in the national economy 90 7.2.2 Consumption development 92 7.3 Socio-economic factors contributing to agricultural protectionism 94 7.3.1 Income disparity between urban and rural areas 94 7.3.2 Food security 96 7.3.3 Changing socio-economic conditions 96 7.4 Changing pattern of agricultural policies 97 7.4.1 Rice 97 7.4.2 Beef 98 7.4.3 Other grains 99 7.4.4 Effects of the policy 99 7.5 Effects of protection: some empirical evidence 101 7.6 The Uruguay Round and the agricultural policy reforms in Korea 103 7.6.1 The Uruguay Round of GATT 103 7.6.2 New agricultural policy reforms in Korea 105 7.6.3 Subsidy issues 107 7.7 Conclusion 107 7.8 References 108
ix CHAPTER 8 CURRENT ECONOMIC DEVELOPMENT AND OUTLOOK FOR THE KOREAN AGRIFOOD SECTOR: IMPLICATIONS FOR AUSTRALIA. 115 8.1 Introduction 115 8.2 Korea’s economic developments and outlook 115 8.2.1 Korea’s macroeconomic outlook 116 8.2.2 Production and consumption outlook 117 8.2.3 Korea’s trade and investment outlook 118 8.2.4 Outlook for the world economy 119 8.3 Developments in Korea’s agrifood sector 119 8.3.1 Outlook for major agrifood products 119 8.3.2 Food processing structures 122 8.4 Agrifood policies 123 8.4.1 Trade and investment policies 124 8.4.2 Production and processing policies 127 8.5 Trade and investment opportunities in Korea 130 8.5.1 Trade opportunities in the Korean agrifood market 130 8.5.2 Investment and business opportunities 131 8.6 Implications for Australia 132 8.6.1 Opportunities and challenges 132 8.6.2 Specific strategies 134 8.7 Bibliography 137 CHAPTER 9 SOUTH KOREA: RETAIL AND FOOD SERVICE MARKETS. 139 9.1 Structure and developments in the retail sector 139 9.1.1 Overview 139 9.1.2 Market structure 139 9.1.3 Consumer trends 142 9.1.4 Retail trends 145 9.1.5 New retail strategies 147 9.1.6 Liberalisation of the market 148 9.1.7 Impact of the crisis 148 9.1.8 Competitor responses 149 9.1.9 Implications for Australian exports 150 9.2 Structure and developments in the food service sector 152 9.2.1 Overview 152 9.2.2 Market structure 152 9.2.3 Consumer and food service trends 156 9.2.4 Impact of the crisis 158
x 9.2.5 Competitor responses 161 9.2.6 Implications for Australian exports 162 9.3 Company profiles 163 Lotte Corporation 163 Shinsegae 164 Haitai 164 LG Mart Co. Ltd 164 Tong Yang Group 164 Woosung 165 Hyundai Department Store 165 Walmart/Makro 165 Carrefour Korea Ltd 165 Hanwha Store Co Ltd 165 Bokwang Family Mart Co Ltd 165 New Core 165 Hangyang 166 Taegu Department Store 166 Dong-A Department Store 166 Food service 166 Dongwha 166 Dongwha Liquor 166 Korean Tourist Hotel Supply Centre 166 Asian Star (TGIF) 166 McDonald’s 166 Imasco/Hardee’s 166 Doosan Foods 167 KFC 167 Pepsi Co Inc (Pizza Hutt) 167 Burger King 167 Midopa 167 9.4 References 168
xi CHAPTER 10 ECONOMIC DEVELOPMENTS IN THE INDONESIAN AND MALAYSIAN AGRIFOOD SECTORS – A LITERATURE REVIEW. 169 10.1 Introduction 169 10.2 Current status and prospects of the economies 170 10.2.1 Macro factors affecting agrifood policy 170 10.2.2 Indonesia – before the crisis 170 10.2.3 The current Indonesian economic situation and macro policy changes 172 10.2.4 The medium-term outlook for Indonesia 173 10.2.5 Malaysia – before the crisis 174 10.2.6 The current Malaysian economic situation and macro policy changes 176 10.2.7 The medium-term outlook for Malaysia 177 10.3 Structure–conduct–performance of the Indonesian and Malaysian agrifood sectors since 1990 177 10.3.1 Indonesian production, business and consumption structures 177 10.3.2 Indonesian organisational conduct 178 10.3.3 Indonesian trade and competitiveness performance 178 10.3.4 Malaysian production, business and consumption structures 178 10.3.5 Malaysian organisational conduct 179 10.3.6 Malaysian trade and competitiveness performance 179 10.4 Policy overview 179 10.4.1 Overall and sectoral Indonesian policies until the crisis 179 10.4.2 The Indonesian current policy situation and outlook 180 10.4.3 Overall and sectoral Malaysian policies until the crisis 180 10.4.4 The Malaysian current policy situation and outlook 181 10.5 Conclusion 181 10.6 Bibliography 183
xii CHAPTER 11 AGRIFOOD DEVELOPMENTS IN INDONESIA, MALAYSIA AND SOUTH KOREA IN RESPONSE TO CHANGING ECONOMIC CIRCUMSTANCES. 187 11.1 Introduction 187 11.2 Australia’s food exports to Asia 187 11.2.1 Indonesia 188 11.2.2 Malaysia 189 11.2.3 South Korea 190 11.2.4 Key findings across all countries 191 11.3. Economic developments and outlook post-crisis 192 11.3.1 Indonesia 192 11.3.2 Malaysia 193 11.3.3 South Korea 194 11.3.4 Key findings across all countries 195 11.4. Developments in the agrifood sectors 195 11.4.1 Indonesia 195 11.4.2 Malaysia 197 11.4.3 South Korea 199 11.4.4 Key findings across all countries 200 11.5. Policies affecting agrifood developments 200 11.5.1 Indonesia 200 11.5.2 Malaysia 202 11.5.3 South Korea 203 11.5.4 Key findings across all countries 204 11.6. Opportunities, challenges and strategies for Australian food companies 204 11.6.1 Opportunities and challenges 204 11.6.2 Specific strategies 205 11.7 Conclusion 206 11.8 References 207
xiii List of authors
Executive Summary Ray Trewin Australian National University
Chapter 1: Key agricultural and agribusiness policy issues in Indonesia. Achmad Suryana, Sjaiful Bahri, Wahida and Ray Trewin Center for Agro-Socioeconomic Research (CASER) and Australian National University
Chapter 2: Indonesia’s pre-crisis agriculture profile: recent policy changes and investment opportunities. Prajogo U. Hadi, Achmad Suryana, Sjaiful Bahri and Adang Agustian Center for Agro-Socioeconomic Research (CASER)
Chapter 3: Indonesia: retail and food service markets. Meyers Strategy Group
Chapter 4: The impact of trade liberalisation in ASEAN/APEC on agricultural trade and investment in Malaysia. Phase I. Tan Siew Hoey
Chapter 5: Recent economic and agrifood policy developments in Malaysia. Tan Siew Hoey
Chapter 6: Malaysia: retail and food service markets. Meyers Strategy Group
Chapter 7: Economic and policy developments in the Korean agrifood sector. Jong-Soon Kang and Yeon Kim Australian National University
Chapter 8: Current economic development and outlook for the Korean agrifood sector: implications for Australia. Jong-Soon Kang, Yeon Kim and Myung-Hwan Kim Australian National University and Korea Rural Economic Institute
Chapter 9: South Korea: retail and food service markets. Meyers Strategy Group
Chapter 10: Economic developments in the Indonesian and Malaysian Agrifood sectors – a literature review. Ray Trewin Australian National University
Chapter 11: Agrifood developments in Indonesia, Malaysia and South Korea in response to changing economic circumstances. Ray Trewin and Brian Johnston Australian National University and Department of Agriculture, Forestry and Fisheries, Australia
xiv Executive summary
Asian agrifood markets have been of growing importance to the Australian agrifood industry. For example, in 1997–98 around 60 per cent of Australia’s food exports worth A$10.4 billion went to Asia. Japan, Indonesia, Malaysia and the Republic of Korea were the major Asian markets in that order.
However, all these markets have been adversely affected by the Asian economic crisis, particularly the last three. For example, Indonesia’s food imports from Australia fell by 23 per cent to $844mn in 1997–98 after growing strongly for many years. Australian industry and policymakers need to understand the changes in trends that are occurring in these markets, what is driving these, and the possible impacts they may have on Australian industry. More specifically in relation to the crisis, there needs to be an assessment of how the economies are coping, the likely speed of recovery, the changes occurring, especially as they affect demand for food products from Australia, and the strategies to adopt.
In response to these needs, Supermarket to Asia Ltd initiated a review of economic developments in the agrifood sectors of the main crisis-hit countries of Indonesia, Malaysia and South Korea. The research was funded by the Rural Industries Research and Development Corporation (RIRDC) with supplementary funding provided by Supermarket to Asia Ltd and the Department of Industry, Science and Tourism (DIST).
The research was contracted to the Australian National University (ANU) and Meyers Strategy Group. The ANU, in conjunction with research groups based in the countries, and Meyers Strategy Group produced a number of background papers on each economy and across economies that are incorporated into this research report and that were drawn on heavily in the main reports. The main reports are summarised in Short Report Number 49.
Some of these background papers refer to related research, such as that undertaken in an Australian Centre for International Agricultural Research (ACIAR)/Australian Agency for International Development (AusAID) project on key APEC agribusiness policy issues. Others reflect the outcomes of specific research, including country visits.
A number of qualifications need to be made concerning the background papers. Because of the diverse sources of the papers, for example some were written by in-country research groups and others by Australian researchers, there may be occasions where different perspectives are presented on the one issue – such as food self-sufficiency. These differences have been addressed in the final reports. It should be noted that information referred to in the papers was up to the July–August 1998 period. Events have continued to move rapidly in each country and could have changed the assessments in the papers. For example, recovery appears to have been quicker than anticipated in South Korea and slower than initially anticipated in Malaysia. Finally, as they were written as stand-alone pieces at various points in the project as the Asian economic crisis evolved, there is a degree of overlap between some of the papers.
The publication, containing 11 chapters, is structured into four parts in two volumes. The first part and volume covers the specific Indonesia papers. Chapter 1, titled ‘Key agricultural and agribusiness policy issues in Indonesia’, is by the Center for Agro- Socioeconomic Research in conjunction with the ANU on economic developments in the agrifood sector up until the crisis. Key aspects discussed in the paper are Indonesia’s strong self-sufficiency goals for rice, soybeans and corn, and the heavy involvement of the national logistics agency, BULOG, in achieving these goals. This paper also illustrates how before the crisis Indonesia’s consumption patterns were changing away from staple foods because of rising incomes.
xv Chapter 2, by the Center for Agro-Socioeconomic Research, outlines economic developments in the agrifood sectors following the onset of the crisis. Titled ‘Indonesia’s pre-crisis agriculture profile: recent policy changes and investment opportunities’, it sets out how badly Indonesia was hit by the crisis. Indonesia was thrown into recession with a massive decline in its exchange rate, income growth and employment, and rising inflation. Consumers have been forced to revert to more basic food items such as rice. The paper highlights the changes in agricultural and food policies that have resulted from the crisis and the higher priority the Indonesian Government has put on the sector because of its ability to withstand the crisis and provide employment and food. The sector is viewed as a prime means of helping the economy recover.
The final paper in part one is by Meyers Strategy Group on economic developments in the food retailing and food service markets in Indonesia. These sectors were growing rapidly before the crisis, with ‘wet markets’ being replaced by more modern supermarkets and retailing operations, and fast-food outlets developing. The crisis has hit these sectors hard, and most developments have now been curtailed.
In the second volume, parts two and three include the individual country papers for Malaysia and South Korea respectively, and part four reports across-country research. In Chapter 4 (‘The impact of trade liberalisation in ASEAN/APEC on agricultural trade and investment in Malaysia’) Tan Siew Hoey looks at economic developments in the agrifood sectors up to the crisis, particularly at Malaysian policies and the impact of liberalisation on agricultural trade and investment. Malaysia is put forward as a successful case study of agribusiness development and the (diminishing) role of government in this. Food production is dominated by estate crops where Malaysia has a comparative advantage, with smallholder policies aimed at maintaining farm incomes rather than self- sufficiency goals. The movement away from traditional rice-based diets towards more Western-style foods as incomes have grown is also described.
Chapter 5, also written by Tan Siew Hoey, is on economic developments following the onset of the crisis, and is titled ‘Recent economic and agrifood policy developments in Malaysia’. Consumers have switched to cheaper sources of food, including local foods – which has been encouraged by the government, and have eaten out less as a result of higher import prices and falling incomes.
The Meyers Strategy Group reports on economic developments in the Malaysian food retailing and services markets in Chapter 6. The boom in food retailing and service sectors prior to the crisis is highlighted, along with the taking over of many local operations by mainly European and United States operators following the crisis.
Written by the ANU, Chapter 7 in the South Korean section is on economic developments in the agrifood sector up to the crisis, titled ‘Economic and policy developments in the Korean agrifood sector’. It shows how rapid industrialisation and rising incomes have led to changes in diets and eating habits, with South Koreans becoming increasingly dependent on food imports.
Chapter 8 is by the ANU and the Korea Rural Economic Institute on economic developments following the onset of the crisis, titled ‘Current economic development and outlook for the Korean agrifood sector: implications for Australia’. Key points are that the South Korean economy is in recession and had been to some degree prior to the crisis. There have been some changes in agricultural and food policies but many aspects of food importing remain subject to government intervention and there are areas where the market works against Australian products, causing them to be less well known and accessible.
The Meyers Strategy Group contributed the final chapter in this section on developments in the South Korean food retailing and food service sectors. The rapid growth in food
xvi retailing and services in response to demand for better quality and more diverse foods prior to the crisis is highlighted in this chapter.
In the across-country part of volume two, Chapter 10 is by the ANU coordinator of this project and compares and reviews the literature on economic developments in the Indonesian and Malaysian agrifood sectors. The chapter is titled ‘Economic developments in the Indonesian and Malaysian agrifood sectors – a literature review’. Although the focus of the paper is on comparisons of economic development in light of the crisis, relevant past research, such as on different self-sufficiency approaches, is heavily drawn on. The chapter provides a current status of these economies and prospects for the future, describes the structure, conduct and performance of the agribusiness sectors, as well as the opportunities and threats that evolve from the changes.
Chapter 11, by the ANU coordinator of this project and the Supermarket to Asia coordinator, is an overview of all three country reports. It was presented at the 43rd Annual Conference of the Australian Agricultural and Resources Economics Society, in Christchurch, New Zealand, on 20–22 January 1999. It draws lessons from comparisons of the countries affected by the crisis and looks at their different responses, for example compares market-based policies with those that inhibit adjustment. The paper also highlights the strategies Australia will need to adopt in order to position itself to meet the opportunities and challenges from changing institutions and policies, and to maintain or increase food exports and agrifood investment to Asia as it recovers from the economic crisis. Australia needs to: keep markets open, for example through close relationships; position Australian products; reduce costs through the supply chain; establish joint ventures and in-country investments in a more attractive situation of lower currency, a more open investment environment and greater demand for new technologies, with the opportunity of gaining market share and better control of product distribution; and understand the markets and competitors.
References, drawn on in the background papers but more comprehensive than these references, are incorporated in the report.
xvii Chapter 1 Key agricultural and agribusiness policy issues in Indonesia.
1.1 Introduction
Since the 1980s Indonesia’s Ministry of Agriculture has shifted its agricultural policy in response to changes in strategic economic environments. Formerly, the main aim of agricultural development was to increase production at a faster rate in order to increase the availability of food and of raw materials for agro-industries. Many assistance schemes such as input subsidies and import barriers were designed to provide cheaper inputs and to protect domestic markets. In 1993, when Indonesia entered its second long-term development plan, agricultural policy changed its orientation, with the main aim to increase the income and welfare of farmers. Product development became oriented towards or based on competitiveness in the domestic as well as the international market. Gradually, subsidies and protection schemes have been revised and removed, in line with WTO/GATT and AFTA agreements.
The long drought and economic crisis in 1997–98 hit Indonesian agriculture very hard. Food crop production fell at a considerable rate, so that in 1998 Indonesia is predicted to import more than 3 million tonnes of rice. The poultry industry collapsed because 70 per cent of its feed was imported and the increase in the exchange rate by more than 500 per cent increased the price of feed to an unbearable level. This nightmare will sharpen the shift in orientation.
The main objective of this paper is to identify key issues for agriculture and agribusiness in Indonesia related to recent economic and social changes. The policies and performance of agricultural production and trade are also explained in order that the dynamics of agricultural and agribusiness development can be understood.
1.2 The share of agriculture in GDP
Indonesia’s GDP increased almost six times (at current value) over the period 1985 to 1996. The share of agriculture in GDP steadily decreased with the growth of the industrial and services sectors, falling from 23.2 per cent in 1985 to only 16.3 per cent in 1996 (Table 1.1). Agriculture’s share of labour absorption did not decrease proportionally, and disguised unemployment in rural areas has grown because of the unbalanced structural transformation.
As shown in Table 1.2, although in 1994 agriculture absorbed 46.2 per cent of labour, which was down from 54.7 per cent in 1985, the absolute number of jobs increased by around 3.7 million over the period. The decrease in the share of labour absorbed was especially seen from 1992 to 1994, when employment decreased from 42.15 million to 37.87 million. One possible reason for the decrease was increasing urbanisation, which may have led to increasing wages in agriculture as the labour supply fell.
This phenomenon indicated that the per capita income of agricultural workers was lower than (or may have even decreased relative to) that of other industries, illustrating that the challenge for Indonesia in the future will be to generate more productive rural employment. One possible solution is to develop rural-based agribusiness by using appropriate capital-intensive and locally specific technology.
1 Table 1.1: Indonesia’s GDP by sector, 1985 to 1996 (per cent) Sector 1985 1990 1995 1996 Agriculture 23.2 21.5 17.5 16.3 Food crops 14.3 13.2 9.3 8.8 Estate crops 3.8 3.4 2.8 2.7 Livestock and products 2.5 2.2 1.8 1.7 Forestry 1 0.9 1.6 1.5 Fishery 1.6 1.7 1.7 1.7 Non Agriculture 76.8 78.5 82.8 83.7 Mining and Quarrying 14 13.4 8.4 8.3 Manufacturing industry 16 19.9 24.2 25.2 Electricity, gas and water 0.4 0.6 1.2 1.2 Construction 5.5 5.5 7.6 8 Trade, hotel, restaurant 15.9 16.9 16.8 16.7 Transport and communication 6.3 5.6 6.8 6.7 Finance, leasing, business 14.6 13.3 8.8 8.9 Services 4.1 3.3 9 8.7 Total GDP 100 100 100 100 (Rp billion) 96,997 195,597 452,381 528,956 Source: Erwidodo, 1998
Table 1.2: Labour absorption by sector, 1985 to 1994 Labour absorption (000 people) Annual Growth (%) 1985 1990 1992 1994 1985–90 1992–94 1. Agriculture 34,141 35,450 42,153 37,867 0.76 -5.23 (54.7) (49.3) (53.7) (46.2) 2. Industry 5,796 8,221 8,255 10,840 7.24 14.90 (9.3) (11.4) (10.5) (13.2) 3. Trade 9,345 10,593 11,747 13,967 2.54 9.04 (15) (14.7) (15) (17) 4. Others 13,175 17,720 16,363 19,374 6.11 8.81 (21.1) (24.6) (20.8) (23.6) Total 62,457 71,984 78,518 82,038 2.88 2.22 (100) (100) (100) (100) Note: Figures in brackets are the percentage of total employment Source: Kasryno, 1997
Most agricultural labour was absorbed by the food crops and horticultural crops sector. Although its share has continually decreased, in 1994 it absorbed 60.9 per cent of agricultural labour, compared with estate crops’ share of 21.9 per cent and the livestock and fisheries sector with a share of 14.6 per cent. Labour absorption growth rates differed across the sectors, especially from 1992 to 1994. Labour absorption in the food and horticultural crops sector fell by –12.3 per cent during this period, while estate crops, livestock and fisheries showed increased growth. Labour absorption in the estate crops sector increased, but the trend was decreasing, i.e. from 10.5 per cent between 1985 and 1990 to 7.7 per cent between 1992 and 1994. Meanwhile, labour absorption in the livestock and fisheries sector steadily increased with a rate of 3.4 per cent from 1985 to 1990 and 16.5 per cent from 1992 to 1994 (Table 1.3).
2 Table 1.3: Agricultural labour absorption by sub-sector, 1985 to 1994 Labour absorption (000 people) Annual Growth (%) 1985 1990 1992 1994 1985–90 1992–94 1. Food and 27,705 26,446 29,963 23,062 –0.93 –12.3 horticultural (81.2) (74.6) (71.1) (60.9) crops 2. Estate crops 3,106 5,105 7,132 8,272 10.45 7.69 (9.1) (14.4) (16.4) (21.9) 3. Livestock and 2,307 2,730 4,065 5,517 3.42 16.5 fisheries (6.8) (7.7) (9.6) (14.6) Total 34,141 35,450 42,153 37,857 0.76 –5.23 (100) (100) (100) (100) Note: Figures in brackets are the percentage of total employment Source: Kasryno, 1997
1.3 Production
Agricultural land, excluding the large estates, has been decreasing. From 1983 to 1993, total agricultural land fell from 16.7 million hectares to 15.6 million hectares, of which 92 per cent of this fall occurred on Java (Kasryno 1997). This will affect the ability to produce agricultural products especially on Java, which has more fertile land than Off Java and is the main food crops area, particularly for rice. It is not easy to prevent the decline of land because of the stronger pressure on land from population growth and industry development. The role of Java as the centre of food production, industry and settlement, makes the problems of land more complex than Off Java.
1.3.1 Food crops
Indonesia’s four main food crops are rice, soybean, corn and cassava. Java still supplies the majority of food crops, due to its land fertility and to the implementation of new technology such as high yielding varieties, fertilisers, pesticides, although its share has steadily declined.
The harvested area of paddy and secondary crops both on Java and Off Java grew at a significant rate. Although Java was still the dominant rice producing region, the area harvested on Java relative to the national level decreased while the area harvested Off Java increased. From 1982 to 1995, the area harvested on Java relative to the total decreased by around 6 percentage points, from 54.7 per cent to 49.2 per cent. This was because of, among other reasons, a decrease in the planted area (with the conversion of agricultural land to non-agricultural purposes), pest and disease attacks, and natural disaster (flood and drought). Java is still expected to be the dominant region in 2005, at a predicted 54.8 per cent of the total area harvested. Sumatra and Sulawesi were the two other main rice regions, and their share of the harvested area has continually increased; for example from 23.8 per cent to 26.6 per cent for Sumatra from 1982 to 1995. Their share in 2005 is predicted to be 25 and 10.9 per cent respectively. Java’s share of total production decreased by around 6 percentage points from 1982 to 1995, from 64.3 per cent to 58.2 per cent. National production of rice in 2000, 2003 and 2005 is predicted to be 60.2 million tonnes, 67.5 million tonnes and 72.9 tonnes respectively (Table 1.4).
Soybean is mainly produced in Java, Sumatra and Sulawesi (Table 1.5). Soybean is more important in Sumatra than rice. In 1995, the area harvested in Sumatra was lower than that in Java, but after 2000 Sumatra should become the largest soybean production area, with a predicted share of 49.3 per cent in 2005, with Java and Bali making up only 30.3 per cent of total harvested area. The share of Sulawesi has been steadily increasing, but it is predicted to still be less than 10 per cent of the total area in 2005.
3 Table 1.4: Harvested area and production of rice by region (%) 1982 1990 1995 2000* 2003* 2005* Harvested area Java, Bali 54.7 53.2 49.2 - - - Sumatra 23.8 24.5 26.6 - - - NTT, NTB, E. Timor 3.8 4 4.1 - - - Kalimantan 9 8.6 9.5 - - - Sulawesi 8 9.6 10.4 - - - Maluku 0.2 0.1 0.2 - - - Irian Jaya 0 0.1 0.2 - - - Indonesia 100 100 100 - - - (000 ha) (8,988) (10,501) (11,479) Production Java, Bali 64.3 62 58.2 56.5 55.5 54.8 Sumatra 19.7 18.6 22.9 23.9 24.6 25 NTT,NTB, E. Timor 3.5 3.3 3.4 3.6 3.6 3.7 Kalimantan 5.3 4.8 5.5 5.4 5.4 5.3 Sulawesi 7.2 8.9 9.9 10.4 10.7 10.9 Maluku 0 0 0.1 0.1 0.1 0.1 Irian Jaya 0 0 0.1 0.1 0.2 0.2 Indonesia 100 100 100 100 100 100 (000 tonnes) (33,584) (45,179) (49,860) (60,247) (67,548) (72,925) Note: * Projection. Source: Sudaryanto et al., 1998
Table 1.5: Harvested area and production of soybean by region (%) 1982 1990 1995 2000 * 2003 * 2005 * Harvested area Java, Bali 76.1 54.2 52.1 - - - Sumatra 10.2 28.5 27.7 - - - NTT,NTB, E. Timor 9.3 10.1 10.8 - - - Kalimantan 0.5 1 1.7 - - - Sulawesi 3.7 6 7.1 - - - Maluku 0 0 1.5 - - - Irian Jaya 0.2 0.2 0.4 - - - Indonesia 100 100 100 - - - (000 ha) (607) (1,338) (1,477) Production Java, Bali 78.6 60.9 55.2 42.8 35.2 30.3 Sumatra 9.3 23.7 26.7 37.5 44.6 49.3 NTT,NTB, E. Timor 8 7.8 8.4 8.7 8.6 8.4 Kalimantan 0.4 0.8 1.6 1.8 1.9 1.9 Sulawesi 3.5 6.5 7.5 19.1 9.3 9.5 Maluku 0 0 0.2 0.2 0.3 0.4 Irian Jaya 0.1 0.2 0.4 0.1 0 0 Indonesia 100 100 100 100 100 100 (000 tonnes) 521.4 1,487.4 1,680 2,930 4,290 5,642 Note: * Projection. Source: Sudaryanto et al., 1998
Three regions dominate corn production. Java and Bali are the largest production areas and although their share has tended to decrease, by 2005 they are still expected to make up 46.8 per cent of the total area harvested. Sumatra’s share, which in 1982 was 5.7 per cent, steadily increased to 17.9 per cent in 1995, and it is expected to contribute around 37.1 per cent of national production in 2005. Sulawesi’s production of corn has showed a decreasing trend. Its share was 15.2 per cent in 1982 and has steadily decreased to 12.2 per cent in 1995. It is expected to have an 8.7 per cent share in 2005 (Table 1.6).
4 Table 1.6: Harvested area and production of corn by region (%) 1982 1990 1995 2000 * 2003 * 2005 * Harvested area Java, Bali 63.9 63.1 57.1 - - - Sumatra 6.1 12.7 18 - - - NTT,NTB, E. Timor 11.1 9.6 9.3 - - - Kalimantan 0.8 1.2 1.3 - - - Sulawesi 17 12.9 13.2 - - - Maluku 1 0.4 0.4 - - - Irian Jaya 0.1 0.2 0.1 - - - Indonesia 100 100 100 - - - (000 ha) (2,061) (3,158) (3,652) Production Java, Bali 68.8 68.2 61.9 55.1 50.3 46.8 Sumatra 5.7 12.7 17.9 26.4 32.6 37.1 NTT, NTB, E. Timor 9.1 7.3 6.9 6.8 6.6 6.4 Kalimantan 0.5 0.8 0.8 0.9 0.9 0.9 Sulawesi 15.2 10.7 12.2 10.6 9.5 8.7 Maluku 0.6 0.3 0.2 0.1 0.1 0.1 Irian Jaya 0.1 0.1 0.1 0.1 0 0 Indonesia 100 100 100 100 100 100 (000 tonnes) (3,234) (6,734) (8,245) (11,364) (14,098) (16,456) Note: * Projection. Source: Sudaryanto et al., 1998
Table 1.7 shows that Java and Bali and Sumatra dominate cassava farming. Production on Java and Bali is predicted to decrease from 72.3 per cent of the total in 1982 to 45.6 per cent in 2005. By contrast, Sumatra’s share has continually increased from 11.7 per cent in 1982 to 22.5 per cent in 1995, and it is expected to have a share of 35.5 per cent in 2005. Sulawesi’s role in cassava production was not as important as its role in the other three food crops and it is predicted to be surpassed by Maluku in 2005: its share, which was 6.4 per cent of total production in 1982, will decrease to 5.6 per cent in 2005, while Maluku’s share will rise from 1 per cent in 1982 to 7.1 per cent in 2005.
Several points can be drawn from the above discussion. First, although it will take time to replace Java as the main source of food crops, Java can no longer be relied on to supply the majority of the country’s needs. The decline of agricultural land can not be prevented. Second, as mentioned in Sudaryanto et al. (1998), rice farming in Java (and to some extent in Sumatra and Sulawesi) has been conducted in a very intensive way, resulting in stagnant productivity. Consequently, the food crop production development program should be reorientated to encourage farming in other areas such as uplands and swampy areas. In addition, the rehabilitation and maintenance of existing irrigation should be given priority.
5 Table 1.7. Harvested area and production of cassava by region (%) 1982 1990 1995 2000 * 2003 * 2005 * Harvested area Java, Bali 71.6 59.4 56.4 - - - Sumatra 10.6 22.4 22.6 - - - NTT, NTB, E. Timor 7 7.7 8.4 - - - Kalimantan 2.4 3.3 3 - - - Sulawesi 6.9 5.7 6.4 - - - Maluku 1.2 1.2 2.9 - - - Irian Jaya 0.3 0.3 0.3 - - - Indonesia 100 100 100 - - - (000 ha) (1,322) (1,386) (1,324) Production Java, Bali 72.3 65.1 59.1 53 48.8 45.6 Sumatra 11.7 18.2 22.5 28.8 32.9 35.5 NTT,NTB, E. Timor 6.1 6.6 6.6 4.9 3.8 3.2 Kalimantan 2.2 2.9 2.9 2.9 2.9 2.9 Sulawesi 6.4 5.7 5.8 5.9 5.8 5.6 Maluku 1 1.2 2.9 3.8 5.8 7.1 Irian Jaya 0.2 0.2 0.2 0.2 0.1 0.1 Indonesia 100 100 100 100 100 100 (000 tonnes) (12,988) (15,830) (15,442) (17,725) (19,671) (21,328) Note: * Projection. Source: Sudaryanto et al., 1998
1.3.2 Horticultural crops
Java has a larger number of high altitude areas than the other islands do and dominates vegetable production (Table 1.8). Potatoes and cabbages can only grow well in high altitudes, while chillies and red onions can grow in low altitudes. Off Java dominated only in tomato production, with a share of 59.5 per cent in 1993.
Java is also dominant in fruit production, even though it is cultivated in a traditional way. East Java accounted for around 35 per cent of mango production in 1993, while West Java’s dominance was in bananas, with the share of around 30 per cent of national production. Table 1.9 shows that from 1993 to 2005 chilli and red onion production is expected to increase by more than 200 per cent, tomato, cabbage and mango production is predicted to increase by more than 100 per cent, and potato and banana production is expected to rise by more than 50 per cent. Orange production is predicted to decrease by 80 per cent over the same period.
6 Table 1.8: Harvested area and production of selected horticultural commodities by region (%) Java Off Java Indonesia 1986 1993 1986 1993 1986 1993 Vegetables Harvested Area* Potatoes - - - - (35) (54) Tomatoes - - - - (52) (49) Chillies - - - - (288) (157) Red Onions - - - - (65) (74) Cabbages - - - - (42) (60) Production Potatoes 78.6 72.6 21.4 27.4 100 (372) 100 (810) Tomatoes 44.6 40.5 55.4 59.5 100 (138) 100 (226) Chillies 61.1 66.5 38.9 33.5 100 (314) 100 (315) Red Onions 66.1 76.9 33.9 23.1 100 (294) 100 (577) Cabbages 69.9 70.2 30.1 29.8 100 (584) 100 (1,266) Fruit Harvested Area* Bananas - - - - (164) (227) Mangoes - - - - (100) (83) Oranges - - - - (78) (30) Production Bananas - - - - (2,193) (2,644) Mangoes - - - - (516) (460) Oranges - - - - (557) (260) Notes: * Data for 1986 is the average of 1984 to 1988 (Sudaryanto, 1988) Figures in brackets are 000 tonnes or 000 ha Source: Kasryno, 1997
Table 1.9: Projected production of selected horticultural commodities (000 tonnes) 2000 2003 2005 Growth 1993–2005 (%) Vegetables Potatoes 1,203.2 1,442.6 1,615.5 99 Tomatoes 449.9 460.8 468.6 107 Chillies 1,100 1,100 1.100 249 Red Onions 910.9 1,083.6 1,208.6 220 Cabbages 2,050 2,447.8 2,734 116 Fruit Bananas 3,662 4,131.4 4,471.7 69 Mangoes 833.8 953.6 1,040.2 126 Oranges 226.2 131.8 58.2 –80 Source: Sudaryanto et al., 1998
1.3.3 Estate crops
Most estate crops are farmed by smallholders and there has been relatively low productivity as a result of a lack of technology, capital and infrastructure, and because of the low selling price which has reduces incentives. Productivity has not significantly increased. The increase of production was largely due to an increase in the area farmed.
7 Off Java contains the potential areas for estate crop production. From the seven major estate commodities, only in tea and sugar cane production does Java have a dominant share (Table 1.10). In 1984, Java produced 79.8 per cent of the country’s tea, and this increased to 81.5 per cent in 1994. Tea is mainly produced in West Java. Java produced 89.7 per cent of the nation’s sugar cane in 1984 but this declined to 78.7 per cent in 1994. Sugar cane is mainly produced in East Java. Java produced less than 20 per cent of the other commodities (rubber, palm oil, coffee, cacao and coconut) in 1984 and by 1994 its share was less than 15 per cent (except for coconut).
Table 1.10: Planted acreage and production of selected estate crops, by region (%) Java Off Java Indonesia 1984 1994 1984 1994 1984 1994 Area Harvested Rubber 6.3 4.9 93.8 95.4 100 (2,711) 100 (3,472) Palm oil 1.6 0.8 98.4 99.2 100 (512) 100 (1,804) Tea 88 85.2 12 14.8 100 (118) 100 (146) Coffee 14.9 12.9 85.1 87.1 100 (894) 100 (1,073) Cacao 25.8 11.3 74.2 88.7 100 (79) 100 (597) Coconut 29.2 24.8 70.8 75.2 100 (3,002) 100 (3,544) Sugar cane 85.1 73.6 14.9 26.4 100 (286) 100 (425) Production Rubber 10.2 6.4 89.8 93.6 100 (1,033) 100 (1,499) Palm oil 0 0.6 99.9 99.4 100 (1,147) 100 (4,008) Tea 79.8 81.5 20 18.5 100 (126) 100 (139) Coffee 15.3 12.2 84.7 87.8 100 (316) 100 (421) Cacao 43.1 6.3 56.9 93.7 100 (27) 100 (270) Coconut 22.8 22.8 77.2 77.2 100 (1,751) 100 (2,587) Sugar cane 89.7 78.7 10.3 21.3 100 (1,707) 100 (2.531) Note: Figures in brackets are 000 tonnes or 000 ha Source: Kasryno, 1997
As Table 1.11 shows, cacao production is expected to increase substantially. Along with palm oil and rubber, this commodity is expected to be one of the main earners of foreign exchange, which is needed to help the country out of its current economic crisis.
Table 1.11: Projection of selected estate crops production, (000 tonnes) 2000 2003 2005 Growth 1994–2005 (%) Rubber 1,811.6 2,007.1 2,149 43 Palm oil 8,684.8 12,779.6 16,533.2 312 Tea 241.5 279.1 307.4 121 Coffee 734.2 867.3 969.3 130 Cacao 1,229.4 2,495.4 4,000.5 1,380 Coconut 3,142.5 3,446.9 3,701.5 43 Sugar 2.7 2.5 2.5 - Source: Sudaryanto et al., 1998
1.3.4 Livestock and fisheries
Java dominates meat production, except for buffalo, native chicken and duck (Table 1.12). The share of Java in the production of beef, goat, sheep, hens and broilers in 1994 was 71.9 per cent, 57.9 per cent, 87.5 per cent, 67.6 per cent, 65 per cent, respectively. In 2005, Indonesia is predicted to produce 1.09 million tonnes of beef, 1.49 million tonnes of native chicken meat and 1.69 million tonnes of broiler meat (Table 1.13).
8 Java is dominant in the production of hens’ eggs, its share of national production rose from 61.8 per cent in 1984 to 67.6 per cent in 1994. The Off Java islands are dominant in the production of native chicken and duck eggs, producing 56.2 per cent and 70.3 per cent of the national total in 1994, respectively. In 2005 the production of hens’ eggs is predicted to be 448,600 tonnes, compared with 122,200 tonnes of native chicken eggs and 63,200 tonnes of duck eggs. Java is the main region for milk production; its share rose from 95.2 per cent in 1984 to 96.9 per cent in 1994. In 2005, milk production is predicted to be around a half a million tonnes.
Table 1.12: Production of selected livestock commodities, by region Java Off Java Indonesia 1984 1994 1984 1994 1984 1994 Meat (%) Beef 70 71.9 30 28.1 100 (216) 100 (358) buffalo 51.9 43.5 48.1 56.5 100 (48) 100 (54) Goat 68 57.9 32 42.1 100 (48) 100 (72) Sheep 85.5 87.5 14.5 12.5 100 (29) 100 (41) Native chicken 43.9 43.8 56.1 56.2 100 (179) 100 (250) Hens 62.8 67.6 37.2 32.4 100 (12) 100 (23) Broiler 41.1 65 58.9 35 100 (79) 100 (474) Duck 29.9 34.6 70.2 65.4 100 (10) 100 (11) Eggs (%) Native chicken 43.9 43.8 56.1 56.2 100 (66) 100 (97) Hens 61.8 67.6 38.3 32.4 100 (207) 100 (356) Duck 29.7 36 70.3 64 100 (82) 100 (128) C. Milk (%) 95.2 96.9 4.8 3.2 100 (179) 100 (389) Note: Figures in brackets are volume in 000 tonnes Source: Kasryno, 1997
Table 1.13: Projection of selected livestock products, (000 tonnes) 2000 2003 2005 Growth 1994–2005 (%) Meat Beef 653.2 890.6 1,088.7 204 Buffalo 103.5 151.9 194.6 260 Goat 52.7 33.9 16.3 –78 Sheep 44.3 44.8 44.1 8 Native chicken 914.2 1,240.1 1,486.5 495 Broiler 939.1 1,348.9 1,690.8 257 Hens 36.3 45.3 52.1 126 Duck 12.6 13.7 14.5 32 Eggs Native chicken 114 119.7 122.2 26 Hens 434.2 448.6 448.6 26 Duck 111.7 87 63.2 –51 Milk 522.4 551.8 558.9 44 Source: Sudaryanto et al., 1998
Fish production in Java is less than in Off Java. Although brackish water ponds in Java are increasing in absolute terms, it share is decreasing due to a large number of ponds being established Off Java. Java dominates the production of white prawns and milkfish, with shares of 71.9 per cent for white prawns and 59.9 per cent for milkfish in 1994 (Table 1.14).
9 Table 1.14: Production of selected fish, by region 1984 and 1994 (%) Java Off Java Indonesia 1984 1994 1984 1994 1984 1994 ‘Windu’ prawn 32.4 48.5 67.6 51.5 100 (7) 100 (87) White prawn 70.3 71.9 29.8 28.1 100 (10) 100 (29) Milkfish 54.4 59.9 45.6 40.1 100 (46) 100 (165) Tuna 0.6 12.4 99.4 87.6 100 (18) 100 (77) Skipjack 3.9 10.2 96.2 89.8 100 (43) 100 (147) ‘Tonnegkol’ 28.2 28.1 71.8 71.6 100 (67) 100 (161) Note: Figures in brackets are volume in 000 tonnes Source: Kasryno, 1997
Prospects for fish production, especially marine fisheries, are good. Around 70 per cent of Indonesia’s territory is marine. In addition, as mentioned by the Directorate General of Fishery in 1996, of 17 fishing areas in the world, only three are considered good areas for fishing, the other 14 being over-fished. One of these areas is in Indonesian territory. From 1994 to 2005, prawn, tuna and skipjack production is expected to increase by 138 per cent, 106 per cent and 89 per cent, respectively.
Table 1.15: Projection of selected fish production, (000 tonnes) 2000 2003 2005 Growth 1994–2005 (%) Prawn 205.3 245.8 276.1 138 Tuna 132.6 148.3 158.7 106 Skipjack 232.1 259.5 277.8 89 Source: Sudaryanto et al., 1998
1.4 Consumption
As drawn from Sudaryanto et al. (1998), the consumption of agricultural products consists of direct consumption and indirect consumption by food processing industries. Data for per capita consumption of rice, soybean, corn and cassava is drawn from the CBS Food Balance Sheet (FBS) and industry consumption is calculated using Input/Output tables. It is important to note, however, that total direct consumption is the multiplication of per capita consumption and total population. Data for the per capita consumption of other food commodities is gathered by the Central Bureau of Statistic in the National Socio-Economic Survey (SUSENAS). As the data does not include processed food, it tends to be consistently lower than data from the FBS, however the FBS only covers a limited number of food items.
1.4.1 Food crops
While per capita consumption of rice, corn and cassava tended to decrease in the early 1990s, per capita consumption of soybean has increased in line with the common trend that as income increases carbohydrate consumption tends to decrease while protein consumption tends to increase (Table 1.16).
10 Table 1.16: Per capita consumption of rice, corn, soybean and cassava 1984 to 1994 (Kg/Capita/Year) Year Rice Corn Soybean Cassava 1984 143.4 27.1 5.7 70 1986 142.1 29.2 8.5 61.3 1988 142.8 30.7 8.3 72.8 1990 151.1 32.0 9.4 72.2 1992 157.6 34.2 12.6 74.4 1994 153.4 29.4 11.7 72.8 Source: Sudaryanto et al., 1998
Between 2000 and 2005, per capita consumption of rice and cassava is predicted to decrease annually by –0.39 per cent and –0.47 per cent respectively, while consumption of corn and soybean is predicted to increase by 0.46 per cent and 0.31 per cent per annum (Table 1.17). Total household demand for the four commodities is predicted to increase annually by 0.87 per cent for rice, 1.72 per cent for corn, 1.56 per cent for soybean and 0.79 per cent for cassava. The source of this growth in the cases of rice and cassava is population growth (as evidenced by falling per capita consumption), while for corn and soybean both per capita consumption and population are factors, although population growth is the main factor. In order to reduce the burden on the food supply, controlling population growth should a high priority.
As demand for these commodities from the food-processing industries is estimated to increase, their role as industrial inputs will become more important and quality will become an important factor.
Table 1.17: Projected consumption of rice, corn, soybean and cassava 2000 to 2005 Commodity/ Per capita consumption Consumption/demand (000 tonnes) Year (Kg/cp/yr) Households Industry Total Rice 2000 151.9 31,974 3,060 35,034 2003 150 32,801 3,257 36,058 2005 148.4 32,982 3,354 36,336 Growth (%/yr) –0.39 0.87 2.10 0.98 Corn 2000 31.0 6,530 6,530 13,060 2003 31.4 6,863 7,892 14,755 2005 31.6 7,012 8,765 15,777 Growth (%/yr) 0.46 1.72 6.52 4.16 Soybean 2000 12.0 2,528 1,315 3,843 2003 12.1 2,648 1,726 4,374 2005 12.2 2,708 2,003 4,711 Growth (%/yr) 0.31 1.56 9.55 4.38 Cassava 2000 73.3 15,214 379 15,593 2003 71.2 15,563 400 15,963 2005 70.2 15,598 414 16,012 Growth (%/yr) –0.47 0.79 1.82 0.81 Source: Sudaryanto et al., 1998
11 1.4.2 Horticultural and estate crops
Fruit and vegetables have become important components of the household consumption package, in line with increases in income, education and knowledge of nutrition. The demand for horticultural products has increased, both in terms of consumption per capita (Table 1.18) and total consumption (Table 1.19). Demand can be direct or indirect, but direct demand is dominant.
Table 1.18: Consumption per capita of horticultural and estate crops, 1984 to 1994 (kg/cap/year) 1984 1990 1994 Horticulture Vegetables Red onions 1.06 1.86 2.17 Chillies 1.77 1.46 1.64 Potatoes 2.0 2.77 3.46 Tomatoes 0.78 1.04 0.96 Fruit Bananas 11.22 12.18 13.12 Mangoes 2.49 2.57 2.36 Oranges 3.03 1.29 1.18 Estate crops Refined Sugar 11.33 11.87 13.59 Palm oil 6.41 8.23 10.47 Coconut oil 2.63 2.56 2.59 Source: Sudaryanto, 1998
Increasing per capita consumption and increasing population have led to significant increases in the consumption of horticultural products. From 1984 to 1994 potato consumption more than doubled, from 319,000 tonnes to 664,300 tonnes. In 2005, potato consumption is predicted to be more than 1.2 million tonnes. In 1984, the consumption of red onions was 169,300 tonnes and this more than doubled to 417,900 tonnes in 1994. Consumption of the other commodities also increased over the same period, but to a lesser extent. Chilli consumption increased from 283,000 tonnes to 314,000 tonnes while tomato consumption increased from 123,900 tonnes to 184,400 tonnes (Table 1.19). Potatoes, red onions, chillies and tomatoes are normal goods, in the sense that consumption increases as income increases.
Of the estate crops, only sugar, palm oil and coconut oil are important in the household consumption package (Sudaryanto 1998). Direct consumption is more important than indirect.
Increasing household incomes and the growth in the population have both led to the increase in consumption of estate crop products. From 1984 to 1994, sugar consumption increased from 1.8 million tonnes to 2.6 million tonnes, palm oil consumption from 1 million tonnes to 2 million tonnes, and coconut oil consumption from 420,000 tonnes to 498,000 tonnes. In 2005 consumption of these commodities is predicted to be 3.9 million tonnes, 2.6 million tonnes and 735,000 tonnes respectively for sugar, palm oil, and coconut oil.
12 Table 1.19: Actual and projected direct household consumption of horticultural and estate crops, 1984 to 2005 (000 tonnes) 1984 1990 1994 2000* 2003* 2005* Horticulture Vegetables Red onions 169.3 331.6 417.9 569.6 647.6 697.4 Chillies 283 261 314.5 471.3 556 611 Potatoes 319 493.1 664.3 969.8 1,136.2 1,247.5 Tomatoes 123.9 185.6 184.4 267.8 312.1 340.5 Fruit Bananas 1,792.7 2,169.8 2,522 3,461.6 3,952.3 4,268.4 Mangoes 398.1 457.9 454.4 697.4 831.1 919.5 Oranges 484.6 229.6 227.4 333.3 390.3 427.5 Estate Crops Sugar 1,810.3 2,119.9 2,612.6 3,350.4 3,717.2 3,943 Palm oil 1,025 1,466 2,012.8 2,334.5 2,487.4 2,572.5 Coconut oil 420 457 498 623.8 690.7 734.8 Note: * Projection Source: Sudaryanto et al. 1998
1.4.3 Livestock and fisheries
From 1984 to 1994 the livestock population increased, except for buffalo, which was largely due to the decrease of the buffalo population in Central Java and East Java. Broiler production grew the most during this period, up to around 45 times. The role of private broiler farms in the growth of broiler population can not be ignored.
The per capita consumption of animal products increased as household incomes increased. Per capita consumption of chicken meat increased from 0.48 kg in 1984 to 1.9 kg in 1992. Per capita consumption of beef increased from 1.28 kg to 1.77 kg, goat/sheep meat increased from 0.28 kg to 0.34 kg and fresh milk increased from 1.1 kg to 1.95 kg during the same period (Table 1.20).
Table 1.20: Consumption per capita of livestock and fish, 1984 to 1994 (kg/cap/year) 1984 1990 * 1992 Livestock Chicken meat 0.48 1.40 1.90 Beef 1.28 1.39 1.77 Sheep/goat meat 0.28 0.31 0.34 Fresh milk 1.1 1.79 1.95 Fish Tuna/Skipjack - 1.26 1.44 Prawns/shrimp - 0.69 0.77 Note: * 1991 for fish Source: Sudaryanto, 1998
Due to data unavailability, information on the consumption of fish is only for 1991 and 1992. Per capita consumption of tuna/skipjack increased from 1.26 kg to 1.44 kg while the per capita consumption of prawns/shrimps increased from 0.69 kg to 0.77 kg (Table 1.20).
By considering the increase of per capita income, changes of elasticities and changes in geographical structures of population (rural, urban), Sudaryanto (1998) estimated that in 2005 the total consumption of chicken, beef, sheep/goat meat and fresh milk will be 679,000 tonnes, 656,000 tonnes, 241,000 tonnes and 1.3 million tonnes respectively.
13 The estimated total consumption of tuna/skipjack and prawns/shrimps in 2005 are 359,000 tonnes and 190,000 tonnes respectively (Table 1.21).
Table 1.21: Actual and projected direct household consumption of livestock and fish, 1984 to 2005 (000 tonnes) 1984 1990* 1992 2000** 2003** 2005** Livestock Chicken meat 76.8 249 350.2 572.4 637.8 678.6 Beef 205.3 246.8 284.8 516 600.9 656.2 Sheep/goat meat 45.5 54.8 63.1 153.1 203.9 241.2 Fresh milk 176.8 319.7 359.8 863.7 1,146.7 1,356.4 Fish Tuna/skipjack - 229 260 309.6 340.4 359.4 Prawns/shrimp - 125 139 160.7 178.5 189.8 Notes: * 1991 for fisheries ** Projection Source: Sudaryanto et al., 1998
1.5 Trade
1.5.1 The importance of international trade for Indonesian agriculture
Ratios of exports and imports of goods and services to GDP give a rough measure of the importance of international trade to the economy. The higher the ratio, the more important international trade is to the country. This ratio also measures the economic relationship among nations, or their level of interdependence. Other indicators, such as a country’s natural resources endowment and the size of its domestic market can predict the importance of international trade. A country that has limited natural resources and a small domestic market will rely more on international trade. Nevertheless, the trade to GDP ratio is useful, especially when analysed over time.
Table 1.22 shows that international trade is very important for Indonesia. Although the trade to GDP ratio decreased from 1991 to 1994, it was still more than 40 per cent. The low ratio of agricultural trade to GDP does not necessarily mean international trade is not important to agriculture as the low ratio can be due to the small share of agriculture in GDP. The ratio of agricultural trade to agricultural GDP is a more appropriate indicator and shows that international trade is quite important to agriculture. The ratio was around 25 per cent from 1991 to 1994 (Table 1.23).
Table 1.22: Ratio of exports, imports and trade to GDP, 1991 to 1994 (%) Exports Imports Total Trade Agric. Total Agric. Total Agric. Total 1991 3.1 25 1.7 22.2 4.8 47.2 1992 3 26.5 1.8 21.3 4.7 47.8 1993 2.9 25.4 1.6 19.6 4.5 45 1994 2.5 22.5 1.6 18 4.2 40.5 Note: Total trade is exports + imports Sources: National Agency for Export Development, 1996; CBS various issues
14 Table 1.23: Ratio of agricultural trade to agricultural GDP, 1991 to 1994 (%) Export Import Total Trade 1991 16.9 9.2 26.1 1992 16.3 9.8 26.1 1993 16.2 8.9 25.1 1994 14.5 9.3 23.8 Note: Total trade is exports + imports Sources: National Agency for Export Development, 1996; CBS various issues
1.5.2 Agricultural trade performance
Agricultural exports have increased at around 9.5 per cent annually, which is lower than the growth of total exports (11 per cent) and of non-oil exports (15.6 per cent), leading to a decrease in agriculture’s share of foreign exchange earnings (Table 1.24). The positive balance of trade shows a decreasing trend, as imports have grown at a higher rate than have exports (Table 1.25).
Table 1.24: Export performance 1985–96 to 1996–97 (%) Commodities 1985–96 1990–91 1995–96 1996–97 Trend Non Oil/Gas 33.2 54.6 77.8 75.9 15.6 Agriculture 12.3 12.7 14.2 12.8 9.5 Non Agriculture Product 20.9 41.9 63.5 63.1 17.2 Oil/Gas 66.8 45.4 22.2 24.1 1.9 Oil * 47.4 28.6 13.7 14.2 0.2 Gas 19.5 16.7 8.6 9.9 5 - LNG 19.5 15.3 7.5 8.8 3.9 - LPG 0 1.4 1 1 18.8 Total ( per cent ) 100 100 100 100 (million US$) 18,612 28,143 47,754 52,186 11 Source: Erwidodo, 1998
Table 1.25: Agricultural trade balance, 1985–96 to 1996–97 (US$ million) 1985–96 1990–91 1995–96 1996–97 Exports 2,287 3,581 6,794 6,662 Imports 763 1,267 5,024 5,024 Balance 1,524 2,314 1,770 1,638 Source: Erwidodo, 1998 (calculated)
15 Figure 1.1: Total exports and imports of agricultural commodities
Million US$ 7500 7000 Total Export 6500 6000 Total Import 5500 5000 4500 4000 3500
3000 2500 2000 1500 1000 500 0
85 86 87 88 89 90 91 92 93 94 95 96
Year
Total exports of agricultural products increased almost threefold from 1985–96 to 1996–97, rising from US$2,287 million to US$6,662 million. Four commodities – natural rubber, prawns/shrimps, palm oil and tapioca (cassava products) – dominated agricultural exports and in 1996–97 contributed more than 80 per cent of agricultural foreign exchange earnings (Figure 1.1).
Table 1.26 ranks agricultural commodities descendingly based on their 1996–97 export shares. The commodities can be divided into three categories as follows: commodities with a share above 20 per cent (rubber, prawns/shrimps); commodities with share between 10 per cent to 20 per cent (palm oil and tapioca), and those with a share below 10 per cent (the rest). Although natural rubber remained the highest (with a share of 26.8 per cent in 1996–97), it showed a decreasing trend, with 2.7 per cent annual growth. Prawns/shrimp showed a stable share with an annual growth of 13.2 per cent. The shares of tapioca and palm oil steadily increased with annual growth rates of 13.8 per cent and 17.7 per cent respectively.
Table 1.27 contains data on imports. Wheat and cotton were the dominant imports, although import shares showed a decreasing trend. The share of wheat, which was 33.9 per cent in 1985–96, decreased to 20.9 per cent in 1996–97. Cotton, which was 23.6 per cent in 1985–96, decreased to 19.5 per cent in 1996–97. As these two commodities can not be grown in Indonesia, imports will increase over time.
Other commodities with large import shares were animal feed, sugar and rice. Rice imports increased significantly in 1991–92, jumping from US$14.1 million to US$53.1 million in 1991–92 while sugar imports jumped to US$136.6 million 1988–99 from US$30.8 the year before. The import share of animal feed was stable within a range of 11 per cent to 15 per cent. Detailed figures are presented in annex tables.
16 Table 1.26: Agricultural export performance, 1985–96 to 1996–97 (%) Commodities 1985–96 1990–91 1995–96 1996–97 Growth Natural rubber 31.2 25 29.3 26.8 2.7 Prawns/shrimps 12.2 30.4 25 26 13.2 Palm oil 7.4 8 14.6 14.9 17.7 Tapioca 5.5 12.6 11.2 13.4 13.8 Coffee 28.8 10.5 9.6 9.1 –1.6 Cacao 0 2.8 3.6 4.2 23.1 Tea 5.9 4.3 1.4 1.6 –1.6 Copra cakes 1.5 1.4 0.7 1.6 9.2 Pepper 3.6 2 2.4 1.4 –3 Tobacco 2.2 1.8 1.2 0.5 1.8 Rawhides 1.6 1.2 0.7 0.5 –2.3 Total 100 100 100 100 9.50 (million US$) 2,287 3,581 6,794 6,662 Source: Erwidodo, 1998
Table 1.27: Agricultural import shares 1985–96 to 1996–97 (%). Commodities 1985–96 1990–91 1995–96 1996–97 Growth Unmilled wheat 33.9 2.3 19.2 20.9 14.9 Cotton 23.6 38.3 22.1 19.5 14.7 Rice 1.2 1.1 12.3 15.3 33.3 Animal feed 11.4 15.2 11 12 13.5 Sugar and honey 0.5 10.2 6.5 10.1 20.3 Oil cakes and other residual 5.5 3.2 5 6.4 14.5 Rubber, Synthet., Reclaimed 0 6.4 4.9 3.9 24.2 Milk and cream 5.7 4.4 4.3 3 13.5 Tobacco un-manufactured 2.2 3.3 2.8 2.7 18.8 Maize 0.9 0.1 3.7 2.7 27 Fresh vegetables 2.1 3.3 2.9 2.3 16.5 Palm oil 2.6 0.6 1.2 1.2 –0.7 Soybean 10.4 11.6 4.3 0.1 1.1 Total ( per cent ) 100 100 100 100 15.5 (million US$) 763.4 1,266.9 4,185.6 5,023.7 Source: Erwidodo, 1998
1.5.3 Direction of agricultural trade
Table 1.28 shows the destinations of Indonesia’s five major agricultural exports. The order of these commodities represents their share, for example, rubber is the largest export commodity. Most of Indonesia’s shrimp is exported to Japan (76.7 per cent) and the US (10.6 per cent), while rubber is mostly exported to the US (44.2 per cent). The dominant importing country for palm oil is still the Netherlands, although its share decreased from 56 per cent in 1985 to 28.9 per cent in 1996. Indonesian coffee mostly goes to Japan, the US and Germany with respective shares in 1996 of 18.8 per cent, 15.9 per cent and 14.9 per cent.
Australia is not a major export destination for most commodities, only for tea, and even then its share of the tea market has decreased from 13 per cent in 1985 to 4.9 per cent in 1996.
17 Table 1.28: Exports of selected commodities by country of destination, 1985 to 1996 Commodity/Country 1985 (per cent) 1990 (per cent) 1996 (per cent) Rubber US 47.1 48.5 44.2 Singapore 21.1 19.8 8.8 Japan 2.8 3.8 7.3 Germany 3.9 2.4 2.5 Netherlands 1.5 1.8 1.8 Others 23.5 29.1 35.4 Prawns, Shrimps and Lobsters Japan 86.4 67.2 76.7 US 1.6 12.1 10.6 Hong Kong 3.8 1.8 2.1 Singapore 5.6 8 1.6 Netherlands 0.6 1.3 0.9 Others 2 9.6 8.1 Palm Oil Netherlands 56.5 39 28.9 Germany 13.4 6.7 9.1 Italy 10.2 6.7 5.5 Pakistan 14.1 0 1.6 England 18.1 13.9 1.1 Others 33.2 33.7 53.9 Coffee Japan 20.2 18.4 18.8 US 28.3 10.9 15.9 Germany 5.2 28.5 14.9 England 0.1 3.4 5.5 Algiers 8.8 6.8 2 Others 37.5 26.4 42.8 Tea Pakistan 12.9 10.2 21.2 US 12.9 6.6 9.8 England 9.4 5 9.2 Netherlands 8.6 5.9 8 Australia 8.7 4.6 5.2 Others 47.5 67.7 46.7 Source: Erwidodo, 1998 (calculated)
Import suppliers are presented in Table 1.29. Australia is Indonesia’s main source of imports. It is dominant in the three largest agricultural imports, although its dominance has been decreasing. Its share in 1994 was 18 per cent for food and live animals, 34.7 per cent for unmilled wheat and 18.5 per cent for cotton. Another dominant exporter to Indonesia is China. It provided 75.2 per cent of unmilled maize imports and 11.1 per cent of food and live animal imports. The US was the dominant provider of cotton. In 1993 its share was 23.7 per cent and this increased to 32.4 per cent in 1994. The domination of the US in rice (49.8 per cent in 1993) was replaced by Thailand in 1994 with a share of 62.8 per cent. The share of the US declined to only 1.1 per cent. Most sugar is provided by Thailand, with a share of 37.8 per cent.
18 Table 1.29: Imports of selected commodities by country of origin, 1993 and 1994 1993 (per cent) 1994 (per cent) Food and Live Animals Australia 22.9 18 China 9.3 11.1 Canada 8.7 8.8 US 7.1 7.7 Thailand 4.5 7.5 India 9.1 5.9 Others 38.5 41.1 Unmilled Wheat Australia 45.3 34.7 Canada 22.6 27.2 Saudi Arabia 14.9 22.8 Argentina 15.4 14.3 Others 1.9 0.9 Cotton US 23.7 32.4 Australia 22.6 18.5 China 16.3 10.8 Russia 4.7 7.6 EEC 2.3 4.4 India 6.8 2.7 Pakistan 8.1 1.3 Others 15.5 22.3 Rice Thailand 49.2 62.8 Vietnam 0 18.5 Myanmar 0 7.7 US 49.8 1.1 Others 1 9.9 Sugar Thailand 47.4 37.8 Germany 7.2 13.9 France 3.5 2.6 China 22.4 0.3 Others 19.5 45.4 Unmilled Maize China 95.1 75.2 US 0.9 6.8 Thailand 1.4 0.4 Hong Kong 1.4 0 Others 1.2 17.6 Source: United Nations, 1995 and 1996
1.6 Indonesia’s agribusiness: the concept and practise
1.6.1 The concept
Indonesia’s agribusiness consists of a number of components that work together dynamically to produce agricultural-based products for consumers and end users. It has its roots in rural areas and communities, where activities such as supplying inputs, services, transportation, farming, processing and marketing are carried out, but it extends all the way to consumers who are often located in urban areas or even in other countries. Agribusiness can be divided into four sub-systems, namely input delivery, farming, post- harvest and processing (agro-industry), and marketing and distribution.
19 Agribusiness is becoming a critical sector for Indonesia, helping an economy based on natural resources to gain greater employment and higher earnings through the value-added processing of raw material inputs. Value-adding is of key importance. The core activities of the whole system must be concentrated in rural areas for the benefit created to be obtained and retained by the agricultural community. Agribusiness provides the domestic market with basic consumer goods, contributes to national productivity in value-added manufacturing and shifts increasing agricultural foreign exchange earnings from bulky raw products to processed products. It is also expected to generate off-farm employment in rural areas such as post-harvest handling, transportation, trading and manufacturing industries.
The ability of agribusiness to exist as a distinct and functional economic entity in the countryside depends upon the capability of that entity to be commercially viable. To be able to survive and be sustainable, profitable and competitive, each unit of the agribusiness system should efficiently and effectively develop appropriate economics of scale.
Agriculture in Indonesia consists of large/medium scale enterprises (mostly estate crop enterprises) and small-scale farming (mostly food crops and cash crops farming). The average small farm is less than 1 hectare in size, and more than 60 per cent are only 0.2 of a hectare. Agribusiness involves a large number of farmers who not only operate their farms individually but also cooperate with each other in a harmonious, orchestrated and consolidated way in large-scale agribusiness and agro-industry. The agribusiness system is made up of joint ventures or partnerships with various business entities such as input suppliers, machinery and equipment suppliers, farmers, agro-industry etc. For these reasons, Indonesia’s strategy for development of the agribusiness system is to promote integrated and sustainable agribusiness entities, organised and managed through collaborative efforts involving farmers and business entrepreneurs, with the core activities conducted in rural areas.
1.6.2 The policies
As agribusiness is a system that involves various institutions across ministries, these should aim to operate harmoniously. The Ministry of Agriculture established a Directorate General level institution in 1994 called the Agency of Agribusiness, which has as its main function policy and program formulation of agribusiness development, especially related to the promotion of product standardisation, the assessment of market development, the promotion of partnerships among agricultural entities, and the promotion of investment opportunities. The target and strategy of agribusiness development is included in the following policies:
Integrated quality development.
This policy is directed to (1) encourage the implementation of the Agricultural Standardisation System as part of the National Standardisation System, (2) introduce, adapt and implement the concept of integrated agricultural products quality, (3) encourage the growth of standardisation institutions, (4) monitor and evaluate the implementation of the standardisation system, and (5) encourage the harmonisation and equity of the standard system with systems used in partner countries. Through these policies, the quality of Indonesia’s agricultural products can be developed to the level required by the buyers.
The development of market accessibility and information.
This policy is implemented through (1) the formulation of rules and regulations that promote the export of agricultural commodities as well as the domestic market, (2) the development of market analysis and information systems, both nationally and regionally,
20 including the development of a marketing strategy model, and (3) the improvement of distribution and market efficiencies, institutions, and market infrastructures.
The promotion of partnership in agribusiness development.
This policy is directed at (1) encouraging partnerships among business entities within the agribusiness system to increase efficiency, (2) improving agribusiness development through effective and dynamic promotion, (3) improving agribusiness cooperatives for locally specific commodities, and (4) encouraging the involvement of Non Governmental Organisations (NGOs) in accelerating rural-based agribusiness development.
The promotion of agribusiness investment opportunities.
The policy is directed at (1) providing information on investment opportunities in agribusiness across prospective commodities on a regional basis, (2) creating a conducive environment for investment through formulation of policies that will attract agribusiness investors, both domestically and internationally, and (3) promoting agricultural investment by providing investment opportunities through expo, presentation, and information of other media materials.
1.6.3 Investment in agriculture
The Government encourages domestic (Penanaman Modal Dalam Negeri or PMDN) and foreign (Penanaman Modal Asing or PMA) investors to invest in Indonesia especially in the current economic crisis. Investors in agribusiness might be foreign, domestic or governmental (state-owned company). As stated by government officials, the participation of the private sector in investment is expected to be the larger part. The proportion of private to total investment needs in the country is expected to be at least 70 per cent. The Government offers investment in agriculture in various fields such as breeding, planting, production, post-harvest, processing, marketing, and equipment rental for both for pre and post-harvest activities. Some activities, however, are reserved for small-scale industries that might cooperate with medium and large-scale industries. The details are presented in Appendix 1.1.
21 Box 1.1. Policy Reforms on Investment (Proposed by the State Ministry of Investment/BKPM on May 1998) a. Investment Permit The authority to issue foreign investment approval of amounts more than US$100 million, which is currently under the President’s authority, would be delegated to BKPM to lessen bureaucracy. The authority to issue domestic investment up to Rp10 billion to be delegated to the Regional Board of Investment Coordination (BKPMD). In the future the investment limit might be increased if the BKPMD is able to handle its authority well. The ‘one roof service’, which is now under the authority of the DG of Customs, would be returned to BKPM. The elimination of the Principal Approval Letter (currently granted by the Governor) in order to avoid duplication as approval is granted by the BKPM. The elimination of various recommendation letters from related Technical DGs. The transfer of authority for the Environmental Impact Assessment (AMDAL) from the Central AMDAL Commission to the Regional AMDAL Commission. b. Investment Incentives. Granting tax holidays of up to 12 years for Off Java and Bali (currently 10 years). The criteria is granted by Presidental decree. c. Investment Services. Identify the loss suffered by Domestic (PMDN) and Foreign (PMA) investors due to the May 1998 riots. Identify PMDNs and PMAs that have been affected by the recent monetary crisis and help them to solve the impact of the crisis, such as by arranging asset transfers, mergers, banking matters. The elimination of restrictions of PMA investment in certain industrial areas. Allow PMAs to choose their location freely in line with existing regional plan, and by taking account the profitability and competitiveness of the industries.
Source : Agribusiness Agency, MOA, 1998a
Appendix 1.1 details regulation in the pre-reformation era. Policy reforms proposed in May 1998 by the National Board of Investment Coordination (BKPM) aimed to aid economic recovery and attract more foreign and domestic investors (see Box 1.1).
In general, agriculture is less attractive to investors, both domestic and foreign, than industry. From 1989 to 1996, the proportion of agricultural investment approvals was around 12 per cent of total/national approvals (Table 1.30). During the same period, only 2.8 per cent of foreign investment approvals were planned for agriculture.
The realisation of investment after obtaining approval usually took one to three years, and actual investment was usually much less than the initial plan. The proportion of agricultural investment realised relative to the national total was about the same as the proportion of investment approved; at 11 per cent for domestic investment and 2.5 per cent for foreign investment.
The lower rate of private sector investment in the agricultural sector was because of its characteristics; i.e., dependent on climate, high risk, and of long gestation. The tedious procedures needed to obtain investment approval, especially the land ownership/right, may further hamper or lower incentives to invest.
Based on sub-sector, estate crops dominated the share of domestic investment, followed by fisheries, livestock and food crops and horticulture (Table 1.31). Their shares in 1996
22 were 81.2 per cent, 7.5 per cent, 6.4 per cent and 4.9 per cent respectively. Although all sub-sectors showed rapid increases, the highest was livestock with annual growth of 90.2 per cent, compared with 59.5 per cent for food crops, 58.4 per cent for estate crops and 42.2 per cent for fisheries.
Most foreign investment also went to estate crops. This sector’s share in foreign investment in 1996 was 57.7 per cent compared with 25.2 per cent for fisheries, 12.5 per cent for livestock and 4.8 per cent for food crops. The competitive advantages and prospective export market possessed by the estate/tree crops sub-sector were important incentives for investment. In terms of annual growth, however, foreign investment in food crops was the highest at 56.1 per cent, with investment in the others ranging from 28.1 per cent to 31.3 per cent (Table 1.31).
Table 1.30: The value of approval and realisation of domestic investment (PMDN) and foreign investment (PMA), 1989 to 1996 Cumulative Approval Realisation Percentage of realisation From 1967 National Agric. % National Agric. % National Agric. PMDN (Rp Billion): 1989 85,006.3 12,233.9 14.4 27,339.8 3,066.7 11.2 32.2 25.1 1990 144,884.7 19,995.3 13.8 35,257 4,014.5 11.4 24.3 20.1 1991 188,895.9 22,075.9 11.7 44,992.5 4,686 10.4 23.8 21.2 1992 216,123.3 26,346.5 12.2 50,957.3 6,218 12 23.6 23.6 1993 255,573.7 28,159.3 11 69,320.9 8,059.9 11.6 27.1 28.6 1994 303,956.5 35,687.6 11.7 93,349.8 9,564.2 10.3 30.7 26.6 1995 373,809.5 44,105.6 11.8 113,900 11,928.5 10.5 30.5 27 1996*) 455,006.7 55,480.7 12.2 135,419.7 12,770.3 9.4 29.8 23 PMA (US$ mill.): 1989 29,927.8 690.5 2.3 14,129.4 476.3 3.4 47.2 69 1990 38,677.9 1,351.6 3.5 16,936.6 519.1 3.1 43.8 38.4 1991 48,351.4 1,423.9 2.9 19,409.6 552.3 2.9 40.1 38.8 1992 63,015.8 1,482.1 2.4 20,599.3 589.1 2.9 32.7 39.7 1993 71,160 1,594.9 2.2 24,508.3 619.1 2.5 34.4 38.8 1994 92,379.1 1,505.3 1.6 30,446.3 665.1 2.2 33 44.2 1995 132,293.8 2,764.9 2.1 37,300 814.9 2.2 28.2 29.5 1996* 165,482.2 4,947.1 3 42,180.6 828.3 2 25.5 16.7 Note: * 15 August 1996 Source: Agribusiness Agency, 1997a
Palm oil and its products were the most attractive estate crop commodities for both domestic and foreign investors. Other commodities invested in were rubber, coffee, cacao, sugar cane, cashew and tobacco. For food crops and horticulture, domestic investors’ interests were in fresh and processed vegetables and fruit, while foreign investors’ interests were in fresh and processed fruit. Shrimps replaced tuna in receiving the highest share of investment in fisheries of both domestic and foreign investors, while livestock investment mainly went to poultry feed, day old chickens and their meats (Agribusiness Agency 1997a).
23 Table 1.31: The value of realisation of domestic investment (PMDN) and foreign investment (PMA) in agriculture by sub-sector, 1989 and 1996 1989 1996 Ann. Growth Value per cent Value per cent per cent PMDN (Rp Bill.): Estate crops 2,477.6 80.8 10,130.4 81.2 58.4 Food and hort. 147.3 4.8 613.4 4.9 59.5 Fisheries 316.3 10.3 934.9 7.5 42.2 Livestock 125.5 4.1 792.5 6.4 90.2 Total 3,066.7 100 12,471.2 100 58.1 PMA (US$ mill.): Estate crops 247 61.5 485.5 57.7 28.1 Food and hort. 9.9 2.5 38.9 4.8 56.1 Fisheries 96.6 24 211.9 25.2 31.3 Livestock 48.2 12 105.3 12.5 31.2 Total 401.7 100 841.6 100 29.9 Source: National Coordination Board of Investment (BKPM) in Agribusiness Agency 1997a.
The present environment (after the May 1998 riots and the current political instability) discourages private investors. The Minister of Investment Promotion stated that the total value of approved investment after May 1998 dropped by 50 per cent as compared with the same period in the previous year.
The realisation was even lower. Many Chinese-Indonesians closed down or temporarily stopped their business in Indonesia due to the political instability. The Government is trying very hard to create a conducive investment environment for domestic and foreign private investors by working to restore the economy, stabilise politics and to provide economic incentives.
1.6.4 The structure of Indonesian agroindustry
There are three criteria used to classified the size of agroindustries: (1) investment value, (2) annual gross return and current assets, and (3) the amount of labour used. This section will use criteria (3), as used by Indonesian Central Bureau of Statistics (CBS) and described in Table 1.32 below.
Table 1.32: Classification of industry by number of workers. Classification of industry Number of workers Household 1 – 4 Small 15 – 19 Medium 20 – 99 Large >= 100 Source: Bahri et al. (1998)
Using this classification, the number of agroindustrial establishments (ISIC code 31) in 1993 was 863,193, consisting of 4,816 (or 0.6 per cent) of medium/large establishments, 35,067 (or 4.1 per cent) of small establishments and, the majority, 823,309 (95.4 per cent) of household industries. As depicted in Table 1.33, from 1974 to 1993, the proportion of household industries ranged from 91.2 per cent to 95.4 per cent, followed by small-scale industries, ranging from 4.1 per cent to 8.5 per cent, and medium/large establishments, ranging from 0.4 per cent to 0.7 per cent (Table 1.33).
24 Table 1.33: Number of establishments (ISIC code 31), labour absorption, share of output value and value-added per unit of agroindustry, by scale of industry, 1974 to 1993. Year Medium/large Small Household Total (per cent) (per cent) (per cent) (per cent) Number of establishments: 1974 0.5 5.3 94.2 100 (460,926) 1979 0.4 8.5 91.2 100 (677,368) 1986 0.7 8 91.2 100 (486,595) 1991 0.5 4.4 95.1 100 (875,958) 1993 0.6 4.1 95.4 100 (863,193) Annual Growth 1974 to 1993 ( per cent) 5.4 2.3 4.7 4.6 Labour absorption: 1974 14.7 8.3 77 100 (1,820,759) 1979 14.3 19.6 66.1 100 (2,060,720) 1986 29.3 17.9 52.8 100 (1,776,591) 1991 26.4 12.7 60.9 100 (2,436,217) 1993 29.4 10.1 60.5 100 (2,510,257) Annual Growth 1974 to 1993 (per cent) 9.2 3.6 0.4 2 Share of output value: 1974 73.1 11.6 15.3 100 (743,984) 1979 67.3 14.4 18.4 100 (2,400,009) 1986 74.3 10.3 45.3 100 (10,103,373) 1991 81.4 6.6 12 100 (22,629,800) 1993 88.3 4.8 7.9 100 (37,357,632) Annual Growth 1974 to 1993 (per cent) 314.2 81.4 129.9 259 Value-added per Unit (Rp Mill): 1974 95.8 1.1 0.1 0.6 1979 278.6 1.4 0.2 1.3 1986 713.2 7.4 0.8 7 1991 1,743.2 9.2 1.1 10.3 1993 2,706.7 9.5 1.1 16.5 Note: Figures in brackets are number of establishments, people and Rp Mill., respectively. Source: Bahri et al. (1998)
Medium/large industries have consistently increased while the other two have fluctuated. The greatest fluctuation was seen in the household category. In 1974 household industries numbered around 434,000. They increased to 618,000 in 1979, declined to 444,000 in 1986, and increased again to 833,000 in 1991, before slightly decreasing to 823,000 in 1993. This indicates that household industries, which usually require a small amount of capital, were more flexible (in the sense of entry and exit) in their adjustment to changes in business environment, such as a monetary crisis.
In terms of output and value-added, there has been a growing imbalance between medium/large and small household industries. Medium/large industries, which comprise of only 0.5 per cent of establishments and only absorb at most 29 per cent of employment, are responsible for 88 per cent of output value and gain 91 per cent of value added. Household industries, which consist of 95 per cent of establishments and absorb 60 per cent of employment, contribute only 7 per cent of output value and gain 6 per cent of value added. One possible reason is the concentration of monopoly power.
The summary of Indonesian agroindustry’s characteristics are presented in Table 1.34, which shows this widening gap. If one of the targets of development is distributional, the
25 direction of agroindustry development needs to change. In addition, as indicated by their high value-added gained and small share of employment, medium/large industries are capital-intensive, and are therefore not very supportive of employment creation objectives.
Table 1.34: Summary of Indonesian agroindustry, 1974 to 1993 Scale 1974 1979 1986 1991 1993 Medium/large Share of number (%) 0.51 0.36 0.79 0.51 0.56 Share of employment (%) 14.7 14.3 29.3 26.4 29.4 Share of output value (%) 73.10 67.28 74.34 81.44 88.36 Value output/unit (mil Rp.) 229.80 667.20 1,948.40 4,133.20 6,854.10 Value added/unit (mil Rp.) 95.80 278.56 713.16 1,743.15 2,706.68 Small Share of number (%) 5.27 8.45 8.01 4.37 4.06 Share of employment (%) 8.3 19.6 17.9 12.7 10.1 Share of output value (%) 11.56 14.36 10.33 6.59 3.79 Value output/unit (mil Rp.) 3.50 6 26.80 38.90 40.40 Value added/unit (mil Rp.) 1.06 1.44 7.38 9.20 9.50 Household Share of number (%) 94.22 91.19 91.20 95.12 95.38 Share of employment (%) 77 66.1 52.8 60.9 60.5 Share of output value (%) 15.34 18.36 45.33 11.97 7.85 Value output/unit (mil Rp.) 0.30 0.70 3.50 3.30 3.60 Value added/unit (mil Rp.) 0.08 0.21 0.83 1.08 1.06 Source: Bahri et al. (1998)
A comparison of costs between agroindustries and non-agroindustries (as presented in Table 1.35) shows the opportunity for the development of agroindustry. The proportion of intermediate inputs describes the level of dependency of one type of industry on either domestic or imported sources. The higher the proportion of imported inputs, the higher dependence of the industry on inputs and therefore the more sensitive it is to exchange rate fluctuations unless its efficiency improves. In mid-July 1997, before the crisis, the exchange rate was around Rp2,400 per US$. The current exchange rate (at the beginning of July 1998) is around Rp16,000 per US$. It was predicted that the exchange rate will not fall below Rp10,000 per US$ (the Government set the exchange rate in its revised national budget to Rp10,000 per US$).
Indonesian agroindustries are less reliant on imported intermediate inputs, ranging from 0.3 per cent to 14.2 per cent, compared with non-agroindustries, which range from 10.8 per cent to 32.3 per cent (except for cement which is only 2.7 per cent). The flour industry, which is the highest user of imported inputs among agroindustries (14.2 per cent), imports all its main input, wheat. For fat and oil, and sugar, on the other hand, most of their main inputs are domestically produced, the same as for cement in non- agroindustries.
The low proportion of imported inputs in agroindustry activities is actually one of the attractions of agribusiness development in Indonesia, especially at the time of monetary crisis with the rapid depreciation of the rupiah. The next question is how the production process can operate efficiently, not only in the agroindustry production process but also in the production of domestic agricultural primary products as inputs to those industries. The use of relatively high domestic inputs, which comes from an inefficient production process in the upstream sub-system, will add a burden to downstream agribusiness industries. In other words, increasing the efficiency of agricultural primary products is a necessary condition for the growth of agroindustry.
26 In terms of using high domestic input (and low imported input), the food processing industry is one possible solution. The problem is, however, that its small surplus may not be attractive to investors. As shown in the table, the surplus gained from this industry is only around 11 per cent, the smallest among the industries. Its small salary/wage and value-added shares also require further study.
Table 1.35: Comparison of the cost structure of Indonesian agroindustries and non-agroindustries, 1990 (%) Domestic Imported Salary Surplus Gross Total value of Type of industry intermed. intermed. and wages value input (output) Input Input added Agroindustries Food processing 72.7 3.6 3.6 11 23.7 100 (2,514) Fat and oil 56 0.3 9.7 27.7 43.7 100 (2,809) Flour 49.5 14.2 11.9 21.3 36.3 100 (2,786) Sugar 56.5 0.3 12.2 15.7 43.3 100 (1,938) Other foods 50.3 6.6 12.6 25.5 43.1 100 (5,050) Beverages 51.1 1 9.2 17.8 48 100 (554) Cigarettes 39.7 4.4 5 15.1 55.9 100 (7,020) Bamboo, woods, 52.8 1.9 12.4 24.9 45.4 100 (9,030) rattan Non agroindustries Textile,garment, 56.8 13.7 11.5 12.9 29.5 100 (10,971) leather Paper and its 50.5 12.4 12.5 17.8 37.1 100 (4,323) products Fertiliser, 39 32.3 11 64.1 28.7 100 (2,300) pesticide Chemical 40 26.9 13.4 11.4 33.1 100 (5,633) Oil refinery 50 11.7 5.1 27.7 38.3 100 (19,051) Mineral (non 43.5 10.8 9.9 25.2 45.7 100 (1,638) metal) Cement 67.5 2.7 6.5 15.3 29.8 100 (1,089) Metal products 47.1 19.5 11.7 14.6 33.4 100 (3,197) Machinery and 31.8 30.8 11.6 21.5 37.3 100 (6,006) electric. Transportation 42.3 14.4 16.6 20.4 43.4 100 (563) Note: Figures in brackets are total cost in billion rupiah Source: Bahri et al. (1998)
27 1.7 Assessment of the current crisis
1.7.1 Economic crisis: the wind of change
Indonesia’s monetary crisis became an economic crisis in mid-July 1997 when the rupiah depreciated uncontrollably. At the beginning, it was thought to be only a contagion effect from Thailand but the crisis worsened resulting, in mid-November 1997, in the liquidation of 16 banks, rising unemployment, the scarcity of staple food and high inflation.
The World Bank indicated four causes of the crisis (KOMPAS, 22 July 1988). The first was the huge short-term external debt of the private sector, which had not been hedged. The Government did not have a good record of this debt and left the private sector to solve the problem. The second is a poor banking system, which featured uncontrolled credit expansion, leading to insolvency. The third is the hesitancy of the Government to undertake reforms, leading to the loss of its credibility from the point of view of investors. The fourth is the rise in political tension and uncertainty during the months before the general election, and when the President Soeharto was reported to be seriously ill.
On 15 January 1998, the IMF came up with a conditional loan agreement in the Government of Indonesia–IMF Letter of Intent, which contained 50 points of agreement (see Box 1.2 for its summary). It included the adjustment of agricultural policies such as the plan to abolish BULOG’s monopoly of some commodities (sugar, soybean, wheat flour, and cloves) and to lower the import tariff on 500 food products in 1997–98. As shown in Table 1.36, tariffs on most of the items, which had been around 15 to 30 per cent, have been reduced to around 0 to 5 per cent. The tariff rates on beverages and liquor (0 to 170 per cent) and pearl and gems (25 per cent) did not change. Some are still above 5 per cent.
28 Box 1.2: The 15 January 1998 GOI–IMF Letter of Intent
1. Sound macroeconomic framework · Controlling inflation around 20% · Current account balance is expected to change from deficit to surplus, to earn foreign exchange for foreign debt repayment 2. Budget Plan is revised with new parameters. · Budget deficit to be around 1% of GDP · Subsidy reduction in energy, particularly oil and electricity, by increasing price but still protecting the poor 3. Fiscal policy transparency · Reforestation fund, which was originally off the budget, must be included in National Budget Plan of 1998–99 4. Private sector’s projects · Government expenditure is limited for vital projects · Rescheduling of 12 infrastructure projects · Budgeted and off-budgeted fund used for IPTN is stopped · N2130 project funding is opened to foreign investors · No special treatments on customs and credit facilities for the National Automobile project 5. Monetary Policies · Central Bank is given full autonneomy to implement monetary policies and independently determine the SBI interest rate · Government support of state-owned and private bank mergers 6. Restructuring of banking and private sectors · A specific plan will be announced in the next few days 7. Structural reformation · By 1 February 1998, BULOG’s monopoly on rice is limited. Its import and distribution monopoly on sugar and wheat flour is withdrawn · Agricultural domestic trade is fully deregulated. Clove Buffer Stock and Marketing Board is eliminated by June 1998 · Trade regulation is eliminated. On 1 February 1998, enterprises free to produce and export according to market demand. Cartels in cement, paper and plywood are eliminated · The elimination of regulations on wholesalers and retailers · Encouraging foreign investment. On 1 February 1998, formal and informal barriers on investment in palm oil eliminated · On 1 February 1998, tax on food is reduced to maximum of 5%, while tax of non-food agricultural products will be reduced by 5% · Asian Development Bank will focus on financing small and medium-sized establishments, and exporters REVISION OF NATIONAL BUDGET PLAN 1998–99 · Economic growth that was originally targeted to be 4% is changed to 0% · Inflation rate that was originally set for 9% is changed to 20% · Rupiah exchange against US$ that was originally set for Rp4,000/US$ is changed to Rp5,000/US$ · Budget for oil subsidy of almost Rp3 trillion to be gradually reduced
Source: KOMPAS, 16 January 1998
29 Table 1.36: Import tariff in 1996–97 and 1997–98 by group of items (HS) Group of Items Import tariff Import tariff in 1996–97 in 1997–98 (%) (%) 01 Live animals 0 – 30 0 – 5 02 Edible meat 15 – 20 5 03 Fish and shrimps 0 – 20 0 – 5 04 Milk products, poultry eggs, natural honey, inedible 5 – 25 5 animal products 05 Animal products 0 – 20 0 – 15 06 Live trees, roots, cut flowers and ornamental leaf 0 – 25 0 – 10 07 Vegetables, and edible roots 0 – 25 5 08 Fruit and other edible shelled fruit 5 – 25 5 09 Coffee, tea, spices 0 – 25 0 – 5 10 Cereals and flours 0 – 15 0 – 5 11 Milling products, essence 0 – 15 0 – 5 12 Oil contained seed and fruit, herbs 0 – 25 0 – 5 13 Resin, and other vegetable fat 0 – 5 0 – 5 14 Plait material, plants essence 0 – 5 0 – 5 15 Animal oil and fat and other products 5 – 20 0 – 10 16 Meat and fish products 15 – 25 5 17 Sugar and candy 0 – 25 0 – 5 18 Cacao and cacao products 5 – 15 5 19 Wheat and its products 5 – 25 5 20 Processed vegetables, fruit and nuts 15 – 25 5 21 Various edible processed food 5 – 25 5 22 Beverages, liquor 0 – 170 0 – 170 23 By-products of processed food 0 – 5 0 – 5 24 Tobacco and its products 5 – 25 5 33 Atsiri oil, fragrance, cosmetics 5 – 20 5 – 15 40 Rubber and its products 5 – 15 5 – 10 41 Raw leather and processed leather 0 – 15 0 – 10 43 Leather products 10 – 15 5 – 10 52 Cotton 0 – 5 0 – 5 53 Textile fibre, yarn 5 5 71 Pearl and gems 25 25 Source: Agency of Agribusiness, MOA, 1998b
The hesitation and inconsistence in implementing the agreement displayed by the Government, for example, by trying to implement the Currency Board System (a fixed exchange rate system), made the situation even worse. Increasing deposit interest rates up to around 60 per cent could not prevent customers from withdrawing their deposits. It was estimated that the inflation rate, which before the crisis was below 10 per cent, could reach over 100 per cent.
The delay in the IMF loan was also blamed for worsening the situation. Further requirements were added when it arrived again on 18 March 1998. Another agreement was signed on 9 April 1998, which was the supplement and complement of the 15 January GOI–IMF agreement, completed by the target date. Most of the items have been implemented (see Box 1.3).
30 Box 1.3 The Additional Memorandum GOI–IMF Letter of Intent, Signed 9 April 1998 The following are selected items considered relevant to agriculture: Target date A. FISCAL Increase customs duties on liquor and tobacco 1 Dec 98 Increase prices of sugar, wheat flour, maize, soybean cake and fish flour 1 Apr 98 Eliminate subsidies on sugar, wheat flour, maize, soybean cake and fish flour 1 Oct 98 B. MONETARY AND BANKING Abolish regulation limiting the opening branch of foreign banks 1 Feb 98 Submit legislation plan to Parliament to eliminate restrictions on foreign 30 Jun 98 investment in banking Abolish banking loan barriers except for prudential purposes C. BANK RESTRUCTURING Items are related to solving banking problems and the role of the Central Bank D. FOREIGN TRADE Reduce tariff by 5% on products currently imposed at 15 – 25% 31 Mar 98 Reduce tariff on all food products to become max. at 5% 1 Feb 98 Abolish local content regulation on milk products 1 Feb 98 Reduce tariff by 5% on non-food agricultural products 1 Feb 98 Gradually reduce tariff on non-food agric. Products to become max. at 10% 2003 Reduce tariff by 5% on chemical products 1 Jan 98 Reduce tariff by 5% on steel and metal products 1 Jan 98 Reduce tariff on steel, metal and fish products to become 5 – 10% 2003 Reduce import barriers on new and used ships 1 Feb 98 Reduce export taxes on leather, ores and waste aluminum 1 Feb 98 Reduce export taxes on log, sawed wood, rattan, and minerals to become max. at 30% by Apr. 98, 20% by end of Dec. 98, 15% by end of Dec. 99. E. INVESTMENT AND DEREGULATION Abolish regulation limiting 49% foreign ownership on companies listed on the Sep 97 stock exchange Establish the revised negative list 30 Jun 98 Abolish regulation limiting foreign investment in palm oil estate 1 Feb 98 Abolish regulation limiting foreign investment in retailing 31 Mar 98 Abolish regulation limiting foreign investment in wholesale sector 22 Apr 98 Abolish restrictive regulation on marketing of cement, papers and plywood 1 Feb 98 Abolish BPPC monopoly in clove industry 1 Feb 98 Abolish the highest retail price on cement 3 Nov 97 Abolish quota on livestock trading 30 Sep 98 Forbid regional government to limit regional trade 1 Feb 98 Allow free competition in the import of wheat flour, soybean and garlic, the Feb 98 marketing and distribution of wheat flour and the import and distribution of sugar Abolish farmers’ obligation to plant sugarcane under TRI programs Feb 98 F. THE PRIVATISATION ON THE STATE-OWNED COMPANIES G. SOCIAL SAFETY NET H. ENVIRONMENT
Source: EKONOMI NERACA, 11 April 1998
Even though it was stated that the April agreement was the final stage of the agreement, the loan did not come into realisation then. The crisis came to a climax when the Government reduced fuel subsidies. Jakarta and other cities were burned and the situation resulted in the resignation of President Soeharto and his cabinet on 22 May 1998.
The president’s resignation was not the end of the crisis. The chaos has destroyed the distribution system and the country is in an economic depression. As quoted by KOMPAS on 2 July 1998, the State Minister for Food and Horticulture stated that 40 per cent of Indonesian population (ie. 80 million people) were below the poverty line, and 50 per
31 cent of them were in the condition of food insecurity. The Central Bureau of Statistics (CBS) predicted that in 1998 the economy will contract by about 13 per cent, and per capita income will drop to US$436.30, partly due to the rupiah depreciation.
The IMF seems very patient in negotiating and updating the agreements. Unemployment has reached 15.4 million, and is predicted to reach 18 to 20 million soon (KOMPAS, 21 July 1998). People questioned the intentions of the IMF and the delays in the promised US$43 billion, of which only US$4 billion has been realised in one year. Feelings of nationalism rose. Many people rejected plans to sell state owned companies to foreign investors.
In June 1998 the IMF introduced another draft Letter of Intent called The Second Additional Memorandum of the GOI–IMF, which was signed on 25 June 1998. This was the revision of the First Additional Memorandum agreed on 9 April 1998, which was no longer considered realistic considering the changes in the Indonesian economy. This memorandum was considered moderate compared with previous requests as it allowed subsidies on some basic foods, and delayed increases in fuel prices until the economy recovers, although price ‘adjustment’ through the reduction in subsidies will still be implemented by March 1999. It also mentioned the plan of a new loan at the amount of US$4 to 6 billion from bilateral and multilateral donors.
Box 1.4 The Second Additional Memorandum of The GOI–IMF Letter of Intent, Signed on 25 June 1988 A. FISCAL POLICIES The central target of the policies is still the minimisation of budget deficits to a level that can be outweighed by the inflow of foreign funds. It is suggested that the deficit from the fiscal year 1999–2000 can be minimised by increasing income and reducing subsidies. B. MONETARY POLICIES Policies are targeted to solving the financial problems of national banks. Money will be supplied to banks with relatively good performance. Mergers and recapitalisation have been suggested to the weaker banks. The GOI will give full warranty to depositors and creditors. C. PRIVATE DEBT To reduce burden on private company debt, domestic and foreign creditors will be involved in negotiations. Creditors are expected to share the burden. A bankruptcy system and rules will be created. D. STRUCTURAL POLICY REFORMS. The GOI was requested to continue structural policy reforms that were agreed (with the World Bank), including free competition between BULOG and private companies in the marketing and distribution of soybean, wheat and sugar, and the use of an international standard auditing system in the financial systems of BULOG, the Electricity State Company (PLN), the State Oil Company (PERTAMINA), and the Reforestation Fund. Transparency in the process of privatising the State Owned Companies (BUMN) is requested and the GOI together with the Asian Development Bank and the World Bank will prepare the Master Plan of the BUMN reforms by September 1998.
Source: KOMPAS 26 June 1998
The changes, although painful, are expected to be favourable to the creation of a more democratic and efficient system, as declared (and forced by people power) by the Cabinet of Development Reform. It is expected that the changes will be supportive of the development of agribusiness/agro-industries and the rural economy as the source of income for the majority of Indonesians.
32 1.7.2 Crisis impact assessment: the issues
Indonesia in transition
Indonesia unexpectedly shifted from one transition before the crisis to another, more painful, transition due to the crisis. The first was the transition from an economy based on natural resources, agriculture and simple labour-intensive industry to one with more advanced industry and technology. Indonesian was very keen to enter the take-off (using Rostow terminology) stage of development.
Unfortunately, the economy was not strong enough to support the high speed of development and the associated heavy social and political burden, and Indonesia’s economic development has to start again from scratch. The growth-oriented economic development implemented during the past three decades did not have the power to solve the accumulated social and political disharmonies.
The second transition is from a centralised state to one that is liberalised and democratic. Although the situation is not exactly the same as in the former Soviet Union in the late 1980s, it is similar. Indonesia now faces the risk of disintegration. The unequal distribution of wealth among regions and individuals, together with the political suppression of the past three decades helped create the current crisis. The development policy, which aimed to jump from an agricultural-based economy to an advanced economy, ignored the agricultural sector and the rural-based economy where the majority live, and these sectors incurred unbearable costs.
This transition brought Indonesia into a fragile and explosive situation. In a borderless era of globalisation, participation from other countries and from international institutions is highly necessary, not only in the form of aid and loans, but more importantly in bringing understanding and wisdom to negotiations. International institutions should consider that drastic shifts may bring Indonesia into another, greater disaster.
However, the crisis also provides lessons to Indonesia about the importance of efficiency and self-reliance, and the awareness that foreign aid and support should be considered as the supplementary resources of development, not the core.
The production of strategic agricultural commodities.
In general, the agricultural sector, which is mostly natural resource-based in nature, has been relatively unharmed by the crisis. The crisis, however, suggests at least five roles for the agricultural sector. These are: (1) a source of growth which could compensate for the predicted negative growth of the industrial sector, (2) a generator of employment to absorb the unemployment caused by the economic slowdown, (3) a food supplier, (4) a foreign exchange generator, and (5) a poverty alleviator.
Food crops are expected to grow at least the same rate as population growth. Fisheries and estate crops, which are export sub-sectors, are expected to grow and become sources of foreign exchange. Livestock activities are highly dependent on imported inputs (feed in particular) and will suffer negative growth.
33 Increased burden on agriculture in terms of employment.
The decreasing share of agriculture in GDP has not been proportionally accompanied by decreased employment, leading to high unemployment (both opened and disguised) in rural areas. In addition, uncontrolled land conversion from agricultural to non-agricultural purposes has worsened unemployment. Some unemployment might be absorbed by industry, but the perfect mobility of labour assumption has not always held. Moreover, the monetary crisis has increased unemployment, with workers lost from industries based on imported inputs. Most unemployed migrants will return to rural areas adding to existing unemployment in agriculture. Policymakers are increasingly aware of how important agriculture is to the ability of the economy to cope with the crisis.
The self-sufficiency arguments
The Government faces a dilemma in choosing appropriate policies for the three strategic commodities of rice, soybean and corn, namely whether to implement a self-sufficiency program or to liberalise these markets.
The pro-liberalisation argument is that, if one country can import the goods cheaper than it can produce them, why not do so. The excess resources can be used more efficiently elsewhere in the economy. The self-sufficiency program could be very costly and may not be effective in increasing productivity and improving the efficiency required by a highly competitive global market.
The pro-self-sufficiency argument, on the other hand, is that an adequate and affordable supply of the three commodities, but rice in particular, is a necessary condition for the country to create the stable political and social environments needed by the development process. No one would argue about the high cost of the self-sufficiency program. The social cost of market liberalisation, however, is also very expensive. The risk of social tension should not be ignored. The current international market price of rice is US$3,200 per tonne, or Rp3,200 per kg using an exchange rate of Rp10,000 per US$ (the current exchange rate is even higher, at around Rp16,000 per US$). Although the current domestic price of rice is only around Rp2,000 per kg, it is still unaffordable to the majority of Indonesian consumers, not to mention those facing food insecurity. In addition, Indonesia, with more than 200 million people in a thin global market, is a big country in terms of demand. Imports of rice would push up the price.
In addition to these arguments, this is the right time for agro-industry to grow. The key word here is ‘affordable’. No matter how expensive rice is, people can buy it if they have adequate income, but no matter how cheap it is, it will be unaffordable if people do not earn an adequate income. Government officials have stated many times that the stock of rice is adequate, yet Indonesia will import another three million tonnes. The problem is not in the stock but in purchasing power. The question is how to increase people’s income. Agro-industry is one possible answer. As the income elasticity of demand for rice is low (less than 0.1 or possibly even negative for the upper-income class), increasing income will have a positive impact on self-sufficiency. Self-sufficiency can also be achieved by reducing demand and by other productive ways such as increasing cropping intensity.
34 The right time for agro-industry to grow
If rural labour-intensive industry, and agro-industry in particular, gets a good chance to grow based on its comparative advantages, Indonesia will gain in international trade as it has an abundant endowment of the required resources. The recent depreciation will provide greater opportunities for Indonesia to boost agro-industry exports.
Agribusiness/agro-industry also provide a chance for Indonesia to solve its recent social problems, by helping to narrow economic or income gaps, both at an individual and regional level. Since agribusiness involves millions of people and is centred on rural areas, the distribution of activities and income will occur automatically.
There are also positive backward linkage effects. Agriculture-based rural industry will increase other activities in the agricultural sector, which is relied on as an input supplier. Labour intensive industries, such as textile and footwear manufacturing industries, have increased significantly. These industries have less backward linkages to agriculture. They are usually established by foreign direct investment, and are usually relocated industries that have lost comparative advantage in their home countries (footloose industries).
Industries that consist of many small-scale establishments create stronger economic fundamentals than those relying on a few conglomerates. Taiwan gives valuable lessons in this. As mentioned by Meier (1989), the strength of the Taiwanese economy lies in its small-scale industries. Taiwan is not suffering from the recent monetary crisis.
Agriculture should be treated as a core and leading sector of the Indonesian economy. Since the economy is characterised by small-scale enterprises, involving millions of farmers, policies to strengthen small-scale enterprises and improve the ability and capability of farmers will be the priority of the Government’s policies and programs.
The development of agro-industries in rural areas is the core part of the development of agribusiness. Establishing strong backward and forward linkages is the main consideration in the development of agro-industry.
The elimination of BULOG’s monopoly
The GOI–IMF letter of intent states that commodities under BULOG’s monopoly (i.e. rice, soybean, sugar, wheat flour, cooking oil) have to be eliminated, except for rice. Theoretically, this should have a positive impact. A careful calculation of the impact should be done, however, as the market does not always adjust smoothly. In addition, other market distortions such as price and trade policies should be taken into consideration in this assessment.
The ending of BULOG’s monopoly on the production and distribution of cooking oil is expected to encourage investors into upstream industry, particularly into palm oil plantation and Crude Palm Oil (CPO) processing. The Government, however, must be consistent with its policy. In 1994, it established the decree allowing foreign investment, but then backtracked, including it in a negative list of investment in 1996. Another policy of debatable benefit is the export tax on CPO, which was imposed at 40 per cent and recently rose to 60 per cent. The main objective of this policy is to meet domestic supply. Up to the present, however, there has been little impact.
Liberalisation of the sugar industry will enable farmers to grow any profitable crops. The price of sugarcane will be determined by market forces. The increase in the price of sugar cane will lead to competition for land between sugar cane and other commodities and push up the price of land.
35 The rupiah depreciation will make imported milk products expensive and domestic products relatively cheaper. However, domestic dairy farmers are highly dependent on imported feed and will face difficulties in increasing their production.
The elimination of the monopoly on the distribution of cloves under the Board of Buffer and Marketing of Cloves (BPPC), is expected to increase the incentive to grow this crop. However, farmers also have problems in selling their products to tobacco/cigarette industries, which have strong market bargaining power. This is the chance for cooperatives to play a role.
1.8 The new vision and mission
Since the era of pre-colonialism, Java has been the centre of government and economic activity, due to its relatively rich natural resources and its strategic location. Its abundance of fertile land and labour is the primary source of its comparative advantage in land and labour-based agriculture. Although it provides only 7 per cent of Indonesia’s arable land, Java has been the main food supplier. The island provides more than 50 per cent of rice and secondary crops production, supplies more than 70 per cent of primary vegetables and fruit, and sugarcane, and yields more than 80 per cent of tea and tobacco production. Java still plays this role, even though the rate of economic growth in the outer islands has increased at a faster rate. The sustainability of its role is now in question. At the same time, the image of agriculture is not attractive to the younger generation. A shift of land and labour-intensive agriculture from Java to Sumatra, Sulawesi, Kalimantan and other islands has started. The perception of agriculture as an unskilled labour sector has been abandoned and the sector has moved towards more skilled and capital-intensive activities, as dictated by efficiency and product competitiveness. In this regard, capital- intensive technology and mechanisation have started to play an important role.
In addition, the steady economic growth (before the crisis) at around 7 per cent annually increased purchasing power and demand for agricultural products, both as foodstuffs and industrial inputs. At the same time, however, the more open economic environment has led to a significant increase of imported agricultural goods. Imports of soybean and maize have increased rapidly in line with the rapid growth of the livestock industry. Imports of live animals and temperate-climate fruit such as apples and grapes increased sharply as well.
These phenomenon have resulted from many factors. One of these is the change in the strategic environment – domestically, regionally and globally. The changes in the regional and global strategic environments, which have come with the implementation of the Uruguay Round Agreement, and the formation of APEC and AFTA, have led Indonesia to open its markets. Global economic change was partly caused by the Triple-T (transportation, telecommunication and tourism) revolution, which led to the information revolution. The availability of information technology and the opening of international markets for agricultural products requires domestic agriculture to implement a modern management system to be able to compete globally.
Another important factor in the shift of direction of agriculture is the changing demographic. Apart from the size of the population (more than 200 million in February 1998), the structure should also be taken into in planning, i.e. the predominance of youth, the growing life expectancy, the increasing educational attainment, the larger participation of women in the labour force, and increasing urbanisation. In Java, the proportion of urban dwellers has increased from 17.6 per cent in 1971 to 35.6 per cent in 1990 and to around 40 per cent in 1997. This growth affects the agricultural sector in a number of ways, including the increasing conversion of agricultural land to non agricultural activities. From 1983 to 1993, 1.28 million hectares of agricultural land was converted (or 100,000 hectares annually), including 20,000 hectares of productive irrigated land and 1.01 million hectares in Java.
36 In the twenty-first century, agriculture should not be just a supporting actor, but a modern, efficient and competitive sector (AARD 1997). It should have the following characteristics:
First, it should be able to use resources optimally and sustainably, in line with principles of economics and efficiency. Resources include land, water, the marine environment, genetics, natural resources, and energy.
Second, a diversification approach should be implemented in a comprehensive way; i.e. vertically, horizontally and regionally. The keys to success are the use of locally specific technology, the availability of infrastructure in rural areas, and the existence of supporting rural/agricultural institutions including agricultural credit schemes, research- extension linkages, and market information. This diversification should not only deal with productive activities but also the processing and marketing of agricultural products.
Third, locally specific and technological breakthroughs should be implemented in agriculture. The key concept is locally specific, considering the large diversity of agricultural resources. With the use of new technology that is adaptable to local conditions, the task of improving efficiency can be appropriately done. Technology should be technically applicable, economically profitable, socially acceptable and environmentally friendly.
The development of agriculture should reflect regional comparative advantage and competitiveness. For example, Java and Bali will be suitable for the development of high- value agricultural products that are driven by urban demand, due to the higher cost of land, capital and labour compared with other regions.
The possible patterns of regional agricultural development in Indonesia is outlined in Table 1.37. In general, however, these are as follows:
1.8.1 Agricultural development on Java
As Java still is, and might always be, the centre of the economy and government, the direction of agricultural development there should be towards higher-value agricultural development that is driven by urban demand. The choice of high-value commodities is based on the fact that in the future the cost of land, capital and labour, and therefore agricultural production, will be more expensive in Java than Off Java. Under these conditions, high-value commodities will be more viable. Commodities should be those demanded by the urban population, which in the future will dominate Java, i.e. vegetables, fruit, chicken meat, beef, fresh fish, prawns, eggs and milk.
This does not mean that Java should not grow paddy at all. Although the demand for rice in Java will continue to decrease, it is still high. In addition, rice farming in certain areas in Java still has comparative advantage, but it should be of a high quality and price, as suited for the consumption of the middle and high-income classes.
To be competitive with imported rice, farming in Java should be efficient through the use of modern technology and professional management systems. Technologically intensive farming is considered an appropriate response to rising land prices. Farming in Java will continue to be dominated by small-scale farming (household farms) as this structure can not be changed easily in the short term. Moreover, small scale farming might also be used as a measure of income distribution.
1.8.2 Agricultural development Off Java.
The shift to higher value-added commodities in Java will cause a significant decline in production of some commodities, rice in particular. To prevent a crisis of rice supply,
37 which could cause social and political disturbances, other areas suitable for rice production should be selected. One possible solution is rice extensification Off Java, for example in swampy areas. Others possibilities are intensification in the upland areas, the rehabilitation of irrigation Off Java, and improving cropping intensities.
Other than rice and secondary crops, the Off Java areas also have the potential to produce agricultural export commodities and therefore the quality development required by the international market should be taken into account.
Table 1.37: The direction of development for agricultural commodities by island/group of islands. Islands Direction of development Java and Bali Concentrate on high-value commodities to fulfil urban demand and to export (horticulture, beef and dairy cattle, broiler and hens, fresh fish, prawns, high quality rice and secondary crops) Sumatra Develop estate and food crops by improving smallholder productivity and horticulture, livestock and fisheries in line with locally specific conditions. Kalimantan The main focus is estate crops. Swampy areas are being developed for food and horticulture to provide national food buffer stocks. Sulawesi In line with local agro-climate conditions, the priorities are livestock, food and estate crops. NUSA Tenggara The main focus is on big ruminant, beef cattle in particular. Some Islands (West N.T., estate commodities are being developed for land conservation East N.T., East purposes. Timor) Maluku The main focuses are fisheries and estate crops. Irian Jaya The development is directed towards estate crops. Rice and secondary crops are mainly developed in Memberamo and the Merauke valley. Source: Suryana (1998)
The current economic and political crisis has necessitated a number of reforms. As the agricultural sector includes most of rural population, which is the lowest income class and the majority of Indonesian population, reforms should be made gradually but in a sustainable way to avoid a large, sudden impact that might worsen the crisis. A careful approach is required, especially in the supply and distribution of basic foods in order to avoid the ‘boomerang effect’ in the form of soaring prices, a lack of supply, and market hysteria, which could cause further chaos and deepening economic depression.
1.9 Conclusion
Changes in regional and global strategic environments, and recent domestic political changes will have significant impacts on economic policies. Recognition of income disparities, both individual and regional, will lead to greater attention to economic development in rural areas. Agriculture as the source of income of the majority will be the main focus of the development after having been ‘ignored’ for quite some time since Indonesia obtained rice self-sufficiency in 1984. A more open, market-oriented policy will make the development of agribusiness a central issue in the upcoming development program. The strategic positions of rice, soybean and corn brought the Government to implement a self-sufficiency program of debatable benefit for these three commodities.
In general, agriculture, which is mostly natural resource-based in nature, is relatively immune to the negative impacts of reforms, being less reliant on imported inputs. Food crops are expected to grow at least the same rate as the population. Fisheries and estate crops, which are export commodities, are expected to gain from the depreciation of the rupiah, but livestock farming, especially that highly dependent on imported inputs, will suffer.
38 Although ultimately the elimination of BULOG’s monopoly on soybean, sugar and wheat, and that of the BPPC on cloves will have positive impacts on the economy, they require a careful and comprehensive impact assessment as the market does not always adjust smoothly. Further studies on issues of self-sufficiency, privatisation, employment and farmers’ income are needed.
Economic reforms, resulting either from the GOI–IMF letter of intent or from global environmental demand, will bring challenges not only for the production sector but also for marketing and distribution. At the same time there is an opportunity to create an efficient economic system. It should be borne in mind by all related parties, however, that Indonesia’s transition period bears a high risk of disintegration if the requirements of agreements push the country into an unbearable situation. All parties concerned with encouraging stable political and economic regional environments are expected to voluntarily take responsibility, at least by giving Indonesia flexible, reasonable and reliable aid requirements.
39 1.10 References
AARD, 1997, “The Vision of Agricultural Development Toward the 21 st Century”, AARD, Jakarta Agribusiness Agency, 1997a, Agribusiness Investment Opportunity in Indonesia, Jakarta. Agribusiness Agency, 1997b, Prospects of Agribusiness Investment in Indonesia, Jakarta. Agribusiness Agency, 1998a, Agency of Agribusiness Master Plan in REPELITA VII, Jakarta. Agribusiness Agency, 1998b, Deregulation formulation on import tariff and agricultural trade. Bahri, S., Achmad Suryana and Erwidodo 1998, Indonesia’s Monetary Crisis and Indonesia’s Agro Industry Development, (paper presented at the Third Workshop of the ACIAR PN 9449, University of Adelaide, 24–25 February 1998. Booth, A. 1992, The Oil Boom and After: Indonesia Economic Policy and Performance in the Suharto Era, Oxford University Press. Oxford. Center Bureau of Statistics 1987, Expenditure for Consumption of Indonesia, Jakarta. Center Bureau of Statistics 1990, Expenditure for Consumption of Indonesia, Jakarta. Center Bureau of Statistics 1993, Expenditure for Consumption of Indonesia, Jakarta. Center Bureau of Statistics 1993, National Income of Indonesia 1985–1990, Jakarta. Center Bureau of Statistics 1996, Expenditure for Consumption of Indonesia, Jakarta. Department of Economic, Social and Policy Analysis Information 1990, Commodity Trade Statistics 1989, Publishing Division, United Nations, New York. Department of Economic, Social and Policy Analysis Information 1993, Commodity Trade Statistics 1992, Publishing Division, United Nations, New York. Department of Economic, Social and Policy Analysis Information 1994, Commodity Trade Statistics 1993, Publishing Division, United Nations, New York. Department of Economic, Social and Policy Analysis Information 1995, Commodity Trade Statistics 1994, Publishing Division, United Nations, New York. Erwidodo, 1997, Agricultural Industrialisation: The hope and reality, in Sudaryanto et al., Industrialisation, Social Engineering and the Role of Government in Agricultural Development, CASER, Bogor, Indonesia (Indonesian Ed.). Erwidodo, 1998, Effects of Trade Liberalisation on Agriculture in Selected Asian Countries With Special Focus on CGPRT Crops: A Case of Indonesia (first country report). Centre for Agro Socioeconomic Research (CASER). Bogor, Indonesia. Government Development Guideline 1998, Pabelan, Jakarta. Hutabarat, B., 1997, ‘Agriculture’s Structure in the Perspective of Economic Structural Changes and Market Globalisation’, in Sudaryanto et al Industrialisation, Social Engineering and the Role of Government in Agricultural Development, CASER, Bogor, Indonesia (Indonesia Ed.). Kasryno, Faisal, 1997, Visi Pembangunan Pertnaian Pada Subsektor Perkebunan Tahun 2020. Badan Litbang Pertanian, Jakarta. Kompas Friday, 26 June, 1998, Prioritas Untuk Distribusi dan Pasok Pangan. Kompas, Jakata. Kompas Saturday, 27 June, 1998, Semoga ini yang terakhir (tanggapan terhadap memorandum, Tambaha Indra, Peneliti RI–IMF. Kompas, Jakarta. Meier, G.M. 1989, Leading Issues in Economic Development, 5th Ed., Oxford University Press, Oxford. NAFED 1996, Indonesian Export and Balance of Trade, Ministry of Industry and Trade Republic of Indonesia, Jakarta. Rachmat, M. 1995, Structure and Performance of Indonesian Agroindustry: Analysis of Changes in 1974–1993, CASER, Bogor (Indonesian Ed.). Rodgers, Y.M. 1993, Indonesia’s International Trade Policy and Performance, UMI, Michigan, the US. Simatupang, P. 1997, Agricultural Industrialisation as Agribusiness’s Strategy and Agriculture’s Development in the Era of Globalisation, in Sudaryanto et al
40 Industrialisation, Social Engineering and the Role of Government in Agricultural Development, CASER, Bogor, Indonesia (Indonesia Ed.). Sudaryanto, Tahlim, dkk 1998, Analisis Permintaan dan Penawaran Komoditas Pertanian Utama dalam Pelita VII. PUSt Penelitian Sosial Ekonomi Pertanian, bekerjasama dengan Agricultural Research Management Project, Bogor. Suryana, A. 1998, ‘Penawaran, Permintaan dan perilaku kebiasaan pangan’, Makalah di- sampaikan pada Widyakarya Nasional Pangan dan Gizi (WKPG) VI, Serpong, 17–20 Februari 1998, (translated: ‘Supply, Food Demand and Food Consumption Behavior’, Paper Presented at the Sixth National Symposium on Food and Nutrition, Serpong, 17–20 February 1998). Temenggung, S.A., 1995 Pattern of Regional Development in Indonesia, in Sjaiful Bahri (1995), Indonesia in Transition: Economic Growth, Trade and Policy Reforms, University of Wolongong, NSW, Australia. World Bank 1994, World Bank Country Study: Indonesia Sustaining Development, Washington DC.
41 Appendix 1.1: Agribusiness investment policies – pre-reform
For agribusiness to grow, conducive economic and social conditions are required. These include comprehensive and integrated planning to provide public and economic infrastructure, the improvement of the quality of human resources especially concerning business and enterpreneurship, and the sustainable utilisation and conservation of natural resources and the environment. The Government of Indonesia has made some effort to provide these conditions through the following investment policies (Agribusiness Agency, 1997a): a. Legal aspects of foreign investment.
Foreign Direct Investment (FDI) is governed primarily by the Foreign Capital Investment Law No. 1 of 1967, as amended by Law No. 11 of 1970. In addition to this law, FDI companies as well as other companies are subject to sectoral or industrial policies applied by government ministries. A FDI company is granted a period of 30 years to operate after its legal formation. If within this time it commits an additional investment (expands its project), another 30 years is granted for the expansion project. A FDI company can continuously exist if it keeps expanding or reinvesting. b. Foreign investment share ownership
Generally, a foreign direct investment occurs through a joint venture with a domestic partner. The partnership may involve legal entities (corporations) or individuals. A joint venture company takes the form of a Limited Liability Company, which is subject to Indonesian Corporate Law, or PT (Perseroan Terbatas, in Indonesian terminology). There is no requirement on the minimum amount of investment (equity plus loan), and this can be determined by the parties concerned, based on economies of scale and business considerations.
Joint ventures may occur in infrastructure projects (including seaport, electricity generation and transmission, as well as distribution, telecommunications, shipping, airlines, potable water, public railways, atomic energy reactors and mass media) provided that the Indonesian share is maintained at least at 5 per cent.
A FDI company may have 100 per cent foreign ownership, but then is able to operate for no longer than 15 years. It then starts to be divested, with shares sold to the public or business, through direct placement and/or through the stock exchange. c. Regulatory environment
While successive reform measures before 1993 had helped stimulate inward private investment, FDI was significantly boosted by after the liberalisation of rules on foreign investment introduced in May 1994. The main elements of the May 1994 deregulation package were as follows:
· Permit 100 per cent foreign ownership of projects throughout Indonesia. · Reduce the minimum equity holding for Indonesian partners in joint ventures from 20 per cent to 5 per cent. · Abolish the previous compulsory requirement of foreign investors to gradually divest 51 per cent of equity to Indonesian partners. · Allow foreign and Indonesian partners to determine changes in the composition of share ownership. · Abolish the previous minimum paid-in capital requirement and permit investors to determine capital outlay based on the commercial viability of projects. · Set the validity of foreign investment licenses at 30 years, with provision for extension for a further 30 years.
42 · Open up to foreign participation a number of strategic sectors previously closed to overseas private investors, including seaports, telecommunication, electric railways, civil aviation and nuclear power.
d. Intellectual Property Protection (Patents, Trademarks, Copyrights)
To safeguard foreign investment and create incentives for local innovation and creativity, the Government has implemented several measures to protect intellectual property rights, including trademark legislation that penalises imitators.
e. Taxation
In addition to modernising and standardising tax regulations, Indonesia’s tax reforms have upgraded tax collection through simplifying procedures, computerisation and payroll withholding tax.
The source of tax is drawn from broad categories:
· Personal and Corporate Income Tax · Domestic Consumption Tax, including Value Added Tax (VAT), Sales Tax on Luxury Goods, and Excise and Miscellaneous Tax. · Real Estate Tax · International Trade Tax, comprising of import and export tariffs and sales taxes on imported commodities.
e.1. Resident and Non-resident Tax
For taxation purposes, foreign residents are classified into three groups:
· Individuals present in Indonesia for more than 183 days in any tax year. · Companies and organisations located in Indonesia. · Non-resident corporations deemed to have a ‘permanent establishment’ in Indonesia. For corporations from countries with which Indonesia has a tax treaty, a permanent establishment is considered to exist should its employee(s) come to Indonesia for business purposes. Non-residents are generally subject to withholding tax if they earn an income while residing in Indonesia for 183 days or less in any 12 month period.
e.2. Taxable Income Rate
With a few exceptions, three rates apply to the annual incomes of individuals and corporations. By lowering income tax rates, the 1994 tax reforms provided additional incentives to investment. For corporations operating in the oil, gas and mining industries, tax regulations are specified in terms of their contracts. In general, such rates are consistent with the tax laws established prior to the 1994 reforms. Individuals and corporations are entitled to a range of tax allowances. For corporations, routine business expenses, together with employer contributions to government approved employee pension plans, are deductible from taxable income. A self-assessment method is used to calculate the tax as presented in Appendix Table 1.1 below:
43 Appendix Table 1.1: Tax rate for taxable income No. Taxable Income Tax rate 1 Up to Rp25 million 10 % 2 From Rp25 million to Rp50 million 15 % 3 More than Rp50 million 30 % Source, Agribusiness Agency, 1997a.
e.3. Value Added Tax (VAT) and Sales Tax on Luxury Goods
Introduced under the tax law of 1984, and replacing the previous general sales tax, VAT is currently applied at a flat rate of 10 per cent to defined groups of goods and services. VAT is paid by manufacturers, importers, wholesalers and retailers of taxable goods and services, with the final cost being passed on to end-users. In addition, there is also sales tax on luxury goods ranging from 10 per cent to 35 per cent. Retailing was brought within the VAT scheme for the first time in April 1992. The 1994 tax law also provided for a separate sales tax on luxury goods for domestic and foreign investment projects and on services related to the exploration of oil, gas and geothermal steam until commercial production is achieved. Previous legislation including VAT and sales tax was amended to bring it into line with Indonesia’s changed economic circumstances.
e.4. Withholding Tax
The payment of dividends, interest, royalties and technical and management fees for services performed in Indonesia to Indonesian and non-Indonesian residents are subject to withholding tax. The withholding tax varies, depending on whether it is paid to residents or non-residents.
Appendix Table 1.2: The withholding tax rate No Item Taxable rate 1 Payments to Indonesian residents (except for technical and 15 % management services at 9 %) 2 Payments to non-Indonesian residents 20 % Source: Agribusiness Agency, 1997a
e.5. Stamp Duty
Stamp duty is nominal only at either Rp2,000 or Rp1,000 on certain documents. The rate of Rp2,000 applies to letters of agreement and other letters, and to National Deed and Land Deed, including copies. For all documents bearing a sum of money, the rate is Rp2,000 when the money value is between Rp250,000 and Rp1 million. If the value is below Rp250,000, it is free from stamp duty. For cheques, the rate is Rp1,000 regardless of the money value stated.
e.6. Land and Building Tax
Land and building tax is payable annually on land, buildings and permanent structures. The effective rate is nominal, typically not more than 0.1 per cent of the value of property is paid annually.
e.7. Double Taxation Avoidance Agreements
To avoid incidental double taxation on certain income such as profits, dividends, interest, fees and royalties, Indonesia has signed agreements (tax treaties) with the countries listed below, including Australia. Withholding tax rates applied to residents of countries signing a tax treaty with Indonesia may be reduced based on the provisions of the particular tax treaty.
44 Appendix Table 1.3: List of countries that have signed tax agreements with Indonesia No Country No Country 1. Australia 16. Pakistan 2. Austria 17. Philippines 3. Belgium 18. Singapore 4. Bulgaria 19. Sweden 5. Canada 20. Poland 6. Denmark 21. Switzerland 7. France 22. United Kingdom 8. Germany 23. Thailand 9. India 24. United States of America 10. Malaysia 25. Finland 11. Japan 26. Hungary 12. South Korea 27. Italy 13. Netherlands 28. Luxembourg 14. New Zealand 29. Sri Lanka 15. Norway 30. Tunisia Source: Agribusiness Agency, 1997a
f. Depreciation and Amortisation
In addition to more than doubling the previous depreciation rate on fixed assets, the 1984 tax law sanctioned the open-ended declining balance method as well, as the straight line method, for all cases of assets except those falling under the category of ‘building’. For the current four basic classes of assets (which are based on length of useful life) more favourable depreciation/amortisation procedures are available to encourage certain key export activities and investment in Indonesia’s remote regions.
The depreciation cost on assets is deductible from before-tax income. Depreciable assets are grouped into four categories depending on their useful life. Investors may choose either the straight line method (for periods of less than 20 years) or the fast declining balance method (except for buildings). The depreciation rate is determined according to the useful life and utilisation.
Appendix Table 1.4: Depreciation rate by type of asset No Physical asset Useful life (yrs) Method of calculation (%) Straight line Declining balance I Non Building Group 1 4 25 50 Group 2 8 12.5 25 Group 3 16 6.25 12.5 Group 4 20 5 10
II Building Permanent 20 5 Non permanent 10 10
Amortisation rates are determined according to the asset’s useful life and utilisation (Appendix Table 1.5).
45
Appendix Table 1.5: Amortisation rate by type of asset No Non physical asset Useful life (yrs) Method of calculation (%) Straight line Declining balance Group 1 4 25 50 Group 2 8 12.5 25 Group 3 16 6.25 12.5 Group 4 20 5 10
g. Small-scale Reserved Industries
Some activities are reserved for small-scale industries that might operate in collaboration with medium and large-scale industries. They are: · Non-pedigree chicken breeding · Dairy cattle breeding · Shrimp lava culture · Mackerel, flying fish · Shrimp catching · Aquaculture of eal, escargot, crocodile, frog, sidat · Coral fish catching (such as seaweed, ribbon fish, sea pearl) · Catching of jelly fish, sea cucumber, ornamental fish · Clove, pepper, melinjo, cinnamon, vanilla, kapulaga and nutmeg plantation · Medical herbs except ginger
46 Annex Table 1.1: The Value of Approval and Realisation of Domestic Investment (PMDN), by Sub-sector, 1989 to 1996 Cumulative Approved Realised % of the realised from 1967 Projects Rp.bill. Projects Rp.bill. Projects Value Estate crops 1989 386 9,346.6 240 2,477.6 65.2 26.5 1990 440 14,840.4 321 3,183 73 21.5 1991 466 16,716.6 351 3,626.3 75.3 21.7 1992 - 17,466.7 389 5,181.8 - 29.7 1993 467 18,499.9 418 6,387.4 89.5 34.5 1994 630 26,287.4 441 7,681.5 70 29.2 1995 684 32,474.1 470 9,699.7 68.7 29.9 1996* 735 39,541.1 479 10130.4 65.2 25.6 Food and Hort. 1989 52 560.7 45 147.3 86.5 26.3 1990 116 1,892.8 53 326 45.7 17.2 1991 121 2,040.8 57 382.4 47.1 18.7 1992 163 3,880.9 61 - 37.4 - 1993 164 4,286.4 61 373.3 37.2 8.7 1994 - - 68 462.7 - - 1995 - - 70 532.9 - - 1996* - - 75 613.4 - - Fisheries 1989 290 2,010 148 316.3 51 15.7 1990 324 2,788.4 182 343.5 56.2 12.3 1991 345 2,965.1 206 504.5 59.7 17 1992 - 3,254.2 225 593.3 - 18.2 1993 347 3,404.6 226 807.8 65.1 23.7 1994 - 5,840 240 867.2 - 14.8 1995 - 7,302.1 241 924.4 - 12.7 1996* - 7,377 241 934.9 - 12.7 Livestock 1989 60 316.6 - 125.5 - 39.6 1990 78 473.7 68 162 87.2 34.1 1991 - - 71 172.8 - - 1992 76 1,744.7 73 - 96.1 - 1993 83 1,968.4 78 484.4 93.9 24.6 1994 93 2,149.8 83 552.8 89.3 25.7 1995 98 2,584.7 92 771.5 93.9 29.9 1996* 98 3,123.3 94 792.5 95.9 25.4 Note: * June 1996 Source: The National Coordination Board of Investment (BKPM)
47 Annex Table 1.2: The Value of Approval and Realisation of Foreign Investment (PMA), by Sub-sector, 1989 to 1996 Cumulative Approved Realised % of the realised from 1967 Projects Rp.bill. Projects Rp.bill. Projects Value Estate crops 1989 - 263.9 41 247 - - 1990 42 672.8 42 334.5 100 49.7 1991 42 672.8 42 346.6 100 51.5 1992 43 705.6 - 359.5 - - 1993 45 743.3 44 381 97.8 51.3 1994 - 513.9 48 - - - 1995 - 1,120.1 54 467.1 - 41.7 1996* 70 2,752.9 - 485.5 - 17.6 Food & hort 1989 15 73.2 10 - 66.7 - 1990 16 238.8 11 9.9 68.8 4.2 1991 18 290 12 12.8 66.7 4.4 1992 - - 12 14 80 4.9 1993 - 293.1 14 17.8 87.5 6.1 1994 29 392.8 14 19.1 48.3 4.9 1995 39 815.4 14 38.9 35.9 4.8 1996* 50 891.9 16 - 32 - Fisheries 1989 39 209.3 28 96.6 71.9 46.2 1990 44 258.3 34 126.5 77.3 49 1991 49 269.3 35 143.3 71.4 53.2 1992 54 308.9 38 154.3 70.4 50 1993 59 330.8 38 158.4 64.4 47.9 1994 61 - 42 178 68.9 - 1995 68 547.9 42 203.6 61.8 37.2 1996* 76 662 53 211.9 69.7 32 Livestock 1989 12 144.1 10 48.2 83.3 33.5 1990 13 181.7 12 48.2 92.3 26.5 1991 14 191.8 13 49.6 92.3 25.8 1992 15 - 14 61.3 93.3 - 1993 16 227.7 14 61.9 87.5 27.2 1994 - 271.8 14 61.9 - 22.8 1995 - 281.5 16 105.3 - 37.4 1996* - 403.2 16 - - - Note: * June, 1996 Source: The National Coordination Board of Investment (BKPM)
48 Annex Table 1.3: Area harvested and production of major cereals, roots, tubers and pulses in Indonesia, 1987–1996. Year Rice (husked) Maize Cassava Sweet Soybean Groundnut Mungbean potato Lowland Dryland Total Area Harvested (000ha) 1987 8796.3 1126.3 9922.6 2626.0 1222.2 229.1 1100.6 550.8 277.2 1988 8925.4 1212.8 10138.2 3405.8 1302.6 247.8 1177.4 585.0 361.5 1989 9365.0 1156.3 10521.2 2944.2 1407.9 240.2 1198.1 620.8 332.1 1990 9377.5 1123.8 10501.4 3158.1 1311.1 208.7 1331.6 635.0 345.5 1991 9168.5 1113.0 10281.5 2909.1 1319.1 214.3 1368.2 628.3 301.3 1992 9799.1 1304.2 11103.3 3629.3 1351.3 229.8 1665.7 719.7 393.1 1993 9806.9 1205.9 11012.8 2939.5 1401.6 224.1 1470.2 624.3 374.1 1994 9494.0 1239.9 10733.8 3109.4 1356.6 197.2 1406.9 643.0 292.1 1995 10081.3 1357.5 11438.8 3651.8 1319.6 225.9 1477.6 739.3 361.1 1996 10207.9 1311.7 11519.6 3679.7 1388.7 212.2 1276.4 696.6 338.4 Trend 1.49 1.74 1.52 2.30 0.78 -1.24 2.56 2.43 1.00 (%) Production (000t) 1987 37969.6 2108.6 40078.2 5154.7 14356.3 2012.8 1161.0 533.1 203.8 1988 39316.1 2360.1 41676.2 6651.9 15471.1 2158.6 1270.4 565.1 284.1 1989 42371.7 2347.4 44719.1 6192.5 17117.2 2202.3 1315.1 619.6 262.4 1990 42825.3 2353.5 45178.8 6734.0 15829.6 1971.5 1389.8 650.2 273.1 1991 42330.9 2357.3 44688.2 6255.9 15954.5 2039.2 1555.5 652.1 237.4 1992 45413.6 2826.4 48240.0 7995.5 16515.9 2171.0 1869.7 739.1 326.8 1993 45558.9 2622.2 48181.1 6459.7 17285.4 2088.2 1708.5 638.7 322.3 1994 43959.2 2682.3 46641.5 6868.9 15729.2 1845.2 1564.8 632.0 256.5 1995 46805.8 2938.4 49744.2 8245.9 15317.1 2139.2 1680.0 760.1 325.3 1996 47688.1 2887.1 50575.2 9142.3 16553.7 2020.0 1510.0 746.6 308.3 Trend 2.25 3.35 2.31 4.42 0.66 -0.41 3.63 3.20 3.26 (%)
49 Annex Table 1.4: Area harvested and production of major vegetable commodities, 1987 to 1996. Year Shallot Cabbage Potato Garlic Carrot Spring Chilli Tomato String- onion bean Area (000ha) 1987 65.2 45.0 32.0 15.7 11.7 26.5 230.4 53.0 130.3 1988 63.4 43.1 39.0 16.0 10.6 22.2 341.0 62.3 201.0 1989 60.4 47.9 39.2 18.9 14.2 29.1 438.4 75.3 213.2 1990 70.1 52.2 44.9 18.5 14.6 29.3 162.3 40.3 98.2 1991 71.0 52.7 39.6 21.1 13.4 28.3 168.1 43.4 100.8 1992 68.9 55.3 48.9 22.2 16.6 31.1 162.5 44.6 103.0 1993 75.1 60.3 51.1 20.0 15.2 34.9 157.5 48.6 96.8 1994 84.6 67.4 56.1 20.8 17.1 34.1 177.6 50.6 106.9 1995 77.2 65.8 62.4 21.9 18.3 34.7 182.3 49.3 108.9 1996 91.4 71.0 66.9 20.0 20.1 40.6 174.1 48.5 100.5 Trend (%) 3.81 5.60 7.45 3.10 6.06 5.07 -7.00 -2.32 -6.12 Production (000t) 1987 412.5 835.6 369.0 87.6 132.2 172.1 436.2 187.4 259.5 1988 379.4 771.3 418.2 95.8 132.4 166.3 448.7 192.2 297.0 1989 399.5 926.1 559.4 107.4 192.6 243.9 489.5 238.2 307.2 1990 495.2 1071.8 628.7 108.9 172.2 237.8 569.6 303.0 339.8 1991 509.0 974.6 525.8 133.9 172.7 219.0 627.2 334.3 393.1 1992 528.3 1213.4 702.3 137.9 233.5 250.0 703.8 401.3 430.1 1993 561.3 1266.0 809.5 128.0 192.5 243.3 772.7 362.0 386.6 1994 636.9 1418.0 877.1 134.9 234.2 272.2 724.4 476.1 453.4 1995 592.6 1625.2 1035.3 152.4 247.2 299.9 1102.3 611.8 583.7 1996 792.0 1530.2 1053.0 151.3 269.0 355.8 1013.7 558.8 613.1 Trend (%) 7.11 8.18 11.56 5.95 7.50 6.91 10.22 13.40 9.02
50 Annex Table 1.5: Area harvested and production of major fruit commodities, 1987 to 1996. Year Mango Rambutan Pineapple Banana Durian Orange Langsat Area (000ha) 1987 121.3 49.9 44.4 175.6 41.6 80.3 16.7 1988 104.9 51.1 49.4 169.7 36.1 72.4 16.5 1989 112.4 46.1 32.8 127.8 24.9 52.6 5.7 1990 124.8 66.6 49.0 132.5 43.8 50.2 11.4 1991 159.0 77.1 41.5 135.1 42.8 60.6 11.0 1992 139.6 73.7 21.2 76.5 36.0 58.2 10.5 1993 126.2 66.4 20.0 70.7 31.4 36.9 8.3 1994 133.5 66.3 20.1 50.0 56.3 61.4 25.4 1995 196.6 80.7 50.7 49.0 46.3 46.0 15.6 1996 198.8 85.0 29.6 49.0 38.7 38.2 8.0 Trend (%) 5.82 5.91 -5.6 -16.55 2.44 -6.08 -0.35 Production (000t) 1987 515.9 184.5 347.8 2193.3 199.4 557.3 62.5 1988 532.0 226.9 357.7 2306.4 183.2 445.0 101.5 1989 445.0 146.9 215.4 2192.1 139.2 268.6 47.0 1990 508.9 270.7 390.3 2411.0 242.6 253.7 79.9 1991 640.5 335.8 375.0 2471.9 205.4 353.0 79.8 1992 484.8 273.4 376.3 2650.8 152.5 395.7 81.0 1993 460.4 277.8 459.1 2643.8 170.9 260.3 59.6 1994 668.0 323.5 346.5 3086.6 268.6 393.4 88.2 1995 889.0 364.0 703.3 3805.4 289.6 1004.6 143.1 1996 782.9 370.4 501.1 3805.4 267.1 730.9 91.5 Trend (%) 5.33 8.12 6.60 6.38 4.71 6.21 4.92
51 Annex Table 1.6: Area planted and production of major estate crops, 1987 to 1996. Year Oil Rubber Coconut Coffee Tea Cocoa Tobacco Cane Pepper Palm sugar Cloves Area (000ha) 1987 728.7 2850.0 3153.1 961.6 120.5 171.8 211.4 334.9 742.3 105.9 1988 862.9 2944.3 3225.5 1025.9 125.3 253.1 187.4 365.5 692.8 106.7 1989 973.5 3056.0 3283.6 1036.6 129.4 317.7 183.8 357.8 702.0 115.2 1990 1126.7 3141.6 3393.9 1069.8 129.1 357.5 235.9 364.0 692.7 127.6 1991 1311.0 3173.9 3573.3 1119.9 133.7 444.1 214.8 386.3 668.2 126.8 1992 1467.5 3289.2 3598.6 1133.9 137.5 496.0 166.9 404.1 608.4 127.2 1993 1613.2 3405.0 3635.9 1147.6 142.6 535.3 178.5 425.7 571.0 130.7 1994 1804.1 3444.8 3681.4 1140.4 145.5 597.0 193.1 428.7 534.4 127.7 1995 2025.0 3495.9 3723.9 1167.5 152.4 602.4 220.9 435.8 501.9 134.7 1996 2226.8 3534.6 3745.5 1178.4 158.1 610.9 219.7 423.4 495.5 136.5 Trend 12.30 2.43 2.02 2.08 2.87 13.31 0.40 2.88 -4.81 2.73 (%) Production (000t) 1987 1825.1 1130.4 2098.5 388.7 126.1 50.2 112.7 2175.9 71.0 49.3 1988 2056.0 1173.3 2144.0 391.1 133.8 79.3 116.9 2004.1 81.2 65.3 1989 2357.8 1209.0 2221.4 401.0 141.4 110.5 81.0 2108.3 56.4 67.8 1990 2916.4 1275.3 2331.6 412.8 155.9 142.3 156.4 2119.6 66.9 69.9 1991 3208.9 1328.2 2478.3 428.3 139.5 174.9 140.3 2252.7 80.3 62.5 1992 3825.5 1398.4 2475.3 436.9 153.7 207.1 111.7 2306.5 73.1 65.0 1993 4023.7 1475.4 2605.9 438.9 165.0 258.1 121.4 2329.8 67.4 65.8 1994 4804.6 1498.6 2649.0 450.2 139.2 270.0 130.1 2453.9 78.4 54.0 1995 5421.7 1573.3 2704.3 457.8 154.0 304.9 140.2 2077.3 90.1 59.0 1996 4959.8 1613.8 2718.9 478.9 158.5 317.7 139.6 2075.6 93.8 63.4 Trend 12.42 4.13 3.13 2.28 1.96 19.67 2.78 0.54 2.91 0.17 (%)
Annex Table 1.7: Population of livestock, 1987 to 1996 Year Cattle Buffalo Horse Goat Sheep Pig Chicken Duck Dairy Beef Native Layer Broiler 1987 233 9510 3290 658 10392 5354 6339 168405 39968 218183 26025 1988 263 9776 3194 675 10606 5825 6484 182879 38413 227044 25080 1989 288 10094 3224 683 10996 5910 6935 191433 40452 262918 24135 1990 294 10410 3335 683 11298 6006 7136 201366 43185 326612 25553 1991 306 10667 3311 695 11484 6108 7612 208966 46885 407908 25369 1992 312 11211 3342 678 12062 6235 8135 222530 54146 459097 27342 1993 329 10829 3057 582 11502 6240 8704 222893 54736 528159 26618 1994 334 11367 3104 611 12770 6741 8858 243261 63334 622965 27536 1995 341 11534 3136 609 13167 7168 7720 250080 68897 689467 29616 1996 348 11810 3171 579 13840 7724 7597 250713 78706 755956 29959 Trend 3.96 2.34 -0.54 -1.77 3.00 3.36 2.87 4.45 8.05 15.05 1.99 (%)
52 Annex Table 1.8: Production of livestock meat, 1987 to 1996 (000 tonnes) Year Cattle Buffalo Goat Sheep Pig Chicken Duck Total Native Broiler Layer 1987 234.8 43.7 61.5 30.6 141.0 180.6 174.6 16.5 10.7 894.0 1988 238.1 41.7 66.2 31.0 154.3 196.1 181.7 15.9 10.4 935.4 1989 252.8 43.1 62.9 32.2 136.3 205.3 210.4 16.7 10.0 969.7 1990 259.2 44.3 58.3 31.7 123.8 219.0 261.4 17.8 10.5 1026.0 1991 262.2 47.5 57.0 37.4 110.0 227.3 326.4 19.3 10.5 1097.6 1992 297.0 45.0 68.8 30.2 149.9 242.0 267.4 25.9 11.3 1137.5 1993 346.3 51.2 71.2 40.1 169.3 242.4 422.7 22.6 11.0 1376.8 1994 336.5 48.2 57.1 42.6 183.6 282.1 498.5 22.6 19.5 1490.7 1995 312.0 46.2 55.9 38.4 177.8 269.4 551.8 33.1 21.4 1506.0 1996 347.2 48.7 59.6 39.0 189.5 281.5 605.0 40.1 20.4 1631.0 Trend 4.74 1.59 -0.7 3.37 3.87 4.95 14.85 9.48 8.73 7.15 (%) Annex Table 1.9: Production of eggs and milk, 1987 to 1996 (000 tonnes). Year Eggs Milk Chicken Duck Total Native Layer 1987 70.7 259.0 121.8 451.5 234.9 1988 76.8 248.9 117.4 443.1 264.9 1989 80.4 262.0 113.8 456.2 338.2 1990 84.6 279.8 119.6 484.0 345.6 1991 87.8 303.8 118.8 510.4 360.2 1992 93.5 350.8 128.0 572.3 367.2 1993 93.6 354.7 128.0 576.3 387.5 1994 119.5 423.5 124.6 667.6 426.7 1995 125.3 457.0 145.6 727.9 433.4 1996 128.8 500.6 153.6 783.0 441.2 Trend (%) 6.77 8.15 2.62 6.65 6.45
53 Annex Table 1.10: Production of marine fisheries, 1987 to 1994 (000 tonnes). Commodity 1987 1988 1989 1990 1991 1992 1993 1994 Trend (%) a. Fish 1731.1 1851.5 1963.6 2037.1 2215.1 2327.8 2484.7 2674.3 6.08 - Tuna 40.5 43.0 66.3 88.7 78.4 90.5 76.7 89.3 11.00 - Skipjack tuna 102.6 127.5 113.8 114.2 132.7 152.0 147.3 157.7 5.65 - Eastern little tuna 122.7 117.9 135.3 140.0 150.4 155.7 161.0 186.5 5.93 - Scad 145.3 127.2 145.8 170.7 213.3 195.7 203.4 219.9 7.56 - Anchovies 118.0 115.6 119.7 127.8 135.6 133.9 142.8 150.6 3.76 -Fringescale 118.3 134.1 141.9 135.0 136.6 139.4 152.6 166.5 3.56 sadinella 121.3 127.5 145.7 145.4 144.1 177.1 173.9 194.9 6.49 - Indian mackerel 962.5 1058.7 1095.0 1115.4 1224.0 1283.5 1427.2 1509.0 6.20 - Others b. Crustaceans 140.9 163.7 154.5 154.8 164.1 178.6 174.9 195.7 3.72 - Banana prawn 35.8 42.8 42.9 41.3 41.7 47.7 43.9 47.2 2.87 - Giant tiger prawn 10.7 12.3 12.0 11.6 13.7 15.6 16.1 17.0 6.58 -Metapenaeus 17.6 17.2 15.1 14.6 16.3 16.2 15.8 20.4 1.11 shrimp 1.0 1.3 0.9 0.8 1.4 2.4 1.2 2.0 9.67 - Panulirid spiny 66.9 80.2 72.3 76.5 78.2 83.5 79.7 91.2 3.08 lobster 9.0 9.9 11.2 10.0 12.7 13.2 18.1 18.0 10.20 - Other shrimp - Crab c. Molluscs 50.7 53.1 55.4 55.1 54.6 75.3 78.8 92.8 8.47 d. Other Aquatic 9.2 15.3 11.9 3.9 5.9 8.6 29.5 6.9 0.83 Animals e. Seaweed 85.4 86.0 86.9 119.3 97.8 101.8 118.4 110.4 4.38 Annex Table 1.11: Production of inland-water fisheries, 1987 to 1994 (000 tonnes) Commodity 1987 1988 1989 1990 1991 1992 1993 1994 Trend (%) 1.Inland Open Water 276.3 281.3 296.4 192.5 294.5 300.9 308.6 336.1 2.75 Fisheries 259.9 262.1 277.0 273.2 274.1 279.6 288.7 312.3 2.14 - Fish 13.9 16.0 17.2 15.6 16.7 16.4 14.7 18.3 1.73 - Crustaceans (shrimp) 1.4 1.5 0.8 2.0 1.5 1.9 2.4 3.2 12.30 - Molluscs 1.0 1.7 1.4 1.8 2.2 2.9 2.8 2.4 12.94 - Other Aquatic Animals 2.Brackishwater Pond 192.1 233.3 258.5 287.1 323.2 337.4 355.3 346.2 8.50 Culture 132.4 154.3 158.3 177.7 181.8 193.1 215.1 208.8 6.50 a. Fish 105.9 118.0 119.3 132.4 141.0 147.0 164.4 153.1 5.86 - Milk fish 12.4 15.7 16.3 19.9 22.8 25.9 21.9 26.4 10.11 - Mozambique tilapia 14.1 20.6 22.7 25.3 18.0 20.2 28.7 29.3 7.27 - Others 59.7 79.0 100.2 109.4 141.3 144.3 140.2 137.4 11.97 b. Crustaceans 25.2 44.5 63.7 67.4 96.8 98.4 87.3 83.2 15.95 - Giant tiger prawn 17.0 17.8 18.5 17.6 19.3 21.8 29.2 23.9 6.47 - Banana prawn 13.8 15.2 15.0 21.0 20.2 21.4 22.1 25.4 8.53 - Metapenaeus shrimp 3.0 0.3 1.1 1.4 3.7 0.1 0.2 2.7 -10.7 - Mysids 0.7 1.2 1.8 2.1 1.2 2.6 1.4 2.3 2 - Crab 11.66 3.Freshwater Culture (fish) 184.6 197.1 208.2 212.8 194.4 212.9 245.1 251.3 3.84 - Common carp 87.8 84.0 87.1 89.2 84.4 93.5 131.1 135.2 6.43 - Java barb 20.1 23.6 21.2 28.0 19.9 21.1 22.0 23.4 0.42 - Mozambique tilapia 12.8 21.4 10.6 21.8 18.3 19.1 21.5 20.4 5.78 - Nilem carp 16.4 10.6 20.5 14.4 9.7 10.4 11.5 12.1 -4.96 - Nile tilapia 9.8 12.2 12.3 12.1 13.2 15.0 18.5 17.6 8.15 - Others 37.7 45.2 56.4 47.2 48.9 53.9 40.6 42.5 0.24 Total 653.0 711.6 763.1 692.4 812.0 851.3 909.0 933.7 5.45
54 Annex Table 1.12: Per capita human consumption of major food commodities in 1987, 1990, 1993 and 1996 Commodities 1987 1990 1993 1996 Cereals, Roots, Tubers and Pulses Rice 116.58 118.14 116.38 111.49 Maize 10.02 8.41 5.86 2.94 Wheat flour 1.05 1.25 1.68 2.64 Cassava 22.67 25.42 20.75 10.86 Sweet potato 7.18 4.63 5.56 2.96 Soybean 3.42 3.54 3.98 4.39 Groundnut 0.57 0.78 0.68 0.94 Mungbean 0.47 0.57 0.57 0.73 Horticulture Cabbage 2.34 1.98 1.87 1.82 Tomato 1.15 1.25 1.47 1.40 Shallot 1.98 1.92 1.96 1.96 Garlic 0.24 0.30 0.38 0.50 Red chilli 1.00 1.20 1.10 1.03 Small chilli 1.08 1.14 1.06 1.01 Orange 0.73 0.88 0.94 1.30 Mango 0.99 0.42 0.52 2.13 Rambutan 2.96 4.78 3.48 2.44 Banana 12.95 13.83 12.58 9.05 Papaya 2.76 3.12 3.02 2.86 Estate Crops Coconut oil 2.538 2.995 3.453 3.952 Palm oil 2.538 2.704 2.954 3.162 Coconut 4.121 4.342 3.913 3.133 Cane sugar 7.618 7.878 8.138 8.804 Tea 0.520 0.494 0.567 0.692 Coffee 0.727 0.851 0.906 0.916 Cocoa 0.005 0.005 0.010 0.021 Pepper 0.057 0.094 0.140 0.166 Livestock and fisheries Meat 3.28 3.53 3.85 5.09 Egg 3.12 3.07 3.80 5.10 Milk 0.94 1.09 1.40 1.66 Fish 12.47 14.25 15.10 15.24 Source: SUSENAS 1987, 1990, 1993 and 1996 (CBS).
55 Annex Table 1.13: Gross Domestic Product by sector (billion rupiah) Sector 1987 1988 1989 1990 1991 1992 1993 1994 1995* 1996* GDP 124,816.9 142,104.8 167,184.7 195,597.2 227,502.3 260,786.3 329,775.8 382,219.7 452,381 532,630.8 Agriculture 29,116.0 34,277.9 39,136.9 42,148.7 44,558.6 50,031.7 58,963.4 66,071.5 77,639.3 88,040.8 Foodcrops 17,540.1 21,123.8 24,491.9 25,907.5 26,149.2 29,470.1 32,093.4 34,941.0 41,958.0 47,622.1 Estate crops 5,118.8 5,633.5 6,196.7 6,666.6 7,547.9 8,407.2 9,014.8 10,587.2 12,676.4 14,147.9 Livestock and 3,014.6 3,544.8 3,814.0 4,368.0 5,120.2 5,763.5 6,202.7 7,102.3 7,998.5 9,347.1 products Forestry 1,246.8 1,448.3 1,643.7 1,854.6 2,002.6 2,182.1 6,267.6 6,897.4 7,390.4 7,882.9 Fishery 2,195.7 2,527.5 3,026.6 3,352.0 3,738.7 4,208.8 5,384.9 6,543.6 7,616.0 9,040.8 Non 95,700.9 107,826.9 128,047.8 153,448.5 182,943.7 210,754.6 270,812.4 316,148.2 374,742 444,590.0 Agriculture Mining and 17,266.8 17,161.8 21,822.5 26,119.0 31,482.0 30,908.2 31,497.3 33,507.1 38,045.1 45,915.6 quarrying Manufacturing 21,150.4 26,252.4 30,323.3 38,910.2 47,554.0 56,560.2 73,556.3 89,240.7 109,395 135,580.9 Industry Electricity, gas 746.9 869.0 1,008.3 1,258.1 1,750.2 2,147.7 3,290.2 4,577.1 5,624.5 6,593.7 &clean water Construction 6,087.4 7,169.2 8,884.2 10,748.5 13,328.6 16,077.0 22,512.9 28,016.9 34,451.9 42,024.8 Trade, hotel 20,048.3 24,379.2 28,855.5 32,999.7 36,899.5 42,778.9 55,297.6 63,858.7 75,874.0 88,877.8 and restaurant Transportation 7,442.6 8,139.8 9,305.5 10,999.6 13,792.4 16,988.0 23,248.9 27,352.7 30,778.3 34,926.3 & communication Finance, 17,056.0 18,514.6 21,992.0 25,979.3 30,703.8 36,338.1 28,047.8 34,505.6 39,890.9 44,371.4 leasing & bussiness services Services 4,902.5 5,351.0 5,829.5 6,434.1 7,443.2 8,946.5 33,361.4 35,809.4 40,681.9 46,299.5 Source: Erwidodo, 1998 Note: * provisional figures Annex Table 1.14: Indonesia's export volume (million tonnes) Commodities 85–86 86–87 87–88 88–89 89–90 90–91 91–92 92–93 93–94 94–95 95–96 96–97* Non Oil/Gas 81,605 74,743 62,975 47,855 38,788 40,873 50,996 80,343 109,618 105,556 159,113 114,584 Agricultural 4,524 4,357 5,857 5,728 6,052 6,529 6,118 5,637 6,791 7,727 7,519 7,169 Products Non- 77,081 70,386 57,118 42,127 32,736 34,344 44,878 74,706 102,827 97,829 151,594 107,415 Agricultural Products Oil (million 1,114 1,177 1,763 2,634 3,953 4,095 10,404 4,080 4,175 4,287 4,257 4,248 barrels) Oil* 338 384 355 336 351 360 6,869 348 352 389 383 360 Gas 776 793 1,408 2,298 3,602 3,735 3,535 3,732 3,823 3,898 3,874 3,888 LNG (juta 776 793 894 945 967 1,100 1,157 1,240 1,277 1,368 1,264 1,354 MMBTU) LPG 0 0 514 1,353 2,635 2,635 2,378 2,492 2,546 2,530 2,610 2,534 Total 82,719 75,920 64,738 50,489 42,741 44,968 61,400 84,423 113,793 109,843 163,370 118,832 Source: Erwidodo Notes: * includes crude oil and oil products MMBTU = Mille-mille British Thermal Unit
56 Annex Table 1.15: Export value (million US$) Commodities 85–86 86–87 87–88 88–89 89–90 90–91 91–92 92–93 93–94 94–95 95–96 96–97* Non Oil/Gas 6,175 6,731 9,502 12,184 14,493 15,380 19,008 24,825 27,170 31,716 37,138 39,591 Agricultural 2,287 2,688 2,908 3,748 3,254 3,581 3,788 4,243 4,533 6,169 6,794 6,662 Products Non- 3,888 4,043 6,594 8,436 11,239 11,799 15,220 20,582 22,637 25,547 30,344 32,929 Agricultural Products Oil (mn barrels) 12,437 6,966 8,841 7,640 9,337 12,763 10,706 10,480 9,334 10,445 10,616 12,595 Oil* 8,816 4,798 6,159 5,007 6,288 8,053 6,869 6,363 5,512 6,312 6,529 7,436 Gas 3,621 2,168 2,682 2,633 3,049 4,710 3,837 4,117 3,822 4,133 4,087 5,159 LNG 3,621 2,168 2,682 2,508 2,801 4,304 3,510 3,764 3,507 3,746 3,603 4,612 (juta MMBTU) LPG 0 0 0 125 248 406 327 353 315 387 484 547 Total 18,612 13,697 18,343 19,824 23,830 28,143 29,714 35,305 36,504 42,161 47,754 52,186 Source: Erwidodo, 1998 Note: * includes crude oil and oil products Annex Table 1.16: Export Volume of Major Agricultural Commodities 1985 to 1996 (thousand of tonnes) Commodities 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Prawn, shrimp and lobster 189 132 194 243 316 411 512 410 527 567 569 542 Natural Rubber 1,192 1,062 1,187 1,220 1,222 1,221 1,473 1,529 1,253 1,296 1,453 1,362 Tapioca and other 1,661 1,777 2,954 2,592 2,446 2,449 1,774 1,536 2,253 2,497 2,257 2,010 foodstuffs Palm Oil 521 569 703 808 943 1,098 1,193 1,033 1,563 1,903 1,719 1,691 Cacao 0 0 0 0 77 105 144 158 184 215 217 214 Coffee 339 309 275 323 399 426 343 270 331 262 269 363 Tea 109 93 98 110 118 112 119 127 120 90 86 88 Tobacco 37 24 20 20 17 21 27 35 35 55 28 28 Copra Cake 433 348 384 355 466 632 465 486 492 803 857 840 Pepper 36 33 36 53 44 52 65 50 30 37 62 30 Rawhide 8 10 6 4 4 2 3 3 3 2 2 1 Total 4,525 4,357 5,857 5,728 6,052 6,529 6,118 5,637 6,791 7,727 7,519 7,169 Source: Erwidodo, 1998 Note:* = preliminary value
57 Annex Table 1.17: Export Value of Major Agricultural Commodities 1985 to 1996 (million US$) Commodities 85–86 86–87 87–88 88–89 89–90 90–91 91–92 92–93 93–94 94–95 95–96 96–97* Prawn, shrimp and 280 390 488 839 781 1,076 1,150 1,266 1,476 1,636 1,694 1,730 lobster Natural Rubber 714 749 1,037 1,229 956 887 932 1,054 974 1,511 2,011 1,788 Tapioca and other 125 174 246 357 347 445 502 579 619 698 757 884 foodstuffs Palm Oil 170 114 214 313 278 284 349 495 555 965 988 994 Cacao 0 0 0 0 100 120 202 187 233 241 277 Coffee 659 853 498 576 452 371 362 264 345 747 650 609 Tea 134 106 119 136 181 154 145 143 144 102 94 108 Tobacco 51 71 47 43 44 72 65 79 71 71 79 36 Copra Cake 35 34 41 42 51 56 51 63 65 71 75 107 Pepper 82 152 158 144 94 78 69 55 56 86 161 93 Rawhide 37 45 60 69 70 58 43 43 41 49 44 36 Total 2,287 2,688 2,908 3,748 3,254 3,581 3,788 4,243 4,533 6,169 6,794 6,662 Source: Erwidodo, 1998 Note: * = preliminary value Annex Table 1.18: Indonesia's Agriculture Import Volume by Commodities (tonnes) Commodities 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Milk and 42,029 40,199 42,284 32,983 35,924 54,508 54,542 54,144 63,701 91,602 75,945 cream Wheat 1,610,139 1,688,313 1,588,229 1,806,092 1,724,495 2,221,583 2,456,438 2,525,520 3,297,139 4,054,202 4,116,261 unmilled Rice 27,765 52,982 32,730 268,321 49,577 170,994 611,697 24,317 633,048 1,807,875 2,149,758 Maize 57,791 221,001 63,459 39,646 9,050 323,263 55,876 494,470 1,118,284 696,193 616,941 unmilled Vegetable 44,625 86,202 351,238 68,346 100,535 105,575 173,411 117,730 23,970 237,112 191,990 fresh, smply psv Sugar and 62,753 136,721 30,774 331,772 288,357 319,018 355,582 248,907 151,532 611,822 1,311,547 honey Feeding stuff 558,011 505,566 132,557 531,136 512,594 788,926 729,503 1,127,177 1,408,965 1,557,601 1,762,545 for animals Oilcake and 407,765 368,241 72,656 301,208 220,643 461,311 437,498 699,947 806,674 988,840 1,215,572 other residual Tobacco 9,824 11,542 27,775 13,601 26,546 38,543 25,108 30,226 40,322 47,953 45,060 unmanufact- ured Soybean 359,270 286,705 63,146 390,471 541,060 672,757 694,133 723,864 800,461 607,373 746,329 Rubber, 234 54 91 48,374 65,913 67,405 85,443 99,436 115,774 139,915 133,831 synthetic, reclaimed Cotton 171,452 211,724 265,835 265,875 334,328 353,560 434,429 416,663 441,630 459,577 92,783 Palm oil 8,786 165,991 62,521 412,393 26,661 37,874 303,744 151,939 123,638 49,785 07,553
58 Annex Table 1.19: Indonesia's import value by commodities (thousand US$), 1985 to 1996 Commodities 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Milk and cream 43,648 39,371 39,485 56,692 61,619 56,144 74,950 91,082 97,707 97,667 179,943 152,842 Wheat unmilled 258,565 272,411 244,030 225,385 286,882 28,883 366,361 403,853 442,005 579,681 803,409 1,050,364 Rice 8,807 5,944 12,311 8,646 75,919 14,131 53,065 172,611 7,196 157,322 514,476 766,316 Maize unmilled 7,182 6,282 24,855 8,399 5,681 1,701 45,951 8,324 68,037 153,510 154,115 132,887 Vegetable fresh, smply psv 15,753 17,922 22,073 54,294 31,282 42,231 46,258 50,426 56,575 97,649 120,198 116,614 Sugar and honey 4,049 19,455 30,774 136,585 116,893 129,503 117,199 122,215 81,398 56,053 272,137 505,686 Feeding stuff for animals 86,646 130,154 132,557 324,657 214,814 192,365 225,493 213,757 334,011 416,577 460,137 603,222 Oilcake and other residual 42,126 80,521 72,656 160,411 40,656 40,015 84,392 85,650 148,330 173,349 209,566 320,009 Tobacco unmanufactured 167,858 21,412 27,775 10,510 24,827 41,964 58,430 64,546 76,997 100,216 115,474 134,153 Soybean 79,664 83,454 63,146 465,839 28,271 146,476 183,974 186,259 197,120 243,734 180,590 3,851 Rubber, synthetic, 170 311 91 525 59,342 80,812 86,397 97,874 114,450 134,894 204,230 196,002 reclaimed Cotton 179,913 171,584 265,835 196,407 376,694 485,049 634,349 667,626 556,975 701,332 923,271 980,576 Palm oil 20,121 2,100 62,521 302,190 36,747 7,662 13,891 113,511 65,672 56 48,113 61,173
59 Annex Table 1.20: Volume of agricultural export commodities by country of destination 1985 to 1996 (tonnes) Country of 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Destination Rubber 1,000.9 959 1,092.1 1,131.9 1,151.8 1,077.3 1,220.0 1,267.8 1,214.3 1,244.8 1,323.8 1,434.3 US 469 449 498 548.1 520.4 517.4 568.9 584 623 571 621 628 Singapore 226 200 227 265.9 281.6 221.7 263.2 270.8 206.4 195.9 145.2 130.2 Japan 27 28 33 42.7 40.3 38.4 62.4 53.2 46.3 39.6 55.1 106.0 Netherlands 14 18 18 21.2 21.5 19.8 32.2 38.6 37.8 39.5 38.2 25.2 Germany 37 30 27 30.9 30.2 25.0 23.3 29.7 19.9 28.2 32.5 35.2 Others 229 234 289 223.1 257.8 305.0 316.6 291.9 280.5 370.2 432.1 509.5 Coffee 285.9 298.5 286.7 298.9 357.6 422.6 381.5 270.6 352.3 291.2 230.1 368.6 Japan 69.4 67.6 55.1 49.7 59.8 63.6 69.3 57.2 53.5 57.3 44.2 62.4 Germany 1.1 2.7 5.4 30.5 54.8 131.5 93.2 52.3 62.7 38.0 32.9 58.2 Aljiers 45.5 45.5 64.0 30.5 28.1 28.8 51.5 28.5 55.8 61.8 22.2 7.8 US 4.6 45.9 20.2 30.3 26.6 45.2 23.7 21.2 24.0 19.7 25.9 60.8 England 14.6 38.7 28.9 1.7 9.8 14.3 13.3 11.0 23.7 21.4 16.5 20.9 Others 150.7 98.1 113.1 156.2 178.5 139.2 130.5 100.4 132.6 93.0 88.4 158.5 Tea 90.3 79.0 90.4 92.6 125.3 111.0 110.9 121.6 124.6 85.1 79.4 101.7 Pakistan 11.4 9.6 12.5 13.9 18.9 13.0 22.3 29.7 26.4 19.6 15.3 22.8 US 13.3 15.6 9.9 14.7 14.0 10.0 13.1 15.2 9.3 10.9 7.6 10.8 England 7.9 12.4 7.7 4.6 9.0 6.7 6.8 10.8 12.0 9.2 7.1 10.6 Netherlands 7.1 6.6 5.0 5.3 4.1 6.3 6.0 5.5 7.2 5.5 6.7 7.5 Australia 8.1 7.9 6.7 7.1 6.3 4.9 5.2 5.4 5.0 4.5 3.3 4.9 Others 42.5 26.9 48.6 47.0 73.0 70.1 57.5 55.0 64.7 35.4 39.4 45.1 Tobacco 20,226.6 23,092.0 18,744.6 18,239.3 17,721.6 17,401.6 22,403.5 28,364.9 37,888.1 30,927.2 21,988.6 33,205.0 US 3,043.7 2,216.2 2,910.7 4,106.7 5,154.6 3,251.8 4,323.8 9,476.6 9,522.9 4,445.7 5,756.3 6,360.2 Germany 10,929.7 12,411.9 10,217.0 5,919.7 5,324.6 4,451.1 4,911.0 3,839.1 3,921.7 3,091.4 1,657.1 1,880.6 Netherlands 1,996.8 1,986.7 2,540.6 2,846.0 2,693.2 3,785.6 3,788.5 3,061.7 2,191.1 3,159.7 3,104.5 3,242.5 France 282.2 2,300.8 276.8 2,711.6 1,011.5 1,471.7 2,383.7 2,475.0 2,716.6 2,211.5 1,364.8 1,006.3 Belgium and 878.6 786.4 632.6 784.3 734.5 786.4 1,380.8 1,506.9 1,465.0 1,019.8 1,119.0 1,199.2 Luxembourg Others 3,095.6 3,390.0 2,166.9 1,871.0 2,803.2 3,655.0 5,615.7 8,005.6 18,070.8 17,044.1 8,986.9 19,516.2 Source: Erwidodo, 1998
60 Annex Table 1.20 (continued…) Country of 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Destination Shrimp 30,979.6 36,101.0 43,940.4 56,551.8 73,279.3 89,974.8 91,750.0 97,106.7 94,682.4 96,455.4 93,130.2 97,835.8 Japan 23,965.0 26,360.3 29,665.3 40,396.8 48,033.6 57,851.0 53,062.9 57,120.7 61,454.0 63,996.1 65,523.8 66,104.8 US 481.1 546.0 1,090.5 1,723.6 5,554.4 8,618.1 12,902.7 14,819.1 10,813.9 10,385.2 4,760.2 9,500.2 Singapore 3,958.9 3,939.3 4,557.9 4,858.7 9,200.3 10,273.8 11,163.3 11,446.1 9,458.5 8,922.9 7,765.7 5,348.8 Hong Kong 1,627.3 1,884.8 2,547.9 2,415.6 2,507.8 2,429.2 2,610.8 2,741.7 3,259.8 4,341.7 4,806.2 4,040.6 Netherlands 188.6 798.0 1,327.1 1,885.7 1,738.9 1,775.0 2,769.9 2,704.6 1,973.9 1,628.3 1,436.7 1,139.3 Others 758.7 2,572.6 4,751.7 5,271.4 6,244.3 9,027.7 9,240.4 8,274.5 7,722.3 7,181.2 8,837.6 11,702.1 White Pepper 12,120.3 16,265.4 19,599.6 21,893.3 24,832.7 34,660.4 30,640.9 30,110.9 14,107.2 18,396.6 20,035.2 17,051.9 Singapore 256.5 545.0 799.5 350.5 754.1 9,518.0 10,414.7 19,691.2 8,343.8 10,847.7 12,108.2 9,739.0 Germany 1,405.0 990.0 815.0 840.0 1,802.8 7,550.5 5,738.3 3,210.0 1,312.5 1,014.1 2,018.0 1,032.0 Netherlands 5,380.0 4,283.0 6,490.0 5,249.2 3,312.9 6,471.5 4,524.1 637.0 1,033.7 2,261.2 1,515.4 715.0 Belgium and 96.0 240.0 90.0 275.0 220.0 480.0 400.0 465.0 135.0 125.0 250.2 120.0 Luxembourg France 80.0 97.0 90.0 60.0 365.0 1,067.5 504.0 70.0 135.0 80.0 294.8 240.0 Others 4,902.8 10,110.4 11,315.1 15,118.6 18,377.9 9,572.9 9,059.8 6,037.7 3,147.2 4,068.6 3,848.6 5,205.9 Black Pepper 14,081.6 13,301.0 10,394.8 19,599.0 17,303.2 13,015.4 19,023.6 31,327.4 9,165.4 16,841.7 36,094.1 19,150.4 US 8,079.8 6,847.5 5,591.2 10,398.0 9,055.0 9,200.0 9,003.0 22,455.5 4,979.5 11,233.7 20,338.6 12,224.0 Netherlands 25.0 30.0 227.0 235.0 165.0 441.2 193.1 2,355.5 300.0 634.0 1,851.8 770.5 Singapore 1,549.5 1,476.9 1,281.9 1,016.7 1,307.0 1,251.6 2,815.5 2,241.6 1,124.2 1,217.0 3,002.2 1,656.6 Germany 90.0 80.0 115.0 837.0 365.3 266.5 367.0 1,433.0 402.5 183.2 2,048.0 227.0 England 60.0 0.0 30.0 97.6 159.6 24.0 90.0 283.6 229.6 146.7 399.1 471.8 Others 4,277.3 4,866.6 3,149.7 7,014.7 6,251.3 1,832.1 6,555.0 2,558.2 2,129.6 3,427.1 8,454.4 3,800.5 Palm Oil 518.8 566.9 551.1 731.1 781.8 815.4 1,167.7 1,030.3 1,372.1 1,631.2 1,265.0 1,672.0 Netherlands 201.6 210.8 184.8 302.5 431.7 326.2 385.0 387.0 396.2 457.2 383.9 490.2 England 64.6 69.6 48.2 71.5 76.7 116.2 129.0 98.9 107.3 72.9 26.4 18.4 Italy 36.4 55.4 54.9 59.6 64.5 55.4 72.5 91.9 109.5 111.2 101.7 94.7 Pakistan 50.3 22.4 0.0 0.0 0.0 0.0 6.5 0.0 67.0 105.0 40.5 28.1 Germany 47.7 73.0 53.9 41.8 66.8 56.8 45.2 59.5 73.9 115.0 105.7 152.1 Others 118.2 135.7 209.3 255.7 142.1 260.8 529.5 393.0 618.2 769.9 606.8 888.5 Source: Erwidodo, 1998
61 Annex Table 1.21: Export Value of Agricultural Products by Destination Country 1985 to 1996 (million US$) Destination Country 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Rubber 717 712 958 1,243.1 1,007.6 846.9 1,056.6 1,036.7 976.8 1,271.8 1,962.8 1,918.0 US 338 336 441 587.0 462.6 410.8 435.3 480 507 584 937 847 Singapore 152 140 187 278.1 230.3 167.4 201.9 218.1 161.0 197.5 206.3 169.7 Japan 20 22 30 49.3 37.4 31.8 48.7 43.6 38.1 41.6 78.6 140.7 Netherlands 11 14 17 24.4 19.6 15.3 24.9 31.6 30.2 41.7 56.4 33.9 Germany 28 23 25 37.6 27.9 20.6 18.0 23.8 16.0 28.9 48.7 47.8 Others 169 177 258 266.7 229.8 246.6 369.1 239.6 224.5 378.5 635.7 678.5 Coffee 561.9 821.7 538.7 551.9 491.1 379.0 375.9 242.0 351.9 753.7 605.7 605.9 Japan 113.4 138.1 132.0 101.5 105.2 69.8 86.1 62.1 60.6 154.2 127.9 114.1 Germany 29.3 106.2 50.9 54.7 64.2 108.2 78.9 42.2 57.9 88.0 82.0 90.4 Algiers 49.2 84.9 56.9 53.3 37.0 25.6 58.8 26.7 51.8 162.9 63.3 12.2 US 158.8 176.1 97.0 54.8 36.0 41.3 22.5 19.5 28.0 58.7 68.0 96.6 England 0.5 2.7 4.0 3.1 13.1 12.7 11.1 7.8 22.3 50.9 42.3 33.2 Others 210.7 313.7 197.9 19.3 296.4 100.0 118.5 83.7 131.3 239.0 222.2 259.4 Tea 149.1 99.1 118.7 125.7 163.1 181.0 143.4 141.0 156.0 96.3 87.8 112.5 Pakistan 19.2 11.6 13.9 16.2 23.1 18.5 28.1 37.0 34.7 23.4 16.5 23.8 US 19.3 18.3 11.3 16.6 15.6 12.0 12.8 14.3 9.2 10.2 7.1 11.0 England 14.0 16.3 9.8 5.4 10.0 9.0 8.3 11.9 13.1 9.3 6.7 10.4 Netherlands 12.8 8.7 7.3 7.6 6.9 10.6 7.9 7.1 10.0 6.5 7.3 9.0 Australia 13.0 10.1 9.3 10.4 10.6 8.4 7.4 6.9 7.5 5.6 3.7 5.8 Others 70.8 34.1 67.1 69.5 59.1 122.5 78.9 63.8 81.5 41.3 46.5 52.5 Tobacco 43,084.8 62,529.7 57,285.1 42,746.3 47,183.0 58,613.9 57,861.3 80,949.5 66,237.6 53,261.7 61,453.7 84,371.4 US 4,289.6 4,865.4 4,748.2 5,589.7 8,464.6 5,670.6 7,920.2 13,648.7 12,322.3 7,249.2 11,492.0 11,942.0 Germany 24,410.5 36,753.2 38,842.4 24,030.1 24,748.6 24,523.1 21,947.5 27,958.0 16,099.2 17,205.7 14,845.4 23,393.3 Netherland 3,089.1 3,091.0 3,829.7 4,787.4 4,957.9 8,948.4 7,825.2 7,767.6 5,037.3 8,471.7 8,876.3 11,025.2 France 297.8 2,702.3 267.9 2,655.6 1,142.3 3,313.1 4,357.1 2,373.8 3,261.0 3,620.3 3,201.5 2,076.4 Belgium and 816.9 1,042.0 662.4 1,502.7 1,484.2 1,924.6 3,167.7 4,379.7 4,439.3 3,115.2 4,385.3 6,961.7 Luxembourg Others 10,180.9 14,075.8 8,934.5 4,180.8 6,385.4 14,234.1 12,643.6 24,821.7 25,078.5 13,599.6 18,653.2 28,972.8 Source: Erwidodo, 1998
62 Annex Table 1.21 (continued…) Country of 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Destination Shrimp 202,708. 284,875 352,086. 499,841 533,953 664,800 749,985 745,851 858,988 996,720 1,031.7 1,008.5 Japan 175,168 237,713 275,409 393,816 389,140 446,420 481,221. 488,884 630,009 763,376 839,193 773,213 US 3,175.5 4,170.0 8,373.3 16,437.2 45,318.1 80,561.4 114,141 119,536 95,821 95,527.1 51,289.2 107,045 Singapore 11,384.1 13,810.9 18,185.0 24,304.4 36,934.2 53,052.2 66,114.6 58,038.0 51,386.7 47,642.9 27,280.2 15,957.0 Hong Kong 7,700.6 9,574.2 14,675.0 14,172.5 23,606.8 12,265.8 13,504.1 13,957.5 15,374.0 21,647.6 30,680.6 21,039.7 Netherlands 1,287.3 6,041.3 8,212.9 11,718.2 11,775.2 8,623.2 14,456.8 12,645.4 11,993.0 12,404.4 11,315.4 9,426.9 Others 3,992.0 13,566.3 27,231.5 39,392.1 27,178.7 63,877.6 60,547.4 52,790.0 54,404.8 56,121.7 71,910.2 81,790.8 White Pepper 41,395.6 83,969.8 102,863 88,199.5 68,789.7 57,313.1 38,859.4 34,988.9 29,654.2 49,940.0 69,836.3 55,665.0 Singapore 998.4 2,756.8 4,000.4 1,209.4 1,611.9 14,681.7 12,960.1 22,881.1 17,043.6 29,038.5 42,267.3 32,435.0 Germany 5,032.9 4,910.4 4,356.4 3,001.7 4,520.3 12,382.4 7,182.0 3,523.7 2,476.0 2,805.1 6,904.1 3,325.0 Netherlands 17,931.9 21,651.8 33,914.3 20,151.9 9,158.2 11,410.4 5,800.1 761.8 2,035.9 6,157.2 5,358.8 2,234.0 Belgium and 358.4 1,222.2 442.3 1,330.2 665.2 851.9 496.2 523.3 278.7 331.4 869.1 408.0 Luxembourg France 276.4 510.1 494.7 224.2 811.5 1,986.1 825.1 86.7 333.4 236.5 1,087.9 831.0 Others 16,797.6 52,918.5 59,654.9 62,282.1 52,022.6 16,000.6 11,595.9 7,212.3 7,486.6 11,371.3 13,349.1 16,432.0 Black Pepper 36,975.8 52,964.4 45,323.4 56,299.3 40,042.1 21,998.4 26,898.1 26,396.2 9,960.2 26,903.6 80,724.8 40,596.4 US 21,278.6 29,620.3 26,276.5 34,724.3 23,420.8 16,007.4 11,723.1 19,463.9 5,319.2 17,787.6 46,165.0 26,693.4 Netherlands 59.5 123.9 969.3 520.4 310.5 748.0 232.0 1,838.3 365.9 959.4 4,157.1 1,647.4 Singapore 2,704.5 4,063.5 4,085.0 1,766.6 1,994.7 1,737.1 3,445.4 1,665.8 1,078.5 1,604.6 6,104.1 2,421.1 Germany 211.7 307.4 380.7 1,750.7 735.6 358.2 367.1 971.1 469.4 311.9 4,716.0 548.0 England 103.8 0.0 96.1 215.9 192.8 38.5 127.7 246.5 245.7 245.7 919.8 1,324.8 Others 12,617.7 18,849.3 13,515.8 17,321.4 13,387.7 3,109.2 11,002.8 2,210.6 2,481.5 5,994.4 18,665.8 7,961.7 Palm Oil 356.5 472.4 717.8 275.5 244.6 203.5 335.5 356.5 472.4 717.8 747.4 825.4 Netherlands 201.6 210.8 184.8 113.8 133.8 79.3 109.3 134.4 130.8 202.9 218.3 238.8 England 64.6 69.6 48.2 28.0 23.4 28.2 36.1 33.1 36.9 31.8 16.4 8.9 Italy 36.4 55.4 54.9 22.7 19.8 13.7 20.6 31.8 36.4 47.7 60.4 45.1 Pakistan 50.3 22.4 0.0 0.0 0.0 0.0 2.0 0.0 26.4 49.4 26.2 12.8 Germany 47.7 73.0 53.9 15.5 19.6 13.7 12.4 20.0 22.9 53.2 60.8 75.0 Others 118.2 135.7 209.3 95.5 48.0 68.6 155.1 137.2 219.0 332.8 365.3 444.8
63 Annex Table 1.22: Import Commodities by Country of Origin, 1993 and 1994 1993 1994 SITC No. Commodity/Country of origin Weight (tonnes) Value (US$ 000) Weight (tonnes) Value (US$ 000) 0 Food and Live Animals World 1,341,977 1,897,455 Canada 116,824 167,626 US 95,234 145,502 China 124,422 210,935 India 122,603 111,298 Thailand 59,888 141,536 Australia 307,010 340,861 Others 515,996 779,697 0.01 Live Animals World 14,497 28,893 21,901 57,825 Australia 14,212 20,703 21,358 44,644 Others 285 8,190 543 13,181 Meat, Meat Preparations World 18,775 25,233 Australia 5,525 9,657 US 4,883 7,908 New Zealand 3,093 4,808 Others 5,274 2,860 0.22 Milk and Cream World 54,143 97,706 63,701 97,667 Australia 15,920 23,180 16,901 23,316 New Zealand 8,104 18,850 13,529 22,525 Germany 6,021 12,670 3,448 6,229 Polland 1,244 1,937 11,272 17,002 Others 22,854 41,069 18,551 28,595 0.22.2 Milk concentrate, sweetened World 38,975 78,116 46,467 78,327 Australia 7,967 15,510 9,354 17,649 New Zealand 8,571 15,980 11,247 18,947 Germany 6,013 12,657 3,254 5,976 Polland 1,244 1,937 11,272 17,002 Others 15,180 32,032 11,340 18,753 0.22.3 Milk products World 8,583 12,650 7,115 11,353 Australia 1,985 3,733 1,303 2,113 New Zealand 1,232 2,276 1,881 2,773 Others 5,366 6,641 3,931 6,467 0.23 Butter, other fat of milk World 9,985 19,019 8,725 16,328 Australia 4,789 8,541 2,941 5,213 New Zealand 2,003 3,885 2,815 5,373 Netherlands 1,447 3,281 1,198 2,503 Others 1,746 3,312 1,771 3,239 0.24 Cheese and curd World 4,340 7,844 3,928 8,883 Australia 3,081 4,975 3,360 7,818 New Zealand 464 1,143 Germany 361 778 Netherlands 223 515 187 610 Others 211 433 381 455
64 Annex Table 1.22 (continued) 1993 1993 1994 1994 SITC No. Commodity/Country of origin Weight (tonnes) Value (US$ 000) Weight (tonnes) Value (US$ 000)
0.03 Fish, crustaceans, molluscs World 15,207 15,545 Japan 7,713 6,851 Netherlands 1,314 468 Ireland 1,040 Others 6,180 7,186 0.34 Fish, fresh, chilled, frozen World 9,754 10,244 10,591 10,652 Japan 5,949 6,771 4,839 6,014 Netherlands 1,738 1,300 1,283 427 Ireland 1,171 1,040 Others 2,067 2,173 3,298 3,171 0.04 Cereals, cereal preparations World 542,555 921,812 Canada 102,396 157,801 Argentina 67,914 82,876 China 87,017 117,156 Australia 205,434 206,320 Thailand 7,420 103,577 Others 72,374 254,082 0.41 Wheat, Meslin, Unmilled World 2,526,000 442,005 3,297,000 579,681 Canada 567,912 99,747 842,759 157,724 Saudi Arabia 366,235 65,709 773,633 132,377 Australia 1,148,000 200,282 1,157,000 201,367 Argentina 394,241 67,914 502,979 82,876 Others 49,612 8,353 20,629 5,337 0.42 Rice World 24,317 7,196 633,047 157,321 US 8,447 3,586 3,423 1,654 Thailand 15,775 3,539 404,910 98,762 Myanmar 47,522 12,171 Vietnam 116,099 29,100 Others 95 71 61,093 15,634 0.44 Maize Unmilled World 494,688 68,037 1,118,000 153,509 China 481,072 64,728 879,883 115,414 Thailand 5,377 927 4,015 588 US 1,255 590 40,528 10,459 Hong Kong 6,400 981 Others 584 811 193,574 27,048 0.46 Meal, flour of wheat World 41,574 7,551 25,005 5,716 Japan 24,465 4,665 22,335 4,970 Canada 15,400 2,620 Others 1,709 266 2,670 746
65 Annex Table 1.22 (continued) 1993 1993 1994 1994 SITC No. Commodity/Country of origin Weight (tonnes) Value (US$ 000) Weight (tonnes) Value (US$ 000) 0.48 Cereal preparations World 25,526 13,085 55,618 19,266 China 3,839 2,038 2,189 1,162 Australia 11,615 4,832 10,311 4,684 France 4,071 1,340 5,316 1,891 Netherlands 675 532 19,408 3,273 Others 5,326 4,343 18,394 8,256 0.05 Vegetables and fruit World 131,801 197,358 US 22,915 36,083 China 30,488 63,612 Myanmar 10,344 18,866 Thailand 10,031 9,664 Australia 18,813 22,785 Others 39,210 46,348 0.54 Vegetables World 117,729 68,574 233,989 97,649 China 31,779 22,868 116,454 52,548 Myanmar 30,027 10,343 52,727 18,271 Thailand 19,228 7,811 8,943 3,729 Australia 3,928 1,858 13,488 5,690 New Zealand 11,672 3,318 15,320 3,550 Others 21,095 22,376 27,057 13,861 0.57 Fruit, Nuts excl oil nut World 74,428 57,261 88,510 69,631 Canada 4,327 3,394 4,131 3,343 US 16,706 17,769 23,988 25,041 Iran 6,120 2,173 4,321 1,926 China 5,358 4,278 9,888 6,916 Rep of Korea 1,604 2,032 1,003 945 Thailand 2,456 2,240 3,866 3,859 Australia 24,436 16,031 18,951 15,812 New Zealand 2,912 1,776 4,051 2,319 Others 10,509 7,568 18,311 9,470 0.57.1 Oranges, etc World 22,587 13,487 27,322 17,367 Australia 13,733 7,545 11,557 7,885 China 2,340 1,801 6,752 4,398 US 1,883 1,470 1,719 1,531 Others 4,631 2,671 7,294 3,553 0.57.4 Apples, fresh World 25,454 21,706 31,428 26,945 US 12,362 11,887 19,389 18,262 Australia 2,895 2,130 1,126 1,117 New Zealand 2,687 1,548 2,929 1,582 Canada 4,321 3,390 4,107 3,318 Others 3,189 2,751 3,877 2,666 0.57.5 Grapes, fresh or dried World 7,286 8,400 5,806 8,141 US 2,040 3,322 2,175 3,603 Australia 4,043 3,768 2,481 3,414 Others 1,203 1,310 1,150 1,124
66 Annex Table 1.22 (continued) 1993 1993 1994 1994 SITC No. Commodity/Country of origin Weight (tonnes) Value (US$ 000) Weight (tonnes) Value (US$ 000) 0.06 Sugar, molasses, honey World 248,906 81,397 151,532 58,053 Thailand 128,052 38,545 62,193 21,936 China 55,858 18,224 259 179 France 6,330 2,880 2,636 1,498 Germany 15,023 5,839 22,550 8,061 Others 43,643 15,909 63,894 26,379 0.61.1 Sugars, beet, cane sugar World 148,230 44,438 15,206 5,868 China 33,838 10,391 Thailand 98,480 29,733 India 12,600 3,621 Rep of Korea 12,942 4,588 Others 3,312 693 2,264 1,280 0.61.2 Other beet, cane sugar World 80,172 26,833 103,833 37,493 China 21,836 7,884 Thailand 29,448 8,764 61,983 21,830 Germany 14,533 5,205 16,882 6,354 Malaysia 3,470 1,260 16,959 6,266 Others 10,885 3,720 8,009 3,043 0.07 Coffee, tea, cocoa, spices World 15,320 18,123 China 2,457 3,001 India 1,323 264 United Kingdom 1,035 332 Australia 2,975 3,156 Myanmar 314 1,035 Singapore 932 1,597 Vietnam 151 1,155 Others 6,133 7,583 0.73 Chocolate, other cocoa prep World 1,122 4,605 1,809 6,001 Australia 425 1,863 653 2,552 United Kingdom 60 1,034 38 278 Others 637 1,708 1,118 3,171 0.75 Spices World 14,756 7,825 12,254 8,247 Australia 2,406 1,024 1,026 518 India 2,455 1,322 538 264 China 2,375 1,945 3,840 2,697 Myanmar 829 314 1,179 946 Others 6,691 3,220 5,671 3,822 0.81 Animal feedstuff World 1,127,000 334,010 1,409,000 416,577 India 551,779 116,832 533,211 107,269 US 74,481 32,188 157,668 62,606 Chile 48,592 28,183 57,895 29,736 New Zealand 58,493 20,058 71,364 25,022 Others 393,655 136,749 588,862 191,944
67 Annex Table 1.22 (continued) 1993 1994 1993 1994 SITC No. Commodity/Country of origin Weight (tonnes) Value (US$ 000) Weight (tonnes) Value (US$ 000) 1.00 Beverages and tobacco World 119,184 141,716 US 34,961 38,725 Zimbabwe 17,940 16,047 China 25,899 25,048 Others 40,384 61,896 11 Beverages World 19,640 16,416 Australia 3,497 3,636 France 4,101 2,560 Singapore 3,346 1,525 Thailand 2,490 5,419 Others 6,206 3,276 12 Tobacco, tobacco manufact World 99,543 125,299 China 24,959 24,886 US 34,113 38,293 Zimbabwe 17,940 16,047 Others 22,531 46,073 22 Oilseed, oleaginus fruit World 271,126 339,559 US 140,986 73,352 China 51,847 185,082 Vietnam 32,608 43,776 Others 45,685 37,349 222 Oilseed World 878,644 289,873 958,593 336,279 China 148,880 51,820 534,623 185,082 US 523,386 140,495 258,411 73,070 Vietnam 59,989 32,508 77,538 43,775 Brazil 87,900 23,842 58,510 16,024 Others 58,489 41,208 29,511 18,328 222.1 Groundnuts World 108,098 58,900 150,901 89,818 China 29,371 18,571 48,398 29,946 India 7,747 4,218 19,062 12,498 Vietnam 59,976 32,501 77,172 43,564 Others 11,004 3,610 6,269 3,810 222.2 Soybeans World 723,864 197,120 800,460 243,733 US 523,366 140,495 258,203 72,937 Argentina 34,200 8,936 Brazil 87,900 23,842 56,510 16,024 China 77,246 23,438 483,177 153,747 Others 1,152 409 2,570 1,025 23 Crude rubber World 115,132 137,650 Rep of Korea 28,801 30,776 Japan 45,265 54,545 Others 41,066 52,329 232 Synthetic rubber, etc World 99,436 114,449 115,774 134,893 Rep of Korea 31,882 28,797 32,889 30,740 Japan 32,534 45,264 40,036 54,543 Others 35,020 40,388 42,849 49,610 Source: Commodity Trade Statistics 1994, 1995
68 Chapter 2 Indonesia’s pre-crisis agriculture profile: recent policy changes and investment opportunities.
2.1 Introduction
The agricultural sector plays a number of important roles in the Indonesian economy. First, it is a source of food for the ever-increasing population. It is widely understood that sufficient availability of the main staple food (rice) would assure social, economic and political stability; these being necessary preconditions for successful national development. Second, it is a source of income and employment for more than 100 million rural families who operate their own farms or work as hired labourers. Third, agriculture generates foreign exchange and supports imports of productive capital assets for enhancing economic development. In the agricultural sector itself, for instance, farm machinery and tools and agro-industrial plants are still imported from abroad to a considerable extent. Fourth, it is a source of cheap labour to support the development of the building and construction sector. During the off-season, farm labourers temporarily migrate to urban areas to seek work before returning to rural areas during the peak agricultural season. The income earned is invested in farm activities and supports family life. Last, the sector fosters the development of non-agricultural sectors through forward and backward linkages.
Since the outset of the New Order era in 1969, the implementation of the Five-Year Development Plans (Rencana Pembangunan Lima Tahun or Repelita), has successfully increased the production of foods and other agricultural commodities, bringing increased foreign exchange and labor absorption. During the post-rice self-sufficiency period (after 1984), however, this basic sector received scant attention from the Government. Development policies and programs aimed at enhancing the industrial sector focusing on high-tech and large-scale manufacturing projects, which necessitated high capital (mostly imported) inputs and a highly educated labour force. Unfortunately, unsound management, government controls over the implementation of these megaprojects, and incorrect monetary policies, aided the collapse of the Indonesian economy after the monetary crisis of mid-July.
The monetary crisis has not been the only source of turbulence. Forest fires and a lengthy drought occurred at almost the same time and exacerbated the problem. The social unrest that followed the crisis had its roots in the excesses of past policies and brought the country into political chaos, which reached a peak in the middle of May 1998 with the fall of President Soeharto and his cabinet. Political uncertainty continues and is expected not to settle down until the end of next year when the new government is established.
This chapter does not predict the political or economic future for Indonesia. It backgrounds Indonesia’s agriculture profile and the policy changes that have resulted from the crisis. The chapter first discusses the events around the crisis before describing agricultural policies before the crisis and policies post-crisis, which are required by the GOI-IMF Letter of Intent and the World Bank’s Agricultural Sector Adjustment Loan. A summary of the pre-crisis production, consumption and trade of major commodities follows, and the chapter ends with a discussion on investment opportunities.
2.2 A brief background to the crisis
Indonesia’s monetary crisis started in the middle of July 1997, in a contagion effect following the floating of the Thai baht, but later became both an economic and political crisis. The rupiah depreciated from around Rp2,400 per US$ in early July to Rp15,000 per US$ in the middle of June 1998, ranking Indonesia as a ‘poor’ country within less than a year.
69 The World Bank (KOMPAS, 22 July 1998) indicated four causes of the crisis (a) the huge short-term external debt of the private sector, which was not being hedged, (b) uncontrolled credit expansion, (c) the government’s hesitation to undertake policy reforms, and (d) the increased political uncertainty a few months before the general election and when President Soeharto was reported to be seriously ill.
The fall of President Soeharto and his cabinet on 21 May 1998 did not spell the end of Indonesia’s troubles, but at least it started the reform momentum. Reform will be difficult and might take a long time because of the strong political and economic influence of those who have benefited from past policies.
During much of 1997, forest fires blazed out of control in Kalimantan, Sumatra and Irian Jaya. The smoke and haze from the one million hectares of fires across Kalimantan and Sumatra damaged the ecosystem and crops, disrupted transport and tourism, increased the incidence of respiratory problems and strained Indonesia’s relations with its ASEAN neighbours, especially Singapore and Malaysia. Estimates of the damage to Indonesia’s logging and timber industries (excluding environmental and health costs) are more than US$900 million (Tay 1998).
The forest fires coincided with the worst drought in 50 years, which lasted from early 1997 until the first half of 1998. The extended drought was attributed to the El Niño effect and caused falls in production in cocoa beans, coffee, palm oil, tea and the second rice harvest of the year. Coffee production dropped by 30 per cent in 1997, more than half of the nation’s 2.7 million hectares of palm oil was damaged, and the paddy harvest was down by 2 million tonnes (Solahudin 1998). As a result, in 1997 coffee exports fell by 20 per cent and tea exports by 36 per cent ( Solahudin 1998). More importantly for the country’s food security objectives, the 3.4 per cent fall in paddy production that year was the largest drop of the past 15 years. The drought’s impact has been worse in the islands of the country’s east, which are drier and have a larger proportion of lower income households than on Java.
2.3 Implication of the crisis for the agricultural sector and rural economy
The International Labor Organization (ILO 1998) predicted that in the current recession prospects for growth in most sectors remain unfavorable for at least two years. The agricultural sector will experience little growth in 1998 due to the drought in Eastern Indonesia and the forest fires in Sumatra and Kalimantan. The manufacturing sector will experience a significant decline in activity due to lower domestic demand and limited employment prospects. The construction sector will remain depressed, and so will the transport, trade and service sectors, which depend to a large extent on the growth of the rest of the economy.
In general, agriculture, being largely natural resource-based, has survived relatively well, with the impact felt most in sectors that rely to a high degree on imported inputs. The World Bank sees the agricultural sector as able to aid economic recovery in five ways: as a source of growth to compensate industrial sectors that suffered negative growth; as able to generate employment to absorb the unemployment caused by the economic slowdown; as a food supplier; as a foreign exchange generator; and as a poverty alleviator.
There have been two main effects from the crisis – the rupiah depreciation and the liberalisation of trade that has been ‘forced’ by the Government of Indonesia–IMF Letter of Intent. The impact on food crops from these developments generally depends on the following: the orientation of the commodity, i.e. import substitution or export promotion; the level of imported inputs used in production; the value of investment and working capital needs in relation to the interest rate; and the elasticity of production on inputs. Export commodities such as estate crops and fisheries will gain but commodities with a high ratio of imported inputs will suffer. Increased interest rates may lead to falls
70 in domestic supply. Commodities using a high proportion of imported inputs, but which are orientated to the domestic market, will suffer seriously. In the poultry industry, for example, the price of feed has increased much more than the price of output, leading to bankruptcies, especially among small-scale farms.
The crisis will also increase farm production costs and therefore the price of basic food. The price of output will not proportionally increase, leading to a decrease in farmers’ purchasing power and demand. As quoted by the KOMPAS newspaper, 40 per cent of Indonesian people (i.e. 80 million people) are below the poverty line and 50 per cent of them are in the condition of food insecurity.
Another impact of the crisis has been substantial labor displacement. Many displaced workers, especially casual and unskilled labor, will be forced to work in the informal sector because they can not afford to remain unemployed for long. They will join those already in self-employment or working in family enterprises, where entry barriers are low. Labour movements will lead to less work and lower earnings for all of those in the informal sector.
The International Labour Office (1998) quoted predictions of crisis-induced unemployment from three sources: the Ministry of Manpower (MoM), BAPPENAS and a Task Force. To estimate unemployment, the MoM assumed 0 per cent economic growth in 1998 and used reported dismissals, BAPPENAS assumed a 10 per cent contraction in growth in 1998 and used sectoral elasticities, and the Task Force assumed a 30 per cent contraction in 1998 and used wage employment elasticities. The estimates of crisis-induced unemployment in 1998 varied from 9 million to 14 million (Table 2.1). The estimates differed because of two main factors; namely, their different estimates of economic contraction and the backlog of jobseekers. In addition, the Task Force assumed half of the displaced workers would be re-employed in the informal sector, albeit in low productivity and low wage work.
Table 2.1: Estimates of crisis-induced unemployment in 1998 Persons (million) MoM BAPPENAS Task Force Backlog 1997 5.80 5.80 2.48 New entrances 1998 2.70 2.80 1.40 Sub-total job seekers 8.50 8.60 3.88 Displaced workers 5.20 3.84 5.41 Total unemployment 13.70 12.44 9.29 Source: ILO 1998
As a result of the large scale dismissal of waged employees in most sectors of the economy, many displaced workers are likely to return to their home towns and villages and some are likely to be absorbed in the agricultural sector, reversing the past trend of the movement of workers out of agriculture. Even if just 10 per cent of the 5.4 million displaced workers returned to agriculture, the share of this sector in total employment could rise from 41 per cent in 1997 to 43 per cent in 1998 (see the Task Force’s estimates of structural changes in employment in Table 2.2).
Some displaced workers will also enter the transport and service sectors. The absorptive capacity of the service sector is limited by the fact that almost 80 per cent of employment in this sector is waged employment. Therefore, only the trade sector, which consists predominantly of self-employed and family workers (85 per cent), is able to be the sector of last resort. It is expected to absorb most of the displaced workers, who can not afford to remain unemployed for long and who cannot make a living in any other sector. Its numbers could swell by over 1.5 million workers, increasing its share from 20 per cent to 22 per cent of total employment.
71 The effects of the crisis are likely to be particularly severe on Java, where urban workers have broken ties with agriculture and new technologies have closed off possibilities of jobsharing. Conversely, in Sumatra and the other Outer islands, closer ties with agriculture and the prevalence of export-oriented crops are likely to lessen the hardship for those displaced from factory and construction work. Returning to their home villages is not a viable option for many, especially in Java, but this may be less critical in the more land- abundant Outer Islands.
Table 2.2: Estimates of structural changes in employment, 1986 to 1998 Total employment (million) 1986 1990 1997 1998 By sector: Agriculture 37.6 42.4 35.8 36.4 Industry 10.8 10.4 16.5 14.2 Trade 9.8 11.1 17.2 18.3 Services 10.1 12.0 17.4 15.4 Total 68.3 75.9 87.0 84.3 By location: Urban 13.6 18.3 29.6 24.2 Rural 54.7 57.6 57.5 60.1 Total 68.3 75.9 87.0 84.3 Source: ILO, 1998
2.4 The crisis and Indonesia’s agricultural policies
Government policies, including agricultural policies, have changed substantially. Some commentators have attributed recent changes to the GOI-IMF Letter of Intent, however policies were gradually changing before the crisis occurred as a response to Indonesia’s commitments under GATT/WTO, with the formation of APEC and AFTA, and with the Government’s concern about poverty alleviation and the welfare of farmers. The shift has been from production-oriented policies towards market-oriented policies.
2.4.1 Pre-crisis policies
Floor price
The pursuance of self sufficiency in rice has been a policy aim since the outset of the First Five-Year Development Plan (Repelita I), while the other commodities were prioritised later as indicated in Table 2.3 (for convenience, only data from 1979 is presented). While the rice floor price policy has remained because of the strategic role of this commodity in the national economy, scant attention has been paid to sugar cane, maize, soybean, mungbean and groundnut regulation because of the substantial and increasing demand for these commodities and their less strategic (political) role (they are mostly used as animal feed). In the case of maize, the floor price policy was terminated in 1991. In the cases of groundnut, mungbean and soybean, the floor price policy was terminated in 1981, 1989 and 1991, respectively. In these cases the prevailing farm gate prices were always higher than the floor prices due to higher international (import) prices, making these floor prices ineffective. The floor price policy for sugar cane is a special case. The policy is aimed at encouraging farmers to grow this crop on scarce land, especially irrigated land on Java. The principal alternative crop, and the first national priority, had been rice, and farmers have been reluctant to produce sugar cane since it yields less profit. On non-irrigated lands, on the other hand, sugar is more profitable than alternative crops, such as maize, soybean and cassava. The competition for land between sugar cane and other crops, particularly rice on irrigated lands on Java, is normally resolved by the Government through forcing the allocation of land for sugar cane at the expense of rice.
72 Table 2.3: Floor price of strategic commodities, 1979 to 1998 (Rp/kg). Year Rice Maize Soybean Mungbean Groundnut 1979 95 67 210 260 300 1980 105 95 240 290 390 1981 120 105 270 310 425 1982 135 105 280 310 - 1983 145 105 280 310 - 1984 165 110 300 325 - 1985 175 110 300 325 - 1986 175 110 300 325 - 1987 190 125 325 350 - 1988 210 140 370 400 - 1989 250 155 400 - - 1990 270 - 500 - - 1991 295 - - - - 1992 330 - - - - 1993 340 - - - - 1994 360 - - - - 1995 400 - - - - 1996 450 - - - - 1997 525 - - - - Source: CPI (1997).
Table 2.4 presents data on the floor price for sugar cane and its ratio to the rice floor price during the crop seasons of 1985–96 to 1995–96. It is shown that the nominal sugar cane floor price continuously increased from 1985–86 to 1991–92 and then remained unchanged until in 1994–95, when it increased. In 1995–96 it remained unchanged. The policy resulted in a fall in the floor price ratio of sugar cane to rice, especially since 1993–94.
Table 2.4: Floor price of sugar cane and its ratio floor price to husked rice, 1985–86 to 1995–96 (Rp/kg). Fiscal year Floor price Applicable from Ratio 1985–86 425.0 1 April 1985 2.43 1986–87 467.5 1 June 1987 2.67 1987–88 514.5 1 June 1988 2.27 1988–89 600.0 1 August 1989 2.86 1989–90 650.0 1 May 1990 2.60 1990–91 708.0 1 May 1991 2.62 1991–92 792.0 1 May 1992 2.68 1992–93 792.0 1 May 1993 2.40 1993–94 792.0 1 May 1994 2.33 1994–95 910.8 1 May 1995 2.53 1995–96 910.8 31 March 1995 2.28
Fertiliser price
To encourage farmers to use fertilisers to increase agricultural production, the Government has fixed the maximum retail price (MRP) of fertiliser since the outset of the First Five-Year Development Plan. The MRP of all the four types of fertiliser subject to price intervention (Urea, ZA, TSP (replaced by SP-36) and KCl) was equal in 1988 at Rp135 and gradually increased over time. The fertiliser and rice policies, which resulted in lower fertiliser–rice price ratios, brought Indonesia to achieve rice self-sufficiency in 1984.
In 1989 the MRPs started to diverge; the MRPs of TSP and KCl become more expensive than those of Urea and ZA, as shown in Table 2.5. The MRP of Urea, ZA, and SR36 still
73 prevail, indicating that the Government restrains the subsidy for these fertilisers. KCL was no longer subsidised after 1994.
Table 2.5: Maximum retail price of fertilisers, 1988 to 1998 (Rp/kg) Year Urea ZA TSP/SP36 KCL 1988 135 135 135 135 1989 165 165 170 170 1990 185 185 210 210 1991 210 210 260 260 1992 220 220 280 280 1993 240 240 310 350 1994 260 260 340 350 1995 295 295 480 - 1996 330 355 525 - 1997 400 450 600 - 1998 400 450 600 - Sources: 1989 to 1997: DGFH (1997b); 1998: Hadi et al. (1998) and media.
Farm credit
To promote agricultural production, subsidised credit, called Kredit Usaha Tani (KUT), has been provided to farmers. The interest rate was initially 12 per cent per annum, compared with the commercial rate of around 20 to 24 per cent. The KUT is basically a credit package covering seeds, fertilisers, pesticides and labour costs for farm operations. The total amount of credit available is around Rp300,000 per hectare of rice field, with eligibility based only on the financial feasibility of farms. In recent years, the interest rate has been increased to 14 to 16 per cent. Liquidity credit from the Central Bank (Kredit Likuiditas Bank Indonesia or KLBI) has been an important source of funds. Another credit schemes with a subsidised interest rate is the Credit for Members of Cooperative Movement (Kredit Koperasi Primer untuk Anggota or KKPA). The total amount of credit given to each borrower (who must be a member of a cooperative) is around Rp50 million and is usually provided for tree crop farming.
Seed and fertiliser distribution
The production and distribution of improved seeds has been carried out by state and private companies and by informal channels. In the case of rice and soybean seeds, the state companies of PT Sang Hyang Seri and PT Pertani are the main producers. In the case of corn, private companies such as PT Charoen Pokphan and PT Pioneer have been the major producers of high-yielding corn seeds. The distribution of rice, corn and soybean seeds has been carried out by PT Sang Hyang Seri and PT Pertani and other distribution channels.
There have been six producers of fertilisers, all of which are state companies. PT Pupuk Sriwijaya is currently appointed as the sole national distributor of subsidised fertilisers. This company is responsible for delivering the fertilisers from factory gate to the village unit cooperatives (Koperasi Unit Desa, KUD). Through these distribution systems, all the farmers’ requirements for seeds and fertilisers can be satisfied.
Agricultural products’ marketing and distribution
Although most agricultural products are freely marketed, particular products are marketed by regulated systems, for example rice, soybean, sugar cane, wheat, Pontianak orange, cloves and crude palm oil. The National Logistics Agency (Badan Urusan Logistik or BULOG) is responsible for the national procurement and stockpiling of rice, soybean and sugar cane, which it purchases from farmers at the respective floor prices. During
74 domestic supply shortages, BULOG has also been responsible for importing these commodities.
The marketing of Pontianak oranges and cloves was also highly regulated. The sole buyer of Pontianak oranges and the cloves were private agencies appointed by the Government. Farmers suffered substantial losses due to extremely low selling prices; the orange agribusiness in West Kalimantan collapsed, for example. Pontianak orange marketing regulation was abolished a couple of years ago and clove marketing regulation was abolished recently. This should encourage farmers to revitalise their orange and clove agribusinesses.
Similarly, the importation (and processing) of wheat was monopolised by a private company. This was also true for the domestic marketing (and processing) of crude palm oil (CPO) and the domestic distribution of olein (cooking oil). In 1998, the monopolies on wheat imports (and processing), on CPO marketing and processing and on olein distribution were terminated. Recently, olein distribution in the domestic market has been interrupted, resulting in a supply shortage that has increased prices. With the depreciation of the rupiah, it is likely that exports will be considered more beneficial by olein producers.
In July 1998, during the olein shortage, the Government established new export taxes on palm oil products, averaging 60 per cent, aiming to discourage CPO exports and assure the domestic availability of olein. Such a policy reduces the profit of CPO producers in the situation where export price is much higher than the domestic price, especially when rupiah is depreciating. However, the export price offers more gains, particularly when rupiah is considerably depreciating, so the high tax rate policy fails to discourage CPO exports. It is likely that exports will remain more beneficial to CPO producers. The scarcity of olein in the domestic market drives up the retail price of the product.
Exchange rate
During the first two years (1969 to 1970) of Repelita I, the Government adopted a managed floating exchange-rate regime. Since the exchange rate tended to be overvalued, the policy shifted to a fixed exchange rate from 1971 to 1977, with the currency fixed at around Rp420/US$1. This regime also caused the rupiah to be overvalued and was considered unrealistic.
In 1978, the policy shifted back to a managed float, with the devaluation of the rupiah to Rp632/US$1. Since then, equilibrium exchange rates have been determined by market forces within an intervention band. The ‘equilibrium’ price gradually moved upward to lie around Rp1,130/US$1 in 1985. Again, the exchange rate was considered overvalued, leading the Government to devaluate the rupiah in 1986 to Rp1,649/US$1. Bank Indonesia then pursued a cautious policy of a gradual managed depreciation against the dollar that allowed the rupiah to fall by about 4 per cent on average each year (Lindblad 1997). The intervention band was progressively widened, moving slowly towards a flexible exchange rate policy in the line with the liberalisation of monetary policy. The exchange rate gradually moved upward to Rp2,385/US$1 on average in 1996.
The huge depreciation of the rupiah against the dollar from August 1997 has been summarised by Lindblad (1997) as follows. On 2 July 1997, the Thai baht was floated and immediately depreciated by 18 per cent, placing the Thai economy in crisis. An international rescue operation two weeks later pumped $US16 billion into the Thai economy, with Indonesia contributing $US500 million.
As the attack on the Southeast Asian currencies spread to Malaysia and the Philippines, Bank Indonesia widened its intervention band from 8 per cent to 12 per cent as a precautionary motive to avoid speculation. The rupiah continued to move towards the upper limit of the intervention band but not yet at an alarming rate, i.e. Rp2,700.
75 However, on 21 July it fell almost 7 per cent, and Bank Indonesia intervened by committing US$500 million to the forward market, resulting in the rupiah rising to around Rp2,600/$US1.
While a rescue plan settled the exchange rate in Thailand, the rupiah continued to be under pressure and fell by more than 3 per cent during the first half of the week beginning 11 August, eventually exceeding the upper limit of the intervention band. On 13 August, Bank Indonesia spent another US$500 million to strengthen the rupiah, but with little success. On 14 August the rupiah was allowed to float. It continued to fall and in March 1998 the average exchange rate was Rp9,539/$US. The social unrest in May worsened the economic condition and jeopardised confidence in the rupiah. In early July, the exchange rate fell to around Rp15,000/US$1.
The price of consumption goods increased very rapidly, primarily because of the scarce supply of domestically produced goods and the increased price of imported ones. The lower price of exported products should result in significantly increased exports of traditional agricultural commodities.
Import tariffs
The Indonesian government imposes import tariffs on a number of agricultural products. In 1995, tariffs ranged from 0 per cent to 25 per cent, as indicated in Table 2.6, representing the base-year tariffs ratified under GATT. These tariff rates are to be gradually reduced and eventually eliminated.
At the Eighth Meeting of the Coordinating Committee of the Implementation of the CEPT Scheme for AFTA in Jakarta on 17-18 February 1998, special arrangements were made for sensitive and highly sensitive agricultural products (see Table 2.7).
Member states are to phase in sensitive products to the CEPT Scheme beginning on 1 January 2001, but no later than 1 January 2003, and will complete their phasing in by 1 January 2010. For highly sensitive products, the phasing in is to begin on 1 January 2001, but no later than 1 January 2005, and is to be completed by 1 January 2010. All quantitative restrictions on sensitive and highly sensitive products are to be eliminated by 1 January 2010. All sensitive products are to have final tariff rates of 0–5 per cent, and the final tariff for highly sensitive products will be flexible. Member states will eliminate all non-tariff barriers on sensitive and highly sensitive products and are to take measures to encourage state trading enterprises to accord preferential treatment to ASEAN suppliers.
76
Table 2.6: Base-year (1995) import tariffs of selected agricultural products. Commodities Tariff (%) Cereals, Roots, Tubers, Pulses: - Rice 0 - Wheat, maize 5 - Manihoc, sweet potato 25 - Dried and sliced cassava 20 - Soybean 5 - Groundnut 25 Vegetables: - Potato seed 20 - Fresh/chilled potato 25 - Fresh/chilled tomato 25 - Fresh/chilled onion 10 - Fresh/chilled garlic 10 - Fresh/chilled cabbage 0 - Fresh/chilled mushroom 25 - Dried peas 25 - Dried vegetables 5 Fruit: - Fresh/chilled pineapple, mango, mangosteen, durian, rambutan, longan 25 - Fresh/chilled langsat, banana 15 - Fresh/chilled mandarin, orange, apple, pear 25 - Fresh/chilled grape 10 - Dried banana 25 Estate Commodities: - Coconut oil, palm oil, copra, palm kernel 5 - Coffee, tea, pepper 25 - Cloves 5 - Sugar 5 Livestock Commodities: - Cattle breed, steer, poultry 0 - Live cattle, buffalo 10 - Fresh/chilled beef meat 30 - Frozen meat 25 Fishery Commodities: - Life fresh water fish 25 - Fresh/chilled tuna 25 - Frozen tuna 25 - Marine fish 15 - Frozen prawn 25 - Frozen shrimp 15 - Crab 25 Source: DGCE (1995).
77 Table 2.7: List of current commodities classified as sensitive and highly sensitive products of Indonesia. Commodity HS Code Description Sensitive products Garlic 0703.20.000 Fresh 0713.90.100 Dried (whole, cut sliced, broken, powder) Cloves 0907.00.100 Fruit 0907.00.900 Other Wheat 1001.10.100 Durum wheat seeds 1001.10.900 Durum wheat other than seeds 1001.90.190 Wheat other than Durum wheat 1101.00.000 Wheat of muslin flour Flour 1102.30.000 Rice flour 1102.90.000 Other cereal flour Soybean 1201.00.100 Yellow 1208.10.000 Flour and meal of soyabeans Highly sensitive products Rice 1006.10.000 Rice in the husk 1006.20.000 Husked (brown) rice 1006.30.000 Milled rice 1006.40.000 Broken rice Sugar 1701.11.000 Raw, no flavor/colour 1701.12.000 Sugar cane Beet sugar 1701.91.000 Other than raw With flavor/colour Other 1701.99.110 Refined white sugar packed for retail 1701.99.191 Refined white sugar pharmaceutical purpose 1701.99.199 Refined white sugar for other purposes 1701.99.000 Other than refined white sugar Source: BPPM (1998).
2.4.2 Crisis-induced policies
Policies that have been introduced as a result of the crisis have been largely influenced by the aid requirements of the GOI-IMF Letter of Intent, which forces Indonesia to implement a more market-oriented economy. The World Bank also applied conditions to its Agricultural Sector Adjustment Loan (ASAL). Boxes 2.1 to 2.4 present GOI-IMF Letter of Intent and its three supplementary memorandums, while Box 2.5 summarises the ASAL. The following are the adjustment policies that relate to agriculture:
BULOG de-monopolisation
The de-monopolisation of BULOG started on 3 November 1997 when general importers were allowed to import garlic, wheat and soybean. On 21 January 1998 imports of milk and milk products, cloves, flours (except wheat) and sugar was allowed. The ban on palm oil exports was removed in April 1998 but was replaced by an export tax of 40 per cent, which was raised in July to 60 per cent. On 22 September 1998 the import of all types of rice was deregulated. The expected impacts of deregulation on BULOG are as follows:
78
Palm oil industry
The palm oil industry plays a number of important roles in Indonesia’s economy. Around two million people are employed in the management of around 2.2 million hectares of plantations. As most plantations are located in rural areas, urbanisation is reduced. As source of income, it yields between Rp2 million and Rp6 million per hectare annually. As source of foreign exchange, the export value of CPO was US$0.75 billion in 1995. It has an important role in downstream industry, 70 per cent of domestic cooking oil industries use CPO as main raw material.
The deregulation of this commodity is expected to attract investors to upstream industries, particularly in palm oil plantation and CPO processing. The Government, however, has to be consistent with its policy, not repeating the experience of 1994 when it initially allowed foreign investors a share of up to 95 per cent, but backtracked after an large inflow of foreign investment occurred, especially from Malaysia. Using the domestic supply adequacy argument, the Government included palm oil in the negative list of investment in 1996.
Sugar industry
The dominant role of BULOG in the sugar industry (in marketing and distribution) started in 1971, with a full monopoly in place by 1981. BULOG held all the domestic supply of sugar, both domestically produced and imported, and set its price at all levels, successfully maintaining the retail price of sugar.
The liberalisation of the sugar industry will allow farmers to grow any profitable crops, the price of sugar will be determined by market forces and sugar factories will compete for sugar cane. The increase of the price of sugar cane will lead to a reallocation of land and competition for land between sugar cane and other commodities, and will ultimately push up the price of land.
The depreciation of the rupiah will increase the price of sugar at both the consumer and producer levels, which will encourage domestic production, but at the same time lead to inflation.
Milk industry
The dairy farming and milk industries are still concentrated in Java, where 96 per cent of the country’s fresh milk is produced. Productivity of dairy farming is low with 8 to 10 lt/day/head compared with 20 to 24 lt/day/head in other countries.
Using the resource cost ratio (RCR) measurement, Indonesia does not have a comparative advantages in dairy farming, with a RCR that varies from 1.67 to 5 for corporate farms and from 1.4 to 3.4 for household farms (Irawan and Rusastra 1990). It is better for Indonesia to import milk than to produce it domestically. Based on sensitivity analysis, domestic production is feasible if the world price for milk increases by 17 to 33 per cent, or if the domestic price increases by 48 to 64 per cent. Septiani (1988) concluded that if the world market price does not change, the break event point will be achieved at the production level of 12 to 14 lt/day/head.
As domestic dairy farming is highly dependent on imported feed, the depreciation of the rupiah causes domestic producers great difficulties. Costs will increase and flow through to the domestic price of milk.
79 The elimination of BPPC’s clove monopoly
The elimination of the Board of Buffer and Marketing of Clove (BPPC) monopoly on the marketing and distribution of cloves is expected to increase the incentive to grow this export commodity. However, farmers have also to face the problem of selling their product to tobacco/cigarette industries that have strong market bargaining power.
The floor price of rice, fertiliser price and farm credit.
Since August 1997, the floor price of rice (unhusked) has been changed three times. Before the crisis the floor price was Rp600 per kg. In early August 1997 it changed to Rp700, then changed again in early June 1998 to become Rp1000. The main objective of this policy is to assure sufficient domestic production of rice to meet domestic demand as well as to offset the severe impact the crisis has had on farmers’ income. The price of Rp1000, which is equivalent to Rp1,650 per kg of rice, is still below the imported rice price of Rp3,200 per kg (using the exchange rate of Rp10,000/US$1).
The increase in the floor price of rice had increased the rice–fertiliser price ratio, therefore in June 1998 the maximum retail price (MRP) of KCl was set at Rp850 per kg, an increase from the previous price of Rp600, to encourage farmers to use more fertiliser. This amounts to a subsidy of around Rp1,250 per kg of KCl, looking at its undistorted price of Rp2,500. Subsidies for the other fertilisers were not changed.
To fulfill demands for liberalisation and to encourage farmers to be more self-reliant, on 1 December 1998, the Goverment eliminated fertiliser subsidies and let fertiliser prices be determined by the market (KOMPAS, 3 December 1998). The credit price per kg of Urea became Rp1,115; ZA became Rp1,000; SP-36 became Rp1,600; and KCl became Rp1,650: increases of 147 per cent, 53 per cent, 146 per cent and 94 per cent respectively. To compensate for the increase, the floor price of unhusked rice was increased to Rp1,500 per kg, up by 50 per cent, and the credit interest rate was reduced to 10.5 per cent, down from 14 per cent. Although the increase in the fertiliser price will increase the production cost per hectare by Rp310,187, because the price of product also increased and the share of fertiliser to total cost is only 18.6 per cent, the farmers will gain additional income per hectare ranging from Rp1.6 million to Rp2.1 million.
To mitigate the severe impact of the drought and economic crisis, outstanding farm credit of Rp2.3 billion has been written off. It was also asserted that a new scheme will be provided for farmers and small enterprises.
Import tariffs
In line with the GOI-IMF Letter of Intent, import tariffs for 500 agricultural items are generally a maximum of 5 per cent, as listed in Table 2.8.
80
Table 2.8: Import Tariff in 1996–97 and 1997–98 by Group of Items. (HS) Group Items Import tariff Import tariff in 96–97 (%) in 97–98 (%) 01 Live animals 0 – 30 0 – 5 02 Edible meat 15 – 20 5 03 Fish and shrimps 0 – 20 0 – 5 04 Milk products, poultry eggs, natural honey, 5 – 25 5 inedible animal products 05 Animal products 0 – 20 0 – 15 06 Live trees, roots, cut flowers and ornamental leaf 0 – 25 0 – 10 07 Vegetables, and edible roots 0 – 25 5 08 Fruit and other edible shelled fruit 5 – 25 5 09 Coffee, tea, spices 0 – 25 0 – 5 10 Cereals and flours 0 – 15 0 – 5 11 Milling products, essence 0 – 15 0 – 5 12 Oil contained seed and fruit, herbs 0 – 25 0 – 5 13 Resin, and other vegetable fat 0 – 5 0 – 5 14 Plait material, plants essence 0 – 5 0 – 5 15 Animal oil and fat and other products 5 – 20 0 – 10 16 Meat and fish products 15 – 25 5 17 Sugar and candy 0 – 25 0 – 5 18 Cacao and cacao products 5 – 15 5 19 Wheat and its products 5 – 25 5 20 Processed vegetables, fruit and nuts 15 – 25 5 21 Various edible processed food 5 – 25 5 22 Beverage, liquor 0 – 170 0 – 170 23 By products of processed food 0 – 5 0 – 5 24 Tobacco and its products 5 – 25 5 33 Atsiri oil, fragrance, cosmetics 5 – 20 5 – 15 40 Rubber and its products 5 – 15 5 – 10 41 Raw leather and processed leather 0 – 15 0 – 10 43 Leather products 10 – 15 5 – 10 52 Cotton 0 – 5 0 – 5 53 Textile fibre, yarn 5 5 71 Pearl and gems 25 25 Source: Agribusiness Agency, MOA, 1998b
Investment policy
On 2 July 1998, the Government announced the list of business sectors closed for investment. It can be interpreted that the business sectors not on the list (as mentioned in the article of the decree) are open for investment and therefore this represents a more open policy towards investment. The list is as follows:
81 Business sectors absolutely closed for investment:
Primary sector · Cultivation and processing of Marijuana and the like · Exploitation of sponges · Contractors of forest logging · Uranium mining Secondary sector · Hazardous pesticides of Penta Chlorophenol, DDT, Dieldrin, chlordane · Production of pulp using sulphite processing and production of pulp with whitening chlor · Manufacturing of alkaline chloride using mercury process · Manufacturing of freon · Manufacturing of cyclamate and saccharine · Processing of mangrove wood to produce finished/semi-finished goods · Liquor/alcoholic beverages · Firecrackers and fireworks · Explosive materials and the like · Manufacturing of weapons and related components · Printing of valuable papers: postage stamps, duty stamps, commercial papers of Bank Indonesia, passports and stamped postage Tertiary sector · Casino/gambling
Business sectors closed for investment, in which a part of the share is owned by foreign citizens and/or foreign legal entities:
Primary sector · Fresh water fish and fresh water fish cultures · Forest utilisation rights Tertiary sector · Taxi/bus transportation · Local shipping · Private television broadcasting, radio broadcasting services, newspapers and magazines · Operation of cinema · Spectrum management of radio frequency and satelite orbit · Medical services: general clinics, delivery clinics, specialist clinics and dental clinics · Trade services and its support services except: retailer (mall, supermarket, department store, shopping centre), distributor/wholesaler, restaurant, quality certification services, market research services, and after-sales services.
82
Box 2.1: The January 15, 1998 GOI-IMF Letter of Intent
1. Sound macroeconomic framework · Controlling inflation around 20% · Current account balance is expected to change from deficit to surplus, to earn foreign exchange for foreign debt repayment 2. Budget Plan is revised with new parameters. · Budget deficit to be around 1% of GDP · Subsidy reduction in energy, particularly oil and electricity, by increasing price but still protecting the poor 3. Fiscal policy transparency · Reforestation fund, which was originally off the budget, must be included in National Budget Plan of 1998–99 4. Private sector’s projects · Government expenditure is limited for vital projects · Rescheduling of 12 infrastructure projects · Budgeted and off-budgeted fund used for IPTN is stopped · N2130 project funding is opened to foreign investors · No special treatments on customs and credit facilities for the National Automobile project 5. Monetary Policies · Central Bank is given full autonomy to implement monetary policies and independently determine the SBI interest rate · Government support of state-owned and private bank mergers 6. Restructuring of banking and private sectors · A specific plan will be announced in the next few days 7. Structural reformation · By 1 February 1998, BULOG’s monopoly on rice is limited. Its import and distribution monopoly on sugar and wheat flour is withdrawn · Agricultural domestic trade is fully deregulated. Clove Buffer Stock and Marketing Board is eliminated by June 1998 · Trade regulation is eliminated. On 1 February 1998, enterprises free to produce and export according to market demand. Cartels in cement, paper and plywood are eliminated · The elimination of regulations on wholesalers and retailers · Encouraging foreign investment. On 1 February 1998, formal and informal barriers on investment in palm oil eliminated · On 1 February 1998, tax on food is reduced to maximum of 5%, while tax of non-food agricultural products will be reduced by 5% · Asian Development Bank will focus on financing small and medium-sized establishments, and exporters REVISION OF NATIONAL BUDGET PLAN 1998–99 · Economic growth that was originally targeted to be 4% is changed to 0% · Inflation rate that was originally set for 9% is changed to 20% · Rupiah exchange against US$ that was originally set for Rp4,000/US$ is changed to Rp5,000/US$ · Budget for oil subsidy of almost Rp3 trillion to be gradually reduced
Source: KOMPAS, 16 January, 1998
83
Box 2.2 The Additional Memorandum GOI-IMF Letter of Intent, Signed 9 April 1998 The following are selected items considered relevant to agriculture: Target date A. FISCAL Increase customs duties on liquor and tobacco 1 Dec 98 Increase prices of sugar, wheat flour, maize, soybean cake and fish flour 1 Apr 98 Eliminate subsidies on sugar, wheat flour, maize, soybean cake and fish flour 1 Oct 98 B. MONETARY AND BANKING Abolish regulation limiting the opening branch of foreign banks 1 Feb 98 Submit legislation plan to the Parliament to eliminate restrictions on foreign 30 Jun 98 investment in banking Abolish banking loan barriers except for prudential purposes C. BANK RESTRUCTURING Items are related to solving banking problems and the role of the Central Bank D. FOREIGN TRADE Reduce tariff by 5% on products currently imposed 15 – 25% 31 Mar 98 Reduce tariff on all food products to become max. at 5% 1 Feb 98 Abolish local content regulation on milk products 1 Feb 98 Reduce tariff by 5% on non-food agricultural products 1 Feb 98 Gradually reduce tariff on non-food agric. Products to become max. at 10% 2003 Reduce tariff by 5% on chemical products 1 Jan 98 Reduce tariff by 5% on steel and metal products 1 Jan 98 Reduce tariff on steel, metal and fish products to become 5-10% 2003 Reduce import barriers on new and used ships 1 Feb 98 Reduce export taxes on leather, ores and waste aluminum 1 Feb 98 Reduce export taxes on log, sawed wood, rattan, and minerals to become max. at 30% by Apr. 98, 20% by end of Dec. 98, 15% by end of Dec. 99. E. INVESTMENT AND DEREGULATION Abolish regulation limiting 49% foreign ownership on companies listed on the Sep 97 stock exchange Establish the revised negative list 30 Jun 98 Abolish regulation limiting foreign investment in palm oil estate 1 Feb 98 Abolish regulation limiting foreign investment in retailing 31 Mar 98 Abolish regulation limiting foreign investment in wholesale sector 22 Apr 98 Abolish restrictive regulation on marketing of cement, papers and plywood 1 Feb 98 Abolish BPPC monopoly in clove industry 1 Feb 98 Abolish the highest retail price on cement 3 Nov 97 Abolish quota on livestock trading 30 Sep 98 Forbid regional government to limit regional trade 1 Feb 98 Allow free competition in the import of wheat flour, soybean and garlic, the Feb 98 marketing and distribution of wheat flour and the import and distribution of sugar Abolish farmers’ obligation to plant sugar cane under TRI programs Feb 98 F. THE PRIVATISATION ON THE STATE OWNED COMPANIES G. SOCIAL SAFETY NET H. ENVIRONMENT
Source: EKONOMI NERACA, 11 April, 1998
84
Box 2.3 The Second Additional Memorandum of The GOI-IMF Letter of Intent, Signed on 25 June 1988
A. FISCAL POLICIES The central target of the policies is still the minimisation of budget deficits to a level that can be outweighted by the inflow of foreign funds. It is suggested that the deficit from the fiscal year 1999–2000 can be minimised by increasing income and reducing subsidies. B. MONETARY POLICIES Policies are targeted to solving the financial problems of national banks. Money will be supplied to banks with relatively good performance. Mergers and recapitalisation have been suggested to the weaker banks. The Government will give full warranty to depositors and creditors. C. PRIVATE DEBT To reduce burden on private company debt, domestic and foreign creditors will be involved in negotiations. Creditors are expected to share the burden. A bankruptcy system and rules will be created. D. STRUCTURAL POLICY REFORMS. The Government was requested to continue structural policy reforms that were agreed (with the World Bank), including free competition between BULOG and private companies in the marketing and distribution of soybean, wheat and sugar, and the use of an international standard auditing system in the financial systems of BULOG, the Electricity State Company (PLN), the State Oil Company (PERTAMINA), and the Reforestation Fund. Transparency in the process of privatising the State Owned Companies (BUMN) is requested and the Government, together with the Asian Development Bank and the World Bank, will prepare the Master Plan of the BUMN reforms by September 1998.
Source: KOMPAS, 26 June 1998
85
Box 2.4 Agriculture-related points of the Supplementary Memorandum of Economic and Financial Policies, Signed on 15 November 1998
Macroeconomic Framework and policies on output, prices, and balance of payment · The appreciation of the rupiah will allow the exchange rate subsidy for the import of rice by BULOG to be removed on 31 December, 1998; the remaining subsidies on low quality rice will be provided explicitly through the budget.
Fiscal policy, development spending and social safety net · Working closely with the World Bank to ensure that subsidies and social safety net programs are better targeted to the poorest groups. · The targeted subsidised rice scheme reached six million families by the end of October 1998, and will be substantially expanded in the coming months. · To increase monthly allocation under the scheme from 10 kg to 20 kg per family effective on 1 December 1998. · Privatisation and state enterprise audits · To fulfill commitment to release detailed financial information on BULOG, Pertamina and The State Electricity Corporation (PLN)
Banking sector reforms
Foreign exchange monitoring system · Bank Indonesia (BI) is preparing a regulation requiring banks to report daily their sales and purchases in the exchange market in a prescribed format. This enables BI to monitor foreign exchange flows on a more timely basis. · To commit to a free foreign exchange system, without surrender or repatriation requirements or capital control.
Source: The Jakarta Post, 16 November 1998
86
Box 2.5 Summary of Indonesia’s Policy Matrix For The Agricultural Sector Adjustment Loan (ASAL) Objective and proposed reform Date to be Executor completed agency To maintain food security in a more efficient and effective manner: 1. Rely on market mechanism for foodstuffs: Abolish general consumer price subsidies for sugar, 8 Sept. 1998 MTI, BULOG soybean, soybean meal, wheat flour, dairy products, and fishmeal Phase out general consumer price subsidies for rice 8 Sept. 1998 BULOG Open foodstuff imports to general importers Pre-negotiation MTI Remove (do not reimpose) import monopolies 12 Sept. 1998 DG Customs Remove preferential exchange rate for BULOG and other Pre-negotiation MF essential importers 2. Protect food-insecure households through well-targeted food subsidy programs: Food program to be expanded to include the majority of Ongoing MFH food insecure households Ensure that poor urban migrant families can participate Ongoing MFH Phase in an increase in rations given to program Pre-negotiation MFH beneficiaries Monitor the food program Pre-negotiation MFH, BULOG Increase involvement of civil society organisations (LSMs) Pre-negotiation MFH, in the planning, distribution, implementation and BULOG monitoring of the targeted food program. 3. Restructure BULOG to improve food security: BULOG will undertake domestic procurement during the Pre-board BULOG harvest when prices usually collapse When the food situation improves, rice rations given to Oct. 1999 MF some groups will be phased out Phase in financial instruments to help stabilise consumer Pre-board BULOG rice prices Prepare a plan to make BULOG an institution appropriate Pre-negotiation BULOG for the food security functions it is now assigned
To improve the efficiency of key farm level factor markets 1. Improve the fertiliser market: Price subsidy differentials between fertiliser used on food Pre-negotiation MF crops and fertiliser used on tree crops will be removed Phase out fertiliser subsidies over three years, including gas Pre-board MF subsidies to fertiliser factories Eliminate the distribution monopoly so that any trader Oct. 1999 MTI may distribute fertiliser Eliminate the fertiliser holding company established in Oct. 1999 MSOER 1997 Remove export quotas Oct. 1999 MTI Remove fertliser import controls Oct. 1999 MTI Prepare a time-bound plan acceptable to EKUIN for the Oct. 1999 MSOER divestiture of fertiliser companies
87
Box 2.5 (continued) Objectives and Proposed reform Action to be Executor completed by agency 2. Improve the seed market by opening to competition: Alter phytosanitary regulation to recognise seed Pre- board MAMA certification from proven jurisdictions Prepare a time-bound plan acceptable to EKUIN for the Pre- board MSOER divestiture of seed companies and their seed gardens To reorient cooperatives: Cooperatives’ role will be oriented toward business, and Pre-board program monopolies such as KUT, fertiliser and food distribution will be phased out Commision a study by an international panel of experts to Pre-board EKUIN, MC advise the Government of the role of cooperatives in society. The panel will, among other things, examine: the Oct. 1999 EKUIN role of cooperatives in modern society; the law and regulations on establishing cooperatives in Indonesia, and their strengths and weaknesses; the role and function of the Ministry of Cooperatives; and alternative forms of business organisation. To enhance the knowledge base to improve agricultural performance To undertake joint consultation and reviews of public Pre-board BAPPENAS, programs and priorities in agriculture with World Bank, EKUIN, MA interested government agencies (central and local), NGOs, and other technical experts on an annual basis to improve the efficiency of sectoral spending. Such reviews will examine, among other things, agricultural research, extension, rural credit, village infrastructure, rural industrialisation, rural education and rural health care.
2.5 Production and consumption
2.5.1 Production
Cereals
Domestically produced cereals consist of rice and maize, which are smallholder commodities. Java has been the main region to produce these commodities; the island contributes about 56 per cent of the national rice production. Wetland rice is the major source of rice production (57.4 per cent). Other prominent regions have been North Sumatra, West Nusatenggara and South Sulawesi.
During the period of 1987 to 1996, total rice production increased by 1.05 million tonnes, or 2.31 per cent per annum (Table 2.9). The sources of this production growth were an increase in the area harvested by 163,000 hectares, or 1.52 per cent, and improvements in yields of 0.79 per cent per annum. The increase in wetland rice production by 0.96 million tonnes, or 2.25 per cent, stemmed from an increase in the area harvested by 141,600 hectares, or 1.49 per cent, and improvements in yield by 0.76 per cent per annum. The improved yield for dryland rice of 1.61 per cent per annum also increased national rice production. In 1996, national rice production was 50.58 million tonnes. Three national programs, the Mass Guidance Program (Program Bimbingan Masal, BIMAS), the Mass Intensification Program (Program Intensifikasi Masal, INMAS) and the Special Intensification Program (Program Intensifikasi Khusus, INSUS), have aided rice production.
88
It has been difficult to increase rice production because of the conversion of fertile lands on Java to industrial and settlement purposes. In addition, the introduction of new varieties has not improved yield, just the resistance to endemic pests (Simatupang 1994). During the 1997–98 drought, serious problems arose in domestic supply. To increase production, alternative avenues have to be sought; for instance, the rehabilitation of existing irrigation facilities on Java to facilitate double or triple cropping and the use of arable land on outer Java, especially swamp lands.
Java is also the major area for corn production, contributing 61.1 per cent of national production. Other notable regions are Lampung and South Sulawesi. From 1987 to 2996, corn production increased by 311,200 tonnes, or 4.42 per cent per annum, due to the increase in the area harvested by 73,300 hectares, or 2.30 per cent, and an improved yield of 2.12 per cent per annum (Table 2.9). In 1996, the national production of corn was 9.14 million tonnes.
The rapid expansion of area and yield of corn emanated from the BIMAS and INMAS programs, in addition to the Upaya Khusus program (UPSUS), which used high-yielding varieties (HYV) such as hybrid or composite corn. The production cost of using HYV is much higher than for traditional varieties and the main problem farmers have in growing HYV has been the unavailability of finance. Credit provision to farmers may be of crucial importance for enhancing corn production growth.
Roots and tubers
Cassava and sweet potatoes are the main crops in roots and tubers, respectively. While cassava is mainly produced on Java (55.91 per cent), sweet potatoes are primarily produced on outer Java (58.52 per cent), as shown in Table 2.9. Another prominant cassava region is Lampung. The most important sweet potato producing regions have been West Java and South Sulawesi.
Between 1987 and 1996, cassava production increased slightly by 101,100 tonnes, or 0.66 per cent per annum (Table 2.9). The sources of this production growth were an increase in the area harvested by 10,100 hectares, or 0.78 per cent, and an improved yield of 0.12 per cent per annum. This slow growth in area expansion was probably due to scarcer land availability. In 1996, the national production of cassava was 16.55 million tonnes.
Production of sweet potatoes slightly decreased by 8,300 tonnes, or 0.41 per cent per annum (Table 2.9) due to a reduction in the area harvested by 2,800 hectares, or 1.24 per cent, and a fall in yield of 0.83 per cent per annum. The negative growth in the area harvested was probably due to scarcer land availability or decreased demand for this commodity. In 1996, the national production of this commodity was 2.02 million tonnes.
Neither cassava nor sweet potato production have received sufficient government attention for development (Sudaryanto and Djauhari 1997). Since yield levels are very low (9.5 to 10 tonnes per hectare), the introduction of new high-yielding varieties (20 to 30 tonnes) would be a favourable option for the future.
89 Pulses
Soybeans, groundnuts and mungbeans are the major pulses. While soybeans and groundnuts are mainly produced on Java (60.55 and 60.26 per cent of national production respectively), mungbeans are primarily produced on outer Java (52.57 per cent), as shown in Table 2.9. Other prominent regions have been West Nusa Tenggara, Aceh, Lampung and South Sulawesi for soybean; North Sumatra, West Nusa Tenggara and South Sulawesi for groundnut; and East Java, Central Java, North Sumatra, Lampung, North Sulawesi, South Sulawesi and Nusa Tenggara (West and East) for mungbean. The production of soybeans during the period 1987 to 1996 increased by 51,700 tonnes, or 3.63 per cent per annum (Table 2.9). The sources of this production growth were an increase in the area harvested by 33,000 hectares, or 2.56 per cent, and an improved yield of 1.07 per cent per annum. In 1996, the national production of soybeans was 1.51 million tonnes. The rapid area expansion and yield improvement emanated from the implementation of special effort programs (Upaya Khusus, UPSUS) that achieved increasing demand. A mutually beneficial business partnership between large companies and farmers has a notable contribution to soybean production growth. Similarly, groundnut production experienced a rapid increase of 20,600 tonnes, or 3.20 per cent per annum (Table 2.9). The sources of this production growth were an increase in the area harvested by 15,500 hectares, or 2.43 per cent, and improvements in yield of 0.83 per cent per annum. In 1996, the national production of this commodity was 0.75 million tonnes. During the same period, mungbean production increased by 8,700 tonnes or 3.26 per cent per annum (Table 2.9). The sources of this production growth were an expansion in the area harvested of 3,200 hectares, or 1 per cent, and a yield improvement of 2.26 per cent per annum. At the national level, the production was 0.31 million tonnes in 1996. To expand the production of pulses, the use of improved seeds and the expansion of land through arranging of cropping patterns and utilising unused drylands would be necessary. Improved farm management, especially pest control, is of crucial importance.
Table 2.9: Area harvested and production of major cereals, roots, tubers and pulses in Indonesia, 1987 to 1996. Year Rice (husked) Maize Cassava Sweet Soybean Ground- Mung- potato nut bean Lowland Dryland Total Area Harvested (000ha) 1987 8796.3 1126.3 9922.6 2626.0 1222.2 229.1 1100.6 550.8 277.2 1988 8925.4 1212.8 10138.2 3405.8 1302.6 247.8 1177.4 585.0 361.5 1989 9365.0 1156.3 10521.2 2944.2 1407.9 240.2 1198.1 620.8 332.1 1990 9377.5 1123.8 10501.4 3158.1 1311.1 208.7 1331.6 635.0 345.5 1991 9168.5 1113.0 10281.5 2909.1 1319.1 214.3 1368.2 628.3 301.3 1992 9799.1 1304.2 11103.3 3629.3 1351.3 229.8 1665.7 719.7 393.1 1993 9806.9 1205.9 11012.8 2939.5 1401.6 224.1 1470.2 624.3 374.1 1994 9494.0 1239.9 10733.8 3109.4 1356.6 197.2 1406.9 643.0 292.1 1995 10081.3 1357.5 11438.8 3651.8 1319.6 225.9 1477.6 739.3 361.1 1996 10207.9 1311.7 11519.6 3679.7 1388.7 212.2 1276.4 696.6 338.4 Growth 1.49 1.74 1.52 2.30 0.78 -1.24 2.56 2.43 1.00 (%/year) Production (000t) 1987 37969.6 2108.6 40078.2 5154.7 14356.3 2012.8 1161.0 533.1 203.8 1988 39316.1 2360.1 41676.2 6651.9 15471.1 2158.6 1270.4 565.1 284.1 1989 42371.7 2347.4 44719.1 6192.5 17117.2 2202.3 1315.1 619.6 262.4 1990 42825.3 2353.5 45178.8 6734.0 15829.6 1971.5 1389.8 650.2 273.1 1991 42330.9 2357.3 44688.2 6255.9 15954.5 2039.2 1555.5 652.1 237.4 1992 45413.6 2826.4 48240.0 7995.5 16515.9 2171.0 1869.7 739.1 326.8 1993 45558.9 2622.2 48181.1 6459.7 17285.4 2088.2 1708.5 638.7 322.3 1994 43959.2 2682.3 46641.5 6868.9 15729.2 1845.2 1564.8 632.0 256.5 1995 46805.8 2938.4 49744.2 8245.9 15317.1 2139.2 1680.0 760.1 325.3 1996 47688.1 2887.1 50575.2 9142.3 16553.7 2020.0 1510.0 746.6 308.3 Growth 2.25 3.35 2.31 4.42 0.66 -0.41 3.63 3.20 3.26 (%/year) Source: CPI (1997)
90 Horticulture
Vegetables
There are many different vegetables, all of which are grown by smallholders, but this chapter focuses only on the major commodities in terms of the area harvested; namely, shallots, cabbages, potatoes, garlic, carrots, spring onions, chillis, tomatoes and stringbeans. Shallots, chillis and stringbeans are mostly produced in low elevated lands, while the others are grown in higher elevated lands. The main producing regions of vegetables have been Java island (especially West Java) and North Sumatra.
During the period of 1987 to 1996, vegetable production grew very rapidly, the increases ranging from 7,100 tonnes (garlic) to 94,000 tonnes (cabbages) (Table 2.10). In percentage terms, growth ranged from 5.95 per cent (garlic) to 13.40 per cent (tomatoes). In 1996, the production of vegetables ranged from 151,300 tonnes (garlic) to 1.5 million tonnes (cabbages).
The sources of the production growth of shallots, cabbages, potatoes, garlic, carrots and spring onions were an expansion in the area harvested (ranging from 3.1 per cent for garlic to 9.45 per cent for potatoes) and a yield improvement (ranging from 1.44 per cent for carrots to 4.30 per cent for shallots). In the cases of chillis, tomatoes and stringbeans, the yield improvement was the only source of production growth. As shown in Table 2.10, the area harvested reduced by 1,400 hectares, or 2.32 per cent, in the case of tomatoes, and 17,800 hectares, or 7 per cent, for chillies. The yield of these crops considerably improved during the period, ranging from 15.14 per cent (stringbeans) to 15.72 per cent (tomatoes).
Technological progress has been the main source of production growth. Commonly, imported improved seeds are the most essential technology component. Changes to improve the economic efficiency of vegetable farming would strengthen the competitiveness of these commodities in world markets.
91 Table 2.10: Area harvested and production of major vegetable commodities, 1987 to 1996. Year Shallot Cabbage Potato Garlic Carrot Spring Chilli Tomato Stringbean onion Area (000ha) 1987 65.2 45.0 32.0 15.7 11.7 26.5 230.4 53.0 130.3 1988 63.4 43.1 39.0 16.0 10.6 22.2 341.0 62.3 201.0 1989 60.4 47.9 39.2 18.9 14.2 29.1 438.4 75.3 213.2 1990 70.1 52.2 44.9 18.5 14.6 29.3 162.3 40.3 98.2 1991 71.0 52.7 39.6 21.1 13.4 28.3 168.1 43.4 100.8 1992 68.9 55.3 48.9 22.2 16.6 31.1 162.5 44.6 103.0 1993 75.1 60.3 51.1 20.0 15.2 34.9 157.5 48.6 96.8 1994 84.6 67.4 56.1 20.8 17.1 34.1 177.6 50.6 106.9 1995 77.2 65.8 62.4 21.9 18.3 34.7 182.3 49.3 108.9 1996 91.4 71.0 66.9 20.0 20.1 40.6 174.1 48.5 100.5 Growth 3.81 5.60 7.45 3.10 6.06 5.07 -7.00 -2.32 -6.12 (%/year) Production (000t) 1987 412.5 835.6 369.0 87.6 132.2 172.1 436.2 187.4 259.5 1988 379.4 771.3 418.2 95.8 132.4 166.3 448.7 192.2 297.0 1989 399.5 926.1 559.4 107.4 192.6 243.9 489.5 238.2 307.2 1990 495.2 1071.8 628.7 108.9 172.2 237.8 569.6 303.0 339.8 1991 509.0 974.6 525.8 133.9 172.7 219.0 627.2 334.3 393.1 1992 528.3 1213.4 702.3 137.9 233.5 250.0 703.8 401.3 430.1 1993 561.3 1266.0 809.5 128.0 192.5 243.3 772.7 362.0 386.6 1994 636.9 1418.0 877.1 134.9 234.2 272.2 724.4 476.1 453.4 1995 592.6 1625.2 1035.3 152.4 247.2 299.9 1102.3 611.8 583.7 1996 792.0 1530.2 1053.0 151.3 269.0 355.8 1013.7 558.8 613.1 Growth 7.11 8.18 11.56 5.95 7.50 6.91 10.22 13.40 9.02 (%/year) Source: DGFH (1996a)
Fruit
There are many varieties of fruit, all of which are produced by smallholders, yet only the important ones in terms of area harvested are included in this chapter; namely, mangoes, rambutans, pineapples, bananas, durians, oranges and langsats. The main production regions are as follows: mangoes – Java island (especially East Java) and South Sulawesi; rambutans – Java island (especially West Java) and some provinces in Sumatra such as Riau and South Sumatra; pineapples – North Sumatra, South Sumatra, Riau, West Java and East Java; bananas – Java island, all provinces in Sumatra except Bengkulu, and other provinces like Bali and South Sulawesi; durians – Java island, some provinces in Sumatra such as North Sumatra and South Sumatra, and South Sulawesi; mandarins (Siam) – West Java, Riau and West Kalimantan; and langsats – South Sumatra, North Sumatra and South Sulawesi.
During the period of 1987 to 1996, fruit production grew very rapidly, ranging from 4,200 tonnes (langsats) to 184,000 tonnes (bananas) (Table 2.11). In percentage terms, growth ranged from 4.71 per cent (durians) to 6.60 per cent (pineapples). The only source of growth in pineapple, banana, orange and langsat production was yield improvement. As indicated in Table 2.11, the harvested area of these crops has reduced, ranging from 0.35 per cent (langsats) to 16.55 per cent (bananas), while production growth rates ranged from 4.92 per cent (langsats) to 6.60 per cent (pineapples). The reduced area for orange production was due mainly to an infestation of the CVPD virus, particularly on Java. For the other commodities, the main source of production growth was an increase in the area harvested, ranging from 2.44 per cent (durians) to 5.91 per cent (rambutans). In 1996, the production of fruit ranged from 91,500 tonnes (langsats) to 3.85 millions tonnes (bananas).
92 Unlike vegetables, fruit crops are perennial, and this prevents farmers from making immediate production adjustment. Increases in output price do not necessarily impact on production, due to a lagged response.
Table 2.11: Area harvested and production of major fruit commodities, 1987 to 1996. Year Mango Rambutan Pineapple Banana Durian Orange Langsat Area (000ha) 1987 121.3 49.9 44.4 175.6 41.6 80.3 16.7 1988 104.9 51.1 49.4 169.7 36.1 72.4 16.5 1989 112.4 46.1 32.8 127.8 24.9 52.6 5.7 1990 124.8 66.6 49.0 132.5 43.8 50.2 11.4 1991 159.0 77.1 41.5 135.1 42.8 60.6 11.0 1992 139.6 73.7 21.2 76.5 36.0 58.2 10.5 1993 126.2 66.4 20.0 70.7 31.4 36.9 8.3 1994 133.5 66.3 20.1 50.0 56.3 61.4 25.4 1995 196.6 80.7 50.7 49.0 46.3 46.0 15.6 1996 198.8 85.0 29.6 49.0 38.7 38.2 8.0 Growth 5.82 5.91 -5.6 -16.55 2.44 -6.08 -0.35 (%/year) Production (000t) 1987 515.9 184.5 347.8 2193.3 199.4 557.3 62.5 1988 532.0 226.9 357.7 2306.4 183.2 445.0 101.5 1989 445.0 146.9 215.4 2192.1 139.2 268.6 47.0 1990 508.9 270.7 390.3 2411.0 242.6 253.7 79.9 1991 640.5 335.8 375.0 2471.9 205.4 353.0 79.8 1992 484.8 273.4 376.3 2650.8 152.5 395.7 81.0 1993 460.4 277.8 459.1 2643.8 170.9 260.3 59.6 1994 668.0 323.5 346.5 3086.6 268.6 393.4 88.2 1995 889.0 364.0 703.3 3805.4 289.6 1004.6 143.1 1996 782.9 370.4 501.1 3805.4 267.1 730.9 91.5 Growth 5.33 8.12 6.60 6.38 4.71 6.21 4.92 (%/year) Source : DGFH (1996a)
Tree crops
The main tree crops are palm oil, rubber, coconut, coffee, tea, cocoa, cloves, and pepper. Palm oil is mostly produced by large companies, while the other commodities are mainly grown by smallholders. Sugar cane is included in this section, since its development is supervised under the Directorate General of Estate Crops. The main producing regions are as follows: palm oil – North Sumatra and Riau; rubber – North Sumatra, Riau, Jambi, South Sumatra and West Kalimantan; native coconut – North Sumatra, Riau, Jambi, Lampung, Java island, and in Sulawesi except for Southeast Sulawesi; hybrid coconut – Lampung, West Java and South Sulawesi; coffee –South Sumatra, Aceh, Bengkulu, Lampung and East Java; tea – West Java, North Sumatra and middle Java; cocoa – North Sumatra, South Sulawesi and Southeast Sulawesi; tobacco – East Java and middle Java; sugar cane – Java (especially East Java) and Lampung. The inefficient sugar industry on Java needs to be relocated to outer Java where there is smaller processing capacity. Clove production is scattered over many regions with Sulawesi island the main producing area and other prominent areas being Java island, Aceh, Bali and Maluku. Pepper is concentrated in South Sumatra (especially Bangka island) and Lampung.
From 1987 to 1996, the production of some commodities grew very rapidly, while others grew slowly (Table 2.12). The volume increase ranged from 2,100 tonnes (tea) to 4.96 million tonnes (palm oil), while the percentage increase ranged from 0.17 per cent (pepper) to 12.42 per cent (palm oil). The production growth of palm oil, coconut, coffee, tea, pepper and sugar cane was due mainly to area expansion, which ranged from 3,290 hectares (pepper) to 165,980 hectares (palm oil) or, in percentage terms, from 2.02 per cent (coconut) to 12.30 per cent (palm oil). Other commodities, such as rubber and cacao, experienced both an area expansion and a yield improvement. In the case of
93 cloves, the production area reduced by 29,210 hectares, or 4.81 per cent per annum, due mainly to the intervention of the Cloves Bufferstock Agency (Badan Penyangga Produksi Cengkeh, BPPC) which depressed prices. However, clove production increased by 2,250 tonnes, or 2.91 per cent, due to yield improvement.
Past government programs that for developing smallholder estate crops have been: Plasma under Nucleus Estate and Smallholder (NES); Replanting, Newplanting and Rehabilitation of Export Commodities; Assisted Project Management Unit; Partial Project; and Assisted Self-Reliance Farmers and, for sugar cane, the Smallholder Sugar- cane Intensification Program (Program Tebu Rakyat Intensifikasi or TRI). Although limited, large state and private companies have also had a role. Investment in estate commodities needs substantial budget support. Therefore, programs have been assisted by loans from foreign financial sources such as the ADB, the IBRD, the World Bank and, to a lesser extent, the Government. Recently, since overseas loans became limited, credit from the Central Bank (Kredit Likuiditas Bank Indonesia or KLBI) has been used to develop these estate crops. Little attention has been paid by the Government to the development of highly prospective commodities, such as palm oil and cocoa. It is likely that an expansion of area on outer Java would be the main way to increase the production of estate commodities.
Table 2.12: Area planted and production of major estate crops, 1987 to 1996. Year Palm oil Rubber Coconut Coffee Tea Cocoa Sugar Cloves Pepper cane Area (000ha) 1987 728.7 2850.0 3153.1 961.6 120.5 171.8 334.9 742.3 105.9 1988 862.9 2944.3 3225.5 1025.9 125.3 253.1 365.5 692.8 106.7 1989 973.5 3056.0 3283.6 1036.6 129.4 317.7 357.8 702.0 115.2 1990 1126.7 3141.6 3393.9 1069.8 129.1 357.5 364.0 692.7 127.6 1991 1311.0 3173.9 3573.3 1119.9 133.7 444.1 386.3 668.2 126.8 1992 1467.5 3289.2 3598.6 1133.9 137.5 496.0 404.1 608.4 127.2 1993 1613.2 3405.0 3635.9 1147.6 142.6 535.3 425.7 571.0 130.7 1994 1804.1 3444.8 3681.4 1140.4 145.5 597.0 428.7 534.4 127.7 1995 2025.0 3495.9 3723.9 1167.5 152.4 602.4 435.8 501.9 134.7 1996 2226.8 3534.6 3745.5 1178.4 158.1 610.9 423.4 495.5 136.5 Growth 12.30 2.43 2.02 2.08 2.87 13.31 2.88 -4.81 2.73 (%/year) Production (000t) 1987 1825.1 1130.4 2098.5 388.7 126.1 50.2 2175.9 71.0 49.3 1988 2056.0 1173.3 2144.0 391.1 133.8 79.3 2004.1 81.2 65.3 1989 2357.8 1209.0 2221.4 401.0 141.4 110.5 2108.3 56.4 67.8 1990 2916.4 1275.3 2331.6 412.8 155.9 142.3 2119.6 66.9 69.9 1991 3208.9 1328.2 2478.3 428.3 139.5 174.9 2252.7 80.3 62.5 1992 3825.5 1398.4 2475.3 436.9 153.7 207.1 2306.5 73.1 65.0 1993 4023.7 1475.4 2605.9 438.9 165.0 258.1 2329.8 67.4 65.8 1994 4804.6 1498.6 2649.0 450.2 139.2 270.0 2453.9 78.4 54.0 1995 5421.7 1573.3 2704.3 457.8 154.0 304.9 2077.3 90.1 59.0 1996 4959.8 1613.8 2718.9 478.9 158.5 317.7 2075.6 93.8 63.4 Growth 12.42 4.13 3.13 2.28 1.96 19.67 0.54 2.91 0.17 (%/year) Source: DGE (1996a to 1996j)
Livestock
There are three important big ruminances in the livestock sub-sector; dairy cattle, beef cattle and buffalo. Dairy cattle farming is highly concentrated on Java, while beef cattle is more scattered, with East Java, Middle Java, South Sulawesi, East Nusa Tenggara and Aceh the major regions. Buffalo is concentrated on Sumatra due to the wet conditions of this island, especially on Aceh, North Sumatra, West Sumatra and South Sumatra. Other important regions have been West Java, Middle Java, East Java, South Sulawesi and Nusatenggara (West and East).
The population of dairy and beef cattle grew rapidly from 1987 to 1996, i.e. 3.96 per cent and 2.3 per cent respectively (Table 2.13). It is likely government programs contributed to this rapid population increase. In remote areas like East Nusa Tenggara,
94 free grazing is adopted in the raising of beef cattle, while on Java an intensive feeding system (kereman) is adopted. Imports of cattle breeds (permitted since 1991) for improving local beef cattle productivity and quality, and of feeder steers for fattening, have acted to rapidly increase cattle meat production. Buffalo production grew by only 0.54 per cent, due mainly to the lack of government programs for developing this livestock, the increased use of tractors for land preparation (especially on Java) and lower demand for buffalo meat. In 1996, the population of dairy cattle, beef cattle, and buffalo was 0.35 million, 11.81 million, and 3.17 million, respectively.
Big ruminances are quasi-fixed assets, and it has been difficult for farmers to immediately adjust production in response to increasing output prices during the economic crisis, as birth rates take time to increase. Increased milking would jeopardise the health of the cattle, and rushed cattle slaughtering could cause an excessive reduction in cattle. Artificial insemination could be increased, but time is still required.
Goat, sheep and pig are classified as small ruminance. The goat and sheep populations have been highly concentrated on Java, where feed (grass and agricultural wastes) is more available. Pig is farmed according to social aspects, i.e., East Nusa Tenggara, Bali, North Sumatra, Riau, West Kalimantan, Riau, North Sulawesi and South Sulawesi. During the 1987 to 1996 period, the population increased by 3 per cent for goats, 3.36 per cent for sheep and 2.87 per cent for pigs. In 1996, the goat, sheep and pig populations were 13.84 million, 7.72 million and 7.60 million, respectively. No specific government programs have been aimed at these livestock. In addition, farming has generally not been commercial (PTNI 1996).
Poultry
Poultry includes ducks and chickens (which can be classified further into native chicken, broilers and layers). Broiler production is highly concentrated in West Java and Middle Java, and other prominent regions have been North Sumatra, East Java and South Sulawesi. The layer population is also concentrated on Java; other important regions have been North Sumatra, Lampung and South Sulawesi. Native chicken and duck populations are scattered across many regions, with Java island the most important.
During the 1987 to 1996 period, the population of native chickens, layers, broilers and ducks increased by 4.45 per cent, 8.05 per cent, 15.05 per cent and 1.99 per cent, respectively (Table 2.13). The rapid increase in population stemmed from government programs such as the Mass Guidance of Chicken Farm (Bimbingan Massal Peternakan Ayam or BIMAS Ayam) program, which focused on layers and broilers in order to meet the rapid increase in the domestic demand for chicken meat and eggs.
Table 2.13. Population of livestock, 1987 to 1996 (000 head) Year Cattle Buffalo Horse Goat Sheep Pig Chicken Duck Dairy Beef Native Layer Broiler 1987 233 9510 3290 658 10392 5354 6339 168405 39968 218183 26025 1988 263 9776 3194 675 10606 5825 6484 182879 38413 227044 25080 1989 288 10094 3224 683 10996 5910 6935 191433 40452 262918 24135 1990 294 10410 3335 683 11298 6006 7136 201366 43185 326612 25553 1991 306 10667 3311 695 11484 6108 7612 208966 46885 407908 25369 1992 312 11211 3342 678 12062 6235 8135 222530 54146 459097 27342 1993 329 108291 3057 582 11502 6240 8704 222893 54736 528159 26618 1994 334 1367 3104 611 12770 6741 8858 243261 63334 622965 27536 1995 341 11534 3136 609 13167 7168 7720 250080 68897 689467 29616 1996 348 11810 3171 579 13840 7724 7597 250713 78706 755956 29959 Growth 3.96 2.34 -0.54 -1.77 3.00 3.36 2.87 4.45 8.05 15.05 1.99 %/year Source: DGL (1997)
95 Livestock products
From 1987 to 1996, meat production increased very rapidly by 7.15 per cent per annum (Table 2.14). In 1996, total production reached 1.63 million tonnes. The most important sources of meat have been cattle (especially beef cattle), broilers, native chickens and pigs, which grew by 4.74 per cent, 14.85 per cent, 4.95 per cent and 3.87 per cent, respectively. The production of poultry meat and egg has been fostered since the Movement of Poultry Mass Guidance (Gerakan Bimas Ayam) in 1979 for broilers and layers. The contribution of other livestock categories, such as buffalo, goat, sheep and duck, to national meat production was small and their growth rates were also slow. Goat meat production decreased by 0.7 per cent.
Egg production has grown very rapidly, i.e. 6.65 per cent per annum (Table 2.15). In 1996, total egg production was 783,000 tonnes. The main source of eggs have been layers, with production growth of 8.15 per cent. Duck egg and native chicken production grew by 2.62 per cent and 6.77 per cent, respectively. Native chickens are the second most important source of egg production.
Milk production grew by 6.45 per cent per annum (Table 2.15). Dairy cattle are the major source of milk. To promote higher production, various government programs for smallholders have been launched. Dairy farming development has focussed on establishing and strengthening dairy cooperatives in producing regions and supporting sound marketing systems. In 1996, national milk production was 441,200 tonnes. It is likely that milk production systems in Indonesia are less competitive than those in temperate zones such as New Zealand and Australia, in terms of genetic resources, farm management and economic scale. Table 2.14: Production of livestock meat, 1987 to 1996 (000 tonnes). Year Cattle Buffalo Goat Sheep Pig Chicken Duck Total Native Broiler Layer 1987 234.8 43.7 61.5 30.6 141.0 180.6 174.6 16.5 10.7 894.0 1988 238.1 41.7 66.2 31.0 154.3 196.1 181.7 15.9 10.4 935.4 1989 252.8 43.1 62.9 32.2 136.3 205.3 210.4 16.7 10.0 969.7 1990 259.2 44.3 58.3 31.7 123.8 219.0 261.4 17.8 10.5 1026.0 1991 262.2 47.5 57.0 37.4 110.0 227.3 326.4 19.3 10.5 1097.6 1992 297.0 45.0 68.8 30.2 149.9 242.0 267.4 25.9 11.3 1137.5 1993 346.3 51.2 71.2 40.1 169.3 242.4 422.7 22.6 11.0 1376.8 1994 336.5 48.2 57.1 42.6 183.6 282.1 498.5 22.6 19.5 1490.7 1995 312.0 46.2 55.9 38.4 177.8 269.4 551.8 33.1 21.4 1506.0 1996 347.2 48.7 59.6 39.0 189.5 281.5 605.0 40.1 20.4 1631.0 Growth 4.74 1.59 -0.7 3.37 3.87 4.95 14.85 9.48 8.73 7.15 (%/year) Source : DGL (1997)
Table 2.15: Production of eggs and milk, 1987 to 1996 (000 tonnes). Year Eggs Milk Chicken Duck Total Native Layer 1987 70.7 259.0 121.8 451.5 234.9 1988 76.8 248.9 117.4 443.1 264.9 1989 80.4 262.0 113.8 456.2 338.2 1990 84.6 279.8 119.6 484.0 345.6 1991 87.8 303.8 118.8 510.4 360.2 1992 93.5 350.8 128.0 572.3 367.2 1993 93.6 354.7 128.0 576.3 387.5 1994 119.5 423.5 124.6 667.6 426.7 1995 125.3 457.0 145.6 727.9 433.4 1996 128.8 500.6 153.6 783.0 441.2 Growth 6.77 8.15 2.62 6.65 6.45 (%/year) Source: DGL (1997)
96 Fisheries
Marine fisheries
Marine products can be classified into fish, crustaceans, molluscs, other aquatic animals and seaweed. Only the most common fish are mentioned, with the remainder grouped into ‘others’. As indicated in Table 2.16, tuna (consisting of tuna, skipjack tuna and eastern tuna) is the most important fish for export, while the others are domestically marketed. From 1987 to 1994 (1995 and 1996 data is unavailable), fish production grew by 131,400 tonnes, or 6.08 per cent per annum. Annual growth of tuna production ranged from 5.65 per cent (skipjack tuna) to 11 per cent (tuna). Production of other kinds of fish ranged from 3.56 per cent (fringescale sardinella) to 7.56 per cent (scads).
In the crustaceans group, prawns and shrimps dominated production. Within the shrimp group, banana prawns were the predominant commercial commodity. Growth rates in the shrimp group ranged from 1.11 per cent (metapenaeus shrimps) to 9.67 per cent (panulirid spiny lobster). In 1994, crustacean production was 1.96 million tonnes. Sumatra (especially Riau, North Sumatra and Aceh provinces) was the major producing region, followed by Kalimantan, Java, Maluku-Irian Jaya and Sulawesi.
Inland water fisheries
Inland water fisheries may be classified into open-accessed water fisheries (lake, river), brackish-water-pond culture and fresh-water culture (this latter category can be broken down into fresh-water-pond culture, cage culture and paddy-field culture). The total production of inland water fisheries from 1987 to 1994 is presented in Table 2.17. Overall, inland water fisheries production increased by 5.45 per cent per annum. Production of open-accessed water fisheries increased by 1.75 per cent per annum. Crustaceans, molluscs and other commodities constituted only a small part. In the brackish-water-pond culture category, production increased very rapidly by 8.50 per cent per annum. The crustacean commodities, such as giant prawns, banana prawns and metapenaeus shrimps, have smaller production quantity, but constitute important export commodities, fetching high prices. The increase in prawn production ranged from 6,47 per cent (banana prawns) to 15.95 per cent (giant tiger prawns) per annum. The Brackish-Water Pond Intensification Program (Program Intensifikasi Tambak, INTAM) contributed to production growth. The production of fresh-water fisheries increased by 3.84 per cent per annum. The major commodity has been common carp, whose production increased by 6.43 per cent per annum. The other commodities constituted a small part of production and growth rates ranged from 0.42 per cent (Java barb) to 8.15 per cent (nile tilapia). Nilem carp fish production decreased by 4.96 per cent per annum.
Sumatra (especially Riau, Aceh and North Sumatra) has been the main shrimp-producing region, followed by Java, Kalimantan, Sulawesi and Maluku-Irian Jaya.
97
Table 2.17: Production of inland-water fisheries, 1987 to 1994 (000 tonnes) Commodity 1987 1988 1989 1990 1991 1992 1993 1994 Growth %/year 1.Inland Open Water Fisheries 276.3 281.3 296.4 192.5 294.5 300.9 308.6 336.1 2.75 - Fish 259.9 262.1 277.0 273.2 274.1 279.6 288.7 312.3 2.14 - Crustaceans (shrimp) 13.9 16.0 17.2 15.6 16.7 16.4 14.7 18.3 1.73 - Molluscs 1.4 1.5 0.8 2.0 1.5 1.9 2.4 3.2 12.30 - Other Aquatic Animals 1.0 1.7 1.4 1.8 2.2 2.9 2.8 2.4 12.94 2.Brackishwater Pond Culture 192.1 233.3 258.5 287.1 323.2 337.4 355.3 346.2 8.50 a. Fish 132.4 154.3 158.3 177.7 181.8 193.1 215.1 208.8 6.50 - Milk fish 105.9 118.0 119.3 132.4 141.0 147.0 164.4 153.1 5.86 - Mozambique tilapia 12.4 15.7 16.3 19.9 22.8 25.9 21.9 26.4 10.11 - Others 14.1 20.6 22.7 25.3 18.0 20.2 28.7 29.3 7.27 b. Crustaceans 59.7 79.0 100.2 109.4 141.3 144.3 140.2 137.4 11.97 - Giant tiger prawn 25.2 44.5 63.7 67.4 96.8 98.4 87.3 83.2 15.95 - Banana prawn 17.0 17.8 18.5 17.6 19.3 21.8 29.2 23.9 6.47 - Metapenaeus shrimp 13.8 15.2 15.0 21.0 20.2 21.4 22.1 25.4 8.53 - Mysids 3.0 0.3 1.1 1.4 3.7 0.1 0.2 2.7 -10.72 - Crab 0.7 1.2 1.8 2.1 1.2 2.6 1.4 2.3 11.66 3.Freshwater Culture (fish) 184.6 197.1 208.2 212.8 194.4 212.9 245.1 251.3 3.84 - Common carp 87.8 84.0 87.1 89.2 84.4 93.5 131.1 135.2 6.43 - Java barb 20.1 23.6 21.2 28.0 19.9 21.1 22.0 23.4 0.42 - Mozambique tilapia 12.8 21.4 10.6 21.8 18.3 19.1 21.5 20.4 5.78 - Nilem carp 16.4 10.6 20.5 14.4 9.7 10.4 11.5 12.1 -4.96 - Nile tilapia 9.8 12.2 12.3 12.1 13.2 15.0 18.5 17.6 8.15 - Others 37.7 45.2 56.4 47.2 48.9 53.9 40.6 42.5 0.24 Total 653.0 711.6 763.1 692.4 812.0 851.3 909.0 933.7 5.45 Source: DGF (1997a).
2.5.2 Consumption
Cereals, roots, tubers and pulses
Per capita consumption of cereals, roots, tubers and pulses has changed over time, as shown by the National Socio-Economic Survey (SUSENAS) on household consumption (Table 2.18). Information is gathered from the head of household as to what was eaten during the week of the interview (usually conducted in January or February). Consumption patterns can be classified as follows: increased but eventually decreased; decreasing; and increasing. Rice and cassava consumption followed the first pattern, increasing from 1987 to 1990, but decreasing in subsequent years. Per capita rice consumption fell from 116.58 kg in 1987 to 111.49 kg in 1996, and cassava consumption fell from 22.67 kg to 10.86 kg. Maize and sweet potato consumption followed the second pattern. Maize consumption decreased from 10.02 kg in 1987 to 2.94 kg in 1996, and sweet potato consumption decreased from 7.18 kg to 2.96 kg. Consumption of wheat and pulses followed the third pattern.
Improvements in real per capita income and changes in consumers’ preference are behind the changes. The decreased consumption of rice, cassava, maize and sweet potatoes suggests that all these commodities may be inferior goods. The increased consumption of wheat and pulses, on the other hand, reflects improvements in income, preferences for higher quality and changing tastes. According to the 1996 SUSENAS data, per capita consumption of rice increased as per capita expenditure (a proxy of per capita income) rose from less than Rp15,000 to between Rp40,000 and Rp59,999, but then continuously decreased as household expenditure increased. In the cases of maize, cassava and sweet potatoes, per capita consumption decreased as household expenditure increased (a negative relationship). On the other hand, the per capita consumption of wheat and pulses increased as household expenditure increased (a positive relationship). It is expected, therefore, that the per capita consumption of wheat and pulses will increase as the per capita income of lower-class consumers increases.
98 Horticultural commodities
According to SUSENAS, the consumption of subtropical imported horticultural commodities, especially grapes, pears, apples, and potatoes, has been substantial and increasing. In this paper, however, only domestically produced commodities are included. Information about changes in the demand for imported subtropical fruit are reflected in the changes in the import quantity, which are in Section 2.5.
Changes in horticultural consumption may be categorised into four patterns: increased and then decreased; decreased and then increased; increasing; decreasing; and stable (Table 2.18). Major horticultural commodities (tomatoes, red chillies, small chillies, rambutans, bananas and papayas) followed the first category. The consumption of these commodities increased from 1987, but then decreased around 1994. In 1996, the capita consumption of tomatoes, red chillis, small chillis, rambutans, bananas and papayas was 1.40 kg, 1.03 kg, 1.01 kg, 2.44 kg, 9.05 kg and 2.86 kg, respectively.
Garlic and orange consumption followed the second pattern. As will be shown in Section 2.5, imports of these commodities have been substantial and increasing, suggesting that the consumption of garlic and oranges (particularly mandarins) included both imported and domestic products. Table 2.18 shows that consumption of these commodities during the 1987 to 1996 period continuously increased. In 1996, per capita consumption of garlic and oranges was 0.50 kg and 1.30 kg, respectively.
Only cabbage consumption followed the third pattern, continuously decreasing during the 1987 to 1996 period, from 2.34 kg in 1987 to 1.82 kg in 1996. Mango consumption was the only case to follow the fourth pattern. Consumption decreased from 1987 to 1990, but continuously increased from 1993 to 1996. In 1996, per capita consumption of mangoes was 2.44 kg, much higher than the 0.99 kg in 1987. Per capita consumption of shallots followed the last pattern; per capita consumption was approximately 1.92 to 1.98 kg per annum.
The 1996 SUSENAS data showed that per capita consumption of cabbages increased as per capita expenditure increased from less than Rp15,000 to the Rp150,000 – Rp199,999 level, but then decreased at the higher subsequent expenditure level of Rp300,000 or more. This was also true for small chillies, mangoes and papayas. The consumption of other vegetable and fruit commodities, on the other hand, increased as per capita expenditure increased (positive relationship). It is expected, therefore, that per capita consumption of these commodities would increase as the per capita income of the lower-class consumer increases.
Tree crops
Changes in the consumption of estate commodities can be classified into the following patterns: increasing; increased and then decreased; and decreased and then increased (Table 2.18). The consumption patterns of most estate commodities (i.e., coconut oil, palm oil, Sugar cane, coffee, cocoa and pepper) during the 1987 to 1996 period fell into the first category. In 1996, per capita consumption of these commodities was 3.952 kg, 3.162 kg, 8.804 kg, 0.916 kg and 0.166 kg, respectively. Only coconut (fresh) followed the second pattern and tea consumption followed the third pattern. In 1996, per capita consumption of coconut (fresh) and tea was 3.133 kg and 0.692 kg, respectively. According to the 1996 SUSENAS data, per capita consumption of coconut oil, palm oil, coconut (fresh), sugar cane and coffee increased as per capita expenditure increased from less than Rp15,000 up to the Rp200,000 – Rp299,999 level, but then decreased at the subsequent higher expenditure level of Rp300,000 or more. It is expected, therefore, that per capita consumption of these commodities would increase as the per capita income of the lower-class consumer increases.
99 Livestock and fisheries products
The per capita consumption of livestock products such as meat, egg and milk, and fisheries product (various products) continuously increased during the 1987 to 1996 period (Table 2.18). In 1996, per capita consumption of these products was 5.09 kg, 5.10 kg, 1.66 kg and 15.24 kg. According to the 1996 SUSENAS data, per capita consumption of livestock and fisheries products was positively related to per capita expenditure. Increased per capita expenditure should increase per capita consumption of these commodities.
Table 2.18: Per capita human consumption of major food commodities in 1987, 1990, 1993 and 1996. Commodities 1987 1990 1993 1996 Cereals, Roots, Tuber and Pulses Rice 116.58 118.14 116.38 111.49 Maize 10.02 8.41 5.86 2.94 Wheat flour 1.05 1.25 1.68 2.64 Cassava 22.67 25.42 20.75 10.86 Sweet potato 7.18 4.63 5.56 2.96 Soybean 3.42 3.54 3.98 4.39 Groundnut 0.57 0.78 0.68 0.94 Mungbean 0.47 0.57 0.57 0.73 Horticulture Cabbage 2.34 1.98 1.87 1.82 Tomato 1.15 1.25 1.47 1.40 Shallot 1.98 1.92 1.96 1.96 Garlic 0.24 0.30 0.38 0.50 Red chilli 1.00 1.20 1.10 1.03 Small chilli 1.08 1.14 1.06 1.01 Orange 0.73 0.88 0.94 1.30 Mango 0.99 0.42 0.52 2.13 Rambutan 2.96 4.78 3.48 2.44 Banana 12.95 13.83 12.58 9.05 Papaya 2.76 3.12 3.02 2.86 Estate Crops Coconut oil 2.538 2.995 3.453 3.952 Palm oil 2.538 2.704 2.954 3.162 Coconut 4.121 4.342 3.913 3.133 Sugar cane 7.618 7.878 8.138 8.804 Tea 0.520 0.494 0.567 0.692 Coffee 0.727 0.851 0.906 0.916 Cocoa 0.005 0.005 0.010 0.021 Pepper 0.057 0.094 0.140 0.166 Livestock and fisheries Meat 3.28 3.53 3.85 5.09 Egg 3.12 3.07 3.80 5.10 Milk 0.94 1.09 1.40 1.66 Fish 12.47 14.25 15.10 15.24 Source: CBS (1987, 1990, 1993, 1996), from SUSENAS.
100
2.6 Exports and Imports
2.6.1. Cereals, roots, tubers and pulses
Exports
Cassava products are the dominant exports in this group. Sweet potatoes and maize are also important export commodities. The export quantities and values of major products such as cassava chips and pellets and maize grain have decreased very rapidly (as shown in Appendix Table 2.1, the quantity of exports during the 1987 to 1996 period decreased by 6.79 per cent, 16.94 per cent and 4.70 per cent per annum, respectively). In the case of maize grain, in particular, this stemmed from a domestic supply shortage due to increased demand by feed industries. These unfavorable changes caused substantial foreign exchange losses. The higher rate of decrease in export value suggests that the export price of these products decreased during the period.
Tapioca, sweet potatoes and maize seeds showed rapid positive trends, although their export quantities were small, suggesting an increase in export prices. The development of maize seed industries, such as PT BISI, PT CPI and PT Pioneer, has acted to enhance domestic maize production, and to generate exports of maize seeds.
The major destinations of these export commodities were as follows: Korea, China, Germany, Italy, Sweden and elsewhere in Western Europe for cassava chips (sliced and dried); Germany and the Netherlands for cassava pellets; Malaysia and China for other cassava products; Japan for tapioca; Singapore and Malaysia for sweet potatoes; Japan and Hong Kong for maize grain; and Japan for maize seeds.
Imports
Indonesia has traditionally imported wheat (grain and flour), milled rice, soybean (grain and cake) and maize. Groundnut products (shelled and cake) have been imported in smaller quantities. During the 1987 to 1966 period, there was a rapid growth in imports of all these products (Appendix Table 2.2).
Milled rice imports, although unstable, increased by approximately 36 per cent per annum. In 1996, the quantity of rice imported was 2.04 million tonnes, at a value of US$55.3 million. The quantity increase was due to a domestic supply shortage, and the rise in value (of 39.20 per cent) reflected increased world prices. In 1997 and 1998, higher imports may be expected as a result of the severe drought, which could also drive up world rice prices. Rice has been imported mainly from India, Thailand, Vietnam and Pakistan.
Maize imports have increased rapidly by 100,000 tonnes, or an average of 39.2 per cent per annum. In 1996, 616.9 million tonnes of rice was imported at a value of US$130.7 million. This may be also considered a consequent of domestic supply shortage crreated mainly by increased demand from feed industries. The rise in value of 41.42 per cent suggests an increase in world prices. Maize has been imported mainly from Argentina, the US, South Africa and Vietnam.
Soybean (yellow grain) is a traditional import, which is needed by tahu (tofu) and tempe (fermented soybean) processors. Soybean imports have significantly increased, rising 7.52 per cent per annum. In 1996, imports were 743,500 tonnes at a value of US$250.6 million. The rise in value of 9.35 per cent suggests an increase in the world price of soybean. Soybean has been imported mainly from the US, Brazil and China.
101 Soybean cake is another consistent import, as it is needed by the feed industry. Import quantity and value have increased by 28.68 per cent and 29.68 per cent per annum, respectively. The rise in value suggests a slight increase in the world price. In 1996, the quantity and value of imports was 942,300 tonnes and US$265.9 million, respectively. Soybean cake has been imported mainly from India, Brazil, Argentina and the US.
Wheat grain is the main cereal import and wheat flour is imported in a small quantity. The import quantity and value of wheat grain increased significantly by 299,400 tonnes (11.49 per cent) and US$80.5 million (16.38 per cent) per annum. Wheat flour imports jumped to 157,900 tonnes in 1995 but then dropped to only 20,200 tonnes in 1996. The increase in the value of imports indicates increases in world prices of wheat grain and wheat flour. In 1996, 4.11 million tonnes of wheat grain was imported, to a value of US$1,049 million. Wheat grain has been imported mainly from India, Thailand, Vietnam and Pakistan.
Groundnut is another important imported pulse commodity in the forms of shelled groundnut and cake. The quantity and value of imported shelled groundnut increased by 16,400 tonnes (22.03 per cent) and US$12 million (26.69 per cent), respectively. The figures for cake were 15,100 tonnes (23.77 per cent) and US$2.7 million, respectively. The quantity of imported cake dropped substantially in 1996. The increase in the import value of both commodities reflects increased world prices. Shelled groundnut has been imported mainly from Vietnam, India and China, and cake is imported only from India.
Trade balance
Indonesia has been a net exporter of a number of root and tuber products such as cassava (chips, pellets and other), tapioca, sweet potatoes and, to a lesser extent, maize seeds. It has traditionally been a net importer of a number of cereals and pulses products such as wheat (grain and flour), milled rice (especially since 1995), maize grain, soybean (grain and cake) and groundnut (shelled and cake). These commodities, with the exception of wheat, offer opportunities for domestic production in the future. For roots and tubers, development would be aimed at enhancing exports so as to generate more foreign exchange. The development of cereals and pulses would be aimed mainly at satisfying ever-increasing domestic requirements, while saving foreign exchange.
2.6.2. Vegetables
Exports
The major export vegetables are potatoes, tomatoes, shallots, cabbages, mushrooms and red chillis. During the 1987 to 1996 period, exports of all these commodities grew rapidly, ranging from 55 tonnes (fresh red chillis) to 6,040 tonnes (fresh potatoes) and in percentage terms from 5.91 per cent (fresh shallots) to 110.44 per cent (fresh mushrooms), as shown in Appendix Table 2.3. The value of exports ranged from US$22,500 (fresh red chillis) to US$1.41 million (fresh potatoes) and in percentage terms from 2.95 per cent (fresh shallots) to 111.88 per cent (fresh mushrooms). In the cases of shallots and carrots, export values trended lower than export quantities, reflecting a decrease in the export price of these commodities. The reverse situation occurred for the remaining seven commodities, suggesting that the export price of these commodities had increased.
The principal destinations have been as follows: Malaysia and Singapore for potatoes, tomatoes and shallots; Malaysia, Singapore and Taiwan for cabbages; Malaysia for carrots; the US and Hong Kong for fresh mushrooms; the US and Japan for processed mushrooms; and Malaysia and Singapore for chillis.
102
Imports
The main vegetable imports are potatoes, onions, shallots, garlic, dried peas and dried chillis. These are imported in the following forms: potatoes – seeds, fresh or chilled, and frozen; onions – fresh or chilled and dried; shallots and garlic – fresh or chilled; peas and chillis – dried (Appendix Table 2.4). During the 1987 to 1996 period, the imports of most vegetables, except dried chillis, increased substantially. The trends of import quantity ranged from 71.29 tonnes (fresh or chilled potatoes) to 4,200 tonnes (fresh/chilled garlic), or 6.73 per cent (dried peas) to 91.39 per cent (frozen potatoes), while the trends of import value ranged from US$45,850 (fresh/chilled potatoes) to US$4.55 million (garlic). The import value of some commodities increased at a faster rate than import quantity, i.e., in the cases of potato seeds, onions (fresh/chilled and dried), shallots and garlic. This suggests the world price of these commodities increased. The reverse was true for the other commodities, such as potatoes (fresh/chilled and frozen) and dried peas. In the case of dried chillis, import quantity and value decreased by 39.83 tonnes (2.98 per cent) and US$10,030 (0.19 per cent), respectively, suggesting an increase in the world price.
Vegetables have mainly been imported from the following countries: Australia, the US and the Netherlands for potato seeds; Australia and the Netherlands for fresh/chilled potatoes; the US for frozen potatoes; the Netherlands, Australia and New Zealand for fresh/chilled onions; the US for dried onions; the Philippines, Malaysia, Vietnam and Singapore for fresh/chilled shallots; China for garlic; and New Zealand, Australia and Canada for dried peas.
Trade balance
For fresh or chilled potatoes, tomatoes, cabbages, carrots, mushrooms, red chillis and processed mushrooms, Indonesia was a net exporter. For fresh or chilled shallots, onions, garlic, frozen potatoes, potato seeds, dried onions, peas and chillis, it has been net importer.
Imported commodities could be produced domestically in the future and the production of exported vegetables such as potatoes, tomatoes, cabbages, carrots, mushrooms and red chillis could be increased in order to generate more foreign exchange. For some imported vegetables that are also domestically produced, such as shallots and garlic, the aim would be to satisfy domestic requirements while saving foreign exchange. Potato seed imports will be still needed so as to improve yield level. Imports of frozen potatoes and dried peas are still necessary since they have not yet been produced domestically. Shallots are both imported and exported, but exports are very small and are usually to meet the demand during the off-season when countries such as Taiwan and Japan are in winter (Hadi 1997).
2.6.3 Fruit
Exports
Bananas, canned pineapple, mangosteens, mangoes, rambutans and durians are the main fruit exports. From 1987 to 1996, exports of canned pineapple, mangosteens and mangoes grew consistently and rapidly, ranging from 71.3 tonnes (mangoes) to 10,500 tonnes (canned pineapple), or, in percentage terms, from 9.8 per cent (mangoes) to 40.28 per cent (mangosteens), as shown in Appendix Table 2.5. Banana exports jumped in 1993, contributing to the rise in export quantity of 9,300 tonnes, or 100.73 per cent per annum, over the period. Rambutan exports dropped in 1996 by 20.9 tonnes, or 24.85 per cent. Exports of durians have been unstable and have tended to decrease. With the exception of rambutans, the export value of fruit rose at a slower rate than did quantity, suggesting decreased export prices (other than for rambutans).
103 The principal export destinations have been as follows: the US, Germany and the Netherlands for canned pineapple; China, Hong Kong, Japan and the United Arab Emirates for bananas; Taiwan, Singapore and Malaysia for mangosteens and mangoes; the Netherlands and the United Arab Emirates for rambutans; and Singapore for durians.
Imports
Mandarins, oranges, grapes, apples, pears and longans are the main fruit imports. With the exception of longans, they are basically subtropical fruit not produced in Indonesia. Although oranges and apples are grown in Indonesia, they taste quite different from imported ones. Imports are mainly consumed by the middle to high-income classes.
From 1987 to 1996, the quantity and value of all these imports increased very rapidly (Appendix Table 2.6). Trend of import quantity ranged from 28.8 tonnes (dried grapes) to 5,340 tonnes (apples) or, an increase of 4.33 per cent (dried grapes) to an increase of 180.34 per cent (mandarins). Higher imports indicate a rapid increase in demand, due probably to higher real income and the prestige of consuming imported products. The trends in import quantity, although remaining high, were slower than those of import value, ranging from 1.74 per cent (dried grapes) to 154.80 per cent (mandarins), suggesting that the world price became cheaper. Imports have mainly come from the following countries: Pakistan, China, Australia and Taiwan for mandarins; Australia, Egypt and the US for oranges; the US, Australia and Chile for fresh grapes; the US, Iran and Turkey for dried grapes; the US, Chile, New Zealand and Australia for apples; China, Australia and New Zealand for pears; and Thailand for longans.
Trade balance
Indonesia has been a net exporter of tropical fruit including canned pineapple and fresh or chilled bananas, mangosteens, mangoes, rambutans and durians, and a net importer of sub-tropical fruit such as fresh or chilled oranges, grapes, apples, pears and mandarins. The longan is a tropical fruit and is produced by Indonesia, but production does not meet domestic demand. Varieties of imported oranges, mandarins and apples are quite different from those that are domestically produced.
2.6.4 Tree Crops
Exports
The main exported estate commodities have been palm oil (CPO and kernel), rubber (especially SIR-20), coconut (oil and cake), coffee, tea, cocoa, and pepper. Indonesia is the second largest CPO exporter in the world after Malaysia, the second largest rubber exporter after Thailand, and the second largest copra exporter after the Philippines. From 1987 to 1996, coconut cake, coffee, and tea experienced negative export trends, while the remaining seven commodities experienced positive trends, most of which were high (Appendix Table 2.7). The trends in export value for CPO, palm kernel, rubber, coconut oil and cake, coffee, were higher than the trends in export quantity, reflecting higher export prices of these commodities. The remaining commodities, like tea, cocoa, and pepper experienced the reverse situation, suggesting decreased export prices.
The major destinations for these exports have been as follows: the Netherlands, India, Malaysia, Germany and Italy for CPO; the Netherlands, USA and Spain for palm kernel; the US and Singapore for rubber; the Netherlands, Korea and the US for coconut oil; Germany, Korea and the Netherlands for coconut cake; Germany, the US, Japan, Singapore and the UK for coffee; Singapore, the US and Germany for cocoa; and the US, Singapore and Germany for pepper.
104
Imports
Few tree crop commodities have been imported, since Indonesia is a major tree crop producing and exporting country. The exception is sugar (which is included in the tree crop section since its development is supervised by the Directorate General of Estate Crops). From 1987 to 1996, the quantity and value of sugar imports increased rapidly by 61,650 tonnes (9.69 per cent) and US$28.79 million (14.68 per cent) per annum, respectively (Appendix Table 2.8). Imports of CPO showed the reverse situation: import quantity and value decreased by 18,720 tonnes (9.19 per cent) and US$6.64 million (3.12 per cent), respectively.
Imports were mainly from the following countries: Malaysia and Singapore for CPO; Singapore for palm kernel; the Philippines for coconut oil; and India, Thailand, China and Brazil for sugar.
Trade balance
Consistently, Indonesia has been a net importer of sugar and a net exporter of palm oil (CPO and kernel), rubber, coffee, coconut (oil and cake), tea, cocoa and pepper. Imports of CPO, palm kernel and coconut oil are essentially aimed at filling temporary domestic supply shortages. The development of all these commodities, therefore, would generate foreign exchange while avoiding imports.
2.6.5 Livestock commodities
Exports
Both food and non-food livestock commodities are exported. Milk, chicken meat, live pigs and eggs were the main food exports, while bovine, goat/sheep and pork meats, margarine and cheese exports were very small. The main non-food commodities to be exported have been bone/ham, leather, poultry, duck feathers, hatching eggs and DOC.
During the 1992 to 1996 period, some commodities experienced positive trends, while others experienced negative trends, as shown in Appendix Table 2.9. Food exports experienced rapid negative growth, ranging from 6.75 per cent (live pigs) to 128.05 per cent (chicken meat), which was probably because of reduced domestic production. In the non-food group, most commodities, except for hatching eggs, experienced slow to rapid export growth rates, which ranged from 1.13 per cent (bone/ham) to 36.63 per cent (DOC) per annum.
The percentage trends in export value of pork and chicken meat, live pork, eggs, milk, cheese, hatching eggs, duck feathers, poultry, and bone/ham were higher than the corresponding trends in export quantity (see Appendix Table 2.9 and Table 2.10). This suggests that the export price of these commodities has tended to increase. The remaining commodities (bovine, goat/sheep and pork meat, DOC and leather) experienced the reverse situation, reflecting decreased export prices.
The main destinations for these exports have been as follows: Malaysia, Japan and Netherlands for pork meat; Singapore for milk, margarine and cheese; and Japan for bone/ham.
Imports
Imported livestock products consisted of food (for example, various meats, milk, margarine, cheese and eggs) and non-food material (for example, cattle, feeder and pig breeds, DOC, poultry, hatching eggs, and leather), as shown in Appendix Table 2.11 for quantity and Appendix Table 2.12 for value. During the 1992 to 1996 period, the
105 quantity of meat (bovine, goat/sheep, pork, chicken and bovine heart) imported increased by 4,600 tonnes, or 24.58 per cent, per annum. With the exception of goat/sheep meat, imports increased rapidly, ranging from 21.5 tonnes (pork) to 2,950 tonnes (bovine) and, in percentage terms, from 16.43 per cent (bovine heart) to 49.21 per cent (pork). Imports of goat/sheep meat decreased by 173.8 tonnes or 13.94 per cent per annum. Annual non-meat imports increased very rapidly, ranging from 99.3 tonnes (eggs) to 11,460 tonnes (milk products) and, in percentage terms, from 109 per cent (cheese) to 166.75 per cent (eggs). The import prices of major food items have tended to decrease.
In terms of import value, the most prominent non-food imports have been leather, feeder steers and DOC. Imports of feeder steers and DOC increased very rapidly, i.e. by 52,300 head (64.07 per cent) and 316,900 head (47.81 per cent) respectively, while cattle breed imports decreased by 3,400 head (39.15 per cent). Trends of import value are similar to those of import quantity, suggesting that the import prices of cattle breeds, feeder steers, leather, hatching eggs and poultry became more expensive, while the prices of pig breeds and DOC became cheaper.
Imports were mainly from the following countries: Australia, New Zealand and the US for bovine meat; Australia and New Zealand for sheep meat; New Zealand, Australia and Singapore for milk, margarine and cheese; and Australia and China for cattle breeds.
Trade balance
Indonesia has been a net importer of major livestock commodities such as meat, milk, margarine, cheese, cattle breed, feeder steers, pig breed, DOC, hatching eggs and leather. Imported cattle, steers, pigs and DOC are needed to improve genetic nature of native breeds. Indonesia has been a net exporter of live poultry, duck feathers and bone/ham.
The gaps between quantities of major commodities exported and imported have widened, due to larger supply shortages in the domestic market. The development of dairy cattle for milk products, of beef cattle, goats, sheep, pigs, broilers and native chickens as sources of meat and of chicken layers and ducks as sources of eggs, are essential in order to satisfy domestic demand while saving foreign exchange.
2.6.6 Fishery commodities
Exports
Exported fishery commodities can be classified into three groups: tuna/skipjack (fresh/chilled, frozen, canned), shrimp (fresh/chilled, frozen, canned) and others (various products). Other products have been predominant in terms of quantity, but shrimp products have been more prominent in terms of value.
From 1987 to 1994, the quantity and value of fishery exports increased very rapidly by 62,400 tonnes (20.26 per cent) and US$165.6 million (16.71 per cent) per annum, respectively, as shown in Appendix Table 2.13. Tuna/skipjack and shrimp exports experienced rapid growth, i.e. 7,000 tonnes (11.23 per cent) and 7,900 tonnes (10.95 per cent), respectively. Within these groups, frozen products expanded at a less rapid rate than fresh/chilled products did. The ‘other’ group experienced the most rapid growth in export quantity and value, i.e. 47,500 tonnes, or 28.16 per cent, per annum.
The value of fish exports grew at a less rapid rate than did export quantity, suggesting that export prices have decreased. This reflects the decreased price of the ‘other’ fishery products group (a 16.71 per cent increase in value versus a 20.36 per cent increase in quantity), as prices in the other two groups increased.
106 Fishery products were mainly sent to Japan, Singapore, the US, the Philippines and the UK for tuna/skipjack; Japan, Singapore, the US and Hong Kong for shrimp; and Thailand, Singapore, Malaysia, China and Korea for other fishery products.
Imports
Imported fishery products consist of fish products (edible and non-edible) and fish meal (Appendix Table 2.14). From 1987 to 1994, imports increased very rapidly, by 1,700 tonnes per annum (23.71 per cent) for edible products, and 25,100 tonnes (22.61 per cent) per annum for non-edible products. Imports of fish meal also rapidly increased, i.e. by 21,000 tonnes (23.75 per cent). Fish meal is an important input for feed industries. Indonesia produces and exports large quantities of fish products while importing large quantities of fish meal. The principal reason for this has been an inadequate supply of raw material, i.e. very low quality fish or waste products (Rachmat et al. 1996). The use of good quality raw material is not suited for producing fish meal. Trends in import value were similar to trends in import quantity, suggesting increased import prices for fish products.
Imports mainly came from Japan and Taiwan for edible products; and Peru and Chile for non-edible products and fish meal. Other notable countries have been New Zealand for frozen fish fillet and China for crab.
Trade balance
In the case of fishery products, Indonesia has been a net exporter. Most high-valued products, especially tuna/skipjack and shrimps, were exported frozen, whereas other products were exported fresh or chilled. Imported fishery products were mostly processed or canned. Fish meal is always imported and will increase because of increasing demand for this feed ingredient.
2.7. Investment opportunities for agribusiness
2.7.1. Prospective commodities for agribusiness
The selection of commodities for investment has to be based on the likely prospects for the investment, both in domestic and internation markets. In the domestic market, prospects may be estimated by looking at the changes in per capita consumption or the derived demand for the commodities. A rise in income might increase domestic demand for chicken meat and, at the same time, demand for chicken feed (maize). For domestically produced commodities, this change provides opportunities for agribusiness expansion. For imported commodities, there are opportunities for imports or for finding commodity substitutes. Factors affecting exports would be the competitiveness of the commodities, changes in consumer preferences, consumer income, availability of substitutes, etc. For particular commodities, however, decreased demand in the domestic market does not necessarily mean market prospects are less. The per capita consumption of cassava and sweet potato, for instance, decreased, but exports increased, suggesting they have expanded their international markets.
In international markets, the prospects may be measured by changes in export quantity, i.e. rapid export growth reflects expanded world markets and slow or negative export growth indicates unsecured markets. Factors affecting exports include the competitiveness of the commodities, changes in the preferences of foreign consumers, income of consumers, availability of substitutes.
107
2.7.2 Resource potential
The availability of agricultural resources, such as land and water for land-based agriculture, biological resources for marine fisheries, and environmental conditions are of particular importance for agribusiness investment. For land-based agriculture, it is likely that an expansion of land will take place on outer Java where dryland and swampland is substantially available (Kasryno 1998). The total availability of arable land on outer Java for agricultural expansion is estimated at 20.7 million hectares, including 8.9 million hectares scattered over Sumatra, 7.9 million hectares on Kalimantan, 0.7 million hectares on Sulawesi and 3.2 million hectares on Irian Jaya. On Java, on the other hand, the rehabilitation of existing irrigation facilities would be necessary so as to improve crop yields and overall productivity of the land.
For livestock raising, natural grass, agricultural waste products and forestry area can be sources of feed, both on Java and outer Java (PTNI 1996). Forests, in particular, could be used by adopting agroforestry systems. In the case of smallholder poultry farms, increased production could be achieved by the use of lower technologies using local inputs.
Marine fishery production could be increased in the future. The most recent stock assessment by the joint teams (consisting of Marine Fishery Research Station, Center for Fishery Research and Development, Directorate General of Fisheries, Bogor Agricultural Institute, LIPI, BPPT and LAPAN) estimated that the total fish (all kinds of marine products) stock in 1997 was 7.09 million tonnes (Nurhakim et al. 1998). Of this, 6.1 million tonnes is considered the Maximum Sustainable Yield (MSY). In 1994, total marine fish production was 3.1 million tonnes (Table 2.8), constituting only 50.8 per cent of the MSY. The total allowable catch (TAC) is 80 per cent of the MSY, or 4.88 million tonnes. Additional fish production of 1.78 million tonnes would be challenging to achieve.
The method for estimating the MSY was the Catch Curve Method, with which the total extinction rate (Z) and weight growth rate (G) coefficients can be estimated. Estimation of the Z and G parameters is used for estimating the MSY with the modification of the Production Surplus (P–S) Model from Csirke and Caddy (1983). The P–S Model is based on Ricker’s Exponential Yield Model (Ricker 1975). The observation covered greater areas and kinds of fish than the previous MSY estimation that, in effect, increased the MSY figure. Yet, the current MSY estimation is not free from defects, since the data on catch and efforts was incomplete and inaccurate, and continuous data on biological and population parameters was unavailable (Nurhakim et al. 1998).
In the case of coastal fishery culture, brackish-water ponds could be expanded though the use of idle mangrove area. Of the total mangrove area of 2.5 million hectares, 498,000 hectares could be used for brackish-water pond culture (Mustafa et al. 1998). At 1997, the existing area of brackish-water ponds was 300,000 hectares. Another production system would be a floating net cage for growing coral fish.
The inland water area, including rivers, lakes, reservoirs and swamps was estimated at 48 million hectares (Samita 1998). The utilisation level of this area was very small (38.8 per cent). The production systems that could be adopted are the floating net cage, the pen and the bamboo cage.
Environmental concerns receive little attention. Any industrial investment should encourage long-term development by guaranteeing that processing activities will not produce pollution (land, water or air). Agribusiness processing activities that will produce serious pollution are expected to be carried out on outer Java.
108
2.7.3 Suggested investments
Cereals, roots, tubers and pulses
Rice production could be increased through the use of better technology such as improved irrigation, rice varieties and farm management. Area expansion could take place on outer Java using dryland or swampland. Rice production could be limited to a self-sufficiency level (self-sufficiency on trend). Related rice-mill units could be increased to process the increased rice production.
Maize production could be increased so as to meet increasing demand for this commodity, especially from the feed industry. Yield improvements, area expansion through arrangement of cropping patterns, and business partnerships between farmers and the feed industry or cooperatives are suggested. The production of modern corn seeds for export is important. This development path is also true for soybeans, except for the export of seeds. Small and medium feed industries could be developed in particular regions so as to mitigate the high dependence of poultry and corn farmers on existing the highly concentrated feed industry, which includes PT Japfa Comfeed, PT Charoen Pokphan and PT Cargill.
Cassava and sweet potato production could be increased so as to meet increased demand from international markets. The introduction of higher yielding varieties and the use of currently idle arable dryland are suggested. For sweet potatoes, the use of land available during the dry season is possible. Business partnerships between farmers and investors are suggested. This is also true for groundnut and mungbean, in order to respond to increased domestic demand.
Investment in the import and processing of wheat grain is challenging in the absence of a monopoly market. The capital necessary for this investment may be quite substantial.
Vegetables and fruit
Exported and domestically consumed vegetables such as potatoes, tomatoes, shallots, cabbages, carrots, mushrooms, red chillis and garlic, and fruit such as canned pineapples, bananas, mangosteens, mangoes, rambutans, durians, oranges and longans are suitable for expansion. The domestic and international markets for these commodities are expanding due to increased consumer income and awareness of the importance of higher quality products. The development paths for vegetables may be focused on the use of improved technology. For fruit, an area expansion is more important, for example through the use of available marginal lands, which would also benefit land conservation. The use of tissue culture for producing banana seeds is recommended. Business partnerships between farmers and investors or cooperatives are suggested. Large-scale processing industries, such as juice or canned fruit, or small-scale industries of various product forms would be more attractive and challenging (Quane 1997).
Estate commodities
All the currently exported estate commodities, such as palm oil, rubber, coconut, cocoa, coffee, tobacco and pepper, could be prioritised for future development. With the exception of coffee, exports of these commodities have grown very rapidly. Although the export quantity of coffee has decreased, its export value has increased, reflecting an increased export price. Tea does not have such a high priority for development since its export value decreased more rapidly than export quantity, suggesting a decreased export price. Sugar cane could be developed so as to meet the domestic supply shortage, while increasing exports of molasses. Imports of sugar cane have increased and, at the same time, the export value of molasses has increased more rapidly than export quantity, suggesting an improved export price.
109
The development paths could be combinations of the following activities: assisting estate commodity smallholders, while encouraging large-scale companies in the business partnership systems; using smallholders’ unused lands for plasma (smallholders) and the provision of convertible forest lands for nucleus (companies); providing reasonably cheap credits to smallholders; developing infrastructure such as roads and seaports; extensions for quality improvement purposes; in the case of sugar cane, relocating sugar factories from Java to more comparatively competitive regions on Java, such as Lampung, with smaller but efficient processing plants; and providing efficient public services.
Livestock commodities
Development of livestock (including dairy cattle, beef cattle, goats, sheep, broilers, layers and native chickens, and ducks) is particularly essential so as to meet increasing domestic demand for meat, eggs and milk, while increasing exports and reducing unnecessary imports.
The production of beef, goat and sheep meat is possible since natural feeds are substantially available. It was estimated that total available natural feed is approximately 105.7 million hectares, consisting of cereals and pulses crop wastes (19 million hectares), estate lands (11.1 million hectares), forest lands (72.7 million hectares) and grass/imperata lands (29.3 million hectares). Imports of cattle breeds and feeder steers could be continued. The development of dairy cattle as source of milk, either for fresh consumption or industrial purposes, could be encouraged through business partnerships between smallholders or through cooperatives that have milk processing industries. The greater use of domestically produced fresh milk instead of imports would save foreign exchange, since the price of imported fresh milk in terms of rupiah is currently very high.
The production of poultry meat could be encouraged through mutually beneficial business partnerships between smallholders and large companies. During an economic crisis, when the price of concentrates in the feed component is appreciably high, the development of low-input technologies would be more beneficial. This may also be true of broilers, in terms of increasing egg production.
Fishery commodities
Tuna, shrimp and various other fish products have been exported in the presence of low domestic per capita consumption. Increased production, therefore, is expected to increase both export and domestic consumption. Marine production could be increased by approximately 2.26 million tonnes per year. However, methods of fishing should be those that conserve marine biological resources, and trawl nets and dynamite should definitely be restricted. Business partnerships between small fishermen and large processing companies would help marine fishery development, with catching, processing and exporting activities particularly attractive and challenging. World demand for fishery products will increase as population, income and the awareness of the higher quality products increases.
The development of inland fisheries such as brackish and fresh-water ponds could be encouraged. Milkfish and shrimp have become commercial commodities with secured markets and high prices. Fresh-water ponds produce high-value fish with a secured domestic market. Pollution of brackish water ponds from processing industries must be avoided.
110
2.8 References
Agency of Agribusiness 1998b, ‘Deregulation Formulation on Import Tariff and Agricultural Trade’, Jakarta. Anonymous 1998a, ‘Inclusion of unprocessed agricultural products’, paper presented at the Eighth Meeting of the Coordinating Committee on the Implementation of the CEPT Scheme for AFTA’, Jakarta, 17–18 February 1998. Anonymous 1998b, ‘Economic issues from the Second Informal ASEAN Summit’, paper presented at the Eighth Meeting of the Coordinating Committee on the Implementation of the CEPT Scheme for AFTA’, Jakarta, 17–18 February 1998. BPPM, 1998, “Inclusion of Unprocessed Agricultural Product”, paper presented at the eighth meeting of the Coordination Committee on the Implementation of the CEPT Scheme for AFTA, BPPM, Jakarta, February 17–18, 1998 CBS 1996a, Indonesia Foreign Trade Statistics: Exports 1996, Volume I, Central Bureau of Statistics, Jakarta. CBS 1996a, Indonesia Foreign Trade Statistics: Imports 1996, Volume I, Central Bureau of Statistics, Jakarta. CPI 1997, Vademekum Pemasaran 1986–1996, Pusat Promosi dan Informasi Tanaman Pangan dan Hortikultura, Jakarta. (translated: Vademecum of Marketing 1986–1996, Center for Promotion and Information of Food and Horticultural Crops, Jakarta). DGCE 1995, Customs Tariff, Directorate General of Customs and Excise, Jakarta. DGE 1996a, Statistical Estate Crops of Indonesia 1995–1997: Palm oil, Directorate General of Estate Crops, Jakarta. DGE 1996b, Statistical Estate Crops of Indonesia 1995–1997: Rubber, Directorate General of Estate Crops, Jakarta. DGE 1996c, Statistical Estate Crops of Indonesia 1995–1997: Coconut, Directorate General of Estate Crops, Jakarta. DGE 1996d, Statistical Estate Crops of Indonesia 1995–1997: Coffee, Directorate General of Estate Crops, Jakarta. DGE 1996e, Statistical Estate Crops of Indonesia 1995–1997: Cocoa, Directorate General of Estate Crops, Jakarta. DGE 1996f, Statistical Estate Crops of Indonesia 1995–1997: Tobacco, Directorate General of Estate Crops, Jakarta. DGE 1996g, Statistical Estate Crops of Indonesia 1995–1997: Cloves, Directorate General of Estate Crops, Jakarta. DGE 1996h, Statistical Estate Crops of Indonesia 1995–1997: Sugar Cane, Directorate General of Estate Crops, Jakarta. DGE 1996i, Statistical Estate Crops of Indonesia 1995–1997: Pepper, Directorate General of Estate Crops, Jakarta. DGE 1996j, Statistical Estate Crops of Indonesia 1995–1997: Tea, Directorate General of Estate Crops, Jakarta. DGF 1995, Promotion of Business Opportunity in Fisheries Sector, Directorate General of Fisheries, Jakarta. DGF 1997a, Statistik Perikanan Indonesia Dalam Angka, 1994, Direktorat Jenderal Perikanan, Jakarta. (translated: Fishery Statistics of Indonesia 1994, Directorate General of Fisheries, Jakarta). DGF 1997b, Nota Keuangan 1997, Direktorat Jenderal Perikanan, Jakarta. (Translated: Financial Notes, Directorate General of Fisheries, Jakarta). DGFH 1996a, Luas Panen, Rata-rata Hasil dan Produksi Tanaman Hortikultura Tahun 1996, Direktorat Bina Produksi Hortikultura, Direktorat Jenderal Tanaman Pangan dan Hortikultura, Jakarta. (Translated: Area Harvested, Yield and Production of Horticultural Crops 1996, Directorate General of Food and Horticultural Crops, Jakarta). DGFH 1996b, Vademekum Sumberdaya Tahun 1996, Direktorat Bina Usaha Tani dan Pengolahan Hasil, Direktorat Jenderal Tanaman Pangan dan Hortikultura, Jakarta
111 (translated: Vademecum of Resources 1996, Directorate General of Food and Horticultural Crops, Jakarta). DGL 1997, Statistical Book on Livestock, Directorate General of Livestock, Jakarta. Gunarto and Ahmad, T. 1998, ‘Pengelolaan budi daya pantai’, dalam Inovasi Teknologi Pertanian: Seperempat Abad Penelitian dan Pengembangan Pertanian, Badan Penelitian dan Pengembangan Pertanian, Jakarta, hal. 945–951, (translated: ‘Management of coastal fishery culture’, in Agricultural Technology Innovation: A Quarter Century of Agricultural Research and Development, Agency for Agricultural Research and Development, Jakarta, pp. 945–951). Hadi, P.U. 1997, Prospek Agribisnis Bawang Merah, Pusat Penelitian Sosial Ekonomi Pertanian, Bogor (translated: Prospect of Shallots Agribusiness, Center for Agro Socioeconomic Research, Bogor). Hadi, P.U., Jamal, E. and Wahida 1998, Kajian Historis Kebijaksanaan Harga Gabah dan Pupuk dan Implikasi Kebijakannya, Pusat Penelitian Sosial Ekonomi Pertanian, Bogor (translated: Study on Historical Rice and Fertiliser Price Policies and Its Policy Implications, Center for Agro Socioeconomic Research, Bogor). ILO 1998, ‘Employment Challenges of The Indonesian Economic Crisis’, ILO Jakarta Office, Jakarta. Irawan, B. and Rusastra, I.W. 1990, ‘Economic Efficiency and Protection Rates of Milk Production in Central Java’, in Comparative Advantages and Protection Structure of the Livestock and Feedstuff Sub-sector in Indonesia, CASER, Bogor Kasryno, F. 1998, ‘Sumberdaya pangan dan lingkungan hidup’, Makalah disampaikan pada Widyakarya Nasional Pangan dan Gizi (WKPG) VI, Serpong, 17–20 Februari 1998 (translated: ‘Food resources and environment’, paper presented at the Sixth National Symposium on Food and Nutrition, Serpong, 17–20 February 1998). Lindblad, J.T. 1997, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies 33(3), 3–33. Mustafa, A., Ahmad, T., and Nikijuluw, V.P.H. 1998, ‘Potensi budi daya perikanan pantai’ dalam 864–869 (translated: ‘Potential of coastal marine fish culture’, in Agricultural Technology Innovation: A Quarter Century of Agricultural Research and Development, Agency for Agricultural Research and Development, Jakarta, pp. 864–869). Nurhakim, S., Uktolseja, J.C.B, Badrudin and Merta, I.G.S. 1998, ‘Potensi, tingkat pengusahaan dan penyebaran sumber daya ikan laut di Indonesia’, dalam Inovasi Teknologi Pertanian: Seperempat Abad Penelitian dan Pengembangan Pertanian, Badan Penelitian dan Pengembangan Pertanian, Jakarta, hal. 850–863, (translated: ‘Potential, fishing efforts and distribution of marine fishery resources in Indonesia’, in Agricultural Technology Innovation: A Quarter Century of Agricultural Research and Development, Agency for Agricultural Research and Development, Jakarta, pp. 850–863). PTNI 1996, Identifikasi Agribisnis Peternakan, Laporan Akhir Volume 2 Laporan Utama, Kerjasama Penelitian antara PT Nexus Indoconsultama dengan Direktorat Jenderal Peternakan, Jakarta. (Translated: Identification of Livestock Agribusiness, A Collaborative Research between PT Nexus Indoconsultama and Directorate General of Livestock, Jakarta). Quane, D. 1997, The Agribusiness, Fruit and Vegetable Processing Consultant’s Draft Final Report: Prepared for the Asian Development Bank, International Agribusiness Consultant. Rachmat, M., Hadi, P.U., Manurung, V.T.M., Sugiarto and Winarso, B. 1996, Prospek Agribisnis Perikanan Rakyat, Pusat Penelitian Sosial Ekonomi Pertanian, Bogor (translated: Prospect of Smallholder Fisheries, Center for Agro Socioeconomic Research, Bogor). Samita, A.S. 1998, ‘Pemanfaatan dan pengelolaan perikanan perairan umum di Indonesia’, dalam Inovasi Teknologi Pertanian: Seperempat Abad Penelitian dan Pengembangan Pertanian, Badan Penelitian dan Pengembangan Pertanian, Jakarta, hal. 952–962, (translated: ‘Utilization and management of inland open- accessed water fishery’, in Agricultural Technology Innovation: A Quarter
112 Century of Agricultural Research and Development, Agency for Agricultural Research and Development, Jakarta, pp. 952–962). Simatupang, P. 1994, ‘Sumber-sumber pertumbuhan hasil dan produktivitas total faktor produksi usahatani padi sawah di Indonesia’, Pusat Penelitian Sosial Ekonomi Pertanian, (translated: ‘Sources of production growth and total factor productivity of wetland rice in Indonesia’, Center for Agro-Socioeconomic Research). Soedjana, T.J. 1998, ‘Penawaran, Permintaan dan Konsumsi Pangan Hewani di Indonesia’, Makalah disampaikan pada Widyakarya Nasional Pangan dan Gizi (WKPG) VI, Serpong, 17–20 Februari 1998, (translated: ‘Supply, Demand and Consumption of Animal-Origin Food in Indonesia’, paper presented at the Sixth National Symposium on Food and Nutrition, Serpong, 17–20 February 1998). Solahudin 1998, ‘Agricultural Policy and Development in Indonesia’, keynote presentation at the International Seminar on Agricultural Engineering and Technology Application in Developing Countries – Case Studies for Indonesia and Some African Countries, Bogor – Indonesia. Sudaryanto, T. and Djauhari, A. 1997, ‘Penawaran, Permintaan dan Konsumsi Umbi-umbian dan Kacang-kacangan’, Makalah disampaikan pada Pra Widyakarya Nasional Pangan dan Gizi (WKPG) VI, Bogor, 22–23 Juli 1997, (translated: ‘Supply, Demand and Consumption of Tubers, Root and Pulses’, paper presented at the Sixth National Symposium on Food and Nutrition, Serpong, 22–23 July 1997). Suryana, A. 1998, ‘Penawaran, Permintaan dan perilaku kebiasaan pangan’, Makalah di- sampaikan pada Widyakarya Nasional Pangan dan Gizi (WKPG) VI, Serpong, 17–20 Februari 1998, (translated: ‘Supply, Food Demand and Food Consumption Behavior’, paper Presented at the Sixth National Symposium on Food and Nutrition, Serpong, 17–20 February 1998). Tay S.S.C. 1998, ‘What Should be Done About the Haze?’, Indonesian Quarterly, 26(2), Second Quarter, Jakarta World Bank, 1998, Indonesia in Crisis: A Macroeconomic Update, The World Bank, Washington D.C.
113 Appendix Table 2.1. Quantities and values of major exported cereals, roots and tubers commodities, 1987 to 1996. Year Cassava Tapioca Sweet potato Maize Chips Pellet Other Grain Seeds Quantity (000t) 1987 451.4 331.7 0 0 0 4.7 0 1988 583.9 502.1 0 0 0 37.4 0.1 1989 833.9 310.3 1.7 24.3 0.1 232.1 1.8 1990 697.3 570.5 3.3 7.1 0.3 136.6 5.2 1991 492.5 364.3 1.9 10.1 0.9 30.7 2.5 1992 368.9 501.3 3.2 3.9 4.7 136.5 13.2 1993 516.6 408.4 10.9 21.0 7.7 52.1 8.7 1994 386.0 298.8 1.2 3.1 4.1 34.1 3.4 1995 426.9 53.3 1.3 23.3 4.6 74.9 4.3 1996 290.0 93.6 4.9 9.7 2.8 21.9 5.0 Growth -6.79 -16.94 33.47 43.20 52.29 -4.70 44.04 (%/year) Value ($000) 1987 50147.0 39637.9 0 0 0 664.1 0 1988 67646.8 58522.6 0 0 0 4709.7 9.0 1989 47840.3 29433.7 275.3 3561.2 59.3 27984.4 273.9 1990 70725.2 70050.7 998.9 1334.6 85.1 16035.8 743.7 1991 53738.7 50476.8 755.6 2320.4 191.4 3501.9 370.6 1992 40625.6 67027.2 1070.0 820.1 1762.7 17287.6 1712.5 1993 47906.4 42625.2 1804.1 3687.4 1122.8 6772.2 1171.7 1994 33328.9 28838.3 1010.0 679.8 849.7 4949.0 670.1 1995 59763.8 6123.0 633.6 4859.0 880.9 10427.8 840.4 1996 21857.8 2399.6 1103.4 2703.8 768.1 4075.3 1228.7 Growth -7.02 -25.66 93.14 97.64 101.44 -7.42 75.07 (%/year) Source: CPI (1997)
114 Appendix Table 2.2. Quantities and values of major imported cereals and pulses commodities, 1987 to 1996. Year Wheat Maize Milled Groundnut Soybean rice Grain Flour Shelled Cake Yellow Cake Quantity (000t) 1987 1668.3 1.5 221.0 54.8 46.4 19.4 286.7 257.0 1988 1588.2 4.5 63.5 21.7 28.4 9.0 465.8 72.3 1989 1806.1 21.2 33.3 262.1 14.5 70.7 384.7 114.4 1990 1704.4 30.4 0.5 6.4 49.8 108.0 526.3 5.3 1991 2221.5 51.6 323.2 168.9 94.6 131.6 631.0 193.3 1992 2456.4 38.9 55.5 566.4 54.9 138.5 687.6 170.6 1993 2525.5 41.6 494.4 3.1 108.1 181.7 700.2 361.1 1994 3295.0 24.9 1109.3 268.8 150.9 192.8 628.2 498.6 1995 4054.2 157.9 969.1 1306.2 148.9 179.0 496.9 681.9 1996 4111.8 20.2 616.9 2040.2 162.0 70.9 743.5 942.3 Growth 11.49 30.22 39.20 36.60 22.03 23.77 7.52 28.68 (%/year) Value ($mn) 1987 244.0 0.3 24.8 12.3 21.7 3.8 63.1 51.9 1988 225.4 0.7 8.2 5.4 13.6 1.7 138.0 18.0 1989 286.9 4.4 4.6 74.0 8.1 12.4 126.9 33.0 1990 277.3 6.4 0.2 2.9 22.5 20.2 143.2 1.5 1991 366.4 9.1 45.7 52.5 31.3 22.9 172.7 42.4 1992 403.9 8.4 7.7 159.0 31.9 25.1 184.4 42.7 1993 442.0 4.6 67.6 1.3 58.9 32.5 190.2 91.7 1994 579.1 5.7 151.9 68.7 89.8 35.3 184.6 121.1 1995 803.4 43.4 152.8 374.1 99.9 27.8 142.9 163.7 1996 1048.9 4.7 130.7 731.1 116.9 16.7 250.6 265.9 Growth 16.38 31.99 41.42 39.20 26.69 24.06 9.35 29.68 (%/year) Source: CPI (1997) and CBS (1996b)
115 Appendix Table 2.3. Quantities and values of major exported vegetable commodities, 1987 to 1996. Year Fresh Fresh Fresh Cabbage Carrot Mushroom Red Chilli potato tomato shallot Fresh Processed Fresh Dried Quantity (tonnes) 1987 34297.2 703.5 4642.1 16107.0 0 0 0 25.8 0.3 1988 57044.8 2101.8 5192.9 29170.1 0 0 0 0.6 10.5 1989 71360.0 2096.3 1737.2 29935.6 2413.3 2.5 3568.7 37.3 160.7 1990 76774.7 1444.3 4062.7 25512.2 2796.2 58.0 5687.3 12.9 97.7 1991 98176.9 1810.3 10375.9 28175.4 1775.3 543.7 6310.6 349.5 101.4 1992 96469.9 2666.3 7843.0 56856.2 1632.1 3417.1 17582.3 623.9 342.2 1993 126584.2 3564.7 5336.5 69939.6 3033.4 6556.4 13142.8 554.3 221.0 1994 88924.7 3744.5 6843.3 68674.1 2223.1 8827.7 17110.8 565.7 328.4 1995 102940.5 3062.8 4158.5 60565.6 2266.6 4510.0 18798.3 493.5 591.8 1996 83132.2 3450.8 7171.0 60132.3 1067.0 1626.7 21205.1 145.9 485.5 Growth 8.89 13.90 5.91 15.05 70.65 110.44 102.98 53.72 62.11 (%/year) Value ($000) 1987 3675.2 75.8 1135.1 1778.3 0 0 0 12.3 1.2 1988 6225.0 299.8 1794.7 3857.8 0 0 0 0.2 6.5 1989 10019.9 477.9 785.7 3555.5 266.1 7.9 5338.4 12.2 214.6 1990 10266.1 259.3 977.3 3908.3 322.8 85.0 10222.7 2.0 114.0 1991 13932.1 436.8 2754.0 3811.5 214.5 974.7 14017.0 146.2 117.7 1992 15554.7 712.3 2332.1 7212.5 216.9 4956.1 37942.7 192.0 219.9 1993 19050.4 968.4 1541.4 9244.1 402.8 9882.7 20451.9 129.1 238.6 1994 13880.0 1586.2 1775.2 9262.1 318.2 14314.2 32662.4 152.0 543.7 1995 18114.8 902.7 1071.9 8632.2 349.6 6497.8 38543.7 223.7 1518.3 1996 15013.4 995.8 1620.9 8573.4 188.3 2326.6 36319.8 125.7 2145.2 Growth 14.38 25.05 2.95 16.85 54.36 111.88 109.42 58.68 68.40 (%/year) Source: CPI (1997) and CBS (1996a)
Appendix Table 2.4. Quantities and values of major imported vegetable commodities, 1987 to 1996. Year Potato Onion Fresh Fresh Dried Dried shallot garlic pea chilli Seeds Fresh Frozen Fresh Dried Quantity (tonnes) 1987 365.3 2.1 0 2440.4 161.5 2645.8 15007.6 6571.5 2952.7 1988 180.5 18.9 0 2598.1 92.5 2545.7 15709.8 8499.1 2521.5 1989 191.1 25.0 1499.3 4423.7 399.3 13415.3 18459.4 7652.2 3132.2 1990 64.0 5.0 2183.3 3645.1 332.4 12088.3 17865.9 9969.3 2000.0 1991 673.6 69.3 1457.7 4312.5 405.6 13638.7 18519.0 10107.5 1266.5 1992 614.9 113.6 1900.6 4856.4 660.2 16593.6 22892.3 8709.9 1014.2 1993 663.6 38.6 2207.5 5538.0 488.9 22252.9 25001.8 9296.8 2761.5 1994 866.0 332.1 4638.9 6340.0 1188.8 15213.3 29625.6 14565.8 4843.9 1995 785.0 308.0 7569.2 8620.4 943.0 31616.2 45373.8 13726.7 1566.1 1996 1209.7 897.4 9384.2 10424.6 1385.2 42057.4 59893.0 11315.5 1788.8 Growth 21.54 56.76 91.39 14.93 25.88 27.38 14.22 6.73 -2.98 (%/year) Value ($000) 1987 244.1 6.8 0 813.1 469.4 958.9 7351.2 2206.3 1994.6 1988 123.7 11.6 0 914.2 125.9 776.5 10558.9 2409.9 1626.7 1989 152.2 25.1 1382.8 1507.2 955.5 4285.6 13363.3 2198.7 2201.1 1990 118.0 5.8 1786 1448.1 833.9 3873.1 14306.1 2271.8 1373.2 1991 537.1 102.6 1274.1 1868.0 858.6 4860.8 14955.3 2386.8 888.1 1992 630.4 116.2 1764 1587.5 1401.6 6928.1 18415.8 1894.9 758.6 1993 533.1 41.0 1949.2 2007.8 1240.7 9154.8 20577.4 2342.9 2081.8 1994 872.6 164.2 4204.1 2572.1 3125.3 5963.9 22672.7 3366.0 3417.6 1995 816.5 419.7 6940.4 3505.7 2166.5 11662.1 42784.2 3224.7 1328.5 1996 987.8 439.4 9290.6 3581.9 3305.9 15646.9 58073.5 2503.1 1677.8 Growth 23.76 47.31 91.09 15.91 27.33 29.50 19.60 3.13 0.19 (%/year) Source : CPI (1997) and CBS (1996b)
116 Appendix Table 2.5. Quantities and values of major exported fruit commodities, 1987 to 1996. Canned Fresh banana Mangosteen Mango Rambutan Durian Year pineapple Quantity (tonnes) 1987 26951.6 51.5 35.7 306.6 10.9 141.0 1988 27483.8 17.1 262.4 738.1 45.8 943.6 1989 48292.9 91.5 277.6 300.2 33.8 434.6 1990 48716.2 154.7 357.5 572.6 108.3 271.9 1991 63932.0 334.3 452.0 722.8 108.6 45.7 1992 71465.4 11.5 1905.1 966.0 264.5 277.3 1993 99396.7 24917.0 1074.0 429.1 202.4 331.3 1994 98102.0 33092.4 2687.4 885.1 272.0 210.0 1995 89403.5 55317.9 3283.8 1693.7 234.4 97.1 1996 125940.5 101495.1 1347.6 566.3 67.0 307.1 Growth 16.93 100.72 40.28 9.8 24.85 -6.15 (%/year) Value ($000) 1987 13757.2 84.9 31.7 231.6 11.9 38.4 1988 14321.8 19.9 260.9 552.0 40.2 299.7 1989 22471.9 164.2 620.7 402.2 43.3 200.5 1990 24965.8 281.7 599.3 579.5 157.6 156.3 1991 45468.8 346.3 530.6 613.5 201.4 18.5 1992 47004.0 17.6 2144.0 857.2 414.3 190.2 1993 49702.5 3300.7 1120.4 586.1 317.2 273.7 1994 46228.8 5820.9 2484.2 935.9 426.0 125.8 1995 46373.5 8637.4 2688.7 1311.7 410.7 88.2 1996 60766.5 14530.7 1073.6 287.1 56.0 17.6 Growth 16.55 67.30 35.30 7.63 26.95 -8.42 (%/year) Source : CPI (1997) and CBS (1996a)
Appendix Table 2.6. Quantities and values of major imported fruit commodities, 1987 to 1996. Year Fresh Grape Fresh apple Fresh pear Fresh Fresh orange longan mandarin Fresh Dried Quantity (tonnes) 1987 4.7 0.7 464.2 8.3 0.9 0 0.1 1988 6.3 2.7 662.3 6.9 3.1 0 0 1989 4.6 53.0 579.4 342.2 360.8 0 0 1990 178.5 249.1 529.7 2177.5 1406.7 0 1.9 1991 2654.7 2548.5 688.9 5757.2 2474.8 352.6 327.3 1992 9658.8 6195.4 545.8 14455.6 5717.3 850.9 1994.0 1993 17889.4 6460.7 825.6 25454.6 7044.2 1998.9 4645.4 1994 18447.2 4791.7 1014.0 31428.3 7743.2 3202.0 8850.9 1995 15296.6 6325.6 724.4 44158.1 18844.8 2930.0 22653.6 1996 14952.3 9102.5 620.6 37638.7 22155.5 4945.7 34488.2 Growth 111.30 105.14 4.33 101.81 104.79 119.08 180.34 (%/year) Value ($000) 1987 5.4 2.6 532.4 14.0 2.0 0 0.6 1988 9.0 6.5 682.8 15.9 5.0 0 0 1989 6.4 37.1 583.0 266.8 426.2 0 0 1990 217.7 427.3 630.0 1489.9 892.5 0 2.5 1991 1849.4 3643.5 716.8 4931.9 2253.1 311.7 203.3 1992 5800.0 7683.7 512.7 13230.7 4473.8 815.6 1215.9 1993 10179.1 7721.2 679.4 21705.3 5529.2 1646.2 3254.9 1994 11411.7 7233.2 908.5 26945.5 6205.2 2784.4 5931.4 1995 8948.6 10245.8 694.2 32486.7 13916.7 3283.8 12336.7 1996 8739.6 15578.2 572.0 28813.5 17061.7 4153.7 18871.0 Growth 99.87 100.30 1.74 93.39 94.99 117.88 154.80 (%/year) Source : CPI (1997) and CBS (1996b)
117 Appendix Table 2.7. Quantities and values of major exported tree crops commodities, 1987 to 1996. Year Oil Palm Rubber Coconut Coffee Tea Cocoa Pepper beans Volume CPO Kernel Cake Oil (000 t) 1987 551.1 87.3 1092.5 381.4 118.4 286.3 90.4 40.9 30.0 1988 852.8 111.4 1132.1 387.1 206.7 299.0 92.7 61.3 41.6 1989 781.8 135.4 1151.4 264.8 191.6 357.0 114.7 75.9 42.9 1990 815.6 158.3 1077.3 447.6 194.0 421.8 111.0 119.7 48.4 1991 1167.7 136.3 1220.0 451.1 197.6 380.7 110.2 145.2 50.3 1992 1030.3 222.5 1267.6 316.9 351.5 269.4 121.3 176.0 62.1 1993 1632.0 275.2 1214.6 333.7 287.0 349.9 123.9 228.8 27.7 1994 1631.2 340.5 1245.0 87.0 392.9 289.3 87.7 231.2 36.0 1995 1265.0 311.4 1324.3 287.3 148.3 230.2 79.2 233.6 57.8 1996 1672.0 341.4 1434.3 314.1 378.8 368.6 101.7 274.1 36.8 Growth 11.14 15.89 2.62 -6.45 8.17 -0.92 -0.58 20.72 1.11 (%/year) Value ($ 000,000) 1987 143.6 33.2 958.0 39.4 58.7 535.6 118.7 66.3 148.7 1988 333.9 40.6 1243.4 47.4 108.4 550.2 125.3 81.9 144.6 1989 244.6 48.1 1007.2 32.6 95.7 493.5 162.7 85.2 111.0 1990 203.5 44.2 846.9 44.2 66.0 377.2 181.0 127.1 80.6 1991 335.5 42.8 965.7 49.0 73.3 372.4 143.1 149.9 66.8 1992 356.5 109.8 1038.5 35.2 183.1 236.8 140.9 158.8 62.4 1993 582.6 110.2 977.1 36.2 118.5 344.2 155.7 210.9 46.0 1994 717.8 177.6 1271.9 10.6 213.2 745.7 97.9 279.4 78.6 1995 747.4 187.3 1963.6 27.7 93.6 606.4 87.7 308.3 155.4 1996 825.4 235.2 1918.0 42.2 266.5 605.9 112.5 262.8 98.9 Growth 18.17 23.36 6.74 -5.87 11.68 1.90 -3.63 17.69 -4.02 (%/year) Source : DGE (1996a to 1996j) and CBS (1996a)
Appendix Table 2.8. Quantities and values of major imported estate commodities, 1987 to 1996. Year Oil Palm Coconut oil Sugar CPO Kernel Volume ( 000 t ) 1987 166.0 0 0 129.8 1988 302.2 0.5 0 130.3 1989 412.4 0.1 0 325.9 1990 26.2 0.5 0 281.0 1991 37.9 17.5 6.8 74.0 1992 308.7 17.2 11.1 294.2 1993 151.9 3.3 33.5 181.3 1994 123.6 13.9 46.0 21.2 1995 49.8 4.2 26.9 578.5 1996 107.6 3.1 43.6 1089.5 Growth (%/year) -9.19 47.61 86.33 9.69 Value ($ mn) 1987 62.5 0 0 25.7 1988 120.4 0.2 0 35.1 1989 224.9 0 0 112.2 1990 7.7 0.3 0 123.4 1991 13.9 7.8 2.1 26.7 1992 113.5 12.1 6.6 98.9 1993 63.7 1.9 15.1 54.1 1994 55.7 8.0 14.2 6.4 1995 48.1 3.3 17.9 251.7 1996 61.2 2.7 4.9 458.9 Growth (%/year) -3.12 49.06 68.07 14.68 Source : DGE (1996a to 1996j) and CBS (1996b)
118 Appendix Table 2.9. Quantities of major exported livestock commodities, 1992 to 1996. Commodity 1992 1993 1994 1995 1996 Growth (%/year) Food Material : a. Meat (tonnes) 718.0 84.4 1308.5 1030.8 45.4 -30.19 - Bovine 0 20.8 4.3 20.7 4.2 28.65 - Goat/sheep 0 0 199.2 0 0 - - Pork 0 0 1.7 9.7 40.9 96.94 - Chicken 718.0 63.6 1103.3 1000.4 0.3 -128.05 b. Pig (000head) 211.2 185.4 154.8 160.7 161.9 -6.75 c. Egg (000 piece) 197.7 634.9 108.8 198.2 0.9 -119.48 d. Milk (tonnes) 9988.0 5532.9 4467.1 3104.0 4978.3 -19.71 e. Margarine (tonnes) 30.3 0 0.6 52.1 311.5 86.14 f. Cheese (tonnes) 35.5 0.5 5.5 2.5 17.7 2.18 Non-Food Material : a. DOC (000 head) 240.9 63.8 123.9 76.7 1371.4 36.63 b. Hatching egg (000 634.0 7.3 5.4 737.5 131.2 -14.65 piece) 273.9 222.9 250.5 390.1 453.8 15.69 c. Duck feather (tonnes) 530.6 697.0 677.8 1633.9 1537.8 29.8 d. Poultry (head) 1457.4 1268.2 1385.7 2957.5 2618.2 20.18 e. Leather (tonnes) 2506.9 2178.8 2747.9 1706.5 2997.2 1.13 f. Bone/ham (tonnes) Source : DGL (1997) and CBS (1996a).
Appendix Table 2.10.Values of major exported livestock commodities, 1992 to 1996 (US$'000). Commodity 1992 1993 1994 1995 1996 Growth (%/year) Food Material : a. Meat 1658.1 1702.3 3849.4 3525.5 80.3 -53.27 - Bovine 0 29.2 77.8 6.5 6.1 21.14 - Goat/sheep 0 0 160.1 0 0 0 - Pork 0 0 149 75.6 65.5 126.9 - Chicken 1658.1 1673.1 3462.5 3443.4 8.7 -97.78 b. Pig 13588.5 15917 13718.1 13913.2 17660.6 3.9 c. Egg 21.6 160.9 68.3 31.7 0.4 -96.02 d. Milk 8591.9 4647.5 3359.8 6900.3 6871.3 -0.52 e. Margarine 66.9 0 0.9 60.4 349.5 74.08 f. Cheese 199.1 3 80 113.2 87.4 19.84 Non-Food Material : a. DOC 452.6 403.9 527.4 381.9 1231.2 19.45 b. Hatching egg 369.8 4.9 1.3 144.3 56.9 -3.61 c. Duck feather 332.9 351.9 362.4 639.9 548.0 15.95 d. Poultry 310.9 430.9 536.3 2711.6 2335.4 58.72 e. Leather 52917.5 33209.4 37311.4 36728.7 31369.2 -9.45 f. Bone/ham 532.5 500.5 561.9 415.1 1176.3 13.98 Source : DGL (1997) and CBS (1996a).
119 Appendix Table 2.11. Quantity of major imported livestock commodities, 1992 to 1996. Commodity 1992 1993 1994 1995 1996 Growth (%/year) Food Material: a. Meat (tonnes) 13001.6 10079.6 15666.7 22052.9 30037.7 24.58 - Bovine 3148.9 3050.5 4799.3 7259.0 15772.0 40.89 - Goat/sheep 1680.2 519.0 492.7 737.3 702.0 -13.94 - Pork 11.7 44.7 150.9 91.1 96.0 49.21 - Chicken 980.4 618.5 2315.0 2002.1 2051.2 26.51 - Bovine heart 7180.4 5846.9 7908.8 11963.4 11416.5 16.43 b. Milk product 211.2 54629.0 55531.2 66070.5 51788.5 111.94 c. Margarine (tonnes) 30.3 9985.7 8725.6 28533.8 32315.8 149.94 d. Cheese (tonnes) 35.5 4340.3 3926.3 7911.0 6119.4 109.00 e. Egg 0.0 0.0 941.6 669.8 161.4 166.75 Non-Food Material: a. Cattle breed (000 head) 18.9 7.7 2.0 3.8 3.8 -39.15 b. Feeder steer (000 head) 19.1 35.4 78.2 186.1 205.1 64.07 c. Pig breed (000 head) 4.3 0.0 0.1 0 0 -75.17 d. DOC (000 head) 205.1 496.1 1800.1 1499.9 1287.9 47.81 e. Poultry (000 head) 0 0 24.7 17.4 74.0 114.65 f. Hatching egg (000 piece) 11.9 1757.4 36.3 2540.3 782.8 87.41 g. Leather (000 sheet) 59967.5 80132.4 189057.9 162550.6 128669.6 22.34 Source : DGL (1997) and CBS (1996b)
Appendix Table 2.12.Values of major imported livestock commodities, 1992 to 1996 (US$'000). Commodity 1992 1993 1994 1995 1996 Growth (%/year) Food Material: a. Meat 15431.2 13047.1 22700.3 30537.7 48675.2 31.48 - Bovine 6998.5 6128.0 10336.3 14534.3 32433.9 39.31 - Goat/sheep 1121.6 897.9 790.7 1062.3 1123.4 1.71 - Pork 45.5 51.1 436.5 252.3 251.9 50.20 - Chicken 1402.1 779.4 3437.2 2635.1 3446.2 30.17 - Bovine heart 5863.5 5190.7 7699.6 12053.7 11419.8 21.76 b. Milk product 91483.1 96517.0 90921.2 144026.5 114821.6 8.55 c. Margarine 17402.6 19019.4 16327.9 65531.0 62770.2 38.03 d. Cheese 8738.0 7844.1 8883.2 11999.7 12265.2 11.03 e. Egg 0 0 374.8 560.9 103.4 156.07 Non-Food Material: a. Cattle breed 4451.5 3419.4 1580.9 3167.4 3014.4 -8.56 b. Feeder steer 8299.1 17112.8 43567.2 109146.1 115129.1 71.13 c. Pig breed 72.6 0.0 92.2 0 0.2 -117.89 d. DOC 4000.9 6902.5 10015.7 13326.8 12828.0 29.88 e. Poultry 0 0 342.5 110.1 679.4 177.44 f. Hatching egg 9.6 12.6 17.0 916.1 868.7 132.97 g. Leather 81774.4 151769.2 358353.7 347136.4 292446.1 33.76 Source : DGL (1997) and CBS (1996b).
120 Appendix Table 2.13.Quantities and values of major exported fishery commodities, 1987 to 1996. Commodity 1987 1988 1989 1990 1991 1992 1993 1994 Growth (%/year) Quantities (000 t) 140.4 181.2 228.6 320.2 409.0 421.4 529.2 545.4 20.16 1.Fish (tuna/skipjack) 38.3 49.3 56.7 72.8 103.4 73.4 92.8 79.7 11.23 - Fresh/chilled 2.3 4.7 8.6 14.0 19.0 20.5 32.5 25.2 34.81 - Frozen 31.7 36.0 27.4 40.1 43.3 33.9 37.2 30.3 0.68 - Canned 4.3 8.5 20.6 18.7 41.1 19.0 23.1 24.3 21.06 2. Shrimp 44.5 56.8 77.2 94.0 95.6 100.5 98.6 99.5 10.95 - Fresh 3.3 3.3 4.9 3.3 4.5 8.1 6.0 6.1 10.75 - Frozen 40.9 53.3 71.7 89.9 90.6 91.5 91.2 92.4 10.86 - Canned 0.3 0.2 0.6 0.8 0.6 0.9 1.4 1.0 23.51 3. Others 57.6 75.1 94.7 153.4 210.0 247.5 337.8 366.2 28.16 Values (US$ mn) 475.5 712.2 825.1 1039.7 1255.7 1263.5 1503.7 1678.7 16.71 1.Fish (tuna/skipjack) 39.3 73.6 102.7 124.7 184.4 146.0 213.8 182.2 20.86 - Fresh/chilled 5.1 14.8 26.7 42.4 68.5 78.4 121.5 84.8 40.31 - Frozen 25.8 38.1 36.7 38.9 38.3 35.5 45.8 38.2 4.22 - Canned 8.3 20.7 39.3 43.5 77.7 32.1 46.5 59.2 21.16 2. Shrimp 353.1 500.3 556.8 690.2 770.0 764.9 876.7 1009.7 13.36 - Fresh 9.0 10.8 6.5 8.4 13.3 30.4 26.2 35.6 22.87 - Frozen 343.5 489.1 547.7 678.1 754.9 727.8 840.8 968.2 13.00 - Canned 0.6 0.5 2.6 3.8 1.8 6.6 9.7 5.9 38.92 3. Others 83.1 138.3 165.6 224.8 301.3 352.7 413.2 486.8 24.29 Source : DGF (1997a) and CBS (1996a).
Appendix Table 2.14.Quantities and values of major imported fishery commodities, 1987 to 1996. Commodity 1987 1988 1989 1990 1991 1992 1993 1994 Growth (%/year) Quantities (000 t) : a. Fish products 65.4 37.9 56.7 73.3 71.6 83.1 177.2 276.8 22.55 - Edible fishery commodities 2.0 5.5 6.0 7.1 3.7 15.1 12.2 14.0 23.71 - Non edible fishery commodities 63.4 32.4 50.8 66.2 67.8 68.0 165.0 262.8 22.61 b. Fish meal 52.5 19.7 38.8 52.1 48.7 47.7 122.6 227.2 23.75 Values (US$ mn) : a. Fish products 27.8 20.7 32.9 47.7 52.4 64.7 109.2 136.7 25.69 - Edible fishery commodities 2.6 5.4 6.2 9.5 7.2 18.5 17.5 18.0 26.67 - Non edible fishery commodities 25.2 15.3 26.7 38.2 45.2 46.2 91.7 118.7 25.71 b. Fish meal 20.8 10.7 20.9 29.2 30.6 31.8 67.1 92.5 24.90 Source: DGF (1997a) and CBS (1996b).
121
122
Chapter 3 Indonesia: retail and food service markets.
3.1 Structure and developments in the retail sector
3.1.1 Overview
During the 1990s, the Indonesian retailing sector grew strongly as a result of the rapid economic growth the country was experiencing. In 1997, total retail sales were A$94.5 billion (Rp183.4 trillion), with food sales representing approximately 37 per cent of this total. In August 1997, the Indonesian Retailers’ Association projected that the retail sector could continue to expand by more than 20 per cent per annum. This projection is now in disarray.
Indonesian retailing is very fragmented and dominated by traditional ‘wet markets’, which sell fresh food and small family-run retail operations. Approximately 70 per cent of the population live in rural areas and buy fresh food daily, a pattern which suits local family retail operations.
In the major urban centres, traditional retail outlets are gradually being superseded by large supermarkets, department stores, convenience stores and other modern food retailing formats such as hypermarkets. Jakarta is the largest centre for modern retail formats. It has a large population, a superior infrastructure, a higher proportion of middle to upper-income earners and a greater utilisation of fridges and freezers.
The huge potential of Indonesia’s retail industry has attracted many foreign companies to the market. This is despite the fact that the Government still does not allow foreign firms to establish outlets unless they are a part of a venture with local companies. There are now at least 20 foreign retail companies operating in Indonesia’s retail sector under franchise agreements.
Supermarkets have been the strongest growing retail sector in the 1990s. This sector has captured a significant market share from traditional retail outlets and has also become more competitive, particularly in Jakarta.
The crisis in Indonesia has had a dramatic impact on the retail industry. However, many analysts and retail executives still believe that the long-term prospects for the market remain positive. In the interim, some rationalisation of the sector is expected and there will be a shift in shopping from higher-priced department stores to cheaper discount operators.
Political instability is expected to continue until the succession from the Soeharto regime is finally resolved. Dr Habibie is considered by most commentators to be only an interim leader. Currency instability is also expected to continue while the political uncertainty exists. At present, the rupiah appears to have found a new level, but medium-term forecasts are still for the rupiah to fall significantly.
The El Niño-induced drought, the worst for many years, has already caused significant hardship to Indonesia and it is compounding the effects of the crisis.
The IMF and World Bank are expected to continue to pressure for the opening up the economy and for economic and structural change. Nevertheless, some commentators say that because of the harm already done to the economy by the Soeharto regime, together with the current restructuring process, it will take five to 10 years to bring growth back to pre-crisis levels.
123 Further foreign investment is expected to occur in the food and other sectors of the Indonesian economy as part of the restructuring process. However, while the present instability exists, it is expected that investors such as retail and hotel operators will remain very cautious about their investments.
3.1.2 Market structure
Size
In 1997, total Indonesian retail sales were estimated to be A$94.5 billion (Rp183.4 trillion), with food sales representing approximately 37 per cent of this total, or A$35 billion (Rp68.2 trillion). It is difficult to be more accurate due to the large number of small street vendors, hawkers and kiosk traders outside the major cities who are not properly accounted for.
The retail market is still highly fragmented. The three largest retail companies in Indonesia are PT Matahari Putra Prima, Hero Supermarkets and PT Ramayana Lestari Sentosa and their combined sales represented only 2 per cent of the total retail market.
In 1997, the number of retail outlets in Indonesia was estimated to be 1.5 million, with the number of food outlets representing 29 per cent of this total. Between 1992 and 1997, the total number of retail outlets grew by 64 per cent (an average annual growth of 11 per cent).
Table 3.1: Total number of food and non-food retail outlets, 1992 to 1997 (000s) Sector 1992 1993 1994 1995 1996 1997 Food 362 367 373 378 406 435 Non-Food 551 636 741 847 948 1067 Total 913 1003 1114 1225 1354 1503 % Growth 10 11 10 11 11 Source: Euromonitor, Indonesian Retailing, January, 1998
Segmentation
Despite the emergence of the supermarket chains, department stores and convenience stores, the traditional retail sector still represents a high proportion of total retail sales. In 1997, the top 10 retailers accounted for less than 3 per cent of total retail sales. Table 3.2 shows the top 10 retailers in Indonesia. Hero Supermarket is the largest food retail chain, with approximately a 40 per cent market share of supermarket food sales.
124 Table 3.2: Leading Indonesian retailers, 1995 Company Brands Type Turnover No. of Outlets (A$mn) Matahari Putra Matahari dept 858 86 dept stores/ Prima supermarkets M&S dept 2 dept stores Hero Supermarkets Hero supermarkets 472 66 supermarkets Star-Mart mini-markets 20 clothing Toy City toy shops 20 mini-markets Mitra discount stores 12 discount Shop-in cosmetic/toiletries 2 cosmetics, 11 toy stores Ramayana Lestari Ramayana dept 390 54 outlets Sentosa Robinson dept PSP Group Putra Serasi dept stores 208 n/a Putra Sinar clothing Tops supermarkets Bi-Lo discount Karabha Unggul Makro discount 189 6 cash-and-carry Alfa Multi Retail Alfa Multi convenience 179 3 outlets Galael Galael supermarkets 151 25 supermarkets Great River Garment Great River clothing 110 n/a Ind Golden Truly Golden Truly supermarkets 103 6 supermarkets Mitra Discount Mitra discount 74 n/a Stores Source: Euromonitor, Indonesian Retailing, January 1998.
Other firms in the retail sector include Metro (supermarkets and department stores) and KemChicks (an upmarket foodstore). Convenient stores such as 7-Eleven, Circle K, Freshmart, AM/PM and Starmart (Hero) are well represented in Jakarta, but have limited exposure in other cities.
There is a high level of income disparity between rural and urban dwellers, with rural dwellers having considerably less spending power. Approximately 70 per cent of the total population live outside major urban centres.
Large supermarket chains, department stores and convenience stores are primarily located in major urban centres such as Jakarta and, to a lesser extent, Surabaya, Bandung, Medan and Demarang. The large retail chains target mainly middle to upper-income earners. In 1996, there were 13 large shopping centres in Jakarta and this was projected to grow to 60 by 1998.
Recently, the major retail chains have begun to target ‘secondary’ urban centres for the establishment of new outlets to avoid the intense competition that has developed in Jakarta.
125
Traditional retail outlets
Despite the rise in modern retailing over the past decade, traditional retailers still dominate the market. For example, in Jakarta there are approximately 150 traditional markets, with up to 80,000 small retail traders. The majority of fresh food is still purchased at these wet markets, which are generally owned and operated by the local government and traders. An extensive range of dry goods and general merchandise is also sold at these markets.
A large number of street vendors, hawkers, kiosk traders and other small independent operators are unaccounted for, making it difficult to be accurate about the real number of outlets and their combined sales turnover.
Modern retail outlets
The modern retail sector, incorporating supermarkets, department stores, convenience stores and discount operators, has developed very rapidly in major urban centres because of a number of factors, including the relaxation of foreign entry regulations preventing foreign companies operating in Indonesia.
The development of modern retailing in areas outside major urban centres has been slower due to the lack of distribution infrastructure, electricity, water and telecommunications. However, a major government infrastructure development program was introduced in 1997 to help the expansion of retailing and other industries. This will be a key factor for the continued expansion of modern retailing in Indonesia.
Department stores have shown strong growth during the 1990s. The two largest department store operators, Matahari and Ramayana, have increased their presence in food retailing. Department stores predominantly target expatriates, foreign visitors and middle to upper-income consumers.
Hero Supermarkets, Galael and Truly Golden are Indonesia’s largest supermarket chains, and they primarily target the middle-income group. Recently, supermarkets have increased their stocks of fresh foods and this is beginning to take market share away from traditional wet markets in major urban centres.
Convenient store chains such as 7-Eleven, Circle K, Freshmart, AM/PM and Starmart (Hero) are primarily located in urban centres, particularly Jakarta, and they mainly target middle to upper-income consumers.
Prior to the onset of the crisis, many of the large retail chains had already started to change their strategies for maintaining market share, for example pricing aggressively, establishing outlets outside Jakarta and moving outside their core business areas.
Distribution
Indonesia’s retail sector is still largely served by traditional distribution systems. Modern systems are mainly attached to the international retail groups in the market. A few local operators of supermarket, department or discount stores have modern distribution facilities, but these are still a minority.
Indonesia’s traditional distribution system is dominated by wholesalers and wholesale markets. Inroads are being made into this systems by such trends as direct purchasing, imported foreign expertise (for example, Davids/Hero) and new facilities. This system generally has the following characteristics:
126
· it is fragmented and regional or product-specific · it results in inefficient small deliveries and lengthy ordering and delivery · it results in excessive retail space being used for storage · it is supported by small to medium-sized retailers and the wet markets · it is plagued by unreliable delivery and quality, loss and waste problems · it uses unsophisticated IT and other management systems
Indonesia’s modern retail distribution system is characterised by some of the following points:
· it is largely ‘proprietary’, led by international retailers for their own business · it is centred around large cities, especially Jakarta · external assistance has been sought to develop new systems and train staff · further change has begun with the arrival of discount and membership club operators · cost and margin pressure caused by the crisis will force the need for more distribution efficiency
3.1.3 Consumer and retail trends
Indonesian consumers are becoming increasingly interested in Western-style foods such as bread and cereal products, dairy products, meat and fruit, as well in pre-packaged foods. This trend has resulted from the massive economic and social changes of the past decade. Incomes have increased and exposure to Western-style food has escalated.
Prior to the crisis, food expenditure had been a small enough proportion of disposable income to afford consumers more choice than they had ever had before. At the same time, the total value of food consumption was still growing. Food had moved from representing around two-thirds of consumer spending in 1992 to approximately one-third in 1997.
The market for imported and speciality food products, which had been growing rapidly, is estimated to have decreased by as much as 70 per cent in 1998. Consumers are reverting to local products and are trading down to lower-priced items by shifting to lesser-quality products and away from shopping in department stores and supermarkets to discount operators and wet markets.
Indonesians have typically bought much smaller packs of many consumer and food products than have consumers in Australia and cost increases are forcing them to do this more than ever.
Competition in the supermarket sector has been driven by the expansion of existing operators and the entry of new foreign operators. Department stores have also moved into the supermarket trade. Mini-markets and new discount retail formats (for example, Makro, Goro, Indogrosir) have arisen and they are attracting lower to middle-income consumers away from supermarkets. The establishment of large one-stop shopping centres and the continuing development of the food service sector are also affecting the pattern of modern Indonesian retailing.
Goro’s involvement in Galael, Walmart’s holding in Matahari, the emergence of PriceSmart and the imminent arrival of Carrefour are just a few of the signs during the past year of the huge changes occurring in the Indonesian retail sector. The crisis has slowed this trend momentarily, however it is likely that the growth and change will continue for reasons of expansion or as a way of rationalising (for example, new, but downsized Goro stores).
This increasing competition had already led to some rationalisation of the retail sector prior to the onset of the crisis (for example, the Galael/Goro and Wal-Mart/Matahari
127 mergers, the downsizing of Goro multi-grocer stores), however this trend is expected to accelerate markedly in the current crisis.
While a few retailers (for example, Hero, Sogo, Price Smart and Goro) have introduced ‘house brands’, they are not widely utilised in the Indonesian retail sector at this stage. It is forecast that house branding will be used more widely in the future as a means of differentiation, in an increasingly competitive market environment.
While the wet markets continue to dominate fresh foods sales, a growing share of this business is being taken by supermarkets and other modern retail formats. As in most other countries, fresh produce is now a significant ‘lead-product’ and a way of differentiation .
Changing socio-economic factors over recent years that have affected Indonesian retail patterns include: the increasing population, increasing disposable incomes, urbanisation, increased demand for imported foods, deregulation of the retail industry, increasing tourism, larger demand for convenience foods, more working women, refrigeration becoming more common in retail outlets and households, and the increasing availability of food products.
Foreign competition legislation has caused much difficulty for foreign investors in Indonesia. Legislation known as Presidential Decree No. 54/1993 forbids foreign firms to invest directly in retail businesses, or to repatriate retailing profits. However, foreign companies have found ways to enter the market. The most common way is by entering into joint venture agreements with Indonesian firms. Instead of passing on retail profits, the foreign company or Indonesian partner is charged on the basis of a franchise or a technical assistance arrangement, or through management fees. According to the free trade agreement signed with the Association of South East Asian Nations (ASEAN) in 1995, Indonesia must fully open up its retail industry to competition by 2003.
Indonesian retail management systems are still fairly elementary. Retailing is not backed by strong quality management or food hygiene systems, except for at the top of the market (for example, Diamond, Hero). There is also a lack of skills in retailing, particularly in areas such as store management, quality control and buying.
3.1.4 Impact of the crisis
Many expatriates have left Indonesia since the start of the crisis and the ‘expats’ retail market is down by over 60 per cent since November 1997. Around 43,000 expatriates have reportedly left Indonesia in response to the crisis and it is estimated that less than half have returned.
Those businesses with large foreign exchange exposures have been the most severely affected by the crisis. The financial sector has also been badly hit. The Government is in the midst of attempts to rationalise the banking and financial sectors at present, although this a major and extended job.
Consumers have become much more cost-conscious. They have shifted to lower-priced ‘durables’ and food options and they have very strongly moved away from imported products.
Local food businesses are gaining some benefit from the crisis, even though market demand is very suppressed. For example, local confectionery and biscuit manufacturers and domestic fresh produce sellers are being assisted by the rupiah’s depreciation. Local manufacturers and the Government are also looking to take advantage of the situation by using Indonesia’s enhanced export competitiveness to develop exports to North Asian and other markets that were beginning prior to the crisis.
128 In addition, discount stores such as Goro and Makro have received a boost from the crisis. While business is not easy for these operators, they have begun to take market share away from higher-priced supermarkets and department stores.
Dairy Farm International’s Group Chief Executive, Ronald J Floto said in February 1998: ‘We believe that Indonesia will overcome its current financial difficulties and the long- term prospects for the country’s retail sector remain good. Companies are continuing to view the current crisis as an opportunity to invest for the longer term, while tightening their belts to weather the shorter-term impact.’
Further restructuring of the retail sector is expected. While retail growth has been considerably reduced by the crisis, factors such as the rise in modern discount retailing formats are expected to outweigh this effect and there is still expected to be growth in the next 12 to 24 months.
Retailer reaction to the crisis has been to look at rationalising their business and to take a very cautious approach to any new investment. Retailers are looking at all avenues to cut costs (for example, negotiating reduced rents, reducing the size of stores and subleasing surplus space).
The market for all imported foods is down by around 50 per cent this year and many imported products are no longer available.
Some importers have had to pay cash for goods – in some cases this has been to prove the capacity of the buyer to pay and in other cases it has been to attract a discount on the sale price. Likewise, importers’ customers often now need to pay cash and they have had their payment terms tightened. The fear of payment default is intense. This concern has also reduced purchase quantities in many cases.
Importers have attempted to extend their selling into non-traditional markets and regions (for example, the outer islands of Indonesia), which has generated some business. But this has also increased the trading risks in dealing with new customers and extended distribution lines, etc.
Another strategy has been to consider alternative products that are cheaper and offer new possibilities for trade that are not available with current high-priced imports. Inventory management has also become much more important to avoid cost wastage and to rationalise unprofitable stocks.
Business has gravitated towards those financially stronger companies who are likely to survive the crisis. Importers in particular have suffered badly and only the most secure companies are now attractive to exporters; these companies are gaining extra business.
Costs for maintaining foreign expertise have risen and some companies have terminated such contracts. For example, many retail companies had retained foreign ‘technical advisers’ to assist the development of their businesses and a number of these people have now been released.
There is still a strong need for many retailing and food distribution skills in Indonesia, which need to be imported. It is yet to been seen whether arrangements such as David’s involvement with Hero will be unwound by the crisis.
A few foreign retailers have already taken advantage of investment opportunities created by the crisis (for example, DFI, R Ahold). Some retail rationalisation had even occurred prior to the crisis (for example, Galael/Goro) and more is expected. Despite the gloomy outlook, the food industry, especially foreign retail organisations, is looking to invest in infrastructure and lay a longer-term platform in Indonesia.
129 Incidents such as those in May 1998 showed the seriousness of the situation in Indonesia. Three days of rioting left Indonesia’s retailing industry on its knees with 43 stores burned to the ground and 53 stores looted and damaged.
Table 3.3: Damage to the retailing industry from the May 1998 riots Store Name Burned Looted and Damaged Estimated losses (Billion Rp) Hero Supermarket 6 20 140 Matahari Dept. Store 6 1 80 Ramayana Dept Store 12 14 150 Alpha Wholesale Market 0 3 22 Goro Wholesale Market 1 1 81.2 Makro Wholesale Market 1 1 50 Diamond Supermarket 0 1 15 Yogya Supermarket 2 0 25 Golden Truly 0 3 3.3 Mitra 5 2 8 Ramandha Supermarket 1 2 2 Sabar Suubur 4 0 12 Tomang Tol 2 1 30 Total 43 53 414.5
Some of the corruption and bureaucratic complications involved in importing and retailing are expected to reduce gradually as many of the previous Soeharto family connections are broken down, however this will take time.
New legislation issued in 1997 (Decree of the Minister of Industry and Trade No. 259/MPP/Kep/7/1997) requires franchisers to: stipulate the standard format and contents of a franchise agreement, have a registration certificate, report on the growth of business on a periodic basis, utilise locally produced materials as much as possible, give priority to small and medium-scale suppliers of basic materials, disclose the choice of locations and understand that in the case of a dispute between the franchiser and franchisee, settlement must be through an Indonesian court. This legislation will affect a number of retail and restaurant chains in Indonesia.
3.1.5 Competitor responses
Most other food exporters to Indonesia are following a similar strategy to those in Australia and many have withdrawn from trade in the short term. However, the most serious exporters are staying in close contact with developments in the market, looking for ‘spot’ trading opportunities and to position themselves for the eventual return of regular business.
US beef, dairy, fruit and vegetable exporters have substantially withdrawn from the market in the interim, dissuaded by the double impact of the fall in market demand and the severe currency shift.
Prospects for 1999 are more interesting in that the general fall in markets around the world will reduce the alternatives available to exporters to shift their products to other markets. These exporters are expected to be more aggressive in trying to retain more business next year.
3.1.6 Implications for Australian trade
In general, Australian food products are well regarded in Indonesia and awareness of Australia as a major supplier of food and beverages has increased considerably in recent
130 years. Australian exporters have been aggressive in their marketing and their profile has been rising relative to that of exporters in the US and in Europe.
The crisis has affected demand not only for luxury goods but also for more basic imported products such as fresh fruit and vegetables, as middle-income groups hit by the crisis have stopped purchasing imported food and consumer durables. Although high-income groups have moderated their consumption, they are still able to purchase luxury items, so this trade has not disappeared.
Importers are desperately searching for cheaper alternative sources of products. This has caused some supply switching (for example, from the US to Australia) and it will probably continue as importers desperately try to survive. In a number of cases importers have also had to accept reduced margins in order to retain business.
Australia’s exports have been hit very hard and in many products exports have virtually stopped. Exports of frozen meat, dairy products, apples, oranges and grapes have all been hit. There is still a small amount of residual trade in these items, but it is very much on a ‘spot’ basis – ‘to satisfy our retail market’, according to Pangansari.
Non-payment problems are significant and have increased. There is more pressure on smaller importers and traders who have less resources and less credibility. Payment terms have been tightened by exporters to minimise their risks. Some importers simply can not pay. They are relying on their exporters to carry them, at least in the interim, and if this is not acceptable, they are going out of business. In a few cases exporter and importer arrangements have been revised, such that Australian exporters have given more favourable terms to their importers to help them continue their business. This is a dangerous strategy and is not common.
Indonesian banks have little credibility with Australian and other exporters and banks for confirming letters of credit. Much trade is now being done via banks in Singapore and elsewhere in the region. One side effect of this situation has been that smaller quantities of credit per order are required in order to minimise the risk to the exporter and the banks involved.
The need for exporter vigilance is great and regular market intelligence and monitoring is required to understand the changes that are occurring in the marketplace. The market is so volatile at the moment that continual vigilance is essential.
Australia needs to capitalise on any trade possibilities resulting from its currency advantage against the US and Europe. ‘Don’t abandon the market’ is the message from a number of exporters.
3.1.7 Products
Australian horticultural exporters reported much higher bad debt problems after the IMF intervention in November 1997. Slowness to act on debts quickly at that time led to a high incidence of payment problems and defaults. Horticultural exporters who failed to resolve outstanding payments then are believed to have incurred up to 70 per cent of bad debts. Prior to that date, bad debt levels were contained to around 20 per cent.
Horticultural exports are down dramatically in 1998, except for certain items (for example, mandarins). ‘Supply-driven’ exporters who could not abandon the market easily last year have incurred higher bad debts than those who took decisive action before November 1997. Trade has virtually stopped and the prospects for next year are that this will be the case until market conditions improve. This is considered to be when the rupiah rises to around Rp5,000–6,000/US$1.
131 Australia’s fresh produce business in 1997 and 1998 benefitted from the El Niño effect that hit other major suppliers (for example, US vegetable producers); otherwise this market might have collapsed further.
The Australian beef export business is down by around 60 per cent this year, according to MLA. Only ‘spot’ trade is occurring at present, and only when payment can be properly secured. It will take some time to recover, perhaps several years. ‘It’s a matter of watching and waiting for trade to start again.’
The trade in live cattle has also stopped, however longer-term prospects for this trade in Indonesia are considered to be very good.
Dairy exports are down significantly this year and the market is considered to be weak. However, the ADC says that prospects for Australian dairy trade with Indonesia are fair over the next 12 months.
The trade in alcoholic imported beverages is very small, because of the Muslim influence on the market and the government controls that remain in place. Australian wine export volumes are down significantly this year (25 per cent on a year ago) and they will probably fall further with the decline of the tourism and hotel markets.
The return of economic growth, together with a gradual reduction in market controls will see the wine and beer markets expand in the longer term. However, the attitude in the Australian wine industry appears to be that the best prospects in the near future lie elsewhere in Asia, and no particular effort will be made to boost Indonesian trade in the immediate future. Japan, China, Malaysia, Hong Kong and Singapore are where the industry’s effort is being made in Asia.
Australia’s seafood trade to Indonesia is very small and mainly comprises higher value speciality seafood products such as Tasmanian salmon. This trade is well down this year and is unlikely to recover quickly.
As in other markets, there is an opportunity to make investments at favourable values, where there is a good business justification for doing so. At the same time, there is a need for extreme caution in making any investments, given the instability and uncertainty in the marketplace. Potential investors are advised to remain well informed about the business environment and market developments.
3.2 Structure and developments in the food service sector
3.2.1 Overview
The Indonesian food service market is very small relative to the size of the population. In 1995, the total market was worth A$3 billion (Rp5,098 billion), which represented by far the lowest per capita expenditure in South East Asia. It is suspected that this figure did not include all the small local food supply and distribution business.
Indonesia is a highly diverse country in terms of economic development and geography. The country is comprised of over 13,000 islands. There are many entrenched cultural and religious attitudes that affect the consumption of certain foods. These factors contribute to the relatively low expenditure in the food service sector.
However, the food service market has experienced substantial growth in recent years from its low base. Between 1991 and 1995, the market grew by 31 per cent. This growth was assisted by the penetration of the major international fast-food and QSR operators, particularly from the US. Increasing disposable incomes and changing consumer demand also contributed to growth.
132 Despite the government’s campaign to encourage increased the consumption of local food, the number of foreign franchise food outlets has grown significantly.
Growth has occurred in all major food service segments, with sales in the fast-food, hotel, bar and club and retail catering sectors more than doubling between 1991 and 1995. Growth was particularly strong in the fast-food sector, especially amongst those chains serving fried chicken, burgers and sandwiches, and there has been an emergence of local fast-food companies serving traditional Indonesian-style foods. There is also a minor trend towards ‘other Asian’ cuisines such as Thai, Japanese and Vietnamese foods.
As with retailing, the expansion of existing franchises and the entry of new brands has caused increased competition, particularly in Jakarta, where a significant proportion of the ‘modern’ food service industry is concentrated. Pricing of food service products (for example, fried chicken and burgers) is highly competitive and some analysts believe that the QSR restaurant and fast-food sector has become saturated.
In 1996, Euromonitor forecasted that the Indonesian food service market would be worth A$2.8 billion (Rp4,787 billion) by the year 2000. This represents a moderate drop in value from that of 1995. The market fall was attributed to the expected decline in sales through the restaurant and cafe and traditional sectors, bought about by increasing competition from other sectors such as fast-food and retail catering.
The crisis has had a significant impact on the food service industry. Sales of food through foreign franchise outlets have dropped dramatically and a number of outlets have been forced to close.
Despite the crisis, many operators still view the long-term prospects for growth as good, although growth is not expected to be as high in the future. There is also likely to be a considerable expansion of QSR and fast-food business beyond Jakarta and on the island of Java.
Expenditure on food service products has grown at a slower rate than total consumer expenditure. While eating away from home is a traditional activity, technological improvements at home (for example, microwaves, refrigerators) have meant that more has been spent cooking at home than on food service products.
3.2.2 Market structure
Size
In 1995, the total food service market was worth A$3 billion (Rp5,098 billion). The market grew by 31 per cent between 1991 and 1995, with the most significant growth occurring in the hotel, fast-food, bar and club and retail catering sectors. These figures fail to pick up the many small family businesses, particularly in the outlying regions of Indonesia. The true value of the sector may be considerably higher.
133 Table 3.4: Food service market by sector, 1991 to 1995 Outlet Sales 1991 Sales 1995 % Growth Mkt. Share Mkt. Share Rp Billion Rp Billion 1991 (%) 1995 (%) Restaurants and 2,051 2,249 10 53 44 Cafes Traditional 1,462 2,029 39 37 40 Hotels 129 280 117 3 5 Fast-food 113 229 102 3 5 Bars and Clubs 74 163 120 2 3 Retail Catering 70 148 111 2 3 Total 3,899 5,098 31 100 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, February 1996
Table 3.4 shows the major sectors of the market, including their sales turnover and market share. Combined sales of food through restaurants, cafes and traditional food service establishments represent over 80 per cent of total sales in the food service sector. While the hotel, fast-food, bars and club and retail catering sectors have smaller sales turnovers, they have shown the strongest growth in recent years. Restaurants and cafes have lost market share to the more ‘modern’ food service establishments.
Segmentation
Restaurants and cafes
In 1995, sales through restaurants and cafes totalled A$1.3 billion (Rp2,249 billion), which represented an increase of almost 10 per cent since 1991. Table 3.5 lists the largest restaurant and cafe chains in Indonesia and their market shares.
Table 3.5: Market Shares of Restaurants and Cafes, 1995 (chain operators only) Company Market Share % PepsiCo 34 Shakey’s International 24 Pasta Mas 10 Others 32 Total 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, February 1996.
Restaurants and cafes accounted for approximately 44 per cent of total food service sales. Between 1991 and 1995, this sector lost market share to other sectors in the food service industry. Some analysts believe that the restaurant and cafe sector is becoming saturated and that it will suffer further from competition from fast-food outlets.
Traditional food service
In 1995, sales through ‘traditional’ food service operations totalled A$1.2 billion (Rp2,029 billion), which represented an increase of 39 per cent since 1991. Despite the government’s attempts to encourage consumption of local food, food service operators serving traditional Indonesian dishes have lost market share to the international chain restaurants.
There is a strong trend towards foreign food consumption, particularly amongst younger people living in large urban centres. The more expensive Western fast-foods are seen by some as a status symbol. However, there has been some reversion to cheaper traditional foods amongst the middle-income group.
134 Hotels
In 1995, food sales through hotels and resorts totalled A$168 million (Rp280 billion), an increase of 117 per cent since 1991.
Hotels selling food are concentrated in Jakarta and the beach resort areas. In 1997, Jakarta had 80 star-rated hotels (10 5-star, four 4-star, 20 3-star, 18 2-star and 20 1- star). There are approximately 1 million visitors to Jakarta annually, who are reported to spend 17 per cent of their travel expenditure on food and beverages. Until recently, there were also around 43,000 expatriate residents living in Jakarta.
Of the five million foreign visitors to Indonesia in 1996, the largest group was Japanese (over 600,000). There are currently three Japanese-owned hotel chains operating in Indonesia (the Nikko, the Dai Ichi and the Imperial).
Table 3.6 lists the major hotels in Indonesia and their market share in 1995.
Table 3.6: Hotel sector market share, 1995 Company Market Share (%) Shangri-La Hotels and Resorts 22 Dusit Group 18 Mandarin Oriental 14 Marriot Hotels, Resorts and Suites 11 Inter-Continental 7 Jakarta International Hotels 4 Others 24 Total 100 Source: Euromonitor, The Market for Food Service in South East Asia, February 1996.
Fast-food/QSR
The fast-food sector had been growing rapidly in the 1990s until competition increased and then the crisis hit. In 1995, sales through fast-food operations totalled A$137 million (Rp229 billion), an increase of 102 per cent since 1991. Table 3.7 lists the largest fast-food operators in Indonesia and their market share in 1995.
Table 3.7: Fast-Food sector market share, 1995 (chain operators only) Company Market Share (%) McDonalds 23 Grand Metropolitan (Burger King, Haagen Dazs) 20 KFC 17 Duskin (Mister Donut) 8 Others 32 Total 100 Source: Euromonitor, The Market for Food Service in South East Asia, February 1996
According to Euromonitor, the leading food service operators in 1995 included KFC (47 outlets), McDonald’s (14), Mister Donut/Duskin (31) and Burger King (11).
Most of the fast-food chains are franchises, located in the major cities of Jakarta, Bandung, Surabaya, Medan and Semarang. Outlets are often located in shopping malls and near large office buildings. Primary targets of the ‘family’ restaurants and fast-food franchise chains are young children and adolescents. US franchises are the clear market leaders in fast-food, with around 80 per cent of the franchise fast-food market. Local franchises are emulating the US models. Their sales are still relatively small, as outlets are generally smaller, with less seating.
135 The most popular fast-food type served in Indonesia is fried chicken, but hamburgers, pizza, pasta, Japanese and local fast-foods are now also popular.
The foreign franchises in this sector are highly dependent on imported raw materials, mainly because the quality and hygiene standards of local suppliers are still inadequate. The Government encouraged foreign chains to source ingredients locally, but with limited success until recently. Higher import costs are expected to cause a review of raw material sourcing by fast-food operators. For example, McDonald’s plans to reduce its reliance on imports from 60 per cent to 25 per cent once standards can be guaranteed. In the longer term this shift in sourcing could have major implications for Australian and US suppliers.
Bars and clubs
In 1995, sales through bars and clubs totalled A$98 million (Rp163 billion), an increase of 120 per cent since 1991.
Retail catering
In 1995, sales through retail catering operations, such as shopping malls, totalled A$89 million (Rp148 billion), an increase of 111 per cent since 1991. Table 3.8 lists the largest retail catering organisations in Indonesia and their market shares in 1995.
Table 3.8: Retail catering market share, 1995 Company Market Share % Melawani Inda Plaza Co 16 Pakuwon, Subentra and Anddreini 13 Sarinah 10 Plaza Indonesia 4 Senayan Square 2 Others 55 Total 100 Source: Euromonitor, The Market for Food Service in South East Asia, February 1996.
3.2.3 Consumer and food service trends
Although the Indonesian diet is still dominated by rice, cooking oils, chicken, fish, vegetables and tea, consumption of Western-style foods such as beef, dairy products, bread, noodles, snack foods, soft drinks and processed foods has been increasing. These changes in food consumption have been linked to increasing disposable incomes, increased demands for convenience, more food imports and the rising number of food outlets. Consumers are now more open to different types of food. There has been a growing trend towards other Asian cuisines (for example, Thai, Japanese and Vietnamese foods).
Food service margins have been under great pressure. It is claimed the food service business returns less than retail business, and that this situation has become much worse.
The continued expansion of fast-food operators has led to aggressive pricing on products such as fried chicken and hamburgers. Franchise operators have adopted new strategies to maintain market share. Many have introduced improved services (for example, some franchises such as KFC, Texas FC, CFC and A&W have started to provide delivery services). Some have introduced new products outside of their main menu (for example, KFC has introduced hamburgers).
No changes are foreseen to the controls on alcohol consumption. Also, the current market trend appears to be towards a strengthening of the ‘halal’ requirements for food
136 production and sale in Indonesia. This has major implications on production and labelling requirements.
There are many European chefs in key positions in ‘star-rated’ hotels and restaurants. These chefs have a strong influence on cooking styles, tastes and purchasing patterns of these establishments and they constitute a key target for exporters wishing to sell foods to them (for example, European chefs still prefer French or Dutch cheese).
Many large fast-food chains now serve halal food for the Indonesian market. It is now common to find restaurants serving halal Chinese, Western and Thai-style food.
Prior to the crisis, food service sales were being driven by such socio-economic factors as: increased urban purchasing power, urbanisation, the increasing number of food service outlets, changing consumer preferences, increased demand for convenience, improvements in infrastructure, the mobility of people, the ability to transport fresh food, new shopping centres, youth willingness to try new foods (60 per cent under 30 years old) and increased exposure to Western foods.
Australia still needs to improve its international competitiveness, particularly in relation to processed food and beverages, if it is to gain a greater share of Indonesia’s food market. At the top end of the market, European and US products are a very high quality, but at the other end of the market, prices are too cheap for Australia to be able to compete.
The slowdown in hotel building activity, which was emerging before 1997, has been exacerbated by the crisis and will have a significant affect on hotel and restaurant catering in the immediate future.
3.2.4 Impact of the crisis
Hotel occupancy rates have reportedly fallen from 65 to 70 per cent last year to around 30 per cent this year and there is little sign of recovery in the foreseeable future. Hotel and restaurant food sales declined by 15 to 20 per cent per cent in the first quarter of 1998, compared with the same period in the previous year, according to a food service distributor.
Sales turnovers in the major Western-style franchise restaurants have reportedly dropped by 40 per cent in the past six months compared with the same period last year, and it is believed that there is worse to come.
A number of fast-food restaurants have closed (for example, KFC has closed 20 outlets, McDonald’s has closed 21 outlets and Texas Fried Chicken also cut its outlets).
The high level of reliance on imported raw materials by many QSR chains and the devaluation of the rupiah have substantially increased many menu prices. Meal prices at many fast-food restaurants have risen substantially, similar to the effect seen in other countries.
The public’s purchasing power has fallen significantly as a result of the devaluation. Desperation is growing and civic unrest and industrial action has increased. This has been suppressed by the Government, but economic hardship can be expected to increase public dissatisfaction unless the situation improves, and this is unlikely in the near future.
The food service industry is being encouraged to buy local products due to the substantial rise in imported raw material. Even before the economic crisis, the government was trying to encourage the purchase of locally produced raw materials, particularly where local products met the strict quality standards of foreign franchises (for example, McDonald’s is now increasing its local sourcing of ingredients).
137 3.2.5 Competitor responses
Prior to the crisis it was already apparent that access to the Indonesia market by a range of new suppliers such as Chile, Morocco and Pakistan had increased dramatically. Food service operators are likely to look much more favourably on these cheaper sources of products. Market demand is still sufficiently depressed that this trend has not emerged strongly yet, but the fact that the products have already been accepted suggests that supply will increase in the future.
The procurement of locally produced raw materials of a consistent high quality and quantity has been a significant problem for the food service industry. Hence, many of the basic raw materials such as flour (of a special quality), beef and potatoes are imported.
However, there has been an accelerating increase in the production of local dry grocery goods in Indonesia, which are steadily improving in quality. This trend has emerged in recent years, and is receiving a boost from the current situation. This is particularly the case for supply to the middle to lower end of the market.
3.2.6 Implications for Australian exports
Many middle-income consumers have cut back, or withdrawn from, eating in restaurants, and are more likely to purchase basic food ingredients (for example, spices, sauces) for cooking at home.
Australian exports to the food service sector have been hit as hard as have exports to the retail sector. Meat, dairy, fruit and vegetable and other business has been hit and it is now very much ‘spot’ business on a sporadic basis. Supply switching has also affected the food service sector.
Horticultural exports are down except for a few particular items (for example, mandarins) that have found niches in the market, for example, if they have been for religious festivals and/or are not substitutable. It is feared that the likely absence of the El Niño effect next year will reduce the support for the market that was present this year. Prospects for Australian produce are therefore much gloomier next year.
Beef exports, down already this year have also been reduced to ‘spot’ trade, mainly for the higher-priced chilled meat trade to restaurants. Beef trade had started to climb sharply in 1996–97, particularly to the food service sector. It will take some time for the market to bounce back.
Dairy exports, such as pizza cheese, are down significantly this year and the market for 1999 is considered to be weak. Similarly, Australia’s seafood trade is unlikely to recover quickly.
Australian wine exports will probably remain small but steady, despite the fact that the tourism and hotel market is still declining. Australia’s trade is very small but there will continue to be some demand from ‘expats’ and the upper-income groups.
138 3.3 Company profiles
Retail
PT Matahari Putra Prima
Established in 1958, Matahari now has 86 department stores, plus a number of Mega M hypermarkets, discount stores and upmarket stores called Galleria in 29 cities around Indonesia. Matahari is widely seen as the number one retailer in Indonesia.
Sales turnovers for 1996 and 1997 were Rp1,888 billion and Rp2,122 billion respectively (approximately A$200 million).
In 1997, Matahari entered into an alliance with another major Indonesian retailer, Multipolar. This has added the Marks and Spencer, Wal-Mart and JC Penny brands to the chain. The purchase allowed Wal-Mart and Mega M to operate in the same market without price wars and to cooperate on merchandising, suppliers and technology.
The group targets the middle class and nearly half of the department stores now have supermarkets, known as Super Bazaars. This highlights Matahari’s increasing focus on supermarket retailing operations. Matahari reaches the upper-income group through its Galleria outlets, of which there are six.
In 1997, Matahari lost Rp138 billion because of the depreciation of dollar and in the May 1998 riots, six of the Matahari department store outlets were burnt and one was destroyed.
Pt Hero Supermarket Tbk
PT Hero Supermarket was established in 1971. The group has focused its efforts on Java, where over 110 million people live. Its core business is supermarket retailing and Hero targets average households and their daily grocery needs. A market share of 25 per cent has been built nationally, using a network of 68 modern supermarkets and 26 convenience stores, as well as an array of other retail formats and fast-food and bakery outlets. These other outlets sell a range of products, including foods and drinks, healthcare products and cosmetic products.
Between 1991 and 1995, Hero’s sales turnover increased at an average rate of 26 per cent per annum to reach Rp787 billion in 1995. Sales turnovers in 1996 and 1997 were Rp904 billion and Rp1,017 billion respectively (approximately A$100 million in today’s terms). This growth was primarily due to the opening of new outlets. On average, the company opened six new outlets per year over this period.
In 1997, a loss of Rp46 billion was incurred mainly because of the depreciation of the rupiah, despite record sales growth of 12 per cent.
In December 1997, PT Matahari Putra Prima bought another 5 per cent of Hero Supermarket, raising its stake to 10 per cent. In February 1998, Dairy Farms International of Hong Kong took a direct shareholding of 7.6 per cent in the company. Through the issue of a five-year bond, Dairy Farms will eventually hold an additional 24 to 55 per cent of the company’s shares.
The Hero Group also has an alliance with International Grocers Alliance (IGA), the largest retail franchise group in the world. It has assisted Hero to improve the key retail areas of hygiene, service, administration and display.
139 Hero operates its own central warehouse in Cibitung. This is a 25,000 square metre facility and all products are distributed to branches via this facility.
In May 1998, Hero had 26 supermarkets damaged during the rioting in Jakarta – 10 stores were looted, 10 stores incurred major damage and another six stores were burnt.
Hero’s own-brand sales contributed about 5 per cent of total sales.
Ramayana Department Store – PT Ramayana Lestari Sentosa Tbk
Established in 1978, this group is the third largest retailer in Indonesia, with 54 stores under the names of Ramayana and Robinson.
In 1995, turnover totalled A$300 million (Rp650 billion). Sales turnovers for 1996 and 1997 were Rp856 billion and Rp1,131 billion respectively (approximately A$500 million).
Between 1989 and 1996, the number of outlets increased by 400 per cent. The company’s strategy prior to the crisis was to open 10 stores per year during 1997 and 1998, some of which were likely to be located on other islands outside Java.
Ramayana targets the lower to middle-income sector and relies on high volumes and small margins. Most outlets are located in highly populated areas.
In May 1998’s riot, 12 of the Ramayana Department Store outlets were burnt and 14 outlets suffered major damage, with a total loss of Rp150 billion.
PT Gelael Supermarket
This major retail group changed substantially in May 1997 when Mr Dick Gelael and The Salim Group reached a separation agreement on the chain’s 19 Gelael retail outlets. The Salim Group, through one of its subsidiaries, PT Lion Superindo, acquired 10 of the 19 outlets in Indonesia. The nine remaining outlets stayed in the Gelael family.
Group sales turnover in 1996, the year prior to the change, was Rp290 billion (A$150 million).
Golden Truly Supermarket – PT Golden Truly
Golden Truly was the first local supermarket and department store chain in Indonesia to apply an American-style ‘factory outlet’ concept. It operates six superstores and department stores throughout the greater Jakarta area.
Group sales turnover in 1996 was Rp180 Billion (A$90 million).
In May 1998’s riots, three outlets were looted, with total loss of around Rp3.3 billion.
Makro
This part of the Dutch cash-and-carry business has five outlets in Indonesia, mainly in the Jakarta area. The group has been expanding steadily for a number of years. Makro is now facing increasing increasing competition from operators such as PriceSmart and Goro, and even from Carrefour.
Goro
The group behind Goro operates a large number of ex-military supply stores and recently opened two ‘multi-grocer’ outlets trading as Goro. These are large cash-and-carry
140 discount stores, which compete directly with Makro. Management is currently reviewing the size of Goro outlets as the current outlets are proving to be too large to trade profitably.
The group is linked to the Salim group, which appears to be bringing the newly acquired Galael supermarkets into the Goro fold (perhaps trading as Goro Plus).
Circle K Convenience Store - Circle K Indonesia Waserda
This convenience store franchise operation now has 23 outlets in Indonesia.
Fresh Mart Convenience Store - The Fresh Mart
This convenience store franchise has five outlets in Indonesia and, as the name implies, it has focused on fresh produce to differentiate itself from other operators.
AM/PM Indonesia Convenience Store - PT Sinar Sahabat
This convenience store franchise has 19 outlets in Indonesia, which are all in Jakarta.
Foodservice
KFC/PT Fast Food Indonesia Tbk
PT Fast Food Indonesia was founded in 1978 by the Gelael Group. It is the exclusive KFC franchise holder for Indonesia. The company operates 164 KFC restaurants in the 36 major cities in Indonesia, employing more than 6,600 employees.
Between 1992 and 1996, sales turnover by FFI grew an average rate of 25 per cent per annum. This growth has slowed in the past couple of years, due to the growth of other franchises. In fact in 1996, as a result of the tight market competition, KFC closed or relocated some of its outlets owing to poor performance.
Sales turnovers in 1996 and 1997 were Rp165 billion and Rp196 billion respectively (A$80 or A$100 million), which was an increase of 25 per cent.
By the end of 1997, there were 150 KFC outlets in 30 Indonesian cities, of which 69 were located in Jakarta. These serve fried chicken and burgers. In 1998, 20 outlets closed due to the crisis.
KFC, consistently rated the best tasting chicken in the market, is very well accepted in Indonesia. The company also offers local menu favourites: rice, perkedel (potato croquette) and Indonesian soup.
McDonald’s/PT Ramako Gerbangmas
McDonald’s entered Indonesia in 1991 and the number of outlets has grown rapidly. As at end of 1997, PT Ramako Gerbangmas (the holder of the McDonald’s franchise), operated 85 outlets, of which 59 are located in Jakarta. Because of the crisis in Indonesia, McDonald’s temporarily closed 14 of its 105 outlets. Six of its outlets were destroyed in the riots in May 1998.
Sales turnovers in 1996 and 1997 were Rp170 billion and Rp280 billion respectively.
The rupiah’s depreciation tripled the prices of raw materials imported by McDonald’s, such as potatoes for its French fries, forcing the company to raise prices by more than 15 per cent to adjust for the increase. McDonald’s is trying to reduce its dependence on imported products. By the end of 1997, the chain had planned to cut its imports from 60
141 per cent to 25 per cent. This is needed for the operation to remain competitive in the market.
Texas Fried Chicken/PT Cipta Selera Murni
Texas Chicken was formerly known as Church Texas Fried Chicken, which was founded in 1983. In 1997, it operated 50 outlets. That year it planned to open another 30 outlets, mainly in areas outside of Jakarta where competition is less intense. The crisis moderated those expansion plans.
All the outlets operated and belong to the CSM group.
Sales turnover in 1997 was Rp40 million.
Two outlets were burned down in the May riots.
California Fried Chicken (CFC)/PT Putra Sejahtera Pioneerindo Tbk (PSP)
PSP derives most of its revenue from fried chicken restaurants, which operate under the name California Fried Chicken. There were 180 outlets in December 1997, but 30 outlets have been closed in 1998 because of the crisis.
Sales turnovers in 1996 and 1997 were Rp91 billion and Rp105 billion respectively (around A$50 million). Some of this growth came from the company’s affiliates. The retail division of PSP also operates other fast-food chains such as Cal Doughnut, Cal Pizza, Isabento (Japanese food) Bang Slamet (Indonesian food and sate) and Sapo Oriental (Chinese food).
Every franchiser pays Rp200 million for franchise rights, including the kitchen equipment, training manual, promotion support and decoration. There is a 7 per cent per month royalty from gross sales. The typical period to break even on franchises is between one and a half to three years. Average sales per outlet are Rp5 million daily.
CFC targets lower to middle-income earners.
PT Wendy’s Citrarassa
PT Wendy’s Citrarasa was established in 1987. It was acquired in 1995 by PT Sierad Pangan, and 99 per cent of the shares are owned by PT Sierad Produce and 1 per cent are owned by PT Sierad Corporation. PT Sierad Produce has developed rapidly into a fully integrated company in the agrifood sector. Its core business remains the production and processing of chicken meat and value-added chicken products. Sierad Produce is the exclusive franchise holder for Wendy’s fast-food in Indonesia.
Wendy’s is now one of Indonesia’s leading Western-style hamburger chains. There are 27 outlets in Java and 41 outlets in Indonesia (with a further 23 planned).
Sales turnovers in 1996 and 1997 were Rp70 billion and Rp107 billion respectively (around A$50 million).
Sales are estimated at between Rp10 million to Rp15 million per day from each outlet.
A & W Family Restaurant/PT Biru Fast Food Husantara
This Western-style restaurant franchise has 30 outlets, mainly in Jakarta. It serves a range of steak and other dishes for younger Indonesians and ‘ex-pats’.
142 Other Fast-Food Outlets
Some of the other foreign fast-food chains in Indonesia include: Arby’s Big Boy Restaurant, B&M Burger, Grandy’s, American Hamburger, Dairy Queen, Jollibee, Burger King, Free Time, Country Chicken, Pizza Hutt and Popeye’s Chicken.
Similar local franchisers include: Galael Group (chicken), Salim Group, PT Fast-Food Indonesia, Nila Chandra FC, Hoka Hoka Bento, Tanzil Fried Chicken, and B Burger. These franchises are not as prevalent as the foreign franchises.
New York Chicken is a new network of fast-food outlets, which is being developed by Mrs Emmy Soebronto Laras, who developed the Texas Fried Chicken chain.
143 3.4 References
AsiaPulse, ‘Salim-le Lion tie up to control Indonesian retailer Gelael’, 12 August, 1997. Austrade Online Asian Update, June 1998. CIC Consulting Group 1993, Study on Fast Food Industry, Marketing in Indonesia. East Asia Analytical Unit 1994, Subsistence to Supermarket, Food and Agricultural Transformation in South East Asia, Department of Foreign Affairs and Trade, Canberra. Euromonitor 1996, The Market for Food Service in South East Asia - Indonesia, February. Euromonitor 1998, Indonesian Retailing, January. Indonesian Commercial Newsletter 1996, Increasingly tight competition forces Hero Supermarket to lower profit target, 21 October. Indonesian Commercial Newsletter 1997, ‘Fast food franchise business: its condition and developments, 22 December. International Market Insight Reports 1997, ‘Indonesia: retail sector to grow by 20 per cent’, 26 August. Jakarta Post 1997, ‘Matahari raises stake in Hero supermarkets, 4 December. Meyers Strategy Group 1996, Opportunities in Asian Food Service Markets, A report for RIRDC, September. Meyers Strategy Group 1997, Asian Customer Requirements for Asian Food Australia, Report to the Prime Minister’s Supermarket to Asia Council, September. Regulatory News Service 1998, ‘Dairy Farm International acquisition of interest’, 17 February. RIRDC 1995a, Food Retailing in South East Asia, Exploiting the Opportunities. RIRDC 1995b, Supermarket and Retailing Infrastructure Development in Indonesia, a report for RIRDC by Instate Pty Ltd, October. US Department of Agriculture Reports 1998, ASEAN Market Watch, 17 February.
144 VOLUME TWO
1 FOREWORD III LIST OF AUTHORS XIV EXECUTIVE SUMMARY XV CHAPTER 1 KEY AGRICULTURAL AND AGRIBUSINESS POLICY ISSUES IN INDONESIA. 1 1.1 Introduction 1 1.2 The share of agriculture in GDP 1 1.3 Production 3 1.3.1 Food crops 3 1.3.2 Horticultural crops 6 1.3.3 Estate crops 7 1.3.4 Livestock and fisheries 8 1.4 Consumption 10 1.4.1 Food crops 10 1.4.2 Horticultural and estate crops 12 1.4.3 Livestock and fisheries 13 1.5 Trade 14 1.5.1 The importance of international trade for Indonesian agriculture 14 1.5.2 Agricultural trade performance 15 1.5.3 Direction of agricultural trade 17 1.6 Indonesia’s agribusiness: the concept and practise 19 1.6.1 The concept 19 1.6.2 The policies 20 1.6.3 Investment in agriculture 21 1.6.4 The structure of Indonesian agroindustry 24 1.7 Assessment of the current crisis 28 1.7.1 Economic crisis: the wind of change 28 1.7.2 Crisis impact assessment: the issues 33 1.8 The new vision and mission 36 1.8.1 Agricultural development on Java 37 1.8.2 Agricultural development Off Java. 37 1.9 Conclusion 38 1.10 References 40 Appendix 1.1: Agribusiness investment policies – pre-reform 42
2 CHAPTER 2 INDONESIA’S PRE-CRISIS AGRICULTURE PROFILE: RECENT POLICY CHANGES AND INVESTMENT OPPORTUNITIES. 69 2.1 Introduction 69 2.2 A brief background to the crisis 69 2.3 Implication of the crisis for the agricultural sector and rural economy 70 2.4 The crisis and Indonesia’s agricultural policies 72 2.4.1 Pre-crisis policies 72 2.4.2 Crisis-induced policies 78 2.5 Production and consumption 88 2.5.1 Production 88 2.5.2 Consumption 98 2.6 Exports and Imports 101 2.6.1. Cereals, roots, tubers and pulses 101 2.6.2. Vegetables 102 2.6.3 Fruit 103 2.6.4 Tree Crops 104 2.6.5 Livestock commodities 105 2.6.6 Fishery commodities 106 2.7. Investment opportunities for agribusiness 107 2.7.1. Prospective commodities for agribusiness 107 2.7.2 Resource potential 108 2.7.3 Suggested investments 109 2.8 References 111 CHAPTER 3 INDONESIA: RETAIL AND FOOD SERVICE MARKETS. 123 3.1 Structure and developments in the retail sector 123 3.1.1 Overview 123 3.1.2 Market structure 124 3.1.3 Consumer and retail trends 127 3.1.4 Impact of the crisis 128 3.1.5 Competitor responses 130 3.1.6 Implications for Australian trade 130 3.1.7 Products 131 3.2 Structure and developments in the food service sector 132 3.2.1 Overview 132 3.2.2 Market structure 133 3.2.3 Consumer and food service trends 136 3.2.4 Impact of the crisis 137
3 3.2.5 Competitor responses 138 3.2.6 Implications for Australian exports 138 3.3 Company profiles 139 PT Matahari Putra Prima 139 Pt Hero Supermarket Tbk 139 Ramayana Department Store – PT Ramayana Lestari Sentosa Tbk 140 PT Gelael Supermarket 140 Golden Truly Supermarket – PT Golden Truly 140 Makro 140 Goro 140 Circle K Convenience Store - Circle K Indonesia Waserda 141 Fresh Mart Convenience Store - The Fresh Mart 141 AM/PM Indonesia Convenience Store - PT Sinar Sahabat 141 KFC/PT Fast Food Indonesia Tbk 141 McDonald’s/PT Ramako Gerbangmas 141 Texas Fried Chicken/PT Cipta Selera Murni 142 California Fried Chicken (CFC)/PT Putra Sejahtera Pioneerindo Tbk (PSP) 142 PT Wendy’s Citrarassa 142 A & W Family Restaurant/PT Biru Fast Food Husantara 142 Other Fast-Food Outlets 143 3.4 References 144 VOLUME TWO 1 CHAPTER 4 THE IMPACT OF TRADE LIBERALISATION IN ASEAN/APEC ON AGRICULTURAL TRADE AND INVESTMENT IN MALAYSIA. PHASE I. 11 4.1 Introduction 11 4.2 Trade impact studies: the conceptual framework 11 4.3 Survey of literature 12 4.4 Recent economic performance 15 4.4.1 Trade Performance 18 4.4.2 Trade Policy 27 4.4.3 The place of agriculture in an industrialised economy 30 4.5 Incentive policies in the agricultural sector 31 4.5.1 Export agriculture 31 4.5.2 Domestic Agriculture Production Sector 35 4.6 Current Issues and Concerns 39 4.7 References 42
4 CHAPTER 5 RECENT ECONOMIC AND AGRIFOOD POLICY DEVELOPMENTS IN MALAYSIA. 43 5.1 Current status of and prospects for the economy 43 5.1.1 Before the crisis 43 5.1.2 Current economic situation and macro policy changes 43 5.1.3 Medium-term outlook 45 5.1.4 Macro factors affecting agrifood policy 46 5.2 Structure of the agrifood sector (structure–conduct–performance since 1990) 47 5.2.1 Production and consumption structures (including key products) 47 5.2.2 Trade and competitiveness 52 5.2.3 Australia’s market share 57 5.2.4 Business structures 58 5.2.5 Organisational issues 58 5.3 Policy overview 61 5.3.1 After the Uruguay Round until the crisis 62 5.3.2 Current situation and outlook 63 5.4 References 65 CHAPTER 6 MALAYSIA: RETAIL AND FOOD SERVICE MARKETS. 67 6.1 Structure and developments in the retail sector 67 6.1.1 Overview 67 6.1.2 Market structure 68 6.1.3 Consumer and retail trends 70 6.1.4 Impact of the crisis 71 6.1.5 Competitor responses 72 6.1.6 Implications for Australian exports 73 6.2 Structure and developments in the food service sector 74 6.2.1 Overview 74 6.2.2 Market structure 75 6.2.3 Consumer and food service trends 78 6.2.4 Impact of the crisis 78 6.2.5 Competitor responses 79 6.2.6 Implications for Australian exports 79 6.3 Company profiles 81 Dairy Farm International/Wellsave/Cold Storage/Guardian 81 Jaya Jusco Stores Bhd 81 Metrojaya Berhad/Metrojaya Department Stores 81 Giant Cash and Carry 82
5 Aktif Lifestyles Stores Sdn Bhd ( formerly Yaohan) 82 MAKRO Cash and Carry Distribution 82 Royal Ahold/TOPS 82 The Lion Group/Parkson Corporation Sdn Bhd 83 Antah Holdings Berhad/7-Eleven 83 KFC Holdings (Malaysia) Bhd 83 McDonald’s 84 Berjaya Land Bhd ( formerly Berjaya Leisure Bhd) 84 Shakey International (Shakey Restaurants) 85 Tricon Restaurants International (TRI) 85 Genting Bhd/Resort World Bhd 85 6.4 References 87 CHAPTER 7 ECONOMIC AND POLICY DEVELOPMENTS IN THE KOREAN AGRIFOOD SECTOR. 89 7.1 Introduction 89 7.2 Economic developments in Agriculture 90 7.2.1 Agriculture in the national economy 90 7.2.2 Consumption development 92 7.3 Socio-economic factors contributing to agricultural protectionism 94 7.3.1 Income disparity between urban and rural areas 94 7.3.2 Food security 96 7.3.3 Changing socio-economic conditions 96 7.4 Changing pattern of agricultural policies 97 7.4.1 Rice 97 7.4.2 Beef 98 7.4.3 Other grains 99 7.4.4 Effects of the policy 99 7.5 Effects of protection: some empirical evidence 101 7.6 The Uruguay Round and the agricultural policy reforms in Korea 103 7.6.1 The Uruguay Round of GATT 103 7.6.2 New agricultural policy reforms in Korea 105 7.6.3 Subsidy issues 107 7.7 Conclusion 107 7.8 References 108
6 CHAPTER 8 CURRENT ECONOMIC DEVELOPMENT AND OUTLOOK FOR THE KOREAN AGRIFOOD SECTOR: IMPLICATIONS FOR AUSTRALIA. 115 8.1 Introduction 115 8.2 Korea’s economic developments and outlook 115 8.2.1 Korea’s macroeconomic outlook 116 8.2.2 Production and consumption outlook 117 8.2.3 Korea’s trade and investment outlook 118 8.2.4 Outlook for the world economy 119 8.3 Developments in Korea’s agrifood sector 119 8.3.1 Outlook for major agrifood products 119 8.3.2 Food processing structures 122 8.4 Agrifood policies 123 8.4.1 Trade and investment policies 124 8.4.2 Production and processing policies 127 8.5 Trade and investment opportunities in Korea 130 8.5.1 Trade opportunities in the Korean agrifood market 130 8.5.2 Investment and business opportunities 131 8.6 Implications for Australia 132 8.6.1 Opportunities and challenges 132 8.6.2 Specific strategies 134 8.7 Bibliography 137 CHAPTER 9 SOUTH KOREA: RETAIL AND FOOD SERVICE MARKETS. 139 9.1 Structure and developments in the retail sector 139 9.1.1 Overview 139 9.1.2 Market structure 139 9.1.3 Consumer trends 142 9.1.4 Retail trends 145 9.1.5 New retail strategies 147 9.1.6 Liberalisation of the market 148 9.1.7 Impact of the crisis 148 9.1.8 Competitor responses 149 9.1.9 Implications for Australian exports 150 9.2 Structure and developments in the food service sector 152 9.2.1 Overview 152 9.2.2 Market structure 152 9.2.3 Consumer and food service trends 156 9.2.4 Impact of the crisis 158
7 9.2.5 Competitor responses 161 9.2.6 Implications for Australian exports 162 9.3 Company profiles 163 Lotte Corporation 163 Shinsegae 164 Haitai 164 LG Mart Co. Ltd 164 Tong Yang Group 164 Woosung 165 Hyundai Department Store 165 Walmart/Makro 165 Carrefour Korea Ltd 165 Hanwha Store Co Ltd 165 Bokwang Family Mart Co Ltd 165 New Core 165 Hangyang 166 Taegu Department Store 166 Dong-A Department Store 166 Food service 166 Dongwha 166 Dongwha Liquor 166 Korean Tourist Hotel Supply Centre 166 Asian Star (TGIF) 166 McDonald’s 166 Imasco/Hardee’s 166 Doosan Foods 167 KFC 167 Pepsi Co Inc (Pizza Hutt) 167 Burger King 167 Midopa 167 9.4 References 168
8 CHAPTER 10 ECONOMIC DEVELOPMENTS IN THE INDONESIAN AND MALAYSIAN AGRIFOOD SECTORS – A LITERATURE REVIEW. 169 10.1 Introduction 169 10.2 Current status and prospects of the economies 170 10.2.1 Macro factors affecting agrifood policy 170 10.2.2 Indonesia – before the crisis 170 10.2.3 The current Indonesian economic situation and macro policy changes 172 10.2.4 The medium-term outlook for Indonesia 173 10.2.5 Malaysia – before the crisis 174 10.2.6 The current Malaysian economic situation and macro policy changes 176 10.2.7 The medium-term outlook for Malaysia 177 10.3 Structure–conduct–performance of the Indonesian and Malaysian agrifood sectors since 1990 177 10.3.1 Indonesian production, business and consumption structures 177 10.3.2 Indonesian organisational conduct 178 10.3.3 Indonesian trade and competitiveness performance 178 10.3.4 Malaysian production, business and consumption structures 178 10.3.5 Malaysian organisational conduct 179 10.3.6 Malaysian trade and competitiveness performance 179 10.4 Policy overview 179 10.4.1 Overall and sectoral Indonesian policies until the crisis 179 10.4.2 The Indonesian current policy situation and outlook 180 10.4.3 Overall and sectoral Malaysian policies until the crisis 180 10.4.4 The Malaysian current policy situation and outlook 181 10.5 Conclusion 181 10.6 Bibliography 183
9 CHAPTER 11 AGRIFOOD DEVELOPMENTS IN INDONESIA, MALAYSIA AND SOUTH KOREA IN RESPONSE TO CHANGING ECONOMIC CIRCUMSTANCES. 187 11.1 Introduction 187 11.2 Australia’s food exports to Asia 187 11.2.1 Indonesia 188 11.2.2 Malaysia 189 11.2.3 South Korea 190 11.2.4 Key findings across all countries 191 11.3. Economic developments and outlook post-crisis 192 11.3.1 Indonesia 192 11.3.2 Malaysia 193 11.3.3 South Korea 194 11.3.4 Key findings across all countries 195 11.4. Developments in the agrifood sectors 195 11.4.1 Indonesia 195 11.4.2 Malaysia 197 11.4.3 South Korea 199 11.4.4 Key findings across all countries 200 11.5. Policies affecting agrifood developments 200 11.5.1 Indonesia 200 11.5.2 Malaysia 202 11.5.3 South Korea 203 11.5.4 Key findings across all countries 204 11.6. Opportunities, challenges and strategies for Australian food companies 204 11.6.1 Opportunities and challenges 204 11.6.2 Specific strategies 205 11.7 Conclusion 206 11.8 References 207
10 Chapter 4 The impact of trade liberalisation in ASEAN/APEC on agricultural trade and investment in Malaysia. Phase I.
4.1 Introduction
Over a 40-year span of development planning and management, policy planners in Malaysia have successfully transformed a predominantly primary producer into an industrialised economy. Throughout this process, outward orientation has been a consistent strategy and tariff levels were generally low as compared with those of other ASEAN producers, although the spread or incidence of the tariffs was highly skewed across sectors. In the area of agricultural trade and investment, Malaysia’s export dominance in rubber and palm oil and its net food import position are based in specialisation according to comparative advantage. Domestic food production was and still is primarily motivated by political economy considerations rather than being a tool of trade strategy.
Malaysia’s approach to the pressures of the WTO and the interests of APEC and ASEAN is very simple: as an advocate of freer trade, Malaysia’s own interest is one of finetuning its economic policies towards enhancing competitiveness in main economic sectors. Towards this end, since the economic reforms of the mid-1980s Malaysia has undertaken to unilaterally reduce tariff rates as part of an overall shift to improve efficiency and reduce domestic inflation. Tariff reductions were phased over the annual budgets of the Finance Ministry, beginning in 1992.
This chapter examines Malaysia’s recent policies relating to agricultural trade and investment and the impact of trade liberalisation on this sector. As the first part of a larger study, this paper will highlight Malaysia as a successful case study of agribusiness development and of the role that government policy has played in shaping this achievement. It will document the various policies and instruments used, particularly over the past ten years, and their impact on production, trade and consumption in agricultural products. The paper will draw on other studies that have measured policy impacts and that have provided inputs into policy change. Identifying gaps in information and knowledge about policy impacts will assist in the design of the second phase of this study.
4.2 Trade impact studies: the conceptual framework
The conceptual framework underpinning trade impact studies is the simple application of welfare economics in tracing out producer or consumer surpluses and losses arising from trade or tariff policies. The theoretical tenets of free trade imply that countries should specialise in the production of goods in which they exhibit a comparative advantage so that world resources are efficiently allocated and trade flows accordingly. Owing to the difficulties of modelling general equilibrium effects, most applications are partial equilibrium analyses. The size of the impact depends critically on estimates of supply and demand elasticities – very powerful concepts in economics but difficult to measure empirically with any great degree of satisfaction. Notwithstanding the difficulties in measuring elasticities, the analyses have improved over time, with more refined measures and fine-tuning of concepts. Attempts have been made to account for both the direct and indirect effects of policy interventions, both tariff and non-tariff and, in the 1980s, for the impact from exchange rate over or under-valuation.
In most developing countries, reviews of policies are often initiated by the multilateral lending or development agencies. The results are then filtered into development plans and adopted as policy guidelines. Agricultural policy analyses prior to the Uruguay Round centred mostly on the issue of comparative advantage (as governments contemplated crop diversification programs, whether for export or for domestic import substitution) and also on issues of price and income instability arising from commodity cycles. Studies
11 measuring the level of protection are often undertaken for the industrial sector, given the prevailing perception that most developing countries lack a comparative advantage in producing manufactured goods. Trade impact studies gained popularity during the Uruguay Round trade negotiations when the issue of who gains and who loses was transferred from the domestic stage to the world stage. Domestic policy interventions not only affect home country producers and consumers but also, through their impact on trade flows, producers and consumers in trade-partner countries. Studies measuring how the removal of trade impediments affects the growth of world trade, and how countries tend to gain either in terms of an increase in producer or consumer welfare, became standard inputs feeding the negotiations. Needless to say, most of these cross-country studies have been undertaken by the large trading nations, which have the intellectual and financial resources to do so.
Developing countries, although being persuaded of the merits of freer trade, often lack the human and financial capacity to undertake detailed studies of the impact of trade liberalisation on domestic industries. For the most part, developing countries remain unconvinced that free trade is equitable between countries of unequal economic strength. Their approach to trade negotiations is therefore one of pleading for special and differential treatment to give them time to acquire a comparative advantage in industries in which they aspire; while liberalising sectors that are generally not producing for the domestic market in any substantial way. Where subsidies are given to the agricultural sector, these are often not enough to produce surpluses for export and the sector is supported for political reasons alone, rather than as a practice in trade strategy.
4.3 Survey of literature
Analyses of the impact of government policies on the agricultural sector in Malaysia have been mainly undertaken on a commodity basis and have been based on typical small country experiences. These studies took place from the mid-1980s in the wake of Malaysia’s traumatic experience in the recession of 1985–86, when the need for competitive industries or sectors was painfully driven home. In the area of commodity exports, in which the nation’s strengths reside, rising competition from factor-abundant neighbouring economies rapidly eroded Malaysia’s dominant position in rubber, and later in palm oil as well. The costs of protecting inefficient industries became all too apparent and even the politically sensitive rice industry came under question and review.
The first study on rice (Tan 1987) was undertaken by Malaysia’s Institute of Strategic and International Studies (ISIS), a government-owned thinktank, as the Prime Minister questioned the wisdom of further investment in rice production given the widely known fact that the country is a high-cost producer of rice. ISIS’s review of the rice policy became the basis of a study on the restructuring of the rice industry sponsored by the World Bank, whose agricultural section made recommendations to the Malaysian Government in 1989. At the same time, the Asian Development Bank (ADB) also sponsored a research report on the rice industry. Both studies calculated the impact of the policies on producer and consumer surpluses: the standard partial equilibrium analyses. The difference between the two studies was that the World Bank study ultimately led to widespread reforms in the rice industry, particularly in rice processing, the lifting of price controls on higher grades of rice, and the privatisation of the commercial activities of the state trading corporation. The ISIS/World Bank study also computed the domestic resource costs of rice production and the associated measures of nominal and effective protection levels, together with estimates of producer and consumer subsidy/tax equivalents. The study, however, did not separate out the effects into direct and indirect effects.
The research department of the World Bank also began to sponsor a number of studies in developing countries on the impact of pricing interventions on the agricultural sector. In Malaysia, the study was undertaken by Jenkins and Lai and this dealt with all major
12 agricultural commodities, namely rubber, palm oil, cocoa and rice. Covering a period of 20 years from 1960 to 1983, the study separated the impact of pricing policies into direct, indirect and total effects. The study found that agricultural pricing policies have resulted in a set of effective protection rates (EPRs) that systematically discriminated against the rubber and palm oil sectors but favoured paddy production and industrial import substitution. Thus, unlike the case of major developed market economies such as the US and the EU, export agriculture is taxed rather than subsidised. The impact of the interventions has been biased but highly consistent over time, and for most of the years the bias has not been particularly large. Although EPRs for paddy production range from –34 per cent to over 100 per cent, the large changes occurred primarily due to changing world prices rather than as a result of government policies. Over the shorter period covered by the ISIS/World Bank study, the EPR ranged from 108 per cent in 1981 to 354 per cent in 1985, the sharp increase due mainly to the fall in world prices in 1985, as the subsidy levels remained fixed over a long period.
Price interventions also affect consumption. In the case of rice, the standard partial equilibrium analysis shows these to be rather large. However, a subsequent general equilibrium analysis by Ahmad Zubaidi (1992) found consumer losses partially mitigated by the switch to the alternative staple, wheat. As for rubber and palm oil, domestic consumption up to 1983 was rather negligible and so was not covered in the Jenkins-Lai study. Note, however, that this study covers the period prior to the IMP with its emphasis on resource-based industrialisation. Since the IMP, domestic consumption has increased, with the bulk exported as processed palm oil rather than as CPO or crude palm oil. Agricultural pricing policies, through their impact on trade flows, also alter the supply and demand for foreign exchange. Export taxes and adjustments in the exchange rate as a result of tariff policies discouraged the export of rubber and palm oil prior to the mid- 1980s. The direct effect of policy interventions in rice production has been a reduced need to import rice and this in turn has been partially offset by the indirect effects of an overvalued exchange rate. Internally too, the greater profitability of palm oil compared with rubber resulted in a shift out of rubber into palm oil cultivation, such that Malaysia ultimately lost its world market share in rubber while becoming predominant in palm oil production. Although the Jenkins–Lai study is the most thorough and detailed to date, it focused on the major crops in terms of land usage. Left out of the study were the fisheries, livestock and forestry sub-sectors, which are also significant contributors to agricultural sector output and employment. Admittedly these are very different sub- sectors.
In 1989 the ADB sponsored a study on incentive policies in the livestock and feedstuffs sub-sector in ASEAN countries. The Malaysian component, undertaken by Tan et al. (1989), applied domestic resource cost methodology to evaluate Malaysia’s comparative cost advantage in beef, mutton, dairy, poultry, pork and egg industries. The study confirmed Malaysia’s comparative disadvantage in ruminant livestock production; however it does have a comparative advantage in import substitution in non-ruminant livestock production. As was the case in the ISIS/World Bank Study on rice, the analysis covered up to the post-farm level: for all the products under investigation, margins at the wholesale/retail and processing stages are higher than those at the farm-gate level, reflecting a less competitive market structure past the farm gate. After the Jenkins-Lai study, several other studies were undertaken by Malaysian researchers. These were single- commodity studies on palm oil (Mad Nasir and Fatimah Mohd. 1993), rubber (Mohammed Yusof and Mad Nasir 1993), cocoa (Mad Nasir et al. 1993), fish (Tai 1993), sawn timber (Mohd. Shahwahid and Mad Nasir, 1993) and were essentially econometric models aimed at specifying supply-demand relationships which can be used for forecasting and for policy simulations. Since the scope of these models was limited to the commodities studied, they were not able to capture the dynamic effects through price and input linkages to other commodities. An attempt was made to incorporate the demand for wheat in modelling the rice and wheat economy by Ahmad Zubaidi (1993).
13 In the case of the partial equilibrium modelling of the impact of the timber levy, the model captured the theoretical impact of the imposition of the export levy and arrived at the expected conclusion of producer losses as a consequence of the levy. However, the most important objective of the levy was not to raise revenue or stabilise income but to propel the primary-exporting sector towards exporting higher value-added products rather than undifferentiated commodities. As the pace of secular decline accelerates with industrial transformation, growing interdependency takes place within the agricultural sector as relative profitability and rising competition for land and labour use cause resource shifts between commodities. For policy planning purposes, the limited commodity models are inadequate for handling the complexities of the agricultural sector during a period of rapid industrial growth.
An attempt to model the general equilibrium effects of external shocks and government intervention in the form of export taxes was undertaken by Yeah et al. (1994). Again this focussed on the two major primary commodities – rubber and palm oil. The analysis covered the period between 1960 and 1990 and calibrations of the social accounting matrix (SAM) were based on the 1983 input-output (I-O) table and the 1970/1978 SAMs that were available at the time of his research. Broadly, the simulation results demonstrated the growing resilience of the Malaysian economy to external shocks and showed the domestic economy’s ability to buffer internal policy-induced distortions. The removal of export taxes increased the agricultural terms of trade, and led to a slight currency appreciation of less than 2 per cent, which impacted adversely on the trade balance by 40.7 per cent in the short term and 55.2 per cent in the long term. In the short run, output expanded by only 1 per cent; however in the long run the expansion was more pronounced at 8.4 per cent. Similarly exports expanded by 1.7 per cent and 10.6 per cent in the short and long runs respectively.
Computable general equilibrium (CGE) models are powerful tools in capturing the significance of intersectoral and macroeconomic linkages. However, they require extensive data inputs. Very often up-to-date I-O tables and SAMs are not available, which compels extensive calibration and hence the quantitative estimates are not easily verifiable. Yeah’s analysis was based on very outdated I-O tables and SAMs; by the late 1980s, dramatic changes had already taken place in the structure of the Malaysian economy and the policy aim in the case of the primary commodities had shifted from one of insulating the economy from external shocks arising from commodity price cycles to one of deepening the industrial base through export levies that favoured downstream industries. However, CGE models remain useful in highlighting how the exchange rate in the Malaysian economy is highly dependent on foreign trade and capital inflows. Against the backdrop of the recent currency turmoil, an updated version of the CGE model should shed further insights on the macro and intersectoral linkages of a rapidly industrialising economy.
The Malaysian Government has recently developed the Malaysian Agriculture Sector Analysis (MASA) model to deal with the complexities of agricultural sector planning in an economic environment that is increasingly challenging, both domestically and internationally. Developed with assistance from the US Department of Agriculture, MASA is a multi-commodity, multi-sector forecasting and policy simulation model of the Malaysian agricultural economy. The model captures 17 commodities, each linked to others through competition in land use and, in some cases, substitution in demand. The model can project the supply and demand for Malaysian agricultural commodities until 2010. Numbers generated from this model will be used to project agricultural sector growth in the Government’s review of the National Agriculture Policy.
To date there has been no specific study assessing the impact of trade liberalisation on Malaysian exports and imports. The above studies, although capturing some of the impacts on trade, were basically focused on domestic policy considerations. Another distinctive aspect of these studies is their focus on upstream agriculture. A major link is missing in all these models; the linkage to downstream industries is important in a era of
14 rapid industrialisation as the issue of availability of raw material supplies continues to haunt the downstream participants. Incentive policies at the upstream level impact on the downstream sector and vice versa. The levy on sawn timber impacts upon the downstream wood-based and furniture industries; while repressive rice price control prior to 1994 impacted adversely on the rice processing industry, and on the incentives of farmers to produce paddy of good milling quality to the mills.
Malaysian officials are anxious to know whether the Uruguay Round negotiations will bring the anticipated increase in trade and market access for many of its agricultural-based products. Malaysia has unilaterally continued to remove impediments to trade such that very few items are currently subject to tariffs. In the area of food, of which Malaysia is a net importer, most tariffs are zero. A very limited number of food types are subject to high import duties and these are taxed because of their luxury nature or to prohibit consumption on health grounds, as in the case of alcoholic beverages.
In order to sustain a competitive advantage in world markets, as industries and product life cycles mature and competitive pressures intensify, policy makers are compelled to take an integrated overview of key industries that are driven by international market forces and to trace the support provided by their supplier firms and ancillary services industries. Competitive advantage resides in industry clusters rather than in key industries alone. Invariably underlying the dynamism of industry clusters is the R&D infrastructure that projects firms ahead of the competition. As structural transformation proceeds, knowledge becomes an important factor in production. Recognising the importance of the economics of agglomeration in enhancing the competitive advantage of Malaysian firms, the Malaysian Government in 1995 adopted the cluster-based approach in the formulation of the Second Industrial Master Plan (IMP). The measure of Revealed Comparative Advantage (RCA) was used to define the clusters. In reviewing the spectrum of industrial sub-sectors, it became evident that Malaysia’s home-grown clusters are resource-based: the most successful being the palm-based cluster. The RCA is basically a specialisation index. It says nothing about the local content of the product in question. In resource-based sectors the local content is practically 100 per cent. In non-resource-based sectors, such as electronics, the import content is very high. The Second IMP marks a significant milestone in the industrial development of the country, as policymakers decide unequivocally to allow market forces to dictate the output mix for much of the industry clusters.
4.4 Recent economic performance
In the 10 years between 1988 and 1997, the Malaysian economy charted an average real growth rate of 8.1 per cent per annum (Table 4.1). This remarkable performance after the recession of 1985–86 was attributed by both policymakers and commentators to the economic liberalisation undertaken by the Government since the mid-1980s. In 1988, manufacturing overtook agriculture as the largest sector in the economy, entrenching the transition to an industrialised economy. The secular decline in the agricultural sector was manifested by the fall in its contribution to GDP from 41 per cent in 1960 to 16 per cent by 1995, as indicated in Table 4.2. Further testimony of the strength of the manufacturing sector is indicated by its contribution to the export structure (in 1995, manufactured exports contributed almost 80 per cent to total exports) and by the increasing ratio of employment in the manufacturing sector to total employment (see Tables 4.3 and 4.4).
15 Table 4.1: GDP sectoral growth rates, 1980 to 1997 (% in 1978 prices) SECTOR 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997* Agriculture, 2.5 4 7 5.4 6 0.2 0 4.3 3.9 –1 1.1 2.2 3 forestry & fishing Mining & –1.4 7.5 0.7 6.2 8.5 5.1 2.5 1.7 –1.5 2.5 9 4.5 2 quarrying Manufacturing –3.8 7.5 13.4 17.6 14.2 15.7 13.9 10.5 13 14.7 14.5 12.2 12.5 Construction –8.4 –14 –11.8 2.7 11.6 19.1 14.6 11.2 11.5 14.1 17.3 14.2 10.6 Electricity, gas & 6.5 8.3 8 9.2 11 13.5 11.2 13.8 13 13.7 13.1 12 12 water Transport, 4.8 6.1 5.3 8.8 9.7 13.3 10.5 8.6 9 12.4 13.9 9.8 10.5 storage & communication Wholesale & –2.8 –11. 4.5 8.8 10 14.8 14.3 10.6 10.2 8 10.1 9.3 8.4 retail trade, 1 hotels & restaurants Finance, 4.1 –0.4 8.1 11 11.2 14.6 12.6 10 12 10 10.5 14.6 11.5 insurance, real estate & business services Government 2.1 4.3 4 3.7 4.7 4.8 4.5 5.6 5 9.4 3.9 4.2 4 services Other services 4.1 4 3.5 3.9 4.7 10.2 9.1 8 7.5 7.1 7.8 8.4 5.7 GDP at market –1 1.2 5.4 8.9 9.2 9.7 8.7 7.8 8.5 9.2 9.5 8.6 7.8 prices Note: * preliminary estimates Sources: Economic Report, Ministry of Finance; Bank Negara Annual Report, various issues.
Table 4.2: Sectoral (%) share of Gross Domestic Product, 1960 to 1995 Sector 1960 1965 1970 1975 1980 1985 1990 1995 Agricultural, livestock, forestry and 40.7 31.5 30.6 27.7 23.8 20.8 18.7 15.5 fishery Mining and quarrying 6.1 9 6.5 4.5 4.5 10.4 9.7 7.3 Manufacturing 8.5 10.4 13.1 16.4 18.6 19.7 27 32.4 Construction 3 4.1 3.9 3.8 4.6 4.8 3.5 3.6 Electricity, gas and water 1.5 2.3 2.7 2.1 2.3 1.7 1.9 2.1 Transport, storage and 4.3 4.3 4.1 6.2 6.9 6.4 6.9 8 communications Wholesale and retail trade, hotels 15.3 15.3 14.5 12.8 13.4 21.1 11 11.8 and restaurants Finance, insurance, real estate and 1 1.6 2.1 8.4 7.8 9 9.7 10.6 business services Government services 5.3 6.2 6.9 12.7 12.2 12.2 10.7 9.2 Other services 9.4 10.8 11.5 2.7 2.9 2.3 2.1 2.1 Services 36.8 40.5 41.8 44.9 45.5 43.7 42.3 43.8 Source: Treasury Economic Report, various issues.
16 Table 4.3: Export structure, imports and trade dependency 1965 to 1995 Item 1965 1970 1975 1980 1985 1990 1995 Export structure (% of total exports) Rubber 38.0 33.4 21.9 16.4 7.5 3.8 2.2 Tin 23.0 19.6 13.1 8.9 4.0 1.1 0.3 Logs and timber 9.0 16.5 12.1 14.1 10.1 8.9 3.6 Palm oil 3.0 5.1 14.3 9.2 10.4 5.5 5.5 Petroleum 2.0 3.9 9.2 23.7 22.8 13.3 3.6 Major commodity 75.0 78.5 70.6 72.3 54.8 32.6 15.2 Manufactured 8.0 11.9 21.4 21.7 32.6 61.3 79.6 goods exports Others 17.0 9.6 8.0 6.0 12.6 6.1 5.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Total exports f.o.b 3782.5 5163.1 9230.9 28171.6 38016.7 79646.4 184986.5 (RM millions) Total Imports c.i.f. 3356.1 4288.4 8530.4 23451.0 30437.8 79118.6 194344.5 (RM millions) Trade dependency 42 41 41 50 48 72 98 ratio CPI, 1980=100 52.8 56.4 80.2 100 125.1 137.8 161.2 Real exports (RM 7,163.8 9,154.4 11,509.8 28,171.6 30,389.0 57,798.5 114,755. millions) 9 Real imports (RM 6,356.3 7,603.5 10,636.4 23,451.0 24,330.8 57,415.5 120,561. millions) 1 Period 1971–80 1981–90 1976–85 1986–95 1971–95 1981–95 Real Export growth 11.9 7.5 10.2 14.2 28.8 15.1 (%) Real Import growth 11.9 9.4 8.6 17.3 31.8 17.7 (%) Source: Computed from Ministry of Finance: Economic Report, various issues.
Table 4.4: Employment by economic sector, 1960 to 1995 1960 1965 1970 1975 1980 1985 1990 1995 Total Employment (thousands) 2,714 2,599 3,340 4,020 4,816.90 5,624.60 6,686 7,915.40 Agriculture, forestry and fishery 1,277 1,310 1,776 1,915 1,910.90 1,759.60 1,738 1,428.70 (thousands) Per cent of total 47.1 50.4 53.2 47.6 39.7 31.3 26 18 Mining and Quarrying (thousands) 196 61 87.3 87.5 80.1 44. 37 40.7 Per cent of total 7.2 2.3 2.6 2.2 1.7 0.8 0.6 0.5 Manufacturing (thousands) - 182 301 448 755.1 855.4 1,333.00 2,051.60 Per cent of total - 7 9 11.1 15.7 15.2 19.9 25.9 Construction (thousands) 150 162 91 160 270.2 429.4 424.2 659.4 Per cent of total 5.5 6.2 2.7 4 5.6 7.6 6.3 8.3 Government services (thousands) 200 - 398 520 658.2 819.5 850.2 872.2 Percent of total 7.4 - 11.9 12.9 13.7 14.6 12.7 11 Other services (thousands) 351 884 963.8 1,275.60 246.8 1,829.00 2,304.00 2,862.70 Per cent of total 12.9 34 28.9 31.7 5.1 32.5 34.5 36.2 Total Labour Force (thousands) 2,312 2,774 3,610 4,470 5,109 6,039.10 7,042 8,140 Unemployment rate (per cent) 6 6.3 7.5 10.1 5.7 6.9 5.1 2.8 Notes: 1. 1960 numbers for mining and quarrying include manufacturing employment. 2. 1960 and 1965 numbers for construction is inclusive of employment in the utilities sector. 3. Other services is composed of the Finance, Insurance and Commerce; and Transport, Storage and Communications sector employment from 1970 onwards. Comparisons for this category over time are not valid. Source: Ministry of Finance: Economic Report, various issues.
17 Table 4.5: Forecast of sectoral value-added shares Sectors RM Million (in 1978 prices) Average Annual Share of GDP (%) 1995 2000 2005 Growth Rate (%) 1995 2000 2005 1996–2000 2001–2005 Agriculture 16,230 18,542 21,081 2.6 2.5 13.5 10.5 8.2 Mining 8,979 10,062 10,824 2.3 1.5 7.4 5.7 4.2 Manufacturing 39,825 66,323 98,672 10.7 8.3 33.1 37.5 38.4 Construction 5,385 8,557 12,159 9.7 7.3 4.5 4.8 4.7 Services 53,303 81,117 124,245 8.8 8.9 44.3 45.8 48.4 Net inputed bank –3,413 –7,502 –10,358 - - –2.8 –4.2 –4 charges(-) and import duties (+) GDP at Purchasers’ 120,309 177,099 256,623 8.04 7.7 100 100 100 Value Source: Ministry of International Trade and Industry: Second Industrial Master Plan, 1996
The decade beginning in 1986 was an important time in the development of the Malaysian economy. It was during this period that a concerted effort was undertaken to accelerate industrial development. For the first time, an industrial master plan was commissioned that set a comprehensive framework for promoting industry groups. The industry groups were classified into resource-based and non-resource-based industries. The IMP pronounced the intention that Malaysia will not remain a primary producer. Over the Second IMP period, from 1996 to 2005, the size of the manufacturing sector is projected to be 38 per cent of GDP, while that of agriculture will reduce further to around 8 per cent of GDP (Table 4.5).
4.4.1 Trade Performance
Foreign trade has always been a striking feature of the Malaysian economy. The trade to GDP ratio increased from around 40 per cent in the early days of independence to almost 100 per cent by 1995, showing Malaysia’s increasing integration with the world economy (Table 4.3). As indicated in the table, the 1970s to the mid-1980s saw little change in the trade ratio, which reflected a more inward-looking policy when tariff rates were relatively high. With the onset of the reforms from the mid-1980s, the trade ratio increased dramatically from 48 per cent in 1985 to 72 per cent in 1990 and reached 98 per cent in 1995. The last decade has seen a rapid escalation in trade as compared with the preceding decade.
Between 1986 and 1995, Malaysian exports in nominal terms grew almost fivefold, with imports registering even faster growth, with an increase of more than sixfold. In contrast, between 1976 and 1985 the compound average growth rate (CAGR) for exports and imports grew by 12.2 per cent and 13.5 per cent respectively. In real terms, the CAGR of 14.2 per cent for exports between 1986 and 1995 was unprecedented in the nation’s history. Such a performance can be attributed to the economic reforms and voluntary trade liberalisation measures of the mid-1980s, and to the consequent depreciation of the ringgit. Over the past two decades of rapid economic growth, import growth has consistently outstripped the growth in exports, again indicating liberal trade policies and the high import content of Malaysia’s industrial transformation.
In 1996, Malaysia attained the fastest growth rate in exports (18 per cent) among 13 countries while ranking third among 17 countries for its import growth rate (22 per cent) (Table 4.6). This trade performance resulted in Malaysia retaining its ranking as the nineteenth leading exporter in the world in 1996, and the seventeenth largest importer (Table 4.7). The rapid growth rate in imports, exceeding that of exports, created deficits in the merchandise balance from 1990. These widened in the 1990s and the current account deficit became quite serious by 1996.
18 Table 4.3 indicates that the most rapid growth in exports from the mid-1980s onwards came from exports of manufactured goods. This period saw the decline in the exports of traditional commodities. As shown in Table 4.8, the CAGR for rubber declined in both volume and value terms between 1980 and 1995. The best performing agricultural export was palm oil, which registered a CAGR of 7.4 per cent in volume and 9.5 per cent in value over the same period. Agricultural export growth as a whole lagged behind that of total exports, such that its share of total exports dwindled to 11 per cent by 1995.
Table 4.6: Economies with the fastest growing trade (annual average growth rates based on dollar values) Exporters Growth (%) Importers Growth (%) Malaysia 18 Argentina 34 Philippines 17 Poland 22 Peoples’ Rep. of China 16 Malaysia 18 Thailand 16 Philippines 18 Singapore 15 Peoples’ Rep. of China 17 Mexico 15 Brazil 17 Ireland 13 Colombia 16 Kuwait 12 United Arab Emirates 15 Republic of Korea 12 Chile 15 Indonesia 12 Mexico 14 Argentina 12 Singapore 14 India 11 Republic of Korea 14 Spain 11 Thailand 13 Indonesia 12 Turkey 11 Israel 11 Taiwan 11 Note: Trading economies on the list: (i) had exports or imports in excess of US$10 billion in 1996; and (ii) had a growth rate of exports or imports of at least one-and-a-half times the annual world average of 7 per cent during 1990 to 1996. Source: WTO International Report, 1996 as cited from: MITI: Malaysia International Trade and Industry Report 1996–97.
Imports of consumption goods currently constitute only 14 per cent of total imports, and of this portion food imports are less than 3 per cent and intermediate goods for agriculture are around 1 per cent. As reflected in Table 4.9, Malaysia is a net food- importing country in the category of SITC 0. Combining SITC 0, 1 and 4, Malaysia has a surplus in the food trade balance. Table 4.10 details the composition of imported agricultural products, showing that cereals and cereal preparations, fruit and vegetables, and sugar and sugar preparations together account for more than 50 per cent of the value of imports in SITC 0. Forest products make up the second largest import category, with paper, paperboard and articles of paper pulp (SITC 641–642) the biggest constituents. The third largest component is the area of agricultural requisites, which has been boosted by rapid increases in imports of veterinary medicaments and in tractor parts from 1985 to 1995.
19 Table 4.7: Leading exporters and importers in world merchandise trade among developing countries, 1995 to 1996 Rank Rank Exporter/Importer Value (fob) Share Annual Change % 1996 1995 (US$ bn) 1996 (%) 1996 1995 Exporters 9 9 Hong Kong 180.9 3.4 4.0 14.7
11 11 PRC 151.1 2.9 1.5 23.0
12 12 Rep. of Korea 129.8 2.5 3.3 31.5
13 13 Singapore 125.1 2.4 5.3 22.5
14 14 Taiwan 116.0 2.2 3.9 19.9
16 18 Mexico 95.9 1.8 20.6 31.3
19 19 Malaysia 78.4 1.5 5.8 25.9
24 22 Thailand 54.8 1.0 –2.9 23.2
World 5254.0 100.0 3.8 19.1
Importers 7 7 Hong Kong 202.0 3.7 3.0 19.1
11 11 Rep. of Korea 150.3 2.8 11.2 32.1
12 12 PRC 138.8 2.6 6.1 14.1
13 13 Singapore 131.5 2.4 5.6 21.4
15 15 Taiwan 102.5 1.9 –1.1 21.4
16 18 Mexico 90.3 1.7 23.6 –11.0
17 17 Malaysia 78.6 1.5 1.0 30.4
19 19 Thailand 68.3 1.3 –3.5 26.8
World 5390.0World 100.05254 4.1100 19.13.8 Source: WTO International Report, 1996, as cited from MITI: Malaysia International Trade and Industry Report, 1996/97
20 Table 4.8: Major agricultural exports, 1980 to 1995 Year Volume (000 tonnes) Volume (000 cubic metres) Value (RM million) Total Main Total % Agric. Rubber Palm Oil Sawn Timber Saw Logs Rubber Saw Logs Sawn Timber Palm Oil Agric. Exports Expts to Exports Total Expts 1980 1525.7 2258.2 3245.2 15156.2 4618 2618.2 1344.1 2603.1 11183.4 28171.6 39.7 1981 1485.3 2506.8 2907.8 15923.3 3713.1 2476.2 1118.9 2835.5 10143.7 27109.4 37.4 1982 1378.1 2817.2 3116.4 19297.8 2655.1 3382.1 1164.6 2742.3 9944.1 28108.2 35.4 1983 1563 2948.8 3437.6 18726 3663.6 3806.9 1349.7 2994.9 11815.1 32771.2 36.1 1984 1590.6 2982 3872.8 16939.4 3671.5 2806.1 1175.7 4545.5 12198.8 38646.9 31.6 1985 1497.4 3232 2780.1 19630.5 2872.2 2771.2 1136.8 3963.1 10743.3 38016.7 28.3 1986 1516.1 4334.6 2999.3 19054.2 3182.7 2872.7 1395 3019.5 10469.9 35318.6 29.6 1987 1620.3 4100.5 3743 22920 3915 4273.7 1651.8 3291.9 13132.4 45224.9 29 1988 1610.6 4166.8 3998 20547 5255.9 4007.2 1843 4540 15646.1 55260 28.3 1989 1487.1 4964.4 5052 21101 3949.1 4355.6 2906.7 4690.9 15902.3 67824.5 23.4 1990 1321.7 5679.7 5222 20354 3026.6 4041.2 3064.7 4410.7 14543.2 79646.4 18.3 1991 1131.8 5562.7 5021 19318 2689.8 4099.6 3008.3 5044.9 14842.6 94496.6 15.7 1992 1035 5580.9 5392 17914 2357.2 3851.4 3487.7 5436.6 15132.9 103656.7 14.6 1993 934 5880.8 5477.8 9287.8 2131.7 2914.1 4545.6 5797.3 15388.7 121237.5 12.7 1994 1017 6603.9 4752.7 8417.3 2927 2543.5 4331.1 8365.3 18166.9 153921.2 11.8 1995 1013.3 6629.7 4337 7746.3 4037.9 2263.5 3839.2 10168.6 20309.2 184986.5 11 CAGR –2.69 7.44 1.95 –4.38 –0.08 –0.97 7.25 9.51 4.1 13.37 (%) Source: Bank Negara Malaysia Quarterly Bulletin, Vol. II, No. 2, second quarter 1996.
Table 4.9: Imports and exports of food items (SITC 0, 1 and 4), 1980 to 1995 (RM million) Year IMPORTS EXPORTS Trade Trade Food & Live Beverages& Animal/Vege- Total Food Food & Live Beverages& Animal/Vege- Total Food Balance Balance Animals Tobacco table fats&oils Imports Animals Tobacco table fats&oils Exports SITC 0 1980 2444.3 221.3 29.7 2695.3 1013.2 29.1 3131.3 4173.6 1478.3 –1431.1 1981 2941.5 255.1 35.2 3231.8 1134.5 29.8 3375.7 4540 1308.2 –1807 1982 2999.4 247.6 36.5 3283.5 1152.5 22.1 3255.8 4430.4 1146.9 –1846.9 1983 2984.5 250.2 56.3 3291 1272.9 28.2 3829.2 5130.3 1839.3 –1711.6 1984 3227.1 212.8 119.9 3559.8 1479.8 28.2 3868.2 5376.2 1816.4 –1747.3 1985 3064 228.9 80.6 3373.5 1662.1 25.5 4845.3 6532.9 3159.4 –1401.9 1986 2914.2 209.6 68.5 3192.3 1964.5 37.4 3609.6 5611.5 2419.2 –949.7 1987 2965.3 192.4 205.1 3362.8 2458.2 57.4 4167.5 6683.1 3320.3 –507.1 1988 2825.9 208.2 267.2 3301.3 2852.4 83.1 5762.6 8698.1 5396.8 26.5 1989 4609.3 236.5 269.5 5115.3 3129.9 80.2 6197.5 9407.6 4292.3 –1479.4 1990 4551.3 292.6 217.8 5061.7 3391.4 94.9 5679.6 9165.9 4104.2 –1159.9 1991 5138.9 423.8 394.8 5957.5 3651.6 169.2 6226.8 10047.6 4090.1 –1487.3 1992 5436.2 398.2 330.3 6164.7 3718.4 190.6 6874.3 10783.3 4618.6 –1717.8 1993 5816.1 390.8 403.8 6610.7 3975.2 184.7 7242.1 11402 4791.3 –1840.9 1994 6600.1 423.7 557.3 7581.1 4378.4 205.4 10484 15067.8 7486.7 –2221.7 1995 7887.7 559.5 380.3 8827.5 4519.4 395.3 12368.9 17283.6 8456.1 –3368.3 Source: Bank Negara Malaysia Quarterly Bulletin,Vol. II, No. 2, second quarter 1996.
21 Table 4.10 Imports of agricultural products by SITC SITC Descriptions 1987 1988 1989 1990 1991 1992 1993 1994 1995 Food/Edible Products 3,026 3,985 4613.91 4582.51 5141.71 5391.49 5816.07 6665.71 7884.64 00 1 Live animals 44.51 59.48 53.76 67.63 73.96 87.52 77.42 98.58 140.18 01 1-017 Meat and meat preparations 180.94 195.82 211.66 248.67 282.5 255.83 283.56 339.72 381.12 022-025 Dairy products and birds’ eggs 288.42 457.21 561.93 538.95 579.96 577.12 715.12 726.52 951.92 034-037 Fish, crustaceans and molluscs & 297.34 341.77 390.63 367.54 450.74 610.95 655.33 760.94 773.11 preparations 041-048 Cereals and cereal preparations 771.14 1059.23 1373.65 1311.16 1506.39 1467.99 1516.44 1648.89 2044.24 054-059 Vegetables and fruit 502.89 722.82 612.85 629.67 683.72 741.97 859.04 985.76 1127.77 061-062 Sugars, sugar preparations and honey 352.21 457.03 564.03 632.44 654.25 593.38 608.31 733.46 854.83 071- 075 Coffee, tea, cocoa, spices and 181.12 138.11 160.89 144.33 172.71 191.98 201.47 275.15 408.8 manufactures 081 Feeding stuff for animals 237.65 294.71 373.06 300.65 325.7 443.2 451.98 540.99 582.33 091& Miscellaneous edible products and 169.89 259.26 311.44 341.49 411.78 421.55 447.41 555.72 620.34 098 preparations Beverages, Starches, 435.16 743.61 784.206 828.671 1064.08 1038.98 1174.35 1619.35 1171.53 Animal&Vegetable Oils & Fats 3 8 111-112 Beverages (Alcoholic & Non- 16.14 125.71 120.31 156.01 195.43 176.67 207.56 262.93 267.21 alcoholic) 222-223 Oil seeds and oleaginous fruit 184.66 305.35 342.45 372.09 443.1 403.33 396.91 435.63 415.85 411 Animal oils and fats 205.14 2.98 2.3 2.42 3.39 2.52 3.56 7.45 9.62 421-422 Fixed vegetable oils and fats, crude, - 252.08 240.82 203.3 373.9 310.89 383.26 532.41 178.52 refined or fractionated 431 Animal or vegetable oils and fats, - 12.13 13.94 12.24 16.46 17.9 17.03 192.55 37.5 processed 592 Starches, inulin and wheat gluten, 29.22 45.36 64.38 82.61 31.8 127.67 166.04 188.4 262.83 albumin. subs., glues Other Agriculture Products 545.99 679.85 987.62 1112.59 1226.33 1683.66 1651.59 2247.4 1700.94 12 1-122 Tobacco and tobacco manufactures 88.22 82.48 121.21 136.88 228.33 222.54 183.24 166.6 291 21 1-212 Hides, skins and furskins, raw. 2.88 2.95 4.75 3.73 5.97 2.61 3.76 8.3 8.37 23 1 Natural Rubber, Natural Gums in 85.16 90.4 213.64 216.57 123.35 150.21 252.07 416 574.8 Primary Form 26 1-268 Natural Fibres (incl. Textile yarn, 234.29 352.5 460.89 549.21 608.06 1022.56 914.61 1286.6 223.5 SITC 651) 291-292 Crude animal and vegetable 125.05 135.91 156.59 154.34 175.75 184.13 183.79 208.2 254.42 materials, N.E.S. 611 Leather 10.39 15.61 30.54 51.87 84.87 101.61 114.12 161.7 348.85 Forest Products 854.36 1,096.7 1326.76 1648.82 2047.64 1982.46 2210.43 2770.2 3946.13 6 24 4-248 Natural Cork, Fuel Wood and Wood 17.93 18.8 38.04 47.45 69.48 90.88 160.72 234.7 309.66 in Chips or Particle 251 Pulp and waste paper 39.66 52.25 59.05 62.98 66.82 60.56 69.33 100.1 114.61 633-635 Cork and wood manufactures (excl. 16.04 31.21 38.7 61.1 74.98 84.57 105.4 126.9 159.45 furniture) 641-642 Paper, paperboard, & articles of 780.73 994.5 1190.96 1477.29 1836.36 1837.33 1874.98 2308.5 3362.41 paper pulp Agriculture Requisites 777.47 862.72 837.08 955.16 943.49 1072.88 1890.76 1759.92 2524.3 272& Fertilizers, crude and manufactured 563.4 591.73 579.51 662.47 614.71 624.37 717.66 779.3 498.26 562 541-542 Veterinary Medicaments 36.32 41 40.38 46.12 57.11 153.11 474.44 695.8 798.6 591 Disinfectants, Insecticides, 96 119.97 92.18 98.77 107.86 108.27 112.91 132 162.39 Fungicides, Weed Killer, etc 721-722 Agricultural machinery (excluding 28.92 78.95 85.21 106.93 123.92 147.36 135.82 145.2 187.54 Parts) 625& Tractor Parts 46.75 30.09 36.63 39.59 37.37 30.59 446.96 4.52 875.82 784 657& Fishing nets and trawlers 6.08 0.98 3.17 1.28 2.52 9.18 2.97 3.1 1.69 793 Total imports of agricultural products 5,639.1 7,368.4 8549.57 9127.75 10423.3 11169.5 12743.2 15062.6 17227.5 Source: Ministry of Agriculture, Import and Export Trade in Food and Agriculture Products, various issues
The composition of agricultural exports and imports clearly reflects Malaysia’s specialisation: the production and exportation of rubber, palm oil and cocoa, in which it has a comparative advantage, and the importation of most of its basic or staple food needs, in which it lacks an advantage. This dependence on external sources for food is made possible by the availability of foreign exchange earned in the more productive agricultural export and manufactured goods export sectors. Earnings from the export of palm-based products alone are more than enough to offset the food import bill. Prior to the currency crisis, food import substitution as a means of saving foreign exchange had
22 therefore never been a convincing argument for policy interventions in food production in Malaysia.
Malaysia’s major trading partners are in Western Europe, Asia, North America, Australia and New Zealand. From 1993 to 1997, as indicated in Table 4.11, trade with the Asian region showed stronger growth than trade with traditional partners. Trade with ASEAN countries almost doubled, while exports to Hong Kong more than doubled. During the 1990s, Malaysia adopted a strategy of actively seeking non-traditional markets in Africa, the CIS and Latin America as a response to the challenges of a more competitive global environment. Such trade flows also stemmed from Malaysia’s increasing investments in emerging markets. Trade and investment strategies in recent years have been aimed particularly at exploring complementarities among less developed countries.
Australia is the largest single supplier of food imports, as indicated in Table 4.12. However, North America has in recent years emerged as an increasingly important supplier: imports of food (SITC 0) from North America almost tripled in value terms between 1991 and 1995. Although most ASEAN countries have large agricultural bases, producing similar or competing products for the same markets in the developed countries, trade in food is the complementing factor binding these countries, a bond further accelerated by the process towards the realisation of AFTA. Geographical proximity is an advantage in food trade, especially in highly perishable items. Thus, Malaysia sources most of its food needs from ASEAN suppliers: rice and fish mainly from Thailand and Vietnam, vegetables, especially cabbages, from Indonesia, and tropical fruit predominantly from Thailand. Australia, New Zealand and North America supply temperate fruit, vegetables, meat and dairy products.
Table 4.11: Direction of external trade, 1993, 1995 and 1997 (RM million) Major Country or 1993 1995 1997 Groupings Exports Imports Trade Exports Imports Trade Exports Imports Trade Balance Balance Balance Western Europe 18853.1 16747.5 2105.6 27197.3 33973 –6775.7 33166.4 34815 –1648.6 EU countries 17573.7 13636.8 3936.9 26273.6 29960.2 –3686.6 31943.5 31224.2 719.3 Other countries in 1279.4 3110.7 –1831.3 923.7 4012.8 –3089.1 1222.9 3590.8 –2367.9 W. Europe Eastern Europe 199.2 456.4 –257.2 644.4 935 –290.6 745.5 1854.9 –1109.4 Asia: 65649.6 70550.1 –4900.5 99619.4 113207.9 –13588.5 122688.3 132243.5 –9555.2 ASEAN countries 33734.7 23203.5 10531.2 50391.4 33748.1 16643.3 60725.1 44960.2 15764.9 Japan 15741.1 32255.4 –16514.3 23449 53088.8 –29639.8 27798.1 48506.4 –20708.3 China 3094.7 2821.1 273.6 4904.4 4298.3 606.1 5257.9 6254.4 –996.5 Hong Kong, SAR, 5001.7 2371.2 2630.5 9899.3 4193.7 5705.6 12178.6 10599.4 1579.2 China Taiwan, ROC 3888.1 6297 –2408.9 5813.3 9913.7 –4100.4 9632.8 10599.4 –966.6 Korea 4189.3 3601.9 587.4 5162 7965.3 –2803.3 7095.8 11323.7 –4227.9 Other countries in 2930.2 1564.3 1365.9 5334.6 1827.7 3506.9 7513.9 2568.1 4945.8 Asia North America: 25813.4 20456.9 5356.5 39783.2 32447 7336.2 42748.9 38783.8 3965.1 United States 24641.2 19856.6 4784.6 38278.5 31413 6865.5 41122 37049 4073 Canada 1172.2 600.3 571.9 1504.7 1034 470.7 1626.9 1734.8 –107.9 Australia 1616.9 3323.7 –1706.8 2824.6 5259.4 –2434.8 3779.1 5473.4 –1694.3 New Zealand 515.9 623.6 –107.7 487.9 800.9 –313 564.6 1085.9 –521.3 Rest of the World 5659.2 3682.2 1977.0 9095.1 5893.6 3201.5 10188.2 9361.9 826.3 Total 121237.5 117404.7 3832.8 184986.5 194344.5 –9358.0 221412.9 220991.5 421.4 Notes: 1. Exports are on fob and imports cif basis. 2. Vietnam became a member of ASEAN in 1995. 3. Prior to July 1995, other countries in Asia included Myanmar, Sri Lanka and Pakistan. 4. Finland and Sweden became EU members on 1 January 1 1995, and Austria joined on 1 March 1995. 5. Other countries in Western Europe include Gibraltar, Greenland, Iceland, Malta, Monaco, Norway, Switzerland and Turkey. 6. East European countries include Bulgaria, the Czech and Slovak Republic, Poland and Yugoslavia. Source: Bank Negara Malaysia, Annual Report 1997.
23 Table 4.12: Malaysia: imports and exports of food items, 1991 and 1995 (Sitc 0, 1 and 4 Only) (Rm Millions) Imports 1991 Total Imports 1995 Total Sitc 0 SITC 1 SITC 4 Food SITC 0 SITC 1 SITC 4 Food E.U. 369.99 167.11 45.37 582.47 645.7 245.08 22.95 890.78 countries Other 74.22 4.11 1.85 80.18 106.23 6.07 7.53 112.3 countries in W. Europe Eastern 5.94 0.08 * 6.02 32.53 0.15 - 32.68 Europe Africa 22.21 1.14 4.48 27.83 189.53 5.04 2.48 194.57 Asean 1423.9 30.63 266.56 1721.13 1653 90.47 154.49 1743.46 countries Other 1276.8 71.7 11.18 1359.69 1486.5 37.81 19.27 1524.34 countries in Asia North 382.62 134.21 13.25 530.08 1091.1 157.56 67.53 1248.67 America Central & 118.3 10.99 50.45 179.74 436.39 9.52 86.47 445.91 South America Australia 1070.1 3.74 0.7 1074.49 1610.9 4.08 2.05 1614.97 New Zealand 394.78 0.06 0.94 395.78 532.77 0.31 1.41 533.08 Rest of the - - - - 99.99 2.13 15.87 102.12 World Total 5138.9 423.77 394.78 5957.41 7884.7 558.22 380.05 8442.88 Exports 1991 Total Exports 1995 Total SITC 0 SITC 1 SITC 4 Food SITC 0 SITC 1 SITC 4 Food E.U. 640.64 1.16 909.56 641.80 669.24 2.92 1211.41 1883.57 countries Other 33.06 0.08 224.92 33.14 111.48 0.29 580.29 692.06 countries in W. Europe Eastern 25.49 * 88.22 25.49 6.08 0.36 23.46 29.90 Europe Africa 20.40 0.38 129.41 20.78 32.89 0.14 980.05 1013.08 Asean 1527.13 118.39 969.46 1645.52 1968.44 199.94 1252.02 3420.40 countries Other 869.87 45.03 3323.26 914.90 1321.66 176.81 7812.60 9311.07 countries in Asia North 365.36 0.14 269.67 365.50 218.47 0.70 414.66 633.83 America Central & 2.92 0.01 232.80 2.93 12.18 0.25 111.42 123.85 South America Australia 135.80 3.90 59.96 139.70 147.77 1.55 180.02 329.34 New Zealand 30.95 * 19.50 30.95 9.53 0.12 35.10 44.75 Rest of the - - - - 18.01 14.63 32.95 65.59 World Total 3651.62 169.09 6226.76 3820.71 4515.75 397.71 12633.98 17547.44 Note: * denotes values less than RM10,000 Source: Department of Statistics, External Trade Statistics, 1991 and 1995.
Malaysia’s trade performance has been further reinforced by its market share of major commodities. Malaysia used to be the world’s largest producer of natural rubber; today it ranks third after Thailand and Indonesia. In palm oil, however, it is currently the largest producer although it anticipates being overtaken by Indonesia by 2007. It is the world’s fourth largest producer of cocoa, and it is unlikely that this position can be improved upon as many producers went out of cocoa during the many years that prices were
24 depressed. In selected non-traditional products, Malaysia is a large supplier of cut flowers to the Asian markets, especially Hong Kong, while it continues to be a major exporter of ‘carambola’, or starfruit, to European markets.
Since the mid-1980s Malaysia’s intention to industrialise was formalised in the Industrial Master Plan, which set out targets and strategies for both the resource-based and non- resource-based industries. Despite the size of manufactured goods exports, especially electronic exports, it is still the resource-based industries that truly command creditable world market shares. The relative advantage of Malaysia’s main resource-based industries is captured by revealed comparative advantage (RCA) ratios (Table 4.13). In the category of palm-based fixed vegetable oils, Malaysia’s RCA is in the double digits, as is also the case for the non-food-based products such as basic oleochemicals. These ratios fell by more than half from 1988 and 1993, reflecting declining world market shares resulting from the expansion of palm oil cultivation in Indonesia. Strong RCAs are also denoted in the wood-based products especially in veneer and plywood, which registered slight improvements over the same period. In the category of other wood products and furniture, the RCA is marginal. Marked improvements have been seen in the wood furniture category; it has responded to the growing scarcity of tropical hardwoods by extensively using rubber wood made available when plantations divested their rubber holdings in response to depressed rubber prices and labour shortages.
In the other industries, especially the food-based industries, the RCAs are unimpressive or practically non-existent, except in a few industries and even then they recorded rather sharp declines over the five-year period. In the cocoa and confectionary sector, the chocolate and other food preparation category saw a sharp decline in the RCA from 6.1 in 1988 to 2 in 1993. The processed fruit and vegetables category also revealed eroding comparative advantage. The performance of the meat and seafood products category was also uninspiring, with only the prepared/preserved fish products recording quite a large improvement in the RCA ratio to 1.09. Except for cocoa and palm oil, the food processing industry has always faced the problem of inadequate raw material supply.
25 Table 4.13: Malaysia: RCA indicators for selected industries, 1988 to 1993 World CAGR % RCA RCA RCA Export (1988–93) 1988 1993 change Share (%) (1988–93) Poultry, dead & edible 0.182 24.21 0.159 0.123 –0.036 Sausages & the like 0 –52.1 1.064 0 –1.064 Other prepared/preserved meat 0.132 1.79 0.206 0.09 –0.116 Frozen fish (excl. fillets) 0.272 28.08 0.138 0.184 0.046 Frozen fish fillets 0.136 111.27 0.007 0.092 0.085 Fish dried, salted or in brine 0.173 11.52 0.147 0.117 –0.03 Prepared/preserved fish 1.609 32.63 0.684 1.085 0.401 Crustaceans/Molluscs 1.24 –10.8 3.876 0.836 –3.04 Fruit & Vegetable Products Vegetables, frozen or otherwise 0.006 –30.14 0.068 0.004 –0.064 Jam, fruit jellies, marmalade 0.247 26.31 0.148 0.167 0.019 Fruit, temporarily prepared 0.03 11.28 0.03 0.02 –0.01 Fruit, preserved & prepared 1.639 18.32 1.366 1.105 –0.261 Juices, fruit & vegetables 0.138 13.7 0.11 0.093 –0.017 Cocoa & Confectionary Products Sugar confectionary & other 0.514 13.83 0.652 0.347 –0.305 Chocolate & other food preparation 3.052 –4.31 6.121 2.057 –4.064 Oleochemicals Fixed vegetable oils, n.e.s. 26.983 1.26 42.994 18.183 –24.811 Fatty acids, acid oils & residues 19.314 2.54 31.369 13.015 –18.354 Acryclic Alcohols & their halogens 2.651 11.16 2.04 1.787 –0.253 Wood Based Products Lumber 8.786 17.58 7.034 5.921 –1.113 Veneer 13.499 34.61 5.281 9.063 3.782 Plywood 10.839 29.5 6.959 7.304 0.345 Particleboard & other panel products 0.53 8.61 0.642 0.358 –0.284 Paper & paperboard excl. newsprint 0.434 22.43 0.266 0.293 0.027 Pulp & wastepaper 0.043 12.27 0.023 0.029 0.006 Wood chemical products 0.037 7.59 0.039 0.025 –0.014 Other wood products 2.132 33.24 1.003 1.437 0.434 Furniture 1.432 50.95 0.364 0.965 0.601 Rubber–based Products Rubber tyres, tyre cases, etc. 0.331 31.35 0.144 0.224 0.08 Materials of rubber 3.287 16.71 2.858 2.215 –0.643 Transmission, conveyor/elevator 0.224 14.91 0.226 0.151 –0.075 Other articles of rubber, n.e.s. 1.883 18.35 1.402 1.269 –0.133 Synthetic rubber lathes 0.407 79.89 0.027 0.275 0.248 Reclaimed rubber, waster & scrap 3.96 57.36 0.486 2.669 2.183 Note: Based on 4-digit SITC data Source: DRI/McGraw-Hill computations for the Second Industrial Master Plan (Malaysia)
26 4.4.2 Trade Policy
Malaysia’s unilateral efforts from the mid-1980s to liberalise trade has been commendable. Prior to the economic reforms, import levies and taxes were important contributors to revenue, with some duties imposed for the purpose of protecting infant industries. As the structure of the economy changed with the scope of industries, imported components became increasingly important in the production of final goods. The Government began to reduce tariff levels for inputs that are not available domestically, so as to enhance the competitiveness of Malaysian products. In the area of food imports, tariffs on a wide range of products, especially those not also produced locally, were reduced. Food items are a major component of the CPI and tariff reductions are seen as an anti-inflationary measure.
Although tariff barriers started to be reduced from the mid-1980s, it was only in the 1990s that the reductions were accelerated. In the area of food trade, the reductions were motivated as much by global competitive pressures as by the constant need to control inflation. As a nation highly dependent on food imports, tariffs were seen as translating into price increases for the final consumer. The government also saw the reduction in tariffs, duties and sales taxes as a way to streamline the tax system in preparation for the switch to a general or non-distortionary value-added tax in the form of the sales and service tax.
Most of the tariffs and sales tax on food imports, especially those in SITC 0, have been reduced or eliminated. Each successive budget, especially from 1993, saw progressive reductions in the tariff rates on food imports. These reductions are relatively easy for policymakers, as most of the products affected are not produced locally and Malaysia is unlikely to have comparative advantages in their production. The reductions were also made at a time when the exchange rate had steadily depreciated by about 20 per cent. The Government was concerned about the rate of inflation as growth accelerated after 1987 and a study undertaken by the Central Bank in 1992 found that one of the sources of inflation was imported inflation.
The reality of the WTO and the progress towards the realisation of AFTA have seen firm commitments by Malaysia to reduce both tariff and non-tariff measures. Even in the area of poultry production, which is a protected import-substituting industry, the traditional non-tariff barrier has been converted into a tariff and in recent years the in- quota level has been exceeded. While food imports such as live animals are subject to import licensing, this is to ensure food safety rather than to impede trade. As noted earlier, given Malaysia’s strong export earnings, the argument for food self-sufficiency as a motive for saving foreign exchange has never been convincing. So far total food exports (SITC 0, 1 and 4) have been able to meet the foreign exchange requirements of the food import bill.
Minimum market access under the WTO commitments is defined as 0 to 3 per cent of total consumption for livestock products. The initial and final quotas and tariffs are indicated in Table 4.14. The tariff levels apply for amounts in excess of the quota and these range from 40 per cent in the case of pork, whether fresh, chilled or frozen, to 70 per cent for chicken wings. In practice, a flexible and pragmatic approach is taken with regard to implementation; the amounts imported have in most cases exceeded the quota quantities. Even where this happened the imports are allowed in tariff free. The lifting of the ban on imports of dressed poultry is a big concession, considering the size of the local poultry industry and its ability to meet all domestic requirements.
27 Table 4.14: Minimum access tariffs and quotas Product Initial Final Quota Tariff Quota Tariff Poultry (whole) 279.9 (m.t) 50% 4,663.50 (m.t) 50% Chicken Wings 466 (m.t) 70% 778 (m.t) 70% Meat of swine fresh, 1.036 (m.t) 40% 1,727 (m.t) 40% chilled or frozen Liquid milk 600,000 (litres) 50% 1,000,000 (litres) 50% Hen Eggs 47,000,000 50% 78,500,000 50% Source: Ministry of Agriculture
The reductions in tariffs or duties have also extended to agricultural exports. Export taxation was an important source of government revenue until recent years. In response to the structural changes taking place as a consequence of market forces, the Government has reduced taxes from time to time. These reductions were seen as a way of assisting the industry in hard times but gradually some taxes were eliminated altogether, as in the case of rubber. The intention is to abolish the export tax on palm oil in order for Malaysian producers to be able to compete with neighbouring producers.
Table 4.15: Agricultural products subject to import licensing Goods Approving authority Poultry (fowls, chicks, ducks, geese, turkeys, guinea fowls Veterinary Department and pigeons) alive or dead or any part thereof. Meat and offals, fresh or preserved (dried, dehydrated, salted, Veterinary Department pickled or smoked) frozen or chilled of buffaloes, cattle, sheep and goats. Birds nest, eggs of poultry, birds and testudinate (terrapin Veterinary Department and the like), excluding turtle eggs. Rice and padi, including rice flour, rice polishings, rice bran Ministry of Agriculture and rice vermicelli. Sugar Ministry of International Trade and Industry (MITI) Wood in the rough, whether or not stripped of its bark or Malaysian Timber Industry merely roughed down, wood roughly squared or half- Board (MTIB) squared, but not further manufactured Rice milling machinery, including parts thereof. Ministry of Agriculture Unmanufactured tobacco, tobacco refuse. Ministry of Primary Industries Liquid milk in any form, including flavoured milk recombined Ministry of International or reconstituted Trade and Industry (MITI) Liquid sterilised flavoured milk, including flavoured milk Ministry of International recombined or reconstituted. Trade and Industry (MITI) Cabbage (round). Federal Agricultural Marketing Authority (FAMA) Coffee, not roasted. Federal Agricultural Marketing Authority (FAMA) Cereal flours: of wheat or of meslin (including atta flour) in packings Ministry of International exceeding 5 kg Trade and Industry (MITI) of wheat or of meslin (including atta flour) in packings of Ministry of International not exceeding 5 kg. Trade and Industry (MITI) 52 goods currently subject to import licensing. Source: MITI: Malaysia: International Trade and Industry Report 1996–97.
The reduction of both tariff and non-tariff measures has left a limited list of agricultural products still subject to import licensing. Table 4.15 shows a total of 13 such groups, involving 52 goods. The licensing of livestock products is mainly for health and sanitary
28 reasons: most countries practise some form of regulation in this regard. Flour and sugar are cases where there has been a need to regulate an oligopolistic structure and to protect consumer interests through price control. Except for the cases of poultry and rice, where domestic production is quite substantial, domestic production of the other regulated food items is insignificant or non-existent (as in the case of wheat flour).
Malaysia’s tariff levels are the lowest among the ASEAN countries (with the exception of Brunei), as shown in Tables 4.16 and 4.17. In 1997 the highest tariff levels in Malaysia applied to wood and wood articles – by 2000, these levels will average 7 per cent. The lowest tariff levels relate to the fats and oils category, with a 1.5 per cent tariff in 1997. By 2000 the chemicals group will have the lowest average tariff, with less than 1 per cent. However, in the area of unprocessed agricultural products, Malaysia’s list of sensitive products is the longest among the group, reflecting the large spread in tariff rates (Table 4.18). Malaysia has, however, submitted the second largest number of tariff lines in the overall inclusion list.
Table 4.16: Range of ASEAN tariffs, 1997 Country Product Highest Tariff Product Lowest Tariff Rate (%) Rate (%) Brunei Wood and wood 7.6 Live animals 0 articles Indonesia Footwear 23.2 Vegetables 0.3 Malaysia Wood and wood 12.4 Fats and oils 1.5 articles Philippines Footwear 14.7 Mineral products 4.1 Singapore* - - - - Thailand Prepared 22.7 Mineral Products 5.7 foodstuffs Vietnam Prepared 5 Miscellaneous 0 foodstuffs manufactures ASEAN Footwear 13.7 Mineral Products 2.5 Note:* Tariff rate in Singapore is zero rated Source: MITI: Malaysia: International Trade and Industry Report 1996–97
Table 4.17: Range of ASEAN tariffs, 2000 Country Product Highest Tariff Product Lowest Tariff Rate (%) Rate (%) Brunei Textiles and 3.8 Live animals 0 apparel Indonesia Footwear 13.8 Mineral products 2.9 Malaysia Wood and wood 7 Chemicals 0.8 articles Philippines Footwear 9.4 Mineral products 3 Singapore* - - - - Thailand Footwear 12.9 Gems 3.1 Vietnam Prepared 5 Miscellaneous 0 foodstuffs manufactures ASEAN Footwear 8.4 Mineral Products 2 Note:* Tariff rate in Singapore is zero rated Source: MITI: Malaysia: International Trade and Industry Report 1996–97
29 Table 4.18: Tariff lines for unprocessed agricultural products (as at January 1997) Country Inclusion List (IL) Temporary Exclusion List Sensitive List (SL) Total (TEL) Malaysia 457 65 198 720 Thailand 519 - 7 526 Philippines 159 206 25 387 Indonesia 198 256 17 324 Brunei - - 14 14 Singapore - - - - Vietnam n.a n.a n.a n.a ASEAN 43,317 377 261 1,971 Note: n.a. = not available Source: ASEAN Secretariat
Table 4.19: Tariff lines under ASEAN 1998 Cept package Country Inclusion list Temporary Sensitive List General Total (IL)* Exclusion (SL) Exception (1)+(2)+(3)+ 1 List 3 List (GEL) (4) (TEL)** 4 2 Brunei 6,060 220 14 236 6,530 Indonesia 6,597 593 23 45 7,258 Malaysia 8,690 406 137 60 9,293 Philippines 5,099 589 58 28 5,774 Singapore* 5,738 - - 120 5,858 Thailand 9,033 74 7 26 9,140 Vietnam 1,497 1,127 23 165 2,812 Laos 533 2,820 96 102 3,551 Myanmar 2,356 2,987 21 108 5,472 Total 45,603 8,816 379 890 55,688 % of total 81.89 15.83 0.68 1.6 100 tariff lines Notes: * for the inclusion list, information reflects submissions up to October 10, 1997 only. ** for the temporary exclusion list, information reflects submissions up to October 14, 1997 only. Source: Business Times, 16 October, 1997: Coverage of the ASEAN Economic Ministers’ Meeting (AEM) in Kuala Lumpur, October 1997.
4.4.3 The place of agriculture in an industrialised economy
Throughout the first two decades of independence, the agricultural sector was the mainstay of the economy. The sector is dominated by the contributions from traditional export crops such as rubber, palm oil and forestry products. During this period, new plantings and investments in R&D to develop new clones and thus improve productivity were the main strategies that contributed to the pre-eminence of Malaysian rubber and palm oil in the world market. Rapid structural transformation after the 1980s brought with it the inevitable increase in land and labour costs, prompting outward investment in plantations in neighbouring countries. This process of reverse investment is also seen as a means of ensuring raw material supply as industrialisation accelerates in the resource- based sectors. Such developments are also symptomatic of the maturity of the resource- based sectors in Malaysia.
During the decade of the Second IMP, the agricultural sector is only expected to grow by around 2.5 per cent a year. Palm oil and forestry products will continue to be the mainstay of the sector while non-traditional agricultural products will be the focus of
30 policy attention. Further developments in the resource-based sectors will see further industrial deepening and greater generation of spin-off activities. Consistent with the adoption of a cluster-based approach to industry promotion, the palm-based and wood- based sectors will see more focused support in the foundation factors to enhance productivity and competitiveness. This means more R&D into new products and their applications and into waste reduction and pollution control; and a more focused marketing and investment strategy globally. R&D investment, which has enhanced the technological superiority of Malaysian agricultural commodities at the primary production level, will now focus on downstream and industrial applications.
How did Malaysia so successfully carve a niche for itself in the agribusiness sector? What were the policies that promoted the development of a dynamic agricultural sector? What are the strategies that are being currently promoted to further the contribution of the sector in absolute terms?
4.5 Incentive policies in the agricultural sector
4.5.1 Export agriculture
Malaysia’s approach to the development of its agricultural sector has mainly been market or commercially driven. The commodity sectors of rubber, palm oil and cocoa production exemplify a highly organised modern agribusiness sector that covers the production and processing of the raw materials and the marketing of the end products. Policies have been pragmatic, focussed and have responded quickly to the challenges and circumstances of the time. The typical approach, which has been duplicated for each of the three main commodities, has been to create an effective institutional infrastructure to steer the development of the commodity system.
In the rubber industry, a board (the Malaysian Rubber Research and Development Board (MRRDB) directs the development of the industry, with the execution or implementation delegated to the Rubber Research Institute of Malaysia (RRIM), the Rubber Industry Smallholders’ Development Authority (RISDA) and the Malaysian Rubber Exchange and Licensing Board (MRELB). Broadly, RRIM carries out the research and development of high productivity clones and new applications of rubber, RISDA takes care of extensions for smallholder replanting programs and development, and the MRELB is responsible for market promotion and quality control.
To support the activities of the various organisations, a cess is raised from the industry: a research cess of 3.85 sen/kg exported and a replanting cess of 9.92 sen/kg exported, the purpose of which is aimed at assisting smallholders in replanting their holdings. Historically the cesses are levied at the point of export. As rubber production has fallen with the switch to palm oil, and as domestic consumption has increased, the amount collected has dwindled over time. A move is being made to collect the cess from domestic users of rubber, particularly as research is now being oriented towards downstream applications and greater industrial uses of natural rubber.
In the case of palm oil, the Palm Oil Registration and Licensing Authority (PORLA) licenses all aspects of the production and export of palm oil products: the nurseries, the shippers, the palm oil mills, the refiners and the distributors. Again, licensing is a means to ensure quality control beginning from the planting stage. PORLA maintains stations and laboratories in the ports to take samples and to ensure that the quality specified in export contracts is adhered to. All contracts are to be registered with PORLA, which uses the price data to derive the average weighted price upon which to calculate the quantum of duty to be paid.
R&D is undertaken by the Palm Oil Research Institute of Malaysia (PORIM) while market promotion is undertaken by the Malaysian Palm Oil Promotion Council
31 (MPOPC). The latter was set up in 1990 in response to the attack on Malaysian palm oil by the American Soybean Association. A cess of RM7 per tonne of palm oil produced is levied for research, a cess of RM1.75 goes to PORLA and a cess of RM2.25 supports the MPOPC – a total of RM11 per tonne produced. There is no replanting cess. Palm oil cultivation is mainly undertaken by the estates: even smallholdings are run as plantations in the Federal Land Development Schemes. These large corporations should have no difficulty raising funds from the market for such a purpose.
The institutional infrastructure for these export crops is very commercially driven, and there are similar arrangements in the other major agricultural activities. In the case of the forestry-based industries, research is undertaken by the Forest Research Institute of Malaysia (FRIM), while policy directions are set by the Ministry of Primary Industries and implemented through the Malaysian Timber Industry Board (MTIB). In response to the anti-tropical campaign, the Malaysian Timber Council (MTC) was set up in 1992 to undertake market promotion. The timber levies were gradually introduced at this time to encourage downstream activities and also to prevent over-harvesting. The activities of the MTC are financed by the levies, and part goes back to the states for reforestation programs.
Forestry issues, however, are complex: there are many varieties of wood unlike in the cases of say palm oil, cocoa or rubber, which are homogeneous products. Supplies of different types of wood are difficult to forecast with any degree of reliability: thus the problem of matching timber supply with the demand from the downstream industries, even with the imposition of the levies on various species, as indicated in Table 4.20. A standard partial equilibrium analysis of the impact of the levy yields the expected stylised result of an adverse impact on production.
32 Table 4.20: Peninsular Malaysia: export levy on sawn timber and timber products, effective 7 May 1998 Export Levy on Sawn Timber (in RM/m3) Export Levy on Timber Products (in RM/m3) Species All Sizes Types of products Kiln Dried Air Dried Group A 1. Chengal Neobalanocarpus heimii 250 250 1.* Railway sleepers and crossings, 40 2. Damar Minyak Agathis borneensis 250 250 Transmission posts, 3. Nyatoh Sapotaceae 250 250 Unassembled pallets, 4. Jelutong* Dyera spp. 250 250 Fine ripped door stiles, 5. Kembang Semangkok Scaphium spp. 250 250 Agriculture stakes, 6. Ramin* Gonystylus spp. 250 250 Cross-arm stiffeners for flakeboard, 7. Red Balau Shorea spp. 250 250 Fenders and wallings Group B* 1. Sepetir Sindora spp. 120 180 2. Dressed timber (S4S) 80 2. Dark Red Meranti Shorea spp. 120 180 E1E, E2E, E3E, & E4E of 3. Light Red Shorea spp. 120 180 Rubberwood (subject to quota) Meranti/Red Seraya 4. Red Meranti Shorea spp. 120 180 5. Melantai/Kawang Shorea spp. 120 180 3. Finger-jointed and/or laminated 250 6. White Meranti/Melapi Shorea spp. 120 180 Sawn-timber of rubberwood 7. White Seraya Parashorea spp. 120 180 8. Perupok Laphopetalum spp. 120 180 4*. Dressed timber (S4S) 40 9. Merbau Intsia spp. 120 180 E1E, E2E, E3E, & E4E of species 10. Balau Shorea spp. 120 180 Other than Rubberwood and Chengal 11. Mersawa Anisoptera app. 120 180 12. Kempas Koompasia malaccensis 120 180 5. Finger-jointed and/or laminated 120 13. Keruing Dipterocarpus spp. 120 180 Sawn- timber of species other than 14. Bintangor Calophyllum spp. 120 180 Rubberwood 15. Melunak Pentace spp. 120 180 16. Geronggang Cratoxylum spp. 120 180 6*. Veneer 250 17. Durian Durio spp. 120 180 18. Rubberwood (subject Hevea spp. 120 7. Utility Plywood to quota) Group C Other Species* 40 40 Note: * suspended; for Group B all species except rubberwood. This suspension is in response to the financial crisis, which saw a sharp drop in timber prices. Source: Malaysia Timber Industry Board (MTIB)
From a policy point of view, the timber levies are aimed at pushing the domestic wood- based industries towards producing high-value finished products; and also at conserving the forests at sustainable yields. Conventional partial equilibrium analysis of the effect of a levy on the export of raw materials, as in the case of Mad Nasir (1994), accepts the status quo analysis: the levy predictably reduces the price to producers and lowers output. The issue confronting policymakers is the conflict in interests between the exporters of raw materials, who want to capture the scarcity rent arising out of the restricted trade in raw materials by the major tropical timber-supplying countries, and the needs of domestic users of timber products.
This dilemma is not restricted to the case of the wood-based industries. Indeed it is common to all other commodities or all resource-based industries: so long as an economy produces more primary resources than it can fully utilise, this conflict of interests between the various participants in the transformation chain will occur. Whether the scarcity rent foregone from the export of raw materials is more than compensated by the long-term impact of generating greater value-added remains a matter for empirical investigation.
Aware that there was an implicit tax on export agriculture (the most productive of the agricultural sub-sectors) while the import-substituting food production sector was being subsidised, the Government announced its National Agricultural Policy in 1981, in which it expressed the intention that agricultural activities should be based on commercial considerations. The export levies were progressively reviewed or modified. In the case of rubber, the export levies have been scrapped, as depressed prices throughout much of the 1980s and 1990s saw pronounced shifts out of rubber into palm oil cultivation. The more diversified structure of the Malaysian economy also implies no urgent need to defend the
33 levies as a stabilisation mechanism. However, the replanting cess and the research cess continue to be levied as they return to the industry for replanting and in the form of high pay-off planting materials. Although the rubber replanting cess was meant for the replanting of rubber, it has not prevented those wishing to switch to palm oil cultivation from using the replanting grant to do so, although the quantum is less than the full entitlement. Policymakers have been flexible in reviewing policies for export commodities in response to market signals.
The first Industrial Master Plan (1986 to 1995) saw the introduction of special incentives for the rubber-based industries to encourage greater domestic consumption of rubber. While support for the tyre industry has not been very successful, the latex-based products received an added boost with the AIDS scare and the demand for surgical gloves, such that many of these industries mushroomed overnight. A shortage of raw materials is a major problem in these industries today, as the area under rubber production has declined.
Under the IMP, the other resource-based industry being promoted is that based on the use of palm oil. To encourage domestic processing and export of processed palm oil, a duty structure on the export of CPO was introduced. There is no ban on the export of CPO, so long as an export duty is paid. Most palm oil is now exported as processed palm oil. However, there are two companies with refineries outside the country that are exempted from the duty in exporting CPO. The export of CPO was in response to the conditions of sale by the importing country, which wished to set up its own processing facilities. A duty structure, as shown in Table 4.21, applies in the export of processed palm oil (PPO) with the duty escalating according to the level of processing. However, in a move to enhance the competitiveness of Malaysian PPO, this was exempted over the past two budgets.
Table 4.21: Duty exemption formula for palm oil [effective 23-10-1981] CATEGORY I: CATEGORY II: Neutralised/Refined Palm Oil (NPO) Neutralised/Refined Bleached Palm Oil (NBPO) Bleached Palm Oil (BPO) Neutralised/Refined Palm Olein (NPL) Crude Palm Olein (CPL) Neutralised/Refined Palm Stearin (NPS) Crude Palm Stearin (CPS) Bleached Palm Olein (BPL) Bleached Palm Stearin (BPS) Export Duty Exemption: Export Duty Exemption: RM95 and less: 100% RM95 and less: 100% RM95-RM200: 0.5 (Dp-95) + 95+ 0.35(Dp-Dc) RM95-RM200: 0.6(Dp-95)+ 95 + 0.35(Dp-Dc) RM200-RM365:0.35 (Dp-200)+147.5+0.35 (Dp-Dc) RM200-RM365: 0.45(Dp-200)+158+.35(Dp-Dc) Rm365 and above: 0.2 (Dp-365)+205.25+.35 (Dp-Dc)
CATEGORY III: CATEGORY IIIA: Neutralised/Refined Bleached and Deodorised Palm Neutralised/Refined Bleached and Deodorised Palm Oil (NBD/RBD PO) Oil (NBD/RBD PO) Neutralised/Refined Bleached Olein (NBPL) Neutralised/Refined Bleached Palm Stearin (NBPS) Export Duty Exemption Export Duty Exemption RM95 and less: 100% RM95 and less:100% RM95 - RM200: 0.65 (Dp-95)+ 95+ ).35(Dp-Dc) RM95 - RM200: 0.7 (Dp-95)+ 95+ 0.35(Dp-Dc) RM200-RM365: 0.5 (Dp-200)+163.25+0.35(Dp-Dc) RM200-RM365: 0.55(Dp-200)+168.5+0.35(Dp- Dc) Rm365 and above: 0.35(Dp-365)+245.75+0.35(Dp- Rm365 and above: 0.4 (Dp-365)+259.25+0.35(Dp- Dc) Dc)
CATEGORY IV: Neutralised/Refined Bleached and Deodorised Palm Olein (NBD/RBD PL) Neutralised/Refined Bleached and Deodorised Palm Stearin (NBD/RBD PS) Full exemption from export duty
34 Source: Ministry of Finance
4.5.2 Domestic Agriculture Production Sector
The domestic agriculture production sector makes up the remainder of the agricultural economy that lies within the purview of the Ministry of Agriculture, namely the domestic food industry, covering rice, livestock, fruit and vegetables and other miscellaneous crops. These activities cater mainly for domestic consumption, although in the case of pork and poultry products there are small surpluses for export. Some non- traditional agricultural products are also promoted for the export market: these are tropical fruit, such as carambolas, mangosteens and watermelons, and cut flowers.
Rice and ruminant livestock production are among the few agricultural products in which the country does not have a comparative advantage. The rice industry was never central to the maintenance of the colonial economy but rather met the need for food security in the days before the Green Revolution. In post-independent Malaysia, it became the target for poverty eradication programs, given that the highest incidence of poverty was among paddy farmers. The main instruments of the rice policy are:
1. a guaranteed minimum price (GMP) for paddy purchase (The GMP was first introduced during the colonial era in 1949 to encourage paddy cultivation. 2. a price subsidy introduced in 1981 aimed at transferring income to farmers without affecting consumer prices 3. a fertiliser subsidy at the rate of a full subsidy for six acres of paddy cultivated 4. rice price control, which fixed prices and marketing margins at all levels of trade 5. the regulation of domestic rice prices through import control
Poverty among paddy farmers is a structural problem arising because of the small farm size operated. Poverty eradication efforts that focused on paddy as the only source of farm income would require ever larger subsidies to keep paddy farmers above some officially defined poverty line. With the secular decline of agriculture, non-farm incomes began to feature more prominently in total farm household income. Despite such trends, the Government in 1990 raised the price subsidy to RM24.81/100kg – an increase of about 50 per cent over the previous level of RM16.50/100kg. In this environment, and with the recognition that rice production was an uneconomic activity, the government decided in the mid-1980s not to invest further in the industry and to limit paddy cultivation to those areas with established irrigation facilities for double-cropping. These are the ‘granary areas’ of the country.2
Institutional development and incentives policies had the direct opposite impact on the development of the rice industry as compared, for example, with rubber and palm oil for which the interventions were fundamentally market-driven. The reform or restructuring of the rice industry culminated in the liberalisation of the domestic rice market in 1993. Rice price control was introduced in 1974 during the height of the world food crises. Maximum ceiling prices were enforced for 11 grades of rice and these were not adjusted for inflation for almost two decades. The impact of the price control was to send many of the marginal mills out of operation and to reduce investment in the rice industry. Many perverse effects began to surface, as the maximum ceiling prices became the de facto minimum prices. The effects cascaded down to the farm level in the form of paddy of doubtful milling quality; and during the periods when world prices were at their trough, active smuggling of rice took place across the Malaysian-Thai border.
The rice policy destroyed incentives to produce good quality paddy at the farm level and good quality rice at the mill level, as mixing or not keeping to the grade specifications took place as millers struggled to keep afloat. In 1993 the Government reformed its rice policy by liberalising the internal rice market and corporatising the national paddy and
35 rice marketing board that became known as BERNAS. Under the Rice (Grade and Price Control) Order of 1992, which became effective from 1 January 1993, the Government categorised rice into three grades: standard, premium and super. The retail price for standard and premium quality rice was fixed at RM0.98/kg and RM1.04/kg respectively. The price of the superior grade rice was allowed to float.
The impact of the reforms have been reflected in the better quality (cleaner and less brokens) rice to consumers. As millers competed for paddy they began to offer prices higher than the GMP, thus obviating the need on the part of the Government to raise the support price.3 Nonetheless, in response to the present financial crisis, the Government raised the GMP to RM55/100kg for long grain paddy and RM51.69/100kg for medium grain paddy. It was the first increase in the GMP since 1979.
BERNAS has the sole right to import rice and to undertake the processing, sale and distribution of rice in the domestic market, including the retail business. Overall it accounts for around 55 per cent of the total domestic rice market and 24 per cent of the market for local rice. As the agency in charge of ensuring adequate rice supply in the country, BERNAS has invested in rice plantations through joint ventures in other countries such as the Republic of Guinea, and is pursuing plans in Myanmar, Cambodia, and Vietnam. Domestically, it has invested in large-scale commercial rice cultivation in Sabah and Sarawak. These two states have low self-sufficiency levels and food security is a recurrent policy concern.
Malaysia will continue to be a net rice importer. The restriction of production to the granary areas implies that Malaysia is able to meet about 65 per cent of its requirements. The trend production is around a million tonnes a year. Productivity levels have more or less stabilised and the R&D pay-off in terms of the high yielding varieties (HYVs) have more or less been able to maintain the increase in demand arising from population growth. Per capita consumption, however, has been fairly constant, as shown in Table 4.22. This appears surprising, as the demand for staple foods usually declines as per capita income rises and, in the case of rice consuming countries, there is normally a switch to wheat consumption. The explanation probably lies in the large presence of the immigrant labour force, which numbers around two million.
Table 4.22: Crude estimates of rice consumption, 1985 to 1995 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Production 1189 1123 1094 1091 1123 1215 1242 1298 1357 1379 1373 ‘000 tonnes Net Imports 426 190 195 279 368 330 400 444 389 335 425 ‘000 tonnes Total Apparent 1615 1313 1289 1427 1571 1545 1642 1742 1747 1714 1798 Consumption* ‘000 tonnes % Production 74 86 85 80 75 79 76 75 78 80 76 to Total Apparent Consumption Mid-year 15.68 16.11 16.53 16.94 17.35 17.76 18.18 18.62 19.21 19.66 20.69 Population Consumption 103 82 78 84 91 87 90 94 91 87 87 Per Capita (kg/year/person ) Note: * Data on changes in stock were not available in arriving at total apparent consumption. Source: Ministry of Agriculture, Padi Statistics, various issues.
36 Table 4.23: Malaysia: self-sufficiency levels in livestock products and per capita consumption, 1986 to 1995 Year Self-sufficiency ratio (%) Per capita consumption Beef Mutton Pork Poultry Eggs Liquid milk Beef(kg) Mutton(kg) Pork(kg) Poultry(kg) Eggs(No.) Mlk (lt) 1986 39 9 109 106 101 4.48 2.35 0.48 9.75 17.6 243 40.52 1987 36 8 111 114 106 4.11 2.51 0.49 10.29 17.9 239 44.75 1988 34 8 125 119 114 3.41 2.86 0.49 8.15 18.2 243 54.73 1989 24 9 126 115 110 4.30 3.41 0.46 9.21 22.1 248 40.73 1990 24 9 131 117 123 4.67 3.49 0.50 10.29 20.3 280 38.47 1991 22 9 135 101 113 3.23 3.82 0.50 10.15 21.9 297 55.62 1992 23 7 137 115 112 3.50 3.85 0.59 10.65 28.3 339 52.00 1993 22 7 140 102 112 3.15 3.98 0.57 10.59 30.4 326 46.87 1994 20 6 139 115 113 5.76 4.36 0.60 11.24 32.6 329 33.65 1995 20 5 142 114 112 3.69 4.67 0.66 10.42 33.1 328 51.70 Source: Department of Veterinary Services: Livestock Statistics, various issues.
In the livestock industry, the contrast between the success of non-ruminant and ruminant livestock production in import substitution arises from the commercially driven nature of the former and the policy-driven nature of the latter, which has been motivated largely by considerations of food self-sufficiency. The relative performance between these two livestock categories is reflected in the self-sufficiency ratios of Table 4.23. Aiding the production of pork and poultry products is the fact that technological developments in breeding, which led to shorter production cycles, are easily transferred and replicated and also, until recently, restrictions and prohibitions on imports. Thus pork, poultry and egg production generate a surplus for export. However, Malaysia is dependent on imported feeds for its livestock sector and this prevents it from becoming a major exporter. The only export market is Singapore, which is somewhat of a captive market. Malaysia does have a comparative advantage in the import substitution of pig and poultry production but in the case of exporting such products the advantage is very marginal: the Singapore market exists by reason of locational advantage and traditional ties (Tan, et al. 1991).
In keeping with its WTO commitments, Malaysia has liberalised the importation of poultry products. Non-tariff barriers (NTBs) in this sector have been ‘tariffied’. In 1996, the Ministry of Domestic Trade introduced price controls on chicken as a reaction to the shortages and the ensuing price rises in the local market. The move was aimed at stabilising prices to consumers. Imports were allowed. As Table 4.24 shows, Malaysia’s in-quota amounts have often been exceeded, and tariffs were not applied despite the excess. During times of great shortage, it is expected that imports will be used to prevent excessive price increase. However, it is unlikely that imports will completely replace local production given that, unlike in the case of rice production, Malaysia does have a comparative cost advantage in the domestic production of chicken and pigs.
37 Table 4.24: Malaysia: market access for livestock products, reporting period: calendar year 1996 Description of products In product For period in During period descriptions question 1. Swine 1.1 Live swine (<50kg) 0103.91 000 18,417 head 226 head 1.2 Meat of swine, fresh chilled or frozen carcasses and half carcasses 0203.11 000 1,105 - 2. Chicken, live, Eggs, Meat & Products 2.1 Live day old chicks 0105.11 100 1,492,725 head 2,965,534 head 2.2 Live fowls of G. Domesticus 0105.91 000 1,196,930 head - 2.3 Meat fresh, frozen & chilled of G. Domesticus 0207.10 100 2985 mt 3,348.67 mt 2.4 Fatty livers 0207.39 210 71mt - 2.5 Chicken wings, fresh, chilled 0207.39 111 497 mt 934.56 mt 2.6 Other poultry cuts, fresh, chilled 0207.39 119 640 mt 2,414.11 mt 2.7 Hen eggs, fresh for hatching 0407.00 111 50,150,000 units - 2.8 Hen eggs, fresh, other 0407.00 111 50,150,000 units - 3. Milk or Milk Products 3.1 Liquid, fat content < 1% 0401.10 920 640,000 litres 1,195,412 litres Source: Ministry of Agriculture
Ruminant livestock production remains hampered by climatic considerations, and attempts to produce breeds suitable for the tropics and that will breed well are still daunting. Ruminant livestock production is also very time-intensive and with the rapidly expanding economy, which continues to draw labour into other sectors, it is becoming even less attractive. Malaysia also lacks the pasture or grazing land for ruminant livestock production and even the feedstuff available, such as palm kernel cake (PKC), is exported to the EU as a result of the Common Agricultural Policy. This used to price PKC beyond the means of local cattle farmers. Even the idea that small ruminants in particular could be economical to raise if they were to graze in the country’s rubber or palm oil estates can prove impractical to implement.
Despite pervasive policy interventions in the ruminant sector, the results have been rather disappointing. Over successive development plans, the Government has tried to increase domestic production of beef, mutton and milk. However, the level of self- sufficiency in these three items has declined over time. The beef program included the supply of imported young calf at one-third of their cost to farmers to fatten. However, the high costs of local feeds and the lack of grazing ground made this an uneconomic venture for the participants and undermined its expressed aim as an income-generating, poverty-reducing program. This program has since been abandoned.
The sheep-rearing program was started in response to the labour shortage on the rubber estates. As such it captured the interests of the plantation owners. However, difficulties in breeding the imported stock resulted in uneconomic production. While some estates continued with the program, the results elsewhere were mixed. During the present financial difficulties, interest in this form of integrated farming surfaced again. The argument this time is backed by the scarcity of foreign exchange due to the sharp depreciation of the ringgit.
The dairy milk production program consists of the establishment of milk collection centres in the major producing areas. There used to be a price support scheme for milk. The price support works as a cross subsidy from the difference in the cost of production of the farms run by the Department of Veterinary Services (DVS) and the price DVS pays to the large milk processing companies. DVS costs the milk produced at its farms at
38 RM0.20 per litre and sells it to the milk processors at between RM0.95 to RM1.50/litre for an average margin of about RM0.73/litre. This difference of RM0.73/litre is paid by the Milk Collecting Centres (MCCs) for the raw milk collected from the farmers. After the currency depreciation, and the consequent rise in the price of imported milk, the price support system ended. The farmers are paid a price of RM1.05/litre while the milk processors pay RM1.10/litre. Within the livestock sector, this venture had the highest effective rate of protection, according to the findings of the ADB study by Tan et al. The dairy program provides Malaysians with access to fresh milk produced in the country. It is highly unlikely that fresh milk will ever entirely replace imported milk constituents in the local market.
As economic transformation deepens and agricultural growth languishes in Malaysia, policy makers look to other crops to infuse the sector with some dynamism. The dynamic growth of the non-traditional agricultural products in world exports in recent years has not escaped the notice of Malaysian entrepreneurs. This is a market where importers are continually looking for exotic products to introduce to the affluent and growing middle class. Malaysia’s carambola has been able to make a presence in the European markets. The realignment of exchange rates in the mid-1980s saw a tremendous surge in exports of cut flowers to the Hong Kong market, which had traditionally obtained its supplies from Taiwan (Tan 1993). The currency realignment saw the NIEs as an important destination for various types of fruit, vegetables, meat and seafood products. These markets are also easier to access than the so-called prized European and Japanese markets. In this area Malaysia has to contend with other lower cost producers in the ASEAN region, such as Indonesia, the Philippines and the newer ASEAN members.
Policymakers from time to time express concern over the rising food import bill. In a move to encourage food production, the Government introduced the Fund for Food Production (3F) in 1993. The initial fund totalled RM300 million. The interest rate was fixed at 7.75 per cent with a maximum loan period of five years. The minimum loan amount was set at RM50,000. In 1995 the fund was increased by another RM300 million, the interest rate was reduced to 4 per cent, the maximum loan period was extended to eight years and minimum loan amount was reduced to RM10,000. For the latter size, no collateral was required but the applicant needed the support of the area’s farmers’ association. By 1996, the cumulative amount lent was RM246.7 million: more than half went into the livestock industry (basically poultry) while about 20 per cent was for fruit and vegetable cultivation. The remaining portion was for food processing. At the end of 1997, the fund was increased by a further RM100 million, as the ringgit continued to plunge with the onset of the currency turmoil from August 1997.
Ensuring adequate supplies of food to consumers at stable prices has always been a major objective of Malaysia’s food policy. During difficult times, such as the present currency crisis, price control emerges as one of the most perceptible means for the Government to express its concerns for the lower-income group. As the case of chicken illustrates, there has been no hesitation to resort to imports despite the large domestic production, and to allow imports in excess of the quota levels. This has also been the case for other fresh products such as pork and liquid milk. The removal of the NTBs for these products have not resulted in a big surge in imports, given the preference of consumers for fresh rather than frozen products.
4.6 Current Issues and Concerns
As a small trading nation, Malaysia has always supported moves to liberalise trade and remove trade impediments. However, Malaysia continues to be concerned that while the WTO has appeared to bind the reduction of tariff levels, other types of non-tariff barriers are surfacing. These NTBs are not the conventional types of subsidies for unfair advantage which are no longer permissible in the WTO environment, but take more
39 subtle forms such as human rights and environmental concerns and sanitary and phyto- sanitary conditions. Very often these conditions are championed by public interest groups that pressure their governments to ban imports from countries that do not fulfil conditions laid down by these pressure groups. Malaysia’s palm oil products are affected by the Codex Alimentarus Commission while its exports of wood products are affected by the green movement in Europe, which bans the importation of tropical timber-based products.
There is growing concern on the part of Malaysia and other developing countries as to what extent the activities of public interest groups are being pursued for trade advantage. At the same time that nominal trade barriers are coming down, other barriers are being erected. Among these are the unilateral sanctions that the United States has used to pry open other markets and close its own. While most countries can agree to the concept of freer trade, big countries can and do practise managed trade as a substitute for structural adjustment.
Malaysia continues to note the barriers among APEC member countries to its imports. Table 4.25 summarises the type of trade impediments to Malaysian products in nine out of the 18 APEC member countries. In the case of Japan, tariff levels escalate with the level of processing, as in the case of cocoa products. Stringent quarantine conditions are imposed for fresh agricultural products such as fruit and cut flowers. The ostensibly free American market is clouded by export subsidies, in the form of farm support and export enhancement programs that disrupt Malaysia’s traditional markets for palm oil such as Egypt, Pakistan and India. Similarly, Australia’s sanitary and phyto-sanitary requirements for agricultural imports are very stringent. While stringent sanitary conditions are acceptable on grounds of food safety, the line between genuine concerns for health and effective impediments to trade is very tenuous. Such standards imply that small producers in developing countries will generally lack the technical and financial capacity to access the larger markets in the region.
In recent months, the currency turmoil and exchange rate instability has impeded trade; although a cheaper local currency should spur exports, continued fluctuations in the exchange rate have disrupted trade. Furthermore, the exchange rate problem is not an isolated one, as the original ASEAN-6 (with the exception of Brunei) and the NIEs are affected. Malaysia’s competitive position vis-á-vis competing ASEAN countries, such as Indonesia, Thailand, and the Philippines, depends on the relative fall in the respective currencies since July 1997. Although a cheaper currency in a way compensates for the decline in tariff rates, it is not clear that a grossly undervalued exchange rate is the answer to long-term competitiveness, as the production process becomes disrupted. To cope with the adverse impacts, the Malaysian government announced capital controls on September 1, 1998 and fixed the ringgit at RM3.80=US$1. This move is a drastic about-turn given the country’s track record of basing its development planning on capitalist principles.
Malaysia is in a somewhat vulnerable position having lost its low-cost labour advantage while not having fully scaled up the technology ladder in producing higher value products. As Malaysia is a high import country, the spectre of imported inflation will soon be reflected in higher food and intermediate input prices. Persistent undervaluation of the ringgit may well spur domestic production of food and other non-food products as import substitution becomes viable. However, the fear of increased unilateral protectionism from the industrial economies is neither unreal nor unfounded. The birth of the WTO may well see the battle being won in the field of trade liberalisation only for the war to be lost on exchange rate disruptions.
40 Table 4.25: Impediments in agricultural trade with key APEC countries Country Products Tariffs Japan Logs Duty free Timber Products Tariff Tropical plywood 10 – 15% Temperate plywood 8.1 – 11.3% Coniferous plywood 8.3 – 10.3% Cocoa beans Duty free Cocoa paste: not defatted 10% wholly/partly defatted 20% Cocoa powder 21.5 – 35% Fresh agricultural produce Stringent quarantine laws: fumigation required for all fruit except for bananas, durians, coconuts and pineapples; Mangosteens to be refrigerated below 17.8°C Cut Flowers Quarantine inspection procedures and lack of airport facilities cause delay and quality deterioration US Wild harvested Shrimps Permits imports from countries with certified sea turtle conservation programs Extruder rubber thread Anti-dumping duties of 10.68 – 20.38%, with reviews and determination taking more than three years US Export Enhancement Program continues to disrupt Malaysian palm oil exports in traditional markets such as India, Egypt and Pakistan Korea Fruit Stringent phyto-sanitary conditions such that Malaysian fruit is unable to gain access Cocoa & cocoa products 15 – 45% Rubber products 7.5 – 30% China Crude palm oil: 9% Duty on in-quota imports 30% Duty on imports in excess of quota Plywood US$20 per cubic metre as compared with similar products from Indonesia Australia Fruit Onerous pest risk analysis prohibit imports of Malaysian fruit Cut Flowers Required to undergo 100% fumigation which takes an average of 10 hours and adds 20% to export cost Groundnuts Prohibited from entry with level of 0.05 mg/kg of cadmium while acceptable standard elsewhere is 0.10 mg/kg Palm oil Incorrect labelling on food packages that palm oil is harmful to health; Australian National Heart Foundation unwilling to endorse palm oil as not harmful for the heart Taiwan Tropical fruit 25 – 50% Imports of certain Malaysian fruit prohibited, unlike those from the US Sawn Timber Duty free Unfinished plywood 15% Processed timber 20% Trop’l hardwood plywood 12.5 – 20% Softwood plywood 5 – 10% Rubber tyres 15 – 20% Fruit juices 45% Frozen seafood 25 – 38% Cocoa powder Duty free Proc’ed cocoa products 15% Confectionary 32.50% Tomato sauce 17.50% Indonesia Oil palm cultivation Freeze on foreign investment in oil palm projects imposed in March 1997. Thailand Palm oil High tariffs In-quota tariff of 10% up to 25,000 tonnes and low quota Imports in excess of 25,000 tonnes, tariff rate of 155.8% Thailand to phase palm oil into CEPT scheme and liberalise trade in palm oil only in 2000 Vietnam Palm oil, cocoa, chocolate, Products subject to import restrictions soft drinks, juices and wooden tableware Sugar, confectionary, beer Temporary import ban and beverages Source: MITI: Malaysia International Trade and Industry Report, 1996–97
41 4.7 References
Ahmad Zubaidi Baharumshah 1992, The Welfare Cost of Malaysian Rice Policy under Alternative Price Regimes, Malaysian Journal of Economic Studies, 24(2), pp. 1–12. Ahmad Zubaidi Baharumshah 1993, A Model for the Rice and Wheat Economy in Malaysia, in Fatimah M. Arshad, Mad Nasir S., and Mohd. Shahwahid O. (eds) 1993, Malaysian Agricultural Commodity Forecasting and Policy Modelling, Centre for Agriculture policy Studies (CAPS), Universiti Pertanian Malaysia. ASEAN Secretariat 1996, AFTA Reader: The Fifth ASEAN Summit, Vol IV. GATT Secretariat 1993, Trade Policy Review: Malaysia, Volume I, Report by the GATT Secretariat, Geneva. Jenkins, G.P. and Lai, A.K.K. 1989, Trade, Exchange Rate and Agricultural Policies in Malaysia, World Bank Comparative Studies, World Bank, Washington, DC. Mad Nasir S., Mat Lani R., and Chew Tek Ann, 1993. A Market Model for Cocoa in Fatimah M. Arshad, Mad Nasir S., and Mohd. Shahwahid O. (eds) 1993, Malaysian Agricultural Commodity Forecasting and Policy Modelling, Centre for Agriculture policy Studies (CAPS), Universiti Pertanian Malaysia. Mad Nasir S. and Mohd. Shahwahid O., 1995. Economic Impact of the Export Levy on the Sawntimber Industry, in Malaysian Journal of Economic Studies, 30(2), pp. 45–57. Mad Nasir S., Webb, A.J. and Hjort, K. 1997, Development of Malaysian Agricultural Sector Analysis Model, Paper presented at the Seventeenth Annual International Symposium on Forecasting, Barbados, 19–21 June. Mohammad Yusof and Mad Nasir S., 1993. Production and Trade Model of Malaysian Natural Rubbber Industry in Fatimah M. Arshad, Mad Nasir S., and Mohd. Shahwahid O. (eds) 1993, Malaysian Agricultural Commodity Forecasting and Policy Modelling, Centre for Agriculture policy Studies (CAPS), Universiti Pertanian Malaysia. Ministry of Agriculture 1992, National Agricultural Policy (1992–2010). Kuala Lumpur. Ministry of International Trade and Industry, Malaysia 1996, Second Industrial Master Plan, 1996–2005, Kuala Lumpur. Mohd. Shahwahid O. and Mad Nasir S. 1993, Sawntimber Export Levy and its Impact on the Timber Industry, Kajian Ekonomi Malaysia, December 1994. Tai Shzee Yew, 1993. An Evaluation of Alternative Fisheries Management Schemes for Malaysia in Fatimah M. Arshad, Mad Nasir S., and Mohd. Shahwahid O. (eds) 1993, Malaysian Agricultural Commodity Forecasting and Policy Modelling, Centre for Agriculture policy Studies (CAPS), Universiti Pertanian Malaysia. Tan S.H. 1987, Malaysia’s Rice Policy: A Critical Analysis (Kuala Lumpur: Institute of Strategic and International Studies, Malaysia). ______1989, Government Interventions in the Padi and Rice Industry of Malaysia, Draft Final Report of the EPU World Bank Rice Industry Restructuring Project. ______1993, An Update of the Malaysian Cut-Flower Industry and its Development Thrust, Borneo Review, 4(2), pp. 174–189. Tan S.H., Zainalabidin M., Chiew, F.C. and Mad Nasir S. 1989, Government Incentives and Comparative Advantage in Livestock and Feedstuffs Sectors in Malaysia. Draft Final Report of the Asian Development Bank Study. Yeah K. Leng, Yanagida, John F. and Yamauchi, Hiroshi 1994, Evaluation of the external market effects and government intervention in Malaysia’s agricultural sector: A computable general equilibrium framework, Agricultural Economics, 11 pp. 237–256.
42 Chapter 5 Recent economic and agrifood policy developments in Malaysia.
5.1 Current status of and prospects for the economy
5.1.1 Before the crisis
The Malaysian economy recorded nine years of unprecedented, continuous high growth rates from 1987 to 1997. Fuelled by massive doses of foreign and domestic investment and technological inputs, the economic structure underwent such rapid transformation that, in a statistical sense at least, Malaysia has attained the status of an industrialised economy. By 1988, the manufacturing sector had overtaken the agricultural sector in its contribution to GDP and notched aside agriculture’s traditional pre-eminence as the largest absorber of labour.
In preparation for the realities of a more liberalised trading environment, policymakers began to undertake a program of unilateral trade policy reform from the late 1980s to the mid-1990s. During this period, many tariff lines were reduced or abolished. As Malaysia has always been a net food-importing country (if palm oil exports are excluded), many imported food items were subject to some level of tariff or non-tariff barriers. These were progressively reduced or abolished, with the non-tariff measures ‘tariffied’ in keeping with its World Trade Organization (WTO) commitments.
On the macroeconomic front, the overvalued exchange rate resulting from the overhang of the second oil shock was allowed to depreciate during the mid-1980s. Malaysian exports began to grow rapidly. A further impetus arose after the exchange rate realignments of the Plaza Accord, when Malaysian exports started to replace exports from the NIEs. From the late 1980s to the mid-1990s, nominal ringgit rates ranged between RM2.5 and RM2.8 to the US$. From 1996 to early 1997, however, the exchange rate began to appreciate to below RM2.5 to the US$. Massive infrastructure projects that were needed to facilitate output expansion entailed a high import content, not only material but non-material as well. This inevitably led to current account deficits that widened as the merchandise balance, traditionally in surplus, began to swing into deficit as well. In the meantime, the exchange rate was kept strong by short-term funds rapidly flowing into the stock exchange in response to Malaysia’s strong economic growth.
Although by March 1997 Malaysian authorities recognised the problems and began to take remedial measures to curb domestic demand and excess liquidity in the financial system, the measures did not have the chance to take effect fully as Malaysia became embroiled in the financial turmoil after the collapse of the Thai baht in April 1997. With stunning rapidity the stock exchange collapsed as foreign funds pulled out, and the ringgit lost more than half its value in early January 1988. At the time of the crisis, the current account deficit was around 5 per cent of GDP,1 although the fiscal deficit was in surplus.
5.1.2 Current economic situation and macro policy changes
Towards the end of 1997, when the Ministry of Finance presented the economic outlook that accompanied the Minister’s budget, the government projected the growth rate for 1997 to be around 7 per cent, while growth for 1998 was anticipated to be 5 per cent. This was subsequently reduced to 2 to 3 per cent growth for 1998 with the release of the Bank Negara (Central Bank) Annual Report in April 1998 (see Table 5.1). The 1998
1 After the imposition of exchange controls in September, the government announced a current account surplus of RM15 billion for the first half of 1998. The country’s foreign exchange reserves increased by US$1 billion to US$22 billion from the time the crisis began. New Straits Times, 9 October 1998.
43 report estimated growth in the first quarter at –1.2 per cent as compared with over 8 per cent for the same period in 1997. Meanwhile the liquidity crunch arising from the stock market collapse began to manifest itself in increasing numbers of lay-offs as businesses failed and in the fall in real estate and rental prices. It is widely expected that growth for 1998 will be negative, and in September the official forecast was –4.8 per cent growth, with 1 per cent growth expected for 1999. Private sector analysts, however, predict that there will be negative growth in 1999 and that economic recovery will take two to three years.
Table 5.1: Key economic indicators, 1996 to 1998 Type of Indicator 1996 1997 19981 Real GDP growth: 8.6 7.8 –4.8 agriculture 2.2 1.3 –5.9 manufacturing 12.2 12.5 –5.8 services 9.7 7.9 2.7 Unemployment rate 2.5 2.6 4.9 Export growth 7.6 13.2 28.1 Import growth 1.9 13.3 14.5 Current account balance (% GDP) –5.1 –5.1 –0.5 Inflation rate:CPI2 3.5 2.6 5.2 Interest rate (inter-bank)3 7.39 8.7 11 Exchange rate (US$)4 2.53 3.88 4.22 Notes: 1. 1998 numbers are estimates by the Ministry of Finance in its latest economic report. 2. For 1998, refers to period between January to September only. 3. 1998 number refers to first quarter. 4. Refers to year-end rates; for 1998 as at end of August. Exchange rate fixed at RM3.80=1US$ from 1 September 1998. Sources: Bank Negara, Annual Report, 1998; Quarterly Bulletin, 13 (1); Ministry of Finance, Economic Report, 1998/99.
In response to the crisis, the government took several measures. First, it tried to address the current account deficit by postponing several mega-projects, such as the KL Linear City, the Bakun Hydro-electric Project, the Northern Regional Airport, the Light Rail Transit System for Johor and Penang, and scaling down the development of the new administrative centre at Putrajaya. The value of these projects totaled RM65.6 billion. Second, the government announced a 2 per cent cut across all government expenditure. This was subsequently raised to 18 per cent as the economic difficulties lasted longer than anticipated. Third, it raised taxes on imported cars and car parts in the 1998 budget in a move to curb consumption of imported goods. Fourth, commercial banks were directed to lend only to productive sectors and a list of what was considered to be productive activities was drawn up (prior to the crisis most banks were overexposed in their lending to the property sector and for share financing).
On the monetary front, the government reduced the statutory reserve requirement (SRR) to 10 per cent, a reduction of 3.5 per cent at one stroke. This move served to unlock the liquidity of the commercial banks and mitigate somewhat the pressure on interest rates (although the reduction in Bank Negara’s lending to the banking institutions dampened the effect). Fixed deposit rates have increased as local banks have competed for deposits against depositors’ rush to transfer funds to foreign-owned banks. The banking system is fragile as local banks face higher operating costs and shrinking effective demand for loans. On 28 June the government reduced the SRR by a further 2 per cent. However, liquidity continues to be problem and this has been manifested in rising interest rates and stagnant loans growth.
44 5.1.3 Medium-term outlook
Most Asian governments hope that the currency depreciation will allow them to export their way out of the present difficulties. Except for the case of Indonesia, the crisis has left the relative competitive position of the ASEAN economies vis-à-vis each other unchanged. While ASEAN as a whole benefits in the immediate short term in the effect on their resource-based exports, the medium to long-term outlook is rather cloudy. Since so many countries are affected at the same time, the expected benefits from the depreciation are attenuated. The present depreciation has taken on an impact similar to an exogenous shock: it is sudden, sharp and disruptive. Furthermore, because of the volatility of exchange rate movements, producers face real difficulties in forward planning.
Of the agricultural producers of ASEAN, Malaysia’s economy is the most integrated with the global economy, with a trade to GDP ratio exceeding 100 per cent after 1990. The immediate impact of the sharp fall in the currency was the curb on imports, including imports of capital and intermediate inputs that have been important to the industrialisation process in Malaysia. The consumption of luxury items and the more expensive food items has also fallen. At the same time, there has been an increase in the value of exports in ringgit terms.
Conventional economic analysis postulates a J-curve effect arising from a currency depreciation, basically a time-lag as people adjust to the new price. In the present crisis, however, there appears to be some immediate relief on the current account, arising partly from the suddenness and sharp drop in the value and from the postponing of the import- intensive mega projects. Apart from the price effect, the income effect as Malaysians adjust to falling incomes will also help correct the trade balance. Bank Negara projected that the current account deficit will drop to –0.5 per cent by 1998 from –5.1 per cent in 1997. The Statistics Department reported a trade surplus at the end of 1997, which escalated to 12 billion by the first quarter of 1998.
While the trade figures are encouraging, the general feeling is that the worst is not yet over. In addition, the uncertainty over the direction of the exchange rate makes it difficult for businesses to commit to new plans. Firms have cut imports by drawing down on inventories. Stocks have not been replenished, especially in the export-oriented firms, which stand the risk of purchasing inputs at one exchange rate only to sell at a lower revenue should the rate recover by the time the products are exported. Also, with the increase in the interest rate, businesses face higher costs of funds.
In a dramatic attempt to revive the economy, the government announced capital controls on 1 September 1998. Given Malaysia’s track record as an open economy, it was a most unorthodox policy stand, but was taken after the failure of the IMF medicine in Thailand, Indonesia and Korea became evident. 2 The exchange rate has been fixed at RM3.80=US$1, with the convertibility of the ringgit to be abandoned on 1 October. With the controls in place, the authorities moved quickly to reduce the SRR, which now stands at only 2 per cent. By pumping in liquidity, policy makers hope to reinflate the economy and prevent asset price deflation by reviving the stock market, and hence reduce the non- performing loans (NPLs) of the commercial banks.
The severity of the currency depreciation and the drastic remedy used to deal with it, in the form of capital controls, imply that it will take longer than a couple of years for the economy to recover. Malaysia took less than two years to recover from the last crisis of the 1985-86 recession, which was caused mainly by the international collapse of
2 Malaysia’s policy switch seems set to be the test case in a global environment in which the IMF has been unable to come to grips with the nature and cause of the crisis and the remedies to deal with it. It can also be seen as the culmination of persistent criticism of the IMF medicine by top mainstream economists in the US.
45 commodity prices. By 1988 the economy was steaming away at 8 per cent growth. This time around because of the regional overhang, and the uncertainty regarding the direction of the Japanese economy and its potential for triggering yet another round of currency depreciations, the outlook is even more cloudy.3 The capital controls, although needed to buy time for Malaysian companies to turn around, also imply reliance on internal sources of capital and ultimately a longer recovery period. It will take at least another three to five years for recovery.
5.1.4 Macro factors affecting agrifood policy
Agrifood policy in Malaysia has evolved from a pre-occupation with the notion of food security via self-sufficiency production targets to the current policy stand of market- driven production. Food security concerns were an overhang from the world food crisis of the mid-1970s, which saw active interventions in import-substituting activities in rice and livestock production. Since the mid-1980s, the reform of the agricultural sector has seen the withdrawal of various subsidy programs, except those pertaining to rice production. Progressively too, various import tariffs have been reduced or eliminated.
In the 1970s, when interventions were the most intense, Malaysia faced the problem of providing employment opportunities to its rapidly growing labour force. The exchange rate then was around US$1=RM3, thus making import-substitution viable. After the two oil shocks, the exchange rate began to appreciate and by the mid-1980s it began to be overvalued. Agricultural sector performance was disappointing. The government began to recognise the implicit tax on the agricultural sector arising from an overvalued exchange rate combined with the effects of its stabilisation tax on export commodities.
Macro-policy reform began in the 1980s and the depreciation of the ringgit in tandem with the currency realignments resulted in a better performance for the agricultural sector. In particular, non-traditional agricultural products such as fruit and cut flowers emerged as new growth areas. The exchange rate made viable the production of import- substitutes in the face of a general reduction in tariff barriers. Thus during the present crisis, the agricultural sector, in particular the food production sub-sector, become the natural focus for policymakers. This sector is seen as an escape valve during the present difficulties, both in earning and in saving foreign exchange. The export commodities, especially palm oil, are great foreign exchange earners. Malaysia imports most of its food needs including rice, fruit and vegetables and meat. In a situation of scarce foreign exchange, the shift to food production is rendered convenient by the availability of agricultural land that was abandoned during the last decade of rapid non-agricultural growth, and by the short-term nature of most of the food crops.
Other than the exchange rate, two other factors have been significant in shaping agrifood policy. These are rising land and labour costs. Over the last 10 years in particular, rapid economic growth has resulted in the expansion of non-agricultural employment, such that labour shortages began to be critical in the agricultural sector. The issue has not merely been one of wages, but also of other non-wage considerations that cannot be met at the estates. Immigrant labour began to be recruited, but even such labour is hard to retain on the estates. In the land settlement schemes, ownership of land alone has not been a sufficient incentive to retain the second generation of settlers. Where land schemes are situated close to the urban areas, the authorities have also allowed the sale
3 In October as this paper is being revised, the US Federal Reserve lowered interest rates twice within a one-month period by a total of 50 basis points. This in effect results in a relative rise in interest rates in the Asian economies but without the undesirable effect of choking off growth. It would also mean an expected depreciation of the US dollar and spur economic recovery in Asia. The effect has been an immediate surge in the stock markets of the region. It remains to be seen whether Malaysia’s recovery will be slower than other affected countries; and whether Indonesia will follow Malaysia’s experiment with capital controls.
46 and conversion of land to non-farm uses, usually housing or industrial estate development.
At the same time, the declining availability of land for large-scale conversion into plantations or land settlement schemes has prompted many Malaysian plantation owners to invest in neighbouring countries where land and labour are plentiful. A popular destination is Indonesia. Opportunities for economic complementarities at the sub- regional level prompt policymakers towards economic cooperation in the growth triangles. Malaysia’s interest in the Indonesia-Malaysia-Thailand Growth Triangle (IMT- GT), apart from the plantation crops, is in the potential the other two members have as sources of food such as livestock, fruit and vegetables.
5.2 Structure of the agrifood sector (structure–conduct–performance since 1990)
5.2.1 Production and consumption structures (including key products)
The agrifood sector consists of palm oil and cocoa production for the export market, and rice, livestock and horticultural production mainly for the home market. Miscellaneous horticultural products, which are exported fresh, include tropical fruit, such as ‘carambola’, watermelons and bananas, and cut flowers. Production of food for domestic consumption is mainly sold fresh. The domestic food processing industry is dominated by the size of the palm oil and cocoa processing industries, given the country’s stature as a large producer of these two commodities. There is a small food canning industry, for example for cordial drinks, fruit, vegetables, fish and meat, based largely on imported raw materials. Table 5.2 provides a snapshot of the food processing industry in 1995. The rest of the primary food production sector is characterised by the dominant share of small farm production of rice, livestock and fruit and vegetables.
Overall the agricultural sector grew by 2 per cent from 1991 to 1995 (the period of the Sixth Malaysia Plan), well below the target rate of 3.5 per cent and at a rate 60 per cent lower than the 4.6 per cent attained during the period of the Fifth Plan. The Seventh Plan (1996–2000) sets a target of 2.6 per cent but it looks as if this rate will be difficult to attain, as growth averaged 1.1 per cent between 1996 and 1998. In real terms (physical volume) palm oil production grew at a compound average growth rate (CAGR) of 6.6 per cent over the period 1985 to 1996, as indicated in Table 5.3. Cocoa production has declined rather severely: in 1995 production was half the level of 1990. As shown in Table 5.4, imports of cocoa beans have increased more than 390 times between 1990 and 1995 as domestic production declined and capacity in the cocoa grinding industry increased. Although palm oil prices continued to be strong, the supply response has been limited as moves to bring new land and to convert from rubber holdings during the 1960s and 1970s exhausted the land margin. New planting is only possible in the east Malaysian states of Sabah and Sarawak but development costs there are much higher. Cocoa production has suffered from the sharp decline in prices throughout the past 10 years. Production is mainly confined to Sabah and Sarawak and the sharp drop in prices has caused many producers to switch to oil palm production.
47 Table 5.2: Principal statistics of the food manufacturing industry Industry Description Industry Number Value of Cost of Value Employ- Salaries Value of %Share % Share Code of Gross Input Added ment & Wages Fixed Fixed Value Establish- Output (RM 000) (RM 000) paid Assets (yr Assets Added ments (RM 000) (RM 000) end) (RM 000) Food Manufacturing 311-312 1406 25658732 21952139 3706593 84037 899345 5090613 100 100 Slaughtering, 31110 22 449590 315345 134245 2979 29704 133141 2.62 3.62 preparing & preserving meat Ice cream 31121 22 98143 61731 36412 932 11161 81565 1.6 0.98 Other dairy products 31129 12 1320292 1057794 262498 2867 60276 253670 4.98 7.08 Pineapple canning 31131 4 74652 61703 12949 1312 10602 17814 0.35 0.35 Other canning & 31139 81 266325 201560 64765 2958 26491 92017 1.81 1.75 preserving of fruit & vegetables Canning, preserving 31140 58 750188 569472 180716 7363 48867 347720 6.83 4.88 & processing of fish,crustacea Manufacture of 31151 15 41780 38732 3048 239 1589 7813 0.15 0.08 coconut oil Manufacture of palm 31152 124 13329354 12097012 1232342 15905 193549 1585550 31.15 33.25 oil Manufacture of palm 31153 25 1227392 1091201 136191 1262 19425 158778 3.12 3.67 kernel oil Other vegetable & 31159 11 1077419 953179 124240 1061 21537 92250 1.81 3.35 animal oils and fats Large rice mills 31162 117 624106 533320 90786 4157 33944 175345 3.44 2.45 Flour mills 31163 9 703724 560187 143537 1498 31230 326350 6.41 3.87 Sago & tapioca 31164 26 48267 35678 12589 808 6333 32290 0.63 0.34 factories Other grain milling 31169 3 22843 16193 6650 102 1477 2114 0.04 0.18 Biscuit factories 31171 76 656922 432575 224347 10160 85437 237023 4.66 6.05 Bakeries 31172 303 351958 214012 137946 7825 49642 158679 3.12 3.72 Sugar factories & 31180 6 1053772 846341 207431 2850 50776 177075 3.48 5.6 refineries Manufacture of 31190 41 736022 565687 170335 4402 49538 cocoa, choc. & sugar confection Ice factories 31211 63 45610 23586 22024 964 8932 44103 0.87 0.59 Coffee factories 31212 83 132776 109689 23089 1324 10144 81395 1.6 0.62 Tea factories off- 31213 10 31272 19994 11278 634 4038 13928 0.27 0.3 estate Meehoon, noodles.. 31214 150 394549 305626 88923 5027 38559 148117 2.91 2.4 Spices & curry 31215 47 85139 57000 28139 1098 9750 24294 0.48 0.76 powder Other food products, 31219 34 494571 358589 135982 2994 46716 325098 6.39 3.67 nec. Manufacture of 31220 64 1642065 1425951 216114 3298 49629 247999 4.87 5.83 prepared animal feed Source: Department of Statistics: Annual Survey of Manufacturing Industries, 1996
48 Table 5.3: Production and exports of Crude Palm Oil and Processed Palm Oil (000 tonnes) Year Crude Palm Oil (CPO) Total Available Exports of % CPO Production Imports Exports for Processing Processed Palm Exported Oil 1985 4,134.5 16.5 13 4,138 3421 0.3 1986 4,542.2 34.4 117.5 4,459.1 4441.3 2.6 1987 4,532 86.8 170.7 4,448.1 4047.7 3.8 1988 5,027.5 121.2 21.5 5,127.2 4320.5 0.4 1989 6,056.5 28.4 19.2 6,065.7 5172.9 0.3 1990 6,094.6 16 93.9 6,016.7 5633.5 1.5 1991 6,141.4 389.9 89.9 6,441.4 5483.3 1.5 1992 6,373.5 165.1 71.6 6,467 5493.4 1.1 1993 7,403.5 240.5 58.7 7,585.3 6058.5 0.8 1994 7,220.6 205 55.1 7,370.5 6695.1 0.8 1995 7,810.5 38.3 17.3 7,831.5 6495.7 0.2 1996 8,385.9 15.2 69 8,332.1 7142.9 0.8 CAGR 6.64 6.57 6.92 Source: Ministry of Primary Industries
Table 5.4: Production and trade in dry cocoa beans (tonnes) Year Exports Imports % production Production Quantity Value Quantity Value exported 1990 247,000 162,618 448,452 101 123 65.8 1991 230,000 148,115 406,482 1,168 2,842 64.4 1992 220,000 125,440 314,539 1,829 3,967 57 1993 200,000 123,147 303,946 2,341 5,859 61.6 1994 177,172 83,028 262,934 11,353 35,164 46.9 1995 131,475 52,533 171,981 39,704 123,737 40 Source: Ministry of Primary Industries
Malaysia commands the largest share of the world market for palm oil, accounting for 65 per cent of total world exports in 1996. This stems from its position as a dominant supplier, accounting for more than half of world production up to 1995 (see Tables 6.5 and 6.6). Indonesia is a close second and it is anticipated that it will overtake Malaysia’s position as the top producer by 2010. Prior to the mid-1980s, Malaysia exported palm oil as crudes (CPO). With the onset of the Industrial Master Plan (IMP) 1986–95, the resource-based industrialisation strategy resulted in practically all exports being in processed form, except in cases where CPO exports were stipulated in the sales contract by the importing country. In the case of cocoa, the erosion in production has meant a scarcity of raw materials for cocoa grinding. About 40 per cent of local beans are exported, as local cocoa products require blending with imported beans. Increasingly the industry has had to depend on imported cocoa beans.
49 Table 5.5: World major exporters of palm oil, 1992 to 1996 (000 tonnes) Per cent share Country 1992 1993 1994 1995 1996 1992 1996 Malaysia 5,555 6,046 6,651 6,513 7,211 66.4 66.4 Indonesia 1,304 1,719 2,173 1,790 2,240 15.6 15.6 Papua New Guinea 178 243 225 223 237 2.1 2.1 Cote D'Ivoire 143 170 148 124 140 1.7 1.7 Singapore* 573 448 328 399 313 6.8 6.8 Hong Kong* 25 61 234 273 283 0.3 0.3 Others* 587 688 1,126 1,470 708 7 7 Total 8,365 9,375 10,885 10,792 11,132 100 100 Source: As compiled by PORLA in Palm Oil Statistics, 1996.
Table 5.6: Global production of palm oil, actual and projected (million mt) Year Malaysia Indonesia Africa Americas Others Total Share (%) 1980 2.6 0.7 0.8 0.1 0.3 4.6 56.5 1985 4.1 1.2 0.7 0.3 0.5 6.8 60.3 1990 6.1 2.4 1.1 0.5 0.8 10.9 56 1995 7.8 4.2 1.3 0.9 1 15.2 51.3 2000 8.7 7.5 1.9 0.8 1.1 20 43.5 2005 9.9 9.9 2.3 0.9 1.2 24.2 40.9 2010 11.1 12.3 2.9 1 1.3 28.6 38.8 2015 11.6 14.4 3.5 1.1 1.5 32.1 36.1 2020 12 17.1 4.2 1.2 1.6 36.1 33.2 Source: Ministry of Primary Industries
While production in the commodity sector is market-driven, in the primary food production sector some of the activities are policy-driven. Generally Malaysia does not have a comparative cost advantage in the production of rice and ruminant livestock production. Owing to the central role of rice in the Malaysian diet, rice production has been the focus of policy attention and has received various forms of subsidies, including a support price for paddy, a price subsidy and a fertiliser subsidy. A recognition of the high cost of production has prompted policymakers to limit production to the major rice growing areas, which have the facilities for double cropping. On average Malaysia currently produces around 80 per cent of its domestic requirements (Table 5.7). The National Agricultural Policy (NAP) projected a self-sufficiency target by 2010, by which time imports will increase to a million tonnes. Imports will therefore be a permanent feature, increasing with population growth.
Table 5.7: Crude estimates of rice consumption in Malaysia, 1985 to 1995 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Production 000 tonnes 1189 1123 1094 1091 1123 1215 1242 1298 1357 1379 1373 Net Imports 000 tonnes 426 190 195 279 368 330 400 444 389 335 425 Total Apparent 1615 1616 1289 1427 1571 1545 1642 1742 1747 1714 1798 Consumption* 000 tonnes % Production to Total 74 86 85 80 75 79 76 75 78 80 76 Apparent Consumption Mid-year Population 15.68 16.11 16.53 16.94 17.35 17.76 18.18 18.62 19.21 19.66 20.69 Consumption Per Capita 103 82 78 84 91 87 90 94 91 87 87 (kg/year/person) Note: * Data on changes in stock were not available in arriving at total apparent consumption. Source: Ministry of Agriculture, Padi Statistics, various issues.
50 Table 5.8: Self-sufficiency levels in livestock products and per capita consumption, 1986 to 1995 Year Beef Mutton Pork Poultry Eggs Liquid milk Beef Mutton Pork (kg) Poultry Eggs Liquid milk (kg) (kg) (kg) (No.) (lt) 1986 39 9 109 106 101 4.48 2.4 0.5 9.8 17.6 243 40.5 1987 36 8 111 114 106 4.11 2.5 0.5 10.3 17.9 239 44.8 1988 34 8 125 119 114 3.41 2.9 0.5 8.2 18.2 243 54.7 1989 24 9 126 115 110 4.3 3.4 0.5 9.2 22.1 248 40.7 1990 24 9 131 117 123 4.67 3.5 0.5 10.3 20.3 280 38.5 1991 22 9 135 101 113 3.23 3.8 0.5 10.2 21.9 297 55.6 1992 23 7 137 115 112 3.5 3.9 0.6 10.7 28.3 339 52 1993 22 7 140 102 112 3.15 4 0.6 10.6 30.4 326 46.9 1994 20 6 139 115 113 5.76 4.4 0.6 11.2 32.6 329 33.7 1995 20 5 142 114 112 3.69 4.7 0.7 10.4 33.1 328 51.7 Source: Department of Veterinary Services: Livestock Statistics, various issues.
The other significant domestic food sub-sector is pig and poultry production. Although production is mainly undertaken by small farmers, farmers have always been commercially driven. This sub-sector does not enjoy any direct subsidy but benefited from import restrictions and bans prior to the joining of the WTO. Another successful factor has been the health services provided by the Department of Veterinary Services. Malaysia produces all its domestic requirements of pork, eggs and poultry meat. There is also a surplus for export but this is practically only to Singapore, a traditional market. Malaysia does have a comparative cost advantage in the import substitution of pork and poultry meat. Expansion to other export markets, however, is limited by the high cost of imported feeds.
In the area of ruminant livestock production, Malaysia’s comparative cost disadvantage is very apparent. Self-sufficiency ratios have declined sharply over the past 10 years. Several factors constrain the production of beef, mutton and milk. These include the difficulty of breeding from imported stocks, the scarcity of grazing grounds and the high cost of feeds. Ruminant livestock activities have not proven financially attractive, as indicated in the findings of the Asian Development Bank study by Tan et al. (1989).
Table 5.8 summarises the self-sufficiency levels and per capita consumption of six common livestock products from 1986 to 1995. Self-sufficiency levels have declined steadily for beef, mutton and liquid milk over the period and such trends are expected to continue into the future. These are markets that Australia currently supplies a large part of, and import-substitution efforts here are likely to meet with only limited success. The National Agricultural Policy (1992–2010) projects a self-sufficiency level for beef of 30 per cent, mutton of 43 per cent and milk of 5 per cent by 2000. Actual achievement was way below these targets and it is unlikely that they will ever be met. In the case of mutton in particular, the targets are way off the mark.
Malaysia grows a large variety of vegetables and fruit for local consumption and export. Exports go mainly to the Singapore market, although selected tropical fruit are sent to Hong Kong, Taiwan and Europe. Malaysia imports a considerable amount of horticultural products, particularly temperate fruit and vegetables, which are immensely popular in the local market. There is also a large quantity of tropical fruit imports that are mainly supplied by Thailand. Overall consumption of fruit is projected under the NAP to increase by 5.3 per cent per annum with per capita consumption growing by 3 per cent.
While the NAP has expressed the intention of increasing domestic fruit and vegetable production, these industries have always faced several supply-side constraints on their expansion. One of the biggest limitations has been the availability of land suitable for commercial operations; and another has been the lack of research and development (R&D) support. Production is currently scattered throughout the country, except for
51 highland vegetable growing. Most vegetable farms in the lowland areas are located near urban centres and these face the inevitable encroachment of urbanisation and the demand for land for industrial and residential uses.
The current crisis has motivated the government to consider the gazetting of permanent zones for food crops.4 It is not entirely clear whether such a move will create further problems in the future as it places a caveat on land utilisation, thus preventing a speedy response to changes in economic opportunities. The drive to encourage farmers to grow food crops and households to grow their own vegetables has already resulted in a glut in the local market for various types of vegetables,5 and the inevitable fall in prices and hence farm incomes. There is, however, a role for greater R&D support in the miscellaneous crops sector to advance technology to the level seen in the rubber, palm oil and cocoa industries.
The other important food item is fish – the main protein source in the country, with a per capita consumption of 42kg. Attempts to further develop deep sea fishing have not been particularly successful as Malaysian fishermen prefer to fish within a day’s distance from the shores. Nonetheless, the NAP envisages deep-sea fishing will contribute significantly to total fish landings by 2010. The focus will be mainly in the country’s Exclusive Economic Zone (EEZ) where there is vast potential of fish resources, including tuna, especially in East Malaysia. Under the NAP, traditional fishing boats operating within 30 nautical miles will gradually be phased out and replaced by modern fishing fleets. Aquaculture offers great potential in expanding fish production, as it contributes around 10 per cent to total fish output.
5.2.2 Trade and competitiveness
Malaysia is the largest producer of palm oil in the world, commanding the leading export market share in 1996, with 7.2 million tonnes. Indonesia, in second position, accounted for less than 2.3 million tonnes in 1996, less than a third of the Malaysian total. The reason is not only the lower level of production in Indonesia but also because its government has imposed export bans or high export tariffs on palm oil to meet domestic consumption needs. Malaysia’s main export markets are in countries with large population bases, such as China, India, Pakistan, and Egypt.
Other than palm oil, Malaysia is a net food (SITC 0) importing country. Food imports (categories 0,1 and 4) totalled RM5.1 billion in 1990, and escalated to RM11.5 billion by 1997 (Table 5.9). About one-third of the total consisted of intermediate products for the food and feed-processing industry and the imports of requisites such as fertilisers, pesticides and equipment. Of the food import structure, the largest categories are grains, fruit and vegetables, sugar and sugar products, and fish products (Table 5.10). The major suppliers are Australia, New Zealand, the ASEAN countries and the United States, the latter having made major inroads in market share in recent years, especially in the area of fruit and vegetables.
4 As reported in the New Straits Times, 17 August 1998. 5 New Straits Times, 9 October 1998.
52 Table 5.9: Imports of food items, 1980 to 1997 (SITC 0, 1 and 4 in RM million) Year Food & Live Animals Beverages & Animal/Vegetable Total Food Tobacco fats & oils Imports 1980 2444.3 221.3 29.7 2695.3 1981 2941.5 255.1 35.2 3231.8 1982 2999.4 247.6 36.5 3283.5 1983 2984.5 250.2 56.3 3291 1984 3227.1 212.8 119.9 3559.8 1985 3064 228.9 80.6 3373.5 1986 2914.2 209.6 68.5 3192.3 1987 2965.3 192.4 205.1 3362.8 1988 2825.9 208.2 267.2 3301.3 1989 4609.3 236.5 269.5 5115.3 1990 4551.3 292.6 217.8 5061.7 1991 5138.9 423.8 394.8 5957.5 1992 5436.2 398.2 330.3 6164.7 1993 5816.1 390.8 403.8 6610.7 1994 6600.1 423.7 557.3 7581.1 1995 7887.7 559.5 380.3 8827.5 1996 9089.6 340.6 747.7 10177.9 1997 10055.5 660.9 809.8 11526.2 Source: Bank Negara Malaysia: Quarterly Bulletin, Vol. II, No. 2, 2nd Quarter 1996.
53 Table 5.10: Imports of agricultural products by SITC (RM millions) SITC 1988 1989 1990 1991 1992 1993 1994 1995 Food/Edible Products 3985 4613.91 4582.51 5141.71 5391.49 5816.07 6665.71 7884.6 001 Live animals 59.48 53.76 67.63 73.96 87.52 77.42 98.58 140.18 011–0 Meat and meat preparations 195.82 211.66 248.67 282.5 255.83 283.56 339.72 381.12 17 022–0 Dairy products and birds' eggs 457.21 561.93 538.95 579.96 577.12 715.12 726.52 951.92 25 034–0 Fish, crustaceans and molluscs 341.77 390.63 367.54 450.74 610.95 655.33 760.94 773.11 37 & preparations 041–0 Cereals and cereal 1059.2 1373.65 1311.16 1506.39 1467.99 1516.44 1648.89 2044.2 48 preparations 054–0 Vegetables and fruit 722.82 612.85 629.67 683.72 741.97 859.04 985.76 1127.8 59 061–0 Sugars, sugar preparations and 457.03 564.03 632.44 654.25 593.38 608.31 733.46 854.83 62 honey 071– Coffee, tea, cocoa, spices and 138.11 160.89 144.33 172.71 191.98 201.47 275.15 408.8 075 manufactures 081 Feeding stuff for animals 294.71 373.06 300.65 325.7 443.2 451.98 540.99 582.33 091& Miscellaneous edible products 259.26 311.44 341.49 411.78 421.55 447.41 555.72 620.34 098 and preparations Beverages, Starches, Animal& 743.61 784.206 828.671 1064.08 1038.98 1174.35 1619.36 1171.6 Vegetable Oils & Fats 111–1 Beverages (Alcoholic & Non- 125.71 120.31 156.01 195.43 176.67 207.56 262.93 267.21 12 alcoholic) 222–2 Oil seeds and oleaginous fruit 305.35 342.45 372.09 443.1 403.33 396.91 435.63 415.85 23 411 Animal oils and fats 2.98 2.3 2.42 3.39 2.52 3.56 7.45 9.62 421–4 Fixed vegetable oils and fats, 240.82 203.3 373.9 310.89 383.26 532.41 178.52 22 crude, refined or fractionated 431 Animal or vegetable oils and 13.94 12.24 16.46 17.9 17.03 192.55 37.5 fats, processed 592 Starches, inulin and wheat 45.36 64.38 82.61 31.8 127.67 166.04 188.4 262.83 gluten, albumin. subs., glues Other Agriculture Products 679.85 987.62 1112.59 1226.33 1683.66 1651.59 2247.4 1700.9 121–1 Tobacco and tobacco 82.48 121.21 136.88 228.33 222.54 183.24 166.6 291 22 manufactures 211–2 Hides, skins and furskins, raw. 2.95 4.75 3.73 5.97 2.61 3.76 8.3 8.37 12 231 Natural Rubber, Natural Gums 90.4 213.64 216.57 123.35 150.21 252.07 416 574.8 in Primary Form 261–2 Natural Fibres (incl. textile 352.5 460.89 549.21 608.06 1022.56 914.61 1286.6 223.5 68 yarn, SITC 651) 291–2 Crude animal and vegetable 135.91 156.59 154.34 175.75 184.13 183.79 208.2 254.42 92 materials, N.E.S. 611 Leather 15.61 30.54 51.87 84.87 101.61 114.12 161.7 348.85 Forest Products 1,096.8 1326.76 1648.82 2047.64 1982.46 2210.43 2770.2 3946.1 244–2 Natural Cork, Fuel Wood and 18.8 38.04 47.45 69.48 90.88 160.72 234.7 309.66 48 Wood in Chips or Particle 251 Pulp and waste paper 52.25 59.05 62.98 66.82 60.56 69.33 100.1 114.61 633–6 Cork and wood manufactures 31.21 38.7 61.1 74.98 84.57 105.4 126.9 159.45 35 (excl. furniture) 641–6 Paper, paperboard, & articles 994.5 1190.96 1477.29 1836.36 1837.33 1874.98 2308.5 3362.4 42 of paper pulp Agriculture Requisites 862.72 837.08 955.16 943.49 1072.88 1890.76 1759.92 2524.3 272& Fertilizers, crude and 591.73 579.51 662.47 614.71 624.37 717.66 779.3 498.26 562 manufactured 541–5 Veterinary Medicaments 41 40.38 46.12 57.11 153.11 474.44 695.8 798.6 42 591 Disinfectants, Insecticides, 119.97 92.18 98.77 107.86 108.27 112.91 132 162.39 Fungicides, Weed Killer, etc 721- Agricultural machinery 78.95 85.21 106.93 123.92 147.36 135.82 145.2 187.54 722 (excluding Parts) 625& Tractor Parts 30.09 36.63 39.59 37.37 30.59 446.96 4.52 875.82 784 657& Fishing nets and trawlers 0.98 3.17 1.28 2.52 9.18 2.97 3.1 1.69 793 Total 7,368.4 8549.6 9127.8 10423.3 11169.5 12743.2 15062.6 17228 Source: Ministry of Agriculture: Import and Export Trade in Food and Agriculture Products, various issues.
54 Table 5.11: Specialisation index in trade in agricultural products SITC 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Food/Edible Products –0.23 –0.10 –0.17 –0.17 –0.14 –0.17 –0.09 –0.19 –0.21 –0.27 00 1 Live animals 0.37 0.57 0.61 0.70 0.70 0.70 0.69 0.73 0.69 0.60 011–0 Meat and meat preparations –0.90 –0.78 –0.78 –0.75 –0.70 –0.65 –0.66 –0.69 –0.69 –0.69 17 022–0 Dairy products and birds' eggs –0.69 –0.63 –0.63 –0.66 –0.55 –0.49 –0.49 –0.53 –0.51 –0.59 25 034–0 Fish, crustaceans and molluscs –0.35 0.18 0.18 0.18 0.25 0.23 0.10 0.09 0.04 0.03 37 & preparations 041–0 Cereals and cereal –0.38 –0.85 –0.87 –0.85 –0.81 –0.79 –0.76 –0.76 –0.71 –0.70 48 preparations 054–0 Vegetables and fruit –0.82 –0.34 –0.40 –0.25 –0.19 –0.22 –0.10 –0.22 –0.31 –0.36 59 061–0 Sugars, sugar preparations –0.27 –0.52 –0.61 –0.41 –0.37 –0.44 –0.42 –0.52 –0.51 –0.62 62 and honey 071– Coffee, tea, cocoa, spices and –0.31 0.71 0.78 0.70 0.72 0.66 0.58 0.59 0.52 0.31 075 manufactures 081 Feeding stuff for animals 0.51 –0.16 –0.14 –0.13 –0.03 –0.10 –0.25 –0.23 –0.26 –0.28 091& Miscellaneous edible products –0.19 –0.10 –0.20 0.00 –0.22 –0.19 0.38 –0.05 –0.07 0.03 098 and preparations Beverages, Starches, Animal 0.82 0.82 0.77 0.78 0.75 0.71 0.74 0.73 0.75 0.83 & Vegetable Oils & Fats 111–1 Beverages (Alcoholic & –0.44 0.53 –0.32 –0.23 –0.36 –0.38 –0.31 –0.35 –0.33 –0.09 12 Non–alcoholic) 222–2 Oil seeds and oleaginous fruit –0.64 –0.61 –0.87 –0.84 –0.73 –0.82 –0.79 –0.83 –0.86 –0.88 23 411 Animal oils and fats –1.00 –1.00 –0.76 –0.47 0.06 0.01 –0.88 –0.88 –0.87 –0.92 421–4 Fixed vegetable oils and fats, 1.00 1.00 0.90 0.91 0.91 0.86 0.89 0.88 0.89 0.96 22 crude, refined or fractionated 431 Animal or vegetable oils and 0.98 0.98 0.98 0.97 0.97 0.98 0.84 0.97 fats, processed 592 Starches, inulin and wheat –0.66 –0.61 –0.56 –0.67 –0.69 –0.67 –0.67 –0.75 –0.64 –1.00 gluten, albumin. subs., glues Other Agriculture Products 0.77 0.77 0.78 0.62 0.50 0.42 0.28 0.28 0.28 0.56 121–1 Tobacco and tobacco –0.94 –0.91 –0.64 –0.92 –0.73 –0.47 –0.38 –0.37 –0.39 –0.25 22 manufactures 211–2 Hides, skins and furskins, raw. –0.63 –0.56 0.25 –0.06 –0.02 –0.31 –0.24 –0.25 –0.32 –0.29 12 23 1 Natural Rubber, Natural 0.97 0.96 0.97 0.90 0.87 0.91 0.88 0.79 0.75 0.75 Gums in Primary Form 261–2 Natural Fibres (incl. textile –0.18 –0.35 –0.34 –0.45 –0.44 –0.45 –0.42 –0.19 –0.20 0.76 68 yarn, SITC 651) 291–2 Crude animal and vegetable –0.67 –0.33 –0.27 –0.31 –0.43 –0.40 –0.31 –0.43 –0.49 –0.48 92 materials, N.E.S. 611 Leather –0.37 –0.33 –0.28 –0.68 –0.72 –0.78 –0.84 –0.84 –0.80 –0.53 Forest Products 0.73 0.78 0.74 0.75 0.70 0.65 0.69 0.70 0.65 0.52 244–2 Natural Cork, Fuel Wood and 0.99 0.99 0.99 0.99 0.99 0.98 0.98 0.96 0.94 0.91 48 Wood in Chips or Particle 251 Pulp and waste paper –0.75 –0.85 –0.73 –0.83 –0.80 –0.77 –0.69 –0.86 –0.92 –0.61 633–6 Cork and wood manufactures 0.93 0.96 0.93 0.93 0.91 0.92 0.93 0.95 0.95 0.94 35 (excl. furniture) 641–6 Paper, paperboard, & articles –0.83 –0.92 –0.62 –0.55 –0.57 –0.62 –0.57 –0.57 –0.60 –0.64 42 of paper pulp Agriculture Requisites –0.65 –0.67 –0.60 –0.50 –0.58 –0.48 –0.52 –0.70 0.50 –0.57 272& Fertilisers, crude and –0.67 –0.71 –0.62 –0.50 –0.63 –0.47 –0.47 –0.94 –0.58 –0.23 562 manufactured 541–5 Veterinary Medicaments –0.88 –0.88 –0.85 –0.78 –0.77 –0.76 –0.88 –0.71 –0.60 –0.60 42 591 Disinfectants, Insecticides, –0.46 –0.40 –0.36 –0.20 –0.17 –0.21 –0.18 –0.20 –0.16 –0.06 Fungicides, Weed Killer, etc 721–7 Agricultural machinery –0.86 –0.88 –0.88 –0.85 –0.89 –0.89 –0.92 –0.82 –0.29 –0.83 22 (excluding parts) 625& Tractor Parts –0.77 –0.60 –0.41 –0.43 –0.33 –0.36 –0.21 –0.54 1.00 –0.96 784 657& Fishing nets and trawlers –0.49 –0.83 –0.36 –0.57 –0.50 0.18 –0.68 0.02 –0.05 0.53 793 Overall 0.48 0.52 0.50 0.46 0.42 0.38 0.39 0.36 0.43 0.36 Source:Computed from Ministry of Agriculture: Import and Export Trade in Food and Agriculture Products, various issues.
55 Competitiveness can be measured by calculating world market shares or by using RCA or specialisation ratios. Underlying the notion of a product’s competitiveness is its inherent comparative advantage. This is often manifested in market share. However, market share can be attained through subsidised production rather than true comparative advantage, a situation which lies at the core of a point of contention in international trade theory. Comparative advantage is conventionally measured by computing the domestic resource cost ratio (DRC), which indicates the efficiency with which domestic resources (of land, labour and capital) are utilised to generate value-added at world market prices. Comparative advantage is indicated when the ratio is below 1.
DRCs require large information sets to compute, therefore rough indications are often resorted to such as the specialisation index (SI) and the revealed comparative advantage (RCA) ratio. These ratios reflect the notion that a country’s comparative advantage is manifested in the extent of its specialisation in particular products and the amount of its participation in world trade. The specialisation index measures the trade balance in a product category as a ratio of total trade in that category. A positive ratio close to 1 measures the extent of specialisation in a particular product category. However, it does not reflect the extent to which the product may be subsidised, and may not net out re- exports. The RCA is a refinement of the SI, as it takes into account the world trade share of a country in a particular product as a ratio of that country’s participation in overall world trade. As in the case of the SI, the RCA is a measure of trade outcomes and does not account for the policy interventions that influence those outcomes.
Simple estimates of specialisation presented in Table 5.11 indicate Malaysia’s comparative disadvantage in food production. The specialisation index is negative for all food categories in SITC 0. Only in the case of SITC 4 is the specialisation index positive and close to 1 in the categories of SITC 421–422 (fixed vegetable oils and fats, crude, refined or fractionated), and 431 (animal or vegetable oils and fats, processed. RCAs computed for the Second Industrial Master Plan (1996–2005) confirm the strong comparative advantage of fixed vegetable oils and fatty acids, although the ratios declined rather sharply from 1988 to 1993 as a consequence of more competitors in the global market (Table 5.12). Another area of some distinct advantage is indicated in the case of chocolate and cocoa products. In the area of processed foods, some potential is indicated in the categories of fish preparations and preserved fish, and fruit preparation and preservation. In the other food category areas, the food processing industry suffers from a shortage of raw materials as the market for fresh products has yet to be fully satisfied by domestic production.
56 Table 5.12: RCA indicators for food industries, 1988 to 1993 World Export CAGR % RCA RCA RCA change Share (%) (1988–93) 1988 1993 (1988–93) Meat and Seafood Products Poultry, dead & edible 0.182 24.21 0.159 0.123 –0.036 Sausages & the like 0 –52.1 1.064 0 –1.064 Other prepared/preserved meat 0.132 1.79 0.206 0.09 –0.116 Frozen fish (excl. fillets) 0.272 28.08 0.138 0.184 0.046 Frozen fish fillets 0.136 111.27 0.007 0.092 0.085 Fish dried, salted or in brine 0.173 11.52 0.147 0.117 –0.03 Prepared/preserved fish 1.609 32.63 0.684 1.085 0.401 Crustaceans/Molluscs 1.24 –10.8 3.876 0.836 –3.04 Fruit & Vegetable Products Vegetables, frozen or otherwise 0.006 –30.14 0.068 0.004 –0.064 Jam, fruit jellies, marmalade 0.247 26.31 0.148 0.167 0.019 Fruit, temporarily prepared 0.03 11.28 0.03 0.02 –0.01 Fruit, preserved & prepared 1.639 18.32 1.366 1.105 –0.261 Juices, fruit & vegetables 0.138 13.7 0.11 0.093 –0.017 Cocoa & Confectionary Products Sugar confectionary & other 0.514 13.83 0.652 0.347 –0.305 Chocolate & other food preparation 3.052 –4.31 6.121 2.057 –4.064 Oleochemicals Fixed vegetable oils, n.e.s. 26.983 1.26 42.994 18.183 –24.811 Fatty acids, acid oils & residues 19.314 2.54 31.369 13.015 –18.354 Acrylic Alcohols & their halogens 2.651 11.16 2.04 1.787 –0.253 Source: DRI/McGraw-Hill computations for the Second Industrial Master Plan, based on 4-digit SITC data. Note: The products represented above are not the complete set of products that are traded in this sector. Only products that Malaysia had a tradeable position in 1993 are shown. The names of these products are reduced forms of the original names, as reflected in the SITC revision 2 classification scheme.
5.2.3 Australia’s market share
Over the past eight years, Australia has been able to maintain its position as the largest single source of food imports into Malaysia. As indicated in Table 5.13, the period 1989 to 1994 saw a strong surge in food imports as GDP growth rates accelerated. During this period GDP growth averaged 8.8 per cent per annum while food imports grew by 9 per cent. Australian imports exceeded the average growth of food imports, with a CAGR of 11 per cent. Several interesting trends are discernible from this table:
· growth in total food imports surged from 1989 to 1994, but thereafter decelerated; · imports from Australia grew at a faster rate than overall food imports did from 1989 to 1994 but grew at below the average food import rate from 1994 to 1997; · in terms of composition, very strong growth was registered in the seafood, confectionery, beverages and dairy products categories from 1989 to 1994, which was not sustained in the 1994 to 1997 period;
Australia has been able to sustain its strong market shares in dairy, meat and other foods categories; in particular strong increases in market share were recorded for horticultural products while the import share for grains eroded somewhat between the two periods.
57 Table 5.13: Australia’s market share of Malaysian food imports, 1989, 1994 and 1997 Total Food Imports Growth (%) Imports from Australia Growth (%) Australia’s 1989 1994 1997 94/89 97/94 1989 1994 1997 94/89 97/94 market share(%) 1989 1994 1997 Meat 76,607 128,086 197,209 67 54 16,118 30,911 38,889 92 26 21 24 20 Dairy 206,602 274,603 353,843 33 29 41,928 85,881 108,842 105 27 20 31 31 Grain 567,743 698,145 943,561 23 35 106,168 142,040 144,525 34 2 19 20 15 Horticulture 255,309 509,296 491,192 99 –4 36,471 62,452 85,504 71 37 14 12 17 Seafood 144,922 292,277 325,896 102 12 966 3,458 3,222 258 –7 1 1 1 Other foods 373,281 559,956 763,862 50 36 101,634 184,119 182,080 81 –1 27 33 24 Confectionery 11,628 27,644 36,586 138 32 2,244 5,085 6,864 127 35 19 18 19 Beverages 44,561 100,462 83,556 125 –17 607 1,373 2,249 126 64 1 1 3 Total 1,680,653 2,590,469 3,195,706 54 23 306,136 515,319 572,175 68 11 18 20 18 CAGR (%) 9 7 11 4 Sources: Malaysia Food Market Profile: Supermarket to Asia Council, Australia; Malaysia: Imports Food, Jan–Dec 1997, Department of Statistics.
Australia’s varied agro-climatic regime enables it to produce a wide variety of horticultural products, including tropical fruit. Malaysians’ strong liking for durians is well known and there are plans to expand production for eventual export to the large Malaysian market. Despite the durian’s popularity, the current financial crisis has badly affected demand for the fruit. From observations at the wet markets, prices have fallen as retailers desperately try to dispose of their fruit. There has been another aspect to this fall in demand: the durian season is often accompanied by illnesses such coughs and colds and sore throats and this has been another good reason to avoid buying the fruit.
5.2.4 Business structures
The agrifood sector is made up of a very modern sophisticated palm oil agribusiness, characterised by capital and technology-intensive production, and a mainly small farm/firm-orientation of domestic food production. The well-organised export production sector is well represented by industry associations at the growers’ level and, as businesses grow, at the crushers’ and refiners’ levels as well. The food processing industry, other than palm oil and cocoa, is dominated by the presence of five or six multinationals in the cereals, milk, noodles, sauces and confectionery areas. The rest of the domestic food production sector is characterised by small farms and small firms at the processing level, which are largely market-driven, except in the case of rice and dairy production, which can be said to be policy-driven. Even in these areas, however, there are increasing tendencies towards larger commercial operations, and small or micro-enterprises for food production are no longer encouraged.
The competitive pull of export markets has led to a flourishing palm-based industry cluster that is well supported by an institutionalised R&D structure financed by the industry, and by the licensing of all aspects of production – from seed production at the nurseries to the activities of shippers, mills, refineries and distributors. Full attention is paid to ensuring the quality of Malaysian palm product exports. Similar levels of support are difficult to replicate in the case of the miscellaneous food production and processing sector given its small contribution to overall output.
5.2.5 Organisational issues
As expansion of the traditional commodities reaches saturation point, policymakers have turned their attention to the area of non-traditional agricultural products, which has been experiencing dynamic growth over the past decade. In an attempt to balance the incentive structure, agricultural activities, particularly in food production, have been
58 included in the list of promoted activities for investment incentives (Table 5.14). Tax incentives include:
· Pioneer status or investment tax credit · Double deduction for promotion of exports · Infrastructure allowance
From numbers released by the Malaysian Industrial Development Authority (MIDA), a total of 35 projects with an investment value of RM104.37 million were approved for tax incentives from 1989 to 1995. These were mainly fruit and vegetable production projects, and only six projects targeted the export market. Many of the activities were undertaken from 1989 to 1990 (see Table 5.15). While the data does not reveal ownership status, some surmising can be done from the equity conditions attached to the granting of the incentives. In the case of fruit and vegetable cultivation, Malaysian participation varied from 40 to 70 per cent. Aquaculture feed projects, surimi-based projects and fish aquaculture projects targeted to the local market require 70 per cent Malaysian participation.
Table 5.14: List of promoted products/activities – Promotion Of Investment Act, 1986 Agricultural Production Integrated Agriculture Processing of Agricultural Produce 1. Cultivation of tea 1. Cultivation and processing 1. Cocoa products of tea 2. Cultivation of fruit 2. Cultivation and processing 2. Coconut products except copra of herbs and spices or crude coconut oil 3. Cultivation of vegetables, 3. Cultivation and processing 3. Fruit tubers or roots of crops for animal feeds 4. Cultivation of rice or maize 4. Cultivation and processing 4. Vegetables, tubers or roots of medicinal plants 5. Cultivation of herbs or spices 5. Culturing and processing of 5. Cereal products aquatic products 6. Cultivation of essential oil 6. Apiculture and processing 6. Starch products crops of its produce 7. Cultivation of planting 7. Essential oils materials 8. Cultivation of crops for 8. Livestock or livestock products animal feeds 9. Floriculture 9. Aquatic products 10. Sericulture 10. Agricultural wastes or by- products 11. Apiculture 11. Aquaculture feed 12. Livestock farming 12. Plants extracts for (excluding rearing of chickens, pharmaceutical, perfumery, ducks or pigs) cosmetic of food industries 13. Production of breeder 13. High fructose syrup stocks 14. Spawning, breeding and 14. Coffee products culturing of aquatic products 15. Offshore fishing 16. Cultivation of medicinal plants Source: Malaysian Industrial Development Authority
59 Table 5.15: Approved investment in agriculture Year Number Value (RM 000) Activity 1989 13 51,931.36 Cultivation of fruit and vegetables 1990 9 5,879.30 Cultivation of fruit and vegetables 1991 3 7,142.62 Cultivation of fruit and vegetables 1992 5 4,513 Cultivation of fruit and vegetables 1993 4 33,935 Cultivation of fruit and vegetables 1994 - - 1995 1 970.50 Cultivation of fruit and vegetables Cumulative Total 35 104,371.78 Note: Of the 35 projects approved to date only six targeted the export market, only two projects included freshwater fish breeding, and one included livestock rearing as well. Source: Malaysian Industrial Development Authority (MIDA)
These projects account for only a fraction of the investments taking place in food production, as they tend to cover the larger establishments with a paid-up capital of more than RM2.5 million that must seek MIDA’s approval to qualify for the tax incentives. Many of the farms or establishments are small and medium-sized enterprises and these are difficult to estimate. However, some insights into the magnitude of investments are provided by the uptake of the Fund for Food Production (3F), which was introduced in 1993. By the end of 1996, the cumulative amount lent was RM264.7 million. Of this amount, more than half went into the livestock industry (basically poultry), approximately 20 per cent was for fruit and vegetable cultivation, and the remainder went into the food processing industry.6 It is not inconceivable that there is some overlap between the MIDA numbers and the 3F numbers, as the approved MIDA projects apply for financing under the 3F scheme.
The adoption of the Second Industrial Master Plan, or IMP2, sets the direction for the development of the domestic food processing industry. As the overall approach of the IMP2 is based on developing or strengthening industry clusters, a number of industries in the food sector (other than the palm and cocoa-based industries) have been identified as having the potential for cluster development. These are the fish and fish products, livestock and livestock products, and fruit and vegetables industries. Measures to promote industry clusters will encompass the activities along the value chain including production, processing and distribution. In all three industries, there will be a greater emphasis on R&D support.
In the fish products sector, Malaysia aims to position itself in niche markets for specialised fish products such as ‘surimi’. Investment in fishing in distant waters will be promoted between domestic and foreign investors and special incentives will be given to encourage them to land their catch in Malaysian waters. Aquaculture operations will be encouraged to operate on a larger commercial basis.
In the livestock sector, greater R&D efforts will be devoted to developing domestic feed resources in order to reduce the current high dependence on imported feeds, for both the ruminant and non-ruminant sectors. Given the low level of local beef and mutton production, large-scale cattle and sheep integration under plantation crops will be further encouraged. The private sector will also be encouraged to set up joint ventures in beef and dairy industries overseas. In the case of the poultry industry, Malaysia is positioned to capture the halal (kosher) meat market in the Middle East. As for pig production, given its cultural sensitivity, the industry will likely be relocated in neighbouring countries in the long term, a move that will, in time, change Malaysia’s current export status.
As for fruit and vegetable production, the plan is to increase the supply of raw materials by encouraging production on a larger commercial scale. The products with potential for
6 As reported in the Bank Negara Report, 1998.
60 food processing include starfruit, pineapples, guavas, bananas, rambutans, chillies, tomatoes and mushrooms. There will also be a focus on niche markets for fresh fruit such as mangosteens, melons, papayas and starfruit.
5.3 Policy overview
The sectoral policy reform of the mid-1980s also recognised that the nation’s comparative advantage lies in plantation perennial crops rather than in short-term food crops. The first National Agricultural Policy (NAP), enunciated in 1984, clearly stated that commercial considerations would determine the crop mix in Malaysia. Accordingly, the Government took steps to reduce the bias against export crops and eliminated most farm subsidies, except those on rice production. The NAP was revised in the early 1990s and a more detailed version was released setting out targets and policies over the period from 1992 to 2010. This is currently being revised against the background of rising competitive pressures and the release of the Second Industrial Master Plan with its emphasis on industry cluster development. There will likely be greater emphasis in the revised NAP on R&D for miscellaneous activities such as livestock, fruit and vegetables and floriculture.
Malaysia’s food policy approach, besides seeking to provide some level of food security through domestic production, is also aimed at providing food to consumers at a reasonable cost. As food constitutes the major portion of the consumer price index, changes in food prices significantly affect the inflation rate. Accordingly from the late 1980s to the mid-1990s, tariff levels and sales taxes on a large number of food items were reduced or eliminated. This unilateral reduction also served to fulfil Malaysia’s commitment to freer trade during the Uruguay Round. As a result, most food items, especially in the unprocessed category for which import substitution possibilities are limited, enter the country at a 0 tariff, or at most a 5 per cent sales tax. Imports from Australia belong mainly to this category and duties, when they apply, are generally less than 10 per cent.
In the domestic food production sector, the most pervasive interventions are found in rice production. Policy instruments include a support price for paddy, a price subsidy and an input or fertiliser subsidy. These are basically income maintenance measures and are limited to existing producing areas. Rice imports will continue to grow with population growth and as domestic production stabilises. Malaysia sources its rice imports from around the region, especially from Thailand. Australia has never been a major source of supply for rice.
Other than tariff barriers, a number of agricultural products are subject to quotas and licensing. These are indicated in Table 5.16. In the case of livestock products, licensing extends to exports as well and is imposed to enforce international phyto-sanitary requirements. Quotas for cabbages and coffee are used to regulate/stabilise domestic prices, while in the cases of sugar and flour they provide the means to regulate competition among local refiners, and thereby domestic sugar prices.
In response to rising competitive pressures and the development of regionalism, ASEAN countries attained a new level of solidarity with the agreement on AFTA. This will see tariff barriers among member countries reduced to below 5 per cent by 2003. The formation of the Asia Pacific Economic Cooperation (APEC) group has seen Malaysia’s commitment to a freer and more liberal trading environment by 2020, with member economies setting out a timetable for trade and investment liberalisation. Unlike ASEAN, APEC operates on the principle of voluntarism with regard to trade liberalisation measures. It is thus difficult to push for agricultural sector liberalisation in APEC because of opposition from Japan and Korea and because of fears that any decision in this regard will grant free-rider status to the European Union.
61 5.3.1 After the Uruguay Round until the crisis
By joining the World Trade Organisation (WTO), Malaysia has committed to binding 62 per cent of tariff lines at an average rate of 9 per cent by 2003. Non-tariff measures in rice and livestock products have been converted to a tariff basis. These have been bound and set to reduce by 2004 to 40 per cent for rice and processed foods and 54 per cent for liquid milk. Market access for livestock products is defined as 0 to 3 per cent of total consumption. In the case of milk products, in which Australia has a large interest, it should be pointed out that Malaysian officials not only allow the final quotas to be greatly exceeded but also allow the excess to be brought in at a zero tariff, despite the 50 per cent tariff rate applicable (see Table 5.17). Such products are regulated in the public interest and keeping food costs low is a primary consideration.
Table 5.17: Market access for livestock products (reporting period: calendar year 1996) Description of products Tariff item Tariff quota In quota numbers in product quantity for period imports during descriptions in question period 1. Swine 1.1 Live swine (<50kg) 0103.91 000 18,417 head 226 head 1.2 Meat of swine, chilled or frozen 0203.11 000 1,105 - fresh carcasses and half carcasses 2. Chicken, live, Eggs, Meat & Products 2.1 Live day old chicks 0105.11 100 1,492,725 head 2,965,534 head 2.2 Live fowls of G. Domesticus 0105.91 000 1,196,930 head - 2.3 Meat fresh, frozen & chilled of 0207.10 100 2985 mt 3,348.67 mt G. Domesticus 2.4 Fatty livers 0207.39 210 71mt - 2.5 Chicken wings, fresh, chilled 0207.39 111 497 mt 934.56 mt 2.6 Other poultry cuts, fresh, chilled 0207.39 119 640 mt 2,414.11 mt 2.7 Hen eggs, fresh for hatching 0407.00 111 50,150,000 units - 2.8 Hen eggs, fresh, other 0407.00 111 50,150,000 units - 3. Milk or Milk Products 3.1 Liquid, fat content < 1% 0401.10 920 640,000 litres 1,195,412 litres Source: Ministry of Agriculture
Two significant developments have taken place in the agrifood sector. One was the corporatisation of the agency for rice procurement, previously known as LPN. In preparation for this event, the government liberalised the market for super grades of rice in 1993. Only the price of the standard grade remains subject to price control. The rice milling and distribution operations of LPN were taken over by the corporatised entity known as BERNAS. BERNAS was given exclusive rights to import rice and went into the retail market for rice. It has also entered into joint ventures to produce rice in Guinea and into trading ventures in other countries aimed at ensuring rice supply.
The other significant development was the liberalisation of poultry imports in 1996 when domestic shortages led to sharp price increases. Ironically this liberalisation came just after the imposition of price controls on chicken from the ex-farm to the retail levels. The move was motivated largely by the need to promote consumer interests, as chicken has become one of the cheapest sources of protein in the country. The long- term viability of the poultry industry remains uncertain in the face of price controls and because of rising feed costs, which have been a consequence of the ringgit’s depreciation.
62 5.3.2 Current situation and outlook
The government has adopted three strategies to deal with financial difficulties. These are:
· to increase the consumption of local products; · to review the need for imported agricultural products; and · to source cheaper manufacturing alternatives.
One of the first steps taken was the increase in the 3F scheme by another RM100 million by the end of 1997. The state governments quickly came up with plans to use land that had been left idle and to promote integrated farming in their agricultural projects. Steps were also taken to encourage households to grow hydroponic vegetables. Some corporations owning large tracts of land earmarked for future needs have been growing short-term crops.
The currency crisis has revived once more issues of food self-sufficiency and import substitution versus export promotion. There are, however, a number of constraints that will put an effective brake on increasing the level of production, whether for domestic consumption or for export. In the area of meat production, especially in the case of ruminants, climate is a distinct disadvantage. Some isolated successes in fruit and vegetable farming have been highlighted periodically in the media but these have yet to result in any measurable impact on the food import bill. The changing structure of the economy implies that commercial operations require a certain size to be effective but so far the plantation groups have not turned to food production in a major way and they will remain indifferent so long as palm oil production continues to be attractive. Implicit in the review of the NAP is the recognition of the non-viability of small farm efforts in having any perceptible impact on increasing food production.
Food import figures analysed by the Ministry of Agriculture for the first four months of 1998 revealed the following picture:7
· the quantity of imported food that can also be produced locally fell from 1.9 million tonnes in the first four months of 1997 to 1.6 million tonnes; · the value of imported food that cannot be produced locally, however, rose by 32.9 per cent from RM0.7 billion last year to RM1.1 billion during the same period.
The most significant decreases in imports were in tropical fruit (96 per cent), live fish (33.7 per cent) and beef (18.2 per cent). Tropical fruit is mainly imported from Thailand. The sharp fall in such imports is due to the luxury nature of these food items, which are sensitive to falls in real income. Other than in the case of beef, it appears that Australian products have not been too adversely affected. According to the Department of Veterinary Services, price discounts by Australian suppliers have been offsetting the price increases from the depreciating ringgit. This has come about because of the sharp decline of demand for cattle from Indonesia, which has brought down the import price.
The current crisis forces a re-examination of food security strategies. Increasingly, economic considerations will have to underwrite many of these strategies. Past approaches of investing in cattle farms in Australia or New Zealand and in rice farming elsewhere in the region will ultimately be based on the viability of such options; in many cases it has become apparent that direct importation is more economical than costly investments in mature industries in economies that are traditional sources of imports.
It is also unlikely that the present difficulties will undermine Australia’s position in the Malaysian food market, as many of the imports from Australia cannot be substituted with domestic production. The challenge for Australia is from other suppliers of similar products as importers shop for similar quality from the cheapest source. Malaysia
7 As reported in the New Straits Times, 7 August 1998.
63 actively promotes trade with less developed countries and in recent years imports from the Latin America have increased as a consequence. There are also opportunities for some joint-ventures in horticultural production and joint marketing, using Malaysia’s convenient geographic location and its ties with Middle Eastern countries.
The currency crisis has also resulted in sharp asset price deflation. Many Malaysian companies are in difficulty, including supermarket chains. One large chain recently sold its controlling interest to a Dutch chain. In recent years the local food distribution scene has seen the advent of hypermarkets and the entry of a large French concern. As a consequence, many of the conventional supermarkets have gone out of business, including those that are Japanese joint-ventures. Such developments will affect the share of importing countries in Malaysia’s food market.
On the trade liberalisation front, Malaysia is unlikely to backtrack on its commitments. At the APEC level, however, Malaysia’s stand is one of flexibility in adhering to the timetable for market liberalisation. The currency depreciation substitutes for high tariffs, but is an unsatisfactory substitute owing to the volatility of the fluctuations; hence the exchange controls.
The imposition of exchange controls does not significantly alter the analysis in this paper. It introduces an element of stability and limits price rises from the currency depreciation. Exchange controls also prevent the fire-sale of troubled Malaysian companies, although these mainly lie outside the food sector.
64 5.4 References
Ahmad Zubaidi Baharum 1992, The Welfare Cost of Malaysian Rice Policy under Alternative Price Regimes, Malaysian Journal of Economic Studies, 24(2), pp. 1–12. ASEAN Secretariat 1996, AFTA Reader: The Fifth ASEAN Summit, Vol. IV. Bank Negara Malaysia, Annual Report, 1995, 1996, 1997 and 1998. Bank Negara Malaysia, Quarterly Bulletin, 13(11). Department of Statistics, Malaysia, Malaysia: Imports and Exports, annual series. Department of Statistics, Malaysia, Survey of Manufacturing Industries, 1995 and 1996. Fatimah M.A., Mad Nasir S., and Mohd. Shahwahid O. (eds) 1993, Malaysian Agricultural Commodity Forecasting and Policy Modelling, Centre for Agriculture Policy Studies (CAPS), Universiti Pertanian Malaysia. GATT Secretariat 1993, Trade Policy Review: Malaysia, Volume I, Report by the GATT Secretariat, Geneva. Government of Malaysia: Seventh Malaysia Plan, 1996-2000. Jenkins, G.P., and Lai, A.K.K. 1989, Trade, Exchange Rate and Agricultural Policies in Malaysia, World Bank Comparative Studies, World Bank, Washington DC. Mad Nasir S., Alan J.W. and Kim H. 1997, Development of Malaysian Agricultural Sector Analysis Model, Paper presented at the Seventeenth Annual International Symposium on Forecasting, Barbados, 19–21 June. Malaysian Industrial Development Authority 1997, Annual Industry Report. Ministry of Agriculture, Malaysia 1992, National Agricultural Policy (1992-2010), Kuala Lumpur. Ministry of Agriculture Malaysia 1995, Annual Fisheries Statistics, Department of Fisheries, Kuala Lumpur. Ministry of Agriculture Malaysia, Import and Export Trade in Food and Agriculture Products, various issues, Kuala Lumpur. Ministry of Finance, Malaysia, Economic Report, various issues, Kuala Lumpur. Ministry of International Trade and Industry, Malaysia, International Trade and Industry Report, 1996–97, Kuala Lumpur. Ministry of International Trade and Industry, Malaysia 1996, Second Industrial Master Plan, 1996-2005, Kuala Lumpur. Ministry of Primary Industries, Malaysia 1996, Palm Oil Statistics, Palm Oil Registration and Licensing Authority. Supermarket to Asia Council 1998, Malaysia Food Market Profiles, Canberra, September. Tan S.H. 1987, Malaysia’s Rice Policy: A Critical Analysis, Institute of Strategic and International Studies, Kuala Lumpur, Malaysia. ______1989, Government Interventions in the Padi and Rice Industry of Malaysia, Draft Final Report of the EPU World Bank Rice Industry Restructuring Project. ______1993, An Update of the Malaysian Cut-Flower Industry and its Development Thrust, Borneo Review, 4 (2), pp. 174–189. Tan S.H., Zainalabidin M., Chiew FC and Mad Nasir S. 1989, Government Incentives and Comparative Advantage in Livestock and Feedstuffs Sectors in Malaysia, Draft Final Report of the Asian Development Bank Study. Tan, S.H., Adnyana, M.A., Mayrowani, H. and Hendayana, R. 1998, Marketing Infrastrutures and Policies for Non-traditional Agricultural Production and Export: The Case of Indonesia, RIRDC/IFPRI, forthcoming.
65 66
Chapter 6 Malaysia: retail and food service markets.
6.1 Structure and developments in the retail sector
6.1.1 Overview
During the 1980s and 1990s, the Malaysian economy was one of the most dynamic in South East Asia, averaging a growth rate around 7 per cent per annum. Between 1991 and 1995, retail sales in Malaysia grew by 42 per cent to reach A$24.7 billion (M$44,970 million). The growth of the retail sector was brought about by a number of factors, including the sustained expansion of the Malaysian economy and the changing lifestyles of consumers.
The development of new shopping complexes and mega malls, the emergence of more sophisticated retailing practices, and aggressive marketing by both retailers and manufacturers served to increase consumer choice and made the market much more competitive.
The recent establishment of hypermarkets and wholesale cash-and-carry centres and the continued growth of hypermarkets, supermarkets and convenience stores has substantially altered the structure of the retail market. However, most fresh food shopping is still done at the ‘wet markets’ and at small independent food stores.
Malaysia’s retail market is still changing quickly with the continuation of retail and distribution infrastructure developments, such as in Peninsular Malaysia and Penang, where most of the population live. Kuala Lumpur has emerged as a major shopping centre, offering a growing challenge to Singapore. As chain operators and mall developers seek new, less developed markets, more of the outlying regions such as Sarawak and Sabah are becoming targets for retail growth.
The diverse religious mix of the Malaysian population has had an important impact on food consumption. Approximately 60 per cent of the population is Muslim. Muslims are not allowed to consume pork and require food to comply with Halal specifications. Approximately 30 per cent of the population is Chinese, including Buddhists, Taoists and Christians. Beef is not eaten by many Buddhists. The remaining 10 per cent of the population is mainly Indian and Hindu, and these religions prohibit beef consumption.
Malaysia has been an important market for Australian food exporters and investors and Australia has a 30 per cent share of Malaysia’s imported food market. Exports of Australian dairy products, fruit, vegetables, seafood and other products have increased considerably in recent years. There is still confidence that imports will expand again in the long term as Malaysia recovers from the crisis and as tariffs continue to fall in line with its WTO commitments.
The economy has avoided the worst of the crisis so far, however there are significant short-term problems that confront Malaysia. These problems include the likelihood of further political instability, the fall in the ringgit, the declining stock market and rising interest rates. In the last few months, assessments of the state of the economy have significantly changed. The Government is anxiously looking for further external funds while trying to avoid the further involvement of the IMF. It is also considering further changes to foreign investment policies that will allow more overseas funds to flow into Malaysia. These issues will continue to dominate the economy and politics in 1999.
In the long term, there is still much confidence that the Malaysian market will recover and become increasingly important to Australia. In the immediate future, questions remain over the politics of the country and how well it can adapt to the crisis.
67
6.1.2 Market structure
Size
Total retail sales in Malaysia grew by 42.4 per cent between 1991 and 1995 to reach A$24.7 billion (M$44,970 million). Sales have been boosted by the development of an infrastructure that has enabled spending to grow in line with rising consumer incomes.
Food retail sales were RM24.3 billion in 1997, an increase of 38 per cent over 1992. Supermarket sales grew by 142 per cent to RM4.6 billion over this period, while general store (the traditional sector) sales grew by only 8.9 per cent to RM13.4 billion.
In 1997, the total number of food outlets in Malaysia was 142,400, which was 37 per cent higher than in 1991. The number of minimarkets grew by 105 per cent and the number of supermarkets by 79 per cent over this period.
Segmentation
The Malaysian food retail market is still largely dominated by general food stores. These are mainly family-run neighbourhood businesses, which are now increasingly under pressure from the rising number of hypermarkets, supermarkets and mini-markets.
Table 6.1 Number of food outlets by type, 1991 to 1997 Type 1991 1995 1996 1997 % Growth 1991–97 Supermarkets 300 472 501 538 79 Mini-markets 340 589 646 699 105 Markets/General Stores 103,360 130,939 137,200 141,500 37 Source: Euromonitor, Malaysian Retailing, May 1998
The requirement for a more sophisticated distribution system to support the growth in modern retailing has meant a need for more distribution investment. This has started with operations such as Australia’s David’s organisation, but has also received a boost from new international retail operators such as Royal Ahold and Dairy Farms.
Wet markets and night markets continue to be very important sources of fresh food, particularly in rural areas. It is estimated that traditional food retailers still account for around 50 to 70 per cent of the retail food market. Fresh products, such as fruit and vegetables, are at the upper end of this range, while packaged grocery items are now frequently purchased in supermarkets or at discount retail stores. The importance of traditional markets is declining and their preservation is not a high priority for the Malaysian Government. The Government is encouraging the development of modern retail facilities for reasons of efficiency and hygiene.
The modernisation of the retail sector started with the development of department stores, such as Parkson’s and Metro Jaya. Most Malaysian department stores contain a supermarket, making them important food outlets. Such stores typically attract higher- income consumers. Malaysia has also had an influx of Japanese-owned department stores such as Sogo, Isetan and Yaohan, which mainly offer a limited selection of higher priced food and non-food products.
Much of the growth in supermarkets has been driven by foreign investment. Most of the larger supermarkets are modern and well-designed, with layouts similar to those in more developed countries. Major supermarkets include: Parkson’s, DFI Supermarkets, Royal Ahold (TOPS), Malaysian FairPrice, Jaya Jusco, The Store, and Hankyu Jaya. Major discount and cash-and-carry operators include: Makro, Carrefour, and Giant Cash and
68 Carry. New outlets continue to open, despite the growing concerns about rising competition from Kuala Lumpur and other cities. While the number of supermarkets remains relatively small, this sector is estimated to represent around 20 to 30 per cent of total retail food sales. The Government’s objective is to increase this to 60 per cent by the year 2000, an objective that appears unattainable.
A relatively new phenomenon in the Malaysian food retailing sector has been the establishment of hypermarkets and wholesale cash-and-carry warehousing centres such as Makro Cash and Carry and Carrefour operations.
International retail operators such as Hong Kong’s Dairy Farm International have taken a fairly cautious approach to opening new outlets in Malaysia. Prior to the onset of the crisis, DFI stated that it did not see all present operators surviving as the level of retailing was already too high in some areas. DFI is revising the supermarket model, which it believes is ideal for the Malaysian market, and has created smaller ‘neighbourhood supermarkets’ with a higher stock of fresh produce. This suits the Asian preference for frequent shopping in a friendlier environment. This format is emerging in other countries such as Taiwan and offers a better counter to the threat of competition from convenience stores.
Table 6.2 lists some of the leading retailers in Malaysia in 1995–97, ranging from the more traditional department stores to the newer discount formats. These statistics are constantly changing and should be viewed as providing a snapshot at a point in time.
Table 6.2: Leading Malaysian retailers, 1997 unless otherwise indicated Company Brand Type Turnover No. of (RM mn) Outlets Parksons Parksons, Hop-In Dept, S/mkt, CVS 642 S/mkt 59 CVS 6 The Store The Store Dept, S/mkt 637 33 Antah Holdings 7-11 CVS 431 101 KFC Ayamas Manufacturer, 321 43 specialty retailer George Town Hdgs George Town Dept, Chemist 310 34 Jaya Jusco Stores Jaya Jusco Supermarket 289 14 Makro Makro Member/discount 274 7 Metrojaya Metrojaya, Cosmart, Dept/H/mkt/CVS 239 20 Metrojaya Mart Royal Ahold TOPS, Bi-Lo Supermarket 1000(c) 7 CK Tang CK Tang Dept 145 1 Aktif Lifestyles Dept, S/mkt 302 5 (formerly Yaohan) DFI Wellsave Supermarket n/a 7 Giant Giant Cash & Carry, n/a S/mkt 4 S/mkt H/mkt 3 Carrefour Carrefour Hypermarket n/a 2 Sources: Euromonitor, Malaysian Retailing, October 1997, May 1998 and other sources
The emergence of new high-technology industries (for example, computer components) in the Johor Baruh corridor is adding a new impetus to economic growth in Malaysia. It remains to be seen how competitive this region will be in the wake of the IT shake-out that is occurring across Asia.
Distribution
Malaysia’s retail sector has seen huge changes during the past five years, including the development of a number of modern distribution facilities. As in other countries, most of
69 the modern facilities are attached to the main international retail groups. A huge amount of change is occurring amongst these retail groups at present and this will see the distribution structure that supports them change greatly over the next few years. For example, the TOPS chain has grown from just a few outlets two years ago to a chain of almost 60 outlets. This will support a much larger and more sophisticated distribution system with a much greater direct sourcing potential.
Malaysia’s modern retail distribution system is characterised by some of the following points:
· retail and distribution change has been amongst the most rapid in the region · development has been led by a few key international retail groups that are now able to support a more sophisticated distribution system, similar to those in more developed countries · infrastructure support (for example, highways) has increased the capacity of distribution systems to achieve national distribution · the supply chains are shortening for key lines and direct sourcing has developed quickly in this market in the past few years
Small retailers still use traditional distribution systems – more so for fresh produce than for packaged grocery items. Government policy appears to have favoured the modernisation of the retail sector, including new distribution methods.
6.1.3 Consumer and retail trends
Malaysian customers are becoming more sophisticated and are seeking a wider choice and better value goods and services. A third of housewives are now regular supermarket shoppers, compared with only one in 10 in 1995. The increasing accessibility of modern retail outlets, such as supermarkets and hypermarkets, has led to their greater acceptance.
Religious diversity, as stated above, still has a major impact on the shape of modern retailing. Dietary needs differ as do the product specifications and packaging. Despite these differences, some general observations can be made regarding the Malaysian diet. Malaysians spend approximately $1,000 per person each year on food. Most Malaysians eat chicken and most like lamb. Food is generally spicy, and rice or noodles are served at most meals.
Consumers have become increasingly familiar with Western foods and have been open to trying new foods. Consumption of Western foods, both away from the home and at home, is growing. For example, breakfast in Malaysian households increasingly includes bread, butter and breakfast cereals. This is especially true of the affluent and younger segments of the population, which include more than 100,000 Malaysians who have studied abroad.
Supermarket buyers, particularly in the upmarket chains, are willing to try most new imported food items as long as they believe that the taste is acceptable to Malaysian consumers and special requirements, like Halal, are met.
Australian exports can benefit from the growth of hypermarkets and cash-and-carry stores, as they offer bulk-buying outlets and they are also a new way to reach the many small retailers and wholesalers from outlying villages. These buyers have until recently had limited exposure to imported foods, but they have readily come to buy products from these stores.
A growing number of the larger supermarket and discount chains have started to import directly from overseas suppliers rather than deal through import and export agents and this trend is increasing. Retailing worldwide has moved in this direction. The more that international operators enter the market and the more this new type of supplier–buyer
70 relationship develops, the more common ‘direct trading’ by retailers will become. The current crisis will only serve to speed this development.
While the retail infrastructure is well developed in the main regions of Malaysia, such as Peninsular Malaysia and Penang, chain operators and mall developers are now actively seeking new markets in outlying regions such as Sarawak and Sabah. These new areas are perceived to be in need of modern retail formats and they are less competitive than markets such as Kuala Lumpur.
The growth in hypermarkets and supermarkets and the cash-and-carry sector has been driven by foreign investment. Foreign investment has been supported by the Malaysian Government, which it sees it as a key factor in the modernisation of the retail and distribution sectors, and of benefit to the market as a whole. For example, the entry of Makro into Malaysia was supported as a significant development in the discount store sector in Kuala Lumpur.
The staging of the Commonwealth Games drove a lot of the recent economic activity and boosted the Malaysian economy. The reality of the cost of this event is starting to set in, however, and the slowdown, which started in late 1998, is another unwelcome pressure occurring at a critical time, and will affect retail demand negatively.
Trade liberalisation under Malaysia’s commitments to the GATT/WTO process has improved market access. A further opening of the Malaysian economy is scheduled, which will open the market further to Australian exports. In addition, the Government may be forced to yield further concessions in such areas as foreign investment if it wishes to obtain IMF or other financial support that the economy desperately needs.
Prior to the crisis, the growth of the retail market was being driven by such factors as: Malaysia’s growing middle class; the changing lifestyles of consumers; the increasing use of credit facilities; the development of retail infrastructure; the explosion of shopping complexes; increasing interest in Western-style foods; reduced import tariffs; new marketing methods by retailers; and increased foreign investment.
In May 1998, Royal Ahold’s acquired seven supermarkets from Yaohan Corporation. The stores are now being converted to the TOPS format. The acquisition makes TOPS one of the leading supermarket operators in Malaysia. TOPS supermarkets have an average size of 12,000 square feet and carry an average range of 8,000 items.
Another significant investment in May 1998 involved a Dutch-Australian consortium, which opened Malaysia’s largest shopping mall, the Kuala Lumpur City Centre (KLCC). The mall is 90,800 square metres in size and has 120 speciality shops, including a number of food outlets. The KLCC is a joint venture between Rodamco NV (The Netherlands) and Westfield Holdings (Australia).
6.1.4 Impact of the crisis
Malaysia’s Prime Minister, Dr Mahathir, is considered to be under steadily increasing pressure to make further structural changes to the economy and even to step down. While this may take some time to happen, such a change is likely to bring a period of significant political instability. Dr Mahathir has been a strong influence on Malaysia’s past economic performance.
The high level of government investment in public works and housing over the past decade has now slowed significantly. This investment has contributed to a high level of public debt, which will have a negative impact on economic recovery for some time yet.
To date, the IMF’s pressure for reform in Malaysia has not been too great. Malaysia initiated its own reform program, and pre-empted the need for IMF involvement at this
71 stage. If the economic situation in Malaysia deteriorates, as many commentators believe that it will, there may be need for IMF involvement. This is increasingly likely, as the economy has now officially entered into recession.
The large retailer, Metrojaya, recently reported losses from its two hypermarkets and claimed that the group’s sales were down by 10 per cent in the middle three months of 1998.
In many cases, food price increases have been forced on the market by higher import costs. The ringgit has weakened and a range of finished food products and ingredients now cost more. This cost has generally been passed on to consumers. In response to the fall in market demand and higher import costs there has been a drive on cost-control by most food businesses.
Importers and distributors have focused much more closely on debt collection fearing defaults from the plethora of small businesses who are struggling to survive in the crisis.
There has been a significant switch from imported to local food products where possible. This has been actively encouraged by the Government (for example, it has sponsored a ‘Buy Malaysian’ campaign), which has had a significant impact on imports.
There has also been a switching from high-cost to lower-cost imports. Consumers are now much more cautious and selective about their food purchases and are buying lower- priced items because their purchasing power has been reduced. There is a definite trend away from luxury items and consumers are cutting down on eating out.
In addition to the fall in demand, rising interest rates, higher rental costs and product cost increases have forced retailers to take major cost-cutting measures to remain in business. Margins are also under great pressure as competition does not allow all cost increases to be recovered. Some larger retailers have had to close outlets and retrench employees to survive and a number of the more vulnerable small independent retailers have already been forced out of business.
6.1.5 Competitor responses
In the past few years, European and US supermarket chains have been actively pursuing Asian markets to offset the constraints in their home markets. Most groups have made an assessment of opportunities in Malaysia and a number have already made investments. Carrefour (France), Makro and Royal Ahold (the Netherlands), Marks and Spencer (the UK) and Jusco (Japan) have all established outlets in Malaysia. They appear to be prepared to wait for profits, and only Yaohan has so far withdrawn from the market.
While in the long term, supermarkets will overwhelm the traditional street markets, there is a long way to go for this to happen in Malaysia. Supermarkets account for less than 25 per cent of the food sold in South East Asia, compared with 65 per cent in the UK and 50 to 60 per cent in Australia.
Supermarket chain Jaya Jusco Stores Bhd ‘is confident of turnover growth, despite the impact of the current economic slowdown’. The company said that ‘it is optimistic about Malaysia’s future’ and that it is committed to ‘maintaining its commitment to the retail market in Malaysia’.
Australia’s key agrifood export competitors are, like Australia, attempting to understand the full impact of the crisis and they are developing new strategies to deal with it. The US Government has used its EXIM agency to help facilitate continued trade in key commodities. US exporters have been hit not only by the fall in market demand, but also by the strengthening US dollar. This has caused a shift of trade away from the US to other suppliers such as Australia and New Zealand.
72 6.1.6 Implications for Australian exports
In general, retail sales are said to have fallen ‘by as much as 30 to 40 per cent’ in 1998. Most imported food items have been affected. Margins have also been squeezed ‘by 25 to 30 per cent’. These affects have depended in part on the currency relativities involved. For example, the US dollar has strengthened against the Australian dollar. At the same time the Australian dollar has strengthened against the New Zealand dollar. Exporters are therefore differently affected depending upon whether their main competitors have appreciating or depreciating currencies. New Zealand’s position, while adversely affected, has strengthened against Australia’s, which will affect some of our dairy, beef, horticulture and other trade. The New Zealand economy is more dependent on exports than Australia’s and can be expected to aggressively defend its market share.
Basic imports have so far held up better than expected in a number of cases. For example, fresh produce exports have remained reasonably good over the past six to 12 months. Australian apples, citrus fruit, vegetables and other exports to Malaysia have continued at lower but satisfactory levels. However, as flagged by several of the industries’ national bodies (for example, the AHC, AHEA), this situation was helped considerably by two key factors. One was the shortfall in supply from Southern Hemisphere suppliers – the US in particular – and also the lower than normal volumes of such key crops as apples, pears, oranges and onions. With the new seasons for these now looming, industry commentators are taking a much gloomier view of prospects for 1999.
The fall in horticultural exports to Malaysia was also driven by the diversion of products to other more lucrative export markets. This was possible in 1997–98 as crop volumes were down. However, there has been some criticism that exporters have ruthlessly abandoned the Malaysian market for short-term gain. Many Malaysian importers understand this reaction, as they have been subjected to the tactic many times in the past. However, if the market is needed again by Australian exporters in 1999, their export tactics will engender far less support than exporters from the US and New Zealand might get.
In the early part of 1998, meat export volumes were down slightly over 1997, but not by as much as expected. Around 650 tonnes of Australian beef was exported to Malaysia during the last year, similar to the year before. MLA reported that the food service market for Australian meat has fared better than the retail market. Some business has also been gained from the US, based on Australia’s currency advantage. Export prospects were regarded as reasonable when interviews took place in July/August, however events are moving very quickly in Malaysia and the prognosis may have changed. A combination of concerns relating to the political climate, national debt, the cost of the Commonwealth Games, the slowdown in construction, among other things, led the MLA to view prospects for beef exports as deteriorating in 1999.
Views expressed in July/August were that dairy export volumes (for example, milk powder) to Malaysia have not been affected as much as expected. Exports were in fact up slightly in the early part of 1998 over last year’s levels. Market prices have fallen, but this is claimed to be more to do with a world-wide surplus than Malaysian market conditions. ADC predicts a reasonably steady market over the next 12 months.
The market for Australian exports is not very large because the majority of the population is Muslim, however, the market pays well because of its relative level of affluence and Chinese consumers’ preference for good red wine.
The market for Australian wine exports has remained fairly static in 1997–98 at around 400,000 litres per annum, but has not fallen. Values have remained steady during the past year as Australian exporters are in too strong a position at this stage to need to accept lower returns. The export market in Malaysia is a mix of retail and hotel trade, which
73 mainly involves Australia’s larger exporters. They have been supplying the market both directly and via Singapore. WEC forecasts a steady market in 1998–99.
While currency relativities have favoured Australian exports over those from the US and Europe, there has also been some impetus given to intra-Asian trade by the economic situation. This has mainly been affecting packaged grocery foods and fresh and processed produce (for example, canned baby corn).
The equity that has been established by Australia as a ‘good neighbour’ is regarded as very important in helping to retain or to win business during the current crisis. Exporter professionalism and responsibility will be needed, despite the difficulty of the market, in order to maintain this goodwill status.
There is still said to be a need for further ‘foreign’ expertise, which can help to improve the efficiency and reduce the costs in the Malaysian food distribution and retailing sectors. In the current market, there is a greater need than ever to make these improvements. This may see the continuation of Australian and other staff retention and/or the use of consultants.
6.2 Structure and developments in the food service sector
6.2.1 Overview
In 1995, the total food service market in Malaysia was worth approximately A$2.1 billion (M$3,867 million) and between 1991 and 1995 the market grew in value by 54 per cent. This growth reflected the strong economic growth in Malaysia and the associated rise in disposable incomes and consumer confidence.
While the Malaysian food service market is still dominated by independent operators, local and foreign-owned food service chains are growing. These chains are largely the same as those omnipresent operators found in South Korea and Indonesia. Traditional food service operators have suffered from a declining market share and have lost out to the rapidly developing international QSR/fast-food operators.
The food service market has been driven by the increasing middle-income consumer group, who are the new ‘diners-out’ at the middle to high end of the market. Not surprisingly, food service consumption is higher in cities than in rural areas. Rural Malaysians eat up to five meals a day, while metropolitan Malaysians typically consume just three meals a day.
The growth in the number of food outlets, similar to the retailing sector, has created a highly competitive market that has placed downward pressure on average meal prices. Food service operators have also had to deal with dramatically rising costs in the crisis, while attempting to deliver value-for-money in the face of increasing competition from other restaurant chains.
Halal foods and the meeting of Halal labelling and packaging requirements are a very important issue for food service operators and their suppliers, given the high proportion of Muslims and the increasing political influence of this group.
The deepening crisis is now starting to be felt by Malaysians consumers more than it was six months ago and their reactions are similar to those observed elsewhere. Eating out has fallen, consumers are trading down in their restaurant choice, cooking at home is on the rise again, and so on. The impact of the crisis does not appear to have been as sudden as in Korea, however, conditions have deteriorated and they are set to get worse.
74 Food service operators are now beginning to go through the same stages of cost control and business rationalisation seen elsewhere and if, as expected, conditions do get worse, more business failures are expected.
6.2.2 Market structure
Size
In 1995, the total Malaysian food service market was valued at A$2.1 billion (M$3,867 million), which represents an increase of over 50 per cent since 1991. Table 6.3 shows that all sectors experienced substantial growth during the early 1990s, except for the traditional catering sector. Although the restaurants and cafes sector dominates the market, in terms of turnover and market share, it is not the fastest growing sector (Table 6.3).
Segmentation
Table 6.3: The food service market by sector, 1995 Sector Turnover (A$ Growth 1991–95 (%) Market Share (%) mn) Restaurants and Cafes 1,003 68 47 Traditional 294 -31 14 Fast-food/QSR 292 113 14 Hotels 274 150 13 Retail catering 181 120 9 Bars and Clubs 85 175 3 Total 2,129 53 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, February 1996
Table 6.4: Leading food service operators in Malaysia Operator Brands/Chains No. of Outlets Turnover 1994 1995 (A$ mn) KFC Holdings KFC 150 1,095 (Malay.) McDonald’s McDonald’s 41 642 Shakey’s Shakey’s 13 n/a International Berjaya Leisure Berjaya 4 932 Berhad Genting Resort World, Highlands 3 790 Source: Euromonitor, The Market for Consumer Catering in South East Asia, Feb, 1996
Table 6.4 illustrates the dominance of the market leader, KFC, in the food service market. In 1997–98, KFC had a 58 per cent market share of the Western quick service restaurant (WQSR) market, followed by McDonald’s with 20 per cent, Pizza Hutt with 9 per cent, the A&W chain with 8 per cent and all the others totalling just 5 per cent (Brandshare, 1998).
Restaurants and cafes
This sector grew by 68 per cent between 1991 and 1995 to reach A$1 billion in value and represented almost 50 per cent of the total value of the food service sector in 1995. There are a growing number of restaurants, including both local and major international restaurants.
75 Major restaurant and cafe chains include Cerebos Pacific and Shakey’s Pizza, which had 33 per cent and 29 per cent of the sector respectively in 1995 (figures include chain operations only). Chinese restaurants are the most popular style of restaurant in Malaysia. Approximately a third of the population is ethnic Chinese so there is strong support for Chinese cuisine. Many restaurants offer variations on traditional Chinese styles of food, incorporating overseas influences such as British, Portuguese and Dutch flavours.
Traditional catering
Traditional catering is dominated by street stall vendors of chicken and rice dishes. In 1995, food service sales through these traditional catering establishments was estimated at A$294 million. This has been the only food service sector to experience a decline in sales turnover during the 1990s. This is due to the growing trend towards more sophisticated dining and increasing competition from the other QSR food service sectors. The Government’s support for modernisation is also a factor working against the survival of many operators in this sector.
QSR/Fast-Food
The faster pace of urban living and an increasing number of two-income families triggered an explosion of US fast-food outlets such as McDonald’s, KFC, A&W, Pizza Hut, Carl’s Jr. and Shakey’s in the 1990s. This has been added to by a myriad of other Western-style restaurants and steak house chains such as the Hard Rock Cafe, TGI Friday’s Bistro, American Chili’s Bar and Grill and Kenny Roger’s Roasters. Yoghurt and ice cream parlours have also become very popular, not only for take-away products, but also as cafes and coffee shops.
In 1995, fast-food sales turnover totalled A$292 million, an increase of 113 per cent since 1991. This growth can be attributed mainly to higher expenditure from teenagers, in conjunction with the increase in the number of outlets being established.
The Malaysian fast-food market is split between fried chicken restaurants and hamburger outlets. In 1995, 60 per cent of the fast-food market was shared between McDonald’s, KFC and Burger King. The 1997–98 figures in Table 6.5 show that this share has risen to around 80 per cent.
Table 6.5: Major fast-food chains and market shares, 1995 Company Operator Market Share (%) KFC KFC Holdings (Malaysia) 29 McDonald’s Golden Arches 19 Burger King Grand Metropolitan 13 Ayamas Convenience Stores KFC Holdings (Malaysia) 10 Kenny Rogers Roasts Berjaya Leisure Berhad 4 Haagen-Dazs Grand Metropolitan 4 Others 2 Total 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, Feb, 1996
Hotels
In 1995, hotel food service sales totalled A$274 million. Sales have increased considerably since 1991 due to the rapid development of new hotels and resorts. Hotels have focused on food service to encourage patrons to dine ‘in-house’ and have also been successful in developing the banquet market to cater for weddings and business functions. Table 6.6 shows the major hotels in Malaysia. There are around 1,200 hotels throughout the country and approximately 140 are located in Kuala Lumpur. Approximately 7
76 million tourists visit Malaysia each year, mostly from other ASEAN countries and the needs of Asian visitors have had a significant impact on the hotel sector.
Table 6.6: Major hotel chains and market shares, 1995 Chain Market Share (%) Berjaya Leisure Berhad 23 Resort World Bhd 21 Shangri-La Hotels and Resorts 11 Holiday Inn 10 Marriot Hotels 8 Hotel Malaysia Ltd 2 Others 25 Total 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, Feb, 1996.
Retail catering
Retail catering includes the food courts that are found in shopping malls and department stores. This sector has grown by 122 per cent since 1991 to reach A$181 million in 1995. The growth of this sector can be mainly attributed to the growth in shopping malls and department stores.
Table 6.7: Retail catering and market shares, 1995 Company Market Share (%) Genting BHD 21 CK Tang 16 Champion 12 Yow Chuan Plaza 7 City Square 4 The Mall 4 Others 36 Total 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, February 1996.
Clubs and bars
Food sales through clubs and bars have been small due to the large proportion of consumers who do not drink alcohol for religious reason and to the restrictive government regulations that curb alcohol consumption and the viability of bars and clubs. However, the growth in popularity of Japanese karaoke and sushi bars has lead to considerable growth in this sector. Between 1991 and 1995, club and bar sales grew by 175 per cent to reach A$85 million.
77 6.2.3 Consumer and food service trends
Malaysian consumers are in general very aware of the benefits of healthy foods. The Government has been active in promoting healthy eating to the Malaysian public. There is even a level of concern that the ‘Westernisation’ of the food service business will be detrimental to the health of Malaysians. However, the fact that Western food retailers can provide lower cost foods, albeit of a lower quality than Asian food, is outweighing this argument. The trend towards Western foods is expected to continue strongly in medium to long term.
Key factors influencing the food service market in Malaysia include: the economic growth of the past decade, increasing personal expenditure amongst teenagers, local food production not keeping pace with rising demand, the reduction in import duties, increasing domestic tourism, rapid urbanisation in the past 10 years, and the continued growth in the number of outlets and variety of foods available.
Distributors still tend to be the key to the supply chain in Malaysia. They can act as ‘gatekeepers’ and information supplied to them does not always reach the end users. It is increasingly important to develop relationships with end users to help break down the strength of the distributors. Modern distribution arrangements, such as David’s centralised distribution operation, are starting to make an inroad into this structure, and will be emulated more and more as international operators establish their own facilities in Malaysia.
The Malaysian Government is now privatising government institutions, such as hospitals, which will lead to greater than ever cost consciousness as contracts are let for food and beverage catering. These institutions are large purchasers, but costs are a major factor for Australian food exporters.
6.2.4 Impact of the crisis
The upmarket 5-star restaurants have been the most affected by the slowdown in consumer spending, which started even before the onset of the current crisis. The buildup of hotel and resort capacity had already reached a point where rationalisation had started and the crisis greatly heightened this problem.
Tourism has slowed markedly with the deterioration in the Malaysian and other Asian economies. The numbers of Japanese and other visitors declined in 1998 and the impact of the crisis has slowed local tourism.
Further rationalisation and restructuring of the hotels and resort sector is expected as many companies are carrying high debts and face poor prospects in 1999. Foreign ownership levels may increase as US and European hotel operators are said to be ‘cashed- up’ and looking for affordable opportunities outside of their own ‘fully’ priced markets. The degree that this happens may still depend on the Malaysian Government’s policy on foreign investment.
The growth of Western-style QSR and casual restaurant chains is also slowing with the general economic slowdown, but their ability to offer competitively priced meals is expected to continue to drive growth for these companies. For example, companies such as McDonald’s are aggressively reviewing their costs and are very active in pursuing business (for example, using special meal offers).
The same supply switching patterns are emerging in Malaysia as elsewhere in Asia. Malaysia has a greater capacity than, for example Korea, to produce items such as fresh fruit and vegetables, however it will take time to develop such industries and may not be viable against Australasian and other Asian competition.
78 6.2.5 Competitor responses
The same reactions from Australia’s agrifood competitors that are being observed in other parts of Asia are being seen in Malaysia. Exchange rate changes are seriously affecting costs and exporters are reassessing their business with Malaysia. The US in particular has been affected by this change. However, with the scale of the crisis across the region exporters are becoming more unwilling to abandon business if it can sensibly be maintained. Prices in general are starting to fall and Australia’s competitors can be expected to market more aggressively in 1999.
Where there have been alternatives, exports have been diverted to these markets to defend export profits. Terms of payment have been tightened in general, although at this stage the failure of importers and domestic Malaysian businesses does not appear to be as great as in Korea and Indonesia.
6.2.6 Implications for Australian exports
Basic imports have held up better than expected for a number of commodities in the early part of 1998. For example, fresh produce exports have remained reasonably good over the past six to 12 months. Australian apples, citrus fruit, vegetables and other exports have continued at slightly lower but reasonable levels. This has been helped by the shortfall in supply from key items from the US and the principal southern hemisphere suppliers.
In general, retail sales have fallen ‘by as much as 30 to 40 per cent’. Most imported food items have been affected to differing degrees. Margins have also been squeezed ‘by 25 to 30 per cent’. Foreign currency relativities have varied the impact on trade depending upon the product and supply source involved. For example, the US dollar has strengthened against the Australian dollar, but the Australian dollar has strengthened against the New Zealand dollar. New Zealand’s position, while adversely affected, has strengthened against Australia’s, which will affect a number of Australia’s key dairy, beef, horticulture and other exports.
‘Buy local’ is a developing theme in Malaysia as seen in supermarkets, which are moving local products to the front of their stores and displaying Malaysian food at ‘special’ locations.
As in other markets, there will be an increasing need for exporters to align themselves with strong partners who are likely to survive the crisis. If the situation in Malaysia progresses to the stage that it has in Korea and Indonesia then business failures will increase significantly.
Australian horticultural exports have been helped in the early part of the year by the supply from its main competitors being down. Also, in many cases, products have been diverted to other more lucrative export markets. For example, a short crop of navel oranges allowed exporters to reduce Malaysia’s supply and increase the supply to the buoyant US market. Whether the industry can do this again next year is yet to be seen.
Horticultural exporters have in many cases been overly opportunistic in the way they have abandoned the Malaysian market to supply other markets and they may find it difficult to come back into the market again at a later stage.
Prospects for beef exports in 1999 are not considered to be as good as in 1998. The MLA believes that a number of serious economic factors have yet to have their full impact. For example, the Government is under strong international pressure to further restructure the economy, which is likely to cost jobs.
79 Dairy volumes in the early part of the year were up slightly on last year’s levels. Market prices have fallen and the earlier assessment by the ADC of a steady recovery over the next 12 months may now be questionable.
The Malaysian wine market is not large, although it is reasonably profitable. Australian exporters appear to be in too strong a position at this stage to need to accept lower returns in order to defend their Malaysian business. Therefore exports are forecast to remain steady or to decline in 1998–99, but with little impact on the Australian industry.
While currency relativities have favoured Australian exports over those from the US and Europe, there has also been some impetus given to intra-Asian trade by the economic situation. This has mainly affected packaged grocery foods and fresh-processed produce (for example, canned baby corn), but over the next few years this can only add to the pressure on Australian exporters.
80 6.3 Company profiles
Retail
Dairy Farm International/Wellsave/Cold Storage/Guardian
DFI Supermarkets (M) Bhd is a 50–50 joint venture between Cold Storage (M) Bhd, which operated four supermarkets under the Cold Storage brand name, and Dairy Farm International Holdings Ltd. DFI has 100 per cent management control. Cold Storage entered the partnership in 1994, with the intention of expanding its supermarket operations.
Since the joint venture, three of the four existing outlets – in Petaling Jaya, Penang and Shah Alam – have been renamed ‘Wellsave’, and one new Wellsave outlet opened in Johor Bahru at the beginning of this year. Malaysians favour frequent shopping on a small scale. Understanding this, DFI has taken shopping to the people, opening its first neighbourhood discount store in March 1998 in the populous township of Taman Desa in Kuala Lumpur. This offers a full supermarket service with good stock control in a tighter environment. DFI plans to expand its neighbourhood stores as and when suitable sites present themselves.
The Wellsave supermarket joint venture increased its network from five to seven in 1997 and is actively looking for further expansion opportunities. It has a 30 per cent interest in the Guardian pharmacy chain, which operates 59 outlets in Malaysia.
Jaya Jusco Stores Bhd
Jaya Jusco Stores is a major shopping centre and supermarket operator in Malaysia. Set up in 1984, it is a joint venture between the AEON group and Japanese retail group Jusco. The venture now has six outlets. The company recorded a turnover of RM692 million for the year ended 28 February 1998, which was up from the previous year, and according to its annual report, the company remains optimistic of the future and is confident about the nation’s economy.
The company’s business strategies are formulated well into the next millennium, which it recognises will very much be a period of a ‘consumer-driven market’. With the impact of the current economy slowdown in sight, the directors are still confident of turnover growth, but also acknowledge that profitability growth would depend on operational cost control and the contribution from newer stores for the new financial year.
‘The company will further strengthen its customer loyalty program, through J-Card membership and rewards. To meet the challenge of our customers who have been accustomed to our excellent service, the store operations will be streamlined to enhance and increase productivity, especially customer services.’
Metrojaya Berhad/Metrojaya Department Stores
Metrojaya started in Malaysia in 1976. It is the operator of several Metrojaya department stores, Metrojaya supermarkets, Metrojaya Marts and the Cosmart Hypermarket operations as well as other retailing interests. To strengthen its position as a leading retail chain in Malaysia, the hypermarket concept was expanded to the Bukit Jambul Complex in Penang in June 1997. Group turnover in 1997–98 was RM286 million, up 14 per cent from the previous year.
‘One of the significant challenges we faced was to review the efficiency and effectiveness of our operational support system, both at store level as well as at the central office with the aim to increase productivity and efficiency.’
81 Giant Cash and Carry
The grocery shop that Mr Teng Sck How started, has grown into GIANT TMC Bhd, with four supermarkets and three hypermarkets. Giant Hypermarket in Plentong, Johor Bahru, was scheduled to opened in July 1998. Shoppers can find over 55,000 items for sale in Giant hypermarkets, which incorporate grocery, houseware, kitchenware, fresh produce, canned goods, apparel and more.
Giant has been successful because it understands quality and service, together with its long-standing ‘everyday low prices’. Giant is perhaps the most successful domestic retail group that is able to complete against foreign retailers. There will be another Giant Supermarket opening in September, in Ampang.
Aktif Lifestyles Stores Sdn Bhd ( formerly Yaohan)
Incorporated in Malaysia in 1994 as a private limited company, it converted into a public company in August 1994. The company adopted its present name in October 1994 and undertook a restructuring exercise at that time involving the acquisition of 100 per cent of Yaohan (M) Sdn Bhd (YMSB).
At the end of 1997, the group dropped the Yaohan name and now trades as Aktif Lifestyles Stores as a result of Yaohan Corp reducing its involvement in the operation. The retailer is now targeting a wider Malaysian customer group, rather than the previously-targeted upmarket Japanese consumers.
YMSB is principally involved in the operation of supermarkets and departmental stores, selling a wide variety of goods such as sportswear, sports equipment, children’s electrical, and foodstuffs, and targeting mainly the middle to higher-income groups.
The 1997 turnover was RM302 million.
MAKRO Cash and Carry Distribution
MAKRO Cash and Carry Distribution (M) Sdn Bhd is projecting sales of RMl billion in Malaysia for next year. Its managing director said Makro’s four stores recorded about RM500 million in sales last year and the company expected this year’s figures to hit RM700 million, following the opening of its fifth outlet in Seberang Jaya. He also said Makro wanted to be an active player in the wholesale and distribution industry. ‘We are also planning to list the company on the KL Stock exchange after we complete the stipulated five-year trading period.’ ‘We have more than 30 stores in the region, including in Thailand, Taiwan, Indonesia and the Philippines, and two new outlets will be opened in China soon,’ he said.
Makro Malaysia has over 400,000 registered members and a staff of 1,200.
The Store Corporation Bhd
The Store is a listed chain of 30 supermarkets and department stores around Malaysia. It is probably the leading local supermarket chain. It had a turnover of RM450 million in 1997.
Royal Ahold/TOPS
The TOPS chain is a joint venture involving Royal Ahold and the Kuok Group that now employs over 500 people. In 1997, TOPS sales in Malaysia totalled US$35 million.
82 In the Asia region Royal Ahold operates about 100 TOPS supermarkets with 1997 regional sales of US$500 million. Ahold is also developing TOPS supermarkets in Thailand, China, Singapore and Indonesia.
In May 1998, Royal Ahold’s joint venture operation in Malaysia (40 per cent is held by the Kuok Group) acquired seven supermarkets from Yaohan Corporation. The stores, located in the north of the country, are being converted to the TOPS format. The acquisition makes TOPS one of the leading supermarket operators in the country. The TOPS supermarket has an average size of 12,000 square feet and carries 8,000 items.
The Lion Group/Parkson Corporation Sdn Bhd
Parkson supermarket and department stores are part of the Lion Group and the group is one of Malaysia’s largest and most successful retailing operations. During 1998, the supermarket chain recorded a loss of RM8 million, which was caused by a decline in consumer spending as a result of the economic slowdown. The retail chain is feeling the pressure from the decline in consumer spending in Asia.
The number of retail outlets in Malaysia in 1997 was: Department Stores and Supermarkets 59 outlets Supercentres 3 outlets Distribution Centres l outlet Convenience Stores (Hop-In) 6 outlets Specialty outlets 58 outlets
Group turnover in 1997 was RM16 billion, of which retailing, distribution and trading accounted for RM1.5 billion.
In August 1998, Parkson proposed that it would sell its supermarket business to Royal Ahold/TOPS to create the largest supermarket group in Malaysia. Parkson’s 27 supermarkets would be incorporated into the RA/TOPS Malaysian business on a cash/equity basis to add to the 10 outlets already held by Royal Ahold. Parkson would then focus on developing its remaining department store business.
Antah Holdings Berhad/7-Eleven
Antah Holdings, owned by several members of the Royal Family of North Sembilan, is a diversified group with interests in financial services, food and beverages, manufacturing, oil and gas, marketing and distribution, property services and retailing. The company was established in 1976 and listed on the Kuala Lumpur stock exchange in 1983.
The company has entered into a number of joint ventures including its major retailing agreement with the 7-Eleven corporation.
Antah 7-Eleven is Malaysia’s largest convenience store chain and represents approximately 22 per cent of total CVS food sales. In 1995, sales turnover totalled RM370 million, which was a 47 per cent decrease from the previous year. However, continuing growth saw turnover in 1997 hit RM588 million.
Food service
KFC Holdings (Malaysia) Bhd
The first Kentucky Fried Chicken outlet opened its doors in 1973. By the end of 1997, there were 240 restaurants nationwide, capturing over 58 per cent of the total WQSR market. In August 1998, the 250th restaurant opened.
83 In December 1995, KFCH acquired control of the Pizza Hutt chain of 29 restaurants. By the end of 1997, there were over 60 outlets, capturing over 9 per cent of the WQSR market share. With these two major restaurant chains, KFCH now commands over 67 per cent of the total WQSR market – more than three times that of McDonald’s, which holds an estimated 20 per cent.
KFCH is also Malaysia’s only fully integrated food operator, as it is involved in food processing businesses. These include a feedmill, breeder farms, a hatchery, contract broiler farms, poultry processing plants, a sauce manufacturing plant, a bakery chain and a commissary.
KFC plans to open between 54 to 56 KFC and Pizza Hut restaurants during 1998.
The company also owns the Ayamas Convenience Stores, which are essentially convenience stores, with retailing in half the store and fast food in the other half. Typical foods sold are curries, chickens, pastries, cakes and salads. In 1995, there were 43 stores, and there are currently 48.
KFC’s market share of the fast-food restaurant market in Malaysia has grown to 56 per cent. It has 255 outlets in Malaysia, employing 6,010 staff. KFC plans to open another 25 outlets by the end of 1998.
KFC turnover in year ending December 1996 totalled RM705.35 million.
KFC is currently looking at ways to slice operational costs because of the economic slowdown and is considering reducing the amount of imported products such as animal feed for its locally bred poultry. Its total processing capacity is up to 130,000 birds per month.
Pizza Hut currently holds approximately 80 per cent of the pizza market in Malaysia. KFC obtained Pizza Hutt’s franchise in July 1995 and since then has put up 30 new outlets and plans are underway for another 10 outlets in 1998. At the end of 1997, Pizza Hut had 62 outlets.
McDonald’s
At the end of 1997, McDonald’s had 113 restaurants in Malaysia, employing 3,800 people. In 1996, sales turnover reached RM164 million but in 1997 sales began to take off. At the end of 1997, growth was targeted at 20 per cent per annum. Although 40 more restaurants were planned for 1998, the economic situation means that the plans may be re-considered and the chain may only grow by 15 to 20 restaurants in 1998.
The McChicken, which is not offered at McDonald’s restaurants in most other countries, outsells the beef burgers in Malaysia.
Currently, the beef for the burgers comes mainly from Australia, raw fish from New Zealand and French fries from the US.
Berjaya Land Bhd ( formerly Berjaya Leisure Bhd)
The Berjaya Group is a large publicly listed organisation that has a number of different interests including financial services, industrial production, hotels and reports, property, consumer markets and gambling.
Berjaya has the licence for the Roasters restaurant chain in Malaysia. The organisation also operates other restaurants throughout Malaysia including traditional, European and Japanese restaurants.
84 Berjaya’s hotels and resorts include Tioman Island Resort Bhd, the Redang Island Resort Sdn Bhd, the Ilham Riang Sdn Bhd and the Berjaya Hotel, all of which run restaurants.
Berjaya Land Berhad (‘BLand’) carried out a rationalisation exercise in April 1997, resulting in BVC (the new holding company) owning an additional 12 hotels, apartments, beach resorts and island resorts in Malaysia and overseas. BVC now has more than 2,600 rooms available. BYC also has an affiliation with Resort Condominiums International (‘RCI’) and Best Western International, the world’s largest independent hotel chain.
Shakey International (Shakey Restaurants)
The Shakey’s Pizza International franchise was acquired by Innopac of Japan in 1989 from its ailing US founder. The group has 15 outlets in Malaysia. Innopac’s sister company is KFC Holdings (Malaysia) Bhd. Shakey’s has a modest market share of less than 10 per cent of the WQSR sector.
Tricon Restaurants International (TRI)
Tricon Restaurants International, the franchiser of Kentucky Fried Chicken, Pizza Hut and Taco Bell fast-foods outside the United States, remains upbeat about prospects in Asia, despite the economic downturn in the region, said its president Peter A Bassi.
‘Asia is our strongest region, especially for KFC,’ he said. TRI is part of Tricon Global Restaurants Inc, which is a spin off from Pepsico’s fast-food operations. Last year, the Asian market accounted for 54 per cent of Tricon Global Restaurants’ international business profit and 37 per cent of the group’s sales of US$20 billion. Mr Bassi said TRI would be opening about 800 new restaurants this year.
He said Malaysia has handled the economic crisis quite well. ‘We have very good franchisees who grow the market, like the ones we have in Malaysia. I think chicken products work very well among Asian cultures. We also have some excellent Pizza Hutt premises in this region,’ Bassi said.
The Malaysia operation was regarded by Tricon as one of its best run businesses as it controls about 55 per cent of the country’s fast-food or quick service restaurant industry, which is estimated to be worth about RM900 million annually.
KFC Holdings had given leadership to the KFC brand in Malaysia over the past 25 years and in December 1996, KFC Holdings was also given the Pizza Hutt franchise.
KFC Holdings plans to spend about RM22 million to open up to 25 new KFC restaurants in the next 12 months. Another RM10 million will be spent on opening 12 Pizza Hutt restaurants. There are now 257 KFC and 65 Pizza Hutt restaurants in Malaysia.
Genting Bhd/Resort World Bhd
Genting owns and operates the Resort World organisation, which is largely concerned with running the Genting Highlands Resort, the largest of its kind in Malaysia with over 850 rooms and a number of instore catering facilities.
The Genting group achieved a satisfactory earnings performance during the year, despite of the competitive business environment and economic turmoil in the ASEAN region. Turnover grew by 44 per cent to RM3,038 million. Leisure and hospitality turnover was RM287 million.
During 1997, visitors to Resort World grew by 14 per cent to 10.3 million. The four hotels of the Resort group sold 836,500 rooms in 1997, an increase of 9 per cent. This
85 represents an occupancy rate of 79 per cent for 1997, one of the highest rates in Malaysia.
In view of the downward revision of Malaysia’s economic growth rate to 2 to 3 per cent for 1998, the group expects the crisis to have a significant impact on its business in 1998.
86 6.4 References
Agence France Presse 1998, ‘Malaysian retailers see gloom after double celebrations, January. Agence France Presse 1998, ‘Malaysia’s largest shopping mall opens doors to public’, May. AP Worldstream 1998, ‘KFC suspends plans to sell Ayamas stake’, 8 May. Asia Pulse 1998, ‘Coles Myers eyes Malaysian supermarket investment: report’, 18 February. Asia Pulse 1998, ‘Malaysian retailers back call to promote home goods’, 20 March. Bernama (Malaysian National News Agency) 1998, ‘KFCH confident of maintaining 68 per cent fast food market share’, 10 April. Business Times (Malaysia) 1998, Retail space in Klang Valley expected to increase in 1998, February. Business Times (Malaysia) 1998, ‘Cosmo to open more Burger King outlets’, January. Business Times (Singapore) 1998, Coles Myer eye stake in Parkson: report, February. Business Times 1998, McDonald’s aims to open more outlets, 27 May. Business Wire 1998, ‘Ahold acquires seven supermarkets in Malaysia: TOPS supermarkets continue to grow in Asia’, May. Euromonitor 1996, The Market for Consumer Catering in South East Asia – Indonesia, Malaysia and the Philippines, February. Euromonitor, Malaysian Retailing, October 1997, 1998 Star 1997, ‘Pizza campaign sees sales increasing by 50 per cent’, October. The Times 1997, ‘Western supermarkets chase eastern promise: analysis’, August. USDA, FAS 1998, ‘Malaysia's diverse cultures offer challenges to importers’, Lloyd Fleck, 1998
87 88 Chapter 7 Economic and policy developments in the Korean agrifood sector.
7.1 Introduction
Prior to 1997, Korea was one of the world’s most successful economies. The economy grew at an average annual rate of 9 per cent from 1970 to 1997. In the 1990s, before the current economic crisis occurred in late 1997, the economy was growing at an average annual rate of over 7.5 per cent (see Appendix Table 7.1). This astounding growth performance was characterised by a remarkable degree of macroeconomic stability, the pursuance of an outward-looking development strategy based on the expansion of exports, and considerable investment in human capital.
Yet, Korea’s rapid industrialisation also featured extensive government involvement, especially during the 1970s. Credit rationing and administrative guidance by the government worked well enough in the early stages of development. However, it eventually generated an industrial structure characterised by a high degree of economic concentration, overly-indebted firms, and a distorted financial system. Over time, as the economy became more open and more complex, the cost-benefit ratio of government involvement worsened. In the end, the systemic risks created by these unreformed components of policy prevented the putting into place of the structural and institutional reforms required to adapt to a changing domestic and international environment.
Nevertheless, there has been substantial progress in trade liberalisation in the manufacturing sector. In contrast, Korean agriculture, which had rapidly lost its comparative advantage and its importance in the national economy, has been the most heavily protected sector over the past three decades. Much of this protection was induced by structural changes resulting from the implementation of outward-looking economic policies since the mid-1960s. Farmers have been a significant political pressure group and a large proportion of agricultural protection has originated from non-economic factors, namely the demand of farmers for higher incomes.
It has been frequently claimed that the pattern of Korea’s agricultural imports has been unpredictable because of the many restrictions and government subsidies (Anderson 1987; Anderson and Tyers 1990; Tyers and Anderson 1984, 1988 and 1992). While many analysts have attempted to explain Korea’s agricultural protection in terms of changing economic factors, Anderson and Hayami (1986) put much stress on the role of socio- political factors in determining levels of protection. Whichever the case has been, agricultural protection has contributed to a large extent to the distortion of agricultural prices and trade volumes, and has caused welfare losses both in Korea and in agricultural exporting nations.
Since the late 1980s, there have been frequent trade frictions in the agrifood sector as the major food-exporting countries have turned their attention to the densely populated and rapidly industrialising Northeast Asian countries, such as Japan and Korea, that have greatly restricted their agricultural imports. There had been little progress in liberalising Northeast Asian agrifood markets until 1994 when outstanding trade talks were settled in the final stage of the Uruguay Round of GATT, and this started enormous pressure to open the agricultural markets in the region.
The settlement of the trade talks in the Uruguay Round suggests that Korea will gradually liberalise its agricultural markets. In early 1994, despite extremely heated nationwide debates and pressure on the government from farmers and interest groups, the government announced that Korea would employ new policy instruments to begin agricultural imports. In 1995 the new import policy instruments were launched.
89 This chapter reviews economic developments and policy changes in the Korean agrifood industry with a particular emphasis on policy changes in the agricultural sector. Section 7.2 overviews the changing importance of the agricultural sector in the national economy and the structural changes occurring in agrifood production and consumption. Section 7.3 discusses the socio-economic factors that have contributed to agricultural protectionism throughout the period of rapid industrialisation. The next section discusses changes in policies that concern the main agricultural products and their effects. Section 7.5 reviews empirical studies on the effects of agricultural policies on the Korean economy and examines the implications for liberalisation. Section 7.6 discusses agricultural policy reforms in Korea after the Uruguay Round. The final section offers a summary and some concluding remarks.
7.2 Economic developments in Agriculture
7.2.1 Agriculture in the national economy
The rapid industrialisation of Korea’s economy has led to a decline in the importance of agriculture in terms of GDP and employment. In 1970, agriculture accounted for approximately 23 per cent of GDP and provided jobs for nearly 50 per cent of the labour force. With rapid economic growth and industrialisation, the structure of the Korean economy changed, and by 1997 agriculture contributed only 4.9 per cent of GDP and employed only 11 per cent of the labour force. The contribution of the food processing industry (including beverages and tobacco) to manufacturing output declined from 21 per cent in 1970 to 6.5 per cent in 1997 (Table 7.1).
Table 7.1: The changing importance of agriculture in Korea’s economy Share of Share of labour Share of Share of imports Land used GDP a (%) b (%) exports (%) (%) (million ha) 1970 23.3 (21.1) 49.5 (7.9) 28 32.8 2.30 1985 10.6 (12.2) 23.7 (13.8) 5.3 14.9 2.14 1990 7.4 (9.8) 17.1(17.8) 5.4 15.4 2.11 1995 5.6 (8.2) 11.9(25.9) 5.2 12.6 1.99 1997 4.9(6.5) 11(29.9) 5.2 c 12.3 c 1.92 Notes: a Share of food, beverages and tobacco in manufacturing output in parentheses. b Share of people over 60 in total farm population in parentheses. c 1996 data. Sources: Bank of Korea, Economic Statistics Yearbook, various issues; Ministry of Agriculture Fishery and Forestry (MAFF), Major Agriculture Fishery and Forestry (AFF) Statistics, 1998; UN Comtrade, International Economic Databank, Australian National University.
While the Korean population increased from 32.2 million in 1970 to 46.2 million in 1997, the total farm population declined from 14.4 million to 4.5 million. This led to a continuous fall in the share of the farm population in the total population from 38 per cent in 1975 to less than 10 per cent in 1997. The agricultural sector contributed about 370,000 people a year to the non-agricultural sectors over this time. At the same time, the number of farm households dropped rapidly from 2.4 million in 1975 to 1.4 million in 1997 and the number of family members per farm household declined to less than four since 1988, mainly due to the migration of young people to urban areas. As a result of this migration, the average age of farmers has increased rapidly. In 1975, over 50 per cent of the farm population was under 20 years of age and less than 9 per cent was over 60 years. In 1997, almost 30 per cent of the farm population was over 60 (Table 7.2).8
8 The fall in the rural population has affected wages and charges for agricultural services. The wages and charges paid by farmers rose very rapidly as the farm population decreased. It has become more expensive for farmers to find manual workers and to employ agricultural implements.
90 Table 7.2: Indicators of structural adjustment in Korea, 1975 to 1997 1975 1980 1985 1990 1995 1997 Farm population (% of total) 37.5 28.4 20.9 15.5 10.9 9.7 Number of farm households (million) 2.4 2.2 1.9 1.8 1.5 1.4 Average family number per farm household 5.57 5.02 4.42 3.77 3.23 3.10 Off-farm income (% of farm household 18 35 36 43 44 54.9 income) Cultivated land area per farm household 0.94 1.02 1.11 1.19 1.32 1.34 (ha) Liability over asset per farm household (%) 0.7 2.5 7.1 6 5.8 7.1 Agricultural sector population by age (% of total) 15–19 15 15.6 14.9 11 9.2 8.5 20–49 31.8 34.2 33.2 33.9 35 31.2 50–59 8.4 9.9 13.2 16.7 18.9 17.5 Over 60 8.8 10.5 13.8 17.8 27.4 29.9 Source: MAFF, Major AFF Statistics, 1998.
With rapid industrialisation and urbanisation, the total area of farm land has declined rapidly, but not as rapidly as the number of farms. As a result, an average farm size has grown slightly from 0.9 hectares to just over 1.3 hectares between 1975 and 1997 (Table 7.2). Nevertheless, demand for land for other uses such as residential, industrial, recreational and infrastructure developments drew land out of farming. During the 1970s and 1980s, between 10,000 and 15,000 hectares of farmland were converted to other uses each year. From 1985 to 1997, the total area of cultivated land declined from 2.14 million hectares to 1.92 million hectares.
The structure of agrifood production in Korea has also been changing rapidly. Urbanisation of the population and changing relative prices of both inputs and outputs have been major influencing factors. Wage rates have risen relative to capital costs, and farm production is becoming increasingly capital-intensive. Land has shifted from the production of traditional and relatively less profitable crops to more profitable fruit and greenhouse production.
The importance of agrifood products in Korea’s trade has also been falling over time. In 1970, agriculture-intensive products accounted for 28 per cent of Korea’s exports and 33 per cent of its imports. The corresponding figures in 1996 were 5 per cent and 12 per cent (Table 7.1). This implies that Korea’s comparative advantage in agrifood production has declined over time, leading to a greater dependence on agrifood imports.
In the mid-1990s, changes to land market regulations encouraged some increase in farm size and farm amalgamation, and led to cost reductions due to the realisation of size economies. This trend was adversely affected by the onset of the economic crisis, but will resume as the economy recovers. Overall, Korea’s agrifood production will become more specialised, reflecting the country’s comparative advantages, and further import liberalisation and rapid increases in imports are expected early in the new century. For some products, especially processed foods, competition from imports will increase. Korea is already highly dependent on imports of a number of major foods (Table 7.3).
9 A ceiling of three hectares imposed on farm size by the Land Reform Act of 1949 prohibited tenancy in order to enhance rural people’s chances of becoming farm owners, but inhibited the growth of farm size. Land policy reforms have encouraged the increase in the number of farms of over three hectares in size. Some consolidation of smaller farms is taking place due partly to favourable movements in machinery costs relative to wages as well as to the continuing depopulation in the countryside.
91 Table 7.3: Food production, consumption and self-sufficiency in Korea, 1997 Domestic production Domestic consumption Self-sufficiency (kt ) (kt ) (%) Rice 5,450 5,070 107.5 Barley 195 415 47 Corn 87 8,348 1 Soybean 156 1,855 8.4 Potato 931 939 99.2 Sesame 29 90 32.2 Red pepper 201 190 105.8 Garlic 394 413 95.4 Onion 740 746 99.2 Beef 237 362 65.5 Pork 699 698 100.1 Chicken meat 278 294 94.6 Milk 1,984 2,440 81.3 Source: MAFF, Major AFF Statistics, 1998.
7.2.2 Consumption development
Korea’s food consumption levels and patterns have changed significantly in association with rapid economic growth, industrialisation, modernisation and urbanisation. In per capita terms, the consumption levels of traditional staple foods such as rice have fallen steadily since the early 1970s. However, the consumption levels of vegetables, fruit, meat and dairy products have risen rapidly, particularly since the early 1980s (Table 7.4).
Table 7.4: Food consumption per capita in Korea (kilograms) 1980 1985 1990 1995 1997 Rice 132.4 128.1 119.6 106.5 102.4 Wheat 29.4 32.1 29.8 33.4 34.4 Vegetables 120.3 98.6 132.6 158.5 145 Fruit 22.3 36 41.8 55.4 57.9 Beef 2.6 2.9 4.1 6.7 7.9 Pork 6.3 8.4 11.8 14.8 15.3 Chicken 2.4 3.1 4 5.9 6.1 Milk and cheese 10.8 23.3 42.8 47.8 52.1 Fish 27 37.2 36.2 46 na Note: na Not available. Source: MAFF, Major AFF Statistics, 1998.
The consumption of non-traditional staple foods such as sheep meat and cheese has not grown substantially, although it has steadily increased. Compared with other meat, lamb is consumed very little – less than 1kg per person in 1997. Cheese consumption increased rapidly at an average of 39.5 per cent per annum from 1985 to 1995. However, it only accounted for around 1 per cent of milk consumption as of 1997.
92 Table 7.5: Structure of household food expenditure in Korea, 1975 to 1995 (%) Cereals Meat Milk & Eggs Fish Fruit Dine-Out Engel Coef 1975 47.4 7.7 3.2 7 3.9 2.1 48.8 1980 35.2 10.2 4 8.4 5.5 3.7 42.9 1985 28.1 12.5 5 8.7 6.2 7.5 36.9 1990 19.1 11.9 4.7 9.6 7.1 20.4 32 1995 11.2 11.6 3.9 9.1 7.8 31.8 28.8 Source: National Statistical Office, National Household Expenditure Survey, various issues.
In association with rapid income growth, there have been substantial changes in the structure of household food expenditure during the past three decades. Table 7.5 shows that Korea’s Engel coefficient (which measures shares of food expenditure in total expenditure) declined from about 49 per cent in 1975 to 37 per cent in 1985 and further to 29 per cent in 1995.
Another significant development is the dramatic increase in the proportion of expenditure on dining out in total food expenditure, especially in the 1990s before the current economic crisis. The figure rose from less than 8 per cent in 1985 to above 20 per cent in 1990 and about 32 per cent in 1995. Table 7.5 also indicates substantial changes in the structure of consumption. While expenditure on cereals (primarily rice) dropped sharply from about 48 per cent in 1975 to 11 per cent in 1995, the share of expenditure on meat, fruit and vegetables rose rapidly over the same period. There has been a substantial increase in expenditure on meat in fast-food restaurants and on processed foods (Rae and Bailey 1997).
Figure 7.1: Index of retail food prices in Korea, 1975 to 1995 (1990=100)
160
140
120
100
80
60
40 1975 1980 1985 1990 1995
Cereals Meats Fish Milk & Eggs Dining-Out
Source:National Statistical Office, National Household Expenditure Survey, various issues.
Figure 7.1 shows changing patterns of retail food prices in real terms during the past three decades. Figure 7.1, together with Tables 7.4 and 7.5, implies that the decline in the importance of cereals has been closely associated with the fall in cereal prices. This indicates that cereal consumption has continuously lost its dominance of total food consumption regardless of falling prices. Rae and Bailey (1997) show that the price elasticity of cereal consumption for the period 1981 to 1995 was close to zero. The
93 negative effect on cereal consumption from growing household incomes and Westernisation of lifestyles has been stronger than the consumption-encouraging effect from falling prices.
In the case of fish, both consumption and price levels have continuously risen. This implies that stronger demand for fish together with rising income have surpassed the consumption-discouraging effect from rising prices. A similar pattern can be observed for the demand for dining out. This pattern may also be applied to meat consumption in general, but to a much lesser extent. While demand for various meats has continued to rise, meat prices have fluctuated over the period. The rapid increase in milk consumption, at least up to the mid-1980s, may have been encouraged in part by falling prices, augmenting the positive impact of higher incomes (Rae and Bailey 1997).
These changes in food consumption in Korea are expected to continue towards the twenty-first century. However, they may be interupted to some extent in the short run because the current financial crisis in the domestic economy, which is expected to continue for at least two years and perhaps as long as five years. During this period, changes in food prices may have stronger effects on consumption than they did before. In particular, the growing shares of dining out and beef consumption in total food expenditure are expected to slow. In the longer run, nevertheless, Korea’s food expenditure is expected to move further away from cereals. While the importance of beef and dining out will grow, shares of other types of meat in expenditure may increase less rapidly or even decrease. Expenditure on dairy products will continue to rise. The emerging awareness and availability of various dairy products, especially cheese, should contribute to additional expenditure growth, over and above that expected to occur in fast-food outlets (Rae and Bailey 1997).
The relatively high growth in the consumption of prepared meat and milk products, fruit and vegetables, edible refined oil and non-alcoholic drinks is expected to continue. The products that are expected to be most popular are ice cream, cheese, yoghurt, milk powder, frozen vegetables, fruit, vegetable soup, sausages, ham, other prepared meat products, natural fruit and vegetable juice, soft drinks, and low-alcohol beverages such as wine and beer.
7.3 Socio-economic factors contributing to agricultural protectionism
As indicated in Anderson and Hayami (1986), Korean agricultural policies have largely been influenced by non-economic factors. Various socio-economic and political factors have played crucial roles in setting agricultural policies in Korea, particularly in favour of farmers. To help our understanding of the impact of distributional and intersectoral factors on Korea’s agricultural trade liberalisation, it will be useful to examine the background of such policies.
7.3.1 Income disparity between urban and rural areas
Amongst all the socio-economic and political factors, income disparities within domestic sectors and households have had the largest influence on policymaking. The income disparity between the agricultural and manufacturing sectors, in particular, has been the major concern of the Korean government because the votes of farmers and farming organisations have always played a significant role in the national elections.
Since Korea launched its five-year economic development plans in 1962, the government’s policy has been to impose relatively high taxes on agricultural sectors, but to subsidise urban-based manufacturing industries. These policies boosted the income of urban workers relative to that of farmers. As shown in Table 7.6, the average income of rural households as a percentage of that of urban wage and salary earners was only 74 per cent for the period 1965 to 1969 (Anderson 1987). The income disparity between urban
94 and rural workers was ignored until the first half of 1970s. One of the key objectives of agricultural price policy, from the mid-1970s, was to ensure that the incomes of farm households caught up with those of urban wage and salary earners.
This policy objective was implemented in various ways. Tax incentives and credit rationing were reversed in favour of farmers. Price supports for agricultural products were provided along with production subsidies to increase agricultural output. Mechanisation of farming was encouraged by favourable loans to improve agricultural productivity, and the government activated various rural industrial policies in order to boost farmers’ off-farm incomes. As a result, rural and urban incomes drew closer until 1984, except for the 1979–80 period of low crop yields.
Table 7.6: Income Disparity between Farm Households and Urban Workers (US$) Farm Household (A) Urban Worker (B) (A / B, %) 1965-69 - - 74 1970-74 1182 1407 84 1975–83 4421 4558 97 1984 6885 6892 99.9 1985 6578 6993 94.8 1986 6802 7641 89 1987 7956 9490 83.8 1988 11115 12454 89.3 1989 13878 16431 84.5 1990 15399 18411 83.6 1991 17225 21318 80.8 1992 18398 24285 75.8 1993 20948 26217 79.9 1994 25759 31026 83 Sources: Anderson (1987); National Agricultural Coop. Federation, Agriculture Yearbook, various issues.
Since 1986, however, the ratio of rural workers’ income to that of urban workers has declined to close to 80 per cent. Table 7.6 suggests a direct cause of this decline. While Korean manufacturing industries continued to expand rapidly in the second half of 1980s because of the ‘three-lows’ encouraging the export boom,10 agricultural growth did not keep pace owing to the worsening conditions for the rural labour force. The rapid leakage of the farm population to urban areas during industrialisation resulted in a serious reduction of labour availability in the farming sector. The migration raised urban wages and charges for agricultural services (Table 7.6).
These changes created a serious labour constraint in rural areas and pressure for structural adjustment in the agricultural sector. Farm mechanisation rose considerably, particularly the numbers of farm tractors and rice transplanters. The use of dryers and harvesting machines also rapidly increased. Mechanisation pushed up labour productivity and increased capital intensity. Despite becoming more capital-intensive, the negative effects from the rapid changes in the rural labour force have tended to increase farmers’ debts. Accordingly, the growth of the agricultural sector has been sluggish during the 1980s and early 1990s.11
The resolution of the income disparity problem has always been a major issue in agricultural policy making. Through institutionalised and collective actions as well as political channels, farmers have demanded pricing policies which discriminate in favour
10The three-lows were: (1) low international energy prices, (2) low international interest rates, (3) low value of the won. 11 In addition to the direct causes of the sluggish agricultural growth, land speculation and the share market boom that occurred mostly in urban areas in the second half of 1980s also contributed to the income inequality between the rural and urban households.
95 of the agricultural sector, and politicians have responded to their demands in order to obtain electoral support.
7.3.2 Food security
Food security has long been considered as another major justification for agricultural protection in Korea. The long experience of chronic food shortages and the shadow of the bitter Korean War have never vanished from Koreans’ memories. The continuous military threats from a hostile North Korea and the ideological confrontation on the Korean peninsula between the world’s most powerful countries have psychologically ruled Korean society during the post-Korean War period. For these reasons, the policy of food security through achieving a high rate of self-sufficiency has long had public support. It has been relatively easy for the Korean government to give direct agricultural assistance as well as to persuade domestic consumers to bear the high prices of domestic agricultural products. The argument of ‘food security’ has worked well in weakening the political pressures of groups opposed to protection policies. In the 1990s, however, it is likely that the food security argument will lose its support. The end of the Cold War dramatically affected Korea, resulting in the forming of diplomatic ties with Russia and China. Many Koreans now believe that short-sighted agricultural policies will worsen overall welfare. The newly elected civilian government is working on alternative food strategies, such as the diversification of food imports, to secure the future supply of food to Korea. Therefore, the food self-security argument is less likely to be reflected in future agricultural policies.
7.3.3 Changing socio-economic conditions
Regardless of all the forces contributing to heavy protectionism in the agricultural sector in Korea, there has been growing pressure – both internal and external – on the Korean government for liberalisation. Changes in Korea’s agricultural policies in the early 1990s suggest that Korea will be more active in liberalising agricultural trade. The Korean government realises that a significant budgetary pressure has accumulated from agricultural subsidies. Korean consumers are aware of the heavy burden of relatively high domestic prices of some agricultural products, and of the benefits of import liberalisation. The government and consumers are now seeking more rational behaviour, and this is supported by the rising number of interest groups that oppose protectionist policies.
In addition, food consumption patterns have gradually changed as incomes have grown, with a movement away from traditional foods such as rice, barley, and fish to foods such as wheat, meat, fruit and vegetables. Self-sufficiency ratios in these foods have remained low, while the traditional foods have been fully self-sufficient. For this reason, imports of agricultural products have increased. The Korean market has become a target for major food exporters, such as the Cairns group, which have been keen to open up agricultural trade. The United States has been looking to pass on its food surplus and, irrespective of the trade talks in the Uruguay Round, has begun exporting to previously untouched Asian agricultural markets (for rice and meats, tropical fruits and nuts, vegetables, etc.) that are economically and politically weak. Korea, which has consistently recorded a large trade surplus with the US, became one of the prime targets and Korean agriculture came under international political and trade pressure.
Growing consumer awareness of the gains from trade liberalisation has strongly influenced the direction of agricultural policy in the 1990s. During the 1970s and 1980s, protection was implemented with little resistance from those who bore the primary economic costs, namely Korean consumers and taxpayers, many of whom had relatives who were farmers and therefore had sympathy for their low incomes and poor living conditions. This offset the political pressures from interest groups opposing protection policies.
In the 1990s Korean farmers do not enjoy the same support for several reasons. First, consumers and taxpayers are aware of the importance of agricultural trade liberalisation,
96 and that it is currently the most sensitive issue in world trade. The possibility of retaliation from its major trading partners, and the fears of export industry groups are forcing urban consumers and taxpayers to reconsider the opportunity costs of high agricultural protection. Second, the level of understanding of the social benefits from trade liberalisation is greater because of government education and media publicity. Third, consumers and taxpayers have realised that they are paying high prices for domestic agricultural products relative to those in other countries and consumer interest groups now have a stronger political influence.
Finally, agriculture’s rapidly declining share of GDP gives it less influence on domestic policies. In the early 1950s, agriculture accounted for almost half of GDP and two-thirds of employment (Anderson 1987). The share of agriculture in GDP and employment was still high in 1970, accounting for 30 and 50 per cent respectively. However, once economic development began and policies turned to export promotion, the share of agriculture in GDP shrank sharply. In 1994, agriculture accounted only for 7 per cent of GDP and 13 per cent of employment in real terms. This trend is likely to continue in the future, and thus agriculture will not have a large influence on future policies.
Agricultural policies in the past have largely responded to concerns about income distribution. Changing views about these policies and the process of trade liberalisation will act to redistribute the income between sectors and industries in Korea. Income redistribution will occur not only between the agricultural, manufacturing, and service sectors, but even between different classes of household. Agricultural trade liberalisation will have some substantial distributional and intersectoral impacts that could determine future policies.
7.4 Changing pattern of agricultural policies
7.4.1 Rice
Before the 1950s, the prime objective of the Korean food policy was to stabilise food supplies with low grain prices in an effort to protect grain consumers. At the same time, the government focused on production growth, particularly of rice. As Korea launched the series of Five-Year Economic Development Plans from 1962, however, relatively higher taxes were imposed on agriculture, while export-oriented manufacturing industries were subsidised. This induced unprecedented real growth of manufacturing production and exports, and urban incomes. Between 1963 and 1979, according to Anderson (1987), manufacturing output grew at 20 per cent a year, export volumes at 25 per cent, and real per capita incomes at almost 8 per cent. After 1979 this high growth continued despite the slowdown in the world economy. From 1981 to 1994, manufacturing output grew by 10.8 per cent a year, export volumes by 13.3 per cent, and GDP by 8.5 per cent (Appendix Table 7.1). As a result of this accelerated industrialisation, there was a dramatic change in the economic structure. Manufacturing industries have thrived with government support, while the relative importance of the agricultural sector in national output has rapidly declined in contrast to the high overall economic growth. Today, over 95 per cent of Korea’s exports are manufactures.
A swing in comparative advantage away from agriculture towards manufacturing was not surprising given Korea’s resource scarcity and rapid economic growth. However, this caused a rapid decline in self-sufficiency of a number of foods, as Table 7.7 reports, and serious income disparities as well as a number of major structural changes on both the output and input sides, as mentioned in Section 7.2. Since the Korean War, there has been a great emphasis on food security, and structural change added further impetus for the agricultural protection policies of the 1970s and 1980s, when the key objectives were to maintain an adequate level of food security and to ensure rural/urban income parity. The food security objective was perceived as requiring full self-sufficiency in rice in particular and a high degree of self-sufficiency in other foods.
97 In an effort to achieve this objective, in 1969 the government adopted a ‘dual-pricing system’ for rice and barley, whereby it purchases rice and barley directly from farmers at a higher price than the market would otherwise force, and sells them to consumers at a lower price. This system was designed to provide strong incentives for rice and barley production to producers while protecting consumers at the same time.
Table 7.7: Changes in food self-sufficiency in Korea (per cent) 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–94 Rice 100 95 89 96 88 101 99 Barley 95 100 90 96 100 93 76 Wheat 28 21 9 3 3 0.2 0.03 Corn 22 40 15 6 4 3 2 Soybean 89 94 81 66 29 19 16 Beef 100 100 94 78 74 90 50 Pork 100 100 102 99 100 101 100 Chicken 100 100 100 100 100 100 100 & eggs Milk 100 100 100 98 98 101 94 Sources: MAFF, Major AFF Statistics, various issues; National Livestock Cooperation Federation; Anderson (1987)
Domestic rice production increased rapidly and complete self-sufficiency was achieved for the first time in 1974, when a new high-yield rice was introduced. Since then, Korea has maintained full self-sufficiency of rice (Table 7.7) with the help of various government subsidies and assistance for producers including cheap loans, low fertiliser prices, and support for irrigation improvements.
However, pursuing full self-sufficiency through the dual-pricing system resulted in many inefficiencies in rice production and distribution. The costs of rice production increased substantially and the government had to keep subsidising farmers. As a result, rapidly increasing budget losses from the management and storage of rice became an unsustainable burden on the government.
7.4.2 Beef
While rice production aimed at self-sufficiency, the situation for meat production was different. Until the mid-1970s, meat consumption was relatively small and entirely met by domestic production. However, as demand for beef rose sharply in association with rapid industrialisation, high value-added beef production attracted many farmers.
As domestic beef production could not keep pace with consumption, its self-sufficiency started to decline from the mid-1970s. Beef shortages caused a sharp rise in price, and this pushed the government to employ beef import policy instruments in the late 1970s. Government intervention in beef markets has continued. In 1982, the Ministry of Agriculture and Fishery (MAF) adopted a new policy called ‘Improvement of Diversified Farming’, whereby substantial loans have been provided to livestock farms to purchase calves in an effort to boost self-sufficiency. Accordingly, the size of cattle farms grew, but the policy created excess demand for calves and a very sharp rise in cattle prices for the following 18 months.
In order to stabilise the prices of calves and cattle, the government allowed imports of calves so that domestic production could expand, and increased beef imports. As a result, the prices of calves and cattle fell far below production costs. The domestic cattle market collapsed in the mid-1980s, and the government suspended beef imports in 1985. The major beef-exporting nations responded by pressuring the Korean government to open up
98 the market. This resulted in the resumption of beef imports in the form of volume quotas plus an ad valorem tariff of 22.5 per cent in 1988 (Harris, Corra and Shaw 1989).
7.4.3 Other grains
The self-sufficiency ratios of some agricultural products such as wheat, corn, soybean have constantly fallen over time. But the relative importance of these products in terms of agricultural income have not been as great as that of rice or beef. Some products such as wheat and corn have relied on restricted imports, while domestic prices have gradually increased. Other grains (barley, potato), vegetables (red pepper, garlic, onion) and livestock products (pork, chicken meat, egg, milk) have maintained almost full self- sufficiency (Table 7.7). The government was particularly keen to encourage barley production to maximise the use of land in winter. Consumption was also strongly encouraged as a substitute for rice and hence to reduce rice imports.
7.4.4 Effects of the policy
It could be said that the key food policy objectives were achieved – the maintenance of a reasonable income parity, and food security through high food self-sufficiency – but at what cost? Domestic prices have been raised progressively through import restrictions, the agricultural market mechanism has been significantly distorted and the government budget has been under serious pressure.
Table 7.8: Nominal protection rates of agricultural products in Korea (per cent) 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–94 Rice 1 16 59 125 175 344 370 Barley 17 4 55 97 149 579 512 Wheat 2 28 36 60 143 - - Corn 41 27 63 87 134 272 228 Soybean 12 61 83 129 243 373 520 Beef -15 29 57 211 208 189 - Pork -5 82 111 113 133 - - Chicken 7 132 103 153 168 - - Milk 173 109 185 180 - - Average 7 61 75 129 170 - - Notes: 1. Rice protection rates for the period 1985–92 are mean rates of nominal protection rates against the Thai export price (FOB) and the US export price (FOB). 2. Beef protection rates for the same period are mean rates of nominal protection rates against the international border price (CIF) and the Australian export price (FOB). 3. Protection rates for barley, wheat, and corn are against FOB export prices, while the rate for soybean is against the US import price (CIF). Sources: IFS System, International Economic Data Bank, Australian National University; National Agriculture Cooperation Federation, Monthly Review, Jan 1996; National Livestock Cooperation Federation; Anderson (1987).
Table 7.8 shows the nominal protection rates (calculated from the difference between the domestic and international prices) of various agricultural products in Korea, which illustrate the combined effects of food price and trade policy instruments. The average protection rates clearly show how the agricultural sector has been transformed. Until the mid-1960s domestic food prices were set by the government at lower than or marginally higher than international prices (Anderson 1987). In the 1970s, the nominal protection rates rose, but fluctuated within an average range of 60 to 75 per cent. From the mid- 1970s, domestic food prices increased rapidly relative to international prices. As of the mid-1980s, food prices in Korea were on average about three times higher than international prices, reaching nominal protection rates of more than 170 per cent.
99 As shown in Table 7.8, among the cereals, rice was the most heavily protected, although protection rates for other grains (barley, wheat, corn) also increased substantially. Considering that more than 40 per cent of farm household income was generated from rice production and that rice constitutes over 80 per cent of total grain production and more than 30 per cent of total grain consumption, the effect of protection was far more substantial. In the 1970s, the nominal protection rates for rice fluctuated within a range of less than 60 per cent. When world rice prices sharply rose in the 1973–74 food crisis, domestic prices did not respond, with nominal protection rates maintained eventually at a negative level. International prices dropped in 1976 and stabilised in 1979. Domestic rice prices rose sharply after 1975, despite the achievement of full self-sufficiency, signalling the distortion created by the self-sufficiency policy and the failure of the rice market mechanism. The nominal protection rate reached more than 150 per cent in 1979. Domestic prices then stabilised, though at a higher level, when there was another sharp increase in the international rice price after the worldwide crop failure in 1980–82. This resulted in a temporary fall in the nominal protection rate to less than 100 per cent. International prices have been stable since 1983, but domestic prices rose further since 1985 and this caused a rapid rise in the nominal protection rate, which reached almost 400 per cent in the early 1990s. The fast rise can be attributed to the accumulated inefficiencies in rice production and pricing policies as well as to the considerable distortion of the rice market mechanism.
Table 7.8 suggests that the domestic prices of livestock products have been even more distorted. Nominal protection rates for beef in particular have been negative and beef self-sufficiency was 100 per cent until the mid-1960s. Nominal protection rates then fluctuated only within 60 per cent between 1965 to 1974. Since the mid-1970s, when Korea started importing beef, the gap between domestic and international prices began to enlarge rapidly. By the mid-1980s, beef prices in Korea were on average more than three times greater than international beef prices, reaching a nominal protection rate of 230 per cent against the international c.i.f border price in 1984.12 The rates for pork and chicken, in contrast, have increased only slightly since the 1970s, showing that Korea’s intensive livestock sector is becoming more efficient as it adopts imported management techniques (Anderson 1987).13
The remainder of agricultural products, other than those listed in Table 7.8, are mostly fruit and vegetables, which account for about 30 per cent of agricultural production. Anderson (1983) showed that fruit and vegetable prices have increased at a considerably faster rate than those in other countries, and that the protection rates for these commodity groups have grown at least as rapidly as those for grain and livestock products.
12 The norminal protection rates of beef fell sharply in 1986–87 to less than 100 per cent against the international price as a result of the 1985 cattle price collapse in Korea. As the domestic cattle price recovered, the rate exploded and reached a record high of 297 per cent against the c.i.f. border price in 1992 (and 478 per cent against the Australian export price). 13 Today, livestock products generate more than 17 per cent of farm household income.
100 7.5 Effects of protection: some empirical evidence
A decline in agricultural comparative advantage in resource-scarce Korea has imposed resource adjustment costs and hence has increased demands for agricultural protection throughout the 1970s, 1980s, and the early 1990s. Agriculture’s importance has continuously diminished, and the proportion of income spent on agricultural products per non-farm household has declined.
There have been some attempts to measure and quantify the price and welfare effects of Korean agricultural protection policies (Tyers and Anderson 1984; Anderson 1987; Anderson and Tyers 1990). Tyers and Anderson (1984) observed that the redirection of agricultural trade with Korea had been very slow due to high protection. Their main argument was that agricultural policies had resulted in a substantial distortion of food prices, particularly for rice and ruminant meat. A contrasting scenario was simulated using a multi-commodity model to examine how price and welfare effects would differ if protection rates were lowered. It predicted that domestic meat prices would fall and, more importantly, that there would be a substantial net increase in economic welfare arising from large increases in consumer welfare and government revenue, which would more than cover losses in producer welfare. According to this scenario, the benefit to Korea and food-exporting countries would be large, as agricultural protection had caused significant adverse effects.
Anderson and Tyers (1990) argued that even if Korea remained a net importer of food, it could gain from global trade liberalisation in agriculture because it would induce investment in new technology. They also found that risk-averse actors in relatively open economies would be better off following liberalisation because international food prices would fluctuate less. Their studies have stressed the importance of agricultural trade liberalisation in aiding the highly protected Korean economy.
Various protection effects were discussed in Anderson (1987). Two realistic policy scenarios were compared to see the likely effects first from growing protection, then from gradual trade liberalisation in Korean agriculture. Examining food production and consumption, they found that meat and milk production would be substantially lowered if this sector was liberalised, while grain production would be only slightly less than that without liberalisation because of its low supply responsiveness to price changes. Without protection, the consumption of livestock products and sugar would be far greater. Rice consumption would increase a little due to the price effect, but the consumption of other grains like wheat and beans would be much higher owing to the positive substitution effect under the liberalisation. The overall results of lifting agricultural trade barriers is that a large volume of grains would be imported, particularly wheat and coarse grains. Rice self- sufficiency would fall to below 100 per cent, and self-sufficiency in other grains and livestock products would be substantially lowered (Anderson 1987).
Anderson (1987) also discussed the welfare effects of policies in terms of transfers and net costs associated with agricultural protection, and suggested that Korea’s food policies involved large transfers from domestic consumers and taxpayers to producers. Producers, however, received little more than 50 per cent of the transfer, with the remainder mostly received by the government through tax revenues and by intermediaries. The results also suggested that income and wealth distribution within groups is far from equitable because the poor are the most affected by high food prices. Within agriculture, the largest producers receive the most benefit from high producer prices because they produce the highest volume of marketed output. Moreover, the benefits to producers tend to get incorporated into land and other capital values, which then boost wealth in proportion to the size of agricultural capital. Similar evidence in the livestock sector shows that the benefits of livestock protection tend to go to the producers with specialised large-scale farms rather than as supplementary income sources to rice farmers.
101 In terms of domestic price stability, Anderson (1987) concluded that Korea’s food policy in the 1970s had substantially contributed to the stability of domestic grain and beef prices, with the coefficients of variation being less than half that of border prices. He found that domestic grain prices were more stable in the 1970s than in the 1960s, while the opposite was true of border prices, and that the instability of domestic meat and milk prices was greater in the 1970s than in the 1960s, whereas international meat prices were much more unstable. The policy had done little to stabilise pork and milk prices and appeared to have destabilised chicken prices.
For some reason, it has always been difficult to trace out the path of agricultural productivity in Korea. However, Anderson (1987) showed that agricultural productivity started to grow faster in the late 1960s as domestic prices began to rise above international prices, and continued to grow during the period of high and rising agricultural protection in the 1970s. The growth of farm labour productivity was even more rapid than total factor productivity as workers were attracted to off-farm work and farmers adopted more capital-intensive technology. The shift from labour-intensive to capital-intensive farming came in response to rapid changes in the ratio of farm wages to farm implement prices.
Empirical studies have mostly been based on Anderson (1987), and have been partial equilibrium analyses. Partial equilibrium models are limited in their ability to analyse the likely distributional and intersectoral impacts of agricultural policies as well as the effects on factor and product markets. A general equilibrium approach is more suitable. Anderson and Warr (1986) attempted to use a simple general equilibrium analysis to examine the likely intersectoral and distributional consequences of food price and trade policies in Korea. The model contained three sectors (food, tradeable manufactures and services, and non-tradeable products) and three factors (land, unskilled labour, and skilled labour). The results indicated that agricultural protection raises the demand for unskilled labour and land proportionately more than it raises the negative effect of higher food prices on the spending power of unskilled labour, and thus it benefits both unskilled labour and landowners at the expense of skilled labour. Furthermore, it discourages manufacturing and service production, and exports, while encouraging agricultural production and self- sufficiency in Korea. It is also likely to reduce wage differentials between skilled and unskilled work, and this in turn encourages more skill-intensive activities within these sectors relative to a free trade situation. Reduced wage differentials exacerbate income inequality in rural areas, as landowners benefit in direct proportion to their land holdings and hence their wealth, while, on the other hand, the differential helps bring about a more equal income distribution in urban Korea. Anderson and Warr (1986) then concluded that although a reduction in wage differentials for different skills might seem a desirable by- product of agricultural protection from a comparative static equity perspective, it might be undesirable from an economic growth perspective, because it weakens the incentive to invest in human capital and lowers national income in a comparative static sense, and thus potentially lowers the rate of economic growth.
This literature survey enables us to make various findings and implications for policymaking, however it should be kept in mind that this literature is mostly based on a partial equilibrium analysis, except for the simple general equilibrium model used by Anderson and Warr (1986). The results might be different if a full general equilibrium model was employed. It is difficult to make broad generalisations of complicated agricultural trade policies. But, as seen in the simple Anderson and Warr (1986) model, a general equilibrium analysis can be a much more powerful tool to evaluate economic policies. It is therefore worthwhile to use this technique to evaluate new policy reforms. It is likely that the allocation of domestic resources across the sectors and industries associated with the new era of agricultural trade liberalisation in Korea will be much more complicated. In the next section, we briefly examine the outcome of the Uruguay Round, and then look at Korea’s plans for agricultural policy reform to see if they conform to the Uruguay Round agreements.
102 7.6 The Uruguay Round and the agricultural policy reforms in Korea
7.6.1 The Uruguay Round of GATT
Since World War II, world trade has been based on the principles encompassed in the GATT agreement, which advocates impartial and free trade. The multilateral trade negotiations through GATT have substantially contributed to the growth of the world economy. The Kennedy Round in the 1960s made a significant contribution to tariff reductions, and the Tokyo Round that followed in the 1970s eased and/or abolished many non-tariff barriers in addition to making further tariff reductions.
However, the regional protectionism that appeared in the 1980s started to distort trade. The growth of the Japanese and NIE economies created trade frictions, particularly with the US, which started to experience large trade deficits. The Uruguay Round in 1986 aimed to address the growing regional protectionism. Agricultural trade liberalisation was the most important issue in Uruguay Round talks. The food crisis in the 1970s, which occurred with the worldwide crop failure in 1973–74 and rapid increases in imports from the USSR, Eastern European and other developing countries, raised agricultural protectionism and led many countries to use agricultural investment policies to increase domestic food production. This led to an agricultural trade crisis in the early 1980s after over-production and export subsidies aimed at increasing food exports led to food stockpiles and dumped exports. This greatly distorted world agricultural trade and increased the budget deficits of the food-exporting countries.
The distortion of agricultural trade and the over-production were perceived not as short term phenomena but as a long-term structural problem. To resolve the problem, it was advocated that markets needed to open considerably, agricultural subsidies should be reduced and export subsidies be restrained. Many countries found it difficult to adopt such suggestions because of the social and political sensitivities that surround agricultural production. The United States called for a multilateral trade negotiation through the Uruguay Round to review policies and establish a fair and market-oriented agricultural trade order that is based upon the principle of comparative advantage. The main contents of the agreements relating to agricultural trade finalised in the Uruguay Round are summarised in Table 7.9.
103 Table 7.9: The UR agreements on Korea’s agricultural trade liberalisation A. Agreements on domestic subsidies for agriculture (a) Reductions of domestic subsidies, on the basis of total amount of measurement of subsidies (AMS): (a.1) by 20% over six years, based on 1986–88 period, in the case of developed countries, (a.2) by 13.3% over 10 years in the case of developing countries. (b) Subsidies for rural developments and production investments are allowable in the case of developing countries. (c) Exemption from the reductions if the total AMS is less than: (c.1) 5% of the corresponding agricultural output in the case of developed countries, (c.2) 10% in the case of developing countries. (d) Direct subsidies under production control plan must be based upon: (d.1) fixed land areas and units, (d.2) the payment, which is less than 85% of the standard production level, (d.3) fixed number of heads in the case of livestock.
B. Market access agreements on agricultural trade (a) Conversion of all non-tariff barriers into tariff-only system. (b) Tariff-binding on all items which are subject to the negotiation: (b.1) Conversion of price differences in the base year between the domestic and international (i.e. Tariff-Equivalent rates or TE) into tariff-binding for import- restricted items. (b.2) Prohibition of raising tariff or TE rates without the consent of trading partners. (c) Lowering the tariff and/or TE rates (based on 1986–88 period) by: (c.1) 36% on average over the following six years, and the minimum of 15% cut for each item in the case of developed countries, (c.2) 24% on average over 10 years, and the minimum of 10% cut for each item in the case of developing countries. (d) Securing the import volumes for Minimum Market Access and Current Market Access: (d.1) MMA: securing the minimum of 3% of domestic consumption and gradually increasing up to 5% during the implementing period for those items of which the import volume is less than 3% of the domestic consumption in the base year. (d.2) CMA: approval of market access to the current level of import volume for those items of which the import volume is more than 3% of the domestic consumption in the base year. (e) Operation of Special Safeguard which can impose an additional tariff up to a third of the level of ongoing tariff rates in the case of a fall in world market prices below the trigger price, or in the case of rapid increase in import volume of the agreed item.
C. Agreements on export subsidies (a) Reduction of export subsidy, based on 1986–88 or 1991–92 period: (a.1) by 36% in terms of budget expense and by 21% in terms of export volume over six years in the case of developed countries, (a.2) to two-thirds the level of that of developed countries over 10 years in the case of developing countries. (b) Agricultural products that are subject to the reduction of export subsidy are 22 items including wheat, feed grains, rice, oil seeds, beef, grape wine, fruit and vegetables. (c) Prohibition of indirect export subsidies, but allowing a flexibility in the reduction process of export subsidies. (d) Restrictions on export credit, guarantees on export credit, and export insurance will be determined later by a special arrangement. Source: Lee et al. (1994).
104 7.6.2 New agricultural policy reforms in Korea
With the completion of the Uruguay Round trade talks in December 1993, the Korean government announced that Korea would open its agricultural markets to imports, particularly to 15 major items that were highly protected in the past. Korea has adopted three different forms in opening up its agricultural market: (1) the application of minimum market access (MMA) together with the tariff-only system; (2) the maintenance of a quota system with a raised tariff rate for an agreed period before markets are completely liberalised; and (3) the application of the ceiling-binding system. The markets for rice, barley, and potatoes take the first form, whereas those for beef, pork and chicken meats, and oranges take the second form. The third relates to vegetables and many other agricultural products. The market liberalisation processes for these agricultural products are summarised in Table 7.10. A special focus has been placed nationwide on the policy reforms for rice and beef imports because of their importance in generating farm income.
Rice
A 10-year period, from 1995 to 2004, has been allowed before Korea has to adopt a tariff-only system for rice imports and during that period a Minimum Market Access system applies with the current ad valorem tariff rate of 5 per cent. The minimum market access system starts with imports of 1 per cent of total domestic rice consumption (based on the average of consumption from the 1986 to 1988 period), with import volumes increasing by 0.25 of a percentage point each year from 1995 to 1999. From 2 per cent in 2000, imports will increase by 0.5 of a percentage point each year, reaching 4 per cent of total domestic rice consumption by 2004. Korea is supposed to then apply a tariff-only system without any other quantitative restrictions from 2005. Tariff rates will be renegotiated with the major rice exporters in accordance with competitiveness and the domestic production base or conditions at the end of 2004. However, if Korea adopts a tariff-only system thereafter, it will impose a tariff- equivalent rate of 90 per cent, which will be calculated by the difference between international and domestic prices (both based on 1986 to 1988 prices), and will reduce its rate by 1 percentage point each year, reaching a level of 80 per cent by 2014. The Korean government has said that there will be no special obligations towards import lines, and thus the lines will be diversified.
Beef
The government has indicated that beef imports will be liberalised faster than rice imports. It has said that the current import quotas plus an ad valorem tariff rate will remain until 2000, and beef imports will be completely liberalised from 2001. However, the government announced that every year from 1995 to 2000 Korea will increase its quota by 20,000 tonnes, starting from 123,000 tonnes in 1995. The import volume in 2000 will therefore be at least 225,000 tonnes. The increase in import quotas will be accompanied by an increase in the current ad valorem tariff rate of 20 per cent to 43.6 per cent in 1995. The ad valorem tariff will then be lowered by 0.4 of a percentage point each year up to 2001, and beef imports are not subject to renegotiation afterwards.
Other agricultural products
Most other agricultural imports will be liberalised by July 1997 through the application of the tariff system. Tariff-equivalent rates calculated from the differences between the international and domestic prices will be applied to pork and frozen chicken meats, dairy products, and fresh oranges. Imports of some dairy products like cheese and milk powder will be liberalised from January 1995, together with barley, corn, soybeans, potatoes and sweet potatoes. In the cases of red pepper, garlic, onion and sesame, ceiling-binding tariff rates will be applied. More detailed plans for other agricultural and livestock products are reported in Table 7.10.
105 Table 7.10: Market liberalisation plan for agricultural products in Korea (a) Rice (i) A 10-year grace period (1995-2004) before liberalisation with a tariff-only system. (ii) Application of MMA: 1% of total domestic consumption in 1995 _ 2% in 1999 _ 4% in 2004. (b) Barley, Sweet Potato, and White Potato (i) Reduction of tariff-equivalent rate by 10% over 10 years. (ii) Application of Minimum Market Access: 3% in 1995 _ 5% in 2004. (b) Barley, Sweet Potato, and White Potato (i) Reduction of tariff-equivalent rate by 10% over 10 years. (ii) Application of Minimum Market Access: 3% in 1995 _ 5% in 2004. (c) Soybean, and Corn (i) Reduction of tariff-equivalent rate by 10% over 10 years. (ii) Allowance of the average level of 1988–90 for Current Market Access (CMA). (d) Beef (i) Import restriction until 2000, but complete liberalisation from 2001. (ii) Import Quotas: 106,000 tonnes in 1994 _ 123,000 tonnes in 1995 _ 225,000 tonnes in 2000. (iii) Tariff rates: 20% in 1994 _ 43.6% in 1995 _ 41.2% in 2001. (iv) Mark-up: 100% in 1993 _ 70% in 1995 _ 0% in 2000. (v) Proportion of SBS: 15% in 1993 _ 30% in 1995 _ 70% in 2000. (vi) Import liberalisation of dried slices of beef and edible beef tongue with tariff rates of 30% and 20% respectively. (e)Pork (i) Import liberalisation from July 1997. (ii) Import Quotas: 21,930 tonnes in 1995 (equivalent to 17,544 tonnes of boneless pork) _ 29,240 tonnes in 1996 _ 18,275 tonnes in June 1997. (iii) Tariff rates: 25% in 1994 _ 37% in 1995 _ 33.4% in 1997 _ 25% in 2004. (f) Chicken meats (i) Import liberalisation from July 1997. (ii) Import Quotas: 7,700 tonnes in 1995 _ 10,400 tonnes in 1996 _ 6,500 tonnes in June 1997. (iii) Tariff rates: 20% in 1994 _ 35% in 1995 _ 30.5% in 1997 _ 20% in 2004. (g) Dairy products (i) Cheese, and Powder milk: Import liberalisation from 1995 with 40% tariff rate. (ii) Whey powder: Import liberalisation with 99% ceiling-binding rate of the current 20% tariff rate, but will be halved by 2004. Market access volume: starting from 23,000 tonnes in 1995, 10 percentage point increase each year until 2004, plus an application of 20% current tariff rate. (iii) Butter: Import liberalisation from July 1996. An application of 99% ceiling-binding rate in 1995, but reduce to 89% in 2004. (iv) Others (Whole milk and fat-free milk powder): Import liberalisation from 1995. An application of 220% ceiling-binding rate in 1995, but reduce to 176% in 2004. (h) Fresh Oranges (i) Import liberalisation from July 1997. (ii) Import Quotas: 15,000 tonnes in 1995 _ 25,000 tonnes in 1997, then 12.5 percentage point increase each year afterwards. (iii) Tariff rates: 50% in 1994 _ 99% in 1995 _ 49.5% in 2004. (i) Orange juice (i) Import liberalisation from July 1997. (ii) Import Quotas : 60,000 tonnes in 1995 _ 40,000 tonnes in June 1997. (j) Red pepper, Garlic, Onion, and Sesame (i) Application of ceiling-binding rates (k) Other Agricultural Products (i) Application of tariff-equivalent rates for 94-subject items including other grains, ginseng, wheat flour products, tobacco, seeds, and peanut. (ii) Other BOP items: Import liberalisation of fresh apple and grape juice with 50% tariff rate, but 10% for fruit juice from 1995. Import liberalisation of fresh grape and apple juice with 50% tariff rate from 1996. Application of ceiling-binding rates for honey, green tea, ginger, and cocoon and raw silk, etc. Source: Lee et al. (1994).
106 7.6.3 Subsidy issues
Another binding agreement of the Uruguay Round is a cut in domestic agricultural subsidies. Table 7.11 shows that the total amount of domestic subsidies that are subject to reduction is 1,718.6 billion won, based on 1989 to 1991 prices. This will be lowered to 1,490 billion won by 2004, a 13.3 per cent reduction over 10 years. Of the 13.3 per cent reduction, 90 per cent is on the reduction of rice subsidies and the rest is to reduce the subsidies for barley, soybean, corn, and rape seed. Applying the de-minimus rule, however, the subsidies for grapes, silk, and milk, along with those for farming and livestock farming facilities, and fertiliser will be excluded from the reduction.14 The Korean government has no obligation to reduce export subsidies since Korea does not have any (major) export subsidies for agricultural products.
Table 7.11: Domestic subsidies for agricultural products in Korea, 1989 to 1991 Amount of subsidy (billion Subsidy in total production won) value (%) Rice 1568.4 24.8 Barley 52.3 17.4 Soybean 72.9 34.1 Corn 22.6 79.9 Rape seed 2.4 53.3 Total AMS 1718.6 Source: Lee et al. (1994).
7.7 Conclusion
Prior to the finalisation of the Uruguay Round negotiations in December 1994, the Korean agricultural sector was seen as highly protected. Despite its success, Korea’s export-driven economic development had resulted in seriously unbalanced growth, with the agricultural sector doing relatively poorly. The swing of comparative advantage away from the agricultural sector caused very sluggish agricultural growth and encouraged various socio-economic and political arguments for protection. The growing income disparity between rural and urban areas was always the hottest policy issue throughout the development period. Now the Korean public realises that high agricultural protection makes agricultural production more inefficient and causes further income disparity problems and substantial welfare losses in addition to serious international trade frictions.
The changing attitudes towards agricultural trade liberalisation resulting from the Uruguay Round now suggest that Korea’s agricultural protection will be substantially lowered or eliminated, depending upon the commodity, by the end of the 1990s. The Uruguay Round trade negotiations reached agreement on the reduction or removal of tariff and non-tariff barriers, and of domestic subsidies for agricultural products as well as export subsidies. Korea is not exempted from implementing these agreements.
14The de-minimus rule applies when the monetary amount of a subsidy to a commodity is less than 10 per cent of its total production value, or when the amount of subsidy to farming facilities (including livestock farming) is less than 10 per cent of the total value of agricultural output.
107 7.8 References
Anderson, K. 1983, Growth of Agricultural Protection in East Asia, Butterworth, Sydney. Anderson, K. 1987, ‘Food Price Policy in Korea: 1955–1985’, Pacific Economic Papers, 149, The Australian National University. Anderson, K. and Warr, P.G. 1986, ‘General Equilibrium Effects of Agricultural Price Distortions: A Simple Model for Korea’, Working Paper 85-5, The University of Adelaide, Australia. Anderson, K. and Hayami, Y. 1986, The Political Economy of Agricultural Protection, Allen and Unwin, Sydney. Anderson, K. and Tyers, R. 1990, ‘How Developing Countries Could Gain from Agricultural Trade Liberalisation in the Uruguay Round’, in I. Goldin and O. Knudsen (eds.) Agricultural Trade Liberalisation: Implications for Developing Countries, OECD, Paris, Chaper 2. Choi, S.K. 1991, ‘The Effects of Trade Liberalisation of Dynamic Economy’, The Korea Rural Economics Review, 14(2), Korea Rural Economic Institute, Seoul, Korea. Chung, K.W. 1993, ‘Migration Impacts on the Change of Family Farm Structure in Korea’, Journal of Rural Development, 16(1), Korea Rural Economic Institute, Korea. Harris, D., Corra, G. and Shaw, I. 1989, ‘Policy Changes Affecting Pacific Beef Trade: A Preliminary Analysis’, paper presented to Pacific Economic Cooperation Conference, May, Seoul, Korea. Kim, M.H. 1993, ‘Structure of the Rice Market and Proposals for Rice Policy Changes in Korea’, Journal of Rural Development, 16(1), Korea Rural Economic Institute, Seoul, Korea. Kim, Y. 1994, ‘Import Liberalisation and Its Forecast Effects on Future Demand, Supply, and Welfare: The Case of Korean Beef Market, and its Implications for Australia’, Unpublished Master’s dissertation, The University of New South Wales, Australia. Lee, D.P. 1995a, ‘Structural Adjustment of Rural Areas through the Development of Second and Third Industrial Sectors’, The Korea Rural Economic Review, 18(3), Korea Rural Economic Institute, Korea (in Korean). Lee, D.P. 1995b, ‘A Study on the New Developmental Strategies for Promotion of Rural Economy’, Journal of Korean Society of Rural Planning, 1(1), pp. 111–124 (in Korean). Lee, J.O. 1993, ‘Trends and Problems of Import Liberalisation of Agricultural Markets in Korea’, Journal of Rural Development, 16(1), Korea Rural Economic Institute, Seoul, Korea. Lee, J.O. et al. 1994, ‘Uruguay Round: Agricultural Trade Negotiation’, D94/1994.11, Korea Rural Economic Institute, Korea. Lee, Y.W. 1991, ‘Wealth, Capital Gain and Income Disparity in Korea – Prospect of Korean Economy: Evaluation and Prospect’, Seoul National University Symposium paper, September 27, 1991, Seoul, Korea. Park, S.W. 1996, ‘Asian Agricultural Policy toward the 21st Century: A Korean Perspective’, presented to the 2nd Conference of ASAE, 6–9 August, Indonesia. Rae, A.N. and Bailey, W.C. 1997, Farm and Food Industry Reforms in the Republic of Korea, Massey University, Palmerston North, New Zealand. Tyers, R. and Anderson, K. 1984, ‘Price, Trade and Welfare Effects of Agricultural Protection: The Case of East Asia’, Pacific Economic Papers, 109, The Australian National University, Australia. Tyers, R. and Anderson, K. 1988, ‘Developing Country Interests in Agricultural Trade Reform’, Working Paper 88-2, University of Adelaide, Australia. Tyers, R. and Anderson, K. 1992, Disarray in World Food Markets: Quantitative Assessment, Cambridge University Press, New York.
108 Appendix Table 7.1: Korean Economic Indicators, 1980 to 1997 GDP a GDP growth GNP per Agriculture Agriculture Industry Inflation CAB b Population (Mil $US) rate (%) capita ($US) (% of GDP) growth (%) growth (%) rate (%) density 1980 63,661 –2.7 1614 14.5 –19.9 24.7 28.8 –5,273 386.1 (0.62) 1981 70,819 6.5 1755 15.2 14.3 6.7 21.3 –4,574 392.2 (0.67) 1982 75,620 5.6 1844 14.3 7.4 –4.7 7.1 –2,513 398.3 (0.73) 1983 83,546 11.8 2025 13.3 7.7 17.7 3.5 –1,504 404.2 (0.79) 1984 90,133 8.8 2152 12.9 –1.5 15.1 2.2 –1,249 409.3 (0.81) 1985 94,322 7.2 2234 12.5 3.8 20.5 2.5 –758 413.3 (0.81) 1986 108,611 11.7 2559 11.2 4.7 15 2.3 4,747 417.1 (0.80) 1987 136,317 11.8 3209 10.1 –6.1 17.1 3.4 10,092 421.1 (0.84) 1988 182,009 11.3 4279 10.2 8.9 12.2 7.1 14,538 425.1 (1.00) 1989 222,152 6.4 5199 9.6 –1 6.8 5.7 5,387 429.3 (1.17) 1990 253,671 9.7 5875 8.7 –4.6 13.7 8.6 –1,745 434.2 (1.20) 1991 294,175 9.2 6752 7.7 0.4 10.4 9 –8,291 438.2 (1.23) 1992 307,938 5 7003 7.4 6 3.4 6.4 –3,939 442.2 (1.21) 1993 332,821 5.8 7508 7 –2.9 6.2 5.2 1,016 446.2 (1.30) 1994 380,820 8.4 8505 7 1.2 8.8 5.7 –3,855 450.2 (1.50) 1995 455,476 9 10068 6.5 2.8 10.2 4.7 –8,251 454.3 (1.63) 1996 480,400 7.1 10548 6.3 3.5 7.3 4.5 –23,000 n.a. (n.a.) 1997e 431,900 5.5 9511 2.9 2.5 2.9 4.7 –13,800 n.a. (n.a.) Source: NAPES Database (http://naped.anu.edu.au/), IEDB, ANU. Notes: a. Percentage of the world total GDP in parentheses. b. ‘CAB’ stands for current account balance (million US$). ‘n.a.’ = ‘not available’.
109 Appendix Table 7.2: Korean Food Manufacturing Statistics 1) Gross fixed capital formation (million $US) 1975 1980 1985 1990 1995 Food Manufacturing 88.2 301.9 411.8 1319.7 1871.5 Meat products . . . . 173.1 Dairy products . . . . 147.4 Canned fruit and vegetables . . . . 103.6 Canned fish . . . . 133.3 Vegetable oil and fat . . . . 37.8 Grain products . . . . 178 Bakery products . . . . 353.3 Sugar . . . . 12.8 Chocolate and cocoa . . . . 192 products Beverages 29.1 96.3 107.2 429.5 989.8 Blending spirits . . . . 184.4 Wine . . . . 32 Malt liquors . . . . 411.5 Softdrink . . . . 361.8 2) Gross output (million $US) 1975 1980 1985 1990 1995 Food Manufacturing 1662 5161.1 7361.9 17080.6 26451.9 Meat products . . 321.9 1301.1 2791.5 Dairy products . . 953 2145.9 3529.3 Canned fruit and vegetables . . 151.6 483.5 1133 Canned fish . . 698.5 2006.8 3276 Vegetable oil and fat . . 582.5 912.2 710.4 Grain products . . 573.1 1144.6 2010.6 Bakery products . . 959.2 2144.1 3108.4 Sugar . . 213 696.1 443.9 Chocolate and cocoa . 479.8 1263 1177.5 products Beverages 643.4 1318.7 1572.4 3888.3 5788.5 Blending spirits . . 630.6 1105.9 1302.1 Wine . . 170.8 288.8 305.2 Malt liquors . . 276.1 653.8 1396.4 Softdrink . . 494.9 1839.9 2784.9
110 3) Number of employees (thousand persons) 1975 1980 1985 1990 1995 Food Manufacturing 103.7 138.9 153.9 177.7 177.8 Meat products . . 8.2 14.7 20 Dairy products . . 9.4 10.2 13 Canned fruit and vegetables . . 7.5 8.6 11.7 Canned fish . . 43.5 51 48.8 Vegetable oil and fat . . 4.7 4.8 2.1 Grain products . . 10.3 9.7 9.3 Bakery products . . 27 31.3 32.1 Sugar . . 0.9 1.3 0.4 Chocolate and cocoa . 14 13.7 6.8 products Beverages 25.7 29.3 26.1 24 17.4 Blending spirits . . 6 4.8 3.8 Wine . . 7.6 5 2.8 Malt liquors . . 2.2 2.2 2.5 Softdrink . . 10.4 11.9 8.3 4) Number of establishments (thousand units) 1975 1980 1985 1990 1995 Food Manufacturing . . 3.65 4.06 5.50 Meat products . . 0.16 0.26 0.45 Dairy products . . 0.06 0.06 0.12 Canned fruit and vegetables . . 0.16 0.22 0.41 Canned fish . . 1.24 1.43 1.90 Vegetable oil and fat . . 0.07 0.07 0.07 Grain products . . 0.57 0.52 0.76 Bakery products . . 0.43 0.42 0.61 Sugar . . 0 0.01 0.01 Chocolate and cocoa . 0.14 0.13 0.09 products Beverages . . 0.99 0.59 0.39 Blending spirits . . 0.03 0.03 0.03 Wine . . 0.91 0.49 0.25 Malt liquors . . 0 0.01 0.01 Softdrink . . 0.04 0.06 0.09
111 5) Value added (million $US) 1975 1980 1985 1990 1995 Food Manufacturing 406.8 1526.1 2048.2 6046.7 10538.9 Meat products . . 92.4 415.8 1077.1 Dairy products . . 270.8 630.9 1409.1 Canned fruit and vegetables . . 52.9 189.6 442.8 Canned fish . . 234.8 801.5 1335.3 Vegetable oil and fat . . 118.6 388.8 217.1 Grain products . . 128.8 341.4 595.3 Bakery products . . 338.7 964.2 1523.7 Sugar . . 45.3 149.1 134.1 Chocolate and cocoa . 178.4 553.2 569.1 products Beverages 345.5 571.3 764.1 1889.1 3130.6 Blending spirits . . 246.3 433.1 607.8 Wine . . 93.8 182.5 204.4 Malt liquors . . 161.8 393.2 823.5 Softdrink . . 262.2 880.4 1495 6) Wage costs (million $US) 1975 1980 1985 1990 1995 Food Manufacturing 88.8 382.8 472.2 1384.4 2266.3 Meat products . . 27.8 115 251.2 Dairy products . . 43.4 120.2 217.5 Canned fruit and vegetables . . 16.9 52.3 127.1 Canned fish . . 74.6 256.7 435.8 Vegetable oil and fat . . 20.6 48.7 35.2 Grain products . . 31.7 80.5 121.8 Bakery products . . 90.2 265.2 423 Sugar . . 6.3 22.7 12.6 Chocolate and cocoa . 44.4 105.3 103.2 products Beverages 33.3 106.2 120.9 261.4 307.4 Blending spirits . . 27.5 55 69.5 Wine . . 23.9 39 39.3 Malt liquors . . 13.6 30.8 55.4 Softdrink . . 56 136.8 143.2 7) Production index (1990=100) 1975 1980 1985 1990 1995 Food Manufacturing 18 42 64 100 123 Source: UNIDO Industrial Data System, International Economic Data Bank, Australian National University. (telnet://iedb.anu.edu.au)
112 Appendix Table 7.3: Korea’s Trade of Agrifood Products, 1975 to 1996 1) Imports (% of total from the world) Meat Dairy & Fish Cereals Fruit & Sugar & Coffee Beverages Eggs Veges Honey Tea etc ASEAN 75 . . . 3 62.2 10.9 16.5 . 80 0 10.6 4.6 0.7 32.4 37.8 13.4 0.7 85 2.6 8.1 4.9 4.3 39.9 27 33.4 0.5 90 0.2 . 5.9 0.1 35.9 45.7 19.4 0.5 96 0.3 0.1 12.1 0.1 28.2 42.1 17.8 0.4 Australia 75 15 6.2 . 8.6 0.1 24.9 . 0.2 80 46 24 0.9 0.9 0.1 37.3 . 0.3 85 4.4 0.2 0.5 13.6 . 52.4 0 0.1 90 51.6 3 0.6 7 0.2 29.4 0.3 0.9 96 17.6 11.3 0.4 7.1 1.1 34.3 2.1 0.7 Canada 75 0.3 . 60.5 0.4 0 . 0 0.1 80 . 0.4 5.7 0.7 . . . 0.1 85 . 7.5 1.5 1 . . 0.3 0.1 90 0.8 1.7 3.2 2.9 0.5 0.1 0 0.6 96 4.6 1.6 1.7 5.2 0.7 0.3 0.3 0.5 China 75 . . . . 0.9 . . . 90 1.4 3.1 3 0.1 6.8 0 0.4 1.6 96 3.3 1.2 21.1 2.7 20.3 0.4 9.4 1.5 NZ 75 74.6 0.1 . 0 0 . . . 80 33.5 3.8 6.9 0.1 . 0.1 . . 85 61 31.4 2.7 0.1 0 0.1 . 0 90 8.1 6.9 2.8 0 0.5 0.2 0.8 0 96 8.2 11 2.4 0 2.1 0.1 2.1 0.2 US 75 7.2 5.9 35.2 86.5 8.4 0.1 3.6 2.6 80 12.2 5.7 34.4 89.6 27 0.3 3.7 1.8 85 24.1 3.7 32.4 59.1 18.8 0.3 2.2 2.1 90 34.4 12 38.6 76.4 23.5 1.7 11.3 7.5 96 49.8 21 16.6 69.4 29.3 2.5 13.3 5.1 W Europe 75 2.8 55.9 0.2 0 1.8 1.2 6.3 94.9 80 0.2 49.6 0.6 0.1 2.4 1.1 4.5 86.3 85 3.7 47.5 7.6 0.3 5.1 2.1 7.5 56.4 90 2.1 69.7 5.1 3 2.1 3.9 18.4 79.8 96 15.3 52.3 5.1 6.4 2.8 3.9 19.1 89.7 WORLD 75 11.8 1.5 8.6 689.1 15.6 206.8 7.6 3.9 (mil. 80 22.7 8.2 34.5 1087.2 28.5 534.2 46.7 6.8 $US) 85 22.1 9.3 82.2 914.5 65.9 161.4 71.6 8.1 90 351.7 19.8 336.2 1351.9 259.4 424.2 143.8 47.2 96 769.4 152.6 1008.8 2688.8 675.3 581.8 306.3 240.7
113 2) Exports (% of total to the world) Meat Dairy & Fish Cereals Fruit & Sugar & Coffee Beverages Eggs Veges Honey Tea etc. ASEAN 75 0.1 6.9 0.5 0.3 2.7 0.3 2 22.2 80 . . 0.7 0.3 1.7 49.4 0.1 2.4 85 . 0.1 1.2 1.2 2.4 1.3 0.9 8.4 90 0.1 . 3.5 4.7 2 18.9 7.1 9.9 96 0 1.2 4.3 1.5 2.6 13.9 0.5 3.4 Australia 75 . . 0.2 . 0.4 0 19.8 0.8 80 . . 0.8 0.2 0.2 0.1 0 . 85 . . 0.8 0.5 0.3 0.2 0.4 0.4 90 0 . 0.7 2.3 0.2 0.5 0.1 0.3 96 0 6.1 0.4 1.6 0.1 0.5 1.4 0.2 Canada 75 0 . 0.4 0.3 8.8 0 0.4 . 80 . . 0.3 1 1.8 0 0.1 . 85 . . 1 1.8 1.7 0.6 0.5 0.1 90 0 . 0.6 9.5 0.9 0.4 0.2 0.5 96 0 0.4 0.4 2.8 0.6 0.2 0 0.2 China 75 ...... 90 0.5 4.8 0.6 9.6 8.6 1.3 17.9 9.2 96 0.1 0.8 4.5 1.2 1.8 5.4 1 1 NZ 75 0.1 . 0 . . . . 0.1 80 . . 0 . 0 . . . 85 . . 0.2 0.2 0 0.1 0 . 90 0.1 . 0.2 0.3 0 0 0 0 96 0 0.5 0.2 0.5 0 0.1 0 0.1 US 75 0 . 10.7 2.9 24.5 4.1 2 1.2 80 0.3 0.1 14.2 16.1 12.9 0.5 5.9 0.1 85 0.1 0 14 39.1 9.5 2.7 18.4 13.5 90 0.6 3.4 10.2 22.2 9 0.9 4.5 11.1 96 0.5 38.3 5.1 14.6 3.7 1.7 1.9 6 W Europe 75 0.1 2 12.6 2.1 11 30.6 2.6 9.4 80 . . 6.4 4.1 3.9 19.3 1.6 6.5 85 0 6.6 4.4 2.4 1 0.3 1 2.9 90 0.1 3.4 8.1 1.9 1.3 0.6 0.5 2.8 96 0.1 4.5 7.3 1.7 0.5 2.9 0.5 0.8 WORLD 75 39.8 0.4 359.5 4.4 51.9 119.1 0.7 1.1 (mil. 80 32.2 4.4 676.1 7.2 170.2 225.2 3.5 36.7 $US) 85 28 23.5 790.8 8.7 170.5 68.3 6.4 7.6 90 56.1 0.7 1359.8 90.5 274.1 153.3 22.5 42.1 96 213.2 3.9 1493.7 273 254.1 235.1 73.4 141.9 Source: UN Comtrade, International Economic Data Bank, Australian National University. (telnet://iedb.anu.edu.au)
114 Chapter 8 Current economic development and outlook for the Korean agrifood sector: implications for Australia.
8.1 Introduction
The past three decades have witnessed fast economic growth and industrialisation in Korea, and the economy has become increasingly dependent on food imports as agricultural production has failed to keep up with rapidly rising demand and considerable resources have moved out of the agricultural sector. Rapid industrialisation and rising incomes have led to significant changes in diets and eating habits. Per person consumption of staple foods such as rice fell, while the consumption of vegetables, fruit, meat, milk and cheese rose sharply. The food retailing and food service sectors grew rapidly in response to consumer demand for better quality and more diverse foods. Between 1991 and 1995, the food service market grew by 47 per cent.
However, the Korean economy is currently in recession following the financial crisis in East Asia – gross domestic product is forecast to fall by 6.5 per cent in 1998. The value of Korea’s currency almost halved in the first few months of the crisis (October 1997 to January 1998), unemployment rose from 2.7 per cent in 1997 to an estimated 8.2 per cent in 1998 and consumption, which grew by 3.1 per cent in 1997, is expected to decline by 11 per cent in 1998. The short-term outlook is that the recession will continue, but a modest economic recovery is expected during 1999.
As the result of the economic crisis, the Korean economy is undergoing significant policy and structural changes. The agrifood sector is under pressure to make considerable changes. While changes in the consumption structure, which had been rapidly Westernised, have slowed at the least in the short term in association with the income contraction, the domestic market has faced increasing pressure for liberalisation. These changes affect the countries that export agrifood products to Korea and/or invest in its agrifood sector, and provide both challenges and opportunities.
This chapter examines how the economy is coping with the economic crisis, how the crisis affects its agrifood sector and at government policies in this sector. The implications of these changes for the Australian Government and the business sector are discussed, and strategies that can agrifood companies can pursue to maximise their involvement in the Korean agrifood market are identified.
8.2 Korea’s economic developments and outlook
Prior to 1997, the Republic of Korea was one of the fastest growing economies in the world. However, the economy started to deteriorate in 1996, due to a decline in the international competitiveness of its major export sectors. The financial health of its industrial companies, especially the chaebols, became increasingly fragile because of their very high short-term debt-to-equity ratios and falling profitability. Corporate bankruptcies led to serious difficulties for banks, especially merchant banks that had borrowed (short-term funds in particular) heavily abroad to finance the investment projects of major chaebols (Corsetti, Pesenti and Roubini 1998). Bankruptcies among major financial institutions began to emerge in 1996.
As corporate failures mounted, international investors became less and less confident of Korea’s business corporations and financial institutions and began to withdraw their funds rapidly from October 1997. As a result, the won started to weaken sharply. Its value dropped rapidly from around W900 per US dollar in September 1997 to a low of W1,706.8 in January 1998. The International Monetary Fund (IMF) was called in on 21
115 November when the value of the currency was falling rapidly and foreign currency reserves were running out.
The Korean economy is currently in the most serious economic trouble in its modern history. Key features are the major contraction of domestic demand, large labour lay- offs, continuing corporate failures, especially in small and medium-sized enterprises, and rapidly declining industrial production. In an effort to overcome the crisis, the Korean Government has been deeply involved in the economic reform of the financial and business sectors. The most crucial factors for achieving the recovery of the Korean economy are believed to be the success of these financial reforms and structural adjustments in the business sector, especially in the chaebols.
8.2.1 Korea’s macroeconomic outlook
The outlook for the Korean economy remains uncertain. Two scenarios are possible. The optimistic scenario is that economic stability and growth could return by 2000. If, however, major structural reform does not progress quickly, the pessimistic scenario could prevail – that is, Korea’s economic recovery to the pre-crisis level could take more than five years.
In the first half of 1998, GDP (gross domestic product) shrank by 5.3 per cent, which was the worst result since Korea started recording economic statistics. In the second half of 1998, GDP is expected to fall by 7 per cent because of the continuing contraction of investment, extremely weak domestic demand and further structural adjustment in the business sector.
As shown in Table 8.1, GDP is expected to fall by –6.5 per cent in 1998, which is much more than many of the projections made earlier in the year. For example, in May the IMF forecast for 1998 was –0.8 per cent but in September it changed its forecast to a more pessimistic –7 per cent.
Table 8.1: Major economic indicators for Korea 1996 1997 1998 1999 forecast estimate Optimistic Pessimistic Change from previous year (%) GDP 7.1 5.5 –6.5 2 –1.5 Consumption expenditure 6.9 3.5 –11 0.8 –1 Private 6.9 3.1 –11.5 1 –1.2 Government 7.1 5.7 –7.2 0 0 Gross fixed capital formation 7.1 –3.5 –28.7 –6.7 –12.9 Exports of goods & services 14.1 23.6 10.9 0.8 –6.3 Imports of goods & services 14.8 3.8 –21 6.5 –0.5 Consumer price index 4.9 4.5 7.6 3 1.7 Producer price index 2.7 3.9 12.6 0.5 1.2 Actual or forecast Current account balance (US$ billion) –23 –8.6 37.3 29.4 30.9 Exchange rate (end of period, W/US$) 844.2 1,415.2 1,350 1,200 1,650 Interest rate (end of period, %) 12.6 29 12.5 11 13 Unemployment rate (%) 2 2.7 8.2 8.7 10 Sources: Data for 1997 is from Bank of Korea. Estimates and forecasts are the results of interviews with the Bank of Korea, the Korea Development Institute, the POSCO Research Institute, and the Economic Research Institutes in LG, Daewoo and Samsung.
Under the optimistic scenario, the economy is expected to show a positive growth rate of around 2 per cent in 1999. Underlying assumptions behind this forecast are structural adjustments in the business sector, which would lead to increasing investment and some
116 recovery of domestic demand, followed by government expansionary policies that start to be implemented in the last quarter of 1998.
If domestic demand and investment remain weak and structural adjustment in the financial and business sectors does not proceed quickly, then the change in GDP may remain negative in 1999, at around –1.5 per cent – the pessimistic scenario. This is close to the IMF’s September 1998 projection of –1 per cent. If this is the case, the Korean economy may fall into a much longer recession than expected and may even sink into deflation with a very low CPI inflation rate (below 2 per cent) in 1999. Even in this case, interest rates will still fall, but are likely to remain at least as high as 13 per cent. Under this scenario, the won may depreciate again, possibly to W1650 per US dollar in 1999. Wages will continue to fall, but the unemployment rate is forecast to rise to 10 per cent or more (to above two million).
While current progress in the recovery of the Korean economy may suggest that the optimistic scenario is more likely, there are still major uncertainties, as financial reform and structural adjustments are still at early stages. Confidence in the economy has yet to be restored and the recession remains severe. With domestic demand continuing to contract, any further weakening in external demand from other Asian countries would exacerbate the recession. Under such uncertainties, the main goal of current government policy is to reduce instability and build up confidence in the economy through further restructuring.
8.2.2 Production and consumption outlook
Throughout 1998, manufacturing production (including mining, and electricity and gas) also declined sharply – by 7.8 per cent and 11.6 per cent during the first and second quarters, respectively (Table 8.2). Only two of the domestic production sectors showed slightly positive growth during the first half of 1998: the agriculture, forestry and fisheries sector (1.4 per cent) and the government and non-profit services sector (0.8 per cent). In manufacturing, production in the light industries fell by more than in the heavy industries. Food and beverage production also declined substantially; as of April 1998, production had declined by almost 15 per cent compared with that in 1997.
Table 8.2: Changes in Production (%; against the same period in the previous year) 1996 1997 1998 (1/4) 1998 (2/4) Oct. 1998 Industrial production 7.3 6.9 –7.8 –11.6 –11.8 Light industries –1 –5.8 –16 –19.3 –22.4 Heavy industries 10.5 11.2 –5.5 –9.7 –8.5 Shipment index 7.6 5 –7.5 –13.3 –16.2 Domestic 6.9 1 –22.1 –28 –32 Export 9.7 16.1 30.4 24.8 21.9 Inventory index 14.7 5.3 –4.7 –7.6 –6.3 Operating rates 1 –2.3 –15.8 –17.2 –22 Agriculture, forestry & 4 2.5 4.6 0 – fishery Food and beverages 4.6 –1.6 –9.2 –14.7 a – Note: a Data for April 1998. Sources: Bank of Korea, Economic Statistics Yearbook, various issues; National Statistical Office, Monthly Statistics of Korea, various issues.
Along with the depression in industrial production, manufacturing operating rates also dropped sharply. The average operating rate fell by more than 15 percentage points, from 79.9 per cent in 1997 to 63.7 per cent in July. The rate of 62.9 per cent in August
117 was the lowest since the 1960s. The operating rates for automobiles and fabricated metals showed the greatest declines.
The outlook for production is expected to be similar to that for economic growth. As structural adjustment and financial reforms proceed in 1999, industrial production is expected to gradually regain its strength. However, it is unlikely that the recovery will begin until the second half of 1999 or late 1999 as industrial disputes following massive labour lay-offs will continue for some time. Due to large-scale industrial adjustment, small and financially fragile firms will continue to exit markets and new entry is unlikely to happen.
As real income falls, the possibility of further lay-offs increases, and as economic prospects remain uncertain, private consumption has subsided drastically during 1998, worsening the economic recession. Consumption is expected to fall by 11.5 per cent in 1998 (Table 8.1). During the second half of 1998, consumption of consumer durables such as cars and electric appliances are expected to show the most significant drop, with a predicted fall of almost 50 per cent. Government consumption is also expected to reduce by 7.2 per cent in 1998, as personnel is cut and budget spending tightened. The massive contraction in consumption has adversely affected Korea's overall economic activity, especially industrial production.
It will take some time for consumption to return to its previous level, but it is not expected to decline significantly in 1999. If structural adjustment is successful and if labour lay-offs are not too large, consumption is expected to rise slightly by 1 per cent or more in 1999 (Table 8.1). Nevertheless, purchasing power will still rise enough to boost the domestic economy. High unemployment is limiting the growth of purchasing power and is a crucial factor preventing the fast recovery of consumption. Under the pessimistic scenario, consumption will reduce further. As the level is already close to the bottom, however, the decline will be by around 1 or 2 per cent through the year.
8.2.3 Korea’s trade and investment outlook
Because of the substantial exchange rate depreciation and the contraction in domestic demand, Korea’s exports increased sharply in the first half of 1998. However, exports began to decline in May 1998 as a result of economic depression elsewhere in Asia, the fall in export prices and continuing difficulties firms are having in finding export financing. The export prices of semiconductors, electronics and chemical products, which account for a large share in Korea’s exports, were still falling in the third quarter of 1998.
While steel and shipbuilding industries still showed strong export performance in the third quarter of 1998, exports of most light industrial products as well as automobiles and semiconductors recorded negative growth rates compared with the corresponding period in 1997. Since the beginning of the exchange rate crisis, imports of almost all items except wheat and some other crops have declined sharply. The drop in imports is expected to be around 21 per cent in 1998 (Table 8.1).
The slower growth in exports and sharp decline in imports have led to a large surplus in the balance of payments. Korea’s current account balance in 1998 is expected to be close to US$40 billion.
Fixed capital formation is expected to decline sharply (by around 29 per cent) in 1998 because of the high probability of business default and financial rigidity. As structural adjustment continues and most investment plans are postponed, investment will continue to fall and significant growth is not expected to resume before the end of 1999. The optimistic forecast for 1999 is for an overall decline in investment of around 7 per cent (Table 8.1).
118 8.2.4 Outlook for the world economy
Economic projections for major countries and regions are mixed (Table 8.3). In general, however, the Asian developing countries experiencing economic problems are expected to gradually regain international confidence throughout 1999 and to show, on average, about 4 per cent growth. China is projected to continue to show strong growth (above 7 per cent in 1999) despite the troubles of neighbouring economies.
In Southeast Asia, Thailand’s economy is being stabilised but economic conditions in Malaysia and Indonesia remain highly uncertain. In Japan, GDP is expected to contract in 1998, but the economy is predicted to grow again in 1999, reflecting the positive effects of expansionary policies. The outlook for Asia would not be as good if the Chinese yuan were depreciated. With the gradual recovery of the Japanese and other Asian economies, the depreciation of the yuan is unlikely, unless there are some unexpected external shocks.
Table 8.3: World economic outlook (GDP growth rate, %) 1997 1998 1999 IMF UN WEFA IMF UN WEFA World 4.1 2 1.9 2.2 2.5 2.5 2.8 Industrialised countries 3.1 2 2 2.3 1.9 2.3 2.5 United States 3.9 3.5 3.4 3.5 2 2.5 2.7 Japan 0.8 –2.5 –1.6 –1.8 0.5 1.5 1.4 European Union 2.7 2.9 – 2.8 2.5 – 2.6 Developing economies 5.8 2.3 2 3.8 3.6 3.8 3.8 Asia 6.6 1.8 –1.1a 4.9 b 3.9 3.1 a 5.3 b China 8.8 5.5 7.4 7.5 – 7.5 8 Latin America 5.1 2.8 2.9 3.3c 2.7 2.8 3.8 c Notes: a For the Asia-Pacific region. b Excludes China. c Excludes Mexico. Sources: IMF (1998); United Nations (1998); WEFA (1998).
Developing countries in South America are also in some economic difficulty because of high interest rates, contracting domestic demand and falling raw material prices, as well as being affected by the economic difficulties in Asia and Russia.
The US economy, which had performed strongly for the past decade, is now slowing and is expected to record a growth rate of around 3.5 per cent in 1998 and from 2 to 2.5 per cent in 1999. Europe, which has been little affected by the Asian economic crisis to date, is expected to maintain steady economic growth in 1998 and 1999. However, the impact of Russia’s economic problems is spreading into Eastern Europe, and could have some adverse effects on countries in the European Union.
8.3 Developments in Korea’s agrifood sector
8.3.1 Outlook for major agrifood products
In association with the economic crisis, the consumption and production of grain is estimated to fall in 1998 (Table 8.4). The consumption of grain as livestock feed, which fell by 10 per cent in 1997, is expected to drop again in 1998 because of the contraction of livestock industries. While the consumption of corn continued to decline in 1998, consumption of wheat increased as a result of wheat being substituted for corn in livestock feed.
119 Table 8.4: Outlook for grain consumption (production) in Korea (million tones) Rice Corn Wheat Total As As processing As food feed 1995 5.54 (4.67) 8.07 (0.07) 3.34 (0.01) 19.78 (5.26) 6.03 3.73 9.36 1996 5.23 (5.32) 9.27 (0.07) 2.88 (0.01) 20.63 (5.89) 6.07 3.84 10.35 1997 5.07 (5.45) 8.35 (0.09) 3.30 (0.01) 19.59 (5.92) 5.90 3.96 9.38 1998 5.08 (4.96) 6.83 (0.07) 4.00 (0.01) 18.26 (5.69) 5.94 3.95 8.08 2000 5.07 (4.90) 7.39 (0.07) 3.85 (0.01) 19.00 (5.62) 5.96 4.09 8.63 2004 5.03 (4.80) 9.07 (0.07) 3.41 (0.01) 21.20 (5.51) 6.10 4.52 10.26 Note: Production in parentheses. Sources: Korea Rural Economic Institute (1998b); Ministry of Agriculture and Forestry.
Corn, wheat and beans accounted for 93 per cent of grain imports in 1997. Due to the economic crisis, total grain imports fell by 12.7 per cent in 1998 (Korea Rural Economic Institute 1998b). The major sources of imports are the United States, Canada and Australia. Wheat is the major item imported from Australia and is used mostly for processing purposes.
The price of domestically produced grain was on average four times the international price in the 1990s. The price gap narrowed in 1998 following the stabilisation of international prices and the depreciation of the won. The domestic rice price was four to five times the price of medium quality Californian rice (f.o.b.) until 1997; it is now around three times the price.
As implied in Table 8.4, the sluggish demand for grain caused by the current economic crisis is predicted to continue for the next couple of years. Total production and the cultivated areas of grain and pulses are projected to show a downward trend, with rice production declining in importance. However, imports of grain and pulses are predicted to increase to 1.6 million tonnes in around 2004, and self-sufficiency is expected to fall to 30 per cent in 2000 and 26 per cent in 2004.
The outlook for fruit and vegetables is mixed. The planted area and the domestic production of apples have been falling since 1990, whereas the domestic production of the higher value pears and grapes increased rapidly as household incomes grew. Self- sufficiency rates for fruit were 100 per cent before 1990, but fell after import liberalisation. The domestic production levels of apples, oranges, pears and grapes are expected to fall in 1998 because of decreases in planted areas. Fruit consumption in 1998 is expected to fall by 10 per cent, mainly because of the decrease in consumer incomes resulting from the economic crisis. Consumers are cutting spending on relatively more expensive fruit such as grapes and imported tropical fruits.
The cultivated area for vegetables has almost doubled from the 1990 level of 40,000 tonnes because of the strong demand for fresh vegetables. However, the production of vegetables in 1998 is expected to fall by 2 to 7 per cent as consumption shrinks (Korea Rural Economic Institute 1998b).
Korea’s apple exports have been growing since the ‘barter trade’ with Taiwan resumed in 1994. Taking advantage of the won depreciation, exports of apples increased by 10 per cent from January to July 1998 and mandarin exports rose sevenfold over the same period. Exports to Southeast Asia are declining, however, with greater exports to the region from the United States and China. Despite the removal of import quotas on oranges, orange imports have not increased much owing to shrinking demand. Imports of other fruit, such as grapes and grapefruit, from January to July 1998 were more than 85 per cent below what they were in the corresponding period in 1997.
Because of the current economic crisis, fruit consumption is expected to continue to decrease in the first half of 1999 and will depress prices by 10 to 20 per cent (Korea
120 Rural Economic Institute 1998b). The fall in demand for the more expensive and/or imported products such as grapes, pears and oranges is expected to be greater than for apples. The domestic production of apples is predicted to fall over the next five years, whereas that of grapes and pears is expected to rise rapidly. The production of greenhouse vegetables is expected to remain at the current level in the short term, even as the Government reduces subsidies. Imports of garlic and onions are likely to remain at minimum import levels for the next couple of years, unless domestic production decreases substantially.
Pork, beef and chicken are the main meats produced and consumed in Korea. Both the production and the consumption of pork are expected to fall in 1998 but they are expected to grow in the longer run (Table 8.5). The number of farm households adopting scale economies in the breeding of pigs is increasing. Nevertheless, Korea will eventually be a net importer of pork. In the meantime, exports increased by 76 per cent in the first half of 1998, however exporters are now facing difficulties because of the economic recession in a major importing country – Japan.
Table 8.5: Consumption (production) of meat and milk in Korea (kilo tonnes) Beef Pork Chicken Milk 1995 301 (155) 662 (639) 268 (263) 2,144 (1,998) 1996 323 (174) 697 (692) 283 (277) 2,463 (2,034) 1997 362 (237) 698 (699) 294 (278) 2,440 (1,984) 1998 305–325 (238–262) 643–658 (683–698) 289–323 (266–277) 2,274 (2,021) 2004 462 (180) 970 (770) 414 (444) 2,526 (2,106) Note: Production in parentheses. Sources: Korea Rural Economic Institute (1998b); Ministry of Agriculture and Forestry.
Beef consumption in the first half of 1998 was more than 10 per cent below what it was in the corresponding period in 1997. The fall can be primarily attributed to the fall in household incomes following the onset of the economic crisis and to the high prices of imported beef in terms of local currency. As a result, the consumption of domestically produced beef is expected to rise by around 10 per cent in 1998 to 250,000 tonnes, whereas the consumption of imported beef is expected to halve to around 70,000 tonnes.
Beef imports in 1998 were initially planned to be 187,000 tonnes, but in the first five months they were only 25,000 tonnes, about 55 per cent less than in the corresponding period of 1997 (Korea Rural Economic Institute 1998b). Beef production is expected to be around 250,000 tonnes in 1998 and 180,000 tonnes in 2004 (Table 8.5). Beef self- sufficiency is projected to be 47 per cent in 2004, when imports will be completely liberalised.
Chicken meat production and consumption have been sluggish in 1998 but will increase in the longer term. The number of chickens being bred for meat is expected to decline in 1998 as the price received falls below the production cost. Prospects for chicken meat imports are not bright in the short term because of the contraction of real incomes. In the first half of 1998 imports of chicken meat were 65 per cent lower than in the second half of 1997.
Imports of milk products have been completely liberalised since July 1996, and imported milk and dairy products that are competitive in both price and quality have been increasing their market shares. In 1998, the increase in domestic production and the contraction of consumption due to the economic downturn have resulted in increasing inventories of powdered milk and decreasing imports. As shown in Table 8.5, milk consumption is expected to fall in 1998 by almost 7 per cent. But the level of consumption will recover gradually and is projected to be just over 10 per cent above the estimated 1998 level by 2004.
121 In the case of processed foods, domestic production and consumption grew rapidly during the 1990s. However, domestic consumption in 1998 is expected to be 10 to 20 per cent lower than in 1997 because of falls in real incomes and price rises. The domestic prices of fruit drinks and processed flour products rose by more than 30 per cent during the first four months of 1998. As the exchange rate has stabilised, prices have stabilised since July at a level that is about 10 per cent above the pre-crisis prices.
The domestic production levels of processed grain products, dairy products and fruit juice are expected to fall in 1998 and 1999 because of the exchange rate depreciation and decreasing demand. Milk powder production will decrease considerably owing to high inventories. A fall in the domestic consumption of these processed products, in particular fruit juice and canned foods, is also expected. Exports of confectionery, which rely largely on imports of raw food products, are forecast to fall by 5 to 10 per cent in 1999 as the unit production price increases.
Imports of concentrated fruit juice from the United States are expected to fall, but those from China will increase because of lower prices. Imports of cheese, ham, other processed meats and processed milk products are forecast to decrease by 10 to 20 per cent in 1999 due to decreasing demand.
8.3.2 Food processing structures
In 1995 the total number of food and beverage companies employing more than five workers was 6,067. Of these, food processors accounted for 92 per cent (Table 8.6). Between 1990 and 1995 the number of food processors grew by 43 per cent, which was above the manufacturing average. Meat and vegetable processing industries grew the fastest among the food processing industries. Non-alcohol beverage production was another fast-growing business in Korea.
Table 8.6: Number of establishments and value of sales in food processing Establishments with more Sales in 1995 than five workers Number in Change from Value (billion Average per firm 1995 1990 (%) won) (billion won) Manufacturing 96,202 40 Food & beverages 6,067 36 22,157.8 3.7 Food processing 5,554 43 17,787.8 3.2 Meat processing 395 186 1,982.3 5 Dairy processing 118 87 2,998 25.4 Fish processing 1,990 39 744.9 0.4 Vegetable & fruit 475 120 2,155.5 4.5 processing Grain processing 822 57 788.4 1 Food oil 77 5 2,214.6 28.8 Bakery & noodles 753 37 3,447.8 4.6 Others 924 4 3,456.2 3.7 Beverages 513 –13 4,370 8.5 Alcohol 271 –49 2,278 8.4 Non-alcohol 242 303 20,921 86.5 Source: Agriculture Fisheries and Livestock News (1997).
While the number of firms increased throughout the 1980s and 1990s by around 4 per cent a year, the total value of sales in real terms grew faster and hence the average size of processing firms increased (Korea Rural Economic Institute 1998a). In the food processing sector, however, firms producing relatively high value-added foods such as dairy products and food oil accounted for less than 5 per cent of the total number of establishments but about 30 per cent of the total value of sales in 1995 (Table 8.6). This
122 implies that most processing firms are small and, as shown in Table 8.6, the average sales value for all food processors is far below that for milk processing and food oil firms.
As noted earlier, over the past two decades Koreans have diversified their diets and have been switching from consuming grain to high value-added, convenient and safe foods. The pattern of food consumption is expected to continue to change, although the pace of change has been slowed by the current economic difficulties. This change is an increasingly important factor contributing to structural changes in food processing in Korea.
The economic crisis has affected food processing not only through the contraction in demand, but also through financial constraints. Many small and/or financially weak, uncompetitive firms have left the industry, leaving fewer, larger firms, whose competitiveness has increased. The economic crisis has also provided foreign producers with the opportunity to enter the Korean market, through exports and through direct investment. Foreign companies entering the market through takeovers, joint ventures or mergers will need to have ‘patient’ capital, however, because of the depressed demand in the domestic market in the short run.
8.4 Agrifood policies
The Government has attached a high priority to the goals of self-sufficiency in food and the protection of farmers’ incomes.
Since the 1970s substantial progress has been made in liberalising trade in manufactured products. In contrast, Korean agriculture has remained the most heavily protected sector. Agriculture’s protection was induced by structural change resulting from the implementation of outward-looking policies for much of Korea’s economy since the mid- 1960s and also originated from political factors. Protection policy has been driven mostly by the demand of farmers for higher incomes. They have been a significant political pressure group.
Since the late 1980s there has been trade friction in the agrifood area, as the major food exporting countries have turned their attention to the large and rapidly industrialising markets in Northeast Asia such as Japan and Korea, which have greatly restricted their agricultural imports.
Pressure for further reform of Korea’s agrifood policies is likely to intensify as the economy recovers from the current downturn. On the domestic front, urban links to the countryside will weaken, as will the political power of farmers. The current level of public support for agriculture will not be sustainable. International pressures for further policy reforms will arise through future multilateral trade negotiations in the World Trade Organisation (WTO), with the next agricultural round due to start by 1999. Korea will face additional reform pressure now that it is a member of the OECD and the Government has to show the world its willingness to adopt more transparent and market- oriented policies. Pressure for policy changes will also continue through APEC, as it works its way through the process of implementing its vision of free trade by 2020. Korea may well adopt farm support policies similar to those now being adopted in some other OECD countries, which are encouraged by the OECD and permitted by WTO rules, such as decoupled direct payments to farmers and support payments that recognise the production by farmers of environmental goods.
123 8.4.1 Trade and investment policies
Agricultural markets in Korea have changed rapidly since the trade negotiations of the Uruguay Round. Prior to the completion of the Uruguay Round of trade negotiations in December 1993, the liberalisation of Korea’s agricultural market began with an announcement of a ‘foreshadowing’ system of import liberalisation as Korea graduated from the BOP (balance of payments) articles of GATT (the General Agreement on Tariffs and Trade) in 1989. The trade negotiations for beef imports with the United States, Australia and Canada have also contributed to the implementation of market liberalisation in Korea.
Following the foreshadowing system, agricultural imports that were previously subject to the articles of BOP protection were liberalised in July 1997. In the period 1989 to 1991, imports of 243 agricultural items, including fruit juice, pineapples and bananas, were liberalised. A further 131 items containing processed fruit products, peach juice, persimmons and pears were liberalised during the period 1992 to 1994. In 1995, 154 agricultural items were liberalised, of which 111 items were in the form of tariff- equivalent rates, and the rest were in accordance with the plan for BOP items. An additional 44 items have been liberalised since 1996. Another eight items including beef and cattle will be liberalised from 2001. Other than rice, all 1312 agricultural items that were subject to the Uruguay Round negotiations will be liberalised by 2001. The key outcomes negotiated at the Uruguay Round are shown in Chapter 7, in Table 7.10.
Korea was given ten years before having to adopt a tariff-only system for rice imports; instead, it agreed to apply the minimum market access system during that period. For all other agricultural and livestock products, Korea agreed to adopt a tariff-only system. Korea was categorised as a developing nation and asked to reduce its tariff and/or tariff- equivalent rates by two-thirds of the levels applied to developed countries.
When all the Uruguay Round commitments are implemented, the average tariff will be about 6 per cent and almost 90 per cent of all tariff lines will be bound. Quantitative restrictions on imports are gradually being removed. By 2001 all restrictions will have been removed except for those on rice, which is governed by the special treatment provision of the Uruguay Round agreement on agriculture. However, with a view to reducing the very large bilateral trade deficit with Japan, Korea continues to maintain import bans on a large number of Japanese products under its Import Diversification Program.
The following describes the recent amendments to systems affecting Korea’s exports and imports.
Reinforcement of quarantine regulations on animal and plant imports
In order to make quarantine systems for imported products more efficient, the Government set a five-year plan (1992–96) for the reinforcement of quarantine systems (which ended in 1995, one year ahead of schedule) and a subsequent five-year plan (1996–2000) for the improvement of quarantine systems.
In an attempt to reinforce examinations on domestic agricultural and livestock products, the Government has launched various activities to ensure that livestock products are safe. The relevant laws on type 1 and type 2 animal diseases and on plant diseases have been amended to comply with international standards. Systems for evaluating risk and selecting qualified quarantine officers have also been introduced.
Reinforcement of the labelling system for identifying the origins of products
As of 1998, 175 out of 225 imported agricultural products are categorised as items that have to identify their origin. Live animals and fish are excluded from the labelling
124 system. In the case of domestically produced products, 148 agricultural items and 105 processed items are subject to the labelling system.
Import management
The Ministry of Agriculture and Forestry has amended tariff laws in an effort to adopt minimum market access and special safeguard systems efficiently. For minimum market access and current market access imports, the Government also adopted import management systems of import licence auctions, end-user selection for direct imports, and imports by government agencies for relevant items.
Among agricultural commodities, 83 items are subject to import management through trade by government agencies. Among these items, those that will be liberalised through the tariff system include:
· 44 items subject to minimum market access: rice, potatoes, barley, ginseng products, etc.; and · 11 items subject to current market access: buckwheat, soybeans, peanuts, green beans, red beans, etc. · Items that are subject to balance of payments provisions include: · 17 items subject to minimum market access: onions, garlic, red peppers, ginger, natural honey, oranges, mandarins, pine nuts, etc.; and · 11 items subject to current market access: beef, sesame, raw silk, etc. · Government agencies for import management and trade are: · Office of Supply (Chodalcheong) for rice and barley; · Agriculture and Fisheries Marketing Organisation for onions, garlic, red peppers, green beans, red beans, ginger, buckwheat, soybeans, peanuts and sesame; · Livestock Marketing Organisation for beef; · National Livestock Cooperatives Federation for natural honey; · Cheju Orange Production Cooperative for oranges and mandarins; · Korea Silk Exporting Cooperatives for raw silk; · National Forestry Cooperatives Federation for pine nuts; and · Ginseng Cooperatives Federation for ginseng.
An ‘open bid’ system is used for auctioning import licences for some agricultural products that are not subject to trade by government agencies. The main government agencies managing auctions are the Agriculture and Fisheries Marketing Organisation, for sesame oil; the Livestock Marketing Organisation, for pork, chicken meat, skim milk and whole milk powder and evaporated milk; and the National Forestry Cooperatives Federation, for dates and chestnuts.
The Government allows end users or major importers of some products to import directly when the market access quantities of those products are considered not to affect domestic production much. Direct imports are also allowed when there is a need to import raw materials at a low tariff rate. The selection of the end users who can import directly is based on past import performances, the capacity of processing facilities, and their production plans.
Among direct import items, those subject to tariff system include:
· 26 items subject to minimum market access: breeding cows and pigs, solid residues of sesame seeds, mixed feeds, etc.; and · 33 items subject to current market access: breeding chickens, corn for seed, potato and sweet potato starches, corn, malting barley, etc.
125 The items that are subject to balance of payments provisions are:
· 4 items subject to minimum market access: birds’ eggs, green tea, etc.; and · 36 items subject to current market access: whey, manioc, malt, lactose, orange juice, etc.
Recent applications of the import management systems included the following:
· 19 items including rice, beef, red pepper, garlic and onions were imported by government agencies. · Import licences on eight items subject to import quotas including pork, chicken meat and powdered milk were auctioned (but quotas on pork and chicken meat were abolished in July 1997). · Tariff quotas on imported agricultural materials were lowered, and flexible tariffs on imports of the items subject to the industrial safeguard system were raised. · Industrial safeguards were applied to imports of artificial powdered milk by means of quantity restrictions.
In 1995 the existing laws on grain and livestock management were amended and a new law was introduced to adopt the minimum market access system as part of the Uruguay Round agreement. The problems of this system are being monitored and analysed every year.
Application of tariff quotas and flexible tariffs
The Ministry of Agriculture and Forestry announced that 23 items would be subject to tariff quotas in the second half of 1997. These items included wheat, corn, soybeans, sorghum, alfalfa and whey powdered milk for feed purposes. The tariff quotas have been removed from all products except whey powdered milk, in order to help livestock farmers reduce their unit price and to increase their competitiveness. Flexible tariffs are applied to protect domestic industries from the rapid increase in imports of low quality products. These include dried radish, vermicelli, red beans, oak mushrooms, silk and bracken.
Application of special safeguards
As part the follow-up to the Uruguay Round agreement, special safeguard tariffs were introduced for products that are subject to tariff-equivalent rates. In 1997, special tariffs based on import quantity were applied to 60 items, including breeding bulls, white and sweet potatoes, barley and other grains, assorted feed, and ginseng products. Special tariffs based on both import quantity and price were applied to 13 items, including green beans, red beans, buckwheat, potatoes and sweet potato starches, wheat starches, and peanuts.
Industrial safeguard system
The industrial safeguard system is also used to protect domestic industries when they are seriously affected by rapid increases in imports of particular products. The products to which this system has been applied include pulses (August 1994), soybean oil (January 1996) and artificial powdered milk (December 1996).
126
Box 8.1: Customs’ inspection of imported food in Korea
In Korea, Customs’ inspection of imported food has caused many civil complaints from importers and discontent between the importers and the Government, some of which have developed into international trade problems. Import inspection is mainly divided into three categories: non-sampling, appearance inspection, and laboratory inspection. Non-sampling, as the name indicates, uses only export documents for clearance by Customs, and thus is best for food importers. Appearance inspection takes two days and laboratory inspection normally takes 20 days. It is laboratory inspection that importers want to avoid.
The main reason for complaints and disputes is that there is no fixed standard to explain why some foods are cleared by non-sampling inspection and others go through laboratory inspection. The trade disputes are caused by the standards for allowable pesticide residue and food additives. Korea uses the standard of the Korea Food Code as the rule, and only if the code has no specific item does the standard and guideline of the Codex Alimentarius Commission become applicable for clearance by Customs.
There is one important discriminatory factor against imports of Australian food products. According to the Korea Food Sanitation Law, Article 16, Section 12, if a food importer submits the original inspection documents received from a certified inspection agency of the country from which the food is imported, the food imports are exempted from laboratory inspection in Korea. Only the Minister of Health and Welfare certifies the inspection agency. If the Minister has not done so, the imported food certified by the national inspection institute of the country of origin is subject to laboratory inspection in Korea. At present, there is only one non-Korean certified agency – the Export Service Center, Oregon Department of Agriculture in the United States. If US food exporters have that agency inspect food before it is exported, the food will be cleared by the Korean Customs Office without delay, allowing it to arrive fresh on the Korean market.
In order to be granted the same access, Australia has applied to have an inspection agency certified, but no decision has been made yet by the Korean Government. Having a certified inspection agency in Australia is vital for Australian fresh food exporters to increase their market share in Korea.
8.4.2 Production and processing policies
Grain and oil crops
As a result of the economic crisis, the operating expenses for grain cultivation have risen and farmers’ incomes have dropped. However, demand for domestically produced grain has been growing, as prices of imported grain have risen rapidly with the depreciation of the exchange rate. Domestic grain is gaining competitiveness in international markets and export demand is rising. This seems to provide an incentive to strengthen the domestic production base. It is likely that the Government will raise its purchasing prices of domestic grain to maintain farmers’ incomes at a certain level.
Grain cultivation accounts for a relatively small proportion of farmers’ incomes in Korea. Nevertheless, this activity will expand if it generates a stable income because its operating expenses are relatively low. To ensure a stable income from grain, the Government has adopted the direct income compensation system for the loss of farm household income and for loss from natural disasters. This system is now being considered as a means of supporting environmentally friendly farming. The Government is also trying to disperse the risks from exchange rate fluctuations by monitoring shipment
127 times and exchange rates, particularly in relation to imports of grain such as rice and barley. The Government plans to replace the current ‘flat buying’ system for grain imports with a system of using the international commodity market, while the introduction of the auction system is underway to allocate import quotas to private importers in order to increase efficiency from grain imports.
Meat and dairy products
The Government is now considering an adjustment of supply schedules for beef imports to stop the price of Korean cattle falling as a result of weak consumption of beef in 1998. The Government will also encourage domestic production and processing industries to buy Korean cattle in order to stabilise the falling price. On the other hand, it allows cattle to be slaughtered for private consumption and provides tax and monetary incentives aimed at reducing the number of Korean cattle for breeding purposes. To promote meat consumption, the Government is trying to improve the marketing system and to encourage lower consumer prices. It is also bringing in stronger competition to reduce marketing expenses and margins. The Government encourages the expansion of direct transactions through producer organisations and the direct sale of meat to supermarkets, convenience stores and restaurants.
Slaughtering and processing facilities in Livestock Processing Centres are being upgraded and meat products are being differentiated by cut in order to promote exports and domestic sales. There will be 12 Livestock Processing Centres by 2000 and they will handle up to 30 to 40 per cent of the total marketing volume of frozen meat. The Government is also expanding its support for pig production and intends to promote pork exports. Various policies and financial support for chicken and milk products are under consideration as well. There has been an improvement in rules and regulations governing the dairy industry, and the amended dairy industry promotion law is being applied to stabilise raw milk demand, supply and prices.
Fruit and vegetables
The Government plans to promote exports of fruit to offset the decrease in domestic demand for fruit. The export focus will be particularly on Japanese and North American markets. A ‘higher density training system’ has been introduced to lower production costs and boost productivity in apple and pear production. There will be no further subsidies for fruit processing facilities because of weak consumption and low operating ratios under the existing system. Processing plants are also expected to be restructured in the near future. Domestic fruit processing firms are expected to increase their dependency on imported materials. It is also possible for them to use domestically produced substitutes if the prices of substitutes drop substantially. The economic crisis has not brought further change in import liberalisation policies for processed fruit products such as concentrated fruit juice because imports of such products have already been liberalised.
Processed food
It is predicted that the economic crisis will cause shortages of supplies and price increases for some processed products as the production levels and operating ratios of food processing industries decline. The Government has plans to increase its financial support for trade to ease difficulties with imports of raw foods if the exchange rate goes above W1,400 per US dollar. Diversification of import lines is also being considered. In addition, the Government will continue its support for exports of confectionery and processed vegetable products such as kimchi in order to overcome the problem of weak domestic consumption.
128
Feed, meat and dairy processing sector
It is expected that falling demand for assorted feed will promote the restructuring of processing industries as market competition intensifies between producers. Producers are focusing particularly on commodity-specific production. Producers are actively seeking to expand foreign investment in order to secure profitability, raw materials, and direct production and sales in other countries. In the cases of prepared meat and milk products, a bilateral agreement has been reached between Korea and the United States on setting the expiry date of products and both parties have agreed to leave the matter in the hands of the industries. As the regulations on specifying the expiry date of products are removed, the industries have adopted the ‘recall system’ and ‘HACCP systems’ in order to improve food safety. They have also decided to reinforce labelling systems that identify the origin of products. The internationalisation and liberalisation of processed foods have simplified and eased licensing procedures and other regulations on business. But the criteria for food safety have been reinforced for health purposes.
Box 8.2: Problems with health food exports to Korea
Health food is one of the fastest growing import products in the Korean processed food market. However, Korean importers, such as Sewon Trading, Saengbo Trading and Korea Roshu, have many difficulties in importing Australian products.
The first problem is that consumers generally do not recognise Australian brands. Australia has a long history of and technology for R&D in health food, and offers good quality products. However, because the Korean consumers lack understanding of the Australian health food industry’s development, Australian products are sold at a considerably lower price than are products from the United States. Saengbo Trading, the Korean agent for Mother Nature, which is the biggest health food manufacturer in Australia, confirmed that, although Australian products are as good as or better than the US products, the retail price is 30 per cent lower. The extreme case is shark cartilage products – US products are sold at US$100 per kilogram whereas Australian products are imported at US$30.
A second problem is that some uniquely Australian and competitive products – for example, Lyprinol of McFarlane Laboratory in Melbourne – have had many difficulties in the registration process, the first check point of the Korean market. Lyprinol, produced from extracted Perna Canaliculus, a kind of mussel found only on the coasts of Australia and New Zealand, has an edge over US competitors. It is an excellent anti-inflammatory arthritis product without any side effect. It is produced in Australia and is extremely popular in Europe and the United States. But, even this product finds it hard to enter the Korean market from the registration stage. For it to be sold as a health food, it must be registered with the Korea Food and Drug Administration. Every health food product sold in Korea has to have its raw materials among the 25 categories that the Korea Food Code defines. Raw materials not included in the 25 categories can be added to the Korea Food Code only when the Minister of Health and Welfare judges it as required. The importer must provide examples of its use in other countries and experience of its use in Korea, but providing this data is impossible. Existing materials in the 25 categories have long been produced by US companies, and it is hard for an Australian company to register a new material.
The size of the Korean health food market is W1200 billion a year based on retail prices (or US$125 million on a Customs clearance basis). A joint endeavour of the Australian Government and manufacturers to break down these restrictions could be expected to increase Australia’s market share in this large and growing Korean market.
129
8.5 Trade and investment opportunities in Korea
8.5.1 Trade opportunities in the Korean agrifood market
Korea is the second biggest market in Asia after Japan for Australian food exports. Australia plays a crucial role as a major supplier of wheat products, sugar, beef, and fishery products in particular.
Wheat
Wheat is one of the major items that Australia exports to Korea. The current economic crisis in Korea will affect Australian wheat exports as the demand for wheat flour products decreases. Compared with consumption of other agricultural products, however, the size of the fall in consumption of flour products is relatively small. Moreover, it is expected that wheat consumption for ramen (noodles) will increase as real income falls, since ramen is a cheap flour product in Korea. In particular, it is predicted that import demand for high quality Australian Standard White Wheat will increase due to the high preference for this product in Korea. Hence, it is possible for Australia to expand its wheat exports (for flour product purposes) to Korea, despite the current economic crisis. In order to compete with the US, however, it is suggested that Australia needs to provide some price incentives and/or support for Korean importers to finance their imports from Australia, at least at a similar level to those provided by the US. This is because Korean importers are facing various difficulties such as a shortage of US dollars, difficulties in opening of letters of credit and low industry operating ratios (down from 70 per cent to 65 per cent).
The United States has provided US$1.06 billion of its GSM–102 export financing funds to Korea in order to help Korean importers ease difficulties in importing feed grains, and this has given the US an advantageous position in exporting feed grains to Korea.
Rice
Australia and the US are the two major countries exporting the MMA quantity of Japonica-type rice to Korea. Australia has a very good export opportunity in 1998 as China, another major rice exporter to Korea, faces serious losses in its production base for rice due to the disastrous flood of the Yangtze River. Thus, Australia needs to renew its export strategy and quickly respond to the changes by increasing its exports of Japonica-type rice to Korea.
Beef
Despite the current economic crisis, beef consumption in Korea has increased by 13.7 per cent during the first half of 1998. This has largely been attributed to the fall in domestic beef prices. The large fall in domestic beef prices has caused the unusual situation whereby the prices of imported beef exceed those of domestically produced beef, though this is only a temporary phenomenon. Accordingly, the consumption of imported beef decreased substantially by 55.6 per cent and beef imports declined by 54.4 per cent over the first five months of 1998. It is also predicted that Australia’s beef exports to Korea will be affected to a large extent unless the Korean economy recovers from the current crisis.
Fruit
Korea has mainly imported tropical fruit such as oranges and bananas. However, imports will decline as consumption decreases. It may be difficult for Australia to export oranges to Korea unless Korea’s quarantine regulations on the importation of
130 oranges are relaxed. Currently, oranges are imported only from the United States and Japan.
Prepared meat products
Korea has fully liberalised its imports of prepared meat products since July 1997, and imports have rapidly increased. The market share of canned meats was 15 per cent at the beginning of market liberalisation in 1987. Market share rapidly increased to 39 per cent in 1989 and a special tariff of 50 per cent was then imposed on imports. The application of the special tariff has ended, and the market share became 20 per cent recently. The market share of imported sausages increased from 3.4 per cent in 1990 to 10 per cent recently. Since domestic industries for prepared meat products are still in a weak position, Korea will have to rely on imports if consumption of such products increases. It is therefore recommended that Australia needs to develop a strategy to export prepared meat products to Korea. In setting up the strategy, Australia needs to strengthen its competitiveness in terms of quality and price to penetrate Korean market successfully because consumer preferences for imported products are decreasing in Korea as the quality of domestic products improves. Denmark and the United States are the two major exporters of canned meats and sausages currently.
Dairy products
Korean dairy industries are now converting their production lines from milk production to the production of milk products such as cheese, butter, evaporated milk, and yoghurt. However, it is predicted that Korea’s imports of such milk products will increase substantially because domestic production costs are still much higher than in the main exporting nations. Australia needs to promote its exports of milk products to Korea by developing strategies and programs that can promote the consumption of Australian products in Korea. Korean consumers are unfamiliar with Australian milk products. Australia and New Zealand have much stronger positions than their potential competitors as the Australian price of raw milk, for example, is 20 to 40 per cent less than the price in Korea.
Exports of processed fruit and vegetables
It is forecast that Korea will increase its imports of fruit jam and jelly, canned fruits and vegetables, and frozen and chilled fruits and vegetables. Currently, domestic industries producing processed fruits and vegetables are led by a couple of big firms (Lotte, Haitai, Jeil-jedang) and some small-scale processing plants supported by the Government. But it is very difficult for small-scale producers to survive price competition. Furthermore, even the big processing firms like Haitai are facing extreme difficulties under the current economic crisis. This suggests that Australia should promote its exports of raw inputs such as concentrated fruit juice to Korea. Australia also needs to actively consider direct foreign investment, joint investment with Korean firms, and mergers with and acquisitions of Korean firms involved in the industry.
8.5.2 Investment and business opportunities
Relaxation of various regulations in an attempt to attract foreign investments and the low value of the won are factors that provide the best time for Australia to expand its business with Korea. Since the beginning of foreign exchange crisis at the end of 1997, the Government has increased the number of industries that are subject to the liberalisation of foreign investment in order to attract stable long-term foreign investments and to promote structural adjustment of domestic industries. The Government also allows hostile mergers and acquisitions of domestic firms and acquisition of land by foreigners. In addition to these, the Government is about to introduce a ‘Foreign Investment Promotion Law’ to simplify relevant documentary
131 procedures for foreign investment. Further tax and rent incentives are under consideration for foreign investment.
Direct investment is recommended, especially for industries producing prepared meats, and processed fruit and vegetable products, because they are mostly small-scale producers. The best way of investment seems to be in the form of joint ventures and mergers and acquisitions, considering Australia’s lack of experience in direct investment to Korea. It seems worthwhile for Australia to invest in the markets of prepared meat products such as ham, sausages, and bacon. Even though the current economic recession in Korea has reduced the consumption of ham and sausages, once the Korean economy recovers the rapidly increasing trend seen between 1987 and 1993 is expected to recover. Market penetration is not easy since big firms like Lotte-ham, Jeil-jedang, and Jinju-ham mostly lead the production of prepared meat products. However, it is possible for Australia to penetrate the market in a form of joint venture with other medium- sized domestic companies.
The milk processing industry has an oligopolistic market structure and Seoul-wooyu, Namyang-yuup, and Maeil-yuup lead the market supply. It seems to be difficult for Australia to join the industry due to the very high competition between domestic producers. Thus, it is more economical for Australia to export milk products such as powder milk, cheese, and butter in a completed form.
Korea has been ranked as the second lowest country after Japan in terms of the level of direct foreign investment in the agrifood sector. The ratio of foreign direct investment to GDP and gross fixed investment has been very low, being 0.5 per cent and 1.5 per cent, respectively. Moreover, it has been relied heavily on direct investment from Japan and the US. For these reasons, it may still be difficult for Australia enter Korean markets, although regulations on foreign investment have substantially eased recently. Australia needs to carefully consider the following in relation to direct investment into Korean markets:
· A strategy to improve negative images of foreign investors held by local people; · The transparency of management and accounting of the firms producing foods in the cases of mergers and acquisitions; · The rigidity of the labour market and regulations on administration, particularly the tense relationship between employers and employees, even though domestic wage level and land price have fallen substantially since the economic crisis. The use of Korean experts would be a good idea.
8.6 Implications for Australia
8.6.1 Opportunities and challenges
The information in this chapter suggests that the Korean economy was going through substantial structural and policy changes that were pushing it towards more market- oriented and open trading systems, even before the onset of the current crisis. Although the current crisis has disrupted the economy, making detailed projections difficult, it is inevitable that changes to a more open trading environment for agrifood will continue in the longer run. In fact, many changes in market structures and industrial organisation have been accelerated by the current economic turmoil, in an effort to overcome the crisis and to regain international confidence in the Korean economy.
In the agrifood sector, rapid economic growth and the expansion of urban areas contributed not only to marked changes in food consumption towards more Westernised products, but also to a weakening of the international competitiveness of domestic agrifood products, except for a few specialised items. Even the domestic distribution and marketing infrastructure, which used to be another constraint to foreign activity in the
132 Korean market, is moving towards being more market-oriented and open to competition. These developments provide Australian agrifood exporters with greater opportunities to access the Korean market in the future.
Until the 1990s the Korean agrifood market was heavily protected by the Government, as has been typical with developing countries that have focused on self-sufficiency and income equality. This led to many Australian food producers encountering extreme difficulties in exporting to Korea and many considered the Korean market as one of the most difficult to access.
Such difficulty was not unique to Australian exporters, although some US companies and products had easier market access due to the political relationship between Korea and the United States. Nevertheless, Korea’s agrifood policies will continue to move towards a more liberalised and open trading environment. The recent policy objectives sought by agricultural policymakers have focused more on modernisation and competitiveness, environmental concerns and welfare improvement (Rae and Bailey 1997).
The implementation of the Uruguay Round agreement over the period to 2004 will significantly affect some sectors of Korean agriculture. On a commodity level, the impact could be most noticeable in the beef and dairy industries. Now is the right time for both the Australian Government and companies to look at the changes in the Korean market and to take initiatives to increase and ease access for Australian products. Otherwise, possible and emerging opportunities may be overshadowed by the previous experiences.
There is also evidence that farmers and many food processing companies in Korea are finding the changed economic environment very difficult. Because of the extreme lack of liquidity in the Korean economy, food processing firms – medium and small firms in particular – as well as farmers are suffering from severe financial problems. Almost all plans for expansion or new establishments have been cancelled or delayed without new schedules being set. Many of the companies that had not been competitive, or have failed to secure credit, are facing the possibility of defaults or have already exited markets.
The immediate outlook for imports is weak because of the greatly reduced domestic demand and spending power, the difficulties importers are having in securing credit and the sharp increase in prices in terms of local currency. However, the outlook for longer- term growth is regarded as favourable to Australian food exporters. Nevertheless, the timing of the turnaround in the market and the return to pre-crisis spending levels is not easy to predict. The recovery may be a minimum of two years away and perhaps up to five years if current efforts fail to achieve structural adjustment and financial reform.
Although Australian agrifood companies have not had much success in Korea and there are still many uncertainties, the changing economic and policy situations do offer opportunities for Australian agrifood producers and exporters. In broad terms, the opportunities lie in greater trade or investment links with Korea and the business that flows from this. Current circumstances suggest that investment is more attractive than trade, as evidenced by the great need of Korean companies for credit, the removal or relaxation of restrictions on foreign investment inflows according to the IMF recommendations, and the sharp depreciation of the won. Under such circumstances, joint ventures with or buying into Korean companies could lead to better penetration of markets. This is the greatest opportunity that the current changes in the Korean economy offer – not only to Australian but also to other foreign investors or companies. However, the price of this opportunity will go up as the economy recovers from the crisis.
The greatest challenges for Australian agrifood exporters come mostly from the lack of familiarity that Korean consumers have of Australian products and from the strategies adopted by Australia’s competitors who face the same opportunities. Other challenges
133 may include Australian companies’ lack of understanding of many aspects of local tastes and the Korean Government’s policymaking process, and/or overcautiousness about the opportunities and risks involved in the Korean market.
8.6.2 Specific strategies
Because of the opportunities offered by the Korean market and the current challenges, there are a few key strategies that Australian food companies should be pursuing to maximise their position in the Korean agrifood market and to build the business relationships that are needed to be successful over the longer term. There are also areas where government support has a role.
Keep markets open
Since the Korean Government is deeply involved in the protection of its agricultural sector, it is very important to have a bilateral agreement at the highest governmental level regarding market access for Australian food. Even though the Korean Government’s role in the agrifood market is getting weaker, it will continue to have strong influence on trade.
Because there is great potential for Korea and Australia to complement each other’s industry and because Korea has a large trade deficit with Australia, further efforts to realise this potential may be worthwhile. For instance, Australia could facilitate Korean exports of manufactures to Australia, and Korea could facilitate imports of Australian agrifood products. They could also develop complementary inspection systems, so that products inspected in the country of origin do not require reinspection when they arrive.
Since 83 agricultural commodities are subject to import management by government agencies in Korea, it is crucial for Australia’s agrifood exporters to know exactly which agency and who in the agency has to be contacted. Initial contacts can be made through Austrade and the Australian Quarantine and Inspection Service, as both agencies have staff in Seoul.
Position Australian products
The profile of Australian agrifood products is relatively low in Korea. This reflects the difficulty of accessing the market and the lack of product exposure to Korean consumers.
There are a number of aspects to positioning Australian products exported to Korea. One is to ensure they have the same or better attributes in terms of, for example, quality, reliability of supply, credit arrangements, promotional support and retail training when compared with those from the United States or Europe. Price will be an aspect of this positioning, but Australian products such as meat and wine are of at least a comparable quality to the products of competing exporters and have the advantage of being cheaper.
Australian exporters need to have a good appreciation of the Korean market and where differentiated or substitutable Australian products could fit in, both in the short and long term. Exporters need to maintain a presence in the market, even in troubled times, to show a commitment to the market and to maintain market awareness, a market network and information sources. This presence need not be through individual companies but through industry and government associations.
134 Reduce costs through the chain from producer to consumer
A strategy to reduce costs throughout the supply chain needs to apply in both countries and to the interaction between them. Korean market access is currently highly regulated, but this is changing as commitments made under the Uruguay Round of trade negotiations come into effect.
Korean quarantine arrangements discriminate against Australia and should be a priority in bilateral negotiations. Australia’s meat tally system is already under investigation to see if it adds significantly to costs and if it does it should be reformed. It is not only institutional arrangements that add to costs. Different slaughtering and meat packaging methods (for example, boning out into packs) could lower costs and make the product cheaper to the end consumer. New technologies can improve productivity and the quality of products, thus expanding the market. Any strategy to reduce costs throughout the supply chain between both countries would need to involve research into new technologies aimed at improving productivity, lowering costs and expanding the market.
Establi sh joint ventures and in-country investment
Korea’s relaxation of various regulations in an attempt to attract foreign investment and the low value of its currency provide Australian companies with good opportunities to expand their business with Korea or to start business with it. Since the beginning of the foreign exchange crisis towards the end of 1997, the Government has increased the number of industries open to foreign investment in order to attract stable long-term foreign investment and to promote the structural adjustment of domestic industries. The Government also allows hostile mergers and acquisitions of domestic firms and the acquisition of land by foreigners. In addition to these changes, the Government will soon introduce a Foreign Investment Promotion Law to simplify relevant documentary procedures for foreign investment. Further tax and rent incentives are being considered for foreign investors.
Direct investment is recommended, especially in industries producing prepared meats and processed fruit and vegetable products, which are mostly small-scale producers. The best form of investment may be through joint ventures, mergers and acquisitions, since this would allow a due-diligence process to be used to fully assess commercial viability before investment.
Penetration of the market for prepared meat products, such as ham, sausages, and bacon will not be easy since big firms such as Lotte-ham, Jeil-jedang, and Jinju-ham account for most of the production of prepared meats. However, it is possible for Australian firms to penetrate the market by undertaking joint ventures with medium-sized domestic companies.
The milk processing industry currently has an oligopolistic market structure and Seoul- wooyu, Namyang-yuup, and Maeil-yuup lead the market supply. It will be difficult for Australian companies to join the industry because of the very strong competition between domestic producers.
Understand the market and competitors
For Australian food companies in the Korean market or interested in entering the market, investing in reliable market intelligence is crucial. Because of the large changes taking place in the market this information is needed now – now is not the time to take a wait and see attitude, which a number of Australian industries appear to have adopted. Obtaining market intelligence should not be an irregular exercise in the current environment. Exporters require a watching brief that covers third players, both in terms
135 of Korean export market opportunities and third country competitors and their strategies (for example, European and US companies buying into the Korean retail and distribution system to help position their products).
For small and medium-sized enterprises, the upfront costs do not warrant an individual company commissioning such work. Companies need to work with general agencies such as Austrade, state government offices or other organisations. More specific market intelligence on partners and competitors could be undertaken by consultants for the individual companies after the market potential is proven.
The distribution chain in Korea is changing significantly and rapidly – the use of the traditional wholesale markets, road and transport services, and the ownership and availability of cold storage and warehouse facilities, for example. Further evaluation of these changes is required and this might best be achieved by assessing key ‘real life’ local, regional and international ‘cases’, which can show the detail of the changes occurring. A small number of critical retail, food service and multinational food and drink companies are at the forefront of these changes and should be studied.
The globalisation of world markets has highlighted the need for more effective management of the total supply chain. This is an area of much interest to major international players and has led to developments in supply chain management such as ‘efficient consumer response’ and ‘efficient food service response’. These approaches are now driving many of the large international operators. Australian exporters need to become familiar with the thinking behind and the potential of the approaches, which contain many of the clues for realising savings and benefits along the supply chain.
More attention needs be paid to the development of key retail, food service and multinational food operators in the Asian region (for example, Wal-Mart, Royal Ahold, McDonald’s and Tricon). These companies are at the forefront of developments across the South Korean, Indonesian and Malaysian markets and they probably offer Australian agrifood exporters the greatest individual opportunities in the medium to long term. There is a real need for Australian exporters to understand these companies better and to begin building the forms of partnership that will be required to do business with them in the future. More expansive and creative approaches to business development (for example, regional supply agreements) are needed to meet the demands of these companies. Their scale and rate of development make them unavoidable in all three markets.
To keep up with the rapid change that is occurring in the Korean market, it is vital for the Australian export community to undertake more market monitoring, with more frequency. Exporters need to monitor the market throughout 1998–99 more carefully than ever before and they should expect to get the best possible information from Austrade, the Department of Foreign Affairs and Trade, Supermarket to Asia Ltd and other federal and state government agencies. Information is the key to identifying and getting scarce business in the new market environment. Not only is more information required, but the information needs to be reliable and appropriate. Agencies such as Austrade should be encouraged to increase their support for collecting market intelligence over the next 12 to 24 months.
136 8.7 Bibliography
Agriculture Fisheries and Livestock News 1997, Korea Food Annual 1997, Seoul. Bank of Korea (various issues), Economic Statistics Yearbook, Seoul. Corsetti, G., Pesenti, P. and Roubini, N. 1998, ‘What caused the Asian currency and financial crisis?’, www.stern.nyu.edu/nroubini/asia/AsianCrisis.pdf, March. IMF (International Monetary Fund) 1998, World Economic Outlook, Washington, DC, September. Kim, B.R. 1995, Supply and Demand Strategies of Major Vegetables, KREI Research Report R317, Seoul (in Korean). –– et al. 1997, Medium and Long Term Strategies for Horticulture Sector, KREI Research Report R368, Seoul (in Korean). Kim, W.G. et al. 1995, Cooperation in Agricultural Trade and Development in Northeast Asia, KREI Research Report R339, Seoul (in Korean). Korea Development Institute 1998a, A comprehensive plan for restructuring the Korean economy and overcoming the crisis, KDI, Seoul, mimeo (in Korean). –– 1998b, An evaluation of current situation: corporate debt analysis, KDI, Seoul, mimeo (in Korean). Korea Rural Economic Institute 1997a, Evaluation of Agriculture and Forestry Projects, Seoul (in Korean). –– 1997b, Issues and Evaluation of Rice Policy, KREI Research Info D123, Seoul (in Korean). –– 1997c, Medium and Long Term Forecast of Grains in Korea, KREI C97-6, Seoul (in Korean). –– 1998a, Impact of IMF Measures on the Agriculture Sector in Korea, Policy Research Report P26, Seoul (in Korean). –– 1998b, Effects of the Current Economic Crisis on the Agriculture Sector in Korea, Report to Supermarket to Asia Ltd Project 1998, Seoul (in Korean). Lee, J.O., Shin, S.Y. and Yang, S.Y. 1995, Outlook for Agricultural Trade in Asia-Pacific under the WTO Regime, KREI Research Report R325, Seoul (in Korean). Ministry of Agriculture and Forestry, Korea 1998, Major Agriculture and Forestry Statistics, Seoul. OECD (Organisation for Economic Cooperation and Development) 1996, OECD Economic Survey – Korea, Paris. Rae, A.N. and Bailey, W.C. 1997, Farm and Food Industry Reforms in the Republic of Korea, Massey University, Palmerston North, New Zealand. Smith, H. 1998, ‘Korea’, in McLeod, R.H. and Garnaut, R. (eds), East Asia in Crisis: From Being a Miracle to Needing One?, Routledge, London, Ch. 4. United Nations 1998, Project Link World Outlook, New York, September. US Department of Agriculture 1997, FAS Online Korean Market Report, AGR Number KS7030, Washington, DC. –– 1998, South Korea: Agricultural Export Opportunities Report, Washington, DC, 13 February. WEFA (Wharton Econometric Forecasting Associates) 1998, World Economic Outlook, Philadelphia, July. Yoo, C.H. et al. 1995, Strategies to Strengthen Competitiveness in the Han-woo industry, KREI Research Report R331, Seoul (in Korean).
137
138
Chapter 9 South Korea: retail and food service markets.
9.1 Structure and developments in the retail sector
9.1.1 Overview
The South Korean retail market has undergone significant changes in recent years. Throughout the late 1980s and early 1990s, consumer goods were mostly bought from small independent stores, supermarkets in expensive department stores, convenience stores, or ‘wet markets’. However, the mid-1990s saw the emergence of hypermarkets and large discount and membership stores. These outlets offer lower prices and a wider selection of products, and they have changed the face of the retail market in South Korea.
The market has suffered from increasing competition as a result of the expansion of existing retail groups, the liberalisation of the market and the emergence of the large discount stores. Many retailers have been forced to offer discounts to attract customers. This has placed considerable pressure on retail prices across the board.
Another major trend has been the increase in imports, despite the government’s attempts to encourage consumers to purchase locally made products. Aggressive marketing by exporters and the rising demand for Western products have resulted in increasing volumes of imports.
Prior to the crisis, analysts projected that the value of the retail market would decline as a result of this increasing competition. The crisis is now expected to slow market growth significantly in the short to medium term and to contribute to a major restructuring of the retail market. As financing terms worsen and sales decline, retailers are postponing their expansion plans, or cancelling them altogether, and they are refocusing on securing existing stores.
While the retail market outlook remains gloomy, Korean retail businesses continue to attract interest from foreign investors because of the following important factors: in 1998 the Government abolished the remaining restrictions on foreign investment; the relatively underdeveloped Korean retail industry offers good growth potential; and the abundance of property assets owned by retailers that are available at reasonable valuations.
9.1.2 Market structure
Size
Total retail food sales were worth W20 trillion in 1997, up from W13.4 trillion in 1992. Despite this growth, the South Korean retail market is still underdeveloped and it offers good growth potential in the medium term.
In 1995, the total number of retail outlets in South Korea was 762,000, with food retail outlets accounting for 35 per cent of this total, or 271,000 outlets. By 1997, the number of food retailers had fallen to 257,800 outlets.
Table 9.1 shows the number of food outlets by sector. Despite the rapid rise of modern retailing establishments, small independent shops and general stores still represent the majority of all retail outlets. However, traditional retailing is gradually losing market share. This trend is likely to continue as the retail market keeps developing.
139
Table 9.1: Number of food outlets Type 1997 Growth 1992–97 (%) Supermarkets 2,700 50 Convenience Stores 2,400 800 General Stores 16,200 -10 Food Specialists 230,100 -18 Other 6,400 8.5 Total 257,800 -16 Source: Euromonitor, May 1998.
Segmentation
Prior to the 1970s, the market consisted mainly of a small retailers (‘mom and pop’ stores) and various types of variety stores and traditional Korean markets. The 1980s saw the emergence of supermarkets and department stores. During this period, organisations such as Shinsegae, Lotte, New Core and Hyundai opened outlets, primarily in the Seoul area.
During the 1990s, large department stores such as Shinsegae started to diversify into new retailing areas such as discount stores and membership and wholesale clubs. The number of these types of outlets has increased since the mid-1990s. They rely on high turnover, offer much lower prices and a wider selection of products, and have changed the face of the retail market in Korea. Most hypermarkets sell food and beverages for 25 to 30 per cent less than other retailing outlets do.
Membership stores such as Kim’s Club and Price Club, as well as non-membership stores such as E-Mart, Lotte and Carrefour, have established successful discount store formats.
The increasing popularity of hypermarkets has coincided with the rising demand for Western-style foods, a call for better value, and falling trade barriers. Retailing has shifted from a ‘sellers’ to a ‘buyers’ market, a trend exacerbated by the current crisis. Discount stores and membership clubs will increase their market share in the future, as sales through department stores and small independent retailers decline.
Prior to the economic downturn, most hypermarket groups had very ambitious expansion plans. In some cases, the establishment of new outlets seemed to be more important than profitability. The recent economic problems have substantially slowed their expansion plans.
Once Walmart has completed its takeover of Makro, the discount sector will comprise of three main firms – Walmart (10 outlets), E-Mart (owned by Shinsegae, the current market leader, with 12 outlets) and Carrefour. The sector will be worth W5 trillion per annum.
In 1996, there was a complete removal of the regulations that restricted foreign retailers from owning domestic businesses. That same year, Makro and Carrefour established outlets in Korea. The liberalisation of the retail market has lead to the entry of many more foreign organisations into Korea.
The various retail sectors in Korea are represented by the following trade associations: KOSCA, which covers the supermarkets and hypermarkets sector; the Korean Convenience Store Association, which covers the CVS sector, the Korean Franchise Association, which covers the main retail franchise operations in Korea; and the Korean Voluntary Association, which covers the many small independent retailers
Table 9.2 lists the main retail groups in Korea in 1995–96.
140
Table 9.2: Major retailers in Korea, 1995–96 Retailer Type Turnover Market Share Number of (A$m) (%) Outlets Lotte Dept/SM 3,576 3.5 55 Shinsegae Department Dept 1,543 1.5 7 Store Hyundai Department Dept 1,112 1 3 Store Dong-A Department Dept 1,003 1 n/a Midopa Dept/Conv 880 1 3 Hangyang SM 837 1 85 Taegu Depart. Store Dept 504 .5 50 Haitai Stores SM 468 0.5 58 Others 91,915 90 n/a Total 101,838 100 762,000 Source: Euromonitor, October 1996.
The 1996–97 sales turnovers of the three leading food retailers were as follows: Lotte, US$1.9 billion; LG Mart, US$815 million; and Hanwha Stores, US$765 million.
Key companies in the confectionery market include: Lotte, Haitai, Crown and Orion (Tong Yang). Lotte has a 30 per cent share of the confectionery market, Haitai has around 20 per cent and the others have much smaller shares.
The key softdrink brands in the market are Coke, Lotte cider and Haitai. Lotte has a market share of 35 per cent, Coke has 30 per cent, Haitai has 27 per cent and the remainder total 8 per cent. Haitai’s share has decreased slightly over the past year. Coke’s share has also fallen as some ex-Coke employees have established a company called Pumyang, which has launched the successful ‘815’ cola. Lotte’s share has gone up slightly over the year.
There is market speculation that Haitai Beverages is to be sold to Coke, which would increase Coke’s share and strength in the market.
The main dairy companies in the market are Maeil and Seoul Dairy, for fresh and flavoured milk and cheese, etc., and Namyan, mainly for processed products.
The main traditional Korean alcoholic drinks in the past were beer and ‘soju’ (local rice wine). The market shares of these ‘carry out’ businesses are now approximately 2.5 million litres per annum of beer and 0.8 million per annum of soju. Beer is now approximately 50 per cent imported and 50 per cent locally produced.
The increase in wine sales has eroded mainly beer sales. This has been assisted by the lower import duty and taxes on wine, which are less than half that on beer. Also, Soju is becoming less popular today in Korea as it is not regarded as healthy – it is even seen to cause cancer. The taste for wine is developing quickly, especially for red wine. Red wine makes up around 85 per cent of imported wine sales, whereas white was more popular not too long ago.
OB and Chilu (linked to Hatai) are the two main local alcoholic drinks companies in Korea.
141
Table 9.3: Market shares for the main alcoholic drinks in Korea (%) Drink Market share (1994 figures) Wine 1 Soju 22 Beer 45 Rice wine 7 Hard liquor (whisky/cognac) 1 Others 24 Total 100
Distribution
Korea’s relatively immature retail sector is served in part by modern-style distribution businesses but more commonly by traditional systems. Modern systems are largely attached to the main international retail groups, which are increasing their presence in the market. Many of the largest local supermarket and department store chains have also established sophisticated modern distribution facilities.
The traditional retail distribution system has been dominated by wholesalers and wholesale markets. This system is generally characterised by some of the following points. The system:
· is generally fragmented and often regional or product-specific; · uses unsophisticated IT and other management systems; · generally results in many inefficient small deliveries and lengthy ordering and delivery; · results in excessive retail space being used for storage; · is generally supported by small to medium-sized retailers and the wet markets; and · is plagued by unreliable delivery and quality, loss and waste problems.
Korea’s modern retail distribution system is characterised by some of the following points:
· it is largely ‘proprietary’, i.e. established by retailers for their own business; · development, which is led by international retailers, is increasingly following international practices; · it is centred around large cities, especially Seoul; · its sophistication, while growing, is restricted by the state of development of suppliers’ systems at this stage; · supply chains are starting to shorten for key lines and more direct sourcing is occurring which bypasses wholesalers and markets; · external assistance has been sought in setting up these systems and a new wave of change has begun with the arrival of operators of discount and membership clubs; · retail rationalisation and change, in part caused by the crisis, will cause a rationalisation of the retail distribution structure.
9.1.3 Consumer trends
Korean consumer confidence has been heavily hit by the crisis and it will take some time to recover.
The most affected group appears to be the middle classes. Over the past two decades, they became consumers of imported products and had to withdraw much of their consumption of imported goods as their incomes fell. The middle classes are the ones being laid-off from their jobs and whose incomes appear to have been the most affected by the crisis. It is estimated that 20 per cent of this group has now fallen back into the
142 lower-income category as a result of the crisis (i.e. those earning less than US$2020 per month).
Young Koreans, who were brought up with prosperity, have largely been ignoring the recession until now. They are now finding the situation a shock, unlike older people who have an understanding of economic hardship. Eating out has been cut back significantly. This has hit hotel and restaurant food lines hard. However, the situation caused increases in some imported grocery lines, such as spices and sauces, for food preparation in the home. Consumers are also buying less fruit as it is regarded as a non-essential item, unlike vegetables, softdrink, meat, etc. Dairy products are also in the non-essential category and have been hit hard.
There is more consumer aggression building up as the reality of the recession sinks in. More careful consideration of purchases is being made and people are seeking ‘specials’ more often when they shop, and are trading down in quality terms to get the price they need.
There is more acceptance of local products now, which is being encouraged by the Government. During the past decade, consumers had moved willingly to imported products as their incomes rose. One view was that the 40 per cent of people who made up middle-class Korea had regularly bought imported food products. Now, 80 per cent of this group has been forced to move away from imports. People have severely decreased spending on clothing, and spending on consumer durables (for example, electronic goods) has stalled. Food was affected later.
The public has taken a fairly practical view of the situation during the past year, accepting much of the change that has happened. The Government reportedly did an excellent public relations job, blaming the trading conglomerates, taking some of the blame themselves, saying that the correction is necessary, and suggesting that the correction will happen fairly quickly. This situation appears to be changing as unemployment heads towards record levels and no end to the recession is in sight.
People expected a number of the changes that are now happening and they have welcomed some of the measures that have opened up the market (for example, restrictions on certain imports). There does not appear to be a strong buildup of anti- foreigner sentiment at this stage, in part because the Government is actively promoting the need for inward foreign investment to help save the Korean economy.
Areas outside of Seoul appear to have been the worst affected to date as employment is more restricted in these areas.
Some comments relating to particular food products include the following.
Prior to the crisis, there was a trend towards the consumption of higher value confectionery items and products with additional ‘functionality’ (for example, sugar-free, calcium-added). There has been a move back to the consumption of basic items.
The total confectionery market has increased slightly in value since the start of the crisis (prices have increased by 25 to 30 per cent), but the volume is down by around 10 per cent. All the food companies are exercising caution about launching new brands. Branding is critical in the market, with Lotte, the market leader, said to be the most popular confectionery brand. Lotte has cut around 50 per cent of each of its confectionery categories.
There is almost total import dependency for items such as sugar, cocoa and flavourings, so the cutbacks do not appear to have been replaced by local products. Even snack products are largely based on imported potatoes. Some flavourings are imported from Australia.
143
Australia’s profile in the processed food market is almost non-existent, certainly in branded products. Unfortunately, now is not the time to attempt to launch new brands. The country of origin is largely irrelevant in the confectionery market, according to Lotte.
Total beverage sales in 1998 were down by around 20 per cent from 1997. Beverage purchases have dropped from an average of 7.9 purchases a month before the crisis to 6.3 a month now. Retail sales were down significantly and restaurant sales went up marginally in value. Juice sales had been increasing rapidly prior to the crisis but in 1997–98 sales were down by 30 per cent as juice is regarded as a non-essential item, bought mainly by the 30+ age group. Softdrink sales were down marginally, as they have taken some of the juice market share. The target age group for softdrinks is the under-20s and sales have marginally increased – partially because of a transfer of juice consumers to cheaper softdrinks. Sales of local ‘traditional’ drinks have fallen as they are mainly based on imported ingredients (for example, prune and pear juices). There are no real substitute ingredients for these drinks, so sales will stay down along with general juice sales. Ironically, Lotte claimed that the two new product successes last year were pear juice and prune juice.
Beverage market shares are as follows: softdrink has around 33 per cent, juice has 35 per cent, traditional drinks have 11.6 per cent, canned coffee has 6.6 per cent and sports drinks have 7.2 per cent. In 1998–99 it is expected that softdrink sales will overtake fruit juice and fruit drink sales, as consumers respond to the cost advantage. Cola drinks make up 20 per cent of the total beverage market, and the cola market is split between Coke (with a 75 per cent share) and Pepsi (with a 25 per cent share). Canned coffee sales have increased significantly in the past one to two years and are predicted to increase further. Traditional drink sales will fall further as consumer preferences change; nothing new is being added in this sector and it is dependent on imports. Consumption of sports drinks will remain about the same.
Milk sales are not part of the beverages category, but reportedly are down as well, as they are regarded as a non-essential item. Drinking yoghurt consumption has increased in recent years and there is a reasonable selection of flavoured milks on offer. The selection of dairy products in the Hyundai department store was extensive, particularly of drinking yoghurts and flavoured cream cheese.
Red meat is generally more expensive than other meats in Korea, but there is a strong preference for red meat in the market (McDonald’s showed this in recent research). It is often symbolic of an upmarket occasion, or is a show of status. Chicken is a cheaper meat, which is more popular in the summer. Pork tends to be eaten more in restaurants than at home. Consumption of seafood tends to reserved for special occasions and or is also dependent on the price. Seafood prices in general have risen in recent years and this has been exacerbated by the crisis.
In 1988, the wine market was liberalised and unrestricted imports were allowed. ‘Hard liquor’ (whisky and cognac) is still under quota and is subject to high duties. This will continue in the future until at least 2000, when the whisky tax will come down and the soju sales tax will go up – under Korea’s WTO obligations. Alcohol drinkers in Korea number around 14 million, of which 85 per cent are male and 15 per cent are female. Wine consumption per capita is 0.8 litres for men, 0.45 litres for women and 0.77 litres in total. In the first six months of 1998, wine imports were down by 62 per cent over the same period in 1997 – measured in nine litre cases, from 550,000 to 207,000 cases. Hard liquor imports have virtually stopped (for example, Dongwha’s sales revenue from this sector dropped by 80 per cent in the first six months of 1998). Very few imports have occurred since October/November 1997.
144 9.1.4 Retail trends
A major and recent retail event was the Walmart takeover of Makro in July 1998. This is still being finalised.
Discount operator Price Club is now set to open more new stores. It has two discount outlets at the moment and is part of the negotiations over Kim’s Club (Lotte is apparently also involved in this negotiation). It is currently in a joint venture with Shinsegae, but this company is in trouble so the future of the relationship is uncertain.
Department stores have traditionally been locally owned and controlled (by the conglomerates) and have been less innovative than foreign retailers. This sector of the market is said to be saturated and ready for rationalisation. The state of their parent companies in many cases will force these department stores to change.
Haitai (the largest local supermarket operator) is in receivership at present. It is believed that the company will be split up (for example, Coke is interested in the beverages division). The ultimate fate of the group is still uncertain as apparently the debt structure of the company is quite complex.
Promodes (France) is reportedly due to open its first store soon. The UK company Tesco recently opened an office in Seoul (KOSCA) and Marks and Spencer (UK) has two non- food stores in Seoul at present.
The Government has been encouraging the Korean conglomerates to rationalise and divest themselves of non-core businesses in order to raise cash. This divestment appears to include hotels and retail operations.
LG 25 (part of the Lucky Goldstar group) is the largest CVS operator in Korea (400 outlets). The 7/11 chain’s development (it has approximately 100 stores) has been much slower than anticipated as it is having difficulties with its Korean partner. The Lawson’s chain is thought to be struggling. Family Mart (a subsidiary of Japanese Family Mart) has 300 outlets and is also having to revise its strategies to secure business.
According to Lotte, the pattern of store visitations (not market share, but the percentage of outlets chosen for each shopping occasion) between pre-crisis and now illustrates the shift of food shopping to cheaper sources of products.
Table 9.4: Store visitations (%) Type of retail outlet Pre-crisis Now Department stores 13.4 9.8 Supermarket/’traditional’ retail 57.0 49.0 Discount operators 20.0 30.0 CVS/other 9.6 10.0 Total 100 100 Source: Lotte Beverages
Retail rationalisation has been sped up by the crisis. For example, Makro has been sold to Walmart and Walmart is now looking to buy a number of Kim’s Club stores owned by the ailing retailer, New Core.
Retail change is largely being driven by foreign companies entering the market with new retailing methods (for example, Carrefour caused a significant change by buying fresh produce from importers, which had not happened before). Department stores have been slow to respond to the crisis, partially out of intransigence, but also because of the complexity of their ownership in many cases.
145 Retail chains in general have now become extremely cautious about new investment plans and they are reviewing all business activities very closely.
The Convenience Store (CVS) chains have been badly hit by the crisis. They are likely to remain under pressure as it is claimed that their pricing is too high and their product mix is not absolutely essential (KOSCA). The market in Korea is different from in Japan, where CVS have been more successful, for a number of reasons: the geography of Seoul is different; there is no protective legislation favouring small retailers; the attitude of shoppers is different, etc. However, CVS growth until recently had been rapid for the following reasons: the sector did not exist previously; growth was from a small base; growth was driven by aggressive Japanese operators looking for expansion; new housing apartment blocks provided new locations; urban development allowed it.
Neighbourhood wet markets (which mainly sell fresh foods) are expected to remain fairly strong as they sell essential everyday items, usually local products, and they are cheaper than supermarkets. This sector was forecast to decline quickly during the 1990s, but it is showing much more resilience than expected.
The Government forecast that ‘modern’ retailers would account for 25 per cent of the food market by the year 2005, up from 15 per cent at present. KOSCA does not now expect this target to be reached.
Department stores have suffered badly in the crisis as their core business has been consumer durables, which have been hit hardest. Non-food sales in 1998 will be down by more than 35 per cent on the previous year. Department stores’ ventures into food retailing have met with limited success, as their prices have been higher than those of the supermarkets and discount operators. Their food sales are reportedly flat.
Supermarket growth has also been flat in the past six to 12 months, as these operators have been squeezed by the discount operators. Supermarkets are generally not popular with suppliers as they have previously pressured suppliers too much on price and payment terms and this has caused much resentment.
Hypermarket and discount business is said to be still growing, although Carrefour claimed that its 1997–98 sales fell by 15 per cent and 1998–99 sales will be down by 20 per cent. Sales of durables fell by 40 to 50 per cent, while food sales were marginally down. Carrefour claimed that E-mart will be its greatest competition in the future as this operation is similar to its own and because E-mart is good at distribution and retail management.
KOSCA said that supermarkets had been growing at around 5 to 6 per cent per annum previously, while discount operators had been growing at as much as 30 per cent per annum in the past few years.
Most retail commentators saw another one to two years of deterioration before the food market hits a floor. Some forecasts are for a much longer recession than this.
The OECD has forecast that the Korean economy will decline by 4 per cent this year, but will then grow again by 1.5 per cent in 1999. It will be at least 2005 before economic growth returns to previous levels.
Prior to the crisis, growth in the retail market was being driven by such factors as a growing middle to upper-income customer base, declining consumer resistance to imported food, the increasing numbers of retail outlets, the increasing variety of foods, aggressive marketing by exporters, the reduction in trade barriers and a steadily improving retail and distribution infrastructure.
146 Table 9.5: Alcoholic drinks – retail market shares (%) Outlet Pre-1994 Now Department stores 50 10 Supermarkets 3 0 Hotels 25 30 Liquor chains 10 5 Bars/clubs 10 10 Discount operators 0 55 Source: Dongwha
Although their retail prices are lower, discount operators are said to offer a more profitable business to suppliers. Department stores are being forced to change in response and they are now looking for an involvement in discount formats (for example, Shinsegae in E Mart). An example of how the respective returns compare is in Table 9.6.
Table 9.6: Comparison on returns on wine between department stores and discount operators Department stores Discount operators Retail prices W 7500/bottle W 2800/bottle Margins 35% 6 – 7% Payment terms 45 days and more cash Marketing support (e.g. sampling girls) 20% Nil Profit/bottle W 300 W 350
In the near future, wine importers and distributors expect further major credit problems with their wholesale and retail customers.
Dongwha and other wine and spirit importers speculated on imports, stocking up at pre- crisis prices, but now confront a highly depressed market and cannot, at this stage, raise prices as there is still too much stock in the market. Some of this is in the hands of companies who are in financial trouble and a lot of the product from stock clearances and company collapses is now going to auction. This stock residual will persist in the market for six to 12 months. Until it is sufficiently cleared, the potential for price rises along the supply chain is limited.
Soju tax is currently relatively low (at around 35 per cent), but it is expected to rise from the year 2000. The beer tax will remain high, limiting the long-term growth of imports. The whisky tax will reduce significantly from 2000.
9.1.5 New retail strategies
According to Lotte’s beverages and confectionery section, retailers are concentrating much more on core products and brands. Other responses include the promotion of ‘patriotism’, the absorption of margin pressure to reduce the impact of price increases, more aggressive promotion and a ‘harder’ approach to buying by retailers and suppliers. There is now much more focus on cost-reduction and retailers are undertaking regular reviews of market movements to continually review their sales and marketing strategies. According to Carrefour, not to do so could mean business failure.
Discounters are gradually introducing modern practices such as Category Management and ECR, but they are still being very selective in what they implement. Few companies are ready for modern practices (for example, Carrefour has been studying EDI use for four years, but still cannot use it except with the largest suppliers).
Family Mart (FM) claimed that prior to the crisis, the CVS operators were investing heavily in new outlets. To reduce costs, FM is now transferring the cost of setting up franchises to franchisees. Previously, FM had paid 90 per cent of the set-up cost of new
147 outlets, now the share is almost the reverse. It says this is due to the shift in interest rates and the fact that there are new dividend payment arrangements available (if the franchisee invests more it gets more back, if it invests less it gets less back).
FM’s new opening plans have been cut back. FM was opening around 15 outlets a month before the crisis, but it now forecasts five new outlets for 1998 and some outlets are being closed. It claims that it is only 10 per cent import dependent and hence it has only really incurred the secondary affects of the crisis, from falls in domestic consumption. FM is now focusing on getting its product mix right, choosing the right locations, offering the right opening hours (often 24 hours), offering additional services (for example, utilities payment facilities), targeting people in their teens to mid-30s and offering competitive and flexible pricing. Stores are ranged from A to C and store pricing strategies vary depending upon the competition in the area. It now stocks a small amount of fresh produce and it is improving its distribution to allow for this. It has three fresh and frozen food DCs, three grocery DCs and two liquor DCs. Some of these DCs are owned and run by FM and some are managed by a third party.
9.1.6 Liberalisation of the market
The Government has over the past few months announced a range of deregulation measures, some of which have come into force and some of which are being implemented over a period of time (for example, the removal of the protection for KTHSC has been announced, but the implementation timing is still not clear).
Areas of de-regulation affecting the food industry that were mentioned include:
· the removal of processed food product date code restrictions · the removal of the 100 day import credit period control · new regulations requiring a reduction of disposable packaging in the fast-food industry · the removal of KTHSC’s special position as the only importer of certain foods · the liberalisation of foreign investment in Korean businesses · the restructuring of the financial sector, soon to include many non-bank businesses such as insurance companies. · the privatisation of government utilities · the slow removal of hard liquor import controls, and agreed reductions in import tariffs
9.1.7 Impact of the crisis
Retail sales have continued to fall across the board. Spending on non-essential items such as cars and clothes has been hit hardest. Consumers are also trying to limit expenditure on non-essential food items and are looking for the lowest prices for everything.
The retail industry has started to restructure as a result of the economic slowdown, with many large organisations rationalising and downsizing to stay in the market. Analysts attribute the closure of some retailers to their previous aggressive expansion programs. Continued restructuring in the retail industry is imminent.
Large department stores have been among the hardest hit. In 1996–97, South Korea’s department stores experienced negative growth for the first time in history. On the other hand, discount stores have been experiencing considerable growth, with this sector likely to be the key driver of retail growth in the short term.
The rate of increase in the number of new retail outlets has fallen. Cut throat competition will continue to reduce average sales per store. An outcome of this is likely to be that smaller, local stores will seek alliances with larger stores in order to survive the slump.
148 While some major local retailers (for example, New Core, Midopa and Nasan) are in financial difficulty, multinational retailers have been carefully pursuing acquisition opportunities. European companies such as Carrefour, Tesco and Promodes and US companies such as Walmart, Kmart and Price Costco, as well as Daiei from Japan, are said to be actively investigating joint venture opportunities with local retailers.
Major retailers are either postponing expansion plans or cancelling them altogether, and instead, many of them are refocusing on solidifying their existing stores. Retailers are vulnerable to the current liquidity squeeze due to their exposure to borrowings associated with their previous expansion. Six second-tier department operators reportedly collapsed in 1997. The high interest rate environment and the continued cash-strapped money market will put further pressure on the viability of even first-tier retailers.
Hypermarkets and other large-volume discount outlets should continue to expand their position within the retail sector as consumer spending on non-durables should be less affected by the crisis. Although they may be less affected, discount stores will experience shrinking margins. Margins will be under pressure as retailers adopt aggressive pricing policies to maintain sales volumes in an increasingly competitive environment.
Foreign organisations are being encouraged to enter the relatively underdeveloped Korean retail industry as the Government seeks to attract foreign capital. Global retail chain operators (for example, Walmart) are known to be tapping investments that have uncomplicated ownership structures and well-established outlets.
9.1.8 Competitor responses
Faced with increasing competition from large foreign companies, existing retailers have been increasing their number of outlets to maintain sales and market share. Many of these retailers are now investing in smaller regional centres to avoid competition in major cities. Some have also been investigating opportunities in other countries, such as China, to avoid the fierce competition in the domestic market. This situation, however, is changing quickly as the affect of the crisis hits.
Foreign manufacturers and retailers are carefully assessing investment opportunities in Korea. For example, Coke is looking to buy into Haitai (in receivership) to gain better distribution control in the market and to take advantage of the availability of cheap assets.
The US is by far the most important influence in the Korean market and is Korea’s main trading partner. It is followed by Japan and Europe (Germany, France, Holland and the UK) and then Australia.
The US (via its government agency, Exim – export credit service) has provided short- term financial support to the banks involved with US–Korean trade, thus enabling them to finance US exports, and this has kept US trade artificially high to the detriment of Australian and other exporters.
Japanese trade had been growing quickly until the crisis, but now it depends on the yen rate. The signs are that the yen is still weakening and this will continue to improve Japan’s export competitiveness in Korea and elsewhere. This represents both an import and export threat to Korea.
There was a traditional preference in Korea for certain European food (for example, wine, cheese, etc.), and European food exporters are also active in the market at present to assist their export trade where possible.
Promotional aggression has increased in many cases in retailing, the fast-food sector, department stores and other sectors. Burger King and McDonald’s have been offering
149 better value meals and undertaking more sales promotion activity. There have been clear signs of aggressive retail promotions in department stores. Prices have been adjusted, some up and some down, and margins have been trimmed to retain business. Burger King described margin pressures right across the fast-food sector and Carrefour reported the same situation in the retail sector.
Wine suppliers cannot put prices up at present as there is no demand and there are still pre-crisis stocks in the market. Confectionery prices have gone up. Beverage prices have gone up. Fresh produce prices have gone up. Beef prices have come down markedly (by up to 40 per cent). The situation in the food market is still mixed as the full impact of the crisis has not worked its way fully through yet and there are many factors at play that are affecting different products in different ways.
There is much rationalisation of food businesses starting to happen and this will increase. Everyone is showing real caution about launching new products and making any new investments.
US beef exporters have been waging a war against local producers for the past few months. Local producers, who have been slaughtering more stock, lowered their prices, causing the US beef importers who were holding stocks to lower their prices, which led to further retaliation from local producers. Local prices are now half of what they were a year ago and imports are minimal.
9.1.9 Implications for Australian exports
Food imports increased by around 200 per cent between 1990 and 1993 and by 100 per cent per year between 1994 and 1997, according to Macro. Much of this increase was driven by the middle-income bracket who had extra income and could afford to buy such goods.
This year food imports have fallen significantly. The Korean Tourist Hotel Supply Center (KTHSC) says that its imports are down by 30 per cent.
In many cases, there are no viable alternatives to imported food ingredients and products. Although there is currently a lull in imports, there will need to be a return to some importing in the near future.
The long-term future for wine in Korea is still regarded as very good, certainly while beer taxes remain high. There should be an opportunity in the near future for Australia to take a greater wine market share from the US, based on Australia’s currency advantage. However, Australia has much work to do to raise its profile at consumer level in the medium to longer term.
At the start of 1998, customers stopped buying frozen vegetable imports and held onto current stocks, but after three months they very cautiously started to buy again. According to Simplot, buying caution will continue in the foreseeable future, but trade opportunities still exist for frozen and processed vegetables and other products.
The affect of the crisis on imports has varied by product. For example, chocolate imports are down by 50 per cent this year, but sauce and spice imports are up by 20 per cent. This has been caused by a reduction in non-essential consumption and a rise in home consumption, according to Macrocom.
A high number of smaller or weaker food importers have collapsed. Some commentors put the figure as high as 70 to 80 per cent over the past six to 12 months. This has caused a major upheaval in the market, but it has left some importers better positioned in the immediate future as they have less competition. However, it has also caused much instability in the market as companies have been quitting stock and going out of business.
150 It was also claimed that competition between the remaining companies has in fact intensified as each company is very jealously guarding its remaining business.
During much of the past decade, there have been government controls and restrictions on food imports. This situation has been changing for some time and now the scenario being described is that by around 2005 the economy will be very open and unregulated. WTO commitments, the Government’s encouragement of inward investment, the various steps to remove protected trading situations and restrictions, etc. are all moving the economy towards much more openness.
There was a control on the number of days credit allowed (100 days) for imports until early 1998, but this rule has been relaxed. This has allowed importers to negotiate more favourable terms with exporters where this has been possible.
Cocoa, food flavourings, sugar and packaged confectionery imports have all fallen dramatically and some lines have been deleted completely. More may yet go. However, the Australian Wheat Board is confident that its exports are holding up well and that they will continue to so in the near future because they are providing ingredients for essential basic foodstuffs.
Lotte is looking for cheaper sources of sugar and flavourings, etc. However, it appears that for a main ingredient item such as sugar there are many complexities involved in changing current import arrangements. For example, Lotte’s purchases are linked to other parts of the Lotte Group, there are existing contracts, there is some difficulty in finding other willing suppliers, there are impending tariff changes and so on.
The limited current trade in Australian fruit and vegetables has been affected, although the US and Southern Hemisphere vegetable supply shortage in 1998 meant that the trade has been better than expected. Further market liberalisation should enhance some of the growth in fruit and vegetable trade.
Banana imports are down dramatically on a year ago, as are grape, citrus and pineapple imports. Fruit imports are considered to be a non-essential food item. Vegetable imports, where permitted, do not appear to have been so much affected. Table 9.7 illustrates the impact of the crisis on fruit and vegetables imports.
Table 9.7: Fruit and vegetable imports (1998 as a percentage of 1997) Item Imports Avocado 70 Banana 14 Cherry 47 Grape 20 Grapefruit 20 Kiwifruit 75 Lemons 23 Oranges 14 Pineapple 0 Source: Austrade
Imports of mixed containers and/or smaller quantities per consignment in the fresh produce business have increased in a reaction to market demand and the trading risks. The fresh produce business can change at any moment. The message offered by importers was that, while trade in general is down significantly, exporters need to stay close to good partners in the marketplace and to remain alert to short-term trading possibilities. These still exist and they will continue to do so (for example, high-priced cherries still sell).
151 Australian wine exports have been affected along with French and other imports. The market in Korea is very small and there has been no great effort by the Australian industry to enlarge it. With other larger, more lucrative markets (for example, Japan, where sales grew by 100 per cent last year) there is little need to at this stage. The market is still quite unsophisticated and mainly comprises the hotel trade. Market prices as well as trade were down in 1998, said WEC
Dairy imports tend to go to the middle-income market, and these people can no longer afford such products. Sales have almost stopped – they are down by around 75 per cent on normal demand. The processing market is faring better, as some of this finished product is going to export. Local FCMP and whey products are still in demand according to the ADC.
Australian dairy exports are mainly cheese for on-processing (for example, pizza cheese). These exports have reduced slightly over the past 12 months. There is a Korean milk- powder surplus, which is affecting that sector significantly. The ADC predicts a softer but steadier market over the next 12 months.
9.2 Structure and developments in the food service sector
9.2.1 Overview
Between 1991 and 1995, the food service market in South Korea grew by 47 per cent to reach A$14 billion (W7,889 billion) in 1995. Growth occurred across all sectors of the market, except in the traditional catering sector. This sector suffered from the increasing trend towards Western-style foods and the continued development of the fast-food sector and family restaurants. Despite this trend, the market is still dominated by small independent restaurants and cafes.
Prior to the crisis, consumers were eating out often. Consumers were eating more Western-style foods, as reflected by the strong sales of hamburgers, fried chicken and pizza. The fast-food sector experienced rapid growth.
Greater competition in the fast-food sector has reduced prices across the whole food service market. The major US fast-food operators in Korea have also become embroiled in the price wars, suggesting that the sector is reaching saturation point.
Consumers are now restricting expenditure on eating out and they are preparing more meals at home. Sales of imported food products have declined since November 1997, as consumers have complied with the government’s encouragement of the purchase of locally produced products. Fast-food outlets, many of which heavily rely on imported raw materials, have been hard hit, as the devaluation of the won has increased their costs, significantly reducing their margins in many cases. Despite the slowdown, many big operators are still developing large-scale future investment plans.
An important impediment to the lack of awareness of Australia as a supplier of food is the domination of the US in the Korean market.
9.2.2 Market structure
Size
Between 1991 and 1995, the food service market in South Korea grew by 47 per cent to reach A$14 billion (W7,889 billion) in 1995. All sectors experienced considerable growth, with the exception of the traditional-style food service sector.
152 Table 9.8: The food service market by sector, 1995 Company Sales (A$ million) Percentage Growth, 1991–95 Restaurants and cafes 9320 80 Hotels 1455 70 Traditional 1285 -52 Fast-food outlets 804 138 Retail catering 749 100 Bars and clubs 508 151 TOTAL 14123 47 Source: Euromonitor, February, 1996
Segmentation
Table 9.9 shows that restaurants and cafes still dominate the Korean food service market, accounting for 67 per cent of the total food service market in 1995.
Table 9.9: The food service market by sector, 1995 (A$ million) Sales Market Share (%) Restaurants and cafes 9320 67 Hotels 1455 10 Traditional 1285 9 Fast-food outlets 804 6 Retail catering 749 5 Bars and clubs 508 3 Total 14123 100 Source: Euromonitor, February, 1996
Traditional-style restaurants
Total sales through traditional-style food service outlets were estimated to be A$1.3 billion in 1995. Traditionally a Korean meal consists of a meat dish with a range of side dishes including pickled vegetables, tofu, fish, seaweed and beans. In recent years, the food service market has seen a shift away from traditional-style food service outlets towards Western-style foods, fast-food outlets and food courts. To stay in the market, some traditional outlets are incorporating western food into their menus.
Restaurants/cafes
The restaurant and cafe sector dominates the Korean food service market, with sales reaching A$9.3 billion in 1995. This sector has also enjoyed considerable growth during the 1990s, which has been maintained through the continued development of restaurant and cafe chains and independently owned restaurants. In particular, there has been considerable growth in American-style restaurants such as TGI Fridays and Sizzlers. There has also been an increasing patronage of family-oriented outlets, where traditional menus contain Western-style foods.
153 Table 9.10: Major operators within the restaurant/cafe sector, 1995 Operator Sector Share (% value) PepsiCo 24 Midopa 17 Pizza Inn 8 Asian Star (TGI Fridays) 7 Cheil Food & Chemical Co 6 Doosan Foods 6 Others 32 Total 100 Source: Euromonitor, February, 1996
Hotels
Between 1991 and 1995, this sector grew by 70 per cent to reach A$1.5 billion. In 1995, there were 435 hotels in Korea, with approximately one quarter of them located in Seoul. Korea has a large tourist industry of around 3.6 million visitors annually.
Table 9.11: Major hotel groups in Korea, 1995 Operator Sector share (% value) Hotel Lotte 16 Marriot Hotels, Resorts 11 Inter-Continental 7 Shangri-La 7 Others 59 Total 100 Source: Euromonitor, February 1996
Most first class hotels in Korea are owned by the large conglomerates and many of these operations are likely to be divested as the owners sort out their financial difficulties.
Fast-food sector
The fast-food sector grew 138 per cent between 1991 and 1995 to reach a sales turnover of A$804 million. It is considered to be the most competitive sector of the food service market. In 1995, there were 10,000 chicken outlets nationwide. The number of fast-food chain stores in Korea continues to increase. In mid-1996, the 16 major fast-food chains had a combined total of 895 stores and by the end of that same year, it was projected that the number would increase by 30 per cent. Fast-food operators often rely on imported raw materials such as beef, cheese, chicken and fried potatoes because they are cheaper than local produce.
Table 9.12: Major fast-food operators, 1996 Company Turnover, 1996 No. Outlets, No. outlets, 1998 (A$ million) 1996 (estimate) Lotteria 250 320 393 KFC 199 110 127 Pizza Hut 175 121 n/a McDonald’s 111 80 126 Popeyes 72 72 125 Coco’s 63 39 n/a TGIF 54 9 n/a Burger King 51 40 49 Wendy’s/Winners 40 30 (Winners) 16 Source: Korean Economic Daily, 15 January 1997 and other sources
154 Table 9.13: Fast-food chains’ share of business, 1995 Brand Operator Sector Share (% value) Lotteria Lotte 28 KFC Doosan Foods 15 McDonald’s McDonald’s Corporation 11 Hardee’s Imasco 10 Domino’s Domino’s 6 Burger King Grand Metropolitan 6 Wendy’s Wendy’s International 5 Others 17 Total 100 Source: Euromonitor, The Market for Consumer Catering in South East Asia, February 1996
Retail catering
Retail catering includes food courts and in-store catering facilities. This sector grew by 100 per cent between 1991 and 1995 to reach A$749 million.
Table 9.14: Major retail catering operators, 1995 Company Sector share (% value) Lotte Corporation 14 Shinsegai 11 Taegu 10 Midopa 8 Others 57 Total 100 Source: Euromonitor, February 1996
Bars and clubs
Although the bars and clubs sector is the smallest in the Korean food service market, it has experienced substantial growth. Between 1991 and 1995, turnover grew by 151 per cent to reach A$508 million. Rising demand for beer has led to a growing demand for bars and clubs, particularly in the larger cities throughout South Korea. Most bars and clubs are still independent establishments.
Food service distribution
Hotels and restaurants have been increasingly able to purchase imported food products without restrictions as the market has been deregulated. However, most of the food imports for hotels and restaurants still come via the Korea Tourist Hotel Supply Center (KTHSC). The KTHSC is in a privileged position and is able to add a minimal mark-up to products because its shareholders are also the owners. It imports a wide variety of foodstuffs, vegetables, fruits and meat and other non-food supplies to member hotels and restaurants and remains confident of its dominant position. It says that there are no other similar large import and distribution companies and it does not see any significant rationalisation of the import and distribution sector that will threaten its position. Others say the removal of government protection for KTHSC will result in significant change. The KTHSC mainly responds to orders from hotels and restaurants, but it also imports in anticipation of repeat orders and holds stock for sale at a later stage. It imported $90 million worth of foodstuffs in 1996, of which $56 million came from the United States.
There are few contract catering companies. Lotte has a division that supplies meals to its own businesses and to some other customers. Contract catering companies tend to be local and specialised or they are an internal supplier to a larger organisation.
155 The ‘lunch box’ trade is mainly handled by smaller, local companies. It is not a major business as it is in Japan. However, via the CVSs, the trade appears to be increasing as people are looking for a cheaper alternative to restaurants for staff and business lunches.
The fruit import market is said to be dominated by just seven to eight main companies now, which is very different to the situation which existed a year ago.
The inadequacies of the infrastructure in South Korea is well documented. Clogged ports, heavy traffic, a lack of storage space and refrigeration and few sites for further development have restricted the growth of the Korean market. Prices for imported products have been significantly increased by these inefficiencies. The distribution system is also fragmented, with few food companies having a national distribution system. Food service operators and importers have to deal with a large number of wholesalers and distributors for the sale of their goods.
In general, retailers do not import directly from overseas suppliers. In most instances, importers take almost all the risks on behalf of retailers. This situation is changing as major retailers are now investigating direct import opportunities as a means to reduce costs.
9.2.3 Consumer and food service trends
There is still a limited awareness of Australia as a food supplier. Australia is perceived as not offering the variety other major exporters do. There is also a question as to whether Australian suppliers are committed to the market and can consistently supply the large volumes demanded. US companies are generally larger and more established and they can supply large volumes of products. The Korean market is very sensitive to brand image and unfortunately Australia has very few prominent brands.
Imports are subject to health inspection by the Ministry of Health and Welfare (MOHW). The first shipment of each consignment is generally subject to a detailed inspection, which may take a long time. Perishable products continue to have difficulty accessing the Korean market for this reason.
Most Korean laws are ambiguous and discretionary. Changes to regulations are rarely announced in a timely manner, which continues to cause problems and frustration in working with Customs and leads to cases of bribery and corruption.
Most of the prime central locations around Korea have already been taken, so food service operators are now turning to suburban locations on the city outskirts, where property is cheaper and where middle and upper-class families live.
Koreans appreciate quality but are not necessarily willing to pay for it. If a lower-priced product of a lower quality is available this will often be the product of choice.
Local manufacturing companies have been attracted by the development of the food service sector and they have been seeking to diversify into this business (for example, Tongyang Confectionery, Manyang Dairy Co).
Prior to the crisis, the key driving forces of growth in the food service sector were: increasing per capita incomes; younger consumers with a higher desire for imported products; the increasing number of working women; smaller families or households; the high level of familiarity with American eating habits; the increasing level of travel overseas; the spread of home appliances such as microwave ovens and refrigerators; the trend towards more convenience foods; the Government’s recognition of the importance of tourism; and the trend towards eating out.
156 Knowledge and control of distribution is the key to market success in the food service market in Korea, especially to gain access to the ‘mom and pop’ sector, according to MLA. While no major changes seem to have happened yet, distribution rationalisation is starting to happen. Some commentators believe that major change in the distribution sector is needed and that it will happen soon.
Major end-users have their own distribution facilities. Most of these facilities are considered to be fairly modern. Smaller operators tend to use public storage facilities. They often agree to share arrangements with other similar businesses. There do not appear to be many specialist food distribution companies offering services to a range of clients. It was claimed that there are maybe 20 to 30 main food distribution companies in Korea. They are a disparate collection of businesses, and are very traditional and sector- specific. There is still a lot of caution about breaking the traditional distribution patterns (for example, missing out wholesalers) for fear of reprisals on other business.
KTHSC is the largest hotel and restaurant distributor, with around a 20 per cent share of the food service market. Its protected position is set to end in the next few years – this decision has been announced, although no timetable has been set.
Foreign hotel ownership is expected to increase because a number of local operations are in trouble and the Government is encouraging the conglomerates (hotel owners in many cases) to sell their hotel interests. This will be aided by the Government’s policy of allowing easier inward investment. However, Austrade said foreign companies are exercising caution in making such investments. There are many issues involved in getting an investment price or deal right. For example, there is still resistance to reducing asset values at this stage, debt structures are often very complex and there are complex relationships involved.
All operators are being very cautious about their distribution (logistics centre) investments, as the costs are high and they do not wish to expose themselves to unnecessary risk at this time.
A number of issues materially affect the pattern of food distribution in Korea. Wholesalers and distributors are still powerful in the market, so to trying to bypass them is difficult. There are still some regional and other restrictions on the distribution of foodstuffs around Korea, but these are quickly disappearing as the market is liberalised.
The two basic food distribution models in Korea appear to be:
· From the manufacturer or importer, to the logistics centre, to the retailer, supermarket, hotel, or special home delivery (the modern system); and · From the manufacturer or importer, to the wholesaler, to the logistics centre, to the stores or secondary wholesale markets, to the final retail or food service outlet (the more complex traditional system).
Burger King and KFC are both in partnership with the Korea company Doosan. They have set up a joint warehousing arrangement for the distribution needs of both businesses. Most of the large fast-food or restaurant chains have similar distribution arrangements.
Distribution in the restaurant sector is much simpler than in the retail sector, as fast-food operations and restaurants are more concentrated around cities (especially Seoul) and they require fewer DCs to service their outlets.
Wine and liquor distribution generally goes from the importer or distributor to the wholesaler, then to the following sectors:
157 ‘Off premise’ department stores discount operators liquor chains (franchise/corporate) supermarkets, CVS, other retail ‘On premise’ hotels bars/saloons, night clubs, etc. restaurants ‘Duty free’ KNTO (Korean National Tourism Office) airlines diplomatic
Between 1991 and 1997 the average growth in liquor imports into Korea per annum was 33 per cent. For some companies it was as high as 41 per cent per annum. The wine and spirit market structure has changed markedly. Between 1987 and 1992 there were 80 licensed importers, in the 1993 to 1995 period it rose to 125 and between 1996 and 1998 it rose to 330. From 1998 onwards, the number of importers is expected to fall again to around 100 to 130. At around 60 to 80 importers, it would reach an ideal level again. Of this number, the 18 largest operators account for around 90 per cent of all imports, according to Dongwha.
There has not been any evidence that health consciousness has changed the fast-food market in Korea at this stage. Fried fast food is still very popular, much more so than in Australia.
There has been a major food safety scare recently related to soft-serve ice cream and sales have plummeted. Sales are still down.
The only new fast-food trend in the market was some interest in Doner Kebabs.
Taco Bell entered the market three years ago and failed. Mexican food was not known and not accepted. Also, it appears that its introduction was not marketed well. Burger King also tried Denny’s restaurants and withdrew again as they were also not accepted.
Bennigan’s seems to have the best reputation amongst the western family restaurant chains, while TGFI probably has the best sales performance.
Burger King almost wholly uses local vegetables (except for US potatoes for French fries), local bread and Australian or American beef (this has shifted more to Australian beef since the start of the crisis).
As an environmental measure, the Government recently passed laws requiring fast-food and other operators to reduce their use of disposable packaging.
9.2.4 Impact of the crisis
Recent trade figures show that total Korean exports have fallen by around 14 per cent on a year ago, while imports have fallen by 44 per cent to the middle of 1998. This has produced a net trade surplus, but this situation is rapidly changing as export profits fall and the scope for import reduction disappears. This trend will intensify the recession in Korea quickly in the near future.
The Bank of Korea is challenging the Government’s approach of trying to ‘manage’ the economic recovery, stating that de-regulation that allows ‘market forces’ to work is the only way to achieve a sustainable long-term restructuring and recovery.
It is estimated that 20 per cent of the middle-income sector has now fallen back into the lower-income category as a result of the crisis. The middle-income group considers that
158 they were primarily the ones who created the economic ‘miracle’ and there is a growing resentment at the deterioration of their conditions.
The combination of recent wage cuts and the price rises (due to import and other costs) have effectively reduced average Korean incomes by 36 per cent, said the Financial Service Commission.
In the year to mid-1998, inward tourism spending was down by 51.3 per cent, overseas travel was down by 42.2 per cent, consumer durables consumption was down by 38.5 per cent, car purchases were down by 65.3 per cent and house prices were down by 30 per cent (Financial Service Commission).
The Government is to order many more under-performing non-banking companies to close or to rationalise (Financial Service Commission). This will cause significant new unemployment. Since late 1997, 1000 businesses a month have gone bankrupt in Korea.
There is a general consensus among traders that the won is expected to weaken further over the next year or so. Also, traders foresaw that the yen would weaken, further worsening Korea’s export competitiveness relative to Japan’s.
In August, the Government announced the privatisation of 55 units of 19 state-run corporations (for example, Korea Telecom, Korea Electric Power Corp). This will cause around 30,000 new unemployed. The plan is to fully privatise these units by 2002. In total, 82 units of 26 state-run corporations will have been affected by then.
While major conglomerates such as Hyundai are struggling for survival, they are also trying to forestall further job losses. Hyundai has postponed further lay-offs until 2002 and reduced its lay-off targets.
The food service business makes up only about 15 per cent of the total Korean food market. The sector is suffering as badly, or worse, than the retailing sector, although food service growth had been much faster than retail growth prior to the onset of the crisis. Hotel business is down by around 30 per cent in 1998 and is expected to fall further, said KTHSC. Prices of imported food items (finished products and ingredients) have risen by 20 to 30 per cent this year. The turnovers of fast-food and family restaurants this year are respectively 20 to 30 per cent and 40 to 50 per cent less than the previous year.
Some major food operators are continuing to develop investment plans for the food service market. For example, Asian-Star (TGI Friday’s), recently introduced another restaurant chain known as Italiani’s and more of these outlets will be opened in 1999. Asian-Star also plans to open three more TGIF restaurants in the beginning of 1999 to increase the total number of outlets to 11.
However, fast-food outlets are feeling the effects of the crisis. About 40 per cent of their raw materials are imported; it is cheaper to import beef, cheese, chicken and fried potatoes than to buy local produce. At the moment, these restaurant chains are taking a ‘wait and see’ stance before attempting to change from imports to local produce.
The economic crisis has had a dramatic impact on the imported beef market. The won rate and a larger than average domestic supply has lead to a decline in demand for imported beef.
Only about 5 per cent of the fresh fruit business goes to the food service market and this ratio has not changed much in recent years. The proportion of the vegetable food service business that goes to the food service market is higher, but still not great.
As economic pressure on the restaurants and fast-food chains rises, the people most affected appear to be the franchisees, which cannot make a profit, nor are they being
159 given much protection by the franchise chains. A number have gone out of business and more are expected to fail.
Despite claims of growth and profitability, some major food service suppliers claim that none of the main family restaurant chains are making money. Planet Hollywood has gone, as have several others (for example, Wendy’s, Denny’s).
Recent sales figures for the main fast-food companies show huge recent increases in many cases and the general slowing of growth in 1997–98 (Table 9.15). There are negative growth forecasts in several cases for the current year.
Table 9.15: Sales performances of major fast-food companies (year on year percentage change) Company 1995 1996 1997 1998 (forecast) McDonald’s 61 47 37 19 Burger King 89 35 35 7 KFC 56 11 5 -4 Popeyes 542 346 93 38 Pizza Hutt n/a 151 34 -21 Lotteria 33 200 5 -6 Source: Burger King
Fast-food sales in 1998 were generally down by individual outlet and by amount per visit. Growth is being generated principally by new openings.
Fast-food shares in 1997–98 by type of food were: hamburgers 592 outlets (53.7%) share chicken 246 (22.3%) pizza 263 (23.9%).
Pizza was the first Western fast food introduced into the Korean market and is regarded as the most ‘mature’ of the three main fast foods. The figures above show that perhaps the largest decline in growth is in pizza outlets.
Burger King claims there is little evidence of a shift away from family restaurant consumption to fast-food. Rather, it sees a general trading-down – to eating out less often, consuming more inexpensive options and eating only at known or favourite outlets, etc.
There was some discussion of the wisdom of the fast-food groups’ different approaches to expansion. Burger King, KFC and Lotteria have mainly company-owned outlets, while Popeyes and others are largely franchise operations. Franchise arrangements have allowed for rapid expansion, however franchisees are more vulnerable to the economic situation and many are failing. As the market worsens there is a likelihood of more failures and this reflects badly on the fast-food operator. Popeyes may suffer from this in the near future, according to Burger King.
Burger King will retain outlet ownership until the year 2002, then it plans to franchise outlets. Popeyes has grown quickly by franchising in the past few years. KFC generally retains company management. McDonald’s has opened mainly company outlets this year, but it will return to franchising next year.
McDonald’s is expected to speed up its investment in Korea in the next few years. It needs growth internationally and now is considered to be a good time to build business at a modest cost. It is likely to buy out or change its local partner, which has not been making the agreed investment into the business.
160 Fast-food margins are being squeezed amongst all operators (for example, Burger King made a loss in 1997–98). Burger King sales per outlet are consistently down this year (5 to 20 per cent). The coming year looks little better, but Burger King sees a return to profit in the short to medium term after some recovery in the economy and when there has been some industry restructuring (for example, cheaper sources of beef).
Hardee’s has closed five insolvent restaurants this year from a total of 24 outlets, but it is also looking to reopen franchises in more profitable situations in the coming year. Burger King closed two locations in Seoul in 1998. Lotteria plans to open 16 and close six. McDonald’s will open 10 company-managed outlets. KFC opened one outlet and closed one. Popeyes overtook KFC in Korea for the first time this year in terms of outlet numbers. TGI Friday’s and Chille have delayed plans to open new outlets this year.
Fast-food operators have become much more aggressive recently in their promotional activity and they are offering better value deals to lure customers (for example, McValue meals).
Fast-food appears to have performed better than the casual restaurant chains in general as they are able to offer cheaper food to younger customers and families. Chicken fast-food is still very popular (for example, Popeyes), as chicken is a cheaper meat than beef or seafood.
9.2.5 Competitor responses
There are no clear signs that local producers and suppliers are filling the import vacuum caused by the crisis. In horticulture, few suppliers appear to be anticipating more demand for their produce. There are also a number of problems with local fruit and vegetable supply (for example, bananas cannot be grown, interest rates have increased, grower and consumer confidence has fallen and there is less enthusiasm for risk taking).
It has been claimed that there is little land available to sustain higher production in the longer term, that production costs are too high for local producers to be competitive, and that the Government will not subsidise agriculture in the future.
Domestic dairy production was not forecast to bridge the dairy product shortfall. There has been some debate in the market about the suitability of soy milk for infants (which had become popular), and demand for milk is expected to increase.
There has been a short-term shift to local beef consumption. Local sales have risen from around 50 per cent of total sales to 70 per cent as local producers have filled the import gap. This has been achieved by slaughtering more of the local beef stock and in the future lower stock levels will not allow this share to be maintained.
The Government recently announced that seven key foodstuff raw material tariff rates: (tomato paste, 50 per cent; frozen cream, 54 per cent; butter, 40 per cent; rape oil, 30 per cent; sunflower seed oil, 25 per cent; lactose, 20 per cent; powdered whey, 20 per cent; other whey, 40 per cent) will be lowered to the level of finished products (8 per cent) from next year in an attempt to improve the competitiveness of local manufacturing.
Many factors mitigate against greater food self-reliance in Korea. There is no wine industry in Korea, seafood production continues to decline, there is no more land available for agriculture, local production costs are too high and so on. The Government is under great pressure to support local agriculture (for example to continue protection of the Cheju mandarin and other production regions), but at this stage it does not appear to be prepared to jeopardise its WTO commitments.
161 9.2.6 Implications for Australian exports
Consumer confidence is now falling quickly and is expected to fall much further yet. The market appears not to have fully come to terms with the gravity of the crisis. The Government’s actions have focused on the conglomerates (banking, automobile makers, etc.) in a way that has not really brought the full impact down to the ‘average’ consumer. The market is to an extent still in the ‘denial’ phase at the moment.
Unemployment is fast becoming a big issue and is expected to increase over the next year. Public resentment is growing quickly and strikes are occurring more frequently. Resentment of ‘the foreign solution’ being touted by the Government is likely to increase and may affect food trade further in the future.
Trade in basic food ingredient imports such as flour and wheat seems to have continued at close to previous levels and there is a belief that this business will continue to be fairly strong, particularly as the Government is reducing tariff levels on these items compared with tariffs on finished goods.
The banking system, although shaky and in the midst of rationalisation, does not appear to have been an impediment to trade, except where borrowers had previously split loans between banks and are now not able to get the same amount of money from a merged bank.
Up to 80 per cent of food importers have collapsed during the past six to 12 months. Great caution is necessary and exporters should try to align themselves with the most viable importers and to maintain these relationships. A continual monitoring of trading partners will be necessary.
Credit terms have been tightened, access to ‘open’ and consignment selling has all but stopped and consignment lots have been reduced in size in a number of cases.
Korea has defaulted on its WTO commitments on imported beef. While Australia has achieved a good share of import sales so far this year, Korea is a far short of its trade quota commitments and Australian and American industries have been applying great political pressure in attempt to force more imports.
Beef imports will remain under quota until 2001, when quotas will be replaced by tariffs (at around 40 to 50 per cent). The net affect of the change will be beneficial to Australia, said MLA. The chilled beef trade is set to start and is considered to be a big opportunity if handled well, according to MLA.
Many of the rules governing foreign investment have been relaxed. It is now possible for foreign investors to take full ownership of Korean businesses that were previously protected. The Government has even set up a department to encourage foreign investors to make investments. The Bank of Korea has strongly advocated that Korean conglomerates should seek foreign partners as means of gaining cash to survive.
There is still a small but regular trade in top-end products (for example, cherries and oranges), although clearly the market is much smaller than it was. The richest consumers in the country still have the capacity and desire to buy imported goods. Exporters must stay alert to these opportunities and they need to maintain a good communication with their import contacts.
Some long-term export opportunities for the market include honey (currently restricted by high import duties, but these are scheduled to decrease by 2004), fruit jams, dairy products (not only cheddar cheese), frozen processed vegetables, wine (rated as having very good medium to long-term potential as the market recovers) and potato products (mainly processed). Potato products such as French fries and potato crisps are very
162 popular and depend on imported raw materials. Chilled meat was another unfulfilled opportunity.
Opportunities for fresh fruit and vegetables appear to be the same as elsewhere in North Asia. Products need to be cheaper, supplied off-season, or different (i.e. value-added or superior quality). Basic vegetables are produced locally and there is the spectre of more fresh and processed products coming into the market from places such as Thailand, Indonesia and China.
Imports of basic wheat and grain-based ingredients are also expected to continue to be strong throughout the current market downturn and beyond.
Meat imports from the UK and Europe are still restricted and resisted because of the mad cow disease scare.
The current quota system in the beef market has encouraged illegal secondary quota buying by wholesalers, which has caused some confusion in the meat distribution supply chain.
There is still a lot of interference with trading and importing in Korea because of corruption, institutionalised bureaucracy and a degree of cultural resistance to foreigners and imports. The workings of the system are said to be very complex and it is necessary to know the right people and how to ‘work the system’.
9.3 Company profiles
Lotte Corporation
Lotte is one of South Korea’s largest conglomerates, with a variety of manufacturing and service interests, including supermarkets and department stores. Lotte is Korea’s largest retailer. The company’s flagship store is the Lotte department store in central Seoul.
Lotte opened its first department store in Seoul in 1979 and now has seven outlets in South Korea. In 1995, Lotte’s turnover totalled W2,000 billion (A$4 billion). The number of supermarkets outlets in 1995 was 50 and each store had an average turnover of W40 billion. Lotte Confectionery Produces a wide range on confectionery items from four large factories in Korea. It also exports to and exports from 60 countries worldwide. Lotte-Chil sung Beverages Established in 1970, this division is the nation’s largest beverages company and one of the largest such companies in Asia. It has 35 per cent of the Korean market. Products include cider and a range of other non-alcoholic drinks, including high-profile brands such as Pepsi. Lotte Samkang Established in 1958, this division is the largest producer and seller of oil and fat- based products in Korea. Ice cream is a particularly important product for this division. Lotteria Established in 1979, this division is the largest fast-food operator in Korea and targets lower to middle-income earners and younger customers. The group has expanded rapidly in recent years and has plans to expand overseas in the future.
Other food divisions are involved in meat products, cold storage, hotels, and food distribution.
163 Shinsegae
Shinsegae, one of Korea’s largest department store chains, is based in Seoul and employs 3,794 people. In 1995, sales turnover totalled W864 billion and the number of outlets was seven.
Prior to the crisis, the company planned to double its number of outlets by 1998. The company also planned to expand outside of Seoul and intended to open discount stores and membership warehouses. This has been achieved via its E-Mart operations. E-Mart runs 12 stores.
Shinsegae Department Store has recently entered into a joint venture agreement with Costco Wholesale Co. (the parent company of the Price Club based in the US) to form Costco Wholesale Korea Co. Shinsegae has 6 per cent equity in the new company. The US company saw excellent future growth prospects for the discount store business in Korea. The new company plans to build 10 new stores in the next five years.
Haitai
The company, which is based in Seoul and Kyunggi, was established in 1974 under the trading name Kosco Super. In 1995, it employed 2,536 people. The group has confectionery, beverages, liquor, retailing and dairy product interests.
In 1995, Haitai group sales turnover totalled A$468 million.
The company is currently in the hands of a receiver and the future of the company is uncertain. Haitai Stores Haitai is Korea’s largest supermarket chain, with 90 stores serviced by one distribution centre and 60 trucks. In October 1997, a Victoria-based cool store operator, P Cleland Enterprises, won a contract to handle all of the distribution operations for Haitai Stores. Haitai Beverages One of the largest beverage companies in Korea, involved in over 30 different softdrink, fruit juice and liquor businesses, Haitai has around 25 to 30 per cent of the beverages market.
LG Mart Co. Ltd
An expanding retail group comprising supermarkets, convenience stores and a food service arm, LG Mart is a part of the Lucky Goldstar group, which is one of Korea’s largest conglomerates.
From a start in retailing in the early 1990s, it had 66 supermarket outlets by December 1997 and around 1500 LG 25 CVSs (500 of its own), making it the largest CVS operator in the country.
The group also has an expanding number of department stores.
Group turnover totalled US$1 billion in 1997, of which 80 per cent came from retailing and 20 per cent from food service.
Tong Yang Group
Tong Yang Group is a large conglomerate of 22 companies and is involved in various businesses including food. Group sales totalled US$4.5 billion in 1996. Food interests relate primarily to confectionery products including the leading Orion brand of confectionery and snack foods.
164
The group also has a joint venture with the Metromedia Restaurant Group of the US, which runs one of the leading Western-style restaurant groups, Bennigan’s.
Woosung
Established in 1969, the group is an important player in the Korean food industry. Products mainly include beverages, canned foods, nuts and snack foods. In 1995, total turnover reached US$148 million after a period of rapid expansion. The group has interests in restaurants such as Bono Boss and is a consultant to the food industry. It has 18 retail stores.
Hyundai Department Store
Hyundai Department Store is an offshoot of the large Hyundai conglomerate. There are three upmarket department stores, which include food halls in their basements that stock a very diverse selection of luxury foodstuffs.
Walmart/Makro
In July 1998, US-based Walmart took over the four stores of Makro. It also plans to build six new outlets to create an operation with a turnover of W5 trillion per annum.
Walmart has also approached New Core, operator of Kim’s Club, about purchasing these outlets. If this happens Walmart would become the largest discount retail operator in the country.
Carrefour Korea Ltd
French-owned Carrefour is now the fourth-largest retail group in the world. They now have four outlets in South Korea and are much watched by the market as they have proven to be highly successful hypermarket/discount operators. A further outlet will open early next year, taking Carrefour’s Korea turnover to US$600 per annum.
Hanwha Store Co Ltd
A major retail group, with ‘Galleria’ department stores and ‘Hanwha’ supermarkets, Hanwha is also moving into the CVS retail sector with its ‘Hanwha Mart’ stores. In 1996, the group had 53 supermarket outlets and four department stores with four new outlets planned.
Group turnover was around US$1 billion in 1996.
Bokwang Family Mart Co Ltd
This is the Korean arm of the Japanese Family Mart CVS retail group, which is one of the largest CVS groups in the market.
FM is transferring the cost of setting up franchises to franchisees to help its own situation. Also, new opening plans have been cut back. FM was to open around 15 outlets per month before the crisis hit, but it now forecasts five for 1998 and it is also closing some outlets.
New Core
This retail group had 21 outlets in Korea in 1996–97. It is the owner of discount membership retail group Kim’s Club.
165 Hangyang
A large supermarket chain with around 90 outlets throughout Korea, in 1995–96 Hangyang’s turnover was A$837 million.
Taegu Department Store
Taegu is a chain of over 50 department stores with a turnover of around A$500 million per annum.
Dong-A Department Store
A largely non-food department store group, Dong-A has a turnover of around A$1 billion per annum.
Food service
Dongwha
Dongwha is another diversified group with interests in the food and beverage industry that include liquor, trading, tourism and duty free shopping. Dongwha Liquor Established in 1987 when alcoholic liquor imports were first permitted, Dongwha Liquor is now one of Korea’s leading liquor importers and distributors to the retail and food service market. Products include a range of leading international brands, including Australian wine.
Korean Tourist Hotel Supply Centre
Established in 1972 with the approval of the Minister of Transportation to import and supply member companies, KTHSC’s 80 to 100 members include many of the leading hotels and restaurants in Korea. In total KTHSC supplies around 500 hotels and 300 restaurants.
Turnover was around US$200 million in 1997 and a wide range of beverages and foodstuffs as well as restaurant equipment was handled.
The KTHSC is estimated to account for around 20 per cent of all imported food service supplies in Korea.
Asian Star (TGIF)
The Korean operator of the TGIF restaurant franchise in Korea. Asian Star has six outlets and plans to open several more outlets in 1998.
McDonald’s
McDonald’s now has around 130 restaurants in Korea, up from 76 in 1996.
Despite troubles with its local partner, McDonald’s has built up a chain of outlets, which are a mix of company-owned and franchised operations. The company intends to open 10 outlets in 1998 and will speed up its expansion plans in the future.
Imasco/Hardee’s
A chain of 24 Western-style restaurants catering to younger Koreans and ex-patriots, Hardees has perhaps the premier reputation amongst the Western-style groups in the market.
166
Doosan Foods KFC KFC is part of a joint venture with the Doosan company. Pepsi Co Inc (Pizza Hutt) The original Western-style fast-food operator in Korea; also part of a joint venture with the Doosan company.
Burger King
Part of the Grand Metropolitan group, Burger King is a later entrant into the Korean fast-food market. It has 49 outlets in Korea and will not open any in 1998. It plans to continue to open more outlets in 1999.
Midopa
A retail and food service business, which had three department store outlets in 1995–96, Midopa’s 1996 turnover was A$900 million.
167 9.4 References
Agriculture Canada 1998, Agri-Marketer, January. Agriculture Canada 1996, Food Trends in Korea, August – 8th edition Asia Pulse 1997a, 1 October. Asia Pulse 1997b, 8 October, Asia Pulse 1997c, 28 November. Asia Pulse 1998, 4 May. Austrade 1998, Responding to the Asian Crisis, February. Euromonitor, The Market for Retailing in South East Asia, South Korea, October 1996, 1998. Euromonitor, The Market for Consumer Catering in South East Asia, February 1996, 1998. Korean Economic Daily 1997a, February 24. Korean Economic Daily 1997b, December 15. Korean Herald 1998, Strategies of Large Korean Retailers, April. Ing Barings 1998, Retail Sector Focus, Korea – Industry Report, January. Prime Minister’s Supermarket to Asia Council 1997, Asian Customer Requirements for Quality Food Australia, September. QDPI and RIRDC 1995, An Overview of Food Retailing in East Asia, Developments, Future Directions and Opportunities. US Department of Agriculture 1997, Korean Market Report. US Department of Agriculture Reports 1998, February 13.
168
Chapter 10 Economic developments in the Indonesian and Malaysian Agrifood sectors – a literature review.
10.1 Introduction
Undertaking a literature review of economic developments in the Indonesian and Malaysian agrifood sectors at the current time is difficult. Because of the crisis that has hit both economies, but particularly Indonesia, from the middle of 1997 and continues to this day, extensive changes across institutions affecting the economic development of the agrifood sector have been implemented or are under consideration. How relevant is old literature in such a situation? How relevant will current literature be, given a rapidly changing environment?
The answers to both of these questions are linked in some respects. There are some fundamental aspects of economic development in the Indonesian and Malaysian agrifood sectors that appear to apply regardless of the circumstances. Indonesia’s and Malaysia’s endowment of natural resources would be one such aspect and food self-sufficiency or outward orientation might be others. Old literature on such aspects will still be relevant but literature on aspects that appear to have changed forever, for example rigid limitations on foreign investment, might no longer be relevant.
Current changes relevant to the fundamental aspects (for example, BULOG reforms) will also be pertinent into the longer term, which should be the timeframe taken by Australian industry in its dealings with these economies, particularly Indonesia. Moreover, if the Indonesian IMF packages are a strong basis for future changes then their principles provide a framework for the longer term. However, both economies are currently facing a continually and rapidly changing environment, for example there has been a sequence of IMF packages announced for Indonesia over the past year and many declared policy changes have failed to be implemented. Thus, any snapshot in time can become dated very quickly and a watching brief may be required to maintain the currency of any detailed review.
The rapid changes in Indonesia and Malaysia offer Australian industry both threats and opportunities. New policies are being put forward that appear to be short-sighted reactions to perceived problems, and which could have major adverse impacts on these countries and their trading partners. For example, there is a push to return to strict self- sufficiency approaches given the current exchange rate settings. Self-sufficiency might make sense when the current exchange rate settings make domestic production more competitive, in which case self-sufficiency would occur without having to be assisted. But Indonesia and Malaysia should not avoid importing products under the rationale of saving foreign exchange. This practise could involve large efficiency loses and even the direct loss of foreign exchange. A case in point concerns cotton imports into Indonesia that are processed into very competitive value-added textile exports. A similar case could be made in relation to grain imports that go into grain product exports or even into cheap domestic foods such as noodles. Now is the time to influence the direction of policy through a well-focused review of relevant literature if it exists, or by highlighting the need for additional specific work and thus avoiding such threats to the wellbeing of many countries.
Now is also the time to take advantage of the opportunities being offered. Waiting until ‘things settle down’ may mean missing out on some short-term windows to longer-term opportunities. Just as the current exchange rate setting favours domestic over foreign production, it also favours Australian investment over trade. Opportunities exist in the short term for undertaking investments linked to longer-term domestic markets or trade opportunities. Adverse circumstances may turn around quickly in the agrifood area if the sector is strongly based on a comparative advantage in labour-intensive agricultural
169 production and food processing. Indonesia certainly sees agrifoods as a sector that could pull it out of the crisis, being a source of growth by providing regional employment and income to alleviate poverty as well as addressing food security and offering a means of Indonesia to trade itself out of its current crisis, saving and earning foreign exchange. But real institutional change will need to occur for this vision to be realised. For example, the forecast privatisation of BULOG will have to be more than just a transfer from a government to a private monopoly. Again, a well-focused review of the literature will help identify these opportunities and any new work required to achieve them.
As the agrifood sector is broad in its coverage, ranging from agricultural production right through to the hospitality sector, and is an important component of an economy, the scope of the review also needs to be broad. For example, the macroeconomic environment, in relation to exchange rate settings, foreign investment requirements and so on, can have a fundamental impact on the sector. However, to keep the review focused, unless there is a strong agrifood interest, these broad aspects will not be covered in the same detail as more specific agrifood aspects.
Broad sources of reference material have been drawn on in this review, incorporating the ANU library reference system and the World Wide Web. More specific agrifood sources such as the Supermarket to Asia agrifood bibliography, Rural Industries Research and Development Corporation (RIRDC) publications, and a search of Australian Rural Research in Progress (ARRIP) for agrifood projects, will also be drawn on heavily, along with bibiographies built up from personal research in the area over the past few years.
The remainder of the chapter is structured as follows. The next section discusses the current status of the economies and their prospects, taking account of relevant macro policy changes. This is followed by a section on the structure, conduct and performance of the agrifood sector, including some discussion of business and other institutional structures. A policy overview preceeds a concluding section.
10.2 Current status and prospects of the economies
10.2.1 Macro factors affecting agrifood policy
Much of Indonesia’s development success, including that in the agrifood area, has been attributed to good macro management (Anderson and Pangestu 1995). A similar situation applies in relation to Malaysia. Macro management can be broad-ranging, covering many fiscal, monetary and other macroeconomy-level policies. The macroeconomy is becoming more important in the determination of economic returns to all activities, including in the agrifoods area. Hoffmann and Schmitz (1996) found that even with the shrinkage of agriculture in terms of its share of GDP, this has corresponded with the growth of linkages with inputs and processed products. This will increase with globalisation, requiring more efficient allocation of resources, based on market signals, across the whole economy. Greater integration of the farm sector will expose it to increased macroeconomic influences, just as greater dependence on the sector will do. Hoffmann and Schmitz (1996) list the real value of money, interest rates, the price inflation rate, the exchange rate, and real GDP as important macroeconomic variables that can be influenced by monetary and fiscal policy.
10.2.2 Indonesia – before the crisis
To analyse the current status of and prospects for the Indonesian economy, it is worth looking at the situation before the crisis (which commenced in the middle of 1997) because there are some key variables that have been little affected by the crisis and are more evident from a longer-term perspective. Such variables include basic ‘givens’ such as population and land area. These may be affected to some degree by the crisis, for example population growth might slow owing to the fall in incomes, and the effective
170 land area might increase with crisis-induced incentives to clear more forest land and to convert it to agricultural production. However, generally these changes will be small in comparison with the changes in key economic variables such as income, inflation and trade. It is also worth taking a historical look at the economic variables that have undergone large changes because this will show the levels they will hopefully return to in the medium term once the crisis is over.
What are the best sources of this historical information? The primary sources tend to be the Bureau of Statistics (BPS), for example their statistical yearbooks, or the Bank of Indonesia (BI), for example their annual reports. Key secondary sources are the Bulletin of Indonesian Economic Studies, which publishes a survey of recent developments every four months (for example, Johnson 1998), and the World Bank, for example its annual country report (World Bank 1997). The Australian Department of Foreign Affairs and Trade also publishes relevant information in its Country Economic Report Indonesia.
Returning to the ‘givens’, Indonesia is the fourth most populous nation in the world and reached a significant milestone in February 1997 when its population passed the 200 million mark (McLeod 1997). In terms of concentrations of population, the highest numbers are on the island of Java (over 110 million), especially in the larger cities such as Jakarta and Surabaya. Java is the most densely populated area in the world at around 8 people per hectare. Despite the urbanisation on Java and elsewhere, around 65 per cent of the population live in rural areas. Two hundred million people make up a lot of consumers and workers. In respect of consumers, prior to the crisis the Indonesian middle-class was larger in number than the entire Australian population. In respect of workers, the large majority of the labour is unskilled. Sectorally, agricultural employment is the largest at around 44 per cent of total employment.
Another given is land. Indonesia, at around 200 million hectares of land, is the thirteenth largest country in the world. It extends over 4,500 kilometers along the equator and spreads across about 13,000 islands of very diverse fertility, topology and climate. This structure makes transport difficult and expensive. Agricultural land is about 82.5 million hectares, or approximately 40 per cent of total land, with the remainder being mainly forests. However, the large rural population means that farms are relatively small – the majority being less than two hectares. Indonesia also has a large area of sea territory and of coastline. Resources significant to these endowments include rubber and palm estates, forests, oil and gas, minerals, and fish. There are a number of products that Indonesia cannot produce, such as wheat, and others that it cannot produce well because of its basic endowments.
Turning to the key economic variables, the picture before the crisis, as illustrated in Table 10.1, was bright (Feridhanusetyawan 1997, World Bank 1997). Economic growth was 7.8 per cent, slightly down on the previous year owing to a drop in rice production from drought. The long-term outlook, as reflected in the current 25-year plan that started in 1994, was also bright, with a long-term growth of 7 per cent expected and average per capita income predicted to reach $US2,600 by the end of the period. The labour force was 90.1 million people, with annual growth of around 2.2 per cent and with 4.4 million looking for work. Inflation was the lowest for 10 years at around 5 per cent year-on-year. The stock market was booming. Interest rates had declined somewhat but remained relatively high, with the rate for three-month deposits at 16.1 per cent. The exchange rate had depreciated a little more than the normal 3 to 5 per cent over the year and the mid-rate was around 2,500 rupiah to the US dollar. Growth of non-oil exports had slowed from 17 per cent in the previous year to around 7 per cent, thought to be due to higher wages affecting competitiveness. Import growth had also slowed, from 22 per cent to around 11 per cent. The current account deficit was growing and in 1996–97 was $US8.1 billion, or 3.5 per cent of GDP. Private sector capital, in particular foreign direct investment, dominated capital flows. Net realised foreign direct investment was $US6.5 billion in 1996–97. Foreign reserves were around $US20 billion or five month’s worth of
171 imports. However, there were worrying signs of a weak banking sector (World Bank 1997). Table 10.1: The Indonesian economy – before the crisis and now Before the crisis Now (August (July 1997) 1998) Economic growth (%) 7.8 –6.2 Unemployment (%) 4.8 17.1 Inflation (%) 5.0 52.2 Interest rates (3-month deposit) 16.1 44.0 Exchange rate (Rp to $US) 2,500 14,000 International reserves ($US billion) 20.0 19.0 Export growth (%) 7.0 11.1 Import growth (%) 11.0 –34.8 Current Account Deficit ($US million) 8,100 81 Foreign Direct Investment ($US billion) 11.6 5.2
The agricultural sector was still significant, making up around 16 per cent of GDP, but was declining and had fallen to third place behind manufacturing and the trade, hotel and restaurant services sectors. Its growth also slowed to around 2 per cent, down from 4 per cent, owing to a fall in rice production from drought. As mentioned earlier, agriculture is a large employer of unskilled labour in Indonesia. Food imports continued to grow, despite high tariff and non-tariff barriers, but Australia’s share of imports fell (Chen and Trewin 1998). Food exports, mainly of rubber, animal and estate crop products, were much larger than food imports. Investment in agriculture was low, especially domestic investment, and most of the foreign investment in the sector was in food crops.
10.2.3 The current Indonesian economic situation and macro policy changes
The current economic situation in Indonesia is very fluid but there are few signs of the country overcoming the crisis in the medium term. Many macro policy changes have taken place in an attempt to stabilise the economy and many more are likely to be announced. One thing that is certain is that the economy has taken a pounding, as can be appreciated from Table 10.1.
Looking at the economic variables discussed in the last section, economic growth fell by 6.2 per cent between the March quarters of 1997 and 1998 (Johnson 1998), and will fall more when the effect from a full year of the crisis is felt. Unemployment has risen significantly, especially in the urban areas, with some estimates putting it at 15.4 million, or 17.1 per cent of the workforce, by the end of 1998. Inflation has increased dramatically from the historical lows experienced a year earlier. In the year to May 1998 inflation grew by 52.2 per cent and is expected to rise further as the full year of the crisis takes effect. The values of companies listed on the fledgling stock market have been significantly downgraded to about 60 per cent of the level of a year ago, mainly on the basis of their poor foreign debt situation. The interest rates associated with three-month deposits were high at 44 per cent in May 1998. The exchange rate was extremely weak at about 20 per cent of its value a year earlier. Non-oil exports, including a number of agricultural-related products, continued to grow at around 11.1 per cent while imports fell dramatically by 34.8 per cent. These aspects contributed to the current account deficit being only $US81 million. There have been large falls in investment; foreign investment approvals fell by 53.6 per cent and domestic investment approvals fell by 47.6 per cent. Foreign reserves are around the same level as a year earlier, at $US19 billion.
The situation was not as bleak for agriculture, which is why it is being looked to as a sector that may help Indonesia back onto the road to recovery. The agricultural sector grew at around 5.3 per cent, up from the previous drought-affected year. Food supplies
172 appear adequate in aggregate but distribution and affordability (given the higher prices and lower incomes) are major problems.
The macro policy changes, a number of which are important to agrifood, have mainly been related to the IMF involvement and have been well summarised by Soesastro and Basri (1998) in the Box 10.1.
Box 10.1 Macro policy changes in the Indonesian economy 11 July 1997, Bank Indonesia widened rupiah intervention band 14 August 1997, Rupiah floated 19 August 1997, Tight money policy 1 September 1997, 1st government package 16 September 1997, 2nd government package (e.g. fiscal consolidation, strengthening of banking and private corporations sector) 31 October 1997, 1st agreement with IMF 1 November 1997, 16 banks liquidated 3 November 1997, Detailed reform package (e.g. tariff reductions, deregulation of imports) 6 January 1998, Budget (Rp 4,000/$, 4% growth, 9% inflation assumed) 12 January 1998, ‘Love rupiah’ campaign 15 January 1998, 2nd IMF agreement signed 22 January 1998, Steps to rehabilitate banks, creation of IBRA, debt pause requested 23 January 1998, Revised budget (Rp 5,000/US$1, 0% growth, 20% inflation assumed) 10 April 1998, 3rd IMF agreement (Rp 6,000/$,US1 –5% growth, 45% inflation assumed, remove BULOGs unfair trading advantage, new bankruptcy laws) Source: Soesastro and Basri (1998).
There were a number of agrifood aspects to these announced changes such as the abolishment of the dairy local content scheme and of restrictions on palm oil investments and controls on sugar plantings on 1 February, and the liberalisation of wheat and wheat flour, soybean, sugar, etc. monopoly import arrangements and restrictions on domestic distribution on 1 March. Some of these changes are still to be implemented and others are continuing to be announced, for example in September 1998 it was announced that BULOG’s sugar import monopoly would be removed immediately.
10.2.4 The medium-term outlook for Indonesia
The medium-term outlook for Indonesia is unclear, probably more so than in the longer term when fundamentals should have a stronger influence and improve the outlook. In the longer term, Indonesia will be in a better position internationally owing to reforms that were introduced as a result of the crisis.
There is a sequence of events that needs to take place in the medium term to set Indonesia on the road to full recovery through greater confidence and investment. Many of these, such as those strongly related to the political and social situation and to institutional arrangements, are difficult to predict, although the general trend is towards greater freedoms. For example, many people were predicting that President Soeharto, having consolidated his position with the armed forces, would still be around today but events have shown otherwise. Political reforms are expected to have been fully introduced within the year (1998), as are substantial reforms making institutions more transparent.
Having said this, some predictions have portrayed the medium term (and even longer- term) outlook for the Indonesian economy and components of it such as the agrifood
173 sector (for example, APEG 1998 and IMF 1998). Given austere monetary and fiscal policies, the medium-term growth outlook is predicted by some to be –10 per cent for the calendar year 1998 (and worse if there is further social disruption). The most recent figures from the IMF predict growth of between –13 and –14 per cent. It is expected to take the country at least two to three years, and perhaps as long as seven years, to recover. Large-scale unemployment is expected for some time. There will be a heavy dependence on aid for basic requirements such as food as well as for infrastructure investment. Inflation on current trends (without additional subsidies) could be around 100 per cent or higher, although the latest figures show inflation at around 80 per cent. The stockmarket will be weak for some time, given the uncertainty and large debt overhangs. Interest rates will be high for a number of reasons, including the increased risk premium and the austere monetary policies. The future exchange rate is difficult to predict but some agencies, abstracting from political and confidence factors, have estimated a ‘fair value’ for the rupiah of around Rp4,000/$US1. The latest IMF agreement works on a target of Rp6,000. Given the exchange rate-induced improvement in competitiveness, non-oil exports would be expected to continue to rise so long as input costs can be kept down (this is assuming there will be no difficulties in obtaining financing for trade and working capital). A rise in exports and a large fall in imports would see a continuing improvement in the current account, in fact the latest figures showed a current account surplus. Imports would be encouraged by an expected continuing fall in tariffs in the medium and longer term under international agreements. It is critical that Indonesia continues to be engaged in the international economy as closing its economy would make recovery from the crisis even more painful. Investment may take longer to recover than trade because of the additional risks involved. However, some companies with currently secure exposures are expanding their interests based in part on the attractive values and good longer-term prospects. Companies becoming involved at an early stage will be the main beneficiaries in the longer term. Given the improving situation in the current account and in investment, foreign reserves would be expected to continue to grow. The exchange rate would be expected to appreciate in the longer term on the basis of these improvements in fundamentals.
There are a number of specific agrifood aspects to the medium-term outlook. Agricultural imports, if purely for consumption purposes, should fall, other things being equal. This has been observed, for example in relation to beef cattle imports. But under new more competitive arrangements some imports, such as meat, may still be affordable. Similarly, under new arrangements wheat and wheat flour imports may be competitive with competing domestic production, say that of rice, if it requires expensive new infrastructure investment or has low productivities. Imports that are more expensive as a result of the exchange rate changes but have cheaper domestic value-added before being exported, for example cotton made into textiles, should now be more competitive on the world market. Agrifood is being looked to as a sector that can help Indonesia through the crisis; it is still experiencing growth, is a large employer, a provider of much needed food, and a saver and earner of foreign exchange. However, policy changes need to be considered in terms of their longer-term and broader impacts. Differential food subsidies could distort market signals and result in production and consumption patterns that hinder Indonesia’s recovery. The benefit of the anticipated reform of BULOG will be highly dependent on the form this takes: a change from a government to a private monopoly may make the situation worse. On the other hand, the crisis has led to the opening up of new opportunities. For example, Indofoods, a monopoly player in many areas, has been facing difficulties, including trading in its stock being suspended, and this opens opportunities for others.
10.2.5 Malaysia – before the crisis
As with Indonesia, it is worthwhile to look at the situation in Malaysia before the crisis to gain a better appreciation of the situation afterwards. In Malaysia’s case, this may be even more worthwhile as the crisis has had less impact and the country is likely to recover more quickly than Indonesia is.
174
There are various primary sources of historical information such as the Central Bank and the Ministry of Finance. However, there is no equivalent of the ANU’s Bulletin of Indonesian Economic Studies for published surveys of the Malaysian economy. Key secondary sources are the Asia-Pacific Profiles and the Australian Department of Foreign Affairs and Trade’s Country Economic Report: Malaysia.
Malaysia’s population is about a tenth of Indonesia’s, at 21.7 million in 1997. The highest concentrations of population are on Peninsular Malaysia, especially in the larger cities such as Kuala Lumpur. Urbanisation has been strong: under 50 per cent of the population lived in rural areas in 1991 and this percentage has been falling rapidly. Although Malaysia’s population is smaller than Indonesia’s, the much higher average income has made it an attractive market for Australian goods that are aimed at more affluent consumers. Malaysia’s relatively smaller population has meant it has faced a shortage of unskilled workers for various tasks, including some work in the agrifood sector. These shortages led to an inflow of migrant workers from neighbouring countries. Sectorally, agricultural employment, at around 1.4 million or 18 per cent of the workforce, is declining.
Malaysia’s land area, which consists mainly of Peninsular Malaysia and parts of the island of Borneo, is 33 million hectares (one sixth the size of Indonesia), with a spread of fertility, topology and climate. Arable land makes up only about 13 per cent of total land, with estates and smallholdings of palm oil, rubber, coconuts and cocoa dominating, and 58 per cent of the remainder is forest. Farms are relatively small, apart from traditional estates growing commodities such as rubber and palm oil and large contract farms growing products like rice, which have been a relatively recent development. Malaysia also has a substantial sea territory and coastline. Resources significant to these endowments include rubber and palm estates, forests, and oil and gas. As with Indonesia, there are a number of products that Malaysia cannot produce and a more substantial number of other products that it cannot produce efficiently because of its basic endowments.
Turning to the key economic variables, the picture before the crisis was bright, as can be appreciated from Table 10.2 (APEG 1998). Economic growth was 7.8 per cent, slightly down on the previous year’s growth. Average per capita income reached $US4,000 during the early part of 1997. The long-term outlook was also bright. Malaysia has the aim of achieving developed nation status by 2020. In 1995 the labour force was 8.1 million (a growth of 1.1 million from 1990) and only 2.7 per cent of people were looking for work. Inflation was 2.7 per cent year-on-year. The stock market was bullish. The interest rate on three-month interbank loans was 7.4 per cent. The exchange rate was around 2.88 ringgit to the US dollar. Growth of exports (mainly resource-related) had been high at 13.2 per cent, and import growth was slightly higher at 13.4 per cent. Malaysia became outwardly orientated in the late 1980s and this position determined much of its policy direction. The current account deficit was high at 13.4 per cent of GDP. Private sector capital, in particular foreign direct investment, dominated capital flows. Net foreign direct investment was $US8.3 billion in 1997, with direct investment in Malaysia falling slightly to $US7.6 billion and direct investment abroad increasing to $US3 billion. Foreign reserves were around $US21.2 billion. However, there were worrying signs of an appreciating currency, a high credit to GDP ratio, a deteriorating reserve adequacy ratio, and a high current account deficit (Athukorala 1998).
The agricultural sector is still significant, making up around 13.5 per cent of GDP, but is declining. Malaysia is much more industrialised than Indonesia. Agricultural growth increased last year by around 3.5 per cent, driven mainly by some good results in the palm oil sector. Food imports were significant and continued to grow but Australia’s share of this was steady (Chen and Trewin 1998). Malaysia’s food production is driven mainly by political economy concerns aimed at maintaining farm incomes rather than at achieving self-sufficiency, and Malaysia is a net food-importer. The main imports were
175 grains, dairy, horticulture, seafood and meat. Agricultural exports, mainly of estate crop products, timber products, and oil and gas, were higher than food imports. In aggregate terms, Malaysia tends to tax rather than subsidise food production. Investment in agriculture was low, especially domestic investment, and most of the foreign investment in the sector was in food crops. Malaysia is a significant investor in the estate crop sector of neighbouring countries, for example Indonesia.
Table 10.2: The Malaysian economy – before the crisis and now Before the crisis Now (August (July 1997) 1998) Economic growth (%) 7.8 2 – 3 Unemployment (%) 2.7 3.5 Inflation (%) 2.7 7 – 8 Interest rates (3-month deposit) 7.39 11.04 Exchange rate (RM to $US) 2.88 4.10 International reserves ($US billion) 21.2 23.5 Exports growth (%) 13.2 36.6 Imports growth (%) 13.4 30.6 Current Account Deficit (% of GDP) 13.4 1.4 Foreign Direct Investment ($US billion) 8.3 –6.8
10.2.6 The current Malaysian economic situation and macro policy changes
The current economic situation in Malaysia is more stable than in Indonesia but there is still a degree of uncertainty associated with the economic outlook. Many macro policy changes have taken place in an attempt to stabilise the economy, in fact macro policy appears to be the main approach Malaysia has taken to overcoming the crisis. The effect of some of these changes, such as the recent introduction of a form of exchange controls, is still uncertain. The impact of the crisis on the economy can be appreciated from Table 10.2.
Looking at the economic variables discussed in the last section, economic growth is expected to fall to between 2 and 3 per cent. Unemployment has risen to 3.5 per cent despite immigrant workers having been sent home. Inflation is expected to triple to between 7 and 8 percent. The interest rate on three-month deposits has risen to 11 per cent. The exchange rate has depreciated, although not to the same extent as Indonesia, to 4.10 ringgits per US dollar. Exports have grown substantially by 36.6 per cent whilst imports have fallen by a smaller amount of 30.6 per cent. These aspects contributed to the current account deficit falling to only 1.4 per cent of GDP. Investment has turned around, with foreign direct investment falling by 6.8 per cent. Foreign reserves are around US$23.5 billion.
Unlike in Indonesia, where agriculture grew more than other sectors following the crisis, growth in Malaysia’s agricultural sector fell by 1.8 per cent in 1998. Malaysia is a large importer of food products and a large exporter of estate crops, such as rubber and palm oil, which take time to expand. It is highly dependent on the income from the sale of products it is competitive in, such as rubber and palm oil, to import food that it cannot produce competitively itself.
Malaysia has tended to focus on the macroeconomy in its response to the crisis. For example, it postponed several mega infrastructure projects, cut all government expenditure, raised certain taxes, such as those on imported automobiles, and directed commercial banks on lending (away from property and shares). More recently it introduced a form of exchange controls to try to raise the value of its currency. There are no specific agrifood aspects to these changes but, as stated at the outset, macroeconomic changes can significantly impact on the agrifood sector, especially when it is a highly traded sector.
176
10.2.7 The medium-term outlook for Malaysia
The medium-term outlook for Malaysia is uncertain but not as uncertain as that for Indonesia. In the medium to longer term, when the fundamentals are stronger, the outlook is good. Malaysia will be in a better position internationally in the longer term following reforms that were introduced as a result of the crisis.
There are some predictions of economic variables that portray the medium and even longer-term outlook for the Malaysian economy and components of it such as the agrifood sector (for example, APEG 1998). The medium-term growth outlook is encouraging, although it is continually being revised down and currently Malaysia is in recession having had two quarters of negative growth totalling about 7 per cent. Recovery is expected to begin relatively quickly – within a year other things being equal (for example, no slowdown in the US or China). Employment will improve but unemployment is expected to remain relatively high, despite the absence of migrant workers. Inflation will fall but will still be higher than before the crisis. Interest rates are expected to remain high. Given the exchange rate-induced improvement in competitiveness, non-oil exports would be expected to continue to rise. However, other neighbouring countries are more competitive in this respect, as well as in terms of land and labour costs, although maybe not in terms of capital costs and inflation. Sectors with large import components would not be as competitive. The rise in exports and a fall in imports should see a continuing improvement in the current account. In the medium and longer term, imports should be encouraged if tariffs continue to fall under international agreements. Malaysia has been lowering tariffs since the late 1980s and has tariffied many of its NTBs more recently, although some import licensing restrictions remain. It is critical that Malaysia continues to be engaged in the international economy, as closing its economy after the restructuring from opening it up would make recovery from the crisis even slower and more painful. Investment may take longer to recover than trade because of the additional risks involved. Given the improving situation in the current account and investment, foreign reserves would be expected to continue to grow. The exchange rate would be expected to appreciate in the longer term on the basis of these improvements in fundamentals.
There are a number of specific agrifood aspects to the medium-term outlook. Malaysia is more industrialised than Indonesia and agriculture’s share of GDP is expected to be only 8.2 per cent in 2005. Agricultural imports if purely for consumption purposes would be expected to fall, other things being equal. This has been observed, for example in relation to fruit imports, although some sources of supplies such as Thailand have been harder hit than Malaysia. Imports that are more expensive as a result of the exchange rate changes but have cheaper domestic value-added before being exported should now be more competitive on the world market. This has occurred in Malaysia with coffee beans; it produces and exports beans but also imports different varieties for blending and for export in a more processed form. Malaysian agrifood exports, such as palm oil, are doing well.
10.3 Structure–conduct–performance of the Indonesian and Malaysian agrifood sectors since 1990
10.3.1 Indonesian production, business and consumption structures
The Indonesian agrifood sector is dominated in a numbers sense by smallholders, mainly located on Java. The food production level consists mainly of small-scale farmers producing food crops, principally rice, on less than a hectare of land. Rice production tends to dominate all aspects of Indonesian agricultural production, especially support policies. There is some larger-scale production in the estate crops area.
177 At the agro-industry level, over 95 per cent of the establishments are small, having between one and four workers, but they absorb 60 per cent of agro-industry employment. However, these establishments produce only 7 per cent of output in value terms and gain only 6 per cent of value-added. There are a few very large down and upstream capital- intensive companies supplying inputs, and processing and marketing products. Indonesian agro-industries are less reliant on imported intermediate inputs (which range from 0.3 to 14.2 per cent) compared with non-agroindustries (where inputs range from 10.8 to 32.3 per cent). The largest user of imported intermediate inputs, the flour industry, imports all its main agricultural input, wheat. However, imported intermediate inputs make up only 14.2 per cent of total inputs illustrating how competitiveness in the other inputs such as labour can be more important.
Before the crisis, Indonesian consumption patterns had been changing as incomes rose. The consumption of staples such as rice, cassava, maize and sweet potato was decreasing and that of wheat and pulses, fruit and vegetables, and meats was increasing. (There are some religious factors that impede pork consumption in some areas.) Following the onset of the crisis, and the subsequent fall in incomes and increase in the number of poor, the distribution and consumption of staples has taken on a renewed importance. However, feeding the poor may be achieved more efficiently and effectively by manufacturing cheap noodles from imported wheat than by trying to increase the domestic production of rice.
10.3.2 Indonesian organisational conduct
Indonesian agriculture is highly organised by the Government, both directly and indirectly. There are rolling five-year and 25-year plans that have a large impact on agriculture in terms of land assignments, production targets, infrastructure investment (for example, irrigation), processing and importing licences and so on. The government has tended not to own agrifood assets, apart from its involvement in BULOG, (although this is changing to some degree following the crisis with government departments having to take over private assets to maintain them). The involvement of cooperatives and concepts such as nucleus–plasma arrangements, where smallholders are linked with large processors or input suppliers, are promoted through such plans. The more ministeries that are involved further downstream in the Indonesian agrifood system, the more difficult the coordination role becomes.
10.3.3 Indonesian trade and competitiveness performance
Indonesian agrifood production and trade tends not to reflect its comparative advantage, as it would in a market economy, but rather the policy directions that it has chosen to take. Rice production dominates, reflecting input subsidies, research and development etc., to the detriment of areas that the country may be more competitive in, such as horticulture and fishponds (Trewin and Tomich 1994). Similarly on the processing side, Indonesia has not taken advantage of its low-cost labour to add value to labour-intensive agrifood sectors that even with imported inputs could be competitive exporters (for example, intensive livestock using imported feeds). Indonesia’s agricultural exports have not kept pace with overall exports and its agricultural trade balance shows a decreasing trend. Exports are dominated by natural rubber, prawns/shrimps and palm oil despite heavy taxes in some cases.
10.3.4 Malaysian production, business and consumption structures
Malaysian agrifood production has two main components – estate production of palm oil and cocoa for export, and smallholder production of rice, livestock and horticulture mainly for fresh domestic consumption. The estate component tends to be market- driven, given Malaysia’s comparative advantage in this sector. Much of the smallholder production is also market-driven, apart from rice and dairy products which are policy- driven like in Indonesia (although Malaysia aims for only 80 per cent rice and 5 per cent
178 dairy self-sufficiency). The tendency in these areas is towards larger commercial operations, and new small producers are not encouraged. Production tends to be scattered across Malaysia, apart from some highland vegetable production.
The estate component, which is capital and technology-intensive, dominates agrifood processing. The estate component is strongly controlled through the involvement of industry associations and through the licensing of most stages of production. Processing of other products is reliant on competitive imported inputs and is dominated by a small number of multinationals in cereals, milk, noodles, sauces and confectionary.
Consumption patterns in Malaysia have changed rapidly with changing incomes and lifestyles. New Western-style foods and shopping styles (for example, supermarkets) have been readily accepted. There are some ethnic aspects that are key determinants of consumption, like the requirement for Halal-certified foods and in relation to pork and beef products.
10.3.5 Malaysian organisational conduct
A number of aspects discussed in the last section on the structure of the Malaysia agrifood sector also relate to conduct in the sector. An example of this is the control of palm oil through the involvement of industry associations and through the licensing of most stages of production. Like Indonesia, Malaysia has short and long-term plans, for example industry master plans and national agricultural plans (1984, 1991 and 1998), with short-term plans dominating, but there appears to be less government involvement in their implementation. The Malaysian Government does not appear to have an unquestioning commitment to planned structures such as industry clusters as appears the case in Indonesia, for example in relation to nuclear–plasma arrangements. The Malaysian Government’s involvement tends to be more in terms of setting targets and facilitating policies such as investment incentives via the taxation system, especially in relation to fruit and vegetables for the domestic market, and research and development.
10.3.6 Malaysian trade and competitiveness performance
Malaysia’s trade reflects its competitiveness or comparative advantage. It is the largest palm oil exporter with three times the exports of the next largest, Indonesia. The contrast in the way the two countries have treated the palm oil sector is quite marked, with Indonesia tending to have taxed the sector through investment and export constraints at various times. In other agrifood areas Malaysia tends to be a net importer. Many of these imports are intermediate goods such as feeds, fertilisers and equipment. The greatest volume of agrifood imports are grains, fruit and vegetables, sugar and fish. Australia has traditionally been one of the largest suppliers but other countries such as the US are increasing their shares.
10.4 Policy overview
10.4.1 Overall and sectoral Indonesian policies until the crisis
Economic policies in the areas of production, processing, distribution and trade have tended to further open market access, and have affected the agrifood sector.
Policies specific to agricultural (especially rice) production concern price, infrastructure, credit and technology policies. Price policies are aimed at encouraging agricultural production (self-sufficiency) and improving farmers incomes. These take the form of subsidies on key inputs such as fertilisers (and can thus be commodity-biased) and of floor prices set for strategic commodities such as rice. These main policies are supported by the development and rehabilitation of irrigation facilities, the provision of subsidised credit (outstanding payments of which have been written off in the past) and extension
179 services. Diversification and quality improvement in other crops are policy objectives but often the focus on rice production adversely affects these objectives.
Processing policies involve a number of Indonesian government institutions, for example investment in agrifood activities must be jointly approved by the Ministry of Industry and Trade and the Coordinating Board of Investment and also the Ministry of Internal Affairs concerning the sites and processing capacities of factories and their possible environmental impacts. Other policy areas cover quality, market access and information, promotion of partnerships and investment opportunities.
Distribution and marketing policies include the distribution of seed and fertiliser, and the marketing of some agricultural products through controlled systems, including rice, soybeans, cane sugar, wheat, Pontianak oranges, cloves and palm oil. BULOG, the national logistics agency, was responsible for the national procurement, stockpiling and import of the first three of these commodities. Other monopoly arrangements applied to the other commodities.
Trade policies could include some of the macroeconomic variables discussed earlier, such as exchange rate settings, but more directly include import tariffs, non-tariff barriers and export taxes. Currently import tariffs range from 0 to 25 per cent (see Fane and Condon 1996 on these and other assistance measures such as effective rates of assistance) but will come down under various international agreements. For example, under AFTA these tariffs will end up in the range of 0 to 5 per cent by 2010. Non-tariff barriers will be similarly addressed. Export taxes on palm oil were applied but were subsequently lifted.
10.4.2 The Indonesian current policy situation and outlook
As a result of the crisis, Indonesia has undertaken many policy reforms across all sectors as well reforming macro policies, such as exchange rate settings, and the banking sector. Trade and investment policies related to all components of the agrifood sector have been reformed, which is appropriate because the exchange rate changes have made investment more attractive than trade and often the impediments here are more encompassing.
In agricultural production, some constraints on sugar production have been lifted but there has been a return to some old policies such as tying fertiliser prices to rice prices, thereby providing a subsidy to this key input. Differential consumption subsidies have been applied to strategic products such as rice.
Agricultural processing is one area undergoing substantial change following the crisis, for example the new cabinet has declared the need to switch from monopoly and other anti- competitive situations to more competitive structures.
Many of the marketing and distribution arrangements have been dismantled in light of the crisis but BULOG is still expected to have substantial controls over rice marketing.
In relation to agricultural trade and investment, tariffs and other arrangements (for example, the dairy local content scheme) have been lowered along with the general reduction in tariffs, and investment restrictions have been lifted in some key agrifood- related areas such as in distribution and retailing. Restrictions on palm oil investments have now been removed and replaced with export taxes. The procedures for approving investment have also been streamlined, for example some investments are now able to be approved by the appropriate minister, rather than by the President.
10.4.3 Overall and sectoral Malaysian policies until the crisis
Over a decade ago, Malaysia recognised that it had a comparative advantage in estate crops and not in food crop production. This was reflected in the lowering of tariffs and sales taxes on most food crops. Some NTBs still apply in terms of quotas and licences for
180 palm oil, for quarantine reasons in livestock, to stabilise prices in the cases of cabbages and coffee, and to regulate competition in the cases of sugar and flour. Subsidies apply only to rice production in terms of price support on standard grades and input subsidies. This is based on the aim of maintaining farm incomes rather than any self-sufficiency goals. Malaysia’s ‘self-sufficiency’ targets have been set much lower than Indonesia’s: rice is at 80 per cent, beef is at 30 per cent and dairy is at 5 per cent. The main objective is to ensure low costs to consumers.
10.4.4 The Malaysian current policy situation and outlook
The policy which has been the most discussed is that of currency controls. These act to make the ringgit worthless outside the country, restrict portfolio investment to remain in the country for at least a year, make non-residents pay for securities in ringgit, and force exports to be paid for in foreign currency. In addition, Central Bank approval is required for investment abroad, and non-residents are restricted in terms of the currencies they can bring in and take out of the country. Such capital controls can insulate the domestic economy from exchange rate movements. Malaysia has an urgent need to restructure its banking sector to address the massive debt but it needs to maintain a tight monetary policy in order to keep the currency stable. Currency controls enable monetary policy to be looser via the ability to lower interest rates without funds flowing offshore. The Malaysian form of currency control – quarantining substantial Malaysian currency held in Singapore – will result in the repatriation of this currency, and provide banks with fresh deposits to revive lending and generate growth. Currency controls must be used for the right reasons and should be limited to short-term capital flows, avoiding a currency black market at the same time. Currency controls should not lead to trade controls, nor affect foreign direct investment, and must be used to assist reforms (for example, in the banking sector), not to avoid them.
The most recent National Agricultural Plan appears as if it will follow the line of the second Industry Master Plan, in its focus on industry clusters. There will be a focus on research and development, especially in the livestock, fruit, and vegetable industries. The latest strategy concentrates on increasing consumption of local products through land allocations and home-grown products, reviewing current imports, and seeking out cheaper alternatives.
10.5 Conclusion
This paper uses available and commissioned literature to look at economic developments in the Indonesian and Malaysian agrifood sectors in light of the crisis. This is a difficult task as the crisis is ongoing and fundamental changes are taking place in the economies concerned. Old and recent literature can easily lose its relevance. However, there are some fundamental aspects of the economic development of these sectors that are still relevant. In this chapter a comprehensive list of relevant references are given in the bibliography but only the key references to the countries’ economic situations, the structure, conduct and performance of the agrifood sectors, and an overview of policies are noted. These aspects are changing so quickly that it is more useful to provide references to source material rather than particular assessments that could date rapidly. If there is a common thread running through the paper, then it is that there are both opportunities and threats in the changing economic situations, structures and policies. Pointing these out or identifying the need for additional work to be able to do so is both useful and timely.
The agrifood sector is broad, ranging from agricultural production right through to the hospitality sector. Thus there are a number of key issues that arose from this literature review and were reinforced during field visits, namely:
181 · When and how will recovery get underway, both in a macro sense and specifically in relation to the agrifood sector, and what should Australia’s involvement be at the various stages of this recovery? The agrifood sector is seen as playing an increased role in terms of recovery from the crisis. · From the country’s perspective, especially Indonesia’s, a key issue is how to best address food security in the short term until recovery is underway without impinging excessively on the longer-term development of the agrifood sector market, for example through excessive government involvement, inappropriate institutions and so on. An aspect of this is to illustrate the benefits of open market policies. · The key challenge to Australia is to find new ways of engaging the agrifood sectors of these countries that do not rely on the ‘simple export model’ but also identify and find new joint venture arrangements that integrate Australian and Indonesian agrifood companies through technology transfer and joint development of markets. The ‘export’ model is still important and emphasises the need for Australia to be competitive in its costs. If this model is not viable because of exchange rate changes, then investment is more appealing and offers a means for Australia to maintain a necessary presence and better position itself for when recovery takes place. Various mechanisms exist in terms of the development of such linkages including a number of Australian business-oriented networks in the countries concerned. · These countries are looking for new ways to actively develop linkages with Australian agrifood businesses that are seen to have well-developed systems of quality control etc. that are needed over and above price levels in terms of developing an internationally competitive sector. These linkages, such as direct supplies and investment, would benefit Australia in terms of it having more control over the quality and supply of its products. · Other countries are positioning themselves and their approaches need to be monitored as they could impinge on Australia’s interests (for example, franchise, credit, and middlemen arrangements preventing the change to more competitive suppliers).
182 10.6 Bibliography
Abmad Zubaidi Baharum 1992, ‘The welfare cost of Malaysian rice policy under alternative price regimes’, Malaysian Journal of Economic Studies 24(2) pp. 1–11. Anderson, K. and Pangestu, M. 1995, ‘Agriculture and rural development in Indonesia: Towards the 21st Century’, CIES Seminar Paper 95–05, April. Asia Pacific Economic Group 1998, ‘Asia Pacific Profiles’, Financial Times. Athukorala, P. and Sen, K. 1998, ‘Processed food exports from developing countries: patterns and determinants’, Food Policy, 23(1), pp. 41–54. Athukorala, P. 1998, ‘Malaysia’ chapter in McLeod. R. and R. Garnaut (eds.), East Asia in Crisis: From being a miracle to needing one, Routledge, London. Booth, A. 1988, Agricultural Development in Indonesia, Allen and Unwin, Sydney. Bulletin of Indonesia Economic Studies 1995, ‘Cumulative Index 1965–1994’. Centre for Agricultural and Rural Development 1990, ‘Analysis of Food Crop Policy for Indonesia’, CARD, Iowa State University, Iowa. Chen, T. and Trewin, R. 1998, ‘Identifying key APEC agribusiness policy issues’, paper presented to the 42nd Annual Australian Agricultural and Resource Economics Society Conference, January (Submitted to the Australasian Agribusiness Review). Denton, A. 1990, ‘Price elasticities from survey data: extensions and Indonesian results’, Journal of Econometrics, 44. DFAT 1994, ‘Subsistence to supermarket’, East Asia Analytical Unit, DFAT. Easton, K., Bell, G. and Ng, F. 1997, ‘Exporting food to Indonesia’, RIRDC. Ellis, F. 1988, ‘Workshop on issues in research methodology for Indonesian agriculture’, February, Jakarta, Indonesia. Erwidodo and Trewin, R. 1996, ‘Social welfare impact of Indonesian dairy policies’, Bulletin of Indonesian Economic Studies 32(3) December. Fane, G. 1992, ‘Review of ‘Rice Policies in Indonesia’ by Pearson, Scott et al., Bulletin of Indonesian Economic Studies 28(1), ANU, Canberra. Fane, G. and Condon, T. 1996, ‘Trade deregulation in Indonesia, 1987–1994’, Bulletin of Indonesian Economic Studies 32(3) December. Feridhanusetyawan, T., 1997, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 33(2), August. Gonzales, L.A., Kasryno, F., Perez, N. and Rosegrant, M.W. 1993, ‘Economic incentives and comparative advantage in Indonesian food crop production’, Research Report 93, IFPRI, Washington DC. Hedley, D. and Tabor, S. 1989, ‘Fertiliser in Indonesian agriculture: the subsidy issue’, Agricultural Economics 3, pp. 49-68. Henderson, D.R., Hardy, C.R. and Neff, S.A. (eds) 1996, ‘Globalisation of the processed food market’, Agricultural Economic Report No. 742, Economic Research Service, USDA, Washington DC. Henneberry, S.R. (ed), ‘Foreign direct investment and processed food trade’, Department of Agricultural Economics, Oklahoma State University, Stillwater. Hoffmann, M. and Schmitz, P.M. 1996, ‘Agriculture and the macroeconomy: modelling linkages using the VAR approach’, paper presented to the 50th EAAE Seminar ‘Economic transition and the greening of policies: modelling new challenges for agriculture and agribusiness in Europe’. IMF (International Monetary Fund) 1998, Annual report 1998, IMF, Washington, D.C. INSTATE 1993, ‘Agribusiness and processed food development in South East Asia’, report for RIRDC, Canberra. INSTATE 1994, ‘Asian food in Australia: Getting a bigger bite’, RIRDC Report No. 94/5, Canberra. INSTATE 1995, ‘Supermarket and retailing infrastructure development in Indonesia’, RIRDC. Jenkins, G.P. and Lai, A.K.K. 1989, ‘Trade, exchange rate and agricultural policies in Malaysia’, World Bank Comparative Studies, World Bank, Washington D.C.
183 Johnson, C. 1998, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 34(2), August. Jones, C. 1994, ‘Rice price stabilisation in Indonesia: an economic assessment of the changes in risk bearing’, Bulletin of Indonesian Economic Studies, 31(1), pp. 109–128. Martin, W. and Warr, P.G. 1993, ‘Explaining the relative decline of agriculture: a supply- side analysis for Indonesia’, World Bank Economic Review 7(3), pp. 381–403, September. McGrane, T. 1998, ‘Processed foods: trade and investment barriers to Australian exporters in key markets’, DIST Working Paper, July. McLeod, R. 1997, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 33(1), April. McLeod, R. and Garnaut, R. (eds.) 1998, East Asia in Crisis: From being a miracle to needing one?, Routledge, London. Nelson, G. and Panggabean, M. 1991, ‘The costs of Indonesian sugar policy’, American Journal of Agricultural Economics 73(3), pp. 703–12. OECD 1997, The Uruguay Round Agreement on agriculture and processed agricultural products, OECD, Paris. Pearson, S., W. Falcon, Heytens, P., Monke, E. and Naylor, R. 1991, Rice policy in Indonesia, Cornell University Press, Ithaca, New York. Piggot, R.R., Parton, K.A., Treadgold, E.M. and Hutabarat, B. 1993, ‘Food price policy in Indonesia’, ACIAR Monograph No. 22, Canberra. Rae, A.N. and Kasryno, F. 1993, ‘A PAM analysis of livestock policies in Indonesia’, ARER 59–70 April. Robinson, S., El-Said, M. and San, N.N. 1998, ‘Rice policy, trade, and exchange rate changes in Indonesia: a general equilibrium analysis’, TMD Discussion Paper No. 27, IFPRI, Washington DC, June. Soesastro, H. and Basri, M.C. 1998, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 34(1), April. Spencer, C., T. Broughton and Ujo, U. 1996, ‘Agribusiness opportunities in Sumatra and East Java’, RIRDC. Sudaryanto, T., Hermanto, Erwidodo, Pasandaran, E. and Rosegrant, M.R. 1992, ‘Food Situation and Outlook for Indonesia’, CASER, Bogor, Indonesia and IFPRI, Washington DC. Supermarket to Asia 1997, ‘Indonesia Food Market Profile’, Supermarket to Asia. Supermarket to Asia 1997, ‘Malaysia Food Market Profile’, Supermarket to Asia. Suryana, A., Bahri, S., Wahida and Trewin, R. 1998, ‘Key agricultural and agribusiness policy issues in Indonesia’, paper prepared for ACIAR PN 9766. Tabor, S.R. 1992, ‘Agriculture in the eighties: a period of transition’ in A. Booth (ed.), The oil boom and after: Indonesian economic policy and performance in the Soeharto era, Oxford University Press, Oxford. Tan, S.H. 1987, ‘Malaysia’s rice policy: a critical analysis’, ISIS, Kuala Lumpur, Malaysia. Tan, S.H. 1989, ‘Government interventions in the padi and rice industry of Malaysia’, report to the EPU World Bank Rice Industry Restructuring Project. Tan, S.H. 1998, ‘Impact of trade liberalisation in ASEAN/APEC on agricultural trade and investment in Malaysia’, paper prepared for ACIAR PN 9766. Tan, S.H., Adnyana, M.A., Mayrowani, H. and Hendayana, R. 1998, ‘Marketing infrastructures and policies for non-traditional agricultural production and export: the case of Indonesia’, RIRDC/IFPRI (forthcoming). Tan, S.H., Zainalabidin, M., Chiew, F.C. and Mad Nasir, S. 1989, ‘Government Incentives and comparative advantage in livestock and feedstuffs sectors in Malaysia’, report for the Asian Development Bank. Timmer, C.P. 1989, ‘Indonesia: transition from food importer to exporter’, Ch. 2 in Food Pricing Policy in Asia, T. Sicular (ed), Ithaca: Cornall University Press. Timmer, C.P. 1991, ‘Food price stabilisation: rationale, design and implementation’ in D.H. Perkins and M. Roemer (eds.), Reforming economic sytems in developing countries, HIID, Cambridge, Massachusetts.
184 Timmer, C.P. 1993, ‘Rural bias in the East and south-east Asian Economy: Indonesia in comparative perspective’, Journal of Development Studies 29(4): pp. 149–76. Timmer, C.P. 1997, ‘Building efficiency in agricultural marketing: the long run role of BULOG in the Indonesian food economy’, Journal of International Development 9(1), pp. 133–145. Tomich, T.P. 1992, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies 28(3), ANU, Canberra. Trewin, R. and Erwidodo 1993, ‘Agricultural policy options to maintain Indonesian rice self-sufficiency’, paper delivered to the 37th Annual Conference of the Australian Agricultural Economics Society, University of Sydney, Sydney. Trewin, R., Erwidodo and Huang, Y. 1993, ‘Stages of development of an Indonesian CGE model (INDOGEM) with application to analysis of key agricultural policies’, Conference paper delivered to 1993 Conference of Economists, Murdoch University, Perth. Trewin, R. and Tomich, T. 1994, ‘Grain in Indonesia’, Economics Division, RSPAS, ANU Working Paper 94/6, RSPAS, ANU, April. Trewin, R., Weigua, L., Erwidodo and Bahri, S. 1995, ‘Analysis of the technical efficiency over time of West Javanese rice farmers’, Australian Journal of Agricultural Economics, August 1995. Trewin, R. 1995, ‘Measuring the impact of Uruguay Round trade liberalisation on Indonesian agriculture’, Paper presented to the 24th Conference of Economists, University of Adelaide, 25–27 September. Trewin, R. 1996a, ‘Linkages among Indonesian grains, livestock and value adding sectors: implications for Australian agribusiness’, Australasian Agribusiness Review 4(1) June. Trewin, R. 1996b, ‘Analysis of market integration between Indonesian grains, livestock and processed foods sectors’, Proceedings of the Econometric Society Australasian Meeting 1996 Vol. 3, W. Schworm, M. McAleer and P. Miller (eds), University of Western Australia, Perth, 10–12 July 1996. Trewin, R. 1996c, ‘Comparison of Chinese and Indonesian food policies’, Proceedings of a Workshop on China’s food problems in a changing economy’, China Agricultural University, Beijing, 10–11 October. Trewin, R. 1997, ‘Further analysis of linkages between Indonesian agriculture, agribusiness and the macroeconomy, Paper prepared for post-Conference Workshop ‘Linkages between agricultural production, trade and the environment: case studies of Indonesia and China’, AARES 41st Annual Conference, Gold Coast, 20–25 January. Trewin, R. 1998a, ‘Indonesia’s agribusiness policies and opportunities for Australian trade and investment’, RIRDC Short Report No. 25. Trewin, R. 1998b, ‘Analysis of Chinese and Indonesian food policy options’, Proceedings of a Workshop on China’s Agriculture at the Crossroads, ANU, Canberra, 15–16 April, 1997. Trewin, R. 1998c, ‘Analysis of linkages between Indonesian grains, livestock and agribusiness policies, and opprtunities for Australian investment and trade’, paper presented to the 25th Conference of Economists, Australian National University, 22–25 September, 1996 and proceedings of the 50th European Association of Agricultural Economists Seminar on Economic Transition and the Greening of Policies: Modelling New Challenges for Agriculture and Agribusiness in Europe, Giessen University, 15–17 October, 1996, Wissenschaftsverlag Vauk, Keil. Trewin, R. 1998d, ‘Lessons for Vietnam from rural sector development in China, Indonesia and Thailand’, paper prepared for a World Bank Report on ‘Vietnam: Development of the Rural Sector from Vision to Action’. Trewin, R. and Chen, T. 1998, ‘Analysis of Australian, Indonesian and Malaysian agricultural and food trade market shares’, Paper presented to the Industry Economics Conference, ANU, 6–7 July. Warr, P.G. 1986, ‘Indonesia’s other Dutch disease: Economic effects of the petroleum boom’, Chapter 9 in Natural Resources and the macroeconomy, J.P. Neary and S. van Wijnbergen (eds), Cambridge: Cambridge University Press.
185 Warr, P.G. 1992, ‘Comparative advantage and protection in Indonesia’, Bulletin of Indonesian Economic Studies 28(3), pp. 41–70, December. World Bank 1992, ‘Agricultural transformation: Challenges and opportunities’ Agricultural Operations Division, Country Department III, East Asia and Pacific Regional Office, World Bank, Washington DC. World Bank 1997, ‘Indonesia: Sustaining high growth with equity’, Report No. 16433–IND, May. World Bank 1998, ‘Restructuring Indonesia’s food and agricultural sector for sustainable and equitable growth’ (mimeo). Yeah, K. Leng, Yanagida, J.F. and Yamauchi, H. 1994, ‘Evaluation of the external market effects and government intervention in Malaysia’s agricultural sector: a CGE framework’, Agricultural Economics 11, pp. 237–256.
186
Chapter 11 Agrifood developments in Indonesia, Malaysia and South Korea in response to changing economic circumstances.
11.1 Introduction
Asian food markets have been of growing importance to the Australian agrifood industry. However, the East Asian economic crisis has adversely affected a number of important Asian markets, including Indonesia, Malaysia and South Korea. Because of the major changes occurring in these important food markets, it is timely to review developments in these economies and their implications for Australian food exporters.
Under a Supermarket to Asia project funded by the Rural Industries Research and Development Corporation, separate country reports have been produced about developments and policies in the agrifood sectors of Indonesia, Malaysia and South Korea in light of the crisis (Supermarket to Asia 1998a, b and c). In this chapter, comparisons across these countries, which have been affected differently by the crisis and have evoked different responses, are undertaken. Lessons can be learnt for various countries from such comparisons of differences, in particular which policies allow market-based responses to work and which ones inhibit adjustment and welfare. In addition, important common aspects such as strategies addressing challenges and opportunities that have arisen as a result of the East Asian economic crisis, can be strengthened through such comparative analysis.
In the next section a brief overview is presented of Australia’s food exports to Asia, both prior to and following the onset of the East Asian economic crisis. The impacts of the crisis on the economic development and outlook for the Indonesian, Malaysian and South Korean economies are then considered in more detail in Section 11.3. Section 11.4 details the developments in the agrifood sectors of these countries. Relevant policy responses to the onset of the East Asian economic crisis are discussed in Section 11.5. Section 11.6 covers the opportunities, challenges and strategies for Australian food companies in light of the crisis. Some conclusions are drawn in the final section.
11.2 Australia’s food exports to Asia
In 1997–98 Australia exported A$18 billion of food to the world – A$10.4 billion to Asia. Indonesia’s share of this was A$844 million, Malaysia’s A$804 million and South Korea’s A$707 million, making them Australia’s second, third and fourth largest Asian markets for food (after Japan) respectively (Figure 11.1).
187 Figure 11.1: Asian markets for Australian food, 1997 to 1998
Japan Indonesia Malaysia Republic of Korea Taiwan China Hongkong India Philippines Singapore Thailand Vietnam Other
0 500 1000 1500 2000 2500 3000 3500 4000 A $ million (fob)
Data source: Supermarket to Asia Ltd.
11.2.1 Indonesia
Over the period 1993–94 to 1996–97, the value of Australia’s food exports to Indonesia grew strongly from A$413 million to A$1,094 million. Major increases were recorded for grain and meat, which dominate food exports, as well as for dairy and horticultural products (Figure 11.2). The rapid increase in average income per person, in conjunction with some market fundamentals such as a population of around 200 million, made Indonesia a very attractive market for Australian companies.
As the Asian economic crisis took hold during the second half of 1997, Indonesia’s food imports declined sharply and the value of Australian shipments to the country fell by nearly 23 per cent in 1997–98. The marginal increases for grain and seafood were far outweighed by the reductions for meat (including live animals) in particular, but also for dairy, horticultural, confectionery, beverages and other foods.
188 Figure 11.2: Australia’s food exports to Indonesia
Grain
Meat
Dairy 1993-94 Horticulture 1994-95
Seafood 1995-96
Beverages 1996-97
Confectionery 1997-98
Other foods
0 100 200 300 400 500 600 700 A $ million (fob)
Data source: Supermarket to Asia Ltd.
11.2.2 Malaysia
Over the period 1993–94 to 1996–97 the value of Australia’s food exports to Malaysia grew relatively strongly from A$537 million to A$789 million, with the biggest increases recorded for grain, dairy products, horticultural products and ‘other’ processed products (Figure 11.3).
As the Asian economic crisis took hold during the second half of 1997–98, Malaysia’s food imports declined, although for the financial year 1997–98 as a whole the value of Australia’s food exports to Malaysia increased by around 2 per cent.
189 Figure 11.3: Australia’s food exports to Malaysia
Grain
Meat
Dairy 1993-94 Horticulture 1994-95 1995-96 Seafood 1996-97 Beverages 1997-98
Confectionery
Other foods
0 50 100 150 200 250 300 A $ million (fob)
Data source: Supermarket to Asia Ltd.
11.2.3 South Korea
Over the period 1993–94 to 1996–97, the value of Australia’s food exports to Korea grew from A$559 million to $A666 million, with major increases recorded in grain, dairy, horticultural and ‘other’ processed foods (Figure 11.4).
As the Asian financial crisis took hold during the second half of 1997, Korea’s food imports declined, but for the financial year 1997–98 as a whole the value of Australia’s food exports to Korea increased by 6 per cent to A$707 million.
190 Figure 11.4: Australia’s food exports to South Korea
Grain
Meat
Dairy 1993-94 Horticulture 1994-95 Seafood 1995-96 1996-97 Beverages 1997-98 Confectionery
Other foods
0 50 100 150 200 250 300 350 A $ million (fob)
Data source: Supermarket to Asia Ltd.
11.2.4 Key findings across all countries
Of the countries covered, Indonesia showed the most growth for Australian food exports over the 1993–94 to 1996–97 period but also the largest fall following the onset of the crisis. This turn around applied especially to meat (including live animals), which was one of the major growth areas, along with grains. Export growth to Malaysia had been higher than that to South Korea, especially for meat products, but grains, dairy, horticultural and ‘other’ processed products had also increased. Overall values in both Malaysia and South Korea held up following the onset of the crisis, reflecting aspects such as Australia’s improved price competitiveness relative to some alternative suppliers. However, grain exports to Malaysia fell somewhat and meat exports to South Korea continued to fall.
191 11.3. Economic developments and outlook post-crisis
11.3.1 Indonesia
Prior to mid-1997, Indonesia’s economic development had been remarkably successful. Real economic growth had averaged 7 per cent a year over a 30-year period, raising the average income per person from less than US$100 in 1972 to over US$1,000 in 1996. However, by 1997 there were worrying signs of a weak banking sector, an economy with too many ‘hidden costs’ undermining efficiency and competitiveness, and a business culture in which investments were based more on connections than real rates of return (World Bank 1997).
Indonesia’s economic situation has changed dramatically following the onset of the East Asian economic crisis (Table 11.1), which began in Thailand in mid-1997 and moved quickly to other East Asian economies and which continues to this day. As a result of the crisis, the International Monetary Fund (IMF) became involved in Indonesia’s economic affairs and the Indonesian Government announced major policy changes. The key macroeconomic policy changes, a number of which were important to agrifood, included the floating of the rupiah, the strengthening of the banking and private corporations sectors, new bankruptcy laws, and tariff and other trade policy reforms (see Soesastro and Basri (1998) for more details).
Table 11.1: The Indonesian economy – before and after the crisis Before the crisis After the crisis (July 1997) (October 1998)a Economic growth 7.8% -15% Unemployment 4.8% 20% Inflation 5.0% 75.5% Interest rate (3-month deposit) 16.1% 55–65% Exchange rate Rp2500/US$1 Rp7500/US$1 Exports growth 7.0% 7.4% Imports growth 11.0% -26.0% Current account balance Deficit US$8100 million Surplus US$700 million Foreign direct investment US$11.6 billion US$5.2 billion International reserves US$20.0 billion US$14.5 billion Notes: This information was obtained mainly from the Survey of Current Developments published every four months in the Bulletin of Indonesian Economic Studies (Evans 1998). This is the most timely of the Indonesian economic assessments; others such as those published by the World Bank tend to be on a less regular basis. a For more details see Trewin (1999). Sources: Evans (1998); Feridhanusetyawan (1997).
Following the crisis, the exchange rate dropped to a quarter of its value, economic growth dramatically contracted, investment halved, unemployment soared (especially in urban areas), inflation and interest rates blew out, and the values of companies on the fledgling stockmarket were significantly downgraded, mainly on the basis of their poor foreign debt situations. Exports, including those of a number of agricultural-related products, have maintained their growth but imports have fallen dramatically, driving the current account into surplus. Although macroeconomic indicators such as growth and inflation are bad, they are better than many of the dire projections that were made in the early part of 1998.
To fully rebuild investor and business confidence in the economy, further political and social change is needed, therefore the medium-term outlook for Indonesia remains uncertain. The overall conclusion of groups examining Indonesia’s medium-term outlook (APEG 1998, IMF 1998) is that the outlook for growth is poor. It is expected to take at least two to three years, and as long as seven years, for the economy to recover.
192 Widespread high unemployment is expected for some time. The country will depend heavily on aid for basic needs such as food, as well as for infrastructure investment.
11.3.2 Malaysia
The economic outlook for Malaysia before the economic crisis was bright, particularly in respect of key macroeconomic variables. It had undergone a sustained period of significant economic growth, driven in part by its outward orientation, especially from the late 1980s. Average income per person reached US$4,000 during the early part of 1997 and Malaysia had the aim of achieving ‘developed nation’ status by the year 2020 (Athukorala 1998b). The much higher average income than in neighbouring countries made Malaysia an attractive market for Australian goods that were aimed at the more affluent consumers, even though Malaysia’s population is smaller than the populations of some other countries in the region. During 1997, however, there were worrying signs of an appreciating currency, a high ratio of credit to GDP, a deteriorating reserve adequacy ratio and a high current account deficit (Athukorala 1998a).
The bright economic outlook changed dramatically following the onset of the Asian economic crisis, which hit Malaysia, shortly after starting in Thailand, when speculators attacked the currency in May 1997. Many macroeconomic policies have been changed in an attempt to stabilise the economy – in fact this appears to be the main approach Malaysia has taken to overcoming the crisis (Athukorala 1998b; Tan 1999). For example, following the onset of the crisis and floating of its exchange rate in July 1997, Malaysia postponed several large infrastructure projects, cut all government expenditure, raised certain taxes such as those on imported automobiles, and directed commercial banks on lending (away from property and shares). The fact that it had little foreign debt exposure enabled Malaysia to avoid involving the IMF in its crisis response. However, there were no clear signs by September 1998 that long-term stability had returned to the economy. As a consequence, Malaysia introduced fiscal and monetary expansion and currency controls in late September. The change to more dramatic policies, and the current political uncertainty, make it difficult to present a clear macroeconomic outlook.
Table 11.2: The Malaysian economy – before and after the crisis Unit Before the crisis After the crisis (July 1997) (October 1998) Economic growth % 7.8 -3.0 Unemployment % 2.7 3.5 Inflation % 2.7 8.0 Interest rates (3-month % 7.39 11.04 deposit) Exchange rate RM/US$ 2.88 3.80 International reserves US$ billion 21.2 23.5 Export growth % 13.2 36.6 Import growth % 13.4 -30.6 Current account deficit % of GDP 13.4 1.4 Foreign direct investment US$ billion 8.3 7.7 Source: Trewin (1999).
Following the crisis, the exchange rate dropped and then was pegged last September, economic growth contracted for several quarters pushing Malaysia into recession, investment fell, unemployment rose (despite immigrant workers being sent home), inflation and interest rates all rose quickly (Table 11.2). The stock market underwent the biggest slump of all the regional stockmarkets (Athukorala 1998b). Exports grew and imports fell substantially, causing the current account deficit to fall. The medium-term outlook for Malaysia remains uncertain. Some commentators (Tan 1999) feel that there is worse to come – on company closures, for example – in the short to medium term. In the medium to longer term, when the fundamentals are stronger, the outlook is good.
193 Malaysia is going to be in a better position internationally in the longer term because of the reforms introduced as a result of the crisis, but in the interim it will face a difficult economic transition.
11.3.3 South Korea
Prior to 1997, the Republic of Korea was also one of the fastest growing economies in the world. However, the Korean economy started to deteriorate even in 1996, due to a decline in the international competitiveness of its major export sectors. The financial health of industrial companies, especially the conglomerates, became increasingly fragile because of their very high short-term debt-to-equity ratios and falling profitability. Corporate bankruptcies led to serious difficulties for banks, especially merchant banks that had borrowed (short-term funds in particular) heavily abroad to finance the investment projects of major conglomerates (Corsetti, Pesenti and Roubini 1998). Bankruptcies among major financial institutions began to emerge in 1996. As corporate failures mounted, international investors became less and less confident about the health of Korea’s business corporations and financial institutions and began to withdraw their funds rapidly from October 1997. As a result, the won started to weaken sharply. When the value of the currency was falling rapidly and foreign currency reserves were running out, the IMF was called in on 21 November 1997.
The Korean economy is currently in the most serious trouble in its modern history (Table 11.3). Key problems are a major contraction of domestic demand, large labour lay-offs, continuing corporate failures, especially in small and medium-sized enterprises, and rapidly declining industrial production. In an effort to overcome the crisis, the Korean Government has been deeply involved in the economic reform of the financial and business sectors.
Table 11.3: Major economic indicators for Korea Unit 1996 1997 1998 1999 Forecast Estimate Optimistic Pessimistic (Change from previous year) GDP % 7.1 5.5 -6.5 2.0 -1.5 Consumption expenditure % 6.9 3.5 -11.0 0.8 -1.0 Private % 6.9 3.1 -11.5 1.0 -1.2 Government % 7.1 5.7 -7.2 0.0 0.0 Gross fixed capital % 7.1 -3.5 -28.7 -6.7 -12.9 formation Exports of goods & % 14.1 23.6 10.9 0.8 -6.3 services Imports of goods & % 14.8 3.8 -21.0 6.5 -0.5 services Consumer price index % 4.9 4.5 7.6 3.0 1.7 Producer price index % 2.7 3.9 12.6 0.5 1.2 (Actual or forecast) Current account balance US$ -23.0 -8.6 37.3 29.4 30.9 billion Exchange rate (end of W/US$ 844.2 1,415.2 1,350 1,200 1,650 period) Interest rate (end of % 12.6 29.0 12.5 11.0 13.0 period) Unemployment rate % 2.0 2.7 8.2 8.7 10.0 Sources: Data for 1997 is from Bank of Korea. Estimates and forecasts are the results of interviews with the Bank of Korea, Korea Development Institute, POSCO Research Institute, and Economic Research Institutes in LG, Daewoo and Samsung.
194 The outlook for the Korean economy remains uncertain. Two scenarios are possible. The optimistic scenario is that economic stability and growth could return by the year 2000. If major structural reform does not progress quickly, the pessimistic scenario could prevail – that is, Korea’s economic recovery to the pre-crisis level could take more than five years.
11.3.4 Key findings across all countries
Indonesia, the least developed of the three countries, was hardest hit by the crisis, had to undertake major changes in conjunction with the IMF who were called in, and will probably take the longest to recover. It will be dependent on aid to assist its recovery for some time. Although uncertainty regarding its recovery is the greatest among the three countries, there are a number of promising signs including the fact that key economic indicators have turned out better than predicted.
Malaysia, which was approaching developed country status before the crisis, did not have the same problems as Indonesia, such as large foreign debt, and avoided IMF involvement. It has mainly addressed the crisis through macroeconomic measures including the recent introduction of a form of currency control. This, along with political developments, has raised uncertainty regarding its expected relatively quick recovery. Moreover, key economic indicators have turned out worse than predicted and Malaysia is now officially in recession.
South Korea, which was the most developed of the countries, was showing signs of difficulties prior to the crisis. The crisis worsened this situation, requiring the IMF to be called in, and South Korea is now officially in recession. The certainty and speed of recovery is dependent on major structural reforms being undertaken. The optimistic scenario is for recovery next year and the pessimistic scenario is for recovery in five years. South Korea’s situation looks better than Indonesia’s but worse than Malaysia’s.
11.4. Developments in the agrifood sectors
11.4.1 Indonesia
Rice dominates Indonesian food consumption; the levels of consumption of wheat flour, meat and sugar are relatively low (Table 11.4). Following the onset of the crisis, and the subsequent fall in incomes and increase in the number of poor, the distribution and consumption of staples have taken on a renewed importance. Indonesian consumption patterns were changing prior to the crisis on the basis of rising incomes. Consumption levels of staples such as rice, cassava, maize and sweet potato were decreasing and those of wheat and pulses, fruit and vegetables, and meat were increasing. These trends are expected to re-establish themselves in the longer term – after the crisis ends.
Prior to the crisis, agricultural production was significant (accounting for around 16 per cent of GDP) but of declining importance, unlike the broader agrifood sector, which was worth US$13 billion in 1997 (Suprapto 1998). It remains a large employer of unskilled labour in Indonesia. Food security concerns have arisen because of lower rice production as a result of drought, delayed plantings, pests, and pesticide and fertiliser problems. A recovery in food production is expected in 1999 as a result of a government program aimed at stimulating production through the greater provision of credit, the continuation of fertiliser subsidies, which should increase cropping intensities, as well as more favourable rainfall projections and cheaper labour. Figures indicate significant imports of rice (5.14 Mt) and wheat (4 Mt) this year compared with an average of 0.5 Mt a year over the period 1985 to 1994.
195 Table 11.4: Consumption of key food products per person in Indonesia, 1996 Expenditure group Population Rice Wheat flour Poultry Soybean Sugar Cooking oil Rupiah per month million kg kg kg kg kg litre Under 15 000 0.3 44.5 0.0 0.1 0.0 2.6 3.7 15 000–19 999 2.5 72.4 0.1 0.2 0.1 3.7 4.1 20 000–29 999 20.9 63.1 0.3 0.5 0.1 5.4 5.4 30 000–39 999 35.3 110.5 0.4 1.0 0.1 7.0 6.8 40 000–59 999 57.7 117.5 0.7 2.3 0.1 8.5 8.3 60 000–79 999 31.2 116.4 1.1 4.2 0.1 10.0 9.9 80 000–99 999 16.8 113.9 1.3 5.6 0.2 10.8 11.1 100 000–149 999 18.4 108.9 1.6 7.9 0.1 11.5 12.3 At least 150 000 12.6 101.6 2.3 12.6 0.3 12.8 15.0 All 195.5 111.2 0.9 3.6 0.1 8.8 8.9 Note: The expenditure groups relate to average expenditure per person per month. Source: BPS (1996).
Indonesia’s agrifood production is dominated by smallholders, located mainly on Java, producing rice on less than a hectare of land. But there is some larger-scale production of non-rice crops on the estates.
Around 95 per cent of agrifood processing establishments are household-based establishments with one to four workers, which account for about 60 per cent of employment in this industry. However, these establishments produce only 8 per cent of the value of output and account for only 6 per cent of value-added. There are a few very large downstream and upstream capital-intensive companies supplying inputs, and processing and marketing products. The largest user of imported intermediate inputs, the flour industry, imports all its main agricultural input, wheat. However, its imported intermediate inputs account for only 14.2 per cent of its total inputs, illustrating how competitiveness in the other inputs such as labour can be more important.
The retailing and food service industries have been hit hard by the crisis. Prior to the crisis these industries were growing rapidly, particularly in Jakarta where infrastructure support is greatest. In the cities, the traditional ‘wet markets’ were gradually being replaced by modern supermarkets and retailing operations. The rapid growth in food services, particularly fast-food outlets, has now been curtailed, with many closing in the past 12 months and products being repositioned to cater for people on lower incomes. Major fast-food chains such as McDonald’s are increasing their sourcing of local products, where quality standards can be met.
Agriculture’s situation has improved since the onset of the crisis and for this reason it is being looked to as a sector that may help Indonesia back on the road to recovery by providing food supplies, employment income and foreign exchange, mainly on the basis of domestic resources. Food supplies appear adequate in aggregate, but distribution and affordability (given the higher prices and lower incomes) are major problems. Because of the economic crisis and the change in the exchange rate, agricultural imports could be expected to fall, other things being equal. But other things may not be equal and under new, more competitive arrangements resulting from policy changes, some imports such as meat may still be affordable. Similarly, wheat and wheat flour imports may be competitive under new arrangements because competing domestic production, say of rice, requires expensive new infrastructure investment or has low productivity. Imports that are more expensive as a result of the exchange rate changes but that have cheaper domestic value-added before being re-exported – for example, cotton made into textiles – should now be more competitive on the world market.
196 11.4.2 Malaysia
Consumption patterns in Malaysia have changed rapidly with changing incomes and lifestyles. New Western-style foods and shopping styles (for example, supermarkets) have been readily accepted. There are some ethnic aspects that are key determinants of developments in consumption – for example, the requirement for halal certified foods. Consumption levels per person and self-sufficiency ratios for selected food items in Malaysia illustrate the recent trends in consumption (Table 11.5). Prior to the crisis, rice consumption per person had been declining slowly and the consumption of meat, especially poultry, and dairy products had been increasing. Malaysia’s self-sufficiency ratios were reasonably high for rice (around 80 per cent) but low for beef, mutton and liquid milk (between 5 and 20 per cent). It is likely that the crisis has interrupted these trends but they will probably resume once incomes begin to rise. Because of the changes in relative prices and incomes the self-sufficiency ratios for many products should be rising, although livestock production will probably be constrained, as many inputs are imported.
Table 11.5: Consumption of food products per person in Malaysia 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 kg kg kg kg kg kg kg kg kg kg Rice 82.0 78.0 84.0 91.0 87.0 90.0 94.0 91.0 87.0 87.0 (86%) (85%) (80%) (75%) (79%) (76%) (75%) (78%) (80%) (76%) Beef 2.35 2.51 2.86 3.41 3.49 3.82 3.85 3.98 4.36 4.67 (39%) (36%) (34%) (24%) (24%) (22%) (23%) (22%) (20%) (20%) Mutton 0.48 0.49 0.49 0.46 0.50 0.50 0.59 0.57 0.60 0.66 (9%) (8%) (8%) (9%) (9%) (9%) (7%) (7%) (6%) (5%) Pork 9.75 10.29 8.15 9.21 10.29 10.15 10.65 10.59 11.24 10.42 (109%) (111%) (12%) (126%) (131%) (135%) (137%) (140%) (139%) (142%) Poultry 17.6 17.9 18.2 22.1 20.3 21.9 28.3 30.4 32.6 33.1 (106%) (114%) (119%) (115%) (117%) (101%) (115%) (102%) (115%) (114%) Eggs 243.0 239.0 243.0 248.0 280.0 297.0 339.0 326.0 329.0 328.0 (101%) (106%) (114%) (110%) (123%) (113%) (112%) (112%) (113%) (112%) Liquid 40.52 44.75 54.73 40.73 38.47 55.62 52.00 46.87 33.65 51.70 milk (4.5%) (4.1%) (3.4%) (4.3%) (4.7%) (3.2%) (3.5%) (3.2%) (5.8%) (3.7%) Note: Figures in brackets indicate Malaysia’ self-sufficiency in the product. Source: Ministry of Agriculture, Department of Veterinary Services.
Despite the relative decline in agricultural production, it is still significant, accounting for around 13.5 per cent of GDP in 1997 with agriculture-related manufacturing and services accounting for 36 per cent of GDP (Pryor and Holt 1998). There have been a number of noticeable trends in agricultural production in recent years. One is the decline in the production of highly organised, export-oriented estate crops, apart from palm oil. The scarcity of key resources, such as land, and relatively high input costs, such as for labour, explain this trend and the trend to investment offshore, in neighbouring Indonesia, for example. Still, Malaysia has a comparative advantage in estate crops as distinct from other agricultural production. Another trend is the increase in rice production, which comes mainly from smallholders. This can be explained by yield increases. Policies aimed at alleviating poverty include output pricing and input (for example, fertiliser) subsidies. Other important production, such as livestock production, is highly dependent on imported feeds and other inputs. The driving objective in other agricultural production is to ensure adequate supplies of food for consumers at stable prices (Tan 1999). Food imports, including from Australia, make up a substantial proportion of domestic consumption of other agricultural products. The United States had made some inroads into this market before the crisis, especially in the areas of fruit and vegetables. Malaysia is a net food importer if palm oil exports are excluded. Malaysia is expected to remain a large importer of food, the level and make-up of this depending on the recovering level of incomes.
Malaysian agrifood production has two main components – estate production of palm oil and cocoa for processed exports, and smallholder production of rice, livestock and
197 horticulture mainly for fresh domestic consumption. The estate component tends to be market-driven, given Malaysia’s comparative advantage in what it produces. Growers are strongly represented by industry associations. Much of the smallholder production is also market-driven, except in the rice and dairy industries, which are policy-driven as in Indonesia – although Malaysia aims for only 80 per cent rice and 5 per cent dairy product self-sufficiency. The tendency in the smallholder production areas is towards larger commercial operations; new small producers are not encouraged. The high cost of rice production has prompted policies to limit this crop to major rice growing areas where double cropping can be undertaken (Tan 1999).
Agrifood processing is dominated by the estate component of agrifood production, which is capital and technology-intensive. This component is organised through the involvement of industry associations and through the licensing of most stages of production to ensure quality control. The processing of other products relies heavily on competitive imported inputs and is dominated by a small number of multinationals in cereals, milk, noodles, sauces and confectionary. The Industrial Master Plan contains a resource-based industrialisation strategy that aims to have almost all exports in a processed form (Ministry of International Trade and Industry 1996).
Prior to the onset of the Asian economic crisis, the Malaysian retailing and food service sectors had been booming. Supermarkets and food service establishments had grown rapidly and a number of large overseas operations had become firmly established. Wet markets remain important as sources of fresh foods, particularly in rural areas, and traditional food retailers still have between 50 and 70 per cent of the market. Since the onset of the economic crisis in Malaysia, there has been a switch from imported to local foods, due mainly to the higher prices of imported products and the income effects of the crisis. There has also been a switch away from eating out. The crisis has greatly affected the food retailing and food service sectors. Margins are being squeezed, some larger retailers are being forced to retrench staff and close operations, and foreign operators (mainly from Europe and the United States) are taking over local operations. In the food service sector, the most severely affected segment has been 5-star hotels and restaurants, with overcapacity compounding the problems. Food distribution has traditionally been subject to various government influences and controls and this has impeded development. Major supermarket and food service chains are developing their own distribution arrangements, albeit very cautiously in the current environment. Malaysian operators are focusing on removing costs from the supply chain and improving services.
Agricultural imports used solely for consumption purposes are expected to fall because of the lower purchasing power of consumers induced by the effects of the crisis. This has been observed, for example, in relation to fruit imports. However, some sources of food supplies, such as Thailand, have been hit even harder than has Malaysia by the crisis, which illustrates that the negative income effects on production appear to dominate any positive export price effects arising from devaluation, at least in the short term. This puts greater onus on exporters such as Australia to keep their costs down as Malaysia is looking at new, low-cost suppliers – for example, India in the case of some meat products. Some imports can be maintained in the current circumstances – for example, imports that will have domestic value-added before being exported. These imports will be more expensive as a result of the exchange rate changes but the domestic value-added will be cheaper, potentially making them more competitive on the world market. This occurs with coffee beans that are imported for blending with domestically produced beans and exported in more processed form. Malaysian agrifood exports such as palm oil are doing well. There have been moves to increase domestic production of, for example, vegetables, but these appear to have had little impact and the outlook appears more promising for processed products that Malaysia has a greater comparative advantage in producing.
198 11.4.3 South Korea
Korea’s food consumption levels and patterns have changed significantly in association with the country’s rapid economic growth, industrialisation, modernisation and urbanisation. In per person terms the consumption levels of traditional staple foods such as rice have fallen steadily since the early 1970s. However, the consumption levels of vegetables, fruit, meat and dairy products have risen rapidly, particularly since the early 1980s (Table 11.6). Another significant development is the dramatic increase in the proportion of dining-out expenditure in total food expenditure, especially in the 1990s prior to the onset of the current crisis. This change involved substantial increases in expenditure on meat in fast-food restaurants and on processed foods.
Table 11.6: Food consumption per person in Korea 1980 1985 1990 1995 1997 kg kg kg kg kg Rice 132.4 128.1 119.6 106.5 102.4 Wheat 29.4 32.1 29.8 33.4 34.4 Vegetables 120.3 98.6 132.6 158.5 145.0 Fruit 22.3 36.0 41.8 55.4 57.9 Beef 2.6 2.9 4.1 6.7 7.9 Pork 6.3 8.4 11.8 14.8 15.3 Chicken 2.4 3.1 4.0 5.9 6.1 Milk & cheese 10.8 23.3 42.8 47.8 52.1 Fish 27.0 37.2 36.2 46.0 na Note: na Not available. Source: Ministry of Agriculture and Forestry (1998).
This changing pattern in food consumption in Korea is expected to continue in the twenty-first century. However, it may be slowed to some extent in the short run by the current economic crisis, as changes in food prices may have stronger effects on the consumption pattern. In particular, the growth in the importance of dining-out and of beef in total food expenditure is expected to slow.
The rapid industrialisation of Korea’s economy has led to a decline in the importance of agriculture in terms of GDP and employment, and by 1997 agriculture contributed only 4.9 per cent of GDP and employed only 11 per cent of the labour force. The contribution of food processing (including beverages and tobacco) to manufacturing output declined from 21 per cent in 1970 to 6.5 per cent in 1997. Although the total area of land used by the agricultural sector had not declined as rapidly as has employment, demand for land in other uses such as residential, industrial, recreational and infrastructure developments has drawn land out of farming. The structure of agrifood production in Korea has been changing rapidly. Urbanisation of the population and changing relative prices of both inputs and outputs have been major influencing factors. Wage rates have risen relative to capital costs and farm production is becoming increasingly capital- intensive. Land is shifting from the production of traditional and relatively less profitable crops to more profitable alternatives such as fruit and greenhouse production. The importance of agrifood products in Korea’s trade has also been falling over time. This implies that Korea’s comparative advantage in agrifood production has declined over time, leading to a greater dependence on agrifood imports.
Between 1990 and 1995, the number of food processing industries grew by 43 per cent, which was above the manufacturing average, with meat and vegetable industries growing the fastest. While the number of firms increased throughout the 1980s and 1990s, the total value of sales in real terms grew faster and hence the average size of processing firms increased (Korea Rural Economic Institute 1998). In food processing, however, firms producing relatively high value-added foods such as dairy products and food oil accounted for less than 5 per cent of the total number of establishments but about 30 per
199 cent of the total value of sales in 1995. This implies that most processing firms are small and the average sales value across all industries is far below that of the milk processing and food oil firms.
The economic crisis has affected food processing, not only through the contraction in demand but also through financial constraints. Many small and/or financially weak uncompetitive firms have left the industry, leaving fewer, larger firms with enhanced competitiveness. The economic crisis also provides foreign producers with the opportunity to enter the Korean market, not only through exports but also through direct investment. Foreign companies entering the market through takeovers, joint ventures or mergers will need to be patient, however, because of the depressed demand in the domestic market in the short run.
11.4.4 Key findings across all countries
Rice has dominated Indonesian food consumption and production for some time, with strong self-sufficiency policies being applied. This was changing prior to the crisis with rising incomes leading to a fall in rice consumption and a rise in the consumption of wheat, meat, fruit and vegetables, which were often bought from modern retail outlets or when eating out. The East Asian economic crisis, in conjunction with the drought and forest fires in Indonesia, led to a fall in production and to food shortages. This situation is expected to improve, but Indonesia will still be dependent on imports and aid to meet its food requirements. Agriculture become more important since the crisis, with it being looked at as a sector that could provide food supplies, employment income and foreign exchange. Downstream components of the agrifood sector have tended to have been highly concentrated but the crisis has led to demands, both from the IMF and the Indonesian parliament, for the breaking down of such arrangements.
Malaysian food purchasing and consumption patterns had already changed dramatically to become more Westernised prior to the onset of the crisis. Production was not as oriented to self-sufficiency as in Indonesia but was still significant, especially in estate crops where Malaysia has a comparative advantage. Some special treatment is provided to smallholder rice producers but this is limited. The sector is mainly driven by the aim of providing consumers with cheap and reliable supplies of food. Imports will remain significant with the level and make-up determined by the recovery from the crisis and the costs of supplies. The structure of downstream activity in the Malaysian agrifood sector has been much more balanced than it has been in Indonesia and there has been some recent takeover activity from foreign operators.
In South Korea, consumption patterns had already changed dramatically in conjunction with the changes in the economy such as industrialisation, modernisation and urbanisation. One key trend was an increase in dining out. Although agriculture is not as important a sector in South Korea as in the other two countries, important changes have been taking place. For example, there has been a strong move towards producing more profitable crops. In line with these changes, a greater dependence on imports has developed. Some of these trends have been interrupted by the crisis and others have accelerated, for example the trend towards fewer but larger operators in the agrifoods sector has been encouraged by falling demand and increasing financial pressures as a result of the crisis.
11.5. Policies affecting agrifood developments
11.5.1 Indonesia
In the past, Indonesian agricultural and food processing sectors have been areas of substantive government intervention, with five-year rolling plans affecting land assignment, production targets, and infrastructure investments such as irrigation,
200 processing and import licensing. Many of these policies are now being changed in response to the crisis and the involvement of international agencies in rescue packages.
As a result of the crisis, Indonesia has reformed many policies across all sectors, including, importantly, the banking sector, as well as reforming macroeconomic policies such as exchange rate settings. Changes to trade and investment policies, which have related to all components of the agrifood sector, have been appropriate because the exchange rate changes have meant investment is more attractive than trade and often the impediments to investment are more encompassing.
Trade policies directly concern import tariffs, non-tariff barriers and export taxes. Most tariffs have fallen as a result of the crisis – those for dairy products being the exception – and will come down further under various international agreements. Non-tariff barriers, which were substantially reduced as a consequence of reforms in the late 1980s (see PECC 1995), tariffication under the Uruguay Round of multilateral negotiations and crisis commitments (for example, removing BULOG’s monopoly importing rights), will be similarly addressed under these international agreements.
Investment restrictions have been lifted in some key agrifood-related areas such as distribution and retailing. Restrictions on palm oil investments were removed and replaced with export taxes, which have subsequently been removed. Procedures for approving investments have also been streamlined.
Policies related to agricultural production, mainly of rice, affect pricing, infrastructure investment, credit and technology provision. Pricing policies have been aimed at encouraging agricultural production (self-sufficiency) and improving farmers’ incomes. The pricing policies have taken the form of subsidies on key inputs such as fertiliser (and could thus be commodity-biased) and the setting of floor prices for strategic commodities such as rice. (Recently mentioned changes to fertiliser subsidies aim to target poor farmers from October 1999.) These main policies have been supported by the development and rehabilitation of irrigation facilities, the provision of subsidised credit (outstanding payments of which have been written off in the past) and extension services. Diversification and quality improvement in other crops are policy objectives but often the focus on rice production adversely affects these objectives. Constraints such as controls on sugar plantings have been removed as part of the IMF package. Other policies relate to cooperatives and concepts such as nucleus–plasma arrangements, which link smallholders with large processors or input suppliers.
Processing policies involve a number of Indonesian government institutions. For example, the Ministry of Industry and Trade, the Coordinating Board of Investment and the Ministry of Internal Affairs must jointly approve the sites and processing capacities of factories and their possible environmental impacts. Other policy areas cover quality, market access and information, promotion of partnerships and investment opportunities. Changes have been made to these policies in the light of the crisis. Most importantly, a number of processing industries such as dairy products are now open to foreign investment. There are also a wide range of incentives that promote agribusiness investment such as exemption or relief from import duties and levies (Suprapto 1998). Tax incentives are also provided to certain industries and/or locations that are considered a national priority in terms of exports and the development of remote areas. Other incentives are provided to exporters of manufactured products – such as the drawback of import duties and surcharges on goods and materials required to manufacture exported finished products, and exemptions from value-added and sales taxes on luxury goods and materials purchased domestically to be used in manufactured exports.
Distribution and marketing policies have included restrictions on investment in retailing, service and distribution sectors, and controlled systems for the distribution of seed and fertiliser, and for the marketing of some agricultural products . The marketing systems have covered rice, soybeans, cane sugar, wheat, Pontianak oranges, cloves and palm oil.
201 BULOG has been responsible for the national procurement, stockpiling and import of the first three of these commodities. Its monopoly will be removed as part of Indonesia’s response to the crisis. Related reforms cover private conglomerates and public monopolies such as BULOG that have influence over most stages of transport, processing and marketing.
General consumer price subsidies are being removed, apart from those on rice, which will be phased down. These subsidies are being replaced by more targeted ones. Other proposed reforms relate to improving the seed market (for example, opening it to competition, recognising seed certification, and divesting seed companies), reorientating cooperatives to business forms, and expanding the knowledge base to improve agriculture’s performance.
11.5.2 Malaysia
The most discussed current Malaysian macroeconomic policy affecting trade and investment is currency controls. The currency controls should be used for the right reasons and be subject to strict restrictions that limit them to short-term capital flows, avoiding a currency black market at the same time. They should not lead to trade controls nor affect foreign direct investment. They should be used to assist reforms (for example, in the banking sector), not avoid them. Currently these controls have support from some multinational companies (Athukorala 1998b). Despite the introduction of capital controls, these are not seen as a retreat from Malaysia’s longstanding commitment to an open trade and investment policy.
Malaysia’s trade reflects its competitiveness or comparative advantage. It is the world’s largest palm oil exporter. Over a decade ago, Malaysia recognised that it had a comparative advantage in estate crops and not in food crop production. This was reflected in the lowering of tariffs and sales taxes on most food crops. Even when tariffs and other trade barriers apply, a flexible and pragmatic approach has been taken to their implementation and imports enter free to meet consumer or processor price objectives. Some non-tariff barriers still apply, in terms of quotas and licences for palm oil, for quarantine reasons in livestock, to stabilise prices in the cases of cabbages and coffee, and to regulate competition in the cases of sugar and flour.
Investment policies impose some ownership constraints – for example, aquaculture operations are required to have 70 per cent Malaysian equity.
Malaysia has short and long-term plans – for example, Industrial Master Plans and National Agricultural Plans (1984 and 1991) – but the Industrial Master Plans dominate. The Malaysian Government does not appear to have an unquestioning commitment to planned structures, such as the industry clusters found in Indonesia. The Malaysian Government’s involvement tends to be more in terms of setting targets and facilitating policies such as investment incentives via the taxation system, especially in relation to fruit and vegetables for the domestic market, and research and development. Plans are often not met. In aggregate terms, Malaysia had tended to tax rather than subsidise food production (Tan 1999). The tax is an implicit tax arising from the country’s previously overvalued exchange rate and from taxes on export commodities, plus the assistance given to manufacturing industries – for example, automobiles.
Subsidies only apply to rice production, in terms of price support on standard grades and inputs. This is based on the aim of maintaining farm incomes rather than any self- sufficiency goals. The main objective is to ensure low costs to consumers. There are some tax incentives in respect of investment tax credits, double deduction for the promotion of exports, and infrastructure allowances. The latest government initiatives to manage the effects of the crisis concentrate on increasing the consumption of local products through land allocations and home-grown products, such as vegetables, reviewing current imports and seeking cheaper alternatives (Tan 1999).
202
The Malaysian Government has been encouraging the modernisation of the retailing, food service and distribution sectors over the past decade through its liberal foreign investment laws. This has led to the development of modern shopping and food service operations, often involving foreign multinationals. Government controls have been evident in the past in food distribution arrangements. However, larger operators have been investing in distribution to service their own operations, breaking down some of the traditional barriers to entry. This trend is also expected to develop further as the economy recovers. Allowing foreign operators to enter the market automatically encourages development as they bring new ways of doing business, which in turn influence local consumers and local businesses. So far the crisis has not caused a curbing of Malaysia’s liberal foreign investment policy.
11.5.3 South Korea
South Korea has attached a high priority to the goals of self-sufficiency in food and the protection of farmers’ incomes, hence agriculture has remained the most heavily protected sector in Korea. Agriculture’s protection was induced by structural change resulting from the implementation of outward-looking policies for much of Korea’s economy since the mid-1960s and largely originated from political factors. Protection policy has been driven mostly by farmers’ strong demand for higher incomes. They have been a significant political pressure group.
Pressure for further reform of Korea’s agrifood policies is likely to intensify as the economy recovers from the current downturn. On the domestic front, urban links to the countryside will weaken, as will the political power of farmers. The current level of public support for agriculture will not be sustainable.
There are further scheduled openings of the Korean food market to imports as trade liberalisation commitments are met. For example, under the Uruguay Round of commitments, Korea has agreed to liberalise market access for 1,312 agricultural items, the exception being rice. Rice was accorded special treatment and was provided a 10-year period (1995–2004) to move to a tariff-only system for imports. In the meantime, a minimum market access of less than 4 per cent of domestic consumption has been allowed. By the completion of the implementation of the Uruguay Round commitments, the average tariff will be about 6 per cent and almost 90 per cent of all tariff lines will be bound. Quantitative restrictions on imports are gradually being removed. International pressures for further policy reforms will arise through future multilateral trade negotiations in the WTO, with the next agricultural round due to start by 1999, and in other forums (for example, the OECD and APEC).
While the agrifood market is in transition from being highly protected to moderately liberalised, many aspects of food importing are still subject to government intervention. These include import management regimes covering 83 agricultural commodities, the reinforcement of quarantine regulations for plant and animal imports, the reinforcement of country of origin labelling, import licensing and quotas.
There are a number of areas of market discrimination in Korea that work against Australian food products. One involves what appears to be preference for imported products from the United States, rather than from Australia, which is partly a reflection of consumers’ lack of familiarity with Australian products. Another area reflects Korea’s policies and measures such as the reinspection required for imported foods and the health food registration process. The net result is that Australian products are less well-known and less accessible to Korean consumers than are US products.
The recent relaxation of investment regulations in Korea is providing new opportunities for investment in the agrifood chain. The Asian crisis has increased the willingness of Korean agrifood companies to consider joint ventures with overseas companies.
203
11.5.4 Key findings across all countries
Indonesia has had perhaps the heaviest government involvement of all the three countries in the development of the agrifood sector. Planning plays a strong role in Indonesian policy processes and rice self-sufficiency policies have dominated the whole sector for some time. This has changed with the onset of the crisis and the involvement of agencies such as the IMF in rescue packages. Investment has become more open with the breaking down of monopoly arrangements. Moreover, consumer and producer subsidies have become much more targeted.
The Malaysian Government has been much less involved than the Indonesian Government in the development of its agrifood sector. It has plans but these are more for guidance, with the Government having concentrated on providing an appropriate macroeconomic environment for the sector to operate in. It also has self-sufficiency targets but these are much lower than those of Indonesia. Tariffs are generally low and even then these are often not applied, as the key focus of policy is to ensure that consumers have cheap and reliable supplies of food. The Government has attempted to make the most of Malaysia’s comparative advantage, for example by providing cheap inputs to the food processing sector rather than trying to achieve self-sufficiency. This aspect is reflected in its treatment of the palm oil industry, which contrasts to that in Indonesia where investment and export constraints have been applied at various times.
South Korea, like Indonesia, assigns high priority to self-sufficiency and the maintenance of farm incomes but the size of its agrifood sector in comparison with Indonesia’s enables South Korea to take a ‘higher cost’ approach. Still, such an approach appears unsustainable and structural adjustments in the economy, plus pressures from international agencies such as the WTO, suggest new agrifood opportunities in South Korea for countries such as Australia over the medium term.
11.6. Opportunities, challenges and strategies for Australian food companies
11.6.1 Opportunities and challenges
It is clear that the three countries and their food markets are going through major changes. However, the long-term growth potential of these food markets to serve a large number of people when incomes again grow significantly is substantial.
The changing economic situation, structures and policies offer both opportunities and challenges for Australian companies. In broad terms, the opportunities lie in greater trade and investment links and the business that flows from these. The main challenges are in how Australia and its competitors position themselves to meet the changes in institutions and policies.
Specific opportunities and challenges will stem from changes in production arrangements – for example, in Indonesia not favouring the production of rice over higher-value products such as horticultural and fish pond products. Such changes will have implications for trade and bring other opportunities in this regard as well as associated investments.
Similarly, the removal of consumption subsidies such as in Indonesia will put products like wheat on more of a level footing with the traditional staple of rice. Australia, plus key competitors (the United States and Canada), could gain from this development, as would Indonesia in that importing wheat would be a better use of resources than trying to develop marginal lands to grow rice.
204 Finally, the removal of monopoly arrangements in processing, retailing, services and distribution sectors, especially in Indonesia, offers a number of direct opportunities for Australian companies in, for example, dairy processing, while also enabling companies to expand markets and obtain greater influence over pricing, quality, supply and costs.
11.6.2 Specific strategies
Because of the long-term opportunities offered by Asian markets and the current challenges, there are a few key common strategies that Australian food companies should be pursuing to strengthen their position in these food markets and to build the business relationships needed to be successful in that market over the longer term. There are also areas where government support has a role.
Keep markets open by maintaining close business and government relationships, fully participating in relevant business forums and governmental discussions on trade issues, and quantifying and promoting the benefits of free trade through relevant joint studies as well as opposing moves in the other direction. Australian government agencies such as the Department of Foreign Affairs and Trade, Austrade and state agribusiness agencies need to continue to monitor developments closely over the next 12 months and report developments to the Australian agrifood industry. Each country, including Australia, can work to overcome particular trade impediments such as unnecessarily restrictive quarantine or Customs’ protocols. In respect of South Korea, this would include the establishment of a government bilateral agreement on market access for Australian food, the highlighting of how Korean and Australian industry can complement each other, the development of complementary inspection systems for imports, and knowing which Korean government agency (and who in that agency) manages imports of Australian agrifood.
Position Australian product by differentiating it in terms of quality, meeting market requirements, reliability of supply, credit arrangements, promotional support, retail training as well as by ‘brand’ identification. The worst strategy Australia companies could take would be to lower the quality of their products, such as vegetables, to compete directly with local products. This would probably gain little or no market share in the short term and lose a substantial share in the longer term.
Reduce costs through the supply chain by streamlining Customs’ and other institutional procedures, examining alternatives to the usual ways of presenting and supplying products, supporting research into new technologies, using new technologies to improve product values and increasing productivity.
Establish joint ventures and in-country investment to take advantage of lower currency values and more open investment regimes through, among other things, sharing new technologies, increasing market penetration, and gaining better control of distribution and product quality. Australian companies need to go beyond the ‘simple export model’ and examine such options as new forms of joint ventures, technology agreements and ‘third’ country trade relationships, taking a medium to long-term view of the market. In Malaysia, the development of key retail, food service and distribution links with companies at the forefront of developments in the Asian food market offers good opportunities for Australian food supply companies.
Understand the market and competitors by investing in reliable market intelligence and evaluating how key companies at the forefront of developments in retailing and food service are managing and instituting change to meet the current challenges. This involves maintaining a presence in the market, even in troubled times, to show a commitment and to maintain market awareness, a market network and information sources. This presence need not be through individual companies but through industry and government associations, taking advantage of the information and services of Austrade, the
205 Department of Foreign Affairs and Trade, Supermarket to Asia Ltd and other federal and state government agencies.
11.7 Conclusion
In this chapter it has been shown that the agrifood sectors of Indonesia, Malaysia and South Korea have been of growing importance to Australian food companies. Consumption patterns and methods of food purchasing have been changing dramatically. The development of these economies has seen their agricultural sectors shrink relative to other sectors, including downstream agrifood sectors such as retailing and services. Trade and investment in these sectors have been growing in importance.
The onset of the East Asian economic crisis has set back these developments to varying degrees for each of the countries studied. However, the crisis has issued Australian agrifood companies with a number of new opportunities and challenges. For example, with the relative change in exchange rates and opening of investment regimes, investment has become more attractive relative to trade. There are different opportunities and challenges in each of the countries studied but they do suggest some common broad strategies for addressing these aspects.
Some of the key differences between the approaches the various countries have taken to the impact of the East Asian economic crisis provide lessons in themselves. For example, some countries have opened up their trade and investment much more than others, realising that the exchange rate changes have introduced some natural protection and improved price competitiveness, and that trading based on comparative advantage is the best way out of crisis. But improved price competitiveness has proved insufficient, especially when neighbouring traders have undergone similar changes, and those countries seeking joint ventures involving new technologies aimed at aspects such as improved quality will benefit in the longer term. In another example of different approaches, some countries have concentrated on macroeconomic reforms while others have taken reforms down to the microeconomic level. The appropriate approach seems to be a mix of the two, with those economies that are more easily able to structurally adjust to changes being in a better position to ride out crises and to continue to develop.
The common strategies that Australian agrifood companies should pursue, with the assistance of government agencies, when seeking to enter or expand their longer-term involvement in these food markets fall into five broad, and at times, overlapping groups, namely:
· keeping markets open; · positioning Australian products; · reducing costs through the supply chain; · establishing joint ventures and in-country investment; and · understanding the market and competitors.
206 11.8 References
Asia Pacific Economics Group (APEG) 1998, Asia Pacific Profiles, Financial Times, Singapore. Athukorala, P. 1998a, Country case study: Malaysia, in McLeod, R. H. and Garnaut, R. (eds), East Asia in Crisis: From Being a Miracle to Needing One?, Routledge, London. Athukorala, P. 1998b, Swimming against the tide: crisis management in Malaysia, ASEAN Economic Bulletin, 15(2) (forthcoming). Biro Pusat Statistik (BPS) 1996, Consumption Expenditure of Indonesia, 1996, National Economic Survey (in Indonesian), Jakarta. Corsetti, G., Pesenti, P. and Roubini, N. 1998, ‘What caused the Asian currency and financial crisis,www.stern.nyu.edu/nroubini/asia/AsianCrisis.pdf, March. Evans, K. 1998, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 34(3), December. Feridhanuseyawan, T. 1997, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 33(2), August. International Monetary Fund (IMF) 1998, Annual Report, Washington DC. Korea Rural Economic Institute (KREI) 1998, Impact of the IMF measures on the agriculture sector in Korea, Policy Research Report P26, Seoul (in Korean). Ministry of Agriculture and Forestry 1998, Major Agriculture and Forestry Statistics. Ministry of International Trade and Industry (MITI), Malaysia 1996, Second Industrial Master Plan, 1996-2005, Kuala Lumpur. Pacific Economic Cooperation Council (PECC) 1995, Survey of Impediments to Trade and Investment in the APEC Region, PECC Report to APEC Trade Ministers, PECC, Singapore, November. Pryor, S. and Holt, T. 1998, Agribusiness as an engine of growth in developing countries, USAID, Washington DC (forthcoming). Soesastro, H. and Basri, M.C. 1998, ‘Survey of recent developments’, Bulletin of Indonesian Economic Studies, 34(1), April. Supermarket to Asia 1998a, Economic change and agrifood development: Indonesia, A report prepared by Supermarket to Asia Ltd, Canberra. Supermarket to Asia 1998b, Economic change and agrifood development: Malaysia, A report prepared by Supermarket to Asia Ltd, Canberra. Supermarket to Asia 1998c, Economic change and agrifood development: Korea, A report prepared by Supermarket to Asia Ltd, Canberra. Suprapto, A. 1998, Prospects of agribusiness investment in Indonesia, Agribusiness Agency paper presented at the 7th meeting of the Australia-Indonesia Working Group on Agriculture and Food Cooperation, Jakarta, 21–24 September. Tan, S.H. 1999, Recent economic and agrifood policy developments in Malaysia, Report for Supermarket to Asia Ltd, chapter in Agrifood developments in Indonesia, Malaysia and South Korea: detailed research papers, Rural Industries Research and Development Corporation Report, Canberra (forthcoming). Trewin, R. 1999, Economic developments in the Indonesian and Malaysian agrifood sectors – a literature review, Report for Supermarket to Asia Ltd, chapter in Agrifood developments in Indonesia, Malaysia and South Korea: detailed research papers, Rural Industries Research and Development Corporation Report, Canberra (forthcoming). World Bank 1997, Indonesia: Sustaining high growth with equity, Report No. 16433- IND, Washington DC, May.
207