T

he beef industry is becoming more economically and politically important in Indonesia. Political sensitivity in the beef sector has significantly escalated after the Corruption Eradication Commission (KPK) named a political party’s leader a suspect in a bribery case related to the government’s procurement of imported beef.

While it is important to continue the legal process, a better understanding of how to best approach Indonesia’s beef self-sufficiency target is required. Many Indonesians ask one “simple” question through social media “Why do we still need to import beef?” They say this question is relevant because of the potential rent-seeking activities triggered by the implementation of protectionist trade and the figure of 14.8 million head of cattle reported in the 2011 livestock census.

Indonesia defines self-sufficiency as local production being able to meet 90 percent of domestic demand. Hence, even when we are self-sufficient, there will still be a 10 percent “gap” for imported beef to cater to specific domestic demand, in particular demand from the hospitality industry and high-end markets.

But meeting 90 percent of domestic beef consumption is a big task. History has shown that such a self-sufficiency target is ambitious given the high volatility of beef production. But the Indonesian government believes that the figure of 14.8 million head of cattle signals a positive indicator that the target is achievable.

However, self-sufficiency is not simply about having a sufficient national cattle herd. Various sources suggest that the Gross Domestic Product (GDP) growth of about 6 percent per annum has led to a 3-5 percent increase in beef consumption. This figure is expected to soar given increased urbanization, modern retail penetration and an expanding middle class (estimated at 30 million people in 2012).

In the past, the deficit was met by live cattle imports, including slaughter and feedlot cattle, and boxed beef imports. However, the current self-sufficiency program restricts these imports, in particular that of boxed beef. The import quota for boxed beef was slashed from 100,000 tons in 2011 to 34,000 tons in 2012 aimed at providing greater opportunities for local beef producers.

Despite massive government programs to assist smallholder cattle producers, the success rates of such programs are limited to some regions like West Nusa Tenggara and, therefore, their impact is insignificant in boosting cattle production at a national level. It is generally accepted that the biggest obstacle to Indonesia’s self-sufficiency target is breeding.

The number of breeding units, however, has not shown a consistent increase over the years. In 2007 there were only 10 units of cattle breeding across Indonesia, which were inadequate to meet the demand.

Foreign investment in breeding establishments is also low. Breeding activities in smallholder systems are also problematic, with farmers struggling to adopt simple farm management such as early weaning, seasonal mating, good animal husbandry, etc.

This highlights the importance of research into farmer’s barriers to adoption of new technology and better management.

In addition to substantial challenges to boosting the national cattle herd, problems along supply chains persist. Typical cattle farmers in Indonesia are smallholders owning three to four head of cattle and are “keepers” instead of producers. They do not always respond to price incentives or other changes in the market. Instead, they keep their cattle as assets and sell them as and when they need cash.

In addition, inefficiencies also persist and farmers are often those who receive the least benefit as they lack access to market information and bargaining power. Beef supply chains are often long, from local traders to inter-island traders to retailers where adequate infrastructure may not be available. Given these supply-chain problems, it is difficult to measure the actual volume of beef that the 14.8 million can cattle provide.

Due to the enormous challenges in improving productivity, a protectionist trade policy can be seen as a “shortcut” to achieving self-sufficiency. If imports decreased, keeping domestic production constant, the self-sufficiency ratio would increase. Problems related to this protectionist approach are multifold.

First, Indonesia is facing strong pressure from the international community to open its domestic markets. Other countries may retaliate with trade policies to “level the playing field” in other sectors. This beef saga may also signal an unfavorable business climate in Indonesia due to policy uncertainty.

Second, the government’s decision to restrict or even ban imports with the subsequent significant increases in prices may lead to a greater challenge to control the slaughter of female cattle that has already been an issue.

This can happen when cattle farmers respond to decreased supply due to import reductions by selling their cattle, including productive females, to benefit from the price hike. In such a situation, instead of achieving the self-sufficiency target, Indonesia will be dealing with a drop in its cattle herd.

Third, one may argue that the current government’s approach is effective as an import-substitution policy. But such an approach would only be effective if certain conditions were met.

First, the protectionist trade policy must only be temporary. This is to provide incentives to beneficiaries, through the future threat of the removal of protection, to focus on improving productivity.

Unfortunately many of these beneficiaries use this opportunity to “lock in” the temporary protection.

Second, selected beneficiaries have to be those which have potential comparative advantage (picking winners) which is difficult to determine in a non-dynamic, protected environment.

Third, as evident from the earlier points, a strong government is a necessity to implement such a strategy. A strong government is needed to ensure that the most cost-effective decision is made rather than a decision based on solely political considerations. The key question is whether Indonesia is up for such a challenge.

Solutions to those problems may require a political-economy framework. Let us assume that producers have two means of generating profits: they can dedicate resources to compete in markets (e.g. to improve efficiency along supply chains), or they can spend resources in getting import licenses i.e. rent seeking. Professor Anne Krueger in her 1974 work The political economy of the rent-seeking society published by the American Economic Review suggests that competition in general is most efficient. But with an import quota, competition among importers is more inefficient than a monopoly.

The government has several policy options. First, to persuade rent-seekers that the government cannot or will not provide sufficient rents, thus encouraging rent-seekers to opt for improving efficiency. This requires a strong government and law enforcement.

Second, Krueger believes that creating a monopoly importer may actually decrease the dead-weight loss associated with quotas although this may increase income inequality. However, the efficiency of such a monopoly importer would likely affect the outcome of this approach.

The third option, which potentially is the best option, is to improve farm productivity and efficiencies along supply chains. Indonesian researchers have sufficient knowledge and capacity to address technical issues in the beef sector.

The remaining challenge is how to ensure local producers adopt better systems taking into account government policy, which unfortunately changes more often than it should do.

The writer is a research fellow of global food studies at the University of Adelaide.