The price of rice

Jeremy P Mulholland & Ken Thomas
Inside Indonesia
No. 58 April -June 1999

Bulog had to feed Indonesia, pacify farmers, and support Suharto’s industrialisation policy. What will happen to it now?

Bulog, the national logistics board that controls the supply of rice and other basic commodities, has as many enemies as it does friends. Some praise it for maintaining rice supplies in difficult circumstances while keeping the price down. Others (including the IMF) criticise it for monopolistic practices. Some argue that Article 33 of the Constitution obliges the state to control the supply of basic commodities. But it has been undeniably corrupt in performing its functions.
Established on 11 May 1967, Bulog forms an important part of the New Order’s economic history. Industrialisation was the Procrustean bed of all policy in that period, particularly from the early ‘80s. To promote industry, the government aimed to increase rice production while keeping prices low for consumers so they would not demand higher wages. To stimulate production, the government improved infrastructure, especially irrigation.

Initially, the agency’s primary function was to purchase basic commodities for public servants and the military. From 1970 it was required to control the price and distribution of basic staples, especially rice and flour, important to social stability. Bulog was not alone in making rice policy. The other principal actors included the National Planning Board (Bappenas), the Co-ordinating Minister for Economics, Finance and Industry (Ekuin), the Minister of Finance, and the Minister of Agriculture. In the background stood the President, who had the final say.
Bulog had to stabilise the price of rice for both producers and consumers. It did this by setting a ceiling price for the benefit of consumers, and a floor price for producers. As far as consumers were concerned it was necessary to have adequate stocks available. This meant running stocks down when there was a surplus and the reverse when there was a shortage, usually by increasing imports. At the appropriate times, the agency purchased rice from the domestic or the international market.
On the production side, to encourage farmers to produce more it was essential to set a price which would act as an incentive. Bulog did this by entering the market when the price fell, withdrawing as it rose above the floor. Rice production increased beyond all expectations, threefold under the New Order. Increased production was essential to provide for the increasing numbers moving into the industrial sector as well as for an expected population increase. Bulog’s contribution through its management of the ceiling and floor prices was important. By the end of the period, the agency had warehouses scattered throughout the archipelago.

Not all farmers benefited equally from the operation of Bulog’s floor price, given the unequal distribution of land and therefore income. The use of new high-yielding seed varieties, introduced in 1967, enabled farmers to increase yields considerably and, with irrigation, to double crop. The main beneficiaries from the stimulus of Bulog's floor price and subsidies for fertilizers were the 20 percent of farmers with more than half a hectare of wet rice. The government seemed to be thinking along the lines of land reform and other measures to reduce inequalities among farmers in the late ‘70s, but eventually the discussion lapsed.

The agency's use of the government sponsored village cooperatives (Koperasi Unit Desa or KUD ) points to another element in the background to the progress of the ‘green revolution' under its auspices. These cooperatives were composed of the richer farmers, were presided over by the head of the subdistrict (the camat) and were designed to implement government policy, not to act as independent agents.
The presence of the non-commissioned officers known as babinsa in the village also served to minimise dissent with government policies. And it should not be forgotten that fear was an all-pervasive factor during the New Order, as an aftermath of the abortive coup in October 1965. Anyone who thought of opposing government polices would have thought twice about voicing discontent, and the babinsa would have been a constant reminder of the likely price of resistance.

It may well be that the open violence Indonesia is now experiencing is a late expression of anger at the way farmers were pressured to adopt the new seeds varieties, to the benefit of some but at a high social cost to most.
With the end of the New Order and the approaching elections, we may well ask what the fate of the government’s industrialisation policy will be, and along with it the policy on rice and Bulog’s role. Which interest group - rice consumers or rice producers - will now win out in rice policy?

Suharto’s friends

Since the late 1950s the ups and downs of particular business groups have generally been linked to powerful political actors. This pattern of patronage is also evident in the food sector. Bulog functioned as a ‘centre of the state’ during the New Order - comparable to the State Oil Company (Pertamina), the State Electricity Company (PLN), or Habibie’s Technology and Assessment Body (BPPT). Ever since Bulog’s operations commenced in May 1967, it has been an important ‘incubator of state tutelage’ (as Richard Robison once put it), aiming to promote private business that would help the state.

It helped accelerate the growth of the private Salim Group, owned by Suharto’s long-time friend Liem Sioe Liong, a Chinese Indonesian whose adopted name is Sudono Salim. The Salim Group’s astounding expansion and growth into many unrelated industries, from shipping to banking, all started with flour. Ever since 1969, the Salim subsidiary PT Bogasari Flour Mills has monopolised the import, milling and distribution of wheat. It became the largest domestic wheat flour producer, and one of the largest instant noodle producers and exporters in the world. It achieved this prominence because of support from Bulog. In return, the Salim group became one of the strongest private supporters of the New Order’s high economic growth.

An important part of New Order capitalism was the ‘tax free charitable foundation’, known as the yayasan. Controlled by top New Order officials, several of these bodies served as financial centres for the repayment of Salim’s ‘gratitude’ (hutang budi) to Suharto and his regime. The diversified Yayasan Harapan Kita (controlled by Suharto himself) and the Yayasan Dharma Putra Kostrad (run by the elite military unit Kostrad) received huge ‘financial contributions’ - purportedly 26% of their incomes - from Bogasari Flour Mills. The expectation of such a quid pro quo among friends was presumably the reason why Bulog helped accelerate the Salim Group’s growth in the first place and was an important element in the creation of a powerful network of conglomerates.

In turn, these yayasan (and others like them) were able to finance ‘palace circle’ ventures in a multitude of different sectors within the Indonesian economy, as well as to ‘bail out’ troubled (Suharto-linked) banks or private businesses. They helped create a tightly interrelated private sector network, with the aim of fostering well-connected private conglomerates. These conglomerates, it should be acknowledged, also contributed to real economic growth.
Realignment

The toppling of Suharto, and Indonesia’s recent economic devastation, have induced a re-configuration of patronage flows. The untimely (albeit honourable) dismissal in August 1998 of Beddu Amang, the head of Bulog, was an important indication of a realignment within Bulog’s ‘politico-bureaucratic web’. Beddu had refused to permit any erosion of the Salim Group’s monopoly of the wheat and sugar industries. He was ‘posted’ to another, less powerful, position in the Finance Department.
With Suharto no longer directly involved in these matters and facing enough difficulty of his own to help the Salim Group, Bulog’s role appears to be shifting towards a more nationalistic orientation of fostering non-Chinese capitalists. Possibly with the support of Indonesia’s top economic minister, Ginanjar Kartasasmita, Bulog now seems to be supporting a shift away from the (Chinese-owned) Salim Group, towards the Bakrie Group controlled by Aburizal Bakrie. There has been speculation that a new group of powerful post-Suharto political actors, among them Ginanjar, Coordinating Minister for the Economy, Finance and Industry, who also heads the Planning Bureau (Bappenas), Rahardi Ramelan, Minister of Industry and Trade, and Adi Sasono, Cooperatives Minister, now have enough control over the levers of patronage to support the growth and expansion of the Bakrie Group into the future, mirroring the Salim Group’s past commercial ascension.

But Bulog remains embroiled in corruption revelations, which demonstrate that any internal change is not going unchallenged. There is controversy over the tendering process for certain food monopolies awarded to Singapore-based PT Bakrie Nusantara International, a financial arm of the Bakrie Group. Also, a land-swap deal involving Bulog is being investigated by the Attorney General’s office. Among the prominent witnesses are Tommy Suharto and Beddu Amang.

Bulog now has Rahardi Ramelan as interim head, and its wings have been clipped: it is said that in 1999 it will be responsible only for rice stabilisation. The question for any new government will be the balance between growth and equity in its rice policy. Bulog would have a role to play in either case. Over time it has developed a certain level of skill, and it still has the warehouse capacity throughout the county to handle large-scale rice imports. The availability of rice for the consumer, and satisfactory returns to farmers whatever the size of their holdings, will remain important government concerns for decades to come.