What is it with the beef import quota?

I think the beef import quota corruption case is going to the wrong directions. Instead of focusing about the case and the economic impact of the underlying import quota policy, most of the media’s focus is increasingly becoming on the women or the sex scandal surrounding it. I’m kinda pissed with the whole spin and I feel that I (at least) have the obligation to unpack the real issues that we should be debating instead of ‘proper’ nicknames for Javanese or Arabic girls.

Moving on. I think we firstly need to look at the structure of our beef market. Second, the implications of the import quota policy and of course, the ongoing corruption case on the beef import quota.

What needs to be in our urgent attention is that the current average price of beef in Java is about Rp. 85.0000-95.000/kg (USD 8-9/kg), and this is a significant jump from last year’s average price which is about Rp. 76.000/kg or Rp.60.000/kg in 2010. You look at the numbers (Ministry of Trade website), and you would see that there is roughly an increase of 20% in beef prices in just two years. Not normal.

Production-wise, if we look at the cattle sensus data, the number of beef cattle have shown an increasing trend. If we have an abundant of cattle why is the price so high? I need to quickly point out, provided that our data is valid, the production data shows the number of available cattle, not the number of meat available for consumption. The data that is largely missing is the number of meat stock we have in our abattoirs or traders (the middle supply chain).

Simple beef supply chain

We import beef in two forms: live beef cattle – so you can put them in feedlotters and make them plump (productivity counts), and frozen meat. Percentage-wise, we import about 60% of our import quota for live cattle, while 40% of our imports are frozen meat. We also limit the places where the imported beef can enter in our territory (only in certain ports), so it doesn’t disrupt the local market. You do want the poor cattle farmers to increase their welfare, no? No? You want cheap beef instead?

Now we go a bit to the rationale for the import quota. Basic microeconomics (for which I have mostly doodled during class – sorry Prof) tells us that if we have the price according to the world market (Pw), you have suppliers willing to sell at a cheaper price (and perhaps better quality too), while the local suppliers can’t compete and can only supply a small amount at that price. So let’s say the government imposes a quota and there is going to be a limit on how many beef products are available on the local market. Thus, this gives the opportunity for local cattle farmers to compete but alas, consumers might have to bear the more expensive price (Pq) as quotas affects the price indirectly. Voila, increase of producer surplus and decrease of consumer surplus, yadayadayada. The difference between quota and tariffs, the government can get the revenue from the tariff, but if it’s a quota – then whoever becomes the importers can get all the profit.

Import Quota

So who decides which importers can import the beef?

Now this is where the beef gets juicy (horrible pun, sorry).

InĀ  January 2013, the Corruption Eradication Commission (KPK) caught red-handed the handing over of money from Juard Effendi and Arya Arby Effendi, two executives from PT Indoguna Utama (a well-known beef importer), to Ahmad Fathanah (AF) – known to be the close acquaintance of Luthfi Hasan Ishak (LHI), the president of the Prosperous Justice Party (Partai Keadilan Sejahtera) at the time. Now the case is on trial and what is at stake is the government’s credibility in setting the import quota policy, as well as PKS’ credibility as a major Islamic party that sells itself as a clean and corruption-free party – with die hard grass root sympathizers (more on this political Islam aspect on another blog post).

But it’s not that easy for KPK as well. In order to prove that the importers paid a sum of money to AF and LHI to get the beef import quota, they need to prove that LHI in fact has an influence over the Ministry of Agriculture (with Minister Suswono, a PKS cadre, at its helm) – to give a recommendation for Indoguna as an importer – which is later decided in a coordination meeting between related ministries (i.e. Ministry of Trade and Ministry of Industry). In this meeting, apart from deciding which firms have the license to import based on the listed criteria, the government also decides the quotas – which have been decreasing for the past two years (compared to 2010).

Quota Influence Cycle

Seeing that this is quite a challenge, that’s why KPK (along with the help of PPATK) also use the Money Laundering Law on the suspects because the burden of proof shifts to them – they need to prove that the flow of money and all the financial transactions that goes through them is legit. And this is where the “many women of AF” story gets messy and convoluted the beef import story because there’s so many unanswered flow of money that goes to these women through AF.

Since the beef import quota case is still on trial, it is too early to know whether any of the suspects are going to jail or if any other actors are going to be implicated. But what we do know now is that the whole import quota policy is based on an unreliable production data, driven by a self-sufficiency policy that is not adding any value to cattle farmers, nor giving the consumers affordable meat.

With rising income in Indonesia, you’ve got an increasing demand but you’re limiting the supply and you expect things to be cheap? Do the math.

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