Free Societies

Indonesia's biggest challenges

Indonesia food prices

Indonesia’s artificially high food prices are one of the biggest factors keeping 28 million of the country’s people mired in poverty.

In many ways, Indonesia is a Southeast Asian success story. This vast archipelago contains the world’s fourth-largest population, and transitioned to democracy only 20 years ago during the Asian financial crisis. At the time, 24 percent of Indonesians lived below the poverty line. Since then, 10 million Indonesians have escaped poverty, and the poverty rate has dropped to just over 10 percent. An increase in population from 200 to 260 million means that an additional 60 million Indonesians now have sufficient incomes to cover their basic living expenses. Even so, 28 million people remain in poverty, thanks to Indonesia’s protectionist food policy, a lack of educational competition, and an economic populism that stifles the manufacturing sector. The Center for Indonesian Policy Studies (CIPS), an Atlas Network partner based in Jakarta, works toward reform in each of these areas with its research-based advocacy.

“Following its vision of a free and prosperous Indonesia, CIPS addresses these factors with its research-based advocacy activities,” explains Rainer Heufers, CIPS founder and executive director. “It advocates for food trade reforms to ease the financial burden on low-income households. It also advocates for competition between schools and for the empowerment of parents to improve school education. With academic rigor and emotionally compelling messages, the aim is to prove that overly protective policies and a lack of competition will, in the end, harm the poor. Instead, poverty can only be overcome if the poor are free to prosper.”

Heufers will appear at a series of Atlas Network events in March, explaining why only civil, political, and economic freedom will allow Indonesia to prosper. On March 15, Heufers will speak in Naples, Fla.; on March 16, he will speak in Sarasota, Fla.; and on March 17, he will speak at the Princeton Club of New York.

Indonesia’s poor suffer most from the country’s extraordinary food prices, Heufers points out, because they spend up to 70 percent of their income on food. This makes them extremely vulnerable to price hikes caused by Indonesia’s protectionist policies, which include a restrictive licensing system, an import quota, and various tariffs and non-tariff barriers to food imports. If Indonesian households were able to purchase their basic food items in neighboring countries — even much richer countries — they would save up to US$24, CIPS has calculated. This is a tremendous amount, considering that Indonesia’s low-income households have an average monthly income of about US$100.

These protectionist food policies not only keep people poor, they also suck people back into poverty. When rice prices surged in 2015, 1 million Indonesians fell back below the poverty line, placing their families at risk for malnourishment. CIPS created its “Affordable Food for the Poor” project to study the impact of import restrictions on domestic food prices and calls for opening up the Indonesian food trade. The organization also won the $25,000 grand prize in Atlas Network’s Think Tank Shark Tank competition at Freedom Dinner in New York City on Nov. 10, for its proposal to fund a massive open online course (MOOC) devoted to teaching how free trade makes food affordable for the poor.

“Poverty is particularly rampant in the Indonesian agriculture,” Heufers continues. “Farming incomes are low and make this sector so unattractive that employment stagnates. A person who wishes to escape poverty appears better off working in the service sector. However, moving to the services industry requires formal education that is hard to obtain. The current education system fails the 50 million children in more than 250,000 schools. According to the latest PISA study, 36 percent of all Indonesian girls and 46 percent of the boys are incompetent in science, math and reading. They score far worse than their neighbors in Thailand, Malaysia or Vietnam.”

Indonesia devotes 20 percent of its national budget to education, so schools aren’t underfunded. Instead, Heufers explains, the problem lies with the 2.6 million teachers who are frequently absent from classes and then boost their students’ performance on official records by leaking the exam questions in advance.

“Many attempts have been made to train and motivate the teachers but to no real avail,” Heufers continues. “In the end, only if schools face serious competition for students will they enhance the quality of education. CIPS, therefore, argues that effective school reforms require rules and regulations that facilitate the establishment of new low-cost private schools for the poor. CIPS also studies school vouchers and education savings accounts that give parents the choice to send their children to better schools in their neighborhood.”

For people with only a basic education, manufacturing jobs have traditionally provided a path toward productive and rewarding lives. Unfortunately, Indonesia’s populist policies have damaged this sector of the country’s economy.

“A few years ago, the spoils of the commodities boom did not only widen the income gap between the rich and the poor, it also provided politicians with the opportunity to call for minimum wage increases,” Heufers explains. “From 2004 to 2014, cities like Jakarta, Surabaya, and Semarang raised them exponentially by 200 percent to 260 percent. That, in turn, reduced the competitiveness of several industries and prevented employment opportunities for low-skilled workers. As a result, employment in the manufacturing sector got stuck below 20 percent of the workforce and cannot absorb a larger share of the 2.3 million new entrants to the workforce every year.”

In the end, economic freedom is the only proven cause of long-term wealth that allows people to escape poverty, and CIPS is the leading voice for policy reforms that would allow Indonesia’s poor to rise out of poverty and flourish.