Nearly 16 percent of Indonesia's 250 million people survive on $1.90 a day or less, as do more than 6 percent of Cambodia's 15 million people.
In both countries, rice is the staple crop, providing more than half the daily calories of the poor. That puts needy Cambodians at a distinct advantage: Between January of last year and April of this, the average wholesale cost of a kilo of rice in Cambodia was roughly 40 cents, while in Indonesia it was nearly 70 cents.
There are a few reasons rice is more expensive in Indonesia. For one, Indonesia is a net importer, whereas Cambodia grows more than it needs. Indonesia is also a far-flung archipelago with abysmal infrastructure, which raises transport costs. But David Dawe of the Food and Agriculture Organization (FAO), a division of the United Nations, has found that transport costs account for only a small share of the gap in prices. Instead, the culprit is policy.
Like many Asian countries, Indonesia wants to be self-sufficient in rice. But as well as trying to help farmers become competitive through investments in agriculture and infrastructure, its government, like others in the region, manipulates the rice market through a welter of subsidies, tariffs and other support mechanisms for domestic producers. These interventions raise prices for consumers and harm the region's poorest people.
Many governments look back with fear to the rice-price spike of 2007-08, seeing it as a reason to build up domestic production so that they are not dependent on a fickle international market. In fact, the rice market is fairly stable: Production has largely matched or exceeded population-growth rates in Asia.
Rice prices shot up then because governments panicked. India restricted exports, which sent the international price soaring. The Philippines, which had low government rice stocks but ample private stocks and was on the verge of a record harvest, nonetheless bought massive quantities of Vietnamese rice at above-market prices. That helped spur a run on rice in Vietnam. Thailand mulled restricting exports and creating a rice-exporting cartel, inspired by OPEC, with Vietnam, Cambodia and Myanmar. Elsewhere, smaller exporters cut exports while importers and farmers hoarded. Prices did not start falling until the second half of 2008, when Vietnam, Japan and Thailand all said they would boost exports, and oil and shipping costs started declining.
This episode was an object lesson in the perils of interference. But governments continue to intervene across the market. They offer trade restrictions, price support and hefty subsidies on power, fertilizer and water, mainly to keep domestic prices stable, assure supplies in times of crisis and protect domestic growers.
In one sense, this has worked. Across Asia, domestic rice prices are relatively stable. But the countries trying to reduce imports tend to have far higher prices than exporters. Japan, for instance, maintains its network of archaic, inefficient, heavily subsidized small rice farms. The average age of its rice farmers is 70. Japan imports rice grudgingly and taxes it heavily: Tariffs on milled rice will remain at 778 percent, even after it joins the Trans-Pacific Partnership, a free-trade agreement under which Japan agreed to lower tariffs on other agricultural imports.
The government plays an even more outsized role in Indonesia and the Philippines, by directly determining the volume of imports. The quota varies from year to year, depending on how good the local harvest is expected to be. Both countries also set a floor price for farmers and a ceiling price for consumers. Vietnam, an exporter, uses quotas to restrict the amount of rice leaving the country, and thus stabilize domestic prices.
Governments not only dictate the volume of trade, they also buy rice directly. For more than a decade China's government has been buying rice from local farmers at above-market rates to maintain its stockpile. The Indian government guarantees farmers a floor price in theory, but many do not receive it. The National Food Security Act, passed in 2013, is supposed to ensure that the poor can buy rice from the government at below-market rates from a network of around 60,000 fair-price shops. This system — the central government buys rice and sends it to the states, who distribute it to shops — provides myriad opportunities for corruption. By some estimates more than half the grain is siphoned off, and tons rot in massive government stockpiles.
Indonesia also guarantees floor and ceiling prices, and maintains a similar rice-distribution program, spending around $1.7 billion each year to distribute subsidized rice to roughly 16 million families. This scheme has also been dogged by allegations of corruption: Some of the rice was rotten and weevil-infested by the time it reached poor families, and some of the families sold rice back to traders for several times the subsidized price. This year an OECD study found that as a result of Indonesia's various policy interventions that rice there cost around 60 percent more than on the world market.
As a result of interventions like these, billions of people pay above-market rates for rice. High rice prices lower purchasing power and increase poverty in rice-importing countries. They also hinder child development by reducing the amount of more nutritious foods households can afford.
Governments often justify keeping prices high on the grounds that it helps poor rice farmers. In fact, most benefits accrue to the richest farmers — those with the most surplus rice to sell. Farmers with holdings too small to grow enough rice to feed their families suffer, as do landless farmhands, the urban poor and farmers of crops other than rice.
But farmhands and the urban poor lack political clout, and subsidies, once in place, can be hard to take away.
For Asian policymakers, it seems, intervening in the market for rice has become as reflexive as eating the stuff.
Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.