Poverty, food prices and supply shocks of agricultural products in Indonesia

Agricultural products constitute a significant component of food consumption in Indonesia particularly among the poor. The prices of these products are relatively volatile and susceptible to occasional disruption in their supply originating from both domestic and overseas. Without good understanding of the effect of agriculture product price volatility on poverty incidence, it will be more difficult for the government to devise appropriate policy measures. Using a general equilibrium model of the Indonesian economy, this paper simulates the effect of the increase in the prices of various important agriculture product caused by supply shocks originating from both domestic and oversea supplies. The result suggests that Indonesian poor, both in urban and rural areas are most vulnerable to the volatility of the price of rice, Indonesians’ main staple food. However, the poverty impact of an increase in the price of other product such as soybean is also non-trivial suggesting the relative importance of these products for the poor. Results also revealed that increases in the price of agriculture food product tend to increase inequality and the increase in poverty incidence is larger in rural areas than in urban areas. The model also accommodates the channel through which increase in the price of agriculture product may affect household income through the factor market. However, the result suggests that those effects are much smaller compared to the effect through increases in the cost of living. Policy implications are discussed.