CEAD member, Dr Ram Pandit, has been working with collaborators at Monash University and the University of Hasanuddin in Indonesia to uncover the exact welfare impact of the commodity price rise in South Sulawesi and its five market clusters – Bone, Bulukumba, Makassar, Palopo, and Parepare. The research aimed to provide the necessary evidence to inform potential food price subsidy policy and food aid measures.
In recent years there has been a marked increase in commodity prices. The lagged effect of COVID-19 pandemic, the conflict between Ukraine and Russia, and global economic outlook have partly contributed to recent commodity price rise, affecting household welfare negatively across the globe. Indonesia has been affected by these domestic and international factors, and experienced a major food price inflation since 2019.
Our research focussed on recent (2021-2022) commodity price rise and its welfare impacts based on the consumption of 10 key commodities – rice, beef, chicken egg, chicken meat, red onion, white onion, red chilli, cayenne pepper, cooking oil and sugar.
We utilised the commodity price data reported by Bank Indonesia and consumption data derived from March series of National Socio-economic Surveys (SUSENAS) for the years 2019 to 2022, and estimated the Quadratic Almost Ideal Demand System (QAIDS) models to examine expenditure shares, expenditure elasticities and price elasticities. We then computed the welfare loss (compensating variation) at the household level at the provincial and market cluster levels.
Our results indicate that estimated expenditure share of households is highest for rice (57.3%) and lowest for beef (0.6%). Beef (5.002), chicken meat (3.118) and red chilli (1.462) are found to be expenditure elastic (i.e. elasticity > 1), whereas rice (0.861) and sugar (0.495) are expenditure inelastic. Based on compensated own price elasticity estimates, beef (-1.41), chicken meat (-1.58), red chilli (-1.8), and sugar (-1.71) have elastic demand, but rice (-0.31) and cooking oil (-0.69) have inelastic demand.
Further, we find that the impact of commodity price rise on household welfare differ by demographic characteristics of the households – area (urban/rural), welfare card holder, and family size. The average welfare loss in 2022 to support households to remain at pre-COVID 19 level of consumption utility is about Rp 18,939/week (A$ 1.76/week). At the regional market cluster level, the largest welfare loss is in Palopo (Rp 30,363/week), followed by Parepare (Rs 23,776/week), Makassar (Rp 24,817), Bone (Rp 21,617), and the lowest loss is in Bulukumba (Rp 11,705/week).
The policy implications of these results are two folds: short and medium-to-long terms. In both contexts, a differentiated policy response would be needed to support affected households in line of the different level of welfare impact by demographic variables and food price inflation by market clusters. In the short term, Indonesian and provincial government in South Sulawesi need to support these households through food aid or food price subsidy that corresponds to their welfare loss. But in the medium-to-long term, Indonesian government may need to look at its food security and commodity trade policies to create beneficial options for net consumers.
More Information
Pandit, R., Anwar, A.I., Nugraha, R. N. P., Pandit, S., (2023). ‘How price rises on staple foods affect households in South Sulawesi’, The Australia-Indonesia Centre.
Key Contacts
Associate Professor Ram Pandit at ram.pandit@uwa.edu.au
Partnership for Australia-Indonesia Research: https://pair.australiaindonesiacentre.org/about/
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