Determinants of Relative Demand for Imported Beef and a Review of Livestock Self-

Sufficiency in Indonesia
Author(s): Risti Permani
Source: Journal of Southeast Asian Economies, Vol. 30, No. 3 (December 2013), pp. 294-308
Published by: ISEAS - Yusof Ishak Institute
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Journal of Southeast Asian Economies Vol. 30, No. 3 (2013), pp. 294-308 ISSN 2339-5095 print / ISSN 2339-5206 electronic

DOI: 10.1355/ae30-3e

Determinants of Relative Demand

for Imported Beef and a Review
of Livestock Self-Sufficiency in
Indonesia

Risii Permani

This paper reviews the challenges facing Indonesia 's self- sufficiency programme. It analyses
the determinants of change in relative demand for imported beef by using the Vector Error
Correction Model (VECM) based on annual data from 1992 to 2010. It also investigates the
long-run relationships between relative domestic price and relative import quantity to predict
the impact of decreased reliance on imported beef using Impulse Response Functions (IRFs).
The results suggest that increased income in Indonesia is associated with increased relative
demand for imported beef. A shock in relative import quantity , as a result of a government
decision to cut beef import quotas , for example , would have long-term impacts on relative
domestic price.

Keywords: Livestock, Indonesia, self-sufficiency, Vector Error Correction Model (VECM), Impuls
Response Functions (IRFs).

I. Introduction growing income has led to a diversification of food

consumption as the population experiences changing
The beef industry is becoming more economically
tastes, dietary intake, and purchasing power. While
and politically important in Indonesia. The
rice remains an important commodity, there is an
recent past was characterized by the Indonesian
government's ambition to achieve self-sufficiency increasing demand for non-staple and high-protein
with regard to this good.1 Beef self-sufficiency food commodities such as beef. Another driving
has been primarily motivated by the revitalization factor has been increased reliance on imported live
programmes in agriculture, fishery, and forestry cattle and, in contrast, increased productive female
introduced in 2005. In the past, the term "self- cattle slaughter. In Indonesia, "excessive" reliance
sufficiency" specifically referred to self-sufficiency on imports is often perceived to be a result of
in rice (Mears 1984). More recently, Indonesia's the government's failure to stimulate domestic

Journal of Southeast Asian Economies 294 Vol. 30, No. 3, December 2013

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production rather than as a means of freeing up the relative prices and income in the long and short
resources for more competitive activities. term by applying the Vector Error Correction Model
Indonesia must increase its domestic production (VECM) using annual data from 1991 to 2010.
from 67 per cent of domestic consumption in 2010 Relative price variation may result from changes in
to 90 per cent by 2014 (Sarwindaningrum 2009). national price levels, tariff reductions, and global
Additionally, the cattle population including those price hikes. This study also adopts the Impulse
that are part of the breeding cycle must increase Response Functions (IRFs) model to observe
from 12 million in 2009 to 14.6 million by 2014 causality among the variables. The outcomes are
(Sarwindaningrum 2009). Although historical useful for gauging Indonesia's response to a shock
time series data has shown that such a target is in trade flows due to changes in price and quantity.
an ambitious one given the high volatility in beef This information may help predict the impact of
production, the Indonesian government believes current government approaches to livestock self-
that the 2011 livestock census, reporting cattle sufficiency on the domestic economy, both in the
population at 14.8 million, is a positive indication short and long term.
that the target is achievable. Few studies comprehensively review Indonesia's
Yet, self-sufficiency is not simply about having livestock sectors, particularly in relation to the
adequate cattle, especially if one takes sustainability government's self-sufficiency programme. Two
into account. Various sources suggest that a GDP exceptions are Hadi et al. (2002) and Vanzetti et
growth of about 6 per cent per annum has led to al. (2010). The first study presents an excellent
a 3 to 5 per cent increase in beef consumption. review of government policies that have been and
This figure is expected to rise given increased should be implemented, as well as a single-country
urbanization, modern retail penetration, and an simulation experiment to estimate the effects of
expanding middle class (estimated at 30 million various policy options such as changes in tariff
people in 2012). In the past, the deficit was met and changes in technical production capacity in
by live cattle imports, including slaughter and livestock sectors (Hadi et al. 2002). In a similar
feedlot cattle, and boxed beef imports. However, vein, but using a multi-country computable general
the current self-sufficiency programme restricts equilibrium model, GTAP, Vanzetti et al. (2010)
these imports, in particular boxed beef. The import look at the feasibility of achieving livestock self-
quota for boxed beef was slashed from 100,000 sufficiency. Both studies conclude that achieving
tonnes in 2011 to 34,000 tonnes in 2012 and was self-sufficiency through tariffs on imported beef
aimed at providing greater opportunities for local and imported cattle is very costly and beef self-
beef producers. Despite massive government sufficiency can better be achieved through research
programmes to assist smallholder cattle producers, and development to increase the productivity of
only some regions such as West Nusa Tenggara native cattle in both breeding and fattening.
have seen successful results. In the meantime, beef This paper extends the GTAP analysis (Vanzetti
prices continue to increase. While beef distributors et al. 2010) by adopting the Impulse Response
and the Ministry of Agriculture have different Functions (IRFs) model. The use of the IRFs
opinions regarding the cause of this price hike, allows us to simulate the impacts of a shock on
the increase contradicts the objective of becoming a selected variable. In particular, the model is
self-sufficient in beef: to promote food security of able to trace out the response of the relative beef
which providing access to affordable food is a key import quantity in the VEC system to shocks in
component. the relative price (and vice versa) and project
Against this backdrop, this study aims at the effect of this one-time shock for future time
reviewing several policy options to achieving periods. In addition, it takes into account tariff
self-sufficiency in beef production. In addition, it and income per capita in estimating demand for
investigates how the ratio of total imported beef to imported beef, which were not considered in
domestic beef production responds to changes in Vanzetti et al. (2010). Also important is a brief

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discussion on several policy options to achieve affected by the world market and government
self-sufficiency. While their studies provide valu- policies on trade.
able insights to the issues, Hadi et al. (2002)'s and Achieving self-sufficiency through improved
Vanzetti et al. (20 10) 's focus on international trade productivity is ideal but challenging. A previous
policy seems to slightly overlook an analysis of study identifies some "technical" constraints
domestic problems. within the livestock sectors across Asian countries,
This study finds that as Indonesia's income per including: limited land; a shortage of skilled
capita increases, domestic demand for imported labour and resources to control animal disease;
beef has increased. The IRFs suggest that a shock the lack of investments; the general lack of related
in relative import quantity, for example as a result and supporting industries; and the unavailability
of the current government's decision to cut beef of conducive conditions governing the production
import quota, would have long-term impacts on and marketing of ruminant meat (Rutherford
relative domestic price. 1999). Indonesia deals with similar issues.
The remainder of the paper is organized as First, the supply of land in Indonesia is
follows. Section II reviews challenges and policy problematic. Indeed, this was the main reason cited
options to achieve the livestock self-sufficiency by the Minister of Agriculture to explain why self-
target. Section III investigates the determinants of sufficiency cannot be achieved in 2010 (Wahyuni
import substitution and IRFs. Finally, section IV 2009). Hutabarat and Kustiari (2009) identify that
concludes with a brief discussion on the limitations one major problem faced by Indonesian agricultural
of the study presented in this paper and offers sectors is increased demand for agricultural land
suggestions for future research. in addition to increased demand for water and

irrigation. A 2005 survey on livestock in Nusa

Tenggara Barat (NTB) province showed that
II. Challenges for Achieving Livestock
the limited land supply has resulted in farmers
Self-sufficiency
keeping their cattle confined (Yusdja et al. 2005).
The concept of self-sufficiency is closely related toThis method may impact beef quality.
food security but the two terms differ. According Second, labour supply and welfare conditions
to the Government of Republic of Indonesia are problematic in Indonesia. There has been
Regulation (Peraturan Pemerintah) No. 68 Yearrising concern about the low proportion of young
2002, food security is a food-sufficient conditionworkers in the livestock sector. Of the 4.3 million
for households determined by the availability of workers in the livestock sectors, 25 per cent are
adequate food in terms of: quantity; quality; safety;between the ages of 10 and 25, 35 per cent are
equality; and affordability. Food supply can comebetween 25 and 44, and the rest (39 per cent)
from either domestic production or other sources.are over 44 (General Directorate of Livestock
Self-sufficiency, on the other hand, is defined as aServices - Ministry of Agriculture Republic of
condition in which at least 90 per cent of domesticIndonesia 2008). Cattle farmers are also facing
demand for food is met by domestic production financial constraints. Indeed, a majority of cattle
(Ilham 2006). Hence, while food security farmers in Indonesia are "keepers" or those who
emphasizes the importance of access to food,keep cattle as assets rather than "producers". This
self-sufficiency requires sufficient domestic food may contribute to high productive female slaughter
production capacity to meet domestic demands. rates. The Indonesian government has introduced
In other words, self-sufficiency is an important various credit schemes to control the rates, yet the
but not a necessary condition to achieving food results of these schemes are not well-documented.
security. However, with increasing international Another major problem with achieving self-
dependence, the sufficiency of local supply is not
sufficiency is strong pressure from the international
community to keep domestic markets open.
only determined by local production but is also

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Indonesia's trading partners, particularly ASEAN, Breeding activities in smallholder systems are
may object to the goal as there is an agreement on also problematic. A consultation with West Nusa
food security through the ASEAN Integrated Food Tenggara-based scientists suggests that there are
Security (AIFS) framework. The AIFS framework, five key components of a successful smallholder
though mainly focused on grain staples, also breeding program: effective insemination;
includes some relevant livestock considerations seasonal mating; early weaning; effective cattle
around the stated cooperation objectives of confinement management; and good animal
increasing sustainable food production; promoting husbandry practices. Substantial challenges remain
conducive markets and trade for agricultural in the last component. For example, the animals'
commodities and inputs (such as animal breeds); food supply is subject to limited land. In most
ensuring food stability; and promoting availability cases, farmers use their land to support their own
and accessibility to agricultural inputs (Vanzetti food consumption rather than that of their cattle
et al. 2010). (Winarso 2009).
To become self-sufficient in beef, the Indonesian Switching the focus to trade, Table 1 presents
government has initiated a number of livestock several policy options. In recent years Indonesia
development programmes. However, the main has been experiencing a significant decline in
objective of these various programmes is not live cattle and beef imports. The share of beef
clearly stated. Hadi et al. (2002) conclude that any consumption coming from imported live cattle
livestock development strategy undertaken by the had decreased from about a quarter of total
government should: (i) improve the incomes of consumption in 2010 to 11 per cent in 2012 and
smallholder producers; (ii) encourage a sustainable boxed beef decreased from one-third in 2010 to

and efficient domestic production capacity; and 6 per cent in 2012. The figure is likely to fall
(iii) satisfy the growing demands of Indonesia's even further as the government continues to
consumers for beef in ways that improve the promote its beef self-sufficiency programme.
overall performance of the economy. Importing breeder cattle has therefore been seen
Preliminary observations and consultations with as "the second best option". However, recent
stakeholders suggest a range of policy options that developments in the breeding cattle trade have not
the Indonesian government can choose from. The been encouraging. In September 2012, a serious
options can be generally divided into two broad dispute emerged between the Indonesian and
categories: trade and productivity improvement. Australian governments with Indonesian officials
This study focuses on trade but a brief overview rejecting more than 11,000 breeding cattle from
of productivity improvement policy is presented Australia (Alford 2012). The dispute followed
below. another incident where Indonesian officials
In terms of productivity improvement prevented 2,000 Australian cattle from entering
programmes, the biggest challenge for the Indonesiathe Jakarta port in August 2012.
self-sufficiency target is breeding. The number of One key issue in the dispute is the confusion
breeding units has not shown a consistent increase over distinguishing breeder cattle form the
over the years. In 2007, there were only ten cattle rest. According to the Ministry of Agriculture
breeding units across Indonesia. Given the aim to Regulation Number 54, the three categories of
boost cattle population by over 20 per cent, such cattle (breeder, feeder, and slaughter cattle) will
a number is highly inadequate. Foreign investment be subject to different import duties. Feeder and
in breeding establishments is still low. According slaughter cattle will be charged a 5 per cent import
to the National Statistics Agency (BPS), only duty, while there is no import duty for breeders.
one unit out of 317 small and large livestock The August 2012 incident was triggered by the
establishments with cattle had investments from a Indonesian officials' reluctance to recognize that
foreign company. the cattle being shipped were breeders, despite

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 TABLE 1

Trade Policy Options to Achieve Beef Self-Sufficiency

Policy options Pros Cons

Impose trade • To immediately achieve self- • Increased beef prices in the short-
barriers (i.e., import sufficiency in livestock given a run due to supply shortage; in the
quota, total import significant drop in imports and long-run, the ability to meet
ban, tariffs) for all consumption. demand depends on productivity
imported cattle • To protect local beef producers. growth rates i.e., whether they
including breeding, • Imports are easily controlled i.e., exceed consumption growth rate
feedlot, and only coming into the country • Can damage trade relationships
slaughter cattle. when needed. with partner countries.
• To reduce the risks of animal • Allocation of import permits may
diseases spread from other create rent-seeking opportunities,
countries (in the case of total • Discourage private sector
import ban). (local and foreign) to invest in
feedlot sectors.
• Feedlot sectors may have problems
in finding breeding cattle.

Increase beef • To provide employment • This option provides less incentive

supply by importing opportunities in feedlot sectors. for improvement in breeding
feedlot cattle. • Local consumers including beef activity.
processing small industries (e.g., • Smallholder feedlot systems must
meatball sellers, etc) have access compete with large-scale feedlot
to an affordable and consistent companies (although this may
supply of beef. provide incentives for them to
improve productivity).

Import breeding • Imported breeding cattle can be • This option provides less ince
cattle. allocated to smallholder systems for improvement in breeding
using government support schemes, activity,
thus increasing employment • There is little room or incentive
opportunities and livelihoods of for Indonesia to improve genetics,
smallholder beef producers. although preliminary observations
• To achieve more sustainable self- suggest that this is not a major
sufficiency targets by increasing issue.
the cattle population. • Recent import protocols restrict
• This option may improve the this option in relation to pedigree
genetics of the Indonesian cattle certificate requirements,
population. • The government's requirement that
commercial feedlots keep breeder
cattle in order to obtain an import
permit is economically inefficient.
• Farmers may not have sufficient
knowledge and capability to
produce the planned outcomes.

Source: Author's compilation based on discussions with various stakeholders.

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claims made by the importers that the cattle were slaughtered.2 SSR1 suggests a 100 per cent ratio
"breeding slaughter cattle". The certification from in 2010, while SSR2 suggests a 75 per cent ratio.
the Australian Brahman Breeders' Association The corresponding import dependency ratio to
SSR2 i.e., IDR2 suggests an average increase in
declaring that the cattle were breeders (not feeders
as claimed by the Indonesian government) wasimport
not dependence in the last decade, from 10
per cent in 1998 to 30 per cent in 2009 before
accepted. Indonesian Customs refer to Regulation
Number 19 which requires individual pedigreedecreasing to 25 per cent in 2010.
certification for each animal (The Republic The sustainability of Indonesia's livestock self-
of Indonesia Ministry of Agriculture 2012). A
sufficiency programme should be of concern. Figure
2 shows that over the last few decades, increases
breeding heifer brought into Indonesia typically
costs US$1,000 while a pedigreed animal may
in be
stocks of live cattle have been significantly
up to 200 per cent more expensive due to theassociated
lack with live cattle imports.3 From the late
of supply (Alf ord 2012). 1960s to the 1970s, Indonesia was exporting live
Despite a number of major challenges, the cattle and buffaloes to several countries including
Indonesian government has been focussing its
Singapore and Hong Kong, which may explain a
resources to achieve livestock self-sufficiencydrop
by in the stocks in 1969 (Figure 2). As domestic
demand increased, the Indonesian government
2014 through various programmes. Yet, the success
of these programmes should be assessed solely stopped live cattle exports in 1979, which may
based on the self-sufficiency ratio. A common explain a significant increase in stocks in the early
measure of self-sufficiency in livestock can 1980s.
be
In the days following Australia's live cattle
misleading because it ignores the types of cattle
that the domestic industry produces. The export
self- ban to Indonesia in mid-201 1 , the Indonesian
sufficiency ratio is normally defined as the ratio
government expressed its confidence that domestic
of production to production plus imports minusbeef price would not be affected by changes in
exports. One main problem with this approach is
imports. The same confidence seemed to inform
that imports may come in various forms. In theits decision to cut import quotas in 2011. The
case of beef, Indonesia not only imports beefnext
in section investigates the causal relationships
boxes but also live cattle for various purposes,between domestic prices and imported beef. The
including slaughter, feeders, and breeding animals.
outcome is useful to test whether the argument
Not all live cattle imports, for example feedersfor
andinsignificant effects of live cattle import on
breeding animals, can be added to "imported beef'
domestic price holds.
calculations of the self-sufficiency ratio. This
would overestimate total imports for consumption
III. Empirical Analysis
purposes. Further, cattle brought to Indonesia as
feeders and breeding animals will reduce the This
self-section uses the VECM to further explore
sufficiency ratio. In contrast, failure to include
determinants of relative demand for imported cattle.
slaughter animals would lead to an underestimation
The analysis is important to assess how responsive
of beef imports, and thus an over-estimated Indonesia's
self- terms of trade are to fluctuation in
sufficiency ratio will be obtained. prices. In addition, it takes into account changes
Figure 1 shows different assumptions onin
the
tariff rates and income per capita. Data are
taken from various sources (FAO 2012; World
import component. SSR1 is where domestic meat
production is divided by total meat production
Bank 2012 a, 2012 b).4 Table 2 presents descriptive
plus meat imports minus meat exports.statistics.
We
exclude live cattle imports for slaughter inThe paper employs three alternative methods:
the calculation. SSR2 includes all live cattle
(i) Ordinary Least Squares (OLS); (ii) the Partial
imports in the calculation by assuming oneAdjustment
live Model (PAM); and (iii) the Vector
cattle weighs 224 kilograms of meat once it isCorrection Models (VECM) (Kapuscinski
Error

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 FIGURE 1

Self-Sufficiency and Import Dependency Ratios (1961-2010)

Í
where, log - ^ - refers to the (logarithm)
and Warr 1999). The specifications are as follows
for country j at time t: V* jj JJ(0/

xy(0ļ o i (pDj^
OLS: log =ctj+ o a) i log -j- +e/ř)
relative demand for imported beef including
Pi (0
(PjW) beef from live cattle import; log - j - refers
W')J j
Oo ol [*>-»1 < to the (logarithm) relative domestic price; and
PAM: log -ģ- =ßj+ßj Oo ol log <
yxj (ř_1) J indicates the difference operator. For simplicity,

»2 Í
+ ßj »2 log +ej(f)
the logarithm of relative demand for imported beef
is denoted as logQI_QD, while the logarithm of
relative domestic price is denoted as logPD_PI.
The difference operator and the lagged operator
íX'(ř)i
VECM: A log = y° y°
o +oy. . Alog '-
will be denoted as "D" and "L", respectively.
'PjM) OLS estimates may be able to produce unbiased
and consistent estimates but they cannot capture
2 fxļ(i-l)ļ 3 any dynamic relationship between imports,
r^0g d (t n ~J> °g 'r, n 1 domestic production, and prices. Given the time-
+ e;(f) series data we use in the analysis, it is most

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 FIGURE 2
Live Cattle Stocks and Imports (1961-2010)

(i.e, to
likely that the estimates are inefficient due when the series has constant mean and
autocorrelation. The model cannot control forstandard
any deviation over time) can be achieved by
commodity-specific effects either. For example,
simple differencing or some other transformation.
However, relative demands for imports in the
the Indonesian government might protect domestic
long-run are often "drifting together" (i.e.,
beef production more than the government protects
live cattle. The inclusion of the level of relative cointegrated) with the relative price index at
demand for imports in the previous period might roughly the same rate.
be able to capture such time-variant commodity- The VECM model aims to distinguish the
specific effects, and is therefore the reason behind
long-run relationship between the two variables
the use of the PAM model. (potentially drifting together) and the short-
The problem with the PAM method, however, run dynamics, i.e., deviations of relative
is the autocorrelation of the error terms due to the demand for imports from its long-run trend and
presence of a lagged dependent variable. It could deviations of relative price-index from its long-
yield biased estimates of elasticity of substitutionrun trend (Engle and Granger 1987). The term
( ( Át- w'1)( PiD(+^''
X Át- if)
log -7:
(ß 2j) . More specifically, if the coefficient for /}] is
I log -7:
larger than 1, the autoregressive estimates are correction term. The ela
non-stationary. If this is the case, then stationarity is estimated based on the

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 TABLE 2

Descriptive Statistics, 1991-2010

Period
Definitions Variables
1991 to 1996 1997 to 2002 2002 to 2010

Domestic beef production (tonnes) QD 316,851.30 336,728.60 392,934.90

33,395.81 16,709.65 52,161.35
Total beef import (including live QI 31,477.65 60,963.31 100,794.60
cattle)(tonnes)a) 35,877.65 27,527.54 52,601.53
Domestic beef producer price PD 3,344.50 1,923.20 4,589.22
(US$/tonne) 290.53 630.31 1,150.17
Imported beef price(unit value) PI 2,367.18 1,439.23 1,802.40
(US$/tonne) 925.15 193.10 255.73
Live cattle tariff (simple average) TARIFF 4.82 1.06 1.25
2.04 0.16 0.37
Live cattle stock (% world's total STOCK_ 0.86 0.87 0.84
live cattle stock) PERCENT 0.03 0.03 0.06
World's GDP per capita GDPC_RATIO 0. 16 0. 15 0. 17
(Constant 2000 US$) 0.01 0.01 0.02
Note: a. Total livestock import is the sum of meat a
cattle is presumed to weigh 224 kilograms (see end
GDPC_RATIO is the ratio of Indonesia's GDP per
Source: Author's calculation based on data from v
second row in each cell (in bold) represent standar

captures to its equilibrium

the short-run level. It is negativebetween
relationship as expected, re
suggesting the process
domestic price and relative re-equilibrates. Column
demand for (4) impo
Coefficient yj te^sof Table
us 4 presents
the a one-step VECM in which the
proportion of
disequilibrium which isterm
error correction corrected
consists of lagged log QI_QDwith
passing period. This and lagged logPD_PI. Basedshould
coefficient on columns (3)beand nega
and less than the absolute
(4), the 95 per centvalue of 1,
confidence interval of the indic
coefficient for relative domestic price is between
its re-equilibrating properties.
0.35 and 1.17.
If J j = 0 , then

process never re-equilibrates

Next, the impulse response
and function
if (IRF)
7y is =-1
derived to illustrate relative beef imports' response
equilibration happens in period 1. Table 3 pre
the stationarity to a shock in relative
property ofprice.the
Figure 3(i) suggests and
data
cointegration test suggesting that one unit shock in relative
thedomestic
use price
of leads
VECM
As shown in Table 4, estimates are obtained to a 0.3 decrease in relative import demand in
from three different specifications: OLS, PAM and Period 1, then gradually increases in imported beef
VECM. For VECM, two different approaches are demand in Period 2 before subsiding in Period 7
used. Column (3) of Table 4 presents results from onwards. Due to increased domestic beef prices,
a two-step VECM. The lagged error-correction consumers would lower beef consumption, leading
(EC) term is derived from residuals based on the to an initial decline in demand for imported beef.
OLS regression in column (1) of Table 4. Note If the market is unrestricted, in Period 2, the
that the term indicates the speed at which it returns higher competitiveness of foreign beef producers

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 TABLE 3
Stationarity and Cointegration Test

Augmented Dicky-Fuller test

for stationarity Johansen test for
h0 = variable has a unit root cointegration
( non-stationer )

Price variable Quantity h0 = max number of

variable cointegration relations = 1
Statistics (p-value in parentheses) -2.477 -2.914 0.296
(0.339) (0.157)
Decision Accept h0 Accept h0 Accept h0
Notes: 5 per cent critical value of Johansen statistics (N = 18,

TABLE 4

Determinants of Relative Live Cattle Import, 1991-2010

Method OLS PAM VECM_two_step VECM_one_step

bit bit bit bit

Dependent variable logQljQD logQI_QD D.logQljQD D.logQIjQD

logPD_PI L275 0.979**
(1.737) (2.963)
L.logQI_QD 0.659*** -0.409***
(4.546) (-6.575)
D.logPD_PI 0.931*** 0.762**
(6.064) (3.959)
L.logPD_PI 0.199
(0.728
L.EC -0.400***
(-5.855)
Constant -2.830*** -1.165*** 0.195* -0.768**
(-4.924) (-4.496) (2.269) (-2.970)
Implied coefficient of elasticity 1.275 0.979 0.931 0.762
Adjusted R2 0.234 0.758 0.793 0.812
Durbin-Watson statistics 0.319 1.727 1.948 1.936
Number of parameters 2 3 3 4
Durbin-Watson (h0 = no serial Reject h0 Accept h0 Accept h0 Accept h0
correlation)
Number of observations 20 20 19 19

Notes: Durbin-Watson critical values (lower and

DW(2,20) = 1.100-1.537; DW(3,20) = 0.998-1.6

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 FIGURE 3

Impulse Response Functions

compared to local producers would lead toRelative

an demand for imported beef may be
increase in demand for imported beef. affected by more variables than relative domestic
Looking at the causal relationship, Figure price.
3(ii) However, the short time-series data used
shows that the effect of one unit shock in relative in this study restricts the number of right-hand
import quantity on relative domestic price is side (independent) variables that can be included.
positive. A shpck in relative import quantity can Preliminary regressions and a literature review
be due to more relaxed trade policy, decreased highlight the importance of income measures in
domestic production capacity, etc. A 1 unit increasepredicting changes in demand for imports. This
in relative import quantity leads to a 0.285 increasestudy therefore includes relative income per capita
in relative domestic prices in Period 1 but in Periodi.e., the ratio of Indonesia's GDP per capita to
2, the effect thins out and stabilises at Period 7. the world's average of GDP per capita (GDPC_
Taken together, there is a strong indication of RATIO). Unobserved determinants of relative
a two-way causal relationship between relative demand for imported beef may be correlated to
import quantity and relative domestic price. relative domestic price. Therefore, the study uses
Furthermore, a shock in each variable seems to the Instrumental Variable (IV) method. To proxy
have significant (i.e., non-zero) effects in the a change in relative domestic price (D.logPD_PI),
long run. it takes the available stock of cattle in Indonesia

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as a percentage, of the world's total cattle stock might be useful to analyse whether increasing
(STOCK_PERCENT). Another variable is tariff. relative domestic productivity by 0.05 or increasing
This study uses data from the World Integrated tariffs by 100 per cent is more feasible. However,
Trade Solution (WITS) database, which suggest taking into account the inefficiency created by
that tariff rates (both simple-averaged and trade- trade barriers and sustainability of agricultural
weighted tariff rates) for livestock up to 2010 had innovation, it seems that increased productivity
been relatively low. is more preferable. The results also show that
The first-stage regression is presented in increased relative income per capita is associated
Table 5. Both TARIFF and STOCK_PERCENT with increased relative domestic price.
are significantly and negatively associated with Table 6 presents the second-stage regression.
change in relative domestic price. This indicatesThe benchmark model in column (a) is taken from
that any intervention affecting both indicatorsthe last column of Table 4. Compared to column
could be effective in controlling the change in (a), the IV model in column (b) produces a slightly
relative domestic prices. A negative link between smaller coefficient i.e., 0.630. GDP per capita
STOCK.PERCENT and D.logPD_PI indicates ratio is positively associated with relative demand
that increased supply of livestock might lead to for imported cattle. This supports argument that
higher competitiveness of domestic beef. many middle-upper Indonesians households prefer
One may question whether relative domestic imported cattle to domestic products.5
price is more responsive to a change in increasing
relative herd size or imposing tariff. According
IV. Concluding Remarks
to the FAO statistics, between 2007 and 2008,
STOCKJPERCENT increased by 0.05. Given its This paper has investigated the determinants of
coefficient, this would lead to a 0.19 decrease in
change in demand for beef and cattle imports
D.logPD_PI. For TARIFF, it increased by 0.56 relative to domestic cattle breeding in Indonesia.
between 2006 and 2007, implying a 0.10 decrease The results suggest that a relative increase in GDP
in D.logPD_PI. In other words, to provide the per capita is associated with increased demand for
same effect on relative domestic price as a 0.05 imported beef. This study also finds that imposing
increase in STOCK_PERCENT, the government tariffs could affect the relative domestic price
must increase tariffs by 100 per cent. Further work but not to the extent that increased production

TABLE 5
First-stage Regression

Dependent variable : _ . _ , ^ ,
D.logPD PI _ . _ , ^ ř P-value ,
L.logQI_QD -0.394 0.037 -10.43 0.000
L.logPD_PI -1.097 0.135 -8.13 0.000
L.TARIFF -0.189 0.036 -5.19 0.000
GDPCratio 36.466 3.769 9.67 0.000

L.STOCK_percent -3.806 1.236 -3.08 0.009

Constant -2.370 0.998 -2.38 0.034

Notes: Number of observations is 19; F-statisti

Adj R-squared = 0.8849; Root MSE = 0.1922

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 TABLE 6
Second-stage Regression (Column (b))

Dependent variable : D.logQIjQD Benchmark IV model

D.logPDJPI 0.762** 0.613**

(3.959) (3.135)
L.logQI_QD -0.409*** -0.483***
(-6.575) (-7.681)
L.logPD_PI 0.199 -0.051
(0.728) (-0.168)
GDPC_ratio 14.974*
(2.028)
Constant -0.768** -3.188**
(-2.970) (-2.614)
Adjusted R2 0.812 0.849
Number of observations 19 19

Notes: Instrumented variable is D.logPD_PI.

capacity does (relative sufficiency

to the world's
target, production
Indonesia will be dealing with a
capacity). drop in cattle population.
Given various challenges discussed
Small sample in
properties in this the
study suggest
earlier sections and the outcome of the time series that the results should be considered as no more
than indicative. The relatively short time series
analysis presented by this study, there is concern
for analysis constrains what could be incorporated
about the long-term effects of current government
into the VECM. It is, however, unlikely that the
approaches to reaching its self-sufficiency target.
As suggested by the IRFs, a 1 standard deviation general pattern of the results would change. The
negative shock in relative import quantity as a resultVECM and IRFs present consistent results with
of the government's import quotas, for example,what is known about the demand for imported
will lead to a 0.3 standard deviation increase in
beef in Indonesia; that income per capita matters
relative domestic price in the next period.and The a shock in beef imports would have long-term
effects on domestic beef prices. Taking lessons
long-run effect of such a shock is also statistically
significant. The effect will be even greater if one studies on aid in Africa, studies using a small
from
takes into account the political context of number
such of samples for a time-series analysis point
a protectionist trade policy. Furthermore, if to thequite consistent results i.e., the significance of
Indonesian government decides to restrict oraid evenin public finance (Fagernäs and Schurich 2004;
Osei, Morrissey and Lloyd 2005). Future studies
ban imports with subsequent significant increases
in prices, the country would face a greater should review results in this paper using a longer
time-series.
challenge to control female cattle slaughters, which
has already been an issue. This can happen when Furthermore, due to limited available data, this
cattle farmers respond to decreased supply due to (i) limits the welfare measure to income per
study:
import reduction by selling their cattle, including
capita without taking into account the health effects
productive females, to benefit from the price of beef consumption; (ii) does not take into account
hike.
In such conditions, instead of achieving the self-
the environmental impact of beef production; and

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(iii) does not take into account the impacts of etc. (Weiderma et al. 2008). Internalizing the
change in beef prices on its substitutes (e.g., lamb above externalities, for example through taxing
and poultry) and complements (i.e., chilli to make beef cattle producers and retailers, would increase
spicy beef or flour to make meatballs). Previous the local price and, therefore, make local beef
studies have found a positive link between beef become less competitive compared to imported
consumption and the risks of heart diseases (Fraser beef. It would also increase the "already high"
1994; Hu et al. 1999). Regarding environmental cost of the government's livestock self-sufficiency
impact, a study in Europe finds that beef has programmes. In short, this study highlights the
four to eight times larger environmental impacts importance of a careful cost-benefit analysis of
than poultry per kilogram slaughtered weight the government's current approach to its self-
as shown by various indicators including: ozone sufficiency programmes. Considering their
layer depletion; aquatic ecotoxicity; use of non- importance, these abovementioned issues should
renewable energy; contribution to global warming; guide future studies.

NOTES

The author is grateful to Dr Ray Trewin, Dr David Vanzetti and Nur Rakhman Setyoko for providing valuable
and inputs to the earlier version of this paper, and Professor Christopher Findlay and Associate Professor We
Umberger for their continuing support. The author gratefully acknowledges Australian Centre for Internat
Agricultural Research (ACIAR) postdoctoral fellowship funding for this research through Project ADP/2005/
The usual disclaimer applies.
1. The target was initially announced during the early years of Susilo Bambang Yudhoyono's presidency. It w
subsequently postponed to 2010. In early 2009, Minister of Agriculture, Anton Apriantono announced that
deadline must, once again, be pushed to 2014 due to a limited supply of land.
2. UN Comtrade data reveal that Indonesian imports of live cattle from Australia in 2008 stood at 494,254 he
with a net weight of 205,548 tonnes, implying an average of 416 kg per head. According to Vanzetti et al. (20
the average slaughter weight can be derived by assuming a 210/390 ratio of slaughter to live weight. See t
study for details on the complexities that might arise due to differences in live weight and dressed weight.
3. The volatility in beef production is relatively low (coefficient variation or CV=0.37) as it is "smoothed
highly volatile imported live cattle, which then enter domestic production chains (CV=1.61).
4. Price indicators are expressed in unit values i.e., (import or export) values divided by quantity. See note 2
details on converting live cattle weight into beef weight.
5. One may argue that as the economy grows, the Indonesians are becoming more aware of the negative hea
effects of beef consumption and, therefore, will reduce their beef consumption. According to Schroeder e
(1996), although consumers in high income countries do not on average increase per capita beef consump
when income grows, there is not enough evidence to concluding that there has been any decrease in
consumption either. To investigate this issue, this study adds GDP per capita and its square variables to
estimation. Unfortunately, this leads to severe multicollinearity and the coefficients for both variables becom
insignificant.

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