Earth Trends by Martin Khor

Monday 8 Jan 2001


Discussions on globalisation usually focus on instability in currencies and financial markets, and increased foreign competition on local banks or industries such as the Proton Saga.   However, the influx of cheaper imports is also affecting the padi farmers, whilst fluctuations in the palm oil price has hit incomes of the oil palm settlers and smallholders.  EARTH TRENDS looks at globalisation's recent effect on rural Malaysia.


 As the new year gets into stride this week, and we finally settle down for work, spare a sympathetic thought for the problems being faced by large sections of the rural Malaysian population.

Our rice farmers and oil palm smallholders are enduring the effects of the vagaries of the global market.

When fears are voiced about the impact of competition arising from globalisation, reference is usually made to the problems faced in the modern urban economy.

Thus, there is the justified concern about financial instability due to often wild fluctuations in levels of currencies.

There is wide publicity of the challenges faced by the national car, Proton Saga, with the implementation of AFTA (the Asean Free Trade Agreement) and rules of the WTO (the World Trade Organisation).     

Fears that local banks may not stand to up greater competition from giant foreign banks if the financial sector is liberalised have led to the government-driven bank merger process aimed at creating stronger and more competitive local banks.

Though less publicised, globalisation can also and is also affecting the rural economy.

In the past few weeks, problems have emerged in the padi sector when farmers faced tumbling prices and lower demand for their rice as larger quantities of foreign rice are being imported or smuggled into the country.

As a result, stocks have been piling up in the rice mills in the northern states of Kedah, Perlis and Kelantan.  Last month, Agriculture Minister Datuk Mohd Effendi Norwani said unsold stock of rice at mills in Kedah and Perlis had reached 126,000 metric tonnes.  The problem could worsen in January when another 700,000 metric tonnes are harvested nationwide.

On 16 December, The Star reported that 10,000 farmers in the Selangor rice-bowl area of Tanjong Karang were facing ruin due to excessive padi supply and lower prices. Farmers raised their problems at a dialogue session with Tanjong Karang MP Datuk Noh Omar and agriculture officials. 

Due to the glut, the farmers were also suffering lower prices.   Whilst they received RM620 per metric tonne at the last harvest, they were now getting RM570, which was above the government-set minimum price of RM550 but which could hardly cover their rising expenses.

The farmers informed Noh that due to rising costs of pesticides and fertilisers, the cost of tending a block of padi patch had risen from RM400 a few years ago to RM1,000 at present.

On 20 December, Effendi announced a temporary ban on rice imports as part of the measures to reduce the glut.  He assured farmers that they would not have a problem in selling their rice harvest. He also said the selling price for farmers would depend on market forces but he hoped it would be not less than RM620 per metric tonne.

According to a press report on 21 December, farmers disagreed that the glut was caused by smuggling or higher productivity, and believed that the main factor was the importation of too much rice. 

According to millers, farmers could get up to RM800 per tonne during good times.  The farmers received an average of RM660 at the last harvest last June and July, but the price had fallen to RM590 in mid-November and RM560 in mid-December.

Whatever are the real causes of the glut, the role of trade liberalisation in increasing imports and putting pressures on the demand for and prices of local rice has now emerged as a major concern.

Effendi has announced that the Agriculture Ministry is drafting a strategic master plan to deal with the expected inflow of imported rice and other farm products once AFTA is implemented in 2003.

"We are aware of the possible problems posed by AFTA and are trying to find the best way to prepare our farming community so that they know what must be done to remain competitive," he said on 19 December.

The Ministry, he added, would try to change the farmers' mind-set so they can adapt to the challenges of facing direct foreign competition caused by trade liberalisation.

The MP for Yan, Nasharudin Mat Isa, also raised concerns about AFTA in a speech during the Parliamentary debate on the 2001 Budget.

He said that when AFTA is implemented in 2003, the agriculture sector in Malaysia would face fierce competition from neighbouring countries. Padi farmers would be worst affected since the production cost is much lower in neighbouring countries compared to Malaysia.

He warned that if the subsidy element for agricultural inputs and for the price cannot be provided by the government because it conflicts with AFTA rules, then the national padi industry will not be able to compete in the open market.

Padi farmers would have to leave the sector, posing a threat to hundreds of thousands of padi-producing farmers and their families throughout the country.

On 29 December, The Star reported that rice millers, Bernas and padi farmers in Kedah had on 26 Deecmber agreed on a discard rate of 14 percent for the wet content of every 100kg of padi for the new harvesting season which had just begun.

This was announced by Mentri Besar Datuk Seri Syed Razak Syed Zain, who also said the farmers' representatives had initially asked for a 12 percent discard rate.

The discard rate had previously been fixed at 16 to 25 percent.  By having a lower discard rate, farmers get a higher share of the price, and this helps to offset the lower level of prices now prevailing.

However, on 30 December, the Star reported that some 100 padi farmers had gathered near the Bernas complex in Alor Star to demand that the state government fix the discard percentage at between 8 and 10 percent.  They dispersed after police promised to deliver their memorandum to the Mentri Besar and Bernas.

This sequence of events shows how increased competition from imports can cause difficulties for local farmers.  In a way, the events are a kind of "dress rehearsal" of what could happen if rapid trade liberalisation takes place under AFTA or the WTO or both.

Under the WTO Agriculture Agreement, governments are only allowed to restrict imports through tariffs and no longer through quotas. The bound tariff levels cannot be raised but should be reduced through time.  Also, subsidies given to farmers have to be progressively reduced, and cannot be raised.

Many developing countries are already facing problems from agricultural trade liberalisation and have tabled proposals to amend the Agreement so that they can better protect their farmers and can continue to provide subsidies.

Given the problems that have already arisen locally (since the padi farmers are already facing the consequences of competing with foreign rice), Malaysia should take an active part in the WTO negotiations to review and amend the Agriculture Agreement to protect the farmers' livelihoods.

Padi is not the only sector facing problems.  The settlers in Felda oil-palm schemes, other oil-palm smallholders and the workers in oil palm estates, are suffering from reduced incomes caused by the sharp decline in palm oil prices since last year.

During the financial crisis, they had actually gained since the ringgit's devaluation increased the prices of palm oil in terms of local currency.

The average price of palm oil rose from RM1,358 a tonne in 1997 to RM2,378 in 1998, providing a bonanza to the smallholders.

The price level began to decline in 1999 (averaging RM1459), and this trend continued in 2000.  Presently prices are at a 15-year low.  Last Friday (5 January) the average crude palm oil price for January was RM699, a drop of 71 percent compared with the average price of 1998.

This has resulted in a sharp reduction in incomes for hundreds of thousands of Felda settler families and independent oil palm smallholders.  Workers in oil palm estates workers may also, to a smaller extent, be affected.

This is a reminder that fluctuations in commodity prices in the world markets still affect the incomes of a large part of Malaysia's rural population.  Whilst there will be good news during an upswing (such as in 1998), there can also be severe effects during a downswing (such as now).

The events taking place in the padi and oil palm sectors show that the effects of globalisation need to be monitored closely (and where possible countered) not only in the industrial and financial sectors, but also in agriculture, where the lower-income and thus more vulnerable groups are located.