The social welfare impact of Indonesian dairy policies

The Indonesian dairy sector remains highly regulated, in spite of trade and investment policy reforms elsewhere in the economy. The regulations, aimed mainly at fostering development of local industry, include an import ratio requirement (BUSEP); import tariffs; an import licensing scheme; and restrictions on investment in milk processing. The paper shows that the current policy mix has resulted in a significant increase in numbers of dairy cattle and dairy farmers, and in fresh milk and end-product output. However, this policy mix imposes costs. The analysis indicates that the economy, and in particular domestic consumers, would gain if dairy trade and investment restrictions were lessened. The gradual movement towards a more deregulated dairy sector is a necessary condition for improved efficiency and a strengthening of Indonesia's competitive position in the world dairy market.