Agricultural transformation: Neglected development in Indonesia

Economic Growth Program
Dr. Ronnie S. Natawidjaja of Center for Agrifood Policy and Agribusiness Studies, University of Padjajaran presented his work on agricultural transformation in Indonesia at GoLive Indonesia-PPIA Indonesian Student Association academic workshop series on 29th October 2012 at School of Economics, the University of Adelaide during his visit to Adelaide. He opened his presentation by saying ” Indonesia is a great country. There is no reason for Indonesians to be poor …” He explained how Indonesia should transform its agricultural sectors which may contribute to poverty reduction programs in Indonesia.

Economic transformation normally refers to change from an agricultural/primary based economy to an industrial-based economy, then to a services-based economy. Although we know the direction, there is no clear consensus regarding how an economy should achieve this change.

Structural change would depend on comparative advantage. But in Indonesia, ‘komoditas unggulan‘ or focused-products, whose producers enjoy special treatments by the government, are those which have abundant availability instead of those with highest comparative advantage. Structural change would also depend on socio-economic and political history and development.

The contribution of Indonesian agricultural sectors to GDP has been declining, at 11% in 2011. However, there is still about 40% of the labour force engaged in the agricultural sector. This implies decreasing welfare of these agricultural workers working in a shrinking sector.  Whilst services and manufacturing sectors are growing, but the growth is only enjoyed by limited share of Indonesian population. According to the World Bank, between 1990 and 2005 based on agriculture’s contribution to growth Indonesia was classified as a ‘transforming country’. Hence, the economy is no longer an agriculture-based country; it is not an urbanised country either.

Agricultural development requires a long-term plan. It may take up to 50 years. But such a long-term project may not be politically favourable given five-year period that the governments both local and central governments are normally running. Agricultural development also requires a solution to allow farmers to move away from primary products to high-value agricultural products. Hence, improvements in agricultural productivity may come not only from increased crop productivity but also ‘reallocation’ effects where farmers move from primary products to high-value agricultural products.

To achieve successful agricultural transformation, Indonesian agricultural sectors should conduct ‘internal transformation’. The sector should be transformed from a subsistent/traditional ie to cater household consumption to a market-oriented sector. Farmers must also take into account arguments against and for specialisation in oppose to diversification. Specialisation in one commodity increases risk portfolio but farmers are constrained by limited land. Farmers should consider how to best achieve economies of scale. Traditionally, farmers cooperatives only assist them to get inputs. It is not clear how effective  the cooperatives have been.

Peter Timmer (1997) argued that as agricultural transformation progresses (for example as indicated by value added per agricultural worker), the gap between the level of diversification at the farm level and food consumption is widening. International trade and commercialisation of agriculture have potentials to fill in this gap. On the other hand, agricultural sectors develop when the economy develops.

Dr Natawidjaja defines three symbiotic drivers of domestic food market transformation. The first driver is retail revolution. In Indonesia, there has been wide-spread growth of modern retail. Unfortunately, only about 15% of farmers are linked to modern-retail channel, directly and indirectly and the government’s assistance to these farmers is minimal. One main challenge in retail revolution is poor coordination between actors in the value chain.

The second driver is food processing industries. There is fast growth of large food processing and beverages industries, both local and multinational companies.

The third driver is urbanisation. Growing urban life style implies change in food demand and dietary intake.

Responding to increase demand for horticulture there is a growing number of horticultural establishments in Indonesia. The number was 220 in 2004, increased to 325 in 2010- 279 of them were in Java. But it is not clear who they are. Are they ‘upgraded farmers’?

Government’s budget for food and agriculture has been focused on subsidies for RASKIN (ie rice assistance to poor people) and input subsidies. This demonstrates government’s short-term priorities. For longer-term agricultural development, there is an urgent call for improved productivity. The Indonesian government should also impose transparent but strict rule for foreign companies to operate in the domestic market. This would encourage ‘a fair share’ to support development of domestic capacity. The Indonesian government should also support and provide incentives for local private sector and investors to develop long-run partnerships with farmers or local producers.

*This report is prepared by Risti Permani.

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Filed under Agriculture, Economic development, Employment, Food and agriculture, Indonesia, Investment, Poverty, PPIA academic discussion, Reform, Trade

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