Indonesia’S Agriculture Sector Development

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  • 1. Today’s Presentation: Indonesia’s Agriculture Sector Development: 1961-2001 Period and After Prayoga Wiradisuria June 2008 Zemi presentation
  • 2. Agenda Context of Agriculture in Indonesia Working Draft - Last Modified 2/8/2006 10:40:49 PM Growth Accounting model Overall Analysis Periodical Analysis Achievement after the financial crisis Printed Moving forwards 1
  • 3. Context of agriculture sector in Indonesia (1) GDP Contribution (%) Export, Import ($1000, base year prices) 5,000,000 100% 4,500,000 Annual growth (1961-2001) Export 4,000,000 Export : 5% 80% Service Import : 6% 3,500,000 Population : 2% Import 60% 3,000,000 2,500,000 40% ` 2,000,000 Industry 1,500,000 20% 1,000,000 500,000 Agriculture 0% 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Employment contribution (%) Rural & Urban population (%) 100% 100% 90% 80% Non-agriculture 80% Urban 70% 60% 60% 50% 40% 40% 30% 20% 20% 10% Agriculture Rural 0% 0% 1961 1966 1971 1976 1981 1986 1991 1996 2001 1961 1966 1971 1976 1981 1986 1991 1996 2001 Source: World Development Indicators, FAO Statistics
  • 4. Context of agriculture sector in Indonesia (2) Commodity break-down Share of rice in food crops non-rice 100% 90% 24% 80% Food crops 70% 76% 60% Rice 50% Horticultural 40% Non-food crops 30% Animal products 20% Fish products 10% Forest products 0% 1961-1965 1971-1975 1981-1985 1991-1995 Source: Fuglie 2004 in “Productivity Growth in Indonesian Agriculture
  • 5. Growth Accounting Model The growth in output is approached and decomposed into the following form for the discrete data Legends: Weights Note: (Wong and Ruttan, 1990) 1 – Base year Variable A (TFP) serves as “Solow 2 – Current year Labor .155 residual” that is procyclical, over Y – Output Land .042 long period of time it can be used L – Labor Fertilizer .239 as a measure of technological N – Land Machinery .173 change F – Fertilizer Livestock .391 M – Machinery S – Livestock A – Total Factor Productivity
  • 6. Data Collection Output (total agriculture sector, Net PIN base 1999-2001) Machinery (tractors in use, unit) 150 100,000 80,000 100 60,000 50 40,000 20,000 0 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 1960 1965 1970 1975 1980 1985 1990 1995 2000 Labor (agricultural population, 1000) Fertilizer (consumption, tonnes) 100,000 3,000,000 90,000 2,000,000 80,000 1,000,000 70,000 60,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 1960 1965 1970 1975 1980 1985 1990 1995 2000 Land (Arable, 1000 ha) Livestock (cattle and buffaloes, head) 22,000 16,000,000 20,000 14,000,000 18,000 12,000,000 16,000 14,000 10,000,000 12,000 8,000,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: FAO Statistics
  • 7. Changes in Total Input and TFP Total Input Change year to year, % 30 Input Change 20 10 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 -10 TFP Change year to year, % 10 5 TFP Change 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 -5 -10 -15
  • 8. Overall Analysis (1) 250 Output Input 200 1961= 100 150 100 TFP 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 • Indonesia has been able to maintain sustainable growth in agricultural output and relatively resilience to national and international situations • Sources of growth, however have been coming from inputs intensification rather than TFP • In the long run, sustaining output growth can no longer depends on inputs, TFP increase should then be a potential area • Quck gain in TFP increase can be obtained through importing farming best practices and champion seed.
  • 9. Overall Analysis (2) Machinery Fertilizer Number per 1000 ha Tons per 1000 ha 35 500 30 US 400 25 20 300 Japan China 15 200 India Indonesia 10 China 100 US 5 India Indonesia 0 0 1960 1970 1980 1990 2000 1960 1970 1980 1990 2000 2010 After four decades, Indonesia still has rooms for Compared to Japan assuming it has advance machinery intensification. agricultural method, the usage of fertilizer in Indonesia can still be expanded. However, this Japan’s numbers are astronomical (not charted should be looked at carefully as US has been quite here), due to application of small tractors. productive at the same fertilizer usage rate as Indonesia. This can also serve as early indication for diminishing return of fertilizer
  • 10. PERIODICAL ANALYSIS Output Total TFP labor land machinery fertilizer livestock input Working Draft - Last Modified 2/8/2006 10:40:49 PM Old Order Era +2 +4 -2 +1 0 +52 -9 +1 1961-1965 New Order Era +4 +2 +2 +1 0 +8 +10 +1 1966-1998 Reform Era +1 -2 +5 0 +2 -3 +2 -3 Printed 1999-2001* *Only captured period where there are still significance political turbulence, stronger effect of financial crisis, and period of significant changes in public administration. 9
  • 11. Agriculture During the Old-Order Era • 1961-1965 era saw numerous political turbulence in the national level involving frequent parliamentary changes in short period of time. This resulted ineffective government causing lack of attention to government programs, including those in agriculture sector. This is also the period where government performed “light-house” policy where the Working Draft - Last Modified 2/8/2006 10:40:49 PM President pursued nation growth through popular ways. • In agriculture, this policy translated to boosting the application of agriculture machinery in order to make Indonesian agriculture looked modern. It was an intensive program represented in machinery annual growth at +52%. Number of tractors grew more than 500% only in five year period. • This approach, however, was argued to not holding to strong fundamentals in agricultural development. Careful education for farmers on farming was overlooked. No Printed farmers protection from increase in prices which reflected in the annual decline of fertilizer usage by -9% annually. • As a result, steady agricultural output growth was not achieved and, in overall, annual growth was only at +2%. 10
  • 12. Agriculture During the New-Order Era (1) • Characterized by heavy government intervention through the introduction of economic programs including that in agriculture sector. However, taming the political and economic situation after the old order was far from easy and took time. Decrease in agricultural performance was observed in its early period. Working Draft - Last Modified 2/8/2006 10:40:49 PM • Aiming to make a agricultural recovery, government expanded input through land and fertilizer expansion. This resulted multiple significant increases in annual output growth. However, up to this level, government effort was fire-fighting in nature and considered as experimenting rather than steady planning. Results were consequently fluctuating in its first five to six year of the new order. • In the 1969 government introduced the 5-year development plan approach (Pembangungan Lima Tahun – Pelita). This is a long-term development vision which devided into 5-year short-term plan and execution. This gives government solid goal and Printed framework of development. Soon following its first implementation, steady input expansion growth was observed attributed to planned and continues government campaign in this area. Output had been steadily increases ever since. • Small disturbance to input and TFP was observed in the early 1980 as the result of the oil crisis in late 1970s that affected inputs prices mainly fertilizers. However, as Indonesia was an oil exporter, the impact to input and TFP as not significant and there was no observable damage in output growth. 11
  • 13. Agriculture During the New-Order Era (2) Working Draft - Last Modified 2/8/2006 10:40:49 PM Increasing agricultural output was in the primary agenda of this era and government introduced programs categorized as follows: 1. Arable land expansion program (for outside Java island) 2. Non-land input expansion program (for Java) 3. Irrigation improvement program Printed 4. Agricultural research and development 12
  • 14. Agriculture in the Reform Era • The Asian financial crisis that toppled former President Soeharto marked the beginning of the reform era. This era introduced full-fledge democracy and decentralized power and economy to the country. As reform era economically devided into two periods: crisis period and growth period, this presentation covers only the crisis period only due to data availability (1999-2001). • In its first 3 years of reform era, Asian financial crisis brought Indonesia’s macroeconomic Working Draft - Last Modified 2/8/2006 10:40:49 PM situation to its low performance. On the farmers’ side, as currency rate was depreciated and inflation was high, subsidies were lifted and costs of fertilizers and pesticides increased. The annual growth of fertilizer then drop to +2% compared to +10% in the new order era. Furthermore, agricultural sector could not absorb more farmers which means employment annual growth became 0. • Due to astronomical interest rates, no micro-finance credits available for farmers. Irrigation infrastructures abandoned. Agriculture education to farmer was chaotic due to rapid transfer of administration from central to region. Supply and product distribution heavily disturbed. Printed • All of these makes total agricultural input growth down by -2% annually. But the biggest impact hit machinery and livestock which actually decreased every year since Asian financial crisis begun. At the same time micro-credit programs were halted and irrigation projects were stopped. • Annual productivity growth down to +1% compared to +4% in the new order era. This gives agricultural contribution growth to GDP at 0.88%, the lowest in Indonesian history (Saragih, 2004). Because input costs were high, farmers have to rely on smart ways to increase productivity, this explains the +5% annual growth of TFP. 13
  • 15. Firefighting in Indonesian agriculture sector • Quickly ease the impact of financial crisis and socio-political changes. Saving Macroeconomic and recovering Indonesian agriculture sector through macroeconomic & Government stabilization, systematic transfer of administration and budget from central to administration local governments Working Draft - Last Modified 2/8/2006 10:40:49 PM Protection & • Protect farmers from dumping practice by other countries, increase import Promotion tariffs for key commodities (i.e. rice, sugar) Policy Budgetary • Budget de-concentration to local governments & direct budgetary assistance instrument to farmers and infrastructure rehabilitation Printed • Deregulation in fertilizer, pesticides, seeds, machinery, value-added tax Non-budgetary elimination, subsidized credit scheme program, local government development instrument as agribusiness actors. Quick Gain • Maintained overall agricultural output growth. observed • Maintained farmers wealth 14
  • 16. Agricultural portrait in 2003 Productivity • Highest productivity record in Indonesian agricultural history for 10 key commodities: 52.0 Some commodities (million tons) 49.0 1998 Working Draft - Last Modified 2/8/2006 10:40:49 PM 9.2 11.0 10.6 2003 5.2 1.6 2.7 Rice Corn CPO Rubber • Rice self-sufficiency and surplus after 20 years • Sugar self-sufficiency Farmers • Increasing farmers’ exchange index from 96.6 (2000) to 110,4 (2003) standard • Reduced rural poverty number from 32.7 million (1999) to 25.1 million (2002) Printed of living • Reduced overall poverty level from 26 million (1999) to 20.6 million (2002) • Farmers income increased annually by 17%. Macro • Recorded annual increase in agricultural trade balance 15% indicators • Recorded increase in agricultural GDP of 2.61% annually (higher than that during crisis and last 5 years of New Order era. • This level of growth excludes achievements made in upstream agro industries (fertilizer, machinery, etc) and downstream (agro-based products) • These achievements is contributed by increases in TFP (ministry of Agriculture, 2004) 15
  • 17. Moving forward.. • The agricultural achievements post crisis have been of higher quality than that during any Era in Indonesian history. This is based on the fact that the achievements have been made Working Draft - Last Modified 2/8/2006 10:40:49 PM with less government intervention and therefore less costs, more sustainable, and more innovative (Saragih, 2004) • Government, however, facilitates Indonesian agricultural growth through: (1) Improve and expand physical infrastructure that includes irrigation, transportation, telecommunication, rural electricity. (2) Revitalization of agricultural innovation system Printed (3) Development of agribusiness systems through government administration, business institutions, and network. (4) Reconstruction of incentive systems for production and innovation (5) Development of input and output market 16
  • 18. Working Draft - Last Modified 2/8/2006 10:40:49 PM Printed 17 Thank you for listening and the suggestions