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