The Roles of Input Policies in Transforming Agriculture in Indonesia

Bustanul Arifinbarifin@uwalumni.com

Professor of Agricultural Economics at UNILA Professorial Fellow at InterCAFE and MB-IPB

Senior Economist with INDEF-Jakarta, Indonesia

International Conference on “Agricultural Transformation in Asia: Policy Options for Food and Nutrition Security”, September 24-26 of 2013, in Siem Reap, Cambodia

Research Objectives

1. Identify key drivers of changes in seed and fertilizer policies in modern history of Indonesian agriculture,

2. Examine policy process on agricultural inputs (fertilizer and seed) to contribute to agricultural development on Indonesia, and

3. Formulate strategies to improve policy environment for promoting sound input use.

Agricultural Inputs and Production Performance• The use of fertilizer and (high-yielding) seed grow very

rapidly since the Green Revolution Era in the 1970s. • Five Efforts: seed, fertilizer, plant density, irrigation and

drainage, and pest and disease management. • Seven Efforts: Five Efforts+ marketing and financing• Farm Formula (Rumus Tani): Fertilizer to rice price ratio • Policy priority of agricultural inputs: food crops, related

to policy strategy for food self-sufficiency & food security.

• After 1980s: Cash crops also obtained attention in order to increase foreign earnings from export commodities: rubber, coffee, cocoa, coconut, oil palm, tea, clove etc.

Transformation—Major Agric Policy

Soekarno(1945-1966)

Soeharto I(1966-1985)

Soeharto II plus(1986-2003)

Yudhoyono (2004 – now)

Share of Agric-PDB >30% 20-30% 15-20% <15%

Share of Agric-labor >50% 45-50% 40-45% <39%

Agricultural Growth Low (<3%) High (6%) Low (3-4%) Low (3%)

Agric Major Policy Mass Guidance Green Revolution Green Revolution Agric Revitalizing

Agric Input Policy Introducing modern inputs

Agric inputs for self-sufficiency

Response to drought & crisis

Organic input grows rapidly

-Fertilizer Subsidy Not specific, but guidance on use

Started in 1971 Price subsidy

Removed -1998 but re-introduced

Compound-NPK, No subsidy

-Seed Subsidy Modern seed was known

Package of agric inputs plus credit

Package of agric inputs plus credit

Private sector grows rapidly

Policy process Top-down: Food, & Peasant first

Top-down: Oder-& Command

Dialog with some stakeholders

Democratization: Dynamic drivers

Historical: Structural Transformation in Indonesia

Source: Synthesized by the author

Structural Transformation: Incomplete Process?

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100

2

4

6

8

10

12

0

5

10

15

20

25

30

Agriculture value added per worker (constant 2000 US$)GDP per capita (constant 2000 US$)Agriculture, value added (% of GDP)GINI indexPoverty headcount ratio at rural poverty line (% of rural population)Poverty headcount ratio at urban poverty line (% of urban population)

Source: BPS

Production Performance of Strategic FoodsStrategic Foods 2008 2009 2010 2011 2012

RiceHarvested Area (ha) 12.327.425 12.883.576 13.244.184 13.203.643 13.445.524

Productivity (ton/ha) 4,89 5,00 5,01 4,98 5,15

Production (ton dry paddy) 60.325.925 64.389.890 66.411.469 65.756.904 69.056.126

MaizeHarvested Area (ha) 4.001.724 4.160.659 4.131.676 3.864.692 3.957.595

Productivity (ton/ha) 4,08 4,23 4,43 4.56 4.90

Production (ton dry grain) 16,317,252 17,629,748 18,327,636 17,643.250 19.387.022

SoybeanHarvested Area (ha) 590.956 722.791 660.823 622.254 567.624

Productivity (ton/ha) 1,31 1,25 1,24 1,37 1,48

Production (ton dry bean) 775.710 974.512 907.031 851.286 843.153

SugarHarvested Area (ha) 436.505 441.040 435.000 430.000 440.000

Productivity (ton/ha) 6,11 5,70 5,11 5,27 5,22

Production (ton sugar) 2.668.428 2.517.374 2.300.000 2.270.000 2.300.000

Source: BPS (various issues)

Use of Fertilizer by Cropping Farms Cropping Farms No

FertilizerChemical Fertilizer

Organic Fertilizer

Chemical+ Organic

Total

Rice Farm Households 1,225,700 10,155,465 94,112 3,516,860 14,992,137Percentage (%) 8.18 67.74 0.63 23.46 100.00Maize Farm Households 1,010,330 2,472,889 134,648 3,096,828 6,714,695Percentage (%) 15.05 36.83 2.01 46.12 100.00Soybean Farm Households 215,717 492,888 85,173 370,699 1,164,477Percentage (%) 18.52 42.33 7.31 31.83 100.00Sugarcane Farm Households 2,819 131,633 4,324 56,683 195,459Percentage (%) 1.44 67.35 2.21 29.00 100.00

Source: BPS, 2009

Use of Seeds by Cropping FarmsCropping Farms Farm Households

Percentage of Farms (%)

Percentage of Total *)

Rice 14,992,137 84.08 Hybrid 430,996 2.87 2.42 High-Yielding 10,947,289 73.02 61.40 Local Seed 3,613,852 24.10 20.27Maize 6,714,695 37.66 Hybrid 3,651,210 54.38 20.48 Composite 341,377 5.08 1.91 Local Seed 2,722,108 40.54 15.27Soybean 1,164,477 6.53 High Yielding 452,029 38.82 2.54 Local Seed 712,448 61.18 4.00Sugarcane 195,459 1.10 High Yielding 134,726 68.93 0.76 Local Seeding 60,733 31.07 0.34Total Farm Household 17,830,832

Source: BPS, 2009

*) This does not add to 100% as a farm household usually grows more than one crop

Fertilizer Shortage during Planting Season

1. Production : Supply of gas vs. individual performance 2. Distribution: Min. of Agriculture vs. Min. of Trade3. Institution: Demand for fertilizer (RDKK) is not easy4. Price: Disparity between MRP(HET) vs. actual5. Subsidy: Gas subsidy vs. price subsidy6. Trust: Price audit on cost of production vs. HET rise

Expenditures on Fertilizer Subsidies

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

IDR/kg

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000IDR billion

Expenditure on fertiliser subsidies (right scale) Ceiling price for urea (left scale)

International price of urea (left scale)

Source: OECD (2012), Ministry of Agriculture (2011)

Allocation of national ag. spending (actual), 2001-09

State Budget: Spending on input subsidy• Increase in public spending on agriculture has gone to subsidize inputs (fertilizer, seeds, food for the poor). Credit remains low.• In 2009 fertilizer subsidies were 4.5 times its 2001 level, while irrigation remained at the same level. This needs policy changes.• Previous studies suggest that the relationship between public spending and growth in the agriculture sector. Spending on public

goods has positive impact on growth, spending for private goods might have negative impact on growth (World Bank, 2009).

Change in national ag. spending (actual) by type, 2001-09

Source: World Bank staff calculation using MoF and SIKD dataNote: 1) Sub-national 2007 spending was from budget data; 2) Sub-national 2008-09 spending was estimated; 3) Post 2009 sub-national spending on agriculture data is not available 4) More detailed notes on categories of agriculture sector spending

2001 2002 2003 2004 2005 2006 2007 2008 20090

20

40

60

80

100

3035 29

3032

20

21

26 2629

34 3332

28

34

39

27 26

4029 32 28 25

3119 17 16

4 712 12

1928 31

Fertilizer subsidies Other subsidies Agriculture R&D Irrigation

Percent

PresidentDPR-House of RepresentativeDPR-House of

Representative

MediaMedia AcademicsAcademicsNGOsNGOs DPR-SenateDPR-

Senate

Fertilizer Industry

Seed Industry

Farmer Organizations

Farmer Organizations

Ministry of State Owned

Enterprise

Ministry of Trade

Ministry of Industry

Ministry of Agriculture

Coordinating Ministry of

Economics Affairs

BULOGFood Security

Agency

Consumer Groups

Consumer Groups Chambers of

Commerce and Industry

Chambers of Commerce and

Industry

Ministry of Finance

Provincial, DIstrict Food Security Agency Provincial, District

BULOG

Governor, Mayor

Provincial, District Agricultural Services

Actors in the Policy Process of Agricultural Inputs and Food Security in Indonesia

PresidentDPR-House of RepresentativeDPR-House of

Representative

MediaMedia AcademicsAcademicsNGOsNGOs SenateSenate

Fertilizer Industry

Seed Industry

Farmer Organizations

Farmer Organizations

Ministry of State Owned

Enterprise

Ministry of Trade

Ministry of Industry

Ministry of Agriculture

Coordinating Ministry of

Economics Affairs

BULOGFood Security

Agency

Consumer Groups

Consumer Groups Chambers of

Commerce and Industry

Chambers of Commerce and

Industry

Ministry of Finance

Provincial, DIstrict Food Security Agency Provincial, District

BULOG

Governor, Major

Provincial, District Agricultural Services

66

5

5

5

444

3

3

3

32

2

2

2

111

1 1

3 1

Influence Level of Actors in the Policy Process of Agricultural Inputs and Food Security

Concluding Remarks: Policy Implications• Agricultural input policies in Indonesia have led to substantial

increase in input use, hence contributing to agricultural development and structural transformation;

• Unbalanced use of fertilizer imply inefficiency and dynamic disequilibrium, hence agricultural performance;

• Key drivers of changes in seed and fertilizer policies:– 1950s-1960s: spirit to achieve self-reliance, BIMAS & INMAS– 1970s-1980s: Green Revolution, subsidy, infrastructure development– 1990s-2000s: Severe droughts, Asian Crisis, IMF intervention– 2004-present: Subsidy dependency, “democratization”, inefficiency

• Policy process has entered into more complex economic (and political) interests and decentralized government and autonomy.

Policy Recommendation for the Future• Continue sharpening the formulation, organization and

implementation of input subsidies to improve policy accuracy;• Determine an exit strategy for the input subsidies by integrating

efficiency improvement and bureaucratic reforms;• Evaluate crucial level of moral hazard among fertilizer users by

determining he degree of fungibility of subsidy given to farmers;• Improve institutional arrangements of agricultural input subsidy,

i.e. how the demand for fertilizer and see and farm level (RDKK) could be monitored by government agencies at central and local.

• Shift to more decentralized subsidy mechanism, by conducting a thorough assessment on distinctiveness and location-specific;

• Revive the roles of agricultural extension agents (PPL), rural cooperatives (KUD) and other civil society initiatives.