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Home>FFTC Document Database>Extension Bulletins>Agricultural Policy Reforms in Indonesia: Accelerating Growth with Equity
Agricultural Policy Reforms in Indonesia: Accelerating Growth with Equity
Achmad Suryana and Erwidodo
Center for Agor-Socioeconomic Research
Agency for Agricultural Research and Development
Jalan Jend A. Yani 70, Bogor 16161
Indonesia, 1996-12-01


Long before the establishment of the World Trade Organization (WTO) and related regional trade movements, the government of Indonesia changed its development strategy so that it looks outward rather than inward. In line with GATT, Indonesia is committed to liberalizing its trade and investment. The future direction of agricultural and rural development, to ensure growth with equity, will be towards decentralized, market-oriented, export-led agriculture, in which private companies participate, and the use of capital intensive technology in agricultural development to increase efficiency and product competitiveness. Policies and programs to promote the sustainability of small-scale farms are designed to operate through farmers' groups, and take advantage of economic globalization.

Abstracts in Other Languages: 中文(1046), 日本語(1188), 한국어(1205)


Indonesia is a developing country which is a success story in its development record, despite a series of severe external set-backs. Twenty-five years ago, Indonesia was one of the poorest countries in the world, with an annual per capita income of only US$50. Since then, it has made great strides, achieving an average GDP growth of almost 7% per annum, a growth performance that ranks among the ten fastest in the world, and is on a par with that of the dynamic East Asian economies (World Bank 1993). During this period, Indonesia has moved from being a low-income country to being a middle-income one. Indonesia's per capita income rose by 4.5% each year to reach US$1020 in 1995. In real terms, the present per capita income is three times higher than that of 30 years ago, implying a substantial improvement in the living standards of the Indonesian population and poverty alleviation.

This success in stimulating economic growth in line with poverty alleviation can be attributed to several elements in development strategy. These include:

  • Substantial investment into economic and social infrastructure which in turn supported broad-based growth. This included investment into human resources, especially basic education and public health.
  • There was a strong emphasis on improving productivity in agriculture as the main source of livelihood for a majority of the population; and
  • Structural reforms in trade and investment that induced a shift from inward-oriented, labor-intensive activities toward outward-oriented, capital-intensive activities.

This paper discusses agricultural policy reforms in Indonesia, and their impact on agricultural development. The second section reviews the performance of Indonesian agriculture, and the steps taken to deregulate the economy, in line with the government's commitment to GATT and its efforts to accelerate growth with equity. The third section discusses future directions of agricultural development in an era of global free trade. It focuses on policies and programs for agricultural development, the economic sustainability of small farms, and poverty alleviation.

Indicators of Agricultural Development

Agriculture has played an important role in Indonesia's economic success. However, over the last 25 years, the share of agriculture in the GDP has declined from 41.9% in 1969 to 17.2% in 1995. During the same period, the agricultural sector grew by 3.45% per annum. The value of agricultural exports in 1994/1995 was US$5,941 million, 18.7% of the total non-oil exports. Rubber, palm oil, coffee, tea, cocoa, and shrimp were the major agricultural export commodities (Rasahan 1996).

A worrying fact is that the decline in employment in the agricultural sector has been much slower than the decline in its share of the GDP. The proportion of agricultural workers in the total work force fell from 54.7% in 1985 to 52.5 in 1990, and an estimated 46% in 1995. At the same time, the absolute number of agricultural workers has been continuously increasing. In 1995, approximately 38 million people were employed in agriculture. This indicates that the sector remains a major economic activity for employment generation, although one with low labor productivity. Meanwhile, the proportion of workers in the manufacturing sector (the sector with the highest GDP growth rate) rose only slightly, from 8.5% in 1985 to 10.8% in 1990. (The remainder of the work force are employed in mining, trade, services etc.). All this evidence suggests the critical importance of promoting labor-intensive non-agricultural employment, in order to minimize unemployment problems and to further reduce poverty in both rural and urban areas.

The agricultural sector in Indonesia can be subdivided into four: namely, food crops and horticulture, estate or tree crops, livestock, and fisheries.

Rice is the main commodity in Indonesian agriculture, and plays a very important role in the economy. It is the staple food for about 97% of the Indonesian population of 197 million people. It contributes around 60% of total energy (calorie) consumption and around 50% of total protein intake, and takes on average 55% of total consumer expenditure. Apart from being a staple food, rice is a major source of income and employment, especially in rural areas. Therefore, rice is considered a socio-economic as well as a political commodity.

Rice, along with other food crops (corn, soybean, cassava, peanut, sweet potato), absorbs 75% of the total labor force in agriculture. Therefore, the Government of Indonesia has paid special attention to these crops in its attempts to increase farmers' incomes, in line with production increase and the creation of employment. During the last ten years, the production of almost all food crops has increased significantly. In 1984, the production of rough rice was 38.33 million mt, while by 1994 production had increased to 46.64 million mt. This had a positive impact on people's food consumption, and average energy and protein intake both increased. In 1994, the average per capita/day consumption was 2,957 Kcalories, and 67 grams of protein.

Plantation crops are important commodities in Indonesian agriculture, providing foreign exchange for the country and raw materials for industry. In addition, tree crops are an important source of employment. The main tree crops cultivated in Indonesia are rubber, oil palm, coconut, tea, coffee and cocoa. It is estimated that more than seven million farm families were involved in the production of tree crops in 1993. The most significant increase has been in the production of palm oil products. The production of crude palm oil in 1984 was 1,75 million mt, and in 1994 reached 4.09 million mt.

The increases in population and income levels have led to greater demand for meat and dairy products. During the ten years from 1984 to 1994, the population of livestock has increased quite significantly. The production of meat increased from 0.74 million mt to 1.47 million mt, egg production increased from 0.36 million to 0.58 million mt, and milk production from 0.18 million mt to 0.39 million mt.

Shrimp and tuna are the most important exports of Indonesia's fisheries industry. In 1984, the catch of saltwater fish was 1.7 million mt, reaching 3.06 million mt in 1994. Over the same period, freshwater fish production increased from 0.55 million mt to 0.96 million mt.

Agriculture also plays an important role in reducing poverty and inequality in rural areas. The number of poor people fell from 54.2 million or 40% of the population in early 1976, to about 27.2 million or 15% of the total population by 1990 (Sundaryanto et al. 1992, Kasryno and Suryana 1992). In 1996, out of every 100 Indonesians, fewer than 14 persons were still living below the poverty line. Income inequality, as measured by household income and expenditure, also declined during this period. This is indicated by the increase in consumption (income) share of the poorest 40% of the population, and the slight decline in the Gini Index. In rural areas, the Gini Index fell from 0.34 in 1978 to 0.25 in 1990, while in urban areas it dropped from 0.38 to 0.34 ( Table 1(1164)). These data indicate that income distribution in rural areas has improved, and is much better than in urban areas.

Agricultural Policy and Trade Reforms

Changing Role of the Government

Given the dramatic changes in both the internal and the external economic environment, the Indonesian Government has redefined its role in the country's economic development. The Ministry of Agriculture is focusing on:

  • Creating a policy environment to foster private sector development and market efficiency;
  • Funding public services such as research, extension and rural infrastructure;
  • Adopting policies to correct market failures, reduce poverty and address food security issues.

While the government of Indonesia continues to support the private sector, its role in production, marketing, and provision of inputs and support services has changed somewhat. Regarding input supplies, the government has gradually introduced more competition in marketing and distribution of production inputs. Moreover, restrictions have been relaxed on the private manufacturing and marketing of some farm equipment for which a greater demand is expected in the future. In the area of research, the government Agency for Agricultural Research and Development (AARD) has initiated collaborative research program with the private sector, in order to ensure that research programs are client-oriented and to identify areas where the private sector can take more responsibility for research.

Indonesia's Gatt Commitments for Agriculture

Long before the GATT agreement had been reached, Indonesia had committed itself to deregulating its trade and economy. This commitment is based simply on the concept that the more Indonesia reduces its own trade barriers, the larger will be the corresponding increase in its exports as domestic distortions and production costs are reduced. This will sharpen the competitiveness of Indonesian exporters, and increase their ability to take advantage of increased opportunities for sales on the world market. The potential gains from trade liberalization, however, can be realized only if Indonesia is successful in undertaking other economic and social reforms.

As an exporter of agricultural products, Indonesia is expected to gain substantial benefits from access to open markets as a result of the Uruguay Round (UR) agreement.

In its UR offer, Indonesia committed itself to an across-the-board binding of tariffs at the rate of 40%.

Tariff bindings have now become a prominent feature of Indonesia's tariffs, and they represent a major step towards compliance with the basic GATT rules. However, the tariff binding commitments Indonesia has undertaken, though fully legitimate under UR obligations, will not help to deregulate domestic trade, nor will they have any impact on the level of protection. This is because the bound rate agreed by Indonesia (40%) is nearly twice as high as the applied rate at present (simple average of 20%, including both tariffs and surcharges).

As far as tariffs are concerned, Indonesia has committed to either bind tariffs on agricultural items, or to bind at a ceiling rate. In the case of two products, namely dairy items and cloves, tariffs are to be bound by tariffication (i.e. the price gap between domestic and foreign products will be charged as a tariff). Tariffs are to be bound at ceiling rates for the following products: rice, meat, some fruits and vegetables, tea, coffee, spices, margarine, sugar, alcoholic beverages and cigarettes. Moreover, Indonesia is committed to reducing the level of tariffs on all agricultural items, including those subject to tariffication, by an overall 24% over a 10-year period (Stephenson and Erwidodo 1995).

Indonesia did not commit itself to any reduction in domestic support measures to agriculture, as all of the existing measures of this type were submitted as exemptions under the `Green Box' (see p. 6 below). In particular, the buffer stock operations of the National Food Logistic Agency will continue, with the aim of stabilizing food prices and ensuring an adequate food supply. Price stabilization measures are allowed, as long as they do not exceed 10% of the value of the domestic production of that product.

Indonesia invoked the Special Safeguard provisions, as provided in the UR agreement on agriculture, for milk and cream, buttermilk, milk fat and cloves. Commitments to reduce export subsidies were undertaken for rice only, since no other commodities are listed as benefiting from export support.

Indonesia's Commitment to Cept-Afta

In line with the GATT agreement, Indonesia has also committed itself to regional trade agreements such as APEC and AFTA. The APEC objectives are contained in the Bogor Declaration agreed at the Meeting of APEC Leaders in November 1994, which commits APEC members to achieve "free and open trade and investment" in the Asia-Pacific region no later than 2020. This goal is to be pursued as soon as possible by further reducing barriers to trade and investment, and by promoting the free flow of goods, services and capital.

The Bogor declaration specifies that the pace at which this would occur would take into account the differing levels of economic development among APEC members, with industrialized economies achieving the target by the year 2010 and developing economies by 2020. The declaration takes into account other multilateral obligations under GATT and the WTO commitment.

Agricultural Trade Reforms and Structure of Protection

Since 1985, the Indonesian government has announced each year trade deregulation packages, in which the main features have been the reduction of tariffs and non-tariff barriers, particularly import licensing. The critical questions are firstly, how far to reduce protection, and secondly, the current disparities of protection in different industries. This is important, because protection given to one industry implies costs to others. In other words, a high level of protection for an industry would result in resources being directed to that industry at the expense of others. It is relative prices that matter, in the allocation of resources within an economy, and what matter therefore are the disparities between the rate of protection for different industries.

Despite on-going reforms, non-tariff barriers are still significant in Indonesia. These arrangements insulate the domestic market from effective import competition by granting import monopolies for a large number of products. State-trading companies, as well as state marketing enterprises and designated private companies, benefit from these licenses.

The coverage of domestic production affected by licensing arrangements has fallen from more than 28% in 1989 to about 22% in 1993 (GATT 1995). However, one-third of manufacturing output still remains affected by import licensing arrangements. Nearly 40 percent of agricultural production in Indonesia still receives special protection from import licensing system. It is worth noting that almost three-quarters of the economy's production covered by the remaining import licenses is related to agribusiness. Recent reforms have relaxed import licenses for a broad range of products, including processed foods.

Although most tariffs remain fairly high, the Indonesian government has reduced their levels considerably over the past few years. Between 1985 and 1992, the average unweighted tariff rate, including import surcharges, fell from 37 to 20%, or from 22 to 9% on an import-weighted basis (World Bank 1993, GATT 1995). The average tariff level weighted by domestic production also declined over this period, from 29 to 13%. Tariff rates for many agricultural commodities were reduced and some were set at zero, including those for wheat, rice flour, soybeans, sugarcane, corn, palm oil and coconut oil (GATT 1995).

Indonesian exports have been subjected to regulations and controls. In 1989, for example, export restriction covered more than 27% of Indonesia's production of tradable goods (GATT Secretariat 1991 and 1995). Some three-quarters of Indonesia's mining output, including oil and gas, is covered by export controls. For agriculture, the proportion is 18%.

The increased use of export restrictions is mainly aimed at:

  • Promoting the conservation of scarce resources;
  • Encouraging greater domestic processing industries for increasing value added and employment; and
  • Preserving the environment.

As such, export controls apply mostly to unprocessed or semi-processed agricultural and forestry products. Export bans on logs and rattan, for instance, have encouraged domestic processing by providing the raw materials at less than world market prices.

Future Direction of Agricultural Development

Reorientation of the Basic Approach

Dynamic changes in the world market situation have led Indonesian agricultural planners to take a new approach to agricultural development. This shift also takes into account the fact that Indonesia's condition now is significantly different than that of 25 years ago, when the country started to build its economy. Indonesia is now entering a new phase of development, and is benefiting from improvements in human resources and economic infrastructure.

Under the Second Twenty-five Year Development Plan, which began in 1993, there will be some shifts in the paradigm of agricultural development (Rasahan 1996):

  • From centralized to decentralized planning, in order to ensure people's participation, optimize the use of diverse natural resources, and to achieve a more equitable development of different regions.
  • From agricultural production to farmers' incomes and welfare, which will mean only technical improvements, but marketing and socio-economic aspects.
  • From the production of primary commodities to agribusiness in rural areas, in order to create added value and retain it for rural households.
  • From labor-intensive technology to create more employment opportunities, to capital-intensive technology and agricultural mechanization as a means of increasing productivity and efficiency.
  • From a strategy of development led by agricultural import substitution to one led by agricultural exports in response to world trade liberalization.
  • From a dominant government role in economic development activities to more participation by the private sector. It is expected that more than 70% of total investment in agriculture will come from the private sector.

Through this shift in the development paradigm, it is expected that Indonesian agriculture will become modern and highly efficient in its utilization of resources, able to compete strongly in global markets, and highly flexible in responding to dynamic changes in commodity markets, both domestic and international.

Policy Instruments of Agricultural Development

The GATT agreement encourages all member countries to avoid measures which distort international trade. It is explicitly mentioned in the agreement that domestic support measures that have a minimal impact on trade (Green Box policies) are excluded from such commitments. These include general government services, for example in the areas of research and extension, disease control, infrastructure and food security. It also includes direct payments to farmers, for example certain forms of income support, structural adjustment assistance, and direct payments under environmental and regional assistance programs. In addition, the agreement permits member countries to make direct payments under programs limiting production, agricultural and rural development, and other support, provided this makes up only a small proportion (5-10%) of the value of production of individual products or the value of total agricultural production.

Policy for Maintaining Rice Self-Sufficiency

For more than three decades, increasing rice production was given a high priority in Indonesia's agricultural development. The aim was to achieve self-sufficiency in rice. Since the 1950s, the Indonesian government has emphasized more intensive production, and provided incentives such as subsidies for fertilizer, pesticides and irrigation, as well as credit and price supports. An indirect incentive has been the provision of research and extension services.

In general, direct subsidies have now been eliminated or are gradually being phased out.

The government has not changed its policy concerning rice self-sufficiency. Increasing rice production at the same rate as any growth in demand is the ultimate target of rice policy in Indonesia. However, a slight change in the policy has taken place, namely from "absolute rice self-sufficiency" to "a trend towards rice self-sufficiency". This means that the government feels it can import some rice during a poor season, and produce occasional exports during a good one. This strategy implies that Indonesia's rice economy should follow dynamically the behavior of international rice markets (Kasryno et al. 1995).

Food pricing policy in developing countries encompasses a wide range of objectives. These include:

  • Stabilizing or reducing the prices paid by consumers;
  • Maintaining uninterrupted food supplies or food security;
  • Stabilizing or maintaining the prices paid to producers, to guarantee incentives for production;
  • Achieving food self-sufficiency in order to reduce the cost of imports;
  • Providing the government with revenue through taxation and tariffs;
  • Increasing foreign exchange earnings, and
  • Promoting industrialization (Steven and Jabara 1988).

In the case of Indonesia, stabilization of the rice price is an important part of achieving these aims, although clearly not satisfactory as the sole instrument to achieve rice self-sufficiency (Afiff 1992).

There is some evidence that strict self-sufficiency is not the best way of achieving food security. Exclusive reliance on domestic production would force all the costs of adjusting to shocks from bad climate, pests and other production risks onto the domestic market, to be borne particularly by low-income consumers. Indonesia's rice buffer stocks, and the policy of allowing rice imports to replenish stocks, have proven effective in dealing with short-term fluctuations in the domestic supply. From the standpoint of food security, the question in the current policy environment is not whether to import rice, but how to manage the rice trade (Trewin and Erwidodo 1993, Trewin and Tomich 1994).

As others have concluded, the basic strategy for rice should be to maintain balanced growth in domestic production and demand at long-term world prices. Any pronounced short-fall may carry a large cost, because Indonesia, with its huge population, is a major actor in the world rice market (Gonzales et al. 1993, Piggott et al. 1993, Trewin and Tomich 1994). Thus, investment in higher rice productivity, particularly in improving irrigation, research and extension, can be seen as part of a stabilization strategy as well as part of strategy for growth with equity.

Policy for the Sustainability of Small Farms and Poverty Alleviation

Indonesian agriculture is characterized by small farms, especially in the production of food crops and some tree crops. In 1983, around 6.5 million farm households, or 40.8% of the total, had a land holding smaller than 0.5 ha, with an average farm size of only 0.26 ha. By 1993, the number of these very small farms had increased to 8.7 million, or 48.5% of the total. Meanwhile, average farm size in Indonesia fell from 1.09 ha in 1983 to 0.74 ha in 1993. This was mainly because of the pressure of a growing population on a limited area of arable land, particularly in Java.

The production of food crops in Indonesia is labor-intensive and traditional in nature. The use of machinery and advanced technology is minimal, mainly because these are inefficient on very small farms. However, farming of this kind will not survive very stiff global economic competition.

Steps to revitalize small-scale farming are being taken by introducing an agribusiness approach to a commodity based farming system (Center for Agro-Socioeconomic Research 1996). The main features of this approach are:

  • There should be a priority commodity or product, even though in year-round farming practices, a diversified cropping system may be developed.
  • The choice of commodity should be based on market preferences, either international or domestic.
  • Economic efficiency should be considered in developing a farming system. For food crops, a land holding of around 500 ha will give economies of scale. It is necessary therefore to coordinate groups of neighboring farms, and make these groups the basis of agricultural development.
  • New improved technology should be introduced, adapted to local conditions. This may take the form of new planting materials, farming practices, or processing and post-harvest handling practices, to increase the quality of the product.
  • To ensure the process of technology transfer, guidance must be given by an integrated team of researchers and extension workers.

An important innovation in the Sixth Five-Year Development plan is the special program for poverty alleviation called the INPRES Desa Tertinggal (IDT), or `underdeveloped village development program'. Its objective is to accelerate poverty reduction in poor villages in a sustainable way. The IDT program provides "seed" capital to poor villages, to mobilize the capacity of the communities to help themselves. The funds are to be managed by the villagers themselves, with the assistance of the immediate local administration and existing village bodies. While IDT itself is an attempt to expand capital and credit in poor villages, other regional programs will be increasingly targeted to IDT villages, with the objective of maximizing their impact on poverty alleviation.

In addition to these special programs, Indonesia reaches most of its poor people through its basic health, education, family planning, and social security programs. However, for these to be effective, two structural barriers need to be broken. First, it needs to be more explicitely recognized that the poor need help. Second, in order to reach the poor effectively, the traditional top-down approach to poverty alleviation is unlikely to succeed. What is needed is community-based and grass-roots assistance.

The poor must be given priority in public expenditure. Infrastructure and basic public services for the poor must be improved, and also income earning opportunities for the poor. Low-income farmers must be given better access to credit and improved technology. It is widely believed in Indonesia that a broad-based growth strategy is the most important way of promoting economic opportunities for the poor.


There is evidence that macroeconomic policies (fiscal, monetary, and exchange rate policies) are important policy instruments to achieve sustainable growth. However, experience suggests that these policies need to be used in a coordinated fashion to keep the economy growing. Rapid monetary growth in Indonesia in 1990, for example, raised inflation, while expectations of a fall in the exchange rate pushed up domestic interest rates.

The policy objectives for agriculture are unavoidably interwoven with the objectives of Indonesia's overall national policy, because of the relative economic importance of agriculture. With a relatively constant 50% of the workforce employed in agriculture, changes in the agricultural sector have considerable impact on the overall national economy. In view of the importance of food crops on GDP, labor absorption, and the domestic food supply, such crops have been the primary concern of the Indonesian government.

The future direction of agricultural development, by which Indonesia hopes to maintain growth, equity, food self-sufficiency, and the sustainability of small-scale farming, needs carefully designed policy programs. The emphasis will be on agribusiness development through the initiative of the private sector, and optimizing the use of Indonesia's diverse natural resources.


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A Korean participant pointed out that in the wake of the Uruguay Round, most Asian countries face the same problem, of how to enhance the competitiveness of farmers. In Korea, the government is interested in enlarging the scale of farming. The underlying principle for this is efficiency rather than equity. He asked which of these two values had priority in Indonesian policy, efficiency or equity. Dr. Achmad replied that policies attempted to obtain both. If efficiency alone is favored, this will anger and impoverish millions of farmers. However, new, capital-intensive technology cannot be used on very small farms, and improvements of productivity and incomes will partly depend on increased efficiency. Programs to develop village economies should also have the effect of improving equity. Dr. Achmad described how, in the village development program, a fund of 20 million rupiahs (US$9,200) is given to each village. The villagers themselves then decide what activities can be generated by these funds.

Dr. Park of FFTC commented that Indonesia has adopted rather aggressive policies in trade liberalization, and that these have been very successful. Some Korean economists would like Korea to follow Indonesia's example, since they feel it represents rapid development. However, in any country where the average farm size is very small, agriculture will always suffer when the market is opened. He asked Dr. Achmad whether the Indonesian government has any plans to mitigate the unfavorable side effects of trade liberalization on farmers. Dr. Achmad replied that at present there is no direct plan to mitigate the situation, but this will be done through the introduction of locally specific, more capital-intensive technology in farming practices, and by strengthening farmer groups or rural institutions in order to increase efficiency and productivity. He felt that very small farms cannot survive on their own: farmers' cooperatives or other groupings of at least 20-30 farms are needed to achieve economies of scale. The emphasis in Indonesia at the moment is not to consolidate land holdings, but to create suitable institutions which will promote group farming in rural areas.

Index of Images

Table 1 Income Distribution and the Gini Index, Indonesia 1978-1990

Table 1 Income Distribution and the Gini Index, Indonesia 1978-1990

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