Revitalizing agriculture in Indonesia

INDONESIA RISING. Policy Priorities for 2010 and Beyond 53469 Revitalizing Agriculture in Indonesia Key Messages Agriculture plays an important role in Indonesia's economy but since the 1990s the sector has been characterized by stagnation and low productivity due to years of declining private- and public sector investment. The recent increase (in real terms) in public spending on agriculture is largely a reflection of poorly targeted subsidies. There is a vital need for a rural income and employment strategy based on the promotion of agricultural diversification into high value commodities, coupled with efforts to raise productivity and stimulate the growth of non-farm rural enterprises to create jobs and reduce poverty. Key Actions 1. Raise productivity by prioritizing investments that improve the quality and management of irrigation systems. 2. Accelerate the titling of agricultural parcels to increase land security and improve farmers' ability to access credit and make productive investments in technology. 3. Promote diversification through improved agricultural services (R&D, extension), and facilitate smallholder involvement in high-value commodities that are attractive to domestic- and export markets. This will necessitate policy and institutional changes that: 1. Shift the composition of current spending and phase out the fertilizer subsidy. Increased spending on agriculture in real terms over the past decade has failed to increase productivity. Resources are being directed towards supporting private inputs through poorly targeted subsidies rather than providing public goods and services. 2. Improve coordination between central and local governments and develop fiscal incentives that enable MoA to work collaboratively with sub-national governments to promote agricultural programs, and foster reforms that improve service delivery. MoA will need to bring stronger management and discipline to the approach (e.g., stronger strategy foundations, identified outcome objectives, monitoring, accountability). 3. Establish a comprehensive monitoring and evaluation (M&E) system that allows the government to assess the impact of its transfer programs and make design corrections needed to maximize increases in agriculture productivity and reduce rural poverty. Agricultural production has not increased despite Where Indonesia Stands Now increased public spending in real terms. Between 2001 and 2008, national spending on agriculture1 increased Agriculture plays an important role in Indonesia's from Rp11 trillion to Rp53 trillion, an average of 11 economy, employing over 40 percent of the workforce including two-thirds of the country's poor, and 1 Includes expenditure by MoA, sub-national government spending contributing 17 percent of GDP. Increases in agricultural on agriculture and irrigation, irrigation expenditure under the Ministry of Public Works and central government subsidies closely related to productivity are credited with reducing poverty in agriculture (e.g. fertilizers), but excludes expenditure on fisheries and Indonesia during the 1970s and 1980s. forestry and rural roads. 2 | INDONESIA RISING percent annually, in real terms. Agriculture's share of total Agriculture Spending in Indonesia, 2001-2008 government spending doubled from three percent in 2001 to six percent by 2008, reaching one percent of GDP 0.2 mostly due to increased subsidies. Significant increases in employment and a remarkable reduction in poverty were achieved by focusing on staple food crops such as rice, corn, sugarcane and soybeans. However, productivity gains for most food crops are slowing significantly because the majority of farmers As % of Agriculture GDP work plots less than one-half hectare in size. With farms this size these staples offer little potential for generating additional employment and income growth. Low levels of As % of National Spending both private and public investment have caused agricultural productivity to stagnate since the 1990s. As % of GDP 0 Over the past three decades Indonesia's capacity in 2001 2002 2003 2004 2005 2006 2007 2008 agricultural R&D has increased significantly, but still Source: DiBi-BNPB remains low by middle-income country standards. By 2007, public spending on R&D was only half that expended on the seed subsidy. After adding in private sector agricultural R&D spending, the intensity with How Indonesia Can Move Ahead which Indonesia invested in agricultural research2 (0.27 percent) was roughly the same as Lao PDR (0.24 percent) Going forward, there is a need to prioritize investments in and much lower than Malaysia (1.92 percent) or the the provision of public goods and services that effectively Philippines (0.46 percent). Further public investments support farmers and improve the climate for private in R&D, rural infrastructure and irrigation are necessary investment. This is necessary to strengthen agricultural complements to private investments in agriculture. productivity, diversify the agro-production and rural economic base, and manage resources sustainably. The By contrast, government allocates a large and increasing following key policy directions and actions support these share of resources to input subsidies in an effort to objectives: increase the production of food crops. Often this focus comes at the expense of other high-value products, Change the focus of public spending on agriculture. reflected for example in the decreasing share in the budget Subsidies now account for 60 percent of the MoA's of Directorate General of Horticulture from six percent in budget: the fertilizer subsidy alone accounts for 0.3 2003 to three percent in 2009. percent of GDP. Phasing out the fertilizer subsidy over the next five years will free up valuable public Much of the current focus of agricultural policy remains resources that can be re-directed to investments in rural centered on the production of staple food crops. Self- infrastructure, research and extension, and irrigation sufficiency in staple foods remains a priority, driven in systems. part by food security concerns and exacerbated by the Shift from low value staples to higher value-added food price crises of 2008. While staples will continue to crops and livestock. The shift toward high value be important for socio-economic and political reasons, agriculture is already underway: the number of an opportunity exists to assist policymakers in designing horticulture farmers nearly doubled to 38 percent of all a rural income and employment strategy based on the farm households between 1993 and 2003. Diversified promotion of high value commodities such as fruits, farming is the solution for small-scale farmers vegetables, aquaculture, livestock products, and smallholder working poor quality land. Small farmers will need estate crops (e.g., cocoa, cashews and spices). public/private sector technical assistance if they are to respond successfully to new market opportunities. Indonesian smallholders' access to export markets can be significantly enhanced through greater facilitation of public private partnerships. Facilitate smallholder involvement in high-value 2 R&D expenditure as a share of total agriculture output. commodity markets. This entails strengthening  Policy Priorities for 2010 and Beyond | 3 vertical integration by (i) building the capacity of areas of Java, resulting in land degradation, soil erosion, farmer organizations like cooperatives, associations, and unreliable water supplies, severe flooding, and decreased other entities, (ii) improving the regulatory framework water quality levels. There is a need to design and for contract farming, (iii) extending extension support implement a cross-cutting strategy for containing and to farmer groups beyond a production focus to include managing present and future costs, and improving land market access, information and capacity building, (iv) and other natural resource usage practices. increasing communication channels between consumers Establish a comprehensive M&E system that allows and farmers by investing in market and information the government to evaluate the impact of its transfer systems, and (v) promoting public-private partnerships programs, make design corrections, and maximize as a means to coordinate farmer training, modernize the effectiveness of its efforts to increase agricultural traditional value chains (e.g., cocoa in Sulawesi) and productivity and reduce rural poverty. develop new market opportunities. Prioritize investments in irrigated agriculture. The government needs to ensure the integrity of the infrastructure by complementing current maintenance How The World Bank Can Help efforts by water users associations with the necessary large-scale investments to improve the efficiency of The World Bank has been a partner in strengthening water use and achieve more "crop per drop". Existing Indonesia's agricultural sector, with particular focus physical irrigation assets are in a mediocre state and on institutional and human resource development, are inadequate to meet development needs. Irrigation irrigation and water resource management, public-private networks on the outer islands languish uncompleted partnerships, and agriculture financing through the and are unable to underpin the longer-term geographic following: shift of agriculture beyond Java. A strategy is urgently needed to retire, replace and/or upgrade existing 1. Investments for improving the quality of agricultural irrigation infrastructure. support services Substantially accelerate titling of agricultural parcels This will be done through the ongoing Farmer to increase land security and help farmers participate Empowerment through Agricultural Technology in active land markets. Indonesia has one of the lowest and Information project (FEATI)