The most distant history of Western involvement in Indonesia conjures up visions of opportunistic explorers, traveling long distances on European ships in search of the riches that these precious islands held. Valued as dearly as gold, the exotic spices grown on the Indonesian archipelago were the foundation for conquering and colonizing this part of the world.

Indonesia is now known not for its spice trade, which accounts for a mere 1% of export revenues, but rather for its low-wage labor, fast-growing economy, and corrupted government. Since Indonesia became an independent nation in 1945, the priorities of its leaders have turned to building a nation and an economy based on industrialization. Indonesia has been swept up in a path common to the fast-growing economies of Southeast Asia: import substitution, followed by export orientation, attracting foreign investment, utilizing a large, low-wage labor pool to fill up manufacturing plants, and finally a turn towards value-added, technology-driven manufacturing. Indonesia’s comparative advantage in agriculture was not seen as the wave of the future, and was not the engine of growth.

This is not to say that the agriculture sector was completely ignored. On the contrary, President Suharto, who ruled the Indonesia from 1965-1998, allocated substantial resources to agricultural development, with a clear bias towards developing rice production. The government spent heavily on fertilizer subsidies, crop intensification programs and farmer training. The decision to focus so strongly on agriculture is probably best explained by Suharto’s rural upbringing and his memory of how rice shortages destabilized Sukarno’s (his predecessor) regime. Although farmers had no political voice to speak of, they did comparatively well in obtaining subsidized credit. Within a decade, 1974-1984, Indonesia moved from being the world’s largest rice importer to self-sufficiency.

The thrust of Suharto’s agricultural development was on the island of Java, considered the political and economic center of the nation. Indonesia is a unique nation in its geographical layout. Consisting of 7 major island groups, the population and environment varies widely across the archipelago. Java is the most densely populated and heavily farmed of the islands. On Java, the limits of arable land expansion were reached by 1930, after which increased productivity was due to intensification. On the other islands, the growth of labor-productivity was largely caused by increases in the land-labor ratio, which implies that producers on average expanded the area under their control. The outer islands are much less densely populated, and land availability makes it possible for farmers to increase acreage.  Additionally, the other islands have traditionally grown cash crops as opposed to rice, a result of both the appropriateness of the land for these crops as well as government policy.

The growth of other sectors of the economy, such as oil and manufacturing for export, has naturally led to a relative decline in the contribution of agriculture to GDP. Specifically, rice's contribution to the agriculture sector has declined in the past three decades, from 37% in 1968 to less than 25% throughout the 1990s. It appears that intensification programs and the "green revolution" have been fully expended and led to diminishing returns of rice production. Production per hectare has been leveling off since 1982, implying the need for crop diversification to increase employment, income, and economic growth of the rural economy.

The impetus for this paper is drawn not only from the need for crop diversification in the rural sector, but also from the recent financial crisis in Asia that has hit Indonesia particularly hard, and resulted in a drastic depreciation of its currency. The exchange rate dropped from 2100 rupiah per dollar in April 1997 to an all time low of 11,000 rupiah per dollar in March of 1998. In the midst of this downturn, farming has been one of the only sectors to see economic gain. The rupiah’s fall has made dollar-based exports of agricultural produce more valuable, in rupiah, than before. Exports have brought in badly needed foreign exchange, and have also been a boon to the rural farmers who dominate the agricultural sector. Recently, several individuals have recognized this need to "return to the land:"

In addition to identifying those crops which have potential to stimulate Indonesia’s economy, it is also important to analyze how rural small-landholders can integrate with urbanizing communities to realize growth and equitable economic gain. There exists an opportunity to develop the rural agricultural population, but in order to create sustainable growth of this sector, policy alternatives should be considered carefully. This requires a close study of the value chain, from the producer to marketing the product to consumers. Currently, there are several intermediaries in the process of getting the coffee cherry to the coffeepot, for example, which may or may not have inefficiencies. Additionally, it will be helpful to review past government policies in both the rice sector and cash crop sector, both to provide a context for future development and to avoid past mistakes.

Finally, other models of rural agricultural development may serve as positive examples that could be transferable to Indonesia. In particular, this paper will explore the development of cocoa farming in Sulawesi, and coffee production in Kenya. These models identify policies and systems that helped to integrate the rural farming sector into the national, and ultimately, the world economy.

Structure of paper

First, this paper will review Indonesia's government policy in agriculture since 1965, a crucial turning point in Indonesia's history marked by the succession of President Suharto. This section will explain the transition of rice production and recent policy towards cash crops. The next section of the paper will examine the role of the smallholder farmer in Indonesia, and the movement of agricultural versus urban labor in Indonesia since 1965. This section will also review the theory surrounding the historical development of the agricultural sector. Third, the cash crops of coffee and spices will be examined to identify their potential for export growth and smallholder development. Coffee production in Kenya will be discussed as an ideal model for smallholder specialty coffee production, and cocoa production in Sulawesi will serve as a second model of smallholder success. Based on the research and predictions of these four sections, the paper will conclude with policy recommendations for sustainable development of smallholder cash crops in Indonesia.