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 1949, 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. 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 29% in 1987 -- will get more recent data). 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 move up employment, income, and economic growth of the rural economy.

This paper will focus on the diversification of agriculture, specifically cash-crop development for export to Western developed countries (i.e. U.S. and Western Europe). The impetus for this paper is drawn not only from the mentioned 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 (rupiah). 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. Recently, several individuals have recognized this need to "return to the land:"

This paper will focus on alternative crops that generate demand in developed countries, and possibilities for new business development. Two crops that fit into this category are specialty coffee (i.e. single-estate, arabica) and spices. Spices are a broad category, and depending on the available information, I will focus on those spices that have the most potential for export (such as pepper, cloves, and cinnamon.) This study will most likely expand beyond Java, as many export crops are grown in Sumatra and Sulawesi.

In addition to identifying those crops which have potential to stimulate Indonesia’s economy, my objective will also be to analyze how rural small-landholders can integrate with urbanizing communities to realize growth and equitable economic gain. This will involve 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. My objective will be to study this value chain and identify how to maximize the economic gain to the producer/ farmer.

In order to find efficiencies, it will be necessary to understand the degree to which farmers are isolated from the market. In a perfect and transparent market, producers have access to information about pricing, technologies, and resources from which they can make decisions about export opportunities and can react to fluctuations of supply and demand. However, the Indonesian market is imperfect, partially due to lack of adequate infrastructure and communication systems. Thus, farmers may be constrained in achieving optimal use of available resources. This topic will require further research to understand the extent of isolation in the rural sector, and how government policy has had a positive or negative impact.

Finally, other models of rural agricultural development may serve as positive examples that could be transferable to Indonesia. In particular, I will explore Thailand and perhaps Costa Rica (and others, depending on the success of their models), to identify policies and systems that helped to integrate the rural farming sector into the national, and ultimately, the world economy.

1. Theoretical framework for thesis

1. The agricultural sector will be a means for recovery and stability in Indonesia's financial crisis
2. Analysis of value chain of specific agricultural exports: are there crops that are more suitable for rural farmers? How is the value chain structured? Are there ways to make it more efficient? Are there opportunities to deliver more value back to the grower?

1. History of cash crops

1. Coffee
2. Spices (TBD: perhaps cloves, cinnamon, pepper)

1. Government policy

1. In agriculture sector
2. Towards cash crops, specifically coffee and spices

1. Value-chain: grower to consumer

1. Case studies

1. Starbucks -- coffee
2. Frontier -- spices

1. Models in other developing countries

A. Thailand, Costa Rica, others (?)

2. Recommendations